Cementos Pacasmayo S.A.A.

Good day, ladies and gentlemen, and welcome to Yosh Pimentos Pacasmayo's second quarter 2021 earnings conference call. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Claudia Bustamante. Ma'am, the floor is yours.

Thank you, Ferreiros. 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, trends, and other matters that are not historical facts and are therefore subject to risk 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 Nahal.

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us. This quarter's immense sales volume continues strong despite political uncertainty proving the resiliency once again. After a very tight run of presidential elections on June 6th, yesterday, Mr. Castillo was proclaimed the next president of the country. There are claims of fraud from Jacob O'Himory and his supporters, which have brought people to the streets to protest against the way the elections were conducted. On the other hand, Mr. Castillo has shown weak signals of moderation and radicalization, so there is still no clarity on how the next government will conduct itself. Despite this uncertainty, we are confident that cement sales will continue strong this year, mainly because our current customer base is not very dependent on macro factors. On the one hand, the self-construction segment continues to be our most relevant source of income, and it has historically had very little correlation with high-level macro factors, at least in the short term. On the other hand, The demand coming from the public sector is basically related to the government-to-government agreement between Peru and the U.K. for the construction of El Norte after El Nino, and some from the government budgets that were put in place to offset the effects of COVID-19. We strongly affirm the belief that neither one of these budgets should be affected by a change in government, as they are way underway and have designated finances. Although CESOS may not be and continues to be the main driver of our growth, we are very pleased with the results of concrete and precast. As you mentioned last quarter, sales of live precast materials such as precast blocks have substantially increased in the past year. Although this has more percentage of our sales, we believe its performance illustrates how successful our strategy to transform our sales and provide the construction solutions the market needs. We have generated a new customer base, mainly expanding the sales of precast blocks to housing projects. We believe this strategy will bring significant increase in sales volume, taking us one step closer to our long-term goals. This quarter, we are also very proud to obtain a silver F in the brand experience category for ConsulateExperto.pe, an online platform created to redesign the former's experience with training and tools that help them be much more efficient. As you have mentioned in previous quarters, we are convinced that our solid results in these trying times come from the fact that we have been able to reinvent ourselves. be one step ahead in terms of digitalization and of course a distinction of how we can provide the best of our experience to all of our customers. This award is a clear recognition of these efforts. Although these are definitely important and absolutely necessary for business continuity, solid results would not be possible if we did not look at our business in an integrated manner. In this quarter, we have obtained two additional recommendations that are very relevant in terms of sustainability and business continuity. This year, we have improved 37 positions in the America of Talent of Peru, which aims to identify the 100 most attractive companies to work in our country. We believe we saw significant progress, which shows our commitment to enhance human capital management, and we will strive to continue improving in this ranking every year. Finally, and very importantly, this year we have once again obtained the award for Social Responsible Companies, DDSR, for Spanish Aviation. So now we are obtaining the award every year since creation 10 years ago, For its addition, there is an evaluation of ESG parameters through specific indicators that are internationally aligned with the Global Reporting Initiative and Sustainable Development Goals proposed by the United Nations. We are particularly proud this year to be able to obtain a special recognition in the ethics and integrity categories, which are very important for us. Although 2021 is proving to be one time and a very challenging year, we have continued to deliver substantial increases in cement, concrete, and brick achievements. that comes as a result of our constant and permanent effort to innovate, expand our market, satisfy new niches, and always remember to be absolutely client-focused. I will now turn the call over to Manuel from Morita Markets of Financial Stocks.

