Cementos Pacasmayo S.A.A.

Since we're in a 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 you, your host for today's call, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Thank you, Melinda. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer, and Mr. Manuel Ferreiros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter, especially our response to COVID-19 and our strategic outlook for the short and medium term. Mr. Ferreiros 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 matters 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 to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call. We hope all of you and your families continue to stay safe in these very difficult times. We are all joining from different parts, different locations, so let's hope that everything works from a technological side. As you probably know, the Peruvian government continued extending the lockdown and state of emergency intended to last two weeks at first for a total of almost three and a half months that ended June 30. Economic activity started gradually since mid-May with 26 activities related to mining, industry and construction services, tourism and commerce. We started producing and shipping cement May 20th, always with the health and safety of our employees at our undisputed top priority. We continue to operate with as little workers as possible in our plants and those that have to go follow strict guidelines for social distancing, hygiene and regular checkups by our health and safety team. All of our administrative staff continues to work from home, and we plan to continue working this way until we are certain that the benefits of returning to the office outweigh the risks. Before moving on to the results of our return to operations, I would like to highlight our actions to fight against the spread of COVID-19. We have acted on four different fronts, and we have acted strongly. First, in terms of health-related initiatives, we have implemented traditional program to help our workers with BMIs above 30. This program has been very successful, and after two and a half months, almost 70% are already below 30. We continue to work with the other 30% and also closely monitor all of them so they are able to maintain these healthy levels. We have also provided all of our workers with access to online doctor's appointments so they don't have to leave their houses unless strictly necessary. Safety kits, including face masks, are alcohol and soap, and psychological and emotional support have also been provided. We have also donated taste tickets to our communities and local authorities. Second, in terms of goods, we have donated food to communities in our area of influence benefiting over 1,800 families. Third, through our volunteering program, we have helped with the disinfection of streets in some of our areas of influence. We filled our mixer trucks with water and disinfectant, and thanks to our almost 80 volunteers, we were able to clean and disinfect more than 17 kilometers of roads. Finally, communication is also very important. In the first weeks of a state of emergency, in some areas of the country, including the north, there was some lack of information on the severity of the pandemic and the true importance of staying home to prevent the spread. We repaired radio and TV spots to help inform... on the population and we believe it was a very successful strategy. We firmly believe on building a better future together and now is the time to show our support to our workers, the families, our communities in our area of influence and those less fortunate during these difficult times. Also, in conjunction with Oxal Mining, we have developed and we take many different programs to aid our people in these difficult times. Moving on to our results, since the start of operations, We have been pleasantly surprised by the cement demand behavior. We had expected the self-construction segment to suffer significantly due to the lockdown, but this was not the case, and it has once again proven its resilience. This segment is generally tied to employment, that in the north is most agriculture, which has had a good year, so it was less affected than in other areas of the country. We are this to the size of the informal sector in the north, which did not quite stop during the lockdown, we can see why the recovery has been faster than expected. Our sales of bagged cement during June were only around 20% below the same period of the previous year, which was a record year, as you may recall. And July sales have continued increasing and look extremely promising, leading us to project that sales could be close to those in 2019. Nonetheless, the effect of over two months of not selling any cement will definitely burden our end of year results, even if this fast and expected recovery consolidates in the next month. Another reason to be very optimistic about the second half of 2020 and all over 2021 is the agreement signed between the Peruvian and the British government to accelerate the execution of the reconstruction plan after El Niño in 2017. The agreement involves the execution of 7 billion solis over the first two years, during which the UK government will provide technical assistance for the construction of hospitals, schools, and river defences, all of which should be finished by June 2022. These are excellent news for the northern region, since the matching infrastructure will finally be built in the best way, hopefully in the most efficient manner. Finally, I would like to take a moment to briefly explain our most relevant digital initiatives. since they have become even more relevant in today's context. As you have mentioned before, since 2018, when we launched our new vision, we identified digital transformation as one of the key axes to articulate our strategy. Since then, we have worked on a variety of tools and projects to digitalize our processes and our relationship with our consumers. We have developed a platform for registration, control, and follow-up, of the different types of discounts and promotions, granting a new digital experience to our client, a great UX, with the required speed and access to information. Another very important digital tool on the operational side of the business is one that allows for online control of the main production variables, such as quality, energy, and consumption of components and resources. It has real-time information, but also keeps historical records of each production variable, giving us the capacity to use it for operational intelligence, as well as predictive analysis. This is complemented by a platform that digitalizes our production team's field work and is managed through mobile devices. One of the most relevant initiatives that has been one to digitalize our relationship with construction companies of all sizes through Pacasmayo Profesional, allowing them to program the requirements and track the shipments online. It integrates all of our back office platforms for an optimal customer service experience This tool allows for the planning and programming of the fleet with efficiency algorithms to optimize the resources such as mixers, pumps, and drivers, according to the client's requirements. All of these and other tools were already in planning or execution. The pandemic only led us to accelerate the development and implementation. We are firmly convinced that the fact that we have already identified these opportunities and have started working decisively on these initiatives has been a key point in our quick adaptation to the new market conditions. Finally, I want to emphasize, I want to overemphasize that we remain fully focused on our long-term goals and are very pleased to have already seen some recovery in sales. We are convinced that the work we have done during the past years in terms of long-term strategy and vision, as well as the quick adaptation during the long-term period, puts us in an incredibly strong position to capitalize on the opportunities ahead and keep helping our country move ahead. I will now turn the discussion over to Manuel to go into more detail on our financial performance. Manuel.

