Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: First Quarter 2019 (ended March 31, 2019)
Context: A leading cement company in Peru serving the construction industry. Results are prepared under IFRS and stated in Peruvian Soles (S/). The quarter saw increased sales volume driven by public sector demand and expansion into the Iquitos market, offset by lower quicklime sales and high prior-year cement prices.
Key Financial Metrics
| Metric (S/ Millions) | 1Q19 | 1Q18 | Variance |
|---|---|---|---|
| Sales of Goods | 313.0 | 315.3 | -0.7% |
| Gross Profit | 111.8 | 120.4 | -7.1% |
| Operating Profit | 61.6 | 62.6 | -1.6% |
| Net Income | 30.1 | 29.8 | +1.0% |
| Consolidated EBITDA | 93.6 | 94.3 | -0.7% |
| Cash Position | 13.6 | 49.1 (Dec 2018) | N/A |
| Total Debt | 1,080.1 | N/A | N/A |
Margins (1Q19 vs 1Q18):
- Gross Margin: 35.7% (vs 38.2%)
- Operating Margin: 19.7% (vs 19.9%)
- Net Income Margin: 9.6% (vs 9.5%)
- Cement EBITDA Margin: 30.0% (vs 30.0%)
Material Changes vs. Prior Period
- Sales Volume: Cement, concrete, and precast sales volume increased 5.4% to 592.9 MT, driven by public sector demand and new sales in Iquitos.
- Revenue: Remained flat (-0.7%) despite volume growth due to lower quicklime sales and higher cement prices in 1Q18.
- Gross Profit: Declined 7.1% primarily due to the use of higher-priced clinker inventory resulting from planned preventive maintenance at the Pacasmayo plant.
- Net Income: Increased 1.0% to S/30.1 million, aided by lower operating expenses (specifically a one-off highway repair expense in 1Q18 that did not recur).
- Production: Total cement production rose 7.1%. Clinker production surged 38.9% due to a low base in 1Q18 (maintenance) and high output at the Piura plant.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Public Investment: Management expects reconstruction spending to continue and potentially accelerate, with 2019 investment anticipated to be nearly double 2018 levels.
- Market Expansion: Aggressive expansion into the Iquitos market is underway, leveraging a new tax law benefiting Amazon-region producers.
- Strategic Projects: The company expects to supply cement and pavement for the Chiclayo Airport project starting in 3Q19, aligning with its 2030 vision to become a leading building solutions provider.
Risks and Contingencies:
- Political Instability: Recent detentions of former presidents and social conflicts (e.g., road blockages in the South) create uncertainty, though macroeconomic stability has historically remained unaffected.
- Operational: Planned maintenance impacts production utilization rates and inventory costs.
- Forward-Looking Statements: Future results depend on assumptions regarding economic conditions, industry trends, and project execution timelines.
Investor Verification Checklist
- Debt Structure: Verify the composition of the S/1,080.1 million debt, specifically the international bond (2013) and local bonds (Jan 2019), and the effectiveness of the US$150 million cross-currency swap hedge.
- Cash Flow: Confirm the significant drop in cash from S/49.1 million (Dec 2018) to S/13.6 million (Mar 2019) and its impact on liquidity.
- Cost Drivers: Assess the sustainability of gross margins given the one-time impact of using high-cost clinker inventory and the potential for recurring maintenance costs.
- Project Execution: Monitor the timeline for the Chiclayo Airport project and the actual volume uptake in the Iquitos market.
- Political Risk: Evaluate the potential impact of ongoing political turmoil and social conflicts on public infrastructure spending execution.