CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Fourth Quarter (4Q) and Full Year (FY) ended December 31, 2013.
Filing Date: February 13, 2014.
Business Overview: A Peruvian cement manufacturer operating primarily in the northern region of Peru. The company produces cement, concrete, blocks, and quicklime. It is the sole cement manufacturer in the northern region, which accounts for approximately 23% of Peru's population and 15% of its GDP.

Key Financial Metrics

Margins (FY 2013 vs FY 2012):

• Gross Margin: 42.2% (vs 39.0%)
• Operating Margin: 23.6% (vs 19.7%)
• Net Income Margin: 12.3% (vs 13.3%)
• Consolidated EBITDA Margin: 28.1% (vs 23.8%)

Material Changes vs. Prior Period

Full Year 2013 Performance:

• Volume: Cement sales volume increased 4.0% year-over-year.
• Profitability: Operating profit surged 27.1% and EBITDA rose 25.3%, driven by operational improvements and margin expansion.
• Net Income Decline: Despite strong operating results, Net Income decreased 2.1% to S/. 152.3 million. This was primarily due to a S/. 48.4 million net loss from exchange rate fluctuations and increased financing costs.
• Exchange Rate Impact: The Peruvian Sol depreciated from S/. 2.55 to S/. 2.795 per US Dollar (9.6% change), negatively impacting the company's net debt position of approximately US$ 150 million.

Fourth Quarter 2013 Performance:

• Volume: Cement sales volume decreased 1.9% compared to 4Q12, reflecting a slight economic slowdown.
• Quicklime Segment: Sales volume dropped 49.5% and gross margin turned negative (-37.5%) due to lower demand from the mining sector (linked to lower metal prices) and expense reclassifications.
• Construction Supplies: Sales declined 18.7% due to increased competition.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Recovery Expectation: Management expects cement sales to recover in the second quarter of 2014, citing improved consumer confidence indices observed since November 2013.
• Infrastructure: The company anticipates demand growth from government infrastructure projects, including the Talara Refinery modernization (US$ 3.5 billion) and the Chavimochic irrigation project.

Capital Expenditures and Expansion:

• 2013 Capex: Total investment was S/. 210.6 million (US$ 75.3 million).
• New Piura Plant: Construction began in October 2013. Expected to start production in H2 2015 with a capacity of 1.6 million MT of cement and 1.0 million MT of clinker.
• Rioja Expansion: Capacity expansion completed, contributing to increased production volumes in 2013.

Risks and Contingencies:

• Legal Victory: In November 2013, the Peruvian Constitutional Court ruled in the company's favor regarding the Mining Royalty Law, confirming the company will calculate royalties based on the value of the concentrate rather than the final industrial product.
• Market Conditions: Continued volatility in metal prices affects quicklime demand. The broader Peruvian economy showed signs of slowing in late 2013, though GDP growth remained positive at 5.1%.

Investor Verification Checklist

• Exchange Rate Sensitivity: Verify the impact of Sol depreciation on future net income given the company's US$ 300 million debt and US$ 150 million net cash position.
• Quicklime Segment Viability: Assess the sustainability of the quicklime business given the 49.5% volume drop and negative margins in 4Q13 due to mining sector weakness.
• Capex Execution: Monitor the progress and cost overruns of the new Piura plant, which represents a significant portion of recent capital allocation (S/. 72.9 million in 2013).
• Infrastructure Pipeline: Confirm the timeline and funding status of key government projects (Talara Refinery, Chavimochic) that are expected to drive future demand.
• Debt Maturity: Review the 10-year bullet maturity of the US$ 300 million international bonds issued in February 2013 to ensure liquidity coverage for interest payments.