Cementos Pacasmayo - Q4 2022
February 15, 2023
Transcript
Operator (participant)
Good day, everyone, and welcome to the Cementos Pacasmayo 4th quarter 2022 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Claudia Bustamante. Ma'am, the floor is yours.
Claudia Bustamante (Sustainability and Investor Relations Manager)
Thank you, Matthew. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our 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 follow with additional commentary on our financial results. We'll 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 therefor e 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. Thank you for joining us today. This quarter, we continue to focus on our strategy, which has led us to deliver outstanding results. During 2022, we achieved over 9% growth in revenues and a similar level growth in the EBITDA year-over-year. Moreover, our profit for the year increased a substantial 16.4%. This is especially relevant considering that 2021 was already an all-time record year. We are convinced that these levels of profitability are possible because of our focus on three main pillars: sustainability, digital transformation, and innovation. We will continue to focus on these aspects to deliver the best possible results, especially during these tough and indeed uncertain times. As we have mentioned before, operating with sustainability at our core is key for a company's future and to fulfill our purpose.
On the environmental front, we have signed the Peru Roadmap to Net Zero, committing ourselves to implement the necessary actions as an industry to reach net emissions of 520 kg of CO2 for every ton of cement by 2030. To achieve this, we need to commit ourselves to working on two fronts. First, by promoting the regulatory framework that allows a minimum of 12% of co-processing. Secondly, and most importantly, by continuing the reduction of our clinker factor industry average of 70%. On this last issue, even though our clinker factor of 73% is already below the national average of 76%, we are working hard on continuing this reduction. The Cement and Concrete Research Center, financed completely by Pacasmayo, has already worked on a cement that at a lab level can have a clinker factor of under 55%.
We expect to have this cement ready for market during 2023. On the social front, I'd like to briefly mention that a project that is very much aligned with our purpose. During this year, we began with a pilot to provide 93 families from the area of influence with improved living conditions. As you may know, many of the houses in the poor areas in Peru don't have proper floors in their houses. They have dirt floors. These are sources of infection since they harbor parasites, bacteria, and insects that cause respiratory diseases, anemia, among others. This project looks to provide them with cement for the floors and to build together a better home. We look forward and very excited to scaling this project in the near future to be able to improve the lives of more people. Moving on to digital transformation.
For the past couple of years, we have been working on enhancing our business models through digitalization. We have developed digital tools aimed at our different clients and stakeholders. We are developing our own marketplace to bring together construction companies, hardware stores, and the final customer, incorporating a new value proposition. For construction companies, we remain very focused on serving our Pacas Pro tool that aims to transform connectivity to our clients, maximizing efficiency in the project management and increasing substantially the user experience. Finally, for retail consumer, we have enhanced MundoXperto, our ecosystem of digital solutions. COVID forced us to adapt very quickly to new technologies in order to respond to the new needs of the foremen, the self-builders, consumers, and clients.
Construye Experto is a platform that is designed to promote the professional development of foremen through virtual tools as well as training and custom-made consultancies. FerreXperto, on its hand, is targeted to the hardware stores, it has a wide variety of training opportunities as well as inventory control tools, order tracking benefits, and promotions. We will continue to both enhance our current digital tools and develop new ones that support and maximize our company's strategy and future growth. Finally, we are convinced that innovation is absolutely key to supporting our vision of becoming a leading provider of building solutions, contributing with the progress and development of our country. To achieve our 2025 goal of deriving 25% of our revenues from non-traditional solutions, we are innovating in both new products and services.
We continue to seek for innovation in our products to develop building solutions that are fit for infrastructure products since it's an area that's still lacking in Peru. We also want to extend these solutions to the self-construction segment, since it remains as the largest proportion of our income. During 2022, we started developing Hayyu, a platform that helps small retail consumers indirectly save money through anticipated sales, so they can reach the amount of cement needed for their construction projects. We believe that by staying close to our clients, being flexible, and adapting fast, we'll be always able to anticipate their needs and continue creating and sharing value. I will now turn the call over to Manuel to go into more detail on finance.
