Cementos Pacasmayo SAA (CPAC) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo's First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded. (Operator Instructions)

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

Thank you. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Ferreyros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter and our strategic outlook. Mr. Ferreyros will then follow with additional commentary on our financial results. We'll then turn the call over to your questions.

Please note, this will be -- this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts, 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 know that this is an extraordinary moment for everyone and our hearts go really out to those affected by the new coronavirus. After a record start of the year, with revenues growing close to 15% in January and February, everything came to a sudden stop when the Peruvian government as most others around the world, declared a state of emergency starting March 16, 2020, intended to last 2 weeks at first and then extended it various times. The quarantine, as we speak, is currently set to end May 10, 2020, when (inaudible) return to activities probably by sector is expected. Our priorities right now are, first and foremost, the health and safety of our employees and their families.

And secondly, the financial well-being of the company. Although, our operations are basically closed on the production side, our team has continued working from home, to not only have all the safety measures and protocols in place to begin production as soon as legally possible, but also working towards the future. Although uncertain of the details, we are certain that we will never be the same at least in the foreseeable future. We have presented our operations reserve plan to the Ministry of Production with the safety of our employees, as always, as our top priority.

We have used this opportunity to jump-start some initiatives we had already been considering, such as more extensive work from home arrangements. We have been pleasantly surprised with the results, encouraging us to continue this working method beyond legal requirements as we believe it will bring about higher productivity levels, increase well-being and a work-home balance for our employees. On the financial side, we have made very significant budget adjustments throughout the organization, making it as lean as possible for its restart.

We have also taken some short-term loans as a precautionary measure to ensure our liquidity during the most difficult times. We have always been very conservative on the financial side, and we believe this will pay off now. I would also like to mention that we launched a voluntary initiative to take the quarantine time as vacation period for those that were not critical workers and could take the time off now. And the vast majority of the company took it. Over 8% of our workers voluntarily agreed to this initiative.

Besides the positive financial implications of this initiative, it clearly demonstrates the commitment of our employees and the alignment with the company's overall well-being. Managing in these difficult times means more than ever, making -- taking care of each other and our families is the top priority. To this end, we're rolling out a health tech mobile application to stay connected.

This application will help us understand how the different infectious areas are impacting our daily lives and our own state of health in order to provide the necessary support and help manage the risk of the new coronavirus. The application allows us to see, in real-time, how the virus is impacting our company and our family as well as the health and well-being of everyone. It also gives us the ability to manage our company's current operations.

Finally, I want to emphasize, really I want to overemphasize that we remain focused on our long-term goals and are absolutely convinced that cement industry in our country will come back. There's great potential for industry even in the medium term, as we believe the government should prioritize investment infrastructure to boost the economy. Our company is more ready than ever to capitalize on its potential and to try to make the best out of this situation adapting to the new reality.

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

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. First quarter 2020, revenues were PEN 299.3 million, a 4.4% lower than the same period of last year, mainly due to halt in production and commercialization after the government declared a state of emergency to prevent the spread of the new coronavirus. Gross profit decreased 17.9% in the first quarter of 2020 compared to the first quarter of 2019, mainly due to lower sales as well as higher costs derived from the sudden stop in regular production.

However, as Humberto mentioned, revenues were performing outstandingly well during the first 2 months of the year, with growth of 14.4% compared to the same period 2019. Consolidated EBITDA reached PEN 72.3 million in the first quarter of 2020, a 22.8% lower than the same period of last year, mainly due to decreased sales of higher costs -- and higher costs mentioned above.

Turning to operating expenses. Administrative expenses for the first quarter 2020 remained in line with the first quarter of 2019. Selling expenses in the first quarter of 2020 increased 31.7% compared to the first quarter 2019, mainly due to increased advertising and promotion during the first 2 months of the year as well as increase in the provision for doubtful collection.

Moving on to the different segments. Cement, concrete and precast sales decreased 4.3% during the first quarter of 2020 compared to the same period of 2019, mainly due to the halt in production. However, during the first 2 months of the year, sales of cement, concrete and blocks increased 14.7%, mainly due to the increased sales of cement and concrete for a construction-related project and self construction.

Gross margins decreased 5.9 percentage points in the first quarter of 2020 when compared to the same period of last year, mainly due to lower sales and the costs derived from the sudden stop in production. Sales of cement decreased 9% in the first quarter of 2020 compared to the first quarter 2019, mainly due to the stop in production. However, during the first 2 months of the year, sales of cement increased 9.9% compared to the same period of previous year, mainly due to the increase in demand in the northern of Peru, particularly from the construction spending and the self construction segment. Gross margin decreased 5.6 percentage points, mainly due to the lower sales and increased costs related to the halt in operations. Concrete sales continued to perform extremely well this quarter, achieving an 18% growth despite the halt in sales since March 16, mainly due to increased demand from small- and medium-sized companies as well as reconstruction-related products.

