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

Greetings, and welcome to Grupo Unacem 4Q 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Monica Paucar, Head of Investor Relations. Thank you. Monica, you may begin.

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 operation during the fourth quarter of the year and the full 2022. Later on, Alvaro Morales, Unacem's corporate CFO, will present the fourth quarter and 2022 financials in detail. Please note that we might disclose some forward-looking statements related to Unacem Corp and its 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 Grupo Unacem 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 to share with you our quarterly performance review. In this conference call, I'd like to reflect the first year anniversary of Grupo Unacem, the holding company. We operate in 5 countries with an installed capacity of 11.3 million tons in cement production, 5.5 million cubic meters in ready-mix, 9.7 million tons in aggregates and after the Termochilca acquisition has been completed, 571 megawatts of wholesale power generation. We manage the platform as a portfolio of assets seeking sustainability and maximizing long-term value creation for our shareholders. In 2022, we carried out a sole strategic scanning process for our organization. The resulting plan sets a portfolio strategy until 2026 as well as exciting value creation goals for each business unit in the maturity space of the market in which they operate. During this period, we will focus on unlocking the value of the asset base, knowledge and expertise that we've been overseeing. We will achieve this by tapping on synergies concentrating on efficiencies and sharing best practices across all units. Once this stage has been completed, we expect to continue to grow our portfolio, keeping the focus on our core business. In line with our portfolio strategy, we announced 2 M&A deals last year. The most recent one is Termochilca, the company that operates [indiscernible] with a total capacity of 300 megawatts. The transaction is a good fit for energy conservation unit, Celepsa, as it complements our renewable generation capacity to back up the supply of our long-term customers, even during the dry season, reduce our exposure to marginal costs in the long run and ensure the sustainability of the business. As many of you may recall, the Termochilca transaction requires approval of the antitrust local authority, INDECOPI. We filed our application in early February and expect clearance to close the transaction by April. Celepsa's and Termochilca's combined capacity still amounts to less than 5% of the Peruvian market share. Our second M&A transaction was the acquisition of CONOVIA, an aggregates company in Chile. Aggregates are important for ready-mix production and their scarcity raised market prices. This transaction allows vertical integrations in our Chilean operation, like those in Peru and in the United States with a corresponding production cost efficiencies and ready mix. I will let Alvaro detail the results of the quarter and the full year. I would only like to highlight our robust performance in 2022 with a consolidated EBITDA of PEN 1.572 billion, up 1.3% year-over-year and revenues of PEN 5.979 billion, up 18% year-over-year. EBITDA margin reached 26.3%, that is 430 basis points below that of 2021. Despite the strong top line performance, margins deteriorated mostly by the increase in raw materials and fuel prices, which affected our Chilean [indiscernible] operations. Net debt closed at 2.2x EBITDA, once again well below our target leverage of 3x EBITDA. Finally, a few comments on the current year 2023. The political environment in Latin America has become a challenge, which we inevitably have an impact [indiscernible]. GDP growth expectations for Peru are of 2.2% for this year after growing only 2.8% last year. This is well below the country's full potential. A comparable situation of course in Chile and Ecuador with GDP growth expectations of minus 1.3% and 2.1%, respectively. Overall, we expect Grupo Unacem to post an EBITDA growth in the low-single digits this year and a slight recovery in margins, mainly due to an expected drop in supply prices. Growth should be supported mostly by operations outside of Peru, with the United States strong market dynamics, Ecuador's margin recovery and Chile's implementation of our strategic plan. That will be all on my side. Thank you very much for your attendance this morning. And now I'll pass it on to Alvaro for a detailed analysis of our financials.

