Ladies and gentlemen, good day, and welcome to Pacasmayo's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. 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, 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'll 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'd 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, while Manuel will cover financial details, and we will then open the line for discussions. In this third quarter, we have seen an outstanding increase in sales, reaching 20% year-on-year.

This growth has come from public sector spending for the construction works but also from private investment projects, such as a mall in Chiclayo and from the self-building segment, which has also posted strong growth this quarter.

But especially relevant here is the increase in concrete sales, which accounted for almost 50% of the overall increase in sales, reaching all-time record levels, reflecting 85% growth year-on-year this quarter.

This growth has come from the ongoing medium-sized projects mentioned last quarter, mainly the mall in Chiclayo and the Talara Refinery and also, bear in mind, for medium-sized solar construction companies developing housing and commercial projects.

This segment in the list brings sustainability and continuity to the business, making it very important in the long term, which is why we have opened a second dedicated plant in Trujillo recently to consistently deliver concrete to this segment.

It is also important to mention that we have continued progressing on our quest to have paved more roads with concrete. Aligned with our target of developing the road infrastructure industry with cement-based solutions, like concrete, for the national network, we are also promoting source stabilization with cement.

This solution, focused on low traffic volume roads, poses an opportunity in Peru where there are thousands of kilometers of rural and urban roads. This solution has been well received by the market and has grown month-over-month since our commercial efforts began.

In addition, we are launching a new innovative bagged product to professionals in the industry. We are absolutely convinced that our actions in the building solutions front are delivering clear results that bring us one step closer to our 2030 vision. Moving on to some key metrics in terms of sales volumes.

As I mentioned above, we saw the continuation and acceleration of the positive trend we saw last quarter with volumes reaching almost 12% growth in the first nine months of the year.

This growth is mainly explained by the continued increase in the construction works that transfer not only to cement but also concrete and precast but also on the housing and infrastructure projects mentioned above. In bigger terms, our consolidated EBITDA increased almost 10%.

Although this represents a slight margin contraction, this is mainly due to temporary cost increases as well as more structural changes. The high transportation costs this quarter because of demand for type V cement increased as production is centralized in the Pacasmayo plant for the whole region.

However, we have been working very hard to try to reduce cost in Pacasmayo so we can offset some of the additional costs derived from this. In the future, we should be able to produce this type of cement in the Piura plant.

On a more structural sense, it is important to clarify and bear in mind that EBITDA margin will tend to decrease in time as less bagged cement is sold and concrete and precast become a higher percentage of overall sales.

This is completely aligned with our strategy since the overall profit of the business will remain increasing when we sell more value-added products despite the margin contraction. In this way, we are only capturing more market among more cement tons of sales.

Finally, I'd like to mention that as a reflection of our hard work in terms of sustainability, we have been included in the 2019 Dow Jones Sustainability Index.

We're committed not only to remain in the index but to improve our performance as we are absolutely convinced that a focus on sustainability is key to our business and to the value generation for our stakeholders. We're also part of Innovandi, the global cement and concrete research network, which was recently launched by the GCCA in Singapore.

The network ties together the cement and concrete industry, which are in difficult situations to drive and support global innovation with actionable results.

It aims to decisively [indiscernible] on the industry sustainability progress and the Pacasmayo is one of only 24 companies from across the world, including cement and concrete manufacturers, [indiscernible] specialists and also our payment suppliers that have already committed to this.

In conclusion, we are extremely proud of our results so far during this year, not only in terms of top line profitability but also in terms of long-term initiatives that will ensure our business future success, sustainable growth and long-term value generation.

I will now turn the discussion over to Manuel to go into more detail on our financial performance.

Manuel?.

Thank you, Humberto. Good morning, everyone. This quarter -- the third quarter of 2019 revenues were PEN383.2 million, 20.2% higher than the same period of last year mainly due to increased cement, concrete and precast volume.

Gross profit increased 16.6% in the third quarter of 2019 compared to the same period of last year mainly due to higher sales, offset by higher transportation and raw material costs, which we will analyze in more details below. For the first nine months of the year, revenues increased 10.5%, and gross profit increased 5.9%.

Consolidated EBITDA reached PEN111.5 million in the third quarter of 2019, 9.9% higher than the same period of last year. During the first nine months of the year, consolidated EBITDA reached PEN299.4 million, a 6.7% increase when compared to the same period of 2018.

Turning to operating expenses, these have increased year-over-year in line with increased sales. The third quarter of 2019 administrative expenses increased 8.9% compared to the third quarter 2018 and 1.5% during the first nine months of 2019 when compared to the same period of last year.

Selling expenses increased 19.4% in the third quarter of 2018 when compared to the same period of last year, in line with increased sales.

