Business Context and Reporting Period
Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Second Quarter (2Q) and Six Months (6M) ended June 30, 2016.
Business Overview: A leading cement producer in northern Peru, serving the construction industry with cement, concrete, blocks, and quicklime. The company recently completed the Piura plant project, which is now operational and supplying nearly 40% of total cement and clinker production.
Key Financial Metrics
| Metric (in millions S/) | 2Q16 | 2Q15 | 6M16 | 6M15 |
|---|---|---|---|---|
| Revenues | 301.7 | 276.5 | 611.3 | 567.1 |
| Gross Profit | 126.4 | 119.5 | 240.7 | 244.6 |
| Operating Profit | 65.9 | 73.0 | 127.3 | 145.3 |
| Net Income | 31.3 | 44.3 | 59.0 | 96.5 |
| Consolidated EBITDA | 93.1 | 89.3 | 178.6 | 178.5 |
| Cash Position (as of 6/30/16) | 124.6 (US$ 37.9 million) | |||
| Total Debt (as of 6/30/16) | 986.7 (US$ 300.0 million) | |||
| Net Adjusted Debt/EBITDA | 2.0x |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9.1% in 2Q16 and 7.8% in 6M16, driven by a 4.8% and 6.5% increase in sales volumes of cement, concrete, and blocks, respectively.
- Profitability Decline: Net income decreased 29.3% in 2Q16 and 38.9% in 6M16. This decline is primarily attributed to:
- Cessation of capitalization of borrowing costs following the completion of the Piura plant.
- Increased depreciation expenses.
- Exclusion of S/ 8.8 million in non-operating income (real estate sale) recorded in 2Q15.
- Negative exchange rate effects due to Sol appreciation on USD cash holdings.
- EBITDA Performance: Consolidated EBITDA rose 4.3% in 2Q16. Excluding the one-time non-operating income from 2Q15, EBITDA would have increased 15.7%.
- Margin Compression: Gross margin decreased 1.3 percentage points in 2Q16 and 3.7 percentage points in 6M16 due to higher fixed costs, increased depreciation, and temporary reliance on imported clinker in 1Q16.
- Operational Shift: The new Piura plant is operating at ~60% utilization, eliminating the need for clinker imports and reducing exposure to volatile import costs.
Guidance, Outlook, and Risks
- Outlook: Management expects mid-single digit growth in full-year volumes. The outlook for the second half of 2016 is solid, supported by continued infrastructure spending, private sector growth, and potential federal spending following the presidential election.
- Strategic Drivers: Future results are expected to improve as fixed costs are absorbed and the Piura facility ramps up, lowering production costs.
- Key Projects: Significant infrastructure projects in the northern region (Talara Refinery, Chavimochic, Longitudinal de la Sierra Highway) are in execution phases, providing steady demand.
- Risks & Contingencies:
- El Niño: Weather anomalies declared ended in April 2016 with less severe impact than expected.
- Political Stability: Recent presidential election resulted in a business-friendly administration, boosting investment confidence.
- Pre-operating Projects: Fosfatos del Pacifico and Salmueras Sudamericanas projects are in pre-operating stages and currently do not generate revenue.
Investor Verification Checklist
- EBITDA Adjustments: Verify the impact of the S/ 8.8 million non-operating income in 2Q15 on year-over-year comparisons.
- Depreciation Impact: Confirm the magnitude of increased depreciation charges post-Piura plant completion and its effect on long-term margins.
- Cash Flow vs. Net Income: Review operating cash flow to ensure the decline in net income is not indicative of liquidity issues (Cash position remains strong at S/ 124.6 million).
- Debt Hedging: Verify the effectiveness of the cross-currency swap agreements covering the US$ 300 million debt against Sol appreciation risks.
- Volume Growth Sustainability: Assess the progress of key infrastructure projects (Talara, Chavimochic) to validate the mid-single digit volume growth guidance.