Good morning, ladies and gentlemen, and welcome to the Cementos Pacasmayo Second Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on listen-only mode and the floor will open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mrs.

Claudia Bustamante, Investor Relations Manager. Claudia, over to you..

Thank you, Jenny. 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, focusing primarily on 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, and thank you once again for joining us today. This quarter's results so our ability to sustain profitability even in the slide of a slowdown in demand.

Even when there has been a slight deceleration in terms of volumes, consolidated EBITDA was $120.5 million, a 33.9% increase when compared to the same period of last year, achieving a margin of 24%. Moreover, our net profit increased 74% year-over-year, reaching $48 million.

This is especially relevant considering the current context with a significant decrease in coal and energy prices and overall inflationary pressures throughout the global economy.

We have been able to achieve this by focusing on operational efficiencies, prioritizing the use of our own clinker and implementing an accurate pricing strategy across both bag cement and concrete. We are certain that this approach and our sustained focus on efficiency will continue to reap benefits in this extremely difficult environment.

The most significant actions we have taken to decrease our exposure to these external factors is the optimization of our current capacity in our Pacasmayo plant.

As most of you know, at the end of last year, our Board decided to invest -- to add 600,000 metric tons of announced capacity in this plant, allowing us to stop almost completely the usage of imported clinker.

Despite some bureaucratic delays, I'm very happy to announce that we are very much on track to finish this optimization as planned in the second half of 2023. We're currently in the similar workspace, finishing the preheater and we'll soon begin the assembly phase.

As this is a brownfield project and the kiln will be part of an already established in production, we expect the ramp-up process to be smooth and relatively fast.

Besides the obvious benefits in terms of profitability, this new kiln will also lead to a reduction in overall CO2 emissions because of the new state-of-the-art technology involved, aligning this investment with our long-term goals of achieving carbon neutrality by 2050.

During this quarter, we launched an initiative that highlights our ability to adapt and align our client needs with our company's long-term goals. As you all know, Peru is a market that still sells mostly back cement.

Throughout the years, we have constantly focused on reducing the clinical cement ratio by producing blended cements and making sure these are most widely used cement in our portfolio. As of this date, our branded cements make up over 80% of our total sales.

In the same quest to continue promoting ecofriendly cement, we have developed and launched what we call the EcoSaco. This is a new technology that allows the back to disintegrate completely within the concrete mix achieving zero waste.

This product is completely aligned with our vision and our intentions as a company as we are able to provide a lower impact on the environment and dispose of less waste.

Moreover, it takes us one step further towards creating a culture that values and demands ecofriendly cement, which is crucial in order to achieve the significant reduction in emissions that we are timely struggling for.

Finally, I'd like to proudly -- extremely proudly mention the substantial positive evolution we have had as a company in the Merco talent ranking. Merco is a corporate monitor reference in Latin America based on a multi-stakeholder methodology composed of six evaluations and more than 20 information sources.

In 2020, we are ranked on the 88th position. We have now planned 66 positions to achieve the 22nd place in 2022. This is undoubtedly assigned that we are on the right track and encourages us to challenge ourselves to improve even more.

As you have mentioned many times before, our people are the most variable assets we have and the driving fall behind our current and future success. I will now turn the call over to Manuel to go into a more detailed financial matter..

Thank you, Humberto. Good morning, everyone. Second quarter 2022 revenues were $502.9 million, a 14.1% increase when compared to the same period of last year, mainly due to an increase price of baggage cement and concrete in line with increased inflation.

The gross profit increased 35.8% mainly due to a reduction in average cost as we were able to prioritize our own clinker, decrease in the over cost of using imported clinker as well as the increased revenues mentioned before.

Consolidated EBITDA 120.5 million in the second quarter of '22, an increase of 33.9% when compared to the same period of last year, mainly due to operational efficiencies and increased prices. During the second half of 2022, the revenues increased 13.5%.

The gross profit increased 29.4%, and the consolidated EBITDA increased 27.1% when compared to the same period of last year, mainly due to the increase in sales and decreased costs, as mentioned before. Turning to operating expenses.

