Claudia Bustamante - IR Humberto Nadal - CEO & Director Manuel Ferreyros - CFO and VP, Administration & Finance.

Andres Soto - Santander Investment Securities Inc. Francisco Suarez - Scotiabank Global Banking and Markets Pablo Ricalde - Bank of America Merrill Lynch Babatunde Ojo - Harding Loevner Funds Jessy Sanchez - Profuturo Benjamin Theurer - Barclays PLC.

Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo's Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may begin..

Thanks, Michelle. Good morning, everyone, and thank you for joining us. By now, you should have access to our earnings announcement for the fourth quarter and full year 2017, which was released yesterday afternoon. It may also be found on our website in the Investor Relations section. On the call with me today is Mr.

Humberto Nadal, our Chief Executive Officer; and our Chief Financial Officer, Mr. Manuel Ferreyros. Before I turn the call over to Humberto, let me remind you that this conference call includes forward-looking statements based on currently available information.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements.

Statements made on this conference call should be considered together with cautionary statements and other information obtained within the company's earnings release dated February 12, 2018, and within the most recent regulatory filings for a discussion of those risks. With that, it's my pleasure to now turn the call over to Mr. Humberto Nadal..

Thanks, Claudia. Hello, everyone, and welcome to our call today. Let me begin by commenting that 2017 was a challenging year for our country as natural disasters and political turbulence tested our resilience.

The strong results Pacasmayo reported yesterday demonstrate once again the earnings power of our business and extend our track record of delivering strong results despite difficulties.

During the fourth quarter, volumes increased in both a sequential and year-on-year basis as projects already under execution continue to yield results with our gradual increase in public spending during the quarter. A focus on efficiency.

Cost control and operating discipline also saw our company achieve healthy gains in fourth quarter cement EBITDA close to 14%.

For the full year, we achieved cement EBITDA margins of almost 31%, only a slight year-on-year decrease, which is particularly outstanding achievement considering the significant impact of Coastal El Niño during the first four months of the year.

You'll note that volumes of cement, concrete and blocks increased just over 7% in the last quarter of the year. It is an encouraging sign of uptick in both public sector spending and the self-construction segment as Peruvians rebuild their homes and properties.

Therefore, we ended the year with volumes reflecting only a slight decrease with year-on-year gross margins that were essentially flat and a 2.2% decrease in cement EBITDA. We achieved this despite the significant pressure we experienced during the first four months of the year from Coastal El Niño.

Since May, we've seen volumes strengthen on a year-on-year basis. It then, we should continue in the year ahead. Today, Peru's infrastructure needs are pressing as ever.

Our government is ramping up investment in transport and water infrastructure of the northern coast as the country struggles to recover from record flooding and landslides last year and recently began its $8 billion post-flooding reconstruction program. From the total budget, 2.2 billion have been included in the 2018 budget law.

And according to a statement released in late January, Peru's Ministry of Transport and Communications has already opened a 10-kilometer [indiscernible] highway in the Piura region, also in the north coast as part of the road infrastructure recovery program in place.

Therefore, we are confident that the infrastructure growth should gain steam in the year ahead with projects gaining traction in second half.

And as high infrastructure spending suppress investment, a sustained global demand for minerals underpins the mining sector, an industry that would also require additional infrastructure across energy, logistics, ports and rail.

As Manuel will review in more detail, in December 2017, we booked a noncash impairment provision, which impacted our fourth quarter and full year consolidated EBITDA and net income.

This noncash impairment provision is related to Pacasmayo's investment in the Salmueras Sudamericanas brine project, a noncement-related project, that is no longer aligned with our vision for the future. Our vision, as we all know, is to transfer Pacasmayo from a cement company into a construction solutions company.

Pacasmayo's focus is now an innovation based in cement-based products, and we believe this is going to give us a true competitive edge to drive diversification, facilitating our transformation into an adaptive basis model while we leverage our client network and market position to address Peru's underserved demand for infrastructure solutions.

