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Edited Transcript of UNACEMC1.LM earnings conference call or presentation 19-Nov-19 3:00pm GMT

Q3 2019 Union Andina de Cementos SAA Earnings Call

Lima Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Union Andina de Cementos SAA earnings conference call or presentation Tuesday, November 19, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Álvaro Morales Puppo

Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager

* Carlos Ugás Delgado

Unión Andina de Cementos S.A.A. - CEO, GM & Director

* Francisco Barúa Costa

Unión Andina de Cementos S.A.A. - Investment Manger

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Conference Call Participants

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* Lucia Calvo Perez

LarrainVial S.A., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Excuse me, everyone, we now have Carlos Ugás, Álvaro Morales and Francisco Barúa in conference. (Operator Instructions) At the conclusion of Álvaro Morales' presentation, we will open the call for question. (Operator Instructions) I will now like to turn the conference over to Francisco Barúa. Francisco, you may begin.

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Francisco Barúa Costa, Unión Andina de Cementos S.A.A. - Investment Manger [2]

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Thank you very much. Good morning, everyone, and welcome once again to UNACEM's Third Quarter of 2019 Conference Call. This morning, we will have Carlos Ugás, and Álvaro Morales, UNACEM's CEO and CFO, respectively, who will be in charge of presenting the quarter's highlights and financial performance. In the end, we will open up for Q&A.

Please note that we might disclose some forward-looking statements that should be considered for reference only and that we will be recording this call. So let's get started with the presentation, Carlos?

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Carlos Ugás Delgado, Unión Andina de Cementos S.A.A. - CEO, GM & Director [3]

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Good morning, everyone, and welcome to our quarterly report. The third quarter of the year was marked by strong cement dispatches despite continuous political turmoil. On September 30, the Peru's dissolved the Congress with the support of people, the military and the police, after calling for a vote of confidence in the government. President Vizcarra was trying to prevent the opposition lawmakers from electing new constitutional court charges, without public scrutiny. As a consequence, we will have compressional elections in January 2020, while Vizcarra governs now through emergency decrees. On the international front, the trade war between the U.S. and China continues to negatively impact commodity prices.

Furthermore, recent social unrest in our neighboring countries Ecuador, Bolivia and Chile will remain as the main sources of uncertainty for the next 12 months. We will be constantly monitoring the political environment in order to minimize future risk for our business. Year-to-date, the Peruvian GDP grew by 2.2%. At this moment projections and growth for the country are closer to a disappointing 3%. As of September, fishing, minus 19.5%; manufacturing, minus 1.7 %; and mining, minus 0.8%, keep underperforming the other sectors of the economy. While on the other hand, telecom, 5.9%; energy, 4.4%; and construction, 4.2%, keep delivering solid results.

The construction sector has been performing well plus the strong cement dispatches in the northern and central region. The former mostly because of reconstruction efforts, while the latter due to important private investment projects. The internal consumption of cement nationwide grew by 7.2% this quarter versus the third quarter 2018, as reported by International Institute of Statistics.

In that sense, during the same period, UNACEM's cement dispatches grew by 5.9%. Given the current political and international environment, we remain cautious of the future cement dispatches uncertainty may continue affecting our business. We will remain financially disciplined as we continue deleveraging the company and implementing cost-efficient policies, while limiting our CapEx to maintenance and mandatory projects.

Our subsidiaries reported strong results across the board during the quarter. Drake Cement keeps improving on a fast pace and CELEPSA has experienced a solid third quarter with higher energy sales and margins. Likewise, UNICON keeps delivering strong results, supported by mining projects and roadwork. On the other hand, UNACEM Ecuador posted slightly negative results due to a slowdown in economy as a whole, as the government makes efforts to lower the fiscal deficit. Alvaro will further elaborate on this later. In September, UNACEM was selected as a index component of the Dow Jones Sustainability MILA Index. This institution recognized our economic, environmental and social efforts to sustain level practices, which we consider as critical to generate long-term stakeholder value.

Also our integrated management system received a recognition from the natural industry society. We're honored to receive this award since we have developed matured and consolidated systems based on ISO 9000 and 14000, also 18000 and lately ISO 37000. That allow us to secure and control the processes throughout the entire operation.

Finally, I will like to highlight that the late October -- or late October, we've secured a pull option over the remaining $225 million of our 2021 Senior Unsecured bonds as part of the liability management program approved by our Board of Directors.

