Cementos Pacasmayo SAA (CPAC) 2016 Q1 法說會逐字稿

Good morning and welcome to the Cementos Pacasmayo first-quarter 2016 results conference call. With us today are Humberto Nadal, Chief Executive Officer, and Manuel Ferreyros, Chief Financial Officer. (Operator Instructions)

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 April 25, 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 the 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 will now turn the call over to Mr. Humberto Nadal, Chief Executive Officer.

Thank you, operator. Good morning everyone, and thank you for joining our conference call.

Cementos Pacasmayo made important progress in its operations in the first quarter of 2016 and ended the quarter in a very strong position. We have high quality operations and the market for cement in Northern Peru is growing at a healthy pace. Financial results for the quarter lack our operations, but we are confident in the financial outlook for the rest of the year.

In terms of operations, the biggest development of the quarter was at our Piura plant. As you know, this is Latin America's most advanced cement production facility. It has already had a positive impact on Cementos Pacasmayo's operations in terms of volumes, margins and logistics.

The biggest development at Piura in the first quarter was that we started producing clinker at the end of January. Piura is now producing clinker at a rate of 800,000 tons per year. That means we will have no need to import clinker for the foreseeable future, even when Piura is undergoing maintenance. So without much greater visibility on to the expenses and we expect to maintain a sustainable gross margins in the 40s.

The other important development of Piura was the end of the ramp-up period. We have now reached initial capacity of close to 60% Cement EBITDA profit at this time. In the first quarter Piura accounted for approximately 20% of total volume. The majority of costs associated with the Piura ramp-up are now behind us.

And during our operations we had regular maintenance at the Pacasmayo facility, specifically in our kiln number three that, as you all know, accounts for two-thirds of our production capacity in Pacasmayo. That maintenance is now complete and Pacasmayo is running as normal. It�s important to remember that with Piura up and running, Pacasmayo will provide a smaller proportion of total volumes.

Turning now to the cement market in the north of Peru, conditions in Northern Peru continued their recent acceleration and we saw 8.1% growth in our volumes of cement, concrete and blocks. To-date El Nino [has grown] milder than expected, so we continue to monitor the situation.

Local governments have completed their vetting-in period and we are seeing continued progress in major infrastructure projects. Major projects in our zone of interest; Longitudinal de la Sierra Highway, the Talara refinery and Chavimochic are consuming cement as programmed and new projects will begin in the year at Alto Piura almost and Nazca Cusco Ayacucho highway.

The self-construction market on the other hand is also showing positive growth. This market consists of individuals working on their own homes. It tends to grow in line with overall economy and benefits when there is a pickup in infrastructure spending. So we are seeing positive performance year-to-date and expect this to continue.

I'd like now to briefly discuss the current federal elections in Peru. Both of the remaining candidates represents continuity in terms of economic policy and are broadly pro-business. Additionally, they have both highlighted the positive economic impact of infrastructure spending, so we are very encouraged by the current political situation at a federal level. Federal spending accounts for approximately one-third of total infrastructure spending in Peru and we think it�s possible to see an increase in federal spending at the end of 2016.

As I mentioned, financial results for the quarter lack our operating performance. Manuel will discuss these in some more detail. Nevertheless, I want to highlight one key experience, which is import of clinker. We had strong cement demand for the first quarter and we didn�t begin producing clinker at Piura until the end of January. We also had maintenance at Pacasmayo's main kiln. As a result, we imported clinker to meet cement demand. In addition, we continued and we will continue to optimize headcount of our operations, which we have also made one-time non-recurring expenses.

Finally, the sudden appreciation of the sol result in a [profit flow] which according to all projections should be reversed during the remainder of the year. We are confident we should be close to our objective of 34% EBITDA margin for the coming months. We have made progress at Piura, so our expense base has already decreased from the first quarter. And the demand environment remains very supportive. So it�s reasonable to expect improved margins going forward.

I will now turn the call over to Manuel for a closer look at our financials for the quarter.

Thank you, Humberto. As Humberto mentioned, the first quarter numbers were affected by a number of one-off expenses, all of which were predicted and planned by the Company.

