Cementos Pacasmayo S.A.A. (CPAC) Q1 2023 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Cementos Pacasmayo First Quarter 2023 Earnings Conference Call [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Ms. Claudia Bustamante, Investor Relations. Claudia, you may begin.

Thank you, Denny. 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 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 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 today. This quarter, we had to face a challenge of inclement weather. As you probably already know, during March, our country and specifically the northern region were deeply affected by a cyclone. This is an extremely rare occurrence that left many without a home or livelihood. So I would first like to take a moment to extend our deepest sense of solidarity with them and the families and the promise that as a company, we will always continue helping as much as possible. Cyclone Yaku mainly affected the regions of Tumbes, Piura, and Lambayeque and La Libertad. This phenomenon and the rainy season in general have [led] so far economic losses estimated at $4 billion. Our sales this quarter were understandably affected by this event temporarily, mainly during March when sales volume decreased by 23% as compared to the same period of 2022. Nonetheless, due to proper cost management and the decrease in the use of imported clinker, we were still able to increase our EBITDA margin by almost [1%] point reaching 25.1%. I would like now to focus first on our capacity to respond like other occasions to a crisis like this and then to focus on the future and how we can all make sure that we are better prepared for the next time this happens. As soon as we realized that the amount of rain, especially in the Pacasmayo area, which is not usually as vulnerable -- the flooding was going to have severe consequences, we promptly -- I would say, immediately deployed our crisis management plan. This plan addresses the effects of climate-related events through our strategy that involves immediate action in coordination with local authorities and neighborhood [countries] in our areas of influence. The first step in this plan is to pump the water out, and we used our mixer trucks to store this water. Once everything was dry, we have to remove any solid waste to clear the way for proper transit and to prevent diseases. Only then, and let me stress this, only then could we provide clean drinking water. In many areas of our country, the sewage system is still undeveloped. And when floods and landslides occur, there's a possibility of collapse posing a very alarming safety threat. We can say we successfully focused on preventing this [from] happening. [I could then] move on to sanitizing the streets. Luckily, our experience with COVID was extremely valuable here as we are already sanitized street using our own mixer trucks. We believe that our crisis plan worked, and we were able to mitigate and reduce the risks in an effective manner. Now that the immediate crisis has, for the time being, subsided, we need to focus on prevention straightaway so that we can be certain that when other weather-related disaster comes, we are better prepared than this time. Although, there has been much ill talk about the inefficiency of the reconstruction plan called [Indiscernible], the reality is really different. And the reality is that part of this plan has in fact been successfully executed, although much lower than initially proposed. The reconstruction plan included hospitals, schools and preventive works such as dams, river defenses and [spraying] systems. The schools and hospitals have been built and were very needed. Now the preventive works are pending. Given the current state of structure in the North and considering that there is a possibility that [Indiscernible] may happen soon, this preventive works have to be prioritized. Pacasmayo has plenty of evidence to support that building with the proper materials and designing correctly makes a world of difference in terms of resilience. We have designed and built using the infrastructural taxes scheme part of the Avenida Bayovar, Avenida Vicente Suarez, and Avenida Jose Lama all of them in Piura. These roads were built using concrete and designed after our extremely careful analysis of the type of salt in order to enter the potential natural disaster, including proper drainage. The results speak of themselves. These roads have endured the recent heavy rains without any important damage and much better than any other alternative. We need to insist on the importance of building resilient infrastructure since extreme climate patterns will continue, and we need to make sure that as a country we are prepared to face it. This has been indeed a different quarter. I will now turn the call over to Manuel to go into more detailed financial analysis.

