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

Good day, everyone, and welcome to the Cementos Pacas Mayo 4th Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Claudia Bustamante.

Ma'am, the floor is yours.

Thank you, Matthew. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer, and Mr. Manuel Ferreiro, 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. Ferreiro 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 filing. With that, I now would like to turn the call over to Mr. .

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. This quarter, we continue to focus on our strategy, which has led us to deliver outstanding results. During 2022, we achieved over 9% growth in revenues and a similar level of growth in EBITDA year over year. Moreover, our profit for the year increased a substantial 15.4%. This is especially relevant considering that 2021 was already an all-time record year. We are convinced that these levels of profitability are possible because of our focus on three main pillars, sustainability, digital transformation, and innovation. We will continue to focus on these aspects to deliver the best possible results, especially during these tough and in need uncertain times. As you have mentioned before, operating with sustainability at our core is key for a company's future and to fulfill our purpose. On the environmental front, We have signed the Peru Roadmap to Net Zero, committing ourselves to implement the necessary actions as an industry to reach net emissions of 520 kilograms of CO2 for every ton of cement by 2030. To achieve this, we need to commit ourselves to working on two fronts. First, by promoting the regulatory framework that allows a minimum of 12% of coprocessing, and secondly, and most importantly, by continuing the reduction of our clinical factor industry average of 70%. On this last issue, even though our clinical factor of 73% is already below the national average of 76%, we are working hard on continuing this reaction. The Cement and Concrete Resource Center, financed completely by Pacasmayo, has already worked on a cement that, at the lab level, can have a clinical factor of under 55%. We expect to have this cement ready for market in 2023. On the social front, I'd like to briefly mention a project that that is very much aligned with our purpose. During this year, we began with a pilot to provide 93 families throughout our area of influence with improved living conditions. As you may know, many of the houses in the poor areas in Peru don't have proper floors in their houses. They have dirt floors. These are sources of infection. They have parasites, bacteria, and insects that cause respiratory diseases, anemia, among others. This project looks to providing with cement for the floors and to build together a better home. We look forward and very excited to scaling this project in the near future to be able to improve the lives of more people. Moving on to digital transformation, for the past couple of years we have been working on enhancing our business models through digitalization. We have developed digital tools in our different clients and stakeholders. We are developing our own marketplace to bring together construction companies, hardware stores, and the final customer, incorporating a new value proposition. For construction companies, we remain very focused on serving our Package Pro tool that aims to transform connectivity to our clients, maximizing efficiency in the project management, and increasing substantially the user experience. And finally, for retail consumer, we have enhanced Mundo Experto, our ecosystem of retail solutions. COVID forced us to adapt very quickly to new technologies in order to respond to the new needs of the foreman, the set of builders, consumers, and clients. ConstruXperto is a platform that is designed to promote the professional development of foreman to virtual tools, as well as training and custom-made consultancies. FerreXperto, on its own, is targeted to hardware stores and has a wide variety of training opportunities, as well as inventory control tools, orders, benefits, and promotions. We will continue to both enhance our current digital tools and develop new ones that support and maximize our company's strategy and future growth. Finally, we are convinced that innovation is absolutely key to supporting our vision of becoming a leading provider of building solutions, contributing with the progress and development of our country. To achieve our 2025 goal of deriving 25% of our revenues from non-traditional solutions, we are innovating in both new products and services. We continue to seek for innovation in our products to develop building solutions that are fit for infrastructure products since it's an area that's still lacking in Peru. We also want to extend these solutions to the self-construction segment since it remains as the largest proportion of our income. In 2022, we started developing IU, a platform that helps small retail consumers indirectly save money to anticipate its sales so they can reach the amount of money needed for the construction projects. We believe that by staying close to our clients, being flexible and wrapping fast, we'll be always able to anticipate their needs and continue creating and sharing value. I will now turn the call over to Manuel to go into more detail finance.

