CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Unaudited interim condensed consolidated financial statements for the three and nine-month periods ended September 30, 2018.
Business Overview: The Company is a Peruvian open stock corporation engaged in the production and commercialization of cement, precasts, concrete, and quicklime in northern Peru. It is a subsidiary of Inversiones ASPI S.A., which holds 50.01% of common shares.

Key Financial Metrics (Nine Months Ended Sept 30, 2018)

Note: All figures are in thousands of Peruvian Soles (S/). Gross margin for the nine-month period was approximately 37.0% in 2018 compared to 39.6% in 2017.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased by 3.1% year-over-year (YoY) to S/921.6 million, driven primarily by the cement, concrete, and precasts segment (up 5.6%).
• Profitability: Net profit increased by 6.3% to S/86.7 million, despite a decline in gross profit. This was achieved through reduced administrative expenses (down 13.4% YoY) and lower selling/distribution expenses.
• Cash Flow: Net cash provided by operating activities decreased by 26.3% to S/135.3 million, largely due to a significant increase in inventory levels (S/41.6 million outflow) and lower payables compared to the prior year.
• Balance Sheet: Total assets increased to S/2.89 billion. Cash reserves declined by 30% compared to the prior year-end, while total liabilities increased by 11.8%.
• Dividends: The Company declared dividends of S/161.4 million during the period, with S/166.8 million remaining payable as of September 30, 2018.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Changes: The Group adopted IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments) effective January 1, 2018. The adoption of IFRS 15 resulted in a reclassification of certain trade agreements and loyalty program costs, reducing reported revenue and sales expenses in the comparative 2017 period, though it had no net impact on profit.
• Foreign Exchange Hedging: The Company maintains cross-currency swap contracts (notional amount US$300 million) to hedge US Dollar-denominated Senior Notes. These generated an unrealized gain of S/1.4 million in Q3 2018, recorded in other comprehensive income.
• Legal and Tax Contingencies: The Group faces legal claims totaling S/16.5 million, including labor claims and tax assessments. Management deems it "only possible, but not probable" that these actions will succeed; no provision has been recorded. Tax returns for years 2012–2017 remain open to review by Peruvian authorities.
• Debt Covenants: The Company is subject to covenants on its US$300 million Senior Notes (Fixed Charge Ratio ≥ 2.5x; Debt-to-EBITDA ≤ 3.5x). As of September 30, 2018, the Group is in compliance.
• Capital Commitments: No significant capital commitments were reported as of September 30, 2018.

Key Facts for Investor Verification

• Dividend Payout: Verify the timing and funding of the S/166.8 million in declared but unpaid dividends.
• Inventory Build-up: Investigate the S/41.6 million increase in inventory, which significantly impacted operating cash flow.
• Quicklime Segment Performance: The quicklime segment reported a loss before tax of S/4.3 million for the nine-month period, contrasting with the profitability of the cement segment.
• Related Party Transactions: Review ongoing transactions with Inversiones ASPI S.A. and subsidiaries, including management fees and land rentals.
• Legal Exposure: Monitor the status of the S/16.5 million in legal claims, particularly the property tax fines and assessments from 2009–2014.