Cementos Pacasmayo - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to Pacasmayo's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode, and please note that this call is being recorded. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Investor Relations Manager. Mrs. Bustamante, you may begin.

Claudia Bustamante (Head of Sustainability and Investor Relations)

Thank you, Tim. 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 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 are related 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 delivered very solid results in terms of margins, EBITDA, and profitability. Although sales volumes continued to lag behind because of demand-side challenges, we were able to achieve a consolidated EBITDA of PEN 132.8 million, a 10% solid increase year-over-year, as well as a 13.8 increase in net income by focusing on operational efficiencies related to clinker production in our most efficient kilns. Northern Peru was impacted by climatic effects, such as higher temperatures and increased water temperatures, which in turn affected agriculture and fishing. For example, mangoes, one of the main crops in northern Peru, experienced a drastic decrease in production during the 2023/2024 agricultural campaign. This translates into decreased disposable income, which in turn affects self-construction.

Additionally, there is a general lack of safety in the country, specifically in the northern part of Peru, mainly in the form of extortions that are affecting overall economic activity, including, and I would say especially, self-construction. We hope that these demand-side challenges can be reverted, and we are confident that when they do, we're in the best possible position to tackle the resultant increase in demand. In our journey to continue developing our building solutions, we recently embarked on the reconstruction of the two runways and the perimeter fence of the Piura Airport, not only as a concrete and pavement provider, but for the first time, directly involved in the construction as part of a consortium.

The way in which we are approaching this project is different from other airport improvement projects we have provided concrete for in the past, since we are, in this case, actively participating in every step, beginning with prospection and ending with the actual delivery of the finished infrastructure project. We firmly believe that involvement in every part, in every part of the process brings invaluable insights and creates significant opportunities to promote, improve, and market our building solutions looking towards the future. I would like now to focus on something that is absolutely crucial for the future of all businesses and organizations, including our own: artificial intelligence and machine learning. New technologies will bring a wide variety of opportunities, and there is no doubt that early adopters will be the biggest beneficiaries, and we intend to be one.

As a company, we're focusing on both developing and adapting digital tools and reinforcing the culture to adopt them. As I mentioned earlier, one of the ways in which we look to gain traction on the building solutions market is by doing prospection work. This is mostly focused on looking for infrastructure opportunities in the initial phase, so that we can get involved in the definition of what materials are required, hence creating and capturing more value for our building solutions. We have recently developed a model that uses AI to identify all of the public infrastructure projects in our area of influence. The robot developed in this project can capture the information and feed it into a large database, allowing the team to focus on the actual development of the solution instead of spending valuable time scouting for projects.

Moreover, this tool generates valuable information to guide our data-driven analysis, and will help us enhance our portfolio of products and services and tailor to the needs of our customer. I will now turn the call over to Manuel to go into more detail financially. Manuel?

Manuel Ferreyros (CFO)

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our first quarter 2024 revenues were affected by a decrease in demand, reaching PEN 476.5 million, a slight decrease of 0.7% when compared to the same period of last year. However, the gross profit increased, achieving PEN 173.9 million, an 8.3% increase when compared to the same period of last year, mainly due to reduced production costs as we maximize the use of our most efficient kilns and benefit from lower cost of raw material. The consolidated EBITDA was PEN 132.8 million this quarter, a 10% increase when compared to the first quarter of 2023, and EBITDA margin was 27.9%, a 2.8 percentage points increase when compared to the first quarter of 2023.

Turning to operating expenses, administrative expenses for the first quarter of 2024 remained in line with those of the first quarter of 2023. Selling expenses during this quarter increased 9.1% when compared to the same period of last year, mainly due to increase in personnel expenses, in line with inflation, as well as software and licenses and higher provision for the doubtful payment. Moving on to the different segments, sales of cement decreased 4.6% this quarter when compared to the same period of 2023, mainly due to a decreased sales volume in the self-construction segment, mainly because of the negative effects, as well as low levels of private and public investment.

Nonetheless, gross margin increased 5.2 percentage points in this quarter compared to the same period of last year, mainly due to lower clinker production costs associated to the use of most efficient kilns, as well as the lower cost of coal. During this quarter, concrete pavements and mortar sales performed very well, increasing 73.8% when compared to the first quarter of last year. This increase was mainly due to the increased sales of pavements for the Piura Airport. Gross margin decreased by 2.5 percentage points this quarter when compared to the same period of last year, mainly due to changes in the composition of our sales portfolio. Finally, the net profit increased 13.8% this quarter when compared to the same period of last year, mainly due to the operational efficiencies mentioned above.

In terms of debt, our net debt to EBITDA ratio was 3.2x, which is a level we expect to reduce in the future. To summarize, this quarter's results show our ability to manage costs and focus on profitability when faced with challenges on the demand side. We are confident that we will continue delivering positive results during the rest of the year. Operator, can now we please open the floor for questions?

Operator (participant)

Yes, thank you, Manuel. We will now move to the question and answer section. If you would like to ask a question, please press star two on your phone and wait to be prompted. If you're dialed in by web, you can type your question in the box provided or request to ask a voice question. We'll now wait a moment or two for questions to come in. Our first question comes from Natalia Leo, from J.P. Morgan. Your line is open. Please go ahead.

