CPAC

Business Context and Reporting Period

Company: Cementos Pacasmayo S.A.A. (NYSE: CPAC)
Reporting Period: Third Quarter (3Q14) and Nine Months (9M14) ended September 30, 2014.
Business Overview: A Peruvian cement manufacturer operating primarily in the northern region of Peru. The company produces cement, concrete, quicklime, and construction supplies. It is currently executing a major expansion project for a new plant in Piura.

Key Financial Metrics

Margins (9M14 vs 9M13):

• Gross Margin: 40.6% (decreased 2.3 percentage points)
• Operating Margin: 22.2% (decreased 1.9 percentage points)
• Net Margin: 13.2% (increased 0.5 percentage points)
• Consolidated Adjusted EBITDA Margin: 27.4% (decreased 1.1 percentage points)

Material Changes vs. Prior Period

Revenue and Volume:

• 9M14: Sales decreased 0.4% and cement sales volume remained flat (-0.1%) compared to 9M13. The decline in concrete sales was offset by a significant increase in quicklime sales.
• 3Q14: Sales decreased 6.0% and cement sales volume dropped 6.4% compared to 3Q13, driven by lower demand in cement and concrete segments.

Profitability:

• 3Q14: Net income fell 17.0% to S/. 40.5 million, primarily due to a higher net loss from exchange rates (S/. 6.2 million loss vs. S/. 1.0 million loss in 3Q13).
• 9M14: Net income increased 3.4% to S/. 121.3 million. This improvement was driven by a significantly lower loss from exchange differences (S/. 9.4 million loss vs. S/. 46.0 million loss in 9M13), which offset declines in operating profit.

Operational Performance:

• Pacasmayo Plant: Cement production decreased 9.7% in 3Q14 due to lower demand. Utilization rates for cement and clinker declined.
• Rioja Plant: Cement production increased 9.4% in 3Q14 and 27.0% in 9M14 due to expanded capacity coming online.
• Quicklime: Production volume surged 44.2% in 3Q14 and 48.8% in 9M14 to meet demand, though margins compressed due to stoppage costs and higher coal prices.

Guidance, Outlook, and Risks

Capital Projects:

• Piura Plant: The new plant (US$ 385 million investment) is on schedule and budget. Production is expected to begin in the second half of 2015. As of September 30, 2014, US$ 193.3 million had been invested.
• Other Projects: The Fosfatos del Pacifico and Salmueras Sudamericanas projects remain in pre-operating stages and are not currently generating revenue.

Economic Outlook:

• Management expects a recovery in the Peruvian economy in 4Q14 and 2015, driven by increased mining production and public infrastructure investment.
• Key infrastructure projects in the northern region (Talara refinery, Chavimochic irrigation, North Highway) are expected to boost cement demand starting in 2015.

Risks and Contingencies:

• Exchange Rates: Significant volatility in exchange rates impacted net income in 3Q14.
• Market Conditions: The Peruvian economy faced a slowdown in the first nine months of 2014 due to reduced private investment and external factors affecting metal prices.
• Project Execution: Delays in regional infrastructure works were noted, though expected to be implemented in 2015.

Investor Verification Checklist

• Exchange Rate Impact: Verify the sensitivity of future net income to currency fluctuations, given the significant variance in exchange losses between 3Q14 and 9M14.
• Piura Plant Timeline: Confirm the projected start of production in H2 2015 and the associated capital expenditure burn rate (US$ 57.6 million expected in 4Q14).
• Concrete Segment Recovery: Monitor the concrete segment, which saw a 27.4% sales drop in 3Q14 due to project delays, to assess if the anticipated infrastructure boom materializes.
• Debt Structure: Review the US$ 300 million international bond (4.50% coupon, 10-year maturity) and ensure liquidity coverage remains adequate given the heavy Capex schedule.
• Quicklime Margins: Assess whether the margin compression in the quicklime segment (down 13.0 pp in 3Q14) is temporary or structural due to input costs.