Cementos Pacasmayo SAA (CPAC) 2017 Q3 法說會逐字稿

Good morning. My name is Julia, and I will be your operator today. At this time, I would like to welcome everyone to Cementos Pacasmayo Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

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, Julie. Welcome to our third quarter results conference call. I'm here this morning with Mr. Humberto Nadal, our Chief Executive Officer; and Manuel Ferreyros, our Chief Financial Officer.

Before we begin, please take note of our cautionary statements. During today's remarks, we will make certain forward-looking statements. This relates 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 for your review.

It's my pleasure to now turn the call over to Mr. (inaudible)

Thank you, Claudia. Good morning everyone, and thank you for joining our call today. I'm very pleased to share Pacasmayo's third quarter results, which again demonstrate our strong position as one of the industry's leading cement producers as well as our company's resilience as we try to return to business as usual.

While Coastal El Niño challenged us last quarter, our performance this May shows a clear, steady improvement in sales and the result -- and as a result, profitability, which Manuel will discuss in detail shortly. It is indeed very, and I want to stress very, encouraging that the construction sector grew nearly 5% in August, the highest rate this year. The INEI, the National Statistic Institute, also recently shared a preview for September which shows that the sector grew almost 9% last month, the highest rate in 42 months. This is, once again, a very positive sign of what we can expect for the months ahead.

Turning over to Pacasmayo specifically, this quarter results are indeed very promising. Revenues increased almost 7%, driven mainly by cement sales, which grew over 9%. It is extremely important to note that this quarter's growth is related fundamentally to home repairs from the sales construction segment. And a small percentage of public spending, but none of it, and I want to stress none of it comes from the official reconstruction plan that should start materializing in the coming months.

No money has been yet spent from the gross of PEN 26 billion allocated to reconstruction of the country's infrastructure, of which, almost 75% is in another part of our country. This growth in revenues has also translated into better profitability and margins. EBITDA in three quarter 2017 grew almost 40% as the main EBITDA margin increased from 4 -- almost 4.6 percentage points when compared to previous quarter. This clearly shows that besides the sales increase, shows our ability to expand profitability as we continue utilizing more of our capacity, demonstrating great promise for margins with upcoming increasing demand.

The outlook, therefore, remains indeed very positive. The demand environment for cement should strengthen significantly on the backs of the major construction projects expected in the coming 3 to 5 years. While the private sector and self-construction markets show also further growth. We therefore expect to finish the year in a similar position as last one, with mid-single-digit growth in 2018 and the high possibility to reach even double-digit growth over the next 3 to 4 years as we look forward to employing our surface capacity to address important construction demand needed to drive both Peru's recovery and important infrastructure development. Our performance this quarter once again demonstrates the strength of our company's operations and our ability to weather challenges and return to strong performance.

Let me now turn the call over to Manuel who will review our financial performance in more detail. Manuel?

Thank you, Humberto, and good morning, everyone. Let me start with the headlines for the third quarter. As Humberto commented, we continue to deliver a stronger result and sequential improvements in EBITDA and sales, with a steady upturn in profitability. Sales volume of cement, concrete and blocks increased 4.8% year-on-year basis, primarily due to the increased sales of the self-construction segment and a gradual increase in public sector spending directed at the Coastal El Niño-related repairs toward the end of the quarter. As Humberto noted, government reconstruction spending related to Peru -- Peru's reconstruction changes plan has not yet begun, which implies an opportunity for faster-paced growth in the future.

Revenues in line with the -- in gross sales volume described increased 6.7% year-on-year. Gross margin reached 40.1%, a 2.7 percentage points decrease year-on-year, mainly due to a higher raw material cost, driven by El Niño.

Cement revenues, which represents 88.1% of the cement, concrete and blocks segment, increased 9.1% year-on-year, mainly due to a recovery in demand in the north of the country. Cement segment gross profit increased 5.1% from PEN 115.8 million to PEN 121.7 million in the third quarter of 2017 compared to the same period, but gross margin decreased 1.8 percentage points. This was again due to an inflated cost of raw materials due to the Coastal El Niño-related road damages as well as an increase in price of the quote.

