Cementos Pacasmayo SAA (CPAC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Pacasmayo Fourth 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, Investor Relations Manager. Ms. Bustamante, you may begin.

Thank you, Angelica. 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.

We would also like to let you know that the earnings release is available for download on the webcast link.

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 would now like to turn the call over to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call.

Before I begin, I would like to acknowledge that we had some technical problems last night. We're trying to hang our financial information in the SMV here in Peru as we speak. That means, as of right now, all the information already there, and it has been in our web page since yesterday. Our apologies, our deepest apologies, but like I said, it was really a technical issue between the compatibility system.

Well, today, I will discuss our overall results, our strategy, Manuel will cover financial details, and then we will open the line for your questions.

2018 was an important year for Cementos Pacasmayo, one marked by transformation. It has been a record year in terms of volumes, reaching our all-time high sales volume and seeing growth after 5 years of flat volumes. We have finally seen some materialization of the expected potential, which gives us tremendous satisfaction and high expectations for the upcoming years.

In terms of strategy, as you already know, this year, we launched a new vision, seeking to evolve from a cement producer to a building solutions company. Following this vision, during 2018, we executed in 2 main fronts. Internally, in terms of processes and customer loyalty, we worked on projects that will allow us to better understand our customers and hence provide the best possible solutions, both in terms of products and services.

In terms of product development, we design different building solutions based on our customers' needs, thus expanding our portfolio of products. These products range from special types of cement and concrete to new cement-based products. For example, we designed the [Ultarmau] cement, that is a type of cement specifically designed for the extreme weather of the highlands. In terms of concrete products, we have developed 2 different types of concrete: one that work underwater and one that is ready for exposure without painting. In terms of new products, we have developed prepackaged mortar and cement-based security barriers. All of these products look to better solve our customers' needs and desires.

An important part of this new strategy is working with the authorities to help them understand the benefits of building roads with concrete, especially in areas that are more prone to rains and flooding, as is the north of Peru. The recent El Niño phenomenon left us with a clear example of the benefits of concrete roads in these conditions as the José de Lama road, which was built using concrete, was already the best-preserved road after a terrible devastation left in Piura. We're pleased to inform that we have already built some additional concrete roads and continue making progress in this area. This is part of the almost 24% growth in concrete sales achieved in the last year when compared to the previous year. Concrete roads present a vast untapped demand since Peru has a huge infrastructure deficit, which includes thousands of kilometers of roads that need to be built or improved. This, in turn, would mean millions of tonnes of cement sold. We believe that both the new product development and the progress in building concrete roads are firm steps towards our 2030 goal of consolidating ourselves as a building solutions company.

Moving on to some key metrics. Volumes grew 4.3% this year compared to the previous one and 5.6% in the fourth quarter when compared to the same period of last year. This shows the acceleration in growth rates, which we have seen in the last months of the year, partly derived from the much-awaited materialization of the construction spending. Although cement EBITDA was affected by noncash expense and some increased costs in the year, we expect EBITDA and margin expansion for 2019 as the positive steady volume growth continues, allowing us to utilize more of our spare capacity.

Regarding our capital structure, I would briefly like to mention the successful local bond issuance we expected in January -- sorry, we executed in January since Manuel will go into further details in his financial analysis. We placed PEN 570 million in local bonds, with the demand exceeding PEN 1.2 billion, obtaining a very competitive rate at maturity. We would like to deeply thank the investment community for their renewed interest and trust in our company.

Finally, I would like to especially mention our new certification, the ISO 37001. During 2018, the company implemented the Anti-Bribery Management System, obtaining the certification in January 2019 on a record time. This certification confirms that our management system is designed to help prevent, detect and respond to bribery and comply with [anti-bribery laws] and voluntary commitments applicable to its activities. We believe this certification reiterates once more our total commitment to global anti-bribery best practices and high standards of transparency and good corporate governance.

In conclusion, we feel very optimistic about the year ahead. We are entering 2019 with a strong end to the previous year and exciting news on our long-term strategy and vision.

I will now turn the discussion over to Manuel to go into more detail on our financial results. Manuel?

