Cementos Pacasmayo SAA (CPAC) 2020 Q2 法說會逐字稿

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

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

Thank you, Melinda. 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, especially our response to COVID-19 and 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 question.

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 in these very difficult times. We are all joining from different parts, different locations, so let's hope that everything works on the technological side.

As you probably know, the Peruvian government continued extending the lockdown and state of emergency intended to last 2 weeks at first for a total of almost 3.5 months that ended June 30. Economic activity started gradually since mid-May with 20 activities related to mining, industry and construction services, tourism and commerce.

We started producing and shipping cement May 20, always with the health and safety of our employees as our undisputed top priority. We continue to operate with as little workers as possible in our plants. And those that have to go follow strict guidelines for social distancing, hygiene and regular checkups by our health and safety team. All of our administrative staff continue 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.

Before moving on to the results of our return to operations, I would like to highlight our actions to fight against the spread of COVID-19. We have acted on 4 different fronts, and we have acted strongly. First, in terms of health-related initiatives, we have implemented a nutritional program to help our workers with BMIs above 30. This program has been very successful, and after 2.5 months, almost 70% are already below 30. We continue to work with the other 30% and also closely monitor all of them so they are able to maintain these healthy levels. We have also provided all of our workers with access to online doctors' appointments so they don't have to leave their houses unless strictly necessary. Safety kits, including face masks, alcohol and soap and psychological and emotional support have also been provided. We have also donated safety kits to our communities and local authorities.

Second, in terms of goods, we have donated food to communities in our area of influence, benefiting over 1,800 families.

Third, through our volunteering program, we have helped with the disinfection of streets in some of our areas of influence. We filled our mixer trucks with water and disinfectant, and thanks to our almost 80 volunteers, we were able to clean and disinfect more than 17 kilometers of roads.

Finally, communication is also very important. In the first weeks of the state of emergency, in some areas of the country, including the north, there was some lack of information on the severity of the pandemic and the true importance of staying home to prevent the spread. We appeared on radio and TV spots to help inform the population, and we believe it was a very successful strategy. We firmly believe on building a better future together and now is the time to show our support to our workers, their families, our communities in our area of influence and those less fortunate during these difficult times. Also, in conjunction with Hochschild Mining, we have developed many different programs to aid our people in these difficult times.

Moving on to our results. Since the restart of operations, we have been pleasantly surprised by the cement demand behavior. We had expected the self-construction segment to suffer significantly due to the lockdown, but this was not the case, and it has once again proven its resilience. This segment is generally tied to employment that in the north is mostly agriculture, which has had a good year so it was less affected than in the other areas of the country. If we add this to the size of the informal sector in the north, which did not quite stop during the lockdown, we can see why the recovery has been faster than expected.

Our sales of bag cement in June were only around 20% below the same period of the previous year, which was a record year, as you may recall. And July sales have continued increasing and look extremely promising, leading us to project that sales could be close to those in 2019. Nonetheless, the effect of over 2 months of not selling any cement will definitely burden our end-of-year results even if this faster-than-expected recovery consolidates in the next month.

Another reason to be very optimistic about the second half of 2020 and all over 2021 is an agreement signed between the Peruvian and the British government to accelerate the execution of the reconstruction plan after El Nino in 2017. The agreement involves the execution of PEN 7 billion over the first 2 years, during which the U.K. government will provide technical assistance for the construction of hospitals, schools and river defenses, all of which should be finished by June 2022. These are excellent news for the northern region since the much needed infrastructure will finally be built in the best way, hopefully, in the most efficient manner.

Finally, I'd like to take a moment to briefly explain our most relevant digital initiatives since they have become even more relevant in today's context. As we have mentioned before, since 2018, when we launched our new vision, we identified digital transformation as one of the key axis to articulate our strategy. Since then, we have worked on a variety of tools and projects to digitalize our processes and our relationship with our consumers. We have developed a platform for registration, control and follow-up of the different types of discounts and promotions, granting a new digital experience to our client, a great UX with the required speed and access to information.

Another very important digital tool on the operational side of the business is one that allows for online control of the main production variables, such as quality, energy and consumption of components and resources. It has real-time information but also keeps historical records of each production variable, giving us the capacity to use it for operational intelligence as well as predictive analysis. This is complemented by a platform that digitalizes our production team with work that is managed through mobile devices.

