Cementos Pacasmayo S.A.A.

Good morning, everyone, and welcome to the Cementos Pagas Mayo first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ms. Claudia Bustamante, Investor Relations. Claudia, you may begin.

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 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 findings. With that, I now would like to turn the call over to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. This quarter, we have to face the challenge of inclement weather. As you probably already know, Green March, our country, and specifically the northern region, were deeply affected by a cyclone. This is an extremely rare occurrence that left many without a home or livelihood. So I would first like to take a moment to extend our deepest sense of solidarity with them and the families, and to promise that as a company, we will always continue helping as much as possible. Cyclone Yaku mainly affected the regions of Tumbes, Piura, Lambayeque, and Libertad. This phenomenon and the rainy season in general have led so far economic losses estimated at $4 billion. Our sales this quarter were understandably affected by this event temporarily, mainly during March, when sales volume decreased by 23% as compared to the same period of 2022. Nonetheless, Due to proper cost management and the decrease in the use of imported clinker, we were still able to increase our EBITDA margin by almost 1% point, reaching 25.1%. I would like now to focus first on our capacity to respond, like in other occasions, to a crisis like this, and then to focus on the future and how we can all make sure that we are better prepared for the next time this happens. As soon as we realized that the amount of rain, especially in the Pacasmayo area, which is not usually as vulnerable to flooding, was going to have severe consequences, we promptly, I would say immediately, deployed our crisis management plan. This plan addresses the effects of climate-related events through a strategy that involves immediate action in coordination with local authorities and neighborhood councils in our areas of influence. The first step in this plan is to pump the water out And we used our mixer trucks to store this water. Once everything was dry, we had to remove any solid waste to clear the way for proper transit and to prevent diseases. Only then, and let me stress this, only then could we provide clean drinking water. In many areas of our country, the sewage system is still undeveloped. And when floods and landslides occur, there's a possibility of collapse, posing a very alarming safety threat. We can say we successfully focused on preventing this from happening and could then move on to sanitizing the streets. Luckily, our experience during COVID was extremely valuable here, as we had already sanitized streets using our own mixer trucks. We believe that our crisis plan worked and we were able to mitigate and reduce the risks in an effective manner. Now that the immediate crisis has, for the time being, subsided, we need to focus on prevention straightaway. so that we can be certain that when another weather-related disaster comes, we are better prepared than this time. Although there has been much ill talk about the inefficiency of the reconstruction plan called , the reality is really different. And the reality is that part of this plan has in fact been successfully executed, although much slower than initially proposed. The reconstruction plan included hospitals, schools, and preventive works such as dams, river defences and drainage systems. The schools and hospitals have been built and were very needed. Now, the preventive works are pending. Given the current state of construction in the north and considering there is a possibility that a niño may happen soon, these preventive works have to be prioritised. Pacasmayo has plenty of evidence to support that building with the proper materials and designing correctly makes a world of difference in terms of resilience. We have designed and built using the Infrastructure for Taxes Scheme part of the Avenida Vallobar, the Avenida Sánchez Cerro, and the Avenida José de Lama, all of them in Piura. These roads were built using concrete and designed after an extremely careful analysis of the type of soil and in order to endure the potential natural disaster, including proper drainage. The results speak for themselves. These roads have endured the recent heavy rains without any important damage and much better than any other alternative. We need to insist on the importance of building resilient infrastructure since extreme climate patterns will continue and we need to make sure that as a country we are prepared to face it. This has been indeed a different quarter. I will now turn the call over to Manuel to go into more detailed financial analysis.

