Cementos Pacasmayo S.A.A.

Good day, ladies and gentlemen, and welcome to Pacas Mayo's fourth quarter 2020 earnings conference call. At this time, all participants are in listen-only mode, and please note this call is being recorded. At the conclusion of the prepared remarks, we will conduct a question and answer session. I would now like to introduce the host for today's call, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Thank you, Catherine. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer, and Mr. Manuel Ferreiro, 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. Ferreiro 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, needs, 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 Navarrete.

Thank you, Claudia. Welcome, everyone, to today's conference call. We hope all of you and your families continue to stay safe during these difficult times. This quarter's cement shipments reached unprecedented levels once again. The 37.2% year-over-year growth in cement sales volume is absolutely remarkable, especially considering last year's volumes were already very strong. This significant increase in sales also resulted in an all-time high quarterly EBITDA levels of 128.1 million soles. The strong second half of the year allowed for yearly cement sales volumes to decrease only 1.2% compared to 2019, despite over two months of virtually no sales, and definitely much better than we could have expected when the pandemic started. This trend has been sustained since June 2020, and we strongly believe we will continue to see strong growth in 2021. One of the reasons to be confident in 2021 is the execution of infrastructure related to the reconstruction plan in Northern Peru after El Niño had a devastating impact in 2017. As we already have mentioned in previous quarters, last June, the Peruvian government signed a government-to-government agreement with the United Kingdom to execute 7 billion solids of this reconstruction plan during the next two years. Last week, the Authority for Reconstruction announced a public bid for a group of projects that adds up to around 2 billion solids added to the $1.6 billion already in execution represent a significant amount of spending, mainly in schools, hospitals, and riverbank defenses, all of which, as you know, are cement intensive. This project will also have boost concrete shares, which have already started picking up this quarter. Even though the fastest peak in demand during 2020 came from the self-construction segment, which consumes mostly back demand, we never lost sight of our vision of becoming a building solutions company with a client as our main focus. Therefore, this year, we focus on strengthening our already existing strategy of selling our concrete to small and medium-sized construction companies, as we realize our largest construction projects, especially those related to private investment, would have a slower recovery. Moreover, diversifying our customer base strengthens our position as we become less reliant on a small number of large projects. Pre-cut sales also had a very strong year, achieving 36.4% year-over-year growth in 2020 despite the two-month halt in operations, mainly from infrastructure projects. We are confident that if we continue to focus on our clients' needs and provide them with innovative, tailor-made solutions, we will continue to grow and advance forward towards our 2030 vision. The world has had to adapt fast in this year, and we are definitely no exception. Many strategies that were in the making were accelerated this year, As you have already mentioned before, we dedicated a great effort and time this year to develop Mundo Experto, an ecosystem made up of digital solutions targeted and customized for different users, such as foremen, hardware stores, and the self-builder. This year, the Good Employers Association of Peru had a special addition to the pandemic called Leading the Change in Adversity. We're proud to say that Pacas Mario, because of Mundo Experto, was an outstanding company in the leadership category in business reinvention. which highlights immediate response capacity to ensure business continuity through reinvention of processes, skills, and digital solutions in order to protect the operation and safety of its staff and customers during the pandemic. It gives us great satisfaction that our initiatives are recognized and drives us to continue innovating and developing tools and channels to improve our customer experience. Finally, I would like to mention that we are humbled and greatly honored to be one of the 2,000 companies to be included for the first time in S&P Sustainability Yearbook in 2021. This report is based on the assessment of the most important companies around the world, grounded on the annual corporate sustainability assessment by SAM. This year, 7,032 companies belonging to a total of 61 industries around the world were evaluated in economic, environmental, and social fields. To appear in the yearbook, To appear in the yearbook, companies must score within the top 15% of the industry and must achieve an S&P Global ESG score within 30% of the industry's top performing companies. Furthermore, we have been awarded with the industry mover status as we recorded the strongest year-on-year score improvement in our industry. A few years ago, we started focusing even more on sustainability, understanding that a company has to transform to incorporate sustainability practices systematically in all areas of it in its core. This recognition, especially in these difficult times, motivates us and affirms our commitment to continue our improvement in this path. 2020 has been indeed a very challenging year, one that has tested our resilience, our capacity to adapt, to innovate, and to constantly and permanently think outside the box to find solutions in an ever-changing and unpredictable world. I firmly, strongly believe that our ability to surpass these difficult times stems from our focus on our people and understanding their wants, needs, and motivations to help them transcend. As a result of this, we have motivated people that are committed to our company's purpose and have high levels of engagement. Our true character is often revealed in times of crisis, and I can humbly but very proudly say that the best of us has flourished in this pandemic. I will now turn the call over to Manuel for a more detailed analysis of the financial results. Manuel.

