Cementos Pacasmayo SAA (CPAC) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo Third Quarter 2020 Earnings Conference Call. (Operator Instructions) At this time, it's my pleasure to turn the floor over to Ms. Claudia Bustamante, Investor Relations manager. Ma'am, the floor is yours.

Thank you, Tom. 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 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, cement shipments accelerated strongly, leading us to reach historical record levels. The 14.2% year-over-year growth in cement sales volume is remarkable, and we hope it continues for the next month. This significant increase in sales also resulted in an unprecedented quarterly EBITDA level of PEN 120.6 million as increased sales were matched with sustained savings in selling and administrative expenses as part of our commitment to operational efficiency.

As you probably know, the Peruvian government gradually began reopening its economy in the third quarter, reaching Phase 3 out of 4, with more than 90% of the economy is currently operating. Although GDP has not yet recovered to pre-pandemic levels, the fall has been decreasing month by month. We hope to continue seeing some recovery as the remainder of the economy reopens.

Cement shipments have recovered well throughout this quarter, but the northern region has fared much better than the rest of the country, reaching pre-pandemic levels as soon as July and historical records during the quarter, as I already mentioned. We are aware, of course, that these growth levels may be difficult to sustain in the future. But we do believe that even in demand provides the main decreases in the upcoming months, the demand for ready-mix and precast materials should increase as the construction-related projects accelerated execution.

Although these market differences between regions cannot be denied, we do strongly believe that our strategies have played a key role in our increased sales volume. We have been working steadily in the past years to focus on our clients' needs to go beyond just any products to providing solutions. These efforts are proven valuable during these challenging times. The self-construction segment has been the motor behind the volume growth this quarter.

We are focused on several fronts to enhance the customer experience and to facilitate access to our solutions. We have developed Mundo Experto, which is an ecosystem made up of digital solutions that join supply and demand and offer a superior purchasing experience, leveraged on intensive use of technology to generate more value for our users.

The digital solutions are targeted and customized for the digital users, such as government, hardware stores and the self-builder. We are convinced that being at the forefront of digitalization for these customers will bring even greater opportunities for future development and growth.

On the other front, we have Pacasmayo Professional, our division that offers construction solutions for the more formal construction segment. As shown in here, it offers a portfolio of comprehensive solutions and include technical assistance throughout the building processes in order to provide a superior user experience. Our portfolio of building solutions looks to maximize our value-added offer, distinguishing clearly ourselves from traditional cement sales and consequently strengthening our market position.

We have developed targeted solutions for different types of customers, looking to expand our customer base beyond construction companies of any type to also include foremen and self-builders. We have developed both adapted ready-mix solutions for structural needs and pre-dosed bagged solutions for nonstructural purposes to better fit this customer need. We believe that there is an important potential market for ready-mix concrete in this segment and are, therefore, working on adapting the value proposition to generate greater value for them.

Finally, I would like to highlight that both our current achievements and the development of our future strategy would not be possible without our people. The health, safety and well-being of our workers will continue as our top priority. We have implemented a variety of systems to communicate, inform and support the physical health of our people, resulting in a lower-than-average level of COVID-19 cases among our workers.

We continue to operate our plan with as little workers as possible. And those that have to go follow strict guidelines for social distancing, hygiene and regular checkups by our health and safety team as well as a strict protocol for accessing all of our facilities, not only for workers, but for contractors and visitors as well. All of our administrative staff continues to work from home, and we plan to continue working this way until we are certain that the benefits of returning to the office outweigh the risks.

We also want to emphasize that emotional health is extremely relevant these days, and we are making sure that the work-home balance is adequate, and more importantly, as how our people feel was supported by the company. We are convinced this is the only way the company will achieve growth and development as empathic leaders who generate the commitment and engagement needed to navigate these uncertain times.

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

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. As Humberto mentioned, in this third quarter, we have reached historical records in revenues and in EBITDA. Revenues were PEN 407.4 million, a 6.3% increase when compared to the same period of last year, mainly due to increased baggage cement shipments, partially offset by lower sales of concrete.