However, during the first nine months of the year, selling expenses increased to a lesser extent, increasing only 2.3% when compared to the same period of 2018 mainly through decreased advertising and promotional expenses after budget adjustments during the first six months of the year. Moving on to the different segments.

Cement, concrete and precast sales increased 24.5% during the third quarter of 2019 compared to the same period of 2018 mainly due to higher sales volume and average price of all segments.

Gross margin decreased 2.4% -- percentage points, sorry, in the third quarter of 2019 when compared to the third quarter of 2018 mainly due to increased production costs in the Piura plant from the initial ramp up of the switch from coal to gas as an energy source, higher cost of raw material as well as higher sales of concrete and precast, which have lower margins but -- than cement but higher overall profit.

During the first nine months of the year, sales of cement, concrete and precast increased 14.9% and gross margins decreased 3 percentage points when compared to the first nine months of 2018 for the above mentioned reasons as well as the use of higher-priced clinker during the first half of 2019 due to maintenance of the kiln in Pacasmayo.

Concrete sales continued to perform outstanding this quarter, increasing 85.8% compared to the third quarter of 2018, reflecting increased sales to infrastructure projects and small- and medium-sized projects, like Humberto mentioned.

Gross margin also increased 9.7 percentage points this quarter compared to the same period of last year mainly due to higher average price and dilution of fixed costs. During the first nine months of the year, concrete sales increased 56.4%, and gross margins increased 7.7 percentage points.

Precast sales also increased 18.2% in the third quarter of 2019 compared to the third quarter of '18 mainly due to high demand from reconstruction-related projects. Gross margin also increased 16.3 percentage points as we continued to focus on higher-margin products.

During the first nine months of the year, revenues increased 6.1%, and gross margins improved 10.3 percentage points due to our focus on higher-margin products.

Quicklime sales continued the downward trend we've been experiencing since beginning of the year, these revenues -- with revenues decreasing 34.4% in the third quarter of 2019 when compared to the same period of last year and 47.3% during the first nine months of the year when compared to the same period of 2018.

Gross margin decreased 5.6 percentage points in the third quarter of 2019 when compared to the third quarter of 2018 and 4.7 percentage points in the first nine months of the year when compared to the same period of last year mainly due to lower sales and lower dilution of fixed costs.

Profit for the period was PEN40.2 million, a 20.4% increase when compared to the third quarter of 2018 and PEN102.5 million during the first nine months, representing an 18.2% increase when compared to the same period of 2018 mainly due to higher revenues.

To summarize, volumes has been strong this quarter, reaching record levels both in terms of cement and concrete. We are very pleased with this growth, especially in the concrete segment as it is aligned with our 2030 vision of becoming a building solution company and the increase in the overall profit of the company as a result of this.

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

Thank you, Manuel. We are very pleased to see that the trading volume is very solid as it has now been sustained and accelerated throughout the year. We are certain that we are very well positioned to capitalize on this growth and transform it into higher value generation for our shareholders.

Can we now please open the call to questions?.

[Operator Instructions]. And we'll take our first from the line of Andres Soto with Santander..

My question is related to your EBITDA margin this quarter. I would like to understand to what extent these one-off factors that you mentioned affected the EBITDA margin.

In terms of percentage points, what will be the normalized EBITDA margin if you exclude these one-off effects? I think this is important because, as you mentioned, this is the sort of sustainable level of EBITDA margin. And if anything, we will see a deterioration going forward given your change in product mix? That will be my first question..

Hello?.

Yes..

Mr. Soto, you are still connected, we're waiting for a response..

Go ahead, Manuel..

And Mr. Nadal, this is Jim, your operator. I'm getting a message from Claudia that they are redialing. They had dropped their line at their location. Ladies and gentlemen, please bear with us for just a moment..

Okay. Let me -- well....

And also, Mr. Soto, for your knowledge, the presenters may have not heard your complete question. You may have to repeat it once they rejoin, sir..

Andres, this is Humberto and Manuel. We had some [indiscernible] if you want to repeat the question..

Yes, Humberto..

Okay. Go ahead, Manuel..

We're back, sorry. Yes, Andres. Sorry, we were disconnected. Basically, the normalized EBITDA should be 30 -- around 30.9%., but we have to consider that this reduction in the EBITDA margin as a percentage is also because we've been transporting some clinker type V that are produced in Pacasmayo.

So we are sending some all-purpose clinker to Pacasmayo and Pacasmayo is producing the clinker type -- the cement type V that should be -- that are sale -- being sale in the north of the country. So that's additional transportation costs that will be I expect this year and next year until we have a new silo built in the Piura plant..

If I can make a comment. Andres, this is Humberto. Let me complement the question, and thank you, it's a very good one. I think normalized EBIT, as Manuel was mentioning, we are already undergoing the setting up of a new silo in Piura. Like Manuel mentioned, it's going to take over 18 months.

