Cementos Pacasmayo - Q1 2023

Transcript

Operator (participant)

Good morning everyone, welcome to the Cementos Pacasmayo first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. 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.

Claudia Bustamante (Investor Relations Manager)

Thank you, Jenny. 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.

Humberto Nadal (CEO)

Thank you, Claudia. Welcome everyone to today's conference call, and thank you for joining us today. This quarter, we had to face the 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. I would first like to take a moment to extend our deepest sense of solidarity with them and their families, and to promise that as a company, we will always continue helping as much as possible. Cyclone Yaku mainly affected the regions of Tumbes, Piura, Lambayeque, and La Libertad. This phenomenon, and the rainy season in general, have left 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 a decrease in the use of imported clinker, we were still able to increase our EBITDA margin by almost 1 percentage point, reaching 25.1%. I would like now to focus first on our capacity to respond, like in 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 to 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 a strategy that involves immediate action in coordination with local authorities and neighborhood councils 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 had 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 and could then move on to sanitizing the streets.

Luckily, our experience during COVID was extremely valuable here, as we had already sanitized streets 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 straight away so that we can be certain that when another 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 Reconstrucción con Cambios, the reality is really different, and the reality is that part of this plan has in fact been successfully executed, although much slower than initially proposed. The reconstruction plan included hospitals, schools, and preventive works such as dams, river defenses, and drainage systems.

The schools and hospitals have been built and were very needed. Now, the preventive works are pending. Given the current state of infrastructure in the north and considering that there is a possibility that El Niño may happen soon, these 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 Works for Taxes scheme, part of the Avenida Bolognesi, the Avenida Sánchez Cerro, and the Avenida José Lama, all of them in Piura. These roads were built using concrete and designed after an extremely careful analysis of the type of soil and in order to endure the potential natural disaster, including proper drainage. The results speak for 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.

Claudia Bustamante (Investor Relations Manager)

This has been indeed a different quarter. I will now turn the call over to Manuel to go into more detailed financial analysis.

Manuel Ferreyros (CFO)

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 the 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 personal expenses as a result of increase in 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 the different segments.

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. Gross margin increased 1.1 percentage point 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 during 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 precast 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. Gross margin was negative, mainly due to low dilution of fixed costs, as heavy precast demand was stalled 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 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 we mentioned before, we had already obtained a loan to pay for this bond. To summarize, this quarter results show our ability to manage costs and seek for pro-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. Please, Humberto. Now we are open to questions.

Operator (participant)

Thank you, Humberto. At this time, we're conducting our question and answer session. If you would like to ask a question via the phone lines, please press star one on your phone keypad. Confirmation tone will indicate your line is in the queue. You may press star two if you want to remove your question from the queue. For any questions via the webcast, please click the Ask Question button on the left-hand side of your screen, type your question, and hit Submit. Please wait a moment whilst we poll for any questions. Okay, Claudia, I don't have any questions on the phone lines. Do you have any via the webcast?

Claudia Bustamante (Investor Relations Manager)

Yes, we do. The first question is about the club deal and the grace period. When would we estimate to start paying the interest on those first disbursements from the previous years? When would we start paying interest on the last disbursement in February of this year?

Manuel Ferreyros (CFO)

Yeah. Thank you, Claudia. The club deal, we'll start paying the first coupon on August of this year, and it's approximately PEN 40 million. It's going to be due 5 years, because this is a loan, a seven year loan with a grace period of two years.

Claudia Bustamante (Investor Relations Manager)

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

Humberto Nadal (CEO)

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, very little. We're starting to recover. There are 3 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 January of this year. They were very new, and they've been focused on the weather this last 3 months. The learning curve should be now much, much faster. Also, all the programs of Mi Vivienda, which are basically mortgage programs, have been revised and reboosted by the government.

We are, I would say, very optimistic that starting around probably June, volumes should recover very, very quickly. We'll see in time how much can we recover of the volume we didn't perform in the first quarter.

Claudia Bustamante (Investor Relations Manager)

What are you expecting in terms of market dynamics for the following months in terms of self-construction and reconstruction initiatives related to the Cyclone that is currently affecting the north?

Humberto Nadal (CEO)

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

Claudia Bustamante (Investor Relations Manager)

The next question is: What types of actions are you currently evaluating to mitigate any impact of a strong to extraordinary El Niño?

Humberto Nadal (CEO)

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. Really who needs to be prepared is not Pacasmayo. Who needs to be prepared is the region. Like I mentioned in the questions before, I think both the regional and the national governments are, as we speak, working intensively to be able to have, as much, preparation as we can possibly have.

Claudia Bustamante (Investor Relations Manager)

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

Humberto Nadal (CEO)

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

Claudia Bustamante (Investor Relations Manager)

How much did the use of imported clinker decrease compared to the first quarter of 2022 and to the fourth quarter of 2022? What was the impact on margins?

Humberto Nadal (CEO)

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

Claudia Bustamante (Investor Relations Manager)

Good morning, Thanks for the presentation. Could you share guidance regarding sales and EBITDA for this year, 2023? Besides this, in an El Niño high impact in the country, are you expecting a sales construction decrease?

Humberto Nadal (CEO)

I think we're very optimistic that, like I said before, we're gonna recover. We will see by the end of the second quarter. 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, we are very optimistic on a quick recovery.

Claudia Bustamante (Investor Relations Manager)

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

Humberto Nadal (CEO)

last year we were very, very strong in price. We were able to recover profitability through price. This year, these first 3 months, as you may understand, I mean, due to what was going on in terms of the weather and everything, we made no price adjustments. We don't intend to do any in the coming months because we think that we did enough on last year.

Claudia Bustamante (Investor Relations Manager)

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

Humberto Nadal (CEO)

In terms of supply chain inventories, I mean, as you know, we are very conservative, and we usually have eight to nine months of limestone, of seashells, of coal. From that stand, we are pretty cost, we've always been. In terms of interruption of the logistics chain, it 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, three days, and then we came back. The fact that we have 3 plants, 2 in the north, the fact that our distribution channels spread all over the north really helps to cover whichever area cannot be reached by our logistic chain can be supplied from somewhere else.

Claudia Bustamante (Investor Relations Manager)

finally, as you showed in the first slides 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 Niño?

Humberto Nadal (CEO)

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

Claudia Bustamante (Investor Relations Manager)

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

Humberto Nadal (CEO)

Thank you, Claudia. For the past couple of years, it seems as we have been faced with a whole spectrum of challenges. First, a global pandemic, then the constantly changing political environment in Peru and the instability this poses, and now extreme weather patterns that are very harmful to our country's already limited infrastructure. 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 infrastructure needs that have been in planning for many years. If anything, besides resilient or, resilience or after resilience, comes extreme positive outlook for our country, and that's where we are.

We have been more than 65 years betting in Peru, betting in the north of the country. I think, this, if you ask me, are the most optimistic moments of the last 10 years. Thank you, everybody, for your remaining interest in our company. As always, we remain at your disposal. Thank you.

Operator (participant)

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.