Cementos Pacasmayo SAA (CPAC) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Cementos Pacasmayo's First Quarter 2018 Earnings Conference Call. (Operator Instructions) And please note that this call is being recorded. (Operator Instructions) I would now like to introduce your host for today's call, Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may now begin.

Thank you. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Ferreyros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter and our strategic outlook. Mr. Ferreyros will then follow with additional commentary on our financial results. He will then turn the call over for 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 filing.

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

Thank you, Claudia. Good morning, everyone, and thanks for joining us on today's call. We had a strong start to 2018 with solid results for the first quarter assuming increases in nearly all key financials and operational metrics and a continued cyclical trend of strengthening volumes.

Our net income increased 37%, compared to the first quarter of previous year, mainly as a result of our 12.8% increase in sales. It is a clear reflection of the rebound in demand we've experienced in first quarter as well as encouraging signs of an uptick in both public sector spending and in the self-construction segment as Peruvians rebuild their homes and properties. Coastal El Niño caused billions of dollars in damages to Peru's already (inaudible) infrastructure. And our country's new government has indicated it will remain focused on reconstruction efforts, which will translate in the rising public investment. President, Vizcarra, has already shown his commitment to speeding the execution of important projects, including changes in the legislation where necessary. Prime Minister, Villanueva, has also called for reduced bureaucracy to accelerate projects implementation. These are strong indicators of improvement, which, we believe, will become more apparent going into second half of 2018.

As you may already noticed, we have launched a new company logo, a new commercial name, a new design for our current products as well as our new products. This is part of our long-term strategy admission, evolving from a cement producer to a construction solutions company, pleasing the clients at the center of our overall strategy. We firmly believe that this strategy will allow us to anticipate the client's needs resulting in overall growth for the company and continue to generate value to our shareholders.

Regarding this new focus, we believe the timing is conducive to these initiatives as the damages from Coastal El Niño need to be fixed soon and as efficiently as possible, giving us an excellent opportunity to showcase our progress, developing specialized cement-based products for specific needs of our clients. In the first quarter, we inaugurated our heavy (inaudible) manufacturing plant that expands our ability to manufacture the highest quality (inaudible) from pre-products such as (inaudible), to provide new and improved solutions, which address today's pricing infrastructure needs. We were able to use our linked applications in our (inaudible) Cajamarca airports here in Peru. You see a concrete, a reduced prime time, a mere fix upper that allowed the run way, and therefore, the airport to remain open throughout the operation process.

Another very good example of this was the repair of the highway back on (inaudible) quarry to the Piura plant, which was damaged and unusable after Coastal El Niño about a year ago. After several months of research, we came up with the most convenient solution based in available resource. We feel (inaudible) in the middle of a desert (inaudible) for use in under 60 days. These are only a few examples of key areas in which we need an intent to innovate (inaudible) by expanding our building solution offerings.

In conclusion, we feel very optimistic about the year ahead. We are confident of our country has left the political turmoil behind and as Pacasmayo, we are entering 2018 having further streamlined operations with a strong end to 2017 and exciting news in our long-term strategy and research.

I will now turn the discussion over to Manuel to go into more details of the financial information. Manuel?

Thank you, Humberto. Good morning, everyone, and let me go over some key financial highlights for this quarter. As Humberto discussed, first quarter sales volume of cement, concrete and blocks increased 7.8% year-on-year, driven by strong cement sales for the public sector and self-construction segment. This reflects continued volume expansion with encouraging signs that Peru's reconstruction is beginning to materialize. In line with strong volumes we saw, first quarter 2018 revenues increased 12.8%. Consolidated EBITDA increased 14.4% compared to last year, mainly driven by increased cement sales volume as well as lower cost due to higher dilution of fixed costs and higher average price of cement. Cement EBITDA margin reached 30% for the first quarter 2018, in line with the same quarter of 2017. As Humberto mentioned, during this quarter, Pacasmayo made a decision to repair the highway that links our primary seashore quarry to the Piura plant. So while this (inaudible) investment incurred a PEN 4.8 million charge during the first quarter, we expect to recover the cost of this investment over the next month. Further, we expect EBITDA margins to normalize and further improve in the quarters ahead, assuming continued volume growth has reaped benefits of good results. Without this expense, cement EBITDA margin would have been 31.6%.

Turning to operating expenses. They have decreased year-over-year as operations related expenses have decreased in fewer severance payments and reduced mining rights with Salmueras Sudamericanas Brine project (inaudible). First quarter 2018, administrative expenses, therefore, decreased 13.2% compared to the same quarter of 2017 to PEN 42 million.

Selling expenses remained in line with the same period last year, reaching PEN 11.7 million in the first quarter of 2018 as compared with PEN 11.4 million in 2017.

