Cementos Pacasmayo SAA (CPAC) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Cementos Pacasmayo's Fourth Quarter and Full-Year 2015 Results Conference Call. With us today are Humberto Nadal, Chief Executive Officer; Manuel Ferreyros, Chief Financial Officer; and Claudia Bustamante, Head of Investor Relations.

As a reminder, all participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that today's conference is being recorded.

During the conference call, management will make forward-looking statements to assist you in understanding its expectations for future performance. These statements are subject to a number of risks that could cause actual results and events to differ materially and I refer you to the Company's press release of February 16, 2016 and the Company's most recent regulatory filings for discussions of those risks.

In addition, statements during this call are based on management's views as of today and it is anticipated that future developments may cause these views to change. Please consider the information presented in this slide. The Company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so except where required by law.

I'll now turn the call over to Claudia Bustamante, Head of Investor Relations.

Good morning, everyone and welcome to the Cementos Pacasmayo fourth quarter and full year 2015 results conference call. Our presenters today will be Mr. Humberto Nadal, Chief Executive Officer and Mr. Manuel Ferreyros, Chief Financial Officer.

After today's presentation, there will be a question-and-answer session. Please note that today's call is being recorded and that the content of this call cannot be reproduced in whole or in part without expressed consent from the Company.

I will now turn the call over to Mr. Humberto Nadal, Chief Executive Officer.

Thank you, Claudia. Good morning, everyone and thank you for joining us on today's conference call. The fourth quarter of 2015 [marked] a really turning point for Cementos Pacasmayo as it was the first quarter in which we started seeing a contribution from our Piura facility, the most advanced cement plant in Latin America.

Furthermore, two weeks ago, clinker production began, thus we can proudly say that the plant's machineries are 100% operational as we speak. We are very pleased to also inform that we completed a project under the budget and right on schedule.

The completion of the Piura facility is a milestone in the history of the Company. We've been working towards completing the plant for more than three years. This 1.6 million ton facility is one of the most advanced in the world. Its strategic location will allow us to serve demand in different locations with a greater degree of sufficiency, lowering our logistics costs. It also has a capacity of 1 million tons of clinker allowing us eliminate completely the use of the imported clinker, which can add volatility and high prices to our expense base. The [run of the] facility continued throughout the fourth quarter and we expect it to run at close to 60% in this year, which we feel is an appropriate level given the current market dynamics.

Turning now to the demand environment, we saw, as we've predicted earlier in the year, continued improvement in the fourth quarter of 2015. The local government in Peru has now completed their bidding in Piura following elections at the beginning of the year, and consequently we are seeing increased spending on infrastructure projects.

Looking at the three major projects in our sort of operation, the biggest project was made at the Longitudinal de la Sierra Highway. We've now sold of almost 60% of the total volumes for these projects, up from 30% at the end of third quarter.

Turning on to our Talara refinery, we've shipped approximately one quarter or 25% of the cement for the project up from 15% at the end of the previous quarter. At the Chavimochic irrigation project, we have seen a modest growth in volumes. We have only just begun but the project is fully on its way and advancing.

Some of the projects that are still in the pipeline for this year are the irrigation project Alto Piura, which was already awarded recently, and the planned city of Olmos, which will start the bidding process this month. We think this is really a very important project. It is one of the few fully-planned cities that will be built in our country.

Turning to the self-construction market, demand has remained steady. Typically, we see self-construction demand rise with infrastructure spending as large-scale projects generate jobs and overall economic activity around the area of the project increases. We saw an additional benefit late in the year for spending on preparations for our potential El Nino. So these are currently for only a small portion of the overall cement volume.

In this improving demand environment, we are able to grow the fourth quarter cement volumes by close to 9% from a year earlier. Crucially, we are able to sell a portion of this demand from the Piura facility. This produced a total of 121,000 tons in the fourth quarter. As a result, we ended 2015 on a very strong note.

Cement volumes, like I mentioned, grew by 9% and EBITDA rose 8.1% excluding the impact of extraordinary income in the year-ago quarter.

