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, 2016
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: The Company is the leading cement manufacturer in northern Peru, operating three facilities (Pacasmayo, Piura, and Rioja). It produces cement, quicklime, and construction materials. In March 2017, the Company spun off its phosphate assets (Fosfatos del Pacífico S.A.) into a new entity, Fossal S.A.A., which were classified as discontinued operations and assets held for distribution as of December 31, 2016.

Key Financial Metrics (Year Ended Dec 31, 2016)

Note: US$ amounts are translated at the period-end rate of S/3.356 to US$1.00.

Material Changes vs. Prior Period

• Profitability Decline: Profit for the year decreased by 46.7% (S/98.8 million) compared to 2015. Operating profit fell 16.8% due to higher fixed costs from lower sales volumes and increased administrative and selling expenses.
• Revenue Stability: Sales of goods increased slightly by 0.7% (S/9.2 million), driven by a 17.2% increase in quicklime sales and a 1.3% increase in cement/concrete sales, offset by a 20.8% decline in construction supplies sales.
• Margin Compression: Gross profit margin decreased from 43.5% in 2015 to 40.6% in 2016. This was primarily due to higher depreciation expenses related to the new Piura plant and a decrease in the margin of the blocks segment.
• Cost Drivers: Cost of sales increased 5.8%. The cost of cement production rose due to higher depreciation, despite a reduction in imported clinker usage (which dropped from 17.9% of production cost in 2015 to 6.0% in 2016).
• Financing Costs: Finance costs more than doubled (increasing 104.9%) to S/75.4 million, largely due to the termination of borrowing cost capitalization following the completion of the Piura plant project.
• Cash Position: Cash and term deposits decreased significantly by 49.3% (S/77.8 million) to S/80.2 million, reflecting capital expenditures and dividend payments.

Guidance, Outlook, and Risks

• Outlook: Management expects public investment to pick up in the second half of 2017 due to reconstruction works in northern Peru following natural disasters (El Niño) and the government's investment plan. The Company aims to maintain market share in the northern region without reducing profitability.
• Capital Expenditures: The Company expects to spend approximately US$20 million per year over the next five years on recurring capital expenditures for maintenance. The new Piura plant was completed under budget (US$365 million vs. US$386 million original budget).
• Key Risks:
  • Regional Concentration: All operations and sales are concentrated in northern Peru, exposing the Company to regional economic downturns, political instability, and natural disasters (e.g., flooding, earthquakes).
  • Competition: Risk of intensified competition if other manufacturers expand into the northern region or if imported clinker/cement prices decrease.
  • Energy Costs: Energy (coal and electricity) accounts for a significant portion of production costs (approx. 26.2% in 2016). The Company does not have long-term coal supply agreements or hedging for coal prices.
  • Regulatory/Tax: Changes in Peruvian tax laws or environmental regulations could increase costs. The Company successfully challenged a new mining royalty tax regulation in 2013, but future regulatory changes remain a risk.
  • Brine Project: The Company is developing a brine project (Salmueras) with a partner. This is a non-core, speculative project with risks regarding regulatory approvals, cost overruns, and commercial viability.

Important Facts for Investor Verification

• Spin-off Impact: Verify the finalization and financial impact of the March 2017 spin-off of phosphate assets into Fossal S.A.A., which reduced the Company's share capital.
• Debt Covenants: Review the covenants associated with the US$300 million 4.50% Senior Notes due 2023, specifically the fixed charge coverage ratio (minimum 2.5:1) and debt-to-EBITDA ratio (maximum 3.5:1).
• Exchange Rate Exposure: Assess the impact of Sol depreciation on US$-denominated debt and imported inputs (coal, electricity), noting that the Company has hedged its US$300 million debt exposure via cross-currency swaps.
• Utilization Rates: Monitor capacity utilization rates, which declined in 2016 (Cement: 46.1% vs. 47.2% in 2015; Clinker: 62.3% vs. 67.5% in 2015) due to market slowdowns.
• Dividend Policy: Confirm the Company's ability to maintain dividend payments given the significant drop in net profit, noting that dividends paid in 2016 were S/155.2 million.