Cementos Pacasmayo SAA (CPAC) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Pacasmayo's Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) And please note, this call is being recorded. (Operator Instructions)

I would now like to introduce the host for today's call, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Thank you, Catherine. 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 filings.

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

Thank you, Claudia. Welcome, everyone to today's conference call. We hope all of you and your families continue to stay safe during these difficult times. This quarter's cement shipments reached unprecedented levels, once again. The 37.2% year-over-year growth in cement sales volume is absolutely remarkable, especially considering last year volumes were already very strong. This significant increase in sales also resulted in an all-time high quarterly EBITDA levels of PEN 128.1 million.

The strong second half of the year allowed for yearly cement sales volumes to decrease only 1.2% compared to 2019 despite over 2 months of virtually no sales and definitely much better than we could have expected when the pandemic started. This trend has been sustained since June 2020, and we believe -- we strongly believe, we will continue to see strong growth during 2021.

One of the reasons to be confident in 2021 is the execution of infrastructure-related reconstruction plant in Northern Peru after El Nino (inaudible) impact in 2017. As we already have mentioned in previous quarters, last June, the Peruvian government signed a government-to-government agreement with the United Kingdom to execute PEN 7 billion of additional construction plan during the next 2 years.

Last week, the authority for our construction announced a public bid for a group of projects that adds up to around PEN 2 billion, which added to the PEN 1.6 billion already in execution, represent a significant amount of spending, mainly in schools, hospitals and riverbank defenses, all of which, as you know, are cement intensive. These projects will also help boost concrete sales, which have already started picking up this quarter.

Even though the fastest peaking demand during 2020 came from the self-construction segment, which consumes mostly bagged cement, we never lost sight of our vision of becoming a building solutions company with a client as a main focus. Therefore, this year, we focus on strengthening our already existing strategy of selling our concrete to small and medium-sized construction companies as we realize a large infrastructure projects, especially those related to private investment would have a slower recovery. Moreover, diversifying our customer base strengthens our position as we become less reliant on a small number of large projects.

Precast sales also had a very strong year, achieving 36.4% year-over-year growth in 2020, despite the 2-month hold in operations, mainly from infrastructure projects. We are confident that if we continue to focus on our clients' needs and provide them with innovative, tailormade solutions, we will continue to grow and advance forward towards our 2030 vision.

The world has had to adapt faster in this year, and we are definitely no exception. Many strategies that were under making were accelerated here. As we have already mentioned before, we dedicated a great effort and time this year to develop Mundo Experto, an ecosystem made up of digital solutions target and customized for different users, such as foremen, hardware stores and self-builder. This year, the Good Employers Association of Peru had a special addition to the pandemic call leading the change in adversity. We're proud to say that Pacasmayo because Mundo Experto was an outstanding company in the leadership category and business reinvention, which highlights the immediate response capacity to ensure business continuity through the invention of processes, skills and digital solutions in order to project the operation and safety of its staff and customers during the pandemic. It is a great satisfaction that our initiatives are recognized and drives us to continue innovating and developing tools and channels to improve our customer experience.

Finally, I would like to mention that we are humbled and greatly honored to be the one of the top 11 companies to be included for the first time in S&P Sustainability Yearbook in 2021. This report is based on the assessment of the most important companies around the world, grounding on the annual corporate sustainability assessment by SAM. This year, 7,032 companies belonging to a total of 61 industries around the world were evaluated in the economic, environmental and social fields. To appear the Yearbook, companies must score within the top 15% of the industry, (inaudible) S&P Global ESG score within 30% of the industry's top performing company.

Furthermore, we have been awarded with the Industry Mover status as we recorded the strongest year-on-year score equipment in our industry. A few years ago, we started focusing on even more sustainability understanding that a company has to transform to incorporate sustainability practices systematically in all areas in its core. This recognition, especially in these difficult times, motivates us and affirms our commitment to continue our improvement in this path.

2020 has been indeed a very challenging year. One that has [taught us] resilience, a capacity to adapt, to innovate and to constantly and permanently think outside the box to find solutions in an ever-changing and ex predictable well. I firmly, strongly believe that our ability to surpass these difficult times stems from our focus on our people and understanding their wants, needs and motivations to (inaudible). As a result of this, we have motivated people that are committed to our company's purpose and have high levels of engagement. Our true character is often revealed in terms of crisis. And I can humbly but very probably say the best of us as far as in this pandemic.

