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

Andres Soto - Santander Mauricio Serna - UBS Luis Pardo - Compass Group.

Good day, ladies and gentlemen. Welcome to the Pacasmayo's Third Quarter 2018 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, Ms. Claudia Bustamante, Head of Investor Relations. Ms. Bustamante, you may now begin..

Thank you, Jeremy. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Ferreyros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter and our strategic outlook. Mr. Ferreyros will then follow with additional commentary on our financial results.

We will 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, strength 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 filings. With that, I'd now like to turn the call over to Mr. Humberto Nadal..

Chulucanas, Santisteban, and Bayovar avenues. Additionally, we have launched a new line of dry cement-based ready-to-use product called Rapimix. This line of products will address both the housing needs in the self-construction segment and the construction companies’ needs in the industrial segment.

This is one more example of the company permanently innovating to deliver new solutions to our clients. I’m also very glad to inform that the positive strength in ready mix sales that we begun seeing at the end of last quarter, has continued.

Year-to-date, we have achieved a 19% increase in sales with a positive sequential trend as volumes have considerably risen quarter-on-quarter. We’ve been proactively looking for new clients, even though large infrastructure projects were experiencing significant delays.

And that has successfully expanded our client base incorporating more small and medium sized projects and companies. Although progress has been slow on the construction efforts, the need is extremely pressing and we are absolutely confident that even if it at a slower pace than expected, the North of Peru will for sure be rebuilt.

In this quarter we’ve seen some progress on the bidding processes for some medium sized infrastructure projects in our area of influence. The modernization of the airports in Piura and Chiclayo should begin execution by next year, as well as works on the Chimbote Bypass.

Besides ensuring the cement for these projects, we’re very actively involved in designing and developing new building solutions, generating value-added product based on cement and presenting this to the corresponding authorities and decision-makers.

We firmly believe, absolutely convinced there’s an excellent opportunity to display our new portfolio of products and to deliver concrete results on our long-term strategy and vision.

To summarize, this quarter we’ve continued to deliver on the operational excellence we’ve consistently committed to and we focus on the pillars that support our long-term strategy which is key for future growth and value generation. With that, I will now turn the discussion over to Manuel to go into more details on our financial performance.

Manuel?.

Thank you, Humberto. Good morning, everyone, and let me go over some financial highlights for this quarter.

As Humberto discussed, third quarter sales volume of cement, concrete and blocks recovered from the slowdown during the second quarter, increasing 1.9% year-on-year to 610.8 million tons driven by strong cement sales to the public sector and self-construction segment.

For the first nine months of the year, we can see volume growth of 3.8% compared to the same period of last year, reflecting the return to volume expansion that should result in positive results for the full year. The revenues of this segment have remained flat mainly due to a change in mix of products sold and to a slight decrease in prices.

Sales of our Mochica cement increased as we successfully defend our market share. And therefore, the average price of cement decreased slightly. However, for the nine months of our ops, as of September 2018, revenues increased 3.1% compared to the same period of last year reflecting increased sales volume.

Consolidated EBITDA for the third quarter reached PEN 101.5 million, a slight decrease of 5.3% compared to last year, that’s a 19.8% increase when compared to the second quarter of 2018 demonstrating a very positive trend.

For the first nine months of the year, consolidated EBITDA increased 5.1% compared to the same period of the previous year, mainly due to efficiencies on operational expenses which offset the increase in coal prices and the use of more expensive raw material in our Piura plant.

Cement EBITDA margin reached 31.9% for the third quarter, in line with the third quarter in 2017. This is a significant achievement considering the cost increase during this quarter as well as a difficult comparative base, since the third quarter of last year was exceptionally strong as volumes recovered after Coastal El Nino.

For the first nine months of the year, cement EBITDA margin reached 30.8%, a 0.6 percentage points increase when compared to the same period of last year. Turning to operating expenses, this has decreased year-on-year, as personnel-related expenses and third-party services have decreased, in line with our constant search for operational excellence.