Looking at our full-year 2015 results, we see the benefits of our core focus on efficiency in 2015. We diligently managed our expenses throughout the operation from production cost to personnel and selling costs. This allowed us to serve our market in the northern region of Peru with an even higher degree of efficiency. These savings were also the primary factor in our positive financial results for the year. We posted a 7.3% increase in consolidated EBITDA excluding the impact of non-recurring factors in both fourth quarter 2014 and second quarter 2015, while gross margin expanded by 180 basis points.

Additionally, and more importantly, net profit rose by 12% even though sales were basically flat. This was, like I said, despite lower cement volumes year on year as a result of weak demand from the public sector in the first half of the year.

In conclusion, we feel very optimistic about the 2016. We're entering the year with improved operations even after a strong end to 2015.

I will now turn the call over to Manuel, who will go through our financial results in more detail.

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, we had a strong end to the year with robust fourth quarter financials.

Revenues from the fourth quarter were up 8.7% to PEN351 million. The main factor in this, as Humberto mentioned, was improved cement, concrete and blocks with sales rose 12% compared to the fourth quarter of 2014.

Gross profit was up 3.1% with a gross margin of 42.6%. The slightly lower gross margin was due to the fact that we used 118,000 metric tons of imported clinker to meet increased demand. It is important to mention that we plan to stop using imported clinker altogether now that the Piura plant has begun producing clinker.

Looking at the results for the different segments, cement sales were up 7.6% due to increased demand from all sectors, but mostly from the public sector, which increased its shares of sales from 17% in the third quarter 2015 to 22% in the fourth quarter of 2015.

Sales of ready-mix concrete and blocks performed very well, increasing 35% and 69.6% respectively compared to the fourth quarter of 2014, reflecting the increase in demand from infrastructure projects. Quicklime sales decreased 33.3% compared to the previous year, mainly due to a decreasing demand. However, the gross margin increased 15.7 percentage points because of a sustained effort to increase sales of a ground quicklime which has a higher sales price.

Turning now to operating expenses, we achieved a decrease in administrative expenses. Thanks to efficiency measures implemented throughout the Company, our reduction in the headcount as well as a lower taxable income and an accounting re-classification. Selling expenses were up by approximately PEN1.1 million in line with higher cement volumes. Results in the fourth quarter of 2014 benefited from PEN10.4 million of extraordinary income from a gain on the sale of some stocks. Excluding this gain, we saw healthy growth in consolidated EBITDA for the fourth quarter 2015 up 8.1% to PEN111.6 million.

Net income was PEN59.8 million, which represented a slight decrease compared to the fourth quarter of 2014, excluding the non-cash gain in that period. Looking briefly at results for full year 2015, we saw positive comparison across key metrics despite lower cement volumes. The gross profit was up 3.3% and gross margin was 43.5%, an increase of 180 basis points from 2014. Administrative expenses were down 3.2% with savings in personnel and third-party services.

At the profit level, we are adjusting not only for the gain in the fourth quarter of 2014, but also an extraordinary income in the second quarter of 2015 from the sale of a land.

On this basis, net income increased 13% year on year, mainly due to a higher gross profit. Thanks to effective cost-cutting initiatives and careful management of our foreign exchange exposure, since we have fully hedged the principal of our $300 million dollar denominated debt. We also saw a 7.3% increase in EBITDA. So we can see that full-year 2015 results were very strong with efficiency throughout the year and a pick-up in demand in the fourth quarter.

The total CapEx for the year was PEN490.8 million, a small decrease from 2014 with more than 80% of the spending going towards the Piura plant. We ended the year with a net adjusted debt to EBITDA ratio of 1.9 times, well within our comfort zone and we expect this ratio to fall further in 2016. Cementos Pacasmayo has always been prudent in its leverage even during CapEx cycles. We were pleased that Fitch affirmed our investment grade with a stable outlook last month. Our balance sheet remains strong, which gives us financial flexibility.

I'll now turn the call back to Humberto for closing comments.

Now, we are ready to take any questions please.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Daniel Rojas, Merrill Lynch.

Humberto, Manuel, Claudia, thank you for hosting the call today. My question is regarding your outlook for 2016. In the release, you mentioned that you're cautiously optimistic and you are also seeing a positive comparison versus this year? I was only hoping to get more information from you is if you think you could be able to see volumes growing at low single digits or higher mid-single digits given the recovery of the Peruvian economy and what we saw this quarter with volumes growing significantly?

