Earnings Call: Q1 2021

Apr 29, 2021

Earnings release

Good day, ladies and gentlemen. Welcome to Pacasmayo's First Quarter 2021 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, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin. Thank you very much. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer and Mr. Manuel Ferreiro, 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. Subscriptions 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 Nadas. Thank you, Claudia. Welcome, everyone, to today's conference call. We hope all of you and your families continue to stay safe in this difficult time. This quarter cement shipments were strong and proved once again our resilience. Despite partial lockdowns for the country in February, the main sales volume at the national level increased by 42.7% in the 1st Q of 2021 compared to previous year. The North clearly outperformed the rest of the country once again as our shipments increased by 67.4% this quarter compared to same period in 2020. Although this increase is partially due to the lack of sales during the last 2 weeks of the quarter in 2020, Most of this growth comes from increased sales year over year without taking into account the holding operations. If we compare only January and February both years where there was no lockdown before, there is still an increase of almost 40% in cement sales volume when comparing both periods, really remarkable. 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 precast. As we mentioned last quarter, concrete sales had already started picking up And during this quarter, they reached the peak levels we are achieving in 2019, and we are confident that these levels are sustainable as we even accelerate in the upcoming quarters. We are especially confident in this because as opposed to 2019, we are serving demand from medium and large infrastructure and private projects, the demand now comes from small construction companies. We have generated a new customer base that is much more atomized as we therefore be less volatile as it less reliant on government spending on reinvestment decisions by large private companies, which is especially important in these uncertain times. As reconstruction spending materializes during the upcoming quarters, concrete volumes should further accelerate. I would also like to mention the increasing sales of light precast materials such as precast blobs. Although this is a small percentage of our sales, I strongly believe its performance illustrates our success or our strategy to transform ourselves and provide the construction and building solutions the market needs. Growth in this segment has also stemmed from changes to our strategy and from tackling new and a large number of smaller clients. As we've concrete, this allows us for less volatility as we rely on a more atomized customer base. This growth has put some pressure on our margins due to the use of imported clinker. However, we have to always keep in mind it is important not to lose focus on 2 aspects that are key to understanding the reasoning behind using imported clinker. First, that the use of imported clinker is directly related to higher profitability, even if it comes at a slight margin decrease in terms of percentage. We will simply be unable to sell the amount of cement we are selling. We did not import some clinker and hence take a much higher loss in overall profit. Secondly and more importantly, there's a clear benefit in delaying the investment of a new plant, both financially and in terms of strategy. In order for our new kiln to be more profitable than using imported clinker, there needs to be a minimum and steady utilization rate, which we cannot guarantee right now since we are still uncertain about sustainability of the current sales volume levels. We applied this strategy in 2017 with a pure plan and it worked beautifully. 2021 has started as a very strong year for us in terms of sales. We continue to deliver substantial increases in cement, concrete and precast shipments that come as a result of our constant effort to innovate, expand our markets, satisfy new niches and always remember to be client focused. We have already surpassed the most challenging year in our history, and we are willing and able to face the challenges that 2021 may bring. We have almost 65 years of successful operating history in a country that has undoubtedly had its share of political turmoil during that period. We will work as hard as ever to continue fulfilling our purpose to transcend as a company to sustainable development and value generation always with our people and our country's best interest as our undeniable focus. Before closing, there's two points I need to touch. I would like to inform that based on the strong results of Q1 and considering the fact that the last year, as a precaution, we lowered our usual dividend, our board this morning has decided and approved a dividend of PEN366,000,000 that will be paid in the 1st week of July. Our strong financial position and positive growth outlook are related to this decision based on our old philosophy that the cash the company won't be needing belongs and should be given out to shareholders. Finally, as I'm sure all you are aware, Peru held presidential and congressional elections rep in 11th. And Neocon have generated great uncertainty as one of the candidates excluding the election in the runoff represents left wing anti free market ideas. This uncertainty has, of course, spread to the stock market, and almost all Boruvian stocks have accumulated losses in the past weeks. Although we are absolutely confident on the strong fundamentals of our company, we can't avoid counter risk and this volatility will remain until there is a final outcome in the 1st week of June. I will now turn the call over to Manuel for a more detailed analysis of the financial results. Manuel? Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. Q1 of 2021 revenues were, as Humberto mentioned, extraordinary, EUR 4 dollars 464,800,000, a 55.3 percent increase when compared to the same period of last year, mainly due to an increased baggage cement shipments as well as to the halt in commercialization during the last 2 weeks of the Q1 of 2020. The gross profit increased 44.8% in the Q1 of 2021 compared to the same period of 2020, mainly due to increased sales mentioned before, partially offset by higher costs as we had to use imported clinker to support our growth. Consolidated EBITDA was €105,100,000 in the Q1 2020, representing 2021, sorry, representing a 45.4% increase when compared to the Q1 of 2020, mainly due to the increased sales under halting commercialization during 2020. Turning to operating expenses. Administrative expenses for the Q1 of 2021 increased 16.9% compared to the Q1 of 2020, in line with increased sales. However, if we look at our initial expenses as a percentage of our sales, it decreased compared to the same period of 2020 as we continue striving for savings. Selling expenses in the Q1 of 2021 only increased 3.6% compared to the Q1 2020, mainly due to an increase in advertising and promotion, offset by a decrease in the allowance for expected credit losses. Moving on to the different segments. Cement, concrete and precast sales increased 55.2% during the Q1 of 2021 compared to the same period of 2020, mainly due to increased sales of baggage cement as well increased sales of concrete and light precast materials, slightly offset by lower sales of heavy precast. Gross margin decreased 2.1 percentage points in the Q1 of 2021 when compared to the same period of 2020, mainly due to the higher cement production costs as a result of the use of imported clinker as well as slightly lower average prices for cement and concrete due to the sales mix as we sold more of our lower priced products. Sales of cement increased 62.7% in the Q1 of 2021 compared to the Q1 2020, mainly due to increase in shipment of baggage cement as demand in the north continued booming during this quarter. However, gross margin decreased 4 percentage points mainly due to increased costs related to the use of imported clinker of the because of the sudden increase in demand as well as lower average prices due to the sales mix. Concrete and paper sales increased 32.8% and gross margin increased 0.8 percentage points, mainly due to higher sales to small construction companies. During the Q1 of 2021, precast sales decreased 33.3% compared to the Q1 2020, mainly due to decreased sales of heavy precast materials. However, this is important to note that light precast sales performed very well as we expect them to continue increasing during the following quarters. Gross margins increased 5.7 percentage point, mainly due to the increased sales of blocks, resulting in high utilization rates in our plants, which allows us to achieve operational efficiencies. Quicklime sales in the Q1 of 2020 increased 23.2% compared to the same period of last year, and gross margin increased 1.5 percentage points compared to the Q1 of last year, mainly due to increased demand. Sales of construction supplies during the Q1 of 2020 increased 74.8% compared to the Q1 2020, mainly due to increased sales to self construction and families work on home improvement project as well as a lower comparative basis due to the government mandate lockdown during the Q1 2020. Gross margin decreased 4.5 percentage points in the Q1 of 2021 compared to the same period of last year. During the Q1 of 2020, the profit for the period was $31,800,000 897.2 percent increase compared to the Q1 of last year, primarily due to increase in revenues and operating profit as well as a lower comparative basis due to the halt in operations during the last 2 weeks of the quarter in 2020. In terms of debt, our adjusted debt in soles considered an exchange rate of the cross currency swap hedging agreements amount of PEN1210 1,000,000. This debt represents 3.47x EBITDA, and we expect that this will continue increasing as EBITDA for the last 12 months still shows effect of the 2 months on Halcyon commercialization during 220. What we expect in the next quarter, this ratio should be under 3x EBITDA. To summarize, this quarter's results shows the resilience in volume despite focalized lockdowns that affect other industries. Moreover, we are now seeing strong growth across all segments, which aligns us with our long term strategy. We are convinced of the financial and operational strength of our company and hope the political uncertainty can settle soon enough to let our stakeholders benefit from the true value of our company. Can we now please open the calls to questions? Thank you. The floor is now open for questions. And we'll go to the line of Andres So to with Santander. Please go ahead. Good morning, Humberto, Manera, Claudia. I hope