Cementos Pacasmayo S.A.A.

Good day, ladies and gentlemen, and welcome to the Cementos Pasques Mayo third quarter 2020 earnings conference call. After the presentation, there will be a question and answer session. If you should require assistance during the call, please press star zero and an operator will assist you. At this time, it's my pleasure to turn the floor over to Ms. Claudia Busamante, investor relations manager. Ma'am, the floor is yours.

Thank you, Tom. 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, focusing primarily on 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, strengths, 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 fight. 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 during these difficult times. This quarter's cement shipments have accelerated strongly, leading us to reach historical record levels. The 14.2% year-over-year growth in cement sales volume is remarkable, and we hope it continues for the next month. This significant increase in sales also resulted in an unprecedented quarterly EBITDA level of $120.6 million, as increased sales were matched with sustained savings in selling and administrative expenses as part of our commitment to operational efficiency. As you probably know, the Peruvian government gradually began reopening its economy in the third quarter, reaching phases three out of four with more than 90% of the economy currently operating. Although GDP has not yet recovered to pre-pandemic levels, the fall has been decreasing month by month. We hope to continue seeing some recovery as the remainder of the economy reopens. Semen shipments have recovered well throughout the coming quarter, but the northern region has fared much better than the rest of the country, reaching pre-pandemic levels as soon as July and historical records during the quarter, as I already mentioned. We are aware, of course, that this growth level may be difficult to sustain in the future. But we do believe that even if demand for bad cement decreases in the upcoming months, the demand for ready-mix and precast materials should increase as the reconstruction-related projects accelerate its execution. Although these marked differences between regions cannot be denied, we do strongly believe that our actions and strategies have played a key role in our increased sales volume. We have been working steadily in the past years to focus on our clients' needs, to go beyond just selling products to providing solutions. These efforts have proven valuable during these challenging times. The self-construction segment has been the motto behind the volume growth this quarter. We have focused on several fronts to enhance the customer experience and to facilitate access to our solutions. We have thus developed Mundo Experto, which is an ecosystem made up of digital solutions that join supply and demand and offer a superior purchasing experience leverage on the intensive use of technology to generate more value for our users. The digital solutions are targeted and customized for the different users, such as foremen, hardware stores, and the self-builder. We are convinced that being at the forefront of digitalization for these customers will bring even greater opportunities for future development and growth. On the other front, we have Pacasmayo Profesional, a division that offers construction solutions for the more formal construction segment. Our strategy here is to offer a portfolio of comprehensive solutions and include technical assistance throughout the building processes in order to provide a superior user experience. Our portfolio of building solutions looks to maximize our value-added offer, distinguishing clearly ourselves from traditional cement sales and consequently strengthening our market position. We have developed targeted solutions for different types of customers, looking to expand our customer base beyond construction companies of any type to also include foremen and self-builders. We have developed both adapted ready-made solutions for structural needs and pre-roll-track solutions for non-structural purposes to better fit these customer needs. We believe that there is an important potential market for ready-mix concrete in this segment and are therefore working on adapting the value proposition to generate greater value for them. Finally, I would like to highlight that both our current achievements and the development of our future strategy would not be possible without our people. The health, safety and well-being of our workers will continue as our top priority. we have implemented a variety of systems to communicate, inform, and support the physical health of our people, resulting in a lower than average level of COVID-19 cases among our workers. We continue to operate our plan with as little workers as possible, and those that have to go follow strict guidelines for social distancing, hygiene, and regular take-ups by our health and safety team, as well as a strict protocol for accessing all of our facilities, not only for workers, but for contractors and visitors as well. 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. We also want to emphasize that emotional health is extremely relevant these days and we are making sure that the work-home balance is adequate and more importantly that our people feel well supported by the company. We are convinced this is the only way the company will achieve growth and development as empathic leaders who generate the commitment and engagement needed to navigate these uncertain times. I will now turn the call over to Manuel for a more detailed analysis of financial results.

