Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q3 2022 Earnings Call Transcript

Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q3 2022 Earnings Call Transcript October 26, 2023

Humberto Nadal Del Carpio: [Call Starts Abruptly] different organizations. We are extremely proud of this achievement since Pacasmayo is the only company in the top ten that does not have a national presence. We truly believe it is a reflection of our constant work in the past 65 years. Reputation is a value that stakeholders attribute to a company based on their perception and interpretation of the image that the company communicates and projects over time. Therefore proper reputation depends on the actual activities and tangible results that stakeholders experience. We take this recognition with great honor and responsibility, and we are absolutely committed to continue delivering a positive experience to all of our stakeholders.

As I’m sure you’re all aware of already, a new forecasting for 2024, currently with a high probability of being a moderate phenomenon. We have already experienced the effects of inclement weather earlier this year with Cyclone Yaku that among other things interrupted part of the road that connects the main [indiscernible] with our plant. Thanks to our conservative inventory policy, we have not been affected by the interruption, but we immediately started planning a solution. We are currently working with the government to install two modular bridges supported by concrete foundations and brick styles. In addition, two detours are currently being built to provide transit continuity to the ongoing works, which should be finished by the end of next month.

A pile of cement on the top of the wheelbarrow in construction site.

The whole project has been planned to minimize the risk of having to halt the construction because of heavy rains. Therefore, the schedule foresees a completion of the underground work by November when there is lower probability of heavy rains, and only the surface work will remain until the end of January, which is the expected completion date for the whole project. We are very confident that our prevention and risk management strategy, as well as our execution capacity, will lead us to restore full transit according to our schedule. As we have previously mentioned, this year we launched the EcoSaco, a cement bag that completely disintegrates with the concrete mix, generating zero waste. For us, this is much more than a simple cement bag. It’s a solution that has the potential to revolutionize the market, particularly the self-construction segment.

As with any transformational change, it requires and will require much effort in order to gradually change culturally established paradigms and consumer habits. This is precisely what we are both glad and proud that the EcoSaco won the Semana Económica ESG Sustainability Prize this week, both in the sustainable product innovation category and the grand prize, which is the all-around category, awarded to the project with the greatest environmental, social, and economic impact. The EcoSaco is also among the 11 finalists in [indiscernible] LatAm in two categories. These awards and nominations are not only a great sign that we are making a strong and impactful contribution, but also outstanding platforms that allow us to continue educating consumers and effectively communicating the benefits of this great product.

Finally, I would now like to mention that I am extremely honored to represent Pacasmayo as a board member for the GCCA, The Global Cement and Concrete Association, for the upcoming two-year period. I take this position with great appreciation, but also with an enormous level of responsibility that it entails. Latin American companies face a great ethical dilemma, as there is a pressing need to reduce carbon emissions and protect our planet, but also an equally pressing need to provide homes, adequate infrastructure, and overall development to our people. We cannot focus on one over the other. We need to creatively think of solutions that will target both issues and this is the only path to achieve true and I mean true sustainable development.

See also 11 Best Low Risk Index Funds to Buy and 13 Cheap Stocks to Buy Today According to Media.

Q&A Session

I will now turn the call over to Manuel to go into more details on financial analysis.

Manuel Ferreyros Peña: Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our third quarter 2023 revenues were PEN516.7 million, a 6.7% decrease when compared to the same period of last year. Gross profit, however, increased 5.2%, achieving PEN174.6 million, mainly due to lower costs as we discontinue the use of imported clinker now that our new kiln is fully operational, lower cost of coal, as well as higher average prices of cement sold. Consolidated EBITDA also increased despite the decreased revenues, reaching PEN128.9 million this quarter, a 3.2% increase when compared to the third quarter of 2022. For the first nine months of the year, revenues decreased 9.1% when compared to the same period of 2022, mainly due to lower levels of public and private investments, as well as the negative impact of Cyclone Yaku during the first quarter of the year.