We currently have a longer duration debt with lower interest rates and more balanced solid dollars profile. We are very satisfied with the successful transaction in a highly volatile environment. That will be all on my side. Thank you very much for your attendance this morning. Now I will pass it over to Álvaro for a detailed analysis of our financials. Thank you.

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [4]

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Thank you, Carlos. 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 1.4% compared to the third quarter of 2018.

This was driven mostly by higher cement dispatches that were partially offset by lower average prices in UNACEM's standalone and higher average prices in the U.S. and higher energy sold.

Year-to-date, consolidated revenues were 7.3% higher than in the same period of 2018.

In Peru, UNACEM cement dispatches recorded a 5.9% increase in the third quarter compared to the third quarter 2018. With respect to the second quarter 2019, dispatches were 3.8% higher, explained mostly by the recovery of our back cement units.

Furthermore, our book unit, mainly UNICON, has been supplying the most important mining project in our area. Clinker export during the quarter recorded 141,000 tons versus 244,000 tons of export in the third quarter 2018.

In the first 9 months of the year, cement dispatches were 6.5% higher than in 2018. As noted, during our fourth quarter 2018, we start seeing a change in the negative trend of last year, which translated in better volumes for our self-construction clients. This trend continues strong despite the political turbulence of our country in the last month as Carlos commented earlier. Ready-mix dispatches during the third quarter 2019 were 0.4% higher than in the third quarter 2018.

In Peru, higher dispatches are explained by important mining and retail clients, and a slow pace in the Line 2 of the Lima Metro. Therefore, UNICON and Concremax dispatched a total of 668,000 cubic meters during the third quarter 2019, a slightly higher volume than the 660,000 cubic meters during the third quarter 2018.

UNICON and Concremax remain the leaders in the ready-mix industry in Peru with a market share of 68% in the central region and 60% nationwide.

Moreover, the ready-mix operations in Ecuador and Chile contribute an additional 40,000 cubic meters and 186,000 cubic meters, respectively.

Regarding UNACEM Ecuador, in the third quarter of 2019, cement volumes in US dollars denominated revenues were 13.9% lower compared to the third quarter 2018.

Year-to-date, volumes were 7.4% lower than 2018, with 833,000 tons sold, compared to the 899,000 tons sold as a result of our lower activity of economy and the construction sector during the year.

EBITDA for the first 9 months of 2019 were $41 million, with a margin of 42.7% compared to the $46.5 million with a margin of 44.6% in the first 9 months of 2018. CELEPSA recorded a 16.9% increase in its revenues during the third quarter 2019.

Energy sales reached 410 gigawatts, 20.7% higher than in the third quarter 2018. Demand from its contracted clients, including UNACEM standalone, increased during the period improving its results. As of September 2019, CELEPSA recorded revenues 15.6% higher, with a total volume sold of 1,128 gigawatts compared to the 973.4 gigawatts in 2018.

Drake Cement keeps improving its results recording 159,000 short tons of cement during the third quarter 2019 versus 174,000 short tons in the third quarter 2018, 8.5% lower, compensated with higher average price $87 for -- per short ton in the third quarter 2018 to 99 short tons -- $99 short tons in the third quarter 2019. For the first 9 months of the year, dollars recorded for 176,000 short tons, 1.5% lower than 2018. As noted, consolidated revenues increased by 1.4% in the third quarter 2019. Regarding the consolidated cost of goods sold, they were 2.6% higher in the quarter versus the third quarter 2018, explained by higher cost of goods sold at cement -- UNACEM standalone both fixed and barrier costs, higher cost of goods sold in CELEPSA due to the volume growth in the quarter.

For the reasons explained before, our gross margin was 26.7% in the third quarter 2019, lower than the 27.5% reached in the third quarter 2018.

Additionally, in the first 9 months of the beginning of the year, gross margin was 27% compared to 28.8% in 2018. Our administrative expenses in the third quarter were 4.9% lower than in the third quarter 2018, explained by the elimination of the management fee at UNACEM standalone. Selling expenses were 25.8% higher due to increased marketing expenses in UNACEM standalone and other income -- and other expenses were stable during the third quarter 2019.

Year-to-date, administrative expenses were 10.3% lower as mentioned before, due to the elimination in 2019 of the management fees at UNACEM standalone. Selling expenses were higher by 23.7%, due to higher advertising expenses in UNACEM standalone and marketing expenses in UNICON.

Other income was PEN 4 million higher mainly due to a (inaudible) from the sale of mixer trucks at Skanon.

For the reasons explained before, our consolidated operating profit in the third quarter 2019 was PEN 174 million, 4.3% lower than in the third quarter 2018. Nevertheless, year-to-date consolidated operating profit was PEN 555 million, 5.8% higher than in the first 9 months of 2018 that was PEN 534 million.

