| ● | packaging, loading and distribution. |
Extraction of raw materials. To produce cement, limestone/seashells are extracted from our quarries. We use explosives to loosen the limestone and deploy bulldozers to remove dirt and the overburden covering the limestone. We crush the limestone in our primary and secondary cone crusher and the resulting limestone is loaded into trucks and hauled to our Pacasmayo or Rioja facilities from the adjacent quarry where it is stored. In the case of Piura, our surface miner drills out our seashell quarry and then it is also loaded into trucks and hauled to the Piura facilities.plant.
Grinding and homogenization. Limestone,Limestone/seashells, clay and sand are mixed with iron that is acquired from third parties. The quality of the resulting raw meal is monitored by examining samples of each batch and processing them through our quality control x-ray software that automatically measures the mix of materials to confirm the blend is in compliance with our quality standards. Subsequently, the raw meal is sent to a blending silo and then to a storage silo from where it is fed into the pre-heater.
Clinkerization.The raw meal is heated at a temperature of approximately 1,450 degrees Celsius in our kilns. The intense heat causes the limestone and other materials in the mixture to react inside the kiln, turning the mixture into clinker. Clinker is then cooled to a temperature of approximately 200 degrees Celsius and stored in a silo or in an outdoor yard.
Cement grinding. After being cooled, clinker, together with gypsum and some admixtures, is fed into a ball mill or into a vertical roller mill where it is ground into a fine powder to produce cement. In this form, cement reacts as a binding agent that, when mixed with water, sand, stone and other aggregates, is transformed into concrete or mortar.
Storage in silos. After passing through the ball mills, the cement is transferred on conveyor belts and stored in concrete silos in order to preserve its quality until distribution.
Packaging, loading and transport. Cement is transferred through another conveyor belt from the silo to be packaged in 42.5 kilogram bags and then loaded into trucks operated by third parties to be transported for distribution. Bulk cement may be transported (unpackaged) on especially designed trucks that deliver large amounts of cement directly to the work site.
Quicklime Production Process
Quicklime is produced by crushing limestone with a calcium carbonate content of at least 95% by calcinating it in a rotary kiln. The limestone for quicklime comes from our quarries. The crushing of the limestone is done at the quarry and the calcination process takes place only at our Pacasmayo facility. We produce quicklime in finely and coarsely ground varieties and sell both varieties in bags of 40 kilograms and up to one metric ton, as well as in bulk.
Raw Materials and Energy Sources
Limestone and Other Calcareous Resources
We obtain limestone required to produce clinker and quicklime principally from land where we have concession rights. For our Pacasmayo plant, we extract limestone from our Acumulación Tembladera quarry located approximately 60 kilometers from the plant, and for our Rioja plant, we extract limestone from our Calizas Tioyacu quarry which is adjacent to our Rioja plant. For our Piura plant, we extract seashells from our Bayovar 4 and Virrilá quarries, located approximately 140 and 120 kilometers, respectively, from the plant.
Acumulación Tembladera. We have a concession with an indefinite term to extract limestone and other minerals from our Acumulación Tembladera quarry, a 3,390 hectare open-pit mine located in the district of Yonan, in the department of Cajamarca. We acquired this concession in November 2002.
Calizas Tioyacu. For our Rioja production, we have a concession with an indefinite term to extract limestone and other minerals from a 400 hectare open-pit mine near our Rioja facility in the district of Elias Soplin Vargas, in the department of San Martín. We acquired this concession in February 1998.
Bayovar 4. For our Piura production, we have a concession with an indefinite term to extract seashells and other minerals from our Bayovar 4 quarry, a 22,326 hectare open-pit mine located in the district of Sechura, in the department of Piura. We acquired this concession in 2008
Virrilá. For our Piura production, we also have a group of concessions with an indefinite term to extract seashells and other minerals from our Virrilá quarry, a 931 hectare open-pit mine located in the district of Sechura, in the department of Piura. We acquired these concessions between 2000 and 2008.
In each of our limestone and seashell concessions, the term of the concession is indefinite, provided we pay an annual concession fee and a penalty fee if we fail to meet required minimum annual production levels. Failure to pay suchtimely pay these fees in a timely manner for two consecutive years will cause us to forfeitresult in forfeiture of our concession titles.concession. As of the date of this annual report, we have fully paid all applicable fees on our operating concessions.
We extracted from our Acumulación Tembladera quarry approximately 1.0 million metric tons in 2015, 0.7 million metric tons in 2016, and 1.9 million metric tons in 2017, 1.9 million metric tons in 2018 and 1.5 million metric tons in 2019 which were used for cement and quicklime production at our Pacasmayo facility. We extracted from our Calizas Tioyacu quarry approximately 481,858 metric tons in 2015, 293,990 metric tons in 2016, and 331,497 metric tons in 2017, 359,529 metric tons in 2018 and 400,520 metric tons in 2019 which were used for cement production at our Rioja facility.plant. We extracted from our Bayovar 4 quarry approximately 44,702 metric tons of limestone in 2016, and 40,183 metric tons in 2017, 43,786 metric tons in 2018 and 41,531 metric tons in 2019 which were used for cement production at our Piura facility. We extracted from our Virrilá quarry approximately 1.2 million metric tons of limestone in 2016 and 866,023 metric tons in 2017, 1.3 million metric tons in 2018 and 1.0 million metric tons in 2019 which were used for cement production at our Piura facility.plant.
We estimate that as of December 31, 2017,2019, our Acumulación Tembladera quarry contains approximately 110154 million metric tons of proven and probable limestone reserves with an average grade of 85.7% of calcium carbonate; our Calizas Tioyacu quarry contains approximately 8.216 million metric tons of proven limestone reserves with an average grade of 90.3% of calcium carbonate; our Bayovar 4 quarry contains approximately 20.04.5 million metric tons of proven seashells reserves with an average grade of 87.2 % of calcium carbonate; and our Virrilá quarry contains approximately 118.789 million metric tons of proven seashells reserves with an average grade of 90.1% of calcium carbonate. Based on limestone consumption at 20172019 levels, we estimate that our limestone reserves at our Acumulación Tembladera quarry have a remaining life of approximately 10899 years and our limestone reserves at our Calizas Tioyacu quarry have a remaining life of approximately 25 years.40 years. Based on seashells consumption for 2017,2019, we estimate that our seashells reserves at our Bayovar 4 and Virrilá quarries havequarry has a remaining life of approximately 108 years and our Virrilá quarry has a remaining life of approximately 57 years. Our estimates were prepared by our internal engineers and geologist and are reviewed periodically.
In addition to our Acumulación Tembladera, Calizas Tioyacu, Bayovar 4 and Virrilá quarries, we also own concession rights to various other calcareous material quarries consisting, in total, of approximately 40,99740,767 hectares located in the northern region of Peru. None of these quarries are in operation as of the date of this annual report.
Clay, Sand and Other Raw Materials and Admixtures
The other raw materials that we use to produce clinker are clay, sand, iron and diatomite.
Clay
For cement production in our Pacasmayo facility, we extract clay from our Señor de los Milagros de PacasmayoPituras quarry, a 400 hectare open-pit concession located in the district and province of Pacasmayo, department of La Libertad. We were granted this concession by the MEM in 1996. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements. We extracted from our Señor de los Milagros de Pacasmayothis quarry approximately 53,855 metric tons of clay in 2015, 41,772 metric tons in 2016, and 49,618 metric tons in 2017.2017, 44,636 in 2018 and in 2019 there was no extraction of clay.
For cement production in our Rioja facility, we extract clay from our Pajonal 2 quarry, a 400 hectares open-pit concession located in the district and province of Rioja, department of San Martin. This concession was granted to us by the MEM in 1998. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements. We extracted from our Pajonal 2 quarry approximately 53,632 metric tons of clay in 2015, 41,592 metric tons in 2016, and 48,215 metric tons in 2017.2017, 42,227 metric tons in 2018 and 57,129 metric tons in 2019
We have not calculated our clay reserves, as we believe there is an abundant supply of clay in our concessions and more broadly in the northern region where we operate.
Sand
For cement production in our Pacasmayo facility, we use sand extracted from our Señor de los Milagros de PacasmayoPituras quarry. We extract approximately 120,000 metric tons of sand per year on average for use at our Pacasmayo facility. Our Rioja facility does not utilize sand as a raw material given the type of cement it produces.
We have not calculated our sand reserves, as we believe there is an abundant supply of sand in our concessions and more broadly in the northern region where we operate.
Iron
We use small quantities of iron in our cement production, which we purchase from third parties at market prices.
Pozzolanic Materials and Other Admixtures
Our cement production also requires small amounts of other admixtures, such as pozzolanic materials, gypsum and blast furnace slag.
For cement production in our Pacasmayo facility, we use pozzolanic materials obtained from our Cunyac quarry, a 200 hectare open-pit concession located in the district of Sexi, province of Santa Cruz, department of Cajamarca. The concession was granted to us by the MEM in 2008. The term of the concession is indefinite, provided we pay an annual concession fee and meet minimum annual production requirements. We began using pozzolanic material at our Pacasmayo facility in 2010 and in 2014 we extracted 127,746 metric tons and used 80,073 metric tons. In 2015, we used 59,694 metric tons from our stock, in 2016 we extracted 65,691 metric tons and in 2017 we extracted 22,287 metric tons.tons, in 2018 and 2019 we consumed pozzolanic material from our stock.
For cement production in our Rioja facility, we use pozzolanic materials obtained from our Fila Larga quarry, a 1,000 hectare open-pit concession located in the district of El Milagro, province of Utcubamba, department of Amazonas. The concession was granted to us by the MEM in 1998. We did not use pozzolanic materials to produce cement in 2015, 20162017 or 2017.2018. In 2019 we extracted 1,000 metric tons of pozzolanic from our Fila Larga quarry.
We also own several other concessions containing pozzolanic material which have not been exploited. In addition, our use of pozzolanic materials may be substituted with clinker or other admixtures. Other admixtures, such as gypsum and blast furnace slag, are purchased at market prices from third-party suppliers. If we are unable to acquire raw materials or admixtures from current suppliers, we believe that other sources of raw materials and admixtures would be available without significant interruption to our business.
Energy Sources
Our main energy sources are fuel in the form of coal and electricity. Our production processes consume significant amounts of energy, because our kilns must reach extreme temperatures to produce clinker and quicklime. In addition, milling operations, homogenization and transportation of materials consume significant amounts of energy.
Coal
We purchase mostly anthracite coal from local suppliers and import small amounts of bituminous coal from suppliers mainly in Colombia, and Venezuela, in each case at spot market prices. Anthracite coal tends to be less expensive than bituminous coal. We store coal at our premises and in our warehouse facility adjacent to the Salaverry port, located approximately 130 kilometers south of our Pacasmayo facility, where we have sufficient stock of coal to maintain our production levels for the next eightsix months.
In December 2009 and February 2010, we entered into option agreements to acquire coal mining concessions as a means to secure a steady and reliable source for our coal requirements and to reduce the volatility in costs related to coal. In 2011, we exercised certain options under these agreements to acquire coal mining concessions for 908.5 hectares near our Pacasmayo facility for a total purchase price of US$4.5 million. In 2013, we exercised our remaining options to purchase an additional coal mining concession for 501.2 hectares for US$1.0 million, thereby completing the acquisition of the related coal mining concessions.
Gas
On August 29, 2018, we signed a gas supply agreement with Olympic Peru that entered in force during 2019 for the supply of gas to our Piura plant. The supply agreement of gas is for a term of 18 years to cover most of our energy needs in the mentioned plant. The contract has two phases: 1) a spot phase, during which we pay for the gas we use, and the agreement may be terminated at any time by either party without penalties, and 2) a take or pay phase, during which we are obliged to pay for a minimum amount of gas established as a percentage (varying from 60% to 70% depending on the year) of the maximum amount of gas purchased by us from Olympic Peru during the spot phase, and penalties apply if either party terminates the agreement. The unit prices of the gas are fixed for each year during both phases. We are currently in the spot phase. The take or pay phase will commence, when the following conditions are met by Olympic: (i) the Peruvian government signs a distribution contract of gas with a third-party concessionaire, (ii) Olympic transfers the pipe to such concessionaire, and (iii) commercial conditions to transport the gas between Olympic Peru and such concessionaire are agreed. These conditions are not under our control and we cannot reasonably estimate when they will be met. See “Item 10. Additional information—D. Material Contracts.”
Electricity
As of December 31, 2017,2019, all of the electricity requirements for our Pacasmayo and Piura facilities were supplied by Electroperú and for our Rioja facility by ELOR.
We have a long-term electricity supply contract with Electroperú currently valid until 2025.2026. Electroperú has agreed to provide us with sufficient energy to operate our Pacasmayo and Piura facilities at pre-determined maximum amounts during the term of the contract. Payments for electricity are based on a formula that takes into consideration our energy consumption and certain market variables, such as the U.S. purchase price index, the global price of oil, the local price of natural gas and the import price of bituminous coal.
In addition, we have a medium-term electricity supply contract with ELOR to supply the Rioja facility, which was recently extended until November 2022. ELOR supplies the Rioja facility with six megawatts of electricity at peak hours and eight megawatts at non-peak hours. Payments for electricity are based on a formula that takes into consideration our energy consumption and certain market variables, such as the U.S. dollar price, the local price of natural gas, the global price of oil and the import price of bituminous coal.
Other Production Materials
We use other materials in the cement production process, including paper bags to package cement, which we purchase principally from local suppliers; plastic bags used to package quicklime, which we purchase from local suppliers; and water to cool the kiln exhaust gases and for our crushing operations at our Acumulación Tembladera quarry, which we obtain principally from a well located at our Pacasmayo facility and from the Jequetepeque river. Water used in our production process is maintained in a closed system at our plants and re-processed for utilization in our production process.
Consumer Base
The retail cement sector in Peru is characterized by households that purchase single bags of cement to gradually build or improve their homes with little or no professional assistance. This sector is known asauto-construcción. Families in this sector tend to invest a large portion of their savings in building or improving their own homes.Auto-construcción is often conducted with the help of a builderforeman (maestro de obra) who generally has experience in construction. Our retail marketing plans typically target themaestro de obra who is usually the decision maker when buying cement and other related construction materials.
We also sell directly to small, medium and large private construction companies working on a variety of construction projects, from housing complexes to commercial developments. In the public sector, we provide cement for national, regional and local governments carrying out construction projects including housing complexes and public construction, ranging from local schools and hospitals to large infrastructure projects.
Sales and Distribution
Distribution
Our market extends from the Ecuadorian border in the north of Peru to the city of Barranca in the south (approximately 180 kilometers north of Lima), to the Andes mountainsrainforest in the east and the Pacific Ocean in the west. Our market covers the provinces of Amazonas, Cajamarca, La Libertad, Lambayeque, Piura and Tumbes in the north; and San Martín and Loreto in the northeast.
Our Pacasmayo, Piura and Rioja facilities supply the entire northern region of Peru, interchangeably subject to where it is most efficient to ship from at the moment, depending on the distance and type of cement being produced, among other factors.
In 2017,2019, approximately 92.3%89.1% of our total cement shipments were in the form of bagged cement, substantially all of which was sold through retailers both within and outside of our distribution network. The remaining 7.7%10.9% of our cement was sold in bulk or in shipments of concrete blocksprecast products or ready-mix concrete directly to large construction companies.
We have developed one of the largest independent retail distribution networks for construction materials in Peru, consisting of more than 394413 local hardware stores, with which we have a distribution agreement. In addition, we also distribute to other independent retailers located throughout the northern region of Peru with whom we do not have contractual relationships. We have built our distribution network by investing in strengthening our relationship with retailers.
Even though our ready mix sales are still a small proportion of our sales, we expect this trend to change as infrastructure becomes a bigger driver of demand in the upcoming years. Additionally, we sell and distribute other construction materials manufactured by third parties that are used alongside cement, such as steel rebar, plastic pipes and electrical wires, among others.
Marketing and Brand Awareness
We use our distribution network, together with our strategically located local commercial offices, to promote our products and brands, as well as to keep us informed of market developments. We believe our distribution network has enabled us to build strong recognition for our Pacasmayo brand amongmaestros de obra, retailers and end consumers which we believe is important to our business, particularly because our cement is principally sold in bags to retail consumers.
Our marketing expenses in 20172019 were approximately S/197.0 million, or 1.6%0.5% of our sales. Historically, our marketing strategy has been to develop brand loyalty by providing high-quality products, tailored to the needs of our customers, and customer service accompanied by complimentary training for themaestros de obra, who are typically the decision makers in theauto-construcciónsegment.
To maintain and improveWe develop strong ties with our relationship with retailers, we have developed several loyalty and incentive programs designeddistributors by promoting income generating opportunities for our distribution network.them. For instance, memberswe give them priority when hiring transportation to distribute our cement throughout our territory. Also, our large salesforce has the ability to cover most of the construction sites in northern Peru generating business opportunities that are then channeled through our distribution network can redeem points fordistributors. Finally, our distributors enjoy various prizes, ranging from computers to trucks. We have also partnered with Financiera Efectiva to provide our customers who qualify access to small loans to help finance the purchase of our products.commercial and marketing benefits such as rebates, special promotions, special credit conditions, and loyalty programs.
Quality Control
In Peru, cement production is subject to standardization (normalización) regulations approved by the National Institute for the Protection of Competition and Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual, or “INDECOPI”). Although the standardization regulations are not mandatory, they are useful in achieving an optimum level of management. As of the date of this annual report, there are 81 standardization regulations approved by INDECOPI in connection with the production of cement and its commercialization. We are currently in compliancewe comply with all standardization regulations applicable to our products.
We have established a quality assurance program in accordance with ISO Standard 9001-2008, certified by SGS del Perú S.A.C., a company that provides inspection, verification, testing and certification services. We monitor quality at every stage of the cement production process. In our facilities, we periodically test the quality of our raw materials. These tests include chemical, physical and x-ray tests. We perform similar examinations of the clinker we produce. Additionally, we also perform regular quality tests on our finished products.
We have a quality control area with computerized systems to access real-time information on the quality of our products. As part of our quality control process, we monitor the performance of our different cement products, monitor the performance of additives in our cement and review monthly statistical analysis on the resistance of cement, among other things.
Competitive Position
Peru’s cement production is segmented into three main geographic regions: the northern region, the central region, including Lima’s metropolitan area, and the southern region. We are the only cement manufacturer in the northern region of Peru. The central region is principally served by UNACEM (formerly known as Cementos Lima and Cemento Andino), some imports, and Caliza Cemento Inca. The south is principally serves the central region andserved by Cementos Yura and Cementos Sur operate in the southern region.Sur. In 2017,2019, our cement shipments were approximately 2.32.6 million metric tons, representing an estimated 21.3%22.2% share of total cement shipments in Peru, and substantially all the cement consumed in the northern region of Peru.
Regulatory Matters
Overview
Although our core business is the production of cement, we hold a number of mining concessions granted by the Peruvian government for the supply of limestone and other raw materials required for cement production. As a result, we are subject both to the mining and the general industrial legal framework in Peru. The regulatory framework applicable to our cement production may be divided into rules and regulations relating to (i) the mining and crushing of limestone and clay, and (ii) the production process.
Mining Regulations
The General Mining Law (Texto Único Ordenado de la Ley General de la Minería) approved by Supreme Decree No. 014-92-EM, published in the Peruvian Official Gazette,El Peruano, on June 3, 1992, is the primary law governing both metallic and non-metallic mining activities in Peru and is supplemented by implementing guidelines and policies regarding mining and the processing of minerals enacted by the MEM. Under the General Mining Law, mining activities (except storage, reconnaissance, prospecting and trade) are carried out exclusively through various forms of concessions. Mining concessions are granted by the Geological, Mining and Metallurgical Institute (Instituto Geológico Minero y Metalúrgico, or “INGEMMET”), and all other concessions, including our mineral processing concessions, are granted by the Directorate General for Mining of the MEM. Any act, transfer, termination or agreement related to these concessions must be registered with the Mining Rights Registry, which is part of the National Public Registry System, to be effective against the Peruvian government and third parties.
Holders of concessions or mining claims must comply with several obligations, including the payment of an annual concession fee (derecho de vigencia) of US$3.00 per applicable hectare. The annual concession fee is due and payable on or prior to June 30 of each year. Failure to pay the annual concession fee for two consecutive years will result in the termination of the mining concession.
Mining activities require holders to obtain title to the surface land from individual landowners, peasant communities or the Peruvian government. Mining concessions are granted for an unlimited period, subject to the achievement of minimum annual production levels. Two different regimes apply depending on the date the concession was granted:
For concessions granted before 2008, the following rules apply:
However, under Supreme Decree No. 054-2008-EM, the rules above will apply only until 2019. As of011-2017-EM, since January 1, 2019, if the annual minimum production or investment has not been met, the annual penalty and the causes to terminate a mining concession will be determined by the General Mining Law for all concessions, granted in 2008 or thereafter, as described below.
For concessions granted inuntil 2008, or thereafter, the following rules apply:
| ● | the minimum annual production target is equivalent to one tax unit (approximately US$1,245) per year per hectare, in case of metallic mining concessions, and 10% of one tax unit (approximately US$124) per year per hectare, in the case of non-metallic mining concessions; |
| the minimum production level is to be achieved no later than the end of the tenth year from the date of grant; |
| ● | if the minimum production level is not achieved within that period, an annual penalty equivalent to 2% of the minimum annual production level is due until such level is achieved; |
| ● | if the minimum production level is not achieved by the end of the fifteenth year, |
| ● | if the minimum |
| ● | if the minimum production level is not achieved by the end of the thirtieth year, the mining concession |
Any penalty must be paid prior to June 30 of each year. Failure to pay the penalty for two consecutive years results in the termination of the mining concession.
From January 1, 2020, these penalties will be applied for concessions granted in 2009 and thereafter.
The foregoing penalties and fines are not applicable to mining concessions granted by the government through private investment promotion initiatives, which will be subject to the minimum production and investment levels set forth in such contracts.
In addition to the payment of the annual concession fee and the penalty, holders of mining concessions must, pursuant to the Mining Royalty Law, pay a royalty for the exploitation of metallic and non-metallic resources. Prior to the amendment of the Mining Royalty Law described below, the amount of the royalty was determined on a monthly basis. For those minerals with an international market price (gold, silver, copper, zinc, lead and tin), the amounts were computed by applying the rates to the value of the concentrate or its equivalent, according to the applicable international market price. The historic rate scales were established in the Mining Royalty Law’s regulations as shown in the following table:
Annual sales | Rate | |||
| Up to 60 | 1 | % | ||
| Between 60 and up to 120 | 2 | % | ||
| More than 120 | 3 | % | ||
In case of minerals without an international reference market price (minerals other than gold, silver, copper, zinc, lead and tin), the mining royalty amounted to 1% of the value of the final product obtained from the mineral separation process, net of any costs incurred in the mineral separation process (componente minero).
However, the Mining Royalty Law was amended on September 29, 2011 to increase the tax payable on metallic and non-metallic mineral resources. Effective October 1, 2011, the royalty for the exploitation of metallic and non-metallic resources is payable on a quarterly basis in an amount equal to the greater of (i) an amount determined in accordance with the following statutory scale of tax rates based on a company’s operating profit margin and applied to the company’s operating profit, as adjusted by certain non-deductible expenses, and (ii) 1% of a company’s net sales, in each case, during the applicable quarter. The royalty rate applied to the company’s operating profit is based on its operating profit margin according to the following statutory scale of rates:
Operating margin | ||||||||
Applicable | ||||||||
| 0% - 10% | 1.00 | |||||||
| 10% - 15% | 1.75 | |||||||
| 15% - 20% | 2.50 | |||||||
| 20% - 25% | 3.25 | |||||||
| 25% - 30% | 4.00 | |||||||
| 30% - 35% | 4.75 | |||||||
| 35% - 40% | 5.50 | |||||||
| 40% - 45% | 6.25 | |||||||
| 45% - 50% | 7.00 | |||||||
| 50% - 55% | 7.75 | |||||||
| 55% - 60% | 8.50 | |||||||
| 60% - 65% | 9.25 | |||||||
| 65% - 70% | 10.00 | |||||||
| 70% - 75% | 10.75 | |||||||
| 75% - 80% | 11.50 | |||||||
| More than 80% | 12.00 | |||||||
Mining royalty payments will be deductible for income tax purposes in the fiscal year in which such payments are made.
We believed that certain portions of the regulations of the Mining Royalty Law were unconstitutional, because they impose a mining royalty tax on non-mining activities. For instance, for cement companies, the amended Mining Royalty Law and its regulations established that the mining royalty tax was calculated based on the total operating profit or net sales, as opposed to operating profit or net sales attributable exclusively to mining products, such as limestone, used to produce cement. Accordingly, in December 2011, we filed a claim to declare that the mining royalty tax applicable for the exploitation of non-metallic mining resources be calculated based on the value of the final product obtained from the mineral separation process, net of any costs incurred in the mineral separation process (“componente minero”).
In November 2013, the Peruvian Constitutional Court affirmed the constitutional challenge we filed against the new regulation of the Mining Royalty Law, in a final and unappealable ruling, on the grounds that the new regulation violates the constitutional right of property, as well as the principles of legal reserve and proportionality. Therefore, the new regulation is rendered inapplicable to our operation. As a result, we will continue to use as a basis for the calculation of the mining royalty the value of the concentrate or mining component, and not the value of the product obtained from the industrial or manufacturing process.
Finally, holders of mining concessions are required at the beginning of their operations to submit a mining closure plan that must contain a description of the steps to restore the areas and facilities of each mining operation area to pre-mining condition. Holders of mining concessions are required to secure completion of the restorative measures by means of the following guarantees: (i) banking guarantee or credit insurance; (ii) cash guarantees; (iii) trusts; or (iv) those indicated in the Peruvian Civil Code.
As of the date of this annual report, we primarily owned non-metallic mining concessions and limited metallic mining concessions with respect to iron. Substantially all of our concessions were granted prior to 2008. Our mining rights and concessions are in full force and effect under applicable Peruvian laws. We believe that we are in compliance in all material respects with the terms and requirements applicable to our mining rights and concessions.
Production Process
The cement production process along with other manufacturing activities are governed by General Industry Law (Ley General de Industrias), Law No. 23407, published inEl Peruano on May 29, 1982, which establishes basic rules that promote and regulate activities in the manufacturing industry. The Ministry of Production is vested with authority to promote private investments in connection with industrial, processing and manufacturing activities, the surveillance of sustainable exploitation of natural resources (except for those extractive activities involving primary transformation of natural products), the protection of the environment, and the supervision of the quality of manufactured products. All industrial companies are subject to the General Industry Law and its regulations to the extent that the company’s gross income is primarily derived from industrial activities. Pursuant to Supreme Decree No. 009-2011-MINAM, the supervisory and monitoring functions of the Ministry of Production were transferred to the OEFA in 2013.
Environmental Regulations
Industrial companies and particularly cement companies are required to comply with several environmental regulations. Pursuant to Article 50 of Legislative Decree No. 757, the competent environmental authority is that corresponding to the activity of the company which generates the higherhighest gross annual income. For that reason, the environmental authority that monitors our operations, considering that cement production represents the highest proportion of our gross profit, is the Ministry of Production.
The Environmental Management Regulations for Manufacturing Industries and internal Trade (Reglamento de ProteccióGestión Ambiental para el Desarrollo de Actividades de la Industria Manufacturera y Comercio Interno—Supreme Decree No. 019-97-ITINCI,017-2015-PRODUCE, or the “Environmental Regulations”), the same that was modified by Supreme Decree No. 006-2019-PRODUCE, set forth different environmental obligations depending on the date of commencement of the subject company’s industrial activities. Thus, companies with industrial cement activities operational at the time these regulations entered into force (September 1997) were obliged to submit an Environmental Adaptation Management Plan (Programa de Adecuación y Manejo Ambiental, or “PAMA”) to the Ministry of Production; while companies with industrial activities starting from that date onwards are obliged to submit either an environmental impact assessment or an environmental impact declaration depending on the level of risk and the impact of their activities on the environment. Furthermore, the Environmental Regulations establish that the Ministry of Production may require a mining closure plan (as an independent environmental assessment) with environmental measures that all companies must comply with before closing their operations to prevent any negative effects on the environment.
With regard to air emissions and wastewater discharges, the Ministry of Production has adopted legally binding environmental quality standards (Limites MáLímites máximos Permisibles,permisibles para emisiones atmosféricas or “LMPs”) for cement and/or limestone industries (approved by Supreme Decree No. 003-2002-PRODUCE)001-2020-MINAM) which are currently being implemented by cement companies . In 2017, New environmental quality standards were established on by the Ministry of Environment (through Supreme Decree No. 003-2017-MINAM for air, and Supreme Decree No. 004-2017-MINAM for water). These standards are legally enforceable and all cement industry operations are required to comply with them.
A violation of the Environmental Regulations is subject to different types of administrative sanctions, as determined in the Environmental Sanctions Regime of the Ministry of Production(Régimen de Sanciones e Incentivos del Reglamento de Protección Ambiental para el Desarrollo de Actividades de la Industria Manufacturera—Supreme Decree No. 025-2001-ITINCI),including warnings notice; fines of up to 600 UIT (US$677,400); restrictions, suspension or cancellation of the authorization or concession; and total or partial closing of the industrial facilities. The type of sanction imposed ultimately depends on the seriousness of the violation. Although the environmental competent authority for industrial activities is the Ministry of Production, other government agencies may impose fines in case of non-compliance with applicable permits.
By Directing Council Resolution No. 023-2013-OEFA/CD, of theOrganismo de Evaluación y Fiscalización Ambiental (the EnvirnomentalEnvironmental Monitoring and EnforecementEnforcement Agency or “OEFA”), OEFA assumes the functions of monitoring, supervision, control and sanctioning of environmental matters in the Cement Sector of the Manufacturing Industry, of the Industrial Subsector of the Ministry of Production - PRODUCE.PRODUCE
Through Directing Council Resolutions No. 004-2018-OEFA/C and 006-2018-OEFA/C, OEFA established sanctions related to failure to comply with environmental permits ranging from 10 UIT (S/43,000) to 30,000 UIT (S/129,000,000), the most serious of which is the development of projects without the approved environmental management permit. Failure to update an environmental impact assessment carries sanctions of up to 6,000 UIT (S/25,800,000), while not complying to commitments included in the environmental impact assessment could carry sanctions of up to 15,000 UIT (S/64,500,000).
In 2016, by Ministerial Resolution No. 201-2016-MINAM, the “National Protocol of Continuous Emission Monitoring Systems – CEMS” was approved. Its objective is to standardize the process of continuous monitoring of polluting gases and particles emitted into the atmosphere by manufacturing activities. It establishes the technical criteria for the selection of continuous monitoring methodologies, as well as the location of the monitoring points, the operation of the equipment and the calibration tests required for the assurance of the quality of the measurements.
By Ministerial Resolution Nº 191-2016-MINAM, the “National Plan for the Integral Management of Solid Waste - PLANRES 2016-2024” was approved. It establishes among other things, obligations to managers regarding the management of non-municipal solid waste, as well as the modification of the environmental studies in case it is planned to carry out co-processing. By Legislative Decree No. 1278, the new Comprehensive Solid Waste Management Law, in order to ensure a constant maximization of the efficiency in the use of materials and regulate the management and handling of solid waste, which includes the minimization of waste generation solids at the source, the material and energy recovery of solid waste, and its regulations approved by Supreme Decree No. 014-2017-MINAM
Prior Consultation with Local Indigenous Communities
On September 7, 2011, Peru enacted Law No. 29785, Prior Consultation Right of Local Indigenous Communities. The law was enacted in order to implement Convention No. 169 of the International Labor Organization on Local Indigenous Communities in Independent Countries, previously ratified by Peru through Legislative Decree No. 26253. This law, which became effective on December 6, 2011, establishes a prior consultation procedure to be undertaken by the Peruvian government in favor of local indigenous communities, whose collective rights may be directly affected by new legislative or administrative measures, including the granting of new mining concessions. Regulation implementing this law was approved on April 3, 2012, by Supreme Decree No. 001-2012-MC, which defines the local indigenous communities that are entitled to the prior consultation rights and establishes the different stages that comprise the prior consultation procedure.
Consultation procedures for mining and processing concessions are carried out by the MEM prior to the granting of a new processing concession.
According to the recent practice of the Geologic Institute of Mining and Metallurgy (Instituto Geológico Minero Metalúrgico), the granting of mining concessions does not qualify as an “administrative measure” that potentially affects the rights of indigenous people because it does not grantper se a right to explore and exploit mineral deposits. Accordingly, the granting of mining concessions has not been included among measures that require consultation procedures with indigenous people. According to Ministerial Resolution No. 003-2013-MEM-DM, the MEM has established that consultation procedures are applicableapply prior to the commencement of: (i) exploration activities (Autorización de inicio de actividades de exploración);(ii) exploitation activities (Autorización de inicio o reinicio de las actividades de desarrollo, preparación y explotación - incluye plan de minado y botaderos); and (iii) processing concessions (otorgamiento de concesión de beneficio).
Local indigenous communities do not have a veto right; upon completion of this prior consultation procedure, the Peruvian government can discretionarily approve or reject the applicable legislative or administrative measure. In addition, any sale, lease or other act of disposal of surface land owned by local indigenous communities is subject to the approval of an assembly composed of the members of such communities according to the following rules:
| ● | for local indigenous communities located on the coast, approval of not less than 50% of members attending the assembly is required; and |
| ● | for local indigenous communities located in the highlands and the Amazon region, approval of at least 2/3 of all members attending the assembly is required. |
Permits and Licenses
Mining Concessions
According to the General Mining Law, a mining concession is required in order to extract mineral resources needed to produce cement. The mining concession grants the right to explore and exploit the mineral resources located in a solid of indefinite depth, limited by the vertical plane corresponding to the sides of square, rectangle or polygon referred to by the Universal Transversal Mercator coordinates. The Geological Mining and Metallurgical Institute(Instituto Geológico Minero y Metalúrgico) is in charge of managing the procedure of granting mining concessions, which includes the receipt of the request, the granting and the termination of mining concessions.
Explosives.Mining concessionaires are required to obtain the following permits to operate and store explosives:
| Certificate of Mining Operation (Certificado de Operación Minera), granted by the MEM; |
| Semiannual Authorization for Use of Explosives, granted by the General Bureau of Explosives of the Ministry of Interior (Superintendencia Nacional de Control de Servicios de Seguridad, Armas, Municiones y Explosivos de Uso Civil, or |
| ● | Manipulation of Explosives License for each individual that intends to handle explosives, granted by the SUCAMEC; and |
| ● | Explosive’s Warehouse Operation License, granted by SUCAMEC. |
Water and Wastewaters
To use water resources in cement industry activities, it is necessary to obtain a water right granted by the Water Management Authority (Autoridad Nacional del Agua, or “ANA”) prior to the use of underground or fresh water sources. If the proposed activities will generate domestic or industrial wastewaters, which will be discharged into natural water sources or soil, authorization from ANA is required, with a favorable opinion of the General Bureau of Environmental Health (Dirección General de Salud Ambiental, or “DIGESA”).
