Cementos Pacasmayo SAA (CPAC) 2017 Q2 法說會逐字稿

Good morning. My name is Karen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cementos Pacasmayo Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the call over to Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may begin.

Thank you. Good morning, everyone. Thank you for joining our call today where our CEO, Mr. Humberto Nadal and our CFO, Mr. Manuel Ferreyros will discuss second quarter results and answer your questions.

Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are, therefore, subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory filings.

With that, I'd now like to turn the call over to Mr. Humberto Nadal.

Thank you, Claudia. Good day, everyone, and thanks for joining us on today's conference call. The second quarter 2017 continued to challenge us, with Coastal El Niño rains and destructive floods finally coming to an end in April. These resonated through our second quarter results. As can be expected, notably impacting April sales volumes and operating expenses as rain suddenly rose forced us to distribute our products through alternate routes, resulting in increased support and logistic costs. However, while we had a difficult start to second quarter, I am indeed pleased to let you know that at the beginning of May, things have returned to normal, and we're already seeing improved performance with strengthened May and June sales growing at 2% and 6%, respectively, as well our more stabilized expenses. It is also important to note that despite this quarter's challenges, we achieved a sequential increase in sales, as Manuel will discuss in more detail in his financial review.

Our Piura plant again made important contributions, remaining fully operational throughout the Coastal El Niño downpours. Reduced clinker production in the second quarter was due to a planned preventive maintenance of Piura's kiln. PPM scheduled at regular intervals, identified potential problems and substantially reduced reactive maintenance. We have a provisional clinker ahead of this scheduled PPM. No imported clinker was, therefore, needed.

Now that Coastal El Niño natural disaster is behind us, let's turn on to the opportunities that lie ahead. As I described, the situation has normalized and we have seen our performance strengthened in the last month. It's important to note that this does not yet include growth related to rebuilding our country's infrastructure The considerable physical damage caused by Coastal El Niño has left hundreds of thousands of Peruvians homeless and caused billions of dollars in damage to schools, hospitals, houses, bridges, roads, highways, channels. Economists in Peru have put a long-term price tag of more than $6 billion, more than 3% of gross domestic product, for community resettlement and reconstruction.

On April 25, Peru's Congress approved a Reconstruction Law, known as Ley de Reconstrucción con Cambios, which creates a dedicated unit that will be in charge with overseeing the reconstruction. The plan is to not only rebuild, but to create infrastructure resilient to future natural disasters, as global climate change is expected to make future El Niño events more frequent and powerful. The Peruvian government has appointed Mr. Pablo de la Flor, former Vice Minister, in early May to lead this effort and assigned more than $6.2 billion from Peru's Emergency Fund to be directed towards rebuilding destroyed or damaged highways, homes and bridges.

Mr. de la Flor should present the construction plan by August, and the reconstruction projects will go through a fast track. We hope execution can begin late this year or early 2018. Note that this budget will be directed towards the northern regions where Pacasmayo operates Ancash, Lambayeque, Piura and Tumbes where most of the damage is concentrated and declared a State of Emergency.

This represents meaningful upside potential for the company's overall performance moving forward. This reconstruction plan is independent of the billions of dollars in blocked infrastructure investment that President Pedro Pablo Kuczynski’s pledged to unlock when he took office in July 2016. This infrastructure investments are supported by the President, both the President as well as Peru's Congress, despite their well-publicized differences.

We are very encouraged by a meeting held last week on July 7, where President Kuczynsk and Keiko Fujimori, the opposition leader that controls Congress, agreed that political dialogue is needed to jump start the country's faltering economic growth. We remain focused on these opportunities and our key advantages. We believe our performance this quarter is further confirmation of Pacasmayo's ability to maintain strong operational performance. The benefits of our Piura plant are clear reflecting our results, which is particularly evident in terms of our [PO].

We are the uncontested leader in North Peru with the capacity to address the construction demand related to Peru's recovery as well as important infrastructure development we expect to come to fruition in the future ahead. We continue to look forward to sequential improvements and improved margins in the second half of this year.

You'll note that we were, again, included in Lima Stock Exchange Good Corporate Governance Index for the eighth consecutive year as one of only 6 Peruvian-listed companies included this year.