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. The second quarter of 2020 revenues were 114.3 million soles, a 64% 0.5% lower than the same period of last year, mainly due to the halt in production and commercialization after the government declared the state of emergency to prevent the spread of COVID-19. Gross profit decreased 98.2% in the second quarter of this year compared to the same quarter of last year, mainly due to the lower sales as well as higher fixed costs derived from the sudden stop in regular production. However, as Humberto mentioned, revenues have started improving since June, and we expect further improvements in the upcoming months. Consolidated EBITDA was negative 5.7 million soles in the second quarter of this year. For the first six months of the year, revenues decreased 34.9%, and EBITDA decreased 64.6% for the above-mentioned reasons. which were partially offset by a very positive first two months of the year. Turning to operating expenses, administrative expenses for the second quarter of this year has decreased 20.7% compared to the second quarter of last year, mainly due to decreased variable salaries because of the company's results of operations. Selling expenses in the second quarter of 2020 decreased 21.7%, compared to the same period of last year, mainly due to decreased advertising and promotion from budget adjustments, and lower variable salaries because of our results of operations. During the first six months of the year, administrative expenses decreased 11.3% for the above-mentioned reasons. Selling expenses for the first six months of the year increased 4.8%, mainly due to the increase in the allowance for credit losses. Moving on to different segments, cement, concrete, and precast sales decreased 65.5% during the second quarter of 2020 compared to the same period of last year, mainly due to the halt in production during the most of the quarter. Gross margins decreased 35.9 percentage points in the second quarter of 2020 when compared to the same period of last year, mainly due to the sudden halt in production. However, the gross margin in June was already almost 30%, and we should see continued improvement. Sales of cement decreased 60.9% in the second quarter compared to the same period of last year, mainly due to the hold in production and commercialization. Gross margins decreased 29 percentage points, mainly due to the lower sales and increased costs related to hold in operations. For the first six months of the year, cement sales decreased 34.8%, and the gross margin decreased 12.1 percentage points. Nonetheless, as Humberto mentioned, we have been recently surprised by the performance of bagged cement sales in the restart of operations, and we are expecting July sales levels to be similar to the same period of 2019. Concrete sales decreased 92.3% and gross margin decreased significantly due to the holding production and commercialization for most of the quarter. For the first six months of the year, sales decreased 43.8% and gross margin decreased 26.9 percentage points. Once shipments to the public sector for the reconstruction and other projects restart, we should start seeing higher levels of concrete sales. Precast sales decreased 64.6%, and gross margin was negative due to complete hold in sales and higher fixed costs during the quarter. For the first six months of the year, sales actually increased 6.5% compared to the same period of last year due to very high sales during the first two months of the year, but gross margin was still negative due to higher fixed costs. Quick-line sales decreased 38.2% compared to the second quarter of 2019, and 25% during the first six months of the year, mainly due to the decreased demand during the lockdown period. Gross margins increased 5.5% percentage points in the second quarter of 2020 compared to the second quarter of 2019, and 2.6 percentage points in the first six months of the year compared to the same period of last year. mainly due to a temporary increase in sales of higher-priced products, as well as a decision to sell X-Works during the lockdown period. The loss for the period was $45.5 million, primarily due to decreased revenues and higher costs for the whole production in operations mentioned above, as well as a slight increase in financial costs because of some short-term loans taken for the working capital. To summarize, this quarter results of operations shows the sharp effect of the complete stop in production and commercialization during the lockdown period. But June and July have already started showing signs, very positive signs of recovery, giving us reasons to be very optimistic about the second half of the year. We have been able to preserve the financial health of the company during the most challenging times and find ourselves in a good position now to continue operating with some financial flexibility as cash generation is steadily increasing. Can we now please open the calls to questions, operator?