In the third quarter of 2017, consolidated EBITDA reached PEN 107.2 million, in line with the third quarter of 2016, but reflecting a 38.9% increase from the second quarter of 2017, which is a significant sequential improvement worth noting. This is primarily due to increased cement demand as well as a normalization of most costs, which had increase in the second quarter of 2017 due to the Coastal El Niño. Cement EBITDA margin for the quarter was 32.2%, up from 27.6% in the second quarter of 2017, reflecting initial signs of a recovery in self-construction as Peruvian rebuild -- Peruvians rebuild their homes. Once the reconstruction plan execution begins in the fourth quarter and in 2018, we expect EBITDA margins to increase as capacity utilization increases and fixed costs are further delivered.

Net income of continuing operations in the third quarter was PEN 38.6 million, a 15.7% decrease compared to third quarter of 2016. This can be attributed to a lower operating profit due to inflated raw material costs, increased transportation costs and exchange rate related to a gain in the third quarter of 2016.

In terms of operating expenses, administrative expenses increased 10.3% compared to the third quarter of 2016, associated mainly with an increase in personnel expenses and consultant services as selling -- and selling expenses decreased 2%.

On a sequential basis, administrative expenses decreased 2%, and selling expenses decreased 12.4%.

Moving onto the balance sheet, we ended September with a cash position of PEN 121.8 million or $37.3 million and a net-debt-to-adjusted-EBITDA ratio of 2.2x.

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

Thank you, Manuel. As I mentioned in my opening remarks, we are indeed very pleased to see the strengthening operational economic environment resonating on this quarter's financial results. We're happy that we're able to recover quite fast from a difficult period of El Niño last quarter. We look forward to the positive effects of significantly increased demand for cement on the backs of the major infrastructure projects expected in the 3 to 5 years ahead, with further growth from private sector and self-construction markets driven by Peru's recovery and important infrastructure development.

Operator, can we now please open the call to questions?

(Operator Instructions) Our first question comes from Mauricio Serna with UBS.

I just wanted to go a little bit about -- onto the results in the margins particularly. You mentioned that you were affected by higher expenses to -- on the raw materials as you had to transport through alternate -- alternative routes. I just wanted to make sure how the recurring would this be or if you expect the repairs of the roads to actually mitigate the costs. Just thinking about the margins year-over-year, they were 200 basis points below, and how much is that actually attributed to the sector. And if we could see like this coming back in the short term or this more of a medium-term effect on the margin?

Yes, Mauricio. Yes, most of the, the extra cost that we have for the transportation, we have a new route because the main route that was across La Niña was totally destroyed. This, the plan side, to be fixed mainly in the next 6 months and we will have some extra cost for the transportation of the -- of our raw material. In the other hand, we have an extra cost of coal. The problem of coal was that -- because of impact of La Nina -- of El Niño, there was a strong rain in the North of the country, and there were a lot of mines that were impacted. Most of them are being repaired already, and we are obtaining enough anthracite coal from the Peruvian coals. But as there has been a lot of hurricanes in the Caribbean, there have been some impact in the cost of international coal. So the total price of coal has gone up. What we expect is the coal cost going down in January again and coming back to the previous original costs.

Okay, okay. And if I may, just one more question regarding pricing. This quarter, you had much better pricing in line with inflation. Now that we're actually seeing demand picking up and potentially even accelerating with the reconstruction volumes, how are you looking at pricing? Do you see any opportunities to do further pricing probably maybe at the beginning of next year and on around what levels?

Thanks for the question, Mauricio. This is Humberto. I mean, like you mentioned, I mean, we've been able to have a good and reasonable price increase this year, a little bit of inflation, and for sure next year, we will try to do the same and even mean a little bit further. We think there's a little bit of room for further improvement on the beginning of next year.

And our next question comes from Francisco Suarez with Scotiabank.

The question I have is, we have seen a lot of gridlock politically in Peru that has been a major cause behind the major disappointments in infrastructure spending and so forth. For the information that you provide us in your press release, which are always very helpful, thank you for that, do you think that we are at an inflection point of a more constructive relation that may be able to finally unlock those infrastructure spending that we haven't seen in Peru? And I'll wait for 2 another question, if I may.

Sure, Francisco. Thank you for your question. I mean, very good question. And are we in inflection point? Absolutely. Because, I mean, if you're at zero, I think whatever you increase is an inflection point. But besides that, I mean, I think we have a new prime minister. She's been in office for less than 6 weeks. I think so far, things seem to be good. She's even working on an initiative, so -- to have some legislative powers. So I think yes. I think it's been a very long first year of government trying to work out politically with opposition, but I think both sides have learned that the only way to move things highly the way (inaudible) mutually collaborate while remaining different as parties. So I do think that the second year, all that learning curve process should pay off, and we should have a more effective government into -- of course, I'd like to (inaudible) in related to us.

