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

Greetings, and welcome to UNACEM Corp. First Quarter 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Paucar, Head of Investor Relations. Thank you. You may begin.

Thank you, Doug. Good morning, everyone, and welcome to our earnings conference call. This morning, Pedro Lerner, our CEO, will discuss the latest developments that affected our operations during the first quarter of the year. Later on, Alvaro Morales, UNACEM Corporate CFO, will present the first quarter financials in detail. Please note that we might disclose forward-looking statements related to UNACEM Corp. and subsidiaries based on currently known facts, expectations and forecasts, circumstances and assumptions regarding future events. Many factors could cause the future results, performance or achievements of UNACEM Corp's. and subsidiary to be different from those expressed or assumed herein. So this should be considered for reference only. Pedro, you may begin.

Thank you, Monica. Ladies and gentlemen, good morning. It is a pleasure once again to share with you our quarterly performance. This is the first quarter post reorganization and we're quite keen to keep providing our investors with information not just on the listed entity, but on our overall platform. As we have discussed in the past, the main goal for this new structure is to focus on long-term value creation for all of our stakeholders, as we have put together a lean team of professionals who support operating units in achieving their best performance. In line with this, we're working on our 2022 to 2026 strategic plan, which seeks to maximize investments and unlock synergies for the group. We are proud to report a strong first quarter for the year in spite of the difficult environment. EBITDA reached PEN 422 million, an increase of 13% year-over-year on the back of a strong revenue performance of PEN 1.374 billion, up 26% compared to the first quarter of 2021. Net debt closed at 2.2x EBITDA, well below our target leverage of 3x EBITDA. Volumes were strong across the board, with all cement operations posting double-digit growth. However, margins declined somewhat on the back of cost pressures. During the quarter, the business environment has deteriorated with political uncertainty, which brings social unrest in Peru, and the rising global inflation and foreign exchange risk have translated into higher productions costs. Peruvian GDP grew by 3.84% during the quarter with the construction sector decreasing 0.49%, mostly owed to the slowdown of the new infrastructure projects. Nevertheless, inflation rose by 1.83% in the period, with construction material prices increasing in 3.53%. We faced a similar situation in Ecuador, with GDP estimated to grow 3.1% this year and inflation increasing by 3.4%. Chile, on the other hand, posted a stronger quarter with GDP growth of 7.2% and inflation of only 1.1%. Moreover, the commodity oil prices have increased by 33.3% in the quarter since December 2021 on the back of the geopolitical risks after the Ukraine invasion. Having said this, we remain optimistic on the long-term growth potential for our industry. In Peru, self-construction remained strong, with an unmet housing demand of over 1 million units. Bear in mind that self-construction represents approximately 70% to 75% of our cement volumes. We see the same untapped market in Chile and Ecuador where housing deficit is in the order of 700,000 and 665,000 units, respectively. Regarding our operations in Arizona, the market remains strong with the Portland Cement Association estimating a growth of 3% to 4% in our area of influence for the year. Moreover, we have several projects underway for Skanon to increase its capacity while reducing its carbon footprint. On the energy side, Celepsa posted a strong quarter, with volumes up 24%. As you are aware, our all renewable energy platform operates 2 hydroelectric facilities with a total capacity of 271 megawatts. We believe there is plenty of room for inorganic growth in a sector which complements nicely our industrial operations. Last but not least, the Peruvian Stock Exchange has ratified UNACEM as part of the Standard & Poor's/BVL Peru General ESG Index. We are honored to be part of the index for the second year in a row and are working diligently on the sustainability of our business. We hope to have further news to share in the coming quarters. In some administrative matters, we continue with our stock buyback program that will go until June 30, 2022. As of March 31st we have acquired 9.95 million shares. I will now pass it over to Alvaro for a detailed analysis of our financial results. Alvaro?

