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, 2014
Accounting Standards: International Financial Reporting Standards (IFRS)
Primary Business: Leading cement manufacturer in the northern region of Peru, producing cement, quicklime, and construction materials. The company also holds non-metallic mining concessions for phosphate and brine projects.
Key Financial Metrics (Year Ended Dec 31, 2014)
| Metric | Value (S/.) | Value (US$) |
|---|---|---|
| Sales of Goods | 1,242.6 million | 416.1 million |
| Gross Profit | 518.4 million | 173.6 million |
| Operating Profit | 300.5 million | 100.6 million |
| Profit for the Year | 188.8 million | 63.2 million |
| Adjusted EBITDA | 365.3 million | 122.4 million |
| Net Cash from Operating Activities | 240.4 million | 80.5 million |
| Total Assets | 3,240.9 million | 1,085.4 million |
| Total Liabilities | 1,170.2 million | 391.9 million |
| Total Equity | 2,070.7 million | 693.5 million |
| Cash and Term Deposits | 580.5 million | 194.4 million |
| Interest-Bearing Debt | 883.6 million (Non-current) | 295.9 million (Non-current) |
Note: US$ amounts are translated at the year-end rate of S/.2.986 to US$1.00.
Material Changes vs. Prior Period (2013)
- Revenue: Sales increased marginally by 0.2% (S/.2.9 million) to S/.1,242.6 million. This was driven by a 91.5% increase in quicklime sales, offset by a 1.5% decrease in cement, concrete, and blocks sales due to a slowdown in construction levels.
- Profitability: Net profit increased 24.0% to S/.188.8 million. This growth was primarily due to lower administrative expenses, reduced exchange rate losses, and an extraordinary gain of S/.10.5 million from the sale of an available-for-sale financial investment.
- Operating Expenses: Total operating expenses decreased 5.4% to S/.217.9 million, largely due to reductions in personnel and third-party service costs.
- Exchange Rates: The Peruvian nuevo sol depreciated 6.8% against the US dollar in 2014. However, the company mitigated impact through hedging (cross currency swaps) and better financial management, reducing the net exchange loss from S/.48.4 million in 2013 to S/.14.8 million in 2014.
- Capital Expenditures: Significant investment continued in the new Piura cement plant, with total capital expenditures reaching S/.586.6 million in 2014, compared to S/.200.6 million in 2013.
Guidance, Outlook, and Risks
Outlook and Strategy
- Expansion: The company is in the construction phase of a new cement plant in Piura, expected to add 1.6 million metric tons of annual capacity, with completion targeted for 2015.
- Non-Core Projects: Continued development of phosphate and brine mining projects. The phosphate project has a 20-year off-take agreement with Mitsubishi. The brine project is a joint venture with Quimpac.
- Dividends: The company declared an extraordinary dividend in November 2014 following the sale of its financial investment. The Board was delegated authority to decide on the distribution of 2014 earnings at the March 2015 shareholders' meeting.
Risks and Contingencies
- Market Concentration: Operations and sales are highly concentrated in the northern region of Peru, making the company vulnerable to regional economic downturns, natural disasters (earthquakes, El Niño), and political instability.
- Competition: Risk of intensified competition if other manufacturers expand into the northern region or if imported cement/clinker prices decrease.
- Input Costs: Exposure to fluctuations in energy prices (coal and electricity) and imported clinker costs. Approximately 43% of cost of sales was denominated in US dollars in 2014.
- Regulatory: Potential changes in Peruvian tax laws, environmental regulations, and mining royalty taxes. The company successfully challenged a new mining royalty regulation in 2013, but future regulatory changes remain a risk.
- Project Execution: Delays or cost overruns in the Piura plant, phosphate, and brine projects could adversely affect financial performance.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants in the US$300 million 4.50% Senior Notes due 2023 indenture (Fixed Charge Coverage Ratio and Debt-to-EBITDA ratio).
- Capital Expenditure Progress: Monitor the timeline and budget adherence for the Piura plant construction, which is a major driver of future capacity and cash outflows.
- Exchange Rate Exposure: Assess the effectiveness of the company's hedging strategy (cross currency swaps) against further depreciation of the nuevo sol, given the significant portion of costs and debt in US dollars.
- Non-Core Project Viability: Review the status of feasibility studies for the phosphate and brine projects, as these are not yet producing revenue and carry significant exploration risk.
- Regional Economic Health: Track construction activity levels and GDP growth specifically in the northern region of Peru, as this is the primary market for the company's core products.