Revenues in the first quarter were up 6.5% to PEN309.6 million led by higher cement volumes. Our gross margin fell this quarter to 36.9% despite positive revenue growth. Gross profit decreased 8.6% to PEN114.3 million from PEN125.1 million. There were several factors in this decline.

Firstly, as expected, we continued using imported clinker during the quarter. We have since then stopped all clinker imports and are producing enough clinker to eliminate the need for imports going forward.

Second, we had costs associated with the ramp-up of Piura. Also we have extraordinary expenses reducing headcounts. Again, these are non-recurring expenses.

Finally, there were increased depreciation cost following the startup of the Piura operation. These depreciation costs will be recurrent; even so we expect we will have a sustainable gross margin in the quarters.

Turning now to operating expenses, they remained stable year over year. In the first quarter we did see significant variations in below-the-line expenses. Financial expenses rose to PEN16.8 million compared to PEN5.1 million a year earlier. This increase was due to the expansion of financial costs related to Piura. These costs were capitalized while Piura was in the construction phase. With Piura now up and running we are accounting for them in the income statement.

Moving now to the effect of exchange rate cost, variation in the dollar ForEx change rate leads to a revaluation of our dollar cash balance, generating a non-cash expense of PEN4.9 million compared with a non-cash gain of PEN4.8 million a year earlier.

Net income for the quarter decreased 47% to PEN27.7 million from PEN52.3 million in the first quarter of 2015. Consolidated EBITDA which gives a better view of our operating performance fell 4% to PEN85.6 million from PEN89.2 million in the first quarter of 2015.

The EBITDA margin was 27.6% down from 30.7%. As I said, this was primarily due to the weaker gross margin. This is important to mention that the normalized EBITDA excluding non-recurrent events and the temporary use of imported clinker would have been PEN104 million and an EBITDA margin of 33.7%. Our balance sheet remains very strong with a net adjusted debt-to-EBITDA ratio of two times.

To sum up, profit fell mainly as a result of our non-recurrent costs and some below-the-line expenses. Our operations remains strong and we expect our financial results to reflect this in 2016. I will now turn the call back over to Humberto for closing remarks.

Thank you, Manuel. To sum up, our operations were strong in the first quarter and we ended the quarter with increased production capacity of both cement and clinker. The market in Northern Peru continues to grow, so we are affirming our expectation of growing cement volumes between 1% to 3%, which is a conservative estimate at this point. And for sure, we will meet this demand with a leaner cost base. We remain very optimistic about our results that will be achieved during the rest of the year.

Now we will open the discussion for questions.

(Operator Instructions) Andres Soto.

In your past conference call you mentioned political uncertainty as your main reason of very cautious about 2016 volumes. However, you are now reiterating the 1% to 3% guidance that you gave before. What is now the uncertainty that prevents you to be more aggressive in terms of your guidance for 2016?

Thank you for that question, Andres. Really what keeps us is our conservative view [and side], I would say, I mean I agree that the present quarter has shown many positive results and even though the elections looking forward I mean have reduced the political uncertainty we still have our second quarter in the middle of elections which are always in terms of self-construction and all things a little more complicated. So at this point that�s what I will say, I mean, we still think about 1% to 3% for that very conservative base. Do we think this to be higher if we were to be more optimistic? Yes, but at this point, we rather be conservative than not.

Perfect, thank you. And can you please also comment on pricing dynamics? Based on your comments in February I was expecting to see sequential increasing prices. But apparently that was not the case. Are you expecting to be able to increase prices in line with inflation in 2016?

The answer is yes. The thing is I mean we have been very focused in our market share, we have obtained the highest market share the Company has seen in the last four or five years. But I would say for the remaining of the year for sure we should be seeing some increase on the price.

And to that point, some competitors are becoming more and more aggressive, I mean in terms of pricing in the center of the country or what is driving the pricing dynamics these days?

Yes, I see much more aggressiveness in the Lima market and eventually that also would help us out, would help us push our pricing scenarios.

Francisco Suarez, Scotiabank.

