CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Primary Business: Leading cement manufacturer in northern Peru, producing cement, quicklime, and construction materials. The company operates three facilities (Pacasmayo, Rioja, and the newly operational Piura plant) and is developing non-core phosphate and brine mining projects.

Key Financial Metrics (2015)

Note: US$ amounts are translated using the average accounting exchange rate of S/3.411 to US$1.00 as of December 31, 2015.

Material Changes vs. Prior Period (2014)

• Revenue: Sales decreased slightly by 0.9% (S/11.6 million) to S/1,231.0 million. This was driven by a 20.8% decline in construction supplies sales due to competition, partially offset by growth in quicklime sales and stable cement sales.
• Profitability: Net profit increased by 12.1% to S/211.7 million. Gross profit margin improved to 43.5% from 41.7% in 2014, driven by operational efficiencies and lower unit production costs.
• Cost of Sales: Decreased by 3.9% to S/695.8 million, primarily due to lower coal prices and reduced volume of imported clinker.
• Exchange Rates: The Peruvian sol depreciated 14.2% against the US dollar in 2015. The company hedged its US$300 million Senior Notes with cross-currency swaps, resulting in a net gain from exchange differences of S/12.4 million (compared to a loss of S/14.8 million in 2014).
• Capital Structure: The company repurchased 37,276,580 investment shares in October 2015, holding them as treasury shares. Total equity decreased slightly due to these buybacks and dividend payments.

Guidance, Outlook, and Risks

Outlook and Management Commentary

• Piura Plant: The new Piura facility began cement production in September 2015 and clinker production in January 2016. Management expects this to eliminate the need for imported clinker, significantly improving logistics and margins.
• Market Demand: Demand is heavily tied to the "auto-construcción" (self-construction) segment (55% of sales) and public infrastructure spending. Public spending slowed in the first eight months of 2015 due to new regional authorities but recovered in the fourth quarter.
• Non-Core Projects: The company continues to develop phosphate and brine projects. The phosphate project has a 20-year off-take agreement with Mitsubishi. The brine project is in the basic engineering evaluation phase with partner Quimpac.

Risks and Contingencies

• Geographic Concentration: All operations and sales are concentrated in northern Peru, exposing the company to regional economic downturns, political instability, and natural disasters (e.g., El Niño).
• Commodity Prices: Production costs are sensitive to coal and electricity prices. Approximately 36% of cost of sales was denominated in US dollars in 2015.
• Regulatory Environment: Risks include changes in Peruvian tax laws, mining royalty regulations, and environmental compliance requirements.
• Project Execution: The phosphate and brine projects face risks related to capital cost overruns, regulatory approvals, and market viability.

Investor Verification Checklist

• Debt Hedging Effectiveness: Verify the continued effectiveness of the US$300 million cross-currency swaps in mitigating sol depreciation risks.
• Piura Plant Ramp-up: Monitor the utilization rates of the Piura facility and the timeline for fully phasing out imported clinker to confirm projected margin improvements.
• Public Spending Trends: Track government infrastructure spending in northern Peru, as it accounts for 16% of cement sales and was volatile in 2015.
• Phosphate/Brine Capital Calls: Review the status of capital commitments from partners (Mitsubishi and Quimpac) and the feasibility studies for these non-core assets.
• Share Buyback Impact: Assess the impact of the treasury share buyback on future dividend per share calculations and earnings per share.