Good day, ladies and gentlemen, and welcome to Pacasmayo's First Quarter 2019 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.

And I would like to now introduce your host for today's call, Ms. Claudia Bustamante, Investor Relations Manager. Welcome, Claudia..

Thank you, Jim. 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, trends and other matters that are not historical facts and are therefore subject to risks and uncertainties that might affect future events or results.

Descriptions of these risks are set forth in the company's regulatory filings. With that, I would now like to turn the call over to Mr. Humberto Nadal..

Thank you, Claudia. Welcome, everyone, to today's conference call. Today, I will discuss our overall results and strategy. Manuel will cover financial details, and we will then open the line for your questions.

During the first quarter of 2019, we have been able to maintain cement volume growth despite the slowdown in public spending that results from changes in regional authorities.

As you may already know, in January, new authorities took office in every region of the country since reelection, which used to be possible at the regional and local level, is no longer so.

This naturally generates some delays in public spending as authorities go through a learning curve both in terms of actual [indiscernible] by the sales authority and in terms of learning the processes and procedures needed to materialize public investment.

Despite these delays, which we have in fact seen in the North, for example, in the Piura Airport bidding process which was delayed for May, we have also seen public spending for the reconstruction works. These reconstruction projects have much difference between public spending in the north and the rest of the country.

This is why we are confident that public spending should continue to grow and even accelerate in the upcoming months as the regional authorities will begin spending on top of reconstruction investment that should also gain some more traction.

As we have mentioned before, a very important part of our new strategy is working with the authorities to expand the uses of concrete and pavement provided by us. Therefore, we are very pleased to inform that we'll be providing pavement to the Chiclayo Airport on the top of the cement that we will also be providing on the project.

It is important to note that our current growth in concrete sales, which has dropped to almost 30% over the last 12 months from March 2009, still comes mostly from sales to small and medium-sized companies. Their construction projects are focused more on housing, which uses mainly bagged cement.

As projects to rebuild roads and bridges start to materialize and regional and local authorities begin unlocking more infrastructure projects, concrete sales will evolve even further. Moving on to some key metrics.

In terms of sales volumes, we saw the continuation of the positive strength in volumes which began last year, with volume growing 5.4% this first quarter when compared to the same period last year. This growth is explained partly because of the continued increase in the construction work, but also from our incursion into a new market.

Although Iquitos lies geographically within our area of influence, we did not provide much cement because its zero productivity makes it difficult to reach. And a law that was enforced since 1998 allows for all companies that's all in the region to get a tax refund on the sales taxes.

After 20 years, correctly so, this tax refund was eliminated on January 1, 2018. Now only the companies that operate in the Amazon region have these benefits since the original idea behind this law is to promote industrialization in the region.

Given that we have a cement plant in the Amazon region, this new law gives us a competitive advantage that we have seized immediately. We expect to see incremental sales in Iquitos throughout the year as we continue implementing our strategy on this new territory. Moving on to EBITDA.

Although cement EBITDA remains flat when compared to first quarter of last year despite the increase in volume, this was mainly due to the increased sales of quicklime. Cement EBITDA margin was almost 30%, in line with the same period last year and are up compared to fourth quarter.

We hope to see some marked improvement during the second half of the year as we utilize more of our installed capacity and benefit from the further dilution of fixed costs. In conclusion, we feel optimistic about the year ahead. The first quarter has demonstrated our resilience despite some adverse effects from the public spending trend.

We expect these conditions to improve in the upcoming months, leading us to expect better volumes and margins in the second half of the year. I will now turn the call over to Manuel to go into more detail on the financial performance..

Thank you, Humberto. Good morning, everyone. First quarter 2019 revenues were PEN 313 million, in line with the first quarter of 2018 despite increased sales volume. This was primarily due to a decreased sales of quicklime and high cement prices during the first quarter of 2018, which affected consolidated revenues.

Gross profit decreased 2.5 percentage points in the first quarter of 2019 compared to the same period of 2018 mainly because we had to use higher-priced clinker which we had in inventory due to the planned preventive maintenance of our main kiln in Pacasmayo.