Thank you, Pedro. Good morning, everyone, and thank you for joining us today. As Pedro mentioned, this quarter was registered a record sales performance that allows us to have outstanding financial results. Our consolidated revenues during the fourth quarter 2022 increased by 12.2% versus the fourth quarter 2021, driven mostly by strong volumes across the board. Strong performance in cement dispatches in Peru and Ecuador, higher ready-mix volumes sold in all our operations, higher [indiscernible] and higher average prices. Full year consolidated revenues increased by 18% compared to 2021. This increase is explained by the solid and sustainable growth of cement, ready mix and energy volumes sold in all our business units. In Peru, cement dispatches registered 1.7 million tons, a slight decrease of 0.2% versus the first quarter of 2021. Additionally, clinker exports through the Conchan terminal reached 101,000 tons, 25.1% lower than those reached in the fourth quarter 2021. According to our commitment to clients this year, full year dispatches reached 6.7 million tons, a 6.9% increase compared to 2021. All in all, the cement market in our area remains strong with Unacem growing stronger than the total Peruvian market with a solid market share of 47.8% in the year. Our ready-mix companies in Peru recorded higher volumes of 12.5% during the quarter, 685,000 cubic meters compared to 6,000 and 8,000 cubic meters the fourth quarter 2021. Full year volumes were 5% higher compared to 2021. Better volumes were dispatched in the second half of the year as ongoing infrastructure projects already contracted are relaunched. 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 fourth quarter 2022 volume was 10.7% higher than the fourth quarter 2021. Energy sales reached 521 gigawatts as demand from its contracted customers increased and new clients were added to their portfolio. Celepsa energy sold during 2022 was 18.7% higher, with a total volume sold of 2,017 gigawatts versus 1,699 megawatts in 2021. Ecuador. Unacem's Ecuador fourth quarter cement volume increased 4.7% to 351,000 tons sold compared to the 335,000 tons sold in the fourth quarter 2021. Year-to-date, volumes in Ecuador were 3.8% higher than 2021, a significant performance considering the 18 days national strike last June. Performance was better during the second half of the year as we anticipated. Furthermore, fourth quarter ready-mix volume were 59.5% higher due to the recovery in the execution of certain infrastructure projects. Full year volumes were 22.7% higher compared to 2022. U.S.A. Drake Cement reported 151,000 metric tons of cement sold during the fourth quarter 2022 versus 158,000 metric tons in the fourth quarter 2021, 4.5% low. Nevertheless, our ready-mix operations reached 228,000 cubic meters sold, 10% higher than the fourth quarter 2021. Aggregates volume was slightly lower by 1.1%, amounting to 676,000 metric tons. In addition, cement volumes for 2022 were 15.3% higher than in 2021 with 667,000 tons. Ready-mix recorded 962 cubic meters sold, a figure 22.9% higher. Aggregates outperformed 2022 with 3 million tons dispatched, 24.7% higher than in 2021. Arizona demand was strong during the year, which reflected our 2022 results in the U.S. Chile. Unacem Chile had cement dispatches of 120,000 tons during the quarter, with both plants operating. Furthermore, cement dispatches in 2022 recorded 430,000 tons. Notwithstanding, the information is not comparable with 2021 given that San Juan plant was incorporated in the second quarter '21 and San Antonio plant started operation in April 2022. Revenue dispatches in the fourth quarter reached 270,000 cubic meter, 34.5% lower than in the first quarter 2021. Full year ready-mix volumes were 2.8% lower than in 2021 with 939,000 cubic meters dispatched. Consolidated cost of goods sold were 22.4% higher in the fourth quarter 2022 due to higher raw material and fuel costs. Additionally, during the quarter, the overhaul of one of the Peruvian fields was executed as to run Ron, with the corresponding effect in the fixed cost. Full year consolidated cost of goods sold were 22.2% higher in 2022 compared to 2021, explained