Good day, ladies and gentlemen. Welcome to the Pacasmayo's Fourth 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, Investor Relations’ Manager. Ms. Bustamante, you may begin..

Thank you, Angelica. 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. We would also like to let you know that the earnings release is available for download on the webcast link. 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 would now like to turn the call over to Mr.

Humberto Nadal..

Thank you, Claudia. Welcome everyone, today’s conference call. Before I begin I would like to acknowledge that we had some technical problems last night while trying to hand our financial information in SMB here in Peru. As we speak that has been solved right now all the information already there. And it has been in our webpage since yesterday.

Our deeper apologies but like I said it was really a technical issue between the company we resist. Well today I would discuss our results our strategy, Manuel will cover financial details and then we’ll open the line for your questions. 2018 was an important year for Cementos Pacasmayo well marked by transformation.

It has been a record year in terms of volumes reaching our all time sales volume and seeing growth after five years of flat volumes. We are finally seen some materialization of the expense potential which gives us tremendous satisfaction and high expectation for the upcoming years.

In terms of strategy as you already know this year we launched a new vision seeking to evolve from a cement producer to a building solutions company.

Following this vision during 2018 we secured s two main fronts internally in terms of processes and customer loyalty we worked on project that will allow us to better understand our customers and hence provide a best possible solutions both in terms of product and services.

In terms of products development, with slight different building solutions based on our customers’ needs thus expanding our portfolio of products. This product creates some special types of cement and concrete to new cement based products.

For example, we designed the Ultarmau cement that is a type of cement specifically designed for extreme weather of the highlands. In terms of concrete product we have developed two different types of concrete. One that work under water and one is really for exposure without painting.

In terms of new products we have developed pre-packets mortar and cement based security buyers. All of these products look to better sever our customer’s needs and desires.

An important part of this new strategy is worthy the authorities to help them understand the benefits of building roads with concrete especially in areas that are more prone to rains and flooding as in the North of Peru. There is La Niña phenomenon left us with a clear example of the benefits of concrete roads in these conditions.

As a Pacasmayo road which was built using concrete was one of the best preserve roads after the terrible devastation left in Piura. We are pleased to inform that we have already built some additional concrete roads and continue making progress in its area.

This is part of the almost 24% growth in concrete sales achieved in the last year when compared to the previous year. Concrete roads present a vast and tough demand since Piura has a huge infrastructure deficit which includes thousands of kilometers of roads that need to be built and improved.

This is in turn would mean millions of tons of cement sold. We believe that above the new product development and the progress in building concrete roads are first steps towards a 2030 goal of consolidating ourselves as a building solution company.

Moving on to some key metrics volume grew 4.3% a year compared to the previous one and 5.6% in the fourth quarter when compared to the same period of last year. This shows the acceleration in growth rates which we have seen in the last month of the year partly derived from the much awaited materialization over construction spending.

Although cement EBITDA was affected by non-cash expense and some increase cost in the year we expect EBITDA margin expansion for 2018 at a positive steady volume growth continues allowing not to utilize more of our spare capacity.

Regarding our capital structure I would please like to mention a successful low combination we expect in January with secured in January. Since Manuel will go into further details in his financial analysis. We placed as far as PEN70 million in local bonds with an amount exceeding 1.2 billion obtaining a very competitive rate and maturity.

We would like to deeply thank the investment community for the renewed interest and trust in our company. Finally I would like to especially mention our new certification the ISO 37001. During 2018 the company implemented anti-bribery management system obtaining the certification in January 2019 on a record time.

The certification confirms that management system is designed to help prevent detect and respond to bribery and comply with anti-bribery laws and voluntary commitments applicable to these activities.

We believe the certification reiterates once more our total commitment to grow one of the best practices and life standard of transparency and good corporate governance. In conclusion, we feel very optimistic about the year ahead we are entering 2018 with a strong end to the previous year and exciting news on our long-term strategy and research.

