Cementos Pacasmayo SAA (CPAC) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo Third Quarter 2021 Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host for today, Claudia Bustamante. Ma'am, the floor is yours.

Thank you, Kate. 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, focusing primarily on our strategic outlook for the short and medium term. 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 files.

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

Thank you, Claudia. Welcome, everyone, to today's conference call. This quarter's cement shipments continued its very strong trend, reaching record revenues levels. Self-construction is still the main driver of this growth, but complete sales have increased significantly this quarter.

Year-on-year growth of concrete sales was 73% with a very solid margin of 12%. When looking at quarter-on-quarter results, there is still substantial growth of 21.2%. Furthermore, if we look at margins, there has been an outstanding increase of 8.2 percentage points. The main driver of this growth in both volumes and margin comes from the demand from reconstruction-related projects, which should continue at least for the next 18 to 24 months.

The exponential growth we have experienced this year could not have been foreseen. If we compare cement shipments year-to-date to the same period of 2019, which I may say was already a record year, the growth rate is almost an incredible 40%. Because of this, for almost a year now, we have been using some imported clinker along with our own clinker, in order to produce all of the cement that is demanded in our area of influence by all of our clients. We have successfully used a similar strategy while building our new capacity in Piura around 7 years ago. However, current market conditions are different in many ways, making it less profitable today to use imported clinker.

Freight prices have gone up significantly, in turn, increasing the cost of importing clinker. And experts agree that this situation is unlikely to change in the short to medium term. This situation led us to reevaluate our current strategy and to think outside the box since the original plan of investing in [a new line] for Pacasmayo was too costly and would take too long considering the pressing need.

This is why after careful evaluation, we have decided to invest approximately $70 million to build an additional 600,000 tons of clinker per year capacity, effectively eliminating the need to use imported clinker if demand remains similar to what it is today. We believe this project is the best alternative given current marketing conditions since it optimizes our current capacity, making the Pacasmayo plant a more balanced one in terms of clinker cement production capacity. And it delivered results in approximately 18 months, which is much shorter than our original plan, which was closer to 40 months. We are absolutely confident that this investment will be very profitable for the company. And it ratifies our commitment and confidence in the development of the country.

Finally, I would like to talk briefly about our new hybrid work model. This pandemic has made us innovative fast-track processes that were already underway and rethink many others. Most of our administrative staff has been working from home since March 2020. Throughout this period, we have been constantly in touch with our people and their needs.

So following these wishes, needs and continued improvement in COVID-19 numbers and the advance of the vaccination process in Peru, we decided to implement a hybrid work model since October. We have carefully, extremely carefully put in place all of the necessary safety protocols in order to ensure a safe voluntary return to the office. We believe a work-life balance is crucial to overall well-being and has a direct repercussion in productivity. Happy people come for great results.

There's also an interaction that happens at the office part of this balance and has been missing for over a year. The purpose of this return is to reconnect, promote our culture and to generate greater value for our clients and the company. We are aware that there will be much to learn and adjust during this process, but are confident that it is another step towards our purpose to build together the future we dream of.

I will now turn the call over to Manuel for a more detailed analysis of the financial results.

Thank you, Humberto. Good morning, everyone. Third quarter 2021 revenues were PEN 507.2 million, a 24.5% increase when compared to the same period of last year mainly due to the continued increase in cement sales volume as well as increased sales volume of concrete this quarter and an increase in price of both cement and concrete, in line with inflation.

Gross profit increased 13.2% compared to the third quarter of 2020 mainly due to increased revenues. Consolidated EBITDA was PEN 117.3 million in the third quarter, a slight decrease when compared to the third quarter of 2020 mainly due to the increased costs derived from the use of imported clinker as well as higher expenses.

During the third quarter of 2020, there were significant budget constraints as we recovered from the effect of the lockdown and halt in commercialization. EBITDA margin for the third quarter was 23.1%, a 2.7 percentage point increase compared to the previous quarter.

During the 9 months of 2021, revenues increased 72.1%. And gross profit increased 76.7% when compared to 9 months of 2020, mainly due to the increase in sales as well as above mentioned halt in operations from mid-March to mid-May in 2020.

Turning to operating expenses. Administrative expenses for the third quarter of 2021 increased 40.4% compared to the same period of last year that was 32.1%, mainly due to increased workers profit sharing, in line with increased income tax base as well as increased third-party services mainly COVID-19-related expenses to comply with protocols to ensure the safety of our workers, software and licenses, training and workers' compensation.

As mentioned above, administrative expenses during the third quarter of 2020 were very low since we had implemented budget restrictions during 2020 after the halt in production and commercialization. During the 9 months of 2021, administrative expenses increased 32.1% when compared to the 9 months of 2020, mainly due to increased sales as well as saving implementation during the 9 months of 2020 to offset the negative effects of the halt in operations.

