Cementos Pacasmayo S.A.A. (CPAC) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Pacasmayo's Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may begin.

Thank you, Michelle. Good morning, everyone. Unfortunately, Mr. Humberto Nadal, our Chief Executive Officer, had planned to be on the call today, but due to flight delays, he won't be able to join. Mr. Manuel Ferreyros, our Chief Financial Officer, will speak on his behalf and will begin our call with an overview of the quarter and our strategic outlook, and then follow with additional commentary on our financial results. We'll then turn the call over to you -- 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. Manuel Ferreyros.

Thank you, Claudia. Good morning, everyone, and thanks for joining us on today's call. During the second quarter of 2018, our revenues on Cement EBITDA increased over 2% and almost 12%, respectively. It is important to note that there were 2 unexpected effects during this quarter. We have a new President who took office at the end of March, and the World Cup happened in June, both of which had an effect in the economy. Also, we are, in fact, cautiously optimistic about President Vizcarra. A change at this level always brings some instability and stagnation, which we have seen during this quarter. However, the projected macroeconomic indicators of domestic demand and employment rates are beginning to improve. So we are confident in the recovery of the following quarters. On the self-construction side, we grow at lower rates than expected, mainly attributed to the World Cup phenomenon. As you may already know, Peru qualified for the World Cup for the first time in 36 years. This resulted in a 200% increase in sales of TVs in June as well as significant increases in sales of Peru shirts, more expenses at restaurants, among others. Considering that lower middle-income families have limited disposable income, they had to decide between buying a new TV or investing in improving their homes, generating -- decelerating in sales to the self-construction segment. Now that the World Cup is over, we should begin to see an improvement in this segment. The reconstruction of the north has suffered delays, but the recent changes of a legal framework could accelerate this execution. The most relevant changes [indiscernible] that the reconstruction will change authorities -- with changed authorities, will no longer need the approval of the Council of Ministers to change the execution unit of a project, and exemption from [indiscernible] to formulate reconstructions projects. This could result in more transfer to national government and award in more small and medium projects. It is worth noting that the concrete business has seen a significant improvement in sales this quarter, especially towards the end of the quarter, so we expect this trend to continue. Concerning infrastructure, we have seen some projects being awarded and bidding process finally moving forward. The salary report and the Chimbote By-Pass have been awarded this quarter, and construction should begin next year and later this year, respectively. The Chiclayo and the Piura airport remodeling is also getting very close to the awarding process. This is a good clear sign that we should start seeing some more infrastructure spending in the upcoming quarters. As mentioned in the previous quarters, our new strategy and long-term vision is focused on evolving from a cement producer to a construction solution company, with the customer as the main driver of our strategy. The 2 axis that articulates this strategy are innovation and digital transformation. On the digital transformation side, among other things, we have started to migrate to SAP 4 HANA, a powerful tool for optimizing and consolidating internal processes. With the implementation of this tool, we position ourselves as a leading company in the technology front. On the innovation side, we're currently developing 8 projects that seek to solve different strategic challenges. We believe this continued focus on operational efficiency and commercial excellence will allow us to reap the benefits of a stronger demand environment in the future. I'd also like to mention that following our desire for evolution and transformation, we have launched a new web page, which we hope will cover -- will convey our vision in a clear and convincing manner. We hope to bring you closer to our operations through various images and videos as well as a 360 degrees video of our three plants. We invite you to visit us at www.cementospacasmayo.com.pe. Before moving on to financial, I'd like to share with you that we are proud of being included as part of a Good Corporate Governance Index for 9 consecutive years. Pacasmayo was chosen among the 10 companies that made up the Good Corporate Governance Index of the Lima Stock Exchange. As you know, since 2010, Pacasmayo has been part of this index, which demonstrates our commitment to good corporate governance and managing based on value that positively influence our shareholders, employees and communities. Now moving on to the financial results. As previously mentioned, second quarter revenues increased 2.3% year-on-year to PEN 287.5 million, driven mainly by strong concrete sales as well as cement sales to the public sector and small- and medium-sized companies. Year-to-date, revenues are up 7.5% compared to the same period of last year, mainly due to an increased sales of cement and concrete as we begin -- began to see recovery after Coastal El Niño in 2017. Consolidated EBITDA increased 9.7% this quarter compared to the same period of last year, mainly driven by increased operational efficiencies. Cement EBITDA margin reached 30.3% for the second quarter of 2018, a 2.5 percentage point increase when compared to the same period of 2017. During the first 6 months, consolidated EBITDA increased 12.2%, mainly because of increased sales volume on operational efficiencies. Cement EBITDA margins reached 30.1% during the first 6 months of 2018, a 1.2 percentage point increase compared to the same period of last year. Turning to operational expenses. This has -- have decreased year-on-year as personnel-related expenses have decreased with fewer severance payments as well as lower third-party services from consultancy services given in the second Q of 2017. Second quarter of 2018 administrative expenses, therefore, decreased 13.2% compared to the second quarter of 2017 to PEN 42.7 million. Selling expenses reached PEN 10 million in the second quarter of 2018, above the second quarter of 2017, but similar to the previous quarters. During the first 6 months of the year, administrative expenses decreased 13.2%, and selling expenses increased slightly, in line with increased sales when compared to the first 6 months of 2017. Moving on to the different segments. Cement sales increased 1.5% during the second quarter of 2018 compared to the same period of 2017, with margins decreasing slightly due to an increase in the price of coal and other raw materials. Concrete sales increased 21.4% compared to the second quarter of 2017, demonstrating the strengthening of this segment. Margin was negatively affected by higher sales from small- and medium-sized companies, which generates higher operational expenses. During the first 6 months of the year, cement sales increased 7.4%, and margins remained stable compared to the same period of last year. Concrete sales increased 16.1%, although margins decreased 10.3 percentage points due to the higher cost mentions above. Net income increased 10.3% during this quarter compared to the second quarter of 2017, and 23.7% during the first 6 months compared to the same period of last year, mainly as a result of increased sales and improved operational profits. To summarize, this quarter, we have continued to focus on the pillars that supports our long-term strategy, which we firmly believe gives Pacasmayo the ability to continue to deliver meaningful value creation to our shareholders. Operator, can we now please open the call to questions?

[Operator Instructions]. Our first question comes from the line of Andres Soto with Santander Bank.

My first question is regarding the competitive environment in Peru. We've seen a significant decline in cement imports in the north part of the country, but at the same time, a significant increase in the central part of the country. And I guess, this has some impact in terms of the competitive environment down there, and it has some repercussions in terms of pricing. So I would like to understand if you have seen any type of price pressures as a consequence of this stronger competitive environment. And marginally speaking, how do you see -- how do you perceive the competitive environment for Pacasmayo going forward?

Yes, Andres, thank you for the question. Only to clarify, yes, there's some more competition, but we maintain our market share in our area and have increased some prices slightly, only for our low-price cement and only in some specific areas and cities. But what you're asking that maybe what makes the difference is that when some company imports cement, they have to import a whole vessel in such a specific date. So you can see some alterations or some differences between previous years, but that depends on when you import the cement. But in the north, we maintain our market share, and prices are slightly low in some types of cement and in some cities -- specific cities.

Okay. And my second question is regarding the reconstruction volumes. In the earnings release, you sound a little bit more optimistic on that on the basis of the special powers given to Vizcarra's administration, but that happened already in May. So have you seen anything in terms of additional progress since then given this new regulation?

Not yet. I think that this should -- we should see some impact in the third and fourth quarters. We'll see more in the fourth quarter than the third quarter.

Our next question comes from the line of Daniel Sasson with Itau BBA.

My first question comes on volumes. You mentioned that you already started to see volumes improving by the end of the second quarter, but I'd like to know what your estimates are for volume growth in 2018 and 2019. And specifically, what would contribute more; a recovery in the self-reconstruction given that the second quarter somewhat is low, or the -- or indeed the infrastructure projects actually picking up? And my second question is related to your efficiencies. You're currently at 43%, 44% capacity utilization. If you could provide us a sensitivity on where do you think your EBITDA margins could be if you increase your capacity utilization, let's say, to 50% because of higher fixed cost dilution. Those would be my questions.

Okay. Thank you for the questions. Yes, the first one, it's concerning volumes. What we're expecting this year, we should grow -- or what we expected we should grow the whole year around 4%. And this has been some impact because, as I mentioned, the World Cup has impact the self-construction consumption. People has been concentrating in the football matches, buying some maybe beers, shirts, TVs. And well, they've allocated the normal expenses that they use for self-construction into those kind of categories. We've been, for first time in our lives, we've been fighting with beers as a -- beers category that usually we don't compete. We -- this year, we expect a 4% growth in volumes; and next year, we expect a 5% growth in volumes. That's our best estimate, but this could be much higher. What it will hit, this will be reconstruction. If reconstruction really pushes hard, these numbers could go up. But what we prefer to mention it's a conservative number, then that's why we are projecting 5% for next year and 4% for this year. Concerning the efficiency of the company, yes, as you mentioned, we are with utilization capacity under 50%. We mentioned that if we take the capacity -- utilization capacity over to 90%, the EBITDA margins should go up to, I would say, 38%. And that means that from 32% or 31.5%, going to 50%, we should hit 32%, 33% and going forward, depending on how much efficiency or how much utilization capacity goes up.

Our next question comes from the line of Vanessa Quiroga with Credit Suisse.

My question is regarding the operational efficiencies that I show being -- keep healthy margins. Can you provide some details of those efficiencies that you're implementing currently?

Yes. We had some operational efficiencies. Yes, as you see, the administrative expenses has gone down. For the few -- the rest of the year, we should have a little bit increase in margins -- in gross margins basically because we're starting to use a less expensive seashell. Because I don't know if you remember, we've been using expensive seashell because we didn't have the road to bring this material from the quarry. So we -- since July, we are using a little bit less expensive raw material concerning the seashell. Concerning the coal, coal has gone up during the year. And what we expect prices should stabilize from now on until the end of this period. But we should start working very hard with administrative expenses to reduce these administrative expenses and to increase margins -- operational margins.

Our next question comes from the line of Mauricio Serna with UBS.

First, I guess, just wanted to touch a little bit on the pricing side. Given that there was a slowdown, you expect some degree of recovery for the second half of the year. Do you see room for additional pricing at this time for a second price increase? And I guess, just talk a little bit more about the gross margins because they've been contracting this quarter also some dilutive effect. What are -- is there anything also that you're planning to do regarding the coal prices, or any way that you can mitigate the increase for the -- affecting the gross margins?

Yes. We are not estimating any more additional increase in prices on the rest of the year. We did a price increase in the first quarter of this year, and we expect to stay with prices stable until the end of the year. Concerning the gross margins, coal price has gone up, and now, they are quite stable. We don't expect coal prices going down. What we are expecting is maybe some reductions in -- or some increase in gross margins because we're going -- we're using a pozzolanic material that we are getting from a different place of Peru. That will reduce a little bit our cost. And also, as I mentioned, we're starting to use the seashell that are coming from the new road that we've built at the beginning of the year called the road La Niña. So we should see some better margins in -- basically, in Piura for the seashells and in the whole -- in Pacasmayo and in Piura concerning the pozzolanic material that's coming from another place in Peru.

Our next question Francisco Suarez with Scotiabank.

Just to be completely sure about this. So the overall weaker volume set we have seen has nothing to do with the new grinding facility being put in Salaverry. And specifically, can you discuss a little bit on how market conditions are in Trujillo, in particular. And also if you can remind me, what is the amount of overall volumes of your low-priced product? I believe that it is mortar, the bags, isn't it? If you can remind me how much that weighs into the overall consolidated volumes, that would be very helpful.

Okay. Thank you for the question. Yes, the answer is yes. We haven't lost any market share. What has happened is that the whole demand or the whole piece of the cake has been reduced, has been impacted. We maintained our market share. And the grinding facility in Salaverry hasn't started yet. They don't even have the final permits. So they have announced that they will start this in the last quarter of this year. Prices in Trujillo, it's one of the seasons that we've reduced the low cement price because it's the closest city to the Salaverry, where the main competitor is. And the last question is our Mochica, who is at the lowest price cement that we have. It's around 30% of the total mix of our total cement.

That's very helpful. So in other words, having -- in contrast to other companies in Peru, you don't rely much on the low-end products, isn't it? I mean, that is something that you will keep doing in the future as well, isn't it?

Yes, we expect to do that. And also, we have to mention that Mochica's a lower-priced brand, but we haven't reduced prices in the 30% because we've reduced prices in the Mochica but in certain cities, not in the whole.