One of the most relevant initiatives has been, one, to digitalize our relationship with construction companies of all sizes through Pacasmayo Professional, allowing them to program their requirements and track their shipments online. It integrates all of our back-office platforms for an optimal customer service experience. This tool allows for the planning and programming of the fleet with efficiency algorithms to optimize the resources, such as mixers, pumps and drivers, according to the client's requirements. All of these and other tools were already in planning or execution. The pandemic only led us to accelerate the development and implementation. We are firmly convinced that the fact that we have already identified these opportunities and have started working decisively on these initiatives has been a key point in our quick adaptation to the new market conditions.

Finally, I want to emphasize, I want to overemphasize that we remain fully focused on our long-term goals and are very pleased to have already seen some recovery in sales. We are convinced that the work we have done during the past years in terms of long-term strategy and vision as well as the quick adaptation in the lockdown period puts us in an incredibly strong position to capitalize on the opportunities ahead and keep helping our country move ahead.

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

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy.

The second quarter of 2020 revenues were PEN 114.3 million, 64.5% lower than the same period of last year, mainly due to the halt in production and commercialization after the government declared the state of emergency to prevent the spread of COVID-19.

Gross profit decreased 98.2% in the second quarter of this year compared to the same quarter of last year, mainly due to lower sales as well as higher fixed costs derived from the sudden stop in regular production. However, as Humberto mentioned, revenues have started improving since June, and we expect further improvements in the upcoming months.

Consolidated EBITDA was negative PEN 5.7 million in the second quarter of this year.

For the first 6 months of the year, revenues decreased 34.9% and EBITDA decreased 64.6% for the both mentioned reasons, which were partially offset by a very positive first 2 months of the year.

Turning to operating expenses. Administrative expenses for the second quarter of this year had decreased 20.7% compared to the second quarter of last year, mainly due to decreased variable salaries because of the company's results of operations.

Selling expenses in the second quarter of 2020 decreased 21.7% compared to the same period of last year, mainly due to decreased advertising and promotional from budget adjustments and lower variable salaries because of our results of operations.

During the first 6 months of the year administrative expenses decreased 11.3% for the both mentioned reasons. Selling expenses for the first 6 months of the year increased 4.8%, mainly due to the increase in the allowance for credit losses.

Moving on to the different segments. Cement, concrete and precast sales decreased 65.5% during the second quarter of 2020 compared to the same period of last year, mainly due to the halt in production during the most of the quarter. Gross margins decreased 35.9 percentage points in the second quarter of 2020 when compared to the same period of last year, mainly due to the sudden halt in production. However, gross margin in June was already almost 30%, and we should see continued improvement.

Sales of cement decreased 60.9% in the second quarter compared to the same period of last year, mainly due to the halt in production and commercialization. Gross margins decreased 29 percentage points mainly due to lower sales and increased costs related to halt in operations. For the first 6 months of the year, cement sales decreased 34.8%, and the gross margin decreased 12.1 percentage points. Nonetheless, as Humberto mentioned, we have been pleasingly surprised by the performance of bag cement sales since the restart of operations. And we are expecting July sales levels to be similar to the same period of 2019.

Concrete sales decreased 92.3% and gross margin decreased significantly due to the halt in production and commercialization for most of the quarter. For the first 6 months of the year, sales decreased 43.8% and gross margin decreased 26.9 percentage points. Once shipments to the public sector for the reconstruction and other projects restart, we should start seeing higher levels of concrete sales.

Precast sales decreased 64.6% and gross margin was negative due to complete halt in sales and higher fixed costs during the quarter. For the first 6 months of the year, sales actually increased 6.5% compared to the same period last year with the very high sales during the first 2 months of the year, but gross margin was still negative due to higher fixed costs.

Quicklime sales decreased 38.2% compared to the second quarter of 2019 and 25% during the first 6 months of the year, mainly due to decreased demand during the lockdown period. Gross margins increased 5.5 percentage points in the second quarter of 2020 compared to the second quarter of 2019 and 2.6 percentage points in the first 6 months of the year compared to the same period of last year, mainly due to temporary increase in sales of higher-priced products as well as the decision to sell ex-works during the lockdown period.

The loss for the period was PEN 45.5 million, primarily due to decreased revenues and higher cost for the halt in production, in operations mentioned above as well as a slight increase in financial costs because of some short-term loans taken for the working capital.