Thank you, Humberto. Good morning, everyone. Fourth quarter 2018 revenues increased by 4.6% to PEN 340.7 million from PEN 325.6 million in the fourth quarter of 2017. This was primarily due to increase in sales volume as reconstruction spending is starting to accelerate.

Revenues for 2018 rose by 300 -- 3.5% compared to 2017. Gross profit decreased 5.9% in the fourth quarter 2018 compared to the same period of 2017 because of an increase in the price of coal as well as our halt in clinker production, which increased the production cost of cement. Gross profit for 2018 decreased 4.2% compared to 2017 mainly due to the reason explained above as well as higher transportation costs after the road damage from Coastal El Niño during the first months of the year and sales of concrete to small- and medium-sized company, which generates a higher operational expense.

Cement EBITDA reached PEN 90.6 million in the fourth quarter of 2018, a 14.1% decrease when compared to the fourth quarter of 2017. During this quarter, we had to generate a provision of an account receivable to a Peruvian tax authority. This was a noncash effect of PEN 9 million. Besides this, we had some cost increase during this quarter related to halt in production according -- compared to the same period of previous year, mainly due to increase in sales and our active strategy to successfully defend our market share. To our -- sorry, besides this, we had some cost increase during the quarter related to halt in production according to our annual production plan, which lead us to temporarily use inventory of higher-priced clinker.

Cement EBITDA margin reached 26.6% for the fourth quarter, 5.8 percentage points below the fourth quarter of 2017. For 2018, cement EBITDA amounted PEN 374.1 million, in line with 2017; and cement EBITDA margin, 29.6%, a 1.2 percentage points decrease when compared to the same period of last year. We expect to see EBITDA and margin expansion during 2019 as the trend in volume growth continues, allowing us to future continue OpEx costs.

Turning to operating expense. These have decreased year-over-year as personnel-related expenses and third-party services have decreased, in line with our constant search for operational excellence. Fourth quarter 2018 administrative expenses decreased 8% compared to the fourth quarter of 2017 to PEN 45.9 million and 12% to PEN 172.1 billion (sic) [PEN 172.1 million] in 2018 when compared to the same period of last year. Selling expenses increased 15.2% in the fourth quarter of 2018 when compared to the same period of 2017 and 7.2% in 2018 when compared to the same period in the previous year, mainly due to increase in sales and our active strategy to successfully defend our market share.

Moving on to different segments. Cement sales increased 2.8% during the fourth quarter of 2018 compared to the same period of 2017 and 3.4% in 2018 when compared to 2017, mainly due to higher sales volume.

Gross margin decreased 3.9 percentage points in the fourth quarter of 2018 when compared to the fourth quarter of 2017 and 2.3 percentage points in 2018 when compared to 2017, mainly due to a halt in production in Piura, which lead us to temporarily use inventory of higher-priced clinker as well as an increase in the price of coal.

Concrete sales continue to perform very well this quarter, increasing 35% compared to the fourth quarter of 2017, reflecting increased sales to the public sector as reconstruction spending is beginning to materialize as well as continued sales to small and medium-sized company.

Gross margin increased 1.5 percentage points in the fourth quarter of 2018 compared to the fourth quarter 2017. Since large infrastructure project has been delayed in north, we have actively sought to fill this gap with demand from other small- and medium-sized projects. This allows us to utilize more of our installed capacity but at the same time generates an additional logistic costs since we need to deliver it to more paying clients.

In 2018, sales increased 23.9%, demonstrating the market recovery of sales volume, especially during the second half of the year. Gross margin decreased 6 percentage points due to increased logistic costs mentioned above as well as an increased depreciation from the investment in new machinery.

Precast sales decreased -- increased 29.8% in the fourth quarter compared to the same period of 2017 and 28% in 2018 compared to 2017, mainly due to a change in strategy, which seeks to expand our client base and our portfolio of products, including heavy precast products.

Gross margin decreased 32.8 percentage points in the fourth quarter of 2018 compared to the fourth quarter of 2017 and 14.2 percentage points in 2018 compared to 2017, mainly due to higher costs from the initial investment required for new heavy precast products. As this business unit continues to mature and expand, we expect margins to improve.