Thank you. The floor is now open for questions. If you do have a question, please press star then one on your telephone keypad to join the queue. If you're using a speakerphone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, if you do have a question or comment, please press star 1 on your telephone keypad at this time. And first, we go to Andres Soto with Santander. Please go ahead.

Hi, Claudia. I'm Roberto Manuel. Thanks for the presentation. My first question is related to infrastructure projects. I understand you are becoming more confident on these demands finally coming along. Can you please give us a sense of the potential cement volumes from these projects over the next 24 months? And out of these, how much is in your pipeline for the second half of 2020? I understand you made this comment that you expect second half to be in line with the second half of 2019, and I would like to understand how much of that is reflected by infrastructure projects vis-à-vis the sort of organic demand that you have.

Hello, this is Humberto. Thank you for the question. In that program that's going to be supervised by the British government, we're expecting somewhere around between 350 to 400,000 tons. This should be happening probably at the beginning of the last quarter of this year, but very strongly over the next year. I think that's a significant demand. And in terms of infrastructure, because this is specifically for reconstruction, I wouldn't like to throw a number right now, because I think the government is very confident this government-to-government system will work during the remaining of this year, and they're thinking of implementing it for other projects. For example, I mean, the Chavimochic project, which was kind of stopped for more than four years because of other reasons, has now been taken over by the central government. I mean, no concrete numbers at this point, but very optimistic about what's going to be happening, especially if this implementation of the reconstruction proves to be very successful.

Thank you, Humberto. My second question is related to dividends. Clearly, profits this year are going to be extremely low. However, the company still has some equity reserves. Given this more optimistic outlook for the next 24 months, can your shareholders still expect dividends to be distributed this year?

That's a very good and a very tough question. I think we are very optimistic about what's coming ahead of us, especially because of what we've been seeing the last six weeks financially. We have recovered all of the short-term loans we had to take because of COVID. So we're in a strong position. Like you say, I mean, profit-wise, the numbers are not going to be there this year as the previous ones, but we have recovered. close to $200 million in undistributed profits. So I think the decision is not mine. Let's see how it goes. But I think if the numbers keep showing the strength we have shown, probably some dividend will be considered by the board, and this is not my decision, but clearly not the same as last year.

Great. Thank you, Humberto, and congratulations for the good news.

Thank you.

Next, we go to the line of Luis Pardo with Compass Group.