Hazardous Waste
Hazardous waste generated as a consequence of cement production activities must be disposed of in specialized landfills. The transportation of solid waste outside the limits of the industrial complex must be conducted exclusively through specialized companies registered with DIGESA. Industries are free to contract with an EPS-RS (a company that provides solid waste services such as transportation, treatment or disposal) or with an EC-RS (a company that carries out commercialization activities aiming at the reuse of solid waste). Yet in order to limit their liability in case of environmental harm, industries must make sure the EPS-RS and EC-RS they retain count with all necessary permits to collect, transport and dispose hazardous wastes.
Chemical Feedstock
The commercialization, transportation and use of controlled chemical feedstock (Insumos Químicos y Productos Fiscalizados,or “IQPF”) is restricted, because of their potential use in the production of illegal drugs or controlled substances. Companies that require an IQPF must obtain an IQPF User Certificate (Certificado de Usuario de IQPF) from the General Bureau of Chemical Feedstock of the Ministry of Interior (Unidad Antidrogas de la Policía Nacional del Perú, or “DIRANDRO”). Companies such as ours are also required to register with the Ministry of Production any IQPF activities they plan to carry out (Registro Único para el Control de IQPF).SUNAT.
Fuel Storage
Any company that purchases fuels for its own activities and has facilities to receive and store fuel with a minimum capacity of one meter cubed (264,170 gallons) is required to (i) receive from the Mining and Energy Investment Supervision Body (Organismo Supervisor de la Inversión en Energía y Minería, or “OSINERGMIN”) prior permission to build and operate said installations, and (ii) be registered with the Registry of Direct Fuel Consumers, in order to obtain the SCOP Code (Código del Sistema de Control de Órdenes de Pedido) necessary to purchase fuel.
Cultural Heritage Protection
If the design and development of cement industry activities involves the removal of topsoil, a Certificate of Non-Existence of Archaeological Ruins (Certificado de Inexistencia de Restos Arqueológicos, or “CIRA”) from the Ministry of Culture (Ministerio de Cultura)Cultura) with respect to the area under construction must be obtained. The CIRA will either certify that on the surface of the evaluated area no archaeological sites or features were discovered, or will identify their exact location and extent in order to implement precautionary measures to protect the archaeological artifact. The CIRA is valid for an unlimited period, but will become void should any archaeological artifacts be accidentally discovered during the construction works or due to any natural cause. In such an instance, the company must stop the construction work immediately and notify the Ministry of Culture. Failure to stop the construction work may generate civil and criminal liabilities. Under certain exceptional circumstances, Peruvian legislation allows the removal of archeological artifacts when the area is required for development of projects that are of national interest.
48
Labor Regulations
Peruvian legislation allows hiring employees through: (i) a fixed-term contract, (ii) a contract for an indefinite duration;duration, or (iii) a contract for part-time employment.
The minimum wage established in Peru is S/930.00 per month. Peruvian labor legislation establishes a maximum 8-hour work day or 48 hours per week for employees older than 18 years. For overtime, employers must pay at least an additional 25% and an additional 35% over the regular hourly wage for the first two hours and for any additional hours, respectively. Employees are entitled to a minimum rest of 24 consecutive hours per week.
Regardless of the type of employment contract, pursuant to Peruvian law full-time employees are entitled to receive:
(i) an additional 10% of the minimum wage, provided that they are responsible for (a) one or more children under the age of 18 or (b) persons who are up to 24 years of age if they are pursuing higher education,
| (i) | an additional 10% of the minimum wage, provided that they are responsible for (a) one or more children under the age of 18 or (b) persons who are up to 24 years of age if they are pursuing higher education; |
(ii) two additional months’ salary per year, one in July and one in December (pursuant to Law No. 29351, until December 31, 2017, said payments were not subject to any social contribution, except for Income Tax; consequently, until December 2017, employers paid directly to their employees as an Extraordinary Bonus, the amount of the contribution to the Social Health Insurance (ESSALUD) for such payments, equivalent to 9% of the bonus paid),
| (ii) | two additional months’ salary per year, one in July and one in December (pursuant to Law No. 29351, as of the date of this report, said payments were not subject to any social contribution, except for Income Tax; consequently, employers pay directly to their employees as an Extraordinary Bonus, the amount of the contribution to the Social Health Insurance (ESSALUD) for such payments, equivalent to 9% of the bonus paid); |
(iii) thirty calendar days of annual paid vacation per year,
| (iii) | thirty calendar days of annual paid vacation per year; |
(iv) life insurance, provided they have been employed for at least four years,
| (iv) | life insurance; |
(v) a compensation for years of service (CTS) equal to 1.16% of a monthly salary and is deposited each year in May and November, provided they work an average of at least four hours per day for the same employer,
| (v) | a compensation for years of service (CTS) equal to one monthly salary is deposited each year in May and November, provided they work an average of at least four hours per day for the same employer; |
(vi) benefits from the Peruvian Social Health Insurance (ESSALUD) to which employers must contribute a rate equivalent to 9% of their employees’ income, and
| (vi) | benefits from the Peruvian Social Health Insurance (ESSALUD) to which employers must contribute a rate equivalent to 9% of their employees’ income; and |
(vii) a percentage of the company’s annual income net of taxes (10% in the case of income derived from industrial cement operations, and 8% in the case of income derived from our mining or commercial activities), provided the company has twenty or more employees.
| (vii) | a percentage of the company’s annual income net of taxes (10% in the case of income derived from industrial cement operations, and 8% in the case of income derived from our mining or commercial activities), provided the company has twenty or more employees. |
Free and Fair Competition Protection
In Peru, businesses are generally not required to receive the prior authorization of the antitrust authority, which in Peru is INDECOPI. However, in order to promote economic efficiency and protect consumers, anti-competitive behavior is subject to sanctions under applicable law. Behavior that is prohibited according to national law includes:includes. (i) the abuse of a dominant market position, (ii) concerted horizontal practices and (iii) concerted vertical practices. Moreover, under the Unfair Competition Law it is illegal to act in a way that may hinder the competitive process. An unfair behavior is one that is objectively contrary to the entrepreneurial good faith, ethical behavior and efficiency in a market economy.
Anti-corruption regulation
Peru has an established legal framework applicable to bribery, both to public officers and between private individuals.
According to Law No. 30424 and Legislative Decree No. 1352, a legal entity will not be liable for bribery offenses if it has voluntarily implemented a “Prevention Model” (compliance program) prior to the commission of the offense. If a legal entity implements a Prevention Model after the offense is committed, it will be considered as a mitigating factor.
Our compliance program complies with all the elements that such program should have according Law No. 30424 and Legislative Decree No. 1352 to be considered as a liability exonerator in case of bribery offenses.
C. Organizational Structure
All of our operating subsidiaries are incorporated in Peru. The following chart sets forth our simplified corporate structure, relevant operating subsidiaries only, as of the date of this annual report.
The following is a brief description of the principal activities of our consolidated subsidiaries:subsidiaries.
| ● | Cementos Selva S.A. is engaged in |
| ● | Distribuidora Norte Pacasmayo S.R.L. is mainly engaged in selling cement produced by the Company. Additionally, it produces and sells precast, cement bricks and ready-mix concrete. |
Our other cement-related materials in the northern region of Peru, near the Peruvian jungle. It holds all of the outstanding shares of Dinoselva Iquitos S.A.C., our cement and construction materials distributor for products processed in our Rioja facility.
| ● | Calizas del Norte S.A.C. (in liquidation). On May 31, 2016, the Company decided to liquidate the subsidiary Calizas del Norte S.A.C. |
| ● | Empresa de Transmisión Guadalupe S.A.C. is mainly engaged in providing electric energy transmission services to the Company. |
| ● | Salmueras Sudamericanas S.A. (“Salmueras”) was engaged in the exploration of a brine project located in the northern region of Peru. In December 2017, the Company decided not to continue with the activities related to this project, as explained in note 1.4 to our annual audited consolidated financial statements included in this annual report. As of December 31, 2017, Quimpac S.A. held a participation of 25.1% of the common shares of this entity. As of December 31, 2018 and during 2019, Quimpac held no common shares of this entity. |
| D. | Property, Plant and Equipment |
Properties
We own our headquarters office in Lima, Peru, at Calle La Colonia 150, Urbanización El Vivero, Surco. We also own our plants, warehouses, transportation facilities and the office space at our production facilities, including our workers’ facilities occupying approximately 50,000 square meters at our Pacasmayo facility and a warehouse occupying approximately 25,000 square meters at the Salaverry port facility.
Area of Operation
We own and operate three cement production facilities. Our largest facility is located in the city of Pacasmayo, department of La Libertad, approximately 667 kilometers north of Lima. The second facility is located in the city of Piura, department of Piura, approximately 330 kilometers north of Pacasmayo. This facility started cement production in September 2015. We also own and operate a smaller cement facility, located in the city of Rioja, department of San Martín, approximately 468 kilometers east of the Panamericana Norte highway. From the Pacasmayo and Piura facilities we supply cement principally to the coastal and centralhighland regions of northern Peru, including the cities of Piura, Chiclayo, Cajamarca, Trujillo and Chimbote. From our Rioja facility, we supply cement to the northeastern region of Peru, including the cities of Moyobamba, and Tarapoto, Loreto, among others among others.
Pacasmayo Facility
As of December 31, 2017,2019, our Pacasmayo facility had 10 kilns, which produce clinker (one of which is also equipped to produce quicklime), and an additional Waelz rotary kiln that produces quicklime. Additionally, our facility has a primary and secondary cone crusher located near our Acumulación Tembladera limestone quarry. The main crusher has installed crushing capacity of 800 metric tons per hour and the secondary crusher has installed crushing capacity of 170 metric tons per hour. Our Pacasmayo facility operates with three horizontal rotary kilns with total installed annual clinker production capacity of 1,034,880 metric tons and six vertical shaft kilns with total installed annual clinker production capacity of 465,120 metric tons. The total installed annual clinker production capacity at our Pacasmayo facility is 1.5 million metric tons. Our Pacasmayo facility also features three cement finishing mills with installed annual cement production capacity of 2.9 million metric. Our Pacasmayo facility is also equipped with silos containing storage capacity for 27,20026,700 metric tons of cement.
As of December 31, 2017,2019, our Pacasmayo facility had installed production capacity of approximately 240,000 metric tons of quicklime per year, including the annual installed capacity of one of our clinker kilns and our Waelz rotary kiln, which are equipped to also produce quicklime.
Piura Facility
Annual installed production capacity of our Piura facilityplant is 1,600,0001.6 million metric tons of cement and 1,000,0001 million metric tons of clinker.
TheOur Piura plant operates with a horizontal kiln with installed clinker production capacity of 1 million metric tons per year, as well as a cement mill with installed cement production capacity of 1.6 million metric tons per year. TheOur Piura facilityplant also has two storage silos with storage capacity of 24,000240,000 metric tons of cement.
Rioja Facility
Annual installed production capacity of our Rioja facilityplant is 440,000 metric tons of cement and 280,000 metric tons of clinker.
Our Rioja facility currently operates with a small cone crusher and four vertical shaft kilns with total annual installed clinker production capacity of 280,000 metric tons and three cement finishing mills with total annual installed cement production capacity of 440,000 metric tons. Our Rioja facilityplant is also equipped with silos with storage capacity of 1,750 metric tons of cement.
Ready-Mix Concrete Facilities
We also have 1925 fixed and mobile ready-mix concrete and precast facilities located in the northern cities of Chimbote, Trujillo, Chiclayo, Piura, Cajamarca, Tarapoto, and Moyobamba,Chachapoyas, Iquitos among others. These facilities allow us to supply ready-mix concrete and precast materials to small, medium and large construction projects throughout the entire northern region of Peru. As of December 31, 2017,2019, our ready-mix operations had 109171 mixer trucks and 2930 concrete pumps available to deliver ready-mix concrete.
Capacity and Volumes
The table below sets forth our clinker, cement and quicklime production capacity and volumes in our Pacasmayo and Rioja facilities for the periods indicated.
| (in thousands of | As of and for the year ended December 31, | As of and for the year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| metric tons, | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
except | Capacity | Production | Utilization | Capacity | Production | Utilization | Capacity | Production | Utilization | Capacity | Production | Utilization rate(1) | Capacity | Production | Utilization rate(1) | Capacity | Production | Utilization rate(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cement: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pacasmayo facility | 2,900 | 1,141 | 39.4 | % | 2,900 | 1,177 | 40.6 | % | 2,900 | 1,884 | 65.0 | % | 2,900 | 1,368 | 47.2 | % | 2,900 | 1,155 | 39.8 | % | 2,900 | 1,141 | 39.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Piura facility(2) | 1,600 | 858 | 53.6 | % | 1,600 | 817 | 51.1 | % | 1,600 | 161 | 10.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Piura facility | 1,600 | 954 | 59.7 | % | 1,600 | 918 | 57.4 | % | 1,600 | 858 | 53.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rioja facility | 440 | 287 | 65.2 | % | 440 | 281 | 63.9 | % | 440 | 288 | 65.5 | % | 440 | 301 | 68.4 | % | 440 | 273 | 62.0 | % | 440 | 287 | 65.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 4,940 | 2,286 | 46.3 | % | 4,940 | 2,276 | 46.1 | % | 4,940 | 2,333 | 47.2 | % | 4,940 | 2,623 | 53.1 | % | 4,940 | 2,286 | 47.5 | % | 4,940 | 2,286 | 46.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Clinker: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pacasmayo facility | 1,500 | 687 | 45.8 | % | 1,500 | 887 | 59.1 | % | 1,500 | 967 | 64.5 | % | 1,500 | 864 | 57.6 | % | 1,500 | 831 | 55.4 | % | 1,500 | 687 | 45.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Piura facility | 1,000 | 746 | 74.6 | % | 1,000 | 629 | 62.9 | % | — | — | — | 1,000 | 758 | 75.8 | % | 1,000 | 676 | 67.6 | % | 1,000 | 746 | 74.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| Rioja facility | 280 | 209 | 74.6 | % | 280 | 215 | 76.8 | % | 280 | 235 | 83.9 | % | 280 | 231 | 82.5 | % | 280 | 211 | 75.5 | % | 280 | 209 | 74.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,780 | 1,642 | 59.1 | % | 2,780 | 1,731 | 62.3 | % | 1,780 | 1,202 | 67.5 | % | 2,780 | 1,853 | 66.6 | % | 2,780 | 1,642 | 61.8 | % | 2,780 | 1,642 | 59.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Quicklime(3): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quicklime(2): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pacasmayo facility | 240 | 168 | 70.0 | % | 240 | 156 | 65.0 | % | 240 | 98 | 40.8 | % | 240 | 74 | 30.7 | % | 240 | 105 | 43.9 | % | 240 | 168 | 70.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Utilization rate is calculated by dividing production for the specified period by installed capacity. |
| (2) | Our |
Insurance
We maintain a comprehensive insurance program that protects us from certain types of property and casualty losses. Our plants and equipment are insured against losses. Additionally, our insurance policy provides coverage for business interruption in our cement manufacturing facilities. We also purchase commercial insurance to cover risks associated with workers’ compensation and other general liabilities. We believe our insurance programs and policy limits and deductibles are appropriate for the risks associated with our business and are in line with the insurance policies of similar cement manufactures that operate in Peru.
Environmental Compliance and Social Responsibility ProjectsSustainability Performance
We arereport our sustainability performance information to the GNR (Getting the Numbers Right) database, inspired by the guiding principles of the Cement Sustainability Initiative (CSI), a sector-project of the World Business Council for Sustainable Development (WBCSD) among other cement companies in complianceLatin America through the Inter-American Cement Federation (FICEM).
In August 2018, we join the Global Cement and Concrete Association (GCCA) and become members of the GCCA and the GCCA announced the formation of a strategic partnership with WBCSD to facilitate sustainable development of the cement and concrete sectors and their value chains. As part of a new agreement, the work carried out by the CSI and the GNR database was transfer from WBCSD to the GCCA on 1 January 2019.
In 2019, we were included as part of the 2019 Dow Jones MILA Sustainability Index for the first time. This Index is made up of those companies that demonstrate superior performance among their peers under social, environmental and economic criteria. This achievement comes as a result of Pacasmayo’s effort to improve in all material respects with applicable environmental lawsof these criteria and regulations and have allto work towards ambitious goals in terms of long-term sustainability. We are committed not only to remain in the required environmental permits and licensesIndex but to conductimprove our business. We have Environmental, Health and Safety management systems in place to addressperformance, as we are convinced that the environmental, health and safety risks inherentfocus on sustainability is key to our business.business and our stakeholders.
Social Performance
We are committed to the development and quality of life of communities that surround the area where we operate. We have developed a good relationship with the local communities surrounding our plant facilities since we started operations in Pacasmayo. We have a number of social responsibility programs aimed at improving health and education in the area. Below is a brief description of a few of our social initiatives.
Tecsup.Tecsup is a leading not-for-profit institute in Peru that provides technical education to high-school students.education. It was founded by the family of our controlling shareholder, and we support it by providing scholarships to promising high school students living near our plants to study at the Trujillo campus of Tecsup. Through its three campuses in Peru, Tecsup has graduated over 9,63911,285 students in various technical fields, some of whom currently work for us and our affiliated companies.
Center for Technological Training. We have three training centers at our facilities where we teach students and adults business and technical skills. Our centers are staffed with instructors from Tecsup. The goal of the center is to help develop the professional skills of the local population, especially of students and teachers at the educational institutions in the towns of Tembladera, Pacasmayo and Piura.Sechura. In 2017,2019, this program benefited over 354 students and teachers.1500 stakeholders.
Abilities Strengthening.This program seeks to provide training to local stakeholders such as grassroots organizations, local entrepreneurs, teachers, journalists, among others. The objective of the program is to strengthen their skills and knowledge by providing courses and seminars especially designed for that purpose. The program is funded by us, in coordination with local governments and social institutions, and in 20172019 benefited six250 stakeholders.
Mi Escuela, mi comunidad (My School, My Community.) We have developed this project for a second year in partnership with the Instituto Peruano de Acción Empresarial – IPAE (Peruvian Institute of Business Action). 42 educationalEducational institutions from the Pacasmayo, Rioja and Tembladera communities participated in this project with the purpose of strengthening the management capacities of school leaders in order to mobilize resources for the education of students. In 2017,2019, this program benefited over 11,32411,147 students and teachers.
Universidad de Ingeniería y Tecnología – UTEC (University of Engineering and Technology) is an educational nonprofit proposal that since 2012 is aimed at the development of people in the engineering field, looking to satisfy the need for these types of professionals in the labor market by implementing a curriculum in line with the trends and demands that globalization poses to modern engineering, with an integrated approach to innovative teaching models. We support it by providing financial aid for its operations. To enhance students’ knowledge, UTEC also has various national and international alliances with top organizations.
Acuícola Los Paiches. Through our social venture, Acuícola Los Paiches S.A.C., we studied the reproductive forms of the “paiche” (arapaima giga), a native fish species that was on the edge of extinction. After years of studies and scientific testing, we have successfully bred this species in captivity, and we have obtained thousands of fingerlings. In 2014, Acuícola Los Paiches S.A.C. received
Supply Chain
Key Performance Metrics (“KPIs”)
The following table summarizes the “Awardfive supply chain KPIs that we monitor. The 2020 targets have been redefined after taking into account the impact of COVID-19.
| KPIs | KPI Name | Target Year | Target | ||||||
| KPI 1 | 1. | % Local Suppliers vs. Imported Suppliers Indicator that shows the percentage of purchases made from local suppliers versus the total purchases from foreign suppliers over the total purchase made in the year under analysis. In 2019, a target of 93% was achieved in this KPI. However, due to the impact of COVID-19 the proposed target for 2020 has been redefined. | 2020 | 90 | % | ||||
| KPI 2 | 2. | % Homologated Suppliers / Total Suppliers Indicator that shows the percentage of homologated suppliers over the total of purchase during the year of analysis. | 2020 | 45 | % | ||||
| KPI 3 | 3. | % of Suppliers Strategic Partners Hired Under Sustainability Terms / Total Suppliers (Expressed in Purchase Value of the Company)Indicators that show the percentage of a supplier’s strategic partner that include sustainability issues in their practices over the total purchase during the year under analysis. | 2020 | 10 | % | ||||
| KPI 4 | 4. | % of Suppliers Trained in Sustainability Matters (expressed in Purchase Value of the Company) Indicator that shows the percentage of suppliers trained in sustainability matters. During 2019, we achieved a compliance target of this KPI of 35%. The target of this KPI for 2020 has been redefined. | 2020 | 33 | % | ||||
| KPI 5 | 5. | % Suppliers With Contractual Clauses Indicator that shows the percentage of suppliers whose contracts contain sustainability clauses during the year under analysis. | 2020 | 10 | % | ||||
Supply Chain Risk Assessment and Action Plans
Our critical suppliers include suppliers classified as “strategic partner suppliers”. These 30 strategic partner suppliers represent the 43.73% of the net value of our annual purchases, or more than S/ 332 million annually for Innovative Exports” from2019 and with 18,523 annual orders. These suppliers are classified into seven purchasing groups:
| ● | Raw material: very important suppliers in economic terms due to the high cost of raw materials, as well as the operation in supply and the impact of a shortage thereof. |
| ● | Primary transportation: limestone, seashell, coal, waste and pozzolana transportation suppliers, very important due the high cost of transport and the large volumes required, as well as the operation in supply due to the impact of a shortage thereof. |
| ● | Spare parts and direct suppliers: suppliers that provides the spare parts and direct supplies that are used by cement, concrete and precast (DINO) plants. |
| ● | Operational services: suppliers that provide limestone and seashell quarrying services, corrective and preventive maintenance services for production plants, industrial cleaning services, import services, consolidation, storage and transportation. These suppliers are very important due for the high cost of services in maintenance costs, for the large volumes required for the exploitation of raw material (clinker production) and for the operability and quality of the service. They have a high impact on costs. |
| ● | Support services: suppliers that perform quarry operation services. Their importance lies in the high cost of services and the large volumes of raw material exploitation, as well as the operability and quality service. They can significantly impact our costs due to a lack of resources, a poor provision of service and the shortage of service. |
| ● | Water / energy: Suppliers with a direct impact on the manufacturing costs of our products and on the continuity of operations. |
| ● | Assets and equipment: suppliers of assets and equipment (Mixers); they ensure the operations of Concrete (DINO) and have a direct impact on the cost of Concrete sales. |
As part of our management processes, we carry out sustainability risk assessments at 100% of our strategic partner suppliers, taking into account the Peruvian Exporters Association – ADEXvariables of term, costs, quality, ethics, and reputation, after-sales service and type of market in which operates our suppliers good and services. This assessment allows us to identify those suppliers with high, medium and low sustainability risk.
From the total evaluated suppliers, a 10% have high sustainability risk, 40% have medium risk and 50% have a low sustainability risk. This evaluation has allowed us to establish mitigation plans for its researcheach supplier according to their purchase group:
| ● | We have established contracts with supply clauses and direct supervision of companies in our operations. |
| ● | We have established the comprehensive management of strategic contracts (by our contract administration area) due to their importance to the continuity of our operations and their participation in the value chain. |
| ● | We have reinforced our monitoring and control system in order to reduce the risks relating to provision and supply, as well as transparency and corruption risks. |
| ● | We have a stock of raw material for safety in plants, we carry out quality reports by external entities to the raw material purchased, we develop new sources of slag and develop modifications of blending slag vs local pozzolana. |
| ● | In relation to operational service suppliers, we carry out social impact measurements through our community relations area, we monitor the human factor and compliance in matters related to occupational health and safety, and we have safety inventory in plants. |
| ● | In relation to suppliers of energy and water, we carry out operational management of rate control in a coordinated manner between our management control and operational areas, validating costs and rates as well as consumption. |
| ● | In relation to suppliers of assets and equipment, we perform quarterly fleet sizing review, maintenance compliance review and equipment performance review with the operating area, and we carry out periodic tenders for the annual purchase of units. |
| ● | In addition to the detailed measures described above, , our risk management processes include the periodic review of our suppliers for the purchase of goods and services, using the world check tool, managed by the corporate purchasing area. This analysis allows us to strengthen the monitoring and control system of our operations in order to increase transparency and reduce the risk of corruption. |
Integration of Environmental Social and for developing “paiche” farmingGovernance Issues in Supply Chain Management
As part of our sustainability strategy by 2030, we have ESG commitments and targets associated with supply chain management. We have established ESG criteria that guide our supplier contracting decisions, in addition to other criteria such as quality, deadlines, price and delivery time. The ESG criteria are included in the Yurimaguas rainforest.approval evaluation that we carry out on our suppliers and we encourage their management. We have established KPIs that allow us to secure our ESG targets:
| ● | % of approved suppliers / total suppliers |
| ● | % of suppliers trained in sustainability criteria. |
| ● | % of suppliers strategic partners hired based on sustainability criteria/total suppliers |
We evaluate all of our strategic partner suppliers based on the foregoing. We are convinced that ESG criteria allow us to mitigate our risks by ensuring a more sustainable supply chain.
Risk Management
Risk Management Description
Corporate Risk Management (GRC) is a structured approach that allows managing all of the important risks that could affect our long-term objectives. The purpose of this approach is to support senior management in the decision-making process, in order to reduce adverse impacts and take advantage of opportunities; as well as managing the action plans to mitigate the risks.
Therefore, Pacasmayo has processes and systems that analyze and evaluate the management of the its business units, encouraging continuous improvement. Our management control systems include:
| ● | Mapping of new emerging risks and definition of impact, probability and design of controls; |
| ● | Periodic review of current risks and update of Impact Probability and Controls information; |
| ● | Quantification and effect of risk on EBITDA; |
| ● | Evaluation of external factors; and |
| ● | Periodic review of policies, procedures, regular internal audits and employee training. |
Risk Management Process
The following are highlights of our risk management process.
| ● | The Risks are mapped considering the impact on profit, revenues, resources, employees, communities where we operate and our suppliers. |
| ● | An integrated risk management system and tools are used to collect information collaboratively with the functional areas and external sources of the company. |
| ● | These processes include the evaluation of risks related to the areas of commercial, operational, environmental and health and safety. |
| ● | The development of a risk management culture throughout the company in a decentralized manner, integrating the processes to the mapping of risks and the identification and mitigation of risks from the strategic level to the operational level. |
| ● | The foregoing is reinforced with training for employees and suppliers and communication plans for the entire company. |
Risk Management Organization
Managers responsible for risk metrics | Risks committee | Audit Committee | ||
● Those responsible for the evaluation, management and prevention of the risk metrices of each area. ● Risk management coordinates with them for the development and monitoring of these metrices. | ● It is the group created to establish and implement risk management at the corporate level. ● It is made up by the CEO, the VPs and the Risks Manager ● the Risks Committee reports to the Audit Committee | ● Made up by 3 independent board members, reports directly to the Board ● The participants are the external auditors, the internal auditor, the compliance officer, the CFO and the Risk Manager ● Evaluates improvement opportunities and plans for the risk metrices. |
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Due to the outbreak of COVID-19, we have activated three plans that are key to the continuity of our business:
| ● | Incident response plan – focused on the immediate response. It includes employee safety and asset protection in each location. |
| ● | Crisis management plan – focus on leadership and the response to manage business impact, including communication with stakeholders. |
| ● | Business recovery plan – Focus on the actions and knowledge needed to recover operations and maintain uninterrupted service. |
Based on these plans, we have prepared a restart protocol for the restart of operations that include new safety measures and measures for the protection of health, and we have updated all of our protocols relating to health and safety to include measures needed to stop the spread of COVID-19.
Emerging risks
Emerging risks are those that have an impact in the long-term. The risks considered here include all recently identified risks that could have a long-term impact on the company’s business or industry, although in some cases they may have already begun to impact the company’s business.
| Risk Description | Potential Impact | Mitigation actions | Evidence of mitigation actions |
| Economic and reputational impact as a consequence of the halt of operations as a result of the contagion of personnel in operating units with the COVID-19 pandemic | - Halt of operations - Reputational impact - employees impacted | üImplementation of home office in administrative team: Attention to infrastructure requirements by the IT team and enabling remote teams üCollaboration monitoring and control platform: Implementation of online platform via monitoring, support and control application for all employees üDevelopment of security protocols: Restart of operations in plants: Transfer to operating units, Entrance to plants. Displacement inside unit. operations, use of locker rooms, use of dining rooms, cleaning of common areas, work in operations, operation of heavy machinery and training üRestart of logistics reception Operations üRestart of Product Dispatch operations üUse of residences üRestart of operations warehouses and Dino experts üRestart of operations warehouses, raw material üRestart of operations, transportation of seashell, limestone and pozzolana üRestart of operations, customer service üAccessory control measures: üSupply security implements to all employees: Delivery for use in operation of prevention implements (gloves, lenses and masks) | üPresentation of the Audit Committee in April 2020 üProtocol to restart operations after halt due to COVID-19 was sent to Ministry of Production on April 6, 2020 and an internal communication was sent to the entire company on April 8, 2020 üCement stock in silos to dispatch immediately once the operations restart üDelivery of food and hygiene kits to employees and contractors (to be delivered when work is restarted and will be published later) |
Loss of information and interruption due to attacks on our information systems and due to failures in the systems that support business processes and guarantee its continuity | -Loss of company information - Filtering of confidential information - Halt of Operations | ü Firewall systems ü IBM external servers ü Constant antivirus updates ü Initiatives - social hacking ü Temporary energy backup systems Cyber Risk Policy (under development). | ü Presentation of the Audit Committee April 2020 ü IT area risk matrix |
Contributions, Payments and fees
Set forth below are our contributions, payments and fees to organizations to which we belong:
| Organization | Total Contributions, Payments and Fees Made During 2019 in S/ | |||
| Producers Association | 943,008.93 | |||
| Stock Market Superintendence | 577,963.02 | |||
| Lima Stock Exchange | 558,495.78 | |||
| Peruvian Institute of Business Action | 384,903.00 | |||
| NYSE | 226,508.00 | |||
| Global Cement & Concrete Association | 105,470.61 | |||
| Others | 205,183.01 | |||
| Total contributions, payments and fees | 3,001,532.35 | |||
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| A. | Operating Results |
Overview
We are a leading Peruvian cement company, and the only cement manufacturer in the northern region of Peru. With more than 6062 years of operating history, we produce, distribute and sell cement and cement-related materials, such as concrete blocksprecast products and ready-mix concrete. Our products are primarily used in construction. We also produce and sell quicklime for use in mining operations.
In 2017,2019, our cement shipmentssales volume were approximately 2.32.6 million metric tons, representing an estimated 21.3%22.2% share of Peru’s total cement shipments, and substantially all the cement consumed in the northern region of Peru.sales that year. That same year, we also sold approximately 163,00066 thousand metric tons of quicklime.
We own three cement production facilities, our Pacasmayo and Piura facilities located in the northwest region of, Peru, and our smaller Rioja facility located in the northeast. Our facilities have total installed annual cement production capacity of approximately 4.9 million metric tons. We also have installed annual production capacity of 240,000 metric tons of quicklime. We own concession rights to several quarries with reserves of limestone/seashells and other raw materials located near our facilities. We estimate that our existing quarries have sufficient reserves to supply our limestone and seashell needs for approximately 10573 years, based on our 20172019 limestone/seashell consumption levels. We completed an expansion of our Rioja plant in April 2013. We more than doubled the cement production capacity of our Rioja facility by installing a new production line that added 240,000 metric tons of installed annual cement production capacity. In 2015, we completed construction of our new cement plant in Piura, the third largest city in northern Peru, which has an annual production capacity of 1.6 million metric tons of cement. The first ton of cement from the Piura facility was produced and shipped on September 17, 2015, and clinker production started in January 2016. The Piura plant improved our competitive position in the northern region of Peru. With production from three plants, we are able to serve our market more efficiently. This state-of-the-art plant in Piura is one of the most modern in Latin America. It also reduces transportation costs by enabling the dispatching of cement from plants within closer proximity to the point of sale.
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Factors Affecting our Results of Operations
Revenue Drivers
In 2017,2019, approximately 92.3%89.1% of our total cement sales were in the form of bagged cement, substantially all of which was sold through retailers both within and outside of our distribution network. The remaining 7.7%10.9% of our cement was sold in bulk or in shipments of concrete blocksprecast products or ready-mix concrete directly to large construction companies. Our retail sales are directed to both theauto-construcciónsegment and construction companies that buy cement for a variety of small construction works, including minor residential, commercial and infrastructure projects. Cement destined for large private and public projects, such as housing complexes, highways, irrigation channels, hospitals, schools, and mining and industrial facilities, is typically sold in bulk or in shipments of concrete blocksprecast products or ready-mix concrete.
According toBased on our estimates, sales to theauto-construcciónsegment accounted for approximately 62.2%60.3% of our total cement sales in 2017, 58.0%2019, 58.7% in 2016 and 55.0%2018, 62.2% in 2015;2017; private construction projects, both large and small, accounted for approximately 23.9%19.9% of our total cement sales in 2017, 25.0%2019, 24.4% in 2016 and 26.0%2018, 23.9% in 2015;2017; and public construction projects accounted for the remaining 13.9%19.8% of our total cement sales in 2017, 17.0%2019, 16.9% in 20162018 and 26.0%13.9% in 2015.2017. Whileauto-construcción continues to represent the majority of our sales, it is expected that as the countryPeruvian economy continues to grow and formalize, private construction projects and infrastructure willshould become increasingly more important to our business.
Our cement sales are largely driven by residential construction (bothauto-construcción and small and large housing projectsdevelopments undertaken by construction companies), which is generally affected by economic conditions in the northern region of Peru.Auto-construcción is particularly affected by levels of disposable household income, as low-income families tend to invest most of their savings in developing their homes. Larger residential construction is more susceptible to the economic outlook, the availability of financing and prevailing investment levels in the region. During 2016, there was significant public investment during the first months of the year due to El Niño prevention investments, but this slowed down significantly afterwards for the rest of the year. GDP in the northern region of Peru is estimated to have contracted 1.0%grown 3.2% in 2017, grown 0.6%2019, 4.7% in 2016,2018 and grown 1.2% in 2015.2017. Our cement volumes, which represented substantially allmost of the cement sales in the northern region of Peru, grew 10.6% in 2019, 4.3% in 2018 and contracted by 0.8% in 2017, by 1.0% in 2016, and by 1.6% in 2015 in terms of metric tons of cement shipments.
Our cement sales are also driven, to a lesser extent, by commercial developments and infrastructure projects. Commercial and other private construction projects are also affected by the level of public and private investment levels in the region, while public infrastructure projects depend on the priorities and financial resources of the national, regional and local governments. During the first nine months of 2017, there was2019, we saw a declinemore significant pick up in public spending, due to El Niño phenomenon and the Odebrecht corruption scandal which delayed investments. However, we expect a significant pickup in public investment during 2018-2021 due tofrom reconstruction works in the North as the infrastructure damaged or destroyed by the landslides, floods and heavy rain resulting from El Niño is restored.related spending.