And my second question is regarding the phosphate project. You gave us a lot of detail on the last pages of the report on how you're moving forward. I just wanted to see if you could give us more out to confirm this? Thank you.

Sure. On the projection, I mean, as you all know, we have elections coming up in, I believe, 41 days. So, while we are cautiously optimistic, I think we should see sales moving up anywhere between, I would say, low one-digit numbers. On a cautious side, like I said, why we remain cautious because of elections even though the last full quarter was very strong and we are still very optimistic with that.

Going on to phosphates, like I said in my last call, not this year, we've completely finished the basic engineering of the project. We've positive net present value, and we have an interesting IRR, and now we are really very focused with our partners of Mitsubishi to evaluate the next steps on that project. We are analyzing various strategic decisions, but the one thing that I think all investors have to be rest assured is, we will make the best decision to great shareholder value. We'll not take any unnecessary risks, that's why we're saying we're studying all the strategic options and hopefully we'll be able to move ahead into one (inaudible) in the coming months.

Let me follow-up with that. These first two months of the year, have you seen volumes increasing at a pace that we saw in the fourth quarter or do you think they will normalize towards the what you said the low one-digit number?

No, I think we are going to be more close to what we saw at the end of last year.

Okay. Thank you. That's very clear.

Thank you.

Andres Soto, Santander.

Thank you, Humberto, Manuel and Claudia. Congratulations on the results. You mentioned that the main driver for the gross profit deterioration was the imported clinker that you had to use in the fourth quarter and you also mentioned that you already started producing clinker in your new Piura facility. With these how much improvement in EBITDA margin can we expect in 2016?

Hello, Andres. Yes. What we used has been 180,000 tons in the last quarter of 2015 compared with the 75,000 tons of the last quarter in 2014. This year, we already started, as Humberto mentioned, producing clinker and producing cement in the Piura plant. So, we shouldn't use anymore imported clinker for the rest of the year. This should take our EBITDA margin to be a little bit over 34%.

Perfect. Thank you very much.

Benjamin Theurer, Barclays.

Good afternoon, Humberto, Manuel, Claudia. I have a couple of follow-up questions. So, just out of curiosity on that clinker, obviously, the amount of imported clinker was quite intense for the fourth quarter. Was there any specific reason why you've decided to import that clinker instead of actually producing it at that Pacasmayo plant where according to the release at least I saw that capacity utilization on clinker would have been some spare capacity here? So, is it more of costs associated and it was just an economic situation that the short-term import was cheaper than producing it in Pacasmayo, what was the thinking behind?

And then looking into 2016, if you could -- well now having Piura basically finished the expansion, if you could share your thoughts on guidance 2016 onwards and also as a result of obviously, most likely less CapEx in 2016 to come in comparison to 2015 and 2014, what's your outlook on dividends if you're going to increase pay-out here in the coming years? Thanks.

Hello, Benjamin. This is Manuel. Yes, we've used this amount of clinker because the demand went out very quickly, and I agree with you we have a spare capacity. But what you have to realize is that we've shut down all the vertical kilns during the last year. That's the main reason why we've used imported clinker, mainly I would say in the Piura plant and in the Pacasmayo plant, because all the vertical kilns are not operating right now, because we were preparing the whole plant or the whole Company for the beginning of the Piura plant.

And also to what we're already saying we have to realize that we are at the end of the campaign of kiln number three. So production at kiln number three was not as strong as it was at the beginning of the year.

To answer the second part of your question, I mean with Piura up and running, our CapEx will be very normalized and focused. And looking towards dividend this year, I mean we see going back last year we had a higher dividend because like we announced, we had saved a certain amount of money in the Piura plant. So, now we should go back to a more regular leverages we had ran in 2014.

Okay. So you're basically reducing a little bit the payout for 2016 onwards, but nonetheless CapEx is going to be less than that in prior years, right?

Yes, the total CapEx or estimated CapEx for 2016 will be around $30 million and in that it's around $10 million left from the Piura plant.

