Good day, ladies and gentlemen, and welcome to Pacasmayo's Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] And now I'm pleased to turn the floor over to our host for today's call, Investor Relations Manager, Ms. Claudia Bustamante. Welcome, Claudia.

Thank you, Jim. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Mr. Manuel Ferreyros, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter and our strategic outlook. Mr. Ferreyros will then follow with additional commentary on our financial results. We'll then turn the call over to your questions. Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are, therefore, subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory slide. With that, I'd now like to turn the call over to Mr. Humberto Nadal.

Thank you, Claudia. Welcome, everyone, to today's conference call. Today, I will discuss our overall results for this quarter, but especially for the year as a whole and how this will sustain the future of our operations. Manuel will then cover financial details, and we will then open the line to your questions. During this fourth quarter, we continued seeing a very strong trend in sales volume, reaching almost 8% growth year-on-year. For the full year 2019, sales volume grew almost 11%, an outstanding level, which we have not seen in the past 7 years. This growth has come from public sector spending for the construction works, but also from the self-construction segment that posted strong growth this year. Agriculture, particularly avocados and blueberries, which grow mainly in the north, have performed very well this year. This in turn resulted in increased self-construction and disposable income increase. Nonetheless, what's especially relevant here is a great increase in nonbagged cement since this reflects clearly our persistent effort to make a change in market dynamics and encourage the use of other building solutions. In 2019, the increase in nonbagged cement products represented 42% of the overall increase in cement, concrete and block sales, reaching all-time record levels. This quarter, in particular, growth has come mainly from medium-sized local construction companies that are developing housing and commercial projects. And we have worked hard, very hard, to incorporate the ready-mix market. This is a segment we believe brings sustainability and continuity to the business, making it very important in the long term. In terms of EBITDA, our consolidated EBITDA increased almost 11% this quarter compared to the same period last year and almost 8% for the full year 2019 compared to 2018. Although this technically represents a slight margin contraction, this is mainly due…

Thank you, Humberto. Good morning, everyone. Fourth quarter 2019 revenues were $374.7 million and 8% - and 9.8% higher than the same period of last year mainly due to the increase in cement, concrete and precast volumes. Gross profit increased 0.2% in this fourth quarter of 2019 compared to the fourth quarter of 2018 mainly due to the higher sales, offset by higher transportation and raw material costs, which we will analyze in more details below. For the full year, revenues increased 10.3% and gross profit increased 4.3%. Consolidated EBITDA reached PEN100.9 million in the fourth quarter of 2019, a 10.9% higher than the same period of last year, mainly due to increased sales mentioned above. During the 2019, consolidated EBITDA reached PEN400.3 million, a 7.7% increase when compared to 2018. Turning to operating expenses. Despite the increase in sales, we have managed to keep expenses at levels very similar to the previous year. Administrative expenses for the fourth quarter of 2019 and the full year 2019 remain in line with the fourth quarter of 2018 and the whole year of 2018. Selling expenses in the fourth quarter of 2019 and the full year 2019 were also flat when compared to the same period of last year despite the increase in sales mainly due to decreased advertising and promotion expenses after budget adjustments. Moving on to our different segments. Cement, concrete and precast sales increased 10.1% during the fourth quarter of 2019 compared to a same quarter 2018 mainly due to the higher sales volume and average price for all segments. Gross margin decreased 4.1 percentage points in the fourth quarter of 2019 compared to the same period of last year mainly due to higher transportation costs. Since there have been a significant increase in demand for type V cement…

Thank you, Manuel. We are indeed pleased to see that not only has overall demand been very strong due to market conditions, but we have been able to capitalize on this positive environment to improve profitability and continue to pave the path towards the future and further value generation. Can we now please open call to questions?

[Operator Instructions] We'll hear first from Andres Soto at Santander. Please go ahead.

My first question is regarding your outlook for volumes in - or total revenue in 2020 considering the ramp-up execution that we are seeing in the reconstruction project. And out of this, how much - how will you break down that expectation in terms of this reconstruction versus the sort of organic growth that you are also seeing in the market?

Andres, thank you for your question. I mean, we think this - our base scenario this year should be around 5% to 6% revenue growth. That's our base scenario. Regarding how we'll speed reconstruction and everything else. I think reconstruction will pick up a stronger pace. As you are aware, that the government has decided to go ahead with a different way of execution. They're going to repeat what they did for a Pan American Games in which are hiring in prior PMOs to conduct still outstanding PEN13 billion in budget. So this will probably speed up the construction in this year compared to the other segments of our demand.

And talking about prices, I saw some weakness on a sequential basis when I look at your cement prices. I would like to understand what is driving this price weakness. And what are you expecting in terms of price increases for 2020?

Yes. Thank you. The last quarter of last year, we had a recuperation in prices going into this year. I think this year, they should probably remain at the levels of - that we closed last year, maybe a little bit higher, but somewhere around there.

Our next question will come from Luis Pardo with Compass Group.

Just a quick question on the margin. Good growth. And as growth continues, it should accelerate based on your comments on the construction. We were expecting somewhat of a margin bump given the high utilization rate. However, this logistics issue is likely to hurt that. What should we expect for EBITDA margins next year - or I mean 2020, sorry.

Yes. Thank you, Luis. Three affects that you [indiscernible]. One is an effect. You mentioned of transporting clinker fly from one place to the other. That should be gone for the third quarter of this year. That should leave us a little bit on the positive side. And of course, as we use Piura at a full scale, that should also capture more EBITDA volume. On the other hand, the more concrete, the more ready-mix we sell, even though we're selling more cement, I recon the market in the cement, when you talk about the specific margin in the consolidated P&L of the concrete that is lower, so that brings numerically the number of the margin lower, even though we are making more money. I mean, bearing all that, I mean, if you put it together, on average, we should be hitting close to a 30% EBITDA margin.

Next, we'll hear from Francisco Suarez at Scotiabank. [Operator Instructions] Mr. Suarez, please go ahead. Your line is open, sir.

Sorry for that. So a follow-up on the - on your logistics cost for this year. So to understand properly, what is the thing that didn't allow you to produce the right set of clinker in Pacasmayo in order to avoid that logistical costs related with clinker transportation?

The answer is very simple. Even though most plants can produce any type of clinker, we need specific silos to store the clinker. So we build Piura at that time the demand on the northern part of our region was very low for cement type V, so we didn't do a silo. We said, okay, the little demand will bring it from Pacasmayo. When the cement demand picked up, we have to ship far more than we had expected. That's why we're now building a silo in Piura. So we can - we always hope to produce the cement. The thing is where we could store it. So starting third quarter this year, we should be storing - producing and storing the cement type V in Piura.

Now that's very clear. And thank you for the answer because I was thinking there was something much more complicated than that. The second question that I have in mind is on margins on ready-mix. Generally speaking, yes, we saw a contraction, but still, those margins are okay. I mean, I think that it is worth - I mean, it is actually correct to expect that EBITDA margins for the ready-mix business should be stabilizing at levels of between 10% and 13%, perhaps.

Yes, that's correct.

Thank you so much, and thank you as well for the guidance on the government-to-government programs that are being put in place this year.

Next, we'll hear from the line of Froylan Mendez with JPMorgan. [Operator Instructions]

Congrats for the strong results. Could you let us know what percentage of the cement volumes in 2019 were the ones that were moved around from Pacasmayo to Piura, how much of the total volumes last year?

I don't have the exact number with me. But the number was not - I mean, specifically high. I would have to guess probably around 25,000 to 35,000 tons.

And regarding the overall demand in 2019, how much was it related to reconstruction projects EBITDA?

In terms - I mean - I'm going to answer that question - I mean, yes, to think about in terms of the increased demand. So I would say, I mean, overall, there are construction last year, that year of $18.7 billion. Probably around 15% was spent last year. So in terms of volumes, around 170,000 - we used around 170,000 tons of clinker to produce probably around 0.25 million tons of cement.

Next, we'll hear from Juan Pablo Brosset with CrediCorp Capital.

I'm just trying to understand why the higher transportation costs will be gone by 3Q '19. So where does the increased demand for this type of cement come from? And another follow-up question is what kind of infrastructure project does - you should use this type of cement?

Sure. I mean this kind of cement is usually used in very heavy chlorine environment, basically ports. I mean, something that's going to see the type of sulfate. In the case of the Talara Refinery, in the case of something around the - on the Paita Port, those are the kind of projects that may require cement type V. I mean, they perform much better when they're exposed to a highly salted environment. And then to finish and the reason about understanding the difference is, I mean, it's a whole different thing moving cement from Piura to Paita to Talara. I mean, we're talking, I mean, a few 100 and some kilometers than bringing it all over from Pacasmayo, which is around 600 kilometers to add on top of that.

That was clear. And one quick additional question, I missed your volume guidance for 2020. Could you perhaps repeat it?

Sure. We said that the base scenario is between 5% to 6%.

Next, we'll hear from Lucia Calvo Perez at LarrainVial.

I wanted to make a follow-up question on the type cement and higher transportation costs that you had this quarter. I just wanted you to comment as - a little bit as last quarter, we had the same effect. But gross margin has still deteriorated quarter-over-quarter from 41% to 39.8%. So I was - I just wanted you to comment as what were you expecting for the first and second quarter of the year if gross margin in cement is going to keep deteriorating. Or I don't know if you expect type V cement sales to represent a higher stake of cement sales in 2020 than in 2019?

No. I mean, once again, there's, I mean, 3 things that are moving the margin. The first one, and I've mentioned a couple of times already, is the moving of cement type V. That will be completely gone by the third quarter of this year. The second thing that will move the margin this year in a positive way is the fact that we're going to be using Piura 100%, which will give us economies of scale. We'll capture something there. The other thing that moves it south, but like I said, I mean, and I've discussed this extensively with many, many analysts and investors, it's the fact that we're selling more building solutions, more ready-mix, the part - the margin of the ready-mix itself, not the cement it uses, the ready-mix, they're value added. They create the margin there, I think Francisco mentioned it's much lower. So when you make the consolidated margin that is going to bring the margin lower, which is a good thing, because we're selling more concrete and we're selling more cement. And I think the way you asked to analyze that is, I mean, that's why EBITDA this year went north of PEN400 million, and last year, it was around PEN370 million. That's the way you should look at it.

Okay. I understand. But looking only like at the cement gross margin and looking at it like quarter-over-quarter, you still have a deterioration. And I wanted to understand if you were expecting further deterioration or effect should remain as - the transportation effect should remain as in this quarter.

Yes. Only to complement the gross margin of cement, if we exclude the transportation issue, should have been in around 43 - between 43% and 43.5%. This transportation effect should - we should have it until at least the first 6 months of this year. The silo will be finished on the third quarter - should be at the beginning of the third quarter. So this extra transportation costs, we should get rid of it for the second half of this year. So margins should go in the second half, again, to 43 something.

Our next question will come from [indiscernible] with Pacifico. Please go ahead. Your line is open.

I wanted to make a quick question about the - your participation in next year's Talara investment recuperation. I don't know how much do you expect to participate in it. Or what are your margins on that front?

Well, I mean, I think, I mentioned before reconstruction works that are most slightly higher this year, I think, should pick up strongly their pace now that the government has decided to use a different business model to run those things. I think that's going to be important. And like I mentioned before, I think, besides big infrastructure projects, what we're seeing is pretty, I would say, amazing housing projects that will be done by the agriculture company that need housing for the workers that are right now spending 2 hours back and forth every morning. And they are going into projects of 400, 600 homes. And I think you want to see much more of that this year.

[Operator Instructions] Next, we'll go to Luis Pardo with Compass once again.

Just a quick follow-up. I understand that you guys are calling for EBITDA margin expansion from today's release, but 300 basis points is a lot. And the transportation issues should remain through the first half of the year, so which should really expect boom in the second half. I just want to get more color on how we get to 30.

Yes. But it's not really 300 basis points because we're going from 28.7 to 30. So I think it's - that's - I think it is reasonably attainable once we have our silo working in Piura.

If that is, I will be a very happy shareholder. Thank you.

And next, we'll hear from Tunde Ojo at Harding Loevner. Please go ahead. Your line is open.

My question is just on the CapEx guidance for 2020. If you can please keep that, that will be helpful.

Yes. The estimate CapEx for 2020, Tunde, it's going to be around $30 million, maintaining CapEx and the new CapEx.

$30 million, 3-0.

Yes, 3-0, yes.

Okay. And it's just basically for maintenance, right?

Yes.

Ladies and gentlemen, thank you all for joining today, and thank you all for your questions. At this time, we have no more signals in the group. I would like to turn it back to our - oh, wait a second, just one moment, Humberto. We do have a follow-up coming from Juan Pablo Brosset at CrediCorp.

Just one quick follow-up question. Regarding energy costs. This quarter, you have much more data on the cost of gas for the Piura plant. Have you witnessed any kind of savings on that front?

No. Like you said, we have a little more experience. We're still working on getting more efficient. We're basically maybe saving a little bit on what we used to spend on coal, but not substantially. We'll see what we - what comes up in the coming months.

Humberto, that was our final question from the audience. I would like to turn it back to yourself and the leadership team for any additional or closing remarks.

Thank you very much. I want to thank everybody that joined the call today. We are very happy. We're very proud. But most of all, we are very excited about what's coming ahead of us in this year, which I think is going to be a very important one. And I'm very happy that our vision of pushing building solutions is really, really making the difference. I mean, we are growing at a much, much higher rate than the average cement growth rate in Peru, and I think that has to do with the strategy of the company. And we are all very proud. I want to keep working hard for that. Thank you, everybody, and have a nice day.

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