CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Peru)
Filing Type: Form 6-K (Unaudited Interim Condensed Consolidated Financial Statements)
Reporting Period: Nine months ended September 30, 2017
Primary Activities: Production and sale of cement, concrete, blocks, and quicklime in northern Peru.
Ownership: Subsidiary of Inversiones ASPI S.A. (50.01% ownership).

Key Financial Metrics (Nine Months Ended Sept 30, 2017)

Note: All figures in Peruvian Soles (S/). Net profit includes a loss of S/754,000 from discontinued operations in 2017.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by approximately 2.8% (S/25.8M) compared to the same period in 2016, driven primarily by a decline in the "Cement, concrete and blocks" segment (down S/43M).
• Profitability Pressure: Operating profit declined by 17.4% (S/36.7M) due to lower gross profit and increased administrative expenses (up S/8.5M).
• Spin-off Impact: On March 1, 2017, the company executed a spin-off of its interest in Fosfatos del Pacífico S.A. to Fossal S.A.A. This resulted in a significant reduction in equity (Capital stock, investment shares, and reserves decreased by over S/350M combined) and the removal of assets held for distribution (S/338M) from the balance sheet.
• Cash Flow Improvement: Despite lower net income, operating cash flow increased by 27% (S/40.2M) due to working capital adjustments, specifically a decrease in inventory and an increase in trade payables.
• Derivative Valuation: The fair value of cross-currency swaps (cash flow hedges) decreased significantly from S/69.9M to S/9.8M, resulting in an unrealized net loss of S/35M recorded in Other Comprehensive Income (OCI).

Outlook, Risks, and Contingencies

• Debt Covenants: The company holds US$300M Senior Notes (maturing 2023). Covenants require a fixed charge ratio of at least 2.5:1 and a debt-to-EBITDA ratio not exceeding 3.5:1. Management states no covenant breaches occurred.
• Capital Commitments: The group has a commitment to contribute up to US$100M to the "Salmueras Project" (brine project). As of Sept 30, 2017, S/58.4M has been contributed.
• Legal and Tax Contingencies:
  • Legal Claims: Third-party claims totaling S/9M exist (labor and tax assessments). Management deems it "only possible, but not probable" that these will succeed; no provision has been made.
  • Tax Audits: Tax returns for years 2012–2016 are open to review. Management believes potential additional payments would not be material.
• Foreign Exchange Risk: The company uses cross-currency swaps to hedge US$300M of Senior Notes. Moderate volatility in the USD/Sol exchange rate was partially mitigated by these hedges.
• Guidance: The filing does not contain specific forward-looking financial guidance or earnings projections for the full year 2017.

Investor Verification Checklist

• Spin-off Accounting: Verify the treatment of the Fosfatos del Pacífico spin-off and the valuation of the resulting investment in Fossal S.A.A. (recorded at cost S/21.2M).
• Derivative Exposure: Assess the impact of the S/35M unrealized loss on cash flow hedges and the sensitivity of future earnings to exchange rate fluctuations.
• Segment Performance: Analyze the specific drivers of the revenue decline in the core "Cement, concrete and blocks" segment versus the growth in "Construction supplies."
• Debt Service: Confirm compliance with Senior Notes covenants given the decline in operating profit and EBITDA.
• Capital Expenditure: Review the S/46M in CapEx for the nine-month period and the status of the Salmueras Project capital commitment.