Claudia Bustamante - Head of IR Humberto Nadal - CEO Manuel Ferreyros - CFO.

Andres Soto - Santander Bank Mauricio Serna - UBS Financial Froilan Mendez - JPMorgan Joswil Vega - Integra Francisco Suarez - Scotia Bank Daniel Sasson - Itau.

Good morning. My name is Karen and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cementos Pacasmayo Second Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

[Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may begin..

Thank you. Good morning everyone, and thank you for joining our call today where our CEO Mr. Humberto Nadal; and our CFO, Mr. Manuel Ferreyros, who'll discuss second quarter results and answer your questions. Please note that this call will include certain forward-looking statements.

These statements relate to expectations, beliefs, projections, strategy and other matters that are not historical facts and are therefore as subject to risk and uncertainty that might affect future events or results. description subject to risk are accept forced in the company's regulatory filings. With that, I'd now like to turn the call over to Mr.

Humberto Nadal..

Thank you, Claudia. Good day everyone and thanks for joining us on today's conference call. The second quarter 2017 continues to be challenge us. With [indiscernible] finally coming to an end in April.

These resonated to our second quarter results as can be expected not only impacting April sales volumes and operating expenses as [indiscernible] to receive with our products to alternate fruits to sorting and increase throughput and our business cost.

However, while we had a difficult start to a second quarter I am indeed glad to let you know that at the beginning of May things have returned to normal and we already seeing improved performance which strengthen May and June sales growing at 2% and 6% respectively as well more stabilized expenses.

It is also important to note that despite this quarter's challenges we achieved a sequential increase in sales as Manuel will discuss in more detail during financial review. Our Peru plant again made important contributions. They are mainly fully operational to us while [indiscernible] downpours. The U.S.

clinical production in the second quarter was due to a planned preventive maintenance of pure skill. PPM scheduled at regular intervals identifying potential problems and substantially reduced relative maintenance. We are provisional clinker ahead of this PPM no important clinker was therefore needed.

Now that [indiscernible] the opportunities that lie ahead. As I've described the situation has normalized and we are seeing our performance strengthening last month. It is important to note that these does not yet include growth related to rebuilding our country's infrastructure.

The considerable physical damage caused by Coastal El Niño has left hundreds of thousands of Peruvians homeless and cost billions of dollars in damaged schools, hospitals, houses, bridges, roads, highways, channels.

Economies in Peru have put a long-term price tag of more than $6 billion more than 3% of growth on mainly products for commutative resettlement and reconstruction. [Indiscernible] Peru Congress has approved a reconstruction law known as [indiscernible] which create a dedicated unit that will be in charge of our scene of reconstruction.

The plan is to not only reveal but to create a construction resilient to future natural disasters as well as to maintain is expected to make future earnings and rent more frequent and powerful. The Peruvian government has appointed Mr.

Pablo de la Flor, Former Vice Minister in early May to lead this effort and as having more than $3.2 billion of Peru's emergency fund to be directed towards rebuilding destroyed or damaged highways, homes and bridges. Mr.

de la Flor should present his construction plan by August and his reconstruction projects will go through a fast track with all expectations start begin late this year or early 2018.

Note that this site will be directed towards the northern regions where Pacasmayo operates [indiscernible] where most of the damage is concentrated and clearly in a state of emergency. It represents meaningful upside potential for the company's overall performance moving forward.

Till the construction plan is independent of the billions of dollars in block infrastructure investment associated with Pedro Pablo Kuczyns pledged to unlock when he took office in July 2016. His infrastructure investments are supported by the President as well as Peru's Congress, despite the well-publicized differences.

We are very encouraged by a meeting held last week on July 7, where President Kuczyns and [indiscernible] the opposition leader, the Congress agreed that political dialogue is needed to jump start the country's bolstering economic growth. We remain focused on these opportunities on our key advantages.

We believe our performance this quarter is further confirmation of Pacasmayo's ability to maintain strong operational performance. The benefits of our field plant are clear representing our results, which is particularly evident in terms of our people.

We are the uncontested leader in North Peru with a capacity to address a construction demand related to Peru's recovery as well as important infrastructure development we expect to come to efficiently in the future ahead. We continue to look forward to sequential improvement and improved margins in the second half of this year.

