Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (Pacasmayo)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter 2018 (Ended March 31, 2018)
Industry: Cement and construction materials in Peru
Currency: Peruvian Soles (S/)
Pacasmayo is a leading cement producer in northern Peru, serving the public sector and self-construction segments. The company recently rebranded to "Pacasmayo" and launched a new logo and product designs to align with a strategy of evolving into a construction solutions provider.
Key Financial Metrics
| Metric | 1Q18 | 1Q17 | Change |
|---|---|---|---|
| Sales Volume (MT) | 562,500 | 521,600 | +7.8% |
| Revenues (S/ millions) | 315.3 | 279.5 | +12.8% |
| Gross Profit (S/ millions) | 120.4 | 112.3 | +7.2% |
| Operating Profit (S/ millions) | 62.6 | 51.8 | +20.8% |
| Net Income (S/ millions) | 29.8 | 21.7 | +37.3% |
| Consolidated EBITDA (S/ millions) | 94.3 | 82.4 | +14.4% |
| Cash Position (S/ millions) | 33.0 | N/A | N/A |
| Total Debt (S/ millions) | 968.1 | N/A | N/A |
Margins:
- Gross Margin: 38.2% (down 2.0 percentage points)
- Operating Margin: 19.9% (up 1.4 percentage points)
- Cement EBITDA Margin: 30.0% (flat vs. 1Q17)
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 7.8% increase in sales volume (cement, concrete, blocks) and higher average cement prices. Public sector and self-construction demand were primary drivers.
- Profitability: Net income rose 37.3% due to higher sales and operating profit. Operating profit increased 20.8%.
- Margin Pressure: Gross margin decreased 2.0 percentage points primarily due to higher transportation costs resulting from road infrastructure damage caused by the Coastal El Niño phenomenon and a slight increase in coal prices.
- Production Variance: Total cement production increased 6.1%. The Piura plant saw a 23.9% volume increase due to demand, while the Rioja plant decreased 12.2% due to road blocks from protests. Clinker production at Piura dropped 61.3% due to planned kiln maintenance.
- One-off Expenses: The company incurred S/4.8 million in one-off expenses to repair the highway connecting its seashell quarry to the Piura plant. Excluding this, Cement EBITDA would have been 18.7% higher than 1Q17.
Outlook, Risks, and Management Commentary
Management Commentary:
Management highlighted a "very solid performance" with 11 consecutive months of volume growth. The company successfully implemented an innovative solution ("geo bolsas") to repair the damaged road, with costs expected to be recovered in four months. The company expects to see further benefits from infrastructure rebuilding efforts following the Coastal El Niño in upcoming quarters.
Political and Economic Environment:
Peru experienced a political transition with the resignation of President Pedro Pablo Kuczynski and the swearing-in of President Martín Vizcarra in March 2018. Management views the new administration as a positive factor for reducing confrontation and facilitating economic growth. Additionally, a new law regarding the Odebrecht corruption case has reinstated banking willingness to finance construction firms previously blocked.
Risks and Contingencies:
- Infrastructure Damage: Ongoing impacts from Coastal El Niño on road networks affecting transportation costs and logistics.
- Political Stability: While improved, the political landscape remains a variable factor for large infrastructure project execution.
- Operational Disruptions: Protests causing road blocks (e.g., at Rioja plant) and planned maintenance affecting production capacity.
Investor Verification Checklist
- Transportation Cost Sustainability: Verify if the S/4.8 million road repair investment has stabilized transportation costs or if further infrastructure damage is expected.
- Public Sector Project Execution: Monitor the actual disbursement and execution speed of the "Reconstruction with Changes" plan funds, as only 10% had been spent at the time of filing.
- Debt Hedging Effectiveness: Confirm the status of the US$300 million cross-currency swap agreements used to mitigate foreign exchange risk on the S/968.1 million debt.
- Concrete Segment Margins: Investigate the 12 percentage point drop in concrete gross margin (to 6.3%) caused by fixed cost dilution issues as large dedicated plants ceased operation.
- Political Impact on Projects: Assess whether the new administration's legislative changes are accelerating the awarding of delayed infrastructure projects (e.g., airports) mentioned in the filing.