For example, we are developing a suite of cost-effective and value-add products that use cement, creating high-quality cement-based products, such as customized sea walls and precast beams as well as bridges that can replace existing products.

In closing, we are proud of our results, which reaffirm once more Cementos Pacasmayo's strong position in the Peruvian cement market and an ability to evolve to continue generating long-term value for our stakeholders.

As a final note, Cementos Pacasmayo was recently awarded MicroStrategy Customer Award, along with other winners, Freddie Mac, AllianceBernstein and Merck.

The award was in recognition of Pacasmayo's project that resulted in an increase of Overall Equipment Effectiveness, OEE, a decrease of product waste, better stock control and a significant reduction in management decision processes by sharing information to the right people at the right time.

This award is a further affirmation of our success in this area and of our focus on operational excellence. With that, let me now turn the call over to Manuel to review our financial performance in more detail.

Manuel?.

Thank you, Humberto. Good morning, everyone. Sales of cement, concrete and blocks increased 7.3% in the fourth quarter of 2017 when compared to the fourth quarter of 2016.

As Humberto mentioned, this was primarily due to a growth in the self-construction segment and some increase in public investment, particularly in small and medium-sized project and repairs. Additionally, sales of cement, concrete and blocks were also up on a sequential basis.

Fourth quarter 2017 revenue increased by 3.6% to PEN 328 million from PEN 316.7 million in the fourth quarter of 2016. In 2017, overall revenues were down slightly when compared to 2016, reflecting a 1.2% decrease. Similarly, quarterly gross profit was up 6.5%, while yearly gross profit fell 2.2%.

The minor year-on-year decline can be attributed to the negative impacts of Coastal El Niño in the first four months of the year, as Humberto has discussed.

Gross margin in the fourth quarter of 2017 was up 1.2 percentage points on a year-over-year basis to 41.3% mainly due to high sales volume, which allowed for higher dilution of fixed cost and a higher average price of cement. The overall gross margin 2017 was in line with that of full year 2016.

The cement business performed particularly well this quarter with revenues up 8.7% compared to the same quarter of the previous year. This boost has allowed for a full recovery of low volumes experienced particularly in March and April, taking us to a full year increase of 2.7% compared to 2016.

Margins also remained stable despite the continued increase of raw materials cost due to damage caused by Coastal El Niño, some of which have not been fully repaired. The concrete business experienced a sequential improvement in revenues of over 11%, also still down when compared to the same quarter of last year.

Despite the decrease in volumes, margins improved on a year-on-year basis due to operational efficiencies, which we expect to maintain in the upcoming quarters. Our decision to divest from Salmueras Sudamericanas brine project, as Humberto discussed, resulted in a noncash impairment provision, which has had a clear impact on our numbers this quarter.

This was reflected in our operating profit and net income of continuing operations in the quarter, which were down 60.8% and 108.6% on a year-on-year basis, respectively.

If we are to exclude the impact of this noncash impairment, we saw net income from continuing operations in fourth quarter 2017 grow in 247.7% on a year-over-year basis whilst remaining relatively flat sequentially. Consolidated EBITDA decreased by 35.7% in fourth quarter of 2017 compared to the same period of 2016.

On a yearly basis, consolidated EBITDA decreased 12.9% year-on-year.

However, cement EBITDA, which excludes the effect of Salmueras Sudamericanas with a noncash effect, was up 13.8% this quarter on a year-over-year basis and only 2.2% down in 2017 compared to 2016 despite the negative effect of Coastal El Niño during the first four months of this year.

Cement EBITDA margin was also up 3 percentage points in the fourth quarter compared to the same quarter of previous years. To summarize Pacasmayo's numbers, reflects our continued success in driving operational efficiency and innovation year-end results. We look forward to a favorable environment as we move into 2018.

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

Thank you, Manuel. We are very pleased with our strong performance this year despite the challenges we faced in early 2017. We are also encouraged by the positive signs we're seeing as demand for cement increases with long-awaited infrastructure projects ramping up and continued growth from the private sector and self-construction market.

Cementos Pacasmayo is well positioned to capitalize on this demand as we continue to deliver meaningful value creation to our shareholders.

Operator, can we now please open the call for questions?.

[Operator Instructions]. Our first question comes from the line of Andres Soto with Santander..

My question is regarding the competitive environment in Peru. I see that imports have been increasing along 2017, and also, you have increased your selling expenses. I see that as a reflection of you preparing for a tougher competitive environment. I understand that there is one new competitor in the region, which is building a new grinding facility.

I would like to -- for you to provide an update on this project, and how do you see this new competitor taking some of the expected growth that you were expecting to have? And in terms of pricing, if this will have any repercussions in terms of your pricing strategy in 2018..

Andres, this is Humberto. Thank you for your question. When you see the number of imports, most of them are going to the city of Lima, even though we still have imports coming to the north. As you have said, we have strength in our commercial investment both in terms of the brand, in terms of the new product.

We're in the middle also of updating some of our images, so it is always part of us spending as a preventive measure to keep our very strong position and our market share. I mean, we are not extremely concerned about what's been happening nor do I think we will prevail our position.

And regarding the pricing policy, we have been conducting, over the last years, we remain on that one.

I think Manuel mentioned that even though we have had a higher cost in many raw materials, we've been able to keep very healthy margins, and that is because our pricing has been, I think, a little bit of inflation and focusing not only in the price but in our share of value.

Regarding the grinding facility that you mentioned in the north, as we speak, this is something apparently under the process, even though we have seen any concrete movement so far.

But like I said, I mean, we're extremely confident that all the work we've been doing over the last 50 years, [indiscernible] the brand, the DINO strategy and now our investment in building solutions position us in a very strong position to keep leading the cement market in the north..

Perfect.

And with that, can you please give us an idea of what are your expectations in terms of volume growth in 2018?.

I think we're looking -- well, it's a tough question because it all depends what happens with the reconstruction program, but we're looking at a base scenario, 5%, 6%. I think if we find us a country are able to push harder on the construction, and we could have brought it into double-digit numbers but a 5%, 6% is our base scenario..

Meaning this doesn't reflect the reconstruction effort? Or does do reflect some of that in the number?.

No, it doesn't reflect any of that because, like I said, I mean, we are not part of the decision..

Our next question comes from the line of Luis Carto [ph] with Compass Group..

A couple of questions here. You talked about the construction next year. We had the budget cut 40% for outstanding for this year and the next. How are we thinking about the reconstruction going forward for the whole period as a whole? It's a multi-year program, but it looks like the budget keeps getting pushed to the outer years.

What are you thinking there in terms of the amount as a whole that is going to be spent? And how does it translate in the potential for incremental tons coming from data alone?.

Sure. I think as we understand it, we are following very closely this. I mean, the reconstruction product, as a company, we have divide it in a little over 6200 individual projects. Together, the amount on investment of a little bit over PEN 18 billion. So we understand it. I mean, this is like a moving target.

The budget has -- is remained untouched, but the fact is that so far, only 10% has been awarded, and only 6% is under execution -- beginning execution. So I'm not concerned about the money. I'm more concerned about the execution.

In terms of how many tons this is we're talking, we're talking a little bit under 1 million tons if all of this was to be executed. Like I said, before, and I think I answered in the question before to Andres, we were simply optimistic.

I mean, if we were to receive this over four years, we'll be talking about $0.25 million per year, which would really throw us in a double-digit growth. If we are more realistic, probably it's going to take more between 4 to 6 years. So that means that we will be looking between 120 to 150 additional tons. That's where we should look at it.

But like I said, this is not about budget in terms of the project; it's more about execution..

Yes, I completely understand that. And then just a question more on the operations. We had the Pacasmayo plant print higher volumes than I was expecting compared to the Piura plant.

Is something specific happened there because that does impact your cost per ton?.

No, that doesn't mean -- like we said since we [indiscernible], I mean, we have a multi-plant strategy operations. So sometimes, in this case, we move like 30,000 tons from Piura to Pacasmayo. It has to do more with the specific strategies and logistics at the moment. I mean, like I say, I think it's typical of any multi-plant operation..

Our next question comes from Francisco Suarez with Scotiabank..

Just to follow up to Luis [ph] questions on the strong utilization on clinker and on Piura.

That had to do with preparing yourselves for your major maintenance works? And secondly, on your overall strategy, you mentioned in your press release that you are actually interested in the high value-added products and what catch my attention on the precast beams and bridges.

I mean, that kind of business, why do you think is worth aiming for that business? Do you have a specific CapEx plans allocated for that potential new business? And how do you see that you might be competitive enough to actually have a dedicated line to the precast business?.

Yes. I'm going to start by the last part of your question. I mean, as you all know, we have an extremely high market. We have a very strong position in our cement market in the north. So we are always looking for more ways to increase the cement sales.

Now we've been looking at this for quite a few years in terms of really build homes in terms of bridge and everything. And I think we've done our homework with that three, four years, [indiscernible] building technology, and I think these are ways to increase the size of the cake.

I mean, we're going into areas that before we're not able to sell cement. And plus, since we are able to bring the solution part to the building, because this is not about the construction company; this is about becoming a provider of building solutions. I think the bridges are a great example.

We have identified quite a few dozen bridges in the north that have fallen down that we believe we have a very strong case for a very competitive price and a very competitive strategy of bringing up this solution. And also, these are going to be based on cement.

So yes, Francisco, we have analyzed, and we have a competitive edge there, and this should increase our cement sales in the end and will allow us to go into near. In terms of CapEx, this is relative. Hello. I mean, we're talking over the next 3 to 4 years.

It may be between $5 million to $6 million, but like I said, it does support and going to depend how well we do it, but we do believe we have a competitive base in this area..

Great.

And on the question on your high clinker transition factors in Piura, does that relate to future and the major maintenance at Piura? Or that is something that we should be considering?.

No, no, no. Once again, and I think it has to do with the previous question. I mean, we're on a multi-plan strategy. So in this case, I mean, we knew maintenance was coming, so we just raised temporarily the smoke, and then we go back to our normal operation. But this is part of our normal operation routine..

Makes total sense.

So lastly, just returning to the first question and to the question, the interesting question that Andres brought to you on the new grinding and mill in the region, does this strategy should also be seen as a way to defend your overall market position? Does that might actually do the trick as well?.

I think, I mean, the way we want to defend our outstanding market position has to do with the brand recognition, the permanent innovation of our products and our [indiscernible] division channel. That is going to defend our market position.

I think, when we talk about building solutions, what that's going to do is going to enhance our market, which are in two different things. I think they're both going to work in just creating value for the shareholder..

Okay, got it. And by the way, I mean, I'm clueless about the new grinding facility in your region.

But are you considering to put another grinding operation in another region in a way to respond to potential incursions from other players in your region?.

If you look at our blueprint, I mean, we have a perfect plan with Piura, Pacasmayo and Rioja. I think it's a matter of economies of scale. I mean, we have a very strong, strong, strong case of production, so I think we're always looking at potentially new grinding facilities.

But you have to bear in mind that in some inputs, our grinding facility, like the case of Salmueras or whatever, they're going to be at a much lower scale. So it's only a matter of how efficient we're going to be in terms of cost. And if at some point, we think that to compete, it's better to open a grinding facility, we will do so.

But so far, I think the way we have our three plants, we're very, very well prepared to face specially small grinding positions..

Got it.

Because you are fully integrated, isn't it, in your region?.

Exactly. Exactly. We're fully integrated, but only from the quarry all the way to the actual delivery of the cement blocks to our final client..

[Operator Instructions]. Our next question comes from the line of Pablo Ricalde with Bank of America Merrill Lynch..

I have a follow-up question on the switch of production from Piura to Pacasmayo. I don't know if you have estimated how much EBITDA was lost on the back of the switch of production or it was none..

It was none..

Our next question comes from the line of Tunde Ojo with Harding Loevner..