Profits for the period was negative this quarter due to 2 noncash effects: the provision of an account receivable with the Peruvian tax authority mentioned above and the expense arising from the accumulated exchange rate loss due to the purchase of part of the international bonds, which I will go into detail later. Excluding this effect, net income would have been PEN 19.4 million.

For 2018, profit for the period was PEN 75.1 million, 6.8 percentage lower than the previous years for the abovementioned reasons. Excluding this effect, net income would have been PEN 106.1 million.

Finally, as Humberto mentioned, we issued local bonds in January of this year. In December, we announced a tender offer for part of the $300 million in international bonds to restructure our debt. We purchased $168.4 million with the private loan -- with a bridge loan obtained for that purpose and later issued local currency bond for PEN 260 million at 6.6875% rate with a 10-year maturity and PEN 310 million with a 15 years maturity and an interest rate of 6.84375%. We are very pleased with the results of this operation as the rates and terms obtained benefits of our financial cost structure, with lower cost of capital and extended maturity and less exposure to currency fluctuation.

To summarize, while some noncash expenses have affected our financial results this quarter, we believe that Pacasmayo is very well positioned to capitalize on the demand recovery expected in 2019 and deliver meaningful value creation for our shareholders in the coming years.

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

Thank you, Manuel. We are very pleased to see a materialization of our renewed strategic vision in this year, and we look forward to the positive effects of significantly increased demand for cement and concrete on the backs of reconstruction spending, with further growth for the private sector has helped construction markets.

Can we now please open the call to questions?

(Operator Instructions) Okay, our first question comes from Andres Soto of Santander.

My first question is related to profitability. If you exclude the effect of the tax provision and the Piura stoppage, what will have been the EBITDA margin of Cementos Pacasmayo this quarter? And I'm curious on your comments regarding profitability in 2019. You said that you're expecting profitability to expand on the back of higher volumes. However, we were expecting this same effect in 2018, and these didn't materialize due to a dilutive effect from your other business segments. What type of volumes are you expecting that makes you confident on this margin expansion?

Okay. Yes, we're seeing with this effect in EBITDA margins. Excluding this effect, the EBITDA margins should have been around 30.5%. You have to consider that what impacts the EBITDA, it's basically the nontax effect from the...

Noncash.

The noncash effect of the tax provision.

Yes. And then -- and there's -- I think, looking forward, there's 2 key issues here. I mean, we are thinking about a 6% volume increase this year. And if you take into account that 2018 was a record year in sales, I mean, that's a significant increase. And the other part of it, I mean, we did a price increase north of 4% 3 weeks ago. And that's gross of the -- those 2 things I mentioned really affect profitability for this coming year.

Perfect. And my second question is related to capital deployment. We saw a significant CapEx increase this year, mostly due to your efforts to expand in the ready-mix business. Are you expecting this high CapEx cycle to continue in 2019? Or what is going to be your priorities in terms of capital deployment this year?

Yes. So we're expecting -- Andres, we had concrete and aggregate equipment of PEN 50 million, and we're expecting, for this 2019, the total CapEx to be around PEN 90 million, a little bit less than 2018.

Our next question comes from Daniel Sasson of Itaú BBA.

My first question is on your leverage ratios. We saw them increasing from 2.3 last quarter to 2.7 now. I know that this was due to the FX loss related to the repurchase and liquidation of part of your bonds and that, for sure, it makes sense for you to replace international bonds with local debt. But I was wondering, what do you think is a comfortable leverage ratio? What's your internal target? And when do you expect to get there? That would be my first question.

Daniel, thank you for the question. Yes, we feel very comfortable in the range between 1.8% and 2.8%. Something -- anything less than 2.8% EBITDA margin -- 2.8x EBITDA margin, EBITDA, we feel very comfortable with that.

Okay. And do you have any dates or schedules or projections on when you should get closer to 2x points? Or do you think that should happen here in 2019? Or this is something more like a midterm target?

No, it's a midterm target. And we expect to be around 2%, I will say in the -- 2x, sorry, in the first half of year of 2020.

Yes, okay. That's very clear. And my second question if you allow me to is, do you have any types of sensitivities in terms of improvement in EBITDA margins depending on your capacity -- on your utilization of capacity? I mean, if your capacity utilization increases by 5 percentage points, let's say, how much better would be your EBITDA margins? Do you have a sense on that?

