Cementos Pacasmayo S.A.A. - Form 6-K Summary
Business Context and Reporting Period
Cementos Pacasmayo S.A.A. (NYSE: CPAC) is a leading cement producer serving the Peruvian construction industry, primarily in the northern region. This Form 6-K reports consolidated results for the second quarter (2Q17) and the six months ended June 30, 2017 (6M17). The results are prepared under IFRS and stated in Peruvian Soles (S/). The reporting period was significantly impacted by the "Coastal El Niño" phenomenon, which caused severe flooding and infrastructure damage in northern Peru, particularly affecting operations in April 2017.
Key Financial Metrics
| Metric (in millions S/) | 2Q17 | 2Q16 | 6M17 | 6M16 |
|---|---|---|---|---|
| Sales of Goods | 282.9 | 301.0 | 563.0 | 609.8 |
| Gross Profit | 110.2 | 128.1 | 223.1 | 242.3 |
| Operating Profit | 47.3 | 69.2 | 99.1 | 132.5 |
| Net Income (Continuing Ops) | 21.3 | 34.0 | 43.7 | 63.5 |
| Consolidated EBITDA | 77.2 | 95.4 | 159.6 | 182.1 |
| Cash Position (as of June 30, 2017) | S/ 49.4 million (US$ 15.2 million) | |||
| Total Debt (as of June 30, 2017) | S/ 975.9 million (US$ 300.0 million) | |||
| Net Adjusted Debt/EBITDA | 2.4x |
Margins (2Q17 vs 2Q16): Gross margin decreased 3.6 percentage points to 39.0%. Operating margin decreased 6.3 percentage points to 16.7%. Cement EBITDA margin decreased 4.4 percentage points to 27.6%.
Material Changes vs. Prior Period
- Revenue Decline: Sales volume decreased 2.8% in 2Q17 and 7.7% in 6M17. Revenues fell 6.0% in 2Q17 and 7.7% in 6M17. The primary driver was a sharp decline in April due to landslides and flooding from Coastal El Niño, which disrupted logistics and reduced demand.
- Profitability Compression: Net income from continuing operations dropped 37.4% in 2Q17 and 31.2% in 6M17. This was caused by lower sales volumes, increased severance payments, higher distribution costs due to road destruction, and minor plant damages.
- Segment Performance: Concrete sales plummeted 40.5% in 2Q17 due to infrastructure project delays. Cement sales remained relatively stable (+0.8% in 2Q17) due to recovery in May and June. Quicklime sales decreased 13.4% in 2Q17.
- Production: Total cement production volume decreased 9.1% in 2Q17. The Piura plant, which remained fully functional during the disaster, saw production decrease 16.0% in 2Q17 due to lower sales and planned maintenance, though it increased 8.2% for the six-month period.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the situation normalized in May, with sales increasing sequentially in May and June. The company expects strengthened results and improved margins in the second half of 2017.
Reconstruction Outlook: Peru's Congress approved a Reconstruction Law with an initial budget of US$ 6.2 billion (S/ 20 billion) to rebuild infrastructure damaged by El Niño. As the sole cement producer in northern Peru, Cementos Pacasmayo expects to benefit significantly from this demand, which is unrelated to broader infrastructure projects.
Risks and Contingencies:
- Natural Disasters: Continued impact of El Niño on logistics and demand.
- Infrastructure Delays: Delays in major projects (e.g., Chavimochic) due to corruption scandals and weather.
- Cost Pressures: Increased costs for coal and logistics due to damaged infrastructure.
Investor Verification Checklist
- Reconstruction Budget Execution: Verify the timeline and allocation of the US$ 6.2 billion reconstruction budget and its specific impact on northern Peru cement demand.
- Operational Recovery: Confirm the sustained recovery of sales volumes in Q3 and Q4 2017 following the April disruption.
- Debt Hedging: Review the effectiveness of the US$ 300 million cross-currency swap agreements in managing foreign exchange risk on the international bonds.
- Infrastructure Project Status: Monitor the status of key projects like the Talara Refinery and Longitudinal de la Sierra Highway, which are major revenue drivers.
- Margin Normalization: Assess whether gross and operating margins return to historical levels as fixed costs are diluted by higher volumes in the second half of the year.