Cementos Pacasmayo S.A.A. American Depositary Shares (Each representing five Common Shares)

Patients, your conference will begin shortly. Once again, thank you for your patience. Your conference will begin shortly. Thank you. Thank you. Thank you. Thank you. Good day, ladies and gentlemen. Welcome to Cementos Pacas Mayo's fourth quarter 2021 earnings conference call. At this time, all participants are on 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 our host for today, Ms. Claudia Bustamante, Investor Relations Manager. Ms. Bustamante, you may begin.

Thank you, Matthew. 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 risks and uncertainties that might affect future events or results. Descriptions of this risk are set forth in the company's regulatory filings. With that, I now would like to turn the call over to Mr. Edgar Canales.

Thank you, Claudia. Welcome, everyone, to today's conference call. This quarter, we saw a slight decrease in volumes, which was offset by higher prices of both cement and concrete, as well as improved sales mix favoring higher margin cement and building solutions. This all led us to an increase in revenues of 10.4%. This improvement was also reflected in quarterly EBITDA, which reached an outstanding $141.5 million, the highest in company history. In terms of annual results, revenues increased almost 50% compared to 2020. Although bagged cement continues to represent most of our sales, it is important to mention that in 2021, concrete, pavement, and mortar sales increased almost 70% when compared to the same period last year. This is truly remarkable and aligns with our strategy to become a building solutions provider. We are extremely pleased with these results, but we are also aware that it is going to be a very difficult task to surpass these record levels So I'll go for 2022, which is still an extremely challenging one, is to maintain current sales volume levels. You have to keep in mind that we went from selling 2.6 million tons in 2019 or 20 to 3.6 million tons in 2021, which means an increase of almost 40%. I would like to take this opportunity to review the year as a whole and to focus on our strategic view for the future. As mentioned before, this year, we reached unprecedented sales levels of sales and EBITDA. This is undeniably exceptional and beyond any estimates we could have rationally calculated at the beginning. As we have mentioned before, the market conditions have boosted sales throughout the country, but as it is evidenced by our increased national market share, we have also managed to grow above the national average. Part of this is derived from public spending for the reconstruction of the North, but we believe it is fair to say that our strategy has also generated additional demand. By maintaining and reinforcing our client-centric vision, we have been able to develop a variety of products and services that respond to their unique needs. For the industrial segment, another Pacasmayo professional brand, we continue digitalizing the purchasing process and the uses of our products and services. We have digitalized almost entirely our transactional relationship with our clients. For our self-builders, on the other hand, we have Mundo Experto, an ecosystem that integrates physical and digital solutions, improves the purchasing experience, and contributes to the professionalization and formalization of the construction market. Although we have been working with sustainability at our core for many, many years now, we believe that COVID-19 pandemic has exacerbated its relevance and the pressing need to show significant improvements in this path. We have always, and I mean always, strived to reach the highest standards, always looking to compare ourselves with the global leaders, despite our size and more localized nature. Evidence of this is the fact that we have been included in the Dow Jones Sustainability Index for three consecutive years, improving our ranking every year to reach the eighth place in our industry during the past year. We have also been included in the sustainability yearbook for two consecutive years. Our first year, we were awarded the industry mover status as we recorded the strongest year on year score improvement in our industry. This makes us extremely proud. This year, we remain in the index as one of the only eight cement companies included. We are very pleased to see that more Peruvian companies are joining the index and yearbook, and hope the number will continue increasing. At the national level, we were recently named the top cement company in ESG by Merco, and reached 15th place in the overall ranking, improving 24 spots since last year. The strongest improvement of any top 100 companies. We are very proud of this achievement and are pleased to see that our efforts carried out throughout many, many years are recognized and rewarded. We will continue to strive for improvement as we know that there are always things we can do better, and we are constantly challenging ourselves to reach those highest scores. I will now turn the call over to Manuel for a more detailed analysis of the financial results. Manuel.