Manuel Ferreyros (CFO)
Thank you, Humberto. Good morning, everyone. Fourth quarter 2022 revenues were PEN 553.8 million, a 1.7% increase when compared to the same period of last year, mainly due to the increased prices of bagged cement in line with increased inflation. Similar, gross profit increased 1.1% when compared to the fourth quarter of 2021, and consolidated EBITDA was PEN 121 million in the fourth quarter, a 14.5% decrease when compared to the same period of last year, mainly due to our non-recurrent expenses this quarter. Despite this increased expenses, EBITDA this quarter was similar to previous quarters of this year.
During 2022, revenues increased 9.2%, gross profit increased 16.6%, and consolidated EBITDA increased 8.8% when compared to the same period of last year, mainly due to increased sales and decreased costs, as we were able to optimize the use of our own clinker and therefore use less imported clinker. Turning to operating expenses, administrative expenses for the fourth quarter of 2022 increased 19.8% and 16.1% for the whole year compared to the fourth quarter and whole year of 2021 respectively. This increase is in line with higher sales and increased salary, as well as an increase in personal expenses due to the union bonus that is negotiated every few years and has a larger impact during the first year, as well as a higher employees' profit sharing.
Selling expenses during the fourth quarter of 2022 increased 55.7% when compared to the same period last year, mainly due to an increase in personal expenses derived from larger sales force, as well as a significant saving in advertising and promotion in the fourth quarter of 2021. During 2022, selling expenses increased 26.6% when compared to 2021, mainly due to higher salaries and the union bonus and higher profit share, as mentioned before, as well as an increased provision for DAPO payments. Moving on to different segments, sales of cement increased 8.7% in the fourth quarter of 2022, and 13.5% during the whole year 2022 when compared to the same period of last year. As bagged cement sales continue to be the biggest driver of demand.
Gross margin decreased 2.6 percentage points this quarter when compared to the same period of last year, mainly due to an increase in the price of coal and electricity. During 2022, gross margin increased 1.4 percentage points as we were able to mitigate some of the increase in the cost of raw material with lower use of imported clinker and optimization of our own capacity. During the fourth quarter of 2022, concrete, pavement, and mortar sales decreased 13.1% and 11.1% in the whole year when compared to the same period of previous year, mainly due to a significant slowdown in sales volume for private and public works.
However, gross margin increased 2.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021, and 2.9 percentage points in the whole year 2022 compared to 2021, mainly due to our decision to focus on higher margin circuits. Sales of precast materials during the fourth quarter of 2022 and the whole year decreased 19.8% compared to the same period of last year and 13.6% in 2022 compared to 2021 respectively, mainly due to a decrease in sales volume for the public sector.
Gross margin was negative in the fourth quarter of 2022 and 2022, mainly due to the adjustment of missing inventories carried out during this year, which left an increase in cost as well as higher prices of raw material and low dilution of costs, heavy precast fixes, and demand was sold for lack of larger projects. Net profit for the fourth quarter of 2022 decreased 24.6% compared to the fourth quarter of 2021, primarily due to a decrease of raising profit as non-recurrent expenses increased this quarter. During 2022, profit for the period increased 15.4% compared to the whole year 2021, primarily due to increased revenues as well as a higher operating profit since we were able to streamline our costs despite some inflationary pressure in prices of raw material.
In terms of debt, our debt-to-EBITDA ratio was 2.9, which is a level we feel very comfortable with it. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bond without incurring in any additional cost due to exchange rate effects. As we mentioned before, we had already obtained a loan to pay for this bond, our current debt levels remain unchanged.
Humberto Nadal (CEO)
To summarize this quarter results show our resilience and ability to deliver continuous profitability. Can we now please open the call to questions?
Operator (participant)
Certainly. At this time, we'll be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Please hold while we poll for questions. Your first question is coming from Babatunde Ojo from Harding. Your line is live.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. Thank you very much, for the presentation. Can you hear me clearly?
Humberto Nadal (CEO)
Yeah, we hear you very well.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay, cool. Yeah, just checking. Thank you so much for the presentation. I have a couple of questions, and maybe I just ask a few and get back on the queue, you know, to allow others. The first is on the use of imported clinker. Right? You sort of reduced the use of imported clinker this year, but I wanted to understand your strategy going forward regarding that because, you know, it sort of dilutes margin each time you use it. Do you have a plan to completely stop using imported clinker in the near future? What volume of inventory do you have left, and are you gonna use it in the coming year, 2023?