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our first quarter 2023 revenues were affected by the temporary decrease in demand, reaching PEN 480 million, an 8.6% decrease when compared to the same period of last year. The gross profit also decreased but significantly less, achieving PEN 160.6 million, a 2.7% decrease when compared to the same period of last year, mainly affected by decreased sales, partially offset by lower costs from decreased use of imported clinker. Consolidated EBITDA was PEN 120.7 million this quarter, a 5.3% decrease when compared to the first quarter of 2022. However, it is important to note that EBITDA margin was 25.1%, a 0.8 percentage point increase when compared to the first quarter of 2022. Turning to operating expenses. Administrative expenses for the first quarter of 2023 increased 8.1% when compared to the first quarter of 2022, mainly due to an increase in personnel expenses as a result of increasing workers' profit sharing and an increase in salaries in line with inflation. Selling expenses during this quarter increased slightly, only 2.9% when compared to the same period of last year, mainly due to expenses related to the development of digital platforms. Moving on to a different segment. Sales of cement decreased only 4.2% this quarter when compared to the same period of last year, mainly due to the temporary decrease in demand because of the flooding and landslides caused by cyclone Yaku and intense rainfall afterwards. However, gross margin increased 1.1 percentage points in the first quarter of 2023 when compared to the first quarter of 2022, mainly due to reduction in the use of imported clinker. During this quarter, concrete, pavement and mortar sales decreased 22.3%, mainly due to a significant slowdown in sales volume for private and public works which deepened due to the interruption in construction due to the heavy rains. Gross margin decreased 1.6 percentage points in the first quarter of 2022 when compared to the same period of last year, mainly due to the lower dilution of fixed costs because of the decreased sales volume. Sales of free cash materials during the first quarter of 2023 also decreased, affected by the rain. The decrease in sales was 30.9% when compared with the same period of last year, and gross margin was negative, mainly due to lower dilution of fixed costs as heavy free cash demand was stored for the lack of larger projects and the effect of flooding during the quarter. Net profit decreased 4.8% this quarter when compared to the same period of last year, mainly due to a temporary decrease in sales. In terms of debt, our net debt-to-EBITDA ratio was 3.2x, which is a level we expect to sustain. It is important to mention that this February we paid the remaining $132 million of our 10-year international bond without incurring any additional cost due to the exchange rate effect. As I mentioned before -- as we mentioned before, we have already obtained a loan to pay for this bond. To summarize, this quarter results show our ability to manage cost and seek for profitability when faced with challenge on the demand side. We are confident that we will continue delivering positive results during the rest of the year. Thank you, and please, Humberto.

Now we are open to questions.

[Operator Instructions] Okay. Claudia, I don't have any questions on the phone lines. Do you have any via the webcast?

Yes, we do. The first question is about the club deal and the grace period [Technical Difficulty] what we estimate to start paying the interest on those first disbursement from the previous years? And when would we start paying interest on the last disbursement in February of this year?

The club deal we will start paying the first coupon on August of this year. It's approximately PEN 40 million, and it's going to renew five years because this is a loan -- a seven year loan with a grace period of two years.

The next question is, I'd like to know what could we expect in terms of cement volumes over the next quarter, given the already mentioned heavy rains in the region as well as the expected El Nino to come ahead? Do you guys plan to revise your volume estimates for 2023?

Well, I think it's a very good question. We are behind the volumes this quarter because of the weather. As we speak, the impact of the weather is now very -- [well], we are starting to recover. And there's three things that are very important. Number one, the government put a special fund to rebuild the north. Number two, as you all know, regional authorities were elected and they were -- started working Jan of this year, and they were very new, and they've been focused on the weather this last 3 months. So the learning curve should be now much, much faster. And also, all the programs of [EVN], which are basically mortgage programs have been revised and reboosted by the government. So we are, I would say, very optimistic that starting around probably June, volume should recover very, very quickly, and we will see in time how much can we recover of the volume we didn't perform in the first quarter.

What are you expecting in terms of market dynamics for the following months in terms of sales construction and reconstruction initiatives related to the cyclone that is currently affecting the North?

Well, I think self-construction has always been the core of our business and that will remain the case. And like I mentioned in the question before, I think reconstruction plans are heavy on their way. The government has testing a very substantial amount of resources. And hopefully, they'll be able to deploy these in the coming weeks, not even months, because they are concerned that some kind of phenomenon may come in the coming years, and we need to be prepared.

