Cementos Pacasmayo S.A.A.

Good morning, ladies and gentlemen, and welcome to the Cementos Pagas Mayo Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mrs. Claudia Bustamente, Investor Relations Manager. Claudia, over to you.

Thank you, Jenny. 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 these risks are set forth in the company's regulatory file. With that, I'd now like to turn the call over to Mr. Humberto Nalae.

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you once again for joining us today. This quarter's results show our ability to sustain profitability even in the light of a slowdown in demand. Even when there has been a slight acceleration in terms of volumes, consolidated EBITDA was 120.5 million, a 33.9% increase when compared to the same period of last year, achieving a margin of 24%. Moreover, our net profit increased 74% year-over-year, reaching 48 million. This is especially relevant considering the current context with the significant decrease in coal and energy prices and overall inflationary pressures throughout the global economy. We have been able to achieve this by focusing on operational efficiencies, prioritizing the use of our own clean core, and implementing an accurate pricing strategy across both bagged cement and concrete. We are certain that this approach and a sustained focus on efficiency will continue to reap benefits in this extremely difficult environment. The most significant action we have taken to decrease our exposure to these external factors is the optimization of our current capacity in our PacaSmile plant. As most of you know, at the end of last year, our board decided to invest to add 600,000 metric tons of annual clinker capacity in this plant, allowing us to stop almost completely the usage of imported clinker. Despite some bureaucratic delays, I am very happy to announce that we are very much on track to finish this optimization as planned in the second half of 2023. We are currently in the civil works phase, finishing the pre-heater, and will soon begin the assembly phase. As this is a brownfield project, and the KIN will be part of an already established sign-up for action, we expect the ramp-up process to be smooth and relatively fast. Besides the obvious benefits in terms of profitability, this new kiln will also lead to a reduction in overall CO2 emissions because of the new state-of-the-art technology involved, aligning this investment with our long-term goals of achieving carbon neutrality by 2050. During this quarter, we'll launch an initiative that highlights our ability to adapt and align our client needs with our company's long-term goals. As you all know, Peru is a market that still sells mostly bagged cement. Throughout the years, we have constantly focused on reducing the clinical cement ratio by producing blended cements and making sure these are most widely used cements in our portfolio. As of this date, our blended cements make up over 80% of our total sales. In the same quest to continue promoting eco-friendly cement, we have developed and launched what we call the Eco-Saco. This is a new technology that allows the bag to disintegrate completely within a concrete mix, achieving zero waste. This product is completely aligned with our vision and our intentions as a company, as we are able to provide a lower impact on the environment and dispose of less waste. Moreover, it takes us one step further towards creating a culture that values and demands eco-friendly cement, which is crucial in order to achieve the significant reduction in emissions that we are extremely striving for. Finally, I'd like to proudly, extremely proudly mention the substantial positive evolution we have had as a company in the MERCO talent ranking. MERCO is a corporate monitor reference in Latin America based on a multi-stakeholder methodology composed of six evaluations and more than 20 information sources. In 2020, we were ranked on the 88th position. We have now climbed 66 positions to achieve the 22nd place in 2022. This is undoubtedly a sign that we are on the right track and encourages us to challenge ourselves to improve even more. As you have mentioned many times before, our people are the most valuable assets we have and the driving force behind our current and future success. I will now turn the call over to Manuel to go into more detail on financial analysis.