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. Fourth quarter 2018 revenues increased by 4.6% to PEN340.7 million from PEN325.6 million in the fourth quarter 2017. This was primarily due to increased in sales volume as the construction spending is starting to accelerate. Revenues for 2018 rose by 3.5% compared to 2017.

Gross profit decreased 5.9% in the fourth quarter 2018 compared to the same period of 2017 because of an increase in the price of coal as well as a hard in clean production which increased the production cost of cement.

Gross profit for 2018 decreased 4.2% compared to 2017 mainly due to the recent explainable as well as higher transportation cost after the road damage from Coastal El Nino during the first month of the year and sales of concrete to small and medium-sized company which generates a higher operational expense.

Cement EBITDA reached PEN90.6 million in the fourth quarter of 2018 a 14.1% decrease when compared to the fourth quarter of 2017. During this quarter, we had to generate a provision of an account receivable to a prudent tax authority.

This was a non-cash effect of PEN9 million besides these we had some cost increase during this quarter related to halt in production according compared to the same period of the previous year mainly due to increase in sales and our active strategy to successfully defend our market share.

Beside this we had some cost increase during this quarter related to halt in production according to our annual production plan which lead us to temporarily use inventory of higher price clinker. cement EBITDA margin reached 26.6% for the fourth quarter 5.8 percentage points below the fourth quarter of 2017.

For 2018 cement EBITDA amounted PEN374.1 million in line with 2017 and cement EBITDA margin 29.6% a 1.2 percentage points decrease when compared to the same period of last year. We expect to see a EBITDA and margin expansion during 2019 and the trend in volume growth continues allowing us to future continued or fixed costs.

Turning to operating expense this has decreased year-over-year as personnel related expenses and third-party services have decreased in line with our constant search for operational excellence.

Fourth quarter 2018 administrative expenses decreased 8% compared to the fourth quarter of 2017 to PEN45.9 million and 12% to PEN172.1 billion in 2018 when compared to the same period of last year.

Same in expenses, increased 15.2% in the fourth quarter 2018 when compared to the same period of 2017 and 7.2% in 2018 when compared to the same period of previous year mainly due to an increase in sales and our active strategy to successfully defend our market share.

Moving on to different segments; cement sales increased 2.8% during the fourth quarter of 2018 compared to the same period of 2017 and 3.4% in 2018 when compared to 2017, mainly due to higher sales volumes.

Gross margin decreased 3.9 percentage points in the fourth quarter 2018 when compared to the fourth quarter 2017, and 2.3 percentage points in 2018 when compared to 2017, mainly due to a halt in production in Piura, which leads us to temporarily use inventory of higher price clinker as well as an increase in the price of coal.

Concrete sales continued to perform very well this quarter, increasing 35% compared to the fourth quarter of 2017, reflecting increased sales to the public sector as the construction spending is beginning to materialize. As well as continued sales with more than medium size company.

Gross margin increased 1.5 percentage points in the fourth quarter of 2018 compared to the fourth quarter of 2017. Since large infrastructure project has been delayed we have actively sought to fill this gap with demand from other small and medium sized projects.

This allows us to utilize more of our installed capacity, but at the same time generate an additional logistic cost since we need to deliver to more paying clients. In 2018, sales increased 23.9%, demonstrating the market recovery of sales volume especially during the second-half of the year.

Gross margin decreased 6 percentage points due to increased logistic cost mentioned about as well as an increased precision from the investment in new machinery.

Precast sales increased 29.8% in the fourth quarter compared to the same period of 2017, and 28% in 2018 compared to 2017, mainly due to change in strategy which seeks to expand our client base and our portfolio of products including heavy precast products.

Gross margin decreased 32.8 percentage points in the fourth quarter of 2018 compared to the fourth quarter of 2017 and 14.2 percentage points in 2018 compared to 2017, mainly due to higher costs from the initial investment required for new heavier precast products. As this business unit continues to mature and expand, we expect margins to improve.

Profits for the period was negative this quarter due to two non-cash affects. The provision of an accounts receivable with Peruvian tax authority mentioned above, and the expense rising from the accumulated exchange rate loss due to the purchase of part of international bonds which I will go into detail later.

