Cementos Pacasmayo S.A.A.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Good day ladies and gentlemen. And welcome to Pacasmayo’s Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. And please note this call is being recorded. At the conclusion of the prepared remarks, we will conduct a question-and-answer session. I would now like to introduce the host for today's call Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

[Claudia Bustamante:]

Thank you, Katherine. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Peñav, 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.

[Humberto Nadal:]

Thank you, Claudia. Welcome, everyone to today's conference call. We hope all of you and your families continue to stay safe during these difficult times. This quarter Cementos achievements reached unprecedented levels once again. The 37.2% year-over-year growth in Cementos volume is absolutely remarkable, especially considering last year volumes were already very strong. The significant increase in sales also resulted in an all-time high quarterly EBITDA levels of S / 128.1 million. The strong second half of the year, allowed for yearly Cementos volumes to decrease only 1.2% compared to 2019, despite over two months of virtually no sales, and definitely much better than we could have expected when the pandemic started. This trend has been sustained till June 2020 and we believe, we strongly believe we will continue to see strong growth in 2021. One of the reasons to be competent in 2021 is the execution of infrastructure related to re-construction plant in northern Peru, after El Nino devastating impact in 2017. As we already had mentioned in previous quarters, last June, the Peruvian government signed a government-to-government agreement with the United Kingdom to execute S / 7 billion of re-construction plant in the next two years. Last week, the Authority for Construction announced a public bid for a group of projects that adds up to around S / 2 billion, which added to the S / 1.6 billion already in execution, represent a significant amount of spending, mainly in schools, hospitals, and river bank defenses, all of which as you know are cement intensive. These projects will also have boost concrete sales, which have already started picking up this quarter. Even though the fastest peak in the month during 2020 came from the self-construction segment, which consumes most bagged cement, we never lost sight of our vision of becoming a building solutions company with a client as our main focus. Therefore, this year, we focus on strengthening our already existing strategy of selling our concrete to small and medium sized construction companies. As we realize our large infrastructure projects, especially those related to private investment would have a slower recovery.

[Manuel Peñav:]

Thank you, Humberto. Good morning, everyone. And I hope all of you and your families are staying safe and healthy. Fourth quarter 2020 revenues were S / 475.3 million a 27.1% increase when compared to the same period of last year. Mainly due to the increased baggage cement shipments. Gross profit increased 19.9% in the fourth quarter, compared to the same period of 2019, mainly due to increased sales mentioned before partially offset by higher cost as we had to use imported clinker, lower sales of concrete and lower average price of cement, mainly due to sales mix as we sold more of our lower-priced products. Consolidated EBITDA of S / 128.1 million in the fourth quarter of 2020, was the highest in the company history and a 27% increase when compared to the fourth quarter of 2019, mainly due to increased sales. It is worth noting that even when compared to the third quarter of 2020, which was also very strong. There was a 6.2% increase. This shows a sustained upwards trend in EBITDA, which we hope can continue in 2021. For the full year, revenues decreased 6.9%, which is remarkable recovery considering that almost 65% decrease recorded in the second quarter of 2020. EBITDA decreased 21.3% mainly due to the halt in operations for over two months – a little bit more than two months during the government mandated lockdown between March and May. Turning to operating expenses. Administrative expenses for the fourth quarter of 2020 increased 16% compared to the fourth quarter of 2019, mainly due to increase in personnel expenses from bonuses and third-party services as a result of increased licenses and other digital tools. Selling expenses in the fourth quarter 2020 decreased 28.7% compared to the fourth quarter of 2019 mainly due to decrease advertising and promotion and a decrease in allowance for expected credit losses.

[Operator:]

Your first question is coming from Andres Soto . Your line is live.

[Andres Soto:]

Good morning, Humberto, Manuel, Claudia. Thank you for the presentation. My first question is regarding your capacity – current level of capacity utilization and the possibilities to expand your Pacasmayo plant. Can you please elaborate on this idea in terms of what is the timing that you are looking to do this and what is the estimated CapEx for this investment? That will be my first question. Thank you.