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our first quarter 2023 revenues were affected by the temporary decrease in demand, reaching 480 million soles, an 8.6% decrease when compared to the same period of last year. The gross profit also decreased, but significantly less, achieving 160.6 million soles, a 2.7% decreased when compared to the same period of last year, mainly affected by decreased sales, partially offset by lower costs from decreased use of imported skincare. Consolidated EBITDA was 120.7 million this quarter, a 5.3% decrease when compared to the first quarter of 2022. However, it is important to note that the VITA margin was 25.1%, a 0.8 percentage point increase when compared to the first quarter of 2022. Turning to operating expenses, administrative expenses for the first quarter of 2023 increased 8.1% when compared to the first quarter of 2022, mainly due to the increase in personal expenses as a result of increasing workers' profit sharing and an increase in salaries in line with inflation. Selling expenses during this quarter increased slightly, only 2.9% when compared to the same period of last year, mainly due to expenses related to the development of digital platforms. Moving on to the different segments, sales of cement decreased only 4.2%, This quarter, when compared to the same period of last year, mainly due to the temporary decrease in demand because of the flooding and landslides caused by Cyclone Yaku and intense rainfall afterwards. However, gross margin increased 1.1 percentage points in the first quarter of 2023 when compared to the first quarter of 2022, mainly due to reduction in the use of imported cleaners. During this quarter, concrete, pavement, and mortar sales decreased 22.3%, mainly due to a significant slowdown in sales volume for private and public works, which deepened due to the interruption in construction during the heavy rains. Gross margin decreased 1.6 percentage points in the first quarter of 2022 when compared to the same period of last year, mainly due to the lower dilution of fixed costs because of the decrease of sales volume. Sales of precast materials during the first quarter of 2023 also decreased, affected by the rain. The decrease in sales was 30.9% when compared with the same period last year, and gross margin was negative, mainly due to low dilution of fixed costs as heavy precast demand was stalled for the lack of larger projects and the effect of flooding during the quarter. Net profit decreased 4.8%. These quarters were compared to the same period of last year, mainly due to a temporary decrease in sales. In terms of debt, our net debt to EBITDA ratio was 3.2 times, which is a level we expect to sustain. 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 the exchange rate effect. As we mentioned before, we had already obtained a loan to pay for this bond. To summarize, this quarter's results show our ability to manage costs and seek for profitability when faced with challenges on the demand side. We are confident that we will continue delivering positive results during the rest of the year. Thank you, and please, Humberto.

Now we're open to questions.

Thank you, Humberto. At this time, we're conducting our question and answer session. If you would like to ask a question via the phone lines, please press star 1 on your phone keypad. Confirmation tone will indicate your line is in the queue. You may press star 2 if you want to remove your question from the queue. For any questions via the webcast, please click the Ask Question button on the left-hand side of your screen, type your question, and hit Submit. Please wait a moment whilst we poll for any questions. Okay, Claudia, I don't have any questions on the phone lines. Do you have any via the webcast?

Yes, we do. The first question is about the club deal and the grace period. When would we estimate to start paying the interest on those first disbursements from the previous years? And when would we start paying interest on the last disbursement in February of this year?

Yeah, thank you, Claudia. The club deal will start paying the first coupon on August of this year. It's approximately 40 million soles. And it's going to be due five years, because this is a loan, a 70-year loan with a grace period of two years.

Okay, the next question. The next question is, I'd like to know what could we expect in terms of demand volumes over the next quarter, given the already mentioned heavy rains in the region, as well as the expected El Nino to come ahead. Do you guys plan to revise your volume estimates for 2023?

Well, I think it's a very good question. We are behind the volumes this quarter because of the weather. As we speak, the impact of the weather is now very real. We're starting to recover. And there are three things that are very important. Number one, the government put a special fund to repeal the North. Number two, as you all know, regional authorities were elected, and they started working in January this year, and they were very new, and they've been focused on the weather these last few months, so the learning curve should be now much, much faster. And also, all the programs of Medellin, which are basically mortgage programs, have been revised and rebooted by the government. So we are, I would say, very optimistic that starting around probably June, volume should recover very, very quickly. And we'll see in time how much can we recover of the volume we didn't perform in the first quarter.

What are you expecting in terms of market dynamics for the following month in terms of self-construction and reconstruction initiatives related to the cyclone that is currently affecting the north?