Cost Drivers
Coal is the main source of energy used in our production process, in particular to fuel our kilns. We purchase anthracite coal from nearby coal mines and import a small amount of bituminous coal primarily from Colombia and Venezuela.Colombia. We do not have long-term coal supply agreements, and we do not engage in hedging transactions in connection with the price of coal. In the past, the price of bituminous coal has been related to the international price of oil, as it is used as a substitute for oil. Coal accounted for an estimated 14.7%10.6% of our costs of production in 2017,2019, 13.1% in 20162018 and 11.3%13.1% in 2015.2017. In 2011, we exercised certain of our options to purchase coal mining concessions, which we intend to use to continue to reduce our use of bituminous coal.coal sourced by third-party producers.
During July 2019 we started using gas in our Piura facility to fuel our kiln. We have a long-term gas supply agreement with Olympic Peru which expires by its terms in 2037, unless earlier terminated by the parties. Gas accounted for an estimated 3.5% of our costs of production in 2019, since we only started using gas in July.
Electricity is used in our facilities mainly to power our cement mills. We power our Pacasmayo facility with electricity purchased from Electroperú, with which we have a long-term supply agreement expiring in 2025.2026. Our Rioja facility is powered primarily with electricity from ELOR, with which we have a medium-term supply agreement expiring in 2022. Under these agreements, the price of electricity is based on a formula that takes into consideration our consumption of electricity and certain market variables, including the international price of oil. Electricity accounted for approximately 13.4%14.9% of ourcour cost of production in 2017, 13.1%2019, 14.8% in 20162018 and 11.3%13.4% in 2015.2017. Electricity costs tend to be lower during the rainy season, from January to March of each year, as our region is served primarily by hydro-electric power plants.
In addition, we purchase from third parties admixtures and certain raw materials that we use in our production process, including gypsum, blast furnace slag, iron and other materials. Admixtures and raw materials used in our cement production process do not include construction supplies that we acquire from third-parties for resale through our distribution network along with our cement products. The cost of admixtures and raw materials purchased from third parties accounted for approximately 5.1%4.7% of our cost of production in 2017, 10.5%2019, 4.3% in 20162018 and 9.7%5.1% in 2015. The decrease in the amount of third party admixtures was due to a more efficient dosage of these materials to achieve cost savings.2017.
Our labor costs decreased slightly in 2017, mainly as a result of one-off severance payments incurred in 2016. Personnel expenses represented 18.4%18.9% of our total costs and expenses in 2017, 21.4%2019, 18.8% in 2016,2018 and 19.8%19.5% in 2015.2017.
Third-Party Construction Supplies
In addition to selling our own products, we also sell and distribute construction supplies manufactured by third parties, such as steel rebar, wires and pipes that are typically used in construction along with our cement. Our profit margins from the sale of third party construction supplies are significantly lower than the margins on our cement products and they are affected by fluctuations in product prices and the exchange rate between thesol and the U.S. dollar between the time we purchase these products and the time we resell them. We sell these products primarily as a service to retailers in our distribution network in an effort to support the sale of our cement products.
Mining Royalty Tax
The mining royalty tax for the exploitation of metallic and non-metallic minerals is payable on a quarterly basis in an amount equal to the greater of (i) an amount determined in accordance with a statutory scale of tax rates based on a company’s operating profit margin that is applied to its operating profit, as adjusted by certain non-deductible expenses and (ii) 1% of a company’s net sales, in each case during the applicable quarter. These amounts are determined based on our unconsolidated financial statements and those of our subsidiaries with operations that are under the scope of the Mining Royalty Law. Mining royalty payments are deductible for income tax purposes in the fiscal year in which such payments are made. For additional information, see note 2728 to our annual audited consolidated financial statements included in this annual report.
Operating Segments
We have three operating segments: (i) cement, concrete and blocks,precast, (ii) quicklime and (iii) sales of construction supplies. For additional information on our operating segments, see note 31 to our annual audited consolidated financial statements included in this annual report.
New Accounting Pronouncements
For a description of new interpretations and improvements to IFRS in effect since 2017,2019, see note 2.3.202.3.19 and note 4 to our annual audited consolidated financial statements included in this annual report.
Critical Accounting Policies
The following is a discussion of our application of critical accounting policies that require our management to make certain assumptions about matters that are uncertain at the time the accounting estimate is made, where our management could reasonably use different estimates, or where accounting changes may reasonably occur from period to period, and in each case would have a material effect on our financial statements. For additional information, see note 2.3 to our annual audited consolidated financial statements included in this annual report.
Determination of Useful Live of Assets for Depreciation and Amortization Purposes
Depreciation of mining concessions and mine development costs are charged to cost of production on a units-of-production basis using proved reserves. Other assets are depreciated on a straight-line-basis over their estimated useful lives, as follows:
Property, Plant and Equipment | Estimated Years of Useful Life | |
| Buildings and other construction: | ||
| Administrative facilities | Between 35 and 48 | |
| Main production structures | Between 30 and 49 | |
| Minor production structures | Between 20 and 35 | |
| Machinery and equipment: | ||
| Mills and horizontal furnaces | Between 42 and 49 | |
| Vertical furnaces, crushers and grinders | Between 23 and 36 | |
| Electricity facilities and other minors | Between 12 and 35 | |
| Furniture and fixtures | 10 | |
| Transportation units: | ||
| Heavy units | Between 11 and 21 | |
| Light units | Between 8 and 11 | |
| Computer equipment | 4 | |
| Tools | Between 5 and 10 |
The assets’ residual value, useful lives and methods of depreciation/amortization are reviewed at each reporting period, and adjusted prospectively, if appropriate.
An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement when recognition of the asset is derecognized.
Exploration, Evaluation and Mine Development Costs
Mining Concessions
Mining concessions correspond to the exploration rights in areas of interest acquired. Mining concessions are stated at cost, net of accumulated amortization and/or accumulated impairment losses, if any, and are presented within the property, plant and equipment caption. Those mining concessions are amortized starting from the production phase following the units-of-production method based on proved reserves to which they relate. The unit-of-production rate for the amortization of mining concessions takes into account expenditures incurred to the date of the calculation. If we abandon the concession, the costs associated are written-off in the consolidated statement of profit or loss.
As of December 31, 2017 and 2016, no amortization under units-of-production method was determined since our mining concessions are not yet on production phase.
Mine development costs and stripping costs
Mine development costs.Mine development costs incurred are stated at cost and are the next step in development of mining projects after exploration and evaluation stage. Mine development costs are, upon commencement of the production phase, presented net of accumulated amortization and/or accumulated impairment losses, if any, and are presented within the property, plant and equipment caption. The amortization is calculated using the unit of-production method based on proved reserves to which they relate. The unit-of-production rate for the amortization of mine development costs takes into account expenditures incurred to the date of the calculation. Expenditures that increase significantly the economic reserves in the mining unit under exploitation are capitalized.
As of December 31, 2017 and 2016, no amortization under the units-of-production method was determined since the projects of the Company are not yet in production phase.
Stripping costs.Stripping costs incurred in the development of a mine before production commences are capitalized as part of mine development costs and subsequently amortized over the life of the mine on a units-of-production basis, using the proved reserves. Stripping costs incurred subsequently during the production phase of its operation are recorded as part of cost of production.
Exploration and Evaluation Assets
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource. Exploration and evaluation activity includes:
License costs paid in connection with a right to explore in an existing exploration area are capitalized and amortized over the term of the license. Once the legal right to explore has been acquired, exploration and evaluation costs are charged to the consolidated statement of profit or loss, unless management concludes that a future economic benefit is more likely than not to be realized, in which case such costs are capitalized. These costs include directly attributable employee remuneration, materials and fuel used, surveying costs, drilling costs and payments made to contractors.
In evaluating if costs meet the criteria to be capitalized, several different sources of information are used, including the nature of the assets, extension of the explored area and results of sampling, among others. The information that is used to determine the probability of future benefits depends on the extent of exploration and evaluation that has been performed. Exploration and evaluation costs are capitalized when the exploration and evaluation activity is within an area of interest for which it is expected that the costs will be recouped by future exploitation and active and significant operations in relation to the area are continuing or planned for the future.
The main estimates and assumptions the Company uses to determine whether is likely that future exploitation will result in future economic benefits include: expected operational costs, committed capital expenditures, expected mineral prices and mineral resources found. For this purpose, the future economic benefit of the project can reasonably be regarded as assured when mine-site exploration is being conducted to confirm resources, mine-site exploration is being conducted to convert resources to reserves or when the Group is conducting a feasibility study, based on supporting geological information.
As the capitalized exploration and evaluation costs asset is not available for use, it is not amortized. These exploration costs are transferred to mine development assets once the work completed to date supports the future development of the property and such development receives appropriate approvals. In this phase, the exploration costs are amortized in accordance with the estimated useful life of the mining property from the time the commercial exploitation of the reserves begins. All capitalized exploration and evaluation costs are monitored for indications of impairment. Where a potential impairment is indicated, assessment is performed for each area of interest in conjunction with the group of operating assets (representing a cash generating unit) to which the exploration is attributed.
Exploration areas in which resources have been discovered but require major capital expenditure before production can begin, are continually evaluated to ensure that commercial quantities of resources exist or to ensure that additional exploration work is under way or planned. To the extent that capitalized expenditure is no longer expected to be recovered it is charged to the consolidated statement of profit or loss. The Group assesses at each reporting date whether there is an indication that an exploration and evaluation assets may be impaired. The following facts and circumstances are considered in this assessment:
If any indication exists, an impairment of the exploration and evaluation assets is recorded.
Revenue Recognition
Revenue is recognized to the extent it is probable that we will obtain the economic benefits and the revenue can be reliably measured, regardless of when the payment received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty.
We have concluded that we are acting as a principal in all of our revenue arrangements.
The following specific recognition criteria must also be also met before revenue is recognized:
Sales of Goodsgoods
Revenue from salessale of goods is recognized at the point in time when control of the significant risks and rewards of ownership have passedasset is transferred to the buyercustomer, generally on delivery of the goods. Revenue from
We consider whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of goods, is measured at fair valuewe consider the effects of variable consideration, the existence of significant financing components, noncash consideration, and consideration payable to the customer (if any).
Rendering of services
In the businesses segments cement, quicklime, concrete, precast and construction supplies, we provide transportation services. These services are sold together with the sale of the consideration received or receivable, netgoods to the customer.
Transportation services are satisfied when the transport service is concluded, which coincides with the moment of returns and trade discounts.delivery of the goods to the customers.
Operating Lease Incomelease income
Income from operating lease of land and office was recognized on a monthly accrual basis during the term of the lease.
Interest Incomeincome
For all financial instruments measured at amortized cost and interest-bearing financial assets, interest income is recorded using the effective interest rate (“EIR”)(EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the consolidated statement of profit or loss.
Impairment of Non-Financial Assets
We assess at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, (goodwill and Intangible assets with indefinite useful lives), we estimate the asset’s recoverable amount. An asset’s recoverable value is the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use, and is determined for an individual asset, unless the asset does not generate net cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset’s cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.
As of December 31, 2019 and 2018, goodwill related to the acquisition of assets made by our subsidiary Distribuidora Norte Pacasmayo S.R.L. amounted to S/4,459,000, See note 1.1 to our annual audited consolidated financial statements included in this annual report. We have assessed the recoverable amount of our goodwill and has determined that there are no indicators of an impairment loss of this asset as of December 31, 2018 and 2019.
We base our impairment calculation on detailed budgets and forecast calculations, which are prepared separately from our cash generation units to which the individual assets are allocated. Impairment losses of continuing operations, including impairment on inventories, are recognized in the consolidated statement of profit or loss in expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or have decreased. If such indication exists, we estimate the asset’s or cash-generating unit’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of profit or loss. Exploration and evaluation assets are tested for impairment annually as of December 31, either individually or at the cash-generating unit level, as appropriate and when circumstances indicate that the carrying value may be impaired.
Deferred Tax
Deferred tax is providedprovisioned using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences.differences, except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except in respect of deductible temporary differences associated with investments in subsidiaries, where deferred assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax related to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of rates applicable to relevant general borrowings of the Group during the period. All other borrowing costs are recognized in the consolidated statement of profit or loss in the period in which they are incurred.
Derivative Financial Instruments and Hedge Accounting
Initial Recognition and Subsequent Measurement
We use derivative financial instruments, such as cross currencycross-currency swaps (CCS), to hedge our foreign currency exchange rate risk. Such derivative financial instruments are initially recognized at their fair value on the date on which athe derivative contract is entered into and are subsequently remeasured at their fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flows hedges, which is recognized in other comprehensive income (“OCI”) and later reclassified to profit or loss when the hedges item affects profit or loss.
For the purpose of hedge accounting, the cross currency swap instrument washedges are classified as cash flow hedge.follows:
| ● | “Fair value hedges” are those that hedge the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. |
| ● | “Cash flow hedges” are those that hedge the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment. |
| ● | “Hedges of a net investment in a foreign operation.” |
At the inception of thea hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge.
The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how our management will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:
| ● | There is ‘an economic relationship’ between the hedged item and the hedging instrument; |
| ● | The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship; and |
| ● | The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. |
Hedges that meet all the strictqualifying criteria for hedge accounting and are between a range of 80 and 125 days of effectiveness, are accounted forrecorded as described below:cash flow hedges.
Cash Flow Hedgesflow hedges
TheAny gains or losses arising from changes in the fair value of derivatives is taken directly to profit or loss, except for the effective portion of the gain or loss on the hedging instrumentcash flow hedges, which is recognized directly in other comprehensive income in the caption “Unrealized gain on cash flow hedge,” while any ineffective portion is recognized immediately in the consolidated statements of profit or loss as finance costs.
Amounts recognized as other comprehensive income are transferred(OCI) and later reclassified to the consolidated statements of profit or loss when the hedged transactionhedge item affects profit or loss.
For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss such as whena reclassification adjustment in the same period or periods during which the hedged financial incomecash flows affect profit or financial expense is recognized or when a forecast sale occurs.loss.
If the hedging instrument expirescash flow hedge is discontinued, the amount accumulated in other comprehensive income must remain in other comprehensive income accumulated if the covered cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or is sold, terminated or exercised without replacement or rollover, or if its designationloss as a hedge is revoked, or whenreclassification adjustment. After discontinuation, once the hedge no longer meetscovered cash flows are given, any amount that remains in other comprehensive accumulated results must be recorded considering the criteria for hedge accounting, any cumulative gain or loss previously recognized in OCI hedge reserve remains separately in equity untilnature of the forecast transaction occurs or the foreign currency firm commitment is met.underlying transaction.
Non-current assets held for distribution to equity holders of the parent and discontinued operations
The Group classifies non-current assets and disposal groups as held for distribution to equity holders of the parent if their carrying amounts will be recovered principally through a distribution rather than through continuing use. Such non-current assets and disposal groups classified as held for distribution are measured at the lower of their carrying amount and fair value less costs to distribute. Costs to distribute are the incremental costs directly attributable to the distribution, excluding finance costs and income tax expense.
The criteria for held for distribution classification is regarded as met only when the distribution is highly probable and the asset or disposal group is available for immediate distribution in its present condition. Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the decision to distribute will be withdrawn. Management must be committed to the distribution expected within one year from the date of the classification.
Assets and liabilities classified as held for distribution are presented separately as current items in the statement of financial position. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit or loss. Additional disclosures are provided in Note 1 of the notes to our audited consolidated financial statements filed as part of this annual report. All other notes to the financial statements include amounts for continuing operations, unless indicated otherwise.
Results of Operations
Comparison of Year Ended December 31, 20172019 to Year Ended December 31, 20162018
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
(amounts in millions of S/) | 2017 | 2016 | Variation % | 2019 | 2018 | Variation % | ||||||||||||||||||
| Sales of goods | 1,225.6 | 1,240.2 | (1.2 | ) | 1,392.7 | 1,262.9 | 10.3 | |||||||||||||||||
| Cost of sales | (732.9 | ) | (736.6 | ) | (0.5 | ) | (905.8 | ) | (796.2 | ) | 13.8 | |||||||||||||
| Gross profit | 492.7 | 503.6 | (2.2 | ) | 486.9 | 466.7 | 4.3 | |||||||||||||||||
| Operating income (expense): | ||||||||||||||||||||||||
| Administrative expenses | (195.6 | ) | (193.4 | ) | 1.1 | (174.5 | ) | (172.1 | ) | (1.4 | ) | |||||||||||||
| Selling and distribution expenses | (46.6 | ) | (39.9 | ) | 16.8 | (44.5 | ) | (44.1 | ) | (0.9 | ) | |||||||||||||
| Impairment on brine project | (47.6 | ) | — | 100.0 | ||||||||||||||||||||
Other operating income (loss) or (expense), net | (4.3 | ) | 2.4 | (279.2 | ) | |||||||||||||||||||
| Total operating expense, net | (294.1 | ) | (230.8 | ) | 27.4 | |||||||||||||||||||
| Other operating income (expense), net | 2.6 | (8.7 | ) | N/R | ||||||||||||||||||||
| Total operating income (expense), net | (216.4 | ) | (224.9 | ) | (3.8 | ) | ||||||||||||||||||
| Operating profit | 198.6 | 272.8 | (27.2 | ) | 270.5 | 241.8 | 11.9 | |||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Finance income | 5.8 | 3.2 | 79.0 | 2.6 | 2.4 | 13.0 | ||||||||||||||||||
| Finance costs | (73.8 | ) | (75.4 | ) | 2.1 | (77.9 | ) | (87.3 | ) | (10.8 | ) | |||||||||||||
| Loss (gain) on the valuation of trading derivative financial instruments | (1.5 | ) | 2.6 | (10.8 | ) | |||||||||||||||||||
| Cumulative net loss on settlement of derivative financial instruments | — | (34.9 | ) | N/R | ||||||||||||||||||||
| Loss from exchange difference, net | (2.2 | ) | (2.5 | ) | 12.0 | (0.6 | ) | (8.4 | ) | N/R | ||||||||||||||
| Total other expenses, net | (70.2 | ) | (74.7 | ) | (6.0) | (76.2 | ) | (125.7 | ) | (39.4 | ) | |||||||||||||
| Profit before income tax | 128.4 | 198.1 | (35.2 | ) | 194.4 | 116.1 | 67.4 | |||||||||||||||||
| Income tax expense | (47.0 | ) | (78.6 | ) | (40.2) | (62.3 | ) | (41.0 | ) | 52.0 | ||||||||||||||
| Profit for the year from continuing operations | 81.4 | 119.5 | (31.9 | ) | ||||||||||||||||||||
| Profit [loss] for the year from discontinued operations | (0.8 | ) | (6.6 | ) | 87.9 | |||||||||||||||||||
| Profit for the year | 80.6 | 112.9 | (28.6 | ) | 132.0 | 75.1 | 75.8 | |||||||||||||||||
Sales of Goods
The following table sets forth a breakdown of our sales of goods by segment and as a percentage of total sales for 20172018 and 2016:2017:
| Year ended December 31, | ||||||||||||||||||||||||||||||||
Year ended December 31, | ||||||||||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||||||||||
(in millions | % | (in millions | % | |||||||||||||||||||||||||||||
| Cement, concrete and blocks | 1,076.7 | 87.9 | 1,103.4 | 88.9 | ||||||||||||||||||||||||||||
| (amounts in millions of S/) | 2019 | % | 2018 | % | ||||||||||||||||||||||||||||
| Cement, concrete and precast | 1,289.0 | 92.6 | 1,134.7 | 89.8 | ||||||||||||||||||||||||||||
| Quicklime | 80.7 | 6.6 | 75.1 | 6.1 | 36.1 | 2.6 | 57.6 | 4.6 | ||||||||||||||||||||||||
| Construction supplies | 66.4 | 5.4 | 59.9 | 4.8 | 67.2 | 4.8 | 69.0 | 5.5 | ||||||||||||||||||||||||
| Other | 1.8 | 0.1 | 1.8 | 0.2 | 0.4 | — | 1.7 | 0.1 | ||||||||||||||||||||||||
| Total sales of goods | 1,225.6 | 100.0 | 1,240.2 | 100.0 | 1,392.7 | 100.0 | 1,262.9 | 100.0 | ||||||||||||||||||||||||
Our total sales of goods decreasedincreased by 1.2%10.3%, or S/14.6129.8 million, to S/1,225.61,392.7 million in 20172019 from S/1,240.21,262.9 million in 2016.2018. This decreaseincrease was primarily due to the following factors:
| ● | a 13.6%, or S/154.3 million, increase in 2019 in sales of cement, concrete and precast mainly due to increased sales of concrete to small and medium sized private projects and the public sector, as well as increased sales of cement toauto-construcciónand the public sector for reconstruction related projects; |
| ● | offset in part by a 37.3%, or S/ 21.5 million, decrease in 2019 in the sales of quicklime, mainly due to a decrease in sales of refined quicklime; and |
| ● | a 2.6%, or S/1.8 million, decrease in 2019 in the sale of construction supplies, mainly due to lower sales of steel bars. |
The following table sets forth the composition of our sales of cement, concrete and blocksprecast for 20172019 and 2016:2018:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||
2017 | 2016 | Variation | 2019 | 2018 | Variation | |||||||||||||||||||||
(in millions | % | (in millions of S/) | % | |||||||||||||||||||||||
| Cement | Cement | 949.0 | 924.4 | 2.7 | 1,065.5 | 975.6 | 9.2 | |||||||||||||||||||
| Concrete | 110.2 | 152.6 | (27.8 | ) | ||||||||||||||||||||||
| Blocks | 17.5 | 26.4 | (33.7 | ) | ||||||||||||||||||||||
| Concrete and pavement | 197.7 | 136.7 | 44.6 | |||||||||||||||||||||||
| Precast | 25.8 | 22.4 | 15.2 | |||||||||||||||||||||||
| Total | Total | 1,076.7 | 1,103.4 | (2.4 | ) | 1,289.0 | 1,134.7 | 13.6 | ||||||||||||||||||
Our total sales of cement, concrete and blocks decreasedprecast increased by 2.4%13.6%, or S/26.7154.3 million, to S/1,076.7 1,289 million in 20172019 from S/1,103.41,134.7 million in 2016.2018. This decrease was primarily due to the following factors:
| ● | sales of cement increased by 9.2%, or S/89.9 million in 2019 due to a 8.3% increase in volume of cement sold, and a 0.9% increase in the average sales price; |
| ● | sales of concrete and pavement increased by 44.6%, or S/61.3 million, in 2019, due to an 40.1% increase in volume and 4.5% increase in the average price of concrete and pavement; and |
| ● | sales of precast increased by 15.2%, or S/3.4 million, in 2019, due to a 23.1% increase in price, partially offset by a 7.9% decrease in volume. |
Cost of Sales
The following table sets forth a breakdown of our cost of sales by segment for 20172019 and 2016:2018:
Year ended December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(in millions | % | (in millions | % | |||||||||||||
| Cement, concrete and blocks | 599.7 | 81.8 | 615.8 | 83.6 | ||||||||||||
| Quicklime | 67.0 | 9.2 | 60.9 | 8.3 | ||||||||||||
| Construction supplies | 64.6 | 8.8 | 58.7 | 8.0 | ||||||||||||
| Other | 1.6 | 0.2 | 1.2 | 0.2 | ||||||||||||
| Total | 732.9 | 100.0 | 736.6 | 100.0 | ||||||||||||
| Year ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and precast | 808.6 | 89.3 | 675.2 | 84.8 | ||||||||||||
| Quicklime | 32.5 | 3.6 | 52.3 | 6.6 | ||||||||||||
| Construction supplies | 64.4 | 7.1 | 67.2 | 8.4 | ||||||||||||
| Other | 0.3 | — | 1.4 | 0.2 | ||||||||||||
| Total | 905.8 | 100.0 | 796.2 | 100.0 | ||||||||||||
Our total cost of sales decreasedin 2019 increased by 0.5%13.8%, or S/3.7109.6 million, to S/732.9905.8 million, for 2017, from S/736.6796.2 million for 2016,in 2018, primarily due to the following factors:
| ● | a 19.8%, or S/133.4 million, increase in the cost of sales of cement, concrete and precast in 2019, due primarily to an increase in sales volume, as well as increased production costs for cement, and increased sales of concrete to small and medium-sized companies; |
| ● | offset by a 37.9%, or S/194.8 million, decrease in 2019 in the cost of sales of quicklime, due primarily to lower sales volume; and |
| ● | a 4.2%, or S/2.8 million, decrease in 2019 in the cost of sales of construction supplies, in line with the decrease in sales volume. |
The following table sets forth the composition of our cost of sales of cement, concrete and blocksprecast for 20172019 and 2016: 2018:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||
2017 | 2016 | Variation | 2019 | 2018 | Variation | |||||||||||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||||||||||||
| Cement | Cement | 496.3 | 489.5 | 1.4 | 624.1 | 535.0 | 16.7 | |||||||||||||||||||
| Concrete | 88.0 | 105.3 | (16.4 | ) | ||||||||||||||||||||||
| Blocks | 15.4 | 21.0 | (26.7 | ) | ||||||||||||||||||||||
| Concrete and pavement | 162.3 | 117.3 | 38.4 | |||||||||||||||||||||||
| Precast | 22.2 | 22.9 | (3.5 | ) | ||||||||||||||||||||||
| Total | Total | 599.7 | 615.8 | (2.6 | ) | 808.6 | 675.2 | 19.8 | ||||||||||||||||||
Our cost of sales represented 55.7%65.0% of our sales in 2017,2019, compared to 55.8%63.0% in 2016.2018. Our total cost of sales of cement, concrete and blocks decreasedprecast increased by 2.6%19.8%, or S/16.1133.4 million, in 2017,2019, primarily due to the following factors:
| ● | cost of sales of cement increased by 16.7%, or S/89.1 million, in 2019, mainly due to a 8.3% increase in cement sales volume and a 8.4% increase in production cost due to higher transportation costs for the production of type V cement centralized at the Pacasmayo plant. |
| ● | a 38.4%, or S/45.1 million increase in the cost of sales of concrete and pavement in 2019, due to an 40.2% increase in volume sold, offset by a 1.8% decrease in production costs, mainly due to dilution of fixed costs. |
| ● | Offset by a 3.5% or S/0.8 million decrease in the cost of sales of precast during 2019, mainly due a 7.9% increase in sales volume, offset by an 11.4% increase in production costs mainly due to higher costs from more specialized products, which also have a higher margin. |
Gross Profit
The following table sets forth a breakdown of our gross profit and gross profit margin by segment for 20172019 and 2016: 2018:
| Year ended December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||
| (in millions of S/) | % | (in millions | % | |||||||||||||
| Cement, concrete and blocks | 477.0 | 44.3 | 487.7 | 44.2 | ||||||||||||
| Quicklime | 13.7 | 17.0 | 14.2 | 18.9 | ||||||||||||
| Construction supplies | 1.8 | 2.7 | 1.2 | 2.0 | ||||||||||||
| Other | 0.2 | 11.1 | 0.5 | 27.8 | ||||||||||||
| Total gross profit | 492.7 | 40.2 | 503.6 | 40.6 | ||||||||||||
| Year ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Gross profit | Gross profit margin | Gross profit | Gross profit margin | |||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and precast | 480.4 | 37.3 | 459.5 | 40.5 | ||||||||||||
| Quicklime | 3.6 | 10.0 | 5.3 | 9.2 | ||||||||||||
| Construction supplies | 2.8 | 4.2 | 1.8 | 2.6 | ||||||||||||
| Other | 0.1 | 25.0 | 0.1 | 6.3 | ||||||||||||
| Total gross profit | 486.9 | 35.0 | 466.7 | 37.0 | ||||||||||||
Total gross profit decreasedincreased by 2.2%4.3%, or S/10.920.2 million, to S/492.7486.9 million in 2017,2019, from S/503.6466.7 million in 2016,2018, mainly because of lower sales of cement, concrete and blocks,due to higher raw material costs of quicklime, which offset higher sales volumes.sales. Our gross profit margin (i.e., gross profit as a percentage of net sales) for 20172019 was 40.2%35.0% compared to 40.6%37.0% for 2016.2018.
The following table sets forth a breakdown of our gross profit and gross profit margin for the cement, concrete and blocksprecast segment for 20172019 and 2016: 2018:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | Variation | Gross profit | Gross profit margin | Gross profit | Gross profit margin | Variation | |||||||||||||||||||||||||||||||
(in millions | % | (in millions | % | percentage | (in millions of S/) | % | (in millions of S/) | % | percentage points | |||||||||||||||||||||||||||||||
| Cement | 452.7 | 47.7 | 434.9 | 47.0 | 0.7 | 441.4 | 41.4 | 440.6 | 45.2 | (3.6 | ) | |||||||||||||||||||||||||||||
| Concrete | 22.2 | 20.1 | 47.3 | 31.0 | (10.9 | ) | ||||||||||||||||||||||||||||||||||
| Blocks | 2.1 | 12.0 | 5.5 | 20.8 | (8.8 | ) | ||||||||||||||||||||||||||||||||||
| Concrete and pavement | 35.3 | 17.9 | 19.4 | 14.2 | 3.6 | |||||||||||||||||||||||||||||||||||
| Precast | 3.7 | 14.7 | (0.5 | ) | (2.2 | ) | 16.9 | |||||||||||||||||||||||||||||||||
| Total gross profit | 477.0 | 44.3 | 487.7 | 44.2 | (0.1 | ) | 480.5 | 37.3 | 458.9 | 40.5 | (3.2 | ) | ||||||||||||||||||||||||||||
Gross profit margin for cement, concrete and blocks increasedprecast decreased by 0.1%3.2 percentage points in 20172019 compared to 2016.2018. This was mainly due mainly to an increasea decrease of 3.6 percentage points in cement margin (0.7 percentage points) due to higher sales volume and price, a decrease intransportation costs, from the concrete margin (10.9 percentage points)transfer of clinker from Piura to Pacasmayo for the production of type V cement, as well as increased production costs during the first half of the year due to lower sales volume and average price becausethe use of delaysimported clinker in infrastructure projects, and a decrease inPacasmayo during maintenance of the blockkiln. This was partially offset by the increase gross margin (8.8 percentage points)of concrete, mainly due to higher dilution of fixed costs as a result of higher sales, and precast, mainly due to sale of piles for the Talara refinery in 2016 that did not continue in 2017.higher margin products.
Operating Income (Expense)expense
Our operating expenses primarily reflect administrative and selling and distribution expenses. In 2017,2019, our operating expenses increaseddecreased by S/8.98.5 million to S/242.2 216.4 million from S/233.3224.9 million in 2016.2018, by the provision expense of a tax receivable to the Peruvian tax authority in 2018, as well as expenses related to reconstruction of public road network destroyed by the Coastal El Niño in 2018.
Administrative Expenses
The following table sets forth the composition of our administrative expenses for 20172019 and 2016: 2018:
Year ended December 31, | Year ended December 31, | |||||||||||||||
(in millions of S/) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
| Personnel expenses | 94.4 | 100.1 | 84.4 | 84.7 | ||||||||||||
| Third-party services | 65.4 | 63.0 | 53.0 | 51.5 | ||||||||||||
| Board of directors compensation | 6.6 | 6.1 | 6.7 | 6.8 | ||||||||||||
| Depreciation and amortization | 14.9 | 12.8 | 14.6 | 12.0 | ||||||||||||
| Taxes | 3.8 | 2.9 | 5.0 | 4.8 | ||||||||||||
| Consumption of supplies | 2.7 | 2.1 | ||||||||||||||
| Donations | 7.3 | 5.8 | ||||||||||||||
| Others | 0.5 | 0.6 | 10.8 | 12.3 | ||||||||||||
| Total | 195.6 | 193.4 | 174.5 | 172.1 | ||||||||||||
Our administrative expenses increased slightly by 1.1%1.4%, or S/2.22.4 million, to S/195.6174.5 million in 20172019 from S/193.4172.1 million in 2016.2018. Personnel expenses decreased by S/5.7 million mainly due to lower severance payments. On the other handremained in line with 2018 and third party services increased by S/2.41.5 million in 2019 mainly due to an increase in legal advisory, labor consultancy and the implementation of the innovation model.services compared to 2018.
Administrative expenses related to the cement, concrete and blocksprecast segment accounted for approximately 89%95.0% of total administrative expenses for 20172019 compared to approximately 89.6%96.5% for 2016.2018. Administrative expenses related to the quicklime, construction supplies and other segments accounted for approximately 8%1.0%, 0.8%2.0% and 2.3%2.0%, respectively, of total administrative expenses for 20172019 compared to approximately 7.5%1.3%, 0.5%0.3% and 2.4%1.9% respectively, for 2016.2018.
Selling and Distribution Expenses
The following table sets forth the components of our selling and distribution expenses for 20172019 and 2016: 2018:
Year ended December 31, | Year ended December 31, | |||||||||||||||
(in millions of S/) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
| Personnel expenses | 18.0 | 17.1 | 26.8 | 21.7 | ||||||||||||
| Advertising and promotion expenses | 19.0 | 15.6 | 7.0 | 13.1 | ||||||||||||
| Third-party services | 4.9 | 4.8 | ||||||||||||||
| Expected credit losses for trade receivables | 1.5 | 0.7 | ||||||||||||||
| Other | 9.6 | 7.2 | 4.3 | 3.8 | ||||||||||||
| Total | 46.6 | 39.9 | 44.5 | 44.1 | ||||||||||||
Our total selling and distribution expenses remained relatively flat, increasing by only 0.9%, or S/0.4 million, to S/44.5 million in 2019 from S/44.1 million in 2018. ,
Selling and distribution expenses related to the cement, concrete and precast segment represented approximately 95.0% of total selling and distribution expenses for 2019, compared to 97.5% for 2018. Selling and distribution expenses related to quicklime, the construction supplies and other segments represented approximately 1.0%, 2.0%, and 2.0% respectively, of total selling and distribution expenses for 2019, compared to 0%, 2.4% and 0.1%, respectively, for 2018.
Other Operating Income (Expense), Net
Our other operating income (expense), net increased S/11.3 million, to an income of S/ 2.6 million, from an expense of S/ 8.7 million, mainly due to expenses related to a non-cash effect generated by the provision expense of a tax receivable to the Peruvian tax authority in 2018, as well as expenses related to reconstruction of public road network destroyed by the Coastal El Niño in 2018.
Income Tax Expense
Our income tax expense increased by 52.0%, or S/21.3 million, to S/62.3 million for 2019 from S/41.0 million for 2018, mainly due to an increase in profit before income tax. Our effective tax rate for 2019 was 32.1%, 35.3% for 2018 and 36.6% for 2017.
Profit
As a result of the foregoing, our profit for 2019 increased by 75.8%, or S/56.9 million, from S/75.1 million for 2018 to S/132.0 million for 2019, mainly due increased sales, as well as to two non-cash effects in 2018: the provision of a tax receivable to the Peruvian tax authority, and the accounting effects of the purchase of part of the international bonds.
