Cementos Pacasmayo S.A.A.

Good day, ladies and gentlemen. Welcome to Pagas Mayo's second quarter 2023 earnings conference call. At this time, all participants are in 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 your host for today's call, Mrs. Claudia Bustamante, Sustainability and Investor Relations Manager. Mrs. Bustamante, 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 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 filing. With that, I'd now like to turn the call over to Mr. Humberto Navarro.

Thank you, Claudia. Welcome everyone to today's conference call and thank you for joining us today. This quarter, we experienced some demand side challenges as heavy rain during March and April caused a decrease in demand. Since May, we have seen a consistent decrease in our cement daily shipments, which gives us the confidence to believe that the second half of the year should be much stronger in terms of demand. It is also important to note that even though revenues were down 12.1% in the second quarter, when compared to the second quarter of last year, a beta margin reached 25.5%, an increase of 1.5 percentage points year over year. This is a very clear indicator of how we are maximizing profitability by striving for efficiencies in this complex demand environment. I would like now to focus on a remarkable event that happened this quarter. As I mentioned before, last year we launched the COSACO, a new technology that allows the cement bag to disintegrate completely within the concrete mix, achieving zero waste. This is a significant innovation in a country like Peru, where most cement is still sold in bags, but it is also a challenging one. Most foremen have learned how to build empirically through experience that is passed on from generation to generation. Innovating in this context is indeed difficult. Moreover, many of these families put their life savings in these houses. They need to be absolutely confident that the quality, properties, and the final product will not be affected at all by this new technique. And this is precisely why a strong marketing campaign is so important. The COSACO Innovation obtained the Grand Effie this quarter, as well as a Gold Effie in the Innovation in Product Marketing category, and a Silver Effie in the Positive Change in the Environment category. The Effie Awards are a symbol of outstanding achievement recognized worldwide that honor all types of effective marketing. It is truly remarkable that a cement company with original scope, such as Pacasmayo, obtained the greatest prize that is usually awarded to companies with a national presence and in the mass consumption segment. We are indeed very proud of this outstanding achievement, especially because the product truly represents our DNA. The effective marketing of this innovation is key to the achievement of its full potential as a zero waste product, as well as to gather to the gradual change in consumers' mindset towards eco-friendly and more sustainable products. As we have mentioned before, we have been producing cement with a lower clinker factor for over 25 years. Pacasmayo's portfolio is mostly made up of blended cements, which have a lower impact on the environment since they use less clinker in their production. Currently, over 85% of our cement sales come from blended cements, which have an average of 22% less clinker than traditional portal cements. achieving significant savings in CO2 emissions during production. However, we consider that this is not enough. We are voluntarily, and I repeat, voluntarily committed to a reduction of 20% in our emissions by 2030, which means we have to decrease our average clinical factor to at least 68% by then, at the case of 3.5 percentage points compared to our 2022 average. We continue innovating to find alternative materials can deliver the same or even better quality cement with an even lower carbon footprint. After speaking about sustainability, I would like now to focus on another fundamental pillar of our strategic model, digital transformation. This is no doubt a popular term these days, but one has to be at the center of those businesses that truly want to be at the forefront. Changes in purchasing behavior of consumers and open access to digital technologies are catalysts of this new wave of digitalization. These trends create both opportunities and risks, as they challenge the status quo. In this changing world, with ever more demanding consumers, a clear digital transformation strategy that seeks to guide and accelerate the company towards its vision, with a focus on collaboration and constant innovation, is even more relevant. And although we have talked about this before, I want to tell you about a great milestone for Pacasmayo, as we have taken the first step towards becoming a fully data-driven organization. We now have a clear strategy for data management. We have established a data and analytics committee to both prioritize and sponsor initiatives. We have now founded the first Agile unit within Pacasmayo, and we are designing and making available an ecosystem of corporate data to our own data lake. And finally, developing case studies to lead and implement data and analytic solutions that add value to our businesses. We are aware that we still have a long way to go, but we believe we are now better prepared to face the future and will continue to promote flexibility, agility, and innovation through our business model and culture to continue along this path. Finally, I would like to briefly update you on the status of our Pacasmayo plant drug optimization. We are very pleased to inform that the kill number four is now operational and wrapping up its production and expect to reach its full capacity during the next couple of weeks. This newer technology will allow us to save 15% in the consumption of kilowatts per hour per ton of clinker and an estimated reduction of 30% in the consumption of the kilocalories per ton. We were able to deliver this project on time with an overall investment of $80 million for the original 600,000 metric tons of clinker per year. I will now turn the call over to Manuel to go into a more detailed financial analysis.