This is further optimization of our full commitment to shareholders and best-in-class corporate governance.

I'll now turn the call over to Manuel to review the highlights of our financial performance. Manuel?

Thank you, Humberto. Good morning, everyone. Shipments of cement, concrete and blocks were 524.8 million tons, a 2.8 decrease compared to the second quarter 2016. As Humberto mentioned, this decrease was mainly due to the sharp decline of shipments in April due to the Coastal El Niño. It is important to note that volumes in both May and June increased year-on-year in line with the end of the flooding and the resulted recovery and demand in self-construction. Shipments increased 2.2% in May and 5.7% in June compared to the same month of last year.

April's sharp demand decrease combined with the need to reroute some shipments also related to El Niño had an impact on our entire cost structure, as Humberto had mentioned, despite a normalization in demand throughout May and June.

Revenues accordingly decreased 6% compared to the second quarter of 2016, while gross profit and gross margin decreased 14% and 3.6 percentage points, respectively.

However, it is important to note that revenues increased year-on-year in both May and June with a growth of 0.6% and 3.9%, respectively.

In our cement segment, revenues increased 0.8% in the second quarter 2017 compared to the second quarter 2016, despite the decreased sales volumes in April due to the recovery of cement volumes in May and June. Cement segment gross margin decreased 1.2 percentage points compared to the second quarter 2016. This was again due to the Coastal El Niño effects in April as well as higher cost of goods sold, as we had to reroute certain shipments due to road closure, as discussed.

In terms of operating expenses, administrative expenses increased 4.5% compared to the second quarter 2016, associated mainly with the Coastal El Niño as well as some consultant services. On a sequential basis, administrative expenses only increased 1.7%. Selling expenses increased 7.6% compared to the second quarter 2016, in line with increasing advertising and promotion expenses budget in order to successfully defend our market share.

On a sequential basis, selling expenses decreased by 6.6%. In line with our comments on the Coastal El Niño and effect on our cost structure, including minor damages to our operations and increased distribution and provision of raw materials cost from road damages, consolidated EBITDA decreased 19.1% year-on-year to PEN 77.2 million, while cement EBITDA margins decreased 4.4 percentage points.

To separate the Coastal El Niño effect on EBITDA margin in April from our normal result in May and June, we provide the margin for each month as well as for the full quarter, cement EBITDA margin for the quarter was 27.6%, while on month-by-month basis cement EBITDA was around 17% in April, around 31% in May and around 32% in June.

These margins only include some recovery in self-construction. Once the reconstruction plan has been presented, and its execution begins later this year, and in 2018, we expect EBITDA margins to increase, as capacity utilization increases and fixed costs are further relieved. Net income of continuing operations in the second quarter was PEN 21.3 million, a decrease of 37.4% compared to the second quarter 2016, basically because of the El Niño impact.

Moving onto balance sheet. We ended June with a cash position of PEN 49.4 million and a net debt to adjusted EBITDA ratio of 2.4x.

I'd now like to turn back the call to Humberto for closing remarks.

Thank you, Manuel. It was a challenging 2 months here in Northern Peru, and it's clear that these are the times when our company strength and the progress we've made are most evident. We believe we have considerable opportunity ahead of -- ahead, as we participate in rebuilding Peru's infrastructure and expect to capitalize on demand recovery anticipated towards the back half of this year, with continued recovery in 2018.

Before I turn the call to the operator, I'd like to speak to our Pacasmayo colleagues and employees for your extraordinary dedication to Pacasmayo and operations, here are my sincere thanks. We commend you for the many contributions you've made to all of our neighbors in these incredibly difficult times. Operator, can we now please open the call to questions.

(Operator Instructions) And our first question comes from Andres Soto from Santander Bank.

I have 2 questions. The first one related to the charges that you're reporting on the brine project. I would like to understand what is your outlook and what is exactly the amount of money that you paid this quarter, which was almost PEN 1 million. My second question is regarding your new cross-currency swap. I would like to understand what is different from the previous one and what can we expect in terms of financial expenses going forward.

