Earnings Call: Q1 2024

May 20, 2024

Summary

Revenue rose 13.9% to PEN 1.6bn and EBITDA grew 7.2% to PEN 419m, but was flat excluding non-recurring income; net profit fell 34.9%. Leverage was 3.4x, while FY EBITDA growth guidance remained mid-single digits.

Greetings. Welcome to Grupo UNACEM first quarter 2024 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Palkar, Head of Investor Relations. Thank you, Monica. You may begin. Thank you, Sherry. Good morning, everyone, and welcome to our earnings conference call. This morning, Pedro Lerner, our CEO, will discuss the latest developments that affected our operations during the first quarter of the year. Later on, Álvaro Morales, UNACEM's Corporate CFO, will present the first quarter financials in detail. Please note that we might disclose some forward-looking statements related to Grupo UNACEM based on currently known facts, expectations, and forecasts, circumstances, and assumptions regarding future events. Many factors could cause the future results, performance, or achievements of Grupo UNACEM to be different from those expressed or assumed herein. This should be considered for reference only. Pedro, you may begin. Thank you, Monica. Ladies and gentlemen, good morning. It is a pleasure once again to share with you our quarterly performance. Our consolidated EBITDA for the quarter reached PEN 419 million, a 7.2% increase year-over-year, mostly on the back of inorganic expansion as Termochilca was incorporated in May 2023, and Tehachapi in November 2023. Additionally, EBITDA includes the proceeds from the sale of land in the U.S., which represented non-productive assets for us. Excluding non-recurring income, EBITDA would have been flat year-over-year. Our top line posted a 13.9% increase, with revenues reaching PEN 1.6 billion. With the incorporation of Tehachapi, our U.S. revenues accounted for 20% of the total, up from 16% in the first quarter of 2023. These results are very much in line with our strategy to remain focused in the construction materials business, operating a geographically diversified footprint. Our Latin American operations continue to face a challenging environment. While the Peruvian GDP posted a shy 1.4% increase in the first quarter of 2024, we have seen a deceleration in the self-construction segment reflected in the slowdown in sales in the traditional distribution channel. This has been partly offset with demand from public infrastructure projects, both from ongoing as well as new projects, especially in the education segment. Our operations in Ecuador and Chile continue to face a declining market. In this environment, we are implementing efficiency measures to lower costs and commercial initiatives to improve our go-to market strategies. In both cases, we have seen positive results and expect marginal market share improvements in both markets. We believe market conditions will improve in the medium term and are preparing our platforms to benefit from a stronger demand. As I mentioned before, our U.S. operations explained 20% of our revenues, and with incorporation of Tehachapi, now represent over 15% of our overall cement capacity. We have completed the first stage of integration process with our California operations as scheduled, and have launched the rebranding and the UNACEM North America cement logo last month as planned. In terms of performance, Tehachapi volumes reached 103,000 metric tons during the quarter. The first quarter is seasonally the lowest in the region as rain and snow impact operations. Second quarter performance so far has proven a steady trend to achieve our goal to increase volumes for the year by 20% compared to last year. Our profitability for the quarter declined to 26.1% from 27.7%, impacted by a combination of factors. The incorporation of Termochilca, although accretive and certainly in line with our strategy to hedge our operations from cyclical dry seasons, has a lower margin than our hydro operations. Additionally, margins have been affected adversely by lower volumes and higher operating expenses as we are moving forward with key initiatives in technology, safety, controls, among others. We closed the quarter with a leverage ratio of 3.4 times EBITDA. Although this is above our 3 times EBITDA goal, the expected performance for ongoing operations, as well as the full year impact of our recent acquisitions, should lower debt levels in the next couple of years. Finally, I want to reiterate our confidence for the 2024 results. In spite of a slowdown in certain geographies, we believe our diversified portfolio as a whole should post consolidated EBITDA growth in the mid-single digits. That is all on my side. Thank you very much for your attendance this morning, and I will now pass it over to Álvaro for a detailed analysis of our financial results. Thank you, Pedro. Good morning, everyone, and thank you for joining us today. As Pedro mentioned, in spite of the challenging macro and political conditions in Latin America faced during this quarter, we achieved overall good operating results that allows us to record top-line growth and stable EBITDA. Please recall that this is the first quarter that reflects results of last year acquisitions, Termochilca and Tehachapi. Our consolidated revenues during the first quarter 2024 were driven mostly by the incorporation of the acquisition from last year, Termochilca and Tehachapi, as well as stronger sales in our ready-mix and energy operations. This, coupled with higher average prices in cement business in Peru, resulted in a 13.9% year-over-year increase. Peru. Cement dispatches registered 1.4 million tons, a decrease of 8.2% versus the first quarter of 2023. Nevertheless, clinker exports through the Conchán terminal reached 139,000 tons, 31.1% higher than those in the first quarter 2023, in line with our commitment to clients this year. Our ready-mix business in Peru recorded higher volumes during the quarter, with 717,000 cubic meters compared to 629,000 cubic meters of the first quarter 2023, a growth of 14%. The higher volumes dispatched on the ongoing infrastructure and projects picked up during the quarter. Celepsa first quarter 2024 volume was 16.7% higher than in the first quarter 2023. Energy sales reached 624 gigawatts hour, as demand from its contracted and new customers increased. Termochilca's