Cementos Pacasmayo SAA (CPAC) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacasmayo's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded. I would now like to introduce your host for today, Mr. Claudia Bustamante, Investor Relations Manager. Mrs. Bustamante, you may 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. We'll 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 hand the call over to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call. Today, I will discuss our overall results and strategy, and Manuel will cover financial details, and we will then open the line for questions.

We are very glad to report a promising second quarter. During this quarter, we have seen a significant increase in sales volume, reaching up almost 12% year-on-year. This growth has come mostly from public sector spending, mainly for reconstruction-related works, where especially relevant here is increase in sales in all segments. Cement sales increased 12.6% year-over-year, while concrete and precast increased 41% and 17%, respectively, over the same period.

These results, despite the learning curve local authorities are still going through, give us high expectations for the upcoming months. On the same note, net income increased 37% this quarter, mainly due to higher sales mentioned above and also due to operational efficiencies, which we have continuously delivered. We firmly and strongly believe the combination of these 2 effects will deliver further profitability in the near future. One very important step we have taken towards reaching our 2030 goal of transforming ourselves into a building solutions company is the creation of a new sales prospecting area in our company.

We are convinced that this is key to understanding and anticipating our clients' needs and hence provide them with the best possible business solution. The team in charge is actively searching for new project for cement, concrete and/or precast material can be used instead of just waiting for demand. One of the most important areas to focus on currently is concrete pavement. As I mentioned before, we are successfully moving towards more roads being built with concrete. In the central part of the country, the [Yongamo Highway], which is 150 kilometers long, will be the first one built using concrete. The Minister of Transport had set some ambitious goals in terms of improving the national road network, including paved roads of 76% in 2016 to 91% by 2021, which means almost 2,700 kilometers of double-lane highways built by 2026, up from only 800 in 2016.

We are at the same time are actively working with the association of cement producers as same as our peers as well as experts in concrete road construction to make sure that concrete pavement is considered as an alternative to asphalt, given the many benefits it can offer, particularly in rainy areas like ours.

What we want to -- some key metrics in terms of sales volume. As I mentioned above, historic continuation and acceleration of the positive trends we saw last quarter. The volume reaching 8.5% growth in the first semester of this year. This growth is mainly explained by the continued increase in reconstruction work, which has transferred not only to cement, but also concrete and precast. In terms of concrete, it is also important to mention that in this quarter we started shipping concrete to the Mall Aventura in Chiclayo, the School for Non-Commissioned Officers in Tarapoto, and increase our shipments to the Talara Refinery. All of these prior projects compared with construction works are resulted in almost 37% concrete sales closing the first 6 months of the year compared to same period of last year achieving record shipments.

Finally, I'd like to mention that we have signed a contract with a gas provider, and we will begin using gas in our Piura plant in the upcoming weeks. This change in our energy matrix is substantial. Gas is more environmentally friendly than coal, which we currently use as it was the only available fuel in the north. We seized the opportunity to switch to gas in the Piura plant as soon as we saw it and are very pleased that we will begin seeing the benefits in the very near future. Logistically, it is also much easier to use gas since there's no need to use trucks to bring the material to the plant and it does not use up storage space or require working capital. Furthermore, considering that we have a long-term contract with the provider, basically it will be much more predictable, allowing forex margin deviation.

In conclusion, we feel very optimistic about the year ahead. This quarter has been very strong in terms of demand, and we expect these conditions to continue in the upcoming months. We are very proud of what we are achieving in terms of our long-term strategy and are convinced that it is the correct path for further growth and value generation.

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

Thank you, Humberto. Good morning, everyone. Second quarter 2019 revenues were PEN 321.8 million, 11.9% higher than the same period of last year, in line with increased cement, concrete and precast volumes. The gross profit increased 8.9% in the second quarter of 2019 compared to the same period of 2018 mainly because we had to use higher price clinker than we had in inventory due to the planned preventive maintenance of our main kiln in Pacasmayo during April. For the first 6 months of the year, revenues increased 5.3% and gross profit increased 3.3%. EBITDA reached PEN 94.3 million in the second quarter 2019, and 11.3% higher than the same period of last year. During the first 6 months of the year, EBITDA reached PEN 187.9 million, 5% increase when compared to the same period of 2018.

