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, 2013
Business Overview: A leading Peruvian cement company and the sole cement manufacturer in Peru's northern region. The company produces cement, concrete, blocks, and quicklime. Results are reported in Peruvian Nuevos Soles (S/.) under IFRS.
Key Financial Metrics
| Metric (in millions S/.) | 2Q13 | 2Q12 | 6M13 | 6M12 |
|---|---|---|---|---|
| Sales of Goods | 295.2 | 265.5 | 586.5 | 542.8 |
| Gross Profit | 134.1 | 98.2 | 254.7 | 207.7 |
| Operating Profit | 77.8 | 45.0 | 146.9 | 104.8 |
| Net Income | 23.4 | 29.9 | 68.5 | 69.8 |
| Consolidated EBITDA | 91.5 | 57.2 | 172.8 | 128.8 |
| Cash Position | S/. 991.6 million (as of June 30, 2013) | |||
| Total Debt | S/. 834.9 million (US$ 300 million) |
Key Margins (2Q13 vs 2Q12)
- Gross Margin: 45.4% (up from 37.0%)
- Operating Margin: 26.4% (up from 16.9%)
- Consolidated EBITDA Margin: 31.0% (up from 21.5%)
- Net Income Margin: 7.9% (down from 11.3%)
Material Changes vs. Prior Period
- Volume Growth: Cement, concrete, and blocks sales volume increased 9.1% in 2Q13. Concrete sales volume surged 58.1%.
- Profitability Expansion: Operating profit rose 72.9% and EBITDA increased 60.0% year-over-year, driven by cost efficiencies (lower electricity costs, optimized coal mix, reduced imported clinker usage) and higher sales volumes.
- Net Income Decline: Despite strong operating performance, Net Income decreased 21.7% in 2Q13. This was primarily caused by a S/. 41.9 million loss from exchange rate fluctuations due to the depreciation of the Peruvian Sol against the US Dollar (from S/. 2.589 to S/. 2.783 per USD).
- Segment Performance:
- Cement/Concrete: Sales up 21.5% with gross margin expansion of 5.9 percentage points.
- Quicklime: Sales volume down 31.0% due to lower mining demand; however, gross margin improved to 35.4% due to lower energy consumption.
- Construction Supplies: Sales down 35.9% due to increased competition.
Outlook, Risks, and Management Commentary
Management Commentary & Outlook
- Infrastructure Demand: Management expects positive impact from government infrastructure investments (approx. US$ 780 million earmarked) and the extension of the Public Works Tax Deduction Law.
- Domestic Drivers: Growth is expected to be driven by domestic demand, specifically the "self-construction" segment linked to middle-low income families.
- Projects:
- New Piura Plant: Environmental Impact Study approved in May 2013; construction to begin soon.
- Rioja Plant: Capacity expansion initiated, contributing to production increases.
- Phosphate & Brine Projects: Fosfatos del Pacifico and Salmueras Sudamericanas remain in pre-operating/engineering stages.
Risks and Contingencies
- Exchange Rate Volatility: Significant exposure to USD-denominated debt (US$ 300 million) creates risk for net income if the Sol depreciates further.
- Global Economic Conditions: Capital outflows from emerging markets and slower growth in China could impact Peru's economy and metal prices (affecting quicklime demand).
- Competition: Increased competition in the construction supplies segment.
Investor Verification Checklist
- FX Sensitivity: Verify the impact of the Sol/USD exchange rate on future net income given the US$ 300 million debt exposure.
- Quicklime Demand: Monitor global metal prices and mining activity in Peru, as quicklime sales are highly correlated with this sector.
- Capex Execution: Track progress on the New Piura Plant and Rioja expansion to ensure capacity additions meet projected demand.
- Infrastructure Pipeline: Confirm the timeline and funding status of government infrastructure projects in the northern region.
- Cost Structure: Assess the sustainability of the gross margin improvements driven by reduced imported clinker and optimized energy costs.