Okay.

And just to complement that, what I'm saying is that the dividends will remain stable. I mean, it could be reduced a little bit, but we don't see any dramatic changes over the last two or three years.

Okay. And then just one follow-up question on Piura clinker? So, you've mentioned about two weeks ago, so meaning 1st of February you launched clinker production in Piura. Did you still import some clinker during January or have you been self-sufficient out of the other two plants in the northern part?

That was January 29, to be absolutely exact because it's a important date for us. And no, we've not imported anymore clinker. What we're doing is we're just finishing out the stock we had on imported clinker but we've stopped completely all imports of clinker.

Okay, perfect.

Adrian Huerta, JP Morgan.

My question has to do with the SG&A, if you can just explain further the decrease that we saw on SG&A and the accounting change that you did? And the second question, if you can comment on average cement prices in December, how do they compare year on year? Thanks.

Yes, basically administrative expenses were, as we mentioned in the press release, there were two or three main issues. One, it's less administrative expenses because we've reduced some headcount and some personnel expenses. But I would say the most important one is that lower taxable income because here in Peru, the law states you have financial statements that you can use -- the hedge is protecting our FX effect. So, we don't have any FX effect financially in our financial statement, but in our taxable statements you can consider the hedge as an income. So, we are, as taxable, we were paying less tax during the next nine years and in the year number 10, tax will be an increase. That's the reason why when you see how much tax we pay there is a important amount of tax that we figured in our balance sheet.

Going on your price question, if we would like to -- if we were to look at the whole year talking about a price increase, a little bit north of 3%?

Perfect. Thank you. And just what was the accounting change as well that took place on the SG&A?

Basically, the reclassification of some tax issues and some deteriorations on inventories.

And how can we measure the reduction? I mean on a quarter-over-quarter basis it was around PEN12 million. How much was due to the tax and how much was due to the headcount reduction?

I would say, the headcount reduction should be around 30% of that.

Thank you so much, Manuel.

Dario Valdizan, Onyx.

Thank you very much for your time. I just got three questions. In the report, when you discuss cement, yes cement results, you mentioned that gross margin decreased 4.3 percent points in 4Q 2015 due to production costs in Piura and ramp-up in the start-up process. My question is kind of like a follow-up to what was asked before. How much of that drop in margins? Your gross margin was 48.2% compared to 51.4% on the third quarter. How much of that 300 basis points drop was from the use of higher imported clinker and how much was related to other costs?

Yes, I would say the clinker -- the imported clinker should be around 75% of that decrease. The rest is fixed costs of the Piura plant that it's not working at full capacity. So, basically, I would say that the biggest amount is imported clinker.

Okay. So of the increase of 17.5% year on year on your COGS imported clinker represents much of that difference, you are saying, right?

Yes, that is right. Yes.

Okay, perfect. Thank you. And then does the clinker utilization rate for the Rioja plant becomes a problem as it is pretty high? Will you be using clinker from Piura sending there or will you use clinker from Pacasmayo because the utilization rates for the Rioja plant look pretty high for clinker?

Dario, this is Humberto. How are you? Really what we're doing now, we are going to be supplying some markets from the Piura plant which is more profitable now that we have our own clinker. So, you should see that utilization of clinker rate from Rioja drop in the coming months and Piura will be taking that part of the demand.

Perfect. And last question if I may, regarding the phosphate project, do you guys have an estimated date when the Fosfatos del Pacifico Board will meet to take a decision on this project?

No, we don't. Well, like I said we're evaluating our options. I think once we are very -- much more clear on the final strategic decisions then we will call on the Board to discuss the issue.

Okay. Do you think this is more something for the second half of this year then?

Yes.

Okay, perfect. Well, thank you very much and congratulations for the results.

Thank you, Dario.

Thank you, Dario.

Pablo Ricalde, Credit Suisse.

Thanks for taking my questions. I have two questions if I may. The first one is regarding your pricing strategy for 2016. I don't know if you already have raised prices for the cement business in the first two months of the year. And the second one is, if you expect any delays in public spending from this year presidential election?