Okay, Andres. I'll take the first part and Manuel can take the second one. Regarding the brine, basically, all the expenses related to our project is keeping the concessions alive. That's all we are doing right now. Like you mentioned, it's around PEN 1 million that is all because that project is on standby. We're already paying enough money to keep the concessions alive.

And that's the amount of money that we shall expect every quarter? Or is this going to be just one a year?

It's more or less same amount every quarter.

Concerning the second question, Andres, we haven't done any extraordinary changes with the swap. It's the same one that we have since the beginning.

So financial expenses will remain at the same level that you currently have?

That's right. Yes, maybe you see some changes because we paid the interest of the debt and the cost of the hedge in dollars. So there is some changes because of exchange rate, but it's only of what we paid every semester.

And our next question comes from Mauricio Serna from UBS Financial.

I have a couple. First, you just talked about the way the volumes and the sales evolved positively in May and June. And I wanted to ask what can you tell us about pricing because it seems that at least price and pricing mix perspective, it's been negative in the last couple of months and probably also April. So I just wanted to get a little bit more detail on that. Also, when you mentioned the EBITDA margins for May and June without the disruptive effect of the El Niño storm, I'd just like to know if those were actually better margins year-over-year? Or how that those compared to the last months of -- in 2016? And finally on the severance payments that you mentioned in the report, is that something that should be recurring on the second half of the year? I think you also mentioned the recurring increase in the administrative expenses, I don’t know if that's excluding these charges.

Yes. Thank you for the question. Yes, the prices -- we've just raised prices around 20, 25 days ago, but there is a big difference that you see between dispatches and revenues are because sales of concrete has gone down approximately 40%. That's the major impact and the big difference between dispatches and revenues. And second, what we expect for the whole year in EBITDA margin is to close the whole year in 31%.

And if I may add to the -- it is Humberto, to Manuel's comment on the price, like he said, I mean, the pricing payment was a little bit over 3.5%, which we think it was -- it's a good amount to increase. I mean, you know what I see reflected here because it was over the last 2 weeks, but, I mean, this would be reflected on the next 6 months.

Mauricio, does that complete your question?

Yes. The first 2, but just I want to know about the severance payments. Should we expecting -- should we be expecting additional ones for the second half of the year? And I think you mentioned like -- you mentioned a recurring amount of like the -- without the effect of the expenses in this quarter?

Regarding the severance payments, I mean, you should expect some in the second part of this year, but at a lower rhythm that they have been doing before. I mean, we're always looking for operational efficiency and sometimes severance payments are the cause for that. But in the long run, it always -- it all works towards operational efficiency.

Okay. And your 31% EBITDA margin expectation includes those severance payments?

Yes.

(Operator Instructions) And our next question comes from Hernán Kisluk from MetLife.

It's just one. It's regarding what do you expect for net leverage by year-end?

Net leverage by year-end should be very similar as what we had today, between 2.3, 2.4.

And our next question comes from Froylan Mendez from JPMorgan.

After that increase, as you mentioned, in the last 2 weeks, would prices in today would be equal to prices in April or a bit still -- a bit lower. I want to understand what's the price level after this increase.

I mean, the increase is to the actual current prices are right now higher than they were in April.

And our next question comes from -- I don't know how to pronounce your first name, I'm so sorry. Is it...

Just say Mr. Vega.

Joswilb Vega from Integra.

I actually have 2 questions. The first one is, if you have identified a source of the (inaudible) spots in May and June and we would expect the same level for the rest of the year, I mean, around 200,000 tons per month, sorry. And the second one would be that you mentioned that you have increased your SG&A expenses because you have expenses more in advertisement to take care of your market share, that is because you are experiencing more competition or not?

Yes. I think the first part of your question, I mean, I think I mentioned in my opening words, I think self-construction has proven very resilient in May and June and I think that's what you're going to be seeing for the remaining part of the year, with positive numbers. And I think the biggest expectation is going to come through our construction side. If that really kicks in towards last 3, 4 months of this year, we could be facing an interesting second semester. And based on your...

In terms of SG&A, yes, I mean, I think I'd be repeating myself every call, every chance, again, I mean, we have a very dominant position in North and we want that to remain for time being. Pacasmayo turns 60 years at the end of this year. So now, I mean, we are in the middle of launching -- we have started already changing some products and relaunching our brand. And it's so far of really always doing preemptive moves on the market, not because we see necessarily increased competition, but because we want to keep our leadership unchallenged.