Excluding this effect, net income would have been PEN19.4 million for 2018, profit for period was PEN75.1 million, 6.8% lower than the previous years for the above mentioned reasons. Excluding this effect, net income would have been PEN106.1 million. Finally, as Humberto mentioned, we issue local bonds in January of this year.

In December we announced a tender offer for price of PEN$300 million in international bonds to restructure our debt. We purchased $168.4 million with the private loan -- with the bridge loan obtained for that purpose.

And later issued local currency bond for PEN260 million at 6.6875% rate with a 10 year maturity and PEN310 million with a 15 years maturity at an interest rate of 6.82437% [ph].

We are very pleased with the results of this operation as the rates and terms of paying benefits our financial cost of structure with lower cost of capital and extended maturity and less exposure to currency fluctuation. To summarize, while some noncash expenses have affected our financial result this quarter.

We believe that Pacasmayo is very well positioned to capitalize on the demand recovery expected in 2019, and deliver meaningful value creation for our shareholders in the coming years. I'll turn the call back to Humberto for closing remarks..

Thank you, Manuel. We are very pleased to see the materialization of our renewed strategic vision in this year, and we look forward to the positive effects of significantly increase demand for cement and concrete on the backs of reconstruction spending, with further growth for the private sector has helped construction markets.

Can we now please open the call to questions..

Operator:.

My first question is related to profitability. If you exclude the effect of the tax provision and the Piura stoppage, what will have the EBITDA margin of Cementos Pacasmayo this quarter? Curious on your comment regarding profitability in 2019, you said that you're expecting profitability to expand on the back of higher volumes.

However, we were expecting the same effect in 2018 and didn't materialize due to dilutive effect from your order business segments.

What type of volumes are you expecting that makes you confident on these margin expansion?.

Yes, we're seeing with this effect in EBITDA margins. Excluding this effect EBITDA margin should have been around 30.5%. You have to consider that what impact EBITDA is basically the non-tax effect from - the non-cash effect of tax provision. And Andres I think there's four key issues here.

I mean, we are thinking about 6% volume increase this year, and if you take into account that 2018 was a record year in sales, I mean that's a significant increase. And the other part of it I mean we did out price increase north of 4% three weeks ago, and that rose our - those two thing I mentioned really affect profitability for this coming year..

And my second question is related to capital deployment. We saw significant CapEx increase this year mostly due to your efforts to expand in the ready-mix business.

Are you expecting these high CapEx cycle to continue in 2019 or what is going to be your priorities in terms of capital deployment this year?.

Yes. So respecting -- Andres, we had concrete and aggregate equipment of PEN50 million, and we're expecting for this 2019 the total CapEx to be around PEN90 million, little bit less than 2018..

Thank you. Our next question comes from Daniel Sasson of Itaú BBA..

My first question is on your leverage ratios, we saw them increasing from 2.3% last quarter to 2.7% now. I know that this was due to the FX loss related to the repurchase and liquidation of part of your bonds and that for sure it makes sense for you to replace international bonds with local debt.

But I was wondering what do you think is a comfortable leverage ratio, what's your internal target and when do you expect to get there? That'd be my first question. Thank you..

We feel very comfortable in a range between 1.8% and 2.8%, something - anything less than 2.8% EBITDA margin, times EBITDA margin we feel very comfortable with that..

And do you have any dates or schedules or projections on when you should get closer to 2x points.

I think that that should happen during 2018 and 2019 or this is something more like mid-term target?.

No, it's a mid-term target and we expect to be around 2% - 2x sorry, in the first half of year of 2020..

That's very clear.

And my second question if you allow me to, do you have any types of sensitivities in terms of improvement in EBITDA margins depending on your capacity, on your utilization of capacity? I mean if your capacity utilization increases by 5 percentage points let's say, how much better would be your EBITDA margins, do you have sense on that?.