Administrative expenses for the second quarter of 2022 increased 16.3% and 14.8% for the six months of the year compared to the same period of last year, in line with increased sales, mainly due to increased salaries and an increase in personnel expenses due to the union bundles that is negotiated every three years and has a larger impact during the first year.

Selling expenses in both the second quarter and during the first six months of 2022, increased 19.7% compared to the same period of the previous year, mainly due to higher salaries and the union bonus as mentioned before. Moving on to a different segment.

Sales of cement increased 18.1% in the second quarter of 2022 compared to the same period of last year, as baggage cement sales continue to be the biggest driver of demand.

Gross margin also increased 5.5 percentage points this quarter when compared to the same period of previous year as we were able to mitigate increase in the cost of raw materials with lower use of imported clinker and optimization of our own capacity.

During the first six months of the year, cement sales increased 16% and margin improved 4.6 percentage points, in line with the quarter's results.

During the second quarter of 2022, concrete and payments and mortar sales remains in line with the same period 2021; however, gross margins increased 7.5 percentage points during the same period, mainly due to our decision to focus on higher-margin products.

During the first six months of the year, revenues decreased 7.4% and sales volume decreased because of a slowdown in sales of the public sector. However, the gross margin increased 4.2 percentage points because of the profitability strategy mentioned before.

Sales of precast materials during the second quarter of 2022 and during the first six months of the same year, decreased 4.7% and 0.7% compared to the second quarter and first six months of 2021, mainly due to a slowdown in public sector spending.

Gross margin was negative for both the quarter of the first six months, mainly due to the write-off of past inventory, which generated a cost increase as well as an overall increase in prices of raw materials.

The net profit for the period increased a substantial 73.9% in the second quarter of this year as compared to the same period of last year, mainly due to the higher operating profit mentioned about as well as a positive exchange rate effect.

During the first six months of the year, net profit increased 57.5%, mainly due to the higher operation profit, as mentioned before. In terms of debt, our net debt-to-EBITDA ratio was 2.3x, which is a level we feel very comfortable at.

To summarize this quarter, results show our ability to find efficiencies in times of cost and inflationary pressure, allowing us to continue delivering substantial profitability.

Can we now please open the call to questions?.

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Francisco Suarez of Scotiabank. Francisco, please ask your question..

The questions that I have, and apologies because this has been addressed in your Investor Day in New York, I was unable to attend. Apologies for that. But the questions that I have late with your overall cost management strategies.

One, I would like to understand if clinker prices -- FOB clinker prices are high enough for you to precisely rely more on your Piura plant for clinker to compensate for the lack of capacity of clinker in Pacasmayo? And secondly, there's something that you have been doing a lot on last year in the form of reducing the overall imports of coal to feed your kiln.

So I would like to understand what other initiatives are you applying to enhance your overall energy mix, and if this reduction in imports of coal are sustainable, and if that has a positive impact in the overall cost structure on your energy metrics?.

Francisco. It's Humberto. Let me talk about questions. On the first one, I mean, any clinker that we produce, whether it's Rioja, Piura or Pacasmayo, it's going to be cheaper than imported clinker. That's a fact. So I mean we are working at 100% with all the plants to avoid importing clinker.

So yes, what we have been doing is very efficient usage of that linker and that lowers the need for imported clinker. That's a fair part of your question. Second part of the question, we are -- you know that cement is all about energy and freight cost, among other things. In terms of coal, we have increased the usage of imported coal from 20% to 15%.

And also, we're trying to use as much as the local coal as we can. So that's why you're seeing the impact on the cost, as you mentioned. And the one thing we're doing strongly strong, not only because of cost but also because of the environment, we're trying to reengage with gas supply. We are very optimistic about it.

We don't have any concrete results to announce as of right now. But hopefully, before the end of the year, we will have news to report that we have been able to reengage with the gas and will be helpful both in terms of our environment and in terms of costs..

Thank you. Your next question is coming from Adrian Huerta of JPMorgan. Adrian, over to you..

Going back to the question on energy costs, what was the -- your energy per cost this quarter versus a year ago? That's my first question, given the changes on reducing the imported coal, et cetera. And the second question is, if you're planning further price increases for the rest of the year..

Adrian, this is Humberto. In terms of pricing, yes, I mean, as we all know, we are living in the middle of inflationary pressure. So for sure, I mean, we think there's more room to increase in the coming six months. And it's going to be very closely related to keeping profitability and depending on what happens to our costs.

I think -- if you take our -- the price of per ton 18 months ago to now, we have increased a lot, but more so than that, what you have to realize that we have been able to keep and I would say, even regain profitability by a very thorough price structure. In terms of coal, I'll leave Manuel..

Yes. In terms of coal, the cost compared to the same quarter compared to the last quarter of the last year, it's around $10 million increase in cost and energy, something similar, around 9.5 million per quarter..

Those increases are $1 million increase year-on-year from energy and from electricity..

Yes..

Yes..

Your next question is coming from Marco Mejía of Kallpa. Marco, please ask your question..

Please could you explain to me, what is your outlook for the volume of cement for the whole year?.

Yes. As you may recall, Marco, I mean, last year, we grew almost 40%. This was something absolutely unprecedented, and went from 2.6 million tons to 3.6 million tons.

So this year, I mean, our biggest objective is to try to stay close to that 3.6 million, which is already -- I mean, it's a very I would say, high expectation on our part, but we're trying to stay very close to that.

Probably at the end even if we decrease a little bit in volume, we'll more compensate that in terms of price or revenue should be definitely up this year..

[Operator Instructions] I will now hand back over to Claudia for any questions that may have come in via the webcast. Claudia..

So firstly, I have a question from Pablo Ricalde. Can you share your outlook towards pricing in that seminar the second half of this year? Do you think there is room for another price hike in the second half? I think we had this already, but….

Yes. I'll give me so glad that we answered that. But thanks, Pablo, for the question. Like I said, I mean definitely the answer is definitely, yes. We're always keeping a balance between profitability and our market share. So I think in version pressures keep going up, I mean, for other view room for that..

Okay. The next question comes from [indiscernible]. What is the driver of solid cement demand in the northern region of Peru. After a strong 2021, I would have expected a significant drop that didn't happen.

Is it demand from public sector and is sustainable?.

Thank you, [indiscernible], for the interest in our company. And I think indeed, a very good question. I mean after 40% year growth, we were all concerned about if it a high that's going to drop. What is the main driver? The main driver is still self-construction. It is not public investment. It is not private investment.

We don't see any hospitals, any malls, any big hires going on. It's basically self-construction that accounts probably for 85% of our sales. We remain optimistic why because in the north in terms of agriculture in terms of fishing in terms of construction, in terms of some tourist, employment is at a very good rate.

As long as the employment, these people will go and build. And especially in an inflationary economy, for employee sector economics 101 means if you get about inflation, you buy durable goods.

What is more durable than a home? So, yes, we are also pleasantly surprised that the levels have not dropped and hopefully, will be very close to the year before with much higher prices..

Okay. And this final question from the webcast coming from [Carlos Kadasa]. Thanks for the presentation and congratulations for the result.

Could you share what are your expectations for volumes through the second half of the year and EBITDA margins? Furthermore, would you expect to change to natural gas in Europe Pacific?.

Carlos, yes, Humberto already answered the question about the volumes. And concerning the EBITDA, we should be around 25% for the second half of the year..

In terms of gas -- Carlos, thank you for the question. And I think I mentioned this before. We have been working deeply with our operations team to try to reengage with gas like we did two years ago in the Piura plant. Hopefully, we'll have something to announce before the end of the year..

We do have one more -- a couple more questions from the webcast. It's one of them from [indiscernible].

And how will you manage the quick line reduction considering the shortage of the bituminous coal?.

We're not talking about a sort of bituminous coal. We're talking about a reshuffling of the structure of coal..

Yes. Only to complement what Humberto mentioned is that we are receiving the bulk of bituminous coal today. So since the next week, we will be already on board with quicklime supply..

Okay. Next question from [indiscernible]. So two questions.

We understand that picture for volumes in 2022, but how about the expectations for the first part of 2023? And do you expect higher prices to harm volumes in 2023?.

Yes. I mean, at this point, it's very hard to anticipate 2023. We still have six more months to go in a very uncertain environment. So I wouldn't want to give any guidance at this point. At this point, we're very focused on defending the volumes that we achieved on 2021.

And in terms of prices, I mean, like I say, I mean, our strategy is to always serve our clients in the best way and keep a balance between market share, price and profitability. So, we'll remain on that strategy..

Okay. Next question from [Carlos Kadasa].

Why did you switch from natural gas in Piura? And what would the -- what would be the savings concerns?.

Yes, regarding the Piura plant, we were not able to achieve sustainable supply of gas in the amount of quality we needed. We're trying to fix that in the coming months, so we can engage with gas. And at this point, I mean, we cannot talk about any savings specifically because we don't have the final numbers yet..

Okay. Next question.

Could you share an outlook on dividends for this year?.

I think what we said in the past that we've had a consistent dividend policy over the last years, except for the extraordinary dividend we provided on July of last year, I think this year, in the second part, we should go about to the historic level of dividends we had previous to 2021 -- '22 -- '21.

But this decision, I mean, it's something that the Board has to wait and make in the coming months..

Okay.

Are there any concerns regarding excess capacity after the clinker expansion in the Pacasmayo plant?.

So, that we understand the numbers, I mean, last year, we sold 3.6 million tons of cement, only 3 million of those were made on clinker, only 3 million. I mean, the expansion will really --if the volumes stay at the level right now, the expansion will only replace imported in care. We will now either capacity.

It has never been our strategy to be like that. We've always had a 25%, 30% idle capacity. In this case, even if demand drops a little bit, I mean, we for sure think that the utilization rate of a new kiln Pacasmayo is going to be in the less optimistic scenario, probably at 60% or 70%..

Okay. That's all the questions from the webcast, but I do think we have one more question on the line. So I'll turn it back over to Jenny..

Yes, we certainly do. We have a question again from Francisco Suarez from Scotia Bank. Francisco, over to you..

As for the second question. But I was curious because you were also referring to overall weakness on works related to the reconstruction programs in Northern Peru.

Can you provide us a little bit more color of what is driving this sort of delays in the overall execution? Is that weather-related or that is actually much more structural? And what do you expect for the rest of the year?.

Thank you, Francisco, for the question. I think the delays are related to the fact that the lady in charge of reconstruction was removed for a position and nobody has been announced yet. So I think it has to do with our own ability to operate. It has nothing to do with weather or anything.

It's only the inability of the authority to keep working on the game plan..

So that's interesting because it is about execution risks rather than any problem with funding, isn't it?.

Absolutely, only execution risk, it is not about funds..

Okay. We don't have any more questions in the queue. So I'll now hand back over to Humberto for any closing remarks..

Thank you. There is no doubt that we are living difficult and uncertain times. Even though we may have learned to live with COVID, we now have to deal with war in Europe and precedent levels of inflation, civil unrest and more radicalized political positions globally.

As the world continues to spin in ever so changing directions, we have to remain calm and confident that the solid foundation we have built for the Company will allow us to prevail and succeed once the cycle as all of them before comes to an end.

Our 65 years of experience in a country that has given us quite a variety of challenges during that time, have provided us with the tools to face difficult times and with absolute confidence that by continuing to focus on our clients' needs and constantly challenging ourselves to think outside the box, we will continue to deliver the best possible results.

I want to thank all of you for attending the call this morning. And as I always say, thank you for the renewed interest in our company, and we always remain here, should you have any further questions. Stay safe, and have a great day..

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..