Earnings Call: Q3 2023

Nov 20, 2023

Summary

Q3 EBITDA fell 13% YoY as weaker volumes, lower margins and weather-affected hydro output offset revenue growth and Termochilca gains. Tehachapi expands U.S. capacity, while 2024 guidance targets mid-teens EBITDA growth.

Greetings. Welcome to Grupo UNACEM third quarter 2023 results conference call. At this time, all participants are now 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, Mónica Paucar, Investor Relations Manager. Please go ahead. Thank you. 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 third quarter of the year, including news related to our recent acquisition. Later on, Álvaro Morales, UNACEM Corporate CFO, will present the third quarter financials in detail. Today, Alicia Campos, our Chief Strategy Officer, will be also joining us. 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, Monica. Ladies and gentlemen, good morning. It is a pleasure once again to share with you our quarterly performance. The last quarter has been a reflection of a decelerating economy throughout the Latin American region, with Peruvian GDP declining 1.29% in September, bringing accumulated GDP decline down to 0.63%, and Chilean GDP almost flat the third quarter of 2023. Although there is no recent data from Ecuador, evidence in the construction market shows a stagnant economy, most likely a result of political uncertainty. Once again, the U.S. market has helped offset the slowdown, with GDP increasing 4.9% in the third quarter of 2023. Our consolidated EBITDA for the third quarter 2023 amounted to PEN 355 million, down 13% year-over-year, with a margin of 20.3%, down from 25.9% in the third quarter of 2022. This drop in profitability is explained mostly by our Peruvian operations, with cement and ready-mix volumes in negative territory as a consequence of tempered self-construction and no new infrastructure projects. On the energy side, the unseasonably dry weather has affected our hydroelectric operations, with marginal costs increasing to $166.18 per megawatt hour by September, up 853% year-over-year from $17.41 per megawatt hour in September of last year. On the flip side, the incorporation of Termochilca in our portfolio has offset the hydro generation decline, with our overall energy EBITDA for the quarter reaching PEN 38 million, up 27% compared to the third quarter of 2022. As we have explained in the past, Termochilca acts as a natural hedge to our pure hydro generators, balancing the negative impact of unseasonal weather. Our Ecuadorian operations also accounted for part of the decline, with both cement and ready-mix volumes falling 16% year-over-year. The decrease in these operations is partly offset by positive results in the U.S., backed by a strong market in Arizona in spite of some production issues on our end. Regarding our U.S. operations, as we announced recently, we closed the acquisition of the Tehachapi on October 31st. Final asset value amounted to US$350 million, which was financed with a $345 million U.S. syndicated loan with a three-year tenor. The excess will enable us to invest in maintenance and expected working capital needs. We are very excited of the potential this operation brings to our portfolio, doubling our capacity in the United States, expanding our Arizona market to include Southern California as well as Nevada, and opening the door to economies of scale and potential synergies between our two plants. We are currently in the initial stages of integration, but can report so far that volumes in the first half of November averaged 2,340 metric tons per day, including sales from the Fontana terminal, which is 200 kilometers south of the plant. This compares with approximately 1,800 metric tons per day at our Drake plant during the third quarter of 2023. As I have mentioned recently, we expect to close the year with EBITDA levels in line with last year's and revenues at record levels. During 2023, we will incorporate eight months of Termochilca operations and two months of Tehachapi operations. Finally, we are optimistic for 2024 as, in spite of being conservative on the macro environment in several of our markets, we have been implementing efficiencies and strategic initiatives at our largest operations and expect the full year of our inorganic expansions to render incremental EBITDA in the range of $30 million-$40 million, bringing consolidated EBITDA growth in the mid-teens. That will be all on my side. Thank you very much for your attendance this morning, and 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. I am glad to go through the highlights of our third quarter, as well as year-to-date consolidated financials. Our consolidated