Yeah, it's around - what we estimate is around 1% every 5 percentage points of increase in capacity, utilization capacity. But it will depend obviously on the mix of concrete and cement and quick. So it would depend on the mix of the product. If you increase concrete, the percentage will be reduced by - but the absolute numbers will growth.

So it depends on the mix of the product we sell..

Thank you. Our next question comes from Vanessa Quiroga of Crédit Suisse. You may now say your question Vanessa..

I have a question about your EBITDA margin outlook. Can you provide us specific guidance or a range of the level of margin that you expect to achieve on average for the year 2019? And the other question that I have is regarding the competitive landscape, what do you see in terms of competition in your import and regions, your foot print? Thank you..

Yeah, our projection for the EBITDA margin for 2019 is around 31.5% area for whole year. And regarding the competitive landscape, we don't see any significant threat in our region for this year, so in that sense I mean we believe we have a very strong position..

Thank you. Our next question comes from Froylan Mendez of JPMorgan. Please state your question..

Could you tell a little bit more on how were prices during the quarter and at what levels are they on a dollar per ton basis and how it compares to input quality? That would be the first question. And my second question is, we continue seeing high expenses to protect market share.

What should we expect going forward? Do they have to stay in around PEN13 million per quarter or should we see this coming down now that you seem to have regained market share from previous quarters. Thank you..

Thank you. A very good question. I think we always like to think of ourselves as long-term greedy. So I mean we have been spending significant amount of money over the last years over defending our market and more than anticipate potential moves of competitors there by developing new channels, new products and everything I mean new digital market.

So all of that may sound as over killing, but we believe that's the only way to protect our position looking towards the future. We're always looking at import parity pricing. At this point we're looking at $134 per ton.

Like I mentioned before when I think Andres asked the question, we had a significant price increase in January, and I think at this point we are at a good point between solid market share and a very I would say solid sustainable price looking forwards the future. And we're always looking at import parity price at every moment..

Just to clarify, so the $134 per ton is the current price or is current import price?.

No, that's our current price..

And do you have any idea where the import parity is?.

I mean it's hard to tell because I mean if you see the trading markets right now, prices tend to fluctuate a lot. So I would not give a guess onto a price because it depends on the origin of cement and the type of cement, the ports they're going to come through. And the difference can be significant.

So I don't adventure myself on trying to target a specific number..

Our next question comes from Babatunde Ojo of Harding Loevner. You may announce your question..

Thank you very much for the presentation.

Two questions from me first is the tax receivable you talked of PEN9 million what exactly was that related probably my first question?.

Yeah this is related to this should happen in 2006 in which I don’t know if you are aware I mean there was specific tax exemptions for some jungle area and we sell the product X works and at that point I mean whenever the client does with the cement it’s something that's up to them. But we get a tax refund for that.

The authority seems to have a different idea in terms of analyzing where the actual cement goes to. There are different the criteria what he is talking about fighting in the courts..

Okay all right that’s very helpful. The second question I have is on the finance cost for the quarter it jumped quite significantly I was wondering is that level is the sustainable level going into 2019 per quarter.

I think the number I have for the quarter is about PEN29 million is that a good number through some quarterly for next year or is there something one-off in this quarter?.

Yeah so the financial cost has increased basically because of bond transaction that we have executed. We don't expect this is our one-off and we don’t expect this happening again in next year..

And given where your debt is right now what would you call the normalized quarterly finance cost for you than per quarter?.

Yeah it should be similar as of third quarter..

As of third quarter okay correct thanks. The other question I have is, you seems to be having a lot of one-off costs coming off this is now becoming communal a bit of a recording eventually.

Are you expecting any new when one-off common op in the nearest future like in 2019 or even in the first quarter that you already know of right now?.

I guess says no but if I want to double click on to your question which once again I think it’s a very good one. I mean there are different kind of one-offs in the case of buying deposits back and everything I mean now we are looking forward a much more competitive financial goals than we had with the previous ones.

So I think that one-off really is going to pay up in the coming years in a case of that’s why at least something that who has been is being fighting of course for over 10 years. Now there is no way we would have an idea.

