Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q4 2022 Earnings Call Transcript

Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good day, everyone, and welcome to the Cementos Pacasmayo Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Claudia Bustamante. Ma’am, the floor is yours.

Claudia Bustamante: Thank you, Matthew. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Ferreyros, 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. Pereira 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. Descriptions 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 Nadal.

Humberto Nadal: Thank you, Claudia. Welcome, everyone, to today’s conference call, and thank you for joining us today. This quarter, we continue to focus on our strategy, which has led us to deliver outstanding results. During 2022, we achieved over 9% growth in revenues and a similar level growth in EBITDA year-over-year. Moreover, our profit for the year increased a substantial 15.4%. This is especially relevant considering that 2021 was already an all-time record year. We are convinced that these levels of profitability are possible because of our focus on three main pillars: sustainability, digital transformation and innovation. We will continue to focus on these aspects to deliver the best possible results especially to the staff and need uncertain times.

As we have mentioned before, operating and sustainability at our core is key for our company’s future and to fulfill our purpose. On the environmental front, we have signed the Peru roadmap to the net zero, committing ourselves to implement the necessary actions as an industry to reach net emissions of 520 kilograms of CO2 per return on cement by 2030. To achieve this, we need to commit ourselves to work — to working on two fronts: first, by promoting the regulatory framework that allows a minimum of 12% of coprocessing; and secondly, and most importantly, by continuing the reduction of our clinker factor industry average of 70%. On this last issue, even though our clinical factor of 73% is already below the natural average of 76%, we are working hard on continuing this reduction.

The cement and concrete results center finance completed by Pacasmayo has already worked on a cement that at the lab level can have a clinker factor of under 55%. We expect to have this cement ready for market in 2023. front, I’d like to briefly mention that our procedure is very much aligned with our purpose. During this year, we began with a pilot to provide 935 minutes of the area of influence with improved lending conditions. As you may know, many of the houses in the poor areas in Peru to have proper floors in the houses. They have their floors. These are sources of infection, the have parasites, bacteria and insects across respiratory diseases, anemia, among others. This project looks to provide them with cement for the floors and to build together a better home.

We look forward and very excited to scale this project in the near future to be able to improve the lives of more people. Moving on to digital transformation. For the past couple of years, we have been working on enhancing our business model through digitalization. We’ve developed digital tools in our different clients and stakeholders. We are developing our own marketplace to bring together construction companies, hardware stores and the final customer, incorporating a new value proposition. For construction companies, we remain very focused on serving our tools that aims to transform connectivity to our clients, maximizing efficiency in the positive management and increasing substantially the user experience. And finally, for retail consumer, we have enhanced MundexPerto, our ecosystem of vital solutions.

Coming for us to adapt very quickly to new technologies in order to respond to the new needs of the format builders, consumers and clients. expert is a platform that is designed to promote the professional development of format to virtual tools as well as training and custom-made consultancies. Perto and Nissan is targeted to the hardware stores and has a wide variety of selling opportunities as well as inventory control tools, order stocker benefits and promotions. We will continue to both enhance our current tools and develop new ones that support and maximize our company’s strategy and future growth. Finally, we are convinced that innovation is absolutely key to supporting our vision of becoming a leading provider of building solutions, contributing with the progress and development of our country.

To achieve our 2025 goal of deriving 25% of our revenues from nontraditional solutions we are innovating in both new products and services. We continue to seek for innovation in our products to develop building solutions that are fit for infrastructure products since it’s an area that’s still lacking in Peru. We also want to extend the solutions to the self-construction segment since it remains as the largest proportion of our income. During 2022, we started developing IU, a platform that helps small retail consumers in directly save money to anticipated sales so they can reach the magma needed for the construction project. We believe that by staying close to our clients, being flexible and ramping fast, we’ll be always able to anticipate the needs and continue creating and selling value.

I will now turn the call over to Manuel to go into more detailed finance.

Manuel Ferreyros: Thank you, Humberto. Good morning, everyone. Fourth quarter 2022 revenues were PEN553.8 million, a 1.7% increase when compared to the same period of last year, mainly due to the increased prices of baggage cement in line with increased inflation. Similar, gross profit increased 1.1% when compared to the fourth quarter of 2021, and consolidated EBITDA was PEN121 million in the fourth quarter, a 14.5% decrease when compared to the same period of last year, mainly due to a nonrecurring expense this quarter. Despite this increase expenses, EBITDA this quarter was similar to previous quarters of this year. During 2022, revenues increased 9.2%. Gross profit increased 16.6% and consolidated EBITDA increased 8.8% when compared to the same period of last year, mainly due to increased sales and decreased costs.

As we were able to optimize the use of our own clinker and, therefore, use less imported clinker. Turning to operating expenses. Administrative expenses for the fourth quarter of 2022 increased 19.8% and 16.1% for the whole year compared to the fourth quarter and the whole year of 2021, respectively. This increase is in line with higher sales and increased salaries as well as an increase in personnel expenses due to the union bonus that is negotiated every few years and has a larger impact during the first year as well as a higher employees’ profit share. Selling expenses during the fourth quarter of 2022 increased 55.7% when compared to the same period last year, mainly due to an increase in personnel expenses derived from larger sales force as well as a significant savings in advertising and promotion in the fourth quarter of 2021.

