Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Third Quarter (3Q16) and Nine Months (9M16) ended September 30, 2016.
Industry: Leading cement producer in Peru, serving the construction sector.
Key Event: Shareholders approved the spin-off of the phosphate business (Fosfatos del Pacifico) into a new entity, FOSSAL, to be traded separately on the Lima Stock Exchange.
Key Financial Metrics
| Metric (S/ Millions) | 3Q16 | 3Q15 | 9M16 | 9M15 |
|---|---|---|---|---|
| Revenue | 314.2 | 313.0 | 925.4 | 880.0 |
| Consolidated EBITDA | 104.5 | 99.6 | 283.1 | 278.1 |
| Net Income | 43.3 | 55.3 | 102.4 | 151.8 |
| Gross Margin | 42.4% | 45.1% | 40.4% | 43.8% |
| Net Income Margin | 13.8% | 17.7% | 11.1% | 17.3% |
Liquidity and Debt:
- Cash Position: S/ 174.6 million (US$ 51.4 million) as of September 30, 2016.
- Total Debt: S/ 1,020.0 million (US$ 300.0 million), consisting of international bonds with a 4.50% coupon and 10-year maturity.
- Net Adjusted Debt/EBITDA: 1.9x.
- Capex (9M16): S/ 90.7 million, primarily allocated to the Piura plant (S/ 53.0 million).
Material Changes vs. Prior Period
- Revenue: Increased 0.4% in 3Q16 and 5.2% in 9M16 year-over-year.
- Profitability: Net income decreased 21.7% in 3Q16 and 32.5% in 9M16. This decline is attributed to the termination of borrowing cost capitalization and increased depreciation following the completion of the Piura plant project.
- Volumes: Cement, concrete, and blocks volumes were down 1.6% in 3Q16 (due to high El Niño prevention spending in 3Q15) but rose 3.6% in 9M16.
- EBITDA: Consolidated EBITDA grew 4.9% in 3Q16 and 1.8% in 9M16, driven by operational efficiencies at the new Piura plant.
- Segment Performance: Concrete sales surged 43.0% in 3Q16 with improved margins, while blocks/bricks sales dropped 51.5% due to the conclusion of specific infrastructure projects.
Outlook, Management Commentary, and Risks
Management Commentary:
- Operational Efficiency: The Piura plant is fully operational for clinker production, increasing total clinker output by 94.2% in 3Q16 and eliminating reliance on imported clinker.
- Market Position: The company outpaced the industry with a 3.6% volume increase in 9M16 versus a 2% industry decline, holding approximately 21% market share.
- Spin-off Strategy: The separation of the phosphate business into FOSSAL is intended to unlock value and provide clarity for investors focused on the core cement business.
Outlook:
- Management maintains a positive outlook, citing a strengthening construction demand environment in Peru.
- Expectations for 2017 include a record year for large-scale public works projects, with a draft budget proposing 50 projects totaling S/ 7.7 billion.
- Public investment showed signs of recovery in August 2016.
Risks and Contingencies:
- Forward-Looking Statements: Future results depend on economic conditions, infrastructure spending execution, and market demand.
- Competition: The market is fragmented with competitors UNACEM and Cementos Yura.
- Regulatory/Political: While optimism is high under the new administration, actual infrastructure spending depends on budget execution and legislative approval.
Investor Verification Checklist
- Spin-off Execution: Verify the timeline and trading details for the new FOSSAL entity and the distribution ratio (approx. 0.20 FOSSAL shares per 1 CPAC share).
- Depreciation Impact: Confirm the long-term impact of increased depreciation from the Piura plant on future net income margins.
- Infrastructure Pipeline: Monitor the execution rate of the proposed 2017 public works budget (S/ 7.7 billion) to validate volume growth assumptions.
- Debt Hedging: Review the effectiveness of the cross-currency swap agreements (US$ 300 million) in managing foreign exchange risk on the international bonds.
- Concrete Segment Growth: Assess the sustainability of the 43% growth in concrete sales and whether it can offset declines in other segments like blocks.