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

Greetings, and welcome to the Grupo UNACEM First Quarter 2023 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, Monica. Please go ahead.

Thank you, Donna. 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, Alvaro Morales, UNACEM's Corporate CFO, will present the first quarter financial in detail. Please note that we might disclose some forward-looking statements related to Grupo UNACEM based on currently known facts, expectations and forecast, circumstances and assumptions regarding future events. Many factors could cause the future results, performance or achievements for Grupo UNACEM to be different than 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. I wish to address the recent political events in Ecuador. The already fragile situation of President Lasso has unfortunately taking a turn for the worst. One of the [ consultants ] implied that Congress will be shut down, a new presidential and congressional elections will be scheduled. The next steps will be determined in 7 days at the most by the Consejo Nacional Electora. In the meantime, President Lasso will be in office and any proposed legislation will have to be approved by the Corte Constitucional. We are monitoring the situation closely. Our initial thoughts are of concern, elections will most likely occur in the next 3 to 6 months in order to complete Lasso's term until May 2025. Then Ecuador will have another presidential and congressional election. We believe it is inevitable that the political uncertainty will affect economic conditions in the country. For now, we remain cautious, but I remind you that Grupo UNACEM is a long-term investor and has been through several political crisis. Going back to our business performance. As I mentioned to you in our last quarterly call, our main concern for our Latin American markets remains the effect of the political environment in our market dynamics. As of now, GDP growth has been revised down for Peru to 2% from an initial 2.2% for the year. A similar situation occurs in Chile, where all market estimates says ] GDP growth still on negative ground, and Ecuador where GDP growth expectations are 2.3% on average. But this period considerably given the recent developments. A consequence, our cement operations in the region are facing difficult market conditions. In Peru, we believe self-construction has dropped by 12% in the first quarter in our area of influence. And although deceleration is not expected to be as steep in the coming quarters, we could be facing a mid-single-digit time for the year. On the flip side, our Peruvian ready-mix business expects a more favorable environment on the back of the restart of important infrastructure projects. Regarding our Ecuador operations. Market conditions were already stagnant almost flat volume expectations for the year and decline in pricing. Moving to Chile, although the first quarter registered market volumes declining by 10%, we're encouraged by the positive performance of our operations and in spite of this challenging market conditions, we believe we will manage to increase market share close to 10% on the back of important commercial efforts and the ramp-up of our second [indiscernible]. On the other hand, our U.S. operations remain strong. The market will be boosted by the large government long-term infrastructure bill with a total funding of $550 billion and municipal spending that will most likely offset any declines in the residential housing sector. We expect our sales volume to remain at even levels in the prior year as we are already operating at full capacity. During the year, we should increase our capacity as the new vertical branding will be operating by the third quarter of 2023 and should enable Skanon to increase cement production to 984,000 tons per year that is up to 55%. Finally, CELEPSA expects a mid-single-digit top line growth in the back of new long-term commercial contracts. More importantly, we closed the Termochilca transaction on May 8 and are busy working on the integration of these operations to our platform. As many of you may recall, the additional 300 megawatts of thermal capacity will enable our energy platform to be self-sufficient going forward. CELEPSA standalone has long-term contracts for over 2,500 gigawatt hours and our hydroelectric capacity produces 1,200 gigawatt hours per year on average. In spite of the mixed results in our top line growth, consolidated revenues for the year should be slightly above those of 2022. But our consolidated EBITDA is expected to register a modest decline as profitability could deteriorate on the back of expensive energy prices in our Peruvian cement business. A less profitable client distribution in the revenue business, a loss of economies of scale in our Ecuadorian operations and the need to purchase energy in the spot market to cover demand for additional clients. However, UNACEM is a firm believer of the long-term industry potential will continue consolidating our operations and strengthening our commercial presence in our markets. As such, we continue our capital investments, I have recently announced commitments for $330 million reached for carbon emission targets by 2030. Additionally, we have launched Progresol Plus, our digital platform for the sale of cement and other construction materials, which will be supported on our strong distribution network. That will be all on our side. Thank you very much for your attendance this morning. And 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. As Pedro mentioned, in spite of the challenging macro conditions we faced during this quarter, we achieved good operating results that allows us to record solid financials. Our consolidated revenues during the first quarter 2023 were driven mostly by stronger sales in our U.S. operations, ready mix and energy in Peru. This, coupled with higher average prices in cement and energy resulted in a 2.6% year-over-year increase. In Peru, cement dispatches registered 1.5 million tons, a decrease of 8% versus the first quarter of 2022. Furthermore, clinker exports through the Conchan terminal reached 105,000 tons, 29.9% lower than those in the first quarter 2022, according to our commitment to clients this year. Our ready-mix companies in Peru recorded higher volumes during the quarter with 629,000 cubic meters compared to the 548,000 cubic meters of the first quarter 2022, a growth of 14.8%. The higher volumes dispatch are supported by the ongoing infrastructure projects that are being executed at a better at a better pace. EBITDA was slightly impacted by the sales mix. CELEPSA the first quarter 2023 volume was 7.2% higher than the first quarter 2022. Energy sales reached 535 gigawatts hour as demand from its contracted customers increased. EBITDA margin was lower due to the purchase of energy in the system to comply with the higher volume contractor that surpasses Platanal and Marañón production. Ecuador, in a sense Ecuador's first quarter cement volumes declined by 10.7% to 284,000 tons sold compared to the 318,000 tons sold in the first quarter 2022. However, first quarter ready-mix volumes were 11.7% higher on the back of [indiscernible]. In the U.S.A., Drake Cement reported 146,000 metric tons of cement sold during the first quarter 2023 versus 170,000 metric tons in the first quarter 2022, 13.8% lower. As Pedro mentioned, Drake's plant is operating at full capacity and demand remains solid. The decline is explained by an extended plant stoppage required for the annual maintenance. Ready-mix operations reached 256,000 cubic meters sold, 0.7% higher than in the first quarter 2022. Aggregate volumes were lower by 36.8%, amounting to 416,000 metric tons. Beginning of 2023, we are only operating one aggregate square, which will result in a decrease in volumes, but we'll maintain our profit in this business. In Chile, UNACEM Chile cement dispatches recorded 118,000 tons during the quarter, which is 38.1% higher year-over-year. With both branded plants fully operating. Ready-mix dispatches experienced a decrease of 26.3% with 181,000 cubic meters dispatched. The whole industry contracted around 10% in the first quarter of the year. Consolidated cost of goods sold were 5.1% higher in the first quarter 2022. We started to see an improvement in the cost of logistics and the supply chain that has shifted the trend of previous quarters, which has offset the cost of some raw materials and fuel, which remain high. As such, our gross margin was 28.6% versus 25.6% of the fourth quarter 2022 at below the 30.4% of the first quarter 2022. Our administrative expenses in the first quarter were 5.3% higher than in the first quarter of 2022, explained by personnel expenses due to nonrecurring events. Selling expenses in the quarter were 6.8% higher than in the first quarter 2022 due to increase in advertising during the period. In the first quarter, other income was PEN 2.6 billion higher than in the first quarter 2022 due to one off income received. Other expenses were PEN 9.1 million higher than in the first quarter 2022, mainly due to UNACEM Peru voluntary retirement program, which ended the first quarter 2023. Consolidated EBITDA in the quarter was PEN 392 million, a figure 7.1% lower than in the first quarter 2022. EBITDA margin was 27.7% for the first quarter 2023, a sequential improvement as the fourth quarter 2022 with positive margin of 24%, but we are below the first quarter 2022, when we recorded a margin of 30.7%. The decline is explained by the lower cement volumes and higher raw material and fuel costs that were partially compensated by the price adjustments. In other words, we were able to partially transfer higher costs, but with no margin gains. Consolidated net debt was PEN 3.6 billion, higher than the PEN 3.5 billion at the first quarter 2022. During this year, we continued with our long-term debt amortization according to schedule. However, some business units took some short-term loss to cover working capital needs. Therefore, the net debt-to-EBITDA ratio was 2.3x at the first quarter 2023, slightly higher from 2.2x at the end of 2022. Our leverage ratio falls within our term -- our medium-term target. Financial expenses were 16.3% higher in the quarter, explained by the new short-term debt acquired at the higher costs. Foreign exchange in the quarter came down from PEN 42 million gain in the first quarter of 2022 to a PEN 50 million gain in the first quarter 2023, mostly by the conversion of U.S. dollar-denominated debt to solace and a lower FX rate in the year compared to the end of 2022. Net profit during the quarter was PEN 171 million, which is 10.9% lower due to the factors mentioned before. In terms of CapEx, disbursement totaled PEN 107 million during the quarter. As we anticipated in our last call, this year's CapEx is expected to be higher due to the execution of some important products, mainly related to our operations sustainability. The main investments are related to the debottlenecking in kiln #1 and hydrogen injection project in UNACEM Ecuador. Comprehensive mill projects and new equipment for aggregates in the Skanon and the expansion of packing and dispatch capacity and the kiln #3 cooler dedusting system in UNACEM Peru. Thank you, that will be all from my side. Now we open the microphone for your questions.

