Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Third Quarter (3Q12) and First Nine Months (9M12) ended September 30, 2012.
Context: The Company is the sole cement manufacturer in Peru's northern region. Results are reported in Peruvian nuevos soles (S/.) under IFRS. The period reflects strong domestic demand driven by public and private investment in Peru's construction sector.
Key Financial Metrics
| Metric (S/. millions) | 3Q12 | 3Q11 | 9M12 | 9M11 |
|---|---|---|---|---|
| Sales of Goods | 310.1 | 260.5 | 852.9 | 717.7 |
| Gross Profit | 120.3 | 106.8 | 328.0 | 302.4 |
| Operating Profit | 63.4 | -45.0 | 168.2 | 67.8 |
| Net Income (Controller) | 47.8 | -35.7 | 119.2 | 39.4 |
| Consolidated Adjusted EBITDA | 76.4 | 63.3 | 205.2 | 198.2 |
| Operating Cash Flow | 63.2 | 65.0 | 87.0 | 97.0 |
| Cash & Equivalents (Sep 30, 2012) | 601.7 | |||
| Total Debt (Sep 30, 2012) | 202.2 |
Margins (3Q12 vs 3Q11): Gross Margin decreased 2.2 percentage points to 38.8%. Operating Margin improved significantly from -17.3% to 20.4%.
Material Changes vs. Prior Period
- Volume Growth: Cement sales volume increased 18.9% in 3Q12 and 17.5% in 9M12 compared to prior year periods, driven by strong demand in the northern region.
- Profitability Turnaround: Operating profit swung from a loss of S/. 45.0 million in 3Q11 to a profit of S/. 63.4 million in 3Q12. This improvement is largely due to the absence of a S/. 96.1 million non-cash impairment charge on zinc mining assets recorded in 3Q11.
- Margin Compression: Despite revenue growth, gross margins declined (down 5.4 pp for the cement segment) due to increased freight costs from a new door-to-door sales strategy and higher unit costs from kiln maintenance requiring imported clinker.
- EBITDA Growth: Cement EBITDA increased 24.7% in 3Q12 year-over-year.
Outlook, Risks, and Unusual Items
- Guidance & Outlook: Management expects Peru's economy to grow between 6.0% and 6.5% by year-end. The Company is expanding capacity at the Rioja plant (adding 0.24 million tons by 4Q12) and has signed a contract for a new plant in Piura (1.6 million tons capacity).
- Capital Expenditures: 9M12 Capex totaled S/. 185.1 million, allocated to plant expansions (Rioja and Pacasmayo), a diatomite brick plant, and pre-operational phosphate and brine projects.
- Dividends: The Board approved a cash dividend of S/. 52.0 million for 2011 net income, payable in November 2012.
- Risks & Contingencies:
- Operational: Scheduled maintenance on kilns 2 and 3 in 3Q12 reduced utilization rates and increased costs via imported clinker.
- Project Delays: Phosphate and Brine projects remain in pre-operational stages with estimated operational dates in 2016 and 3-5 years, respectively.
- Market: Reliance on the Peruvian construction sector and "self-construction" segment.
Investor Verification Checklist
- Margin Sustainability: Verify if the gross margin compression (due to freight and imported clinker) is temporary or a structural shift due to the new sales strategy.
- Capacity Expansion: Confirm the timeline and cost overruns for the new Piura plant and Rioja expansion to ensure they meet the projected 4Q12 and 2016 operational targets.
- Debt Servicing: Review the S/. 202.2 million debt obligation (due 2018) against the current cash position of S/. 601.7 million to assess liquidity coverage.
- Non-Core Assets: Monitor the progress and capital requirements of the Fosfatos del Pacifico and Salmueras Sudamericanas projects, which currently generate no revenue but incur costs.