Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Second Quarter (2Q) and First Six Months (6M) ended June 30, 2019.
Context: A leading Peruvian cement company serving the construction industry. Results are prepared under IFRS and stated in Peruvian Soles (S/). The company focuses on cement, concrete, precast materials, and quicklime.
Key Financial Metrics
| Metric (Millions S/) | 2Q19 | 2Q18 | 6M19 | 6M18 |
|---|---|---|---|---|
| Revenue (Sales of Goods) | 321.8 | 287.5 | 634.8 | 602.8 |
| Net Income | 32.2 | 23.5 | 62.3 | 53.2 |
| Consolidated EBITDA | 94.3 | 84.7 | 187.9 | 179.0 |
| Operating Profit | 62.2 | 52.4 | 123.8 | 115.0 |
| Cash Position | S/ 35.4 million (as of June 30, 2019) | |||
| Total Debt | S/ 1,075.9 million (Adjusted Debt: S/ 1,043.9 million) | |||
| Net Adjusted Debt/EBITDA | 2.7x (as of June 30, 2019) |
Operational Highlights
- Sales Volume: Cement, concrete, and precast shipments increased 11.8% in 2Q19 and 8.5% in 6M19.
- Production: Total cement production rose 14.3% in 2Q19. Clinker production decreased 34.9% in 2Q19 due to planned maintenance.
- Margins: Cement EBITDA margin was 29.2% in 2Q19 (down 1.1 pp) and 29.6% in 6M19 (down 0.5 pp).
Material Changes vs. Prior Period
- Revenue Growth: Driven by an 11.8% increase in sales volume, primarily from public sector spending for El Niño reconstruction and new infrastructure projects. Average prices for cement and concrete also increased.
- Profitability: Net income surged 37.0% in 2Q19 and 17.1% in 6M19, fueled by higher operating income.
- Margin Compression: Gross and EBITDA margins declined slightly due to the use of higher-priced clinker during planned maintenance at the Pacasmayo and Piura plants in Q1 and Q2.
- Segment Performance:
- Concrete: Sales jumped 41.2% in 2Q19 with improved margins due to fixed cost dilution.
- Precast: Sales reached a record in 2Q19 (+17.4%) driven by reconstruction demand.
- Quicklime: Sales dropped 38.9% in 2Q19 due to decreased demand.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Public Spending: Management expects acceleration in public spending in the second half of 2019 and into 2020 as new local authorities settle into roles.
- Strategic Shift: Continued focus on "building solutions" with aggressive expansion in concrete and precast sales, including a new heavy precast plant in Piura.
- Infrastructure: Targeting 8,000 km of roads in the North for concrete pavement projects.
- Margin Recovery: Margins are expected to recover in upcoming months as maintenance concludes and operational efficiencies improve.
Risks and Contingencies
- Economic Slowdown: Peru's GDP growth forecast was revised down to 3.2% due to temporary mining production decreases and reduced public investment in the first half of the year.
- Political Tensions: Tensions between the President and Congress are cited as a factor slowing private investment plans.
- Global Risks: Escalating US-China trade tensions pose risks of a global slowdown, though Peru is considered well-positioned.
- Operational: Planned maintenance at kilns temporarily impacted clinker production and increased costs.
Investor Verification Checklist
- Public Sector Dependency: Verify the sustainability of El Niño reconstruction spending and the timeline for new local authority budget execution.
- Maintenance Impact: Confirm the completion of kiln maintenance at Pacasmayo and Piura and the return to normal clinker production costs.
- Debt Structure: Review the maturity profile of the S/ 1,075.9 million debt and the effectiveness of the US$ 150 million cross-currency swap hedging.
- Concrete/Precast Growth: Assess the long-term viability of the 40%+ growth in concrete sales and the ramp-up of the new Piura precast plant.
- Quicklime Demand: Monitor the trend in quicklime sales, which declined significantly, to determine if this is a structural shift or cyclical.