Gross profit decreased 3.4% in the third quarter of 2020 compared to the same quarter of last year, mainly due to the higher cost as we had to use imported clinker because of the sharp and sudden increase in demand as well as higher fixed costs due to lower sales of concrete and a lower average price of cement as we sold more of our value brand cement.

Consolidated EBITDA was PEN 120.6 million in the third quarter of this year, as I mentioned before, the highest in the company history and an 8.2% increase when compared to the third quarter 2019, mainly due to increased sales as well as sustained savings in administrative and selling expenses.

For the first 9 months of the year, revenues decreased 19.4% and EBITDA decreased 37.5%, mainly due to the hold in operations for over 2 months during the government mandate lockdown between March and May.

Turning to operating expenses. Administrative expenses for the third quarter of 2020 decreased 20.1% compared to the third quarter of 2019, mainly due to decrease in variable, salaries and third-party service. Selling expenses in the third quarter of this year decreased 16.8% compared to the same period of last year, mainly due to decreased advertising and promotion and lowered variable salaries because of our results of operations.

We will continue to strive to sustain these budget adjustments when possible to ensure efficiencies that can offset some of increased costs. During the first 9 months of the year, administrative expenses decreased 14.1% -- 14-point -- sorry, 14.4%, and selling expenses decreased 2.8%, mainly due to the above-mentioned savings.

Moving to the different segments. Cement, concrete and precast sales increased 2.9% during the third quarter of this year compared to the same period of last year, mainly due to the increased sales of bagged cement as well as precast, offset by lower sales of concrete.

Gross margin decreased 2.8 percentage points in the third quarter of 2020 when compared to the same period of last year, mainly due to the higher cement production costs as a result of the use of imported clinker as well as lower dilution of fixed cost from the slower recovery in concrete sales. For the first 9 months of this year, cement, concrete and precast sales decreased 20.8% and gross margin decreased 8.5 percentage points as a result of a government mandate halt in operation.

Sales of cement increased 15.2% in this third quarter compared to the same period of last year, mainly due to increased shipments of bagged cement as demand in the Northern region boomed during this quarter. However, gross margin decreased 3.1 percentage points, mainly due to increased costs related to the use of imported clinker because of the sudden increase in demand as well as lower average prices due to sales mix. For the first 9 months of the year, cement sales decreased 16.7%, and gross margin decreased 7.9 percentage points.

Concrete sales decreased 52.1% as gross margin decreased 17.4 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. For the first 9 months of the year, sales decreased 47.8% as gross margin decreased 23.4 percentage points. Once shipment for the public sector for the reconstruction and other projects start accelerating, we should start seeing higher levels of concrete sales.

Precast sales increased 46.2% and gross margin increased 6 percentage points during the third quarter of this year compared to the third quarter of 2019, mainly due to the increased sales for reconstruction-related projects. For the first 9 months of the year, sales increased 21.4%. However, gross margin decreased mainly because of the sales mix since we sold more lower-margin products.

Quicklime sales in the third quarter of 2020 increased 9.8% and gross margin increased 14.3 percentage points compared to the third quarter of 2019, mainly due to temporary increase in sales of ground quicklime, which has a higher average price. During the first 9 months of the year, quicklime sales decreased 13.6 compared -- 13.6% compared to the same period of 2019, mainly due to decreased sales volume as a result of a stop in operations of most sectors during the government mandate lockdown during the second quarter.

Gross margin increased 7.4 percentage points during the first 9 months of the year 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 third quarter of 2020 increased 68.9% compared to the third quarter of 2019, in line with that cement sale as family work on home improvement projects. Gross margin remained flat in the third quarter of 2020 compared to the same period last year. During the first 9 months of the year, construction supplies increased 2.2% compared to the same period of 2019, mainly due to the halt in commercialization for most of the second quarter of the previous -- previously mentioned.

