UNACEM Corp S.A.A. (UNACEMC1) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to UNACEM's Third Quarter of 2021 Earnings Conference Call. This morning, Pedro Lerner, our CEO, will discuss the latest developments that affected our country and industry during the third quarter of the year. Later on, Alvaro Morales, UNACEM's Corporate VP of Finance, will present the third quarter financials in detail. In the end, we will open up for Q&A. [Operator Instructions] Please note that we might disclose some forward-looking statements that should be considered for reference only. We will also be recording this call. Pedro, let's get started.

Thank you, Francisco, and welcome, everybody, to another UNACEM quarterly report. I would like to go straight to the point. The third quarter accounted for an historical third quarter of cement dispatch for our company in Peru. Our dispatches in Peru grew 13.9% quarter-to-quarter, with a 57.2% consolidated EBITDA growth in the same period. This increased the consolidated EBITDA margin from 26.3% to 30.5%. It is important to mention that our net-debt-to-EBITDA margin is also 2.5x, well below our most optimistic projections. Nevertheless, we also experienced important challenges in our production, logistics and commercial areas that we were able to tackle on a timely basis to serve our clients and gain some market share points. These results also come in the midst of political volatility, which you are already aware of. I'm proud of our team's performance, working in a highly competitive environment. The construction sector has outperformed all the other sectors of economy, with a growth year-to-date of 63.8% compared to a 17.5% growth for the national GDP. But this growth also shows important price increases of 11% year-to-year for construction materials versus 5.1% consumer price index nationwide. The cement industry is still lagging with an increase of net prices of just 1.6%. Our management is cautiously watching all the political, economic and social environments that will affect our business in 2022 and is planning accordingly. Regarding the global pandemic, the national vaccination program has evolved positively, with 73% of the Peruvians over 12 years old receiving at least one shot. Therefore, the contagions and deaths are at lows since April 2020. We are still watching the evolution of the pandemic to safeguard our employees and we slowly go back to our normalized operations. Our subsidiaries also posted impressive results during the quarter, showing an important resilience in a highly volatile international environment. It is the case of UNICON, CELEPSA and UNACEM Ecuador growing at double digits in both volume and revenues, while being highly efficient in their cost structures. Skanon was a lagger this time due to some climate issues in the state of Arizona. Alvaro will elaborate on this later. In some administrative matters, our Board recently approved the reorganization process that the management proposed for our group of companies. This process still needs to be approved in a Shareholders' Meeting that will be held on December 14. We will keep you posted on this important landmark for UNACEM. As announced by our Board in September, we have started a stock buyback program that will go until December 31, 2021. As of September 30, we were able to buy back 3.1 million shares using our cash margin. I recently attended the COP26 meeting in Glasgow, and I can reaffirm our commitment with global climate change mitigation, reducing our carbon footprint and excelling in ESG principles. In that regard, UNACEM was recently included among 15 firms on the first Standard & Poor's Dow Jones Sustainability Index in Peru. And for the third consecutive year, the Dow Jones Sustainability Index, MILA Pacific Alliance. UNACEM will keep working thoroughly in these areas, aiming to become a reference throughout the industry and peers. That will be all from my side. Thank you very much for your attendance this morning. And now I will pass it over to Alvaro 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 35.5% compared to the third quarter 2020. This was driven mostly by higher cement and ready-mix dispatches in Peru, Ecuador and Chile, and higher energy sold and higher ready-mix and aggregates average prices despite lower volumes in our U.S. operations. Year-to-date, consolidated revenues were 50.2% higher than in the same period of 2020, with higher volumes sold across all business units and solid results in the U.S. operations. In Peru, UNACEM's dispatch recorded a 13.9% increase in the third quarter 2021 compared to the third quarter 2020. During the quarter, both our back and bulk units overperformed, recording an historical third quarter of cement dispatches. Additionally, clinker exports during the quarter recorded 260,000 tons versus 16,000 tons of exports in the third quarter 2020. Please note that in 2020, we execute repairing works at the Conchán pier. In the first 9 months of the year, cement dispatches were 54.1% higher than in 2020. Please take note that in 2020, mainly in the second quarter, accounted only 40 days of operations due to the government measures for the COVID pandemic, which explained the important decrease in dispatches in the comparison period. Nevertheless, the results were overcome our estimates. Ready-mix dispatches during third quarter 2021 were 34.7% higher than in the third quarter 2020. Demand since the restart of operations are still sluggish but improving at a better pace. Therefore, UNICON and Concremax dispatched a total of 602,000 cubic meters during the third quarter 2021 compared to the 447,000 cubic meters during the third quarter 2020. Moreover, the ready-mix dispatches in Chile increased significantly due to the incorporation of 2 new batch plants in that country. Year-to-date, ready-mix volume were 64.7% higher. Most of the impact in the segment is explained by our Peruvian operations and the incorporation of new units in Chile. Regarding UNACEM Ecuador, in the third quarter 2021, cement volumes were 19.7% higher and revenues in soles were 37.7% higher due to a higher volume sold and the higher FX in the period. Year-to-date, volumes were 47.2% higher than 2020, with 940,000 tons sold compared to the 638,000 tons sold in the third quarter 2020. 2021 results for Ecuador are even higher than in 2019. CELEPSA recorded a 44.8% increase in its revenues during the third quarter 2021. Energy sales reached 429 gigawatts, 27.7% higher than in the third quarter 2020 due to higher demand from its contracted clients, including UNACEM stand-alone. As of September 2021, CELEPSA recorded revenue 39.5% higher, with a total volume sold of 1,228 gigawatts, 939 gigawatts in 2020. Drake Cement recorded 149,000 short tons of cement during the third quarter 2021 versus 194,000 short tons in the third quarter 2020, 23.7% lower. Ready-mix volumes was 158,000 cubic meters, lower by 4% of the 163,000 cubic yards -- sorry, cubic yards bought of 2020. For the first 9 months of the year, cement volume recorded 464,000 short tons, 17.1% lower than in 2020. Volumes were down due to a particular monsoon that hit the state really hard with heavy rain and storms. In spite of lower volumes sold, average prices was 8% higher and ready-mix prices was 9% higher. As noted, consolidated revenues increased by 35.5% in the third quarter 2021. Regarding the consolidated cost of goods sold, they were 25.4% higher in the quarter versus the third quarter 2020, explained by higher cost of goods sold due to higher volumes sold, with normal operating levels across the board. Year-to-date, consolidated cost of goods sold were 37.3% higher due to the same reasons explained before. Increase in the cost of goods sold was lower than the increase in revenues. For the reasons explained before, our gross margin was 29.4% in the third quarter 2021, higher than that 23.7% reached in the third quarter 2020. Additionally, in the first 9 months of the year, gross margin was 28.9% compared to 22.3% in 2020. Our administrative expenses in the third quarter were 17.6% higher than in the third quarter 2020, explained by board fees and donations in UNACEM stand-alone that were higher during the period. Selling expenses were 29.1% higher, mainly due to higher marketing expenses, advertising in UNACEM stand-alone. Year-to-date, administrative expenses were 27.6% higher. Selling expenses were higher by 26.5%, in line with the quarter trend. For the reasons explained before, our consolidated operating profit in the third quarter 2021 was PEN 237 million, 60.7% higher than in the third quarter 2020. Furthermore, year-to-date consolidated operating profit was PEN 774 million, [ 213 ] higher than in the first 9 months of 2020, that was PEN 247 million. A remarkable result. The consolidated EBITDA for the quarter was PEN 430 million, PEN 263 million in the third quarter 2020 and PEN 1.5 billion for the last 12 months of 2021, PEN 904 million in the same period of the previous year. This was explained by higher cement volume, average prices and export prices in Peru; higher ready-mix volumes in Peru, Ecuador and Chile; higher energy result in Peru; higher volumes sold in Ecuador; higher industrialized concrete structures in Peru; net from lower industrialized concrete structures in Chile. Consolidated net debt was PEN 3.6 billion. Therefore, the net debt/EBITDA ratio was 2.5x, lower than the 4.2x reported at the end of 2020. Debt in PEN decreased due to prepayment of long-term debt that was made as the continue serve -- and the continued services of our debt schedule, despite the FX conversion impact of the U.S. dollar-denominated debt. Foreign exchange registered a loss of PEN 36 million in the third quarter 2021 versus a loss of PEN 10 million in the third quarter 2020, explained mostly by our U.S. denominated debt and the fluctuation of the FX rate during the period. As of the first 9 months of the year, foreign exchange passed from a loss of PEN 58.9 million in 2020 to a loss of PEN 73.5 million in 2021. Net profit in the third quarter 2021 was PEN 91.1 million versus PEN 61.9 million in the third quarter 2020. As of September 2021, net profit was PEN 392.8 million versus PEN 8.4 million in the same period of 2020 for the reasons explained before. In terms of CapEx, disbursements correspond to minor projects across all companies, including work in the control system of Kiln #2 at the Condorcocha plant, structural reinforcement in the chambers of Atocongo's multisilo, the new grinding mill in Skanon and overhaul of equipment, among others. Thank you. That will be all from my side. Now we open up for your questions.

