CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Third Quarter (3Q13) and First Nine Months (9M13) ended September 30, 2013.
Business Overview: The Company is the sole cement manufacturer in Peru's northern region, supplying cement, concrete, blocks, and quicklime. The northern region represents approximately 23.2% of Peru's population and 14.8% of its GDP. The Company operates two main plants: Pacasmayo and Rioja.

Key Financial Metrics

Margins (3Q13 vs 3Q12):

• Gross Margin: 41.9% (up from 38.8%)
• Operating Margin: 22.3% (up from 20.4%)
• Consolidated EBITDA Margin: 26.8% (up from 24.7%)
• Net Income Margin: 14.5% (down from 15.1%)

Material Changes vs. Prior Period

Revenue and Profit Growth:

• Cement Sales: Volume increased 3.5% in 3Q13 and 6.2% in 9M13. Sales revenue for cement, concrete, and blocks rose 14.7% in 3Q13, driven by strong demand in the northern region and the "self-construction" segment.
• Quicklime: Sales volume and revenue declined significantly (-47.7% volume, -43.0% revenue in 3Q13) due to lower demand from the mining sector caused by falling metal prices.
• EBITDA: Consolidated EBITDA increased 17.6% in 3Q13 and 28.0% in 9M13, reflecting improved operational efficiency and higher cement margins.

Operational Changes:

• Production: Cement production at the Rioja plant increased 42.9% in 3Q13 following capacity expansion. Clinker production at the Pacasmayo plant decreased 13.1% due to unscheduled stops of vertical kilns and cement mills, necessitating increased clinker imports.
• Expenses: Administrative expenses rose 17.9% in 3Q13, primarily due to one-time severance packages and cost reclassifications.

Financial Impact of FX:
Net income for 9M13 was negatively impacted by a S/. 46.0 million loss from exchange rate fluctuations. The Peruvian Sol depreciated from S/. 2.589 to S/. 2.782 per US$ 1.00, affecting the Company's US$ 300 million debt.

Outlook, Risks, and Management Commentary

Economic Outlook:
Management notes a slight economic slowdown in Peru, with GDP growth projections revised to 5.5%. However, business confidence improved in September. Private investment projects for 2013-2015 reached US$ 45.6 billion. The government has earmarked US$ 780 million for infrastructure, which is expected to drive cement demand.

Strategic Projects:

• Infrastructure: Major projects in the northern region (e.g., Chavimochic irrigation, Quitaracsa Hydroelectric Plant) are expected to benefit the Company.
• Phosphate Project: Basic engineering studies are in the final approval stage. A 20-year off-take agreement exists with Mitsubishi Corporation.
• Brine Project: Development is contingent on basic engineering results and local community agreements.

Risks and Contingencies:

• FX Risk: Significant exposure to exchange rate fluctuations due to US$ 300 million in debt.
• Operational Risk: Reliance on imported clinker due to kiln stoppages increases cost volatility.
• Market Risk: Quicklime segment remains vulnerable to mining sector cycles and metal price volatility.

Investor Verification Checklist

• FX Exposure: Verify the impact of the Sol's depreciation on future interest payments and net income, given the US$ 300 million debt load.
• Operational Stability: Confirm the long-term reliability of the Pacasmayo vertical kilns and the cost implications of continued clinker imports.
• Quicklime Demand: Assess the correlation between global metal prices and the Company's quicklime revenue trajectory.
• Infrastructure Pipeline: Validate the execution timeline of government infrastructure projects in the northern region to ensure projected demand materializes.
• Capex Allocation: Review the progress and ROI of the S/. 152.0 million invested in 9M13, specifically the New Piura Plant and Phosphate Project.