You'll note that we were again including the Lima Stock Exchange, good corporate governance index for the eighth consecutive year as one of only six public listed companies included this year. This is further affirmation of our full commitment to shareholders and best-in-class corporate governance.

I will now turn the call over to Manuel, to review the highlights of our financial performance. .

Thank you, Humberto. Good morning everyone. Shipments of cement concrete and blocks were 524.8 million tons, a 2.8 decrease compared to a second quarter of 2016. As Humberto mentioned, this decrease was mainly due to the sharp decline of shipments in April due to the Coastal El Nino.

It is important to note that volumes in both May and June increased year-on-year in line with the end of the flooding under asserted recovery in demand in self-construction. Shipments increased 2.2% in May and 5.7% in June compared to the same month of last year.

April's sharp demand increased combined with the need to review some shipments also related to El Nino had an impact on our entire cost structure as Humberto had mentioned, despite a normalization in demand throughout May and June.

Revenues accordingly decreased 6% compared to the second quarter 2016 while gross profit and gross margin decreased 14% and 3.6 percentage points respectively. However, it is important to note that revenues increased year-on-year in both May and June with a growth of 0.6% and 3.9% respectively.

In our cement segment, revenues increased 0.8% in the second quarter 2017, compared to a second quarter 2016. Despite the decreased sales volume in April due to the recovery of cement volumes in May and June. Cement, a segment gross margin decreased 1.2 percentage points compared to second quarter of 2016.

This one again due to the Coastal El Niño effects in April, as well as a higher cost of goods sold as we had to reroute certain shipments due to road closure as discussed.

In terms of operating expense, administrative expenses increased 4.5% compared to the second quarter 2016, associated mainly with the Coastal El Niño as well as some consultant services. On a sequential basis, administrative expenses all increased 1.7%.

Selling expenses increased 7.6% compared to the second quarter of 2016 in line we increasing advertising and promotional expenses, budgets in order to successfully defend our market share. On a sequential basis, selling expenses decreased by 6.6%.

In line with our comments on the Coastal El Niño and the stakes on our cost structure including minor damages to our operations and increased distribution and provision of raw materials cost from road damages, consolidated EBITDA decreased 19.1% year-on-year to 77.2 million S/. While Cement EBITDA margins decreased 4.4 percentage points.

To separate the Coastal El Niño effects on a EBITDA margin in April from our normal results in May and June we provide the margin for each month as well as for the full quarter. Cement EBITDA margins for the quarter was 27.6% while on month by month basis cement EBITDA was around 17% in April around 31% in May and around 32% in June.

These margins all include some recovery and self-construction. Once the construction plan has been presented and its execution begins later this year and in 2018 we expect EBITDA margins to increase as capacity utilization increases and fixed costs are further relieved.

Net income of continual operations in the second quarter was 21.3 million S/ a decrease of 37.4% compared to a second quarter 2016. Basically because of the Nino impact. Moving on the balance sheet, we ended June with a cash position of 49.4 million S/ and a net debt to adjusted EBITDA ratio of 2.4 times.

I now like to turn back the call to Humberto for closing remarks..

Thank you, Manuel. It was a challenging few months here in northern Peru but it's clear that these are the times when our company strength and the progress we've made are most evident.

We believe we have considerable opportunity ahead as we participate in rebuilding Peru's infrastructure and expect to capitalize on the manner currently anticipated towards the back half of this year, and considerable recovery in 2018. Before I turn the call to the operator I'd like to speak on part of my colleagues and employees.

For your extraordinary dedication to Pacasmayo on our operations here are my sincere thanks. We commend you for the mainly good decisions you've made to all of our neighbors in these incredibly difficult times. Operator can we now please open the call to questions..

[Operator Instructions] And our first question comes from Andres Soto from Santander Bank. Please state your question..

I have two questions. The first one related to the charges that you are reporting on the brine project. I would like to understand what is your outlook and what is exactly the amount of money that you paid at this quarter which was almost S/ 1 million. My second question is regarding your new cross currency swap.

I will like to understand why is different from the previous one and what can we expect in terms of our financial expenses going forward? Thank you..