Manuel? Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. As Humberto mentioned, in this third quarter, we have reached historical records in revenues and in EBITDA. Revenues were $407.4 million a 6.3% increase when compared to the same period of last year, mainly due to increased baggage demand shipments, partially offset by lower sales of concrete. Gross profit decreased 3.4% in the third quarter of 2020 compared to the same quarter of last year, mainly due to the higher cost as we had to use imported tinker because of the sharp and sudden increase in demand. as well as higher fixed costs due to the lower sales of concrete and a lower average price of cement, as we sold more of our value brand cement. Consolidated Evita was 120.6 million in the third quarter of this year, as I mentioned before, the highest in the company history, and an 8.2% increase when compared to the third quarter of 2019, mainly due to increased sales as well as sustained savings in administrative and selling expenses. For the first nine months of the year, revenues decreased 19.4% and EBITDA decreased 37.5%, mainly due to the halting operations for over two months during the government-mandated lockdown between March and May. Turning to operating expenses and initiative expenses, for the third quarter of 2020, decreased 20.1% compared to the third quarter of 2019, mainly due to decrease in variable salaries and third-party service. Selling expenses in the third quarter of this year decreased 16.8% compared to the same period of last year, mainly due to decrease advertising and promotion and lower variable salaries because of our results of operations. We will continue to strive to sustain these budget adjustments when possible to ensure business efficiencies that can offset some of the increased costs. During the first nine months of the year, administrative expenses decreased 14.4%, and selling expenses decreased 2.8%, mainly due to the above-mentioned sales. Moving to the different segments, cement, concrete, and precast sales increased 2.9%, during the third quarter of this year compared to the same period of last year, mainly due to increased sales of bags, cement, as well as precasts, offset by lower sales of concrete. Gross margin decreased 2.8 percentage points in the third quarter of 2020 when compared to the same period of last year, mainly due to higher cement production costs as a result of the use of imported clinker as well a slower dilution of fixed costs from the slower recovery in concrete sales. For the first nine months of this year, cement, concrete, and precast sales decreased 20.8% and gross margin decreased 8.5 percentage points as a result of the government mandate halt in operation. Sales of cement increased 15.2% in this third quarter compared to the same period of last year, mainly due to increased shipments of baggage cement as demand in the northern region boomed during this quarter. However, gross margin decreased 3.1 percentage points, mainly due to increased costs related to the use of imported clinker because of the sudden increase in demand, as well as lower average prices due to sales mix. For the first nine months of the year, cement sales decreased 16.7% and gross margin decreased 7.9 percentage points. Concrete sales decreased 52.1% as gross margin decreased 17.4 percentage points, mainly due to a high comparative basis since last year would reach record sales levels as well as a slower recovery in concrete sales than in back cement. For the first nine months of the year, Sales decreased 47.8% and gross margin decreased 23.4% points. Once shipments for the public sector for the reconstruction and other projects start accelerating, we should start seeing higher levels of concrete sales. Precast sales increased 46.2% and gross margin increased 6% points. during the third quarter of this year compared to the third quarter of 2019, mainly due to increased sales for reconstruction-related projects. For the first nine months of the year, sales increased 21.4%. However, gross margin decreased mainly because of the sales mix since we sold more lower-margin products. Quick-line sales in the third quarter of 2020 increased 9.8% and gross margin increased 14.3 percentage points compared to the third quarter of 2019, mainly due to a temporary increase in sales of ground quick-line, which has a higher average price. During the first nine months of the year, quick-line sales decreased 13.6% compared to the same period of 2019. mainly due to decreased sales volume as a result of stopping operations of most sectors during the government-banded lockdown during the second quarter. Gross margin increased 7.4 percentage points during the first nine months of the year, compared to the same period of 2019, mainly due to a temporary increase in sales of higher-priced products, as well as a decision to sell ex-works during the lockdown period. Sales of construction supplies during the third quarter of 2020 increased 68.9% compared to the third quarter of 2019, in line with that cement sales as family, work, and home improvement projects. Gross margins remained flat in the third quarter of 2020 compared to the same period of last year. During the first nine months of the year, construction supplies increased 2.2%, compared to the same period of 2019, mainly due to the halt in commercialization for most of the second quarter of the previously mentioned. The profit for the period was $45.2 million, a 12.4% higher compared to the same period of 2019, primarily due to increased revenues and operating profit. This result has led us to overturn the net loss we had accumulated as of June to a net profit of 10.4 million soles a day. To summarize, this quarter's results show the resilient and rapid response of both the market and the company. The negative result of the second quarter has not only been reversed, but we have achieved year-over-year growth in most key metrics. We believe that we are in a strong financial position to face demand and to continue operating with some financial flexibility as cash generation is steadily increasing. Can we now please open the call to questions?

