00:06 Good day ladies and gentlemen and welcome to the Cementos Pacasmayo Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. 00:25 It is now my pleasure to turn the floor over to your host for today, Claudia Bustamante. Ma'am, the floor is yours.

00:34 Thank you, Kate. 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. 00:56 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 filing. 01:18 With that, I'd now like to turn the call over to Mr. Humberto Nadal.

01:22 Thank you, Claudia. Welcome, everyone to today's conference call. This quarter's segment shipments continued its very strong trend, reaching record revenues levels. Self-construction is still the main driver of this growth, but concrete sales have increased significantly this quarter. 01:40 Year on year growth of concrete sales was seventy three percent with a very solid margin of twelve percent. We're looking at quarter on quarter results that is still substantial growth of twenty one point two percent. Furthermore, if we look at margins, there has been an outstanding increase of eight point two percentage points. 01:59 The main driver of this growth in both volumes and margin comes from the demand from reconstruction related projects, which should continue at least for the next eighteen to twenty four months. This financial growth we have experienced this year could not have been foreseen. 02:14 If we compare cement shipments, year to date to the same period of twenty nineteen, which I may say was already a record year, the growth rate is almost an incredible forty percent. Because of this, for almost a year now we have been using some imported clinker along with our own clinker in order to produce all of the cement that is demanded in our – or influenced by all of our clients. 02:37 We have successfully used a similar strategy while building our new capacity in Piura around seven years ago. However, current market conditions are different in many ways, making less profitable today to use imported clinker. 02:52 Freight prices have gone up significantly in turn increasing the cost of importing clinker and experts agree that this situation is unlikely to change in the short to medium term. This situation led us to re-evaluate our current strategy and to think outside the box. This…

05:30 Thank you, Humberto. Good morning, everyone. Third quarter twenty twenty one revenues were five seven point two million, a twenty four point five percent increase when compared to the same period of last year, mainly due to the continued increase in cement sales volume, as well as increase in sales volume of concrete this quarter and an increase in price of both cement and concrete in line with inflation. 05:57 Gross profit increased thirteen point two percent compared to the third quarter of twenty twenty, mainly due to increased revenues. Consolidated EBITDA was hundred seventeen point three million in the third quarter, a slight decrease when compared to the third quarter of twenty twenty, mainly due to increased cost derived from the use of imported clinker, as well as higher expenses. 06:23 During the third quarter of twenty twenty, there were significant budget constraints as we recovered from the effect of the lockdown and halt in commercialization. EBITDA margin for the third quarter was twenty three point one percent, a two point seven percentage points increase, compared to the previous quarter. 06:23 During the nine months of twenty twenty one, revenues increased seventy two point one percent and gross profit increased seventy six point seven percent when compared to nine months of twenty twenty. Mainly due to the increase in sales, as well as above mentioned halt in operations from mid-March to mid-May in twenty twenty. 07:07 Turning to operating expenses, the administrative expenses for the third quarter of twenty twenty one increased forty point four percent, compared to the same period of last year was thirty two point one percent, mainly due to the increased workers profit sharing in line with increased income tax base as well as increased third party services, mainly COVID-nineteen related expenses to comply…

14:54 Thank you. [Operator Instructions] Our first question today is coming from Adrian Huerta at J.P. Morgan. Your line is live. You may begin.

15:24 Hi, Manuel and Humberto, congrats on the results. Quick question on margins, we saw the gross margins for cement at almost thirty five percent, what was the margin on imported clinkers during the quarter? And is this higher freight cost already impacted the cost of imported clinker during the quarter, or should we expect increased costs on imported clinker in the fourth quarter versus this quarter?

15:50 Hello, Adrian. How are you? Yes. What we've used this third quarter of twenty twenty one had to do with more than one hundred thousand tons of clinker. This has impacted in around fifty million soles in this quarter. For the fourth quarter, we spent a similar consumption of around one hundred and thirteen thousand, and the cost will be very similar to the third quarter. The over cost.

16:23 Sorry. The 50 million soles is what, the cost of the important clinker?

16:29 The excess cost of imported clinker.

16:32 Versus the clean that you've produced?

16:37 That's right. Yes.

16:38 And again, the higher freight that we're seeing over the last couple of months, should we continue to see this cost on a per ton basis to increase in the fourth quarter?

16:54 According to – this is Humberto, how are you? According to [Multiple Speakers] – we should not see any more increases on freights during this coming quarter.

17:06 Okay. Thank you. And if I may ask another question on demand. What percentage of your volumes year-to-date, you think are attributed to the reconstruction efforts?

17:19 Around ten percent.

17:22 Ten percent. Perfect. [Multiple Speakers]

17:26 If I may elaborate, I mean, the strong demand is fundamentally based on self-construction. That's why we are so optimistic for the future. I mean granted reconstruction G2G, government spending is important, but I mean self-construction is what really is moving the demand so higher.

17:46 And are you guys seeing remittances is growing strongly in Peru?

17:53 I don't know the information on that, but the one thing I may tell you is when we came out from pandemic towards the end of last year, we conducted a very extensive in-depth analysis of why was demand so high because we were surprised by when we reached three hundred thousand tons per month. And we were concerned it was related, mainly to government bonds, so some kind of help to the pandemic. 18:16 Surprisingly so, when we asked the people, I mean, we will a building or people that were thinking about building over the next forty five days, how was the financing investment? Only four percent said, it was thanks to some help from government, almost eighty percent said that with their own money, and only around ten percent said they were borrowing the money. So, I mean the base of the demand was basically the work of these people.

18:43 Yeah. I'm not sure how [Multiple Speakers] in Peru, but least in Mexico and in the Caribbean, it was quite relevant and remittances are growing twenty percent this year and they were also up strong last year and that's where it's been driving back, cementing in this country. So, I wonder how important is remittances in Peru, but I have no idea? Okay. Thank you.

19:11 If I might talk about remittances, they are not as important as they are in Ecuador or Mexico and other countries. I mean, here what we are seeing is that the north part of Peru has a condition of full employment. And it has had that condition over the last eighteen years, thanks to the other agriculture going very strong, fishing going very strong, building going very strong. 19:31 So, I think the base here and if I double pick on that answer of eighty percent of people of their own money, very few mentioned that this money was based on [remittances] [ph]. The also said, it was based on the money they were being able to save because they were fully employed.

19:47 Thank you, Humberto.

19:52 Nice to hear from you, Adrian. Take care.

19:55 Thank you. [Operator Instructions] Our next question today is coming from Francisco Suarez at Scotiabank. Your line is live. You may begin.

20:11 Thank you so much. Congrats on the results and apologies if I missed the earlier remarks. The question that I have is that, related with your expansion on the Pacasmayo plant, it seems that seventy million dollars, it seems to be a low priced investment. So, what I want to understand is, I think that you might be considering an expansion that will not consider a new grinding unit need, and perhaps, if you can elaborate a little bit on the tons per capacity of clinker of that new line? Thank you so much.

20:52 Sure, Francisco. Very good question. When we talk about our three plants, if you talk about Piura, our plant in the jungle, these are plants that have pre-tight balance between grinding of raw materials, clinker production, grinding of cement, and dispatches. Not the case of Pacasmayo. Pacasmayo has been growing over last thirty years, where there were some cement capacity [outage] [ph], so what we have today was a very unbalanced plant. 21:21 So, what we're doing is basically – what we are doing basically is adding only clinker capacity why? Because we have enough raw material grinding, we have enough cement grinding. So, what we're doing is upgrading with [indiscernible] two thousand tons per day, that means six hundred thousand tons per year. And with this, we're going to raise the usage of our raw griding to one hundred percent. 21:48 So we'll have a very level plant. That's why investment seems apparently so low is you compare to; you remember the three hundred and sixty six million of Piura. Piura was a big greenfield here and this is why this decision makes so much chance, because it's limited amount or around seventy million dollars and we should – the payback is very, very quick, why? Because we're only adding the capacity we need. 22:13 Now, we'll have aligned that is a one hundred percent in usage raw grinding. It is going to one hundred percent in usage of clinker and we feel have some spare capacity in cement griding, which is always important towards the market. So, that's the rationality behind the decision.

22:31 That's perfectly clear. Thank you for that. A follow-up on Adrian’s questions on the cost structure. What can you tell us on flat costs that you are experiencing at the moment on coal prices as well? Do you see, and if you can answer this question and connect the dots between what is the level of inventories that are relatively at low cost in your books, compared to the additional inventories that you need to purchase on the spot prices now?

23:13 Yeah. I mean what we have seen over the last five months is a dramatic increase in the freight cost. I mean this is a world phenomenon. I mean, when we started importing clinker right after the pandemic, we reopened on pandemic, we were talking about seventy dollars of the clinker already, around seventy dollars of an importing clinker. That has gone up almost by thirty something dollars over the last month. 23:39 That what really pushed us also to make this decision of building the additional team. I mean, what we are hearing from the people that are the experts in terms of prices say, that these prices will not go lower in the coming not only months, in the coming years. They think they are going to level where they are, they [indiscernible] want to keep increasing. 23:57 So, like Manuel answered to Adrian’s question, I mean, the prices which were brought in clinker right now and the excess we're paying for every ton compared to our own clinker got to remain the same over the coming months and hopefully we’ll remain the same till we get our new capacity in eighteen months from now.

24:22 Yeah. And if you can elaborate on the cost of slag as well as coal?

24:30 Yes. I mean, let me really clarify on the question before I – because you asked about inventory. When I see the clinker prices are going to remain the same, this applies to the future acquisition of clinker. That's very important to clarify. In terms of the slag and coal once again, all of these are being impacted by freight costs that have been increasing. So, of course, I mean, depending what has been the slag, and the coal we mean from [indiscernible], that's going to be impacted by the same freight phenomenon. Manuel?

24:57 Francisco, hello good morning. Well, you have to consider the eighty eight percent of the total coal that you use we use, our unpurified coal that we buy locally. So, we have some impact of the cost of [vision] [ph], but we're going to have the major impact of the vessels.

25:19 Perfect. Thanks so much. Congrats again.

25:23 Thank you. Nice to hear you.

25:27 Thank you. We have no further questions in the queue at this time. I will now turn the floor back over to Humberto Nadal for closing remarks.

25:38 Thank you. I want to thank everybody for joining today in the call. Indeed, the past year and half has been extremely challenging for everyone on a worldwide basis. In our case, it has pushed us to adopt much quicker that we were used to. Absolutely think outside the box in a permanent basis and learn to operate in very uncertain ground. 26:01 Decision making in this condition clearly is uncertain if not easy at all, but success, we strongly believe stems from very brave decisions. We are very confident that decision to commit to our country's long-term development and investment expand and optimize our capacity will bring significant returns in the near future and will consolidate Pacasmayo’s leading position in our region. 26:26 With that being said, thank you, everyone and as always – I think there's some follow-up questions.

26:35 We do have two follow-up questions in queue. The first is coming from, once again from Adrian Huerta. Your line is live.

26:44 Thank you. Just to go back on the excess cost on the clinker that you bought in the quarter, fifteen million soles, one hundred thousand tons of clinker, I was just doing the math and that's around one hundred and thirty dollars per ton, U.S. dollars can you just clarify that Manuel please?

27:10 One second please. That's an over cost of thirty dollars per ton Adrian. Fourteen million soles [indiscernible] and over one hundred and fifteen thousand, it's thirty dollars extra start cost per ton for the third quarter and fourth quarter of this year.

27:41 But you said, fifty million soles?

27:45 Fifteen million soles, yes, one five million soles.

27:50 One five?

27:53 That’s right. Yeah, fifteen million soles.

27:57 I thought it was 50, sorry. Okay. Perfect. Excellent. Thank you.

28:05 An additional thirty dollars per ton during this quarter and next quarter. Next year pricing will go a little bit higher.

28:13 Excellent. Thank you.

28:19 Thank you. Our next question is a follow-up from Francisco Suarez. Your line is live.

28:26 Apologies for the follow-up question, but regarding prices, first of all, congrats for passing that extra cost to find the consumer. The question is how risk it might to be continue pushing for higher price hikes in the sense of potentially attracting shipments from your competitors in Peru? I know that your import party prices has actually – it gives you a leeway to do that, but do you see any risk still on increasing further prices?

29:05 Francisco, this is Humberto. I think we have successfully read the market over the last almost sixty years, you should remain confident that we will continue to do so.

29:18 Okay, got it. And lastly on, when we see the shipments on Northern Peru, now we see that the total share of shipments to the total country based on the information that you share in your press release is roughly twenty seven percent of total shipments, which is actually quite high compared to the past ten years or so, do you think in other words that the overall conditions related with the reconstruction efforts in Peru, as you mentioned, the overall trends that you see that are driving self-construction linked to the [indiscernible] and so on, that would be enough to keep that level of demand as it is as now?

30:04 Yes. I think, Francisco, the key thing and you just mentioned is, full employment. I think the North of Peru is an example of our country when all the investments and the qualified people and people working very hard are there you reach important levels of employment. You have three cities that are over one point something million people or growth there. So, I think you have twenty seven percent of sales and national dispatches should remain because those conditions are prevailing in the north and happily as a Peruvian, I must say that they are not prevailing in the south only.

30:41 Got it. And of course, penetration is relatively low, isn’t it? I mean, the kilograms consumed per capita are really, really low in spite of the rising demand?

30:54 I think more than really, really low and I think we discussed this in the past. When you go into per capita, you have to divide per capita for housing up per capita for infrastructure. I think per capita per housing is rising constantly over the last years, but [indiscernible] per capita in terms of infrastructure, that one is really, really low. 31:13 So, in the end, it will bring the whole average to a lower level. I think the per capital of housing is okay, but the per capita for infrastructure is disappointingly low.

31:25 Perfectly understood. Thank you so much.

31:29 Thank you.

31:32 [Operator Instructions] We have no final questions in the queue. Mr. Nadal, do you have any final comments?

31:54 No, like I said before, I mean, I reiterate that we are very confident [indiscernible]. We have taken last stride about this new investment. We have been here for decades and we are always very optimistic about the future of our country, and we are absolutely sure that we will follow a growth path in the coming years and Pacasmayo will be permanent part of history of this country. Thank you very much. And as always, we will always hear if you have any further questions. Have a great day.

32:28 Thank you ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.