We didn't anticipate such a high demand of our cement type V in the northern part of our region.

But you have to bear in mind, it's very important that, I mean, as our business solution segment keeps growing, I mean, our cement EBITDA is still the same, but we are putting more and more and more revenues on other building solutions that besides cement are also bringing some margin, but that kind of margin will depend on the cement per se..

Perfect. And also related -- also with operating leverage, we also saw an increase in administrative expenses, and I would like to understand what is driving this.

What are you expecting going forward? Again, I understand this could be also related to this change in product mix, but I would like to understand if this is something that we should expect this type of growth as you continue growing in these other segments..

Yes, Andres. This is only to clarify. The administrative expenses go high when the profit is higher, and this is part of sharing profit that we distribute law to the employees of the company. So it's a higher profit, there's more administrative expenses because there are more profit sharing..

And we'll take our next question from the line of Ramon Obeso with Scotiabank..

A couple of questions, if I may. First, I'd like to understand why production of type B cement is concentrated in Pacasmayo? Second, I'd like to know what is the size of the current ready-mix backlog.

And what are the overall prospects for that backlog to grow? And lastly, if you could provide additional color on what type of raw materials are experiencing cost increases at Piura, and if this might be a one-off?.

Thank you for the question. Like I said, I mean, the main type V has grown substantially in the northern part of our region. We did not anticipate that kind of demand. Even though there was some demand, the thing is, I mean, it made no sense for us to build a special purpose silo for a small volume because the field costs would have killed us.

Now that the demand is higher, that's why we are undergoing at this time a small project to build a silo V cement for the Piura plant. That's fundamentals, and in terms of cost, I mean, coal is going a little bit higher.

And Manuel mentioned, in the case of Piura plant, like everything, I mean, when we moved on to gas, the ramp up was a little bit expensive till we really got control of the cost. Now it's under what we have anticipated, which is similar, maybe a little lower than the coal cost.

So that's why, like I mentioned in the question -- in the previous question from Andres, the margins looking forward to stabilize around what we manage on a little bit north of 30.5% EBITDA margin..

Okay.

On the size of the current ready-mix backlog?.

In terms of the revenues backlog, we have to bear in mind that a lot of this is coming from the construction projects. I mean reconstruction budget is PEN18.7 billion divided in over 6,000 projects, all of them are fundamentally cement. We are right now around 25% execution of that budget.

So you have to bear in mind that 75% is still to come, that would be at the back of the projects 3 to 4 coming years..

And we'll take our next question from the line of Juan Brosset with CrediCorp Capital..

I have a couple of questions. The first one is that the company incurred an additional cost this quarter associated to the switch from coal to gas in the Piura plant. I was wondering how long will we see these additional costs.

And the second question is now that we have much more data on what the impact of natural gas will be, is there any -- do you have any idea on what the potential impact on margins would be?.

Yes. Thank you for the question. The ramp up process is practically now over. And we said it from the beginning, I mean, from a cost stand, there should be a little bit of saving, not a lot. We don't have a specific number, but we are more optimistic about the stability of the production.

It's not only about how much we're paying per kilo calories, it's also how much stability and help it's going to bring to the clinker production. We don't have a concrete number till we have at least six months to nine months running the kiln. I mean we are very conservative with the numbers we give out to the market.

So when we have this probably by the end of the year or beginning of next one, we shall have an answer to your question. But I mean the idea was not about cost reduction, it was more about stability of production..

We'll take our next question from the line of David Orobosa [ph]..

First, congratulations for results. They were very impressive as you [indiscernible]. The parade sooner or later had to be good. I know it seems that all comes in the same time. Well, my three question is because I wanted to know how much of these sales increase is driven my self-construction and by projects. So I understand this is ordinary growth.

Can you give me some guidance there? And can I simply assume that the cement decrease is mainly driven by self-construction and concrete increase by freight? And my second question is, this quarter, the gross margin of concrete was 25.95%, the highest in almost three years, mainly driven by diluted cost, fixed cost.

So my question is, how much the margin of this segment can grow and -- in EBITDA gross margins? And I imagine that this -- that as the development of this project goes on, EBITDA gross margin will continue to increase.

Am I right?.

Let me take the first part of the self-construction and ready-mix. Self-construction remains an incredibly important segment of our demand, probably around 70%, and will remain like that. I mean, look, we've always said in the past we are very optimistic about it because it is closely related to employment.

And luckily for us and for the country, the northern region of our country have a pretty good situation of very, very little unemployment. So I think self-construction will remain very strong in the coming times. Manuel will tackle the second part of your question..

So the margin of the concrete will depend on what kind of concrete we sell to which kind of project. It's not stable. We sell in one month to a project that the cost or the sales price is higher, we could increase a little bit the gross margin. But I think that this should be the peak in gross margin that we should get in the close future.

