Earnings Call: Q4 2023

Mar 5, 2024

Summary

FY23 revenue rose 6.6%, while EBITDA fell 5.1% and net profit declined to PEN 514m, pressured by acquisition costs and weaker Latin American volumes. FY24 EBITDA growth is guided to the high single digits, with CapEx expected to exceed PEN 1bn.

Greetings, and welcome to Grupo UNACEM's fourth quarter 2023 results conference call. At this time, all participants are in 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 from your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mónica Paucar Toranzo, Investor Relations Manager. Thank you, Rob. You may now begin. Thank you, Rob. 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 fourth quarter, as well as our full year results. Later on, Álvaro Morales, UNACEM's Corporate CFO, will present the fourth 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, so this should be considered for reference only. Pedro, you may begin. Thank you, Mónica. Ladies and gentlemen, good morning. It is a pleasure once again to share with you our quarterly performance. Once again, our operating platform has proven quite resilient, as in spite of challenging economic and political environment in our Latin American markets, we have achieved a consolidated EBITDA of PEN 381 million in the fourth quarter of 2023, only 1.3% below the fourth quarter of 2022, with revenues actually improving to PEN 1,658 million, up 3.3% year-over-year. In terms of the whole year, we achieved an EBITDA of PEN 1,492 million, a 5.1% decline in spite of a 6.6% increase in the top line. The drop in profitability is explained mainly by non-recurrent factors related to the transaction costs of the Tehachapi deal closed on October 31st. These have offset the significant efforts in profitability improvements in our Peruvian operations. EBITDA margin for the quarter amounted to 23% and to 23.4% for the year. One-time expenses represented 87 basis points for the quarter and 23 basis points for the year. During this quarter, our Peruvian operations managed to offset the weak economic environment with stronger pricing and cost efficiencies in the case of cements. The reactivation of large infrastructure projects with better pricing in our ready-mix platform and stronger marginal costs in the energy market, coupled with incremental EBITDA from Termochilca, incorporated in our operations in May 2023. All in all, Peruvian EBITDA increased 6.5% year-over-year the fourth quarter of 2023. On the flip side, our Chilean and Ecuadorian operations post a double-digit decline in EBITDA as a result of a difficult industry environment and adverse foreign exchange impact in the specific case of the Chilean peso. Still, we remain confident of the long-term potential of both of these operations. As such, we doubled milling capacity in Chile to 600,000 metric tons in April 2022, and closed 2023 operating at over 80% of capacity and an estimated market share of 11%. On the ready-mix side, we are relocating some of our plants and participating in high-profile public infrastructure projects, both of which should bring positive results in 2024. In the case of Ecuador, we are working on offsetting the market slowdown with several commercial initiatives to increase our reach to the end customer, and operational efficiencies focused on our carbon emissions goals for 2030. Our U.S. operations were impacted by one-time expenses related to our Tehachapi deal. Apples to apples, EBITDA growth would have been 8% during the fourth quarter of 2023 compared to the prior year, as a strong performance in cement offset the impact of operating only one quarry in our aggregate system. As you know, we closed our Tehachapi deal on October 31st, and since then, our teams have been working on the integration of both cement operations. Tehachapi has contributed with 80,000 tons during the quarter, and we expect volumes to pick up after the rainy season is over. In the meantime, I commend our team's effort to achieve a seamless transition. Our first milestone is to launch the commercial rebranding and integrate the back office platforms into the second quarter of 2024. Following our two successful M&A deals and annual CapEx of PEN 500 million, we closed the year with a leverage ratio of 3.4 times EBITDA. Although this is above our 3 times EBITDA goal, we are confident we will be able to lower debt levels in the next couple of years as the new business units' results are fully reflected in our consolidated numbers. Finally, I reiterate our optimism for 2024, as in spite of being conservative on the macro environment in several of our markets, we see infrastructure investments start to pick up