Gross margin increased 0.8 percentage points this quarter compared to the same period of last year, mainly due to the dilute of fixed costs and derived from a higher sales. Precast sales also increased 77.8% in the first quarter of 2020 compared to the same period of last year, mainly due to higher demand from reconstruction related products. Gross margin increased 0.4 percentage points, mainly due to higher sales, despite higher costs related to the halt in operations. Quicklime sales decreased 5.5% compared to the first quarter of 2019, mainly due to decreased demand. Gross margin increased 4.3 percentage points in the first quarter of 2020 compared to the same period of 2019. Profit for the period decreased 64...

Manuel's line has disconnected, please stand by. And Manuel has rejoined.

Okay. Only to summarize, despite our very strong start for the year, the 4Q already showed the effect of the new coronavirus. As Humberto mentioned, we are focusing on maintaining the financial health of the company, adjusting all costs and at the same time, preparing ourselves to start operations as soon as legally possible and embrace the new reality.

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

Thank you, Manuel. These are indeed unprecedented times, and we are forced to think of new and innovative ways to function, all as individuals and in our business. We are more than ready for the challenge, and we'll continue to work hard to generate long-term value for our shareholders.

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

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

I understand there is a plan to gradually reopen the Peruvian economy over the next few months, which includes construction as one of the sectors that should normalize first, especially for large-scale infrastructure projects. Could you please help us quantify the potential demand we could see from this project this year? And how much of this could start showing up in your 2Q results? That will be my first question.

And my second question is related to margin performance in Q1. I imagine this was not only due to lower capacity utilization, but also increased transportation costs from the Piura to the Pacasmayo plant. Could you please help us break down these effects? I'm trying just to quantify the sensitivity of your EBITDA margin to lower volumes?

Hello, Andres, this is Humberto. Thank you for your question, and I hope everybody's doing well in your home and your family. I'm going to take the first question, and I will leave Manuel to take the second one. At this point, it's not really clear what will happen starting Monday. We have seen -- I have seen many different plans of how the government intends to open the economy. But I would say that most of them include cement as an industry that will go in the first chunk of this opening because indeed, we are strategic to mines and everything.

But I think initially, we're going to be focused fundamentally to service infrastructure. In our case, we're talking about the Salaverry port. In our case, we're talking about the airport in Chiclayo, which we have already been awarded in the past and quite a few other projects that are going on. When you talk about specific volumes, it's hard to tell because, first of all, you have to bear in mind that 65% of our sales go to self construction. That's going to take, I think, a little bit longer to restart, even though we have submitted protocols for all our hardware stores and even the self reconstruction site. But we have to wait and see what the government does.

So we are really opening at the beginning for the 25% to 30% of the market. And it's all going to depend on how ready the building companies are to pick up the rhythm in the coming future. So you know me, I mean, I'm very cautious about projecting volumes. So at this point, it's very hard to project until we actually open and see what are the construction companies up to. Manuel?

Yes, related to how much could have been the EBITDA without the cost of transportation from Piura to Pacasmayo. It could have gone up to around 25.2% as EBITDA margin. And as summarized, EBITDA margin, excluding the 15 days halt could have been a little bit higher than 30%.

(Operator Instructions) We'll go next to Luis Pardo at Compass Group.

I understand there's a level -- a high level of uncertainty, as Humberto mentioned, but it is important to point that in all phases of the recovery, construction does mention, and you have 95% market share. So whether it's concrete, cement or whatever it is, it's something that's built in Northern Peru, it is likely that you would be involved. Am I correct?

Hello, Luis, this is Humberto. Yes. The answer is absolutely yes. I mean we have a very high market share, like we mentioned, and we are more than ready to start serving every single client on the road. What I was trying to be cautious about is the rhythm at which dispatches are going to pick up, and it has to do, you have to realize that, I mean, construction companies have to redeploy the workers to the Salaverry port for the case of airport in Chiclayo and so forth. And also, I mean -- I think the big push that's going to determine how fast we're going to come back it's not only infrastructure, but it's self construction. I think that you have to -- if you see what's going on in Colombia, what's going on in the U.S. and what's going on in Spain, construction is one of the leading areas for the recovery for many reasons.

One, because it's high and intense in labor, it generates employment, which is very important for all countries. Point number two, construction sites are open and there's quite a significant social distance between workers as everybody is doing whatever they're supposed to be doing. So I think the protocols you have submitted to the government, to authorities are pretty clear. That this is a segment that would run -- could be very important for the recovery, and we believe that the health risks are significantly low as compared to other one. So yes, I mean, I'm very optimistic that we're going to be one of the ones with the fastest recovery. But as much as I'm optimistic, I mean, I really cannot put a color, a specific number to that optimism at this point.