revenues during the third quarter increased by 11.4% compared to the third quarter of 2022. This was driven mostly by the incorporation of Termochilca to the portfolio. Our cement and ready-mix Peruvian operations show a decrease in dispatches compared to the third quarter of 2022. Nevertheless, cement volumes improved by 6.15% compared to the second quarter 2023, demonstrating the resilience of self-construction demand in the central area of the country. Likewise, year-to-date consolidated revenues increased by 7.9%. In Peru, cement dispatches registered 1.5 million tons, a decrease of 13.8% versus the third quarter of 2022. The comparable base was particularly tough as the third quarter of 2022 posted record volumes for UNACEM Peru, reaching 1.7 million metric tons. Likewise, year-to-date dispatches reached 4.5 million metric tons, an 11.7% decrease compared to the same period in 2022. Our area of influence maintained increasing volumes up until October 2022, while the rest of the country had declining cement demand since early the second quarter 2022. In other words, we have tougher comps for this period. Nevertheless, UNACEM maintains a solid market share of 48.5% year-to-date. Our ready-mix companies in Peru recorded lower volumes of 6.8% during the quarter, 597,000 cubic meters compared to the 640,000 cubic meters of the third quarter 2022. Year-to-date, volumes were 1.3% higher compared to the first nine months of 2022. As we anticipate, the most important ongoing infrastructural projects already contracted are keeping pace, but no new projects have started operations. Celepsa third quarter 2023 volume was 2.4% lower than the third quarter 2022. Energy sales reached 485 gigawatt hour. The lower rainy season impacted hydropower production. Year-to-date, Celepsa energy sold was slightly higher, 0.6%, with a total volume sold of 1,506 gigawatt hour, versus 1,497 gigawatt hour in the first nine months of 2022. Termochilca recorded 715 gigawatt hour sold during the third quarter. Market conditions and the current price levels of the grid allowed the company to close its first full quarter in the group with outstanding results. Moreover, Termochilca compensated the contraction of our hydropower platform and proved our investments rational of lowering our energy and risk. UNACEM Ecuador third quarter cement volume decreased 15.7%, with 321,000 tons sold compared to the 381,000 tons sold in the third quarter 2022. Sequentially, volumes improved by 5.7% from the second quarter of 2023. Year-to-date, volumes in Ecuador were 6.7% lower. We expect that now that political environment is more stable, Ecuador volumes should maintain a pace of above 300,000 tons per quarter. Furthermore, the third quarter ready-mix volumes were 15.7% lower. Year-to-date, volumes were 2.6% lower compared to 2022. Drake Cement reported 166,000 metric tons of cement sold during the third quarter 2023 versus the 168,000 metric tons in the third quarter 2022, a decrease of 7.6%. The contraction in the volumes is explained due to some unexpected technical difficulties in the plant that reduced its production capacity. The market remains strong, and our ready-mix operations reached 252,000 cubic meters, 9.7% higher than in the third quarter 2023. The volume of aggregates was 40.1% lower, with 481,000 metric tons sold. Note that we are currently operating only one quarry, and the other quarry was closed, which was beneficial as it was cash flow negative. Therefore, this year's reduction in volumes is actually positive for U.S. EBITDA results. In addition, cement volumes for the first nine months of the year were 9.5% lower than in 2022. Ready-mix was 1.6% higher. Aggregates recorded 1.3 million tons in the first nine months. The market trend in Arizona keeps solid, and prices are increasing and reflect the robust performance of our U.S. operations in our year-to-date results. UNACEM Chile had cement dispatches of 123,000 tons during the quarter. Furthermore, cement dispatches year-to-date recorded 369,000 tons. As mentioned in our previous conference call, overall construction markets have decelerated. However, we have managed to increase market share and ramp up the utilization rate of both plants. Ready-mix dispatches in the third quarter reached 161,000 cubic meters, 30.2% lower than in the third quarter 2022. Year-to-date ready-mix volumes were 28.1% lower as of September 2022, with 521 cubic meters dispatched. We expect that the following months' dispatches will recover as some new infrastructure projects begin operations. Consolidated cost of goods sold increased 21.5% in the third quarter 2023 due to lower sales volumes and the effect of higher fuel costs, mainly