Thank you, Humberto. Good morning, everyone. As Humberto mentioned, our second quarter 2023 revenues were affected by the temporary decrease in demand, reaching $442 million, a 12.1% decrease when compared to the same period of last year. Gross profit also decreased, but significantly less, achieving $152.6 million, a 3.5% decrease when compared to the same period of last year, mainly affected by decreased sales, partially offset by lower costs from decreased use of imported clinker and lower coal costs. Consolidated EVITA was 112.6 million soles this quarter, a 6.6% decrease when compared to the second quarter of last year. However, it is important to note that the EVITA margin was 25.5%, a 1.5 percentage point increase when compared to the second quarter of last year. For the first six months of the year, results followed a similar trend. Revenues decreased 10.3%, gross profit only 3%, and EBITDA 5.9% when compared to the same period of 2022. EBITDA margin during this period was 25.3%, an improvement of 1.2 percentage points compared to the same period of last year. Turning to operating expenses, administrative expenses for the second quarter of 2023 increased 6.2% compared to the same period of last year, and 7.2% during the first six months of the year when compared to the same period of 2022, mainly due to the increase in wage in line with inflation, as well as an increased donation as a result of the Cyclone Iaco. Selling expenses decreased 7.6% in the second quarter of 2023 and 2.4% in the six months of 2023 compared to the same period of last year, respectively, mainly due to decrease in personal expenses, basically, because of variable salaries in line with decreased sales, as well as a decreased advertising and promotion expenses. Moving on to the different segments, sales of cement decreased 7.4%. This quarter were compared to the same period of last year, and 5.8% during the first six months when compared to the first six months of 2022. This was mainly due to the temporary decrease in demand because of the flooding and landslides caused by Cyclone Jaco and intense rainfall afterwards. We have started seeing a recovery in sales volume and expect the second half of the year to show this improvement. However, a gross margin increased 2.3 percentage points in the second quarter of 2023 when compared to the second quarter of 2022, and 1.7 percentage points in the first six months of the year when compared to the same period of last year, mainly due to the reduction in the use of imported liquor and lower cost of coal. During this quarter, concrete payments and mortar sales decreased 30.6% when compared to the same period of last year, mainly due to a significant slowdown in sales volume for private and public works. New regional authorities took office this January and almost immediately had to deal with the cyclone Yaku and its aftermath, so have only recently began to look into investment possibilities. We believe that the second half of the year should bring along more public and prospective investments. especially considering that preventive works for the predicted in Nino in 2024, which should begin as soon as possible. Gross margin decreased by 9.5 percentage points in the second quarter of 2023 when compared to the same period of last year, mainly due to lower dilution of fixed costs because of the decrease in sales volume. It is important to note that we have worked very hard in streaming our costs, and we are certain that once volume improves, we should be able to capitalize on margins. Results for the first six months of the year were similar. Revenues decreased 26.5%, and gross profit decreased 5.5 percentage points when compared to the same period of previous years. Sales of precast materials during the second quarter of 2023 and the first six months also decreased, affected by the low levels of public investment and the heavy rates. Net profits decreased 9.4% this quarter and 7.2% during the first six months of the year, when compared to the second quarter and the first six months of last year, respectively. mainly the temporary decrease in sales. In terms of debt, our net debt to EBITDA ratio was 3.3 times. To summarize, this quarter's results show our ability to manage costs and seek for efficiencies during lower demand times. This makes us confident that we will be able to maximize profitability as soon as the market starts recovering. Operator, please, can we open to questions?

No problem. At this time, we are opening the floor up for questions. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For anyone using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please pause a moment. while we wait for any questions. Just as a reminder, if you have any questions, please press star 1 on your phone keypad now.