Selling expenses increased 51.1% in the quarter compared to the same period of last year and 37 -- and 35.7% in 9 months of 2021 compared to the same period of last year mainly due to an increase in variable salaries and advertising and promotion, in line with increase in sales.

Moving on to the different segments. Cement, concrete and precast sales increased 27.3% during the third quarter of 2021 compared to the same period of 2020, mainly due to the increase in sales of bagged cement and concrete as well as increased prices for both of this.

Gross margin decreased 3.5 percentage points in the third quarter of 2021 when compared to the same period of 2020 mainly due to decreased cement margin because of the use of imported clinker.

During the 9 months of 2021, sales of cement, concrete and precast increased 24 -- 74.5% and gross margin increased 0.6 percentage points, mainly due to increased sales and the halt in commercialization during the second quarter of 2020.

Sales of cement increased 23.2% in the third quarter compared to the third quarter of 2020, mainly due to increased shipments of baggage of cement as demand in the north continue booming during this quarter as well as price increase in line with inflation. Gross margin decreased 3.2 percentage points mainly due to the need of use imported clinker to satisfy the outstanding levels of cement demand.

During the 9 months of 2021, sales of cement increased 72.5% and gross margin remained in line when compared to the same period for last year, mainly due to the increased sales of self-construction during 2021 as mentioned above as well as halt in production and commercialization mentioned before.

During the third quarter 2021, concrete and pavement sales increased 72.8% and gross margins increased 3.4 percentage points, mainly due to higher sales volume and higher prices, both as a result of demand for reconstruction-related projects.

In terms of pricing, during this quarter, we also decided to slowly but persistently increase prices since they were at a low point after the lockdown in 2020 and the slow recovery afterwards. This, alongside higher prices, from more complex type of cement for reconstruction projects has allowed for the significant margin expansion, which we are confident will be sustainable for at least next month.

During the third quarter of 2021, precast sales increased 15.8% compared to the same period of last year and 23.8% in the 9 months of 2021 compared to the same period of previous year mainly due to increased sales of light precast products such as blocks and pavements for reconstruction-related projects. Gross margin during the third quarter of 2021 decreased 12.3 percentage points mainly due to sales mix as we sold higher-margin products during the third quarter 2020. However, gross margin during the 9 months of 2021 increased 5.2 percentage points.

During the third quarter of 2021, quicklime sales decreased 12.2% mainly due to the increased (sic) [decreased] demand in the first part of the quarter, partially offset by higher sales towards the end, which will continue during the fourth quarter of this year. During the 9 months of 2021, quicklime sales increased 8.1% mainly due to higher sales volume. Gross margins remained flat in the third quarter of 2021 and 9 months of 2021 when compared to the third quarter and 9 quarters (sic) [9 months], respectively, of 2020.

During the third quarter of 2021, construction supply sales were in line with the same period last year. Gross margin decreased 3.1 percentage points in the third quarter of 2021 compared to the same period of last year mainly due to the exchange rate effect that affected the cost of imported materials such as steel bars. During the 9 months of 2021, construction supplies were increased -- sales increased 66.3% compared to the 9 months of 2020, mainly due to unusual low sales during the second half of last year.

In terms of debt, our net debt-to-EBITDA ratio is 2.6x, which is a level we feel very comfortable at. During this quarter, we obtained a syndicate loan between Banco de Credito and Scotiabank with a 9-year maturity in the currency of soles at a rate of 5.82% per year. With this plan, we will pay the short-term bank loans, and the contract also includes the funds to pay the international bonds due 2023.

We believe that given the situation, this operation has been an absolute success, both in terms of the rate and the term. In this way, we have secured the funds to pay our short-term debt. The remainder of the bonds, we believe that we, therefore, have an optimal finance structure to face uncertain times.

To summarize, this quarter results shows resilience in volumes of -- despite political uncertainty. We are convinced that our decision to expand to optimize capacity is the best possible during these times and that we will soon reap the benefit in terms of profitability.

Can we now, please, open the call to questions?

(Operator Instructions) Our first question today is coming from Adrian Huerta at JPMorgan.

Congrats on the results. A quick question on margins. We saw the gross margin for cement at almost 35%. What was the margin on imported clinker during the quarter? And is this higher freight cost already impacted the cost of imported clinker during the quarter? Or should we expect increased costs on imported clinker in the fourth quarter versus this quarter?

Yes, what we've used this third quarter of 2021 is a little bit more than 100,000 tons of clinker. This has impacted in around, I would say, PEN 15 million in this quarter. For the fourth quarter, we expect a similar consumption of around 113,000, and the cost will be very similar to the third quarter, the overall cost.

Sorry, the PEN 50 million is what, the cost of the imported clinker?