But it will depend on the mix of the products that we sell. And basically, the smaller the projects are, the less margin that you obtain. The bigger the project, the bigger margin you obtain..

And our next question will come from Tunde Ojo with Harding Loevner..

Thank you very much for the very good result. First question for me is a follow-up from the one you just answered.

Can you please give a split up view of sales in terms of self-construction and infrastructure project and then also your private project? I know you mentioned 70% is self-construction, but can you give the split for the other segments? And also, how fast is each of these segments growing?.

Sure. Thank you, Tunde, for the question. I don't know if I got it correctly, but self-construction, which is, I mean, a whole big segment divided into different kinds of self-construction, is 70%, 7-0 percent, of our sales more or less.

It may go down a little bit when we have a large infrastructure project like, for example, the Talara Refinery or, I mean, to a supplier that will push it back a little bit. But I think going forward, it's going to remain at 70%.

And how much is it growing? We're probably talking about this segment is well around 10% per year at this particular point..

Yes.

And for the infrastructure side of the -- what's the contribution? And how fast is that growing?.

Yes. The other part of the pie has to do with -- more than infrastructure was rebuild and reconstruction, which is not exactly the same thing. You have to bear in mind that, I would say, probably 70% of our construction budget is going to be aimed at housing.

So only the little bit, the other 30% is in more infrastructure, smaller tender offers, stuff like that. Large infrastructure projects in the north remain still an enormous potential but not a reality right now. Except for a refinery, there have not been any large infrastructure projects, as we know, over the last 3 years.

We remain cautiously optimistic that at some point, the government will tackle these things..

Okay. The other question I have is on the statements you made earlier, I mean in the press release, where you mentioned shipping clinker from Piura plant to Pacasmayo because of the strong demand in the type V cement.

My question is why did you need to ship clinker from Piura to Pacasmayo given that Pacasmayo can also produce its own clinker? What exactly happened during the quarter that necessitated this sort of move across plants?.

Yes. You have to bear in mind or keep in mind that different kinds of cement require sometimes different kinds of clinker. And even though, I mean, clinker may be produced in both plants, you need the correct silos to be able to handle the clinker.

That's why we were shipping because we can make it in Piura, the clinker, but yes, it's a logistical thing why we do not have a silo. We just cannot store it and put it in the pipeline of production, that's why we're bringing it from Pacasmayo. We need to do some operations in Piura to produce it.

Why didn't we do it from the beginning? Because the volumes were not significantly high. Now that we are facing higher volumes, we just are doing some minor investments to have Piura ready for clinker..

Okay.

And then lastly for me, I know you mentioned in a press release that the political situation hasn't impacted your demand and also the numbers shows that, but is your expectation going forward that the whole political situation is not going to impact the trajectory of growth in this business?.

I think for the last year or so, we've had a very uneven political situation, and the management is very strong. The analysts tend to believe that political and economic highways run parallel and not interchange it, but we would have to see. Because at some point, I think, such a high political crisis, I think, may impact results in the future.

Hopefully not, hopefully not. But so far, there's no effect, but at this point, we cannot really anticipate this..

We'll take our next question from the line of Sebastián Montoya with Compass Group..

I have a quick one. I would like to know where do you think are your cement prices going.

I mean what are you waiting for in terms of prices for the coming quarters?.

Thank you for the question. We are -- an important fact we gave at the beginning of the year was -- from there, it really remains -- I'll leave it unchanged. Maybe at some point, some more promotions here and there. But in general, I don't foresee for the rest of the year any changes in price..

[Operator Instructions]. We'll take our next question from Lucia Calvo Perez with LarrainVial..

I have a question related to the last question. I was wondering if you could comment a little bit about price dynamics as you commented in the press release that prices had increased across segments. But if you can comment a little bit about pricing dynamics, especially in the cement segment.

It's the only segment that revenues increased more than volumes..

Sure. Thank you for your question, Lucia. Like I said before, we're always very cautious in our -- in terms of prices, where it's kind of a lever between the price parity of imports, profitability and also defending our solid leading position in the market. So how we see a combination will always guide our decisions.

In the -- like I said before, in the coming months, we don't foresee any change in pricing, going up or going down. We're just happy where we are in terms both of the top line but especially in terms of the profitability we're providing for the company..

And at this time, we do have no further signals from our phone audience. Gentlemen, I'll turn it back to you for any additional or closing remarks..

Thank you very much. I want to once again thank everybody for the permanent interest in our company. Like I said before and I think Manuel stressed in the numbers, we had a fantastic quarter, and we're having a great, great, great year.

But more than everything, we are absolutely convinced in the future of this company, and we are absolutely convinced on what we're going to create in terms of value through both the building solutions and the constant development of new segment -- of new cement segment. Thank you, everybody, for joining today, and have a very nice day..

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