To summarize, this quarter results of operations shows the sharp effect of the complete stop in production and commercialization during the lockdown period. But June and July have already started showing signs, very positive signs of recovery, giving us reasons to be very optimistic about the second half of the year. We have been able to preserve the financial health of the company during the most challenging times and find ourselves in a good position now to continue operating with some financial flexibility as cash generation is steadily increasing.

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

(Operator Instructions) And first, we go to Andres Soto with Santander.

My first question is related to infrastructure projects. I understand you are becoming more confident on this demand finally coming along. Can you please give us a sense of the potential cement volumes from these projects over the next 24 months? And out of this, how much is in your pipeline for the second half of 2020? I understand you made this comment that you expect second half to be in line with the second half of 2019. And I would like to understand how much of that is reflected by infrastructure projects vis-a-vis the sort of organic demand that you have?

This is Humberto. Thank you for the question. In that program that's going to be supervised by the British government, we're expecting somewhere around between 350,000 to 400,000 tonnes. This should be happening probably at the beginning of the last quarter of this year but very strongly over the next year. I think that's a significant demand. And in terms of infrastructure, because this is specifically for reconstruction, I wouldn't like to throw a number right now because I think the government is very confident the government system will work during the remaining of this year, and they are thinking of implementing it for other projects. For example, I mean, the Chavimochic project, which was stopped for more than 4 years because of Odebrecht, has now been taken over by the central government. So I think, I mean, no concrete numbers at this point, but very optimistic about what's going to be happening, especially if this implementation of reconstruction proves to be very successful.

My second question is related to dividends. Clearly, profit this year are going to be extremely low. However, the company still has some equity reserves. Given this more optimistic outlook for the next 24 months, can your shareholders still expect dividends to be distributed this year?

That's a very good and a very tough question. I think we are very optimistic about what's coming ahead of us, especially because of what we've been seeing in the last 6 weeks. Financially, we have recovered all of the short-term loans we had to take because of COVID. So we're in a strong position. Like you say, I mean, profit-wise, the numbers are not going to be there this year as the previous ones, but we have close to $200 million in undistributed profit. So I think the decision is not mine. Let's see how it goes. But I think if the numbers keep showing the strength we have shown, probably some dividend will be considered by the Board. And this is not my decision but clearly not the same as last year.

Next, we go to the line of Luis Pardo with Compass Group.

Yes. Andres beat me. I don't like that. I'm usually first in the call. Hope your families are doing well. And like I second Andres' comment here. Congrats on the pickup, the V-shape like recovery you are seeing here. My question here goes, if you could give us more details on how and why like expecting second half to be similar to 2019, which was a record year, is something that is very impressive. And I don't think any other cement companies have that in the region. So if you could give us more color there and on the reasons behind the confidence you have to show those numbers in the second half of the year?

Luis, this is Humberto. I hope everybody's doing great in your family. It's a very good question. Why are we so optimistic? Because unlike other companies, because I think, and not to brag, but we're unlike any other company. But besides that, I mean, I think were based in what we have been seeing over these last 6 weeks. But let's focus on one thing that's very important. What we are seeing right now is fundamentally cement in bags. This is related to employment. As you know, agriculture has been running very strong in the north. They're having a very good year. Fishing has almost finished all of the quota this year, and all of this reflect unemployment. So I think basically, that's driving a very strong demand in terms of the bag cement.

Point number two, the informal sector, like you say, which explains 70% of our demand, didn't really quarantine as the formal one. I mean, these are people that need to somehow work every day. And the fact that they keep buying cement is a clear example that they have found a way to keep working and buying cement.

And also, one thing that we need to really, really weigh here is this agreement with the British government is a tremendous news, absolutely tremendous news because we're talking about 350,000 tonnes of cement. For a company that is selling 2.6 million, 2.5 million a year, these are significant numbers. I mean, if you divide it over 15 months, it brings a substantial growth to us.

So why are we so optimistic? Because of what we have been seeing over the last 7 weeks since we opened. Even though the big projects, I mean, are still coming in, I mean, for us to be, like I mentioned, in June 20% off based only on bag cement with no ready-mix is fantastic. I sincerely hope we are right. You know us well enough. We are always cautiously optimistic, but we also are based on facts and numbers. And the numbers we posted in the press release are clearly a reflection that the recuperation so far seems to be in a very strong V-shape.

Very good. Congrats. I know it's early and you're very conservative, which I like as a shareholder. But if all these trends continue, then like 2021 could be a very strong year. It's like you're having the same year in the second half of 2020 and you have the need of the reconstruction in 2021. And the agro sector is not going to slow down, then 2021 could be another record year after 2019, no?