The excess cost of imported clinker.

Versus the clinker that you produce?

That's right. Yes.

And again, this -- the higher freight costs that we're seeing over the last couple of months, should we continue to see this cost on a per ton basis to increase in the fourth quarter?

According to what I -- this is Humberto. According to the information we have, I mean, we should not see any more increases on freight during this coming quarter.

Okay. And if I may ask another question on demand. What percentage of your volumes year-to-date you think are attributed to the reconstruction efforts?

Around 10%.

10%. Perfect.

Yes. If I may elaborate, I mean, the strong demand is fundamentally based on self-construction. That's why we are so optimistic towards the future. I mean, granted reconstruction, G2G government spending is important. But I mean, self-construction is what really is moving the demands also higher.

And are you guys seeing remittances growing strongly in Peru?

I don't have the information on that, but the one thing I may tell you is when we came out from pandemic towards the end of last year, we conducted a very extensive in-depth analysis of where -- why was demand so high because we were surprised by when we reached 300,000 tons per month. And we were concerned it was related mainly to government bonds or some kind of help from the pandemic.

Surprisingly so, when we asked the people, I mean, people that were building or the people that were thinking about building over the next 45 days, how are they financing the investment, only 4% said that it was thanks to some help from the government, almost 80% said that with their own money and only around 10% said they were borrowing the money. So I mean, the base of the demand was basically the work of these people.

Yes. I'm not sure how relevant are remittances in Peru, but at least in Mexico and in the Caribbean, they're quite relevant. And remittances are growing at 20% this year, and they were also up strongly last year, and that's where it's been driving back cement in this country. So I wonder how important is remittances in Peru, but I have no idea. Okay.

Adrian, if I may talk about remittances, they are close. They are not as important as they are in Ecuador or Mexico or other countries. I mean here, what we are seeing is that the north part of Peru has a condition of full employment and it has had that condition over the last 18 years, thanks to the agriculture going very strong, fishing going very strong, building going very strong.

So I think the base here, and if I double click on that answer, about 80% of people of their money, very few mentioned that this money was based on remittances. They also -- it was based on the money that they were being able to save because they were fully employed.

(Operator Instructions) Our next question today is coming from Francisco Suarez at Scotiabank.

Congrats on the results. And apologies if I missed the earlier remarks. The question that I have is that related with your expansion on the Pacasmayo plant, it seems that $70 million, it seems to be a low-priced investment. So what I want to understand is I think that you might be considering an expansion that will not consider a new grinding unit? And perhaps if you can elaborate a little bit on the tons per day capacity of clinker of that new line?

Sure. Sure, Francisco. Very good question. When we talk about our 3 plants, if you talk about Piura, our plant in the jungle, these are plants that have a pretty tight balance between grinding of raw materials, clinker production, grinding of cement and dispatches.

Not the case of Pacasmayo. Pacasmayo has been growing over the last 30 years where there were some cement capacity added. So what we have today was a very unbalanced plant. So what we're doing basically is adding only clinker capacity. Why? Because we have enough raw material grinding, and we have enough cement griding.

So what we're doing is upgrading with a -- here and that's going to produce 2,000 tons per day. That means 600,000 tons per year. And with this, we're going to raise the usage of raw grinding to 100%. So we'll have a very level plan. That's why investment seems apparently so low if you compare it to, you remember the 366 million of Piura. Piura was a greenfield.

Here, and this is why this decision makes so much sense because it's a limited amount of around $70 million. And we should -- the payback is very, very quick. Why? Because we're only adding the capacity we need. Now we'll have a line that is 100% in usage of raw grinding. It's going to be 100% in usage of clinker, and we still have some spare capacity in cement grinding, which is always important towards the market. So that's the rationality behind the decision.

That's perfectly clear. Now a follow-up on Adrian's questions on the cost structure. What can you tell us on the slag cost that you are experiencing at the moment and coal prices as well? Do you see -- and if you can answer this question and connect the dots between what is the level of inventories that are relatively low, at low cost in your books compared to the additional inventories that you need to purchase on the spot prices now?

Yes. I mean, what we have seen over the last 5 months is a dramatic increase in the freight cost. I mean it is a world phenomenon. I mean when we started importing clinker right after the pandemic, reopen of the pandemic, we were talking about $70 of the clinker already, around $70 of importing clinker. That has gone up almost by $30-something over the last months.

That's what really pushed us also to make this decision of building the additional kiln. I mean what we are hearing from the people that are the experts in terms of prices say that these prices will not go lower in the coming -- not only months, in the coming years. They think they're going to level where they are. They don't think they're going to keep increasing.

So like Manuel answered to Adrian's question, I mean, what were -- the prices at which we're importing clinker right now and the excess we're paying for every time compared to our own clinker, that should remain the same over the coming months and hopefully will remain the same till we get our new capacity 18 months from now.