Yes. It's around -- we estimate it's around 1% every 5 percentage points of increase in capacity -- utilization of capacity. But it will depend obviously on the mix of concrete and cement and quick. So it will depend on the mix of the products. If you increase concrete, the percentage will be reduced, but the absolute numbers will be -- will grow. So it depends on the mix of the products that we sell.

Our next question comes from Vanessa Quiroga of Crédit Suisse.

I have a question about your EBITDA margin outlook. Can you provide us specific guidance or the range of the level of margin that you expect to achieve on average for the year 2019? And the other question that I have is regarding the competitive landscape. What do you see in terms of competition in your important regions, your footprint?

Yes. Our projection for the EBITDA margin for 2019, it's around 31.5% area, so -- for the whole year.

And regarding the competitive landscape, we don't see any significant threat in our region for this year. So in that sense, I mean, we believe we have a very strong position.

Our next question comes from Froylan Mendez of JPMorgan.

Could you tell a little bit more on how were prices during the quarter and at what levels are they on a dollar per tonne basis and how it compares to input quality? That would be the first question. And my second question is, we continue seeing higher expenses to protect market share. What should we expect going forward? Do that just stay in around PEN 30 million per quarter? Or should we see this coming down now that you seem to have regained market share from previous quarters?

Thank you. A very good question. I think we always like to think of ourselves as long-term greedy. So I mean, we have been spending significant amounts of money over the last years over defending our market and more than anticipate potential moves of competitors there by developing new channels, new products and then reaching, I mean, new digital markets. So all of that may sound as a overkilling, but we believe that's the only way to protect our position looking towards the future. We're always looking at import parity pricing. At this point, we're looking at $134 per tonne. Like I mentioned before, when I think Andres asked the question, we had a significant price increase in January. And I think at this point, we are in a good point between solid market share and a very, I would say, solid and sustainable price looking towards the future, but we're always looking at the import parity price at every moment.

Just to clarify, so the $134 per tonne is the current price or is the current import parity?

No, that's our current price.

And do you have any idea where the import parity is?

I mean, it's hard to tell because I mean, if you see the trading markets right now, prices tend to fluctuate a lot. So I will not give a guess onto the price because it depends on the origin of cement, the type of cement, the ports they're going to come through. And the difference can be significant. So I'd rather not venture myself on trying to target a specific number.

Our next question comes from Tunde Ojo of Harding Loevner .

A couple of questions for me. First is the tax receivable you talked about of PEN 9 million. What exactly was that related to? That will be my first question.

Yes. This is related to -- this should happen in 2006 in which as -- I don't know if you're aware, I mean, there was special tax exemptions for some general areas. And we sell the product ex works. And at that point, I mean, whatever the client does with the cement is something that is up to them, but we get a tax refund for that. The authority seems to have a different idea in terms of analyzing where the actual cement goes to. We have a different criteria, which is something we're still fighting in the courts.

Okay. All right, that's very helpful. The second question I have is on the finance cost for the quarter. It jumped quite significantly. I was wondering if that level is the sustainable level going into 2019 per quarter. I think the number I have for the quarter is about PEN 29 million. Is that a good number to assume quarterly for next year? Or is there something one-off in this quarter?

Yes. So the financial cost has increased basically because of the bond transaction that we have executed. We don't expect -- this is a one-off, and we don't expect this happening again next year.

And given where your debt is right now, what would you call the normalized quarterly finance costs for you then per quarter?

Yes, it should be similar as the third quarter.

The third quarter, okay, got it. The other question I have is, you seem to be having a lot of one-off costs coming up. It's now becoming a little bit of recurring event. Are you expecting any new -- any one-off coming up in the nearest future or like in 2019 or even in the first quarter that you already know of right now?