The profit for the period was PEN 45.2 million, a 12.4% higher compared to the same period of 2019, primarily due to increased revenues and operating profit. This result has led us to overturn the net loss we had accumulated as of June to a net profit of PEN 10.4 million.

To summarize, this quarter, results show the resilience and rapid response of both the market and the company. The negative result of the second quarter has not only been reversed, but we have achieved year-over-year growth in most key metrics. We believe that we are in a strong financial position to face demand and to continue operating with some financial flexibility as cash generation is steadily increasing.

Can we now please open the call to questions?

(Operator Instructions) We'll take our first question from Andres Soto with Santander.

Congratulations on the results. My first question is regarding some of the comments that you made in the release, where you say that you expect by 2023, 25% of revenues should come from value-added products.

I would like to understand what is the starting point that we should look at, is it 10% now? Or will -- kind of that number? And what type of capabilities and investments will be required in order for you to achieve this goal? That's my first question.

Andres, Humberto. Thank you for joining the call. Yes. Yes, when we talk about building solutions, this is more -- think of focus on value creation. In what sense? I mean last year, I mean 2019, we were already at 17% of our sales were coming from building solutions. We're talking products based on cement, but with some value. For example, the underwater pipes for the Talara Refinery, for example, some bridges, for some [bricking] things.

In terms of CapEx, these are very low -- or certainly, because basically includes some cranes, some facilities, but nothing compared to what cement would cost. I mean probably over the next 3 to 5 years, we're going to invest around $20 million in the building solutions over that period of time.

So like I said, it's not substantial in terms of CapEx. But it does allow us on the one sense to bring more growth; and the second, be close to the consumer; and of course, great value for the company.

Perfect. And my second question is regarding capital deployment. When I look at my numbers, I see that net debt-to-EBITDA next year should be already below 2x. So I would like to understand what will be your priorities in terms of capital deployment going ahead. Is it to increase dividend distribution? Or are you looking for opportunities for inorganic expansion. And this, also considering the fact that some players are apparently leaving the region. So will you consider to buy any of the operations in case CEMEX decides to sell any of the Latin American operations?

Yes, Andres. This is Manuel. Considering the next year EBITDA, excluding all this lockdown, we should be around 2x net debt to EBITDA. A little bit lower than that.

And considering your other part of the question, Andres. I mean you know that our policy, and this is for the Board to decide, has always been that if we have sufficient cash generation, whatever money we may not use for our CapEx shall go to shareholders. So I think dividends are always at the priority of our list.

And regarding potential acquisitions, we have been -- since we did the IPO in 2011, we have been selectively trying to pursue them. We are very successful because we never found something that there was a clear path to value generation. We are still watching the situation. You mentioned what specification or some others. I think we have a very strong balance sheet. And it's something that even though we would analyze, we would only go in if we have a very clear idea how to create value. So that would be my answer to your question.

And we'll take our next question from Lucia Calvo Perez with LarrainVial.

And congratulations on the results. I wanted to ask you three questions. The first one is, well, until when do you think you're going to be importing clinker for the unexpected growth in cement? And my second question is

(technical difficulty)

in that this demand for [top traction] and capacity?

And the third question is, well, also related to volumes. But if you have any expectations on the -- in terms of timing and the schedule of the reconstruction program awarded to as a government-to-government contract to the United Kingdom, I mean if you are expecting demand from volumes coming in there like during the first half of the year around 2021 or maybe it's more towards the second half of the year?

Yes. Thank you for the question, Lucia. The first part, I mean we are very -- I don't -- we're cautiously optimistic that volumes are going to stay at the current levels. So to answer of the importing clinker, that's when -- we have always to secure production capacity. So we will be importing clinker products for the coming years, which I think is a very good scenario to have because that means the demand remains very high. Of course, something happens with demand, we can always go back on that. So I mean, my first answer to your question, we'll be important thinkers. We decide to go into new CapEx to increase the capacity of our plants.