Thank you, Humberto. Good morning, everyone. Second quarter 2022, revenues were $502.9 million, a 14.1% increase when compared to the same period of last year, mainly due to an increased price of baggage, cement, and concrete in line with increased inflation. The gross profit increased 35.8%, mainly due to a reduction in average costs, as we were able to prioritize our own clinker, decreasing the over-cost of using enforced clinkers. as well as the increased revenues mentioned before. Consolidated EBITDA, 120.5 million in the second quarter of 2022, an increase of 33.9% when compared to the same period of last year, mainly due to operational efficiencies and increased prices. During the second half of 2022, the revenues increased 13.5%, the gross profit increased 29.4%, and the consolidated VITA increased 27.1% when compared to the same period of last year, mainly due to the increase in sales and decreased costs as mentioned before. Turning to operation expenses, administrative expenses for the second quarter of 2022 increased 16.3% and 14.8% for the six months of the year, compared to the same period of last year. in line with increased sales, mainly due to increased salaries and an increase in personal expenses due to the union bonus that is negotiated every three years and has a larger impact during the first year. Selling expenses in both the second quarter and during the first six months of 2022 increased 19.7% compared to the same period of the previous year, mainly due to higher salaries and the union bonus, as mentioned before. Moving on to a different segment, sales of cement increased 18.1% in the second quarter of 2022 compared to the same period of last year, as baggage cement sales continue to be the biggest driver of demand. Gross margin also increased 5.5 percentage points this quarter, when compared to the same period of previous year, as we were able to mitigate increasing the cost of raw materials with lower use of imported clinker and optimization of our own capacity. During the first six months of the year, demand sales increased 16%, and margin improved 4.6 percentage points, in line with the quarter's results. During the second quarter of 2022, concrete and pavement and mortar sales remained in line with the same period of 2021. However, gross margins increased 7.5 percentage points, during the same period mainly due to our decision to focus on higher margin products. During the first six months of the year, revenues decreased 7.4%, as sales volume decreased because of a slowdown in sales of the public sector. However, the gross margin increased 4.2 percentage points because of the profitability strategy mentioned before. Sales of precast materials during the second quarter of 2022 and during the first six months of the same year, decreased 4.7% and 0.7% compared to the second quarter and first six months of 2021, mainly due to a slowdown in public sector spending. Gross margin was negative for both the quarter and the first six months, mainly due to the write-off of past inventory, which generated a cost increase, as well as an overall increase in prices of raw materials. The net profit for the period increased a substantial 73.9% in the second quarter of this year as compared to the same period of last year, mainly due to the higher operating profit mentioned above, as well as a positive exchange rate effect. During the first six months of the year, net profit increased 57.5%, mainly due to the higher operating profit as mentioned before. In terms of debt, our net debt to EBITDA ratio was 2.3 times, which is a level we feel very comfortable at. To summarize this quarter, results show our ability to find efficiencies in times of cost and inflationary pressure, allowing us to continue delivering substantial profitability. Can we now please open the call to questions? Thank you.

Ladies and gentlemen, the floor is now open for questions. If you have any questions on the phone lines, please press star 1 on your phone at this time. If you wish to ask a question using the webcast, please type your question in the chat box and hit submit. We ask that while posing your question on the phone, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please wait while we poll for any questions. Thank you. Your first question is coming from Francisco Suarez of Scotiabank. Francisco, please ask your question.

Thank you so much. Good morning. Thanks for the call, Claudia, Humberto, Manuel. The questions that I have, and apologies because this has been addressed in your investor day in New York. I wasn't able to attend. Apologies for that. But the questions that I have relate with your overall cost management strategies. One, I would like to understand if clinker prices, FOB clinker prices are high enough for you to precisely rely more on your pura plant for clinker to compensate for the lack of capacity of clinker in Pacasmayo. And secondly, there's something that you have been doing a lot on last year in the form of reducing the overall imports of coal. to feed your kilns. So I would like to understand what other initiatives are you applying to enhance your overall energy mix and if this reduction in imports of coal are sustainable and if that has a positive impact in the overall cost structure on your energy mix. matrix. Thank you.

Thank you, Francisco. Let me tackle both questions. On the first one, I mean, any clinker that we produce, whether it's Rioja, Pura, or Pacasmayo, it's going to be cheaper than imported clinkers. That's a fact. So, I mean, we are... They're working at 100% with all the plants to avoid importing clinker. So, yeah, what we have been doing is very efficient usage of that clinker, and that lowers the need for imported clinker. That's the first part of the question. Second part of the question, we are, you know, cement is all about energy and fry costs, among other things. In terms of coal, we have decreased the usage of imported coal from 20% to 15%, and also we're trying to use as much of the local coal as we can. So that's why you're seeing the impact in the cost, as you mentioned. And the one thing we're doing strongly, strongly, not only because of cost but also because of the environment, we're trying to reengage with gas supply. We are very optimistic about it. We don't have any concrete results to announce as of right now, but hopefully before the end of the year, we will have news to report that we have been able to reengage with gas, and it will be helpful both in terms of environment and in terms of costs.

