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

Ladies and gentlemen, greetings, and welcome to Unacem Corp Third Quarter 2022 Results Conference Call. At this time, all participants are in a listen only mode. But please Question-and-Answer Session will follow the formal presentation. If anyone should require operator assistance during the conference, [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Monica Paucar, Investor Relations. Please go ahead.

Thank you. 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 third quarter of the year. Later on, Alvaro Morales, Unacem's Corporate CFO, will present the third quarter financials in detail. Please note that we might disclose some forward-looking statements relating 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 and subsidiaries to be different from those expressed or as long hearing. 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. We are proud to report another strong performance during the third quarter of 2022, with EBITDA of PEN 46.6 million on the back of a robust revenue performance of PEN 1.57 billion. EBITDA was down 1.7% year-over-year but posted a sequential growth of 13.7%. Revenues were up 15.9% compared to the third quarter 2021, 9.9% above the prior quarter. Still, EBITDA margin declined by 460 basis points to 25.9% as some of our operations were unable to transfer higher production costs to pricing. On a country-by-country basis, results were mixed with the Peruvian and U.S. Cement operations, maintaining a double-digit growth trend, partly offsetting weaker results, especially in Ecuador and Chile. Net debt closed at 2.1x EBITDA, once again, well below our target leverage of 3x EBITDA. Peruvian GDP grew by 3.6% during the quarter, while construction GDP was up 1.6%. Inflation has increased 8.64% in the last 12 months as of October and construction material prices rose by 7.23% in the same period. Although our macro environment continues to deteriorate, our cement and ready-mix sales volumes were up by 5.2% and 6.5%, respectively. We believe this is most driven by the current cargo market environment, which has resulted in little or no imported product in our area and has enabled our commercial team to improve penetration in certain market segments, achieving a market share of over 95% in the last quarter in Lima. On the ready-mix front, this has been the strongest quarter so far this year and already contracted infrastructure projects are ramping up and is containing market share in the small to midsized ready-mix segment. Our U.S. operations continued to outperform our other markets. With EBITDA up an impressive 78% year-over-year, while revenues grew by 49.3% during the same period. Cannon results have been supported by an active construction industry in Arizona, which we believe will remain strong in spite of a potential decline in the housing segment overall as demand in the area is supported mostly by nonresidential and public infrastructure. In the first 9 months of the year, a foreign exchange recorded a gain of PEN 9.6 million versus a loss of 73 -- there's one page. On the flip side, our Peruvian operation was in the higher production costs as price increases were not enough to offset the increase in fuel and energy costs, resulting in a significant deliberation in March. Nevertheless, volumes remain solid, and we expect them to be above 2021 volumes despite the 18-day national strike that impacted our operations in June. In the case of Chile, although we are facing a similar situation, we are encouraged by the smooth ramp-up of our new mill, which has enabled us to become self-sufficient in cement for all our ready-mix operations. Furthermore, the additional capacity has allowed us to double our cement market share in a very competitive market to an estimated 10% to 11%. Our energy platform, Celepsa, has posted a 14.7% decline in EBITDA year-over-year. Celepsa is a cyclical business and during the third quarter, the dry season, our hydro-generating capacity declined below our contracted volumes, the company covers the deficit with third-party thermal energy. Celepsa volumes amounted to 497 gigawatt hours, 15% above the third quarter of 2021 and flat sequentially. Once the rainy season begins, we expect EBITDA levels to pick up and reflect our more robust client base. As I mentioned to you in our last conference call, we reiterate our expectations for a slightly higher 2022 EBITDA compared to the year before. Although we acknowledge our portfolio companies at a different maturity stages, we are in the process of implementing a strategic plan to achieve higher returns for rejected capital for our stakeholders in the years to come. Additionally, in our effort to continue improving our reporting and disposal to the market, we're also working on our group's ESG metrics that will be released as part of our annual reporting package to shareholders. That will be all on my side. Thank you very much for your attendance this morning. And now I'll 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. 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 15.9%. This was driven mostly by higher volumes and prices across all the business units. Our cement Peruvian operations maintained strong volume and revenue, demonstrating the resilience of the self-construction from our bag cement clients, together with a slight recovery of both cement demand in the central area of the country. U.S. operations volumes continued their strong sequential upward trend. Likewise, year-to-date consolidated revenues increased 20.3%. This increase is explained by the solid and sustained growth of cement, ready mix and energy volumes sold in all our business units. In Peru, cement dispatches registered 1.7 million tons, an increase of 5.3% versus the third quarter of 2021. These results have outperformed our estimate, recording a new historical record for the company. Additionally, clinker export through the Conchán terminal reached 135,000 tons, 38.1% lower than those reached in the third quarter '21 according to our commitments to clients this year. Likewise, year-to-date dispatches reached 4.9 million metric tons, a 9.7% increase compared to the same period in 2021. In all, the cement market in our area remains strong with a same growing stronger than the total Peruvian market with a solid market share of 47.8% year-to-date. Our ready-mix companies in Peru recorded higher volumes of 6.5% during the quarter, 640,000 cubic meters compared to the 601,000 cubic meters of the third quarter 2021. Year-to-date volumes were 2.3% higher compared to the first 9 months of 2021. As we anticipate better volumes are dispatched in this second half of the year as ongoing infrastructure projects already contracted a relaunch. Unicon and Concremax maintained their leadership in the market by supplying the most important projects in the central region of Peru and gaining market share in small to medium segments in Lima. Celepsa's third quarter 2022, volume was 15.9% higher than the third quarter 2021. Energy sales reached 497 gigawatt hours as demand from its constructed customers increased and new clients were added to