in the cement and ready-mix business units. The increase in prices in Peru marginally offset higher fuel and raw material costs, resulting in a lower gross margin of 20.5% compared to the 27.1% achieved in the third quarter 2022. Year-to-date consolidated cost of goods sold increased 12.8% compared to 2022, while gross margin was 24.8%, lower than the 27.8% achieved as of the first nine months of 2022. Our administrative expenses for the quarter increased 11.5% due to higher personnel expenses, advisory, IT expenses, and Termochilca. Selling expenses were 3.4% higher, in line with the volume sold. Other income and expenses net showed a variation mainly due to non-recurring income from the closing adjustment of quarries and natural gas savings in UNACEM Peru, added to the sale of mixer trucks in the U.S. Similarly, year-to-date administrative expenses were 12.8% higher. Selling expenses were only 1.8% higher. Other income and expenses net in the first nine months of 2023 increased due to the last phase of the voluntary retirement program and some non-recurring consultancy fees. For the reasons explained before, our consolidated operating profit in the third quarter 2023 was 225 million soles, a figure 22.7% lower than in the third quarter 2022. Year-to-date consolidated operating profit was 11.3% lower compared to 2022. Consolidated EBITDA in the quarter was lower than in the third quarter 2022, reaching 354.9 million soles, compared to the 406.5 million soles in the third quarter 2022. EBITDA margin in the quarter was 20.3% versus 25.9% during the third quarter 2022. Once again, this decline is mostly explained by cement and ready-mix lower gross margin and the shift in the energy mix towards thermal generation. Last 12 months EBITDA was 7.2% lower than last 12 months EBITDA recorded in the third quarter 2022, mainly explained by lower volumes across the main business units and economies of scale, with higher average prices that partially offset the effect of the higher cost of goods sold. Administrative expenses were higher due to higher personnel and advisory expenses. Consolidated net debt was 3.9 billion soles. The net debt/EBITDA ratio was 2.6. Therefore, we are complying with our leverage target, which is below the three times limit. By year-end, once the acquisition of Tehachapi is reflected in our balance sheet, we expect the ratio to go up to approximately 3.8 times. By the end of 2024, with a full year consolidating Tehachapi, we should be close to our target leverage range. Gross debt in soles increased as a result of new debt for Termochilca acquisition and some working capital loans, mainly in UNACEM Peru and Celepsa. Foreign exchange exposure on total debt at the end of the third quarter 2023 was 20.5%. Short-term debt maturities represent 51.2% of total debt. We should migrate to a long-term structure in the upcoming months. Financial expenses increased by 34.5%, reaching PEN 67.4 million in the quarter, and by 35.9%, reaching PEN 195.8 million in the first 9 months of the year, due to higher debt levels and higher average interest rates. Foreign exchange registered a loss of PEN 50 million in the third quarter 2023 versus a loss of PEN 40 million in the third quarter 2022, mostly explained by the higher debt in US dollars due to Termochilca acquisition and the FX rate in the comparison period. In the first 9 months of the year, a foreign exchange passes from a gain of PEN 10 million in the third quarter 2022, to a loss of PEN 80 million in the third quarter 2023. Net profit on the quarter was PEN 78.6 million versus PEN 162.7 million in the third quarter 2022. As of the first 9 months of the year, net profit was PEN 378 million as of September 2023 versus PEN 465 million in the same period of 2022, which is explained by the factors mentioned before. In terms of our ongoing investment as of the third quarter 2023, CapEx recorded PEN 369 million, higher than the PEN 262 million in the third quarter 2022. The main investments are related to the project of new automated packaging system and reinforcement of the multisilo in UNACEM Peru, the integral project in the new mill in Drake Cement, mixer trucks in UNICON Peru, kiln number 2 optimization project at UNACEM Ecuador, which will increase capacity marginally on the back of efficiencies in the production process, and the new mobile plant of Prefabricados Andinos in Chile. We expect an increase in our CapEx in the following quarters, as we should recover the pace on the execution of some important projects, mainly related to our environmental strategy, and 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. Operator, we can now proceed to the Q&A session. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We will pause for a brief moment to poll for questions. There are no questions from the phone line. I would like to turn the call back over to Mónica Paucar for web questions. Thank you, Cheryl. We will give our attendees a couple of minutes so we can receive the questions through the webcast if we have some. Let's give them a couple of minutes, please. We have one question from the webcast. It comes from Bruno Preusta. Bruno, Álvaro wants to know if we have any guidance about CapEx that we would like to allocate in 2024. Thank you, Bruno, for the questions. Right now, we are in the process to prepare the budget for next year, so I don't have, in this moment, a number for CapEx, but the idea is that we need to invest in a CapEx of sustainability in the cement plants mainly, in all our operations. We will be able to have a number at the end of this month, where the budgets are going to be ready. We have a budget of PEN 300 million for 2023. We expect to improve that for next year because of the delay in permits and license in Peru, we delay some important investments that should be start next year. We expect to have higher CapEx levels for 2024. Thank you. We have another question from Giovanni Sanchez. I will handle that to Alicia. Giovanni wants to know if we can give him some guidance regarding dispatches of cement in Peru and Ecuador for next year. Hi, Giovanni. Good morning. Yes, in terms of 2024, for Peru, we're expecting an increase very much in line with the expected recovery of the construction sector, around 2%. In the case of Ecuador, we're expecting a recovery of around 4%. Thank you, Alicia. One more follow-up question from Giovanni. He wants to know which kind of technical issues we have had in Arizona in the last quarter, and that gave us a decrease in our cement production. What is the status as to date? Álvaro, can you help us with that? Yes. Thank you for the question. What happened in the cement plant of Arizona, Drake Cement, we have problems with the finish mill. Finish mill is that, mix the clinker with gypsum and produce the cement. The problem is that the market is so demanding product that we cannot stop the grinding mill in order to make a full maintenance of this equipment. What we are doing is we are producing as much as this machine can produce and expecting that the new mill will replace it, and we can stop the old mill in order to make the correct repairments of this equipment. We are producing around 10% lower, but this machine can produce. That is the problem we have in this quarter. Thank you, Álvaro. The next question comes from Gerard Ford. He wants to know what is our guidance for gross margins for the fourth quarter 2023, and if we already see a normalization of marginal costs, of the energy business. I am going to jump up before I hand it to Alicia. We are not going to give guidance regarding margins for the fourth quarter 2023, Gerard, as we will not take that one this time. Regarding the marginal cost, I will handle it to Alicia. Hi, Gerard. On the energy business, we are expecting to recover the more normalized weather with the rains coming back, and therefore more injection from our hydro generation capacity. To your point, yes, we are expecting a normalization on marginal cost from the fourth quarter onwards. Thank you. We have one question from Bianca Venera. If we can elaborate a little bit more regarding the non-recurrent income that we mentioned, from natural gas and the closing quarries that we have during the third quarter. Álvaro, can you help us with that one? Yes. About the quarry, the quarry is a provision. The provision is that we were a higher provision that we need in order to, in the future, make the close of quarries. The idea is that we reevaluate this provision, and we finish the amount that we have in our financial statement was higher than what's needed. So it's only a provisions correction. The other question, Mónica? Yes, regarding the savings on natural gas. Sorry, yes. The idea is that in the quarter, we have some excess gas capacity that you have to take-or-pay. So you don't have possibilities to not pay that what you contract. The idea is, in this quarter, we can resell this gas to electrical company, and we reduce our cost of natural gas in our production process. Thank you, Álvaro. I don't see any other further questions in the webcast. I'll hand it over to Pedro for his closing remarks. Well, Mónica, thank you very much for your time this morning. Please do not hesitate to reach out to Mónica should you have any follow-up questions. Have a great day. Thank you all. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.