Thank you, Humberto. Good morning, everyone. Fourth quarter 2022 revenues were $553.8 million, a 1.7 increase when compared to the same period of last year, mainly due to the increased prices of baggage cement, in line with increased inflation. Similar, gross profit increased 1.1 when compared to the fourth quarter of 2021, and consolidated EBITDA was 121 million in the fourth quarter, a 14.5% decrease when compared to the same period of last year, mainly due to a number of current expenses this quarter. Despite these increased expenses, EBITDA this quarter was similar to previous quarters of this year. During 2022, revenues increased 9.2%, gross profit increased 16.6%, and consolidated EBITDA increased 8.8% when compared to the same period last year, mainly due to increased sales and decreased costs, as we were able to optimize the use of our own clinker and therefore use less imported clinker. Turning to operating expenses, administrative expenses for the fourth quarter of 2022 increased 19.8% and 16.1% for the whole year. compared to the fourth quarter and whole year of 2021 perspective. This increase is in line with higher sales and increased salaries, as well as an increase in personal expenses due to the union bonus that is negotiated every few years and has a larger impact during the first year, as well as a higher employee's profit share. Selling expenses during the fourth quarter of 2022 increased 55.7% when compared to the same period last year, mainly due to an increase in personal expenses derived from larger sales force, as well as a significant saving in advertising and promotion in the fourth quarter of 2021. During 2022, selling expenses increased 26.6% when compared to 2021 mainly due to higher salaries and the union bonus and a higher profit share, as mentioned before, as well as an increased provision for double payments. Moving on to different segments, sales of cement increased 8.7% in the fourth quarter of 22 and 13.5% during the whole year 2022. when compared to the same period of last year. As DAC cement sales continue to be the biggest driver of demand, gross margin decreased 2.6 percentage points this quarter when compared to the same period of last year, mainly due to the increase in the price of coal and electricity. However, during 2022, gross margin increased 1.4 percentage points, as we were able to mitigate some of the increase in the cost of raw material with lower use of imported clinker and optimization of our own capacity. During the fourth quarter of 2022, concrete, pavement, and mortar sales decreased 13.1% and 11.1% in the whole year when compared to the same period of previous year. mainly due to a significant slowdown in sales volume for private and public works. However, gross margin increased 2.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021, and 2.9 percentage points in the whole year 2022 compared to 2021, mainly due to our decision to focus on higher margin service. Sales of precast materials during the fourth quarter of 2022 and the whole year decreased 19.8% compared to the same period of last year, and 13.6% in 2022 compared to 2021, respectively, mainly due to a decrease in sales volume for the public sector. Gross margin was negative in the fourth quarter of 2022 and 2022, mainly due to the adjustment of missing inventories carried out during this year, which left an increase in cost as well as higher prices of raw material and low dilution of costs. Heavy precast fixes and demand was solved for lack of larger projects. Net profit for the fourth quarter of 2022 decreased 24.6% compared to the fourth quarter of 2021, primarily due to a decrease of raising profit as non-recurrent expenses increased this quarter. During 2022, profit for the period increased 15.4% compared to the whole year 2021, primarily due to increased revenues, as well as a higher operating profit, since we were able to streamline our costs despite some inflationary pressure in prices of raw material. In terms of depth, our depth to EBITDA ratio was 2.9, which is a level we feel very comfortable with it. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bond without incurring any additional cost due to exchange rate effects. As we mentioned before, we had already obtained a loan to pay for this bond, so our current debt levels remain unchanged. To summarize, this quarter's results show our resilience and ability to deliver continuous profitability. Can we now please open the call to questions?

Certainly. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star 1 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. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while I poll for questions.

Your first question is coming from Gunde Ojo from Harding. Your line is live.

Thank you very much for the presentation. Can you hear me clearly?

yeah we hear you very well okay cool yeah just just checking thank you so much for the presentation so I have a couple of questions and maybe I just ask a few and get back on the queue just you know to allow others but the first is on the on your use of imported clinker right you sort of reduced the use of imported clinker this year but I wanted to understand your strategy going forward regarding that because it sort of dilutes margin each time you use it. Do you have a plan to completely stop using imported clinker in the near future? And what volume of inventory do you have left and are you going to use it in the coming year, 2023?

Sure. As you know, we are in a towards the end of the expansion of our Pacasmayo plant. This will be operative third quarter of this year. The reason we have an imported clinker was because demand in 2021 rose abruptly. But going forward, we have completely stopped clinking ports as we speak, and we see absolutely no need in the future because our new kiln will come in in the third quarter of this year. And at this point, we hold around 200,000 tons of imported clinker, which are our security stocks.

200,000 tons, right?

Yeah, 200,000 tons.

Okay, and are you going to use that this year? And how would that compare with last year?

Yeah, I mean, we're going to use it, I mean, towards the coming months before we go into the operation. And the average cost is similar to what we're using towards the end of last year.

Okay. Okay. All right, fair enough. Thanks. The other question I have is on your volumes, which sort of declined this 2002 financial year for the reason you mentioned. It was sort of high in the previous year. But I was wondering, because when I looked at the data you shared in the press release, you have the central and the southern regions still growing. Despite coming from a higher base as well, but the northern part, for you, sort of had a decline last year. And I was wondering why are those areas growing as opposed to you a day competing with your product? And you also mentioned something about reconstruction projects having less shipments to them. Are those reconstruction projects done right now, or do you still have much to go? Because I was just wondering where we are in those implementations. Thanks.