their portfolio. Average prices were stable during the period, around $48 per megawatt ton. Year-to-date, Celepsa energy sold was 21.8% higher, with a total volume sold of 1,487 gigawatt hours versus the 1,228 gigawatt hours in the first 9 months of 2021. In Ecuador, Unacem Ecuador third quarter cement volumes increased 10.6% with 381,000 tons sold compared to the 344,000 ton sold in the third quarter 2021. Year-to-date volumes in Ecuador were 3.5% higher, a significant performance considering the 18-day national strike. With this recovery, we expect Ecuador revenues to be slightly higher than 2021. Furthermore, third quarter ready-mix volumes were 44.7% higher due to the recovery in the execution of certain infrastructure projects. Year-to-date, volumes are 13% higher compared to 2022. Cement reported 168,000 metric tons of cement sold during the third quarter '22 versus 134,000 metric tons in the third quarter '21, a significant increase of 25.4%. Likewise, our ready-mix operations reached 230,000 cubic meters sold, 25% higher than in the third quarter 2021. Aggregates volumes were 24.1% higher with 802,000 metric tons. In addition, cement volumes for 9 months of the year were 22.8% higher than in 2021 with 516,000 metric tons. Ready-mix recorded 734 cubic meters sold a figure 27.5% higher. Aggregates outperformed the first 9 months with 2.4 million tons dispatch 34.7% higher than in 2021. The market trend indicates a result, which is already reflected in our year-to-date results. Chile, Unacem Chile had cement dispatches of 119,000 tons during the quarter, with both plants operating. Furthermore, cement dispatches year-to-date recorded 310,000 tons. Notwithstanding, the information is not comparable with 2021, given that the San Juan plant was incorporated in the second quarter '21 and San Antonio plant started operation in April this year. Volumes are expected to continue to increase compared to 2021 as we optimize optimization of the new assets. Ready-mix dispatches in the third quarter reached 230,000 cubic meters, 0.7% than in the third quarter '21. Year-to-date, ready-mix volumes were 19.9% higher as of September 2021 with 734,000 cubic meters dispatch. Consolidated cost of goods sold increased 19.6% in the third quarter 2022 due to higher sales volumes and the effects of higher fuel costs, mainly in the cement and ready mix business unit. The increase in prices and the economies of scale marginally offset higher fuel and raw material costs, resulting in a lower gross margin of 27.1% compared to the 29.4% achieved in the third quarter 2021. Year-to-date, cost of good sold increased 22.2% compared to 2021, while gross margin was 27.8%, slightly lower than the 28.9% achieved as of the first month of 2021. Our administrative expenses for the quarter increased 22.2% due to higher personnel expenses, such as employee profit sharing board fees and taxes. Selling expenses were 3.1% higher in line with the higher volumes sold. Other income decreased because in the third quarter 2021 an accounting adjustment of the badwill generated by the acquisition of Unacem Chile for PEN 48.9 million was recorded. Other expenses during the third quarter 2022 were PEN 16.6 million higher than that PEN 36.9 million of the third quarter 2021, mainly explained by the voluntary retirement program launch in Unacem Peru at the beginning of this year. Similarly, year-to-date administrative expenses were 27.5% higher, saving expenses were 9.3% higher. Other income come from PEN 61.1 million in the third quarter 2021 to PEN 31.9 million in the third quarter 2022. This important decrease is explained by lower dividends received from affiliates, such as Ferrocarril Central that sent us PEN 18.9 million in 2021 and the adjustment of the badwill generated by the purchase of Unacem Chile. While other expenses in the first 9 months of 2022 increased by 47.1% compared to 2021. For the reasons explained before, our consolidated operating profit in the third quarter 2022 was PEN 291 million, a figure 22.7% higher than in the first quarter 2021. Year-to-date consolidated operating profit was 6.6% higher compared to 2021. Consolidated EBITDA in the quarter was slightly lower than in the third quarter 2021, reaching PEN 406 million compared to the PEN 413.4 million in the third quarter 2021. EBITDA margin in the quarter was 25.9% versus 30.5% during the third quarter 2021. Last 12 months EBITDA was 10.9% higher than last 12 months EBITDA recorded in the first quarter 2021, mainly explained by better volumes across all the business units and economies of scale that partially offset the effect of the higher cost of goods sold, mainly due to fuel and raw materials costs. Administrative expenses were higher due to higher operating performance and personnel expense, mostly as a result of higher workers' profit sharing, profits and Unacem Peru voluntary retirement product. Consolidated net debt was PEN 3.4 billion. The net debt EBITDA ratio was 2.12x. Thanks to the significant improvement in EBITDA. Therefore, we are complying with our leverage target, which is below 3x. Gross debt decreased as a result of debt amortization according to the periods scheduled mainly from Unacem Peru, Celepsa and Unicon Peru. Foreign exchange exposure on total debt at the end of the third quarter 2022 was 15.7%. Short-term debt maturities represent only 23.6% of total debt. Financial expenses decreased by 16.6%, reaching PEN 50.1 million in the quarter and by 17.4%, reaching PEN 144 million in the first 9 months of the year due to lower debt levels and lower average interest rates. Foreign exchange registered a loss of PEN 30 million in the third quarter 2022 versus a loss of PEN 36 million in the third quarter 2021, mostly explained by the lower devaluation of the Peruvian local currency in the comparison period. In the first 9 months of the year, a foreign exchange recorded a gain of PEN 9.6 million versus a loss of PEN 73 million in 2021. Net profit in the quarter was PEN 162.7 million versus PEN 91.1 million in the third quarter 2021. As of the first month of the year, net profit was PEN 455 million as of September 2022 versus PEN 393 million in the same period of 2021, which is explained by the factor mentioned before. In terms of our ongoing investment as of the third quarter 2022, CapEx recorded PEN 252 million higher than the PEN 183 million in the third quarter 2021. The main investments are related to the project of the new automated packing system and reformat of the multi-silo in Unacem Peru. The Integra project of the new mill in trade cement mix extraction in Unicon Peru, kiln #2 Optimization project at Unacem Ecuador, which will increase capacity marginally on the back of efficiencies in the production process and the new mobile plant of Preansa Chile. We expect an increase in our CapEx in the following quarter, and we should recover the pace on the execution of some important plant, mainly related to our environmental strategy, and some of them have a delink in execution due to local government permits and license, especially in Peru. Thank you. That will be all from my side. We can now proceed to the Q&A session.

