CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 6-K (Unaudited Interim Condensed Consolidated Financial Statements)
Reporting Period: Three months ended March 31, 2019
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and commercialization of cement, precast, concrete, and quicklime in the northern region of Peru. It is a subsidiary of Inversiones ASPI S.A., which holds 50.01% of common shares.

Key Financial Metrics

Note: Total Debt includes current (S/73,338) and non-current (S/1,003,185) interest-bearing loans.

Material Changes vs. Prior Period

• Revenue: Decreased slightly by 0.7% to S/312.998 million, driven primarily by a significant drop in Quicklime revenue (S/7.346 million vs. S/19.625 million in Q1 2018), partially offset by growth in Cement, concrete, and precast revenue.
• Profitability: Net profit increased by 1.2% to S/30.145 million despite lower gross profit, aided by a reduction in total operating expenses (S/50.219 million vs. S/57.807 million).
• Liquidity: Cash and cash equivalents declined significantly by 72.2% to S/13.642 million. This was due to a net cash outflow from operating activities of S/6.088 million (compared to an inflow of S/40.373 million in Q1 2018), largely driven by increased inventory levels and decreased trade payables.
• Debt Restructuring: The Company issued S/570 million in new senior notes in January 2019 to repay a mid-term loan of S/580.769 million obtained in late 2018 to finance the repurchase of US dollar-denominated senior notes.
• Accounting Policy Change: The Group adopted IFRS 16 (Leases) on January 1, 2019, recognizing right-of-use assets of S/135,000 and lease liabilities of S/148,000.

Outlook, Risks, and Contingencies

• Guidance: The filing does not contain specific forward-looking financial guidance or management commentary regarding future earnings projections.
• Debt Covenants: The Company is subject to financial covenants on its Soles-denominated senior notes, including a fixed charge coverage ratio of at least 2.5 to 1 and a debt-to-EBITDA ratio not exceeding 3.5 to 1. As of March 31, 2019, the Company has complied with all covenants.
• Legal Contingencies: Third-party claims totaling S/11.766 million are pending, including labor claims and tax assessments. Management believes it is only possible, but not probable, that these actions will succeed; therefore, no provision has been recorded.
• Tax Risks: Tax returns for years 2014-2018 remain open to review by Peruvian tax authorities. Management does not expect material additional tax liabilities, though this cannot be assured.
• Foreign Exchange: The Company utilizes cross-currency swaps to hedge US dollar-denominated debt. While volatility in the USD/SOL exchange rate exists, the hedge mitigates the impact on the financial statements.

Investor Verification Checklist

• Cash Burn: Verify the sustainability of the negative operating cash flow (S/6.088 million outflow) and the sharp decline in cash reserves.
• Quicklime Segment: Investigate the cause of the 62% revenue decline in the Quicklime segment compared to Q1 2018.
• Debt Maturity: Review the maturity profile of the new S/570 million senior notes issued in January 2019 (10 and 15-year maturities) and ensure compliance with covenants remains robust.
• Inventory Build-up: Analyze the S/31.045 million increase in inventories contributing to the negative operating cash flow.
• Legal Exposure: Monitor the status of the S/11.766 million in legal claims, particularly the S/7.681 million related to property tax fines.