The next question is, what type of actions are you currently evaluating to make any impact of a strong to extraordinary El Nino?

We have been -- I think what Yaku showed is that we are very prepared. I mean our plants suffered no damage at all. Our logistics chain was able to be very resilient. So really, who needs to do prepared is not Pacasmayo. Who need to be prepared is the region. And like I mentioned in the questions before, I think both the regional and the national government are, as we speak, working intensively to be able to have as much preparation as we can possibly have.

The next question, what percentage of total sales are geographically located in the affected regions of Tumbes, Piura, Lambayeque and La Libertad?

90% of you consider La Libertad. If you were to exclude La Libertad and focusing what's in raining over the last three weeks which is Tumbis, Piura and the rest will be -- Lambayeque be around 40%.

How much imported clinker -- how much did the use of imported clinker decrease compared to the first quarter of '22 and to the fourth quarter of 2022? And what was the impact on margins?

The total impact -- the total clinker that we've used in the first quarter of 2023 has been very, very little, around 3,000 tonnes of clinker. Compared with the same period of last year it was around 100,000 tonnes. So that affected over cost last year of around PEN 23 million.

Could you share guidance regarding sales and EBITDA for this year 2023? Besides this in El Nino high impact in the country, are you expecting a sale construction decrease?

I think we're very optimistic that -- like I said before, we're going to recover. We will see by the end of the second quarter. But I would say that by the end of the second quarter, we may be very close to the EBITDA that we performed last year. Even though the sales of the first quarter have been very bad, but we are very optimistic on a quick recovery.

The next one is on pricing. How much was the average increase in prices year-over-year of cement in this quarter?

Last year, we were very strong in price. We were able to recover profitability through price. This year, these first three months, as you may understand, I mean, due to the -- what was going on in terms of the weather and everything, we've made no price adjustments, and we don't intend to do any in the coming months because we think that we did enough last year.

The next question is, in the event of a long El Nino, what are the possible risks that you can face in the following months regarding supply chain purchases, inventory and transportation costs?

In terms of supply chain inventories, I mean, as you know, we are very conservative and we use the last eight to nine months of limestone, of seashells, of coal. So from that time, we are pretty cautious and always been. In terms of interruption of the logistics chain we will have to be more concerning how to get to the market. That is unpredictable. Even though Yaku was very strong, we stopped maybe a couple of days, two, days and then we came back. The fact that -- we have three plants, two in the north. The fact that our distribution channel spread all over the North really helps to cover whichever area cannot be reached by logistic chain, can be supplied from somewhere else.

And then finally, as you showed in the first slide of the presentation, the advantage of building with concrete, do you see a higher growth rate of sales of concrete as a preparation for El Nino?

The answer is a definite yes, capital letters, because authorities have seen [terrains] in concrete side compared to asphalt. So I think what the government is trying to do now in terms of reconstruction will be done mostly with concrete.

I think those are all the questions. So I'll now turn it over to Humberto for closing remarks.

For the past couple of years, it seems that we have been faced with a whole spectrum of challenges. First, a global pandemic, then the constantly changing political environment in Peru and instability disposes and now extreme weather patterns that are very harmful to our countries and very limited infrastructure. But we have taken these challenges as we should, as learning opportunities, and we can now adapt and react faster, make us feel more confident we are well prepared to face the future. These are crucial moments for our country. Let us take the recent flooding as a sign and opportunity to actually push for all of the structural needs, [roughing] and planning for many years. If anything, besides resilience or other resilience comes extreme positive outlook for our country, and that's where we are. We have been more than 65 years [paying] in Peru, paying in north of the country. And I think this, if you ask me, are the most optimistic moments over the last 10 years. Thank you, everybody, for your remaining interest in our company. And as always, we remain at your disposal. Thank you.

Thank you very much, everybody. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.