Luis Pardo Yes, Andres Dimi. I don't like that. I'm usually first on the call. Hey, guys. How are you? I hope your families are doing well. And I second Andres' comments here. Congrats on the pickup, the V-shaped like recovery you were seeing here. my question here goes if you could give us more details on on how and why um like expecting a second half to be similar to 2019 which was a record year is something to that that is very impressive and i don't think any other uh cement companies have that in the region so if you give us more color and on on the reasons behind the confidence you have to show those numbers in the second half of the year.

Hello, Luis. This is Humberto. I hope everybody's doing great in your family. It's a very good question. Why are we so optimistic? Because unlike other companies, because I think, not to brag, but we are unlike any other company. But besides that, I mean, I think we're based in what we have been seeing over these last six weeks. But let's focus on one thing that's very important. What we're seeing right now is fundamentally cementing bags. This is related to employment. As you know, agriculture has been running very strong in the north. They're having a very good year. Fishing has almost finished a quarter of this year. And all those things reflect on employment. So I think basically that's driving a very strong demand in terms of the bag cement. Point number two, The formal sector, like you say, which explains 70% of our demand, didn't really quarantine as a formal one. I mean, these are people that need to somehow work every day, and the fact that they keep buying cement is a clear example that they have found a way to keep working and buying cement. And also, one thing that we need to really, really weigh here is this agreement with the British government, these are tremendous news, absolutely tremendous news, because we're talking about 350,000 tons of cement for a company that is selling 2.6, 2.5 a year. These are significant numbers. I mean, if you divide it over 15 months, it brings substantial growth to us all. Why are we so optimistic? Because of what we have been seeing over the last seven weeks since we opened, even though The big projects, I mean, are still coming in. I mean, for us to be, like I mentioned, in June, 20% off based on your back command with no ready mix, it's fantastic. So I hope we are, I sincerely hope you're right. You know us well enough. We are always cautiously optimistic, but we're also based on facts and numbers. And the numbers we posted in the press release are clearly a reflection that the recuperation so far seems to be in a very strong V-shape.

Very good. Congrats. I know it's early and you're very conservative, which I like as a shareholder. But if all these trends continue, then 2021 could be a very strong year. If you're having the same year in the second half of 2020 and you have the media, the reconstruction in 2021, and the agro sector is not going to slow down, then 2021 could be another record year after 2019, no?

Absolutely. I mean, the fact that we, this year, like I mentioned, Emmanuel, I think, stressed that we have two months that we stopped, and we are still in the second part of the year with our country. We're still trying to recover. We have seen very strong numbers. And this program with the British government is going to come 80%, I would think, over the next year. So, yes, I mean, at this point, being cautiously optimistic, as you know, we are in Bacchus Mayo, I think 2021 could break new records like above of what was 2019, which was already a record year of our 63-year history.

But, yes, absolutely. Okay, I'm going to leave you guys. I just want to make a quick comment. It's very good the job that Manuel and Claudia do talking to investors during the crisis. So I appreciate all the help we've gotten over the last few months. Thank you very much, guys. Thank you, Luis.

Next we go to Alejandro Chavelas with Credit Suisse. Please go ahead.

Congratulations on the results and the strong performance during June and July. My question is related to other questions already posted in the call. I mean the July demand seems to be really strong. You seem really confident that it is not a one-off but that it will continue throughout the second half of the year. What are you hearing on the ground from the consumers? Is there a possibility that this could be inventory restocking rather than a strong trend? Or what are you thinking on that front? I mean, you sound confident just to get more sense on the ground what you are hearing.