Humberto Nadal (CEO)
Sure. As you know, we are towards the end of the expansion of our Pacasmayo plant. This will be operative, third quarter of this year. The reason we have been importing clinker was because demand in 2021 rose abruptly. Going forward, we have completely stopped clinker imports as we speak, and we see absolutely no need in the future because our new kiln will come in, third quarter of this year. At this point, we hold around 200,000 tons of imported clinker, which are our security stock.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
200,000 tons, right?
Humberto Nadal (CEO)
Yeah, 200,000 tons.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay, are you gonna use that this year? How would that compare with last year?
Humberto Nadal (CEO)
Yeah, I mean, we're gonna use it, I mean, towards the coming months before we go into the operation. The average cost is similar to what we're using towards the end of last year.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. All right. Fair enough. Thanks. The other question I have, is on your volumes, which sort of declined this 2002 financial year for the reason you mentioned, it was sort of high in the previous year. I was wondering, because when I looked at the data you shared in your press release, you have the central and the southern region still growing, despite coming from a higher base as well. The northern part for you sort of had a decline, last year. I was wondering why are those areas growing as opposed to you? Are they competing with your product? You also mentioned something about reconstruction projects having less shipments then. Are those reconstruction projects done right now, or do you still have more to go?
I was just wondering where we are in those implementation. Thanks.
Humberto Nadal (CEO)
Yeah. Sure. I mean, you have to When you see the numbers of growth, you have to go back more than last year. You have to already go to back the last two or three years. What happened was we grew 42% on the previous year. Even though we decreased 5% on the net of the last two years, we were up by 30 something percent. The other regions of the country did not grow 42%. Of course they were catching up. If you do the math, over the last three years we have grown much more than the south and the center regions. Going to the construction, I mean, the reconstruction of the north is something that has been going on and off over the last few years, and there's a lot still remaining.
The thing it has to do with the fact that the government has to approve by packages. We finish a package, now they have to approve. I believe there are two or three more packages coming in, it all depends, I mean, how quickly the government, based on the G2G agreement, can get these contracts up and running.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. I have more questions. I'll pause now and get back on the queue. Thank you.
Humberto Nadal (CEO)
Sure. Thank you.
Operator (participant)
Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Francisco Suarez from Scotiabank. Your line is live.
Francisco Suarez (Analyst, Latam Industrial Real Estate, Infrastructure, and ESG)
Thank you for the call. Good morning, gents. The question that I have first relates with the social unrest. I want to understand a little bit better where did the road blockades happen? Is this actually disrupting the shipments coming from Piura to the southern portion of your footprint, or that is concentrated actually much more within the Pacasmayo area and the southern portion of your footprint? If you can help us a little bit to understand, because to my knowledge, I think that the social unrest has been concentrated much more in the southern portion of the country and to some extent in the Lima market as well.
Wanted to understand what are the risks of disruptions from shipments from Piura and if this is actually something that might be occurring in the year going forward. My second question, if I may, I was trying to do a brief math here, and it seems that excluding the CapEx related with the Pacasmayo expansion, your overall free cash flow conversion ratio might be somewhere at the levels of 35%. Just wanted to check if that number is roughly accurate, and what expectations you may have for your free cash flow conversion to, for 2023 might be, excluding the expansion, the CapEx on and expansion on Pacasmayo. Thank you.
Humberto Nadal (CEO)
Francisco, it's Humberto. Good to hear from you. Clearly the social unrest has been much more focused on the southern part of Peru in Puno, Cusco, Arequipa, Lima. The north, it remains pretty calm, even though there have been some interruptions in the area of Chao going to Chimbote. The southern part of our area of influence has been a little bit affected, but nothing at all compared to what has been going on in the south, where they've had four, five, six, eight days of operation they could not go ahead. No. As we are speaking right now, there's no roadblocks currently. That was something happened towards the second week of January. That is the first part. The second part of the question, yeah, you're right on that conversion number.
Francisco Suarez (Analyst, Latam Industrial Real Estate, Infrastructure, and ESG)
Okay, perfect. Do you think that free cash flow conversion ratio might be something that you might be sustaining on the year going forward?