Well, I think self-construction has always been the core of our business, and that will remain the case. And like I mentioned in the question before, I think reconstruction plans are heavy underway. The government has tested a very substantial amount of resources, and hopefully they will be able to deploy this in the coming weeks, not even months, because they all are concerned that some kind of phenomenon may come in the coming years, and we need to be prepared.

The next question is, what types of actions are you currently evaluating to mitigate any impact of a strong to extraordinary El Niño?

I think what Yaku showed is that we are very prepared. I mean, our plants suffered no damage at all. Our logistics chain was able to be very resilient. So really, who needs to be prepared is not Pacasmayo. Who needs to be prepared is the region. And like I mentioned in the questions before, I think both the regional and the national governments are, as we speak, working intensively to be able to have as much preparation as we can possibly have.

The next question, which percentage of total sales are geographically located in the affected regions? So Tumbes, Piura, Lambayeque, and La Libertad.

90%. 90%. If you were to exclude La Libertad and focus on what's been raining over the last few weeks, which is Tumbespura, and the rest will be around 40%.

How much imported clinker? How much? Did the use of imported clinker decrease compared to the first quarter of 22 and to the fourth quarter of 2022? And what was the impact on margins?

Yeah, the total impact, the total clinker that we've used in the first quarter of 2023 has been very, very little, around 3,000 tons of clinker. Compared with the same period of last year, it was around 100,000 tons. So that affected overcost last year of around 23 million sores.

Good morning, and thanks for the presentation. Could you share guidance regarding sales and EBITDA for this year 2023? Besides this, in a niño high impact in the country, are you expecting a self-construction decrease?

I think we're very optimistic that, like I said before, we're going to recover. We will see by the end of the second quarter. But I would say that by the end of the second quarter, we may be very close to the beta that we performed last year, even though the sales of the first quarter have been very bad. But we are very optimistic on a quick recovery.

The next one is on pricing. How much was the average increase in prices? year-over-year of cement in this quarter?

Last year, we were very strong in price. We were able to recover profitability through price. This year, these first three months, as you may understand, I mean, due to what was going on in terms of the weather and everything, we made no price adjustments, and we don't intend to do any in the coming months because we think that we did enough last year.

The next question is, in the event of a long El Nino, what are the possible risks that you can face in the following months regarding supply chain purchases, inventory, and transportation costs?

In terms of supply chain inventories, I mean, as you know, we are very conservative, and we usually have eight to nine months of limestone, of seashells, of coal. So from that stand, we are pretty cautious. In terms of interruption of the logistics chain, it will have to be more concerning how to get to the market. That is unpredictable. Even though Jack was very strong, we stopped maybe a couple of days, two, three days, and then we came back. The fact that we have three plants, two in the north, the fact that our distribution channels spread all over the north really helps to cover whichever area cannot be reached by a logistic change and be supplied from somewhere else.

And then finally, as you showed in the first slides of the presentation, the advantage of building with concrete, do you see a higher growth rate of sales of concrete as a preparation for El Niño?

Yes. The answer is a definite yes, capital errors, because authorities have seen the resilience of concrete compared to us all. So I think what the government is trying to do now in terms of reconstruction will be done mostly with concrete.

I think those are all the questions, so I'll now turn it over to Humberto for closing remarks.

Thank you, Claudia. For the past couple of years, it seems as if we have been faced with a whole spectrum of challenges. First, a global pandemic, then the constantly changing political environment in Peru and instability disposes, and now extreme weather patterns that are very harmful to our country's already limited infrastructure. But we have taken these challenges as we should, as learning opportunities. and we can now adapt and react faster, make us feel more confident that we are well prepared to face the future. These are crucial moments for our country. Let us take the recent flooding as a sign and opportunity to actually push for all of the structural needs that have been in planning for many years. If anything, besides resilience comes extreme positive outlook for our country, and that's where we are. more than 65 years in Peru, building in the north of the country. And I think this, if you ask me, are the most optimistic moments of the last 10 years. Thank you, everybody, for your remaining interest in our company. As always, we remain at your disposal. Thank you.

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