Okay, Andres. I'll take the first part and then Manuel can take the second one.

Regarding the brine basically all the expenses related to that project is keeping the concessions alive that's all we are doing right now, like you mentioned [indiscernible] that is all because that project is on standby we are already paying enough money to keep the concessions alive..

And that's the amount of money that we should expect every quarter or this is going to be just one a year?.

It is more or less the same amount every quarter. .

Perfect. Thank you..

Well the second question Andres, no we haven’t done any extraordinary changes with the swap, its a same one that we have in the beginning..

So financial expenses will remain at the same level that you currently have?.

That's right. Yes, maybe you see some changes because we pay interest of the debt and the cost of hedge in dollars. So, this is some changes because of the exchange rates but it's only of what we paid every semester..

Okay, thank you very much..

Thank you. And our next question comes from the line of Mauricio Serna from UBS Financial. Please state your question..

I have a couple. First, you just talked about the way the volumes and the sales evolved positively in May and June. And I wanted to ask what in terms about pricing because it seems that at least price and pricing mix perspective, it's been negative in the last couple of months and probably also April.

So, I just wanted to get a little bit more detail on that.

Also, when you mentioned EBITDA margins for May and June without the disruptive effect of the El Niño storm, I'd just like to know if those were actually better margins year-over-year? Or how did those compare to the last months in 2016? And finally, on the severance payments that you mentioned and the report, is that something that should be recurring in the second half of the year? I think you also mentioned the recurring increase in the administrative expenses.

I don’t know if that’s excluding these charges. Thanks for taking the questions. .

Yes, the prices, we've just raised prices around 20 to 25 days ago. But there is a big difference that you see between dispatches and revenues are because sales of concrete has gone down in approximately 40%. That's the major impact and the big difference between dispatches and revenues.

Second, what we expect for the whole year in EBITDA margin is to close a whole year in 31%..

And if I may add to Humberto, to my last comment on the price, like he said, the pricing term was a little over 3.5%, which we think it's a good amount to increase. As we have reflected yet, because it was done over the last two weeks. But I mean this should be reflective on the next six months. .

Mauricio, does that complete your question?.

Yes, the first two.

But just I want to know of the severance payments, should we be expecting additional ones for the second half of the year? And I think you mentioned like you mentioned a recurring amount of over like the -- without the effect of the expenses in this quarter?.

Regarding severance payment, I mean you should expect some in the second part of this year and at a lower rhythm that they have been doing before. I mean we're always looking for operational efficiency and at sometimes severance payments are the cost for that, and in the long run it all works towards our operational efficiency. .

Okay.

And your 31% EBITDA margin expectation includes the severance payments?.

Yes. .

Thank you. [Operator Instructions]. And our next question comes from [indiscernible] from MetLife. Please state your question. .

Hello, good morning and thank you for taking my questions.

Just one, it's regarding what did you expect for net leverage by year end?.

Net leverage by year end should be very similar as to what we have today to around between 2.3, 2.4..

And our next question comes from Froilan Mendez from JPMorgan. Please state your question. .

Hi, thank you very much for taking my questions. After that increases, you mentioned in the last two weeks, would prices in today would be equal to prices in April or a bit lower.

Want to understand what's the price level after a big increase?.

I mean the increase is to the actual current prices or prices are right now higher than they were in April..

Okay. Thank you. .

Thank you. And our next question comes from I don't know how to pronounce your first name, I'm so sorry. It is Joswil Vega from Integra. Please state your question..

Yes, don’t worry about it. Thank you, good morning to everyone. And thank you for taking my questions. I actually have two questions. The first one, if you have, identified the source of the [indiscernible] in May and June.

And we would expect the same level for the rest of the year, I mean around 200,000 tons per month? And second would be that, you mentioned that you have increased your SG&A expenses, because you have expense more in advertisement to take your market share that is because your experience in more competition or not? Thank you..

I think the first part of your question I mean I think I mentioned in my opening words, I think self-construction has proven very resilient in May and June and I think that’s what we are going to be seeing for the remaining parts for the year with positive numbers. And I think the big expectation is going to come through our construction side.

