CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter (4Q) and Full Year (FY) ended December 31, 2018.
Announcement Date: February 11, 2019
Business Overview: A leading cement company in Peru serving the construction industry, producing cement, concrete, precast, and quicklime. The company is transitioning its strategy from a pure cement producer to a "building solutions" company.

Key Financial Metrics

Material Changes vs. Prior Period

• Volume Growth: Sales volume of cement, concrete, and precast increased 5.6% in 4Q18 and 4.3% for FY2018, driven by public sector recovery and self-construction demand.
• Revenue: Increased 4.6% in 4Q18 and 3.5% for FY2018, primarily due to volume growth.
• Profitability:
  • 4Q18 Net Loss: Reported a net loss of S/ 11.5 million (vs. S/ 0.9 million loss in 4Q17). This was driven by two non-cash items: a tax receivable provision and accounting effects from bond repurchases. Adjusted net income would have been S/ 19.4 million.
  • FY2018 Net Income: Decreased 6.8% to S/ 75.1 million. Excluding non-cash effects, adjusted net income would have been S/ 106.1 million.
  • Margins: Cement EBITDA margin decreased 5.8 percentage points in 4Q18 to 26.6% due to production cost increases and the tax provision. FY2018 Cement EBITDA margin was 29.6% (down 1.2 pp).
• Debt Reprofiling: In December 2018, the company purchased US$ 168.4 million of outstanding international bonds and issued two local bond placements totaling S/ 570 million to reduce currency exposure and cost of capital.

Outlook, Management Commentary, and Risks

• Guidance & Outlook: Management expects the positive volume trend to continue in 2019, driven by the execution of the government's reconstruction plan (only ~20% of the budget executed to date) and new infrastructure projects (e.g., Chiclayo Airport).
• Strategic Shift: The company is evolving into a "building solutions" provider, focusing on innovation and digital transformation. This includes expanding product portfolios (e.g., special weather cement, underwater concrete) and targeting small/medium enterprises.
• Operational Risks:
  • Cost Pressures: Increased costs for coal, raw materials, and transportation (due to road damage from Coastal El Niño) impacted gross margins.
  • Production Halts: Temporary halts in clinker production at the Piura plant and inventory consumption affected utilization rates and costs.
  • Political Environment: While Peru remains macroeconomically stable, political reforms and referendum outcomes are monitored for potential impacts on public investment.
• Unusual Items: The 4Q18 results were significantly impacted by a non-cash provision for a tax receivable and the liquidation of derivative financial instruments related to debt restructuring.

Investor Verification Checklist

• Adjusted Earnings: Verify the magnitude of the non-cash tax provision and bond repurchase accounting effects to understand the underlying operational profitability (Adjusted 4Q18 Net Income: S/ 19.4M).
• Debt Structure: Confirm the terms and interest rates of the new local bond issuances (S/ 260M @ 6.69% and S/ 310M @ 6.84%) and the remaining exposure to international bonds.
• Reconstruction Spending: Monitor the actual disbursement of the government's S/ 7 billion reconstruction budget and the timeline for project tenders to validate volume growth forecasts.
• Cost Inflation: Track coal prices and transportation costs, as these were primary drivers of margin compression in 2018.
• Quicklime Segment: Assess the sustainability of the quicklime business, which saw a 45.7% sales drop in 4Q18 and negative gross margins in the precast segment due to initial investment costs.