So regarding the grinding facility that had been talked about and then not, do you have an idea of what the size of scale of that facility is going to be if it ever happens and time line of that coming online if you know that?.

As far as I understand, and please don't quote me on this because there's no official information, it is something that's still in the air, we took our own 200,000 tons of capacity. And I mean, for you to come online, you still have to go through all the permitting and everything, so I don't think it's going to be anything in the near future..

Got it. I have a follow-up, might as well just put it out there. Regarding the Salmueras project that you made a decision to discontinue, right, write off the investment.

I was wondering why did you go the route of writing it off as opposed to the spin-off that you did for phosphate? Why didn't you do it that way as well? Is it because it is financially not feasible? Or what happened there?.

No. I think, I mean, first of all, the phosphate and the brine project weren't enough, so there are different stages of development. In the case of phosphate, there was a basic engineering, all the permitting, everything.

It was absolutely ready, and it was all a matter of focus and a matter of price of the rock, and we are absolutely convinced that, that project, I mean, which is an independent company, now it will find its way to execution.

In the case of brine, this was a much, much earlier stage project in which we have [indiscernible] basic engineering and everything, but as we saw in numbers, it's all about being economically feasible or ready way -- at a much earlier stage, and it has to do more with the fact that we just want to focus on cement.

It's not about being piece of our art; it's more about us renewing our absolute focus on cement..

Our next question comes from the line of Benjamin Theurer with Barclays..

Quickly following up on what you've done on the project and obviously, in the past, as a lot of CapEx went into phosphate and, to a certain degree, as well on the prime project.

Now with the focus on, as you said, cement and construction materials, could you share your outlook in terms of investments in 2018? What are you focusing at? Are you aiming some sort of acquisition on the construction materials side? And if so, in what area would that be? And if not, how much CapEx do you think are you going to spend over the next 12 months considering that you spent very little actually throughout 2017? So what's more or less the level we can expect for 2018?.

I think the total CapEx is going to be somewhere between $20 million to $25 million in the coming year, maybe higher than that. But I mean, it's....

Dollars or sols?.

Dollars. Dollars, dollars, dollars..

Dollars, okay..

In terms of decision, I mean, we've said in the past, I mean, we have been pursuing some acquisitions. We never actually did anything because we never found one that was a clear value creation for our shareholder and we are very prudent.

We would like to grow, but we're not going to do that if we don't -- if we're not convinced about the past, especially since we think, I think in the next two, three years, I want it be very, very good in Peru.

I think we have a brand-new facility in Piura, which is doing outside mainly, so think we owe it to our shareholders, at least for the next two to three years, to focus in profitability and cash generation, which I think is going to be really outstanding in our company.

But like I say, if something comes up that we think makes sense, okay, maybe we'll go -- we'll try it and go back to our market. But as we are speaking, I see nothing in the horizon..

Our next question comes from Jessy Espinoza with Profuturo..

I was wondering if you can give us any guidance in EBITDA margin. And also, if you still expect to reach double digits in 2018 for some volumes..

Yes. Like I said before, I mean, we're talking about basis scenario, 5%, 6% in terms of sales growth, but I am at least very optimistic that the reconstruction will hit in as with growth to double digit. The reason we don't put it in our estimation is because it has to do with the government's capacity to execute, and we have no interest on that.

In terms of EBITDA margins, our base scenario is around 32%..

Okay.

So for 2019, you are more in a middle single digit also of expensing that?.

My answer will be the same one as it is. I mean, it all depends. I mean, we are close to 1 million tons in the reconstruction program. If that takes in three years, that would throw us in the double digit. If it takes more than that, we will get close to that but not so quiet.

Like I say, I mean, we are very prudent in the numbers we give to the market and especially, things we don't control..

[Operator Instructions]. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks..

Thank you very much. Like always, thanks to all of you for joining us on our call. We closed very well last year, and we are very optimistic of our future, this and the coming years. Thanks for joining the call. And as always, if you have any follow-up questions, Claudia, Manuel and myself are always available to try to answer them.

Thank you very much, and have a nice day..

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