68
Results of Operations
Comparison of Year Ended December 31, 2018 to Year Ended December 31, 2017
| Year ended December 31, | ||||||||||||
| (amounts in millions of S/) | 2018 | 2017 | Variation % | |||||||||
| Sales of goods | 1,262.9 | 1,220.8 | 3.4 | |||||||||
| Cost of sales | (796.2 | ) | (733.0 | ) | (8.6 | ) | ||||||
| Gross profit | 466.7 | 487.8 | (4.3 | ) | ||||||||
| Operating income (expense): | ||||||||||||
| Administrative expenses | 172.1 | (195.6 | ) | (12.0 | ) | |||||||
| Selling and distribution expenses | (44.1 | ) | (41.7 | ) | 5.8 | |||||||
| Impairment on brine project | - | (47.6 | ) | N/R | ||||||||
| Other operating income (expense), net | (8.7 | ) | (4.3 | ) | N/R | |||||||
| Total operating income (expense), net | (224.9 | ) | (289.2 | ) | (22.2 | ) | ||||||
| Operating profit | 241.8 | 198.6 | 21.8 | |||||||||
| Other income (expense): | ||||||||||||
| Finance income | 2.3 | 5.8 | (60.3 | ) | ||||||||
| Finance costs | (87.3 | ) | (73.8 | ) | (18.3 | ) | ||||||
| Gain on the valuation of trading derivative financial instruments | 2.6 | - | N/R | |||||||||
| Cumulative net loss on settlement of derivative financial instruments | (34.9 | ) | - | N/R | ||||||||
| Loss from exchange difference, net | (8.4 | ) | (2.2 | ) | 281.8 | |||||||
| Total other expenses, net | (125.7 | ) | (70.2 | ) | (79.1 | ) | ||||||
| Profit before income tax | 116.1 | 128.4 | (9.6 | ) | ||||||||
| Income tax expense | (41.0 | ) | (47.0 | ) | (12.8 | ) | ||||||
| Profit for the year from continuing operations | 75.1 | 81.4 | (7.7 | ) | ||||||||
| Loss for the year from discontinued operations | - | (0.8 | ) | N/R | ||||||||
| Profit for the year | 75.1 | 80.6 | (6.8 | ) | ||||||||
N/M means not meaningful.
Sales of Goods
The following table sets forth a breakdown of our sales of goods by segment for 2018 and 2017:
| Year ended December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and precast | 1,134.7 | 89.8 | 1,071.8 | 87.8 | ||||||||||||
| Quicklime | 57.6 | 4.6 | 80.7 | 6.6 | ||||||||||||
| Construction supplies | 69.0 | 5.5 | 66.4 | 5.4 | ||||||||||||
| Other | 1.6 | 0.1 | 1.9 | 0.2 | ||||||||||||
| Total sales of goods | 1,262.9 | 100.0 | 1,220.8 | 100.0 | ||||||||||||
Our total sales of goods increased by 3.4%, or S/42.1 million, to S/1,262.9 million in 2018 from S/1,220.8 million in 2017. This increase was primarily due to the following factors:
| ● | a 5.9%, or S/62.9 million, increase in 2018 in sales of cement, concrete and precast mainly due to increased sales of concrete to small and medium sized projects and the public sector, as well as increased sales of cement to auto-construction and the public sector; |
| ● | offset in part by a 28.6%, or S/ 23.1 million, decrease in 2018 in the sales of quicklime, mainly due to a decrease in sales of refined quicklime; and |
| ● | a 3.98%, or S/2.6 million, increase in 2018 in the sale of construction supplies, mainly due to spending by the self-construction segment as families were rebuilding their homes after coastal El Niño. |
The following table sets forth the composition of our sales of cement, concrete and precast for 2018 and 2017:
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | Variation | ||||||||||
| (in millions of S/) | % | |||||||||||
| Cement | 975.6 | 944.1 | 3.3 | |||||||||
| Concrete and pavement | 136.7 | 110.2 | 24.0 | |||||||||
| Precast | 22.4 | 17.5 | 28.0 | |||||||||
| Total | 1,134.7 | 1,071.8 | 5.9 | |||||||||
Our total sales of cement, concrete and precast increased by 5.9%, or S/62.9 million, to S/ 1,134.7 million in 2018 from S/1,071.8 million in 2017. This tab was primarily due to the following factors:
| ● | sales of cement increased by 3.3%, or S/31.5 million in 2018 due to a 3.8% increase in volume of cement sold, offset by a 0.5% decrease in the average sales price; |
| ● | sales of concrete and pavement increased by 24.0%, or S/26.5 million, in 2018, due to an 18.0% increase in volume and 6.0% increase in the average price of concrete and pavement; and |
| ● | sales of precast increased by 28.0%, or S/4.9 million, in 2018, due to a 25.5% increase in volume and a 2.5% increase in price, mainly due to a change in strategy which seeks to expand our client base and our portfolio of products including heavy precast products. |
Cost of Sales
The following table sets forth a breakdown of our cost of sales by segment for 2018 and 2017:
| Year ended December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and precast | 675.2 | 84.8 | 599.7 | 81.8 | ||||||||||||
| Quicklime | 52.3 | 6.6 | 67.0 | 9.2 | ||||||||||||
| Construction supplies | 67.2 | 8.4 | 64.6 | 8.8 | ||||||||||||
| Other | 1.5 | 0.2 | 1.7 | 0.2 | ||||||||||||
| Total | 796.2 | 100.0 | 733.0 | 100.0 | ||||||||||||
Our total cost of sales in 2018 increased by 8.6%, or S/63.2 million, to S/796.2 million, from S/733.0 million in 2017, primarily due to the following factors:
| ● | a 12.6%, or S/75.5 million, increase in the cost of sales of cement, concrete and precast in 2018, due primarily to an increase in sales volume, as well as increased production costs for cement, and increased sales of concrete to small and medium-sized companies which results in higher logistics costs; |
| ● | offset by a 21.9%, or S/14.7 million, decrease in 2018 in the cost of sales of quicklime, due primarily to lower sales volume; and |
| ● | a 4.0%, or S/2.6 million, increase in 2018 in the cost of sales of construction supplies, in line with the increase in sales volume. |
The following table sets forth the composition of our cost of sales of cement, concrete and precast for 2018 and 2017:
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | Variation | ||||||||||
| (in millions of S/) | % | |||||||||||
| Cement | 535.0 | 496.3 | 7.8 | |||||||||
| Concrete and pavement | 117.3 | 88.0 | 33.3 | |||||||||
| Precast | 22.9 | 15.4 | 48.7 | |||||||||
| Total | 675.2 | 599.7 | 12.6 | |||||||||
Our cost of sales represented 63.0% of our sales in 2018, compared to 60.0% in 2017. Our total cost of sales of cement, concrete and precast increased by 12.6%, or S/75.5 million, in 2018, primarily due to the following factors:
| ● | cost of sales of cement increased by 7.8%, or S/38.7 million, in 2018, mainly due to a 3.8% increase in cement sales volume and a 4.0% increase in production cost in the aftermath of El Niño related damages which affected our ability to source raw materials during the first months of the year, as well as an increase in the price of coal; |
| ● | a 33.3%, or S/29.3 million increase in the cost of sales of concrete and pavement in 2018, due to an 18.0% increase in volume sold as well as a 15.3% increase in production costs. Since large infrastructure projects have been delayed in the North, the Company has actively sought to fill this gap with demand from other small and medium-sized projects. This allows us to utilize more of our installed capacity, but at the same time generates an additional logistics costs since we need to deliver to more clients; and |
| ● | a 48.7%, or S/7.5 million increase in the cost of sales of precast during 2018, mainly due a 25.5% increase in sales volume and a 23.2% increase in production costs mainly due to higher costs from initial investment required for new heavy precast products. As this business unit grows and matures, we should see margin improvement. |
Gross Profit
The following table sets forth a breakdown of our gross profit and gross profit margin by segment for 2018 and 2017:
| Year ended December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Gross profit | Gross profit margin | Gross profit | Gross profit margin | |||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and precast | 459.5 | 40.5 | 472.1 | 44.0 | ||||||||||||
| Quicklime | 5.3 | 9.2 | 13.7 | 17.0 | ||||||||||||
| Construction supplies | 1.8 | 2.6 | 1.8 | 2.7 | ||||||||||||
| Other | 0.1 | 6.3 | 0.2 | 10.5 | ||||||||||||
| Total gross profit | 466.7 | 37.0 | 487.8 | 40.0 | ||||||||||||
Total gross profit decreased by 4.3%, or S/21.1 million, to S/466.7 million in 2018, from S/487.8 million in 2017, mainly because of, higher raw material costs of cement and quicklime and higher sales to small and medium sized concrete companies, which generate higher logistics costs. Our gross profit margin (i.e., gross profit as a percentage of net sales) for 2018 was 37.0% compared to 40.0% for 2017.
The following table sets forth a breakdown of our gross profit and gross profit margin for the cement, concrete and precast segment for 2018 and 2017:
| Year ended December 31, | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| Gross profit | Gross profit margin | Gross profit | Gross profit margin | Variation | ||||||||||||||||
| (in millions of S/) | % | (in millions of S/) | % | percentage points | ||||||||||||||||
| Cement | 440.6 | 45.2 | 447.8 | 47.4 | (1.6 | ) | ||||||||||||||
| Concrete and pavement | 19.4 | 14.2 | 22.2 | 20.1 | (12.6 | ) | ||||||||||||||
| Precast | (0.5 | ) | (2.2 | ) | 2.1 | 12.0 | N/R | |||||||||||||
| Total gross profit | 459.5 | 40.5 | 472.1 | 44.0 | (2.7 | ) | ||||||||||||||
Gross profit margin for cement, concrete and precast decreased by 2.7 percentage points in 2018 compared to 2017. This was mainly due to a decrease of 1.6 percentage points in cement margin due to higher raw materials costs, a decrease of 12.6 percentage points in concrete and pavement margin due to higher sales to small- and medium-sized companies which generated a higher logistics costs, and a decrease in the precast margin mainly due to higher costs from initial investment required for new heavy precast products.
Operating expense
Our operating expenses primarily reflect administrative and selling and distribution expenses. In 2018, our operating expenses decreased by S/64.3 million to S/ 224.9 million from S/289.2 million in 2017, mainly due to the impairment of our brine assets during 2017, as well as operating efficiencies derived from lower administrative expenses.
Administrative Expenses
The following table sets forth the composition of our administrative expenses for 2018 and 2017:
| Year ended December 31, | ||||||||
| (in millions of S/) | 2018 | 2017 | ||||||
| Personnel expenses | 84.7 | 94.4 | ||||||
| Third-party services | 51.5 | 65.4 | ||||||
| Board of directors compensation | 6.8 | 6.5 | ||||||
| Depreciation and amortization | 12.0 | 14.9 | ||||||
| Taxes | 4.8 | 3.8 | ||||||
| Consumption of supplies | 1.8 | 2.7 | ||||||
| Donations | 9.9 | 7.3 | ||||||
| Others | 0.6 | 0.5 | ||||||
| Total | 172.1 | 195.6 | ||||||
Our administrative expenses decreased by 12.0%, or S/23.5 million, to S/172.1 million in 2018 from S/195.6 million in 2017. Personnel expenses decreased by S/9.7 million mainly due to lower severance payments in 2018. Third party services also decreased by S/13.9 million in 2018 mainly due to a decrease in consultancy services compared to 2017.
Administrative expenses related to the cement, concrete and precast segment accounted for approximately 96.5% of total administrative expenses for 2018 compared to approximately 89.0% for 2017. Administrative expenses related to the quicklime, construction supplies and other segments accounted for approximately 1.3%, 0.3% and 1.9%, respectively, of total administrative expenses for 2018 compared to approximately 8.0%, 0.8% and 2.3% respectively, for 2017.
Selling and Distribution Expenses
The following table sets forth the components of our selling and distribution expenses for 2018 and 2017:
| Year ended December 31, | ||||||||
| (in millions of S/) | 2018 | 2017 | ||||||
| Personnel expenses | 21.7 | 18.0 | ||||||
| Advertising and promotion expenses | 13.1 | 14.0 | ||||||
| Third-party services | 4.8 | 7.4 | ||||||
| Allowance for expected credit losses, note 7 (d) | 0.7 | 1.2 | ||||||
| Other | 3.8 | 1.0 | ||||||
| Total | 36.5 | 34.2 | ||||||
Our total selling and distribution expenses increased by 16.8%5.8%, or S/6.72.4 million, to S/46.644.1 million in 20172018 from S/39.941.7 million in 2016,2017, primarily related to an increase in the advertisingsales as well as a slight increase in personnel expenses in line with our strategy to serve more small and promotion expenses budget tomedium sized clients and successfully defend the Company’sour market share.
Selling and distribution expenses related to the cement, concrete and blocksprecast segment represented approximately 95%97.5% of total selling and distribution expenses for 2017,2018, compared to 95.4%94.4% for 2016.2017. Selling and distribution expenses related to quicklime, the construction supplies and other segments represented approximately 0%, 4.9%2.4%, and 0.1% respectively, of total selling and distribution expenses for 2017,2018, compared to 0%, 4.1%5.5% and 0.5%0.1%, respectively, for 2016.2017.
Other Operating Income (Expense), Net
Our other operating income (expense), net decreased S/6.74.4 million, to a lossan expense of S/8.7 million in 2018 from an expense of S/ 4.3 million in 2017, from income of S/2.4 million in 2016, mainly due to additional costs incurred resulting from roadway damage caused by the landslides, floods and heavy rainsexpenses related to a non-cash effect generated by the effectsprovision expense of El Niño.a tax receivable to the Peruvian tax authority.
Impairment on brine project
The Company had decided to prioritize its investments in the development of products related to the manufacture and sale of cement and construction solutions; therefore, the disposal of investments that are not in line with the strategic plan that has been approved. As a result of this decision, in the fourth quarter of 2017, the Company decided not to continue with the brine project and recorded and impairment in the project.
Other Expenses, Net
Our other expenses, net decreasedincreased by S/4.555.5 million, to S/ 125.7 million in 2018 from S/70.2 million in 2017, from S/74.7 million in 2016, mainly due to a decrease in the counterparty risk fornet loss originated by the cancellation of cross-currency swap.swaps after purchasing part of our outstanding international bonds.
Income Tax Expense
Our income tax expense decreased by 40.2%12.8%, or S/31.66.0 million, to S/41.0 million for 2018 from S/47.0 million for 2017 from S/78.6 million for 2016.2017. In December 2016, the Peruvian government approved an increase of the income tax rate from 28% to 29.5% to be effective as of January 1, 2017. This increase resulted in an increase in our deferred income tax liability ofon S/22.3 million and increased the deferred income tax asset by S/8.5 million (S/14.6 million was recognized as a higher income tax expense in the consolidated statement of profit or loss and S/824,000 as an income in Other Comprehensive Income).
Our effective tax rate for 2018 was 35.3%, 36.6% for 2017 was 36.6%,and 39.0% for 2016, and 28.9% for 2015.2016. It was unusually high in 2017 mainly due to the non-deductible expenses related to the impairment on the brine project and in 2016 due to the increase in the future tax rate from 26% to 29.5%.
Profit from continuing operations
As a result of the foregoing, our profit from continuing operations for 20172018 decreased by 31.9%7.7%, or S/38.16.3 million, from S/119.5 million for 2016 to S/81.4 million for 2017 to S/75.1 million for 2018, mainly due to mainly due to two non-cash effects: the impairment on the brine project. The Company decided to prioritize its investments in the developmentprovision of products relateda tax receivable to the productionPeruvian tax authority, and sale of cement and constructive solutions, for which the disposal of investments that are not in line with the strategic plan has been approved. Because of this decision, in the last quarteraccounting effects of the year the Company decided not to continue with the Salmueras project and consequently wrote-off allpurchase of a portion of the investment related to this project as of December 2017. This write-off accounted for S/47.6 million,international bonds. Profit from continuing operations without the impairmentthese effects would have been S/118.8106.1 million.
Results of Operations
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Year ended December 31, | ||||||||||||
(amounts in millions of S/) | 2016 | 2015 | Variation % | |||||||||
| Sales of goods | 1,240.2 | 1,231.0 | 0.7 | |||||||||
| Cost of sales | (736.5 | ) | (695.8 | ) | 5.8 | |||||||
| Gross profit | 503.6 | 535.3 | (5.9 | ) | ||||||||
| Operating income (expense): | ||||||||||||
| Administrative expenses | (193.4 | ) | (179.7 | ) | 7.6 | |||||||
| Selling and distribution expenses | (39.9 | ) | (31.5 | ) | 26.7 | |||||||
| Net gain on sale of available-for-sale financial investment | — | — | ||||||||||
| Other operating income, net | 2.4 | 3.9 | (38.5 | ) | ||||||||
| Total operating expense, net | (230.8 | ) | (207.3 | ) | 11.3 | |||||||
| Operating profit | 272.8 | 328.0 | (16.8 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Finance income | 3.2 | 3.4 | (5.9 | ) | ||||||||
| Finance costs | (75.4 | ) | (36.8 | ) | 104.9 | |||||||
| Gain (loss) from exchange difference, net | (2.5 | ) | 12.2 | N/M | ||||||||
| Total other expenses, net | (74.7 | ) | (21.2 | ) | 252.5 | |||||||
| Profit before income tax | �� | 198.1 | 306.8 | (35.4 | ) | |||||||
| Income tax expense | (78.6 | ) | (89.4 | ) | (12.1 | ) | ||||||
| Profit for the year from continuing operations | 119.5 | 217.4 | (45 | ) | ||||||||
| Loss for the year from discontinued operations | (6.6 | ) | (5.7 | ) | 15.8 | |||||||
| Profit for the year | 112.9 | 211.7 | (46.7 | ) | ||||||||
N/M means not meaningful.
Sales of Goods
The following table sets forth a breakdown of our sales of goods by segment for 2016 and 2015:
Year ended December 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(in millions | % | (in millions | % | |||||||||||||
| Cement, concrete and blocks | 1,103.4 | 88.9 | 1,089.2 | 88.5 | ||||||||||||
| Quicklime | 75.1 | 6.1 | 64.1 | 5.2 | ||||||||||||
| Construction supplies | 59.9 | 4.8 | 75.6 | 6.1 | ||||||||||||
| Other | 1.8 | 0.2 | 2.1 | 0.2 | ||||||||||||
| Total sales of goods | 1,240.2 | 100.0 | 1,231.0 | 100.0 | ||||||||||||
Our total sales of goods increased by 0.7%, or S/9.2 million, to S/1,240.2 million in 2016 from S/1,231.0 million in 2015. This increase was primarily due to the following factors:
The following table sets forth the composition of our sales of cement, concrete and blocks for 2016 and 2015:
Year ended December 31, | ||||||||||||||
2016 | 2015 | Variation | ||||||||||||
| (in millions of S/) | % | |||||||||||||
| Cement | 924.4 | 928.7 | (0.5 | ) | ||||||||||
| Concrete | 152.6 | 123.9 | 23.1 | |||||||||||
| Blocks | 26.4 | 36.5 | (27.7 | ) | ||||||||||
| Total | 1,103.4 | 1,089.2 | 1.3 | |||||||||||
Our total sales of cement, concrete and blocks increased by 1.3%, or S/14.2 million, to S/1,103.4 million in 2016 from S/1,089.2 million in 2015. This increase was primarily due to the following factors:
Cost of Sales
The following table sets forth a breakdown of our cost of sales by segment for 2016 and 2015:
Year ended December 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(in millions | % | (in millions | % | |||||||||||||
| Cement, concrete and blocks | 615.8 | 83.6 | 572.0 | 82.2 | ||||||||||||
| Quicklime | 60.9 | 8.3 | 49.0 | 7.0 | ||||||||||||
| Construction supplies | 58.7 | 8.0 | 73.1 | 10.5 | ||||||||||||
| Other | 1.2 | 0.2 | 1.7 | 0.2 | ||||||||||||
| Total | 736.5 | 100.0 | 695.8 | 100.0 | ||||||||||||
Our total cost of sales increased by 5.9%, or S/40.8 million, to S/736.6 million for 2016, from S/695.8 million for 2015, primarily due to the following factors:
The following table sets forth the composition of our cost of sales of cement, concrete and blocks for 2016 and 2015:
| Year ended December 31, | ||||||||||||||
2016 | 2015 | Variation | ||||||||||||
(in millions | % | |||||||||||||
| Cement | 489.5 | 460.2 | 6.4 | |||||||||||
| Concrete | 105.3 | 87.9 | 19.8 | |||||||||||
| Blocks | 21.0 | 23.9 | (12.1 | ) | ||||||||||
| Total | 615.8 | 572.0 | 7.7 | |||||||||||
Our cost of sales represented 55.8% of our sales in 2016, compared to 52.5% in 2015. Our total cost of sales of cement, concrete and blocks increased by 7.7%, or S/43.8 million, in 2016, primarily due to the following factors:
Gross Profit
The following table sets forth a breakdown of our gross profit and gross profit margin by segment for 2016 and 2015:
| Year ended December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Gross profit | Gross | Gross | Gross | |||||||||||||
(in millions | % | (in millions of S/) | % | |||||||||||||
| Cement, concrete and blocks | 487.7 | 44.2 | 517.3 | 47.5 | ||||||||||||
| Quicklime | 14.2 | 18.9 | 15.1 | 23.6 | ||||||||||||
| Construction supplies | 1.2 | 2.0 | 2.5 | 3.3 | ||||||||||||
| Other | 0.5 | 27.8 | 0.4 | 19.0 | ||||||||||||
| Total gross profit | 503.6 | 40.6 | 535.3 | 43.5 | ||||||||||||
Gross profit decreased by 5.9%, or S/31.7 million, to S/503.6 million in 2016 from S/535.3 million in 2015 mainly as a result of, increased depreciation from the Piura plant, and to a lesser extent due to a 6.0%, or S/0.9 million decrease in gross profit from the quicklime segment in 2016 that resulted from a decrease in sales of the higher priced product during the year, despite an overall increase in sales volume. Our gross profit margin (gross profit as a percentage of net sales) for 2016 was 40.6% compared to 43.5% for 2015.
The following table sets forth a breakdown of our gross profit and gross profit margin for the cement, concrete and blocks segment for 2016 and 2015:
Year ended December 31, | ||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||
Gross | Gross profit margin | Gross | Gross | Variation | ||||||||||||||||
| (in millions of S/) | % | (in millions | % | percentage | ||||||||||||||||
| Cement | 434.9 | 47.0 | 468.6 | 50.4 | (3.4 | ) | ||||||||||||||
| Concrete | 47.3 | 31.0 | 36.0 | 29.1 | 1.9 | |||||||||||||||
| Blocks | 5.5 | 20.8 | 12.7 | 34.5 | (13.7 | ) | ||||||||||||||
| Total gross profit | 487.7 | 44.2 | 517.3 | 47.5 | (3.3 | ) | ||||||||||||||
Gross profit margin for the cement, concrete and blocks segment decreased 3.3 percentage points in 2016 compared to 2015. This was due mainly to a decrease in cement margin (3.4 percentage points) that resulted from increased depreciation from the Piura plant, a 13.7 percentage point decrease in the margin of our blocks segment attributable to sales of piles for the Talara refinery in 2015, partially offset by a 1.9 percentage point increase in concrete margin that resulted primarily from higher prices and dilution of fixed costs that resulted from increased demand during the first nine months of the year.
Operating Income (Expense)
Our operating expenses primarily reflect administrative and selling and distribution expenses. In 2016, our operating expenses increased by S/23.6 million to S/230.9 million in 2016 from S/207.3 million in 2015.
Administrative Expenses
The following table sets forth the composition of our administrative expenses for 2016 and 2015:
Year ended December 31, | ||||||||
(in millions of S/) | 2016 | 2015 | ||||||
| Personnel expenses | 100.1 | 94.1 | ||||||
| Third-party services | 63.0 | 56.7 | ||||||
| Board of directors compensation | 6.1 | 7.1 | ||||||
| Depreciation and amortization | 12.8 | 10.7 | ||||||
| Taxes | 2.9 | 2.2 | ||||||
| Consumption of supplies | 2.1 | 2.4 | ||||||
| Donations | 5.8 | 6.1 | ||||||
| Others | 0.6 | 0.4 | ||||||
| Total | 193.4 | 179.7 | ||||||
Our administrative expenses increased by 7.6%, or S/13.7 million, to S/193.4 million in 2016 from S/179.7 million in 2015. Personnel expenses increased by S/6.0 million, primarily as a result of higher severance payments and third-party services increased by S/6.4 million mainly due to an increase in consulting services in IT, environment and security, and logistics services for the Piura plant, among others.
Administrative expenses related to the cement, concrete and blocks segment accounted for approximately 89.6% of total administrative expenses for 2016 compared to approximately 90.1% for 2015. Administrative expenses related to the quicklime, construction supplies and other segments accounted for approximately 7.5%, 0.5% and 2.4% respectively, of total administrative expenses for 2016 compared to approximately 6.3%, 0.7% and 2.9% respectively, for 2015.
Selling and Distribution Expenses
The following table sets forth the components of our selling and distribution expenses for 2016 and 2015:
| Year ended December 31, | ||||||||
(in millions of S/) | 2016 | 2015 | ||||||
| Personnel expenses | 17.1 | 16.2 | ||||||
| Advertising and promotion expenses | 15.6 | 8.5 | ||||||
| Other | 7.2 | 6.8 | ||||||
| Total | 39.9 | 31.5 | ||||||
Our total selling and distribution expenses increased by 26.7%, or S/8.4 million, to S/39.9 million in 2016 from S/31.5 million in 2015, primarily related to an increase in advertising and promotion expenses invested to protect our market share in light of decreased sales volumes during the year.
Selling and distribution expenses related to the cement, concrete and blocks segment represented approximately 95.4% of total selling and distribution expenses for 2016, compared to 94.3% for 2015. Selling and distribution expenses related to quicklime, the construction supplies and other segments represented approximately 0%, 4.1% and 0.5% respectively, of total selling and distribution expenses for 2016, compared to 0%, 4.8% and 0.9%, respectively, for 2015.
Other Operating Income, Net
Our other operating income, net decreased S/1.5 million, to S/2.4 million in 2016 from S/3.9 million in 2015.
Other Expenses, Net
Our other expenses, net increased by S/53.5 million, to S/74.7 million in 2016 from S/21.2 million in 2015, mainly due to an increase in finance cost, due to the termination of borrowing cost capitalization following the conclusion of the Piura plant project, and to an adverse exchange rate effect since we held cash in dollars, which depreciated in relation to the sol, resulting in a loss of S/2.5 million, compared to a gain of S/12.2 million in 2015.
Income Tax Expense
Our income tax expense decreased by 12.0%, or S/10.8 million, to S/78.6 million for 2016 from S/89.4 million for 2015. In December 2016, the Peruvian government approved an increase of the income tax rate from 28% to 29.5% to be effective as of January 1, 2017. This increase resulted in an increase in our deferred income tax liability of S/22.3 million and increased the deferred income tax asset by S/8.5 million (S/14.6 million was recognized as a higher income tax expense in the consolidated statement of profit or loss and S/824,000 as income in Other Comprehensive Income). Our effective tax rate for 2016 was 39.0%, and 28.9% for 2015.
Profit from Continuing Operations
As a result of the foregoing, our profit from continuing operations for 2016 decreased by 45.0%, or S/97.9 million, from S/217.4 million for 2015 to S/119.5 million for 2016.
| B. | Liquidity and Capital Resources |
Our main cash requirements are our operating expenses, capital expenditures relating to the maintenance and expansion of our facilities, the servicing of our debt, the payment of dividends and payment of taxes. Our primary sources of cash have been cash flow from operating activities, and our issuance of Senior Notes and, to a lesser extent, loans and other financings. We believe that these sources of cash will be sufficient to cover our working capital needs in the ordinary course of our business.
Cash Flows
The table below sets forth certain components of our cash flows for the years ended December 31, 2017, 20162019, 2018 and 2015. 2017.
| Year ended December 31, | ||||||||||||
(in millions of S/) | 2017 | 2016 | 2015 | |||||||||
| Net cash flows from operating activities (1) | 250.4 | 241.7 | 275.6 | |||||||||
| Net cash flows from (used in) investing activities (1) | (70.6 | ) | (135.6 | ) | (475.9 | ) | ||||||
| Net cash flows from (used in) financing activities (1) | (185.4 | ) | (177.5 | ) | (257.8 | ) | ||||||
| Increase (decrease) in cash | 5.6 | (71.4 | ) | (458.1 | ) | |||||||
| Year ended December 31, | ||||||||||||
| (in millions of S/) | 2019 | 2018 | 2017 | |||||||||
| Net cash flows from operating activities (1) | 205.1 | 203.6 | 250.4 | |||||||||
| Net cash flows from (used in) investing activities (1) | (79.6 | ) | (98.8 | ) | (70.6 | ) | ||||||
| Net cash flows from (used in) financing activities (1) | (106.8 | ) | (105.3 | ) | (185.4 | ) | ||||||
| Increase (decrease) in cash | 18.7 | (0.5 | ) | (5.6 | ) | |||||||
| (1) | Includes continuing and discontinued operations. For detail on cash flow from discontinued operations please see |
Cash Flows from Operating Activities
Net cash flow from operating activities increased by 3.6%0.7% or S/8.71.5 million, to S/250.4205.1 million in 20172019 from S/241.7203.6 million in 2016,2018, mainly due to an increase of inventory and a decrease inof income tax payments.payments and interest.
Net cash flow from operating activities decreased by 12.3%18.7% or S/33.946.8 million, to S/241.7203.6 million in 20162018 from S/275.6250.4 million in 2015,2017, mainly due primarily to a decrease in our operating income.
Net cash flow from operating activities increased by 14.6% or S/35.2 million, to S/275.6 million in 2015 from S/240.4 million in 2014, due primarily to an increase in operating income.of inventory and an increase of income tax payments.
Cash Flows used in Investing Activities
Net cash flowflows used in investing activities were S/70.679.6 million for 2017,2019, and were primarily related to maintenance capex for our cement plants and purchase of equipment for concrete and aggregates.
Net cash flows used in investing activities were S/98.8 million for 2018, and were primarily related to maintenance capex for our cement plants and purchase of equipment for concrete and aggregates equipment.
Net cash flow used in investing activities were S/135.6 million for 2016, and were primarily related to investments related to the new cement plant in Piura.
Net cash flows used in investing activities were S/475.9 million for 2015, and were primarily related to the purchase of property, plant and equipment for the Piura plant net of the income derived from the sale of real estate assets.
Cash Flows used in Financing Activities
Net cash flows used in financing activities were S/185.4106.8 million for 2017,2019, and were primarily due to dividends paid to our shareholders.
Net cash flows used in financing activities were S/177.5105.3 million for 2016,2018, and were primarily due to dividends paid to our shareholders.
Net cash flows used in financing activities were S/257.8 million for 2015, and were primarily due to dividends paid to our shareholders and the buyback of investment shares.Indebtedness
Indebtedness
As of December 31, 2017,2019, we had total outstanding indebtedness of S/972.3 million1,101.9 (US$300332.2 million). As of December 31, 2017,2019, we maintain cross currency swap hedging agreements for US$300150 million to manage foreign exchange risks related to our U.S. dollar-denominated debt. The adjusted debt by hedge iswas S/913.31,069.5 million (US$281.8322.4 million).
(amounts in millions of S/) | As of | Interest | Maturity | As of December 31, 2019 | Interest rate | Maturity date | Currency | |||||||||||||||
| 4.50% Senior Notes due 2023 | 972.3 | 4.5 | % | February 8, 2023 | 434.4 | 4.50 | % | February 8, 2023 | U.S. dollars | |||||||||||||
| 4.50% Senior Notes due 2029 | 259.4 | 6.69 | % | February 1, 2029 | Soles | |||||||||||||||||
| 4.50% Senior Notes due 2034 | 309.3 | 6.84 | % | February 1, 2034 | Soles | |||||||||||||||||
| Short-term promissory notes | 8.3 | 2.70 | % | May 8, 2020 | U.S. dollars | |||||||||||||||||
| Short-term promissory notes | 13.7 | 4.64 | % | June 18, 2020 | Soles | |||||||||||||||||
| Short-term promissory notes | 5.3 | 3.36 | % | August 6, 2020 | U.S.dollars | |||||||||||||||||
| Short-term promissory notes | 4.9 | 3.23 | % | August 14,2020 | U.S.dollars | |||||||||||||||||
| Short-term promissory notes | 16.9 | 3.16 | % | October 9, 2020 | U.S.dollars | |||||||||||||||||
| Short-term promissory notes | 43.1 | 3.00 | % | October 10, 2020 | U.S.dollars | |||||||||||||||||
| Short-term promissory notes | 6.6 | 2.35 | % | November 27, 2020 | U.S.dollars | |||||||||||||||||
| 1,101.9 | ||||||||||||||||||||||
International Bonds.In February 2013, we issued US$300,000,000 of our 4.50% Senior Notes due 2023 in our inaugural international bond offering. A portion of the proceeds from this offering were used to prepay amounts outstanding on our secured loan agreement with BBVA Banco Continental, and the remaining proceeds was used in capital expenditures incurred in connection with the construction and operation of the new Piura plant and our cement business. The notes were issued pursuant to Rule 144A under the Securities Act and in compliance with Regulation S under the Securities Act, and listed on the Irish Stock Exchange.
The indenture pursuant to which the notes were issued contains certain covenants, including restrictions on our and our restricted subsidiaries’ ability to incur further indebtedness or issue disqualified stock and preferred stock, unless the following conditions are met:
| ● | the fixed charge coverage ratio for our most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or such disqualified stock or such preferred stock is issued, as the case may be, would have been at least 2.5 to 1.0; and |
| ● | the consolidated debt to EBITDA ratio for our most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or such disqualified stock or such preferred stock is issued, as the case may be, would have been no greater than 3.5 to 1.0,
in each case, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional indebtedness had been incurred or the disqualified stock or the preferred stock had been issued, as the case may be, at the beginning of such four fiscal quarters. The indenture also contains restrictions on our ability and that of our restricted subsidiaries to incur liens and to merge, consolidate or transfer all or substantially all of our assets. |
In management’s opinion, we were in compliance with all of applicable covenants as of the date of this annual report.
The subsidiaries that guarantee the notes are those related to our cement business namely, Cementos Selva S.A., Distribuidora Norte Pacasmayo S.R.L., Empresa de Transmisión Guadalupe S.A.C., Dinoselva Iquitos S.A.C. and Calizas del Norte S.A.C., in liquidation.
In December 2018, we purchased US$168,388,000 or approximately 56.13% of the total outstanding bonds by means of a partial cash tender offer (local bond program).
Local Bonds. On January 8, 2019, the General Shareholders’ Meeting approved the issuance of a local bond program for up to S /1,000 million soles. On January 31, 2019, 2 issuances were completed for a total of S/570 million. One for S/260 million with a rate of 6.68750% for a term of 10 years, and another for S/310 million with a term of 15 years and a rate of 6.84375%. The rates and terms obtained benefit our financial costs structure, with lower cost of capital, an extended maturity and less exposure to currency fluctuations.