Moving on to a different segment, cement sales increased 13.4% during the first quarter of 2018 compared to the same period of 2017. With margins remaining flat due to the increased transportation cost and slight increase in the price of the coal. Concrete sales increased 10% compared to the first quarter of 2017. Although, margin was mainly affected by the higher fixed costs as large dedicated plants have ceased operations due to decreased demand from the large infrastructure projects.

Finally, in the first quarter of 2018, net income increased 37.3% compared to the same period of 2017, mainly as a result of increased sales and improving operating profit.

To summarize this quarter, we have experienced the operational benefit of an improved demand environment. We expect to see further improvement as capacity utilization of our facilities continue to rise and we reap the benefits of our commitments to operational efficiency.

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

(Operator Instructions) Our first question is from the line of Daniel Sasson with Itaú.

My first question is regarding to your forecasted margins -- EBITDA margins for 2018. I was wondering how much can you improve your margins now that you've started to repair damaged infrastructure or infrastructure that was damaged by the heavy rains last year by the Coastal El Niño. So what would be your EBITDA margin forecast? And how does that -- how would that be a factor impacted by the higher capacity utilization in Piura? And if you expect Piura to -- capacity utilization at Piura to increase throughout 2018 and throughout 2019 because of the construction works in the northern region? And my second question is more an overall question related to the -- your volume growth estimates for 2018 and 2019 considering everything, the infrastructure projects, the higher repay or self-construction demands and so on and so forth?

Daniel. The first part, as Manuel mentioned, I think as you will know, margins are solely impacted by volume growth. But anyhow, 32% looking forward is something that we feel very comfortable as a base scenario, with our volumes growing around 4% to 6%, which was what we said in our last call at the beginning of this year. According to the second part of your question, we have to bear in mind that self-construction is still the long puller of demand right now, PEN 18.9 billion of the reconstruction budget assigned to the north, only 10% has been allocated so far. So we still feel that should be the key in the coming years, in this (inaudible) next 3 years. Then of course, our base scenario will move from the 4%, 6% to a double-digit scenario. The reason we don't mention those numbers is because we are not really in the position to determine when and how that money will be spent. But we remain confident with our new government, we will have this coming in the coming years.

Perfect. Just as a follow-up, what's the impact on cement demand on volumes spending specifically from the PEN 18.9 billion that is budget for the reconstruction works in the northern region?

If we were to bring all the reconstruction program into cement tons, (inaudible) million tons of additional cement.

(Operator Instructions) Thank you. At this time, we have no additional questions. I will turn the floor back to management for further remarks.

Actually, we do have another question that just came in from the line of Froylan Mendez with JPMorgan.

Regarding SG&A, we saw an impact last quarter on increased marketing efforts. I want to know your thoughts going forward, what should the normalized level of SG&A should be? And what are the drivers behind it?

Froylan, SG&A, we should expect being flat for the next 3 quarters. We expect having a reduction of the whole compared expense last year compared with this year, I would say 8% reduction.

Our next question is from the line of Julio Arantes with JPMorgan.

Have a very quick question. If you could provide an update on the competitive environment in the northern part of the country? We saw late last year, earlier this year some headlines over potential competitor trying to import cement and potentially bringing a grinding facility there as well. So if you could provide the company's view? And if you have seen any new developments from this potential entrant? And also, what would be the base case for price expectation throughout this year if the strategy remains truly past inflation? Or if you see a different environment for 2018?

Yes, Julio. Thank you very much for your question. In terms of the competitive scenario, we know as much as you already know through the press. I mean, yes, some cement is being imported into all parts of Peru, the amount is very small. We've heard rumors about a grinding facility being set up. But so far, I mean, we have not seen anything concrete in that. As you -- as I mentioned in my speech, I mean, we've just launched our new logo, our new strategy, you have to remember that as Pacasmayo (inaudible) 16 years of continued leadership and support for the clients. So I think we remain very confident over capacity of our company, our brands and our different kinds of cement to fight any new visitors. In terms of price adjustment, we did some movements at the beginning of this year. So, yes for sure, we will be comfortably above inflation for this year and we should regain a little of margin on that in the coming months.

Thank you. At this time, I'll turn the floor back to the management for closing remarks.

Well, thanks -- thank you all for joining us today. We are very happy with the results this quarter. We are even more excited about the future. Looking forward to (inaudible) for this year, for the coming 3 years. We're convinced our revised vision of becoming a construction solution company is right on the mark. And I'm sure we'll deliver strong value for our shareholders in the coming months and, of course, on the coming years. Thank you very much. And as usual if you have any questions, we are always here available for them. Thank you. Have a nice day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.