by higher volumes sold, the increase in prices and the economies of scale -- at the increase of price and the economies of scale marginally offset higher fuel and raw material costs. Our gross margin was 27.2% versus 29.7% of 2021. Our administrative expenses in the fourth quarter were 14.1% higher than in the fourth quarter of 2021. Selling expenses in the quarter were 6.6% higher than in the fourth quarter 2021. Full year administrative expenses in 2022 were 23.5% higher and selling expenses were higher by 8.5% than in 2021, explained by higher personnel expenses due to workers' profit sharing and board fees. Selling expenses were higher in line with the higher demand. In the fourth quarter, other income was higher than the fourth quarter 2021, mainly due to a non-current income from claims to the tax authority in Peru and sale of mixer trucks and equipment in the U.S.A. Other expenses was similar than in the fourth quarter 2021. For the full year, other income were 7.4% lower due to extraordinary dividend from Ferrocarril Central Andino received in 2021, PEN 21 million. Other expenses during 2022 were 22.1% higher than in 2021, mainly due to the voluntary retirement program executed in Unacem Peru during this year. As a consequence, our consolidated operating profit in the quarter was PEN 260 million, 12.3% lower than in the fourth quarter 2021. Full year consolidated operating profit was PEN 1,085 million, higher by 1.4% than the PEN 1,071 million recorded in 2021. The operating margin was 18.2% in 2022 versus 21.1% in 2021. The consolidated EBITDA in the quarter was PEN 686 million, a figure 9.7% low. 2022 consolidated EBITDA was PEN 1.57 billion, 1.3% higher than the PEN 1.55 billion reached in 2021. EBITDA margin was 26.3% for 2022, lower than the 30.6% margin of EBITDA in 2021. The better volumes across all business units, price adjustments and economies of scale partially offset the effect of the higher cost of goods sold, mainly due to fuel and raw materials. In other words, we were able to partially transfer higher costs, but with no margin gain. Operating expenses were higher due to higher operating performance and personnel expenses, mostly as a result of higher workers' profit sharing, board fees and Unacem Peru -- board fees and Unacem Peru voluntary retirement profit. Consolidated net debt was PEN 3.4 billion, lower than the PEN 3.5 billion at the end of 2021. During this year, we continued with our debt amortization according to schedule. Therefore, the net debt-to-EBITDA ratio was 2.2x at the end of 2022, down from the 2.3x at the end of 2021. Our leverage ratio falls within our medium-term target. Financial expenses were 12.3% lower in the quarter. Full year financial expenses were 15.9% lower in 2021, explained by lower stock of debt and stable average cost. Foreign exchange in the quarter turned for PEN 9.4 million gain in the fourth quarter 2021 to a PEN 25.8 million gain in the fourth quarter 2022. Full year foreign exchange passed from a loss of PEN 64.1 million in 2021 to a gain of PEN 35.4 million in 2022, mostly by the conversion of our U.S. dollar-denominated debt to soles and a lower FX rate in the year. Net profit in the quarter was PEN 195 million. Full year net profit was PEN 660 million versus PEN 575 million during 2021 due to the factors mentioned before. In terms of [indiscernible], disbursement total of PEN 121 million, 23% higher. The main investments are related to the project of new automated packaging system and reinforcement of the multi-silo in Unacem Peru, the Integra project of a new mill in Drake Cement, mixes tracking in UNICON Peru, still #1 optimization project at Unacem Ecuador, which will increase capacity marginally on the back of efficiency in the production process and the new mobile plant of PREANSA in Chile. We expect an increase in our CapEx in 2023 as we should recover the pace on the execution of some important projects, mainly related to our environmental strategy, as some of them have a delay in execution due to local governance permits and license, especially in Peru. Thank you. That will be all from my side. Now we open up for your questions.

