Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q4 2024 Earnings Call Transcript

Cementos Pacasmayo S.A.A. (NYSE:CPAC) Q4 2024 Earnings Call Transcript February 14, 2025

Marcelo Furlan – Itau:

Adrian Huerta – JP Morgan:

Francisco Suarez – Scotiabank:

Luis Ramos – Larrain Vial:

Gabriel Perez – CrediCorp:

Operator: Good day, ladies and gentlemen. Welcome to Pacasmayo’s Fourth Quarter 2024 Earnings Conference Call. At this time all participants are in listen-only mode and please note that this call is being recorded. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. I would now like to introduce your host for today’s call, Ms. Claudia Bustamante, Investor Relations Manager. Mrs. Bustamante, you may begin.

Claudia Bustamante: Thank you, Louis. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; Mr. Manuel Ferreyros, our Chief Financial Officer; and Eli Hayashi, our Finance Managing Director. Mr. Nadal will begin our call with an overview of the quarter, focusing primarily on our strategic outlook for the short and medium term. Mr. Ferreyros will then follow with additional commentary on our financial results. We’ll then turn the call over to your questions. Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other methods that are not historical facts and are therefore subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company’s regulatory filings. With that, I’d now like to turn the call over Humberto

Humberto Nadal: Thank you Claudia. Welcome, everyone, to today’s conference call, and thank you for joining us today. Before beginning the analysis of this quarter’s results, I would like to take a few minutes to talk about the recent announcement of Manuel Ferreyros retirement as CFO. As most of you already know, at the end of last year, we announced that Manuel will be stepping down as CFO effective March 31, after an impeccable career that led in to be considered several times as one of the best CFOs in our industry in Latin America. His retirement is a part of a succession plan carefully drawn up more than three years ago. In April 2025, a new chapter will begin for the company and the leadership of Ms. Eli Hayashi, who will maintain Manuel’s legacy and learnings leading Pacasmayo to be better every day.

Now moving on to our results. This quarter, we saw a reversal of the negative trend in sales volume, resulting in an increase of 2.6% year-over-year. This increase was mainly due to increased sales to the public sector and concrete and payment for the Piura airport project. For whole year 2024, revenues increased 1.4% despite a slight decrease in sales volumes, mainly due to sales mix and our dynamic pricing strategy. Moreover, consolidated EBITDA reached a record PEN549.3 million with an EBITDA margin of 27.8%. These results considering a challenging demand environment outstanding and give us the confidence to believe that with a stronger demand scenario in 2025, we will be able to deliver even better results. I would now like to highlight the progress in 2024 of some key elements of our strategy.

As you are all aware, the world is transforming fast. The understanding and use of new technologies such as AI and machine learning and the immense power of data are accelerating the pace of change. As a company, we are focusing on both developing and adopting digital tools and reinforcing the culture to adopt them. Throughout 2024, we made significant strides in digital transformation aligning technology with our strategy of strategic objectives to enhance efficiency and innovation. We developed initiatives focused on the digitalization of operations, introduced a user center service model to improve customer interactions and AI-driven solutions play a growing role in the company’s evolution. Additionally, data management and automation played an increasingly crucial role in optimizing supply chain efficiency modernizing logistic processes, streamlining operations and reinforcing our commitment to continuous improvement.

However, all of these technology adoption and data reliance brings its own challenges. Cyber security is paramount in the process of digital transformation. During 2024, we focused our efforts on strengthening the protection of operational technologies by increasing the maturity of the industrial network. We also consolidated an Information Security Committee composed of representatives from various management positions to ensure a comprehensive approach to digital risk management. These efforts culminated in a major milestone as we became the first Peruvian cement company to obtain an ISO 27001 certification, the international standard for safeguarding the confidentiality and integrity of information. Another important pillar of our strategy is to continue to develop and strengthen our building solutions.