[Humberto Nadal:]

Sure, Andres. Hi. I hope you're doing fine. Yes, indeed we're operating at very high level. We’re operating at full capacity right now, some of us are already very importing clinker as we have planned to do – we did it already when we're spending few of that, and we are really working on expansion on a brownfield in Pacasmayo. The level of CapEx will depend on the capacity level. We are talking anywhere between $180 million to $250 million depending on the size of the clinker. This is something that we're going to probably upgrade in the second quarter of this year, but we still want to make the decision because I mean we still are going to be importing clinker for 2021, 2022, sometimes in 2023 because it makes economic sense instead of when we – when we get a new plant in Pacasmayo, it is going to be because we can operate and start with 60% or 70% capacity utilization otherwise exposed will kill us. I know that answers your question.

[Andres Soto:]

Perfect, that's pretty clear. Thank you, Humberto. That’s pretty clear. So, you haven't made a decision yet. This is just a preliminary to you, and you were expecting – when are you expecting to have up your final green light on this project?

[Humberto Nadal:]

Yes, we have not made that decision. I mean, even though the management is incredibly strong. We have to be incredibly strong for a sustained amount of time for us to make such an important decision. This is just maybe – mainly will be taken out sometime this year.

[Andres Soto:]

Okay. Got it. And as a follow-up to that…

[Manuel Peñav:]

This is…

[Andres Soto:]

Yes.

[Manuel Peñav:]

As I mentioned the capacity of clinker but the cement were around 67% of the intention. So that we have plenty of spare capacity in cement.

[Andres Soto:]

Perfect. Got it. And as a follow-up to that your EBITDA margin this quarter was 27% partially due to this high level of utilization and the need for importing clinker. Is there any other non-recurring factors that affected your EBITDA margin this quarter or should we assume that as long as you continue importing clinker 27% is the EBITDA margin you are looking at?

[Manuel Peñav:]

Well basically the importing clinker, but what you have to consider is that this period, this quarter we've have sold more bags of cement for low cost or low-price cements, basically for a self-construction. So, once next year what we expect is that the concrete should increase and prices should increase a little bit, so margin should go up.

[Andres Soto:]

Got it. And my second question is regarding the recent restrictions regarding COVID improve, have you seen any reduced demand as a consequence of both restrictions in Pacasmayo's area?

[Humberto Nadal:]

No, the answer is no. And basically because of some restrictions has to do with extreme areas, which are Lima and the South of Peru, the north and luckily for us it’s not under an extreme situation. So, we are seeing no change at all in demand.

[Andres Soto:]

Okay. Thank you so much and congratulations on the results.

[Humberto Nadal:]

Thank you, Andres.

[Operator:]

Your next question is coming from Froylan Mendez . Your line is live.

[Froylan Mendez:]

Thank you very much and congrats for the strong results. I wondered if you have the gross margin for cement if you had – not had any imports during the year. And if you could, share the exact amount of tons of clinker imported during 2020? And additionally, have you had any changes to your estimate on how much volumes come from the reconstruction project this and next year? Thank you so much.

[Humberto Nadal:]

No. Our estimate for the reconstruction is still the same as the last call. And what we’ve been using of imported clinker during this year has been – the second half of this year has been around 200,000 tons, obviously more in the fourth quarter than in the third quarter.

[Froylan Mendez:]

Do you have an estimate of the impact on gross margins of this imported clinker?

[Humberto Nadal:]

Not right now, but I can call you back later.

[Froylan Mendez:]

Perfect. Thank you so much.

[Operator:]

Your next question is coming from Lucia Calvo Perez . Your line is live.

[Lucia Calvo Perez:]

Hi, good morning, Humberto, Manuel and Claudia. Thank you for the call. I was wondering about your expectation regarding prices for 2021. Are you expecting them to maintain in current levels while self-construction demand is still strong? Or are you expecting to make an increase in prices? Thank you.

[Humberto Nadal:]

Yes, we – Lucia, thank you for the question. We raised prices towards the end of last year and a little bit beginning of this year. So, right now, we have – what I think very comfortable levels higher than last year. And we're going to remain like that probably for the rest of the year.

[Lucia Calvo Perez:]

Okay, thank you.

[Operator:]

Your next question is coming from Francisco Suarez . Your line is live.

[Francisco Suarez:]

Good morning, Claudia, Manuel, Humberto. Thanks for the call. Congrats on the results. The questions that I have relates with one your inventories linked to purchases of clinker. I mean, it is in my view that you have already depleted a lot of your high-cost inventories related within clinker imports. So, my question relates with what amount of this has been depleted already? And what's left in order to see a potential increase in margins in the short-term? And secondly, on your sales mix, you mentioned in your press release that you had a higher share of low value-added cement. Does the overall reconstruction program linked with the UK? Does that in a way allows you to sell more sulphate-resistant cement or any other form of value-added cement and the mix? Anything that you can help us with how your overall mix might change this year compared to last year? That would be very helpful. Thank you so much.