Derivative Financial Instruments
As of December 31, 2017,2019, we maintain cross currency swap hedging agreement in aggregate principal amount of US$300150 million to hedge against the foreign exchange risks associated with our U.S. dollar-denominated debt. Of the US$150,000,000 shown in the swap position, there are underlying liabilities in the amount of US$131,612,000. The difference of US$18,388,000 is reflected in net (loss) gain on the valuation of trading derivative financial instruments.
During 2019, the net gain originated by the exchange difference was approximately S/729,000 and, during 2018, the net loss from exchange difference amounted to S/8,377,000. All these results are presented in the caption “Gain (loss) from exchange difference, net” of the consolidated statement of income. The net loss difference in exchange for the year 2018 includes a loss of S/4,293,000 originated by cash flow hedging instruments that changed under negotiation conditions.
76
Capital Expenditures
See “Item 4—Information on the Company—A. History and Development of the Company—Capital Expenditures.”
| C. | Research and Development, Patents and Licenses, Etc. |
As of December 31, 2017,2019, our research and development group consisted of 10 geologists.8 geologists in-house, as well as a research and development agreement with UTEC, for the development of new types and uses of cement. Our research and development team is mainly focused on developing (i) an ideal mix of additives for our cement products in an effort to reduce the amount of clinker material in our cement; (ii) other concrete products with various practical applications; and (iii) products with specific characteristics that meet market demands. We believe our research and development department is an integral part of our strategy to develop innovative cement products by continuously studying the chemical composition of cement and making it adaptable to the requirements and specific needs of our end consumer.
| D. | Trend Information |
Cement Market
The Peruvian Cement Market
Peru’s cement production is segmented into three principal geographic regions: the northern region, the central region, including Lima’s metropolitan area, and the southern region. The table below sets forth selected data with respect to each region in Peru and the corresponding cement manufacturers. Market share data is based on metric tons of cement delivered during 2017.2018.
Geographic Breakdown
| Northern Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2013 | 2014 | 2015 | 2016 | 2017 | % share | ||||||||||||||||||
| C. Pacasmayo | 2,110 | 2,051 | 2,022 | 2,004 | 1,981 | 18.6 | % | |||||||||||||||||
| C. Selva | 240 | 296 | 288 | 281 | 286 | 2.7 | % | |||||||||||||||||
| Imports | 34 | 40 | 12 | 38 | 0.4 | % | ||||||||||||||||||
| Total | 2,384 | 2,387 | 2,322 | 2.285 | 2,305 | 21.7 | % | |||||||||||||||||
| Central Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2013 | 2014 | 2015 | 2016 | 2017 | % share | ||||||||||||||||||
| UNACEM | 5,612 | 5,701 | 5,546 | 5,110 | 4,993 | 46.8 | % | |||||||||||||||||
| Caliza Inca | 288 | 383 | 357 | 347 | 387 | 3.6 | % | |||||||||||||||||
| Imports | 465 | 461 | 507 | 490 | 313 | 2.9 | % | |||||||||||||||||
| Total | 6,365 | 6,545 | 6,410 | 5,947 | 5,693 | 53.3 | % | |||||||||||||||||
| Southern Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2013 | 2014 | 2015 | 2016 | 2017 | % share | ||||||||||||||||||
| Grupo Yura | 2,515 | 2,600 | 2,480 | 2,645 | 2,618 | 24.6 | % | |||||||||||||||||
| Total | 2,515 | 2,600 | 2,480 | 2,645 | 2,618 | 24.6 | % | |||||||||||||||||
| Total Regions | 11,264 | 11,532 | 11,212 | 10,877 | 10,616 | 100.0 | % | |||||||||||||||||
| Northern Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2015 | 2016 | 2017 | 2018 | 2019 | % share | ||||||||||||||||||
| Pacasmayo Group | 2,310 | 2,285 | 2,267 | 2,364 | 2,615 | 22.2 | % | |||||||||||||||||
| Imports | 12 | - | 76 | 32 | 13 | 0.1 | % | |||||||||||||||||
| Total | 2,322 | 2,852 | 2,343 | 2,396 | 2,628 | 22.3 | % | |||||||||||||||||
| Central Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2015 | 2016 | 2017 | 2018 | 2019 | % share | ||||||||||||||||||
| UNACEM | 5,546 | 5,110 | 4,993 | 5,058 | 5,316 | 45.1 | % | |||||||||||||||||
| Caliza Inca | 357 | 347 | 387 | 448 | 513 | 4.3 | % | |||||||||||||||||
| Imports | 507 | 490 | 496 | 885 | 663 | 5.6 | % | |||||||||||||||||
| Total | 6,410 | 5,947 | 5,876 | 6,391 | 6,492 | 56.0 | % | |||||||||||||||||
| Southern Region (thousands of metric tons) | ||||||||||||||||||||||||
| Plant | 2015 | 2016 | 2017 | 2018 | 2019 | % share | ||||||||||||||||||
| Grupo Yura | 2,480 | 2,645 | 2,618 | 2,597 | 2,584 | 21.9 | % | |||||||||||||||||
| Imports | 3 | 18 | 42 | 65 | 98 | 0.8 | % | |||||||||||||||||
| Total | 2,483 | 2,663 | 2,660 | 2,662 | 2,682 | 22.7 | % | |||||||||||||||||
| Total Regions | 11,215 | 10,895 | 10,879 | 11,449 | 11,802 | 100 | % | |||||||||||||||||
Sources: ASOCEM, INEI, ADUANET (SUNAT).
The table below sets forth production by type of cement produced by each manufacturer in Peru: Peru that is part of ASOCEM:
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| Portland Cement | Other Portland Cements | |||||||||||||||||||||||||||
| Business | I | II | V | IP | I(PM) | MS | I Co | |||||||||||||||||||||
| UNACEM | ü | (1) | ü | (1) | ü | (1) | ü | ü | ||||||||||||||||||||
| Cementos Pacasmayo | ü | ü | (2) | ü | ü | ü | (2) | ü | ||||||||||||||||||||
| Cementos Selva | ü | (1) | ü | (1),(3) | ü | (1),(3) | ü | |||||||||||||||||||||
| Cementos Sur | ü | ü | (2) | ü | (2) | ü | ü | |||||||||||||||||||||
| Yura | ü | ü | (2) | ü | (2) | ü | ü | |||||||||||||||||||||
Source: ASOCEM
| (1) | Low alkaline content. |
| (2) | Our Portland cement II is the same as our type MS/MH/R cement. |
| (3) | Manufactured upon request. |
Although a large part of housing construction is mainly concentrated in the Lima metropolitan area, located in the central region of Peru, still concentrates a large proportion of demand, the housing market in the provinces of Peru, including the northern region, has grown significantly in recent years. Despite this trend, Peru continues to have significant shortages in housing, estimated by the INEI at 1.9 million homes nationwide. Economic growth, particularly in the mining and agribusiness sectors, rising employment levels and the implementation of real estate projects, have resulted in the creation of higher paying jobs, which have ultimately resulted in the expansion of the housing market.
Although Peru has improved by 3835 places on the Global Competitiveness Index prepared by the World Economic Forum which measures the quality of infrastructure, among other things, from 110th place in 2008 to 72nd65th in 2017,2019. In the 2019 report, although Peru stands in first place (along with another 33 countries) in Macroeconomic stability, it lies in 88th place in infrastructure, demonstrating that it continues to have a significant deficit in infrastructure. In recent years, significant efforts have been made to channel investments into the infrastructure sector through a series of initiatives that range from the creation of financial instruments (such as the infrastructure investment and trust funds) to regulatory changes, to promotion of more public private partnerships (for example “taxes for infrastructure” which allows private companies to use part of their tax payments to directly finance infrastructure works).
Distribution and Logistics
Peru’s cement market is divided into three regions circumscribed primarily by the location of established production facilities. Our facilities are located in the northern region of Peru, UNACEM controlsis the main producer in the central region, and Yura in the southern region. Cement is mainly sold in bags of 42.5 kilograms (approximately 94 pounds). However, cement can also be sold in bulk according to customer requirements.
The transportation and storage of cement requires specialized equipment. A favorable location of the production facilities not only reduces the time required to transport cement products to distributors and third-party merchants but also diminishes the costs of necessary equipment and resources. The location of a cement plant relative to its distribution network provides operational efficiencies and advantages that translate into stronger market share.
Cement can be stored in silos for up to 12 months if the silo is completely humidity proof. The typical vehicles used for the transport of cement are adapted to maintain the necessary environment during shipment. The proximity of production plants and storage centers to distribution centers, third-party vendors and retail outlets, creates a more efficient supply chain and minimizes the time and resources required to transport products from the production line to the construction site. The streamlined nature of this process ensures that cement products in the northern region of Peru, for example, reach customers within approximately one week of production. A cement company’s success is inherently linked to the sophistication of its distribution network and its emphasis on quality assurance throughout the supply chain.
Competitive Dynamics
The Peruvian cement market is comprised basically of three groups and one small plant, which own six cement producing companies:
| ● | Cementos Pacasmayo and Cementos Selva, which principally serve the northern region; |
| ● | UNACEM, which principally serves the central region; |
| ● | Cementos Yura and Cementos Sur, which primarily serve the southern region; and |
| ● | Caliza Cemento Inca, located in Cajamarquilla, Lima which principally serves the central region as well as other regions throughout the country. |
The level of competitiveness of cement companies generally depends on their cost structure, which is a function of the cost of energy, fuel, costs of raw materials and transportation. Cement companies in Peru generally compete within the limits of their distribution market, which is determined principally by their geographic locations.
The following are the main characteristics of the cement sector in Peru:
| ● | highly fragmented consumer base; |
| relatively low cost of energy and raw materials; |
| ● | operations and distribution primarily determined by geographic location; and |
| ● | high correlation toauto-construcción and public and private investments. |
| E. | Off-Balance Sheet Arrangements |
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our results of operations, financial condition or liquidity.
| F. | Tabular Disclosure of Contractual Obligations |
The following table sets forth our contractual obligations with definitive payment terms as of December 31, 2017.2019.
| Payments due by period | ||||||||||||||||||||
(in millions of S/) | Less than | 1-3 Years | 3-5 Years | More than | Total | |||||||||||||||
| Debt adjusted by hedge (principal portion)(1) | — | — | — | 913.3 | 913.3 | |||||||||||||||
| Interest payments | 43.8 | 87.6 | 87.6 | 21.9 | 240.9 | |||||||||||||||
| Hedge commission | 26.1 | 52.2 | 52.2 | 13.0 | 143.5 | |||||||||||||||
| Energy Supply (2) | 6.0 | — | — | — | 6.0 | |||||||||||||||
| Total | 75.9 | 139.8 | 139.8 | 948.2 | 1,303.7 | |||||||||||||||
| Payments due by period | ||||||||||||||||||||
| (in millions of S/) | Less than 6 months | 6 to 12 months | 1 to 5 Years | More than 5 Years | Total | |||||||||||||||
| Interest-bearing loans adjusted by hedge (1) | — | 98.7 | 400.7 | 570.0 | 1,069.4 | |||||||||||||||
| Interest | 29.1 | 31.3 | 203.5 | 232.1 | 496.0 | |||||||||||||||
| Hedge finance cost payable | — | 14.7 | 36.8 | — | 51.5 | |||||||||||||||
| Trade and other payables | 174.9 | 50.3 | — | — | 225.2 | |||||||||||||||
| Total | 204.0 | 195.0 | 641.0 | 802.1 | 1,842.1 | |||||||||||||||
| (1) | Does not include issuance costs. |
In addition, we have various mining fees and royalties payable to the government and third parties in connection with our concessions and surface land use.
| G. | Safe Harbor |
See “Part I—Introduction—Forward-Looking Statements.”
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and Senior Management |
General
Our business and affairs are managed by the board of directors in accordance with our by-laws and Peruvian Corporate Law No. 26887 (“Peruvian Corporate Law”). Our by-laws provide for a board of directors of between seven and eleven members. Between three and five alternate directors may be elected by the shareholders to act on behalf of any director who is absent from meetings or who is unable to exercise his or her duties, when and for whatever period fixed by the chairman of the board. Alternate directors have the same responsibilities, duties and powers of directors to the extent they are called to replace them.
Directors are elected at a shareholders’ meeting and hold office for three years. Directors may be elected to multiple terms. Our current board of directors is composed of nine directors and two alternates. If a director resigns or otherwise becomes unable to continue with the duties, a majority of our directors may appoint one of the alternate directors to serve as director for the remaining term of the board. In the first board meeting held after the annual shareholders’ meeting where members of the board are elected, the board of directors must elect among its members a chairman and a vice chairman.
The board of directors typically meets in regularly scheduled bi-monthly meetings and when called by the chairman of the board or a person representing the chairman. Resolutions must be adopted by a majority of the directors present at the meeting and the chairman is entitled to cast the deciding vote in the event of a tie.
Duties and Liabilities of Directors
Pursuant to Article 177 of Peruvian Corporate Law, directors are jointly and severally liable to a corporation, shareholders and third parties for any damages caused by abuse of power, fraud, willful misconduct or gross negligence. In addition, pursuant to Article 3 of Law No. 29720, as of June 26, 2011, directors of companies listed on the Lima Stock Exchange are also strictly liable for any damages caused as a result of any transactions in which they were involved and which resulted in damages or other losses to the corporation. A director cannot be found liable if the director expressed disagreement at the time the vote was cast or upon learning of such transaction and if there is a record expressing such opposition.
Our by-laws prohibit a director from voting on matters in which such director has an interest. In addition, Article 180 of the Peruvian Corporate Law requires a director with a conflicting interest on a specific matter to disclose such interest and abstain from the deliberation and decision-making process with respect to such matter. A director who violates this requirement is liable for any damages caused to us and may be removed by a majority of the board of directors upon request of any member of the board or by a majority vote of the shareholders.
Our by-laws stipulate that Directors’ compensation is determined by the Mandatory Annual General Shareholders’ Meeting at the time it reviews our annual audited financial statements. The fixed portion of the Chairman’s compensation shall be twice the amount allocated to any other director. If directors are part of one or more Committees, their compensation may include an additional amount for the work performed as members of such Committees. The additional compensation of the directors may not exceed the aggregate fixed portion of the compensation that the directors are entitled to receive. Our by-laws do not restrict Directors from voting upon matters relating to their own compensation.
Our by-laws do not prohibit our directors from borrowing from us. However, Article 179 of the Peruvian Corporate Law provides that directors of a company may enter into an agreement with such company only if the related loan agreement relates to operations the company performs in the regular course of business and in an arms’-length transaction. Further, a company may provide a loan to a director or grant securities in such director’s favor only in connection with operations that the company usually performs with third parties. Agreements, credits, loans or guarantees that do not meet the requirements set forth above require prior approval from at least two thirds of the members of the Company’s Board of Directors. Directors are jointly liable to the company and the Company’s creditors for contracts, credit, loans or securities executed or granted without complying with Article 179 of the Peruvian Corporate Law.
According to our Director’s Duties, Rights and Legal Obligations Manual, members of the Board must perform an annual self-evaluation of the Board and each Committee. Each director will be requested to provide his or her assessment of the effectiveness of the Board and the Committees. If determined by the Board to be desirable, the Board may retain independent corporate governance experts to assist the Board with the evaluations.
Legislative Decree No 1422, enacted on September 13, 2018 established provisions with regard to the Peruvian General Anti-Avoidance Rule (GAAR) for tax purposes. According to this Decree, the GAAR will apply for tax audits reviewing facts, acts and situations from July 19, 2012 and thereafter. Legal representatives will be jointly liable for taxes due when the GAAR is applied, provided those legal representatives have collaborated with the design or implementation of the acts challenged by the Peruvian Tax Authority using the GAAR. Boards of directors (for entities having a board of directors) will be responsible for approving the entity’s tax planning and cannot delegate this obligation. Finally, the board of directors must evaluate the tax planning implemented up to September 14, 2018, in order to ratify or modify the plan (the period for ratifying or modifying the tax plan will end on March 29, 2019).
Neither our by-laws nor Peruvian Corporate Law contain age limit requirements for the retirement or non-retirement of directors.
Board of Directors
The following sets forth our directors and alternate directors and their respective positions as of the date of this annual report. On March 24, 2017, the Annual Shareholder’s meetingSeptember 1, 2019, Ana María Botella Serrano was held and new directors were elected for the period 2017-2020. On December 19, 2017, Mr. Dionisio Romero Paoletti, Director, submitted his resignationappointed to the Board of Directors. On February 12, 2018, Mr. Juan Francisco Correa Sabogal was appointed as his replacement.Board.
| Name | Position | |||
|
| Year of | ||
| Eduardo Hochschild Beeck | Chairman of the Board | 1963 | ||
| José Raimundo Morales Dasso | Vice Chairman of the Board | 1946 | ||
| Juan Francisco Correa Sabogal | Director | 1974 | ||
| Roberto Dañino Zapata | Director | 1951 | ||
| Carlos Miguel Heeren Ramos | Director | 1968 | ||
| Humberto Nadal Del Carpio | Director, Chief Executive Officer | 1964 | ||
| Hilda Ochoa-Brillembourg | Director | 1945 | ||
Felipe Ortíz de Zevallos Madueño | Director | 1947 | ||
| Marco Antonio Zaldívar Garcia | Director | 1960 | ||
| Robert Patrick Bredthauer | Alternate director | 1947 | ||
Manuel Bartolomé Ferreyros Peña | Alternate director, Chief Financial Officer | 1966 | ||
| Ana María Botella Serrano | Alternate Director | 1953 |
The following sets forth selected biographical information for each of the members of our board of directors. The average tenure of board members is 9.67 years. The business address of each of our current directors is Calle La Colonia 150, Urb. El Vivero, Surco, Lima, Peru.
Eduardo Hochschild Beeck. Mr. Hochschild serveshas served as Director since April 1991, and is currently serves as Chairman of the Board. He holds a Mechanical Engineering degree in mechanical engineering from Tufts University, Boston, United States.USA. Mr. Hochschild is also the President of Hochschild Mining plc, Inversiones ASPI S.A. and is on the Board of TrusteesDirectors of UTEC and TECSUP. He is also Director of Banco de Crédito del Perú, El Pacífico Peruano-Suiza Compañía de Seguros y Reaseguros, Fosfatos del Pacífico S.A., and Sociedad de Comercio Exterior del Perú (COMEX Perú), and of the National Society of Mining, Petroleum and Energy (Sociedad Nacional de Minería, Petroleo y Energía). In addition, heHe is Vice-Chairman of the Silver Trust of Peru, andalso an expert consultant offor the Economic CounselCouncil of the Episcopal Conference.
José Raimundo Morales Dasso. Mr. Morales serveshas served as Director since March 2008. He holds a BachelorBachelor’s degree in Economics and Business Administration from Universidad del Pacífico, and a MasterMaster’s in Business Administration from the Wharton BusinessGraduate School of Finance from the University of Pennsylvania, United States.USA. Between 1970 and 1980 he worked in different positions onat the Bank of America and Wells Fargo Bank. In 1980 he started to work at Banco de Crédito del Perú and served seniorin high management positions. Mr. Morales workedHe served as the Chief Executive Officer of Banco de Crédito del Perú from October 1990 to April 2008. Currently, he is Chairmanthe Vice-Chairman of the Board of Atlantic Security Bank, Vice Chairman of the Boardboard of Credicorp Ltd.LTD., Banco de Crédito del Perú and El Pacífico Peruano-Suiza Compañía deCía. Seguros y Reaseguros. In addition, he is member of the Board of Directors Salmueras Sudamericanas, Fosfatos del Pacífico,Atlantic Security Bank, Alicorp S.A.A., Pesquera Centinela S.A., Grupo Romero, Cementos Pacasmayo S.A.A., Salmueras Sudamericanas S.A., Fosfatos del Pacífico S.A., Cerámica Lima S.A., Corporación Cerámica S.A., and Inversiones y Propiedades S.A. He is also a board member of the Board of the Peruvian Institute of Economics.Economy.
Juan Francisco Correa Sabogal. Mr. Correa serveshas served as Director since February 2018. He completedholds a bachelor’s degree in Business Administration studies atfrom Universidad de Lima and has an MBAa Master in Business Administration (MBA) from The Wharton Business School, University of Pennsylvania. He wasMr. Correa served as Lazard Freres LLC’s Mergers and Acquisitions Managing Director with Lazard Freres LLC at its Midwest Advisory practicetheir Middle East and US offices until July 2017, following a career of more thanover 11 years withat that firm. Mr. CorreaHe was one of the founding members of the practice and was responsible for establishing the business and developing itsan American client base in the U.S. Midwest across a varietyMiddle East in an array of industries. Prior to that,Previously, Mr. Correa was ahad been the Director inof Lazard’s Power,New York-based “Power, Energy & InfrastructureInfrastructure” group, out of New York, covering a variety ofoverseeing various sub-sectors. Mr. Correa also held a number orassumed responsibilities in connectionlinked to Lazard’s efforts in Latin America and was a member of the Board of Directors of MBA Lazard (Lazard’s former joint venture for Spanish speaking Latin America). Prior to joining Lazard, Mr. Correa held positions withworked at RWE/Thames Water, Merrill Lynch and Banco de Crédito del Peru. In addition, Mr. Correa has advisedbeen a broadconsultant to a large number of U.S.international companies and international corporations in mattersAmerican on topics that are not in the public domain related to strategic and M&A activity,strategies of activities of mergers acquisitions and corporate finance topics.finance. (Second-degree affinity of Eduardo Hochschild).
Roberto Dañino Zapata. Mr. Dañino serveshas served as Director since 1995. In July 2001 he resigned from the Board of Directors to take office as Prime Minister of the Peruvian Government, before rejoininggovernment. Later on, he rejoined the Board in June 2008. He is an attorney-at-lawattorney having graduated from the schools of Law of both Harvard University and Pontificia Universidad Católica del Perú. Mr. DañinoHe was the Peruvian Ambassador of Peru to the United States and Senior Vice-President and General Counsel of the World Bank. He has also been Partner and Chairman of the Latin American Practice at Wilmer Cutler & Pickering Washington D.C. (now Wilmer Hale)., Washington D.C. He is currently the Chairman of the Board of Directors of Everis (Peru) and Independent Directormember of the Board of Directors of Inversiones Centenario, Results for Development, LUMNI and LUMNI,AFP Integra, as well as member of the Advisory Board of UBER Technologies, Open Society Foundation,Foundations and Goldman Sachs.
Carlos Heeren Ramos.Mr. Heeren serveshas served as Director since March 2017. He is Executivealso the CEO at Universidad de Ingeniería y Tecnología (UTEC) and TECSUP. Moreover, he is Director of the University of Engineering and Technology (UTEC) and TECSUP, as well as Director in different nonprofitvarious companies and organizations. He holds a bachelor’s degree in economics from Universidad del Pacífico, with a master degree in economics from the University of Texas at Austin. He previously served as partner in APOYO Consultoría. He is also Director of San Fernando, Interbank, Talma, Montana and other non-profit companies and institutions. He has previously served as a partner in Apoyo Consultoría. He holds a degree in Economics from Universidad del Pacífico and a Post-graduate degree in Economics from the University of Texas.
Humberto Reynaldo Nadal Del Carpio.Mr. Nadal joined our company as Corporate Development Manager in June 2007 and has served as our Director since March 2008, and as Chief Executive Officer since April 2011. He hasholds a BachelorBachelor’s degree in Economics from Universidad del Pacífico and a Master degree in Business Administrationan MBA from Georgetown University. He is also the representative of Cementos Pacasmayo in the General ManagementCEO of ASPI, Fosfatos del Pacífico S.A. and Salmueras.FOSSAL. Moreover, he is a board member at Ferreycorp and has been Chairman of the Board of Trustees of Universidad del Pacífico, Director of Ferreycorp and has been Chairman of the Board of Directors of Fondo Mivivienda.Mi Vivienda. In April 2006, he joined Compañía Minera Ares S.A.C. (a subsidiary of Hochschild Mining plc) as Corporate Development Manager. Mr. Nadal has also served as Business, Administration and Finance Manager of the Instituto Libertad y Democracia and as Chief Executive Officer at Socosani S.A. He was recognizedhas been honored by the Institutional Investor magazine as one of the three best CEO’sCEOs in the Latin American construction industry of Latin America for 2014,in 2015, 2016, 2017, 2018 and 2017.2019.
Hilda Ochoa-Brillembourg. Mrs.Ms. Ochoa-Brillembourg was appointedhas served as a Director of Cementos Pacasmayo S.A.A. insince October 2011. She holds a Bachelor of Science degreeDegree in Economics fromUniversidad Católica Andres Bello of Venezuela, a Master’s degree in Public Administration and is a PhD candidate in Business Administration, PhD candidateboth from Harvard Business School.University. She is the founder and since 1987, President and Executive Director, of Strategic Investment Group, and a group of affiliated investment management firms. In 2014 sheShe served as President and CEO from 1987 to 2017. She was appointed Chairpersonas Chairwoman of the Board of Directors.Directors in 2014 and is the president of Emeritus since 2017. From 1976 to 1987, she was Chief Investment Officer of the Pension Investment Division at the World Bank. Mrs. Ochoa- BrillembourgMs. Ochoa-Brillembourg is ona member of the Board of Directors and of S&P Global, where she is also a memberthe Dispute Settlement committee of its auditthe Asset Management Company, an affiliate of the World Bank and financial policy committees.Independent Director.the IFC.
Felipe Ortíz de Zevallos. Mr. Ortiz de Zevallos has served as Director since March 2014. He studied at the Universidad Nacional de Ingeniería in Lima, at the University of Rochester in New York and at Harvard Business School. He is the founder and chairpersonhas been Chairman of Grupo Apoyo since 1977. Mr. Ortiz de ZevallosHe has served as Ambassador of Peru toin the United States from 2006 to 2009(2006-2009) where he was responsible, for negotiatingwith the US Congress’ approval, of managing the Free Trade Agreement between both countries. He has been a professor at Universidad del Pacífico and served as Dean of said university’s Presidentuniversity from 2004 ato 2006. In addition, he was President of the Asociación Civil Transparencia. He is currently an independent board member of various companies and non-profit organizations. In addition, he is currently President of theAsociación Civil Transparencia (Transparency Civil Association). He has received numerous awards, such as the IPAE Award in 1990, the Journalism Jerusalem Prize in 1998 and the Manuel J. Bustamante de la Fuente Award in 2008. In 2009, the Lima Chamber of Commerce paid tribute to Mr. Ortiz de Zevallos for thesehis contributions to the social and economic development of Peru, and in 2011 the Ministry of Economy and Finance awarded him with the “Hipólito Unanue” award for his contributions to the country’s economic and financial development. He was “ad honorem” advisor to the President Kuczynski between August 2016 and December 2017.Independent Director.
Marco Antonio Zaldívar.Mr. Zaldívar has served as Director since March 2017. He is a member of the Public Accounting Association, an Universidad de Lima alum and graduate of the Executive Development Program of Universidad de Piura’s PAD. In addition, Mr. Zaldívar holds an MBA degree from the Adolfo Ibáñez School of Management (USA). He has been Chairman of the Board of the Lima Stock Exchange. He is a Certified Public Accountant, graduated from the University of Lima and the General Management Program at PAD, Universidad de Piura. He holds an MBA from the Adolfo Ibañez School of Management (USA). Previously, at Ernst & Young, he was a Partner of Risk Management and Regulatory Matters, Senior Partner of the Firm’s Audit and Business Advisory Division. He has also been Vice Dean of the Lima Public Accountants’ Association, PresidentChairman of the Board of Directors and Chairman of the Procapitales Corporate Governance Committee. He is currently an Independent Director of Banco Santander del Perú, Edpyme Santander Consumo, Buenaventura and Unión de Cervecerías PeruanasUnion of Breweries Peruvian Backus yand Johnston, among other positions, highlighting his extensive experience in corporate governanceof Corporate Governance issues.Independent Director.
Robert Patrick Bredthauer. Mr. Bredthauer has been an alternate directorserved as Alternate Director since March 2003. He hasholds a degree in Business Administration from Hochschule St. Gallen, Switzerland, and a commerce degree from the École Supérieure de Commerce, La Neuveville, and the École Supérieure de Commerce, Lausanne, both in Switzerland. Since 1976, he acted as Vice-President of Finance and Executive Vice-President of Cemento Nacional C.A. (Guayaquil, Ecuador) and prior to that, washe served as the regional Controller for Holderbank Management and Consulting in Nyon, Switzerland. Independent Alternate Director.Switzerland.
Manuel Bartolomé Ferreyros Peña.Mr. Ferreyros has been an alternate directorserved as Alternate Director since March 2008 and as our Chief Financial OfficerVice-President of Finance and Administration since January 2008. He is a member of the Board of Directors of Fosfatos del Pacífico.fico S.A. Mr. Ferreyros hasholds a BachelorBachelor´s degree in Business Administration from Universidad de Lima, a Multinational MBA atfrom the Adolfo IbañIbáñez School of Management, Miami and a Master’s in Business Administration from The College of Insurance inof New York. Mr. Ferreyros has pursued the Advanced Management Program at Instituto Centroamericano de Administración de Empresas -– INCAE (Central American Institute of Business Administration) and the CEOCEOs’ Management Program at Kellogg University,School of Management, among others. Prior toBefore joining Cementos Pacasmayo,the Company, Mr. Ferreyros was Chief Executive Officer of La Positiva Seguros y Reaseguros. He was recognizedhas been honored by the Institutional Investor magazine as one of the three best CFO’sCFOs in the Latin American construction industry of Latin America for 2014,in 2015, 2016, 2017, 2018 and 2017.Alternate Director.2019.
Ana María Botella Serrano.Ms. Botella has served as Alternate Director since September 1, 2019 after having been appointed by the Board of Directors on June 24, 2019. She holds a bachelor’s degree in Law from the Complutense University of Madrid and is a member of the Senior Civil Administrators of the State. As a civil servant, she has worked at the Ministry of the Interior, Civil Government of La Rioja, Ministry of Public Works, Treasury Delegation of Valladolid and Ministry of Finance. In 2003, she was elected Councilor of the City of Madrid, has served as Second Deputy Mayor and has held the Government Delegations Employment and Social Services and Environment and Mobility. In December 2011, she was invested Mayor of the City of Madrid, a position she held until June 2015. She is currently the Executive President of the Integra Foundation and Director of Programs of the Atlantic Government Institute
Executive Officers
Our executive officers oversee our business and are responsible for the execution of the decisions of the board of directors. The following table presents information concerning the current executive officers of the company and their respective positions:
Name | Position | Year of | Year of | Position | Year of Birth | Year of Appointment | ||||||
| Humberto Nadal Del Carpio | Chief Executive Officer | 1964 | 2011 | Chief Executive Officer | 1964 | 2011 | ||||||
| Jorge Javier Durand Planas | General Counsel | 1966 | 2008 | Legal Vice - President | 1966 | 2008 | ||||||
| Manuel Bartolomé Ferreyros Peña | Chief Financial Officer | 1966 | 2008 | Chief Financial Officer | 1966 | 2008 | ||||||
| Carlos Julio Pomarino Pezzia | Vice President, Cement and Building Solutions Business | 1962 | 2009 | Vice – President of the Cement Business | 1962 | 2009 | ||||||
| Diego Arispe Silva | Central Manager of Human Management | 1981 | 2019 | |||||||||
| Aldo Bertoli Estrella | Commercial Director | 1969 | 2016 | Central Business Manager | 1969 | 2016 | ||||||
| Carlos Paul Cateriano Alzamora | Corporate Social Responsibility Director | 1957 | 2006 | Central Manager of Corporate Social Responsibility and Communications | 1957 | 2006 | ||||||
| Martin Ferraro Murdock | Innovation Director | 1982 | 2016 | |||||||||
| Rodolfo Ricardo Jordan Musso | Infrastructure and Engineering Director, Cement Business | 1952 | 2009 | |||||||||
| Dante Rafael Cárdenas Roncal | Central Manager of Innovation and Digital Transformation | 1974 | 2018 | |||||||||
| Rodolfo Ricardo Jordán Musso* | Central Manager of Engineering and Infrastructure | 1952 | 2009 | |||||||||
| Tito Alberto Inope Mantero | Building Solutions Director | 1972 | 2015 | Central Manager of Construction Solutions | 1972 | 2015 | ||||||
| Joaquin Larrea Gubbins | Special Projects Director | 1974 | 2011 | |||||||||
| Diego Reyes Pazos | Supply Chain Director | 1977 | 2013 | Central Manager of Supply Chain | 1977 | 2013 | ||||||
| Hugo Villanueva Castillo | Operations Director, Pacasmayo and Rioja Cement Plant | 1962 | 2012 | Central Manager of Operations | 1962 | 2012 | ||||||
| * | Mr. Jordán resigned from the Company on December 31, 2019. |
The following sets forth selected biographical information for each of our executive officers:
Humberto Reynaldo Nadal Del Carpio.See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Board of Directors.”
Jorge Javier Durand Planas. Mr. Durand joined the Hochschild Group in 19941994. He serves as the Company’s Legal Vice-President and has been our General Counsel since 2008. Previously, he washeld the title of Legal Vice-President and General Counsel ofat Hochschild Mining plc. HeMr. Durand holds a Law degree from Universidad de Lima (Peru), and a Master’s in Business Administration from the Universidad del Pacífico (Peru). Among other studies, he has also completed the Management Program for Lawyers and the Corporate Governance and Performance Program at the Yale School of Management (USA), the Strategic Negotiations Program of Harvard Business School (USA) and the Prince of Wales’s Business & Sustainability Programme by the University of Cambridge Institute for Sustainability Leadership (UK). Currently, Mr. Durand currentlyis also is a board member of Salmueras, Inversiones AspiASPI S.A. and Cementos Selva S.A., and he is member of the Board Committeeof Directors of UTEC and TECSUP. In addition, Mr. Durand is alternate director of the National Confederation of Private Business Associations (CONFIEP).
Manuel Bartolomé Ferreyros Peña.See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Board of Directors.”
Carlos Julio Pomarino Pezzia. Mr. Pomarino acts as Vice President,is the Vice-President of the Cement and Building Solutions Businesspart of the business since January 2012.2017. He hasholds a degree in Economic Engineering from Universidad Nacional de Ingeniería and a MasterMaster’s in Business Administration from the Adolfo Ibañez School of Management and ESAN, pursuedESAN. He has also participated in the AdvancedSenior Management Program at the Universidad de Piura and he completed the Certification of Independent boardBoard members at Centrum Católica. He was the Vice-President of Cement from 2012 to 2017, Deputy Chief Executive Officer from 2009 to 2012, served as Commercial Officer of ourthe Company from 2002 to 2009, and as Chief Executive Officer of Distribuidora Norte Pacasmayo S.R.L. from 1998 to 2009. Prior to joining ourthe Company, Mr. Pomarino worked as Manager of Administration and Finance Manager at Comercializadora de Alimentos S.A. and as Chief Financial Officer at Fábrica de Tejidos San Jacinto S.A.