Yes, sir. And ladies and gentlemen, if you'd like to ask a question at this time, it is star 1 on your touchtone telephone. Please make sure your mute function is turned on to allow your signal to reach our equipment. Again, that's star one at this time if you'd like to ask a question. We'll take our first question from Andres Soto with Santandar.

Hi, Humberto Manuel, Claudia. Thank you so much for the presentations. Congratulations on the results. My first question is regarding some of the comments that you made earlier. in the release where you say that you expect by 2023, 25% of revenue should come from value-added products. I would like to understand what is the starting point that we should look at? Is it 10% now? And what type of capabilities and investments will be required in order for you to achieve this goal? That's my first question.

Hi, Andres Humberto. Thank you for joining the call. I hope you're doing well, you and the family. Yeah, when we talk about building solutions, this is more a thing of focus and value creation. In what sense? I mean, last year, I mean 2019, we were already at 17% of our sales were coming from building solutions. We're talking products based on cement, but with some value. For example, the underwater pipes for the metal refinery. For example, some bridges. For example, some pre-cutting. In terms of capex, these are very low for the second because basically it includes some cranes, some facilities, but nothing compared to what a cement plant would cost. I mean, probably over the next three to five years, we're going to invest around... $20 million in building solutions over that period of time. So like I said, it's not substantial in terms of capital, but it does allow us on the one hand to bring more growth, and the second, be close to the consumer, and of course, raise value for the company.

Perfect. And my second question is regarding capital deployment. When I look at my numbers, I see that next year should be already at below two times. So I would like to understand what will be your priorities in terms of capital deployment going ahead. Is it to increase dividend distribution or are you looking for opportunities for inorganic expansion? And this also considering the fact that some players are apparently leaving the region. So will you consider to buy any of the operations in case CEMEX decides to sell any of the Latin American operations.

Yes, Andres. Hello, this is Manuel. Considering the next year's EBITDA, excluding all this lockdown, we should be around two times net debt EBITDA. A little bit lower than that.

And considering the other part of the question, Andres, I mean, you know that our policy, and this is for a board to decide, has always been that if we have a sufficient cash generation, whatever money we may not use for our capex should go to shareholders. So I think dividends are always at the priority of our list. And regarding potential acquisitions, we have been, since we did the IPO in 2011, we have been selectively trying to pursue them. We have never been successful because we never found something that there was a clear path to value generation. We are still watching the situation. You mentioned one specific case. There are some others. I think we have a very strong balance sheet, and it's something that even though we would analyze, we would only go in if we have a very clear idea how to create value. So that would be my answer to your question.

Perfect. Thank you so much, and congratulations again.

And we'll take our next question from Lucia Calvo-Perez with Lorraine Evenal.

Good morning, Humberto, Manuel, and Claudia. Thank you very much for the call, and congratulations on the results. I want to ask you three questions. The first one is, well, until when do you think you're going to be importing clinker for the unexpected growth in cement? My second question is, I think that this demand for self-destruction and the third question is, well, we're also related to volumes, but if you have any expectations in terms of timing and the schedule of the reconstruction program awarded as a government-to-government contract to the United Kingdom, I mean, if you are expecting demand from volumes coming in there, like during the first half of the year in 2021, or maybe more towards the second half of the year.

Thank you. Yeah, thank you for the questions here. Regarding the first part, I mean, we are very, I don't know, we're cautiously optimistic that volumes are going to stay at their current levels. So the answer of the importing clinker, that's when we have always to secure production and capacity. So we will be importing clinker for the coming years, which I think is a very good scenario to have because that means the demand remains very high. Of course, something happens with demand, we can always go back on that. So my first answer to your question, and we'll be importing clinkers if we decide to go into a new capacity to increase the capacity of our plants. Regarding the second part of your question, the second one I inquired here, the one regarding the reconstruction works, I mean, there's dozens of British citizens already working in the north on this reconstruction plan, so we expect that demand should come in the first half of the coming year. Okay.