During 2024, we do significant projects towards this goal. First, we designed an innovative solution for river bank protection that our traditional on with steel and rocks. But there are parts of the north where rocks are not readily available, we signed a new solution using mainly cement, local materials and mortalized both more cost-effective and more durable. Secondly, we executed the reconstruction of the two runways and the perimeter fence of the Puria airport not only as a concrete and payment provider, but directly involved in the construction as part of the consortium. The way in which we approach this project is different from other airport improvement projects we have provided concrete following the past. Since in this case, we actively participated in every step, beginning with prospection and ending with actual delivery of the finished infrastructure project.

This involvement in every step of the process has brought invaluable insights and learning opportunities albeit at some additional cost. We remain really confident that value-added building solutions are a rock forward for our company, and we will continue learning, adjusting and improving in this journey. Finally, I would like to briefly mention some advancement and recognitions in terms of sustainability. We are extremely pleased to be the first Peruvian cement company to obtain an environmental product decoration from the global EPD program for three of our cement plants, representing an estimated 75% of our current portfolio. Verified by iron ore, this international certification provides full transparency and environmental impact of our products through the life cycle, reaffirming once more our leadership in sustainability and our commitment to responsible construction.

In addition, we are honored to have been included for the fifth consecutive year in the sustainability yearbook by S&P and will maintain our position as industry leaders in the macro responsibility ESG ranking for the ninth year in a row. This valuation, which considers environmental impact, social responsibility, ethics and corporate governance, place us in a top 10 more responsible companies in the country. These recognitions reinforce the dedication to sustainability and drive us to continued embedding it at the core of our business strategy. I will now turn the call over to Manuel to go through financial analysis.

Manuel Ferreyros : Thank you, Humberto. Good morning, everyone. This quarter revenue increased 3% compared to the same period of 2023, reaching PEN526.7 million. During this same period, the gross profit decreased 2.1% when compared to the same period of previous year, mainly due to higher costs related to the execution of the Piura airport project. Consolidated EBITDA was PEN142.5 million. This quarter and the EBITDA margin was 27.1% and 8.7% and a 3.4 percentage point decrease, respectively, when compared to the adjusted EBITDA and the 19.2% and 3.7 percentage point increase respectively, when compared to a consolidated EBITDA of the same period of 2023. For the whole year of 2023, revenues increased 1.4%. Consolidated EBITDA increased 14% and the EBITDA margin also increased 3.3 percentage points when compared to the same period of last year.

These positive results, as Humberto mentioned, are the outcome of a smart pricing strategy and a solid operating efficiencies. During to the operating expenses, administrative expenses for the fourth quarter of 2024 increased 16% and 9.2% in 2024 when compared to the same period of the previous year, respectively, mainly due to the increased personnel expenses because of a larger workforce as well as a higher workers’ profit share and third-party services related to renewal fees for mining concession, software and licenses among others. Selling expenses during this quarter increased 34.8% and 17% in the 2024 compared to the fourth quarter and 2023, respectively, mainly due to the increase in personnel expenses because of a larger worker force as well as a higher workers’ profit share, advertising and promotion as well as software and licenses.

Moving on to the different segments. Sales of cement increased 1.8% this quarter when compared to the same period of 2023, mainly due to an increase in average prices. The gross profit of this period also increased 1.9% and the gross margin remained flat when compared to the fourth quarter of 2023. For the whole year of 2024, sales of cement decreased 2.2% when compared to the whole year of 2023, mainly due to a decrease in demand from the self-construction segment. Nonetheless, due to our continued focus on efficiencies, the gross profit increased 7.6% and the gross margin increased 4.1 percentage points in 2024 when compared to 2023, mainly due to cost optimization. During this quarter, concrete payments and mortar sales increased 30.9% and 48.8% for the whole year 2024 when compared to the same period of 2023, mainly due to an increased sales volume of payments for the Piura airport project among others.

Gross margin decreased during this quarter and the full year, mainly due to increased costs related to the execution of the Piura airport project. There is a difference in exchange rate between the rate project projected in the contract versus the real exchange rate as well as the additional costs incurred because of the extension of the project beyond our planned execution period. As Humberto mentioned before, we remain confident that developing, building solutions is the right path for our company, even if it entails some additional costs in the short term. Regarding precast material sales and gross margin for the fourth quarter 2024, were mostly in line with the fourth quarter of 2023. During 2024, precast sales increased 18% compared to 2023, mainly due to an increased demand from the public sector.

