Cementos Pacasmayo - Q3 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to Pacasmayo's Q4 2023 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 open up the question and answer session. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, you may begin.

Claudia Bustamante (Sustainability and Investor Relations Manager)

Thank you, Tim. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, the Chief Executive Officer, and Mr. Manuel Ferreyros, the 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, and we will 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 hand 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 were able to focus on maximizing profitability. Revenue showed a substantial improvement, increasing 16.9% compared to 2023 compared to the previous quarter. It was mostly a result of stronger demand, as volumes increased 14.5% when compared to the previous quarter. This was indeed in line with the recovery we are anticipating for the H2. Although year-on-year revenue did decrease, consolidated EBITDA reached PEN 128.9 million, an increase of 3.2% when compared to the Q3 of 2022, and the EBITDA margin also increased 2.5 percentage points, reaching 24.9%.

This is the outcome of our focus on cost optimization, which has allowed us to maximize profitability as the demand environment begins to improve. I would like now to focus first on a remarkable achievement for our company. For the first time, Pacasmayo entered the top 10 in the Merco Reputación in the Merco Empresas ranking for 2023. Merco, as you all know, is the most prestigious corporate reputation ranking for Spanish-speaking Latin America and Spain. Present in more than 16 countries, it evaluates the policies and initiatives of companies through a survey of opinion leaders, journalists, and executives, highlighting the perception of reputation in different organizations. We are extremely proud of this achievement, since Pacasmayo is the only company in the top 10 that does not have a national presence. We truly believe it's a reflection of our constant growth in the past 65 years.

Reputation is the value that stakeholders attribute to a company based on their perception and interpretation of the image that the company communicates and projects over time. Therefore, corporate reputation depends on the actual activities and the tangible results that the stakeholders experience. We take this recognition with great honor and responsibility, and we are absolutely committed to continue delivering a positive experience for all stakeholders. As I'm sure you're all aware of already, a new forecast for 2024, currently with a high probability of being a moderate phenomenon. We have already experienced the effects of inclement weather early this year, with Hurricane Yaku, that among other things, interrupted parts of the road that connect the main seashore going to our plant. Thanks to our conservative investment inventory policy, we have not been affected by interruptions, but we immediately started planning a solution.

We are currently working with the government to install two modular bridges supported by concrete foundations and pilings. In addition, two depots are currently being built to provide traffic continuity with manual works, which should be finished by the end of next month. The whole project has been planned to minimize the risk of having to halt the construction because of heavy rains. Therefore, the schedule precedes the completion of the underground work by November, as there's lower probability of heavy rains, and all the surface work will remain at the end of July, which is the expected completion date for the whole project. We are very confident that our prevention and risk management strategy, as well as execution capacity, will lead us to restore full profit according to our schedule. As we have previously mentioned, this year we launched the Ecosaco.

It's a cement bag that completely integrates with the concrete mix, generating zero waste. For us, it is much more than a simple cement bag. It's a solution that has the potential to revolutionize the market, particularly the self-construction segment. As with any transformational change, it requires a deliberate effort in order to gradually change culturally established habits and consumer habits. This is precisely why we are both proud and humbled that the Ecosaco won the Semana Económica ESG Sustainability Prize this week, both in the sustainable product innovation category and the Grand Prize in the overall category, an award for the project with the greatest environmental, social, and economic impact. The Ecosaco also won eleven finalists in the eight Latin American categories.

These award nominations are not only a great sign that we are making a strong and impactful contribution, but also outstanding platforms that allow us to continue educating consumers and effectively communicating the benefits of this new product. Finally, I would now like to mention that I am extremely honored to represent Pacasmayo as a board member for the GCCA, the Global Cement and Concrete Association, for the upcoming two-year period. I take this position with great appreciation, but also with an enormous responsibility. Latin American companies face a great technical dilemma. There is a pressing need to reduce carbon emissions and protect our planet, but also an equally pressing need to provide homes, critical infrastructure, and overall development to our people. We cannot focus on one over the other.

We need to creatively think of solutions that will target both issues, and this is the only path to achieve true and true sustainable, sustainable development. I will now turn the call over to Manuel to discuss the rest of us.

Manuel Ferreyros (CFO)

Thank you, Humberto. Good morning, everyone. As Roberto mentioned, our Q3 2023 revenues were PEN 516.7 million, a 6.7% decrease when compared to the same period of last year. Gross profit, however, increased 5.2%, achieving PEN 174.6 million, mainly due to lower costs as we discontinued the use of imported clinker now that our new kiln is fully operational. Lower cost of coal, as well as higher average prices of cement sold. Consolidated EBITDA also increased despite the decreased revenues, reaching PEN 128.9 million this quarter, a 3.2% decrease when compared to the Q3 of 2022.

