CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (Pacasmayo Cement Corporation)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Three months ended March 31, 2014
Filing Date: April 28, 2014
Business Overview: The Company is a Peruvian open stock corporation primarily engaged in the production and marketing of cement, blocks, concrete, and quicklime in Peru's northern region. It is a subsidiary of Inversiones ASPI S.A., which holds approximately 50.94% of the Company's shares.

Key Financial Metrics

All figures in thousands of Peruvian Soles (S/.), unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased by approximately 3.0% year-over-year, driven primarily by the cement, concrete, and blocks segment (up 2.7%).
• Profitability Decline: Net profit decreased by 11.8% to S/.39.8 million. Operating profit declined 5.5% due to increased administrative expenses (up 12.0%) and higher finance costs.
• Exchange Rate Impact: The Company recorded a net loss from exchange differences of S/.2.4 million, compared to S/.3.1 million in the prior year, attributed to volatility in the US Dollar against the Nuevo Sol affecting USD-denominated borrowings.
• Capital Expenditure: Additions to property, plant, and equipment more than doubled to S/.117.8 million (from S/.57.7 million), primarily for the construction of a cement plant in Piura and commissioning of a diatomites brick plant.
• Liquidity Position: Cash and term deposits decreased by S/.100.5 million during the quarter, largely due to significant investing outflows (S/.118.0 million) and working capital adjustments.

Outlook, Risks, and Contingencies

• Capital Commitments: The Group has significant ongoing commitments, including S/.144.8 million for the Piura cement plant and a US$100 million commitment for the brine project (Salmueras Sudamericanas S.A.), of which US$16.8 million has been contributed as of March 31, 2014.
• Debt Covenants: The Company issued US$300 million Senior Notes in 2013 (4.50% interest, maturing 2023). Covenants require a fixed charge ratio of at least 2.5:1 and a debt-to-EBITDA ratio not exceeding 3.5:1. Management confirmed compliance as of the reporting date.
• Legal and Tax Contingencies: Third-party legal claims totaling S/.2.8 million are pending, including labor claims and tax assessments. Management deems it "possible but not probable" that these will succeed; no provision has been recorded.
• Environmental: The Peruvian authorities approved the Environmental Impact Study (EIS) for the Phosphates project in March 2014.
• Segment Performance: The "Quicklime" segment reported a loss before tax of S/.2.1 million, while the core "Cement, concrete and blocks" segment generated S/.63.7 million in profit before tax.

Investor Verification Checklist

• Capital Expenditure Progress: Verify the timeline and budget adherence for the Piura cement plant and the diatomites brick plant, given the doubling of CapEx in Q1.
• Foreign Exchange Exposure: Assess the impact of continued USD/PEN volatility on future finance costs and net profit, given the lack of hedging instruments.
• Debt Covenant Compliance: Monitor the fixed charge and debt-to-EBITDA ratios closely as the company continues heavy investment phases.
• Brine Project Funding: Track the remaining capital requirements for the US$100 million brine project commitment and the ability of non-controlling interests to meet their funding obligations.
• Quicklime Segment Viability: Investigate the causes of the loss in the quicklime segment and management's strategy to improve its profitability.