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: Fiscal year ended December 31, 2016 (Comparative data for 2015 and 2014)
Filing Date: February 14, 2017
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and marketing of cement, blocks, concrete, and quicklime in the northern region of Peru. It is a subsidiary of Inversiones ASPI S.A. (50.01% ownership).

Key Financial Metrics (2016 vs. 2015)

Material Changes and Drivers

• Profitability Decline: Net profit attributable to equity holders dropped significantly from S/215.5 million in 2015 to S/116.2 million in 2016. This was primarily driven by a substantial increase in finance costs (S/75.4 million in 2016 vs. S/36.8 million in 2015) and a net loss from exchange differences (S/2.5 million loss in 2016 vs. S/12.2 million gain in 2015).
• Discontinued Operations: The Company classified its subsidiary, Fosfatos del Pacífico S.A. (phosphate and diatomite exploration), as "held for distribution" and a discontinued operation. This segment recorded a loss of S/6.6 million in 2016. Assets held for distribution totaled S/338.4 million.
• Cost Pressures: Cost of sales increased by 5.9% to S/736.5 million, compressing the gross margin from 43.5% in 2015 to 40.6% in 2016. Administrative and selling expenses also rose.
• Liquidity: Cash and cash equivalents decreased by nearly 50% to S/80.2 million, largely due to dividend payments of S/154.4 million and investing outflows of S/135.6 million.

Outlook, Risks, and Contingencies

• Spin-off Project: Shareholders approved a spin-off of the Fosfatos del Pacífico S.A. assets to a new entity, Fossal S.A.A., expected to occur in March 2017. This will reduce capital stock by approximately S/107.6 million.
• Debt Covenants: The Company holds US$300 million in Senior Notes due 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 confirmed no breaches occurred in 2016.
• Foreign Exchange Risk: The Company utilizes cross-currency swaps to hedge US$300 million of Senior Notes. Despite hedging, the 2016 period saw a net loss on exchange differences. Sensitivity analysis indicates a 10% strengthening of the USD would negatively impact pre-tax profit by S/1.2 million.
• Tax Rate Change: Peruvian legislation increased the corporate income tax rate from 28% to 29.5% effective 2017, impacting deferred tax liabilities.
• Legal Contingencies: The Company faces third-party claims totaling S/9.6 million (labor and tax assessments). Management deems it only possible, not probable, that these will succeed, and no provision has been recorded.

Investor Verification Checklist

• Spin-off Execution: Verify the completion of the Fosfatos del Pacífico spin-off to Fossal S.A.A. and the resulting capital reduction.
• Debt Servicing: Monitor the Company's ability to maintain debt covenants given the increased finance costs and reduced profitability.
• Dividend Policy: Assess the sustainability of dividend payments (S/0.285 per share in 2016) given the 46% drop in net income.
• Exploration Projects: Review the status of the brine project (Salmueras Sudamericanas) and phosphate project, which continue to generate losses and require capital contributions.
• Tax Audits: Monitor open tax audits for years 2012-2016, particularly regarding the S/9.6 million in disputed assessments.