Thank you, Humberto. Good morning, everyone. Fourth quarter 2021 revenues were $524.9 million and 10.4% increase when compared to the same period of last year, mainly due to increased baggage cement prices as well as concrete sales, which performed very well this quarter. Gross profit increased 7.6% in the fourth quarter compared to the same period of last year, mainly due to the increase in sales mentioned before, partially offset by higher costs as we had to use imported ink. Consolidated EBITDA was $141.5 million in the fourth quarter of 2021, the highest in the history of the company, and a 10.5% increase when compared to the fourth quarter of 2020, mainly due to increased sales. For the full year, revenues increased 49.5%, as Humberto mentioned, and EBITDA increased 44%, mainly due to increased sales volume, pricing of both cement and concrete, as well as a more favorable sales mix since we sold higher margin types of cement. This is the highest EBITDA in the company history, despite having use of significant amount of imported clinker, which increased our production costs. Turning to operating expenses, administrative expenses for the fourth quarter decreased 4.7% compared to the same period of last year. mainly due to decrease in personal expenses and donations, which were high due to COVID-19 during 2020. During 2021, administrative expenses increased 20% when compared to 2020, mainly due to increased workers' profit sharing in line with increased income tax base, increase in the exchange rate, as well as an increase in third-party services, mainly COVID related expenses to comply with protocols to ensure the safety of our workers. It is also important to note that administrative expenses during the period of 2020 were low due to budget restrictions after the halt in production and commercialization. Selling expenses for the four quarters increased 3.4%, mainly due to an increase in variable salaries in line with increase of sale. During 2021, selling expenses increased 28.1% compared to 2020, mainly due to the increase in variable salaries mentioned before, as well as the increase in advertising and promotion, as we recovered from an exceptional low base during 2020 because of COVID-19. Moving on to the different segments, cement, concrete, and precast sales. increased 9% during the fourth quarter of 2021 compared to the same period of 2020, mainly due to increased sales price of baggage cement, as well as higher volumes and price of concrete. Gross margin during the fourth quarter of 2021 remained in line with the same period of 2020, mainly due to higher cement production costs as a result of the use of imported which were partially upset by higher prices. For the full year 2021, cement, concrete, and precast sales increased 50.6%, driven by the substantial increase in sales volume, as well as an increase in prices of both cement and concrete to offset cost inflation. Gross margin in 2021 remained in line with 2020. Sales of cement increased 10.4% in the fourth quarter, mainly due to the increased prices and a more favorable sales mix as we sold more of our higher margin type of cement. Gross margins increased 0.8 percentage points, mainly due to the increase in average prices mentioned before. For the full year 2021, cement sales increased 49.9%, mainly due to increased sales volume during most of the year, as well as an increase in price. Gross margin decreased 0.5 percentage points, mainly because of increased costs derived from the use of imported clinker to satisfy this increased demand. Concrete pavement and mortar sales increased 9.7% this quarter, mainly due to increasing volumes. Gross margins decreased 1.8 percentage points in the fourth quarter compared to the same period of last year, mainly due to higher margins in the fourth quarter of 2020 due to shipments of a special concrete for the Salaveh report. For the full year 2021, sales of concrete increased 69.3% compared to 2020, mainly due to the sharp increase in sales, both in volumes and in terms of pricing, as well as the low comparative base due to complete stop in sales during the second quarter of 2020. Precast sales decreased 28.4% compared to the fourth quarter of 2020, mainly due to a higher competitive basis from the fourth quarter of 2020, pent up demand from the second quarter of 2020 when commercialization was halted. Gross margin was negative in this quarter, mainly due to a write-off of some past inventories, which generated an increase in costs, as well as less dilution of fixed costs. For the full year 2021, precast sales increased 2.6 when compared to the same period of the last year, mainly due to the increased sales of light precast products such as blocks and pavements for reconstruction-related projects. Gross margin for 2021 decreased 12.2 percentage points when compared to 2020, mainly due to the write-off of inventories mentioned before. The quick line sales in the fourth quarter of 2021 increased 49% when compared to the fourth quarter of 2020. This last quarter, we have increased the volume against our average since we have been able to sell to regain some past clients. However, these are more distant, so costs are higher. But they had a large contribution margin since there was plenty of spare capacity. During the full year of 2021, quick-line sales increased 20.3% compared to the same period of 2020, mainly due to the increased sales volume mentioned before. Gross margin, however, decreased 1.1 percentage point during the full year 2021 compared to the same period of last year, mainly due to the right cost mentioned before. Sales of construction supplies. during the fourth quarter of 2021 increased 70.1% in the fourth quarter of 2021 and 45.7% in the whole year when compared with the same periods of last year respectively, mainly due to increased sales as well as unusually low sales during the second quarter of 2020. Gross margin in the fourth quarter of 2021 2021 remained in line with the same period of last year, mainly due to the exchange rate that affected the cost of imported materials such as steel bars. During the fourth quarter of 2021, the profit for the period was $51.6 million, and 8.6% increase compared to the fourth quarter of 2020, primarily due to the increased revenues from higher average prices. For the full year, 2021, the net profit was $153.2 million, a 164.5% increase compared to 2020, mainly due to increased revenues as well as the effect of the losses during the 2020 lockdown period. To summarize, this quarter's results continue to show our strength, despite some slowdown in volumes as comparative bases become more complex. For the full year 2021, results are outstanding and show our resilience and prudent financial management during the difficult times pay out substantially. We believe that we are in a strong financial position to face future demand and to continue growing with some financial flexibility as cash generation is steadily increasing and focuses on operational efficiencies. Can I now please open the call to questions?

