Earnings Call: Q2 2021

Jul 20, 2021

Earnings release

Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer and Mr. Manuel Pareto, 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. Ferreiro 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 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. Thank you, Gloria. Welcome everyone to today's conference call and thank you for joining us. This quarter's average sales volume continues strong despite political uncertainty, proving the resiliency once again. After a very tight run of presidential election on June 6, yesterday, Mr. Castillo was proclaimed the next President of the country. There are claims of fraud from the Cancorp of Kimoyan supporters, which have brought people to the streets to protest against the way the elections were conducted. On the other hand, Mr. Castillo has shown mixed signals of moderation and radicalization, so there is still no clarity on how the next government will conduct itself. Despite this uncertainty, we are confident that cement sales will continue strong this year, mainly because our current customer rate is not very dependent on macro factors. On the one hand, the self construction segment continues to be our most relevant source of income and it has historically had variable correlation with high level macro factors, at least in the short term. On the other hand, the demand coming from the public sector is basically related to the government to government agreement between Peru and the UK for the construction of the North after El Nino and some from the government projects that were put in place to offset the effects of COVID-nineteen. We strongly firmly believe that neither one of these projects should be affected by a change in government as they are well underway and are designated finance. Although sales of cement have been and continue to be the main driver of our growth, we are very pleased with the results of concrete and precut. As we mentioned last quarter, sales of live precut materials such as precut blocks have substantially increased in the past year. Although this has more presented to our sales, we believe this performance illustrates our successful strategy to transform ourselves and provide the construction solutions that market needs. We have generated a new customer base, mainly extending the sales of precut blocks to housing projects. We believe this strategy will bring significant increase in sales volume, taking us one step closer to our long term goals. This quarter, we are also very proud of obtaining a silver F in the brand experience category for Constellix Perko. PE, an online platform created to redesign the former experience. With training and tools that help them be very much more efficient. As you have mentioned in previous quarters, we are convinced that our solid results in this fine time come from the fact that we have been able to reinvent ourselves to be one step ahead in terms of digitalization and of constant distinction of how we can provide the best of our experience to all of our customers. This award is a clear recognition of these efforts. Although sales are definitely important and absolutely excited for business continuity, solid results would not be possible if we did not look at our business in an integrated manner. This quarter, we have obtained 2 additional recognitions that are very relevant in terms of sustainability and business continuity. First, this year, we have improved 37 positions in the Mercos Talento Peru, which aims to identify the 100 most attractive companies to work in our country. In the lead, we saw significant progress, which shows our commitment to enhance human capital management, and we will strive to continue improving in this ranking every year. Finally, and very importantly, this year we have once again obtained the award for social responsible company, BTSR for Spanish aviation. So now we have obtained this award every year since creation 10 years ago. For each addition, there is an evaluation of ESG parameters to specific indicators that are internationally aligned with the global reporting initiative and sustainable development goals for both United Nations. We are particularly proud this year to be obtained a special recognition in ethics and integrity categories, which are very important for us. Although 2021 is proving to be one time and a very challenging year, we have continued to deliver substantial increase in cement, concrete and rigor shipments that come as a result of our constant and permanent effort to innovate, expand our market, sell exciting initiatives and always remember to be absolutely client focused. I will now turn the call over to Manuel for a more detailed analysis of financial results. Manuel? Thank you, Humberto. Good morning, everyone. 2nd quarter 2021 revenues were $440,900,000 a 285.7% increase when compared to the same period of last year, mainly due to the hardship of residization during most of the Q2 of 2020 as well as an increased baggage cement shipment. However, even if we compare this quarter revenues to those from Q2 of 2019, there is a still significant increase of 37%. Gross profit increased substantially this quarter compared to the Q2 of 2020, mainly due to the fact that it was close to 0 during the same period because of the hold in operations and the subsequent effect in gross profit as there was no dilution of fixed costs. Consolidated EBITDA was $90,000,000 in the Q2 of 2021, representing a significant increase when compared to the Q2 of 2020 when EBITDA was negative for the above mentioned reasons. We expect an important increase in EBITDA for the rest of the year. During the 6 months of 2021, revenues increased 119% and gross profit increased 116 percent when compared to the same period of 2020, mainly due to an increase in sales as well as the above mentioned holding operations from mid March to mid May. Turning to operating expenses. Initial expenses for the 2nd quarter increased 41.7% compared to the Q2 of 2020, in line with increased sales, but mainly due to the substantial reduction in expenses during the lockdown period in 2020 as well as an increase in workers' profit sharing as a result of improved results. Selling expenses in the Q2 increased 71.1% compared to the Q2 of last year, mainly due to the above mentioned decrease in expenses during 2020 and an increased profit sharing. During the 6 months of 2021, administrative expenses increased 28% and selling expenses increased 29% when compared to the same period of last year, mainly due to the increases in sales as well as savings implemented during the 6 months of 2020 offset the negative effect of the wholesale operations. Moving on to the different segments, cement, concrete and precast sales increased 296.5% during the Q2 of 2021 compared to the same period of 2020, mainly due to the halt in operations during the Q2 of 2020 as well as an increased sales of baggage cement. Gross margins increased 26.4 percentage points in the Q2 of this year compared to the same period of last year, mainly due to sustained fixed costs with virtually no selling during the Q2 2020. During the 6 months of 2020, sales of cement concrete and precast increased 120.1 percent and gross margin improved 5.1 percentage points, mainly due to increased sales