you and your families are well. Maybe the natural question that one should ask is what has changed since February that makes you guys decide to postpone the capacity expansion and rather make a dividend distribution? I suspect I know the answer to that question. So I would rather ask if the same level of cautionness is what you guys are seeing among your customers and if we should expect this to affect Pacasmayo's volumes in the Q2? Hello, Andreas. I hope you're doing well and family. No, I mean, let's face it. I mean, what I said, it's absolutely true. Last year, our dividend that was normally running around $50,000,000 we lowered it by half. And the fact of the matter is, I mean, sales remain strong. We're very confident about that. But if you see our debt level, considering that a potential expansion in the Pacasmayo plant is going to spread over the next 3 years, we feel like we have enough room in our balance sheet to accommodate an investment of that sort. So nothing has really changed in terms of that. And in terms of the dividend, I mean, of course, I mean, we have to take into consideration everything surrounding us, but we have always and we've talked about this in the past many times, we strongly believe that the cash that is not needed by the company belongs to shareholders. So we are wholly acted upon what we have always predicated. Perfect. So you are not seeing a slowdown in volumes related to the political uncertainty, to put it in different words? Not at all. Okay. Uncertainty, to put it in different words? Not at all. Perfect. My second question was related to outsourced tinker. I would like to understand if you have already depleted the expensive inventory you had or if you continue expecting the or we should expect to continue to be a factor in your margin performance over the next few quarters? Yes, Adrien. This is Manuel. Yes, what we should expect the same percentage of gross margin in this second and basically in the second quarter because we have the main maintainings of the kiln in Pacasmayo and the kiln in Piura. This should pick up again in the 3rd Q4 of this year. And if I may complement that, that's quick to Andres, and I'm measuring in my speech, but I think it's very important to realize that when we analyze, I mean, the over cost of imported clinker, which runs around probably $20 to $21 per ton, we compare it to how much are we saving in terms of financial cost of deferring the investment for the time being until we have a higher need. And if we think that Pacasmay expansion is going to take between $220,000,000 to $250,000,000 at a take 6% or 100% interest, we believe that as long as we are south of 700,000 tons, we are more or less neutral to both positions. And at the time, I mean, we are still very south of that. We did it for Piura and only when we were importing over 500,000 tons at that moment, now with the amount a little bit higher, then we try to move in the investment. So we are very positive about investment and but we are always watching the sales to see what is the exact moment to trigger the decision. That's very clear. Thank you so much. Next, we go to the line of Jocelyn Jensen with Lucore Analytics. Please go ahead. Hi. Thank you very much for taking my question. Could you provide a view of this political situation and if the outcome favor is Pedro Castillo less winning candidate? Do you see any potential risk for your business? I think it's a very good question. And I mean, and if I was a political analyst, I would have a better answer. But the way I see it is, I mean, the country has to decide 5 weeks from now what kind of model in terms of political economy it was for its future. I think if we take what has been going on over the last elections, there was been usually a country that's more on the moderate center, center left. I believe that this will be also the way the country will go. Of course, I have no guarantee of that, but my experience tells me that. In the event that Mr. Castillo becomes the President, we would need more clarity on exactly what he is intending to do as only now we are still finding out his potential governor plan and what he decides to do. So I think at this point, I mean, there's no much I can comment on that. Okay. Thank you very much. You're welcome. And that is all the signals we have at this time. We will return to Humberto Nadal for closing remarks. Thank you very much. I want to thank everybody today for their continued interest in Pacasmayo. Pacasmayo has 65 years. We have sailed through different kinds of waters, storms, the peaceful waters, but we are very positive both on the fundamentals of the company and we will also remain very positive on the potential this country offers and has offered in the past for our businesses. We remain committed to our country. We remain committed to our regions in which we operate. We are committed to our clients, our customers, our workers as we did during the pandemic and the COVID times. So we are always cautiously optimistic. The numbers give us a reinforcement of why we should remain optimistic and we will keep working no matter who wins elections. We will keep working very strongly to deliver always the best results in the value creation for our shareholders that we have been doing over the last 65 years. Thank you very much for your time and your interest. Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.