Yes. And if you can elaborate on the cost of slag as well and coal?

Yes. I mean let me clarify on that question before I -- because you asked about inventory. When I say that the clinker prices are going to remain the same, this applies to the future acquisition of clinker. That's very important to clarify.

And in terms of the slag and coal once again, all of these are being impacted by freight costs that have been increasing. So of course, I mean, depending where we've getting the slag from and the coal we get from Colombia, that's going to be impacted by the same price phenomenon. Manuel?

Francisco, what you have to consider the 88% of the total coal that you use -- we use are anthracite coal that we buy it locally. So we don't have -- we have some impact of the cost of diesel, but we don't have the major impact of the vessel.

We have no further questions in the queue at this time. I will now turn the floor back over to Humberto Nadal for closing remarks.

Thank you. Thank -- I want to thank everybody for joining today in the call. Indeed, the past 1.5 years has been extremely challenging for everyone on a worldwide basis. In our case, it has pushed us to adapt much quicker than we were used to, absolutely think outside the box on a permanent basis and learn to operate in very uncertain ground.

Decision-making in this condition clearly is uncertain. It's not easy at all. But success, we strongly believe, stems from very brave decisions. We are very confident that decision to commit to our country's long-term development and invest to expand and optimize our (inaudible) capacity will bring significant returns in the near future and will consolidate Pacasmayo's leading position in our region.

With that being said, thank you, everyone. And as always -- I think there are some follow-up questions?

We do have 2 follow-up questions in queue. The first is coming from once again from Adrian Huerta.

Just to go back on the excess cost on the clinker that you brought down in the quarter, PEN 15 million, 100 million -- 100 ton -- 100,000 tons of clinker, I was just doing the math, and that's around USD 130 per ton. Can you just clarify on that, Manuel, please?

One second, please. That's an over cost of $30 per ton, Adrian. PEN 14 million, if you divide it by 4 and over 115,000. It's $30 extra cost per ton for the third quarter and fourth quarter of this year.

But you said PEN 50 million?

PEN 15 million.

PEN 15 million. Yes, 1-5 million soles.

1-5.

That's right, yes. PEN 15 million.

I must apologize for Manuel.

(inaudible) was PEN 15 million, sorry. Okay. Perfect. Excellent.

An additional $30 per ton during this quarter and next quarter. Next year, prices will go a little bit higher.

Our next question is a follow-up from Francisco Suarez.

Apologies for the follow-up question. But regarding prices, first of all, congrats for passing that extra cost to the final consumer. The question is how risky might be to continue pushing for higher price hikes in the sense of potentially attracting shipments from your competitors in -- within Peru. I know that your import parity prices has actually gives you a leeway to do that. But does -- do you see any risk on increasing further prices?

Francisco, this is Humberto. I think we have successfully read the market over the last almost 60 years. You should remain confident that we'll continue to do so.

Okay. Got it. So -- and lastly, on -- when we see the shipments on Northern Peru, now we see that the total share of shipments to the total country based on the information that you shared in your press release is roughly 27% of total shipments, which is actually quite high compared to the past 10 years or so. Do you think that, in other words, that the overall conditions related with the reconstruction efforts in Peru, as you mentioned, the overall trends that you see that are driving self-construction linked to the agriculture features and so on, that would be enough to keep that level of demand as it is as now?

Yes. I think Francisco a key thing, and you just mentioned is the full employment. I think the north of Peru is an example of how our country when all the investments and the qualified people and people working very hard are there, you reach important levels of employment.

You have 3 cities that have over 1-point-something million people growth is there. So I think you had a 27% of sales. And national dispatches should remain because those conditions that are prevailing in the north. And happily, as a Peruvian, I must say that they are not prevailing in the south or Lima.

Got it. And of course, penetration is relatively low, isn't it? I mean the kilograms consumed per capita are really, really low despite of the rising demand.

I think more than really, really low, and I think we discussed this in the past. When you go into per capita, you have to divide per capita for housing and per capita for infrastructure. I think the per capita for housing is raising constantly over the last years. But unhappily, the per capita in terms of infrastructure, that one is really, really low. And so in the end, it will bring the whole average to a lower level. I think the per capita for housing is okay, but the per capita for construction is disappointingly low.

(Operator Instructions) We have no final questions in the queue. Mr. Nadal, do you have any final comments?

No. Like I said before, I mean, I reiterate that we are very confident of the decision we have taken last Friday about this new investment. We have been here for decades, and we are always very optimistic about the future of our country. And we are absolutely sure that we'll follow a growth path in the coming years, and Pacasmayo will be a permanent part of history of this country. Thank you very much. And as always, we're always here if you have any further questions. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.