Moreover, gross margin increased 10.7 percentage points when compared to 2023, mainly due to dilution of fixed costs because of this higher sales volume. Moving back to our consolidated results. The net profit increased 39.3% this quarter and 17.8% for the whole year when compared to the same period of last year, respectively, mainly due to increased operating profit, as mentioned before, as well as to the impairment loss of our vertical gains included in the 2023 results. Finally, in terms of debt, our net debt-to-EBITDA ratio was 2.7 times below the level obtained the previous quarter as we continue deleverage. As Humberto mentioned, I have decided to step down as CFO as of March 31. Pacasmayo has been my home for the past 17 years, will surely miss it.

But it is time for the next generation to step forward as the greatest legacy we can leave is a team of well-prepared and talented individuals. El Hiyashi has worked for Pacasmayo for the last 20 years since he internship, and I have worked closely with her for the last past five years. I am confident that she is more than ready to take up the challenge. I want to thank each and every one of you for your trust in me as CFO and in our company throughout this time. Operator, can we please now open the floor for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Marcelo Furlan from Itau. Please go ahead.

Marcelo Furlan : Hi, everyone. Can you hear me?

Humberto Nadal: Yes, please go ahead.

Marcelo Furlan: Okay. Thank you guys for taking my question. So I have a couple of questions here. The first is related to sales volumes for ’25. I mean when we see the volumes in this 4Q, which rose by 3% year-over-year. And actually when you compare the second half sales volumes in 2024, it increased by 14% versus the first half of last year. So on top of that, I’d like to have more color on what are you guys expecting for sales volumes in 2025? This is my first question. The second question is, if you guys could please give you a little bit more detail regarding the higher cost and expenses that you guys had in this 4Q. This would help as well. And finally, my third question is related to capital allocation ahead. So what are you guys forecasting for CapEx in ‘2025? And also what are guys forecasting for maybe increasing shareholders’ return and so on and so forth. So that’s pretty much it. Thank you.

Humberto Nadal: Sure. As we mentioned, I mean, the last quarter, we saw for the first time in 2024, an increase compared year-to-year. So we believe the volumes should show a positive trend on 2025, probably on the same positive numbers that we saw in the last quarter of 2024. Regarding the CapEx question you had, our sustaining CapEx remains at PEN100 million more or less. We don’t see any additional CapEx in this coming year or even 2026. I think we are well prepared to deliver all the demand that will be showing up. And in terms of higher cost and expenses, I mean, I think I would like to drive your attention back to — in the end, we finished the EBITDA margin at a level which we think is very good. But more than a good and competitive is very sustainable.

Of course, we have had some increased costs in terms of we have more personnel. The company is growing and everything we had some increased cost because of profits are in companies that’s according to the law. But in the end of ways, you have to see — look at it is, I mean, I think the EBITDA margin, which we closed the year is one that we should be sustained towards the future.

Marcelo Furlan: Okay. Thank you so much, guys.

Operator: Okay, thank you. Our next question comes from Adrian Huerta from JP Morgan. Please go ahead.

Adrian Huerta : Thank you, Humberto and Manuel and Manuel best wishes on whatever you do, I was privileged to work with you all these years, Manuel. My question is just on energy cost. You can just tell us how your energy cost per ton behaved during 2024 and why we could expect for this year, Humberto?

Manuel Ferreyros: Hello. Adrian, thank you. Energy cost, 2024, has gone down compared with 2023, and we expect should be flat for 2025.

Adrian Huerta: And just remind me what are the main fuels that you use?

Manuel Ferreyros: For the kilns, we use coal, local coal. And basically, for the mills we use electricity.

Adrian Huerta: And do you have fixed cost on that goal? Or you…

Manuel Ferreyros: No, in coals, we buy local coal. And basically, I would say it’s quite steady the price. We don’t have a contract. We will buy on spot. But we are the main buyer in Peru. So basically, I would say it’s quite steady with price. And for electricity, yes, we have a long-term contract.