We expect to see EBITDA expansion during the second half of the year as the trend in volume growth continues, and costs are controlled as we do not foresee any more additional maintenance costs as both of our main kilns of our plants have already undergone maintenance this year.

Turning to operating expenses, this decreased year-over-year, in line with our constant search for operational excellence. The second quarter 2019 administrative expenses decreased almost 2% compared to the second quarter 2018, and 2% in the first 6 months of 2019 compared to the same period of 2018, despite increase in sales.

Selling expenses increased almost 4% in the cost -- in the second quarter 2019 when compared to the same period of last year, in line with increased sales. However, during the first 6 months of the year, selling expenses decreased 5.3% compared to the same period of 2018.

Moving on to a different segment, cement, concrete and precast sales increased 16% during the second quarter of 2019 compared to the same period of 2018, mainly due to this higher sales volume and average price for all segments. Gross margins decreased 2.3 (sic) [2.4] percentage point in the second quarter of 2019 when compared to the second quarter of 2018, mainly due to use of higher-priced clinker due to planned preventive maintenance of the main kiln in Pacasmayo as well as maintaining cost in the Piura plant.

During the first 6 months of the year, sales of cement, concrete and precast increased 9.8% and gross margins decreased 3.1 percentage points when compared to the first 6 months of 2018 for the above-mentioned reasons.

We do not foresee any major or more additional costs for maintenance as both of main kilns of our plants have already undergone maintenance this year. Concrete sales continue to perform very well this quarter, increasing 41.2% compared to the second quarter of 2018, reflecting increased sales to larger-sized projects, like Humberto mentioned, and to reconstruction-related works. Gross margin also increased 8.3 percentage points this quarter compared to the same period of last year, mainly due to the higher average prices and dilution of fixed costs. During the first 6 months of the year, concrete sales increased 37%, and gross margin increased 4.9 percentage points.

Precast sales also increased 17.4% in the second quarter of 2019 compared to the second quarter 2018 mainly due to high demand from reconstruction-related projects. Gross margin also increased 14.8 percentage points as we continue to focus on our higher-margin products.

During the first 6 months of the year, revenues were flat when compared to the same period of last year, mainly due to especially high demand during the first quarter 2018. However, gross margin still improved 7.5 percentage points due to our focus on higher-margin products. As this business unit continues to mature and expand, we expect sales and margins to continue improving.

Quicklime sales continue the downward trend, which have been seen and experiencing since last year. With revenues decreasing 38.9% in the second quarter of 2019 compared to the same last -- same period of last year, and 51.5% during the first 6 months of the year when compared to the same period of last year.

Gross margin increased 1.6 percentage points in the second quarter of 2019 when compared to the second quarter of 2018, mainly due to sales mix. During the first 6 months of the year, gross margins decreased 3.7 percentage points when compared to the same period of 2018, mainly due to lower sales and lower dilution of the fixed costs.

Profit for the year -- for the period, sorry, was PEN 32.2 million, a 37% increase when compared to the second quarter of 2018, and PEN 62.3 million during the first 6 months, representing a 17.1% increase when compared to the same period of 2018, mainly due to higher revenues and lower operating expenses.

To summarize, volume have continued the strong trend that began last year, and we expect this to transform into higher margins in the following quarters as costs are controlled after maintaining work and higher volumes results in higher dilution of fixed costs.

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

Thank you, Manuel. We are pleased to see that the trend in the volumes is very solid as it has now been sustained and accelerated through the year. We are certain that we are very well positioned to capitalize on this growth and transform it into higher value generation.

Can we now please open the call to questions?