The question that I have is relates with what you stated on your utilization rates at Piura. You mentioned that you're operating at 60% capacity utilization. That is cement capacity utilization, isn�t it, because you also say this in your press release that you are operating already at 2,800 tons per day on clinker capacity, so that puts you roughly at full capacity over there. So if I am wrong, the question is, by how much you will be sending clinker to Pacasmayo to grant that and produce cement? And what are your expectations on how to properly integrate both operations?

Only to answer the question, it's -- we are already at 80% utilization capacity of the clinker.

Okay, 80%.

That doesn�t mean that we are going to use the full clinker of Piura. We are going to use Pacasmayo, is self-sufficient clinker in Pacasmayo now that we finished the maintenance of kiln number three and Piura will be self-sufficient of clinker in Piura. What we said is that the Piura plant will be working at the -- in a normal basis in and around 50% to 55% of utilization rate.

Okay, got it, thank you. And also, a follow-up on Andres' questions on pricing dynamics. And I guess that now that we -- I mean, you typically like to improve prices on February but that didn�t happen. I mean one of the reasons because I was a little bit surprised as well of not seeing a sequential improvement in prices overall.

Hi Francisco, this is Humberto. Like I said before, we have been very focused on the first quarter for market share. We are with a very high number. And also I think competition I mean was a little bit harder on our Southern cities like Puquio so that�s why we were very cautious about price. We are consolidating more the position. But like I said, I mean for sure when you see on a yearly basis by the end of the year our price increase will be the one we said at the December conference call, which it should be a little bit of inflation. For sure we will get there.

Eric Neguelouart, Bank of America.

Congratulations on the results. I would like to know if we could have more guidance on the phosphates business and anymore guidance you may have. In the press release you mentioned there is going to be evaluation of next steps, but I don�t know if there is more visibility we could have from you. Thank you.

Sure, thank you for your question. Like I mentioned in the last call, December of last year we finished the final operation of basic engineering. And since then we are working very heavily with our partners to identify next steps which are basically are going to be between two or three alternatives. We are studying the possibility of bringing in a new partner, also I mean there is a possibility that we may exit the project. But we are evaluating it at this stage the same way we did it four years ago, which is the best way to capture the value for the Pacasmayo shareholder. But will decide which of the alternative way out is the one, that�s the one we are going to take. I mean, at all I would say no matter what the decision we will wait, we will be very conservative about it. And we will only take the one that we think balances the risk and the value capture for our shareholder.

Benjamin Theurer, Barclays Capital.

Just a quick follow up on what you've mentioned, if you could potentially quantify a little bit the impact here on gross margins. So you've mentioned that there were a couple of headcount reductions, but also additional costs associated to Piura. So thinking of that headcount reductions, so first of all, why does that show up in gross profit, so what's the relation here?

And then second now did you really stop importing clinker or is there still something left which is going to be reflected in second quarter results? But basically started April 1 onwards is 100% produced at one of your plants? So that would be like first part of the question.

Yes, hello Benjamin, this is Manuel. Yes, as told and what we state is gross margin -- normalized gross margin should be around 40% -- a little bit high from 40%, around 42%. And that means and the reason of this is that we have, as I mentioned in the press release, we are -- we had been using imported clinkers because we had the maintenance of the Pacasmayo plant and also the beginning of the Piura plant. That means that today we stop using all the imported clinker, we're using only the clinker that we are producing in Piura and in Pacasmayo.

We have left around 30,000 tons of clinker in stock, imported clinker in stock that we are not going to expect to use it. This is only a backup or an emergency stock that we have just in case. But what we expect for the rest of the whole year to use our own clinker of -- the clinker that we produce in two plants.

Okay, so that 30,000 tons basically going to be placed into inventory and in case you need it because of whatever incident that might happen, be it weather related or whatsoever, you have a little bit of the backup, correct?

That�s right, yes.

Okay, understood. And then, well, on those one-time costs associated with headcount reduction all that, can you quantify that a little bit and where was that coming from, so why headcount reduction, which area, was it in the sales channel, was it general admin costs, people who got laid off or was it just because of reallocation now and the shifts in where you have different production, be it between Piura and Pacasmayo plant?