Adrian Huerta: And just a follow-up on the previous question on cement volumes for this year. Can you elaborate just a little further on those positive trends that we saw in 4Q that could continue into this year? By segment, how do you see the different segments, residential, non-residential infrastructure, how you see and which should be the main drivers for this year for volumes?

Humberto Nadal: Sure. I’m going to answer the question on volumes from a different angle than the segments you’re asking me. I mean, for us, since 80% of our sales go to self-construction, the key proxy for us is employment. People have to be fully employed. We just closed last year our agricultural exports at a record level, PEN12 billion. That means, I mean, lots of thousands of people employed, very well employed and well paid. That’s why this year has begun so strongly and that’s why the end of last year was so strong. Fishing also had a fantastic first season of the year. So all these things convey a potential residential demand that should be absolutely positive side compared to last year. Second, we have just a new Minister of Economics appointed two weeks ago, even though he’s not a specialist in economics, he comes from a long and very successful career in building infrastructure.

So I think we’ve already seen that he has come in very strong in terms of unlocking some projects. So I think also from the infrastructure level, we’re going to see the central and regional government spending much more. So as we stand, we closed this year at a very high note in terms of volumes. This year has opened in similar tools and all these things just make us feel very optimistic about volumes.

Adrian Huerta: Thank you, Humberto, Manuel.

Operator: Our next question is from [indiscernible].

Unidentified Analyst : Thanks for the presentation. Why has the number of employees increased? Is it due to a specific project?

Humberto Nadal: Yes. I mean when we talk about the numbers, I mean, it has to do a lot with specific projects. Sometimes, I mean, like we do the Piura project, so we hire a bunch of people, by the end of our project will be out. We have to do with that. I mean in the ready-mix in the ready mix business, depending on the project. Now we’re going to set a Chavimochic irrigation, we have a Yanacocha projects. Those things, I mean, a really temporary employment increase. In terms of increasing people that are going to stay for good. That’s still increasing but probably at a level of, I don’t know, maybe 10 or 15 people a year, not a lot.

Operator: We have a question from Francisco Suarez from Scotiabank. Francisco.

Francisco Suarez : Thanks so much. Good morning, everyone. And congrats on the results and Manuel on a personal note, thank you for all your wonderful effort, it was quite right. Thank you so what for everything, best wishes as well. The question that I have relates with overall utilization on — I mean you have reached levels that usually in the future may lead to a downward trend — are you still optimistic on your overall utilization rates on your cement operations? And the second question that I have is if you can walk me a little bit through what are the structural features that makes you think so bullish on your ability to maintain the current margins? Thank you.

Humberto Nadal: Thank you, Francisco. I mean I think right now, we’re in terms of clinker 70% utilization capacity. We are very confident. We’re okay with that. Also, you have to bear in mind, we keep lowing our clinker factor probably in the next couple of years, we should be somewhere around the 67%, 68% that is really increasing capacity. And in terms of cement utilization mills we’re taking about 60%. So yes, I think we are we are not concerned at all about capacity. And in terms of the EBITDA margins, I think made a very important question before. Energy costs, which are a fundamental part have been flat over the last two years. If you add to that personnel cost, which go up with inflation, that really allows us to be very confident that the margins should be maintained.

Our pricing policy has been very efficient over the last years. And I think those three factors allow us to think that EBITDA margins going forward should be maintained. If anything, I mean, if the volumes pick up more than we expect, maybe you should see a little bit of improvement there.

Francisco Suarez: And if I may — and thanks for your complete answer, you also think that catch my attention, clinker factors. What are the drivers behind improvement? What type of additions are you ambition in addition to Slack? Is anything happening on that front that explains that such improvement?

Humberto Nadal: Yes. We are not slack. I mean, we’re having — focusing heavily in Pusan materials also enroll in roll line. I think those are the main drivers that are really driving our clinker factor lower. And more than that, Francesco, I mean we have been for us with 60% clinker factor. It’s a commercial issue. The thing is, I mean, there are some cements that are required by government with a clinker effect of 90%. So we’re trying to change the frame of mind of people to understand that other cement to lower clinker factor are as good as the ones like the cement type 1. It’s not so much only production. It’s also a very strong for a commercial side to move our portfolio an average to clinker factor.

