Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Fourth Quarter (4Q) and Full Year ended December 31, 2012.
Filing Date: February 19, 2013.
Business Overview: A leading Peruvian cement company and the sole manufacturer in Peru's northern region. The company produces cement, concrete, blocks, and quicklime. Results are prepared under IFRS and stated in Peruvian nuevos soles (S/.).
Key Financial Metrics
| Metric (in millions S/.) | 4Q 2012 | 4Q 2011 | 2012 Full Year | 2011 Full Year |
|---|---|---|---|---|
| Sales of Goods | 317.0 | 277.3 | 1,169.8 | 995.0 |
| Gross Profit | 128.8 | 123.1 | 456.8 | 425.5 |
| Operating Profit | 62.4 | 51.1 | 230.5 | 118.9 |
| Net Income (Controller) | 39.9 | 28.3 | 159.0 | 67.7 |
| Cement EBITDA | 78.3 | 70.1 | 292.1 | 270.8 |
| Operating Cash Flow | 12.7 | 35.4 | 99.7 | 132.3 |
| Investing Cash Flow | (138.7) | (60.7) | (667.4) | (239.2) |
Liquidity and Debt (as of Dec 31, 2012):
- Cash Position: S/. 473.8 million (US$ 185.7 million), including S/. 434.0 million in certificates of deposit.
- Total Debt: S/. 215.5 million (US$ 84.5 million), primarily a loan with BBVA Banco Continental due in 2018.
- Recent Financing: Successfully placed US$ 300 million in Senior Notes (4.50% coupon, due 2023) on February 1, 2013. Proceeds were used to prepay the BBVA loan and fund the new Piura plant.
Material Changes vs. Prior Period
- Profitability Surge: Full-year 2012 Net Income increased 134.9% to S/. 159.0 million compared to S/. 67.7 million in 2011. This growth was significantly aided by the absence of a S/. 67.1 million impairment charge on zinc mining assets recorded in 2011.
- Volume Growth: Cement sales volume rose 16.6% in 2012 and 14.2% in 4Q12, driven by strong demand in the northern region and the "self-construction" segment.
- Margin Compression: Despite revenue growth, Gross Margin decreased 3.8 percentage points (to 39.0% for 2012) due to higher clinker costs (including imported clinker) and increased freight costs from a new door-to-door sales strategy.
- Cash Flow Decline: Operating cash flow decreased 24.6% in 2012, attributed to higher tax payments related to the 2011 sale of a subsidiary stake and increased purchases of imported clinker.
Outlook, Risks, and Management Commentary
Management Commentary & Strategy:
- Commercial Strategy: The company shifted to a 100% door-to-door sales system, increasing revenues and freight costs but reducing percentage margins.
- Capacity Expansion: The Rioja plant expansion is expected to be operational in Q1 2013, adding 0.24 million metric tons of capacity. A new Piura plant is under construction.
- Strategic Projects: The Fosfatos del Pacifico (phosphate) project is in the basic engineering stage, with operations expected in 2016. The Salmueras Sudamericanas (brine) project is also in the engineering phase.
Risks and Contingencies:
- Project Delays: The Rioja plant expansion encountered delays, though completion is targeted for Q1 2013.
- Pre-operating Costs: Consolidated Adjusted EBITDA was negatively affected by expenses from the Fosfatos del Pacifico and Salmueras Sudamericanas projects, which are not yet generating revenue.
- Forward-Looking Statements: Future results depend on economic conditions, industry trends, and the successful execution of capital expenditure plans.
Investor Verification Checklist
- Debt Refinancing: Verify the full prepayment of the S/. 202.2 million BBVA loan using proceeds from the US$ 300 million Senior Notes issuance.
- Margin Sustainability: Assess the long-term impact of the door-to-door sales strategy and reliance on imported clinker on gross margins.
- Capital Expenditure Execution: Monitor the timeline and cost overruns for the Piura plant and Rioja expansion projects.
- Non-Core Asset Performance: Track the progress and capital requirements of the pre-operating phosphate and brine projects.
- Market Share: Confirm the company's dominance in the northern region (approx. 22% of Peru's population) and its ability to maintain volume growth amidst regional competition.