Perfect. Thank you very much.

And ladies and gentlemen, one moment, please. We're experiencing a slight interruption in our conference. One moment. And we are now back live.

Yes, I know you're still in the line. I hope you got my answers to your question on the imported clinker and the reconstruction program. And I was telling you, I didn't quite get your second question. I don't know if you can please rephrase it for me. Thank you.

And Lucia, if you could re-cue, please. At this time, we'll go next to Francisco Suarez with Scotiabank, but Lucia, if you would, please re-cue for your secondary question. And Francisco, your line is now open.

Thank you so much. Thanks again for your congratulations for this superb quarter. It's been some sort of a routine for you guys. The question that I have is on capital allocation. You mentioned previously that perhaps dividends might be ranking first in priority, ones that you feel comfortable enough with your balance sheet to distribute more dividends to shareholders. But what about the potentially just making a single modern line in the plant of Pacasmayo? That plant probably can actually get much more efficient if you have something like what you have currently in Piura, and not to mention that it will be definitely producing less carbon emissions and the like. So if you can walk me on what could be the priorities on capital allocation as your cash starts to mount more than current levels and what would be the order of those priorities, that would be very helpful. And the second question that I have is that because I didn't get the answer because you were caught in the line on the reasons of why you had to rely on clinker imports because I noticed that Piura was operating very few, I mean, very small amount of clinker for the quarter. Sorry for that.

Sure, Francisco. I think very good questions. I'll take them in order. First, dividends are a priority as long as the company has bought the cash position and has no other use for those funds. Clearly, we are already starting getting a new key on the package. We are at the previous ability level. We should have probably the preliminary numbers and ideas in December of this year. But you have to bear in mind two things. First, demand is rising so quickly that we're not going to make a decision a cap execution on a temporary redistribution of demand. We have to be very confident on the demand, looking forward to do it. And point number two, and we did it with FIUDA. Before starting FIUDA, we are importing three or four years of clinker because we need at least a deficit of half a million to 600,000 tons of clinker to make it worthwhile a new investment. Otherwise, there's two things. One, every year you postpone the investment, you have a lower financial cost and make sense to import the clinker. And point number two, if you build a plant and you operate it at 15 or 20% capacity, then it's really the fixed cost will kill you. So like I said, giving is our priority, but we are now actively looking at a new plant or a renovated plant in Pacasmayo. But you have to also bear in mind that Pacasmayo, in terms of milling and in terms of this part, all that part is new. So what we would look at would be a brownfield focused fundamentally in the handling of the materials coming into the plant and the kiln. And the other question was, I heard of clinker capacity. When we came out of the lockdown, it was really impossible to anticipate what was going to go on with demand. And at that point, our priority was to keep our cash. That's why we didn't open the funeral kiln initially. We did, instead of opening in May, we did it some weeks after that, when we realized demand was coming back strong, and we switched from a cash preservation move to let's Let's go full production. So at this point, all our teams are at full production, and with this kind of demand, we need to import Tinker to put up with demand.

Perfectly. Thank you so much for your answers, and congrats again. Take care.

Thank you. Take care, Francisco.

Once again, ladies and gentlemen, if you'd like to ask a question at this time, it is star 1 on your touchtone telephone. Again, star 1 to ask a question at this time if you'd like to ask a question. We'll pause just a moment. There are no further questions in the queue. Mr. Nadal, I'd like to turn the call back over to you for any closing comments.

Thank you. This has no doubt been an outstanding quarter in terms of results for operations, and we cannot deny that it surprised us as well, but we're in a very strong position both financially and operationally to take on the challenge and rise to the occasion. There are definitely uncertain times because none of us can really envision what the new normal will look like, but What we are clearing and what is certain is that now, more than ever, we need to present as a company and build together the future we dream of. Thank you very much for your interest in our company. As always, Manuel, Claudia, and myself remain open to any questions you may have. Stay safe and have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time. Have a great day.