Diego Arispe Silva.Mr. Arispe is our Central Manager of Human Management since January 2019. He holds a degree in Law by the Pontificia Universidad Católica del Perú and has a Master of Business Administration (MBA) from Columbia Business School. He has been working at the company for more than 10 years, having held various positions in the areas of Human Management, Social Responsibility and Legal, and was part of the team in charge of the implementation of our cement plant in Piura, as Project Controller.
Aldo Bertoli Estrella.Mr. Bertoli acts as Commercial Directoris our Central Business Manager since May 2016. He hasholds a degree in Business Administration from Universidad de Pacífico and a Master’s degree in Business Management from Universidad de Piura. Before joining theour company, heMr. Bertoli worked for five years at Pepsico Inc as the Sales Manager in Perú – Ecuador- Bolivia at Pepsico Inc., he previously spent 12for Peru, Ecuador and Bolivia. Previously, Mr. Bertoli worked for twelve years at Procter & Gamble in various commercialseveral Commercial positions, including four years in Bolivia as Country Manager.Manager in Bolivia
Carlos Paul Cateriano Alzamora. Mr. Cateriano actsserves as Central Manager of Corporate Social Responsibility Director since June 2012. Previously, he was Human Resources Manager from 2006 to 2012.since 2006. He studied Mechanical Engineering at the Pontificia Universidad Católica del Peru and has pursued different studies in the AdvancedSenior Management Program at the Universidad de Piura. Prior toBefore joining our company, Mr. Cateriano worked as Human Resources DeputyAssistant Manager at Banco Wiese Sudameris S.A. (acquired by Scotiabank Perú S.A.A.) from 1999 to 2006. In addition,. Moreover, he has worked asalso held the position of Head of Training at Banco Santander Perú S.A., from 1995 to 1999, and has worked as a consultant at Polimerosfor Polímeros y Adhesivos S.A.
Martin Ferraro MurdockDante Rafael Cárdenas Roncal. Mr. Ferraro servesCardenas served as IT Manager from April 13, 2015 until October 31, 2018 and in November he assumed the position of Central Manager of Innovation Director since July 2016.and Digital Transformation. He has vast experience in information technologies, implementation of systems and digital transformation an innovation projects. He holds a degree on Business Administration and Financein Industrial Engineering from the Pontificia Universidad Peruana de Ciencias Aplicadas - UPC (Peruvian University of Applied Sciences)Católica del Perú and a Master inof Business Administration (MBA) from Stanford Graduate School of Business.York University, Canada. Prior to joining us, Mr. Ferraro joined our Company in January 2004 and since then hasCardenas served in different positions, most recently as CommercialCorporate IT Manager between June 2012 and December 2014, and Finance,at Iberoamericana de Plásticos, Corporate IT and Administration Manager between January 2015 and June 2016.at Quimtia, PMO Manager at Hewlett Packard, Project Manager at Telus, among others.
Rodolfo Ricardo Jordan Musso. Mr. Jordan serves as our Central Manager of Engineering and Infrastructure Director since January 2015. Previously he was2018. He previously served as Central Manager of Industrial Development Manager.Development. He hasholds a degree in Civil Engineering from Universidad Católica del Perú and he has pursued an Advanced Management Program at the Universidad de Piura. Prior toPiura (University of Piura). Before joining ourthe Company, he served as Chief Executive Officer of GMI Ingenieros Consultores, and afterwards as Executive Director of the Mexican affiliate of Graña & Montero Ingenieros Consultores. From 2007 through 2009 heMontero. He served as Marketing Manager of Distribuidora Norte Pacasmayo S.R.L.S.R.L from 2007 to 2009.
Tito Alberto Inope Mantero.Mantero. Mr. Inope serves as Buildingis our Central Manager of Constructive Solutions Director since January 2015. He is an economist, graduatedholds a degree in Economics from Universidad de Lima and has an MBAa Master’s degree in Business Administration (MBA) from the Universidad Peruana de Ciencias Aplicadas (UPC), as well as the Senior Management Program (PAD). Mr. Inope joined our Company in 1996, and he has worked at our company since 1996 and has heldin different management positions duringthroughout his 18 years in the past 18 years.Company.
Joaquin Larrea Gubbins.Diego Reyes Pazos. Mr. LarreaReyes serves as Special Projects Director since October 2016. He holds a degree in Business Administration from Universidad de Lima (University of Lima) and a Master in Business Administration from the Kellogg School of Management. Prior to joining our Company, Mr. Larrea worked as Corporate Development Director of General Electric for Peru, Ecuador and Bolivia. At Cementos Pacasmayo, he served as Business Manager of the Zinc Division for one year, as our Corporate Finance Head for five years, and as Central Manager of Corporate Development for five years.
Diego Reyes Pazos. Mr. Reyes serves as Supply Chain, DirectorAdministration and Risks since July 2013. He has extensivevast experience in the supply chain, project development, design and implementation of systems/processes and financial analysis. He graduated with a degree in Business Administration from the University ofUniversidad de Lima and received an MBAa Master’s in Business Administration from the University ofUniversidad de Piura. Before joining our Company,company, Mr. Reyes worked as Operations and Finance Manager at Belcorp, as Senior Business Process Expert for Latin America at SAB Miller, as Project Manager in the Vice Presidency of Supply Chain at UCP Backus & Johnston, among others.Johnston.
Hugo Pedro Villanueva Castillo. Castillo. Mr. Villanueva serves as Central Manager of Operations Director for theof Cementos Pacasmayo and Rioja cement plantCementos Selva since January 2012. Previously, he wasserved as Operations Manager forof Cementos Selva S.A. for over nine9 years. Mr. Villanueva has also worked at our Company for over 20 years, holding different positions. Mr. Villanuevapositions in the areas of Quality, Production and Operations of the company. He holds a Master degree in Chemistry from Universidad Mayor de San Marcos. He holds a Master’s in Business Administration from EGADE andthe Monterrey Technological Institute (Mexico). Additionally, he has taken courseworkparticipated at the General Management Program at PAD, Universidad de Piura and at the Program for Senior Management at INCAE in Costa Rica. He has also participated in different specialty programs in the industry.
| B. | Compensation |
As of December 31, 2017,2019, the total short termshort-term compensations amounted to S/22,705,000 (2016:23,692,000 (2018: S/21,752,000)24,129,000, 2017: S/22,705,000) and the total long termlong-term compensations amounted to S/11,401,000 (2016:6,523,000 (2018: S/16,088,000)9,495,000, 2017: S/11,401,000). This compensation included payments made in connection with the workers’ profit sharing required under Peruvian labor laws, which require us to distribute between 8% and 10% of our taxable annual income, net of taxes, to all employees, including our executive officers. See “Item 4. Information on the Company—B. Business Overview—Regulatory Matters” for additional information on the profit sharing regulatory requirements.
InSince 2011, we decided to pay each of our directors a yearly compensation of US$200,000 (US$400,000 in the case of our Chairman). In addition, compensation paid to certain of our directors for serving on board committees will be, in aggregate per year, not higher than the total amount paid to our directors for serving on our board of directors. Our 20172019 director compensation was approved at our annual shareholders’ meeting.
Neither we nor any of our subsidiaries have entered into any agreement that provides for any benefit or compensation to any director or executive officer after expiration of his or her term.
Executive Compensation Plan
Our business operates in a competitive environment where highly trained professionals and executives are in demand. Continued expansion of the Peruvian economy over the past several years has created new opportunities resulting in additional competition for local talent. As a result, we have in place compensation plan to retain our key executives and attract new executives with the skills and experience required to achieve our strategic objectives and create long-term value for our shareholders. We believe that executive compensation should reward individual performance and the achievement of our strategic objectives.
Our executive compensation plan has been designed to achieve the following primary objectives:
| ● | recruit, retain and incentivize highly talented and dedicated executives with the skills and experience required to manage and operate our business and create long-term value for our shareholders; |
| ● | provide our executive officers with compensation opportunities that are fair, reasonable and competitive in the market; |
| ● | compensate based on our performance and individual performance; |
| ● | promote transparency by using clear and straightforward compensation metrics; and |
| ● | align the interests of our executive officers with the interests of our shareholders, both in the short-term and long-term. |
Our executive compensation plan is in addition to workers’ profit sharing requirements applicable to all of our employees, including our executive officers, under Peruvian labor laws.
Our compensation plan has been designed to compensate our executives through a combination of base salary, a cash bonus incentive and other benefits that we believe are fair and equitable to us and our shareholders and competitive in the market. We believe that the combination of salary, cash bonus incentive and other benefits help distinguish us from other companies in the cement industry in Peru, and serve as an important retention tool as we compete for executive talent. We also believe that it will provide an appropriate compensation structure to retain our executives, reward them for individual performance, and induce them to contribute to the creation of long-term value.
Components of Executive Compensation
The key components of our executive compensation plan are:
| ● | base salary; |
| ● | short-term cash bonus incentives; and |
| ● | long-term cash bonus incentives. |
The short term cash bonus incentives;incentives are defined based on achieving specific business goals which include sustainability metrics and
We believe that the use of few and straightforward compensation components promotes the effectiveness and transparency of our executive compensation plan and enables us to be competitive. No formula or specific weightings or relationships are used to allocate the various components in our executive compensation plan. Each component has an important role in implementing our executive compensation philosophy and in meeting the executive compensation objectives described above.
Base Salary
We compensate our executive officers and other employees with a base salary to compensate them for services rendered on a day-to-day basis during the fiscal year. Base salaries provide stable compensation to executives, allow us to recruit and retain highly talented and dedicated executives and, through periodic merit increases, provide a basis upon which executives may be rewarded for individual performance.
Short-Term Cash Bonus Incentives
As a key component of our compensation plan, we currently provide our executive officers the opportunity to earn annual cash bonuses based on the achievement of our short-term business objectives. As additional cash compensation that is contingent on achieving our business objectives, cash incentives augment the base salary component while being tied directly to corporate and individual performance objectives. The financial profitability variables are based on EBITDA targets.
Long-Term Cash Bonus Incentives
In addition, as a tool to promote retention of our executive officers, we have implemented a deferred cash incentive program that we believe aligns compensation with corporate performance, allows us to recruit and retain competent executive talent, and rewards for superior performance measured over the long-term. Our plan provides for the payment of bonuses in addition to the annual bonuses that are paid to our executive officers.
Our long-term bonus incentive program features the following key components:
| ● | available to senior executives who have been employed by our company at this level for at least four years; |
| ● | at the end of each year, the cash bonus will be accrued in a “personal virtual account” for the benefit of the relevant executive; |
| ● | on the fifth anniversary of the creation or beginning of the bonus plan, the relevant executive will receive the amount accrued during the first four years; |
| ● | additional annual bonuses will be accrued for the following four years and a final payout will be made at the end of the eighth year from the creation or beginning of the plan; and |
| ● | if the employee decides to voluntarily leave the company before a scheduled distribution, he will not receive this compensation. |
Our plan provides that the executive must meet the following eligibility criteria:
| ● | must be no older than 58 years at the time his or her participation in the incentive program begins; |
| ● | must have at least four years as senior executives with either our company, or our subsidiaries or affiliates; |
| ● | is a professional who is deemed to have characteristics that are attractive to the market; and |
| ● | the executive’s departure is deemed by the board of directors or a committee thereof to have an adverse effect on our performance. |
| C. | Board Practices |
For information about the date of expiration of the current term of office and the period during which each director has served in such office, see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management.”
Benefits upon Termination of Employment
There are no contracts providing for benefits to directors upon termination of employment
Board Committees
We have four board committees comprised of members of our board of directors, which are described below.
Executive Committee
Our by-laws permit us to delegate an executive committee composed of three to five members of the board of directors. Mr. Eduardo Hochschild Beeck (chair), Mr. Roberto Dañino Zapata, Mr. Raimundo Morales Dasso and Mr. Humberto Nadal del Carpio are currently members of our executive committee. Our executive committee is mainly responsible for (i) supervising and supporting our management in executing the resolutions passed by our board of directors, (ii) executing the strategy approved by our board of directors, (iii) meeting short-term and medium-term goals, as well as designing action plans to meet such goals in accordance with the long-term strategy and goals approved by our board of directors, (iv) approving agreements or transactions involving amounts greater than US$3 million but less than US$20 million, (v) monitoring compliance with the annual budget and approving any significant deviations from approved levels of working capital, (vi) making strategic decisions that do not rise to the level of a full board approval, and (vii) approving and executing new projects in amounts up to US$20 million.
Our executive committee also performs the functions of a compensation committee.
Antitrust Best Practices Committee
The antitrust best practices committee is composed of three members:members: Mr. Raimundo Morales Dasso, Mr. Humberto Nadal del Carpio and Mr. Eduardo Hochschild Beeck. The antitrust best practices committee is responsible for informing our employees about our competition best practices and for monitoring compliance with such practices, including compliance with antitrust regulations.
Audit Committee
Our audit committee is composed of three directors: Ms. Hilda Ochoa-Brillembourg, who is the chairman of the audit committee, Mr. Felipe Ortiz de Zevallos and Mr. Marco Antonio Zaldívar. All of the members of the audit committee qualify as independent in accordance with the SEC rules applicable to foreign private issuers. Ms. Hilda Ochoa-Brillembourg and Mr. Marco Antonio Zaldívar also qualify as financial experts under SEC rules. The audit committee is responsible for (i) reviewing our financial statements; (ii) evaluating our internal controls and procedures, and identifying deficiencies; (iii) the appointment, compensation, retention; and (iv) oversight of our external auditors. Additionally, it is responsible for informing our board of directors regarding any issues that arise with respect to the quality or integrity of our financial statements, our compliance with legal or regulatory requirements, the performance and independence of the external auditors, or the performance of the internal audit function; and overseeing measures adopted as a result of any observations made by our shareholders, directors, executive officers, employees or any third parties with respect to accounting, internal controls and internal and external audit, as well as any complaints regarding management irregularities, including anonymous and confidential methods for addressing concerns raised by employees.
Corporate Governance Committee
Our corporate governance committee is composed of four directors. The current members are Mr. Felipe Ortiz de Zevallos (chair), Mr. Humberto Nadal del Carpio, Mr. Roberto Dañino Zapata and Mr. Eduardo Hochschild Beeck. The corporate governance committee is responsible for assisting the board on its oversight of director nomination and committee assignments, as well as the board and CEO successions. Similarly, it is responsible for assisting in the implementation of the committee and board self-assessment surveys and the review of governance principles.
| D. | Employees |
As of December 31, 2017,2019, we had a total of 1,3861,721 permanent employees. The following table sets forth a breakdown of our employees by category as of the periods indicated.
As of December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
| Management | 35 | 30 | 35 | |||||||||
| Administrative personnel | 1,032 | 1,004 | 1,002 | |||||||||
| Plant workers | 319 | 297 | 507 | |||||||||
| Total (1) | 1,386 | 1,331 | 1,544 | |||||||||
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Management | 36 | 35 | 35 | |||||||||
| Administrative personnel | 1,364 | 1,133 | 1,032 | |||||||||
| Plant workers | 321 | 309 | 319 | |||||||||
| Total (1) | 1,721 | 1,477 | 1,386 | |||||||||
| (1) | Workers from our social venture Acuícola Los Paiches S.A.C. are excluded from these calculations. |
As of December 31, 2017,2019, approximately 10.1%17.1% of our employees were members of labor unions (Sindicato Único de Trabajadores de Cementos Pacasmayo S.A.A)S.A.A, Sindicato de Trabajadores de Distribuidora Norte Pacamasyo S.R.L , Sindicato Único de Trabajadores de la Empresa Distribuidora Norte Pacasmayo S.R.L.-Dino) that represents its members in collective bargaining negotiations. Our management and administrative personnel are not members of a labor union. Labor relations for unionized and non-unionized employees in our production facilities, including compensation and benefits, are governed by a collective bargaining agreement that is renewed annually. In February 2016,March 2019, three-year Union Agreements were signed with our largest union.
Under Peruvian law, it is illegal to lay off employees without cause or without following certain formal procedures. In addition, employees who are laid off are entitled to severance payments upon termination of their employment in an amount equal to one and a half month’s salary for each full year of work performed with a maximum payment equal to 12 monthly salaries provided they are indefinite term employees. In case of fixed term employment relationship the severance payment is equal to 1.5 monthly salaries for each month, until the completion of the contract, with a maximum of 12 monthly salaries.
Our employees are enrolled in either the national public pension fund or a privately managed pension fund. In both cases the applicable payment (approximately 13%) is withheld by the employer from the employees’ monthly salary. As of December 31, 2017,2019, approximately 11.4%12.1% of our employees were enrolled with the national public pension fund and 89.5%87.4% with a private social pension plan.
We believe we have a good relationship with our employees. In the past, we have not experienced any material strikes, work stoppages or any other significant disruptions.
Diversity
We seek to generate a culture of diversity that includes minority groups and vulnerable populations.
As of the date of this annual report, 12.49% of our total workforce is female, and 11.43% of our senior management positions are held by women. The positions of women in managerial positions, including junior, middle management and senior managerial positions represented 0.24% of such positions as of the date of this annual report. Although, as of the date of this annual report, we do not have female personnel in commercial management, 17.39% of our junior management positions are held by women, who provide support for business management. The proportion of women in management roles is growing annually, including in headquarters in support and commercial areas. However, 100% of our operational workforce is made up of men.
Remuneration Equality
We pay our employees taking into account the responsibility, experience and performance of their work. For this reason, we report the average remuneration of men and women in our workforce at their different levels of management:
| Employee Level | Average Monthly Female Salary (in soles) | Average Monthly Male Salary (in soles) | Ratio (=Average Female Salary / Average Male Salary) | |||||||||
| Executive level (Base salary only) | - | - | - | |||||||||
| Management level (base salary only) | 13,682 | 13,169 | 1.0390 | |||||||||
| Management level (base salary + other cash incentives) | 14,991 | 14,738 | 1.0172 | |||||||||
| Non-management level | 4,527 | 3,246 | 1.3946 | |||||||||
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Freedom of Association
17.37% of our employees are members of the the Pacasmayo or DINO Unions (which consists of two separate unions).
The most representative benefits of the union agreement include:
| ● | School Assignment (100% of Employees/Plant Workers) |
| ● | Annual union increase (100% of Employees/Plant Workers) |
| ● | Bid closing bonus (100% of Employees/Plant Workers) |
| ● | Study scholarships (Employees from the branches where there is a union) |
| ● | Vacation Loan (100% of Employees/Plant Workers) |
| ● | Allowance for death of direct family members (100% of Employees/Plant Workers) |
| ● | Allowance for death of Employees (100% of Employees/Plant Workers) |
| ● | Assignment by May 1st (An amount is granted to the Union Organization) |
| ● | Union anniversary allowance (An amount is awarded to the Union Organization) |
| ● | Paid leave for the death of a direct family member (100% Employees/Plant Workers and Executive Management) |
| ● | 27% discount for the purchase of cement (100% Employees/Plant Workers and Executive Management) |
| ● | Special group medical insurance (with a 70% subsidy from the company (100% of employees) |
Human Rights
To manage our risks related to human rights, we work under a multidimensional and participatory approach with different areas of the organization. We analyze the most relevant risks in our operations and value chain, and we also identify the stakeholders that could be affected. Among the issues evaluated are labor rights, health and safety, discrimination and harassment, freedom of association, the rights of indigenous peoples, labor conditions in the supply chain, potential environmental impacts, among others. The groups analyzed have been our employees, suppliers and the community.
Based on the identified risks, the different areas of the organization establish action plans to manage them. As part of these plans, we include training and dissemination actions on the company's commitments, directed to the board, executive team and employees in general. Finally, we make complaint mechanisms available to our stakeholders, through which we can receive complaints related to possible affectations of human rights. Any complaint is evaluated and investigated internally to take the necessary corrective actions. During 2019, we have not received any complaints regarding issues related to human rights, so no remediation actions have been carried out.
Engagement
In 2019 we started measuring the level of engagement of all the employees of Cementos Pacasmayo and Subsidiaries, achieving a result of 78%, percentage higher than the market, which ranges from 70% and 75%
The methodology used was the standard, and the survey had three fundamental pillars: 1) Connection; 2) Commitment; and 3) Effort; that measure the involvement or emotional state of the employee towards the Company and the way in which this is reflected in their performance results and/or achievement of objectives. These three pillars, are measured on the following 12 dimensions: autonomy, feedback, leader coaching, growth and development opportunities, collaboration, optimism, self-efficacy, pressure at work, cognitive demands, emotional demands, role conflict and obstacles at work.
The scale used in the survey was the following:
0 - Never
1 - Almost Never
2 - Sometimes
3 - Regularly
4 - Quite a few times
5 - Almost always
6 - Always
| E. | Share Ownership |
As of March 31, 2018,2020, persons who are currently members of our board of directors and our executive officers held as a group 836,1491,164,895 of our common shares and no investment shares (not including common shares held by Mr. Eduardo Hochschild through ASPI). This amount represented less than 1% of our outstanding share capital as of March 31, 2018.20120. Mr. Eduardo Hochschild through ASPI indirectly controls 211,985,547 or our common shares.
Mr. Humberto Nadal, Mr. Raimundo Morales, Mr. Roberto Dañino, Mr. Carlos Heeren, Mr. Manuel Ferreyros, Mr. Carlos Pomarino and Mr. Martín Ferraro own individually and in the aggregate less than 1% of our common shares.
There are no minimal specific stock ownership requirements for the CEO and other members of our executive committee. However, we have a security trading policy regarding non-public information and the prevention of insider trading that states directors and restricted persons (managers or others who have had a relation with the Company and have access to privileged information due to their condition or exercise of functions) can only buy or sell company stocks prior authorization and only in certain periods (Trading Window).
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| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. | Major Shareholders |
As of March 31, 2018,2020, our issued and outstanding share capital was composed of 423,868,449 common shares. In addition, as of March 31, 2018,2020, we had 40,278,894 non-voting investment shares outstanding, 36,040,497 of which were held in treasury.
The following table sets forth the beneficial ownership of our common shares and non-voting investment shares as of March 31, 2018. 2020.
| As of March 31, 2018 | ||||||||||||||||||||||||
Common shares | Investment shares | Total | ||||||||||||||||||||||
Shareholder | Number of | Percentage | Number of | Percentage | Number of | Percentage | ||||||||||||||||||
| ASPI(1) | 211,985,547 | 50.01 | % | — | — | 211,985,547 | 45.67 | % | ||||||||||||||||
| CPSAA (treasury shares) | — | — | 36,040,497 | 89.48 | % | 36,040,497 | 7.76 | % | ||||||||||||||||
| RI—Fondo 2 (AFP Prima) | 15,272,426 | 3.60 | % | — | — | 15,272,426 | 3.29 | % | ||||||||||||||||
| RI—Fondo 3 (AFP Prima) | 11,979,550 | 2.83 | % | — | — | 11,979,550 | 2.58 | % | ||||||||||||||||
| Directors and officers(2) | 836,149 | 0.20 | % | — | — | 836,149 | 0.18 | % | ||||||||||||||||
| American Depositary Receipt Program | 70,097,971 | 16.54 | % | — | — | 70,097,971 | 15.10 | % | ||||||||||||||||
| Other shareholders | 113,696,806 | 26.82 | % | 4,238,397 | 10.52 | % | 117,935,203 | 25.41 | % | |||||||||||||||
| Total | 423,868,449 | 100.00 | % | 40,278,894 | 100.00 | % | 461,147,343 | 100.00 | % | |||||||||||||||
| As of March 31, 2020 | ||||||||||||||||||||||||
| Common shares | Investment shares | Total | ||||||||||||||||||||||
| Shareholder | Number of shares | Percentage | Number of shares | Percentage | Number of shares | Percentage | ||||||||||||||||||
| ASPI(1) | 211,985,547 | 50.01 | % | — | — | 211,985,547 | 45.67 | % | ||||||||||||||||
| CPSAA (treasury shares) | — | — | 36,040,497 | 89.48 | % | 36,040,497 | 7.76 | % | ||||||||||||||||
| RI—Fondo 2 (AFP Prima) | 19,591,306 | 4.62 | % | — | — | 19,591,306 | 4.22 | % | ||||||||||||||||
| RI—Fondo 3 (AFP Prima) | 19,055,816 | 4.50 | % | — | — | 19,055,816 | 4.11 | % | ||||||||||||||||
| IN—Fondo 3 (AFP Integra) | 23,655,908 | 5.58 | % | — | — | 23,655,908 | 5.10 | % | ||||||||||||||||
| PR—Fondo 2 (PROFUTURO) | 18,646,208 | 4.40 | % | — | — | 18,646,208 | 4.02 | % | ||||||||||||||||
| PR—Fondo 3 (PROFUTURO) | 18,818,758 | 4.44 | % | — | — | 18,818,758 | 4.05 | % | ||||||||||||||||
| Directors and officers(2) | 1,164,895 | 0.27 | % | — | — | 1,164,895 | 0.25 | % | ||||||||||||||||
| ADRS NY | 31,425,896 | 7.41 | % | — | — | 31,425,896 | 6.77 | % | ||||||||||||||||
| Other shareholders | 79,524,115 | 18.76 | % | 4,238,397 | 10.52 | % | 83,762,512 | 18.05 | % | |||||||||||||||
| Total | 423,868,449 | 100.0 | % | 40,278,894 | 100.0 | % | 464,147,343 | 100.0 | % | |||||||||||||||
| (1) | ASPI is indirectly controlled by Mr. Eduardo Hochschild through Farragut Holdings, Inc. (Cayman Islands). Mr. Eduardo Hochschild is a member of the board of directors of our company. The shares expressed here include those held through ASPI. |
| (2) | See “Item 6. Directors, Senior Management and Employees—Share Ownership” for information regarding shares of our common stock owned by members of our board of directors and executive officers. The number of common shares held by directors and executive officers excludes any shares that may be deemed to be beneficially owned by Mr. Eduardo Hochschild through ASPI. |
Changes in Ownership
The following sets forth the composition of ownership from December 31, 20132015 to December 31, 2017. 2019.
| As of December 31, | ||||||||||||||||||||
Shareholder | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| ASPI | 45.67 | % | 45.67 | % | 45.67 | % | 50.94 | % | 50.94 | % | ||||||||||
| CPSAA (treasury shares) | 7.76 | % | 6.41 | % | 6.41 | % | — | — | ||||||||||||
| IN—Fondo 2 (AFP Integra) | — | — | — | 1.05 | % | 1.05 | % | |||||||||||||
| RI—Fondo 2 (AFP Prima) | 3.29 | % | 4.19 | % | 5.10 | % | 4.66 | % | 4.71 | % | ||||||||||
| RI—Fondo 3 (AFP Prima) | 2.58 | % | 3.12 | % | 4.29 | % | 4.29 | % | 4.78 | % | ||||||||||
| HO-Fondo 3 (AFP Horizonte) | — | — | — | — | — | |||||||||||||||
| HO-Fondo 2 (AFP Horizonte) | — | — | — | — | — | |||||||||||||||
| IN—Fondo 3 (AFP Integra) | — | — | — | 0.78 | % | 0.78 | % | |||||||||||||
| PR—Fondo 2 (AFP Profuturo) | — | — | — | 0.86 | % | 0.86 | % | |||||||||||||
| PR—Fondo 3 (AFP Profuturo) | — | — | — | 0.50 | % | 0.50 | % | |||||||||||||
| American Depositary Receipt Program | 15.10 | % | 16.23 | % | 16.66 | % | 18.13 | % | 18.38 | % | ||||||||||
| Other shareholders | 25.41 | % | 24.38 | % | 21.87 | % | 18.79 | % | 18.00 | % | ||||||||||
| Total | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||||
| As of December 31, | ||||||||||||||||||||
| Shareholder | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| ASPI | 45.7 | % | 45.7 | % | 45.7 | % | 45.7 | % | 45.7 | % | ||||||||||
| CPSAA (treasury shares) | 7.8 | % | 7.8 | % | 7.8 | % | 6.4 | % | 6.4 | % | ||||||||||
| RI—Fondo 2 (AFP Prima) | 3.9 | % | 4.4 | % | 3.3 | % | 4.2 | % | 5.1 | % | ||||||||||
| RI—Fondo 3 (AFP Prima) | 4.1 | % | 0.1 | % | 2.5 | % | 3.1 | % | 4.2 | % | ||||||||||
| IN—Fondo 2 (AFP Integra) | — | 4.6 | % | — | — | — | ||||||||||||||
| IN—Fondo 3 (AFP Integra) | 5.1 | % | — | — | — | — | ||||||||||||||
| PR—Fondo 2 (AFP Profuturo) | 4.0 | % | — | — | — | — | ||||||||||||||
| PR—Fondo 3 (AFP Profuturo) | 4.0 | % | — | — | — | — | ||||||||||||||
| Directors and officers | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||
| American Depositary Receipts | 6.7 | % | 13.0 | % | 15.1 | % | 16.2 | % | 16.6 | % | ||||||||||
| Other shareholders | 18.5 | % | 24.3. | % | 25.5 | % | 24.3 | % | 21.9 | % | ||||||||||
| Total | 100 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
On March 24, 2014, Mr. Eduardo Hochschild sold 1,310 of our common shares.
On October 14 and 15, 2015, ASPI sold 9,863,277 and 4,036,723, respectively, of our common shares. On October 15, 2015, we bought back 37,276,580 investment shares, which we currently hold in treasury.
On January 19, 2017, our management approved the buyback of an additional 7,911,845 investment shares, which we currently hold in treasury.
On March 1, 2018,2017, we spun-off a portion of the net assets (consisting of the assets and liabilities) related to Fosfatos del Pacífico S.A. to Fossal S.A.A. (“FOSSAL”), and as a result our capital stock was reduced by approximately S/107,593,030, from S/531,461,479 to S/423,868,449.
Differences in Voting Rights
Our major shareholders do not have different voting rights.
Securities Held in the Host Country
On February 7, 2012, we completed our initial public offering of 20,000,000 ADSs, each representing five common shares, in the United States. On March 2, 2012, we sold an additional 2,296,800 ADSs pursuant to an over-allotment option granted to the underwriters in that offering. Our ADSs are listed on the New York Stock Exchange. As of March 31, 2018,2019, we estimate that there were 13,922,30512,122,950 ADSs outstanding, which represented 16.42%14.3% of our common shares outstanding as of such date. As of December 31, 2017,2019, the number of record holders of our common shares (or ADSs representing our common shares) that file Form 13-Fs in the United States was 17.13.
Arrangements for Change in Control
We are not aware of any arrangements that may, when in force, result in a change in control.
| B. | Related Party Transactions |
Peruvian Law Concerning Related Party Transactions
Under Peruvian law, board members and executive officers of a publicly-held company may not (i) engage in transactions with the company or any related party of the company, except for transactions entered into in the ordinary course of business and on an arm’s length basis, (ii) appropriate for their own benefit a business opportunity that belongs to the company, or (iii) participate in any transaction or decision that presents a conflict of interest with the company.
Peruvian law sets forth certain restrictions and limitations on transactions with certain related parties.
For instance, from a tax standpoint, the value of those transactions must be equal to the fair market value assessed under transfer pricing rules (i.e., the value agreed to by non-related parties under the same or similar circumstances). Similarly, companies with securities registered in the Peruvian Public Registry of Securities (Registro Público del Mercado de Valores), such as us, are required to comply with the following rules:
| ● | The directors and managers of the company cannot, without the prior authorization of the board of directors, (i) receive in the form of a loan money or assets of the company; or (ii) use, for their own benefit or for the benefit of related parties, assets, services or credits of the company. |
| ● | The execution of agreements that involve at least 5% of the assets of the company with persons or entities related to directors, managers or shareholders that own, directly or indirectly, 10% of the share capital, requires the prior authorization of the board of directors (with no participation of the director involved in the transaction, if any). |
| ● | The execution of agreements with a party controlled by the company’s controlling shareholder requires the prior authorization of the board of directors and an evaluation of the terms of the transaction by an external independent company (audit companies or other to be determined by the Peruvian Securities Commission). |
The external independent company that reviews the transaction should not be related to the parties involved therein, nor to directors, managers or shareholders that own at least 10% of the share capital of the company.
93
Related Party Transactions
As a general policy, we do not enter into transactions with related parties, including our board members and officers, on terms more favorable than what we would offer third parties. Any related party transaction we have entered into in the past has been in the ordinary course of business and on an arm’s length basis.
As of December 31, 2017,2019, we had an accounts receivable balance with ASPI, our controlling shareholder, in the amount of S/641,000157 (US$197,470)47).
The following transactions have been entered into by us with related parties:
| ● | We lease a plot of land adjacent to our headquarters to our affiliate, Compañía Minera Ares S.A.C., a subsidiary of Hochschild Mining plc. We received rental payments of, S/336,000 in 2017, S/339,000 in 2018 and S/344,000 in 2019. |
| ● | We lease part of our headquarters as office space to ASPI and its affiliates. We received rental payments of, S/383,000 in 2017, S/ 368,000 in 2018 and S/378,000 in 2019. |
| ● | We provide back office management and administrative services to ASPI and its affiliates, for which we received S/1,560,000 in 2017, S/1,765,000 in 2018 and S/.1,744,000 in 2019. |
| ● | We receive security services from our affiliate Compañía Minera Ares S.A.C., a subsidiary of Hochschild Mining plc. We paid a total of S/1,195,000 in 2017, S/2,059,000 in 2018 and S/1,989,000 in 2019 for these services. |
ASPI and Hochschild Mining plc are majority-owned and controlled, directly and indirectly, by Mr. Eduardo Hochschild.
For more information about our related-party transactions please see note 2526 to our annual consolidated financial statements included elsewhere in this annual report.
| C. | Interests of Experts and Counsel |
Not applicable.
| ITEM 8. | FINANCIAL INFORMATION |
| A. | Consolidated Statements and Other Financial Information. |
See Item 19. — Exhibits.
Legal and Administrative Proceedings
From time to time, we may become subject to various legal and administrative proceedings that are incidental to the ordinary conduct of our business. We are currently not party to any material legal or administrative proceedings.
Dividends and Dividend Policy
Our ability to pay dividends is subject to our results of operations for each year. Holders of our common shares and investment shares are entitled to receive dividends on a pro rata basis in accordance with their respective number of shares held.
Under our dividend policy, shareholders must take the following factors into consideration prior to declaring dividends: our financial and economic condition, including committed and budgeted expenses and obligations, and previously approved investments. In addition, our dividend policy states that (a) our board of directors may declare advanced dividends based on either the net income resulting from financial statements prepared for such purpose or the cumulative net income corresponding to previous years, provided that shareholders delegated such authority to the board of directors, and (b) holders of common shares representing no less than 20% of our total share capital may request the distribution of dividends up to 50% of the net income corresponding to the previous year, net of any legal reserve requirements. Our board of directors makes a recommendation at the annual shareholders’ meeting with respect to the amount and timing of dividend payments, if any, to be made on our common shares and investment shares.