Absolutely. I mean, the fact that we, this year, like I mentioned, and Manuel, I think, stressed that we have 2 months that we stopped, and we think in the second part of the year with our country, which is still trying to recover, we have been seeing very strong numbers. And this program with the British government is going to come 80%, I would think, over the next year. So yes, I mean, at this point, being cautiously optimistic, as you know, we are in Pacasmayo, I think 2021 could break new records like above of what 2019, which was already a record year of our 62-year history. But yes, absolutely.

Okay. I'm proud of you guys. I just want to make a quick comment. It's very good, the job that Manuel and Claudia do, talking to investors during the crisis. So I appreciate all the help we've gotten over the last few months.

Next, we go to Alejandro Chavelas with Crédit Suisse.

Congratulations on the results and on the strong performance during June and July. My question is related to other questions already posted in the call. But I mean, the July demand seems to be really strong. You seem really confident that it is not a one-off growth, that it will continue throughout the second half of the year. What are you hearing on the ground from the consumers? Is there a possibility that this could be inventory restocking rather than a strong trend or what are you thinking on that front? I mean, you sound confident, just to get more sense on the ground what you are hearing.

Thank you. I think that's a very, very good question, indeed. I think when we started on May 20, and we had been out of stock in our DINOs, in our hardware stores, in modern channel. So the first 15 days operation, clearly, we knew we were just replenishing stocks. As you know, stock level in our markets are very low, in our factories, in the DINOs, in the hardware, everywhere. So I mean, nobody has more than 3, 4, 5 days of stocks. So I mean this replenishing of the stock was only the first 10, 15 days. I mean those days have long passed. That's why, I mean, the last days of May when inventory are very good, but we were very cautious because we said, no, we're just replenishing stock. June was a harder month, but what we're seeing in July, we -- in June, we're seeing something that I think we published in our report. I mean, we have been growing 10% from 1 week to the next for 6 consecutive weeks. So I think that's not a replenishing of stock. That is basically demand getting back very quickly to a very strong level. So yes, I mean, you know us well enough to know that we are cautiously optimistic, but this time, we are very optimistic, I have to say.

Next, we go to the line of Froylan Mendez with JPMorgan.

So maybe trying to look at the other side, what could go wrong on your optimistic outlook? I mean, I tried to think that there has to be a part of the demand that has to be hurt. I guess private construction is going to be the sector that is going to be most impacted. And then you would need a very strong incremental infrastructure sector to compensate for the volumes lost in the private construction sector. Could you just explain to us what are the sectors that you expect to be impacted because of the crisis?

Sure. I think it's a very good question. What can go wrong? I think clearly, health issues. I mean, the numbers are still very high in Peru. They keep going higher. So if we were to go into another quarantine, another lockdown, I think that would be terrible for the whole country, not only Pacasmayo. I think that's something that would throw all our optimists through a window in one single action. And I think that's something that I think is improbable but possible. So that, I think, is our biggest fear and concern.

And I fully agree with you, construction companies are taking longer than the self-construction segment to come in. But the one thing, I mean, even though many are hurt, I mean, the government has launched a very strong program in terms of new houses and even everything. So the way you have to look at it, I mean, this is a market that may be hurt because, I mean, a lot of people have lost their jobs and everything. But the government and the private sector are throwing so many initiatives that I think that's going to compensate that.

And let's bear in mind one thing. When we talk about this agreement with the British government, PEN 7 billion, that's a lot of money and to be spent over 15 months. That's unheard of in our region, unheard of. I mean, the most we were able to spend in infrastructure or public spending for construction was maybe PEN 1 billion a year. So to spend PEN 7 billion over 15 months, these are numbers -- so you keep adding all those things, they all end being aggregate demand for cement. And I think that's what we're looking these days, and that's why we're also so optimistic. And the key thing here is, I think the reason self-construction is picking up so much of the demand, and we discuss this, Manuel was saying, because of employment. And agriculture is doing, luckily, very well. Fishing is having an okay year. So those things, in the end, I think, keep people employed and keep people wanting to keep building.

Next, we go to Adrian Huerta with JPMorgan.

Most of my questions were answered, but let me take it a little bit further. And this is great news, and I'm quite excited to see the PEN 7 billion being spent over the next couple of years or the next 15 months. But thereafter, because it's going to happen fast, what can we expect thereafter on further investments and where the money could come from? Is the government already working on something to make this, not as large, but an ongoing spending going forward?