and our efficiencies and strategic initiatives bearing fruit. These, coupled with our inorganic expansion, should bring consolidated EBITDA growth up by high single digits. That will be all on my side. Thank you very much for your attendance this morning, and now I will 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, this quarter, our results proved resilient considering the challenging economic and political environment we faced. I will discuss our performance, which show once again the advantages of our diversified platform. In terms of volumes, Peru cement dispatches registered 1.5 million tons in the fourth quarter 2023, a decrease of 14.08% versus the fourth quarter of 2022. Additionally, clinker exports through the Conchán terminal reached 252,000 tons, 150% higher than those reached in fourth quarter 2022, according to our commitment to clients this year. Full year dispatches reached 5.8 million tons, a 12.5% decrease compared to 2022. Still a solid result considering that 2022 volume was a record for the company. As we anticipated, volume drop this year was partially compensated by higher average prices. Overall, the cement market in our area remained strong, with UNACEM growing above the total Peruvian market, with almost the same market share above 48% in the year. Peru ready-mix recorded similar volumes during the quarter, 579,000 cubic meters compared to 685,000 cubic meters of the fourth quarter 2022. Full year volumes were 1.6% higher compared to 2022. Better volumes were dispatched in the second half of the year, as ongoing infrastructure projects already contracted increased their dispatch pace. Namely, line 2 of the Lima Metro, that by the end of 2023, hit over 1 million cubic meters of ready-mix dispatch, and others, like the expansion of Jorge Chávez Airport and Chancay Port. Celepsa, fourth quarter 2023 volume was 68.8% higher than fourth quarter 2022. Energy sales reached 879 gigawatt hours. Full year results for Celepsa, considering hydro and thermal generation, recorded a total volume sold of 3,542 gigawatt hours versus 2,017 gigawatt hours in 2022. Termochilca incorporation to our portfolio proved our investment and growth strategy in this business, especially in a dry season year like 2023. Ecuador. UNACEM Ecuador's fourth quarter cement volume decreased 17.3% to 290,000 tons sold, compared to 351,000 tons sold in the fourth quarter of 2022. Year-to-date volumes in Ecuador were 9.5% lower than 2022. The political unrest before elections constrained demand in the quarter and in the whole year. Furthermore, fourth quarter ready-mix volumes were 16.8% lower as the execution of infrastructure projects lacked during the year. Full year volumes were 6.5% lower compared to 2022. U.S.A. Drake Cement reported 155,000 metric tons of cement sold during the fourth quarter 2023, and our recently incorporated Tehachapi Plant contributed with 80,000 tons. All in, our U.S. cement volume increased by 55.7% in the quarter. Nevertheless, our ready-mix operations reached 225,000 cubic meters sold, slightly lower by 1.3% than in the fourth quarter of 2022. Aggregate volumes were lower by 31.4%, amounting 463,000 metric tons. As we are operating only one quarry since January 2023, in spite of lower revenues from the aggregate unit, a bit that this year was six times higher compared to 2022. Cement volume for 2023 were 5.2% higher than in 2022, with 702,000 tons. Ready-mix recorded 971,000 cubic meters sold, a figure 0.9% higher. Aggregates reached a total dispatched of 1.8 million tons. Chile. UNACEM Chile had cement dispatches of 121,000 tons during the quarter, with both plants operating. Furthermore, cement dispatches in 2023 recorded 479,000 tons, 11.4% year-over-year. 2023 performance of the Cepto contract. Nevertheless, our team managed to work closely with our clients, improving our market share. Ready-mix dispatches in the fourth quarter reached 191,000 cubic meters, 11.3% lower than in the fourth quarter of 2022. Full-year ready-mix volumes were 24.1% lower than in 2022, with 712,000 cubic meters dispatched. Our consolidated revenues during the fourth quarter 2023 increased by 3.3% versus the fourth quarter of 2022, driven mostly by the incorporation of Termochilca and Tehachapi, and a strong U.S. market and better pricing in Peru. Full-year consolidated revenues increased by 6.6% compared to 2022. This increase is explained by the above mention, and slightly higher results from our Peruvian and U.S. concrete business. Consolidated cost of goods sold were 3.7% higher than in the fourth quarter 2023, due to lower economies of scales in the cement operations and higher raw material