Okay. Basically, the non-recurrent costs has been around PEN30 million, that means -- or a little bit more than PEN30 million. That means the clinker that we are not going to use because we are going to use local clinker or our producing -- our clinker that we will produce. We have some production costs of the headcount and that means basically from the operations section, and this is because we are making more efficient plant in Pacasmayo mainly, we've reduced around 40 people on the first quarter of this year.

Okay, perfect. And then lastly, can you share a little bit an update on the phosphate project, how you are moving forward, et cetera? If you could give a little bit of a guidance what you are seeing here? Is this still something you are working on and what are basically the next steps because what's somewhat stated in the press release it�s more like past-looking but a little bit of forward-looking what you are planning to do on the phosphate project in specific?

Sure. Like I said before, I mean, we have concluded all the basic engineering studies for the phosphate, and at this point we are analyzing strategic alternatives to capture the value for our shareholders. These alternatives include bringing a new partner, these alternatives include selling the projects and that's where we are right now. I mean, we expect to take some time -- somewhere in the remainder of the year our final decision, but you have to rest assure that the decision will be based in whatever we think at this point captures the most value for the shareholders.

Gabriela Benjamin, Newfoundland Capital Management.

I have a question on the strategy. The reason why you guys had to import more clinkers, could you have the Pacasmayo's main kiln waited for maintenance and so that Piura plant was actually producing clinker. That way you wouldn't have to import. So strategically there if -- or did demand come back suddenly and you guys hadn't expected such a pickup in demand?

Yes, usually I mean in the past normally the kiln number three would last 11 months for every month of maintenance. We were at month number 18 because last time we did a really good job with the maintenance, so we were stretching it out very thin at the end, so the decision had been made already in November of last year that kiln number three would stop the first quarter of this year. So to answer your question, I mean from engineering point of view we had to make that decision, at that point it was already programmed, like Manuel mentioned, and, yes, I mean we didn't foresee the pickup in demand, that�s how we ended up using money for the clinker. But we always want to make our decisions based on whatever is best for the plant.

Perfect, that makes sense. And then also I saw a pickup in advertising and selling cost. Can you speak a little bit to that, was that to protect market share in the borderline cities that you have with Central Peru or what their increase came from?

Yes, I mean basically you answered in the question, I mean we -- like I mentioned before, we have seen a little bit more of competition on our southern cities so we were making a bigger effort to defend our market share.

Okay, perfect. And one more question, just there is a significant increase in the balance sheet in prepayments, I was just wondering what those related to?

Yes, that�s basically payment of insurance in -- of all our facilities.

Okay, and that increased because now Piura is covered under it?

That includes Piura, yes.

Miguel Ospina, Compass Group Asset Management.

Why are you saying that gross margins should be normalized at 20%, last year you posted 42%, why the Piura plant is not impacting profit (inaudible) the margin?

Yes, basically because the Piura plant, it�s not at full utilization capacity. As I mentioned, the Piura plant will be at 60%. The most important one is the precision, the precision for the Piura plant is around PEN7 million, so that has been factored in the quarter. That's the main reason why you see that the EBITDA -- the normalized EBITDA. Even we have PEN7 million in that impact, the precision in the margin is going up in a big proportion.

And the other question would be, you were saying that EBITDA margin should be now normalized, so we can assume that the margins during the second quarter and going forward should be close to 34%?

Yes, that's right.

Perfect, thank you.

Samuel Bevan, Aberdeen Asset Management.

My previous question was on the phosphate project which has been answered. I was wondering if you could provide some guidance for cement volumes going forward in 2016?

Sure. Like I said earlier, we are cautiously optimistic about volumes. We have seen guidance -- we have given guidance more on the 3%, and the reason being because last year the second semester had quite a higher base. Being conservative I think 3% is okay, and we could be surprised a bit I mean what happens with the (inaudible) and how quickly the next government begins to unveil the infrastructure (inaudible).

(Operator Instructions) Jacqueline Heng, Credicorp Capital.