and the wholesale commercialization during the Q2 2020. Sales of cement increased 261 percent in the Q2 of 2021 compared to the Q2 of 2020, mainly due to the wholesale commercialization during the same period of last year as well as an increase in shipments of bagpipe cement as demand in the Northern North continued booming during this quarter. Gross margin increased 19.2 percentage points mainly due to the negative effect on cost during the holding operation in the Q2 2020. During the 6 months of 2021, sales of cement increased 121.8% and gross margin improved 2.1 percentage points when compared to the 6 months of 2020, mainly due to the holder production and commercialization mentioned above. During the Q2 of 2021, concrete and pavers and pavement sales increased substantially since they were only $3,300,000 in the Q2 of last year because of the complete wholesaleization. Gross margin increased 273.5 percentage points, mainly due to the significant costs that could not be diluted on last year. Similarly, sales of concrete and pavement for the 6 months increased 132%, and the gross margin increased 20.2 percentage points compared to the same period of last year. During the Q2 of 2021, precast sales increased 3.47.4% compared to the Q2 of 2020, mainly due to wholesale operations. However, if we compare precast sales to the Q1 of 2021, we can see that the positive upward trend continues since sales increased 33.3% quarter on quarter. Gross margin increased 94.8 percentage points, mainly due to the net margin during the Q2 2020 because of fixed costs without sales during that quarter. Similarly, during the 6 months, free cash sales increased 31.6% and gross margin increased 20 percentage points as compared to the same period of last year. Quicklime sales in the 2nd quarter increased 20.6% compared to the Q2 2020, and gross margin decreased 7.7 percentage points compared to the Q2 2020, mainly due to the increased demand, but most of it from granulated quicklime, which has a lower margin than ground quicklime. During the 6 months of 2021, sales increased 22% and gross margin increased 0.6 percentage points. During the Q2 of 2021 and the 6 months of 2021, construction supply sales increased 394.2% and 161.3% compared to the same period of last year, primarily due to increase in sales from the wholesale commercialization. Gross profit improved 12.4 percentage points in the Q2 of 2021 compared to the same period of last year, mainly due to a low comparative basis. In 6 months 2021, the gross margin remained in line with the same period of last year. In terms of debt, our debt to EBITDA ratio has come down to 1.9x, but the important addition is that we have to note that we have been able to recover low indebtedness levels quickly after the most trying times. To summarize, this quarter results show the results following despite political uncertainty, and we are convinced of the financial operational strength of our company and expect to continue delivering solid results in the upcoming quarters. And now we please open the call to questions. Operator? Yes, thank you. Our first question today comes from Enrique Grau with CreditCo Capital. Please go ahead. Thank you, gentlemen, for the call. I have one question. I was wondering if margins kept being affected by clinker imports. If that is the case, how much does a ton of imported clinker cost? Yes. Of course, I mean, you have to realize that we say a year and a half ago when we were coming to close to our full utilization of clinker capacity, it makes sense for us to import clinker. Can we have enough volume that makes sense to build a new plant? Even though it affects the margins, I mean, we're still going to make more money in terms of soles or dollar. The thing is the margin will go down because imported nickel is more expensive. Regarding how much more expensive it is, normally around $20 but it all depends on the exchange rate and it depends on the freight costs. Okay. And can we expect these lower margins to remain for the rest of the year and then they should gradually should go up? No. I think, I mean, the 1st part of the year, we have used an important component in Puerto Rico because we have to do maintenance to our teams in Pune and Pacasmayo. This should be a lower rate in the 2nd part of the year. And then, like I say, it all depends, I mean, what happens with exchange rate and the freight rates. So, yes, margins remain the same, but could go a little bit higher. Perfect. Thank you very much. Sir, there appear to be no further questions at this time. And I apologize, we have one more question from Andre So to with Santander. Please go ahead, sir. Perfect. Good morning, Humberto, Manuel and Claudia. Thank you for the presentation. My question is, in your earnings release, you mentioned political uncertainty of some of the causes for a slowdown in volumes in the Q2 compared to the Q1 of this year. I would like to understand what are you seeing at this point? Do you believe that now that Pedro Castilla has been confirmed as President, we can expect an improvement in those projects that were sort of standby at this point? Or you expect political uncertainty to persist? And if that's the case, what will you need or your clients will need to hear from Castillo's administration in order to become more constructive on Peru's political outlook? Hello, Andreas, and thank you for the question. I think I said in my opening remarks, I think our self builders and the G2G agreement has little to do with the macroeconomic fundamentals and they're not expecting a lot of things to be announced from President Castillo. I think they have their own dynamics. I think when we see our daily discussions, we are still at very strong rates and we think we're going to for sure, grow this year as being a record year in the net. And we think for the time being, and this is my personal interpretation, they're not so much waiting for the time these people will keep on working the same way they kept on working through the COVID-nineteen crisis and that's the central in foreign economy, which is part of a robust economy of Peru. Perfect. Thank you so much, Humberto. There appear to be no further questions at this time. We'll turn the floor back to Mr. Humberto Nadal for closing remarks. Please go ahead, sir. Thank you so much. In summary, Pacasmayo has been operating for 64 years in a wonderful and main stress of 1 for adjective and complex country. Over this period, we've had many kind of governments going from the left, center and right. As with all, we have not only prevailed, but accumulated valuable experience. We see every new chapter as an opportunity to learn and improve, and we are ready to take all the challenges that may come to the confidence that our solid fundamentals, our integrity and our capacity to adapt will lead a way to a promising and sustainable future. We remain extremely optimistic of our company and we will always remain very optimistic about the future of our country. Thank you very much for your interest in our company. And as always, my mayor, Calle and Marcel, who are always here in case you have any further questions. Thank you very much. Have a very nice day and please stay safe. Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time and have a great day.