Under Peruvian law, companies may distribute up to 100% of their profit (after payment of income tax) subject to a 10% legal reserve until the legal reserve equals 20% of shareholders’ equity. According to Article 40 of the Peruvian Corporate Law, in order to distribute dividends, profits must be determined in accordance with the individual financial statements of the company.
Payment of Dividends
Dividends are paid to holders of our common shares and investment shares, as of a record date determined by us. In order to allow for the settlement of securities, under the rules of the Peruvian Securities Commission, investors who purchase shares of a publicly-held company three business days prior to a dividend payment date do not have the right to receive such dividend payment. Dividends on issued and outstanding common shares and investment shares are distributed pro rata.
Holders of common shares and investment shares are not entitled to interest on accrued dividends. In addition, under Article 232 of the Peruvian Corporate Law, the right to collect accrued dividends declared by a publicly-held company expires 10 years from the original dividend payment date.
Previous Dividend Payments
The following table sets forth the amounts of cash dividends declared and paid from 2012 through the date hereof for our common shares and our investment shares.
Year ended December 31, | Dividends paid | Per share | |||||||
| 2017 | 149,837,396 | 0.35000 | |||||||
| 2016 | 155,236,000 | 0.28500 | |||||||
| 2015 | 162,950,000 | 0.28000 | |||||||
| 2014 | 116,393,000 | 0.20000 | |||||||
| 2013 | 58,196,000 | 0.10000 | |||||||
| 2012 | 52,000,000 | 0.08935 | |||||||
At the annual shareholders’ meeting held on March 27, 2018, the shareholders of the Company approved the financial statements for fiscal year 2017 including the net income for such year and delegated to the Board of Directors the authority to decide the distribution of dividends from the retained earnings account and fiscal year 2018 operating results.
| Year ended December 31, | Dividends declared and paid | Per share (in S/) | ||||||
| 2019 | 154,118,465 | 0.36000 | ||||||
| 2018 | 161,396,280 | 0.38000 | ||||||
| 2017 | 149,837,396 | 0.35000 | ||||||
| 2016 | 155,236,000 | 0.28500 | ||||||
| 2015 | 162,950,000 | 0.28000 | ||||||
| 2014 | 116,393,000 | 0.20000 | ||||||
| 2013 | 58,196,000 | 0.10000 | ||||||
| B. | Significant Changes |
We are not aware of any changes bearing upon our financial condition since the date of the financial statements included in this annual report.
| ITEM 9. | THE OFFER AND LISTING |
| A. | Offer and Listing Details |
Market Price of Our Common Shares and ADSs
Our ADSs
On February 7,,2012, we completed our initial public offering of 20,000,000 ADSs, each representing five common shares, in the United States. On March 2, 2012, we sold an additional 2,296,800 ADSs pursuant to an over-allotment option granted to the underwriters in that offering.
Our ADSs are listed on the New York Stock Exchange under the symbol “CPAC.” On April 24, 2018, the closing price per ADS as quoted on the New York Stock Exchange was US$12.27.
The following table sets forth for each of the most recent three months and for the current month the high and low closing prices in U.S. dollars of our ADSs on the New York Stock Exchange as reported by the New York Stock Exchange.
ADSs | ||||||||
(in US$) | High | Low | ||||||
| 2017: | ||||||||
| January | 9.59 | 9.22 | ||||||
| February | 9.94 | 9.07 | ||||||
| March | 11.40 | 9.73 | ||||||
| April | 11.41 | 10.66 | ||||||
| May | 11.91 | 10.30 | ||||||
| June | 11.87 | 11.20 | ||||||
| July | 11.90 | 11.11 | ||||||
| August | 12.44 | 11.39 | ||||||
| September | 13.15 | 12.20 | ||||||
| October | 13.04 | 12.70 | ||||||
| November | 13.19 | 11.97 | ||||||
| December | 12.59 | 11.55 | ||||||
| 2018: | ||||||||
| January | 13.49 | 12.40 | ||||||
| February | 13.15 | 11.78 | ||||||
| March | 12.43 | 11.49 | ||||||
| April (through April 24, 2018) | 12.73 | 11.80 | ||||||
Our Shares
Our common shares and our investment shares are registered in the Public Registry of Securities held with the Peruvian Securities Commission and are listed on the Lima Stock Exchange under the symbols “CPACASC1” and “CPACASCI1,” respectively. On April 24, 2018, the closing price per common share as quoted on the Lima Stock Exchange was S/8.00 and S/6.63 per investment share. Historically, the trading volume of our investment shares on the Lima Stock Exchange has been limited.
The following table sets forth for the five most recent full years the high and low closing prices insoles of our common shares and investment shares on the Lima Stock Exchange as reported by the Lima Stock Exchange.
Common shares | Investment shares | ||||||||||||||||
(in S/) | High | Low | High | Low | |||||||||||||
| 2012 | 6.90 | 4.75 | 6.00 | 4.45 | |||||||||||||
| 2013 | 7.85 | 5.45 | 6.50 | 3.75 | |||||||||||||
| 2014 | 6.50 | 4.70 | 4.00 | 2.50 | |||||||||||||
| 2015 | 5.45 | 3.57 | 2.60 | 2.25 | |||||||||||||
| 2016 | 6.70 | 4.27 | 4.70 | 2.13 | |||||||||||||
| 2017 | 8.59 | 5.96 | 6.80 | 4.20 | |||||||||||||
The following table sets forth for each quarter of the three most recent financial years the high and low closing prices insolesof our common shares and investment shares and the Lima Stock Exchange as reported by the Lima Stock Exchange.
Common Shares | Investment Shares | |||||||||||||||
(in S/) | High | Low | High | Low | ||||||||||||
| 2015: | ||||||||||||||||
| First quarter | 5.45 | 4.64 | 2.50 | 2.45 | ||||||||||||
| Second quarter | 5.15 | 4.37 | 2.60 | 2.46 | ||||||||||||
| Third quarter | 5.27 | 3.80 | 2.60 | 2.25 | ||||||||||||
| Fourth quarter | 5.00 | 3.57 | — | — | ||||||||||||
| 2016: | ||||||||||||||||
| First quarter | 5.36 | 4.27 | 2.33 | 2.13 | ||||||||||||
| Second quarter | 6.08 | 4.90 | 3.39 | 2.70 | ||||||||||||
| Third quarter | 6.70 | 6.38 | 4.70 | 4.43 | ||||||||||||
| Fourth quarter | 6.60 | 6.10 | 4.55 | 4.30 | ||||||||||||
| 2017: | ||||||||||||||||
| First quarter | 7.50 | 5.96 | 4.80 | 4.20 | ||||||||||||
| Second quarter | 7.62 | 6.90 | 4.82 | 4.70 | ||||||||||||
| Third quarter | 8.41 | 7.35 | 5.90 | 4.50 | ||||||||||||
| Fourth quarter | 8.59 | 7.75 | 6.80 | 6.00 | ||||||||||||
The following table sets forth for each of the most recent six months and for the current month the high and low closing prices insoles of our common shares and investment shares on the Lima Stock Exchange as reported by the Lima Stock Exchange.
Common Shares | Investment Shares | |||||||||||||||
(in S/) | High | Low | High | Low | ||||||||||||
| 2017: | ||||||||||||||||
| October | 8.50 | 8.35 | 6.50 | 6.00 | ||||||||||||
| November | 8.59 | 7.90 | 6.80 | 6.15 | ||||||||||||
| December | 8.20 | 7.75 | 6.32 | 6.00 | ||||||||||||
| 2018: | ||||||||||||||||
| January | 8.40 | 8.05 | 6.50 | 6.50 | ||||||||||||
| February | 8.33 | 7.90 | 6.65 | 6.55 | ||||||||||||
| March | 8.15 | 7.57 | 6.65 | 6.65 | ||||||||||||
| April (through April 24, 2018) | 8.10 | 7.85 | 6.65 | 6.63 | ||||||||||||
| Common shares | Investment shares | |||||||||||||||
| (in S/) | High | Low | High | Low | ||||||||||||
| 2014 | 6.50 | 4.70 | 4.00 | 2.50 | ||||||||||||
| 2015 | 5.45 | 3.57 | 2.60 | 2.25 | ||||||||||||
| 2016 | 6.70 | 4.27 | 4.70 | 2.13 | ||||||||||||
| 2017 | 8.59 | 5.96 | 6.80 | 4.20 | ||||||||||||
| 2018 | 8.45 | 6.28 | 6.70 | 5.00 | ||||||||||||
| 2019 | 6.83 | 5.50 | 5.00 | 3.90 | ||||||||||||
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Trading in the Peruvian securities market
The Lima Stock Exchange
As of December 31, 2017,2019, there were 282273 companies with securities listed on the Lima Stock Exchange. Established in 1970, the Lima Stock Exchange is Peru’s only securities exchange. On November 19, 2003, the members of the Lima Stock Exchange approved to convert its corporate status to a publicly held corporation effective as of January 1, 2003. As of December 31, 2017,2019, The Lima Stock Exchange had a share capital of S/182,092,340, divided into 173,659,481 class “A” shares and 8,432,859 class “B” shares of par value S/1.00 each. Class “A” shares are entitled to one vote per share while class “B” shares do not have voting rights. As of December 31, 2017,2019, the Lima Stock Exchange had 225241 shareholders. On March 2020, after its annual review, FTSE announced that, since there is only one Peruvian stock in the FTSE Global All Cap index, it fails the new minimum investable market cap and securities count requirement criterion. As a result, Peru will be reclassified from Secondary Emerging market to Frontier market status effective from September 2020.
Trading on the Lima Stock Exchange is primarily done on an electronic trading system that became operational in August 1995. From the first Monday of November through the second Sunday of March of each year, trading hours are Monday through Friday (except holidays) as follows: 8:20 a.m.-8:30 a.m. (pre-market ordering); 8:30 a.m.-2:55 p.m. (trading); 2:55 p.m.-3:00 p.m. (after-market sales); and 3:00 p.m.-3:10 p.m. (after-market trading). At all other times, trading hours are from Monday to Friday (except holidays) as follows: 9:00 a.m.-9:30 a.m. (pre-market ordering); 9:30 a.m.-3:55 p.m. (trading); 3:55 p.m.-4:00 p.m. (after-market sales); and 4:00 p.m.-4:10 p.m. (after-market trading).
Substantially all of the transactions on the Lima Stock Exchange are traded on the electronic system. Transactions during the electronic sessions are executed through brokerage firms and stock brokers on behalf of their clients. Brokers submit orders in the order in which they are received. The orders must specify the type of security as well as the amount and price of the proposed sale or purchase. In order to control price volatility, the Lima Stock Exchange imposes a 15 minute suspension on trading when the price of a security varies on a single day by more than 15% for Peruvian companies there are volatility auctions for variations of +/- 7% during trading session and 30% for+/- 4% during the last half-hour of continuous trading, when a stock reaches the 15% limit there is an auction and a consequent price formation. For non-Peruvian companies.companies there is no limit because it is the price in the foreign market the main reference.
Regulation of the Peruvian Securities Market
The Securities Market Law regulates certain securities matters, such as transparency and disclosure, corporate takeovers, capital market instruments and operations, the securities markets and broker-dealers, and credit-rating agencies. In 1996, the Peruvian Securities Commission, “Superintendencia del Mercado de Valores – SMV”, formerly known as the National Supervisory Commission for Securities and Companies (Comisión Nacional Supervisora de Empresas y Valores, or “CONASEV”), was given additional responsibilities relating to the supervision, regulation and development of the securities market, while the Lima Stock Exchange was granted the status of a self-regulatory organization. Additionally, a unified system of guarantees and capital requirements was established for the Lima Stock Exchange.
Pursuant to Law No. 29,782, published in the Peruvian Official Gazette,El Peruano, on July 28, 2011, the Peruvian Securities Commission is a governmental entity reporting to Peru’s Ministry of Economy and Finance with functional, administrative, economic, technical and budgetary autonomy.
The Peruvian Securities Commission is governed by the Superintendent and a five board-members confirmed by the Superintendent (who acts as President of the board) and four members appointed by the Peruvian Executive Power (one suggested by the Ministry of Economy and Finance, one suggested by the Peruvian Central Reserve Bank, one suggested by the Peruvian Superintendence of Banking, Insurance and Private Pension Funds and one independent member). The Peruvian Securities Commission has broad regulatory powers, including reviewing, promoting, and making rules regarding the securities market, supervising its participants, and approving the registration of public offerings of securities.
The Peruvian Securities Commission supervises the securities markets and the dissemination of information to investors. It also (i) governs the operations of the Public Registry of Securities, (ii) regulates mutual funds, publicly placed investment funds and their respective management companies and broker-dealers, (iii) monitors compliance with accounting regulations by companies under its supervision as well as the accuracy of financial statements and (iv) registers and supervises auditors who provide accounting services to those companies registered with the Peruvian Securities Commission.
Pursuant to the Securities Market Law, broker-dealers must maintain a guarantee fund. This guarantee fund must be managed by an entity supervised by the Peruvian Securities Commission. Contributions to the guarantee fund must be made by the 25 broker-dealers that are members of the Lima Stock Exchange and are based on the volume traded over the exchange. In addition to the guarantee fund managed, each broker-dealer is required to maintain a guarantee in favor of the Peruvian Securities Commission to guarantee any liability that broker-dealers may have with respect to their clients. Such guarantees are generally established through letters of credit issued by local banks.
Disclosure Obligations
Issuers of securities registered with the Peruvian Securities Commission are required to disclose material information relating to the issuer. Pursuant to the Securities Market Law and relevant regulations enacted thereunder, all material information in connection with the issuer of registered securities (such as our common shares and investment shares), its activities or securities issued or secured by such issuer which may influence the liquidity or price of such securities must be disclosed. Accordingly, issuers must file with the Peruvian Securities Commission mainly two types of information: (a) financial information, including interim unaudited financial statements on a quarterly basis (which are not required to be subject to limited review), and annual audited consolidated financial statements on an annual basis, and (b) material information relating to the issuer and its activities that may significantly affect the price, offering or negotiation of the issued securities, and in general, all the information that may be relevant for investors to be able to make investment decisions.
In order to comply with the foregoing disclosure obligations, issuers must disclose reaffirmation to the Peruvian Securities Commission and, if the securities are listed, with the Lima Stock Exchange as soon as practicable but not later than one business day after having become aware of such information.
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
SetThe information set forth below is certain information relating to our share capital, including brief summariesin Exhibit 2(d), “Description of Securities Registered under Section 12(b) of the material provisions of our by-laws, Peruvian corporate law and certain related laws and regulations of Peru, all as in effect as of the date hereof.
General
We are a publicly-held corporation under Peruvian Corporate law registered with the Public Registry of Corporations in Lima. We are currently listed on the Lima Stock Exchange.
The second article of our by-laws provides that our principal corporate purposeExchange Act” is mining and the production and sale of cement, quicklime and other construction materials in Peru and internationally.
We have common shares and investment shares.
See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management” for information regarding our Board of Directors.
Common Shares
Common shares represent 100% of our voting shares. As of March 31, 2018, 423,868,449 of our common shares were outstanding. As of March 31, 2018, there were 7,155 owners of record of our common shares (considering the ADSs listed in the New York Stock Exchange are heldincorporated herein by one registered owner). Our common shares have a par value of S/1.00 per share and have been fully subscribed and are fully paid. Our common shares are registered in the Securities Public Registry of the Peruvian Securities Commission and are listed on the Lima Stock Exchange.
Investment Shares
As of March 31, 2018, 4,238,397 of our investment shares were outstanding excluding 36,040,497 investment shares that were held in treasury. Investment shares have no voting rights and are not, under Peruvian law and accounting regulations, characterized as share capital. However, investment shares are still considered part of a company’s equity. As of March 31, 2018, there were 385 owners of record of our investment shares. Our investment shares have a par value of S/1.00 per share and have been fully subscribed and are fully paid. Our investment shares are registered in the Securities Public Registry of the Peruvian Securities Commission and are listed on the Lima Stock Exchange.
Shareholders’ Liability
Under Peruvian Corporate Law, holders of our common shares cannot vote on matters with respect to which they have a conflict of interest.
Under Article 133 of the Peruvian Corporate Law, a shareholder must abstain from voting if such shareholder has a conflict of interest. A resolution approved in disregard of this provision may be challenged under Article 139 of the Peruvian Corporate Law and any shareholder that participated in the determination in breach of this provision, if such shareholder’s vote was key in attaining the required majority, may be held liable individually, or jointly with any other shareholder voting in breach of the provision.
Redemption and Rights of Withdrawal
Under Article 200 of the Peruvian Corporate Law, holders of our common shares have redemption rights if: (i) we change our corporate purpose; (ii) a change occurs in the place of organization to a foreign country; or (iii) any transformation, merger or significant spin-off occurs with respect to our company.
Preemptive and Accretion Rights
If we increase our share capital, holders of our common shares and investment shares have the right to subscribe to new common shares and investment shares, respectively, on a pro rata basis. Holders of common shares have preemptive rights in order to maintain their share interest in our share capital, unless the capital increase (i) results from a conversion of debt to common shares; (ii) is approved by shareholders representing at least 40% of the subscribed voting shares provided that the capital increase does not favor, directly or indirectly, certain shareholders to the detriment of others; and (iii) results from a corporate reorganization. Holders of investment shares have preemptive rights to maintain their proportional ownership in our share capital.
Shareholders who are in default of any payments relating to a capital call may not exercise their preemptive rights.
Preemptive rights are exercised in two rounds. During the first round, shareholders may subscribe to the new shares on a pro rata basis. During the second round, shareholders who participated in the first round may subscribe to any remaining shares on a pro rata basis up to the amount of shares such shareholders subscribed for in the first round. The first round must remain open for at least 15 business days. The second round must remain open for at least three business days.
Voting Rights and Dividends
Common Shares
Holders of common shares are entitled to one vote per share, with the exception of the election of the board of directors, where each holder is entitled to one vote per share per nominee. Each holder’s votes may be cast for a single nominee or distributed among the nominees at the holder’s discretion. To that effect, each of our common shares gives the holder the rights to as many votes as there are directors to be elected. Shareholders may pool votes in favor of one person or distribute them among various persons. Those candidates for the board who receive the most votes are elected directors. Holders of common shares may attend and vote at shareholders’ meetings either in person or through a proxy.
Holders of common shares have the right to participate in the distribution of dividends and shareholder equity resulting from liquidation. Our by-laws do not establish a maximum time limit for the payment of the dividends. However, according to Article 232 of the Peruvian Corporate law, the right to collect past-due dividends in the case of companies that are publicly held companies, such as ours, expires 10 years after the date on which the dividend payment was due.
Our share capital may be increased by a decision of holders of common shares at a shareholders’ meeting. Capital reductions may be voluntary or mandatory and must be approved by holders of common shares at a shareholders’ meeting. Capital reductions are mandatory when accumulated losses exceed 50% of the capital and to the extent such accumulated losses are not offset by accumulated earnings and capital increases within the following fiscal year. Capital increases and reductions must be communicated to the Peruvian Securities Commission, the Lima Stock Exchange and theSuperintendencia Nacional de Administración Tributaria(SUNAT). Voluntary capital reductions must also be published in the official gazette El Peruano and in a widely circulated newspaper in the city in which we are located.
Investment Shares
Under Peruvian Corporate Law, investment shares do not represent share capital. Accordingly, our balance sheet reflects the investment shares as a separate account from our share capital. Holders of investment shares are neither entitled neither to vote nor to participate in shareholders’ meetings. However, investment shares confer upon the holders thereof the right to participate in the dividends distributed according to their par value, in the same manner as common shares. Investment shares also confer to the holders thereof the preemptive right to (i) maintain the current proportion of the investment shares in the case of a capital increase through new contributions; (ii) increase the number of investment shares upon capitalization of retained earnings, revaluation surplus or other reserves that do not represent cash contributions; (iii) participate in the distribution of assets resulting from a liquidation in the same manner as common shares; and, (iv) redeem the investment shares in case of a merger and/or change of business activity.
Liquidation Rights
If we are liquidated, our shareholders have the right to receive net assets resulting from the liquidation, after we comply with our obligation to pay all our creditors and after discounting any existing dividend liabilities. For this reason, we cannot assure that we will be able to reimburse 100% of the book value of the common shares and investment shares in case of bankruptcy or liquidation.
Ordinary and Extraordinary Meetings
Pursuant to Peruvian Corporate Law and our by-laws, the annual shareholders’ meeting must be held during the three-month period after the end of each fiscal year. Additional shareholders’ meetings may be held during the year. Because we are a publicly-held corporation, we are subject to the special control of the Peruvian Securities Commission, as provided in Article 253 of the Peruvian Corporate Law. If we do not hold the annual shareholders’ meeting during the three-month period after the end of each fiscal year or any other shareholders’ meeting required by our by-laws, a public notary or a competent judge shall call for such a meeting at the request of at least one shareholder of the common shares. Such meeting will take place within a reasonable period of time.
Other shareholders’ meetings are convened by the board of directors when deemed convenient by our company or when it is requested by the holders of at least 20% of our common shares. If, at the request of holders of 20% of the common shares, the shareholders’ meeting is not convened by the board of directors within 15 business days of the receipt of such request, or the board expressly or implicitly refuses to convene the shareholders’ meeting, a public notary or a competent judge will call pursuant to Law No. 29560 for such meeting at the request of holders of at least 20% of our common shares. If a public notary or competent judge calls for a shareholders’ meeting, the place, time and hour of the meeting, the agenda and the person who will preside shall be indicated on the meeting notice. If the meeting called is other than the annual shareholders’ meeting or a shareholders’ meeting required by the Peruvian Corporate Law or the by-laws, the agenda will contain those matters requested by the shareholders who requested the meeting.
Holders of investment shares have no right to request the board to call a shareholders’ meeting.
Notices of Meetings
Since we are a publicly-held corporation, notice of shareholders’ meetings must be given by publication of a notice. The publication shall occur at least 25 days prior to any shareholders’ meeting in the Peruvian Official Gazette,El Peruano, and in a widely circulated newspaper in the city in which we are located. The notice requirement may be waived at the shareholders’ meeting by agreement of the holders of 100% of the outstanding common shares.
Quorum and Voting Requirements
According to Article 25 of our by-laws and Article 257 of the Peruvian Corporate Law, shareholders’ meetings called for the purpose of considering a capital increase or decrease, the issuance of obligations, a change in the by-laws, the sale in a single act of assets with an accounting value that exceeds 50% of our share capital, a merger, division, reorganization, transformation or dissolution, are subject to a first, second and third quorum call, each of the second and third quorum call to occur upon the failure of the preceding one. A quorum for the first call requires the presence of shareholders holding 50% of our total common shares. For the second call, the presence of shareholders holding at least 25% of our total common shares is adequate, while for the third call there is no quorum requirement. These decisions require the approval of the majority of the common shares represented at the shareholders’ meeting. Shareholders’ meetings convened to consider all other matters are subject to a first and second quorum call, the second quorum call to occur upon the failure of the first quorum.
In accordance with Peruvian Corporate Law, only those holders of common shares whose names are registered in our stock ledger not less than 10 days in advance of a meeting will be entitled to attend the shareholders’ meeting and to exercise their rights.
Limitations on the Rights of Non-residents or Foreign Shareholders
There are no limitations under our by-laws or Peruvian Corporate Law on the rights of nonresidents or foreign shareholders to own securities or exercise voting rights with respect to our securities.
Disclosure of Shareholdings and Tender Offer Regulations
Disclosure of Shareholdings
There are no provisions in our by-laws governing the ownership threshold above which share ownership must be disclosed.
However, according to Article 10 of CONASEV Resolution No. 090-2005-EF-94.10, as amended, we must inform the Peruvian Securities Commission of the members of our economic group and a list of our holders of common shares owning more than a 5% share interest, as well as any change to such information.
Tender Offer Regulations
Peruvian security regulations include mandatory takeover rules applicable to the acquisition of control of a listed company.
Subject to certain conditions, such regulations generally establish the obligation to make a tender offer when a person or group of persons acquires a relevant interest in a listed company. According to Peruvian law, a person acquires a relevant interest in a listed company when such person (a) holds or has the power to exercise directly or indirectly 25%, 50% or 60% of the voting rights in a listed company, or (b) has the power to appoint or remove the majority of the board members or to amend its by-laws.
In general, the tender offer must be launched prior to the acquisition of the relevant interest. The tender offer may be launched after the “relevant interest” is acquired if it is acquired (a) by means of an indirect transaction, (b) as a consequence of a public sale offer, or (c) in no more than four transactions within a three-year period.
This mandatory procedure has the effect of alerting other shareholders and the market that an individual or financial group has acquired a significant percentage of a company’s voting shares, and gives other shareholders the opportunity to sell their shares at the price offered by the purchaser. The purchaser is required to launch a tender offer unless: (a) shareholders representing 100% of the voting rights consent in writing, (b) voting shares are acquired by a depositary in order to subsequently issue ADSs, or (c) voting shares are acquired pursuant to the exercise of preemptive rights.
Changes in Capital
Our by-laws do not establish special conditions to increase or reduce our share capital beyond what is required under Peruvian Corporate Law.
Anti-Takeover Provisions
Our by-laws do not contain any provision that would have the effect of delaying, deferring or preventing a change of control. However, acquisitions of shares of our capital stock that involve a change of control may be subject to Peruvian securities and exchange regulations (Ley de Mercado de Valores y Reglamento de Oferta Pública de Adquisición y de Compra de Valores por Exclusión) applicable to tender offers.
Form and Transfer
Common shares and investment shares may be either physical share certificates in registered form or book-entry securities in the CAVALI S.A. ICLV book-entry settlement system, also in registered form.
Furthermore, the Peruvian Corporate Law forbids publicly-held corporations, such as us, from including in their by-laws stipulations limiting the transfer of their shares or restraining their trading in other ways. In addition, pursuant to our by-laws, we cannot recognize a shareholders’ agreement that contemplates limitations, restrictions or preferential rights on the transfer of shares, even if such an agreement is recorded in our stock ledger (matrícula de acciones) or in CAVALI S.A. ICLV.reference.
| C. | Material Contracts |
On December 31, 2007, we entered into a contract for the general management and provision of services with ASPI, pursuant to which we provide legal and corporate services to it. See “Item 7. Major Shareholders and Related Party Transactions—A. Related Party Transactions.”
On February 1, 2008, we entered into a surface rights agreement with Compañía Minera Ares S.A.C., pursuant to which we lease a plot of land adjacent to our headquarters to our affiliate, Compañía Minera Ares S.A.C., a subsidiary of Hochschild Mining plc. See “Item 7. Major Shareholders and Related Party Transactions—A. Related Party Transactions.”
On June 30, 2008, we entered into a property lease agreement with ASPI pursuant to which we lease part of our headquarters as office space to ASPI. See “Item 7. Major Shareholders and Related Party Transactions—A. Related Party Transactions.”
On June 3, 2010, we entered into a long-term electricity supply agreement with Electroperú, a government-owned company, which expires in July 2020, to serve the electricity requirements of our Pacasmayo facility. Electroperú has agreed to provide us with sufficient energy to operate our Pacasmayo facility at pre-determined maximum amounts during the term of the contract. Payments for electricity are based on a formula that takes into consideration our energy consumption and certain market variables, such as the U.S. purchase price index, the global price of oil, the local price of natural gas and the import price of bituminous coal. We entered into an addendum to this agreement, effective February 1, 2016,2020, which extends the term of the agreement until DecemberMay 31, 2025, reduces the prices for the 2016-2020 period and establishes new prices for the 2020-2025 period.2026. See “Item 4. Information on the Company—A. History and Development of the Company—Raw Materials and Energy Sources.”
On February 8, 2013, we issued US$300,000,000 of our 4.50% Senior Notes due 2023, in our inaugural international bond offering, pursuant to an indenture. A portion of the proceeds were used to prepay amounts outstanding our secured loan agreement with BBVA Banco Continental, and the remaining proceeds will bewere used to cover a portion of the capital expenditures we expect to incur in connection with the construction and development of the new Piura plant and our cement business. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
On January 31, 2019, we issued S/ 570,000,000 of Senior Notes in two issuances. One for S/ 260 million with a rate of 6.68750% for a term of 10 years, and another for S/ 310 million with a term of 15 years and a rate of 6.84375%. The proceeds were used to purchase a portion of the US$ 300,000,000 of our Senior Notes due 2023.
On August 29, 2018, we signed a gas supply agreement with Olympic Peru that entered in force during 2019 for the supply of gas to our Piura plant. The supply agreement of gas is for a term of 18 years to cover most of our energy needs in the mentioned plant. The contract has two phases: 1) a spot phase, during which we pay for the gas we use, and the agreement may be terminated at any time by either party without penalties, and 2) a take or pay phase, during which we are obliged to pay for a minimum amount of gas established as a percentage (varying from 60% to 70% depending on the year) of the maximum amount of gas purchased by us from Olympic Peru during the spot phase, and penalties apply if either party terminates the agreeemnt. The unit prices of the gas are fixed for each year during both phases. We are currently in the spot phase. The take or pay phase will commence, when the following conditions are met by Olympic: (i) the Peruvian government signs a distribution contract of gas with a third-party concessionaire (ii) Olympic transfers the pipe to such concessionaire, and (iii) commercial conditions to transport the gas between Olympic Peru and such concessionaire are agreed. These conditions are not under our control and we cannot reasonably estimate when they will be met.
| D. | Exchange Controls |
Since August 1990, there have been no exchange controls in Peru and all foreign exchange transactions are based on free market exchange rates. Prior to August 1990, the Peruvian foreign exchange market consisted of several alternative exchange rates. Additionally, during the 1990s, the Peruvian currency experienced a significant number of large devaluations, and Peru has consequently adopted, and operated under, various exchange rate control practices and exchange rate determination policies, ranging from strict control over exchange rates to market determination of rates. Current Peruvian regulations on foreign investment allow the foreign holders of equity shares of Peruvian companies to receive and repatriate 100 percent of the cash dividends distributed by such companies. Such investors are allowed to purchase foreign exchange at free market currency rates through any member of the Peruvian banking system and transfer such foreign currency outside Peru without restriction.
| E. | Taxation |
The following summary contains a description of certain Peruvian and United States federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADSs. The summary is based upon the tax laws of Peru and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change.
Prospective holders of common shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs in their particular circumstances.
Peruvian Tax Considerations
The following are the principal tax consequences of ownership of common shares or ADSs by non-resident individuals or entities (“Non-Peruvian Holders”) as of the date hereof. Legislative, judicial or administrative changes or interpretations may, however, be forthcoming. Any such changes or interpretations could affect the tax consequences to holders of common shares or ADSs and could alter or modify the conclusions set forth herein. This summary is not intended to be a comprehensive description of all the tax consequences of acquisition, ownership and disposition of common shares or ADSs and does not describe any tax consequences arising under the laws of any taxing jurisdiction other than Peru or applicable to a resident of Peru or to a person with a permanent establishment in Peru.
For purposes of Peruvian taxation:
| ● | individuals are residents of Peru, if they are Peruvian nationals who have established their principal place of residence in Peru or if they are foreign nationals with a permanence in Peru of 183 days in any 12-month period (the condition of Peruvian resident can only be acquired as of the 1st of January of the year following the fulfillment of residence conditions); and |
| ● | legal entities are residents of Peru if they are established or incorporated in Peru. |
Changes to Peruvian tax law
In December 2016, the Peruvian Governmentgovernment approved an increase of the income tax rate from 28% to 29.5% to be effective from 2017 onwards.
Cash Dividends and Other Distributions
Cash dividends paid with respect to common shares and amounts distributed with respect to ADSs are currently subject to a Peruvian withholding tax, at a rate of 5%6.8% of the dividend paid. In December 2016, the Peruvian government approved the decrease in the withholding tax rate on dividend paid from 6.8% to 5% effective in 2017. As a general rule, the distribution of additional common shares representing profits, distribution of shares which differ from the distribution of earnings or profits, as well as the distribution of preemptive rights with respect to common shares, which are carried out as part of a pro rata distribution to shareholders, will not be subject to Peruvian tax or withholding taxes.
Capital Gains
Pursuant to Article 6 of the Peruvian income tax law, individuals and entities resident in Peru are subject to Peruvian income tax on their worldwide income while Non-Peruvian Holders are subject to Peruvian income tax on Peruvian source income only.
The general rule of the Law of Income Tax in Peru provides that income derived from the disposal of securities issued by Peruvian entities is considered Peruvian source income and is therefore subject to income tax. Peruvian income tax law also provides that capital gains resulting from the disposal of ADSs that represent shares issued by Peruvian entities are considered Peruvian source income and therefore also subject to Peruvian income tax. Peruvian income tax law also provides that taxable income resulting from the disposal of securities is determined by the difference between the sale price of the securities at market value and the tax basis.
Notwithstanding the foregoing, capital gains resulting from the disposal of ADSs or beneficial interest in ADSs that represent shares issued by a Peruvian entity are not considered Peruvian source income as long as the ADSs issued by the foreign depositary are held in the name of a nominee and such ADSs are not transferred to a third party as a result of the disposal of the ADSs.
In the event ADSs are exchanged into common shares and such common shares are disposed of, capital gains resulting therefrom will be subject to an income tax rate of either 5% or 30%, depending on where the transaction takes place. If the transaction is consummated in Peru, the income tax rate is 5%; if the transaction is consummated outside of Peru, capital gains are taxed at a rate of 30%. Peruvian income tax law regulations have stated that transactions are deemed to be consummated in Peru if the common shares are transferred through the Lima Stock Exchange. Any gain resulting from the conversion of ADSs into common shares or common shares into ADSs will not be subject to taxation in Peru.
Any Non-Peruvian Holder who acquires common shares will have the following tax basis: (i) for common shares purchased by the transferor, the acquisition price paid for the shares; (ii) for common shares received by the transferor as a result of a share capital increase because of a capitalization of net profits, the face or nominal value of such common shares; (iii) for other common shares received free of any payment, the stock market value of such shares if listed on the Lima Stock Exchange or, if not, the face or nominal value of such common shares and (iv) for common shares of the same type acquired at different opportunities and at different values, the tax basis will be the weighted average cost. In cases where common shares are sold by Non-Peruvian Holders outside the Lima Stock Exchange, the tax basis must be certified by the Peruvian tax administration prior to the time payment is made to the transferor; otherwise it would not be possible to deduct the tax basis and a 30% Peruvian income tax would apply to the total sale price. Under Peruvian income tax law, tax basis certification is granted by the tax authorities within 30 days from the date of the application (which application must contain supporting evidence with respect to the tax basis) is made by the transferor. If the tax authorities do not respond within such 30 day period, the tax basis presented for approval by the transferor is deemed automatically approved.