During 2022, selling expenses increased 26.6% when compared to 2021, mainly due to the higher salaries and the union bonus and higher profit share, as mentioned before as well as an increased provision for tape payment. Moving on to different segments. Sales of cement increased 8.7% in the fourth quarter of ’22 and the 13.5% during the second — during the full year 2022 when compared to the same period of last year. As bagged cement sales continue to be the biggest driver of demand, gross margin decreased 2.6 percentage points this quarter when compared to the same period of last year, mainly due to the increase in the price of coal and electricity. However, during 2022, gross margin increased 1.4 percentage points as we were able to mitigate some increase in the cost of raw material with lower use of imported clinker and optimization of our own capacity.

During the fourth quarter of 2022, concrete payment and mortar sales decreased 13.1% and 11.1% in the whole year when compared to the same period of previous year, mainly due to a significant slowdown in sales volume for private and public works. However, gross margin increased 2.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 and 2.9 percentage points in the whole year 2022 compared to 2021, mainly due to our decision to focus on higher-margin services. Sales of precast materials during the fourth quarter of 2022 and the whole year decreased 19.8% compared to the same period of last year and 13.6% in 2022 compared to 2021, respectively, mainly due to a decrease in sales volume for the public sector.

Gross margin was negative in the fourth quarter of 2022, and 2022 mainly due to the adjustment of missing inventories carried out during this year, which led to an increase in cost as well as higher prices of raw material and low dilution of costs. Heavy precast fixes and demand when we sold for lack of larger projects. Net profit for the fourth quarter of 2022 decreased 24.6% compared to the fourth quarter of 2021, primarily due to a decreased operating profit as nonrecurring expenses increased this quarter. During 2022, profit for the period increased 15.4% compared to the whole year 2021, primarily due to the increased revenues as well as a higher operating profit since we were able to streamline our cost despite some inflationary pressure in prices of raw material.

In terms of debt, our debt-to-EBITDA ratio was 2.9, which is a level we feel very comfortable with it. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bonds without incurring any additional costs due to exchange rate effects. As we mentioned before, we had already obtained a low to pay for this bond, so our current debt levels remain unchanged. To summarize, this quarter results show our resilience and ability to deliver continuous profitability. Now can we now please open the call to questions.

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Q&A Session

Operator: . Your first question is coming from Tunde Ojo from Harding. Your line is live.

Babatunde Ojo: Thank you. So, I have a couple of questions and maybe I’ll just ask a few and get back on the queue, just to allow others. But the first is on your use of imported clinker, right? You sort of reduced the use of import at Linker this year. But I wanted to understand your strategy going forward regarding that because it sorts of dilutes margin each time you use it. Do you have a plan to completely stop us an imported clinker in the near future? And what volume of inventory do you have left? And are you going to use it in the coming year 2023?

Humberto Nadal: Sure. As you know, we are in — towards the end of the expansion of our Pacasmayo plant. This would be operative third quarter of this year. The reason we have been imported clinker was because demand in 2021 rose abruptly. But going forward, we’re going to — we have completely stopped drinking ports as we speak. And we see absolutely no need in the future because our new will come in, in our third quarter of this year. And at this point, we hold around 200,000 tons of imported clinker, which are security stock.

Babatunde Ojo: 200,000 tons, right?

Humberto Nadal: Yes, 200,000.

Babatunde Ojo: Okay. And are you going to use that this year? And how would that compare with last year?

Humberto Nadal: Yes. I mean we’re going to use it, I mean towards the coming months before we go into operation. And the average cost is similar to what we’re using towards the end of last year.

Babatunde Ojo: Okay. All right. Fair enough. The other question I have is on your volumes, which sort of declined this 2002 financial year for the reason you mentioned, it was sort of high in the previous year. But I was wondering — because when I look at the data you shared in your press release, you have the central and the Southern region still growing despite coming from a higher base as well, but the not impact you sort of had a decline last year. And I was wondering why are those areas growing as opposed to you a day competing with your products. And you also mentioned some reconstruction projects having less shipments than — are those construction points is done right now? Or do you used to have much to go? Because I was just wondering where we are in those implementations. Thanks.

Humberto Nadal: Yes. Sure. I mean, you have to — when you see the numbers of growth, you have to go back more than last year, have go to back in the last two or three years. What happened was we grew 42% on the previous year. So even though we decreased 5% on the net of the last two years, we were up by 30-something percent. The other regions of the country did not grow 42%. So of course, they’re capturing up, if uses the math over the last three years, we have grown much more than the south and understand the regions. Going to the construction, I mean, reconstruction of the north is something that has been going on and off over the last few years, and there’s a lot still remaining. The thing it has to do with the fact that the government has to approve by packages.

We finish a package. Now they have to approve, I believe there are two or three more packages coming in. And it all depends, I mean, how quickly the government based on the G2G agreement can get these contracts up and running.

Operator: Your next question is coming from Francisco Suarez from Scotiabank. Your line is live.