Operators, if you have no questions on the floor, we're going to go to the questions on the web.

Yes. Perfect.

I'll start with a question from Francisco Suarez. Congrats for advancing in your production integration, namely improving clinker capacity. Two questions. The first one, any plans to add a new grinding unit in your Pacasmayo plant to reduce further kilowatt hour per ton? And the second one, what can you tell us on spending related to reconstruction efforts in northern Peru? and the creation of resilient infrastructure to cope for more climate volatility in the future.

Thank you, Francisco, for your comments and on your two questions. We have no intentions of adding grinding capacity. As a matter of fact, we have more than enough. As you well know, I mean, we always run a lower clinical factor, so usually our grinding capacity is ahead of our clinical capacity. At this point, as a company, we can dispatch over 5 million tons, and the two grinding facilities which is grind number six and number seven in Pacas Mayo. They were built around 2009, 2010, so pretty modern. So the question tells you that it's novel. And the second question, Yesterday, President Boluarte signed officially the creation of the National Authority for Infrastructure, which is, I think, a huge step in the right direction. This is a very interesting position because it will not be politically appointed. It has a lot to do with long-term vision. So I'm sure with that and with all the things that we are seeing over the last three or four weeks of the authorities preparing for El Niño, we are very confident that the second semester will show better numbers in terms of volumes. As a matter of fact, if you see our daily sales, we have seen a consistent improvement over the last two or four weeks, and I think this will be reinforced by the spending of the local and national authorities in the coming months.

The next question is about, from Gerard Forrest from INTEGRA, how much Is the cost of coal as a percentage of your own clinker?

Hello, good morning. The percentage of the cost of coal, it's approximately 14%.

And then regarding the EcoSaco, is there any difference between the growth margin of this product with other products? And also, what's the

a share of the eco cycle within our no basically there is no additional cost well additional cost is minimum because the the only difference is the cost of the bag so it's basically the same cement and then the next question comes from marcelo burlan um

Three questions. So first, Pacasmayo has disbursed 160 million soles in the first half, which is well above historical levels. Could you guys give me more color regarding the main investments the company has made so far in 2023 that justified the increase?

Yeah, I think the fundamental is, I mean, till number four, like I said in my speech, we spent around $80 million in to put it into production. And this is an extraordinary CAPEX event. After that, I mean, we have nothing in the horizon except the normal sustaining CAPEX.

Another question. After the full ramp-up of kiln number four, what can be expected to be sustainable margins in the medium to long term?

The sustainable beta margin in the medium term should be around between 26 and 27%. Sorry, but it will depend on how much ready mix we sell. If the ready mix increases, obviously the margin goes out. But at the absolute EBITDA that we make, it goes up.

And then finally, we have to affect the country by the end of the year. So could we expect better cement demand in the third quarter as a result of preventive public and private investments?

Absolutely. I mean, we've already seen that over the last weeks. The regional government is trying to get up to par with Nino preventive measures. So, yeah, I think whether Nino happens or not is something we don't know. We're not clear at this moment or the strength of it. We're not clear, but we are seeing a lot of investment in terms of preventive works.

Short-term debt seems high for this year. Cash in hand doesn't seem enough. Please, could you explain a little more about how are you going to overcome it?

Basically, the short-term that we've acquired has been for the Pacasmayo nuclear, but this is a very small amount. It's only hundreds and something million soles. And we should prepay it during the next six months.

That's all the questions we have from the webcast, so I'll hand it over to Humberto for closing remarks.

Thank you, Claudia. Bacaspire has been operating in Peru for over 65 years. Throughout this time, we have seen demand periodically fluctuate, affecting our short-term financial results. However, our strategic model allows us to be ready to take on the market when conditions improve, focusing on those things that generate long-term value. We strongly believe The successful adoption of digital transformation and a culture of innovation and sustainability are those drivers that will lead us towards sustained value generation. The success of these measures is highly reliant on people's compromise and active participation, and we are absolutely confident that we have the best talent to achieve it. I would like to thank everybody for their renewed interest in our company, and as always, Manuel, Claudia, and myself will remain here should we have any further questions. Thank you very much, and have a great weekend.

Thank you, 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.