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

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. Fourth quarter 2020 revenues were PEN 475.3 million, a 27.1% increase when compared to the same period of last year, mainly due to the increased bagged cement shipments. Gross profit increased 19.9% in the fourth quarter compared to the same period of 2019, mainly due to increased sales mentioned before, partially offset by higher costs as we have to use imported clinker, lower sales of concrete and lower average price of cement, mainly due to sales mix as we sold more of our lower priced product.

Consolidated EBITDA was PEN 128.1 million in the fourth quarter of 2020, the highest in the company's history and a 27% increase when compared to the fourth quarter of 2019, mainly due to increased sales. It is worth noting that even when compared to the third quarter of 2020, which was also very strong, there was a 6.2% increase. This shows a sustained upward trend in the EBITDA, which we hope can continue in 2021.

For the full year, revenues decreased 6.9%, which is remarkable recovery considering that almost 65% decrease recorded in the second quarter of 2020. EBITDA decreased 21.3%, mainly due to the halt in operation from over 2 months -- a little bit more than 2 months during the government-mandated lockdown between March and May.

Turning to operating expenses. Administrative expenses for the fourth quarter 2020 increased 16% compared to the fourth quarter of '19, mainly due to increase in personnel expenses from bonuses and third-party services as a result of increased licenses and other digital tools. Selling expenses in the fourth quarter 2020 decreased 28.7% compared to the fourth quarter of 2019, mainly due to decreased advertising and promotion and a decrease in allowance for expected credit losses. During the full year 2020, administrative expenses decreased 6.4%, mainly due to the decrease in variable components such as volumes and decreased workers profit sharing because of the company's results of operations. Selling expenses in 2020 decreased 9.7% compared to 2019 mainly due to the above mentioned savings in advertising and promotion, reduction in variable salaries and decreased allowance for expected credit losses.

Moving on to a different segment. Cement, concrete and precast sales increased 25.5% during the last quarter of this year compared to the same period of 2019, mainly due to increased sales of bagged cement as well as precast offset by slightly lower sales of concrete.

Gross margin decreased 1.5 percentage points in the fourth quarter of 2020 when compared to the same period of 2019, mainly due to higher cement production costs as a result of the use of imported clinker as well as lower dilution of fixed costs from the slower recovery in concrete sales and slightly lower average price on cement and concrete due to the sales mix, as we sold more of our low-priced products.

For the full year 2020, cement, concrete and precast sales decreased 8.4% as a result of a government-mandated halt in operations in the second quarter. Gross margin decreased 6.2 percentage points, mainly due to increased cost of lower revenues during the lockdown period as well as the use of imported clinker since the third quarter.

Sales of cement increased 31.6% in the fourth quarter of 2020 compared to the fourth quarter of 2019, mainly due to the increased shipments of bagged cement as demand in the North continued booming during this quarter. However, gross margin decreased 2.5 percentage points, mainly due to the increased costs related to the use of imported clinker because of the sudden increase in demand as well as lower average prices due to the sales mix. For the full year 2020, cement sales decreased 3.9% and gross margins decreased 6.1 percentage points.

Concrete sales decreased 12.7% and gross margin decreased 5.3 percentage points, mainly due to a high comparative basis since last year, we reached record sales levels as well as a slower recovery in concrete sales than in bagged cement. However, if we look at quarter-on-quarter figures, concrete sales increased 43.3% compared to the third quarter of 2020, showing a very positive growth trend. For the full year 2020, sales decreased 38.2% and gross margins decreased 17 percentage points. As Humberto mentioned, we are confident that with the upcoming shipments to the public sector for the reconstruction and other projects, we will still -- we will start seeing higher levels of concrete sales and stronger margins.

Precast sales increased 62.1% and gross margins increased 3.4 percentage points during the fourth quarter of 2020 compared to the same period of 2019, mainly due to increased sales for reconstruction-related projects. Gross margins increased 3.4 percentage points as higher sales allowed for higher dilution of fixed costs. For the full year 2020, sales increase are remarkable 36.4% despite the 2-month halt in operation during the lockdown because of very strong demand during the rest of the year. However, the gross margin decreased 1.5 percentage points, mainly because of the sales mix.

Quicklime sales in the fourth quarter of 2020 remained in line with 2019, and gross margins decreased 1.5 percentage points compared to the fourth quarter of the same period. During the full year 2020, quicklime sales decreased 10% compared to the same period of 2019, mainly due to decreased sales volume as a result of the stop in operations of most sectors during the government-mandated lockdown during the second quarter.