Natalia Leo (Equity Research Associate)

Thank you. Hi, everyone. Thank you so much for taking my question. I actually have two. So I was wondering if you could tell us a bit more on your expectations for volumes for the full year. I remember last quarter you mentioned a low single digit increase, but just wondering if maybe your expectations are down a bit, considering how they were in this quarter, so maybe flat or down? And the other one was on gross margins. So you had, like, 44% gross margin this quarter. Just to understand, is that the normalized level you expect for the full year, or should it be closer to the 47% that we saw in the fourth quarter? So thank you.

Manuel Ferreyros (CFO)

Thank you for the question. The first part of the question, I mean, we have always experienced seasonality in our demand, and we remain confident that especially public expenses should pick up in the second semester, second semester of this year. We also think that the security issue should be tackled in the coming months. So yeah, we think we are optimistic that the second semester this year will bring better volumes to the table, and that should counteract the decreasing volumes during the first part of the year. Concerning margins, we think that the margins we mentioned today in this call are the ones that should be sustainable looking into the future.

Natalia Leo (Equity Research Associate)

Great. Thank you. If I could just a follow-up: So do you see volumes increasing sequentially in the second half of the year?

Manuel Ferreyros (CFO)

Yes, that's the case. I mean, if you see our last four or five years, it's usually the case, and we think this year there's no reason why it should be different.

Natalia Leo (Equity Research Associate)

Great. Thank you.

Operator (participant)

Okay. Thank you. Our next question comes from Marcelo Furlan, from Itaú. Please go ahead.

Marcelo Furlan (Equity Research Analyst and Executive Director)

Yes. Hi, everyone. Good morning. Can you hear me?

Manuel Ferreyros (CFO)

Yes, we can hear you.

Okay. Thank you. So guys, my question is related to capital allocation. I mean, following the conclusion of the Q4 last year, now the company doesn't have any major projects on the way. So I would like to know, in terms of capital allocation, if you guys thinking about distributing dividends to shareholders, thinking on shareholders going forward? And also, to the financial leverage, you guys had this 3.2x the financial leverage. So if you guys have planned to increase the financial leverage going forward, and what would be a sustainable financial leverage for the company? So these are my questions. Thank you.

Thank you. The first part of the question, I mean, the level of dividends is for the board to decide. That being said, and me being part of the board, I mean, the idea philosophically has always been that the cash that the leftover cash should go to shareholders. I think over the last year, we've had a very consistent dividend policy, and the way we look at it right now, I mean, probably that consistency will go on towards the end of this, of this year. And regarding the leverage level, as you know, I mean, we finished Q4 last year. We don't, we don't foresee any substantial CapEx investments in the coming future.

We have structured our debt in a way that we have a club deal with two main banks in Peru, and we're gonna be lowering the debt over the next four or five years according to that club deal with the banks.

Marcelo Furlan (Equity Research Analyst and Executive Director)

Okay, thank you so much, you guys.

Operator (participant)

Thank you. Just a reminder, if you do have a question, please press star two on your phone and wait to be prompted. Our next question is a text question from David Cuenca, from Compass Group. David asks: "Thanks for the presentation. I would like to know if you have some insights about prices of cement for this year, and maybe for next year, and if you have some info about other projects like the Piura Airport. Thank you.

Humberto Nadal (CEO)

Thank you. I mean, we've been monitoring carefully the price situation, and if you see, even though our cement sales in terms of tons are lower, our revenues remain almost flat. I think we've had a very successful managing of prices. We will continue to monitor the situation. It's always a fine line between keeping a substantial market share, at the same time, profitability. That is just an ongoing situation. We always wanna look for a way to maximize profits. And in the case of the question about the Piura project, I mean, there's some more airports coming down the line, not this year, but the coming few years.

We are strongly convinced, like I mentioned in my speech, that the learning curve for the Piura Airport will help us in the other airports. Also, at Chavimochic, next phase should go ahead in the project towards the end of the year. There's a G2G government agreement between Peru and Canada, and that should go and probably give green light to the infrastructure project. Those are the two main things, I think. Other than that, we still think that private investment remains pretty low.

Operator (participant)

Great. Thank you, Humberto. We also have a question, a text question from Marco Mejía from Kallpa, who asks: "Could you give us please, some insights about coal prices? Thank you.

Humberto Nadal (CEO)

Hello, Marco. Yes, the coal prices now are stable, at a range of, I would say, around $250 per ton. So we expect the stable price for at least this year.

Operator (participant)

Okay, thank you. Just a final reminder, if you do have a question, please press star two and wait to be prompted. We'll just give it another 10, 20 seconds or so to see if there are any final questions. Thank you. I'm not seeing any more questions, so perhaps I can hand it back to Humberto for closing remarks.

Humberto Nadal (CEO)

Thank you. I'll say that current political and financial market conditions have unfortunately, I may add, made it less attractive to invest in Latin American companies. That being said, we remain firm believers in the great potential that both our company and our country hold for the future. The true test of a successful company strategy comes during those times when market conditions are least favorable, and I think we have been consistently delivering very good results over the last years. We will continue to focus on our strategic goals, reinforcing digital transformation, developing and empowering more and more our talent, and operating our business responsibly. By doing this, we are absolutely certain that we'll not only continue delivering positive results today, but be ready to reap further benefits when market conditions improve.

Thanks, everybody, for your renewed interest in our company, and as always, we remain at the disposal if you have any questions in the future. Thank you very much.

Operator (participant)

That concludes the call for today. Thank you, and have a nice day.