The answer is no. But I mean, we had -- if I want to double-click onto a question which -- once again, I mean, I think it's a very good one. I mean, there are different kind of one-offs. I mean, in the case of buying the bonds back and everything, I mean, now we are looking forward on much more competitive financial costs than we had with the previous bond. So I think that one-off really is going to pay off in the coming years in the case of it. That one-off will be something that was -- is being fight in courts for over 10 years now. There was no way we would have an idea that I mean, this is not like impairments or one-offs related to the pieces itself. These are just these issues that we take because we obviously want to create value or things that just maybe continues and happen. But at this point, we have no one-offs in the coming months as we stand right now.

Okay, very, very helpful. And just sorry to hog the phone. This is the last from me. The last one is on the gross profit margin compression in the quarter if you look at it on a year-on-year, and you mentioned today -- and you mentioned coal prices. You also mentioned using sort of higher-priced clinker from the other plants. If you have to disaggregate the margin compression between both, where would you put the sort of split between those 2 factors?

Yes. Excluding all this, we -- what we expect is we should be in a gross margin around 38%, 39%.

Our next question comes from Francisco Suarez of Scotiabank.

Two questions. One, related to your overall notional exposure on derivatives that now after you cut your debt exposure in dollars, the notional amount that relate to that transaction, that actually has been adjusted downwards? Or -- and if not, what would be that notional amount and what the potential effects depending on how the sol moves against the dollar? And secondly, you are aiming to a strategy of making sure that you can provide to the market building solutions. As far as I understand, these new businesses clearly should be considered with lower margins in general. Nevertheless, the payback seems to be quite attractive. So if you will like to share a little bit about what might be the return on those -- on that CapEx on those businesses, that could be very, very helpful.

Concerning your first question, yes, the total amount of hedge that we have now pending is $150 million. So the total debt that we have in dollars are fully covered.

Okay. It is 1:1.

Yes, it's almost 1:1, a little bit under 1:1 because we have $136 million outstanding and $150 million in hedge. Basically -- it's Humberto. Concerning the second part of it, we are discovering more and more that these building solutions, I mean, can show very interesting profitability numbers. I mean, I can throw you only one example. We just got awarded some weeks ago what's called a coletoso marino. These are really underwater sewage pipes that in the end, I mean, they are giving us a net margin -- an EBITDA margin of 25%. So just to give you an idea, this is very interesting because usually, the CapEx involved in this kind of fields, this is very, very low. So we're in the -- we're still in the beginning stages of this and the roads and everything. We believe that besides the cement margin, which is already attractive, and you know our margins, we're going to make a substantial return on invested capital on the expansion into building solutions.

That's precisely what I wanted to understand. And if you were -- eventually will be sharing the overall criteria on how you will be investing in these new activities, perhaps a certain threshold or anything that you can give us in the future, that will be very appreciated to understand where are you guys heading. That's it, the second question.

We will. But I mean, just to give you an idea, I mean, even if we are assuming successful in this building solutions idea, we're talking about, on the high end, the CapEx for the next 4 years should not exceed probably $12 to $15 million on the high end. And I think the numbers that, that's going to result in are really substantial.

(Operator Instructions) Okay, our next question comes from Raúl Jacob of CrediCorp Capital.

I just wanted to ask if the rains that we're seeing, especially in the south but also in some regions in the northern part of Peru, in Huánuco, for example, I don't know if there have been any blockages of roads in your area of influence important for the distribution of cement.

Thank you for the question. So far no. I mean, it has been raining a little bit in the north. We have to recall that this is a rain season. I mean, it's rainy season, it's normal. But as we stand right now, and I talked to both Pacasmayo and the Piura plant managers yesterday, things are fine. I mean, there's been no stoppage of roads or anything so far.

There appear to be no further questions at this time. I'll turn the floor back over to you if there's no questions at this time.

Thank you. And like I said before, I mean, we are really pleased with the way we've closed last year. Even besides our record volumes on an annual basis, I think the strength over the last trimester was really important, and we are seeing the same kind of strength in the beginning of this year. Yes, I think the competitive situation is well under management. And I think this should be a year where both volumes and profitability really, given interest is high, can we keep creating shareholder value, like has been always our purpose. I want to thank everybody for their time today. And as always, I mean, Claudia, Manuel and myself, we're always here if you should have any further questions. Thank you very much for your time.

Thank you. This does conclude today's conference call. We thank you for your participation. You may now disconnect your lines at this time, and have a great day.