Cementos Pacasmayo SAA (CPAC) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Pacasmayo's Third 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 begin.

Thank you, Jeremy. 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. We will then turn the call over to 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 morning, everyone, and thanks for joining us on today's call. The third quarter showed a recovery in volume growth after a temporary slowdown during May, June, and July, due mainly to the World Cup. Sequentially, cement volumes increased more than 14% this quarter compared with the previous quarter and almost 4% for the first 9 months of the year compared to the same period of last year. We believe this is a positive sign of the trend we can expect for the rest of the year, making it possible for us to reiterate at this point our expectations for full year volume growth between 3% to 4%.

Despite some challenges on the cost side, with coal prices rising, and an increased cost of raw materials in Piura, since we had to use inventory of higher-priced seashell, we were able to deliver a very strong cement EBITDA margin of almost 32% this quarter. If we look at year-to-date results as of September, we have seen a 5.1% increase in cement EBITDA. This is a very clear example of how we have delivered on our commitment to operational efficiency and value generation.

I'd like now to move on to the progress on our long-term strategy. As we have mentioned before, our new focus is to evolve to a building solutions company, with the client as the main and fundamental driver. During this third quarter, we built a significant concrete pavement road, the Sanchez Cerro Avenue, located in Piura. This pavement was almost 2 kilometers long, and it's one of many we intend to build in the future, as we work hard on educating authorities and users on the increased benefits of concrete roads, especially in areas prone to severe rain and flooding at the north of Peru. We already have 3 additional roads in Piura that are either in execution or very close to it, totaling an additional 13 kilometers: Chulucanas, Santisteban and Bayovar Avenues. Additionally, we have launched a new line of dry cement-based ready-to-use product called Rapimix. This line of products will address both the housing needs in the self-construction segment and the construction companies' needs in the industrial segment. This is one more example of a company permanently innovating to deliver new solutions to our clients.

I am also very glad to inform that the positive trend in ready-mix sales that we begun seeing at the end of last quarter has continued. Year-to-date, we have achieved a 19% increase in sales, with a positive sequential trend as volumes have consistently risen quarter-on-quarter. We have been proactively looking for new clients, given that large infrastructure projects were experiencing significant delays and thus have successfully expanded our client base, incorporating more small and medium-sized projects and companies. Although progress has been slow on reconstruction efforts, the need is extremely pressing, and we are absolutely confident that even if it is at a slower pace than expected, the north of Peru will, for sure, be rebuilt.

During this quarter, we have seen some progress on the bidding processes of some medium-sized infrastructure project in our area of influence. The modernization of the airports in Piura and Chiclayo should begin execution by next year as well as works on the Chimbote Bypass. Besides ensuring the cement for these projects, we are very actively involved in designing and developing new building solutions, generating value-added product based on cement and presenting these to the corresponding authorities and decision-makers. We firmly believe, absolutely convinced, this is an excellent opportunity to display our new portfolio of products and to deliver concrete results on our long-term strategy and vision.

To summarize, this quarter we have continued to deliver on the operational excellence we have consistently committed to and to focus on the pillars that support our long-term strategy, which is key to our future growth and value generation.

With that, I will now turn the discussion over to Manuel to go into more details on our financial performance. Manuel?

Thank you, Humberto. Good morning, everyone, and let me go over some financial highlights for this quarter. As Humberto discussed, third quarter sales volume of cement, concrete and blocks recovered from the slowdown during the second quarter, increasing 1.9% year-on-year to 610.8 million tonnes, driven by strong cement sales to the public sector and self-construction segment.

For the first 9 months of the year, we can see volume growth of 3.8% compared to the same period of last year, reflecting the return to volume expansion that should result in positive results for the full year. The revenues of this segment have remained flat, mainly due to a change in mix of products sold and to a slight decrease in prices. Sales of our Mochica cement increased as we successfully defend our market share. And therefore, the average price of cement decreased slightly. However, for the 9 months of -- as of September 2018, revenues increased 3.1% compared to the same period of last year, reflecting increased sales volume.

Consolidated EBITDA for the third quarter reached PEN 101.5 million, a slight decrease of 5.3% compared to last year but a 19.8% increase when compared to the second quarter of 2018, demonstrating a very positive trend. For the first 9 months of the year, consolidated EBITDA increased 5.1% compared to the same period of the previous year, mainly due to efficiencies of -- on operational expenses, which offset the increase in coal prices and the use of more expensive raw material in our Piura plant.