Certainly. Ladies and gentlemen, the floor is now open for questions. The webcast audience can submit questions by clicking on the ask question button on the left of your screen. Type your question into the box and hit the send button to submit your question. If you'd like to ask a question over the phone line, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Please hold while you poll for questions. Thank you. Your first question is coming from Adrian Huerta. Please announce your affiliation, then pose your question.

Thank you. Adrian Huerta from JP Morgan. Hi, Humberto and Manuel. Thank you for taking my question and congrats on the results. My question has to do with demand. If you can just tell us what was the growth on cement demand from self-construction during the full year? And what percentage of your volumes last year was for the reconstruction efforts done in the country?

Hi, Adrián.

Good to hear from you. I think, I mean, the increasing demand was really outstanding. Like I mentioned, in 2019, which was the previous record year, we were around 2.6 million tons. In 2020, even through after two months of lockdown, we were close to 2.6 million. And last year we cost with 3.6, which is 38% higher. Reconstruction was not that relevant. I mean, it was probably under 2%. So really what we were seeing is an extremely strong demand from the informal sector. We're going to see much more reconstruction coming on this year when all of the projects materialize. But like I said, I mean, it has to do a lot with... high employment levels in terms of agriculture, fishing, even construction. And that's also generating demand. And also we believe that when you lock people in the houses for so many months, they realize that the houses probably need some improvement, some things need to be made, or even some younger families try to find a new home. So I think our firm demand has been from there. And point number two, I mean, we've been pushing 2017 building solutions. That is also very important. So we were selling cement in places that probably before we were still was being sold or clay bricks were being sold. So I think it's a combination of all those things.

Excellent. Thank you, Humberto. And if I may add another question, good growth on prices throughout the whole year, 3%, 4% a quarter. It was even a bit stronger in the fourth quarter. Was there another increase this year, and are you going to try to catch up at least with the inflation that you had last year for this year?

Last year, overall, in the year, our price increase was about 15%, which I think was very important to keep profitability. It was way above the inflation rate of 7%. I don't recall in all the years as CEO we were able to And we will keep this year seeing if there's more opportunities to raise prices, but we're already at a level that we think is extremely, extremely competitive.

Excellent. So no price increases so far this year, even in January? You did not have a price increase in January?

We have moved a little bit of price in January, yes.

Okay. Thank you.

Thank you, Leon. Take care.

Thank you. There are no further questions in the queue at this time.

We now proceed to webcast questions.

Okay, we have a question from Pablo Ricalde. Can you provide additional information on the changes in sales mix you saw during the quarter, and if you expect this favorable mix effect to continue in 2022?

Yes. As the public infrastructure, they spend more expensive or more expensive Yeah, more profitable type of cement. And also, the self-construction they're pushing into the MS cement. It's a little bit more profitable than the all-purpose cement.

I hope that answers the question.

