Cementos Pacasmayo S.A.A. — FY2017 Form 20-F Summary
Business context and reporting period. This is the company’s annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter report. Cementos Pacasmayo produces and sells cement and related construction products, primarily in northern Peru, and reports under IFRS in Peruvian soles (S/). Its ADSs trade on the NYSE. The company reported approximately 2.3 million metric tons of cement shipments and an estimated 21.3% share of Peru’s cement shipments.
Key financial metrics
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Sales of goods | S/1,225.6 million | S/1,240.2 million | Down 1.2% |
| Gross profit / margin | S/492.7 million / 40.2% | S/503.6 million / 40.6% | Profit down 2.2%; margin down 0.4 percentage points |
| Operating profit | S/198.6 million | S/272.8 million | Down 27.2%; reported operating margin was 16.0% |
| Profit from continuing operations | S/81.4 million | S/119.5 million | Down 31.9% |
| Profit for the year | S/80.6 million | S/112.9 million | Down 28.6%; parent-attributable profit was S/93.8 million |
| Adjusted EBITDA and margin | S/371.5 million / 30.3% | S/371.0 million / 29.9% | Adjusted EBITDA up 0.1%; non-IFRS measure |
| Operating cash flow | S/250.4 million | S/241.7 million | Up 3.6% |
| Capital expenditures | S/70.0 million | S/120.3 million | Primarily maintenance and equipment purchases in 2017 |
At year-end, cash and term deposits were S/49.2 million, down from S/80.2 million. Current assets were S/553.4 million and current liabilities S/205.0 million, giving working capital of S/348.3 million. The company reported S/972.3 million of outstanding debt principal (the balance-sheet carrying amount, net of issuance costs, was S/965.3 million). Debt consists of 4.50% Senior Notes due February 2023. Cross-currency swaps covered the US$300 million principal; management stated the hedge-adjusted debt was S/913.3 million. The company reported compliance with debt covenants.
Net cash used in investing activities was S/70.6 million and net cash used in financing activities was S/185.4 million. Financing outflows principally reflected dividends and hedge costs, as well as a S/34.2 million purchase of treasury investment shares. Dividends paid were S/149.8 million, or S/0.35 per share.
Material changes versus FY2016
- Sales fell mainly because cement-related revenue declined 2.4%, particularly concrete and blocks, amid delays in infrastructure and private construction projects. Cement sales revenue itself rose 2.7%, reflecting higher average price and volume.
- The fourth-quarter decision to discontinue the brine project produced a S/47.6 million impairment charge. Management said continuing-operations profit would have been S/118.8 million without the impairment, versus reported S/81.4 million.
- Operating expenses increased 27.4%, including the impairment, higher selling and distribution costs, and a shift in other operating income to a S/4.3 million expense. Selling and distribution expenses rose 16.8%, partly due to increased advertising.
- Profitability also reflects a difficult operating year: Coastal El Niño damaged roads and disrupted shipping and access to raw materials. The company recognized S/9.7 million of disaster-related costs, net of insurance compensation.
- Adjusted EBITDA remained broadly stable, with management citing Piura operational efficiencies and the elimination of imported clinker as offsets to lower sales and first-four-month disruption. Cement production was 2.286 million tons versus 2.276 million in 2016; capacity utilization was 46.3%.
- The March 2017 Fosfatos del Pacífico spin-off reduced assets, equity and share capital. This was a corporate separation distinct from the Q4 brine-project discontinuation.
Outlook, management commentary and risks
- No specific company revenue, profit or EBITDA guidance is provided. Management anticipated a pickup in public investment during 2018–2021 for northern reconstruction following El Niño. Peru’s “Reconstruction with Changes” plan had an approved budget of S/25.7 billion; delivery and timing remain uncertain.
- Management’s strategy is to focus on cement and construction solutions, maintain northern-market share and cost efficiency, deepen retailer and customer relationships, and selectively consider complementary acquisitions. The company also expected to spend approximately US$20 million annually over the next five years on recurring maintenance capital expenditures.
- Demand is concentrated in northern Peru and tied to housing, self-construction and public/private construction. Self-construction represented an estimated 62.2% of 2017 cement sales. Political uncertainty, corruption investigations, delayed projects and regional economic weakness could constrain demand.
- Coastal El Niño, flooding, landslides and road damage pose operational and distribution risks. Production is also exposed to coal and electricity costs; energy was approximately 28.1% of cement production costs in 2017. Coal is bought at market prices without long-term supply contracts or price hedging.
- All US-dollar debt was hedged through cross-currency swaps at year-end, but the company cautions that currency volatility and the sol/US-dollar mismatch remain risks. Other material risks include competition, environmental and regulatory requirements, tax changes, labor issues, and reliance on the Pacasmayo and Piura facilities.
- Contingencies include third-party claims totaling S/16.6 million, for which no provision was recorded because management and counsel considered an unfavorable outcome possible but not probable. A disputed VAT refund receivable of S/9.2 million is also outstanding; management’s advisers considered recovery supportable but expected it to take a long time. The filing states there were no material legal proceedings.
- The auditor issued an unqualified opinion on the IFRS financial statements, and management and the auditor reported effective internal control over financial reporting as of December 31, 2017.
Most important facts for investors to verify
- Whether reconstruction spending and other public/private projects convert into cement demand, particularly given the company’s northern Peru concentration and low 46.3% capacity utilization.
- The brine impairment’s accounting and tax treatment, and whether the company has fully exited the project without further costs or obligations.
- Cash generation, working-capital needs and liquidity after the year-end cash decline, dividends and ongoing capital spending.
- The effectiveness and continuing economics of the US$300 million cross-currency hedge, including future hedge payments and exposure if hedge terms or effectiveness change.
- The status and recoverability of the S/9.2 million VAT refund, the S/16.6 million claims, and any tax assessments still open to review.
- Whether reported earnings comparisons account for the Fosfatos spin-off, the noncash brine impairment, discontinued operations and the distinction between consolidated profit and parent-attributable profit.