Manuel? Thank you, Humberto. Good morning, everyone. Second quarter 2021 revenues were $440.9 million, a 285.7% increase when compared to the same period of last year. mainly due to the wholesale commercialization during most of the second quarter of 2020, as well as an increased baggage cement shipment. However, even if we compare this quarter revenues to those from second quarter of 2019, there is still significant increase of 37%. Gross profit increased substantially this quarter compared to the second quarter of 2020, mainly due to the fact that It was close to zero during the same period because of the halt in operations and the subsequent effect in gross profit, as there was no dilution of fixed costs. Consolidated EBITDA was $90 million in the second quarter of 2021, representing a significant increase when compared to the second quarter of 2020, when EBITDA was negative for the above-mentioned reasons. We expect an important increase in the VITA for the rest of the year. During the six months of 2021, revenues increased 119% and gross profit increased 116% when compared to the same period of 2020, mainly due to the increase in sales as well as the above-mentioned halting operations from mid-March to mid-May. Turning to operating expenses, administrative expenses for the second quarter increased 41.7% compared to the second quarter of 2020 in line with increased sales, but mainly due to the substantial reduction in expenses during the lockdown period in 2020, as well as an increase in workers' profit sharing as a result of improved results. Selling expenses in the second quarter increased 71.1% compared to the second quarter of last year, mainly due to the above-mentioned decrease in expenses during 2020 and an increased profit chain. During the six months of 2021, administrative expenses increased 28% and selling expenses increased 29% when compared to the same period of last year, mainly due to the increases in sales as well as savings implemented during the six months of 2020, offset the negative effect of the halting operations. Moving on to the different segments, cement concrete and precast sales increased 296.5% during the second quarter of 2021, compared to the same period of 2020, mainly due to the halting operations during the second quarter of 2020, as well as an increased sales of baggage cement. Gross margins increased 26.4 percentage points in the second quarter of this year compared to the same period of last year, mainly due to sustained fixed costs with virtually no selling during the second quarter of 2020. During the six months of 2020, sales of cement, concrete, and precast increased 120.1%, And gross margin improved 5.1 percentage points, mainly due to increased sales and the halting commercialization during the second quarter of 2020. Sales of cement increased 261% in the second quarter of 2021 compared to the second quarter of 2020, mainly due to the halting commercialization during the same period of last year, as well as an increase in shipments of bagged cement. as demand in the north continued booming during this quarter. Gross margin increased 19.2 percentage points, mainly due to the negative effect on cost during the halting operation in the second quarter of 2020. During the six months of 2021, sales of cement increased 121.8 and gross margin improved 2.1 percentage points when compared to the six months of 2020, mainly due to the halt of production and commercialization mentioned above. During the second quarter of 2021, concrete unpavement sales increased substantially since they were only 3.3 million in the second quarter of the year because of the complete halt in commercialization. Gross margin increased 273.5 percentage points, mainly due to the significant costs that could not be debuted on last year. Similarly, sales of concrete and pavement for the six months increased 132 percent, and the gross margin increased 20.2 percentage points compared to the same period of last year. During the second quarter of 2021, precast sales increased 347.4 percent compared to the second quarter of 2020, mainly due to halting operations. However, if we compare precast sales to the first quarter of 2021, we can see that the positive upward trend continues since sales increased 33.3% quarter on quarter. Gross margin increased 94.8 percentage points, mainly due to the narrow margin during the second quarter of 2020 because of fixed costs without sales during that quarter. Similarly, during the six-month precast sales increased 31.6% and gross margin increased 20 percentage points as compared to the same period of last year. Quickland sales in the second quarter increased 20.6% compared to the second quarter of 2020 and gross margin decreased 7.7 percentage points compared to the second quarter of 2020. mainly due to the increased demand, but most of it from granulated quicklime, which has a lower margin than ground quicklime. During the six months of 2021, sales increased 22%, and gross margin increased 0.6 percentage points. During the second quarter of 2021 and the six months of 2021, construction supply sales increased 384.2%, and 161.3% compared to the same period of last year, primarily due to increasing sales from the halting commercialization. Gross profit improved 12.4 percentage points in the second quarter of 2021 compared to the same period of last year, mainly due to the low comparative basis. In six months, 2021, the gross margin remained in line with the same period of last year. In terms of debt, our debt to EBITDA ratio has come down to 1.9 times, but the important issue is that we have to note that we have been able to recover low indebtedness level quickly after the most trying times. To summarize, this court of assault showed a reliance in volume despite political uncertainty. and we are convinced of the financial operational strength of our company and expect to continue delivering solid results in the upcoming quarters. Can now we please open the call to questions, operator?