Gross margin, however, increased 5.4 percentage points during the full year 2020 compared to the same period of 2019, mainly due to a temporary increase in sales of higher-priced products as well as a decision to sell ex-works during the lockdown period.

Sales of construction supplies during the fourth quarter of 2020 increased 76.8% compared to the fourth quarter '19, in line with baggage cement sales as families worked at home improvement projects. Gross margin remained flat in the fourth quarter compared to the fourth quarter 2019. During 2020, construction supply sales increased 22.3% compared to the same period of 2019, mainly due to the strong recovery during the second half of the year.

During the fourth quarter of 2020, the profit of the period was PEN 47.5 million a 61% increase compared to the fourth quarter 2019, mainly due to increased revenues and operating profits. For the full year 2020, the net profit was PEN 57.9 million, a 56.1% decrease compared to 2019 because of increased costs and loss of income during the lockdown period during the second quarter of the year.

In terms of debt, as you already know, we decided to take on some short-term loans for working capital needs when the pandemic started. Although we have enough cash to pay back those loans, we have decided to be cautious, since there is still uncertainty and the impact of the second wave and how this can impact the economy in the North. We believe that our current net debt-to-EBITDA ratio of 2.9x, which has come down significantly from a peak of 3.9x in the second quarter, is approaching healthy levels quickly, as we expect EBITDA to continue increasing.

To summarize, this quarter's results show the strength positive trend in bagged cement, which is now translating onto other segments, giving us reasons to believe that 2021 should be a very positive year. We are convinced that we are now -- we are able to quickly overturn the negative results on the second quarter because of our strategic decisions and financial performance during the strict lockdown period. We believe that we are in a strong financial position to face further demand and to continue growing with some financial flexibility as cash generation is steadily increasing and focusing on operational efficiency.

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

(Operator Instructions) Your first question is coming from Andres Soto.

My first question is regarding your capacity, the current level of capacity utilization and the possibility to expand your Pacasmayo plant. Can you please elaborate on this idea in terms of what is the timing that you are looking to do this? And what is the estimated CapEx for this investment? That will be my first question.

Sure. Andres. Yes, indeed, we're operating at very high level, operating at full capacity right now. As Manuel said, we're already importing clinker as we have planned to do we did it already when we're expanding Piura, and we are already working on expansion on a brownfield on Pacasmayo.

The level of CapEx going to depend on the capacity level. We are talking anywhere between $180 million to $250 million, depending on the size of the kiln. This is something that we're going to probably upgrade in the second quarter of this year. But we still won't make the decision because, I mean, we still are going to be importing clinker for 2021, 2022, sometime 2023 because it makes economic sense instead of our -- when we get a new plant in Pacasmayo, it is going to be because we can open it and start it at 60% or 70% capacity utilization. Otherwise, fixed cost will kill us. I don't know if that answers your question.

Perfect. That's very clear. So you haven't made the decision yet. This is just a preliminary figure, and you are expecting -- when are you expecting to have a final green light on this project?

Yes. We have not made the decision. I mean, even though demand is incredibly strong, it has to be incredibly song for a sustained amount of time for us to make such an important decision. This decision maybe, maybe will be taken some time this year.

Okay. Got it. And as a follow-up to that -- yes.

I need to complement, Humberto mentioned, the capacity of clinker. But in cement, we're around 67% of (inaudible). So we have plenty of spare capacity in cement.

Perfect. Got it. And as a follow-up to that, your EBITDA margin this quarter was 27%, partially due to this high level of utilization and the need for imported clinker. Is there any other nonrecurring factors that affected your EBITDA margin this quarter? Or should we assume that as long as you continue importing clinker, 27% is the EBITDA margin you're already looking at?

Well, basically, the imported clinker. But what you have to consider that this period, this quarter, we have sold more bagged cements of low cost or low-priced cement, basically for self-construction. So once next year, what we expect is that the concrete should increase and prices should increase a little bit, so margins should go up.

Got it. And my second question is regarding the recent restrictions regarding COVID in Peru. Have you seen any reduced demand as a consequence of those restrictions in Pacasmayo's area?

No, the answer is no. And basically because there's some restrictions has to do with extreme areas, which are Lima the South of Peru. The North, luckily for us, is not under the extreme situation. So we have seen no change at all in demand.