However, gross profit was roughly aligned with the same period of the previous year and consolidated EBITDA decreased only 2.9%, mainly due to decreased revenues, partially offset by the lower cost mentioned above. Nonetheless, EBITDA margin for the first nine months of the year increased 1.6 percentage points when compared to the same period of the previous year. Turning to operating expenses, administrative expenses decreased 5% in the third quarter of 2023 compared to the third quarter of 2022. And this is mainly due to a temporary decrease in personal expenses, as well as lower third-party service. During the nine months of 2023, administrative expenses increased 2.9% compared to the nine months of 2022, mainly due to an increase in salaries, in line with inflation as well as in software licenses.

Selling expenses increased 2.9% during this quarter when compared to the same quarter last year, mainly due to an increased web maintenance services. During the first nine months of the year, selling expenses remained in line with those of the same period last year. Moving on to the different segments, sales of cement decreased 4.2% in the third quarter of 2023 compared to the third quarter of 2022, and 5.2% in the first nine months of the year when compared to the same period of previous year, mainly due to decreased demand from the self-construction segment, from the record level reached in the post-pandemic times. However, the gross margin increased 4.5 percentage points this quarter and 2.7 percentage points during the first nine months of the year when compared to the third quarter and nine months respectively, mainly due to the cost optimization, as we have now discontinued the use of imported clinker, as well as lower cost of raw materials such as coal and higher average price of cements sold.

During this quarter, we are glad to report that sales of concrete, pavement and mortar increased 3.4% when compared to the same quarter of last year, mainly due to an increase in sales of pavement, and as we began dispatches for the Piura airport and other mining works. During the first nine months of the year, sales of concrete, pavement and mortar decreased 16.2% when compared to the same period of the previous year, mainly due to an increase in public and private investments partially offset by the work executed this quarter. Gross margin decreased 5.3 percentage points during this quarter compared to the same period of last year, and the 5.1 percentage point in the nine months of this year compared to the same period of last year, mainly due to a lower dilution of fixed costs.

Sales of precast material this quarter also decreased as public and private works are still at historical low levels. The decrease in sales was 18.3% when compared to the third quarter of 2022 and 31.9% during the first nine months of the year when compared to the same period of last year. Gross margin was still negative mainly due to a low dilution of fixed costs as precast demand has installed for lack of private and public projects, as well as the effects of the flooding during the first quarter of the year. Net profit increased 4.1% this quarter when compared to the third quarter of last year, mainly due to the cost efficiencies as we mentioned before, as well as a slight decrease in expenses. During the first nine months of the year, net profit decreased 3.6% when compared to the same period of 2022, mainly due to the lower revenues partially offset by the imported cost structure mentioned before.

However, net margin for both the third quarter and the first nine months of the year increased 0.9 percentage points and 0.5 percentage points when compared to the third quarter and the first nine months of last year. In terms of debt, our debt-to-EBITDA ratio was 3.3 times, which is a level we respect to progressively decrease as we start paying the club deal and the EBITDA increases since we currently do not plan to incur an additional debt. To summarize this quarter results has started to show the benefit of focusing on cost management and preparing for an improving demand environment. We are confident that we will still continue delivering positive results during the rest of the year. Thank you.

Operator: Thank you. We will now move to the question-and-answer section. [Operator Instructions] So we have a question from Eduardo Vazquez [ph], who is a private investor.

Unidentified Analyst: Excellent presentation. Three questions. Can you give us a dividend guidance for 2023? Number two, considering the extremely low stock price, are you evaluating a share buyback? And number three, are you considering to exclude or call back the investment share class stocks?

Humberto Nadal Del Carpio: Thank you, Eduardo, for your comments and to answer your three questions. In terms of dividend policy, that is something for the board to decide, but I may say that our intention has been over the last years to keep the same level of dividends. So, even though that’s a board decision, that should be in line with the past years. Number two, are we considering buyback? No. And the reason for it right now is that we have been concerned for many, many years about the liquidity of the stock. And if we were going to do a buyback that would only harm the low liquidity we already have. And number three, in terms of the investment shares, many years ago, we did a buyback. The company right now controls around 90% of the investment shares. And for the time being, we are not going to do any additional moves on that either.

Operator: Thank you. [Operator Instructions] We’ll just wait another moment or two for any further questions to come in. We have another question. This is from Ernesto Sanchez from PRIMA.