Very clear. Thank you so much. Take care, Jens.

Thank you. Your next question is coming from Adrian Huerta of JP Morgan. Adrian, over to you.

Thank you. Hi, I'm Huerta Manuel and Claudia. Going back to the question of energy cost, what was your energy per cost this quarter versus a year ago? That's my first question, given these changes on reducing the imported coal, et cetera. And the second question is if you're planning further price increases for the rest of the year.

In terms of prices, yeah, I mean, as we all know, we are living in the middle of inflationary pressures, so for sure, I mean, we think there's more room to increase in the coming six months, and it's going to be very closely related to keeping profitability and depending on what happens to our costs. I think if you take the price of Pertan, 18 months ago to now, we have increased a lot. But more so than that, we have to realize that we have been able to keep and I would say even regain profitability by a very thorough price structure. In terms of coal, I'll leave Manuel.

Yeah, hello, Adrian, how are you? In terms of coal, the cost compared to the same quarter compared to the last quarter of the last year is around 10 million soles, increase in cost. And in energy, Something similar, around 9.5 million per quarter.

Thank you, Humberto. Those increases are million solids increase year on year from energy and from electricity?

Yes.

Perfect. Thank you.

Thank you very much.

Okay, your next question is coming from Marco Mejia of Calpa. Marco, please ask your question.

Hey, good morning to everyone. Thanks to Humberto, Manuel, and Claudia. Please, could you explain to me, what is your outlook for the volume of salmon for the whole year?

Yeah, as you may recall, Marco, I mean, last year we grew almost 40%, which was something absolutely unprecedented. It went from 2.6 million tons to 3.6 million tons. So this year, I mean, our biggest objective is to try to stay close to those 3.6, which is already, I mean, it's a very, I would say, high expectation on our part, but we're trying to stay very close to that. Probably at the end, even if we decrease a little bit in volume, we'll more compensate that in terms of price. So revenue should be definitely up this year.

Thanks, Alberto.

Okay, as a reminder, ladies and gentlemen, if anyone does have a question and you wish to ask one, please press star 1 on your handset. I will now hand back over to Claudia for any questions that may have come in via the webcast. Claudia.

Hello. So first we have a question from Pablo Ricalde. Can you share your outlook towards pricing in BATS and then for the second half of this year? Do you think there is room for another price hike in the second half? I think we already got it.

Yeah, like you mentioned, Clara, we answered that. Thanks, Pablo, for the question. Like I said, I mean, the answer is definitely yes. We're always keeping a balance between profitability and market share. So I think if investment prices keep going up, I mean, for sure there will be room for that.

Okay, the next question comes from Tim Deodro. What is the driver of solid cement demand in the northern region of Peru? After a strong 2021, I would have expected a significant drop, but that didn't happen. Is the demand from public sector, and is it sustainable?

Thank you, Tunde, for your interest in our company, and I think, indeed, a very good question. I mean, after 40% year growth, we were all concerned about, is it a high that's going to drop? What is the main driver? The main driver is still self-construction. It is not public construction. uh investment it is not private investment when you don't see any hospitals any malls any big highways going on it's basically self-construction that accounts probably for 85 percent of our sales uh we remain optimistic why because in the north in terms of agriculture in terms of fishing in terms of construction in terms of or some tourists employment is a very good rate as long as there's employment these people will go and build and especially in an inflationary economy For the informal sector, economics 101 means if you hear about inflation, you buy durable goods. What is more durable than a home? So yeah, we are also pleasantly surprised that the levels have not dropped, and hopefully we'll be very close to the year before with much higher prices.

Okay, and this is the final question from the webcast, coming from Carlos Garaza. Thanks for the presentation and congratulations for the results. Could you share what are your expectations for volumes for the second half of the year and EBITDA margins? Furthermore, would you expect to change to natural gas in your facilities?

Hello, Carlos. Yes, Humberto already answered the question about the volumes. And concerning the EBITDA, we should be around 25% for the second half of the year.

In terms of gas, Carlos, thank you for the question, and I think I mentioned it before. We have been working deeply with our operations team to try to reengage with gas like we did two years ago in the Pura plant. Hopefully, we'll have something to announce before the end of the year.