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. Fourth quarter 2020 revenues were 475.3 million soles, a 27.1% increase when compared to the same period of last year, mainly due to the increased baggage demand shipments. Gross profit increased 19.9% in the fourth quarter compared to the same period of 2019, mainly due to increased sales mentioned before, partially offset by higher costs as we have to use imported clinker, lower sales of concrete and lower average price of cement, mainly due to sales mix as we sold more of our lower priced products. Consolidated Evita was handled 28.1 million solids in the fourth quarter of 2020, the highest in the company history. and a 27% increase when compared to the fourth quarter of 2019, mainly due to the increased sales. It is worth noting that even when compared to the third quarter of 2020, which was also very strong, there was a 6.2% increase. This shows a sustained upward trend in the EBITDA, which we hope can continue in 2021. For the full year, Revenues decreased 6.9%, which is remarkable recovery considering that almost 65% decrease recorded in the second quarter of 2020. EBITDA decreased 21.3% mainly due to the halt in operations from over two months, a little bit more than two months, during the government mandate lockdown between March and May. Turning to operating expenses, Administrative expenses for the fourth quarter of 2020 increased 16% compared to the fourth quarter of 2019, mainly due to increase in personal expenses from bonuses and third-party services as a result of increased licenses and other digital tools. Selling expenses in the fourth quarter of 2020 decreased 28.7% compared to the fourth quarter of 2019, mainly due to decreased advertising and promotion and a decrease in allowance for expected credit losses. During the full year 2020, administrative expenses decreased 6.4%, mainly due to the decrease in variable components, such as bonus, and decreased workers' profit sharing because of the company's results of operations. Selling expenses in 2020 decreased 9.7% compared to 2019, mainly due to the above-mentioned savings in advertising and promotion, reduction in viable salaries, and decreased allowance for expected credit losses. Moving on to a different segment, cement, concrete, and precast sales increased 25.5% during the last quarter of this year, compared to the same period of 2019, mainly due to increased sales of back cement as well as precast, offset by slightly lower sales of concrete. Gross margin decreased 1.5 percentage points in the fourth quarter of 2020 when compared to the same period of 2019, mainly due to higher cement production costs as a result of the use of reporting clinker, as well as lower dilution of fixed costs from the slower recovery in concrete sales and slightly lower average price on cement and concrete due to sales mix, as we sold more of our low-price products. For the full year 2020, cement, concrete, and precast sales decreased 8.4% as a result of a government mandate halt on operations in the second quarter. Gross margins decreased 6.2 percentage points, mainly due to increased cost of lower revenues during the lockdown period, as well as the use of imported tinker since the third quarter. Sales of cement increased 31.6% in the fourth quarter of 2020 compared to the fourth quarter of 2019, mainly due to increased shipments of bagged cement, as demand in the north continued booming during this quarter. However, gross margin decreased 2.5 percentage points, mainly due to the increased costs related to the use of imported tinker, because of the sudden increase in demand, as well as lower average prices due to the sales mix. For the full year 2020, cement sales decreased 3.9% and gross margins decreased 6.1 percentage points. Concrete sales decreased 12.7% and gross margins decreased 5.3 percentage points, mainly due to a high comparative basis since last year we reached record sales levels as well as a slower recovery in concrete sales than in bagged cement. However, if we look at quarter-on-quarter figures, concrete sales increased 43.3% compared to the third quarter of 2020, showing a very positive growth trend. For the full year 2020, sales decreased 38.2% and gross margins decreased 17 percentage points. As Humberto mentioned, We are confident that with upcoming shipments to the public sector for the reconstruction and other projects, we will start seeing higher levels of concrete sales and stronger margins. Precast sales increased 62.1%, and gross margins increased 3.4 percentage points during the fourth quarter of 2020 compared to the same period of 2019, mainly due to increased sales for reconstruction-related projects. Gross margins increased 3.4 percentage points as higher sales allowed for higher dilution of fixed costs. For the full year 2020, sales increased a remarkable 36.4% despite the two-month halting operations during the lockdown because of very strong demand during the rest of the year. However, the gross margin decreased 1.5 percentage points mainly because of the sales mix. Quick-line sales in the fourth quarter of 2020 remained in line with 2019, and gross margins decreased 1.5 percentage points compared to the fourth quarter of the same period. During the full year 2020, quick-line sales decreased 10% compared to the same period of 2019, mainly due to decreased sales volume as a result of the stopping operations of most sectors during the government-mandated lockdown during the second quarter. Gross margin, however, increased 5.4 percentage points during the full year 2020 compared to the same period of 2019, mainly due to a temporary increase in sales of higher priced products as well as the decision to sell X works during the lockdown period. Sales of construction supplies during the fourth quarter of 2020 increased 76.8% compared to the fourth quarter of 2019, in line with baggage demand sales as families worked at home improvement projects. Gross margins remained flat in the fourth quarter compared to the fourth quarter of 2019. During 2020, construction supply sales increased 22.3% compared to the same period of 2019, mainly due to the strong recovery during the second half of the year. During the fourth quarter of 2020, the profit of the period was $47.5 million solid, a 61% increase compared to the fourth quarter of 2019, mainly due to increased revenues and operating profits. For the full year 2020, the net profit was $57.9 million, a 56.1% decrease compared to 2019 because of increased costs and loss of income during the lockdown period during the second quarter of the year. In terms of debt, as you already know, we decided to take on some short-term loans for working capital needs when the pandemic started. Although we have enough cash to pay back those loans, we have decided to be cautious. Since there is still uncertainty about the impact of the second wave and how this can impact the economy in the north. We believe that our current net debt to EBITDA range of 2.9 times, which has come down significantly from a peak of 3.9 times in the second quarter, is approaching healthy levels quickly, as we expect EBITDA to continue increasing. To summarize, this quarter's results show the strength, positive trend in baggage demand which is now translating onto other segments, giving us reasons to believe that 2021 should be a very positive year. We are convinced that we are now, we are able to quickly overturn the negative results on the second quarter because of our strategic decisions and financial problems during this strict lockdown period. We believe that we are in a strong financial position to face further demand and to continue growing with some financial flexibility as cash generation is steadily increasing and focusing on operational efficiency. Can we now please open the call to questions, please?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Andre Soto. Your line is live.