Cement EBITDA margin reached 31.9% for the third quarter, in line with the third quarter of 2017. This is a significant achievement considering the cost increase during this quarter as well as a difficult comparative base, since the third quarter of last year was exceptionally strong, as volumes recovered after Coastal El Niño. For the first 9 months of the year, cement EBITDA margin reached 30.8%, a 0.6 percentage points increase when compared to the same period of last year.

Turning to operating expenses, these have decreased year-on-year as personnel-related expenses and third-party services have decreased, in line with our constant search for operational excellence. Third quarter 2018 administrative expenses decreased 13.7% compared to the same period of 2017 and to PEN 41.6 million and 13.4% to PEN 126.3 million in the first 9 months when compared to the same period of last year. Selling expenses increased slightly, both in the third quarter and in the first 9 months compared to the same period of 2017, respectively, mainly due to an increase in sales.

Moving on to the different segments. Cement sales decreased slightly during the third quarter of 2018 compared to the same period of 2017, with gross margin decreasing 3.2 percentage points. This was mainly due to a change in the mix of products sold and a slight decrease in prices as well as an increase in the price of coal and other raw materials, as we consume inventory of higher-priced seashells in Piura. For the first 9 months of the year, cement sales increased 3.7% compared to the same period of the previous years, mainly due to an increase in sales volume. Gross margin decreased slightly due to increase of the costs mentioned above.

Concrete sales increased 24% compared to the third quarter of 2017, reflecting increased sales to small and medium-sized companies as well as to continue to expand our client base.

Gross margins decreased 5.7 percentage points in the third quarter of 2018 compared to the third quarter of '17. Since large infrastructure projects have been delayed in the north, we have actively sought to fill this gap with demand from other small and medium-sized projects. This all allows us to utilize more of our installed capacity, but at the same time, generates an additional logistic cost since we need to deliver to more clients.

For the first 9 months of the year, sales increased 19%, mainly due to the increased demand mentioned above. Gross margin decreased 8.5 percentage points due to the increased logistic costs as well as increased depreciation from the investment in new machinery.

Precast sales increased 19.6% compared to the third quarter of 2017, mainly due to a change in strategy, which seeks to expand our client base on our portfolio of products, including heavy precast products. Gross margin decreased 16.4 percentage points compared to the third quarter of '17, mainly due to a higher cost from initial investment required for a new heavy precast products. For the first 9 months of the year, sales increased 27.3%, mainly due to the successful expansion of our client base.

Quicklime sales volume decreased 47% in the third quarter of 2018 and 24.5% in the 9 months of 2018, compared to the same period of last year, mainly due to an increase in sales of refined quicklime impacting consolidated revenues of the company.

Finally, third quarter 2018 net income decreased 13.5% compared to 2017, mainly due to decrease in revenues as well as lower operating income derived from higher coal costs and the use of higher-priced seashells in Piura.

During the first 9 months of the year, net income increased 6.4% when compared to the same period of last year, mainly due to an increased sales volume as well as operational efficiencies, which offset the increased costs.

To summarize this quarter, we have seen a recovery in volumes and margins when compared to the second quarter of this year. We expect to see further improvement as capacity utilization of our facilities continues to rise and we reap the benefits of our commitment to operational efficiencies.

Operator, can we please open the call for questions?

(Operator Instructions) Our first question comes from the line of Andres Soto from Santander.

Humberto, Manuel and Claudia, I have 2 questions. The first one related to your volumes outlook in 2019. Based on your press release, you are expecting several infrastructure projects to start execution next year. Can you please quantify this in terms of cement or ready-mix volumes?

Sure, Andres. This is Humberto. Even though we are in the middle of -- we are in the final part of doing our budget for next year, but we are looking at probably the 5% volume growth.

5% volume for cement, which to me sounds a little bit conservative if you consider some of the execution of El Niño, isn't it?

Yes. But I mean, we know each other well enough to know I mean, this year, we started saying between 3% and 4%, and even though it's been a very rocky year for many, many circumstances, we were able to maintain that. We would rather be more on the conservative side, that we're within the base, it should be 5% in the execution of the Piura -- of the north. Rebuilding comes up faster. Of course, that number could increase substantially. But we'd rather be conservative, and as you mentioned, and see what destiny holds for us. And one thing also we have to mention -- sorry to -- one more area you have to also recall that starting January 1, we're going to have whole new authorities in the north. That usually means there's a little bit of a slowdown in execution. Hopefully, would not be that much. So like assessing -- going into 2019 with a base amount of 5%, I think, is pretty good.

