Good day, everyone, and welcome to the Cementos Pacasmayo Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Claudia Bustamante.

Ma'am, the floor is yours..

Thank you, Matthew. 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.

Pereira 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..

first, by promoting the regulatory framework that allows a minimum of 12% of coprocessing; and secondly, and most importantly, by continuing the reduction of our clinker factor industry average of 70%.

On this last issue, even though our clinical factor of 73% is already below the natural average of 76%, we are working hard on continuing this reduction. The cement and concrete results center finance completed by Pacasmayo has already worked on a cement that at the lab level can have a clinker factor of under 55%.

We expect to have this cement ready for market in 2023. [indiscernible] front, I'd like to briefly mention that our procedure is very much aligned with our purpose. During this year, we began with a pilot to provide 935 minutes of the area of influence with improved lending conditions.

As you may know, many of the houses in the poor areas in Peru to have proper floors in the houses. They have their floors. These are sources of infection, the have parasites, bacteria and insects across respiratory diseases, anemia, among others. This project looks to provide them with cement for the floors and to build together a better home.

We look forward and very excited to scale this project in the near future to be able to improve the lives of more people. Moving on to digital transformation. For the past couple of years, we have been working on enhancing our business model through digitalization. We've developed digital tools in our different clients and stakeholders.

We are developing our own marketplace to bring together construction companies, hardware stores and the final customer, incorporating a new value proposition.

For construction companies, we remain very focused on serving our [indiscernible] tools that aims to transform connectivity to our clients, maximizing efficiency in the positive management and increasing substantially the user experience. And finally, for retail consumer, we have enhanced MundexPerto, our ecosystem of vital solutions.

Coming for us to adapt very quickly to new technologies in order to respond to the new needs of the format builders, consumers and clients. [indiscernible] expert is a platform that is designed to promote the professional development of format to virtual tools as well as training and custom-made consultancies.

[indiscernible] Perto and Nissan is targeted to the hardware stores and has a wide variety of selling opportunities as well as inventory control tools, order stocker benefits and promotions. We will continue to both enhance our current tools and develop new ones that support and maximize our company's strategy and future growth.

Finally, we are convinced that innovation is absolutely key to supporting our vision of becoming a leading provider of building solutions, contributing with the progress and development of our country. To achieve our 2025 goal of deriving 25% of our revenues from nontraditional solutions we are innovating in both new products and services.

We continue to seek for innovation in our products to develop building solutions that are fit for infrastructure products since it's an area that's still lacking in Peru. We also want to extend the solutions to the self-construction segment since it remains as the largest proportion of our income.

During 2022, we started developing IU, a platform that helps small retail consumers in directly save money to anticipated sales so they can reach the magma needed for the construction project.

We believe that by staying close to our clients, being flexible and ramping fast, we'll be always able to anticipate the needs and continue creating and selling value. I will now turn the call over to Manuel to go into more detailed finance..

Thank you, Humberto. Good morning, everyone. Fourth quarter 2022 revenues were PEN553.8 million, a 1.7% increase when compared to the same period of last year, mainly due to the increased prices of baggage cement in line with increased inflation.

Similar, gross profit increased 1.1% when compared to the fourth quarter of 2021, and consolidated EBITDA was PEN121 million in the fourth quarter, a 14.5% decrease when compared to the same period of last year, mainly due to a nonrecurring expense this quarter.

Despite this increase expenses, EBITDA this quarter was similar to previous quarters of this year. During 2022, revenues increased 9.2%. Gross profit increased 16.6% and consolidated EBITDA increased 8.8% when compared to the same period of last year, mainly due to increased sales and decreased costs.

As we were able to optimize the use of our own clinker and, therefore, use less imported clinker. Turning to operating expenses. Administrative expenses for the fourth quarter of 2022 increased 19.8% and 16.1% for the whole year compared to the fourth quarter and the whole year of 2021, respectively.

This increase is in line with higher sales and increased salaries as well as an increase in personnel expenses due to the union bonus that is negotiated every few years and has a larger impact during the first year as well as a higher employees' profit share.

Selling expenses during the fourth quarter of 2022 increased 55.7% when compared to the same period last year, mainly due to an increase in personnel expenses derived from larger sales force as well as a significant savings in advertising and promotion in the fourth quarter of 2021.

During 2022, selling expenses increased 26.6% when compared to 2021, mainly due to the higher salaries and the union bonus and higher profit share, as mentioned before as well as an increased provision for tape payment. Moving on to different segments.