volume during the quarter recorded 329 gigawatts hour. Ecuador. UNACEM Ecuador's first quarter volume contracted due to the ongoing social unrest in the country that is affecting the construction activity. Cement volumes declined by 6.2% to 266,000 tons sold, compared to 284,000 tons sold in the first quarter 2023. Ready-mix volumes were impacted also, 4.4% lower. U.S. Our U.S. operations, UNACEM North America, reported 243,000 metric tons of cement sold during the first quarter 2024 versus 146,000 metric tons in the first quarter 2023, 66.4% higher. As I mentioned before, this is the first full quarter of Tehachapi, which contributed with 103,000 tons of cement. Ready-mix operations remain strong, recording 254,000 cubic meters sold, 12.2% higher than in the first quarter 2023. Aggregate volumes were higher by 1.2%, amounting to 421,000 metric tons. Chile. UNACEM Chile cement dispatches recorded 131,000 tons during the quarter, which is 11.4% higher year-over-year, with both grinding plants fully operating. Ready-mix dispatches experienced an increase of 5.3% with 201,000 cubic meters dispatched. Consolidated cost of goods sold were 11.9% higher in the first quarter 2023. The volume decline on the cement business in Peru and Ecuador resulted in higher production costs with lower economies of scale. Termochilca incorporation to the portfolio with lower margins compared to the hydropower platform. Our gross margin was 25.4% versus 28.6% of the first quarter 2023. Our administrative expenses in the first quarter were 32.2% higher than in the first quarter of 2023, explained by higher donations, PEN 7.8 million. The incorporation of Termochilca and Tehachapi, PEN 9.4 million. Insurance, PEN 1.9 million, and higher consultancies due to the projects that are being executed across all business units. Selling expenses in the quarter were 4.2% higher than in the first quarter 2023 due to the incorporation of the new companies consolidated in the group's results. In the first quarter, other income and expenses net passed from an expense of PEN 6 million to an income of PEN 26 million. This is explained by a non-recurring income from the sale of land in the U.S., a non-productive asset in New York, and a precast plant in Chile. Consolidated EBITDA in the quarter was PEN 419 million, a figure 7.2% higher than in the first quarter 2023. EBITDA margin was 26.1% for the first quarter, below the first quarter of 2023, when we recorded a margin of 27.7%. The decline is explained by the lower cement volumes in Peru and Ecuador, that were partially compensated by the price adjustments and the incorporation of Termochilca and Tehachapi to the portfolio. Last 12 months, the first quarter 2024 EBITDA was PEN 1,533 million, 1.1% lower than the last 12 months of the first quarter 2023 EBITDA. Last 12 months, the first quarter 2024 margin was 23.2%, lower than the 25.6% margin of the last 12 months of the first quarter 2023. This decrease in margin is explained by lower economies of scale due to the contraction in the volume sold and the incorporation of Termochilca and Tehachapi to the portfolio. Administrative expenses were also higher due to incorporation of the newest businesses to the group, and increase in consulting services across our business unit. Sales expenses were in line with the volume sold. Consolidated net debt was PEN 5.1 billion, flat compared to the end of last year. As you may recall, both acquisitions were fully levered, and long-term debt amortizations have been offset by short-term loans to cover working capital needs in some business units. All in all, net debt EBITDA ratio was 3.4 times in the first quarter 2024, above our three times target. However, we should delever in the medium term as our acquisitions do not reflect a full year of operations yet. Financial expenses were 74.2% higher in the quarter, explained by the new debt acquired at a higher cost. Foreign exchange in the quarter went from a gain of PEN 15.2 million to a loss of PEN 18.4 million, mostly by the conversion of the US dollar denominated debt to soles, and a higher FX rate in the year compared to the end of 2023. Net profit during the quarter was PEN 111 million, which is 34.9% lower due to the factors mentioned before. In terms of CapEx, disbursement totaled PEN 95 million, 11.2% lower than the first quarter 2023. The main investments are related to the kiln number three dedusting system and the roofing of the clinker fields, improvement in the grinding facility in Graucement, and the increase in fixed assets for the ready-mix division in the U.S., mixer trucks and pumps in UNICON Peru, Talca Ready Mix new plant in Chile, and kiln number one debottlenecking to increase production in UNACEM Ecuador. Thank you. That will be all from my side. Now we open the microphone for your questions. Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Questions can also be typed into management on the webcast platform. We will pause for a brief moment to poll for questions. There are no questions on the phone line, so we will now pause for questions to be typed onto the web platform. Thank you, Sherry. Let's wait a couple of minutes to see if we get some questions through the webcast. We have one question, our first question that comes from Pedro Muñoz del Río. The question is: Last quarter, the cost of sales increased percentage more than the sales. What was the reason? I am going to hand it over to Álvaro. Thank you for the questions. Yes, our incomes increased by 13.9%. Our consolidated cost of goods sold was 19.1% high. The reasons of that more cost of goods than sales is that, in terms of volumes, we have a decline in Peru and Ecuador in cement, and the incorporation of Termochilca to the portfolio that has lower margins compared to our hydropower plant. Some increase in raw material in the cement business in Peru, and a reduction of our productions that lower our economies of scale. Thank you, Álvaro. Let's wait a couple of minutes, see if we have another one on the line. Sherry, we have no further questions, so I am going to pass it over to Pedro for his closing remarks. Thank you very much for your time this morning. Please do not hesitate to reach out to Monica should you have any follow-up questions. Have a great day. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.