Cementos Pacasmayo S.A.A. - 3Q 2017 Earnings Summary
Business Context and Reporting Period
Cementos Pacasmayo S.A.A. (NYSE: CPAC), a leading cement producer in northern Peru, reported consolidated results for the third quarter and nine months ended September 30, 2017. The company operates in a market recovering from the "Coastal El Niño" phenomenon, which caused significant infrastructure damage and disrupted operations in the first half of the year. The company is the primary cement supplier for the northern region of Peru, which is the focal point of the government's upcoming reconstruction efforts.
Key Financial Metrics
| Metric (S/ Millions) | 3Q 2017 | 3Q 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenues | 334.7 | 313.7 | 897.7 | 923.4 |
| Gross Profit | 134.3 | 134.2 | 357.4 | 376.5 |
| Operating Profit | 75.3 | 78.5 | 174.3 | 211.0 |
| Net Income (Continuing Ops) | 38.6 | 45.8 | 82.3 | 109.2 |
| Consolidated EBITDA | 107.2 | 107.1 | 266.9 | 289.2 |
| Cash Position | S/121.8 million (as of Sept 30, 2017) | |||
| Total Debt | S/979.5 million (US$300.0 million) | |||
| Net Adjusted Debt/EBITDA | 2.2x |
Material Changes vs. Prior Period
- Volume Recovery: Sales volume of cement, concrete, and blocks increased 4.8% in 3Q17 compared to 3Q16, driven by the self-construction segment and late-quarter public spending. However, 9M17 volume decreased 3.5% due to the severe impact of Coastal El Niño in the first four months.
- Margin Compression: Gross margin decreased 2.7 percentage points to 40.1% in 3Q17, primarily due to higher raw material costs and increased coal prices following infrastructure damage. Concrete sales dropped 30.5% year-over-year, significantly impacting overall margins.
- Profitability: Net income from continuing operations fell 15.7% in 3Q17 and 24.6% for the nine-month period. The decline is attributed to lower operating profits, higher transportation costs via alternate routes, and the absence of a significant exchange rate gain recorded in 3Q16.
- Operational Efficiency: Consolidated EBITDA remained flat year-over-year in 3Q17 but showed a strong sequential increase of 38.9% from 2Q17, signaling a return to normalcy.
Outlook, Guidance, and Risks
- Reconstruction Catalyst: Management expects significant growth driven by Peru's "Reconstruction with Changes" Plan, which allocates nearly S/26 billion (US$8 billion) for infrastructure repair through 2021. Approximately 70-75% of this spending is targeted at northern Peru, Cementos Pacasmayo's primary market.
- Guidance: The company expects to finish 2017 flat year-over-year, with mid-single-digit growth in 2018. Double-digit growth is anticipated over the next three to four years as reconstruction projects ramp up.
- Key Projects: The company is actively supplying the Talara Refinery (96% shipped), Longitudinal de la Sierra Highway (64% shipped), and Alto Piura (6% shipped). New projects like Huacrachuco-Sausacocha and the New City of Olmos are expected to begin execution soon.
- Risks: Risks include delays in government bidding processes, continued volatility in raw material costs, and potential political instability, although a new cabinet was recently approved, suggesting improved stability.
Investor Verification Checklist
- Reconstruction Timeline: Verify the actual start dates and awarding of the S/26 billion government reconstruction contracts to confirm the timing of the expected demand surge.
- Raw Material Costs: Monitor coal prices and logistics costs, as these were primary drivers of margin compression in 3Q17.
- Concrete Segment Recovery: Track the recovery of concrete sales, which fell 30.5% in 3Q17, as this segment is critical for infrastructure projects.
- Debt Hedging: Confirm the status of the US$300 million cross-currency swap agreements used to hedge foreign exchange risk on international bonds.
- Political Stability: Assess the impact of the new cabinet and legislative relations on the speed of infrastructure project approvals and funding disbursement.