Would you like to take the online questions first, the questions on your webcast?

Let me -- let's give them one more minute. We have one question from Carlos Carazas. He wants to know if we could share more in detail about Peruvian expectations. If we see a resilient year in terms of volumes and how long can we increase prices in the local market? Alvaro, do you want to take that?

As Pedro mentioned, for this year 2023, we expect supply prices to come down. That will improve our costs, our EBITDA margin. And that, for us, is for the group, we expect a growth -- EBITDA growth in the low-single digits for this year. Well, in our -- we expect for our 2023 market in Peru, a slightly reduction in volumes, but with better prices. We already increased prices at the beginning of the year in an average of 7.3%. So it will compensate the reduction of our volume sales. And for the local market, we think that we are in the right level of prices for this year. So we are not expecting more prices increase for the rest of the year.

Our next question comes from Gerald Ford. He wants to know what we are expecting about volume, cement volumes and the trend in the U.S. going forward?

Yes. Well, 2022 was a very strong year, and our unit sold all the order production and the inventory they had at the beginning of the year. For 2023, we see our operations at full capacity volumes and better prices because we saw at the beginning of the year that prices in the U.S. increased around 8%. So we expect a better income for the year.

Our next question comes from Bianca Venegas from Credicorp. What -- she wants to know what's our cost strategy going forward, considering this continued effect in the margins?

We mentioned in our report at the beginning of this meeting, we -- now we are looking that in 2023 that fuel costs are going down, logistic costs are going down, that is going to improve our cost of raw materials, and we improved our production cost and will improve our margins for the year. So we expect -- in terms of cost, we expect a better year than 2022. Well, bear in mind that our portfolio allows us to offset negative effect with positive impact in other markets.

The next question comes from [ Andrew Peckson ]. And he wants to know [indiscernible] more insight on our CapEx spending for 2023, given the fact that we already mentioned that it will go up. And what is the leverage that we expect in 2023 given the CapEx that will go higher? Andrew, just give us one minute.

About the CapEx, we expect for 2023 to increase our expenditures approximately going from PEN 422 million that we used in 2022 to around PEN 600 million for this year. It's around 40% increase. The leverage EBITDA, net EBITDA ratio with this CapEx and the acquisition of Termochilca should go -- should be around 4.5% 2.6x EBITDA, a little increase from the 2.2 that we closed our 2022 year -- the year 2022.

Our next question comes from Bianca, again. Pedro, she wants to know what we are planning regarding M&A activity.

We are not looking for -- we're not actively looking for or pursuing M&A [indiscernible] investments or activities, but we are always assessing whether the right opportunity arises. We are not actively engaged in [indiscernible] activities that we are always evaluating options, if they arrive [indiscernible] strategy.

And the last question from Carlos. He wants to have a little bit more color on our operations. What's the perspective of the state, we expect favorable results on the current macro scenario of the U.S.? Alvaro?

As we mentioned, the price increase in the U.S. should drive top line growth and offset a slightly decline in volumes that we expect for this year. So we are willing to have a strong EBITDA performance for our U.S. operations.

We just have one more question. This comes from Joan Sanchez. And we wants to know in the short term, if we have any additional efficiency projects in Ecuador and Chile, considering that they were hit -- their margins were hit in the recent quarters? I'm going to pass it over to Alvaro.

Okay. Talking about Ecuador, the margin should benefit from lower costs, mainly of use. And Chile also will benefit from the lower clinker import costs as well as a strategic -- our strategic initiatives that are underway. In the first 2 months of this year, we already saw that fuel and logistic prices have dropped down importantly. So that's going to benefit our margins in Ecuador, Peru, Chile in all our operations.

We have one more question from Marco Mejia. Marco wants to know how long we estimate the ramp-up stage of our Chilean operations. And I will pass it over to Alvaro for the answer.

Yes. About Chile, we have now the good notice that all our 2 milling plants are working at full capacity in this moment. So we expect really, really more increase in our results for Chile in 2023 after a 2022 year that was complicated because FX in Chile and logistic costs and fuel costs.

I don't see any further questions from the webcast. I don't know we'll have some other questions on the phone line.

No, Monica, we do not have any questions on the audio line. So ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Pedro Lerner, corporate CEO, for closing remarks. Over to you, sir.

Thanks, and thank you all for your time this morning. I would like to invite you to our upcoming general shareholders' meeting scheduled for March 30. In the meantime, please do not hesitate to reach out to Monica should you have any follow-up questions. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.