(Operator Instructions) We'll go first to Daniel Sasson, Itaú.

Congratulations on your volume performance -- strongest year-on-year volume performance since the fourth quarter of 2012, if I'm not mistaken, so congratulations on that.

My question is related to your leverage ratios, we saw a slight decline due to 0.7x by the end of this quarter. I was wondering if you could share with us what's your internal target ratio for -- in terms of leverage. And what we should expect you to do with the cash generation after that? Maybe from 2020 onwards if there's any chance you could increase your dividend payments? Or what would be the best uses of cash in that situation?

Yes. Daniel, what we expect is to generate definitely more cash, and we could increase dividends and that's a Board decision in 2020 going forward. But what we have to consider is that we have to invest in CapEx for the ready-mix business that is growing in 40% in the last quarter, so we have to buy more ready-mix equipment to provide and to serve our main clients in the North.

And is there any internal leverage target that you'd like to pursue or that you'd be comfortable with in order to essentially pay more dividends?

Well, we feel very comfortable being between 1.8 and 3x EBITDA -- net EBITDA. So it's a huge range, but we feel comfortable. Anything under 3x, we feel very comfortable.

We'll go next to Juan Pablo Brosset, CrediCorp Capital.

Claudia, Manuel and Humberto, thank you for your presentation, and congratulations on the results. I have just one quick question regarding the Chiclayo airport project. You mentioned on the MD&A that deliveries are expected to start by 3Q '19. I was wondering if we -- if you have any guidance regarding the expected volumes to be delivered and the expected length of these deliveries?

Yes. Thank you for your question. This should start this coming quarter, and we're talking about around 5,000 tons in the first part of this -- of our project, then as the second part it's going to involve more the buildings more than the runway for additional months for a similar amount in the coming months.

We'll move next to Froylan Mendez at JPMorgan.

I have three questions. First on volumes. Could you give us some color on the type of projects that drove this nice growth in the quarter? And what percentage of the incremental volumes that you're expecting for these and next year should be coming from these projects? In that sense, also, would you also expect to see second half '19 to decelerate to reach your 5% growth view in volumes? That's my first question.

Yes. Well -- I mean, you have to realize, I mean, these strong volumes 12% as somebody mentioned before, we've not seen these volumes in many, many years. These are consequence of many things. I mentioned reconstruction is important in terms of the housing, very important, now it's focusing on the southern areas of our region, mostly Trujillo. I think projects that we mentioned at Chiclayo and the Refinery, are still very important, but you cannot forget that self-construction still is the main driver here. As self-construction is closely linked to employment.

And we believe that North, at this moment, has a very high level of employment where it's formal/informal, so that's the main driver. And in terms of the volumes towards the end of the year, when we opened the -- when we closed last year, we mentioned that the base scenario was within 4% and 6%. As you see, I mean, we are -- we've closed on 8% this first semester, and we hope the volumes will keep like that in the second part of this year. So I mean at this point probably if you have to give a number for the year, we're talking about 8%, but we could be surprised positively in the coming semester.

Thank you. And on prices, what was the sequential price evolution in soles term during the quarter for cement and ready-mix of the mix there?

Yes. We did a price change towards the end of last year and then it has remained basically unchanged for the semester -- first semester of this year.

Perfect. And lastly on costs. How do you think your cost per ton will change in Piura by shifting to natural gas? And should we see this shift in 3Q already? And additionally, can you give us more color on the length and the contractual terms? I mean is it a fixed price? For how long? Is there a minimum purchase amount, and overall if this is embedded in your 31.5% gross margin guidance that you have been telling us?

Yes. Like I said, I mean, we just begun -- this is really I mean fresh news out of the bakery in terms of the gas. I mean as we're speaking, we already have started the first trials with the gas in the Piura plant. Of course, there's a ramp-up here, I mean hopefully. We were there 2 days ago. It's going very well. In 2, 3 weeks we should be running -- in a month, I would say, we should be running mostly on gas. I -- only then we will see the real savings. I mean we should have some savings, especially considering that the price of coal was increasing over the last month, now we have to forget about that.