So it is reconstruction that have signed the agreement with the British government. And there are 2 things I can take from that meeting. First of all, it was a very small SWAT team but very efficient. And point number two, they clearly told us that the government is using the reconstruction of the north as a pilot to really see if this government-to-government supervision can be taken even further and specifically can be translated into infrastructure projects, which, as you know, we have over $160 billion for the whole country. So I think that if this works over the next 15 or 18 months, those PEN 7 billion, first of all, that's only the first part of reconstruction because we still have more funds to come. But I think the government or the coming government will use this experience to keep doing the same system, which I think is great. So I think that's what I think keeps us -- that would come. And also, I know you read in the papers, but the Chavimochic project, which was stopped for a while, has been taken over by the central government once again. And like I said, I think that we're going to get into this wave of trying to be more efficient in public spending.

(Operator Instructions) And next, we go to Francisco Suarez of Scotiabank.

Congrats on the news, gents, and thanks for the efforts. As Luis Pardo says, this is very helpful for all of us. And a follow-up question on Luis Pardo's. I understand the structural differences on your end market exposures that you have in Northern Peru, namely, why it is important, the agriculture, the fishing season. I mean, all the rationale behind the self-construction. But does the fact that it's not as densely populated in the north in contrast to Lima, does that also place a role in the recovery that we are seeing in the pickup of cement shipments? And my second question relates now with these funds that you have from the U.K. There is a need for you to implement certain protocols under the COVID, now that COVID hit in terms that you may be required to make sure that your contractors, your clients do have those protocols in place because that might affect or not the overall disbursement of funds or anything that they will less the risk in that sense?

Francisco, Humberto, thank you for your questions. And I'm going to go by the second part first. I mean, we spend over a month working strongly in our protocols. That's why luckily, and I'm hitting my head for good luck, we've had no event since we've opened almost 2 months ago. And we are very strict on that protocol, and we have extended it to our DINOs and our hardware stores and our associates and everybody. So I think we're working very strongly there. As a matter of fact, the British authorities were very impressed by the level of precision we were using in protocols. And I must say, I mean, we have to thank also our peers in the rest of the world because we are able to learn from the CEMEX and the Holcims and the Lafarge of the world that are very open to help us since they had been affected by COVID before. So I think we were able to learn from them, tropicalize the protocols and make them work. So I think we are very confident that we are fine there. I always tell my people, we had a talk yesterday, we cannot let our guard down because we have to keep being very aware that COVID is a tremendous threat. So I think we're okay on that stand.

And the first part of your question, the north of Peru has, unlike the south, 3 cities with over 1 million people. We have Piura, we have Trujilo and we have Chiclayo. And of course, they are not as big as Lima, but the way they are disseminated, I mean, in 3 different cities and the way they react to economic variables seems to be okay. Like I say, Lima has a whole different dynamic. In Lima, the informal sector is way much smaller than in the north and south of Peru. So I think we are going to keep being okay. And these are cities that still need rebuilding and building and need houses and need hospitals and they need malls and everything. So I think it's good we have million-people cities, but I think it's also great that instead of a one big metropolis, we have various spread over almost 1,000 kilometers. I don't know if that makes sense to you.

This concludes our question-and-answer session. The floor returns to Humberto Nadal for closing remarks. Mr. Nadal, please go ahead with your closing remarks.

Yes. Okay. Thank you. There was something wrong here.

Like I was saying, I think this has been indeed the most challenging quarter in Pacasmayo's history. But at the same time, we are extremely proud of how we navigated it and the resulting outcome. We believe that there are many reasons to be more than cautiously optimistic about the demand in the second half of this year. All of you know us very well, and we wouldn't be as bullish or as optimistic unless we really believe in this. And we believe that due to the current behavior of the self-construction segment as well as the additional upcoming cement sales to the public sector through this agreement with the British government is going to turn into a quick V-shaped recovery. More importantly, we consider ourselves in a very strong position, both financial and operationally as well as in terms of use and development of digital tools, to tackle this new challenge. We're going to remain focused on the creation of long-term value. At this point, we're going to remain focused on the health and the well-being of our people and our communities. And I want to thank you all for your continued support for our company. And we will, you all know us, I mean, Manuel, Claudia and myself, we're always available. And we are sure that when we get together 3 months from now, we probably will be looking at very good results. Thank you very much for your time today and stay safe.

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