Ernesto Sanchez: Given the finalization of the investment in the Kiln 4, how much CapEx do you expect onwards on a quarterly basis? Any specific reason for the decrease in personnel expenses and third-party services for Q3 2023? And finally, do you expect to maintain similar SG&A expenses or a normalization for the next quarters?

Humberto Nadal Del Carpio: Yes, sure. I mean, I think Manuel mentioned that after Kiln number 4, we have no extraordinary CapEx. So we’re going to go back to what we call the sustaining CapEx, which is around PEN100 million per year. In terms of [indiscernible], I mean, we’re always, for cost optimization and we’re also going to try to keep running a very, a very tight chip. And can you repeat the last part of the question, please?

Ernesto Sanchez: Yes, no problem. Do you expect to maintain similar SG&A expenses or a normalization for the next quarters?

Humberto Nadal Del Carpio: Yes, the answer will be yes.

Operator: Perfect. Thank you. Our next question comes from Bianca Venegas from Credicorp Capital.

Bianca Venegas: Can you give guidance on dividends and CapEx for 2023? And what are you expecting in terms of market dynamics for the following months in terms of self-construction and public investment?

Humberto Nadal Del Carpio: Yes, like I mentioned before, I think dividends, even though it’s our board decision and I also have to make that disclaimer, we should keep in line with the policy of the previous years. And CapEx, like I mentioned before, I mean, it should be around PEN100 million per year, which is sustaining CapEx. In terms of market dynamics, we are seeing, and we anticipated this in our last call, that the second semester will be much stronger. That’s why the volumes in the third Q has been around 15% higher than the second Q. We think we should close the year on the levels of the third quarter and that gives us a very promising start for the next year. I think self-construction will remain strong as long as agriculture and fishing recovers in the north and public investment will rally behind the prevention jobs…

Operator: Perfect. Thank you. [Indiscernible] Can you give us more detail about what’s included in other operating expenses in this quarter?

Manuel Ferreyros Peña: Yes, thank you for the question. Basically, [indiscernible] because as Humberto mentioned, we’re donating the construction of the bridge. So basically, it’s expenses of [indiscernible]. We will have expenses this quarter and next quarter.

Operator: Okay, thank you. Gamze Alpar from Impera Capital asks, could you please elaborate on how you see demand for 2024?

Humberto Nadal Del Carpio: That’s a very good question and I try to – it’s very hard to predict when we have an economic and political environment that is so complicated in Peru. But we may not be optimistic. I mean, we’re going to probably close this year a little bit under 3 million tons for these purchase. And hopefully, next year we’ll be able to jump back on the – over the 3 million ton level. But like I said, I mean, it’s all going to depend on how the country goes so far. I mean, the indicators of GDP growth and everything are not too optimistic, but I think we’ll be fine.

Operator: Okay, thank you. We have one more question from Marco Antonio Mejía Peñalva from Kallpa. He asks, thank you for the presentation. My question is about what are the other operating expenses of PEN10.3 million in the income statement, please? Thanks.

Humberto Nadal Del Carpio: Yes, like Manuel mentioned, I mean, we’re all about preventing risks. And since [indiscernible] will be coming, even though it’s going to be a medium-strength phenomenon, we have donated the [indiscernible] bridges and roads and everything and that’s extraordinary – extraordinary operating expenses.

Operator: Perfect, thank you. I’m not seeing any more questions. So I will now hand back to Humberto for closing remarks.

Humberto Nadal Del Carpio: Thank you. We stand at a point in time when social, environmental and geopolitical issues at the global level are becoming stronger and more recurrent. Although we may be tempted to feel as if these things are either happening far away from us or seem completely beyond our realm of action, the reality is that discontent and inequality are at the core of this conflict and that doesn’t happen anywhere. The private sector is capable, extremely capable of deep transformational change that can help bridge those gaps. As the Peruvian cement company that operates locally but recognizes its place in global economy, we will continue to focus on evolving our business model so that it is capable of achieving the transformational change that we need to contribute towards the future that is fair, tolerant, resilient, and most of all, sustainable.

I want to thank you all for your renewed interest in our company and as always, we remain sure to have any further questions. Thank you very much for your time today.

Operator: That concludes the call for today. Thank you and have a nice day.