Fitch Affirms Cementos Pacasmayo S.A.A.'s IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the following ratings of Cementos Pacasmayo S.A.A. (Pacasmayo):

--Foreign currency Issuer Default Rating (IDR) at 'BBB-';

--Local currency IDR at 'BBB-';

--USD300 million senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

The ratings reflect the company's solid business position as the only cement producer in Peru's northern region. This position has resulted in high margins, low leverage and solid liquidity. The small size of the cement market in the north, as well as the difficulty of logistics in this region, has limited the impact of imports. Further factored into the ratings is the favorable outlook for Peru's cement industry over the medium term driven by Peru's positive macro-economic and business environment.

The Stable Outlook reflects Fitch's view that Pacasmayo will maintain the positive trend in its cement operating results based upon its market position coupled with a favorable business and macroeconomic environment in its area of influence. The ratings consider that the company's free cash flow (FCF) will be negative between 2014-2016 due to the high level of expenses associated with building a new cement plant in Piura. The Stable Outlook also factors in the expectation that the company's gross adjusted leverage, measured by the total adjusted debt-to-EBITDAR ratio, for its cement operations will remain between 2.25x and 2.50x and that the company will maintain an adequate liquidity and manageable debt profile in the short- to medium-term.

Solid Business Position:

Cementos Pacasmayo is the dominant player in Peru's northern region, where it provides essentially all the cement being consumed. During the last 12-month (LTM) period ended Sept. 30, 2013, the company sold 2.3 million metric tons, maintaining its historical market share in Peru's cement industry of around 22%.

High Margins:

Pacasmayo's EBITDA during the LTM ended Sept. 30, 2013 was S/.336 million (USD120 million), resulting in an EBITDA margin of 27%. The company has maintained EBITDA margins above the norm for the industry because of its dominant position in the northern region. The company is expected to maintain EBITDA margin above 25% over the next five years.

Strong Liquidity:

As of Sept. 30, 2013, the company's total debt and cash positions were S/.819 million (USD294 million) and S/.1,063 million (USD382 million), respectively. Pacasmayo's liquidity is strong as a result of its solid cash position and manageable debt payment schedule.

Negative FCF during 2013-2016:

Pacasmayo's cement operations are expected to generate negative FCF during the next several years due to the execution of its capex plan to build a new cement plant in the city of Piura. The company anticipates starting operations at Piura during the first half of 2015, with a cost of approximately USD$380 million. The ratings incorporate the expectation that the cement operations will become FCF positive after the completion of the plant. This plant will increase the company's annual cement capacity by 1.6 million tons.

Increased Leverage over the Medium Term:

Pacasmayo's gross adjusted leverage (total debt/total EBITDA) as of Sept. 30, 2013 was 2.4x due to the USD$300 million bond issuance to refinance short-term debt and fund the new Piura plant. The company was net cash positive as of Sept. 30, 2013 due to the S/.1,063 million (USD382 million) of cash it held. During 2014, capex should be around S/.664 million and the company is projected by Fitch to distribute about S/.50 million of dividends. Consequently, Fitch projects that FCF will be negative by about S/.488 million during 2014. While total leverage is expected to remain in the range of 2.25x to 2.50x, net debt will climb to around 1.0x. The plant should be completed in the first half of 2015 and then leverage should gradually decline.

Continued Growth in Peru's Cement Industry:

The company is expected to continue to benefit from solid business fundamentals. The Peruvian economy is forecast to grow by about 6% per year in 2013 and 2014, after growing by 7% and 6% during 2011 and 2012, respectively. During the last 10 years (2002-2012), the company's cement sales volume grew at a compound annual growth rate (CAGR) of around 11%. Sales have been driven by the rapid expansion of the construction sector.

KEY RATING DRIVERS:

Positive Rating Actions: Any positive rating action is unlikely to occur before the company completes its aggressive capex program. A positive credit consideration would be an expansion of the company's geographic presence.

Negative Rating Actions: Pacasmayo's rating could be negatively affected by some combination of the following: significant deterioration in Peru's macroeconomic and business environment; increasing competition resulting in the company's EBITDA margin deterioration; or significantly higher levels of capex related to the Piura plant.

Additional information is available at 'www.fitchratings.com'.

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814363

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Phillip Wrenn, [phone]
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
[e-mail]
or
Secondary Analyst
Josseline Jenssen, [phone]
Director
or
Committee Chairperson
Joe Bormann, CFA, [phone]
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, [phone]
[e-mail]