Got it. And precisely, that was my second question. Regarding the political environment, several developments over the past few weeks, both at the national and the regional level. So based on those events, are you more optimistic or more cautious regarding the performance of the region and specifically, your volumes in regards to the reconstruction plan?

Let's see. I think, President Vizcarra has a more efficient management of reconstruction. Shout out for him, but I think going into the future, I mean, I'd rather be cautious in the political scenario than being -- I may be, business-wise, optimistic, but I mean politics is a different -- whole different arena. I think the President is pushing very hard, as I just read today, in an interview where he says that. I mean he's going to -- himself, he intends to spend most of his time outside Lima, and trying to specifically and personally have the new authorities, so reconstruction gets underway faster. The fact of the matter is, I mean, he's been President, the rebuilding of the north has gone faster than before, which does not mean as fast as he would desire, but I think yes, we could be say between cautious to cautiously optimistic.

Our next question comes from the line of Mauricio Serna from UBS.

I guess, I just want to talk a little bit more about pricing. If you could specify how much of the lower prices was actually due to, I guess, a defensive stance for your market share and how much came from a mix perspective? Just also wanted to understand on the market share, how are you seeing the competitive environment right now with this new entrant recently coming in? What's the outlook? Do you think, given these growth expectations that you're talking about for next year, that should be enough to sustain volumes and prices recovery ongoing?

Yes. Thank you for your question. I mean, looking into the competitive situation, I mean, we always like to say that we are long-term greedy, not short-term greedy. And I think this year proves that we've been very careful in the way we managed prices, in the way we managed what I call potential competition. I think what you were seeing in terms of some of our peers showing up in the north from the Midland. From what I know, they will refocus more towards the Southern part of Peru. So I think, next year, I will say slight but more competitive environment will not be the case. So I think probably we would see a year with a very strong market share like this one, and probably, a more interesting movement in price.

Okay. So from what I understood, probably, the pricing will not really pick up in the fourth quarter, but if everything turns out good regarding the reconstruction trigger for next year, that should also come in with some pricing, right?

That's correct. And we also have to bear, I mean -- I said this over the last years. We usually try to keep up with inflation. This year was not the case. Even though we had some additional coal prices and some other things. I mean, we are very focused in defending our market share, which really is the key to our future. I think in the next year, we're going to go back to our normal pricing policy of the past.

(Operator Instructions) Our next question comes from the line of Luis Pardo from Compass Group.

Gents and Claudia, I have a question regarding your guidance for next year. When you talk about 5% growth, you're talking about cement, blocks, and precast all together? Because there's a wide difference in the margins you get for each one of these products. So if you could give me more color on what to expect -- what you're expecting only for cement, it will be much appreciated.

Yes. When we talk 5%, we talk in volumes overall. I understand your concern, but we have to bear -- keep in mind that most of our volumes still comes from our block cement. So -- I mean, most of that 5% increase would come from that, which brings us the higher margin.

Okay. Okay. And in terms of the reconstruction, what specifically has changed that gives you more hope for next year versus the past 2 years -- well, 1.5 year, that not much has developed in terms of that project?

We talk about numbers. I mean, if you take how many homes were being built over the first period of reconstruction on the year, last year, versus the last 4 or 6 months, it's clear that there's a pickup in the rate. If you see how -- I mean, a simple act, I mean how many times have President Vizcarra visited the north over the last 6 months or the previous 6 months? How -- he was there opening the new avenues in Piura. I mean you see a more pure focus in trying to help the authorities, both local and regional, to get things moving. So I mean it's not perceptual, the numbers are there, the level of execution, the percentage of the PEN 18.9 billion that are already in the bidding process is higher. So like I said, I mean, it's a percept. In terms of perception, I see it more, and in terms of numbers, the numbers are much better than before.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Humberto Nadal for closing remarks.

Thank you. And thank you all for joining us. Like always, I mean, we keep trying our best on delivering our highest efforts in terms of a company being more efficient, being more lean, and delivering results that create value. We remain absolutely committed to our long-term reach of becoming a billing solutions company. We are convinced this will make a difference in the coming years, but like every reason, give it some time to really catch on. And if you have any questions, in the meantime, myself and all the IR team are always at the end of the line to take your calls. Thank you very much and have a nice day.

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