Regarding the second part of your question, the second one I didn't quite hear. But the one regarding the reconstruction works, I mean, there's dozens of British citizens already working in the North on this reconstruction plan. So we expect that demand should come in the first half of the coming year.

Ladies and gentlemen, one moment, please. We're experiencing a slight interruption in our conference. One moment.

And we are now back live.

Yes. I know Lucia, if you're still on the line, I hope you got my answers to your question on the important clinker and the reconstruction program. And I will tell you, I didn't quite get your second question. I don't know if you can -- please, rephrase it for me. Thank you. If not, we'll go on...

And Lucia, if you could requeue, please? At this time, we'll go next to Francisco Suarez with Scotiabank. But Lucia, if you would please requeue for your secondary question.

Congratulations for this superb quarter. It's been some sort of a routine for you guys. The question that I have is on capital allocation. You mentioned previously that perhaps dividends might be ranking first in priority, once that you feel comfortable enough with your balance sheet to distribute more dividends to shareholders.

But what about the potentially just making a single modern line in the plant of Pacasmayo? That plant probably can actually get more -- much more efficient if you have something like what you have currently in Piura. And not to mention that it will be definitely producing less carbon emissions and the like. So if you can walk me on what could be the priorities on capital allocation as your cash starts to mount more than current levels, and what would be the order of those priorities, that would be very helpful.

And the second question that I have is that -- because I didn't get right the answer because you were caught in the line on the reasons of why do you have to rely on clinker imports. Because I noticed that Piura was operating very few on -- I mean very small amount of clinker for the quarter. Sorry for that.

Sure, Francisco. I think very good questions. I'll tackle them in order. First, dividends are a priority as long as the company has both the cash position and has no other use for those funds. Clearly, we are already starting getting a new kiln in Pacasmayo. We are at a pre-feasibility level, we should have probably the preliminary numbers, an idea, in December of this year.

But you have to bear in mind two things. First, demand has risen so quickly that we're not going to make a decision, a CapEx decision, on a temporary increase of demand. We will speed up to be very confident on the demand looking forward to do it. On point number two -- and we did it with Piura. Before starting Piura, we are importing 3 or 4 years of clinker because it makes -- we need at least a deficit of 500,000 to 600,000 tonnes of clinker to make it worthwhile an investment.

I'll arrive at 2 things. One, [I only hear you postpone the] investment, you have a lower financial cost and makes sense to import the clinker. One -- and point number two, if you build a plant and you operate it at 15% or 20% capacity, then it really the fixed cost will kill you. So like I said, dividends are our priority, but we are now actively looking at a new plant or a renovated plant in Pacasmayo.

But you have to also bear in mind that -- the plant, Pacasmayo, in terms of milling and in terms of dispatch, all that part is new. So what we would look at would be a brownfield focus fundamentally in the handling of the material coming into the plant and the kiln.

And the other question was in terms of clinker capacity. When we came out of the lockdown, it was really impossible to anticipate what was going to go on with demand. And at that point, our priority was to keep our cash. That's why we didn't open the Piura kiln initially. We did -- instead of opening in May, we did it some weeks after that when we realize demand was coming back strong, and we switched from a cash preservation mode to let's go full production. So at this point, all our kilns are at full production and with this kind of demand, we need to import clinker to put up with demand.

(Operator Instructions) There are no further questions in the queue. Mr. Nadal, I'd like to turn the call back over to you for any closing comments.

Thank you. This has no doubt been an outstanding quarter in terms of results of operations, and we cannot deny that it surprise us as well. But we're in a very strong position, both financially and operationally to take on the challenge and rise to the occasion.

There are definitely, at certain times, as none of us can really envision what the new normal will look like. But what we are clear and what is certain is that now more than ever, we need to present as a company and build together the future we dream of.

Thank you very much for your renewed interest in our company. As always, Manuel, Claudia and myself remain open to any questions you may have. Stay safe, and have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time. Have a great day.