Good morning. Thank you for the presentation. My first question is regarding your... capacity, current level of capacity utilization and the possibility to expand your Pacasmayo plant. Can you please elaborate on this idea in terms of what is the timing that you are looking to do this and what is the estimated capex for this investment? That will be my first question. Thank you.

Sure, Andres. Hi, I hope you're doing fine. Yeah, indeed, we're operating at very high level, opening at full capacity right now. Some of us are already importing clinkers, as we have planned to do. We did it already when we were expanding Pura. And we are already working on expansion on a brown sugar on Pacas Mayo. The level of cap is going to depend on the capacity level. We are talking anywhere between $180 to $250 million, depending on the size of the kiln. This is something that we're going to probably have ready the second quarter of this year. we still won't make the decision because, I mean, we still are going to be importing clinker for 2021, 2022, sometime 2023, because it makes economic sense instead of when we get a new plant in Pacasmayo, it is going to be because we can open it and start it at 60% or 70% capacity utilization, otherwise the fixed cost will kill us. I don't know if that answers your question.

Perfect. No, just to be clear, thank you, Humberto. Just to be clear, so you haven't made the decision yet. This is just a preliminary figure, and you are expecting, when are you expecting to have a final green light on this project?

Yeah, we have not made the decision. I mean, even though the demand is incredibly strong, it has to be incredibly strong for a sustained amount of time for us to make such an important decision. Maybe it will be taken sometime this year.

Okay, got it. And as a follow-up to that, yes.

Only to complement, as I mentioned, the capacity of a tinker, but in cement we're around 67% of utilization, so we have plenty of spare capacity in cement.

Perfect, got it. And as a follow-up to that, if the margin this quarter was 27%, partially due to this high level of utilization, and the need for important clean care, is there any other non-recurring factors that affected URB the margin this quarter, or should we assume that as long as you continue importing clean care, 27% is maybe the margin you are looking at?

Well, it's basically the important clean care, but what you have to consider is that this period, that this quarter, we have sold more back cement of low cost or low price cement basically for self-construction so once next year what we expect is that the concrete should increase and prices should increase a little bit so margin should go up got it and my second question is regarding um the the recent restrictions regarding regarding covet uh in peru have you seen any any um

Reduce demand as a consequence of both restrictions in package modules area No, the answer is no and basically because some restrictions have to do with extreme Areas, which are Lima the south of Peru the north and luckily for us is not under the extreme situation. So we have Seen no change at all in demand Perfect.

Thank you so much and congratulations on the results Thank you

Your next question is coming from . Your line is live.