Francisco Suarez: That’s makes a lot of sense. Thank you so much.

Operator: [Operator Instructions] So we have a question from Luis Ramos from Larrain Vial.

Luis Ramos: Hi, everyone. Thanks for taking my questions. First, how vulnerable is this projected recovery on the cement volumes in 2025, particularly considering the increase in security and upcoming elections? Second, could you provide us more color on these cost overruns in the Piura airport? How long will these negative effects left on gross margins?

Humberto Nadal: Thank you for the question. In terms of vulnerability, I don’t think the upcoming elections of vulnerability. I do think that increase in security may be availability because 80% of our markets of construction and we still need to get out to work. So yes, I don’t think upcoming elections are an issue. I think in security has been there for the last two years. I don’t see getting any worse than it has been. So I think that’s a flat thing. In terms of Piura, first of all, all the cost overruns are already in the results. I mean there’s nothing coming into the future. Everything has gone under the bridge now. And as we fundamentally, like Manuel mentioned in his speech, exchange rate, we projected asset rate that didn’t happen.

Point number two, we had overruns in terms of time, we should have completed the project some months before that we are actually completing it. These negative effects like I said, I mean they would have no effect in gross margins in the future. This is a project that’s already — it’s almost done. So the way we see it is, I mean, — this year, we should be revenues of PEN500 million coming from building solutions. One of the key positioning factors of us has been we are more than just a company sell cement bags. And I think some things and take a learning curve. I think the Piura airport was one of them. But luckily, we were able to deliver the project in the end at an additional cost, but all this has already been taking care of in the 2024 results.

Operator: Okay. Thank you. We had a tax question from Gabriel Perez from CrediCorp.

Gabriel Perez: Yes, I have two questions. I’ll start with the first one. Could you give us more color on your expectations regarding 2025 in terms of cement deliveries and EBITDA margins?

Humberto Nadal: Yes. I think I’ve asked that before, I think the color would be the trend we saw in the last quarter 2024 is the one that should be going forward. And in terms of EBITDA margins, we should be able to keep the high EBITDA margin we achieved at the end of 2024.

Gabriel Perez: Okay. And the next question from Gabriel. Given new projects like [indiscernible] where we should expect higher concrete sales do you believe gross margin could be lower than 2024?

Humberto Nadal: I think what we’re going to expect in terms of concrete sales, I mean we have a huge Yanacocha project coming in this year. Chavimochic project should come in probably towards the end of the year. We see the ready mix. And like I mentioned before, and I’ll say once more, EBITDA margins should remain at the level we saw at the end of 2024.

Operator: Okay. Thank you. We are not seeing any more questions. Thank you, everyone, who had sent questions. So perhaps I can hand it back to Mr. Humberto Nadal for concluding remarks.

Humberto Nadal: Thank you, everyone, for participating today. And today, indeed, is a special call for all of us in Pacasmayo for me, especially as my dear friend is joining me for the last time. I would like to close on a more personal note because Manuel retirement in fact — I would say, a very significant milestone for our company. Succession is never easy because it involves people, involves human feelings, the size and expectations, but it is clearly necessary. It is one of the greatest test and ultimate credit demonstration of our professionalized recognized when it’s time to pass the torch and to ensure it is placed in the right hands. While leadership may change, the essence of this company remains absolutely unchanged, built on the dedication, values and reason that each of us upholds.

Manuel has exemplified in a way I’ve never seen before, this period for 17 extraordinary years, leaving a lasting impact that will guide us over. On behalf of all of us in Pacasmayo and especially on my own behalf, we thank you for your leadership, your integrity, your uplifting spirit and all the lessons you have on us over these 17 years. You will always be part of this company’s story, and we wish you nothing but the very best in this next chapter. We need meeting very much my dear friend. With that in mind, thank you very much, everybody, for joining us today in the call. We closed a record year. And hopefully, this year, as we did in 2024, we will be able to get even better results. Thank you so much for your new interest in our company.

Have a very nice day.

Operator: That concludes the call for today. Thank you, and have a nice day.