Operator:.

Good day ladies and gentlemen. Welcome to Pacasmayo’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only 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, Melinda. 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, especially our response to COVID-19 and our strategic outlook for the short and medium-term. 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. We hope all of you and your families continue to stay safe in these very difficult times. We are all joining from different parts of different locations, so let’s hope that everything works from a technological side.

As you probably know, the Peruvian Government continues extending the lockdown and state of emergency intended to last two weeks at first, for a total of almost 3.5 months that ended June 30. Economic activities started gradually since mid-May with [20] activities related to mining, industry and construction services, tourists and commerce.

We started producing our ship instrument May 20, always with a health and safety of our employees as our undisputed top priority. We continue to operate with as little workers as possible in our plans. And those that have to follow strict guidelines of social distancing, hygiene and regular check-ups by our health and safety team.

All of our administrative staff continues to work from home and we plan to continue work in this way until we are certain that the benefits of returning to the office outweigh the risk. Before moving on to the results of our return to operations, I would like to highlight our actions to fight against the spread of COVID-19.

We have acted on four different fronts, and we have acted strongly. First, in terms of health-related initiatives, we have implemented an additional program to help our workers with BMIs [above 30]. This program has been very successful and after 2.5 months, almost 70% are already below 30.

We continue to work with the other 30% and also closely monitor all of them so they are able to maintain these healthy levels. We have also provided all of our workers with access to online doctor's appointments, so they don't have to leave their houses unless strictly necessary.

Testing kits, including face masks, [alcohol] and soap and psychological and emotional support have also been provided. We have also donated testing kits to our communities and local authorities. Second, in terms of goods, we have donated food to communities in our area of influence benefiting over 1,800 families.

Third, through our volunteering program, we have helped with the disinfection of streets in some of our areas of influence. We filled our mixer trucks with water and disinfectant and thanks to our almost 80 volunteers, we were able to clean and disinfect more than 17 kilometres of roads. Finally, communication is also very important.

In the first weeks of the state of emergency, in some areas of the country, including the North, there were some lack of information on this [indiscernible] pandemic and the true importance of staying home to prevent the spread. We [repaired radio and TV spots] to help inform the population and we believe it was a very successful strategy.

We firmly believe on building a better future together and now is the time to show our support to our workers, their families, our communities, in our area of influence and those less fortunate during difficult times.

Also in conjunction with [virtual] mining, we have developed [indiscernible] many different programs to aid our people in these difficult times. Moving on to our result, [since the] result of operations, we have been pleasantly surprised [indiscernible] behavior.

We are expected the self construction segment to suffer significantly due to a lockdown, but this is not the case and it has once again proven its resilience. This segment is generally tied to employment, but in the North, its most agricultural, which has had a good year, so it was less affected than in the other areas of the country.

[Indiscernible] to the size of the [informal] sector in the north, which did not quite stop during the lockdown, we can see why the recovery has been faster than expected. Our sales were back [indiscernible] in June were only around 20% below the same period of the previous year, which was a record year as you may recall.

And July sales have continued increasing and looks extremely promising, leading us to project that sales could be close to those in 2019. Nonetheless, the effect of over two months of not sending any cement will definitely burden our end of year results, even if this faster and expected recovery consolidates in the next month.

Another reason to be very optimistic about the second half of 2020 and all over 2021 is the agreement signed between the Peruvian and the British Government to accelerate the execution of the reconstruction plan of [El Nino] in 2017.

The agreement evolves execution of the 7 billion soles over the first two years during which the UK Government will provide technical assistance for the construction of hospitals, schools, and river [defenses], all of which should be finished by June 2022.

These are excellent news for the northern region, [which is much needed] infrastructure will finally be built in the best way, hopefully in the most efficient manner. Finally, I would like to take a moment to briefly explain our most relevant digital initiatives since they have become even more relevant in today's context.