Thank you, Pedro. Good morning, everyone, and thank you for joining us today. As Pedro mentioned, despite the challenging environment we faced, we had a strong first quarter. I will be glad to go through the highlights of our consolidated financial results. Before we get started, the simple reorganization became effective on January 1, 2022. Therefore, in line with what was discussed at our shareholders meeting last December, we have published the financial results of the recently incorporated UNACEM Peru with the same detail that our investors are used to so they don't lose visibility of the cement business in this country. As you may all know, the simple reorganization has no effect on the consolidated financial statements that we are going to discuss today since it was a simple distribution of assets and liabilities between UNACEM Corp and its subsidiaries, the business units in our portfolio today. Let's get started. Our consolidated revenues during the first quarter were PEN 1,374 million, 26.4% higher than the first quarter of 2021. This increase is explained by the strong performance of cement volumes in all our operations. coupled with higher energy volumes sold, which offset lower ready-mix volumes in Peru and Ecuador. Our U.S. operations volumes were up 28.5% year-over-year and continue their strong upward trend sequentially. Also, the incorporation of the cement operation in Chile in the second quarter 2021 and better volumes in ready-mix in that country contributed to our top line growth. Additionally, all business units posted higher average prices across the board. In Peru, cement dispatches recorded 1.6 million tons, a 10.5% increase compared to the first quarter 2021. Our bagged cement unit kept its solid levels, and our bulk unit improved its volume dispatches in the quarter. Moreover, clinker exports through our Conchan pier recorded 151,000 tons, 41% higher than in the 107,000 tons exported in 2021. Our ready-mix companies in Peru recorded slightly lower volume, 1.2%, of -- 548,000 cubic meters in the first quarter 2022. We expect to have better volume for the coming quarters with the ongoing infrastructure projects that are already contracted. UNICON and Concremax maintained its leadership in the market, supplying the most important projects in the Central region of Peru. Celepsa volume was higher by 23.7%. Energy sales reached 499 gigawatts. Demand from its contracted clients, like UNACEM Peru and Electrodunas, increased during the quarter. Ecuador. Payment volume in UNACEM Ecuador during the first quarter increased by 12.9% with 318,000 tons sold compared to the 281,000 tons sold in the first quarter 2021. Ready-mix volumes were 15.9% lower due to the lack of execution of its infrastructure projects. The U.S.A. Drake Cement recorded 170,000 metric tons of cement sold during the first quarter 2022 versus 132,000 metric tons in the first quarter 2021, an important 28.5% increase. Also, ready-mix operations achieved 225,000 cubic meters dispatched, a figure 22.6% higher than in the first quarter 2021. Aggregate volumes were 13.6% higher with 659,000 tons. The market trend indicates robust demand for our area of influence. Chile. UNACEM Chile had cement dispatches of 85,000 tons. The information is not comparable with the first quarter of 2021 as San Juan plant started operations at the end of March 2021. Furthermore, for the second quarter 2022 onwards, we expect higher volumes as starting in April of this year, the new mill at the San Antonio grinding plant launched operations, increasing capacity by twofold to 600,000 tons. Ready-mix dispatch reached 259,000 cubic meters, 59.5% higher than in the first quarter 2021. Consolidated cost of goods sold were 28.7% higher in the first quarter 2022 due to higher volumes sold and the effect of more expensive fuel costs, mainly in the Cement business unit. Therefore, economies of scale offset marginally fuel costs. Our gross margin was 30.4%, lower than the 31.6% reached in the first quarter 2021. Administrative expenses during the quarter were higher by 43.1% due to higher personnel ends, namely workers' profit sharing, Board fees and taxes. Selling expenses were 18.9% higher, in line with the higher volume sold. Other income was lower by PEN 91.7 million, mainly because in the first quarter 2021, we recorded a nonrecurring noncash income from badwill related to the UNACEM Chile acquisition. Excluding this effect, other income would have been PEN 7.2 million lower. Other expenses during the first quarter 2022 were PEN 9.3 million lower than in the third quarter 2021, also due to a nonrecurring tax expense related to legal mining workers compensation fund recorded in 2021 in UNACEM Peru. For the reasons explained before, our consolidated operating profit was 12.12% lower, recording PEN 297.9 million in the third quarter 2022 versus PEN 339.3 million in the first quarter 2021. Consolidated EBITDA was up by 12.7% in the first quarter 2022 to PEN 422 million versus PEN 374 million in the first quarter 2021. EBITDA margin in the quarter was 30.7%. EBITDA margin in the first quarter 2021 was 34.4%. Last 12 months EBITDA was 58.2% higher than the last 12 months EBITDA registered as of the first quarter 2021, mainly explained by economies of scale with higher sales volumes and the effect of normalized operations for COVID stoppage. Administrative and selling expenses were higher due to higher personnel expenses, mainly due to higher workers' profit sharing. Consolidated net debt was PEN 3.5 billion. Net debt-to-EBITDA ratio was 2.2x, thanks to the important improvement of EBITDA. Therefore, we are compliant with our target leverage that is below 3x limit. Gross debt in PEN decreased as a result of debt amortization according to schedule during the period, mainly from UNACEM Peru. Foreign exchange risk exposure in the total debt as of the end of the first quarter 2022 was 14.8%. Short term debt maturities represent 22% of the total debt. Financial expenses were lower, reaching PEN 46.5 million in the first quarter 2022 versus PEN 60.3 million in the first quarter 2021 due to lower debt and lower average interest rates. Foreign exchange passed from a loss of PEN 20 million in the first quarter 2021 to a gain of PEN 42.1 million in the first quarter 2022. Net profit was PEN 191.5 million during the first quarter 2022 versus PEN 213.6 million during the first quarter 2021, explained by the factors mentioned before. In terms of our ongoing investment, as of the first quarter 2022, CapEx recorded PEN 49 million, similar to the PEN 47 million in the first quarter 2021. The main investments are related to the project of the new automated packing system and reinforcement of the multisilo in UNACEM Peru, the integral project of the new mill in Drake Cement, mixer trucks in UNICON Peru and kiln #2 optimization project at UNACEM Ecuador, which should increase capacity marginally on the back of efficiencies in the production process. We expect an increase in our CapEx in the following quarters as we should recover the pace of the execution of some important projects, mainly related to our environmental strategy. Thank you. That will be all from my side. Operator, we can now proceed to the Q&A session.