I will take the second question and then I will ask you to rephrase the first one because [I couldn't hear]. I think public spending, like we said, we have to realize now that unlike 10 years ago, central government which will be new in some more months is responsible for one out of every $3 being spent, that is really responsibility of the regional governments which have already -- which are already one year in office and like I said in my presentation, I think they are spending on a pretty good rate. So, I think two-thirds of the spending should keep a very strong rate and depending on who gets elected and the experience already have in government, we don't foresee really any droppage in public spending if anything. I was reading a chart yesterday that made an analysis of the last three or four governments on how during the first six months of the new government's really public spending picked up really quick. So we are very optimistic about that. And could you please repeat me the first part of the question, I couldn't hear?

Yes. The first one is - it's regarding the pricing strategy for 2016, and if you have already raised prices in January -- cement prices in January?

Yes. We did a slight increase in January and like I said, I mean, we closed last year a little bit over 3%. This year, we are foreseeing probably a little bit higher of a price increase than that and we already started in January.

Okay. Thanks a lot.

Thank you.

Francisco Suarez, Scotiabank.

Thanks for the call. Congrats on the results, gentlemen. A question on -- one step we reached the 60% or so utilization rates at Piura. Are you expecting one of your long dry kilns in Pacasmayo to be shut down as well? And the second question relates a bit with how order purchases that you have done in coal. I mean, you usually do those kind of purchases during December for tax purposes. Did you make additional purchases of coal during December and what amount that would be? Thank you.

Hi Francisco, this is Humberto. (inaudible) additional purchase of coal. I think we are really permanently optimizing our inventory of coal and we have many suppliers and we are very comfortable with the working coal capital we have right now.

So, the answer is no to that. On the first one, and I've said it before, let's wait and see when Piura is up and running and it's going to be a cost decision whether we optimize the use of kiln number two in Pacasmayo or not. Kiln number three would remain in production as usual. And then the other one is going to depend, like I said -- our policy is going to be, we are going to dispatch the last ton we sell from the kiln and the plant that gives us the higher margin. It has to do not only with production efficiency but also with where the market is located. So, I think this is something we'll have to see in the coming months.

Fantastic. Thank you very much and congrats again.

Thank you.

Thank you. (Operator Instructions) Samuel Bevan, Aberdeen Asset Management.

Thanks very much for the call and congratulations on results. I wanted to discuss the phosphate project once more and how you intend to finance the project. Previously you've mentioned off-balance sheet project financing, but given that leverage ratio should be a bit better and you may have some (inaudible) next year, just wanted to get a handle on why you feel comfortable in terms of your leverage ratios?

So like we've always said, I mean the finance of project -- phosphate project -- sorry, will be based on project finance. I think on the conservative side that project finance rate should be at least 50% of the total investment, probably more into the 60% and that when I say that we are evaluating strategically how to move along in the project. One key part of evaluation is the work we're doing with the banks right now in terms of how high can that number be.

So, I mean our strategy towards that is that. So I think in the end most of the structure financing will be through project finance. So, this means if you go back now to Pacasmayo and I think Manuel mentioned, that we are closing the year with 1.8 net debt to EBITDA ratio. This is something that we are in a comfort zone. As Piura steps up and comes in, really the CapEx should be very low in the coming year that we should start going lower than that. So, I think -- I mean as you all know, we are very prudent in Pacasmayo writing the debt and we don't intend to change that.

Okay, excellent. Thanks.

Thank you. At this time, I would like to turn the conference back over to the management for any closing comments.

Thank you. To sum up, we are cautiously optimistic about the outlook for 2016, even though we closed 2015 in a great way. Full year of 2015 was strong and I think more or less demonstrated our operating leverage in the fourth quarter. The end of that clinker imports will improve our cost bases further and we are very happy about this. We will see stronger economic growth compared to the last year and lesser infrastructure spending which we have always said over the last years.

El Nino remains a risk even though it's lower now according to official forecast, but we still have to keep it in mind. Based on these factors, we are, like I said before, forecasting our full-year cement volumes to grow between 1% to 3% for this year, being very prudent in our forecast. And this, of course, will impact our EBITDA and our margins for that year.

I would like to thank everybody for joining us today and especially for keeping the interest in our Company and we hope to come back always with good results. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.