Cement EBITDA reached PEN 94 million solid in the first quarter of 2019, in line with the first quarter of 2018 but 3.8% higher quarter-on-quarter. We expect to see EBITDA margin expansion during 2019 as the trend in volume growth continues, allowing us to further reduce our fixed costs. Turning to operating expenses.

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. The first quarter 2019 administrative expenses decreased 2.1% compared to first quarter 2018 to PEN 41 million and 10.7% quarter-on-quarter.

Selling expenses decreased 13.7% in the first quarter of 2019 when compared to the first quarter 2018 mainly due to decreased advertising and promotional expense. Moving on to a different segments.

Cement sales increased 1.7% during the first quarter of 2019 compared to the same quarter of 2018 mainly due to higher sales volume in Iquitos as well as housing-related reconstruction works throughout the North.

Gross margin decreased 3.6 percentage points in the first quarter of 2019 when compared to the first quarter of 2018 mainly due to use of higher-priced clinker due to planned preventive maintenance of the main kiln in Pacasmayo.

Concrete sales continued to perform very well this quarter, increasing 31.6% compared to the first quarter of 2018, reflecting an increased sales to small and medium-sized companies. Gross profit increased 27.5% compared to the same period of 2018.

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 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 clients.

Precast sales decreased 12.9% in the first quarter compared to the same period of last year mainly due to high demand from projects that ended in 2018. Nevertheless gross margin increased 1.4 percentage points mainly due to our strategy to focus on higher-margin projects.

As this business unit continues to mature and expand, we expect sales and margin to continue improving. Quicklime sales decreased 62.8% mainly due to low levels of demand explained in previous quarters. Profit for the period was PEN 30.1 million solids 1% more than in the first quarter of 2018, mainly due to lower operating expenses.

To summarize, volume has continued the strong trend that began last year, but also margins still need to catch up. We are confident this would happen in the following quarters as the sequential increases in cement prices materializes and higher volume results in higher dilution of fixed costs.

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

Thank you, Manuel. We are pleased to see the recovery in the demand environment and strongly believe that we are very well positioned to capitalize on this recovery and deliver a meaningful value creation for our shareholders in the coming years.

Can we now please open the call to questions?.

Thank you Gentlemen. [Operator Instructions] We’ll take a question first from Andres Soto with Santander..

Good morning Manuel and Humberto thank you for the presentation. I have two questions. The first one related to competitive dynamics. Based on this quarter performance in terms of price and marketing expenses, it seems to me that competitive dynamics have significantly improved in the north part of the country.

Considering this, do you see any additional room for price increases this year? Or the price increase that we saw this quarter is what you are expecting for 2019?.

Andres, thank you for your question. This is Humberto. Indeed, I mean we were able, towards the end of last year, to make a substantial price increase, which resulted in what you're saying. For the time being, we feel that the prices are at the right level that gives us good profitability and also allows us to remain as a dominant player..

Perfect. My second question is related to margins. In your initial remarks, you said that you are still confident that you are going to achieve margin expansion this year, although it appears to me that you are anticipating a major maintenance in your Piura plant in 2Q, I guess.

What will be the impact of this maintenance in your second quarter results? And will that put at risk the idea of margin expansion in 2018?.

It's Manuel. So Andres, what we're expecting for the second quarter of this year, margin should be, EBITDA margin should be around 30.1%. It's much higher than average margin that we obtained in 2018 that was 29.6%.

At the end of the year, what we should expect is margins going up because we're not going to have any maintenance – major maintenance in Piura nor in Pacasmayo. So the total EBITDA margin that we should obtain for the whole year will be around 31%..

Great, thank you..

We’ll move next to a question from Daniel Sasson with Itau..

Hi, everyone, thank you Humberto for taking my questions. My first question comes on the reconstruction works. If you could specify how much volumes you expect this year and next year and give us some color on the percentage of the budget that have already been deployed for the reconstruction work in the northern region of Peru, that would be great.

And in regards to all the infrastructure projects and the concession with the airports and so on and so forth, is there anything that changed that makes you more optimistic with the fact that these projects might take off now and – vis-à-vis the delays we had over the past months, I would say? So is there funding already secured for this project or anything that makes you more optimistic with the development of such projects? Thanks a lot guys..

Thank you for the question. Let me take the first one, and then I will also answer the second. Last year, we sold around 80,000 tons going to reconstruction. This year that number should be closer to 200,000 tons, which should be a similar number on the coming year.