Third quarter 2018 administrative expenses decreased 13.7% compared to the same period of 2017 and to PEN41.6 million and 13.4% to PEN126.3 million in the first nine months when compared to the same period of last year.

Selling expenses increased slightly both in the third quarter and in the first nine months compared to the same period of 2017, respectively mainly due to an increase in sales. Moving on to the different segments.

Cement sales decreased slightly in the third quarter 2018 compared to the same period of 2017 with gross margin decreasing 3.2 percentage points.

This was mainly due to a change in the mix of products sold and a slight decrease in prices as well as an increase in the price of coal and other raw materials as we consumed inventory of higher priced seashells in Piura.

For the first nine months of the year, cement sales increased 3.7% compared to the same period of the previous year mainly due to an increase in sales volume. Gross margin decreased slightly due to increase of costs mentioned above.

Concrete sales increased 24% compared with third quarter of 2017, reflecting increased sales in small and medium sized companies as well as we continue to expand our client base. Gross margin decreased 5.7 percentage points in the third quarter 2018 compared to the third quarter of ‘17.

Since large infrastructure projects have been delayed in the north, we have actively sought to fill this gap with demand from other small and medium-sized projects. This all allows us to utilize more of our installed capacity. But at the same time, generate an additional logistic costs, since we need to deliver more clients.

For the first nine months of the year, sales increased 90%, mainly due to increased demand mentioned above. Gross margin decreased 8.5 percentage points due to increased logistic costs as well as increased depreciation from the investments in new machinery.

Precast sales increased 19.6% compared to the third quarter of 2017 mainly due to the change in strategy. We seek to expand our client base and our portfolio of products including heavy precast products.

Gross margin decreased 16.4 percentage points compared to the third quarter of ‘17 mainly due to a higher cost from initial investment required for our new heavy precast products. For the first nine months of the year, sales increased 27.3% mainly due to the successful expansion of our client base.

Quicklime sales volume decreased 47% in the third quarter 2018 and 24.5% in the nine month of 2018 compared to the same period of last year, mainly due to an increase in sales of refined quicklime impacting consolidated revenues of the company.

Finally, third quarter 2018 net income decreased 13.5% compared to 2017 mainly due to decrease in revenues as well as lower operating income derived from higher coal costs and the use of higher-priced seashells in Piura.

During in the first nine months of the year, net income increased 6.4% when compared to the same period of last year, mainly due to an increased sales volume as well as operational efficiencies which offset the increased costs. To summarize, this quarter, we have seen a recovery in volumes and margins when compared to the second quarter of this year.

We expect to see further improvements as capacity utilization of our facilities continue to rise and we reap the benefits of our commitment to operational efficiencies.

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

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

Hi, Humberto, Manuel and Claudia. Thank you for your presentation. I have two questions. The first one related to your volumes outlook in 2019. Based on your press release you're expecting several infrastructure projects to start execution next year.

Can you please quantify this in terms of cement or ready-mix volumes?.

Sure, Andres. This is Humberto. Even though we are in the middle of -- we are in the final part of doing our budget for next year, we are looking for the 5% volume growth..

5% volume for cement which to me sounds a little bit conservative, will you consider some of the execution of El Nino, isn’t it?.

Yes, but I mean we know each other well enough to know. I mean this year, we started selling between 3% and 4% and it has been a really lumpy year for many circumstances, we were able to maintain that. We’d rather be more on the conservative side that we’re within the base and that should be 5% in the execution of Piura -- of the north.

Rebuilding comes faster, Of course, that number could increase substantially. But we'd rather be conservative, and as you mentioned and see what destiny holds for us. And one thing also we have to mention -- sorry, one more idea. You also have to also recall that starting January 1st we are going to have whole new authorities in the north.

That usually means there's a little slowdown in execution. Hopefully, it would not be as much. So like I said going into 2019 with a base amount of 9.5% I think is pretty good..

Got it. And precisely that was my second question. Regarding the political environment, several developments over the past few weeks both at national and the regional level.

So based on those events, are you more optimistic or more cautious regarding the performance of the region and specifically your volumes in regard to the reconstruction plan?.