Thank you, Alvaro, and thanks, everybody, for listening. Now we open up for Q&A. [Operator Instructions] Okay. We have a question from Steffania Mosquera. She's asking about a more elaborate answer to the PEN 54 million other nonoperating expenses reported during the quarter. Alvaro?

Yes. Now we are -- Fabiola?

Alvaro, it's regarding the acquisition of -- in Chile.

The acquisition? Okay, yes. Thank you very much, Monica. Sorry, what happened in this March, we acquired Cementos La Unión from Chile. That includes a very important losses that have a very important impact in the taxes that we registered as an asset in UNACEM consolidation. Now with our auditors, [ Cape Mehem ] they ask -- they said that yes, it is an asset for Cementos La Unión. Now the name is UNACEM Chile. But in terms of the consolidation, we only can recognize this income when this is realized. That means that in the future, with the profits of our operations in Chile, we are going to recover these losses that, that company has had for many years. And we are going to recognize to -- as an income when it is going to be realized. And that we need to reverse the asset that we registered in the consolidations in the first quarter. So it's only to fix a mistake really in our accounting about the acquisition of UNACEM Chile. So it's something that we consider with our auditors to fix in the third quarter.

Excellent. Thank you, Alvaro. We have two questions from Philip Khoury of Impera Capital. Thanks for your questions. The first one is regarding guidance for the fourth quarter and next year. Philip, as of now, we are still in a very volatile environment. We are not giving feedback. But we will be more than happy to answer your second question, which is regarding competition and how they are being affected by bulk shipping costs and energy, and other rising costs. Alvaro, can you help us with that question?

About competition?

About how our competition is dealing with rising costs of bulk shipping, energy, et cetera.

Yes. Well, our competition are importers of clinker. They import clinker and they produce cement in our area of influence. The problem that we think that they are having now is that the increase of freight and increase of the product, the FX that also increased have affected them about the -- and the problems of the crowded ports, and affected them to import in a good price. So they are asking us to buy our cement and they are now selling our cement through their operations. So this is -- we think this is a temporary situation, but some of the increase in our sales is explained because our competitors are buying from us, our cement and resell into the market.

Thank you, Alvaro. I would also add that the current price in local currency is pretty much the same. It didn't grow by much. So the costs have risen more than the prices for them. And the other thing is in U.S. dollars, given the devaluation of the currency, they are also struggling with that problem. So thank you very much, Alvaro. We have another question from [ Gance Alpa ], also from Impera Capital. Thanks for your congratulations. Gance is asking about -- he's asking two questions. He's asking about what is our target of net-debt-to-EBITDA levels. They have gone below 3x net-debt-to-EBITDA this time and Gance is asking about our target. And the second question, the question is regarding our CapEx requirement for 2022. Again, we are not giving guidance on 2022 now, Gance. But we will answer your question regarding our targeted net-debt-to-EBITDA. Alvaro?

Yes. When we acquired UNACEM Ecuador in 2014, our Board of Directors give us the challenge to reduce the net debt EBITDA level from 5x that it was in the moment that we acquired UNACEM Ecuador to return to 2.5x. So we have already arrived to this level. So for us, is something very important that we achieve what the Board of Directors challenged us as the administration. The idea is we will see, we will continue paying our debt according to schedule. Hopefully, our EBITDA is going to increase. Hopefully. We don't know. We cannot have projections about this volatile market. But what we expect is to continue generating the cash necessary to reduce our debt. So for us, now we are in a comfortable level. But if we can improve, welcome. About the CapEx required to 2021, we are now in this moment, making our budget. So it's something that we will have, close to the end of the year to approve in our Board meeting.

Thank you very much, Alvaro. Gance, I would just add that, as Alvaro mentioned, comfortable level for us are levels below which were the levels that we had before the acquisition of UNACEM Ecuador back in 2014. We have finally reached that target. So right now, we are going to keep delevering the company for the years to come. So that's us. So there are no more questions. We'll give you one more minute, maybe there can be more questions. Okay. So if there are no more questions, please feel free to e-mail me or -- sorry, there is another question from Philip. And it's regarding the debt as well, Alvaro. He is asking if we are going to continue paying debt in 2022.

Yes. We are not giving projections, but hopefully, we will continue to reduce our debt according to the schedules of our current debt. So yes, the idea is to reduce and to pay the debt as it is planned.

So basically, we're going to continue paying our debt according to our debt schedule. And do we see an increase in dividend distributions or acquisitions, Alvaro?

Well, we already have -- our -- sorry, our shareholders, our Board has already called a Shareholders' Meeting for December 14, and they are going to discuss that point. It's in the agenda and they are going to discuss to see if they change our dividend policy, actual dividend policies, and it is a possibility to increase our dividend policy. And acquisitions, there is nothing in the rudder, now in this -- the moment, but we are open.

Thanks. Thanks, Alvaro. Yes. The dividend policy is coming from the Board, and it's considered every trimester, every quarter. So we will keep you posted on that. There's another question from Gance from Impera Capital. He's asking about -- he's mentioned that our inventory to revenue has decreased significantly this year. And if we can give some color on this. This is regarding the low levels of inventory, Alvaro.

Yes, yes. Well, this year, our sales, our tons sales increased significantly, and we are trying to -- and we have also, in clinker exports, that we have agreements that we need to comply. The idea is that we are producing all the clinker we can. But the market is really very, very strong in this moment. And that means that we don't have the possibility to make inventories. For us, it's really good. But we are -- we have some inventory level that is for security. But yes, it's -- this is -- this year, we have -- we are working with inventory levels lower than years before. But it's because of the demand. It's because of the demand.

Great. Thank you, Alvaro. Are there any further questions? Then I'll be more than happy to answer any other questions that you might have. E-mail me or Monica. We are always available. Thank you very much for joining us in this conference call. Hopefully, we'll see you in 2022. Have a good day.

Thank you. Bye-bye.

Bye-bye.

Thank you.