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: Unaudited interim condensed consolidated financial statements for the three and nine-month periods ended September 30, 2019.
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and commercialization of cement, precast, concrete, and quicklime in the northern region of Peru. It is a subsidiary of Inversiones ASPI S.A., which holds 50.01% of common shares.

Key Financial Metrics (Nine Months Ended Sept 30, 2019)

Note: All figures in Peruvian Soles (S/). Debt includes current (85,286) and non-current (1,011,876) interest-bearing loans.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased by approximately 10.5% year-over-year (YoY) for the nine-month period, driven primarily by the "Cement, concrete and precast" segment, which saw revenue rise from S/820.4M to S/943.0M.
• Profitability: Net profit attributable to equity holders increased by 16.1% YoY (from S/88.2M to S/102.5M). Operating profit margins improved slightly due to revenue growth outpacing operating expense increases.
• Segment Performance: While the cement segment grew, the "Quicklime" segment experienced a significant revenue decline of 47.3% (from S/48.8M to S/25.7M), though it remained profitable.
• Balance Sheet: Cash and cash equivalents doubled from S/49.1M at year-end 2018 to S/99.3M at September 30, 2019. Total assets increased to S/2.98B.
• Debt Restructuring: In January 2019, the Company issued S/570M in senior notes (Soles) to settle a mid-term loan of S/580.8M obtained in late 2018. This refinancing extended maturities and adjusted interest rates.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Policy Change (IFRS 16): The Group adopted IFRS 16 Leases on January 1, 2019, using the full retrospective method. This resulted in an increase in right-of-use assets by S/148,000 and lease liabilities by S/163,000, with a corresponding reduction in equity.
• Foreign Exchange Risk: The Company maintains Cross Currency Swap (CCS) contracts to hedge US$131.6M of senior notes denominated in USD. An unrealized loss of S/1.7M was recorded in Other Comprehensive Income (OCI) for the quarter ended September 30, 2019.
• Tax Environment: As of January 1, 2019, tax benefits for the Loreto region were eliminated, including VAT refunds and exemptions on imports for that region. Management does not expect significant contingencies from transfer pricing reviews.
• Legal Contingencies: Third-party claims totaling S/11.4M are pending, including labor claims and property tax fines. Management deems it "only possible, but not probable" that these actions will succeed; no provision has been made.
• Capital Expenditures: Additions to property, plant, and equipment totaled S/57.4M for the nine-month period.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the fixed charge coverage ratio (min 2.5:1) and debt-to-EBITDA ratio (max 3.5:1) covenants attached to the new Soles-denominated senior notes.
• Quicklime Segment Volatility: Investigate the 47% revenue drop in the quicklime segment to determine if this is a temporary market fluctuation or a structural decline.
• FX Hedging Effectiveness: Monitor the performance of the Cross Currency Swaps against USD/PEN volatility, as unrealized losses in OCI can impact equity.
• Legal Claims Resolution: Track the status of the S/11.4M in legal claims, particularly the S/7.7M related to property tax fines, to assess potential future cash outflows.
• Inventory Levels: Review the increase in inventories (up S/77.2M in working capital adjustments) to ensure it aligns with sales growth and does not indicate obsolescence or overstocking.