Okay. Congratulations on the results.

Your next question is coming from Froylan Mendez.

Congrats for the strong results. I wondered if you have the gross margin for cement, if you had not had any imports during the year? And if you could share the exact amount of tons of clinker imported during 2020? And additionally, have you had any changes to your estimate on how much volumes to come from the reconstruction project this and next year?

No. Our estimate for the reconstruction has still the same as the last call. And what we've been using of imported clinker during this year has been the second half of this year, around 200,000 tons, obviously, more in the fourth quarter than in the third quarter.

Do you have an estimate of the impact on gross margins of this imported clinker?

Not right now, but I can call you back later.

Your next question is coming from Lucia Calvo Perez.

I was wondering about your expectation regarding prices for 2021. And are you expecting them to maintain increased levels while self-construction demand is still strong? Or are you expecting to make an increase in prices?

Yes. We -- thank you for the question. We raised prices towards the end of last year and elevated at the beginning of this year. So right now, we are at what I think very comfortable levels, higher than last year, and we're going to remain at that probably for the rest of the year.

Your next question is coming from Francisco Suarez.

Congrats on the results. The question that I have relates with, one, your inventories linked to purchases of clinker. I mean it is, in my view, that you have already depleted a lot of your high-cost inventories related with clinker imports. So my question relates with what amount of this has been depleted already. And what is left in order to see a potential increase in margins in the short term?

And secondly, on your sales mix, you mentioned in your press release that you had a higher share of low value-added cement. Does the overall with construction program linked with the U.K., does that, in a way, allows you to sell more sulfate-resistant cement or any other form of value-added cement in the mix? Anything that you can help us with how your overall mix might change this year compared to last year? That would be very helpful.

Thank you, Francisco. I'm going to take the second part of the question, and I will leave the clinker question to Manuel. Yes, indeed, I mean, the reconstruction tends to be a more sophisticated project base in terms of schools, in terms of river banks. So yes, I mean, that's going to require a different kind of cement priority at a higher price. I mean -- and I think it absolutely a previous question. I mean we have been selling, I would say, a bit more of our low-priced cements, I mean, maximizing our market share. But I do think that the reconstruction projects and also some big infrastructure projects coming in, are the ones that are going to allow us to sell more sophisticated cement. And like I mentioned before also, I mean, we were able to look at some prices at the beginning of the year. Manuel?

Yes, We've used all the clinker that we had wasn't higher price definitely. And now we're importing new clinker at higher price than the production cost that we have but it's a lower price than what we had in the stock before. So what we expect the margin will go through the EBITDA margin for the whole year 2021 should be a little bit higher than the one we're finishing this year or should be much higher because this year we have a stop of 2 months, but should be higher even than the EBITDA margin that we are having in the fourth quarter of this year.

Your next question is coming from Alejandro Chavelas.

Congratulations on the results. Just if you could provide a little bit more color on the strength of bagged cement? Do you -- I understand you have been working hard to understand why is it strong and the strength of the consumer demand and how it is behaving. If you could give us a little bit more information on that? And what do you expect for next year in terms of bagged cement? I think that would be really useful for us.

Sure. I mean, when we started up again in May and then June, July, August the cement was very strong, we conducted a -- I would say, a very thorough study trying to understand where was the money coming from all this bagged cement. I mean self-construction, and because we were concerned that it was coming from the bonds given by the government or some kind of high of pension funds or aids or whatever. And only 4% of people interviewed and we interviewed over 600 that said that this was coming to some kind of external source. 65% of people said it comes from their own savings and their own working capital.

So I think that's why we are very optimistic about this demand remaining high. The year has opened incredibly well. And we do believe that we should see a record year based on that, based on the fact that the self-construction seems to have -- I mean, the informal economy has a resilience that is absolutely fantastic and way stronger than a formal economy. And I think a lot of people started working pretty quick after the quarantine, and they're back on the seat and these people work on a daily basis, everything else to recover pretty quick. So we're very optimistic about bagged cement this year.

That's very useful. Perhaps just as a follow-up, did that study that you conducted also analyze what people were doing with the cement, like what were the main uses that they were finding or did you do work on that or just on the services?