Humberto Nadal (CEO)
Yes. I mean, indeed, I mean, once you take out the Pacasmayo project, which is almost done, yeah, we should be sustaining that.
Francisco Suarez (Analyst, Latam Industrial Real Estate, Infrastructure, and ESG)
Okay, perfect. Thank you so much.
Operator (participant)
Thank you. Your next question is coming from Babatunde Ojo from Harding. Your line is live.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
All right. Thank you so much. Yeah, I'm back again. just sort of a few follow-up questions that I have left is, can you provide sort of some guidance into what you're expecting in terms of your performance for 2023? Maybe like volume growth expectations, revenue, EBITDA margins. If you can provide all of those three or any of them, it would be helpful.
Humberto Nadal (CEO)
Sure. It's very hard to predict volumes with a country in the middle of social unrest. Despite that, we closed last year on a 3.4 billion tons, and we would like to remain somewhere around that area. In terms of EBITDA margins, I think they're gonna be stable till we have our kiln 4 coming into Pacasmayo on the third quarter. That will jump EBITDA margins as we start making our own clinker and start not depending on imported clinker, that should be higher.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. When you mean EBITDA margin stable now, are you talking about 22%, 23%? You know, you had different numbers across the year. Are you talking about the average for 2022?
Humberto Nadal (CEO)
You kinda calculate for EBITDA margin.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
No, no. I'm asking you, when you said it would be stable, what number will it be stable at before Q4? Is it the average for 2022?
Humberto Nadal (CEO)
I think, we should be around the volumes of last year.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
No, I'm not talking about volumes. I'm talking about the EBITDA margin. you said it would be stable until Q4 when.
Humberto Nadal (CEO)
Going forward?
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Yeah. Can you hear me?
Humberto Nadal (CEO)
25% EBITDA margins for the whole year.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
25, you said?
Humberto Nadal (CEO)
Yes, 25.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay, that's very helpful. In terms of pricing, are you putting in any additional pricing? What sort of price growth are you looking at for 2023?
Humberto Nadal (CEO)
I think we've been very aggressive in terms of market in terms of price last year. We remain like that at the beginning of this year. It all depends on how inflation behaves in our region specifically, not in the country. We'll always be sure that the price is going a way that we retain our profitability levels.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Yeah. You said you put in pricing earlier this year in January?
Humberto Nadal (CEO)
Yes.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Like, can you give a sense of what % you did on average in that period?
Humberto Nadal (CEO)
Around 3%.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Around 3%. Okay, that's very helpful. Last one for me is, Piura kinda reached 100% clinker capacity utilization, from your disclosure. I'm just wondering what next after that? You know, are you looking at increasing clinker capacity at Piura or since Pacasmayo is coming up, you don't need to do anything on Piura? Just wanted to understand what you're doing in terms of capacity expansion and optimization going forward.
Humberto Nadal (CEO)
That's a very good question, with I think it's a very straightforward answer. Once the kiln number 4 comes in, we will be able to produce around 3.5 million tons of cement with our own clinker capacity, which is what we will have with kiln number 4. We will be at 100% capacity as soon as we turn on the kiln. What goes on from there on, it depends all on demand. We don't foresee a project coming in the near future because even if demand goes up 5%, 10%, or 15% going to 3.7, or 3.8 million tons, it's always much, much smarter to import a little bit of clinker than setting up a new plant, to be used only 20% capacity. I don't foresee any project.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Hello?
Humberto Nadal (CEO)
You manage it?
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Yeah. I lost you for just the last bit, but I think I get it that, you don't foresee any expansion in the near term. I think that's.
Humberto Nadal (CEO)
No.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
That's clear. Yeah. In terms of CapEx, so how much are you looking at this year? Because, you know, Pacasmayo is still ongoing. What kind of level are you looking at in aggregate for CapEx for 2023?
Humberto Nadal (CEO)
We normally spend around $20 million.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. All right. Thanks.
Humberto Nadal (CEO)
You have to add that to the Pacasmayo. We're talking sustaining CapEx.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Yeah, what is your total CapEx for 2023, including Pacasmayo continued expansion?