The next question is from Luis Ramos. What are your expectations for volumes in 2022? How much of this dynamic will come from reconstruction projects? And the second part, could you provide more color on the mix improvement, which I think we just... In terms of volume, like I said in my presentation, I mean, 3.6 million tons of...

of cement is really an incredible volume. I mean, we used to have 20% of the national demand, and we're up to 27%. So I think if we manage to keep the volumes at higher prices, it would be an outstanding result. In terms of reconstruction, 2022 will be south of 2%, so it's not really a relevant number. In 2023, it will be up to close to 5%.

And another question, we have one on what are your targets for sales and margins for 2022?

In terms of sales, like I mentioned before, 3.6 million tons. In terms of margins, our idea is to have around 25.2%. Regarding prices, do we foresee them to remain...

or will competition drive prices down as supply chain returns to pre-pandemic levels?

Like I mentioned before, we were able to have a very substantial price increase over the last year. Even in the last quarter, the recent revenues went up 10%, even though sales were down 6%, as to do fundamentally with price. We have started moving a little bit on January and February this year, so we're going to keep watching the competitive situation, and depending on that, we're going to see if prices can still be increased.

Moving on to a couple of questions on the dividend. We have a first question from Carlos Caraza from Seminario. Regarding dividends, you mentioned a dividend of 75 cents soles per share. That is about 330 million soles. 2022 accumulated results are not enough. From which account will you take the given data?

You have to keep in mind that, I mean, the dividend payout of this year was absolutely exceptional for many, many reasons, and I'm sure our investors understand. This year we should go back more to what were normal levels in the past, but we are still recovering from a very high dividend this past year, and also the fact that we gave out most of our return earnings. So we're going to have to see how the results come in the first two quarters of this year. and probably will go to a level somewhere south of what it was before the pandemic.

Moving on to a question from Sebastian Gallego from Ashmore. How do you see competition under this environment of strong demands and higher prices? Could you provide financial guidance for 2022 and CAPEX needs for 2022?

Well, in terms of competition, I mean, with the dollar hitting $4.10 at some point, even though it's gone back to $3.80, it's much less competitive for people to import either clinker or cement. So I think we are pretty much, I'm not saying not concerned, but less concerned than we were at pre-pandemic levels, and it seems to us the logistic chain in the world still remains extremely extremely uh expensive and confusing so i this year i think competition will be a huge a huge issue in terms of uh uh in terms of topics this should be as similar as the last year as 2021 of around 100 million dollars

Yes, it's basically around $20 million. Well, that doesn't include the additional coverage for the Pacasmayo upgrade of kill number four.

And then finally, from Stefania Mosquera from Credit Corp., what are the expected levels of SG&A? We expect these levels to be recurrent, so similar to SG&A.

Yeah, it should be similar to 2021.

Okay. Thank you, everybody, for the questions. And closing up to say that 2021 has been a remarkably successful year in so many fronts. We saw record sales volume that led us to decide in this package my optimization investment in order to supply the clinker needed. This decision was taken within an uncertain macro environment and much in line with what is the DNA of the company, which is a long term, which is a confidence that it will be very profitable for the company. And it really ratifies our commitment to the country's development. I think commitment has to be ratified when things are maybe shady, maybe complicated, maybe uncertain, but we are here more than 60 years. I am absolutely convinced we will remain here in Peru, fully committed to our country for many more decades to come. I have to really mention also that none of these achievements, let me stress the word none, could have been possible without the talented and outstanding group of professionals that make up Acasmayo. They are the reason we achieve every single goal we achieve every year. The past two years have been extremely challenging for all of us, both at the personal and professional level, and the commitment and the level of engagement we have from our team is undoubtedly the biggest source of our success. We would be absolutely nothing without our team, without our people. Our challenge now is to sustain our current financial results and continue improving our sustainability management, the independent foundation that we allow for a prosperous future. As we now prepare to hopefully leave COVID behind, Also, we have an enormous challenge in the way we're going to go back to the office, in the way we're going to go back, and fundamentally centered in our people's well-being and fundamentally centered in always being close to our client. Thank you very much for taking the time today. And as always, Manuel, Claudia, and myself, we're always here should you have any more questions. Have a nice day, and please stay safe.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.