And in terms of looking forward, these are very long-term contracts. It's a very complex contract that I cannot discuss here in this call, but what I can tell you, I mean, it is very similar, conceptually, to the one we have in terms of electric -- of electricity. We have 10 of 12 years contract in that case. I mean we are doing in case of the gas, it's a very similar -- very similar philosophical condition to the contract. Some part of it is take-or-pay. Of course, in return in the prices should go up or dwindle with a lot of variables. But I mean like Manuel mentioned, this should give us enormous stability in terms of cost outlook towards the future.

(Operator Instructions) We'll go to Lucia Calvo Perez, LarrainVial.

I have the same question as I think Froylan from JPMorgan. I want to ask you about sequential prices. What are you thinking about prices going forward? If you're going to maintain the prices increase maybe in December? Or if you're planning on another price increase? And also I had a question about when were you planning to have the Piura plant running by gas? And if you think this should be a logistics benefits on efficiencies?

Yes. In terms of prices, I think we are at a very comfortable level where we are right now, with increase maybe at the end of this year -- the end of last year, sorry. We do not foresee at this point any further prices -- price increases in the coming semester. I mean we are always revising the competitive situation and the market about as we are, we're fine.

In terms of gas, like I said before, for sure. We should be fully operational in gas by this trimester, this quarter and that -- I mean, we will probably see some of those results embedded in the results of this quarter. But like I said, it's a process of discipline that we are for the first time operating on gas. There's always a learning curve, and we like to be very conservative about the results. But for sure we should see something in the coming months.

And at this time, I have no other questions holding. I apologize, we did have one more signal. I have Tunde Ojo at Harding Loevner.

Congratulations on the strong results. Just following up on the question on gas. Can you maybe give a sort of guidance in terms of how much cheaper is gas to coal that you currently use just to get a sense of cost savings that you might be getting over there?

Like I say -- Tunde, thank you for your question, It's a very relevant one. But at this point, as we have just started operating the gas, I would not be very comfortable in talking about specific numbers. For sure, in the coming call or in the coming 45 days, we'll have a very clear picture about the savings. Also, we have to bear in mind that, that's a hard comparison because we need to compare it to the price of coal, which right now it keeps going up. For a fact, we're going to see some margin capture here, but I would really like to wait for the plant to be running at least a couple of months on a more stable situation, and then we could deliver a more clear information. You know us, I mean, we're very prudent about the numbers we give out.

Got it. Very helpful. And then a follow up on that on the margin. I know you've guided sort of 31.5% EBITDA margin guidance for the year. Are you still comfortable with that guidance? Meaning, expect much improved EBITDA margin performance in the second half?

Tunde, this is Manuel. Yes, we are expecting 31.5% as a percentage for the EBITDA for the whole year, but what we didn't expect is that the ready mix or concrete were going to grow as much faster as consumption of cement. So as you know, once the concrete grows at a higher rate than the cement, the margins changes a little bit. So now we're expecting around 30%, 30.5% for the whole year because we're going to take more money, but margins are going to be a little bit lower because concrete are going to have a bigger percentage in our mix.

And we have no other questions holding. I'll turn it back to management for any additional or closing remarks.

Thank you very much. I want to like to thank everybody for joining the call today. I think we are very happy with this quarter. One of -- one of our analysts mentioned we haven't had such a quarter in probably 5, 6 years, and we are going excited about it. But we think the best is yet to come. I hope when we get to the 3 months from now, we're also looking at a great third quarter.

Thank you very much. And if you have any further questions, Claudia, Manuel and myself, are always at your disposal for any further inquiries. Thank you very much. Have a great day.

Ladies and gentlemen, that will conclude today's teleconference. We thank you for your participation. You may disconnect your phone lines at this time.