Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (Peru)
Filing Type: Form 6-K (Consolidated Financial Statements)
Reporting Period: Year ended December 31, 2017 (Comparative data for 2016 and 2015)
Business Overview: The Company is a Peruvian corporation primarily engaged in the production and marketing of cement, concrete, blocks, and quicklime. It operates through three main reportable segments: Cement/Concrete/Blocks, Construction Supplies, and Quicklime. The Company is a subsidiary of Inversiones ASPI S.A.
Key Financial Metrics (2017 vs. 2016)
| Metric (S/ in thousands) | 2017 | 2016 |
|---|---|---|
| Revenue (Sales of Goods) | 1,225,639 | 1,240,169 |
| Gross Profit | 492,683 | 503,639 |
| Operating Profit | 198,560 | 272,808 |
| Profit Before Tax | 128,417 | 198,110 |
| Net Profit for the Year | 80,631 | 112,894 |
| Net Profit Attributable to Parent | 93,782 | 116,174 |
| Operating Cash Flow | 259,510 | 241,679 |
| Free Cash Flow (Op. Cash Flow - CapEx) | 185,006 | 106,050 |
| Total Assets | 2,814,115 | 3,320,623 |
| Total Liabilities | 1,307,407 | 1,340,594 |
| Interest-Bearing Debt (Non-Current) | 965,290 | 998,148 |
| Cash and Cash Equivalents | 49,216 | 80,215 |
Note: All figures are in Peruvian Soles (S/). Free Cash Flow calculated as Net Cash from Operating Activities less Net Cash Used in Investing Activities.
Material Changes and Unusual Items
- Impairment on Brine Project: The Company recorded a significant non-cash impairment charge of S/47,582,000 in 2017 related to the decision to discontinue the brine project (Salmueras Sudamericanas S.A.). This charge reduced operating profit significantly compared to 2016.
- Spin-off of Fosfatos del Pacífico: In March 2017, the Company executed a spin-off of its interest in Fosfatos del Pacífico S.A. to Fossal S.A.A. Assets and liabilities related to this entity were classified as "held for distribution" in 2016 and were removed from the balance sheet in 2017, contributing to the decrease in total assets.
- Discontinued Operations: Results from Fosfatos del Pacífico are presented as discontinued operations. The loss from discontinued operations was S/754,000 in 2017 compared to S/6,589,000 in 2016.
- Revenue Decline: Total sales decreased by approximately 1.2% year-over-year, driven primarily by a decline in the cement segment.
- Disaster Losses: The Company incurred a net loss of S/9,688,000 due to the "Coastal El Niño" phenomenon in early 2017, affecting inventories and infrastructure.
Guidance, Outlook, and Risks
- Strategic Focus: Management has decided to prioritize investments in cement and construction solutions, leading to the abandonment of the brine project.
- Debt Covenants: The Company maintains US$300 million Senior Notes due in 2023. Covenants require a fixed charge ratio of at least 2.5:1 and a debt-to-EBITDA ratio not exceeding 3.5:1. The Company reported no breaches of these covenants in 2017.
- Accounting Standards Adoption: The Company plans to adopt IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) in 2018.
- IFRS 9 Impact: Expected to increase assets and equity by approximately S/4,002,000 due to reclassification of available-for-sale investments.
- IFRS 15 Impact: Expected to decrease revenue and selling expenses by approximately S/4,717,000 due to changes in revenue recognition for commercial agreements and loyalty programs, with no net impact on profit.
- Foreign Exchange Risk: The Company has significant exposure to the US Dollar due to its Senior Notes. It utilizes cross-currency swaps to hedge this risk. A 10% appreciation of the US Dollar would negatively impact profit before tax by approximately S/1,239,000.
- Legal Contingencies: The Company faces various legal claims totaling S/16,570,000 (including tax assessments and labor claims). Management believes it is not probable that these will result in a material liability, and no provision has been made.
Investor Verification Checklist
- Brine Project Impairment: Verify the rationale and valuation methodology behind the S/47.6 million impairment charge on the brine project assets.
- Spin-off Execution: Confirm the finalization of the Fosfatos del Pacífico spin-off and the resulting equity structure with Fossal S.A.A.
- Debt Covenants: Monitor compliance with Senior Notes covenants (Fixed Charge and Debt/EBITDA) given the reduction in operating profit.
- IFRS 15 & 9 Transition: Review the 2018 financial statements for the specific adjustments related to the adoption of new revenue and financial instrument standards.
- El Niño Recovery: Assess the status of insurance recoveries (S/9.38 million pending) related to the 2017 natural disaster losses.
- Non-Controlling Interests: Note the significant loss allocated to non-controlling interests (S/13.15 million) in 2017, primarily driven by the brine project impairment.