Sales of cement increased 8.7% in the fourth quarter of '22 and the 13.5% during the second -- during the full year 2022 when compared to the same period of last year.

As bagged cement sales continue to be the biggest driver of demand, gross margin decreased 2.6 percentage points this quarter when compared to the same period of last year, mainly due to the increase in the price of coal and electricity.

However, during 2022, gross margin increased 1.4 percentage points as we were able to mitigate some increase in the cost of raw material with lower use of imported clinker and optimization of our own capacity.

During the fourth quarter of 2022, concrete payment and mortar sales decreased 13.1% and 11.1% in the whole year when compared to the same period of previous year, mainly due to a significant slowdown in sales volume for private and public works.

However, gross margin increased 2.5 percentage points in the fourth quarter of 2022 compared to the fourth quarter of 2021 and 2.9 percentage points in the whole year 2022 compared to 2021, mainly due to our decision to focus on higher-margin services.

Sales of precast materials during the fourth quarter of 2022 and the whole year decreased 19.8% compared to the same period of last year and 13.6% in 2022 compared to 2021, respectively, mainly due to a decrease in sales volume for the public sector.

Gross margin was negative in the fourth quarter of 2022, and 2022 mainly due to the adjustment of missing inventories carried out during this year, which led to an increase in cost as well as higher prices of raw material and low dilution of costs. Heavy precast fixes and demand when we sold for lack of larger projects.

Net profit for the fourth quarter of 2022 decreased 24.6% compared to the fourth quarter of 2021, primarily due to a decreased operating profit as nonrecurring expenses increased this quarter.

During 2022, profit for the period increased 15.4% compared to the whole year 2021, primarily due to the increased revenues as well as a higher operating profit since we were able to streamline our cost despite some inflationary pressure in prices of raw material.

In terms of debt, our debt-to-EBITDA ratio was 2.9, which is a level we feel very comfortable with it. It is important to mention that this February, we paid the remaining $132 million of our 10-year international bonds without incurring any additional costs due to exchange rate effects.

As we mentioned before, we had already obtained a low to pay for this bond, so our current debt levels remain unchanged. To summarize, this quarter results show our resilience and ability to deliver continuous profitability. Now can we now please open the call to questions..

[Operator Instructions]. Your first question is coming from Tunde Ojo from Harding. Your line is live..

Thank you. So, I have a couple of questions and maybe I'll just ask a few and get back on the queue, just to allow others. But the first is on your use of imported clinker, right? You sort of reduced the use of import at Linker this year.

But I wanted to understand your strategy going forward regarding that because it sorts of dilutes margin each time you use it.

Do you have a plan to completely stop us an imported clinker in the near future? And what volume of inventory do you have left? And are you going to use it in the coming year 2023?.

Sure. As you know, we are in -- towards the end of the expansion of our Pacasmayo plant. This would be operative third quarter of this year. The reason we have been imported clinker was because demand in 2021 rose abruptly. But going forward, we're going to -- we have completely stopped drinking ports as we speak.

And we see absolutely no need in the future because our new [indiscernible] will come in, in our third quarter of this year. And at this point, we hold around 200,000 tons of imported clinker, which are security stock..

200,000 tons, right?.

Yes, 200,000..

Okay.

And are you going to use that this year? And how would that compare with last year?.

Yes. I mean we're going to use it, I mean towards the coming months before we go into operation. And the average cost is similar to what we're using towards the end of last year..

Okay. All right. Fair enough. The other question I have is on your volumes, which sort of declined this 2002 financial year for the reason you mentioned, it was sort of high in the previous year.

But I was wondering -- because when I look at the data you shared in your press release, you have the central and the Southern region still growing despite coming from a higher base as well, but the not impact you sort of had a decline last year. And I was wondering why are those areas growing as opposed to you a day competing with your products.

And you also mentioned some reconstruction projects having less shipments than -- are those construction points is done right now? Or do you used to have much to go? Because I was just wondering where we are in those implementations. Thanks..

Yes. Sure. I mean, you have to -- when you see the numbers of growth, you have to go back more than last year, have go to back in the last two or three years. What happened was we grew 42% on the previous year. So even though we decreased 5% on the net of the last two years, we were up by 30-something percent.

The other regions of the country did not grow 42%. So of course, they're capturing up, if uses the math over the last three years, we have grown much more than the south and understand the regions.

Going to the construction, I mean, reconstruction of the north is something that has been going on and off over the last few years, and there's a lot still remaining. The thing it has to do with the fact that the government has to approve by packages. We finish a package.

Now they have to approve, I believe there are two or three more packages coming in. And it all depends, I mean, how quickly the government based on the G2G agreement can get these contracts up and running..

[Operator Instructions] Your next question is coming from Francisco Suarez from Scotiabank. Your line is live..

The question that I have first relates with the social unrest.

I want to understand a little bit better where did the road blockades happened? Is this actually disrupting the shipments coming from Piura to the southern portion of your footprint or that is concentrated actually much more within the Pacasmayo area and the southern portion of your footprint.

If you can help us a little bit to understand because on to my knowledge, I think that the social unrest has been concentrated much more in the southern portion of the country. and to some extent, in the Lima market as well. But I wanted to understand what are the risks of disruptions from shipments from Piura.

And if the need this is actually something that might be occurring in the year going forward? And my second question, if I may. I just want to -- I was trying to do a brief math here. And it seems that excluding the CapEx related with the Pacasmayo expansion, your overall free cash flow conversion ratio might be somewhere at the levels of 35%.

So just wanted to check if that number is roughly accurate. And what expectations you may have for your free cash flow conversion to for 2023 might be excluding the expansion -- the CapEx and expansion of Pacasmayo. Thank you..

Francisco, it's Humberto. Good to hear from you. Clearly, the social unrest has been much more focused on the southern part of Peru in [indiscernible]. The Northeast remains pretty calm, even though there have been some interruptions in the area of Chao going to Chimbote.

So, the southern part of our area a little bit affected, but in nothing at all compared to what has been going on in the South where they've had four, five, six, eight days of operation that could not go ahead. So, no. And as we are speaking right now, there's no roadblocks currently, that was something happened towards the second week of January.

So that's scale fair part. And the second part of the question, yes, you're right on the conversion number..

Okay. Perfect.

And do you think that, that free cash flow conversion ratio might be something that you might be sustaining on the year going forward?.

Yes. indeed, I mean, once you take out the Pacasmayo project, which is almost done, we should be sustaining that..

Your next question is coming from Tunde Ojo from Harding. Your line is live..

Just sort of a few follow-up questions that I have left is can you provide sort of some guidance into what you're expecting in terms of your performance for 2023, maybe like volume growth expectations, revenue, EBITDA margins, if you can provide all of those three or any of them will be helpful..

Sure. It's very hard to predict volumes with a country in the middle of such social embrace but despite that, we closed last year on 3.4 million tons, and we would like to remain somewhere around that area.

In terms of EBITDA margins, I think they're going to be stable until we have our kiln number four coming into Pacasmayo in the third quarter that will jump EBITDA margins as we start making our own clinker and start not depending on imported clinker, then that should be higher..

Okay.

When you mean EBITDA margin stable now? So, are you talking about 22%, 33% because you have different numbers across the year or are you talking about the average for 2022?.

You can calculate for EBITDA margin..

No. I'm asking you when you said it will be stable.

What number would it be stable at for Q4, is it the average for 2022?.

Yes, I think we should be around the volumes of last year..

No, I'm not about volumes. I'm talking about the EBITDA margin. You said it will be stable until Q4 when -- Yes. Can you hear me? [technical difficulty].

25% EBITDA margin for the whole year..

25%, you said?.

Yes. 25%..

Okay. That's very helpful.

And in terms of pricing, are you putting in any additional pricing? What sort of price growth are you looking at for 2023?.

I think we've been a very aggressive in terms of market or vessel price last year. We remain like that at the beginning of this year. We're going to -- a lot depends on how inflation behaves in our region, specifically in the country. But we'll always be sure that the price is going away that we retain our profitability levels. .

Yes. So, you said you put in pricing earlier this year in January..

Yes..

Like can you give a sense of what percentage you did on average in that period?.

Around 3%. .

Around 3%. Okay. That's very helpful. And last one for me is Pure kind of reach 100% clinker capacity utilization from your disclosure. And I'm just wondering what next after that? Are you looking at increasing clinker capacity prior? Or since Pacasmayo is coming up, you don't need to do anything on Pure.

I just wanted to understand what you're doing in terms of capacity expansion or optimization going forward..

That's a very good question with. I think it's a very stressful answer. Once the Gen number four, we will be able to produce around 3.5 million tons of cement with our own clinker capacity. which is what we will have with Clink number four. So, we will be at 100% capacity as soon as we turn on the [indiscernible].

What goes on from there on, it depends on demand. We don't foresee a post coming in the future because even if demand goes up 5%, 10% or 15% going to 3.7 million tons, it's always much smarter to import a little bit of clinker than setting up a new plant to be used or only 20% capacity. So, I don't foresee any projects. [technical Difficulty].

Hello?.

Yes. I lost you for you at the last. But I think I get it that you don't foresee any expansion in the near term. I think that's clear..

No..

Yes. So, in terms of CapEx, so how much are you looking at this year? Because Pacasmayo is still ongoing.

What kind of level are you looking at in aggregate for CapEx for 2023?.

We normally spend about $20 million. .

Okay. Alright. Thank you. .

[indiscernible] We're talking sustaining CapEx....

Yes. But what is your total CapEx for 2023, including Pacasmayo continued expansion..

Around $50 million, '20 or '22 will be of our sustaining CapEx and... [technical Difficulty].

Okay. I mean, of course, it cos a little bit again, but I think I had the number of $50 million. Last one for me is on your balance sheet, on your debt, right? You mentioned that you were -- that you sort of refinanced part of your debt, I didn't get that part. If you don't mind repeating what you did in terms of financing, it would at a higher cost.

So, should we expect higher interest expense going forward?.

No, we don't expect any addition [technical difficulty] The bond that we issued 10 years ago was a trade of 4.5% plus. The swap all-in was around 7.10, and now we have [technical difficulty].

You're breaking up. I didn't get all your response. Sorry. I don't know what....

You have to bear in mind, I mean -- did you hear me there?.

No, I didn't hear you. No, not at all. You were mute for a minute..

Do you hear me now?.

Yes. I can hear you now, correct..

Okay. What I was trying to explain is, I mean, 1.5 years ago, when rates were still low, we managed to structure corporate credit with two banks here to be able to repay -- we have just repaid $140 million of the bond.

Those bonds, if you add the coupon rate of 4.5% plus the swap, they were at an all-in of 7.10% and the new credit is at a cost of 5.8%. So, if anything, the financial cost is lower. .

Okay. Got it. All right. Thanks, that’s all for me. Thank you so much..

Thank you. There are no further questions on the phone lines at this time..

I have two questions from the webcast.

So, can -- first, could you give more color on the nonrecurring expenses that occur in the fourth quarter?.

Yes, basically nonrecurrent expenses is, as we mentioned, there is an increase in the bonus that we pay or we negotiate with unions and it's heavily impacted in the first. It's basically a three-year arrangement with the union, and has a much higher impact in the first year than in the second and the third.

And we have to compare this year with the previous year, the impact has been much higher this year. Also, there is an increase and that depends on the profit, or profit share for the employees. So basically, that's the two main -- the two main impacts in exchanges..

The next question is, what is your strategy to manage cost going forward?.

Yes. I mean we are always working and trying to be extremely efficient our main costs are related to energy. So, coal electricity are the things that are mostly impacting us due to the inflationary pressure.

So, looking forward, I mean, we're going to go into gas, and we're trying to also make a more efficient -- the most efficient we can our coal buying process..

And the last one is how do you plan to mitigate the risk of not having geographical diversification in your top line?.

That's a very good question. And the fact of the matter is, I mean, 2021, we grew 42%. So yes, I mean, on the one hand, we are very focused and north of Peru. But clearly, it's a region that has an enormous potential to offer. If we are diversified to give an example, into a neighboring country, we would have taken us 10 years to grow 42%.

So yes, we are pretty exposed to a north part of Peru, but we think that in terms of strategy, the growth potential is so immense still there that it pays to be very focused in one region, even though it is risky. I think there's no more questions, so I'm going to go on with my closing remarks.

2022 was a remarkable year, and I want to raise a remarkable year for us, both in terms of significant advantage in our strategy and an achievement of some financial results. We are aware that 2023 brings even more challenges and even higher levels of uncertainty for the world and particularly for our country.

Although we are definitely influenced by the Mac economic and political framework, we do believe we have two very clear competitive advantages. First, the north of the country has a slight different dynamic has made it less implied the conflict.

And second and most importantly, our focus on literal transformational innovation has provided us with the tools to be much more resilient and adapted. Finally, we understand that there is a little -- there's a little benefit of being an item of excellence.

It has focused less on what we're lacking in terms of institutions are focused more on our behavior and the behaviors of those we can positively impact. We are at a crucial time to influence significant change, which will only happen by working altogether.

We strongly believe in the future of region, and we even stronger belief in the future of our country. Thank you very much for the time today..

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation..