Cementos Pacasmayo S.A.A. (CPACASC1) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to Pacasmayo's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, you may begin.

Thank you, Tim. 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. Ferreyros 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.

Thank you, Claudia. Welcome, everyone, to our quarterly results conference call, and thank you so much for joining us today. This quarter, revenues increased 3.4% year-over-year, showing a reversal of a negative trend that started almost 2 years ago. The increase in revenues were mainly driven by concrete and pavement sales related to the Piura Airport project, which almost doubled in this quarter as compared to the second quarter of 2023. Furthermore, we were able to achieve a 6% increase in consolidated EBITDA, mainly due to operational efficiencies derived from our new kiln in Pacasmayo as well as favorable raw material prices. We are confident that the efficiencies achieved will be sustainable over time, and top line growth should sustain by the continued delivery of concrete and pavement for the airport projects and increased participation on public investment projects. These factors certainly make for a more promising second half of the year. Despite this increase in infrastructure-related demand, the housing sector in Peru is still by far the biggest driver of demand. According to a study conducted by GRADE, a private research center in Peru, there is a requirement of 142,000 new homes every single year. Social housing programs only cover 30% of this requirement, leaving the remaining 70% up to self-construction. On average, we have to mention that self-construction process takes an appalling 16 years from the acquisition or occupational property to the completion of the home. During this time, families spend about 8 years in a completely precarious home, and an additional 8 years in a home under construction. Dirt floors are known to harbor parasites and bacteria that can cause serious illnesses, including respiratory illnesses and anemia among many others. To tackle this extremely hard reality, we are working on a variety of different fronts. First, to decrease anemia and illnesses as part of our corporate social responsibility efforts, we are changing dirt floors and replacing them by concrete starting in our areas of influence. By the end of July, 255 floors will be completed, and our target is to build 1,000 for their homes by the end of this year. Additionally, we want to go one step beyond and ensure improvement in their overall health, this program will also provide health counseling to help our beneficiary families understand how to make and sustain those healthy lifestyle changes. As you probably already know, the self-construction segment represents over 17% of our sales. As mentioned before, self-construction process takes on an average 16 years. It is unacceptable for a family trust to wait this long for a proper home. These families are our consumers, and we know that when they buy a bag of cement, what they really want is their dream home. Therefore, we are committed and working on solutions aimed at easing this unnecessary long journey. We're developing a temporary housing service that will help low-income families to live in a better quality temporary homes. This temporary solution can be transferred without additional expenses to their permanent home, avoiding precarious situations and enabling transformation for future years. On the financing side, a tremendous challenge at this point, we have AYU, our solution designed as an intelligent purchasing method so that people are able to define their project and buy the materials that they need, month by month, until we have all of the materials needed to carry out their chosen project. All of these programs are absolutely aligned with our purpose of building together the future you dream of. Finally, I would like to mention that we are very pleased with the performance of our building solutions this quarter. Concrete, mortar and pavement sales increased 91% this quarter when compared to the same period last year. Concrete and pavements sales were mainly related to the Piura Airport as I mentioned before. This quarter, we finished Phase 1 of the project, which included the construction of the temporary runway. Phase 2 of the project will tackle the reconstruction of the main runway, which began at the end of this quarter and should be completed by December of this year. Free cash sales this quarter also increased 46% year-over-year, positively affected by the acceleration of public sector projects. We expect this trend to continue, as public works continues its execution and new projects start coming in line in the upcoming months. I will now turn the call over to Manuel to go into more detailed financials. Manuel?

Thank you, Humberto. Good morning, everyone. Our second quarter 2024 revenues were PEN 457.1 million, a 3.4% increase when compared to the same period of last year, mainly due to increased sales of concrete, mortar, pavements and precast, as Humberto mentioned before. Gross profit increased 5.9%, achieving $161.6 million, mainly due to lower production costs as we discontinue the use of imported clinker and maximize the use of our new and more efficient kiln in Pacasmayo as well as lower cost of raw material, mainly the coal. Consolidated EBITDA increased 6.1% this quarter compared to the same period of last year, mainly due to these efficiencies as well as to increase revenues. For the first 6 months of the year, revenues increased 1.3% when compared to the same period of 2023. Gross profit for the first 6 months of the year increased 7.1% when compared to the same period of previous year, mainly due to efficiencies derived from the -- our optimization capacity as well as lower cost of raw material. Likewise, EBITDA increased 8.1% and EBITDA margin increased 1.7 percentage points for the first 6 months of the year when compared to the same period of last year. Turning to operating expenses. Administrative expenses increased 6% in the second quarter of 2024 and 2.1% in the 6 months 2024 compared to the same period of last year, mainly due to a slight increase in personnel expenses and property taxes. Selling expenses increased 11.5% and 10.2% in the second quarter 2024 and the 6 months of 2024 compared to the same period of last year, mainly due to increased software and licenses, third-party services and personnel expenses. Moving on to the different segments. Sales of cement decreased 3.6% in the second quarter of 2024, and 4.1% during the first 6 months of the year compared to the same period of last year, respectively, mainly due to decreased demand from the self-construction segment. However, gross margin increased 3.7 percentage points during the second quarter of this year, and 4.4 percentage points during the first 6 months of the year when compared to the second quarter of 2023 and the first 6 months of last year, respectively, mainly due to the cost optimization related to our optimized clinker capacity and more favorable raw material costs, as mentioned before. During this quarter, we are glad to report that sales of concrete, pavements and mortar increased 91.1% during the second quarter of this year, and 82% during the first 6 months of the year when compared to the second quarter of 2023 and the first 6 months of 2023 mainly due to increased sales of concrete and pavement to the Piura Airport project. Gross profit -- or gross margin in the second quarter of 2024 was in line with the same period of last year. Sales of precast materials also increased 68.2% this quarter and 46.2% during the first 6 months of the year compared to the second quarter and the 6 months of last year, respectively, mainly due to increased public sector investments. Gross margin increased 21.3, and 19.9 percentage points in the second quarter and the first 6 months of the year compared to the same period of last year, mainly due to higher dilution of fixed cost as volume increase. And profit decreased 15.4% this quarter compared to the same period of last year, mainly due to a one-off exchange rate gain in the second quarter of 2023 due to the completion of our Pacasmayo plant project as the equipment was paid in euros. During the first 6 months of the year, net profit remained in line with the same period of last year. In terms of debt, our net debt-to-EBITDA ratio was 3.1x, which is a level we expect to sustain and progressively decrease as EBITDA increase sales, we currently do not plan to incur an additional debts. To summarize this quarter's results, show the benefits of our continued focus on cost management in operational efficiencies, and efficiencies allow us to capitalize on profitability beyond top line growth. We are confident that we will continue delivering positive results during the following quarters. Operator, can we please now open the line for questions?

[Operator Instructions] So we have a voice question from Peter Nelson at MAX Solutions. Perhaps we can come back to Peter. We have a question from Marcelo at Itau.

Okay. So my question is related to cement volumes for the second half of this year. I mean you guys mentioned that volumes from precast and concrete for better, given the Piura Airport project and also higher product investments and so on. But on the low light here, we had this still weak bagged cement and sales volumes. So could you please give a little bit more color regarding in terms of what can you expect in terms of the bagged cements volume for the second half? As we also could expect a better macro trends and so on, if this could help to support a higher bagged cement for the second half? So this is my first question. And the second question is related to capital allocation as the company doesn't have any major growth projects under rate. If you could explain or give more color about what is the management views for capital allocation going forward? So these are my 2 questions.

Yes, Marcelo, thank you for the question. Like I mentioned in my brief speech, I mean, we are optimistic about the second semester in terms of volumes, usually, I mean, if you take the history, the second semester usually comes better. And we are seeing quite a few public projects getting traction over the last weeks. So I think the volumes on the second semester for sale will be higher than the volumes on the first semester. And regarding capital allocation, I think, like Manuel said, I mean, we are in a comfortable debt level at this point. We have a club deal that we have to honor over the last 6 years, and we intend to do strictly with that. And we have no need for any further debt or capital at this moment.

Our next question comes from Natalia Leo at JPMorgan.

I just wanted to understand a bit better the dynamics for concrete. And if you expect this volume of sales -- or this amount of sales to continue in the second half and maybe in 2025? And also, what can you tell us about the margins on concrete as well that we still be low in the second quarter?

Yes. I mean, to complement my answer to Marcelo, one of -- also besides the fact that I mentioned the public investment is getting a lot of traction. We have to understand that. I mean deficiency has been extremely good this past month, and that will translate on the coming months on higher demand for cement and concrete. The same applies to agriculture. As you know, both fishing and agriculture are good sort of business because they employ thousands of people. And these people usually what they do with their exceeding income is invested in improving or starting to build a home. So besides the public investments, I think, we'll come stronger, we're going to see a higher pull in terms of self-construction, in terms of people that are employed and are having higher salary. Regarding the margins, concrete and cement also, I mean, are very affected by the level of activity, as conclude recuperates, I mean their margins, we will also see better numbers.

[Operator Instructions] Okay. We have a text question from Gerard Fort at Integra. He asks what explained the lower gross margins in concrete and pavement, considering revenue increased 91%, but we saw a decrease on margins year-on-year?

Basically, the -- it's basically the mix of the products that we sell in concrete. The bigger the infrastructure project is, the lower margin you have. So the big advantage of that is that you can be use fixed cost debt.

Okay. Thank you. We have one more text question. [Operator Instructions] So we have a text question from Marco Mejía at Kallpa, who asks, do you see a recovery of cement dispatches for the second semester? You mentioned new projects for the next quarters. Do you think that this will maintain the concrete demand at these levels?