[Humberto Nadal:]

Thank you, Francisco. I want to take the second part of the question and I will leave the clinker question to Manuel. Yes indeed, I mean, the reconstruction tends to be a more sophisticated project based in terms of our schools, in terms of river beds and everything. So, yes, I mean, that one will require a different kind of cement probably at a higher price. I mean – and I think it's absolutely a previous question. I mean, we have been selling a bit more of our low-priced cements, I mean maximizing our market share, but I do think that the reconstruction projects and also some big infrastructure projects coming in are the ones that are going to allow us to sell more sophisticated cements. And like I mentioned before – so I mean, we're able to get some prices at the beginning of the year. Manuel?

[Manuel Peñav:]

Yes, Francisco, hello. Yes, we've used all the clinker that we had wasn't a higher price definitely as now we're importing new clinker at higher price on the production costs that we have, but it's a lower price than what we had in the stock before. And so, when we expect the margin will go through – the EBITDA margin for the whole year 2021 should be a little bit higher than the one we're finishing this year, or should be a much higher because we do have a stock of two months, but should be higher even than the EBITDA margin that we are having in the fourth quarter of this year.

[Francisco Suarez:]

Thank you. Perfect and clear. Thank you both. Take care. Congrats again.

[Humberto Nadal:]

Thank you. Thank you, Francisco.

[Operator:]

Your next question is coming from Alejandro Chavelas . Your line is live.

[Alejandro Chavelas:]

Hello, Pacasmayo team. Thanks for the call and congratulations on the results. Just if you could provide a little bit more color on the strength of bagged cement, I understand you have been working hard to understand why is it strong and the strength of the consumer demand and how it is behaving. If you could give us a little bit more information on that and what do you expect for next year in terms of bagged cement, I think, that would be really useful for us. Thanks.

[Humberto Nadal:]

Sure. I mean, when we started up again in May, and then June, July, August, demand was very strong, we conducted, I would say, a very thorough study trying to understand where was the money coming from all these bagged cement, I mean, self-construction, and because we were concerned that it was coming from the bonds given by the government or some kind of pension fund, or aid, or whatever. And only 4% of people we interviewed, and we interviewed over 600, said that this was coming from some kind of external source. 65% of people said it came from their own savings and their own working capital. So, I think that's why we're very optimistic about this demand remaining high. The year has opened incredibly well. And we do believe that we should see our record year based on that, based on the fact that the self-construction seems to have I mean, the Peruvian economy has suffered such high resilience that is absolutely fantastic and way stronger than the formal economy. And I think a lot of people started working pretty quick after the quarantine, and they are back on their feet. And these people on a daily basis, they have been able to recover pretty quick. So, we are very optimistic about bagged cement this year.

[Froylan Mendez:]

That's very useful. Thank you very much. Perhaps just as a follow-up with that study that you conducted, also analyzed what people were doing with the cement, like what were the main uses that they were finding or did you work on that, or just on the research?

[Humberto Nadal:]

No, basically people were spending much more time on their homes, they were doing improvements, basically home improvements. I mean, they were doing another room, or they were completing a ceiling, or just making sure the family were more comfortable. But the thing that we have to bear in mind is that the government has launched a very aggressive program of housing for the year. And that is also going to mean that our self-construction and self-building will pick up not only in-home improvement, but in new homes.

[Froylan Mendez:]

Thanks. That's very useful. Congratulations again.

[Humberto Nadal:]

Thank you.

[Operator:]

Your next question is coming from Enrique Grau . Your line is live.

[Unidentified Analyst:]

Thank you, gentlemen and congrats on those results. I have one question regarding your expenses. Do you expect your expenses to be consistent with those higher prices you were talking about? Should we expect lower margin for this year compared to last year's? Thank you.

[Manuel Peñav:]

Well margins are usually better than last year. Excluding the two months that we had shut down our margins, for example, Brazil has been re-emerging and has been much higher than the rest of the year. And we expect next year we should be at around 28.5% to 29% margin.

[Unidentified Analyst:]

Thank you.