So yes, we are still very – bidding a lot on the reconstruction, which like we said is well on its way even though it has slowed just a little bit, just a tad because of new authorities. But the volumes, I mean, I think are pretty reasonable for this year and the coming year. And I will try to answer the second part of your question.

And if you have any corrections, obviously, you can make it again. In terms of infrastructure, where I mentioned the airport of Chiclayo, which is now on its way, we are participating on not only the cement but also the pavement for the landing strip and everything. I think it's hard to tell.

I think we are strongly counting that the rollout of the reconstruction will be very solid grounds to build on top in terms of reconstruction project coming after that. But we still have to see other authorities unfold in the coming months to be more optimistic or more precise about that..

Okay, perfect. Thank you..

Our next question will come from Mauricio Serna with UBS. Your line is open, please go ahead..

Hi, good morning and thanks for taking my questions. First, I want to ask about the prices. If you could just remind us what level are you seeing the prices in U.S. dollars.

And if we assume – I mean, if we assume that your prices remain stable, how should they look on a year-over-year basis over the last – over the next quarters? And if not, like what are you assuming? Are you seeing enough demand to do – to try to do another price increase maybe in second half of the year? And lastly, on a similar line, we are seeing a better capacity utilization, not really translating that much into gross margins because of the high clinker cost.

So as that happened in this quarter, should we expect also an improvement in the gross margins as you make use of those higher cost inventories? Thank you..

Going into the first part, we're looking at $136, more or less, per ton. I mean it can change a little bit because of exchange rates. And like I mentioned in a previous question, I think we were able to realize significant price increase towards the end of last year, which put us at a very comfortable price right now.

Of course, you need – under a reason and I mean, probably in the second semester, depending on the situation and the accompanying environment, we may make a different move. But at this point we cannot – we do not anticipate that happening. And the second part of the question about clinker.

We have some tons of imported clinker which are much lower price than the one we manufacture, which remains on your – in the Piura plant. That's why our gross margin suffered a little bit in the first quarter. We still have some of this inventory that we are going to use in the coming months. But I think Manuel summarized it very well.

I mean, we have to look at it, in the end, even for things I mean, we are targeting EBITDA margin of 31%..

Got it. Thank you..

[Operator Instructions] We’ll take our next question from Tunde Ojo at Harding Loevner..

Thank you very much. You mentioned imported clinker just now and I'm wondering why do you need imported clinker when you have enough spare capacity – spare clinker capacity in some of your other plants. If you can explain that dynamics, that will be very helpful. The second question I have is on pricing.

When we talked in the last call, you mentioned you increased prices by an average 4% for cement in about – in January. So I was expecting a better growth for the cement business in the first quarter versus first quarter last year.

Did you roll back those prices? Or did you give some discounts? Or is there anything that happened whereby that didn't flow through in terms of year-on-year growth on your cement business because it was slightly flat year-on-year? Thanks..

Let me take the first part of the question. I mean, I don't know if you recall, but when we were building the Piura plant two years ago, we're importing our own 0.5 million tons of clinker per year because, I mean, we are out of clinker capacity.

The small inventory we still hold comes from those days that we have – now we are passing little by little. So it's not that we are not – we thought of importing clinker completely three years ago, but we still have some small remaining inventory from those times. In terms of the pricing, we did increase towards the end of year.

But when you compare quarter of – first quarter of last year and this one, I mean there – that is not such a price increase. The price increase is when you compare it to the last quarter of last year. That's what we talk here also.

That's why when you compare the first two quarters of the last two years, the difference is not so much in terms of revenues..

Okay. Okay, thanks..

And that was the final question in the queue. I will turn it back to our leadership team for any additional or closing remarks. Thank you very much. I just want to thank everybody for joining us today in our call.

We are very happy with the start of the year in a country that's still struggling to find its political way, and I hope we do in the coming months and, of course, the coming year. But as a company, I think we are performing a good job, and we are happy with our results and remain confident that this will be a good year we have started.

Thank you very much for all your questions. And as always, Manuel, Claudia and myself are always here if you have any remaining questions. Thank you very much, and have a very nice day..

Ladies and gentlemen, this does conclude today's earnings conference. And we thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day..