For the first nine months of the year, revenues decreased 9.1% when compared to the same period of 2022, mainly due to lower levels of public and private investment, as well as the negative impact of Cyclone Yaku during the Q1 of the year. However, gross profit was roughly aligned with the same period of the previous year, and consolidated EBITDA decreased only 2.9%, mainly due to decreased revenues, partially offset by the lower costs mentioned above. Nowadays, EBITDA margin for the first nine months of the year increased 1.6 percentage points when compared to the same period of the previous year. Turning to operating expenses, administrative and auxiliary expenses decreased 5% in the Q3 of 2023 compared to the Q3 of 2022.

This is mainly due to a temporary decrease in personal expenses, as well as lower third-party services. During the nine months of 2023, administrative expenses increased 2.9% compared to the nine months of 2022, mainly due to an increase in salaries, in line with inflation as well as in software licenses. Selling expenses decreased 2.9% during this quarter when compared to the same quarter last year, mainly due to decreased maintenance services. During the first nine months of the year, selling expenses remained in line with those of the same period last year.

Moving on to our different segments, sales of cement decreased 4.2% in the Q3 of 2023 compared to the Q3 of 2022, and 5.2% in the first nine months of the year when compared to the same period of the previous year, mainly due to a decrease in demand from the construction segment, from the record level reached in the post-pandemic times. However, the revenue margin increased 4.5 percentage points this quarter and 2.7 percentage points during the first nine months of the year when compared to the Q3 and nine months, respectively, mainly due to the cost optimization, as we have now discontinued the use of imported clinker, as well as lower cost of raw materials, such as coal and higher average price of cement sold.

During this quarter, we are glad to report that sales of concrete, pavement, and mortar increased 3.4% when compared to the same quarter last year, mainly due to an increase in sales of pavement, pavement, and as with the guided purchases to repair efforts and other minor works. During the first nine months of the year, sales of concrete, pavement, and mortar decreased 16.2% when compared to the same period of the previous year, mainly due to a decrease in public and private investment, partially offset by the work executed this quarter.

Gross margin decreased 5.3 percentage points during this quarter compared to the same period of last year, and a 5.1 percentage point in the nine months of this year compared to the same period of last year, mainly due to a lower reduction in fixed costs. Sales of precast materials also decreased as public and private works are still at historically low levels. The decrease in sales was 18.6% when compared to the Q3 of 2022, and 31.9% during the first nine months of the year when compared to the same period of last year.

Gross margin was stimulated, mainly due to the low reduction of fixed costs, as precast demand has stopped for lack of private and public projects, as well as the effect of the flooding during the Q1 of the year. Net profit decreased 4.1% this quarter when compared to the Q3 of last year, mainly due to the cost efficiencies, as we mentioned before, as well as the slight decrease in expenses. During the first nine months of the year, net profit decreased 2.6% when compared to the same period of 2022, mainly due to regular revenues, partially offset by the improved cost structure mentioned before. However, net margin-

... for both the Q3 and the first nine months of the year, increased 0.9 percentage points and 0.5 percentage points when compared to the Q3 and the first nine months of last year. In terms of debt, our debt-to-EBITDA ratio was 2.3x, which is a level we expect to progressively decrease as we start paying the debt due and the rate increases, since we currently do not plan to embark in additional debt. To summarize this quarter results, as stated, to show the benefit of focusing on cost management and prepare for an improving demand environment. We are confident that we, we will still continue delivering positive results through the rest of the year. Thank you.

Operator (participant)

Thank you. We will move to the question and answer section. If you'd like to ask a question, please press star two on your phone and wait to be prompted. If you're dialing by web, you can type your question in the box provided or request to ask the first question. We'll just wait a moment for the questions to come in. So we have a question from [Alvaro Espinoza], who is a private investor.

Speaker 5

Excellent presentation. Three questions. Can you give us a dividend guidance for 2023? Number two, considering the extremely low stock price, are you evaluating a share buyback? And number three, are you considering to exclude or pull back the investment share class stocks?

Humberto Nadal (CEO)

Thank you, [Alvaro], for comment, and for asking the three questions. Because we give you the policy that is done for the board to decide, I maintain, our intention has been over the years, to keep the same level of, of, dividends. [So, even though it was a board decision], that should be in line with, with, past years. Number two, are we considering, buyback? No, and the reason for right now is that we are, we have been concerned for many, many years about the liquidity of the stock. And if we were going to do a buyback, that would only harm the low liquidity we already have. And number three, about the investment shares, many years ago, we did a buyback.