We do have one more, a couple more questions from the webcast. First one of them from Bianca Venera. How will you manage the quick-line production considering the shortage of the terminal's cost?

We're not talking about a source of bituminous coal. We're talking about a reshuffling of the structure of coal.

Yes, only to complement what Alberto mentioned is that we are receiving the bulk of the bituminous coal today. So since the next week, we will be already on board with a quick line supply.

Okay, next question from . So two questions. We understand the picture for volumes in 2022, but how about the expectations for the first part of 2023? And do you expect higher prices to harm volumes in 2023?

Yeah, I mean, at this point, it's very hard to anticipate 2023. We still have six more months to go in a very uncertain environment. I wouldn't want to give any guidance at this point. At this point, we're very focused in defending the volumes that we achieved in 2021. And in terms of prices, I mean, like I say, I mean, our strategy is to always serve our clients in the best way and keep a balance between market share, price, and profitability. So we remain on that strategy.

Okay, next question from Carlos Caracas. Why did you switch from natural gas in Piura and what would be the savings in terms?

Yeah, what happened in Piura plant, we were not able to achieve a sustainable supply of gas in the amount of quality we needed. We're trying to fix that in the coming months so we can re-engage with the gas. And at this point, I mean, we cannot talk about any savings specifically because we don't have the final numbers yet.

Okay, next question. Could you share an outlook of dividends for this year?

I think... What we said in the past, we've had a consistent dividend policy over the last years, except for the extraordinary dividend we provided on July of last year. So I think this year, in the second part, we should go back to the historic level of dividends we had previous to 2021. But this decision, I mean, it's something that the board has to wait and make in the coming months.

Okay. Are there any concerns regarding excess capacity after the clinker expansion in the back of my account?

So that we understand the numbers. I mean, last year we sold 3.6 million tons of cement. Only 3 million of those were made around clinker. Only 3 million. I mean, the expansion will really... If the volumes stay at the level right now, the expansion will only replace important linker. We will have no idle capacity. It has never been our strategy to be like that. We've always had a 25%, 30% idle capacity. In this case, even if demand drops a little bit, I mean, we for sure think that the utilization rate of a new kiln impact is going to be in the less optimistic scenario probably at 60% or 70%.

Okay, that's all the questions from the webcast, but I do think we have one more question on the line, so I'll turn it back over to Jenny.

Yes, we certainly do. We have a question again from Francisco Suarez from Scotiabank. Francisco, over to you.

Thank you for the second question, but I was curious because you were also referring to overall weakness on works related to the reconstruction programs in northern Peru. Can you provide us a little bit more color of what is driving these sort of delays in the overall execution? Is that weather-related or that is actually much more structural? And what do you expect for the rest of the year? Thank you.

Thank you, Francisco, for the question. I think the delays are related to the fact that the – the lady in charge of reconstruction was removed from her position and nobody has been announced yet. So I think it has to do with her own ability to operate. It has nothing to do with weather or anything. It's only the inability of the authority to keep working on the game plan.

So that's interesting because it is about execution risks rather than any problem with funding, isn't it?

Absolutely. Only execution risks. It's not about funding.

Perfect. Thank you so much Take care, gents. Thank you, Francisco.

Okay, we don't have any more questions in the queue, so I'll now hand back over to Humberto for any closing remarks.

Thank you. There is no doubt that we are living difficult and uncertain times. Even though we may have learned to live with COVID, we now have to deal with war in Europe, unprecedented levels of inflation, civil unrest, and more radicalized political positions globally. As the world continues to spin in ever so changing directions, we have to remain calm and confident that the solid foundation we have built for the company will allow us to prevail and succeed once this cycle, as all of them before, comes to an end. Our 65 years of experience in a country that has given us quite a variety of challenges during that time have provided us with the tools to face difficult times. And with absolute confidence that by continuing to focus on our clients' needs, and constantly challenging ourselves to think outside the box, we will continue to deliver the best possible results. I want to thank all of you for attending the call this morning. And as I always say, thank you for the renewed interest in our company. And we always remain here should you have any further questions. Stay safe and have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.