No, no. Basically, since they were spending much more time on their homes, they were doing improvements, basically home improvements. I mean they were doing another room or they were completing a ceiling or just making sure the family were more comfortable. But the thing also we have to bear in mind is that the government has launched a very aggressive program of housing for this year, and that is also going to mean that our self-construction and the self-building will pick up, not only in home improvements but in new homes.

Your next question is coming from [Enrique Grow].

Congrats on those results. I have 1 question regarding your expenses. Do you expect your expenses to be consistent with those higher prices you were talking about? Should we expect lower margin for this year compared to last year?

Well, margins is usually better than last year. Excluding the 2 months that we had in shutdown, our margins, for example, this year has been -- EBITDA margin has been much higher than the rest of the year, and we expect next year, we should be around 28.5% to 29% as a margin.

Before we finish, I can answer the question that [Fernando] made us, excluding the imported clinker, the gross margin for the fourth quarter of this year could have been very similar to the one of the fourth quarter of 2019, around 33.6%.

If I can complement what Manuel is saying, I think it's very important, everybody to bear in mind the fact that we are closely watching at the moment to decide on the expansion of Pacasmayo why because it's always a financial analysis between what is the excess cost of importing clinker versus what is financial savings we're doing by deferring a substantial investment of over $200 million. And that is something that we are permanently watching. It has to do with how -- what kind of cost we can get of the clinker, what kind of CapEx we're looking and what kind of financial cost we can get in the market.

So these are analyses we do permanently, and that is going to along with demand, going to be a key variable for us to make the decision. We did in Piura. In Piura, we imported clinker for almost 4 years. And at that time, [500 million] tons was the breakeven between importing clinker or building a new plant. Numbers have changed now, but this is something that we are permanently checking so that decision is taken in the way that really will create value for the company.

Okay. And do you have any estimated volumes for this year?

We closed at almost 2.6 million tons, which is a similar volume to 2019. Like I said in the summary, I mean, it's remarkable that we did that with 2 months stopping. So if we see what we have been watching on the last 2 quarters of the year, I would say that the growth this year will be, for sure, a double-digit one.

There are no further questions from the lines at this time. We do now have a follow-up in queue from Andres Soto.

Perfect. Just going back to your comment on, Humberto, on the estimated CapEx for this new kiln. Looking at my numbers by -- this will represent an additional 2 points in terms of leverage for Pacasmayo. So we will be talking about almost 4x net-debt-to-EBITDA. Is this something you guys are looking to do with debt only or you will be considering also equity for doing this investment?

Sorry, Andres, can you repeat the question because...

Basically, what is the capital structure that you are looking for the potential investment on business plan? I know it's preliminary, but looking at my numbers by the end of this year, you will be at 2.1 net-debt-to-EBITDA, assuming the $250 million investment, there will be an additional 2 points in leverage. So I was curious you feel comfortable with this level or you will be considering issuing equity for funding investment?

Yes. With the new investment of Pacasmayo, if we decide to do it, and it will take place in approximately 2 years, 2 to 3 years. So that's going to be spent considering that we have cash that we produce every year of around $80 million, what we expect is the margin EBITDA -- sorry, the ratio should not go higher than 3.4%, 3.5% -- or 3.4, 3.5 points.

We have no further questions from the lines. Manuel, do you have any further remarks? Manuel, do you have any closing remarks for today's call?

I'm back, Manuel. If I can make the closing remarks?

Yes. Humberto, go on.

Humberto, do you have any closing remarks for today's call?

Yes. Yes, sorry, I got disconnected momentarily. Like I was saying, and I realize I was talking to myself. It has been no doubt an outstanding quarter in terms of results from operations, and we cannot deny the full year results are well beyond our initial expectations. However, we are incredibly convinced our resilience, a very strong financial and operational position. And more importantly, our ability to adapt and respond in a very fast and a very swift manner plays a key and tremendous role in achieving this result. We believe that this challenging year has provided us with incredible rich knowledge, not only in our market and clients but also fundamentally on our people and our essence.

And my congrats, my absolute thanks and recognition goes to the whole team of Pacasmayo. They are an outstanding bench of people that surprised me year over year, and I'm sure for many years to come. My recognition is tremendous to that incredible team. It is indeed in difficult times that we discover what we are really capable of doing, and we believe that we are now better equipped to face another challenging year with constant determination. I'm convinced this will be the best year in the company's history. Thank you to everybody for renewed interest in our company. And as always, Claudia, Manuel and myself, we are here if you have any further questions. Thank you very much, and have a great day, and please stay safe.

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