That I completely understand, and I agree with. It will be difficult to do. The other question is for Manuel. With the cash that you have on hand, let's say, Peru goes into massive disaster and doesn't reopen, how much could you stand without operating with the cash you have today?

Yes. Luis, in the worst-case scenario, if nothing opens and we stay with total payroll and all the costs and et cetera, we have enough cash for whole year.

Okay. So with the cash balance today, even if you don't sell one more bag of cement, you have cash until December?

That's right, yes. That's correct.

We'll go next to Francisco Suarez at Scotiabank.

My question relates with import quality prices. It seems that the overall production cost of clinker overall has declined due to energy prices. Is this fair to say that you will be picking more volumes rather than better prices once that you can restart your operations?

Francisco, the cost is looking great. It will probably go down because of cost of raw material, some raw materials such as coal, are going down. Yes, we expect a lower cost in the future, despite we have a stock of clinker in Piura -- basically, in Piura for the Piura plant. So we will restart the Piura plant in, we expect, the next 3 or 4 months. But the Pacasmayo plant, we will start producing the clinker immediately after the halt stops.

Okay. And what about then on your overall pricing strategies. Do you think that you will be limiting your potential price increases going forward? And you will be, in other words, preferring to allocate the highest possible volumes in the market rather than wishing for better prices?

Francisco, I think at the beginning of our -- first of all, I should start by saying hope you and your family are doing well. As I mentioned, I mean, we started January and February with a very strong increase in revenues close to 15%. One of the reasons for that wasn't only good volumes, but also, I think the prices at a good level. So I think that good level should probably remain for the rest of the year because it's in a good territory.

Okay. Perfect. And lastly, if I may. Any concerns on any of your raw materials in terms of overall disruption. For instance, what about the blast furnace and -- that you used as alternative -- oh sorry, as an addition to cement?

No. Really, I mean, ever since we had the El Nino phenomenon 3 or 4 years ago, we were very conservative in terms of our stocks. So I think in terms of -- I think, Manuel, mentioned in terms of clinker, in terms of slag, in terms of pozzolane. I mean, we have over 6 to 8 months of supply in all of them. So we are absolutely terrific. If anything, probably from a cash management perspective, well, like Manuel mentioned we are deferring, I mean, the starting of some of our kilns maybe intending to optimize the working capital between cash and inventories, but we are at ease with all our stocks.

And with no other questions holding, I'll turn the conference back to Mr. Nadal for any additional or closing comments.

Thank you, operator, and thank you all. These are indeed not only unprecedented but extremely difficult times. But we remain optimistic. We remain committed to our employees, committed to our shareholders, committed to our communities and mostly committed to our country. I'm convinced that some months from now, hopefully, we will look back into this and focus on the lessons learned and not focus on what we lost, but in what we gained. We are absolutely convinced that the future is bright for us. If anything, we have suffered a small derange from that, but will come stronger. We will come wiser and we will come more together as a country in the future. Thank you very much for all and my best wishes everybody is safe home with their loved ones. Thank you very much.

Ladies and gentlemen, that will conclude today's conference. And actually, we have a few other questions holding, gentlemen, if you would like to take them?

Sure, go ahead.

Okay. We will take (inaudible) with Rimac Insurance.

I just want to -- I don't know if you can be more specific when you say that you have enough cash in your balance sheet for the rest of the year, even though in the worst-case scenario production is off. And maybe you can give me some color regarding your revolving credit facilities in a scenario, would you have to refinance your debt?

Sure. Let me take that question. I think Manuel was very clear. And he said, I mean, let's foresee a scenario, which I think is highly, highly improbable because I think we will be producing 4 days from now. In which there's no production, in which if there's no production, in which there's no collection of our accounts receivable, and we make no more extra budget cuts, which we have already done substantial, in that case we have plenty of cash on hand to survive the rest of the year.

As you may understand, in this process, we're only May 1 tomorrow. So we see, in the next 2 or 3 weeks that this is going to be the scenario. Of course, we will take additional measures so that cash in hand would last us significantly more than till the end of the year. I think that's more enough color. And also you have to bear in mind that I mean, all of our financing except for short-term loans we have taken over the last 6 weeks is in a very long term, even though we have some bonds coming up in 2023. There are ones that are 13 and 9 years going forward.

So I think financially, we have absolutely nothing to worry, no concern. And one more thing also. I mean we have a substantial stock of raw materials in terms of clinker and pozzolane raw material if needed. So I was asking one of -- (inaudible) one of colleagues before. At some point, we're also want to make wise decisions in terms of how we turn that inventory to maximize the cash position. I think that's more than enough color, and that should give you more than enough peace of mind that from a finance and cash management point of view, we're in a fantastic position.

And that was our last question. So today, that will conclude the conference. We thank you for your participation. You may disconnect your phone line at this time, and have a great day.