As you have mentioned before, since 2018, when we launched our new vision, we identified digital transformation as one of the key access to articulate our strategy. Since then, we have worked on a variety of tools and projects to digitalize our processes and our relationship with our consumers.

We have developed a platform for registration, control, and follow-up of the different kinds of discounts and promotions, granting a new digital experience to our clients, a great [UX] with a required speed and access to information.

Another very important digital tool on the operational side of the business is one that allows for online control of the main production variables that is quality, energy, and consumption of components and resources.

It has real time information that also keeps historical records of each production viable, giving us the capacity to use it for operational intelligence, as well as predictive analysis. This is complemented by a platform that digitalizes our productions team to work and is managed through mobile devices.

One of the most relevant initiatives that has been one to digitalize our relationship is construction companies of all sizes through Pacasmayo Professional, allowing them to program the requirements and track the shipment online. It integrates all of our back office platforms for an optimal customer service experience.

This tool allows for the planning and programming of the fleet with efficiency. Our goal is to optimize the resources such as mixers, pumps, and drivers, according to the client's requirements. All of these and other tools are already in planning or execution. The pandemic only led us to accelerate the development and implementation.

We are firmly convinced that in fact that we have already identified these opportunities and have started working decisively on these initiatives as in a key point in our quick adaptation to new market conditions.

Finally, I want to emphasize, I want to over emphasize that we will remain fully focused on our long-term goals and are very pleased to have already seen some recovery in sale.

We are convinced that the work we have done during the past years in terms of long-term strategy and vision, as well as a quick adaptation in the long-term period put us in an incredibly strong position to capitalize on the opportunities ahead and keep helping our country move head.

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. And I hope all of you and your families are staying safe and healthy.

The second quarter of 2020 revenues were PEN114.3 million, 64.5% lower than the same period of last year, mainly due to the halt in production and commercialization after the government declared the state of emergency to prevent the spread of COVID-19.

Gross profit decreased 98.2% in the second quarter of this year compared to the same quarter of last year, mainly due to lower sales, as well as higher fixed cost derived from the sudden stop in regular production. However, as Humberto mentioned, revenues have started improving since June and we expect further improvements in the upcoming months.

Consolidated EBITDA was negative PEN5.7 million in the second quarter of this year. For the first six months of the year, revenues decreased 34.9% and EBITDA decreased 64.6% for the above mentioned reasons, which were partially offset by a very positive first two months of the year.

Turning to operating expenses, administrative expenses for the second quarter of this year has decreased 20.7%, compared to the second quarter of last year, mainly due to decreased variable salaries because of the company's results of operations.

Selling expenses in the second quarter of 2020 decreased 21.7% compared to the same period of last year, mainly due to decrease advertising and promotional from budget adjustments and lower variable salaries because of our results of operations.

During the first six months of the year, administrative expenses decreased 11.3% for the above mentioned reasons. Selling expenses for the first six months of the year increased 4.8%, mainly due to the increase in the allowance for credit losses.

Moving on to different segments, cement, concrete and precast sales decreased 65.5% during the second quarter of 2020, compared to the same period of last year, mainly due to the halt in production during the most of the quarter.

Gross margins decreased 35.9 percentage points in the second quarter of 2020 when compared to the same period of last year, mainly due to the sudden halt in production. However, the gross margin in June was already almost 30% and we should see continued improvement.

Sales of cement decreased 60.9% in the second quarter, compared to the same period of last year, mainly due to the halt in production and commercialization. Gross margins decreased 29 percentage points, mainly to lower sales and increased costs related to halt in operations.

For the first six months of the year, cement sales decreased 34.8% and the gross margin decreased 12.1 percentage points. Nonetheless, as Humberto mentioned, we have been pleasing surprised by the performance of bagged cement sales in the restart of operations and we are expecting July sales levels to be similar to the same period of 2019.

Concrete sales decreased 92.3% and gross margins decreased significantly due to the halt in production and commercialization for most of the quarter. For the first six months of the year, sales decreased 43.8% and gross margin decreased 26.9 percentage points.