Thank you, Alvaro. -- ask a question through the webcast please. The first question comes from Bianca Venegas. She is asking regarding market dynamics, what are we expecting the infrastructure and self-construction segment in Peru? And in the case of the U.S.A., if we expect a drop in the residential demand drop down volumes in our area of instance. Alvaro?

Thank you for the question. What we can say is that historically, fluctuation in self-construction segment was never too significant. The self-construction cement is a very large atomized demand, which according to our analysis to increase or decrease in a range of plus 4 or minus 4%. After this strong quarters, we expect a slight decline in the last quarter of this year. And well, this decline will not offset the strong result of the year and we will hit a new historical record in cement dispatch. About the next year, as I mentioned, if there is a slightly lower demand of our self-construction segment, it will not be too significant.

In terms of cannon?

Yes. About cannon, 22 is going to be a record year for cannon, supported by a strong demand in the Arizona region. Well, we'll continue producing at full capacity and even selling our inventory. We think that in the particular case of the Arizona market for 2023 will keep our actual levels because is housing is going to reduce slightly new infrastructure product coming to Arizona for the next year that will compensate the reduction in the housing market. So we expect a 2023 growth margin for cannon for our U.S. operation also.

Thank you, Alvaro. Marco Mejia has a question that is very similar to what just Alvaro mentioned, Marco, if you want to follow up something additional, please let us know. The next question comes also from Bianca. She wants to know about fuel costs and how this has pressured our margins during the quarter, what will be our cost strategy next.

Fuel cost was a very important issue this year. We see the different countries and in our different operations, increase in fuel cost that goes from 24%, 26% increase in Peru to 48% increase in Chile and 75% increase in Ecuador fuel prices. So the impact was very high. It's difficult to say what's going to happen the following months, but we see now in the fuel market is that the prices are going down a little bit. But we think that for next year, we'll have better prices in fuel cost than what we had in 2022. That's going to give us a recovery in our margin. So you now see that coal, now the prices are lower than was in the first 3 quarters of 2022.

Thank you, Alvaro. One more question from Marco Mejia from Calpa. He wants to know what we expect for prices for the following months in 2022. And if we expect to keep this price level for the first half of 2023.

Okay. In 2022, we had 3 price increases in Peru, in Cement prices in Peru. So in 2023, mainly in the first half of 2023, you will see that the effect of the recent price increases will still impact revenues positively for that period. The idea is that we think that considering that the fuel cost can reduce for the second year, this will not going to be necessary to improve prices -- increase prices in the first half of next year. So we are looking for stable prices for the next year.

Thank you, Alvaro. Give them a few seconds, if something comes up through the webcast. I think we don't have any more questions. Now I hand over to Pedro for his closing remarks.

Thank you, Monica, and thank you very much for your time this morning. We're looking forward to your comments on our upcoming annual reporting package, which, as you know, will be the first of Grupo Unacem. Please do not hesitate to reach out to Monica should we have any follow-up questions. Have a good day.

Thank you. The conference of Unacem has now concluded. Thank you for your participation. You may now disconnect.