[Operator Instructions] There are no questions in the queue at this time. I'd like to hand the call back to management for closing remarks.

Thank you, Doug. We have actually one question from the webcast live. This is a question from Carlos Carazas from Seminario. And he's asking us if -- "Thank you for the results." Carlos, thank you for that. And he is wondering how are going to be -- our cement dispatches are going to be boost and local revenues are going to be boost linked to the pension funds withdrawal in the next months? Alvaro, Pedro?

Okay. Thank you, Monica. It is hard to say. We believe that when money is injected to the economy, it certainly has an effect on cement patches. But I would be very cautious to say that it would -- it is the main driver of cement dispatch. There are other dynamics in the Peruvian economy -- basically, change of habits and consumption and how the people are still saving through building and self-construction. So yes, we think it will have an effect, but it is very hard to quantify to what degree. However, I don't know if you want to comment on that.

Okay. As Pedro mentioned, we have 70% or 75% of our cement demand explained by the self-construction that we believe that has been partially supported by pension and pension fund withdrawals, government grants and household savings. So it's a very -- our very important client that we expect to be helping us in the next month.

We have one more question from the webcast from [ Endre ] from [ Impera Capital. ] And he's asking us if we can give them some more color about EBITDA margin in Skanon. It contracted a little bit, and he -- she wants to know if it's explained by -- mainly because of the higher energy costs or if there are some other drivers?

Thank you for the question. In the case of Skanon, as we mentioned, we are facing a very, very strong market in this moment, but it's offset because of the in this case, is pet coke costs that increased very high in our -- in the -- that market. Also, natural gas increased a lot and coal that we use. We -- in our plant in Drake Cement, we use these 3 types of fuels, no? We will use oil, we use gas -- natural gas and we use pet coke in similar proportions. And that 3 prices of these fuels increases very, very importantly. That's why our margin -- EBITDA margin reduced, but we are expecting a robust demand for the next month.

One more question from Endre. He wants to have us reminding what are going to be our CapEx priorities in 2022?

Yes. As we mentioned, the last 2 years, we reduced our CapEx investment because the pandemic and the uncertainty of our market, our political situation in the country. And the idea is we need to return to have the execution of a very important priority that we have, mainly related to our environmental strategy to be clear that we need to improve our sustainability for our operations. So some of the amount that we didn't invest in the last 2 years, we are going to invest for this year.

Thank you, Alvaro. Doug, I don't know if there are any other questions over the phone?

There are no questions on the audio.

Okay. Then I think we will finish the Q&A session with this then.

Okay. Thank you for joining us today. Overall, I would like to congratulate the team for yet another strong quarter. Going forward, we are cautious of the current political and business environment. But in spite of the challenges, we remain focused on our long-term commitment to generate value for our shareholders and contribute to the community in all ESG-related matters. Thank you very much for your time this morning, and please do not hesitate to reach out to Monica should you have any follow-up questions. Good morning.

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