Thank you. Thank you. I think that's a very, very good question indeed. I think when we started on May 20th and we were, we had been, out of stock in our Dinos, in our hardware stores, in a modern channel. So the first 15 days of operation, clearly we knew we were just replenishing stocks. As you know, stock level in our markets are very low, in our factories, in the Dinos, in hardware, everywhere. So, I mean, nobody has more than three, four, five days of stocks. So, I mean, this replenishing of stocks of the stock was only the first 10 or 10, 15 days. I mean, those days have long passed. That's why, I mean, the last days of May were very good, but we were very cautious because we said, no, we're just repairing stock. June was a harder month, but what we're seeing in July, since June we're seeing something that I think we probably see in our report. I mean, we have been growing 10% from one week to the next for six consecutive weeks. So I think that's not a replenishing of stock. That is basically demand getting back very quickly to a very strong level. So, yeah, I mean, you know us well enough to know that we are constantly optimistic, but this time, yeah, we are very optimistic, I have to say.

That's fair. Thank you very much.

Next, we go to the line of Fraulein Mendez with J.P. Morgan. Please go ahead.

Hi, guys. Thank you very much for taking my question. So maybe trying to look at the other side, what could go wrong on your optimistic outlook? I mean, I try to think that there has to be a part of the demand that has to be heard. I guess private construction is going to be the sector that is going to be most impacted. And then you would need a very strong incremental infrastructure sector to compensate for the volumes lost in the private construction sector. Could you just explain to us what are the sectors that you expect to be impacted because of the crisis?

Sure. I think it's a very good question. What can go wrong? I think clearly health issues. I mean, the numbers are still very high in Peru. They keep going higher. If we were to go into another quarantine, another lockdown, I think that would be terrible for the whole country. I think that's something that would throw all our optimism through a window in one single action. That's something that I think is improbable, but possible. That, I think, is our biggest fear and concern. I fully agree with you. Construction companies have are taking longer than the self-construction segment to come in. But the one thing, I mean, even though many are hurt, I mean, the government has launched a very strong program in terms of new houses and everything. So the way you have to look at it, this is, I mean, this is a market that may be hurt because, I mean, a lot of people have lost their jobs and everything. But the government and the private sector are throwing so many initiatives that I think that's going to compensate that. And let's bear in mind one thing. When you talk about this agreement with the British government, $7 billion solid, that's a lot of money to be spent over 15 months. That's unheard of in our region, unheard of. I mean, the most we were able to spend in infrastructure or public spending for construction was maybe a billion a year. So to spend $7 billion over 15 months, these are numbers. So if you keep adding all those things, they all... and being aggregate demand for cement. And I think that's what we're looking these days, and that's why we're also so optimistic. And the key thing here is, I think the reason self-construction is picking up so much of the demand, and we discussed this with Manuel all the time, because of employment. And agriculture is doing luckily very well. Fishing is having an okay year. So those things, in the end, I think keep people employed. and keep people wanting to keep building.

Fair enough. Thank you so much.

Next, we go to Adrian Huerta with JP Morgan.

Hi, Manuel and Humberto. Thank you for taking my call. Most of my questions were answered, but let me take it a little bit further. And this is great news, and I'm quite excited to see this $7 billion solid being spent over the next 15 months. But thereafter, because this is going to happen fast, what can we expect thereafter on further investments and where the money could come from? Is the government already working on something to make it this, not as large, but an ongoing spending going forward?

the authorities of reconstruction that have signed the agreement with the British government. And there are two things I can take from that meeting. First of all, it was a very small SWAT team, but very efficient. And point number two, they clearly told us that the government is using the reconstruction of the North as a pilot. to really see if this governmental governance supervision can be taken even further and specifically can be translated into infrastructure projects, which, as you know, we have over $160 billion for the whole country. So I think that if this works over the next 15 or 18 months, those $7 billion, first of all, that's only the first part of reconstruction because we still have more funds to come. But I think the government or the coming government will use this experience to keep doing the same system, which I think is great. So I think that's what I think keeps us optimistic. That should come. And also, I know you're writing the papers, but the Chavimochi project, which was stopped for a while, has been taken over by the central government once again. And like I said, I think they're all going to get into this wave of trying to be more efficient in public spending.

Thank you, Humberto. Hello? Yes, thank you so much, Humberto. Nice to hear from you.