Yeah, sure. I mean, you have to, when you see the numbers of growth, you have to go back more than last year. You have to go back to the last two or three years. What happened was we grew 42% on the previous year. Even though we decreased 5%, on the net of the last two years, we were up by 30-something percent. The other regions of the country did not grow 42%. So, of course, they were catching up. If you do the math over the last three years, we have grown much more than the south and the center regions. Going to the construction, I mean, the reconstruction of the north is something that has been going on and off over the last few years, and there's a lot still remaining. The thing it has to do is the fact that the government has to approve by packages. We finish a package, now we have to approve. I believe there are two or three more packages coming in, and it all depends, I mean, how quickly the government, based on the G2G agreement, can get these contracts up and running.

Okay. I have more questions, but I'll pause now and get back on the queue. Thank you. Sure. Thank you.

Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Francisco Suarez from Scotiabank. Your line is live.

Thank you for the call. Good morning, gents. The question that I have first relates with social unrest. I want to understand a little bit better where did the road blockades happen? Is this actually disrupting the shipments coming from Pura to the southern portion of your footprint, or that is concentrated actually much more within the Pacas Mayo area and the southern portion of your footprint? If you can help us a little bit to understand, because to my knowledge, I think that the social unrest has been concentrated much more in the southern portion of the country and to some extent the Lima market as well. But I wanted to understand what are the risks of disruptions from shipments from Piura, and if there are any visas, actually something that might be occurring in the year going forward. And my second question, if I may, I was trying to do a brief math here, and it seems that excluding the CAPEX related with the Pacasmayo expansion your overall free cash flow conversion ratio might be somewhere at the levels of 35%. So we just wanted to check if that number is roughly accurate and what expectations you may have for your free cash flow conversion for 2023 might be, excluding the expansion and expansion on Packers Mayo. Thank you.

Francisco, it's Humberto. Good to hear from you. Clearly, the social unrest has been much more focused on the southern part of Peru, in Puno, Cusco, Arequipa, Prima. The northeast remains pretty calm, even though there have been some interruptions in the area of Chao, going to Chimbote. So the southern part of our area of influence has been a little bit affected, but nothing at all compared to what has been going on in the south, where they've had four, five, six, eight days of of operation that cannot go ahead, so no. And as we're speaking right now, there's no roadblocks currently. That was something that happened towards the second week of January. And the second part of the question, yeah, you're right on that conversion number.

Okay, perfect. And do you think that that free cash flow conversion ratio might be something that you might be sustaining on the year going forward?

Yes, indeed. I mean, once you take out the Pacasmayo project, which is almost done, we should be sustaining that.

Okay, perfect.

Thank you so much.

Thank you. Your next question is coming from Kunde Ojo from Harding. Your line is live.

Thank you so much. I'm back again. Just sort of a few follow-up questions that I have left. is can you provide sort of some guidance into what you're expecting in terms of your performance for 2023? Maybe like volume, growth expectations, revenue, beta margin, if you can provide all of those three or any of them, it would be helpful.

Sure. It's very hard to predict volumes with a country in the middle of social unrest, but despite that, We closed last year on 3.4 million tons, and we would like to remain somewhere around that area. In terms of EBITDA margins, I think they're going to be stable until we have our kiln number four coming into Pacasamayo on the third quarter. That will jump EBITDA margins as we start making our own clinker and start not depending on imported clinker, then that should be higher.

Okay, when you mean EBITDA margin stable now, so are you talking about 22%, 23%? Because you know you had different numbers across the year. Or are you talking about the average for 2022?

You can calculate for EBITDA margin.

No, no, no. I'm asking you when you said it will be stable, what number will it be stable at before Q4? Is it the average for 2022?

Yeah, I think we should be around the volumes of last year.

No, I'm not talking about volumes. I'm talking about the EBITDA margin. You said it will be stable until Q4. Going forward. Yeah.

Can you hear me? 75% EBITDA margins for the whole year.

25% you said?

Yes, 25%.

Okay, that's very helpful. And in terms of pricing, are you putting in any additional pricing? What sort of price growth are you looking at for 2023?

I think we've been very aggressive in terms of market. of price last year. We remain like that at the beginning of this year. It all depends on how inflation behaves in our region specifically, not in the country. But we'll always be sure that the price is going away, that we retain our profitability levels.

Yeah, so you said you put in pricing earlier this year, in January?

Yes.