[Manuel Peñav:]

Before we finish, I can answer the question of Froylan Mendez, excluding the imported clinker Froylan, the gross margin for the fourth quarter of this year, could have been very similar to the one of fourth quarter of 2019 around 33.6%.

[Humberto Nadal:]

If I can comprehend what Manuel is saying, I think, it's very important for everybody to bear in mind is the fact that we are closely watching at the moment to decide on the expansion of Pacasmayo, why because it's always financial – between what is in excess cost of importing clinker versus what is the financial savings we’re doing by deferring substantial investment of over $200 million. That is something that we are permanently watching. It has to do with what kind of costs we incur with clinker, what kind of CapEx we are looking and what kind of financial costs we can get in the market. So, these analyses we do permanently, and that along with demand is going to be key variables for us to make the decision. We did in Piura, Piura we imported clinker for almost four years. And at that time five million tons was the breakeven between importing clinker or building a new plant. Numbers have changed now, but this is something that are permanently taking – so the decision is taken in the way that really will create value for the company.

[Unidentified Analyst:]

Okay. And do you have any estimated volumes for this year?

[Humberto Nadal:]

We closed at almost 2.6 million tons, which is a similar volume to 2019. Like I said in the summary, I mean, it's remarkable that we did that with two months stopping. So, if we see what we have been watching over the last two quarters of the year, I would say that the growth this year will be for sure, a double digit one.

[Unidentified Analyst:]

Okay, thanks.

[Operator:]

And no further questions from clients. And this time. We do now have a follow-up in queue from Andres Soto. Andres, your line is live.

[Andres Soto:]

Perfect, thank you so much. Just going back to your comment Humberto on the estimated CapEx for these new kilns, looking at my numbers this will represent an additional two points in terms of leverage for Pacasmayo. So, we will be talking about almost four times net debt-to-EBITDA. Is this something you guys are looking to do with debt only or you will be considering also equity for doing this investment?

[Manuel Peñav:]

Sorry Andres can you repeat the question because I couldn’t hear you?

[Andres Soto:]

Basically, what is the capital structure that you are looking for the potential investment on this new plant? I know it's preliminary but looking it by numbers, by the end of this year, you will be 2.1 net debt-to-EBITDA assuming $250 million investment will be an additional two points in leverage. So, I was curious if you will be comfortable with this level, or you will be considering issuing equity for funding the investment?

[Manuel Peñav:]

Yes, with the new investment of Pacasmayo if we decide to do it, it would take place in approximately two years, two to three years. So that's going to be spread. Considering that we have a cash that we produce every year of around $80 million, what we expect is – sorry the ratios should not go higher than 3.4%, 3.5% – or 3.4, 3.5 points.

[Andres Soto:]

Perfect. That's very clear. Thank you, Manuel.

[Manuel Peñav:]

Thank you

[Operator:]

We have no further questions from the line. So, Manuel, do you have any further remarks? Manuel, do you have any closing remarks for today's call?

[Humberto Nadal:]

I'm back Manuel. I will be making the closing remarks.

[Manuel Peñav:]

Yes Humberto, go ahead.

[Humberto Nadal:]

Yes, thank you. Thank you.

[Operator:]

Humberto do you have any closing remarks for today’s call?

[Humberto Nadal:]

Yes. Sorry I got disconnected momentarily. Like I was saying, and I realized I was talking to myself, we have seen with no doubt an outstanding quarter in terms of results of operations. And we cannot deny that our full year results are well beyond our recent expectations. However, we are incredibly convinced with our resilience, our very strong financial, and operational position and more importantly, our ability to adapt and respond in a very fast and authoritative manner played a key and tremendous role in achieving these results. We believe that this challenging year has provided us with incredible, rich knowledge not only in our market our clients, but also fundamentally on people in essence. And my congrats, my absolute thanks and recognition goes to the whole team of Pacasmayo, they are an outstanding bunch of people that surprised me year-over-year, and I'm sure for many years to come my recognition is tremendous to that incredible team. It is indeed in difficult times that we discover what we are really capable of doing. And we believe that we are now better equipped to face another challenging year, which comes under termination. I'm convinced this will be the best year in the company's history. Thank you to everybody for renewed interest in our company. And as always, Claudia, Manuel and myself we are here if you’ve got any further questions. Thank you very much. And have a great day. And please stay safe.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation.