Good day, ladies and gentlemen, and welcome to the Cementos Pacasmayo Third Quarter 2020 Earnings Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Ms. Claudia Bustamante, Investor Relations Manager. Ma'am, the floor is yours.

Thank you, Tom. 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 term 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, strength 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 floor 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 during these difficult times. This quarter, cement shipments have accelerated strongly, leading us to reach historical record levels. The 14.2% year-over-year growth in cement sales volume is remarkable, and we hope it continues for the next month. This significant increase in sales also resulted in an unprecedented quarterly EBITDA level of PEN120.6 million as increased sales were matched with sustained savings in selling and administrative expenses as part of our commitment to operational efficiency. As you probably know, the Peruvian government gradually began reopening its economy in the third quarter reaching Phases 3 out of 4, with more than 90% of the economy currently operating. Although GDP has not yet recovered to pre-pandemic levels, the fall has been decreasing month by month. We hope to continue seeing some recovery as the reminder of the economy reopens. Cement shipments have recovered well throughout the [Technical Difficulty] this quarter, but the Northern region has fared much better than the rest of the country, reaching pre-pandemic levels as soon as July and historical records during the quarter, as I already mentioned. We are aware, of course, that these growth levels may be difficult to sustain in the future, but we do believe that even if demand for bagged cement decreases in the upcoming months, the demand for ready-mix and pre-customer deals should increase as our reconstruction related projects accelerate this execution. Although these market differences between regions cannot be denied, we do strongly believe that our actions and strategies have played a key role in our increased sales volume. We have been working steadily in the past years to focus on our clients' needs, to go beyond just any product to providing…

Thank you, Humberto. Good morning, everyone, and I hope all of you and your families are staying safe and healthy. As Humberto mentioned, in this third quarter, we have reached historical records in revenues and in EBITDA. Revenues were PEN407.4 million, a 6.3% increase when compared to the same period of last year, mainly due to increased baggage cement shipments partially offset by lower sales of concrete. Gross profit decreased 3.4% in the third quarter of 2020 compared to the same quarter of last year, mainly due to the higher cost as we had to use imported clinker because of the sharp and sudden increase in demand as well as higher fixed costs due to lower sales of concrete and a lower average price of cement, as we sold more of our value-brand cement. Consolidated EBITDA was PEN120.6 million in the third quarter of this year. As I mentioned before, the highest in the Company's history and an 8.2% increase when compared to the third quarter of 2019, mainly due to increased sales as well our sustaining savings in administrative and selling expenses. For the first nine months of the year, revenue decreased 19.4% and EBITDA decreased 37.5% mainly due to the wholesale operations for over two months during the government mandated lockdown between March and May. Turning to operating expenses. Administrative expenses for the third quarter of 2020 decreased 20.1% compared to the third quarter of 2019, mainly due to decrease in variable salaries and third-party services. Selling expenses in the third quarter of this year decreased 16.8% compared to the same period of last year, mainly due to the decreased advertising and promotion and lower variable salaries because of our results of operations. We will continue to strive to sustain these factored adjustments when possible to ensure business…

[Operator Instructions] We'll take our first question from Andres Soto with Santander.

Hi, Humberto, Manuel, Claudia. Thank you so much for the presentations. Congratulations on the results. My first question regarding some of the comments that you made in the release where you say that you expect by 2023, 25% of revenue should come from value-added products. I would like to understand what is the starting point that we should look at, it is 10% now? Or, kind of that number. And what type of capabilities and investments will be required in order for you to achieve this goal. That's my first question

Hi Andres, Humberto, thank you for joining the call. I hope you're doing well, you and the family. When we talk about building solutions, this is more, I think I'll focus on value creation in what sense, I mean last year I mean 2019, we already had 17% of our sales were coming from building solutions. We're talking products based on cement, but return value, for example the underwater pipes for Talara Refinery, for example, some bridges, for some [indiscernible]. In terms of CapEx, these are very low certainly because basically includes some cranes, some facility, but nothing compared to what our cement plant would cost. I mean, probably over the next three to five years, we're going to be at around PEN20 million in this building solutions over that period of time. So like I said, it's not a substantial item CapEx, but it does allow us on PEN0.01 to minimal growth and the second biggest to the consumer and of course, great value for the Company

Perfect. And my second question is regarding capital deployment. When I look at my numbers, I see that net debt to EBITDA next year should be already below 2 times. So I would like to understand what will be your priorities in terms of capital deployment going ahead. Is it to increase dividend distribution or are you looking for opportunities for inorganic expansion and this also considering the fact that some players are apparently leaving the region. So, will you consider to buy any of the operations in case our CEMEX decides to sell any of their Latin-American operations?

Yes, Andres, hello, this is Manuel. Considering the next year EBITDA excluding all this lockdown, we should be around 2 times net debt to EBITDA. A little bit lower than that.

And considering the other part of the question, Andres, I mean, you know that our policy and this is for the Board to decide, has always been that if we have sufficient cash generation, whatever money we may not use for our CapEx shall go to our shareholders. So I think dividends are always at the priority of our list. And regarding potential acquisitions, we have been, see we see the IPO in 2011. We have been selectively trying to pursue them. We have never been successful because we never found something that there was a clear path to value generation. We are still watching the situation. You mentioned what specification or some others. I think we have a very strong balance sheet. It's something that even though we would analyze, we would go in if we have a very clear idea how to create value. So that will be my answer to your question.

And we'll take our next question from Lucia Calvo-Perez with LarrainVial.

I wanted to ask you three questions, the first one is well until when do you think you're going to be importing clinker for the unexpected growth in cement. And my second question is I think that this demand for [indiscernible] and capacity. And the third question is, well, also related to volume spread. if you have any expectations in terms of timing and the schedule of the reconstruction program awarded to as a government to government contract to the United Kingdom. I mean if you are expecting demand from volumes coming in there like during the first half of the year in 2021 or maybe more toward the second half of the year.

Yeah, thank you for your question Lucia. Regarding the first part, I mean we are very, I know we're cautiously optimistic that volumes are going to stay at their current levels. So the answer of the imported clinker that's when we have, always to secure production capacity, so we will be importing clinker product for the coming years, which I think is a very good scenario because that means that their demand remains very high. Of course, if something with demand, we can always go back on that. So, my first answer to your question, we'll be importing clinkers. We decided to go into new CapEx to increase the capacity of our plants. Regarding the second part of your question, the second one, I didn't quite hear, but the one regarding the reconstruction works. I mean there is dozens of British citizens already working in the North on this reconstruction plan. So we expect that demand should come in the first half of the coming year.

And ladies and gentlemen, one moment please. We're experiencing a slight interruption in our conference, one moment. And we are now back live.

Yes, I know you're still on the line. I hope you got my answers to your question on the imported clinker and the reconstruction program. And I was saying I didn't quite get your second question, I mean if you can please rephrase it for me. Thank you.

And Lucia if you could requeue, please. At this time. We'll go next to Francisco Suarez with Scotiabank, but Lucia if you would please requeue for your secondary question. And Francisco, your line is now open

Thanks again and congratulations for this superb quarter. It's been some sort of a routine for you guys. The questions that I have is on capital allocation. You mentioned previously that perhaps dividends might be ranking first in priority once that you feel comfortable enough with your balance sheet to distribute more dividends to shareholders, but what about the potentially just making a single modern line in the plant of Pacasmayo. That plant probably can actually get more, much more efficient, if you have something like what you have currently in Piura. And not to mention that it will be definitely producing less and carbon emissions and the like. So if you can walk me or what could be the priorities on capital allocation as your cash starts to mount more than current levels and what could be the order of those priorities, that will be very helpful. And the second question that I have is that because I didn't get right the answer, because you were cut in the line, I want the reasons of why do you have to rely on clinker imports because I noticed that Piura was separating very few, I mean very small amount of clinker for the quarter? Sorry for that.

Sure, Francisco. I think very good questions. I'll tackle them in order. First, dividends are priority as long as the Company has both the cash position and has no use for those funds. Clearly, we are already starting, they're getting a new kiln in Pacasmayo. We are at a pre-feasibility level. We should have probably the preliminary numbers, an idea on December of this year, but you have to bear in mind two things, first, demand has risen so quickly that we're not going to make a decision, a CapEx decision on a temporary increase of demand. We will have to be very confident on the demand, looking forward to do it and point number two, as we did with Piura. Before starting Piura, we are importing three or four years of clinker because it makes, we need at least a deficit of 0.5 million to 600,000 tons of clinker to make it worthwhile in investment. Otherwise there is two things. One, postpone the investment you have a lower financial cost and makes us to import the clinker. And point number two, if you build a plant and you operate it at 15% or 20% capacity, then really the fixed cost will kill you. So like I said, dividends are priority but we are now actively looking at a new plant or a renovated plant in Pacasmayo but you have to also bear in mind that Pacasmayo in terms of milling and in terms of dispatch, all that part is new. So I would look at would be a Brownfield focus fundamentally and the handling of the materials coming into the plant and the kiln. And the other question was in terms of clinker capacity, when we came out of the lockdown, it was really impossible to anticipate what was going to go on with demand and at that point, our priority was to keep our cash. That's why we didn't open the Piura kiln initially. We did instead of opening in May, we did it some weeks after that when we realized, demand was coming back stronger, and we switched from a cash preservation booth to let's go full production. So, at this point, all our teams are at full production. With this kind of demand, we need to import clinker to put up with demand.

[Operator Instructions] There are no further questions in the queue. Mr. Nadal, I'd like to turn the call back over to you for any closing comments

Thank you. This has no doubt been an outstanding quarter in terms of results of operations and we cannot deny that it surprises us as well, but we are in a very strong position both financially and operationally to take on the challenge and rise to the occasion. There definitely are certain times as none of us can really envision what the new normal will look like. But we are clearly and what is certain is that now more than ever, we need to present as a company and build together the future we dream of. Thank you very much for your renewed interest in our company. As always, Manuel, Claudia and myself remain open to any questions you may have. Stay safe and have a great day

Ladies and gentlemen this does conclude today's conference. We appreciate your participation. You may disconnect at this time. Have a great day.