[Operator Instructions]. Our next question comes from the line of Froylan Mendez with JPMorgan.

Regarding your comments on transforming into a construction solution company, can you give us a little bit more color on what this means in terms of CapEx and diversification into other products, maybe downstream products?

Yes. Basically, turning the company to a solutions company means that we have to focus on the client as the main issue of the whole company. All the company has to think, the client is the most important thing in the company. And also, we are investing, yes, the total CapEx. Estimate CapEx is around, I would say, $15 million in the next 2 years. And this is to prepare the company to be able to build solutions as bridges -- basically, bridges and precast -- different kinds of precast products.

Are these higher-margin products that you're seeking for?

Well, margins of cement are very high, so we expect to maintain the margins of the cement in these precast products. But it's basically to turn product that doesn't use cement to products that uses cement. For example, the bridges are made of steel. What we're trying to work is to change the mind and instead of using original steel, start using bridges made of cement.

Our next question comes from the line of Joswilb Vega with ASP Integra.

Currently, are there any major projects, public or private, under construction in the north or ready to begin so far? And my second question is according to ASOCEM data, internal consumption grew during June almost 6%. But despite the decrease, does this could be explained by higher competition? And this difference has been experienced in your market?

No, you see the last information that ASOCEM has sent to the market, I think, was today. The whole market -- the whole national cement consumption has decreased, I think it's 3.5%, during June. That doesn't mean that we have lost any kind of market share, but it means that the whole market has reduced, because as I've mentioned, it's a consequence of the World Cup. Everybody was concentrated in the World Cup. Self-construction was concentrated in the World Cup, so they haven't been consuming cement. Concerning the projects, yes, there are 2 projects coming soon. We expect it's the two airports in the north, the Chiclayo airport and the Piura airport. And also, the Salaverry port should start -- well, as you know, has been assigned to grupo trans -- well, Grupo Romero. And they should start building this in the next years. So what we think is that new private project will start next year, these three projects.

Our next question comes from the line of Francisco Suarez with Scotiabank.

Sorry. Just have another question for this. But Manuel, do you think that the overall infrastructure spending might be affected by all the mess that we have seen affecting the judiciary -- I mean, all the corruption scandals? Does that might impact the overall business sentiment or in any way the execution of public works ahead?

I think that one of the big advantage that we have in Peru is the economy goes in a different road than the political side. I think that it could impact, yes; it could impact some, yes. But at the end, what we think is that things will go -- will move, and investment in private sector will go on, and some public investments directly concerning the reconstruction are starting to move. So we expect next year, we should have very good projects in the reconstruction side. But yes, it will impact. It impacts the mood of the country. People are fed up of corruption. And really, these phone calls that have been taped, people are really, really [foreign language]?

Upset.

Upset.

Our next question comes from Luis Pardo [ph] with Compass Group.

Quickly here, I want to make the difference between the self-construction sector and the project reconstruction and public investment. How much do you think the reconstruction could grow by itself? And kind of what is the torque that gives -- that public investment gives to your volumes? Because if we forget about 2017, given everything that went on with El Niño and every one else that happened there. 2018 is still close to 5% below 2016, which is kind of worrisome in terms of volume growth.

Yes, Luis. What we're expecting for the reconstruction next year, the reconstruction will consume around 100,000 tons of cement in the worst-case scenario. That's the worst case. What we expect, it's a total consumption of around 200,000 tons of cement next year. That's our base scenario, 200,000 tons of cement in the reconstruction. I would say worst case, the worst, worst case will be 100. And in the positive side, it should be around 300,000 to 350,000 tons of cement. But it's very difficult to project that. It will depend how fast these projects goes on now.

Okay, okay. That's clear. And the self-construction sector grows about, let's say, GDP-like terms? Say growth rate, GDP-like growth rate?

Self-construction should grow with a mix of GDP and employment. If there is a lot of investment in agriculture, GDP could grow -- sorry, self-construction should grow faster. It's more tied -- more than to the GDP, it's more tied to employment.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Ferreyros for any closing remarks.

Okay. Thank you again for joining us. Should you have any follow-up questions or concerns, please don't hesitate to contact us. The team looks forward to speaking to you, and hope you have a very good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.