The company right now controls around 90% of the investment shares, and for the time being, we are not gonna do any additional moves on that either.

Operator (participant)

Thank you. Just a reminder, if you have a question, please press star two on your phone and wait to be prompted. You can also request to ask a text question by web. We'll just wait a moment or two for any further questions to come in. We have another question, and this is from [Nicolas Sanchez] from [Sigma].

Speaker 6

Given the finalization of the investment in the inaudible, how much CapEx do you expect to put on a quarterly basis? Any specific reason for the decrease in personal expenses and third-party party services for Q4 2023? And finally, do you expect to maintain similar SG&A expenses or normalization for the next quarters?

Humberto Nadal (CEO)

Yeah, sure. I mean, I think as I mentioned, that after we have no extraordinary CapEx, [other than the road], today. But because of sustaining CapEx, we keep around PEN 100 million per year. In terms of SG&A, I mean, we're always for cost optimization, and we also wanna try to keep running a very tight ship. And, can you repeat the last part of the question, please?

Speaker 6

Yes, no problem. Do you expect to maintain similar SG&A expenses or normalization for the next quarters?

Humberto Nadal (CEO)

Yes. That will be yes.

Speaker 6

Perfect. Thank you.

Operator (participant)

Our next question comes from [Bianca Venegas], from Credicorp Capital.

Speaker 4

Can you give guidance on dividends and CapEx for 2023? And what do you expect in terms of market dynamics for the following months in terms of self-construction and public investment?

Humberto Nadal (CEO)

Yeah, as I mentioned before, I think, dividends, even though it's a board decision and I always recommend in their favor, we should keep in line with the policy of the previous years. And CapEx, like I mentioned before, I mean, it should be around PEN 100 million per year, which is sustaining CapEx. In terms of market dynamics, we are seeing, and we anticipated this in our last call, that the sector of the mortar is going much stronger. That's why the volumes in the Q3 have been around 15% higher as we continue. We think we should close the year on the levels of the Q3, and that are giving us a very promising start for the next year. In self-construction, we remain strong as well.

Agricultural and fishing recovered well, and public investment [will likely be higher than] the original goals for the year.

Speaker 4

Perfect. Thank you.

Speaker 7

From AFP, can you give a little more detail about what's included in other operating expenses in this quarter?

Humberto Nadal (CEO)

Sure. Yes, thank you for the question. It is basically as I mentioned during the meeting, the construction of the bridge. So basically, it's expected that we will have expected this quarter and next quarter.

Operator (participant)

Okay, thank you. [Sandra Rojas] from [Credicorp Capital] asks, could you please elaborate on how you see demand for 2024?

Humberto Nadal (CEO)

That's a very good question. It's very hard to predict when we have an economic and political environment that is so complicated in Peru. But we remain optimistic. I mean, we're gonna probably close this year a little under 3 million tons for dispatches, and hopefully next year we'll be able to come back over the 3 million ton. But like I said, I mean, it's all going to depend on how the country goes so far. I mean, the indicators of GDP growth and everything are not too optimistic, but I think we'll be fine.

Operator (participant)

Okay, thank you. We have one more question from [inaudible]. He asks, thank you for the presentation. My question is, what are the other operating expenses of PEN 10.3 million in the income statement, please? Thanks.

Humberto Nadal (CEO)

Yeah, like Manuel mentioned, I mean, we are all preventing risks, and since La Niña will be coming, even though it's only a medium phenomenon, but also related, La Niña, bridges, the roads and everything, and that's extraordinary. It's ordinary operating expenses.

Operator (participant)

Thank you. I'm not seeing any more questions, so I'll now hand back to Humberto for closing remarks.

Humberto Nadal (CEO)

Thank you. We've come at a point in time when social, environmental, and geopolitical issues at the global level are becoming stronger and more recurrent. Although we may be tempted to feel as if these things are either happening far away from us or seem completely beyond our realm of action, the reality is that these are at the core of these topics, and that that's not happening anywhere. The private sector is capable, extremely capable of deep transformational change that can help bridge those gaps. As a Peruvian cement company that operates globally and recognizing its place in the global economy, we will continue to focus on evolving our business model to the sustainable and key transformational change that we need to contribute towards a future that is fair, permanent, resilient, and most of all, sustainable.

I want to thank you all for your interest in our company, and as always, we remain to welcome your questions. Thank you very much for today.

Operator (participant)

That concludes the call for today. Thank you very much.