Got it. And another question relates with a follow-up actually on potential increasing prices a little bit more than inflation. Aren't you worried that considering that UNACEM's utilization rates are so low, that might actually attract more cement from UNACEM? Is that a risk that you may see? And what about coal? Usually, you make more purchases of coal that helps you a little bit your own -- on your tax planning at the end of the year. Considering current prices on coal, is that something that we should be seeing in this year? Or actually, you might be interested more in pushing that -- those purchases of coal somewhere in the future when -- once that coal prices go down?

Francisco, Humberto again. I'll take both questions. On the first one, I mean, for us, pricing is part of a very solid commercial strategy. It's only one element of it. So I think, I mean, we are very clear in the strength of our brands, in the positioning of our DINO commercial structure. And I think that's why we are so strong in the market and pricing. I mean, it's only one element there. We are, of course, always observing what is going on with the competition. But I mean, we're pretty confident that, as we have done in the past years, we're able to, little by little, raise prices and keep a very substantial market share. I mean, we're very, very confident in our strategy.

And going to the second part, the coal prices, like Manuel mentioned before, I mean, the hike in price was due to a specific situation of El Niño. So I mean, it will make no sense for us to buy at a peak. We are seeing those prices dropping in the coming weeks, so we'll wait for the appropriate moment and then we will be beef up in coal stock.

Our next question comes from Jean Pierre Abusabal with AFP HABITAT.

Actually, most of my questions have already been answered, but I wanted to know what kind of progress have you seen with the reconstruction process in the North? So I think...

Sure. I think, I mean, it's all about execution capabilities. As we all know, we have an authority appointed from the central government and we have this regional presence. And I think they've had a hard time playing as a team and I think, like everything, I think after 3, 4 months of doing so, I think they learn little by little. So I think it's all about execution. It's all about the money. Clearly, not all the needs, which are there, but I think it's all about the capacity to deliver at the national, regional and local level. And hopefully, we'll see an improvement done in the coming months.

And our next question comes from Joswilb Vega with Integra.

Actually, I have 4 questions. I don't know if you want the 4 questions in just one shot or one by one.

One by one better, so we don't lose track.

Okay, okay. We would like to know if you have seen new competitors in your markets. We know that during the first quarter of the year, company imported an important quantity of cement in -- and we would like to know how they are doing.

Sure. I mean, they've imported that in several of this year. They've not really any substantial impact at all in the market. I mean, like I said before in a previous question, I mean, it's not only about bringing cement. It's about brand, about positioning, quality, distribution. So I think their effect has been really extremely, extremely tiny.

Okay. Okay. Great. There have been some disagreements with Pablo de la Flor and the local governments in the north of this country. Do you think this could complicate the reconstruction process? And also, the proximity of the rainy season, maybe it could complicate more this process?

No. I think -- I mean, disagreements are -- will occur when people are trying to do things. So I think they're normal in the course of business. They have, like I said before, they have to learn to work as a team and I think disagreements are not bad. They only will bring up the best solutions. About the rainy season, I mean, clearly, there's going to be no Niño this year. I just saw [a report] not so long ago and the probability of El Niño is 5% or really will not happen. So the rain will be normal. I mean, we've been building like that for the -- with that kind of rainfall year, so that's not an issue at all.

Okay. And finally, do you have a plan about what to do with the treasury stock, mainly with the investment in stock?

Sure. That is something that I think was a very wise decision when we did it in the past years because it creates value for all shareholders equally.

For the time being, we will keep them in our hands.

(Operator Instructions) At this time, I'd like to turn it over to management.

Thank you. And once again, thanks all of you for joining us. It's always interest and we enjoy sharing all this [details]. So if you have any calls -- sorry, any questions, and, of course, Claudia, Manuel and myself, anybody in the team are ready to answer.

And let me just close by saying that we are -- we're very happy with this third quarter. I think it's an effort the company always trying to put its best results forward. Like I said, I mean, I'm happy, surprised that we're able to come back so quickly and so strongly from a very, very strong phenomenon of El Niño, and I think the best is yet to come. So we are very optimistic of what will happen in this last quarter this year and in the next few years.

Thank you very much, everybody, for your time.

Thank you. This does concludes today's teleconference. We thank you for your communication. You may disconnect your lines at this time, and have a great day.