My question relates to the admin expenses, year on year we saw that it was flat. But actually in terms of -- compared to the previous quarter there has been a significant increase. Is there something we can expect going forward or is this just a one-off for this period? Thanks.

Yes, we feel administrative expenses hasn't gone up, the only one who has gone up is the sales expenses that Humberto explained because of the competition in the area of -- the southern area of our territory. Administrative expenses are quite stable.

Yes, related to last quarter that was quite a large increase.

That�s compared you mean with December, last quarter in December?

Yes.

No, the number that is going to be steady and is going to be normalized is the one of this quarter.

Carlos Rojas, Andino Asset Management.

I have a couple of questions, most of them have been already answered. But you mentioned that you had competition in Trujillo. Can you just tell us a little bit about who is entering to the market, is it the big player, is it small players and if you can keep your prices in that zone or just lowering to keep your market share?

And the second question goes related to the FX loss, I believe that what you are doing is you are keeping your cash in dollars, is that something that we should expect for this year, keeping your cash in dollars?

Yes, Carlos, to answer the first question, I mean what we are seeing is increased competition from very small players and there is I mean no real attack from any small players. It's just I mean normally (inaudible) some income trucks that goes to Lima with some products, come back empty and it's a little bit there. We have not lowered prices, we have just based ourselves in a very strong commercial position and many other marketing tools to defend the market share. But that's the reason, I mean, we still have an extremely high market share, but any price increase competition (inaudible) back. So whatever we see is just fight for -- to defend our market share.

Hello Carlos, answering your second question, the FX, FX has (inaudible) because we have cash in dollars and we expect to maintain our main cash in dollar during the year.

Okay, thank you.

Froilan Mendez, JPMorgan.

Just to make clear, so Piura and Pacasmayo will each supply their own produced clinker for their own cement production, right, and at 50% to 55% capacity utilization. Is that right?

Yes. That's correct.

Great. And any color for reducing leverage going forward?

No, I think I mean we're going to have very healthy cash flow generation this year. We have not started specifically any -- anything in terms of that drive, (inaudible) at a comfortable level, that�s something that maybe we'll start looking next year.

Okay. Thank you very much.

(Operator Instructions) Francisco Suarez, Scotiabank.

I have a doubt on based on what you answered to Benjamin few moments ago, on the inventories of imported clinker. You mentioned you have roughly 30,000 tons of inventories, but usually clinker doesn't last forever. So I guess that the rational thing to do is to use it anyway regardless of having an inventory there for any potential contingencies or, I mean what my question actually refers to is that if we should be seeing perhaps even you are not using that clinker, we should be -- we should be seeing a write-off of inventories for the amount of the value of those inventories, isn't it?

Francisco, this is Humberto. No, there is actually no chance of write-off. And clinker can last a very long time. I mean, so rest assure that with like Manuel mentioned this is only an emergency stock, we would only use it if something happens, but we don't intend to use in the coming years. And like I said, clinkers can last quite a few years.

Okay, got it. And lastly, in the case again going to Trujillo, I guess Trujillo has a port there and is it easier to ship by sea imports to Trujillo?

No, really Trujillo has no port. The closest port is Salaverry, which is almost 200 kilometer away from Trujillo. So I think it's very uneconomic to ship through Salaverry.

And there are no further questions at this time. I'd be happy to return the conference over to Mr. Humberto Nadal for any concluding comments.

Thank you very much and thank you to everybody for joining today's call. Thank you for your continued interest in our Company. Like I mentioned before, this was a quarter that really, this was very optimistic in terms of what's ahead of the future for Peru, and specifically for the northern region. We will have a new president in the next two months and we are very confident at this point that the infrastructure spending will pick up heavily during the next three to five years and that's what we remain very optimistic about, the performance of our Company, and specifically because now with Piura up and running and being such an efficient and (inaudible) I am sure that Company will be in a position to capture a lot of the value created in the cement market in the coming year.

Thank you very much once again for your time and as always Manuel, Claudia and myself, we are here if you have any further questions. Thank you very much.

Thank you. This does conclude today's conference. You may now disconnect your lines and everyone have a great day.