Thank you.

Ladies and gentlemen, if you do have a question or comment, please press star 1 now. And next we go to Francisco Suarez of Scotiabank. Please go ahead.

Thank you so much. Congrats on the news, Jens, and thanks for the efforts. As Luis Pardo says, this is very important. very helpful for all of us. And a follow-up question on Luis Pardo's. I understand the structural differences on your end market exposures that you have in northern Peru, namely why it is important, the agriculture, the fishing season, I mean, all the rationale behind the self-construction. Does the fact that it's not as densely populated in the north in contrast to Lima, does that also place a role in the recovery that we are seeing in the pickup of cement shipments? And my second question relates with now with these funds that you have from the UK, there is a need for you to implement certain protocols under the COVID after another COVID hit. in terms that you may be required to make sure that your contractors, your clients do have those protocols in place. Does that might affect or not the overall disbursement of funds or anything that we can label as a risk in that sense? Thank you.

Francisco, Humberto, thank you for your questions. And I'm going to go by the second part first. I mean, we spent over a month working strongly in our protocols. That's why, luckily, and I'm hitting my head for good luck, we've had no event since we opened almost two months ago, and we are very strict on that protocol, and we have extended it to our dinos and our hardware stores and our associates and everybody. So I think we're working very strongly there. As a matter of fact, the British authorities were very impressed by the level of precision we were using protocols. And I must say, I mean, we have to thank also our peers in the rest of the world because we were able to learn from the CEMEX and the whole teams and the Lafarge of the world that were very open to help us since they had been affected by COVID before. So I think we were able to learn from them, tropicalize the protocols and make them work. So I think we are very confident that we are fine there. I always tell my people, we had a talk yesterday, we can not let our guard down because we have to keep being very aware of the COVID is a tremendous threat. So I think we're okay on that stand. And the first part of your question, the north of Peru has, unlike the south, three cities with over a million people. We have Pura, we have Trujillo, and we have Chiclayo. So I think, of course, they're not as big as Lima, but the way they're disseminated, I mean, in three different cities, and the the way they react to economic variables seems to be okay. Like I say, Lima has a whole different dynamic. In Lima, the informal sector is way much smaller than in the north or south of Peru. So I think we are going to keep being okay. And these are cities that are still in need of rebuilding and building and they need houses and they need hospitals and they need malls and everything. So I think it's good we have a million people's cities. But I think it's also great that instead of one big metropolis, we have them spread over almost 1,000 kilometers. I don't know if that makes sense to you.

No, that makes perfect sense and a great answer. And thanks again for your efforts and congrats again. Thank you.

This concludes our question and answer session. The floor returns to Humberto Nadal for closing remarks.

Mr. Nadal, please go ahead with your closing remarks. Yes, do you hear me?

Yes, you're on.

Yes, now we're going to hear you. Okay. Yeah, okay, thank you. There was something wrong here on the phone. Like I was saying, I think this has been indeed the most challenging quote in Pacasmayo's history. But at the same time, we are extremely proud of how we navigated it and the resulting outcome. We believe that there are many reasons to be more than cautiously optimistic about the demand in the second half of this year. You know, most of all of you know us very well, and we wouldn't be as bullish or as optimistic unless we really believe in this. And we believe that due to the current behavior of the self-constructed segment, as well as additional upcoming amendments to the public sector to this agreement with the This government is going to turn into a quick V-shaped recovery. More importantly, we consider ourselves in a very strong position both financially and operationally, as well as in terms of use and development of digital tools to tackle these new challenges. We're going to remain focused on the creation of long-term value. At this point, we're going to remain focused on the health and well-being of our people and our communities. And I want to thank you all for your continued support for our company. And you all know us, me, Manuel, Claudia, myself, we're always available. And we are sure that when we get together three months from now, we probably will be looking at very good results. Thank you very much for your time today, and stay safe.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.