If that really kicks in towards the last three four months of this year, we could be facing an interesting second semester. And based on your -- in terms of SG&A, I think I have been repeating myself every call, every chance I get I mean, we are the very dominant position in north and we will want that to remain for time being.

But [indiscernible] 60 years the end of this year, so I mean we are in the middle of launching -- we have started already change our product and re-launching our brand. And it's all part of really always doing a preventive move on the market not because we see necessarily good competition, but because we are unchallenged..

[Operator Instructions] And our next question comes from [indiscernible]. Please state your question..

Can you talk a little bit about the level of price increase you said you implemented 75 days ago?.

The net price increase that Manuel was mentioning was around 2.5%..

And our next question comes from Francisco Suarez from Scotia Bank. Please state your question..

Just reaching to the hike in cement prices that you just did, what are the chances to improve the sales mix with value added product? I mean perhaps placing more in the market the ancillary [ph] brands and so forth rather than the typical general use for cement.

And also, a follow up question on your expenses related with advertising and everything, does that if only for advertising general or are you actually increasing the margins that distributors may actually get for selling your product in your locations? Thank you..

On the first time, I mean as we have discussed with you in privately, we're always all about high margin cement. I mean I said it before we are in an important for the company because we are turning 60 years and we are in the middle of some surprises that are going to come in the second part of this year.

Regarding high value cement I mean we are always trying to push the most cement that both the general public wants that bring more margin to us, I mean [indiscernible] like I said in the second part of this year we would see some surprises. Regarding your second part of the question, the increases have to do with basically advertising.

I mean the margins we give to our distributors has remained unchanged. .

Thank you. And our next question comes from Daniel Sasson from Itau. Please state your question..

My first question is related to your one growth expectation, I know you have a risk of first half of 2017 but you seem to be more optimistic with the S/ 20 billion that are going to be put to use for the reconstruction works and if you could detail what do you expect for volume growth in the second half of these years, we should assume a 5% growth in the second half as we have seen already in June otherwise that would be key optimistic and what are your views for 2018? And in the same line can you give us more color on the [indiscernible] and you see foremost what do you expect in terms of cement demand maybe already in 2017, you have that two projects you mentioned that could already start in 2017? And finally, the S/ 20 billion for the reconstruction that were transferred to the reconstruction fund, how long do you think it will take for this money to be actually deployed? Should we expect it in three or four years or that seems optimistic at this point? Thanks a lot.

.

Regarding the first part I mean what will happen in the second semester, I mean like we measure March and April we took a severe hit in downward sales so I think and we said in the previous call I think the second semester will be a pretty good one and we should compensate on dramatic sales.

So, if we were to make up for our projection right now, we come the year at a despite as the same as similar year we will consider that a pretty good number considering the Coastal El Nino.

Turning to 2018 that's a different story because then you would have that, so then yes, I mean we would be looking at probably 4% to 5% growth and these are our construction company and that could really hit the double-digits number.

I mean when it took about S/ 20 billion redeployed over the next two years which is the plan of [Indiscernible] and that's why those are your question, I mean I could, I'll be very confident that we would see '18, '19 and '20 as double-digits if the money is deployed. .

Thank you. And our next question comes Mr. Vega from Integra. Please state your question..

You mentioned that you have some probably in transportation because of the Coastal El Nino, but I will like to know if the transportation expenses are included in selling expenses or in cost of goods sold.

My question is because I can see that the COGS for both quarter and selling expenses for over quarter are almost the same I mean the only difference has been the rain, so I would like to know how you consider these transportation expenses?.

Yes, the cost of transportation is included in the cost of goods..

Excellent. Thank you. And I'll now turn it back over to Humberto for some closing remarks. .

Thank you again for joining us. We're closing a very challenging quarter and I think as I said before, my repeated thanks to all of Pacasmayo team. I think we've done a tremendous efforts and tremendous job in a very difficult environment. And I think May and June have resulted positive. Thanks to all the efforts of our team.

And also, I like to thank you because like every single member of our company were there to help our neighbors in a very difficult situation in last months. Thanks everybody for joining the call today. And if you have any questions, as always Claudia, Manuel and myself are always available. Thank you very much for your time. .

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. And have a great weekend..