The consolidated EBITDA for the quarter was PEN 288 million compared to the PEN 300 million in the third quarter 2018 and PEN 1,170 million for the last 12 months compared to the PEN 1.2 million -- PEN 1.2 billion in the same period of the previous year.

This was explained by higher cement volume net from lower average prices and higher cost of goods sold in Peru; lower volume and average prices in Ecuador; lower volume sold in Drake Cement net from higher average price; higher revenue mix volumes in Peru, net from lower average price.

Consolidated net debt was PEN 4 billion, therefore the net-debt-EBITDA ratio was 3.5x, improving from 3.6x reported at the end of 2018. During the first 9 months, we lowered our debt due to scheduled payments. As Carlos mentioned, in October, we executed total redemption of our $2,025 million of our Senior Note due 2021.

In order to do so, we've raised the equivalent of $230 million in sol with 3 long-term bank loans. This operation allows us to extend our debt maturity profile through to 2026 to reduce our financial expenses and to lower significantly our FX exposure for the following years.

Foreign exchange registered a loss of PEN 33 million in the third quarter 2019 versus a loss of PEN 17 million in the third quarter 2018. Explained mostly by our US dollar-denominated debt and a higher FX rate during the peak.

As of the first 9 months, foreign exchange passed from a loss of PEN 33 million in 2018 to a gain of PEN 3 million in 2019. Net profit in the third quarter 2019 was PEN 54 million versus PEN 66 million in the third quarter 2018.

As of September 2019, net profit was PEN 271 million versus PEN 188 million in the same period of 2018, for the reasons explained before. In terms of CapEx, disbursements correspond to minor projects across our subsidiaries, including Atocongo thermal plant, overhaul of several equipment and mixer trucks among others. Thank you. That will be all from my side. Now we open up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lucia Calvo Perez with LarrainVial.

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [2]

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I have 3 questions. The first one is if you could comment us a little bit about your expectations regarding 2020 cement volumes in prices in Peru. And I was wondering if you were expecting demand from Line 2 to break -- to accelerate next year? My second question is regarding the debt levels you're expecting to reach by 2020? And my third question is regarding the marketing expenses you were commenting that increased the sales expenses. And if you were expecting to maintain that? Or we should see that lowering in the next quarters?

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [3]

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Lucia, one favor. I'll let -- we couldn't understand very well your questions, but we understand the first question is regarding the -- you want guidance on what is our expectation for 2020 in -- for our cement (inaudible) in Peru? That's right? The third question is regarding marketing expenses?

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [4]

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Yes.

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [5]

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Okay.

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [6]

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If you're going to maintain that? Yes.

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [7]

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And the second question I couldn't understand. Can you please repeat it?

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [8]

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Yes. What were your debt levels expectation for the end of 2020?

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Carlos Ugás Delgado, Unión Andina de Cementos S.A.A. - CEO, GM & Director [9]

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Okay. Understood. Perfect. So Lucia, Álvaro is going to answer your first question.

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [10]

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Regarding our 2020 expectations in cement in Peru, we are now making -- elaborating our budget for next year. We estimate a 3.6% increase in volume for next year. That's our budget for next year, mainly due because we expect that the Metro -- the Metro of Lima is going to perform better than this year. No? We see some increase in volume for next year according to the schedule that they have compared to -- that they have to give to us. So the idea is that with that and keeping the other sectors of our market stable, we hope to have that 3.6% increase in volume.

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Lucia Calvo Perez, LarrainVial S.A., Research Division - Equity Analyst [11]

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Okay. And do you have any expectations regarding prices?

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Álvaro Morales Puppo, Unión Andina de Cementos S.A.A. - Financial & Corporate Development Manager [12]

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They're stable -- absolutely stable.

The second question about the debt -- our schedule to -- for next year is to reduce our debt in $140 million. With that, our debt ratio -- debt-equity -- EBITDA ratio should be lower than 3 for next year. And in marketing expenses, we are budgeting that next year we're going to stay -- to keep stable as we explained this year.

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Operator [13]

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(Operator Instructions) Francisco Barúa, there are no more questions at this time.

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Francisco Barúa Costa, Unión Andina de Cementos S.A.A. - Investment Manger [14]

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Okay. Thank you very much. And thank you all of you who attended the call. If you have any other questions or any doubt that you would like to share with us, please give us a call, Monica and me are always available. Thank you very much and have a good day.

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Operator [15]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.