costs in the cement and ready-mix operations in Peru. Full-year consolidated cost of goods sold were 10.3% higher in 2023 compared to 2022, explained additionally by the incorporation of Termochilca. Our gross margin was 24.7% versus 27.2% of 2022. Our administrative expenses in the fourth quarter were 38.3% higher than in the fourth quarter of 2022, with non-recurrent expenses associated to the U.S. acquisition of PEN 18.8 million. Excluding these expenses, administrative expenses increased by 21.7%. Selling expenses in the quarter were 18.7% lower than in the fourth quarter 2022, in line with lower volumes. Full-year administrative expenses in 2023 were 20% higher due to non-recurrent expenses from inorganic growth by PEN 20 million. Without the acquisition, 15.3% higher. Higher consulting services and personnel expenses required to implement our strategy across all business units. Selling expenses were lower by 4.1% than in 2022 as a result of lower volume and strict use of marketing expenses. In the fourth quarter, net other expenses and incomes passed from an expense of PEN 4 million in the fourth quarter 2022, to an income of PEN 21 million in the fourth quarter 2023, mainly due to non-recurrent income from the real estate sale in our Chile operations, required by authorities to expand a highway. Also, no expenses in the quarter related to UNACEM Peru voluntary retirement program. For the full year, net other expenses and incomes recorded a gain of PEN 10 million for the reasons mentioned before. Consequentially, our consolidated operating profit in the quarter was PEN 257 million, 1.1% lower than in the fourth quarter 2022. Full-year consolidated operating profit was PEN 990 million, lower by 8.8% compared to the PEN 1,085 million recorded in 2022. The operating margin was 15.5% in 2023 versus 18.2% in 2022. The consolidated EBITDA in the quarter was PEN 381 million, 1.3% lower year-over-year. 2023 consolidated EBITDA was PEN 1.49 billion, 5.1% lower than the PEN 1.57 billion reached in 2022. EBITDA margin in the quarter was 23% versus 24% during the fourth quarter 2022. EBITDA margin for 2023 was 23.4% versus the 26.3% of EBITDA margin in 2022. Lower volumes across all business units in Latam were partially offset with higher average prices and the solid performance in our U.S. operations. Financial expenses were 62.3% higher in the quarter, as Termochilca and Tehachapi acquisitions were fully executed this year. Full year financial expenses were 42.6% higher than in 2022, explained by higher debt due to inorganic growth and higher average cost due to market conditions. Foreign exchange in the quarter went from a PEN 25.8 million gain in the fourth quarter 2022 to a PEN 22.8 million gain in the fourth quarter 2023. Full year foreign exchange gain decreased from PEN 35.4 million in 2022 to PEN 4.6 million in 2023, mostly by the conversion of US dollar-denominated debt to soles, and a slightly lower FX rate in the year. Net profit in the quarter was PEN 136 million. Full year net profit was PEN 514 million versus PEN 660 million during 2022, due to the factors mentioned before. Consolidated net debt was PEN 5.1 billion, higher than the PEN 3.4 billion at the end of 2022, mostly explained by the new debt for inorganic growth for PEN 1.7 billion. As a consequence, net debt EBITDA ratio closed at 3.4 times in 2023, up from 2.2 times at the end of 2022. We're momentarily above our target leverage ratio, but should recover when Termochilca and Tehachapi reflect full year results. In terms of CapEx, disbursements totaled PEN 500 million during the year, 19% higher. The main investments are related to the new automated packing system, the kiln number three, dedusting system, and improvement in kiln number one in UNACEM Peru. The integral mill project in Drake Cement, and the increase in fixed assets for the aggregate division in the U.S. Mixer trucks and pumps in UNICON Peru, and kiln number one optimization project to increase production and the hydrogen injection project, both in UNACEM Ecuador. We expect an increase in our CapEx this year as we should recover the pace on the execution of some important projects, mainly related to our environmental strategy, as some of them have a delay in execution due to local government permits and licenses, especially in Peru. Thank you. That will be all from my side. Now, we open the microphone for your questions. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question today, you may press star one from your telephone keypad, and a confirmation tone indicate your line is in the question queue. You may press star two if you'd 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. One moment please while we poll for questions. Thank you. Thank you. Once again, that's star one to ask a question. At this time, I don't see any phone questions. Monica, would you like to see if we have any questions that are submitted over email? Yes, Rob. We're going to give a couple of minutes, so we can receive if any questions from the webcast. Thank you. While we are waiting, if you have a question over the webcast, you may submit it at this time. Thank you. Thank you, Rob. We have a question from Omar Avellaneda. He is asking, "What is your guidance of cement dispatches in Peru and Ecuador for 2024?" I am going to pass it over to Alvaro. Thank you for the question. In Peru, we are expecting a better year in terms of dispatch due to an improvement in the economy driven by the private and public consumption and the recovery of the self-construction. In Ecuador, we expect that the macroeconomics regarding government expenditure will allow general consumption to improve. For the moment, it is still cautious. The stability in Ecuador will give a boost in the performance of the company, and we will monitor and keep you posted. We are cautious about Ecuador 2024 dispatches this year. One more follow-up question from Omar, regarding pricing strategy in Peru. Alvaro? Yes. About this year, 2024, we expect to have an average increased price around 3%-4%, mainly due to the higher fuel cost that we expect to have this year. But in terms of market, we see that price in this is what we think that is going to be good for the market. Thank you. Another follow-up question from Omar Avellaneda. Can you comment on your CapEx for 2024 on a consolidated basis, Alvaro Morales? Okay. For 2024, we are focused on sustaining projects that will improve the efficiencies of the operations in the long term, and also projects related to our carbon neutrality efforts. We are not planning any big expansion CapEx at the moment. The quicklime project that we announced in joint venture with Calidra from Mexico, that should start construction during the second quarter 2024, and start operations in the first half of 2026. In 2024, we are expecting CapEx of slightly over PEN 1 billion related focus on sustainability efforts. Thank you. Okay, we have another question from Gerard Ford. How much are you expecting of non-recurring expenses related to the integration of Tehachapi for 2024, Alvaro Morales? Yes. Thank you for the question. About the integration of Tehachapi, we are using our own resources, so you will not see any non-recurring expenses in 2024 related to the Tehachapi acquisition. All the expenses were registered in 2023. The bank fees, the lawyer fees, all the integration was paid in that year. Thank you, Alvaro. We are receiving more questions, just a minute. There are no questions on the phone at this time, Monica. Yes. We have one more question from Omar. If we can give some more details on the other operating income generating of PEN 20.9 million soles in the fourth quarter. If recurring income considering 24 million generated on the 24. I am going to pass it over to Alvaro. One minute, please. Thank you, Mónica. Just to recall the question regarding the operating income generated in the fourth quarter that amounted to $20.9 million. Álvaro? Okay. In the case of Celepsa registered PEN 6 million regarding the negative goodwill of the acquisition of Termochilca. Additionally, Celepsa registered PEN 2.3 million from a provision that they eliminate about the maintenance of the Carpapata hydroelectric. In the case of SKANON, they received PEN 1 million regarding sales of ready-mix trucks from Desert Ready Mix. In the case of Ecuador, they had PEN 1 million regarding another elimination of a provision for the year. UNACEM Chile, PEN 14.7 million regarding the sale of the terreno San Antonio, and there are other numbers regarding other concepts for PEN 3 million. The main things are Celepsa with PEN 8.8 million, PEN 14.7 million from the sale of the land in Chile, and the others are recurring incomes that are normally for the business. Thank you, Álvaro. Rob, I don't see any other questions from the webcast. There are no questions on the phone at this time either, Mónica. Great. I will pass it over to Pedro for his closing remarks. I would like to invite all our shareholders to our next annual shareholders meeting to be held March the 27th. We are looking forward to seeing you there. Thank you very much for your time this morning, and please do not hesitate to reach out to Mónica should you have any follow-up questions. Have a great day. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.