Humberto Nadal (CEO)
Around $50 million. 20 or 22 will be of sustaining CapEx, and the difference between.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. Of course, you cut a little bit again, but I think I heard the number $50 million. Last one for me is on your balance sheet, on your debt, right? You mentioned that you were that you sort of refinanced a part of your debt. I didn't get that part. If you don't mind repeating what you did in terms of refinancing and if it was at a higher cost. Should we expect higher interest expense going forward?
Humberto Nadal (CEO)
You know, we don't expect The bond that we issued 10 years ago was at a rate of 4.5, plus the swap all-in was around 7.10, now we have.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
You're breaking up. I can't. I didn't get all your response. Sorry.
Humberto Nadal (CEO)
No.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
I don't know-
Humberto Nadal (CEO)
You have to bear in mind, I mean... Did you hear me there?
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
No, I didn't hear you.
Humberto Nadal (CEO)
Did you hear me?
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
No, not at all.
Humberto Nadal (CEO)
Okay.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
You went mute for a minute.
Humberto Nadal (CEO)
Do you hear me now?
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Yes, I can hear you now. Correct.
Humberto Nadal (CEO)
Okay. What Manuel was trying to explain is, I mean, a year and a half ago when rates were still low, we managed to structure corporate credit with two banks here to be able to repay. We have just repaid $140 million of the bonds. Those bonds, if you add the coupon rate of 4.5% plus the swap, they were at an all-in of 7.10%, and the new credit, it's at a cost of 5.8%. If anything, the financial cost is lower.
Babatunde Ojo (Partner and Portfolio Manager – Emerging Markets)
Okay. Got it. All right. Thanks. That's all for me. Thank you so much. Appreciate it.
Humberto Nadal (CEO)
You're more than welcome.
Operator (participant)
Thank you. There are no further questions on the phone lines at this time.
Speaker 6
I have two questions from the webcast. First, could you please give more color on the non-recurrent expenses that occurred in the fourth quarter?
Manuel Ferreyros (CFO)
Basically, the non-recurrent expense is, as you mentioned, there is an increase in the bonus that we pay or we negotiate with the unions, and it's heavily impacted in the first. It's basically a three-year arrangement with the union, and has a much higher impact in the first year than the second or the third. We have to compare this year with the previous year, the impact has been much higher this year. There is an increase and that depends on the profit. The profit for a profit share for the employees. Basically, those are the two main impacts in expenses.
Speaker 6
The next question is, what is your strategy to manage costs going forward?
Humberto Nadal (CEO)
I mean, we are always working and trying to be extremely efficient. Our main costs are related to energy. Coal, electricity are the things that are mostly impacting us due to the inflationary pressure. Looking forward, I mean, we're gonna go into gas, and we're trying to also make a more efficient, the most efficient we can our coal buying process.
Speaker 6
The last one is, how do you plan to mitigate the risk of not having geographical diversification in your top line?
Humberto Nadal (CEO)
That's a very good question. The fact of the matter is, I mean, 2021 we grew 42%. Yeah, I mean, on the one hand, we are very focused on north of Peru, clearly it's a region that has an enormous potential to offer. If we are diversified, to give you an example, into a neighboring country, it would have taken us 10 years to grow 42%. Yeah, we are pretty exposed to the north part of Peru, we think that in terms of strategy, the growth potential is so immense still there that it pays to be very focused in one region, even though it is risky. I think there's no more questions. I'm gonna go on with my closing remarks.
2022 was a remarkable year, I wanna restate, remarkable year for us, both in terms of significant advances in our strategy and an achievement of sound financial results. We are aware that 2023 brings even more challenges and even higher levels of uncertainty for the world and particularly for our country. Although we're definitely influenced by the macroeconomic and political framework, we do believe we have two very clear competitive advantages. First, the north of the country has a slight different dynamic that has so made it less inclined to conflict. Second, and most importantly, our focus on digital transformation and innovation has provided us with the tools to be much more resilient and adaptive. Finally, we understand that there's little benefit on being an island of excellence.
Let us focus less on what we're lacking in terms of institutions, and focus more on our behavior and the behaviors of those we can positively impact. We are at a crucial time to influence significant change, which will only happen by working all together. We strongly believe in the future of our region, and we even stronger believe in the future of our country. Thank you very much for your time today.
Operator (participant)
Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.