Once shipments to the public sector for the reconstruction and other project restart, we should start seeing higher levels of concrete sales. Precast sales decreased 64.6% and gross margin was negative due to complete halt in sales and higher fixed costs during the quarter.

For the first six months of the year, sales actually increased 6.5% compared to the same period of last year due to very high sales during the first two months of the year, but gross margin was still negative due to higher fixed costs.

Quicklime sales decreased 38.2%, compared to the second quarter of 2019, and 25% during the first six months of the year, mainly to the decreased demand during the lockdown period.

Gross margins increased 5.5% percentage points in the second quarter of 2020, compared to the second quarter of 2019 and 2.6 percentage points in the first six months of the year, compared to the same period of last year, mainly due to temporary increase in sales of higher priced products, as well as the decision to sell X works during the lockdown period.

The loss for the period was PEN45.5 million, primarily due to decreased revenues and higher cost for the halt in production in operations mentioned above, as well as a slight increase in financial costs because of some short-term loans taken for the working capital.

To summarize, this quarter results of operation shows the sharp effect of the complete stop in production and commercialization during the lockdown period, but June and July have already started showing signs – very positive signs of recovery giving us reasons to be very optimistic about the second half of the year.

We have been able to preserve the financial health of the company during the most challenging times and find ourselves in a good position now to continue operating with some financial flexibility as cash generation is steadily increasing.

Can we now please open the call to questions operator?.

Thank you. [Operator Instructions] And first, we go to Andres Soto with Santander. Please go ahead..

Hi, Claudia, Humberto, Manuel. Thanks for the presentation. My first question is related to infrastructure projects. I understand you're becoming more confident on this demand finally coming along.

Can you please give us a sense of the potential cement volumes from these projects over the next 24 months? And out of these, how much is in your pipeline for the second half of 2020? I understand you made this comment that you expect it’s going to have to be in-line with the second half of 2019 and I would like to understand how much of that is reflected by infrastructure projects vis-à-vis sort of organic demand that you have?.

Hello, it’s Humberto. Thank you for the question. In that program that's going to be supervised by the British Government, we're expecting somewhere around between 350,000 tons to 400,000 tons. It should be happening probably at the beginning of the last quarter of this year, but very strongly over the next year. I think that's a significant demand.

And in terms of infrastructure, because this is specifically for reconstruction, I would like to throw a number right now because I think the government is very confident the government system will work during the remaining of this year and they are thinking of implementing it for other projects.

For example, I mean, the Chavimochic project, which was kind of – was stopped for a couple – for more than four years because [indiscernible] has now been taken over by the central government, so I think – I mean, no concrete numbers at this point, but very optimistic about what’s going to be happening especially if this implementation of reconstruction proves to be very successful..

Thank you, Humberto. My second question is related to dividends, clearly profits this year are going to be extremely low, however, the company still have some equity reserves.

Given this more optimistic outlook for the next 24 months, can your shareholders expect dividends to be distributed this year?.

That's a very good and a very tough question. I think we are very optimistic about what's coming ahead of us, especially because of what we've been seeing in the last six weeks financially. We have recovered all of the short-term loans we had to take because of COVID, so we're in a strong position.

Like you say, I mean, profit wise numbers are not going to be there this year as the previous ones, but we have close to $200 million in – and we distributed a profit. So, I think the decision is not mine. Let's see how it goes.

But I think if the numbers keep showing the strength we have shown, probably some dividend will be consumed by the Board and this is not my decision, but clearly not the same as last year..

Great. Thanks Humberto and congratulations for the good news..

Thank you..

Next, we go to the line of Luis Pardo with Compass Group..

Yes. Andres beat me. I don't like that. I'm usually first in the call. Hey, guys. How are you? Hope your families are doing well. I mean like a second Andres' comments here. Congrats on the pickup, the V-shaped like recovery we're seeing here.