Yes, thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you 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. Please hold a moment while we poll for questions. Our first question today comes from Enrique Grau with Carrico Capital. Please go ahead.

Thank you, gentlemen, for the call. One question, and I was wondering if margins kept being affected by clinker imports. If that is the case, how much does a ton of imported clinker cost?

Yes, of course. I mean, you have to realize that we said a year and a half ago when we were coming to flow for a full application of capacity, it makes sense for us to import clinker Can we have enough volume that makes sense to build a new plant? Even though it affects the margins, I mean, we're still going to make more money in terms of solar for dollars. The thing is the margin will go down because the product is more expensive. Regarding how much more expensive it is, normally around $20, but it all depends on the exchange rate and it depends on the freight costs.

Okay, and can we expect – these lower margins to remain for the rest of the year, and then they gradually should go up.

I know. I think, I mean, the first part of the year, we have used an important component, important trinket, because we have to do maintenance to our kilns in Pune and Bacas Mayo. This should be a lower rate in the second part of the year. And then, like I say, it all depends, I mean, what happens to exchange rate and the freight rate. So, yeah, might just could remain the same or could go a little bit higher.

Perfect. Thank you very much.

As a reminder, ladies and gentlemen, if you do have a question or comment, please press star 1 on your telephone keypad at this time. Again, that's star 1 if you'd like to queue up for a question or comment. Sir, there appear to be no further questions at this time. Oh, and I apologize, we have one more question from Andre Soto with Santander. Please go ahead, sir.

Good morning. Thank you for the presentation. My question is, in your release, you mentioned political uncertainty as some of the causes for slowdown in volumes in the second quarter compared to the first quarter of this year. I would like to understand what are you seeing at this point? You believe that now that Pedro Castillo has been confirmed as president, We can expect an improvement in those projects that were sort of on standby at this point, or you expect political uncertainty to persist? And if that's the case, what will you need or your clients will need to hear from Castillo's administration in order to become more constructive on Peru's political outlook?

Hello, Andres, and thank you for the question. I think I said in my opening remarks, I think our self-builders and the G2G agreement have little to do with the macroeconomic fundamentals, and they're not expecting a lot of things to be announced from President Castillo. I think they have their own dynamics. I think when we see our daily dispatches, we see a very strong rate, and we think we're going to for sure close this year as being a record year, and we think for the time being, and this is my personal interpretation, they're not so much waiting for the time. These people will keep on working the same way they kept on working through the COVID-19 crisis, and that's the central informal economy, which is part of the robust economy of Peru.

Perfect. Thank you so much, Humberto. Thank you, Andrés.

And once more, if you have a question or comment, you may press star one on your telephone keypad at this time. There appear to be no further questions at this time. We'll turn the floor back to Mr. Humberto Nadal for closing remarks. Please go ahead, sir.

Thank you so much. In summary, Pacasmayo has been operating for 64 years in a wonderful and may stress a wonderful, addictive and complex country. COVID-19 has had We've had many kinds of governments going from the left, center, and right. As we know, we have not only prevailed, but accumulated valuable experience. We see every new chapter as an opportunity to learn and improve. And we are ready to take on the challenges that may come. With the confidence in our solid fundamentals, our integrity, and our capacity to adapt, we lead the way to a promising and sustainable future. We remain extremely optimistic about our company, and we will always remain very optimistic about the future of our country. Thank you very much for your interest in our company, and as always, Manuel, Claudia, and myself are always here in case you have any further questions. Thank you very much. Have a very nice day, and please stay safe.

Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.