Cementos Pacasmayo S.A.A. (CPAC) Q2 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo Second Quarter 2021 Earnings Conference Call. [Operator Instructions] At this time, it's my pleasure to turn the floor over to your host, Claudia Bustamante. Ma'am, the floor is yours.

Thank you, operator. 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 term 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, strength 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 and thank you for joining us. This quarter Cementos volume continued strong despite political uncertainty, proving the resiliency once again. After a very tired runoff for the entire election on June 6, yesterday, Mr. Castillo was proclaimed the next President of the country. There are claims of fraud for Keiko Fujimori and her supporters which have brought people to the street to protest against the way the elections were conducted. On the other hand, Mr. Castillo showed mix signals of moderation and radicalization so there's no clarity on how the next government will conduct itself. Despite this uncertainty, we are confident that the cement sales will continue strong this year, mainly because our current customer base is not very dependent on macro factors. On the one hand, the self-construction segment continues to be our most relevant source of income. And yet historically had very minimum correlation with high level macro factor at least in the short term. On the other hand, the demand coming from the public sector is basically related to the government to government agreement between Peru and the UK for the reconstruction after El Nino, and some from the government bodies that were put in place to offset the effects of COVID-19. We strongly and firmly believe that neither one of these policies should be affected by changes in government. They are well underway and have estimated finance. Although sales of cement have been and continue to be the main part of our goal, we're very pleased with the results of concrete and precast. As we mentioned last quarter, sales of light precast materials such as precast blocks are substantially increased in the past year. Although, these are more representative of our sales, relative performance illustrates how successful strategy with our overall sales and provide a construction solutions and market need. We have generated a new customer base mainly bringing the sales of precast blocks to housing projects. We believe this strategy will bring significant increase in sales volume, taking us one step closer to our long-term goals. This quarter, we also very proud of Silver Effie, the brand experience category for construyexperto.pe, an online platform created to redesign the foreman's experience, with training and tools that help them be very and much more efficient. And as we've seen in previous quarter, we are convinced that our solid during these trying times comes from the fact that we have been able to reinvent ourselves. To be one step ahead in terms of digitalization and of course a depiction of how we can provide a base of our experience to more of our customers. This award is again recognition of these efforts. Although things are definitely important and absolutely recognize for business continuity, solid results would not be possible, if we do not look at our business in an integrated manner. This quarter, we have obtained 23 recognitions that are very relevant in terms of stability and business continuity. First, this year we have improved 37 procedures in the Merco Talento Perú, which aims to identify the 100 most attractive companies to work in our country, clearly, we saw significant progress, which shows our commitment to enhance human capital management, and we will strive to continue improving in this ranking every year. Finally and very importantly, this year we have once again obtained the award for social responsible company, BCR for its Spanish abbreviation. So now we are finished about every year [Indiscernible] 10 years ago for its recent, there is evaluation of ESG parameters for specific indicators that are internationally aligned with the global reporting initiative on the sustainable development goals for both [Indiscernible]. We're particularly proud this year that we have obtained a special recognition in ethics and integrity categories, which are very important for us. Although 2021 is proving to be once again a very challenging year, we have continued to deliver substantial increase in cement, concrete and precast shipment. That comes as a result of our constant and permanent effort to innovate, expand our market, satisfy new niches, and always remember to be absolutely client focused. I will now turn over to Manuel Ferreyros for financial comments. Manuel?