I mean this is not like impairments or one-off rated the pieces himself it just yield he shows that we take because we don’t create value or thing such as maybe continues can happen. But at this point we have no one-offs in the coming months as we stand right now..

Okay very, very helpful. And just sorry to hog the phone. This is the last from me, the last one is on the gross profit margin compression in the quarter look at it on a year-on-year. You mentioned coal prices you also mentioned using in the sort of higher price the clinker from the older plant.

If you have to segregate the margin compression between both what would you put the sort of speed in those two factors?.

Yeah excluding all this what we expect is we should be in a gross margin around 38%/39%..

Okay helpful thank you very much..

Thank you. Our next question comes from Francisco Suarez of Scotiabank. You may now say your question. Francisco you’re alive..

Yeah hi good morning sorry for that Humberto, Claudia and Manuel thanks for the call two questions one related to your overall notional exposure on derivatives that now after you thought your debt exposure in dollars.

The notional amount relate to debt transaction that actually has been adjusted downwards and if not what could be that notional amount and what the potential affects depending on how the saw most against the dollar. And secondly you are aiming to a strategy of making sure that you can provide to the market building solutions.

As far as I understand these new businesses clearly should be considered with lower margins in general. Nevertheless, the pay back seems to be quite attractive. So if you would like to share a little bit about what might be the return on that CapEx on those businesses? That could be very, very helpful. Thank you..

Concerning your first question, the total amount of hits that we have now pending is $150 million. So the total debt that we have in dollars are fully covered.

It is a one-to-one?.

Yes, it's almost one-to-one, [indiscernible] one-to-one because we have [indiscernible] because it some of kind – concerning the second part of it, we are discovering more and more than the building solutions I mean can show very interesting profitability numbers. I mean I can't throw you only one example.

We just put a word out some weeks ago what's called our coletoso marino. These are really underwater sewage pipes that in the end I mean they're giving us a net margin - an EBITDA margin of 25%. So just to give you an idea of this, this is very interesting because usually CapEx involved in these kind of is very, very low.

So even though we're still in the beginning stages of this and the roads and everything. We believe that besides the EBITDA margin which is already attractive, and you know our margins. We're going to make substantial turn on investment capital on expansion into building solutions..

That's precisely what I wanted to understand. And if you were – eventually you will be sharing the overall criteria on how you will be investing in these new activities. Perhaps certain threshold or anything that you can give us in the future, that will be very appreciated to understand where are you guys heading..

We will but I mean just to give you an idea I mean even we are extremely successfully in independent solutions idea, we're talking about on the high end the CapEx for the next 4 years should not exceed probably $15 million on the high end. And I think the numbers are [indiscernible]..

[Operator Instructions] Our next question comes from Raul Jacob of CrediCorp Capital. You may now state your question..

I just wanted to ask if the rains that we're seeing specially in the south but also in some regions in the northern part of Peru in one [indiscernible] I don't know if there have been any blockages of roads in your in your area of influence important for the distribution of cement? Thank you..

So far, no. I mean it has been raining a little bit in the north, we have to recall that this is a rain season, I mean it's rainy season, it's normal. But as we start right now and I talked to both Pacasmayo and Piura plant managers yesterday, things are fine. I mean there's no stoppage or roads or anything so far..

Thank you. There appear to be no further questions at this time. I'll turn the floor back to you, there's no questions at this time..

Thank you. Like I said before I mean we're really pleased with the way we've closed last year even besides our record volumes on an annual basis, I think the strength over the last trimester was really important and we're seeing the same kind of strength in the beginning of this year. I think competitive situation is well under Management.

And I think this is the year where both volumes and profitability really, given interest is high, can we keep creating share holder value like we always our purpose. I want to thank everybody for the time today and as always I mean Claudia, Manuel, myself, we're always here if you still have any further questions. Thank you very much for your time..

Thank you. This does conclude today's conference call. We thank you for your participation. You may now disconnect your lines at this time and have a great day..