Let's see, I think presently President Vizcarra has a more efficient management of reconstruction, Shout out for him. But I think going into the future I mean I would rather be cautious in the political scenario that being -- I maybe business wise, optimistic, but I mean politics is a different -- a whole different arena.

I think President is pushing very hard as I just read today an interview where he says that I mean he is going to himself -- he intends to spend most of his time outside Lima and trying to specifically impersonate how the new authorities so the construction gets underway faster.

Faster than -- I mean since he's been President, the rebuilding of the north has grown faster than before which does not mean as fast as we would desire, but I think, yes, we could be -- actually I think it caused us to cautiously be optimistic. .

Our next question comes from line of Mauricio Serna from UBS. Please proceed with your question. .

I guess I just want to talk a little bit more about pricing, if you could specify how much of the lower prices was actually due to I a guess defensive stance for your market share and how much came from a mix perspective? Just also want to understand on the market share, how you are seeing the competitive environment right now with this new entrant recently coming in? What's the outlook? Do you think you know given this growth expectations that you're talking about for next year that should be enough to sustain volumes and prices recovery ongoing? Thanks..

Yes. Thank you for your question. I mean looking at the competitive situation, I mean we always like to say we’re long-term greedy, not short-term greedy. And I think this year proves that we’ve been very aggressively in the role managed prices in the way we managed what I call potential competition.

I think what you’re seeing in terms of some appearances showing up in the North from the Midland from what I know to refocus more towards the Southern part of Peru. So I think next year, I would say slight but more competitive environment would not be the case.

So I think we would see a year with a very strong market share like this one and probably more interesting movement in price. .

Okay.

So from what I understood, probably the pricing will not really pick up in the fourth quarter but if everything turns out good regarding the reconstruction trigger for next year that should also come in with some pricing, right?.

That’s correct, We also have to bear, I mean -- I said this over the last years, we usually try to give up with inflation, this year it was not the case. Even though we had some additional coal prices and some other things, I mean we were very focused underpinning our market share which really is the key to our future.

I think the next year we’re going to go back to our normal pricing policy of the past. .

[Operator Instructions]. Our next question comes from the line of Luis Pardo from Compass Group. Please proceed with your question..

I have a question regarding the guidance for next year. When you talk about 5% growth, you’re talking about cement blocks and precast all together because of there’s wide difference in the margins you get for each one of these products.

So if you can give me more color on what you expect -- what you’re expecting only for cement it will be much appreciated? Thank you..

Yes. When we talk 5%, we talk in volumes overall. I understand your concern but we have to keep in mind that most of our volumes still come from our block cement. So I mean most of that 5% increase will come from that which brings us to higher margin. .

Okay.

And in terms of the reconstruction, what specifically has changed that gives you more hope for next year versus the past two -- well year and a half but not much has developed in terms of that project?.

Look at our numbers, I mean if you take how many homes were being built over the first year of reconstruction on the year -- last year versus the last four or six months, it’s clearly there’s a pickup in the rate.

If you see how -- I mean I mean, a simple act, I mean how many times have President Vizcarra visited the north over the last six months or the previous six months, he was there opening the new avenues in Piura. I mean you see a more pure focus in trying to help the authorities both local and regional to get things moving.

So I mean it's not perceptual, the numbers are there. The level of execution, the percentage of the 18.9 billion solids that are already in the bidding process is higher. So like I said I mean in terms of perception I see it more and in terms of numbers the numbers are much better than before..

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. And I would like to turn the call back to Humberto Nadal for closing remarks..

Thank you. And thank you all for joining us. Like always I mean we keep trying our best on delivering our highest efforts in terms of the company being more efficient, being more lean and delivering results that create value. We remain absolutely committed to our long-term vision of becoming a building solutions company.

We’re convinced this will make a difference in the coming years, but like every reason, it needs some time to really catch on. And if you have any questions in the meantime, myself and all the IR team are always at the end of the line to take your calls. Thank you very much and have a nice day..

This concludes today’s conference. Thank you very much for your participation. You may disconnect your lines at this time..