Thank you, Humberto. Good morning, everyone. Second quarter 2021 revenues were $449 million, a 285.7% increase when compared to the same period of last year, mainly due to the halting of precipitation during most of the second quarter of 2020, as well as an increased baggage cement shipment. However, even if we compare this quarter revenues to those from second quarter of 2019, there is still significant increase of 37%. Gross profit increased substantially this quarter compared to the second quarter of 2020, mainly due to the fact that it was close to zero during same year because of the whole variation and subsequent effects in gross profit. There was no dilution of fixed costs. Consolidated EBITDA was $90 million in the second quarter of 2021, representing a significant increase when compared to the second quarter of 2018, when EBITDA was negative, for the above mentioned reasons. We expect an important increase in EBITDA for the rest of the year. During the six months of 2021 revenues increase 119% and gross profit increase 116% when compared to the same period of 2020 mainly due to the increase in sales, as well as the above mentioned halting operations from mid March to mid May. Turning to operating expenses, administrative expenses for the second quarter increased 41.7% compared to the second quarter of 2020 in line with increased sales, but mainly due to the substantial reduction in expenses during the lockdown period in 2020. As well as an increase in workers profit share as a result of improved results. Selling expenses in the second quarter increased 71.1% compared to the second quarter of last year mainly due to the above mentioned decrease in expenses during 2020 and an increase profit share. During the six months of 2021, administrative expenses increased 28% and selling expenses increased 29% when compared to the same period last year, mainly due to increases in sales as well, a savings implemented during the six months of 2020, offset the negative effects of the housing operations. Moving on to the different segments, cement, concrete and precast sales increased 296.5% during the second quarter of 2021 compared to the same period of 2020 mainly due to the halt in operations during the second quarter of 2020 as well as an increased sales of baggage cement. Gross margins increased 26.4 percentage points in the second quarter of this year, compared to the same period of last year mainly due to sustained fixed costs, with virtually no selling during the second quarter of 2020. During the six months of 2020 sales of cement, concrete and precast increase 120.1% and gross margin improved 5.1 percentage points, mainly due to increased sales and halt in commercialization during the second quarter of --. Sales of cement increased 261% in the second quarter of 2021 compared to the second quarter 2020 mainly due to the halt in commercialization during the same period of last year, as well as an increase in shipments of baggage cement as demand to north continue booming during this quarter. Gross margin increased 19.2 percentage points, mainly due to the negative effect on costs during the halt in operation in the second quarter of 2020. During the six months of 2021 sales of cement increased 121.8% and gross margin improved 2.1 percentage points when compared to six months of 2020 mainly due to the halt in production and commercialization mentioned above. During the second quarter of 2021, concrete and pavers sales increased substantially since they were only $3.3 million in the second quarter of last year because of the complete halt in commercialization. Gross margin increased 273.5 percentage points mainly due to the significant costs that could not be reviewed it on last year. Similarly, sales of concrete and pavers for the six month increase132% and the gross margin increased 20.2 percentage points compared to the same period as of last year. During the second quarter of 2021, precast sales increased 347.4% compared to the second quarter of 2020, mainly due to halt in operations. However, if we compare precast sales to the first quarter of 2021, we can see that a positive upward trend continues since sales increased 33.3% quarter-on-quarter. Gross margin increased 94.8 percentage points mainly due to the negative margin during the second quarter of 2020 because of fixed costs without sales during that quarter. Similarly, during the six month precast sales increased 31.6% and gross margins increased 20 percentage points as compared to the same period of last year. Quicklime sales in the second quarter increased 20.6% compared to the second quarter of 2020 and gross margin decreased 7.7 percentage points compared to the second quarter of 2020 mainly due to the increased demand, but most of it from granulated quicklime which has a lower margin than ground quicklime. During the six months of 2021 sales increased 22% and gross margin increased 0.6 percentage points. During the second quarter of 2021 and the sixth month of 2021, construction supply sales increased 384.2% and 161.3% compared to the same period of last year primarily due to increase in sales from the halt in commercialization. Gross profit improved 12.4 percentage points in the second quarter of 2021 compared to the same period of last year, mainly due to low comparative basis, in six months 2021 the gross margin remained in line with the same period of last year. In terms of our debt, our debt to EBITDA ratio has come down to 1.9x. But the important issue is that we have to know that we have been able to recover low indebtedness level quickly after most trying times. To summarize this quarter the solid [Indiscernible] in volume despite political uncertainty, we are convinced of the financial and operational strength of our company and expect to continue delivering solid results in the upcoming quarters. And now we please open the call to questions, operator.

[Operator Instructions] Our first question today comes from [Indiscernible]

Thank you, gentlemen for the call. I have one question. And I was wondering if margins get being affected by clinker imports? If that is the case how much of does a ton of imported clinker costs?

Yes, of course. I mean, you have to realize that we said year and a half ago when we were coming to close for facilitation of clinker capacity, in my sense for us to import, can we have enough volume that makes sense to be the new plant? Even though they either fix the margins, I mean, we're still going to make more money in terms of sols or dollars. The thing is the margin will go down because imported clinker is more expensive. Regarding how much more expensive it is normally around $20 but it all depends on the exchange rate and in terms of the freight costs.

Okay and can we expect these lower margins to remain for the rest of the year? And then they should gradually should go up?

I know I think I mean, the first part of the year, yes, we use an important component, important clinker because we have to do maintenance to our accounting unit Pacasmayo, this would be a lower rate in the second quarter of the year. And then like I say, it all depends. I mean, what happens to the exchange rate and the freight rates. So yes, margins could remain the same or could go a little bit higher.

We have one more question from Andrés Soto with Santander. AndrésSoto: Perfect. Good morning, Humberto, Manuel and Claudia. Thank you for the presentation. My question is in your earnings release you mentioned political uncertainty as some of the causes for slowdown in volumes in the second quarter compared to the first quarter of this year. I would like to understand why are you seeing at this point? Do you believe that now that Pedro Castillo has been confirmed as President, we can expect an improvement in those projects, or were sort of understand by this point or you expect political uncertainty to persist. And if that's the case, what will you need or your clients will need to hear from Castillo administration in order to become more constructive on political outlooks?

Hello, Andres and thank you for the question. I think I said in my opening remarks. I think our self builders and G2G agreements have little to do with the macroeconomic fundamentals that they are expecting a lot of things to be announced from President Castillo. I think they are growth dynamics. I think when we see our daily dispatches, we see a very strong rate and we think we're going to for sure across this year of being a record year and demand we think for the time being, and this is my personal interpretation there not so much waiting for the time people will keep on working the same way they get on work through the COVID-19 crisis, and that's the central and formal economy, which is part of a robust economy of Peru.

There appear to be no further questions at this time; we'll turn the floor back to Mr. Humberto Nadal for closing remarks. Please go ahead, sir.

Thank you so much. In summary, Pacasmayo is operating for 64 years, you know wonderful. I mean, this is wonderful as a given complex country. Always Peru has, we've had many kinds of governments going from the left, center and right as you know, we will not only prevail, but accumulated valuable experience. We see every new chapter on opportunity to learn and improve. And we are ready to take early challenges that may come due to the confidence in our solid fundamentals, our integrity, and our capacity to adapt to lead a way to a promising and sustainable future. We remain extremely optimistic of our company, and we will always remain very optimistic about the future of our country. Thank you very much for your interest in our company. And as always, Manuel, Claudia and myself, we are always here in case you have any further questions. Thank you very much. Have a very nice day, and please stay safe.

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