[Operator Instructions] We're showing no audio questions at this time. I'd like to turn it over to Monica for any web questions.

Thank you, Donna. Let's give a couple of minutes. Sometimes we have some delay when receiving the questions through the webcast. I want to give everyone a couple of minutes for questions to be done.

[Operator Instructions]

We're receiving questions in the webcast. Our first question comes from Juan Sanchez from Lima . He wants to know what we expect from Ecuador for the next -- for this coming year? So I'm going to pass it over to Alvaro.

Thank you for the question. About our Ecuador operations. We think that the market is affected both the uncertainty of the political situation of the country. But we will see what is going to come now with the [indiscernible] that Pedro mentioned and see if they can return to a normal democratic political situation in the country that will allow investments in housing and infrastructures will continue. But we are, in this moment, cautious about in the future -- the near future of our sales in Ecuador.

And the next question is from Giovanni . He want to know which percentage of our total sales represent, were negative affected by the climate risk during the first quarter, especially with funds . I believe this question is regarding Peru, how much impact we have in our cement dispatch probably.

Well, we have 2 programs in the first quarter. Of course, one was the climate and the other one, the social movements that affected some parts of that of our area of influence. In the case of the climate, we have promised to dispatch to the [indiscernible] the jungle and the high mountains. We think that our -- about our reduction of 8% of volumes, mainly 2% or 3% represents the climate and social problems for the first plant.

We are still showing no audio questions at this time.

I have some other questions here coming through. We have another one from . He wants to know how do we see cement dispatches in Peru for 2023?