Thank you very much, and congrats for the strong results. I wondered if you have the gross margin for cement if you had not had any imports during the year, and if you could share the exact amount of tons of clinker imported during 2020. And additionally, have you had any changes to your estimate on how much volumes come from the reconstruction project this and next year? Thank you so much.

No, our estimate for the reconstruction has been the same as the last call. And what we've been using of important concrete during this year has been the second half of this year being around 200,000 tons. Obviously, more in the fourth quarter and in the third quarter.

Do you have an estimate of the impact on gross margins of this imported clinker?

Not right now, but I can call you back later.

Perfect. Thank you so much.

Your next question is coming from Lucio Calvo Perez.

Your line is live.

Hi. Good morning. Thank you for the call. I was wondering about your expectation regarding prices for 2021. Are you expecting them to maintain increased levels while self-contraction demand is still strong? Or are you expecting to make an increase in prices? Thank you.

Yeah, thank you for the question. We raised prices towards the end of last year and elevated beginning of this year. So right now we are at what I think are very comfortable levels, higher than last year. And we're going to remain like that probably for the rest of the year.

Thank you. Your next question is coming from Francisco Suarez.

Your line is live.

Good morning, Claudia, Manuel, Humberto. Thanks for the call. Congrats on the results. The question that I have relates with one, and your inventory is linked to purchases of clinker. I mean, it is in my view that you have already depleted a lot of your high-cost inventories related with clinker inputs. So my question relates with what amount of this has been depleted already and what is left in order to see a potential increase in margins in the short term. And secondly, on your sales mix, you mentioned in your first list that you had a higher share of low value added cement. Does the overall reconstruction program linked with the UK, does that in a way allows you to sell more sulfate-resistant cement or any other form of value-added cement in the mix. Anything that you can help us with, with how your overall mix might change this year compared to last year, that would be very helpful.

Thank you so much. Thank you, Francisco. I'm going to take the second part of the question and I will leave the clinker question to Manuel. Yes, indeed. I mean, the reconstruction tends to be a more sophisticated project based in terms of schools, in terms of riverbeds and everything. So, yes, I mean, that's going to require a different kind of cement probably at a higher price. I mean, and I think it has to do with the previous question. I mean, we have been selling, I would say, a bit more of our low-priced cements, I mean, maximizing our market share. But I do think that the reconstruction project and also some big infrastructure projects coming in are the ones that are going to allow us to sell more sophisticated segments. And like I mentioned before, also, I mean, we were able to look at some prices at the beginning of the year. Manuel?

Yes, Francisco, hello. Yes, we've used all the clinker that we had. It wasn't a higher price, definitely. And now we're importing a new clinker. It's a higher price than the production cost that we have, but it's a lower price than what we had in the stock before. So, when we expect the margin, I will go through the VITA margin for the whole year 2021 should be a little bit higher than the one we're finishing this year, or it should be much higher because this year we have a stop of two months, but should be higher even than the VITA margin that we are having at the fourth quarter of this year.

Thank you. Perfectly clear. Thank you both. Take care. Congrats again.

Thank you. Thank you for the call.

Your next question is coming from Alejandro Chevalas. Your line is live.

Hello. Thanks for the call and congratulations on the results.

Just if you could provide a little bit more color on the strength of vaccines. I understand you have been working hard to understand why is it so strong and the strength of the consumer and how it is behaving. If you could give us a little bit more information on that and what do you expect for next year in terms of black cement, I think that would be really useful for us. Thanks. Sure.

I mean, when we started up again in May and then June, July, August and Seman was very strong, we conducted a I would say a very thorough study trying to understand where was the money coming for all this back cement. I mean, self-construction, and because we were concerned that it was coming from the bonds given by the government or some kind of pension funds or aid or whatever. And only 4% of people interviewed, and we interviewed over 600, said that this was coming from some kind of external source. 65% of people said it came from their own savings and their own working capital so i think that's why we are uh very optimistic about this demand remaining high the year has opened incredibly well and uh we do believe that we should see a record year based on that based on the fact that the self-construction seems to have i mean the informal economy has suffered such a resilience that is absolutely fantastic and way stronger than the form formal economy and i think a lot of people uh started working pretty quick after the the quarantine And they're back on their feet, and these people work on a daily basis. They've been able to recover pretty quick. So we're very optimistic about back cement this year.

That's very useful. Thank you very much. Perhaps just as a follow-up, did that study that you conducted also analyze what people were doing with the cement? Like, what were the main uses that they were that they were finding or did you just work on that or just on the search?

No, no, no. Basically, since they were spending much more time on their homes, they were doing improvements, basically home improvements. I mean, they were doing another room or they were completing a ceiling or just making sure the family were more comfortable. But the thing also you have to bear in mind is that the government has launched a very aggressive program of housing for this year And that is also going to mean that self-construction and self-building will pick up, not only in home improvements, but in new homes.

Thanks. That's very useful. Congratulations again. Thank you.

Your next question is coming from Enrique Grau. Your line is live.

Thank you, gentlemen, and congrats on those results. I have one question regarding your expenses. Do you expect your expenses to be consistent with those higher prices you were talking about? Should we expect lower margins for this year compared to last year's? Thank you.

Well, margins this year should be better than last year, excluding the two months that we had a shutdown. Our margins, for example, this year has been, the VITA margin has been much higher than the rest of the year, and we expect next year we should be around 28.5% to 29% as a margin.

Thank you.

Before we finish, I can ask the question that Roland made us. Excluding the imported clinker for land, the gross margin for the fourth quarter of this year could have been very similar to the one of the fourth quarter of 2019, around 33.6%.

If I can complement what Manuel is saying, I think it's very important for everybody to bear in mind the fact that we are closely watching at the moment to decide on the expansion of Bacchus Meyer. Why? Because it's always a financial analysis between what is the excess cost of importing clinker versus what is the financial savings we're doing by deferring substantial investment of over $200 million. And that is something that we are permanently watching. It has to do with what kind of costs we can get of the clinker, what kind of capex we're looking, and what kind of financial costs we can get in the market. So these are now things we do permanently, and that is going to, along with demand, going to be a key variables for us to make the decision. We didn't impute that. In Tura, we imported clinker for almost four years. And at that time, half a million tons was the break-even between importing clinker or building a new plant. Numbers have changed now, but this is something that we are permanently checking, so the decision is taken in the way that really will create value for the company.

Okay. And do you have any estimated volumes for this year?

We closed at almost 2.6 million tons, which is a similar volume to 2019. Like I said in the summary, I mean, it's remarkable that we did that with two months stopping. So if we see what we have been watching over the last two quarters of a year, I would say that the growth this year will be for sure a double-digit one.

Okay, thanks.

There are no further questions from the lines at this time.

We do now have a follow-up in queue from Andre Soto. Andre, your line is live.

Thank you so much. Just going back to your comment, Humberto, on the estimated capex for this new kiln. Looking at my numbers, this will represent an additional two points in terms of leverage for So we will be talking about almost four times needed to EBITDA. Is this something you guys are looking to do with debt only or you will be considering also equity for doing this investment?

Sorry, Andres. Can you repeat the question?

Basically, what is the capital structure that you are looking for for the potential investment on this new plan? I know it's preliminary, but looking at my numbers by the end of this year, you will be at 2.1. Assuming the $250 investment, there will be an additional two points in leverage. So I was curious if you feel comfortable with this leverage level or you will be considering issuing equity for funding the investment.

With the new investment of Pacasmayo, if we decide to do it, it would take place in approximately two years, two to three years. So that's going to be spent. Considering that we have a cash that we produce every year of around $80 million, what we expect is the ratio should not go higher than 3.4%, 3.5%. Perfect.

That's very clear. Thank you, Manuel. Thank you.

We have no further questions from the lines. Manuel, do you have any further remarks? Manuel, do you have any closing remarks for today's call?

I'm back, Manuel, if I can make the closing remarks.

Do you have any closing remarks for today's call? Yes, sorry, I got disconnected momentarily. Like I was saying, and I realized I was talking to myself, there has been no doubt an outstanding quarter in terms of results of operations, and we cannot deny that the full year results are well beyond our initial expectations. However, we are incredibly convinced our resilience, a very strong financial and operational position, and more importantly, our ability to adapt and respond in a very fast and assertive manner have played a key and tremendous role in achieving this result. We believe that this challenging year has provided us with incredibly rich knowledge, not only in our market and clients, but also and fundamentally in our people and our essence. And my congrats, my absolute thanks and recognition goes to to the whole team of Pacasmayo. They are an outstanding bunch of people that surprised me year over year over year, and I'm sure for many years to come. My recognition is tremendous to that incredible team. It is indeed in difficult times that we discover what we are really capable of doing, and we believe that we are now better equipped to face another challenging year with confidence and determination. I'm convinced this will be the best year in the company's history. Thank you to everybody for our renewed interest in our company. And as always, Claudia, Manuel, and myself, we are here if you have any further questions. Thank you very much, and have a great day, and please stay safe.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.