My question here goes if you could give us more details on how and why like expecting a second half to be similar to 2019, which was a record year is something that is very impressive and I don't think any other cement companies have that in the region, so if you give us more color there and on the reasons behind the confidence you have to show those numbers in the second half of the year?.

Hello, Luis. This is Humberto. Hope everybody's doing great in your family. It’s a very good question, why are we optimistic? Because unlike other companies because I think, not too bad, but we are unlike any other company.

But besides I mean, I think we're based in what we have been seeing over these last six weeks, but that’s focusing one thing that's very important. What we're seeing right now is fundamentally cementing bags. This is related to employment. As you know, agricultural has been running very strong in the north. They're having a very good year.

Fishing has almost finished all of the quarter this year, and all of this reflects unemployment. So, I think basically, that's driving a very strong demand in terms of the bagged cement. Point number two, the [pharma sector], like you say, which explains 70% of our demand, didn't really quarantine as a former one.

I mean, these are people that need to somehow work every day and the fact that they keep buying cement is a clear example that they have found a way to keep working and buying cement.

And also one thing that we need to really, really weigh here is this agreement with the British government is a tremendous news, absolutely tremendous news, because we're talking about 350,000 tons of cement for a company that is selling 2.6, 2.5 a year. These are significant numbers.

It is – I mean if you divide it over 15 months, it brings some substantial growth to us.

So, why are we so optimistic? Because of what we have been seeing over the last seven weeks since reopen even though there were big projects, I mean, still coming in, I mean, for us to be – like I mentioned, in June, 20% only on bag cement with no ready-mix is fantastic. So, I hope we are – as you see, I hope you're right.

You know what’s well enough, we are always cautiously optimistic, but we also are based on facts and numbers, and the numbers we posted in the press release are clear reflection that the operation so far seems to be in a very strong V shape..

Very good, congrats. I know it's early and you're very conservative, which I like as a shareholder, but if all these trends continue, then like 2021 could be a very strong year.

No, it’s like you're having the same year in the second half of 2020 and you have the media, the reconstruction in 2021 and the agro sector is not going to slow down, then 2021 could be another record year after 2019, no?.

Absolutely.

I mean, the fact that we – this year, like I mentioned, I'm realizing stress that we are two months that we stopped and we think in the second part of the year with our country, which is still trying to recover, we have seen very strong numbers, and this program with the British Government is going to come 80% I would think over the next year.

So yes, I mean, at this point, being cautiously optimistic, as you know, we are in Pacasmayo. I think 2021 could break new records like above what was 2019, which was already a record year of our 63-year system, but yes, absolutely..

Okay. And while I'm with you guys, I just want to make a quick comment. It's very good that the job that Manuel and Humberto do talking to investors during the crisis. So, I appreciate all the help we've gotten over the last few months. Thank you very much, guys..

Thank you, Luis..

Next, we go to Alejandro Chavelas with Credit Suisse. Please go ahead..

Hello Pacasmayo team, congratulations on the results and the strong performance during June and July. My question is related to other questions already spoken in the call, but I mean, the July demand seems to be really strong. You seem really confident that it is not a one-off, but that it will continue throughout the second half of the year.

What are you hearing on the ground from the consumers? Is there a possibility that this could be inventory restocking rather than a strong trend? Or what are you thinking on that front? I mean, you sound confident, just to get more sense on the ground what you're hearing..

Thank you. Thank you. I think it’s a very, very good question indeed. I think when we started on May 20, and we were – we had been out of stock in [indiscernible] hardware stores in modern channel. So, the first 15 days of operation, clearly, we knew we were just replenishing stocks.

As you know, stock level in our markets are very low in our factories, in the [indiscernible] in harbors everywhere. So, I mean, nobody has more than three, four or five days of stocks. So I mean, these replenishing of the stock was only the first 10 or – 10, 15 days. I mean, those days are long past.

That's why, I mean, the last days of May when the operations were very good, but we were very cautious because we said, no, we’re just replenishing stocks. June was a harder month, but what we're seeing in July, we – in June, we're seeing something and I think you’ve already seen our reports.

I mean, we have been growing 10% from one week to the next for six consecutive weeks. So, I think that's not a replenishing of stock; that is basically demand getting back – very quickly to a very strong level. So yes, I mean, you know us well enough to know that we are cautiously optimistic, but this time, yes, we're very optimistic, I have to say..

Okay, thank you very much..

Next, we go to the line of Froylan Mendez with JPMorgan. Please go ahead..

Hi, guys, thank you very much for taking my question. So, maybe trying to look at the other side, what could go wrong on your optimistic outlook? If I – I mean, I tried to think that there has to be a part of the demand that has to be hurt. I guess private construction is going to be the sector that is going to be most impacted.

And then you would need a very strong incremental infrastructure sector to compensate for the volumes lost in the private construction sector.

Could you just explain to us what are the sectors that you expect to be impacted because of the crisis?.

Sure. I think it's a very good question, what can go wrong? I think clearly, health issues. I mean, the numbers are still very high in Peru. They keep going higher. So, if we were to go into another quarantine, another lockdown, I think that would be terrible for the whole country, not only in Pacasmayo.

I think that's something that would throw all our optimism through the window in one single action. So, I mean that's something that I think is improbable but possible. So that I think is our biggest fear and concern.

And I fully agree with you, construction companies are taking longer than the self construction segment to come in, but the one thing I mean, even though many are hurt, I mean, the government has launched a very strong program in terms of new houses and [indiscernible] and everything.

So, the way you have to look at it, this is – I mean, this is a market that may be hurt because, I mean, a lot of people have lost their jobs and everything, but the government and the private sector are throwing so many initiatives that I think that's going to compensate that.

And let’s bear in mind one thing, when you about this again agreement with the British Government, 7 billion soles, that's a lot of money and to be spent over 15 months, that's unheard of in our region, unheard of. I mean the most we were able to spend in infrastructure or public spending for construction was maybe a billion a year.

So, to spend 7 billion over 15 months, these are numbers – so you keep adding all those things. They all – and being aggregate demand for cement and I think that's what we're looking these days and that's why we’re also so optimistic.

And the key thing here is, I think the reason self construction is picking up so much of the demand [indiscernible] because of employment, and agriculture is doing luckily very well, fishing is having an okay year. So, those things in the end, I think, keep people employed and keep people wanting to keep building..

Fair enough. Thank you so much..

Next, we go to Adrian Huerta with JPMorgan..

Hi, Manuel and Humberto. Thank you for taking my call. Most of my questions were answered.

But let me think a little bit further, what – and this great news, and I'm quite excited to see the [PEN7 billion] been spent over the next couple of years – over the next 15 months, but thereafter, what is – because this is going to happen fast, what can we expect thereafter on further investments and where the money could come from? Is the government already working on something to make this, not as large but an ongoing spending going forward?.

[Indiscernible] construction that have signed the agreement with the British Government, and there are two things I can take from our meeting. First of all, it was a very small [SWAT] team, but very efficient.

And point number two, they clearly told us that the government is using the [record signs] of the north as a pilot to really see if this government to govern operation can be taken even further as specifically can be translated into infrastructure projects, which, as you know, we have over [160 billion] for the whole country.

So, I think that if this works over the next 15 or 18 months, those 7 billion, first of all, that's only the first part of reconstruction because we still have more funds to come, but I think the government or the coming government will use this experience to keep doing the same system, which I think it's great.

So, I think that's what I think gives us – that would come. And also I know you read in the papers, but they tell you, most of projects which was stopped for a while has been taken by the central government once again, and like I see, I think they are going to get into these wave of trying to be more efficient in public spending..

Thank you, Humberto..

Hello?.

Yes. Thank you so much, Humberto. Nice to hear from you..

Thank you, Adrian..

[Operator Instructions] And next, we go to Francisco Suarez of Scotiabank. Please go ahead..

Thank you so much. Congrats on the news and thanks for the efforts. As Luis Pardo said, this is very helpful for all of us.

And a follow-up question on Luis Pardo’s, I understand the structural differences on your end-market exposures that you have in northern Peru, namely that why it is important, the agriculture, the fishing season, I mean if all the rationale behind the self construction, but does the fact that is not as densely populated in the north in contrast to Lima, does that also plays a role in the recovery that we are seeing in the pickup of cement shipments? And my second question relates with – now with these funds that you have from the UK, there is a need for you to implement certain protocols under the COVID – after another COVID hit in terms that you may be required to make sure that your contractors, your clients are making – do have those protocols in place, does that might affect or not the deal overall, [disbursement] of funds or anything that we can – they will lesser risk in that sense? Thank you..

Hi Francisco, Humberto. Thank you for your questions. And I'm going to go by the second part first. I mean, we spent over a month working strong in our protocols. That's why luckily, and I’m hitting my head for good luck, we've had no events since we've opened almost two months ago.

And we are very strict in that protocol and we have extended to our [indiscernible] and our hardware stores and our associates and everybody. So, I think we're working very strong here. As a matter of fact, the British authorities were very impressed by the level of precision we were using the protocols.

And I must say, I mean, we have to thank also our peers in the rest of the world because we're able to learn from [indiscernible] of the world that are very open to help us. It seems they have been affected by COVID before, so I think we were able to learn from them [indiscernible] the protocols and make them work.

So I think we are very confident that we are fine there. I always tell my people, we are – talked yesterday, we can't let our guard down because we have to keep – we’ve been very aware of the COVID as a tremendous threat. So, I think we're okay on that stand.

And the first part of your question, the northern Peru has, unlike the south, three cities with over a million people. We have [indiscernible] so I think, and of course, they're not as big as Lima, but the way they're disseminated, I mean, in different cities and the way they react to economic variables seems to be okay.

Like I say, Lima has a whole different dynamic. In Lima, the pharma sector is way much smaller than in the north or south Peru. So, I think we are going to keep being okay and these are cities that still need rebuilding and building on any houses, they need hospitals and they need malls and everything.

So, I think it's good we have a million people cities, but I think it's also great that instead of one big metropolis we have them spread over almost 1,000 kilometers. I don’t know if that makes sense to you..

No, that makes perfect sense and a great answer. And thanks again for your efforts and congrats again. Thank you..

This concludes our question-and-answer session. The floor returns to Humberto Nadal for closing remarks. Mr. Nadal, please go ahead with your closing remarks. .

Do you hear me?.

Yes, you're on..

Yes, now we can hear you..

Okay. Yes, okay, thank you. Something wrong here with my phone. Like I was saying, I think this has been indeed the most challenging quarter in Pacasmayo's history, but at the same time, we are extremely proud of how we navigated it and the resulting outcome.

We believe that there are reasons – there are many reasons to be more than cautiously optimistic about the demand in the second half of this year. You know most of or all of you know us very well and we wouldn't be as fully as optimistic unless we really believe in this.

And we believe that due to record behavior of the self construction segment as well as the addition of commitment to the public sector for this agreement with the British government, its going turn into a quick V-shaped recovery.

More importantly, we consider ourselves in a very strong position, both financially and operationally, as well as in terms of use and developing – development of digital tools to tackle these new challenges. We're going to remain focused on the creation of long-term value.

At this point, we’re going to remain focused on the health and well-being of our people and our communities. And I want to thank you all for your continued support for our Company. And we will – like you all know, as I mean, Manuel, Claudia, myself, we're always available.

And we are sure that when we get together three months from now, we probably will be looking at a very good results. Thank you very much for your time today and stay safe..

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day..