(Operator Instructions) And our next question comes from (inaudible) [Harding].

Can you talk a little bit about the level of price increase you said you implemented 25 days ago?

The net price increase that Manuel was mentioning was around 2.5%.

And our next question comes from Francisco Suarez from Scotiabank.

Just in addition to the hike in cement prices that you just did, what are the chances to improve the sales mix with value-added product? I mean, regardless -- I mean, perhaps, placing more in the market the Antisalitre brands and so forth rather than the typical general use for cement. And also a follow-up question on just -- on your expenses related with advertising and everything. Does that is only for advertising in general? Or do you actually increasing the margins that the distributors may actually get for selling your products in your locations?

Thank you, Francisco. Let's see. On the first one, I mean, as we've discussed, I mean, with you in privately, I mean, we've always all about high margin cements. I mean, I said it before, we are in an important year for the company because we are turning 60 years, and we are in the middle of some surprises, I want to come in the second part of this year. Regarding high-value cement, I mean, we're always trying to push the most -- the Cementos both the general public ones as that bring more margin to us. I mean, not only the aim is for demands, where we, like I said, in the second part of this year, we will see some surprises. Regarding your second part of the question, I mean, the increases have to do basically advertising. I mean, the margin we give to our distributors has remained unchanged.

And our next question comes from Daniel Sasson from Itaú.

My first question comes -- it's related to your one growth expectation. I know that you have a rough first half of 2017, but you are more -- you seem to be more optimistic with the PEN 20 billion that they're going to be put to use for the reconstruction works. And if you could detail, what do you expect for volume growth in the second half of this year, if we should assume a 5% growth in the second half as we've seen already in June? Or if that would be too optimistic? And what are your views for 2018? And on the same -- in the same line, do you -- can you give us a more color on the Huacrachuco-Sausacocha and you see of almost what you expect in terms of cement demand, maybe already in 2017, these are the 2 projects you mentioned that could already start in 2017? And finally, the PEN 20 billion for the reconstruction that were transferred to the reconstruction fund, how long do you think it will take for this money to be actually deployed? Should we expect it in 3 or 4 years or that seems optimistic at this point?

Yes. Regarding the first part, I mean, what's going to happen in the second semester, I mean, like we mentioned, I mean, in March and April, I mean, we took a severe hit in downward sales. So I think and we said in the previous call, I think the second semester will be a pretty good one and we should compensate those dramatic sales. So if we were to make up a projection right now, I mean, if we come the year at a dispatches the same as similar year, we will consider that a pretty good number considering the Coastal El Niño. Turning to 2018, that's a different story, because then you'll have that. So then, yes, I mean, we'll be looking at probably 4% to 5% growth and either a construction comes in that could really hit the double-digit number. I mean, when you talk about PEN 20 billion, this is deployed over the next 2 years, which is the plan of Mr. de la Flor, and that to answer also your question. I mean, I could -- we're very confident that we would see '18, '19 and '20 double digits if that money is deployed.

And our next question comes from Mr. Vega from Integra.

I'm sorry for the additional question. You mentioned that you have some trouble in transportation because of the Coastal El Niño. But I would like to know if the transportation expenses are included in selling expenses or in cost of goods sold. My question is because I can see that the COGS for both quarter and selling expenses for the quarter are almost the same. I mean, the only difference has been the revenue. So I'd like to know how is considered these transportation expenses.

Yes. No, this -- the cost of transportation is included in the cost of goods sold.

And I'll now turn it back over to Humberto for some closing remarks.

Thank you again for joining us. We're closing a very challenging quarter. And I think I said before, I mean, my repeated thanks to all the Pacasmayo team. I think we've done a tremendous -- they've done a tremendous job in a very difficult environment. And I think May and June have resulted positive. Thanks to all the efforts of our team. And also, I'd like to thank them because Pacasmayo every single member of our company was there to help our neighbors in a very difficult situation over the last months. Thanks, everybody, for joining the call today. And if you have any questions, as always, Claudia, Manuel and myself are always available. Thank you very much for the time.

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