Can you give a sense of what percentage you did on average? in that period around three percent around three percent okay that's very helpful and last one for me is so pure kind of reach 100 percent clinical capacity utilization um from your um disclosure i'm just wondering what next after that you know are you looking at increasing capacity capacity up period or

since pacas mayo is coming up you don't need to do anything on pure i just wanted to understand uh what you're doing in terms of capacity expansion optimization going forward yeah that's a very good question with i think it's a very straightforward answer once the kill number four comes in we'll be able to produce around 3.5 million tons of cement with our own clinker capacity which is what we will have with number four so we will be at 100 capacity as soon as we turn on the kiln. What goes on from there on, it depends on demand. We don't foresee a project coming in the near future, because even if demand goes up 5, 10, or 15 percent, going to 3.7, 3.8 million tons, it's always much smarter to import a little bit of clinker than setting up a new plant to be used at only 20 percent capacity. So I don't foresee any project.

Hello? Can you hear my answer?

Yeah, I lost you for just the last bit, but I think I get it that you don't foresee any expansion in the near term. I think that's clear. Yeah, so in terms of CapEx, so how much are you looking at this year? Because, you know, because Mayo is still ongoing. What kind of level are you looking at in aggregate for CapEx for 2023?

You know, we're in a bad week with COVID-19. We normally spend around $20 million. Okay. All right. Thanks.

We're talking sustaining capex.

Yeah, but what is your total capex for 2023, including packets Mario continued expansion?

Around $50 million. $20 million or $22 million will be of sustaining capex and any difference between 2020

Okay. And then, of course, you caught a little bit again, but I think I had the number $50 million. Last one for me is on your balance sheet, on your debt, right? You mentioned that you sort of refinanced a part of your debt. I didn't get that part. If you don't mind repeating what you did in terms of refinancing and if you were at a higher cost, so should we expect higher interest expense going forward?

you know we don't we don't speak any other the bond that we issued 10 years ago was a rate of 4.5 plus the swap all in was around 7.10 and now we have you're breaking up i can't i can't i didn't get all your response sorry no i don't know what you have to bear in mind i mean did you hear me there

No, I didn't hear you. Did you hear me? No, not at all. You went mute for a minute.

Do you hear me now?

Yes, I can hear you now. Correct.

Okay. What Manero was trying to explain is, I mean, a year and a half ago when rates were still low, we managed to structure corporate credit with two banks here to be able to repay. We have just repaid $140 million of the bonds. Those bonds, if you add the coupon rate of 4.5 plus the swap, they were at an all-in of 7.10. And the new credit, it's at a cost of 5.8. So if anything, the financial cost is lower.

Okay.

Got it.

All right. Thanks. That's all from me. Thank you so much. Appreciate it.

You're more than welcome.

Thank you. There are no further questions on the phone lines at this time.

I have two questions from the webcast. So first, could you give more color on the non-recurrent expenses that occurred in the fourth quarter?

Basically, the non-recurrent expenses, it's an information there is an increase in the bonus that we pay or we negotiate with the unions. And it's heavily impacted in the first. Basically, a three-year arrangement with the union. And it has a much higher impact in the first year than in the second and the third. And we have to compare this year with the previous year. The impact has been much higher this year. Also, there is an increase, and that depends on the profit, as in the profit for the profit share for the employees. So basically, that's the two main... The two main impact in the trends.

The next question is, what is your strategy to manage cost going forward?

Yeah, I mean, we are always working and trying to be extremely efficient. Our main costs are related to energy. So coal, electricity are the things that are mostly impacting us due to the inflationary pressure. So looking forward, I mean, we're going to go into gas, and we're trying to also make a more efficient, the most efficient we can, our coal buying process.

And the last one is, how do you plan to mitigate the risk of not having geographical diversification in your top lines?

That's a very good question. And the fact of the matter is, I mean, 2021, we grew 42%. So, yeah, I mean, on the one hand, we are very focused on the north of Peru, but clearly it's a region that has an enormous potential to offer. If we had diversified, to give you an example, into a neighboring country, it would have taken us 10 years to grow 42%. So, yeah, we are pretty exposed to the north part of Peru, but we think that in terms of strategy, the growth potential is so immense still there that it pays to be very focused in one region. even though it is risky.

I think there's no more questions, so I'm going to go on with my closing remarks.

2022 was a remarkable year. and I want to raise a remarkable year for us, both in terms of significant advances in our strategy and an achievement of some financial results. We are aware that 2023 brings even more challenges and even higher levels of uncertainty for the world and particularly for our country. Although we are definitely influenced by the macroeconomic and political framework, we do believe we have two very clear competitive advantages. First, the north of the country has a slightly different dynamic and has so made it less inclined to conflict. And second, and most importantly, our focus on digital transformation and innovation has provided us with the tools to be much more resilient and adaptive. Finally, we understand that there's little benefit on being an island of excellence. It has focused less on what we're lacking in terms of institutions and focused more on our behavior and the behaviors of those we can possibly impact. We are at a crucial time to influence significant change, which will only happen by working all together. We strongly believe in the future of our region, and we even stronger believe in the future of our country. Thank you very much for your time today.

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