CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Second Quarter (2Q) and Six Months (6M) ended June 30, 2014.
Industry: Cement and construction materials in Peru.
Context: The Company operates primarily in northern Peru. The reporting period reflects a stabilization in the Peruvian economy, with management expecting growth in public and private infrastructure investment in the second half of 2014. The Company was selected for the Lima Stock Exchange's Good Corporate Governance Index for the fifth consecutive year.

Key Financial Metrics

Margins (6M 2014 vs 6M 2013):

• Gross Margin: 40.5% (down 2.9 percentage points)
• Operating Margin: 22.2% (down 2.8 percentage points)
• Net Income Margin: 13.4% (up 1.7 percentage points)

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 2.9% in 6M14, driven by a 3.5% rise in cement sales and a 57.2% surge in quicklime sales, partially offset by a decline in concrete sales.
• Profitability Pressure: Gross profit declined 4.1% and Operating profit fell 9.0% in 6M14. This was primarily due to higher costs from temporary consumption of imported clinker, decreased concrete demand, and increased personnel expenses (severance payments and profit sharing).
• Net Income Surge: Despite lower operating profit, Net Income increased 18.0% in 6M14 (and 75.2% in 2Q14). This improvement is attributed to a significantly lower net loss from exchange rate fluctuations compared to the prior year.
• Production: Total cement production rose 4.1% in 6M14, aided by capacity expansion at the Rioja plant. However, clinker production at the Pacasmayo plant dropped 28.8% in 2Q14 due to scheduled maintenance stoppages.

Outlook, Risks, and Unusual Items

Guidance and Outlook: Management expects further growth in public and private investment in the second half of 2014. Key drivers include government spending reactivation, stable financing rates, and the commencement of major infrastructure projects such as the Siguas II Project, Toromocho, and Metro Line 2. The construction sector is forecast to recover, driven by infrastructure concessions and self-construction stabilization.

Capital Expenditures (Capex): As of June 30, 2014, the Company invested S/. 267.1 million. The primary allocation was the new Piura plant (S/. 227.0 million). An additional investment of approximately US$ 148.8 million is estimated for the second half of 2014.

Risks and Contingencies:

• Operational: Scheduled maintenance stoppages at the Pacasmayo plant reduced clinker production, necessitating the import of clinker which impacted gross margins.
• Market: Decreased demand for concrete negatively impacted sales and margins in that segment.
• Financial: While exchange rate volatility improved net income in 2014, it remains a variable factor. The Company holds significant debt (S/. 838.8 million) in international bonds with a 4.50% coupon rate.

Investor Verification Checklist

• Exchange Rate Impact: Verify the sustainability of the net income growth, which was heavily driven by a reduction in exchange rate losses rather than core operational margin expansion.
• Imported Clinker Costs: Assess the duration and cost impact of relying on imported clinker due to the Pacasmayo plant maintenance stoppage.
• Concrete Segment Recovery: Monitor the trend in concrete sales, which declined 17.0% in 6M14, to determine if this is a temporary market fluctuation or a structural shift.
• Capex Execution: Track the progress and funding requirements for the new Piura plant, which represents the majority of current capital expenditure.
• Debt Service: Confirm the Company's ability to service its S/. 838.8 million debt obligation, noting that principal payments are not due until maturity (10-year bullet), but interest payments are ongoing.