On December 31, 2010, Law No. 29645 was enacted and took effect from January 1, 2011. This law states that in transactions relating to Peruvian securities through the Lima Stock Exchange, CAVALI S.A. ICLV (the Peruvian clearing house) will act as withholding agent to the extent that such transactions are settled in cash through CAVALI’s account (liquidación en efectivo). The implementing regulations of Law No. 29645 enacted on July 9, 2011 provide that CAVALI began acting as a withholding agent as from November 1, 2011. As a result, while such regulations do not apply to securities transferred though the Lima Stock Exchange by a Non-Peruvian Holder, such transferor must still self-assess and pay its income tax liability directly to Peruvian tax authorities within the first 12 working days following the month in which Peruvian source income was earned. With respect to transactions of Peruvian securities conducted through the Lima Stock Exchange that are settled directly without CAVALI’s intervention (liquidación directa), Non-Peruvian Holders are required to self-assess and pay income taxes directly to the Peruvian tax authorities within the first 12 working days following the month in which income from a Peruvian source was earned. Finally, if the purchaser is resident in Peru and the sale is not performed through the Lima Stock Exchange, the purchaser will act as withholding agent.
Nevertheless, Law No. 30,34130341 was enacted on December 12, 2015 and took effect on January 1, 2016, and Legislative Decree No. 1262, which complements Law No. 30,341 took effect on January 1, 2017. Such law, which will be in effect until December 31, 2019, regulates an exception to a general rule. However, its effect was extended until December 31, 2022 by Emergency Decree 005-2019. The exemption regulated in the law applies to the income from the sale of shares and other securities representing shares made through a centralized negotiation mechanism supervised by the SuperintendencySuperintendence of Securities, where the shares disposed of aredo not represent 10% or more of the shares issued by a specific company.
Law No. 30,34130341 and the amendment through Legislative Decree No. 1262 includesand Emergency Decree 005-2019 include the following provisions:
| ● | Securities covered by the exemption: |
| Ø | American Depositary Receipts |
| Ø | Exchange Trade Fund (ETF) units having underlying shares and / or debt securities as underlying; |
| Ø | Debt securities; |
| Ø | Certificates of participation in mutual funds for investment in securities; |
| Ø | Certificates of participation |
| Ø | Negotiable invoices. |
| ● | Requirements for apply the exemption: |
| Ø | No transfer of 10% or more of the shares or securities representing shares in a period of twelve (12) months. In the case of ADRs and GDRs, this requirement will be determined by considering the underlying shares; |
| Ø | In the case of shares or securities representing shares, the calculation of the percentage shall be determined based on the total number of shares of capital or account of investment shares at the time of disposal; |
| Ø | The law indicates those operations to be considered for calculating this percentage, as well as those that do not; |
| Ø | The securities must have a stock market presence. To determine if the securities have a stock market presence, the following shall be taken into account; |
| Ø | Within 180 business days prior to the transfer, the number of days in which the |
| Ø | The number of days determined according to what is indicated in the previous section will be divided between 180 and multiplied by 100; and |
| Ø | The result cannot be less than the limit established by the regulation. This limit |
| Ø | Those responsible for conducting centralized trading mechanisms must disseminate on their web pages the list of the securities that comply with having a presence in the stock market. |
| ● | Loss of exoneration: |
| Ø | If, after applying the waiver, the issuer delivers the values of the Securities Registry of the Stock Exchange, in whole or in part, in an act or progressively, within the 12 months following the sale, the exoneration |
| Ø | Those responsible for conducting the centralized trading mechanisms must notify SUNAT, in accordance with the procedure set forth in the regulations, of the securities whose registrations are canceled within 12 months of the sale. |
Other Considerations
No Peruvian estate or gift taxes are imposed on the gratuitous transfer of ADSs or common shares. No stamp, transfer or similar tax applies to any transfer of ADSs or common shares, except for commissions payable by seller and buyer to the Lima Stock Exchange (0.15% of value sold), fees payable to the Peruvian Securities Commission (0.05% of value sold), brokers’ fees (about 0.05% to 1% of value sold) and Value Added Tax (at the rate of 18%) on commissions and fees. Any investor who sells its common shares on the Lima Stock Exchange will incur these fees and taxes upon purchase and sale of the common shares.
United States Federal Income Tax Considerations
The following are the material United States federal income tax consequences as of the date hereof to a United States Holder (as defined below) of the acquisition, ownership and disposition of our common shares and ADSs. Except where noted, this summary deals only with common shares and ADSs held as capital assets (generally, property held for investment). As used herein, the term “United States Holder” means a beneficial owner of common shares or ADSs that is for United States federal income tax purposes:
| ● | an individual citizen or resident of the United States; |
| ● | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| ● | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| ● | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
| ● | a dealer in securities or currencies; |
| ● | a financial institution; |
| ● | a regulated investment company; |
| ● | a real estate investment trust; |
| ● | an insurance company; |
| ● | a tax-exempt organization; |
| ● | a person holding our common shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; |
| ● | a trader in securities that has elected the mark-to-market method of accounting for your securities; |
| ● | a person liable for alternative minimum tax; |
| ● | a person who owns or is deemed to own 10% or more of our stock (by vote or value); |
| ● | a partnership or other pass-through entity for United States federal income tax purposes; |
| ● | a person required to accelerate the recognition of any item of gross income with respect to our common shares or ADSs as a result of such income being recognized on an applicable financial statement; or |
| ● | a person whose “functional currency” is not the U.S. dollar. |
The discussion below is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. There is currently no income tax treaty between the United States and Peru that would provide for United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our common shares or ADSs, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADSs, you should consult your tax advisors.
This summary does not address the Medicare tax on net investment income or the effects of any state, local or non-United States tax laws. If you are considering the acquisition, ownership or disposition of our common shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
The gross amount of distributions on the ADSs or common shares (including amounts withheld to reflect Peruvian withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles.
To the extent that the amount of any distribution (including amounts withheld to reflect Peruvian withholding taxes) exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or common shares, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend. Such dividends (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the common shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
With respect to non-corporate United States Holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A non-United States corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on common shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs, which are listed on the New York Stock Exchange, but not our common shares, are readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our common shares that are represented by ADSs, but not our common shares that are not so represented, will meet such conditions required for the reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. Non-corporate United States Holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
The amount of any dividend paid insoles will equal the U.S. dollar value of thesoles received, calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received by you, in the case of the common shares, or by the depositary, in the case of ADSs, regardless of whether thesoles are converted into U.S. dollars at that time. If thesoles received as a dividend are converted into U.S. dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If thesoles received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a tax basis in thesoles equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of thesoles will be treated as United States source ordinary income or loss.
Subject to certain conditions and limitations, Peruvian withholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or common shares will be treated as foreign source income and will generally constitute passive category income. However, in certain circumstances, if you have held the ADSs or common shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any Peruvian withholding taxes imposed on dividends paid on the ADSs or common shares. If you do not elect to claim a United States foreign tax credit, you may instead claim a deduction for Peruvian income tax withheld, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale, exchange or exchangeother taxable disposition of ADSs or common shares in an amount equal to the difference between the amount realized for the ADSs or common shares and your tax basis in the ADSs or common shares. Such gain or loss will generally be capital gain or loss. Capital gains of non-corporate United States Holders derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
If Peruvian income tax is withheld on the sale or other disposition of our ADSs or common shares, your amount realized will include the gross amount of the proceeds of that sale or other disposition before deduction of the Peruvian income tax. Any gain or loss recognized by you will generally be treated as United States source gain or loss. Consequently, in the case of gain from the disposition of ADSs or common shares that is subject to Peruvian income tax, you may not be able to benefit from the foreign tax credit for that Peruvian income tax (i.e., because the gain from the disposition would be United States source), unless you can apply the credit (subject to applicable limitations) against United States federal income tax payable on other income from foreign sources. Alternatively, you may take a deduction for the Peruvian income tax if you do not take a credit for any foreign taxes paid or accrued during the taxable year. You are urged to consult your tax advisors regarding the tax consequences if Peruvian income tax is imposed on a disposition of ADSs or common shares, including the availability of the foreign tax credit under your particular circumstances.
Passive Foreign Investment Company
We do not believe that we are, for United States federal income tax purposes, a passive foreign investment company (“PFIC”), and we expect to operate in such a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes on gain recognized with respect to the ADSs or common shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us (as discussed above under “Taxation of Dividends”), if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or common shares and the proceeds from the sale, exchange or redemptionother taxable disposition of our ADSs or common shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.
The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership or disposition of our ADSs or common shares. You should consult your own tax advisors concerning the overall tax consequences to you, including the consequences under laws other than United States federal income tax laws, of an investment in our ADSs or common shares.
| F. | Dividends and Paying Agents |
Not applicable.
| G. | Statement by Experts |
Not applicable.
| H. | Documents on Display |
We make our filings in electronic form under the EDGAR filing system of the SEC. Our filings are available through the EDGAR system at www.sec.gov. In addition, our filings are available to the public over our website www.cementospacasmayo.com.pe. Such filings and other information on our website are not incorporated by reference in this annual report. You may request a copy of this filing, and any other report, at no cost, by writing to us at the following address or telephoning us:
Investor Relations Department
Calle La Colonia 150,
Urbanización El Vivero, Surco,
Lima, Peru.
Tel.: + (511) 317-6000
E-mail: cbustamante@cpsaa.com.pe
| I. | Subsidiary Information |
See note 1 to our annual audited consolidated financial statements included in this annual report for a description of our subsidiaries.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
For a description of our market risks, see note 2931 to our consolidated financial statements included in this annual report.
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| A. | Debt Securities |
Not applicable.
| B. | Warrants and Rights |
Not applicable.
| C. | Other Securities |
Not applicable.
| D. | American Depositary Shares |
Fees and expenses
JPMorgan Chase Bank, N.A., as depositary, pursuant to our Deposit Agreement, dated as of February 7, 2012, and the amendment dated February 21, 2017 (as so amended the “Deposit Agreement”), may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of common shares, issuances in respect of common share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADSs or American Depositary Receipts representing ADSs (“ADRs”) are cancelled or reduced for any other reason, US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a common share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing common shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
| ● | a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; |
| ● | a fee of US$0.05 or less per ADS for any cash distribution made pursuant to the deposit agreement; |
| ● | a fee of US$0.05 or less per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision); |
| ● | reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the common shares or other deposited securities, the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions); |
| ● | a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to US$0.05 per ADS issuance fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were common shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto; |
| ● | stock transfer or other taxes and other governmental charges; |
| ● | cable and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of common shares; |
| ● | transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; and |
| ● | expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars. |
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees. The amounts of reimbursements available to us are not based upon the amounts of fees the depositary collects from investors. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing common shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting on their behalf. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid. At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
The Deposit Agreement is filedincorporated by reference as Exhibit 2.2 to this annual report, and Amendment numberNo. 1 thereto is incorporated by reference in this annual report.report as Exhibit 2.2A. We encourage you to review this documentthese documents carefully if you are a holder of ADRs.
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Dispute Resolution.”
| ITEM 15. | CONTROLS AND PROCEDURES |
| A. | Disclosure Controls and Procedures |
As of the end of the period covered by this annual report, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15€13a-15(e) and 15d-15€15d-15(e) of the U.S. Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,2019, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.
| B. | Management’s Annual Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not necessarily prevent or detect some misstatements. It can only provide reasonable assurance regarding financial statement preparation and presentation. Also, projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the polices or procedures may deteriorate over time.
Management assessed the effectiveness of its internal control over financial reporting for the year ended December 31, 2017.2019. The assessment was based on criteria established in the framework “Internal Controls—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (COSO). Based on this assessment, our management has concluded that as of December 31, 2017,2019, our internal control over financial reporting was effective.
The effectiveness of internal control over financial reporting as of December 31, 2017,2019, has been audited by Paredes, Burga & Asociados SCRL, member firm of EY (formerly Ernst & Young), an independent registered public accounting firm, as stated in their attestation report, which is included under “Item 15—Controls and Procedures—C. Attestation Report of Independent Registered Public Accounting Firm.”
| C. | Report of the Independent Registered Public Accounting Firm |
To the Shareholders and the Board of Directors of Cementos Pacasmayo S.A.A. and subsidiaries.
Opinion on Internal Control over Financial Reporting
We have audited Cementos Pacasmayo S.A.A. and subsidiaries internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Cementos Pacasmayo S.A.A. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated April 29, 2020, expressed an unqualified opinion thereon.
108
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada
A member practice of
Ernst & Young Global Limited
/s / Cristian Emmerich
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada
Lima, Peru,
April 29, 2020
| D. | Changes in Internal Control Over Financial Reporting |
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required under Rules 13a-15 or 15d-15 that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 16. | [RESERVED] |
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our Board of Directors has determined that Ms. Hilda Ochoa-Brillembourg and Mr. Marco Antonio Zaldívar, members of the audit committee, are “financial experts,” as such term is defined in the SEC rules. We have determined that Ms. Hilda Ochoa-Brillembourg and Mr. Felipe Ortiz de Zevallos and Mr. Marco Antonio Zaldívar are independent under the standards of the New York Stock Exchange listing rules and Rule 10A-3 under the Exchange Act.
| ITEM 16B. | CODE OF ETHICS |
We have adopted a code of ethics that applies to our directors, officers and employees. Our code of ethics is available on our website http://www.cementospacasmayo.com.pe. Information on our website is not incorporated by reference in this annual report.
If we make any substantive amendment to our code of ethics or if we grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver by filing a current report on a Form 6-K or in our subsequent annual report on Form 20-F to be filed with the SEC. During the year ended December 31, 2019, no such amendment was made nor did we grant any waiver to any provision of our code of ethics.
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit and Non-Audit Fees
The following table presents the aggregate fees for professional services and other services rendered by our independent auditors, Paredes, Burga & Asociados SCRL, member firm of EY (formerly Ernst & Young), responsible for auditing the annual consolidated financial statements included in the annual report, during the fiscal years ended December 31, 2019 and 2018.
| Year Ended December 31, | ||||||||
| (in thousands of S/) | 2019 | 2018 | ||||||
| Audit fees | 1,138 | 1,130 | ||||||
| Tax fees | 302 | 247 | ||||||
| Total fees | 1,440 | 1,377 | ||||||
Audit fees in the above table are the aggregate fees billed and billable by our independent auditors in connection with the audit of our annual consolidated financial statements and review of our quarterly financial information.
Tax fees in the above table are fees billed relating to tax compliance services.
Our audit committee is responsible for the oversight of the independent auditors and has established pre-approval procedures for the engagement of its independent registered public accounting firm for audit and non-audit services. Such services can only be contracted if they are approved by the audit committee, they comply with the restriction provided under applicable rules and they do not jeopardize the independence of our auditors.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Not applicable.
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
| ITEM 16G. | CORPORATE GOVERNANCE |
We are a “foreign private issuer” within the meaning of the New York Stock Exchange corporate governance standards. Under New York Stock Exchange rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange.
We currently follow certain Peruvian practices concerning corporate governance and intend to continue to do so. There are significant differences in the Peruvian corporate governance practices as compared to those followed by United States domestic companies under the New York Stock Exchange’s listing standards.
The New York Stock Exchange listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors.
The listing standards for the New York Stock Exchange also require that U.S. listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors.
In addition, New York Stock Exchange rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.
The New York Stock Exchange’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. In November 2013, the Peruvian Securities Commission and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Good Corporate Governance Code for Peruvian Companies.” These principles are disclosed on the Peruvian Securities Commission web page at http:// http://www.smv.gob.pe/ and the Lima Stock Exchange web page at http://www.bvl.com.pe. Although we have implemented a number of these measures and are part of the Best Corporate Governance Practices Index of the Lima Stock Exchange, we are not required to comply with the referred corporate governance guidelines by law or regulation, only to disclose whether or not we are in compliance.
| ITEM 16H. | MINE SAFETY DISCLOSURE not applicable |
| ITEM 17. | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18. | FINANCIAL STATEMENTS |
See our consolidated financial statements beginning at page F-1. Our financial statements have been prepared in accordance with IFRS as issued by the IASB.
| ITEM 19. | EXHIBITS |
| * | This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference. |
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F on its behalf.
| CEMENTOS PACASMAYO S.A.A. | ||
| By: | /s/ Humberto Nadal Del Carpio | |
| Name: | Humberto Nadal Del Carpio | |
| Title: | Chief Executive Officer | |
| By: | /s/ Manuel Bartolome Ferreyros Peña | |
| Name: | Manuel Bartolome Ferreyros Peña | |
| Title: | Chief Financial Officer | |
Date: April 30, 2020
| Cementos Pacasmayo S.A.A. and Subsidiaries | ||
| Consolidated financial statements as of December 31, 2019 and 2018 together with the Independent Auditors’ Report | ||
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated financial statements as of December 31, 2019 and 2018 together with the Independent Auditors’ Report
Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cementos Pacasmayo S.A.A. and subsidiaries.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Cementos Pacasmayo S.A.A. and subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the “consolidated financial statements”statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172019 and 2016,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) the Company´sCompany’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 201829, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Likewise, we are a public accounting firm registered with the Peruvian Board of Public Accountants Associations and are required to be independent with respect to the Company in accordance with International Auditing Standards approved for its application in Peru by the Peruvian Board of Public Accountants Associations.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Report of Independent Registered Public Accounting Firm (continue)
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
| Revenue recognition | ||
| Description of the Matter | At December 31, 2019, the Company’s revenue from the sale of cement, concrete and precast was S/(000)1,289,034. As discussed in Note 2.3.15 to the consolidated financial statements, revenue is recognized at the point in time when control of the goods is transferred to the customer, generally upon delivery. As the Company sells its products to a very large number of small distributors, management analyzes proper revenue recognition at year end, ensuring that only delivered goods are recognized as revenue. Auditing the Company’s proper revenue recognition at year end was complex and involved a high degree of auditor judgment because of the large number of small transactions and the complexity of management’s processes to ensure revenue was properly recognized. |
| How We Addressed the Matter in Our Audit | We obtained an understanding of the process, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to determine the proper timing of revenue recognition, including management’s controls over the completeness and the accuracy of the financial data generated by its distribution centers. Our audit procedures included, among others, selecting a sample of recorded revenue transactions and obtaining source documents to evaluate management’s application of their accounting policy and tested revenue recognition for the performance obligations in the pertinent period. We analyzed sales activity before and after year-end and obtained explanations and supporting documentation for any unusual or unexpected sales activity. We tested the mathematical accuracy of management’s analysis of undelivered goods and the associated timing of revenue recognized in the financial statements. Further, we evaluated management’s significant accounting policies related to revenue recognition for reasonableness. We also evaluated the adequacy of the disclosure relating to revenue recognition in the notes to the consolidated financial statements. |
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada
A member practice of
Ernst & Young Global Limited
/s/ Cristian Emmerich |
/s/ Carlos Valdivia
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada Lima, Peru.
We have served as the Company’sCompany‘s auditor since 2002.
Lima, Peru
Peru.
April 27, 2018.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required under Rules 13a-15 or 15d-15 that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our Board of Directors has determined that Ms. Hilda Ochoa-Brillembourg and Mr. Marco Antonio Zaldivar, members of the audit committee, are “financial experts,” as such term is defined in the SEC rules. We have determined that Ms. Hilda Ochoa-Brillembourg and Mr. Felipe Ortiz de Zevallos and Mr. Marco Antonio Zaldívar are independent under the standards of the New York Stock Exchange listing rules and Rule 10A-3 under the Exchange Act.
We have adopted a code of ethics that applies to our directors, officers and employees. Our code of ethics is available on our website http://www.cementospacasmayo.com.pe. Information on our website is not incorporated by reference in this annual report.
If we make any substantive amendment to our code of ethics or if we grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver by filing a current report on a Form 6-K or in our subsequent annual report on Form 20-F to be filed with the SEC. During the year ended December 31, 2017, no such amendment was made nor did we grant any waiver to any provision of our code of ethics.
Audit and Non-Audit Fees
The following table presents the aggregate fees for professional services and other services rendered by our independent auditors, Paredes, Burga & Asociados SCRL, member firm of EY (formerly Ernst & Young), responsible for auditing the annual consolidated financial statements included in the annual report, during the fiscal years ended December 31, 2017 and 2016.
Year Ended December 31, | ||||||||
(in thousands of S/) | 2017 | 2016 | ||||||
| Audit fees | 1,332 | 1,491 | ||||||
| Tax fees | 358 | 196 | ||||||
| Total fees | 1,690 | 1,687 | ||||||
Audit fees in the above table are the aggregate fees billed and billable by our independent auditors in connection with the audit of our annual consolidated financial statements and review of our quarterly financial information.
Tax fees in the above table are fees billed relating to tax compliance services.
Our audit committee is responsible for the oversight of the independent auditors and has established pre-approval procedures for the engagement of its independent registered public accounting firm for audit and non-audit services. Such services can only be contracted if they are approved by the audit committee, they comply with the restriction provided under applicable rules and they do not jeopardize the independence of our auditors.
Not applicable.
Not applicable.
Not applicable.
We are a “foreign private issuer” within the meaning of the New York Stock Exchange corporate governance standards. Under New York Stock Exchange rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange.
We currently follow certain Peruvian practices concerning corporate governance and intend to continue to do so. There are significant differences in the Peruvian corporate governance practices as compared to those followed by United States domestic companies under the New York Stock Exchange’s listing standards.
The New York Stock Exchange listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors.
The listing standards for the New York Stock Exchange also require that U.S. listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors.
In addition, New York Stock Exchange rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.
The New York Stock Exchange’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. In November 2013, the Peruvian Securities Commission and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Good Corporate Governance Code for Peruvian Companies.” These principles are disclosed on the Peruvian Securities Commission web page at http:// http://www.smv.gob.pe/ and the Lima Stock Exchange web page at http://www.bvl.com.pe. Although we have implemented a number of these measures and are part of the Best Corporate Governance Practices Index of the Lima Stock Exchange, we are not required to comply with the referred corporate governance guidelines by law or regulation, only to disclose whether or not we are in compliance.
Not applicable.
See our consolidated financial statements beginning at page F-1. Our financial statements have been prepared in accordance with IFRS as issued by the IASB.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F on its behalf.
| ||
| ||
Date: April 27, 2018
29, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cementos Pacasmayo S.A.A. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Cementos Pacasmayo S.A.A. and subsidiaries internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Cementos Pacasmayo S.A.A. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2017 and 2016, the related consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated April 27, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Likewise, we are a public accounting firm registered with the Peruvian Board of Public Accountants Associations and are required to be independent with respect to the Company in accordance with International Auditing Standards approved for its application in Peru by the Peruvian Board of Public Accountants Associations.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada
A member practice of
Ernst & Young Global Limited
/s/ Carlos Valdivia
Paredes, Burga & Asociados Sociedad Civil de Responsabilidad Limitada
We have served as the Company’s auditor since 2002.
Lima, Peru,
April 27, 2018
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statementsstatement of financial position
As of December 31, 20172019 and 20162018
| Note | 2017 | 2016 | Note | 2019 | 2018 | ||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | ||||||||||||||||||
| Assets | |||||||||||||||||||||
| Current assets | |||||||||||||||||||||
| Cash and cash equivalents | 6 | 49,216 | 80,215 | 6 | 68,266 | 49,067 | |||||||||||||||
| Trade and other receivables | 7 | 99,518 | 81,121 | 7 | 120,530 | 102,969 | |||||||||||||||
| Income tax prepayments | 27,755 | 46,546 | 30,191 | 36,748 | |||||||||||||||||
| Inventories | 8 | 373,020 | 346,535 | 8 | 519,004 | 424,783 | |||||||||||||||
| Prepayments | 3,846 | 7,909 | 10,339 | 5,765 | |||||||||||||||||
| Total current assets | 553,355 | 562,326 | 748,330 | 619,332 | |||||||||||||||||
| Assets held for distribution | 1.1 | — | 338,411 | ||||||||||||||||||
| Non-current assets | |||||||||||||||||||||
| Trade and other receivables | 7 | 16,207 | 25,120 | 7 | 4,681 | 4,532 | |||||||||||||||
| Prepayments | 533 | 1,222 | 151 | 342 | |||||||||||||||||
| Available-for-sale financial investments | 9 | 21,206 | 657 | ||||||||||||||||||
| Derivative financial instruments | 30 | 489 | 69,912 | ||||||||||||||||||
| Property, plant and equipment | 10 | 2,208,553 | 2,273,048 | ||||||||||||||||||
| Exploration, evaluation and intangible assets | 11 | 13,416 | 43,028 | ||||||||||||||||||
| Financial investments designated at fair value through other comprehensive income | 9 | 18,224 | 26,883 | ||||||||||||||||||
| Other financial instruments | 30 | - | 12,268 | ||||||||||||||||||
| Property, plant and equipment, net | 10 | 2,100,682 | 2,152,724 | ||||||||||||||||||
| Intangible assets | 11 | 47,366 | 40,881 | ||||||||||||||||||
| Goodwill | 12 | 4,459 | 4,459 | ||||||||||||||||||
| Deferred income tax assets | 15 | 142 | 6,350 | 16 | 7,419 | 3,098 | |||||||||||||||
| Other assets | 214 | 549 | 246 | 105 | |||||||||||||||||
| Total non-current assets | 2,260,760 | 2,419,886 | 2,183,228 | 2,245,292 | |||||||||||||||||
| Total assets | 2,814,115 | 3,320,623 | 2,931,558 | 2,864,624 | |||||||||||||||||
| Liabilities and equity | |||||||||||||||||||||
| Current liabilities | |||||||||||||||||||||
| Trade and other payables | 12 | 177,995 | 142,773 | 13 | 237,299 | 154,565 | |||||||||||||||
| Income tax payable | 2,431 | 3,464 | |||||||||||||||||||
| Financial obligations | 15 | 98,774 | 60,822 | ||||||||||||||||||
| Provisions | 13 | 24,575 | 31,711 | 14 | 16,603 | 46,453 | |||||||||||||||
| Total current liabilities | 205,001 | 177,948 | 352,676 | 261,840 | |||||||||||||||||
| Liabilities directly related to assets held for distribution | 1.1 | — | 2,704 | ||||||||||||||||||
| Non-current liabilities | |||||||||||||||||||||
| Interest-bearing loans and borrowings | 14 | 965,290 | 998,148 | ||||||||||||||||||
| Financial obligations | 15 | 1,003,130 | 1,022,555 | ||||||||||||||||||
| Other financial instruments | 30 | 1,302 | - | ||||||||||||||||||
| Lease liabilities | 57 | - | |||||||||||||||||||
| Other non-current provisions | 13 | 28,293 | 22,042 | 14 | 7,643 | 5,377 | |||||||||||||||
| Deferred income tax liabilities | 15 | 108,823 | 139,752 | 16 | 145,099 | 123,489 | |||||||||||||||
| Total non-current liabilities | 1,102,406 | 1,159,942 | 1,157,231 | 1,151,421 | |||||||||||||||||
| Total liabilities | 1,307,407 | 1,340,594 | |||||||||||||||||||
| Total liability | 1,509,907 | 1,413,261 | |||||||||||||||||||
| Equity | 16 | 17 | |||||||||||||||||||
| Capital stock | 423,868 | 531,461 | 423,868 | 423,868 | |||||||||||||||||
| Investment shares | 40,279 | 50,503 | 40,279 | 40,279 | |||||||||||||||||
| Treasury shares | (119,005 | ) | (108,248 | ) | |||||||||||||||||
| Investment shares holds in treasury | (121,258 | ) | (121,258 | ) | |||||||||||||||||
| Additional paid-in capital | 432,779 | 545,165 | 432,779 | 432,779 | |||||||||||||||||
| Legal reserve | 160,686 | 188,075 | 168,636 | 168,356 | |||||||||||||||||
| Other reserves | (43,699 | ) | (16,602 | ) | |||||||||||||||||
| Other accumulated comprehensive results | (19,853 | ) | (11,946 | ) | |||||||||||||||||
| Retained earnings | 611,652 | 677,086 | 497,200 | 519,285 | |||||||||||||||||
| Equity attributable to equity holders of the parent | 1,506,560 | 1,867,440 | |||||||||||||||||||
| Non-controlling interests | 148 | 112,589 | |||||||||||||||||||
| Total equity | 1,506,708 | 1,980,029 | 1,421,651 | 1,451,363 | |||||||||||||||||
| Total liabilities and equity | 2,814,115 | 3,320,623 | |||||||||||||||||||
| Total liability and equity | 2,931,558 | 2,864,624 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statement of profit or loss
For the years ended December 31, 2019, 2018 and 2017
| Note | 2019 | 2018 | 2017 | |||||||||||
| S/(000) | S/(000) | S/(000) | ||||||||||||
| Sales of goods | 18 | 1,392,701 | 1,262,934 | 1,220,750 | ||||||||||
| Cost of sales | 19 | (905,806 | ) | (796,206 | ) | (732,956 | ) | |||||||
| Gross profit | 486,895 | 466,728 | 487,794 | |||||||||||
| Operating income (expenses) | ||||||||||||||
| Administrative expenses | 20 | (174,482 | ) | (172,141 | ) | (195,617 | ) | |||||||
| Selling and distribution expenses | 21 | (44,533 | ) | (44,117 | ) | (41,678 | ) | |||||||
| Impairment on brine project | 1.3 | - | - | (47,582 | ) | |||||||||
| Other operating income (expense), net | 23 | 2,645 | (8,697 | ) | (4,357 | ) | ||||||||
| Total operating expenses, net | (216,370 | ) | (224,955 | ) | (289,234 | ) | ||||||||
| Operating profit | 270,525 | 241,773 | 198,560 | |||||||||||
| Other income (expenses) | ||||||||||||||
| Finance income | 24 | 2,576 | 2,367 | 5,842 | ||||||||||
| Finance costs | 25 | (77,986 | ) | (87,338 | ) | (73,759 | ) | |||||||
| (Net loss ) net gain on the valuation of trading derivative financial instruments | (1,491 | ) | 2,603 | - | ||||||||||
| Cumulative net loss on settlement of derivative financial instruments | 15 | - | (34,887 | ) | - | |||||||||
| Gain (loss) from exchange difference, net | 5 | 729 | (8,377 | ) | (2,226 | ) | ||||||||
| Total other expenses, net | (76,172 | ) | (125,632 | ) | (70,143 | ) | ||||||||
| Profit before income tax | 194,353 | 116,141 | 128,417 | |||||||||||
| Income tax expense | 16 | (62,306 | ) | (40,995 | ) | (47,032 | ) | |||||||
| Profit for the year from continuing operations | 132,047 | 75,146 | 81,385 | |||||||||||
| Loss for the year from discontinued operations | 1.2 | - | - | (754 | ) | |||||||||
| Profit for the year | 132,047 | 75,146 | 80,631 | |||||||||||
| Attributable to: | ||||||||||||||
| Equity holders of the parent | 132,047 | 76,699 | 93,782 | |||||||||||
| Non-controlling interests | - | (1,553 | ) | (13,151 | ) | |||||||||
| 132,047 | 75,146 | 80,631 | ||||||||||||
| Earnings per share | ||||||||||||||
| Basic and diluted profit from continuing and discontinued operations attributable to equity holders of common shares and investment shares of Cementos Pacasmayo S.A.A. (S/ per share) | 27 | 0.31 | 0.18 | 0.21 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statements of other comprehensive income
For the years ended December 31, 2019, 2018 and 2017
| Note | 2019 | 2018 | 2017 | |||||||||||
| S/(000) | S/(000) | S/(000) | ||||||||||||
| Profit for the year | 132,047 | 75,146 | 80,631 | |||||||||||
| Other comprehensive income | ||||||||||||||
| Other comprehensive income to not be reclassified to profit or loss in subsequent periods: | ||||||||||||||
| Change in fair value of financial instruments designated at fair value through other comprehensive income | 9(a) | (8,659 | ) | 5,677 | 37 | |||||||||
| Deferred income tax | 16 | 2,554 | (1,675 | ) | 62 | |||||||||
| Other comprehensive income to be reclassified to profit or loss in subsequent periods: | ||||||||||||||
| Transfer to profit or loss of the year of net loss on settlement of derivate financial statements | 15 | - | 34,887 | - | ||||||||||
| Transfer to profit or loss of the net loss on derivate financial statements that changed to trading condition | - | 4,275 | - | |||||||||||
| (Net loss) net gain on cash flows hedges | 30(a) | (2,556 | ) | 201 | (38,230 | ) | ||||||||
| Transfer to profit or loss of fair value of financial instruments designated at fair value through other comprehensive income sold | - | - | (243 | ) | ||||||||||
| Deferred income tax | 16 | 754 | (11,612 | ) | 11,277 | |||||||||
| Other comprehensive income for the year, net of income tax | (7,907 | ) | 31,753 | (27,097 | ) | |||||||||
| Total comprehensive income for the year, net of income tax | 124,140 | 106,899 | 53,534 | |||||||||||
| Total comprehensive income attributable to: | ||||||||||||||
| Equity holders of the parent | 124,140 | 108,452 | 66,685 | |||||||||||
| Non-controlling interests | - | (1,553 | ) | (13,151 | ) | |||||||||
| 124,140 | 106,899 | 53,534 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statementsstatement of profit or losschanges in equity
For the years ended December 31, 2017, 20162019, 2018 and 20152017
| Note | 2017 | 2016 | 2015 | ||||||||||||
| S/(000) | S/(000) | S/(000) | |||||||||||||
| Sales of goods | 17 | 1,225,639 | 1,240,169 | 1,231,015 | |||||||||||
| Cost of sales | 18 | (732,956 | ) | (736,530 | ) | (695,757 | ) | ||||||||
| Gross profit | 492,683 | 503,639 | 535,258 | ||||||||||||
| Operating income (expenses) | |||||||||||||||
| Administrative expenses | 19 | (195,617 | ) | (193,376 | ) | (179,723 | ) | ||||||||
| Selling and distribution expenses | 20 | (46,567 | ) | (39,899 | ) | (31,481 | ) | ||||||||
| Impairment on brine project | 1 | (47,582 | ) | — | — | ||||||||||
| Other operating income (expense), net | 22 | (4,357 | ) | 2,444 | 3,913 | ||||||||||
| Total operating expenses, net | (294,123 | ) | (230,831 | ) | (207,291 | ) | |||||||||
| Operating profit | 198,560 | 272,808 | 327,967 | ||||||||||||
| Other income (expenses) | |||||||||||||||
| Finance income | 23 | 5,842 | 3,240 | 3,416 | |||||||||||
| Finance costs | 24 | (73,759 | ) | (75,397 | ) | (36,807 | ) | ||||||||
| (Loss) gain from exchange difference, net | 5 | (2,226 | ) | (2,541 | ) | 12,194 | |||||||||
| Total other expenses, net | (70,143 | ) | (74,698 | ) | (21,197 | ) | |||||||||
| Profit before income tax | 128,417 | 198,110 | 306,770 | ||||||||||||
| Income tax expense | 15 | (47,032 | ) | (78,627 | ) | (89,383 | ) | ||||||||
| Profit for the year from continuing operations | 81,385 | 119,483 | 217,387 | ||||||||||||
| Loss for the year from discontinued operations | 1.1 | (754 | ) | (6,589 | ) | (5,720 | ) | ||||||||
| Profit for the year | 80,631 | 112,894 | 211,667 | ||||||||||||
| Attributable to: | |||||||||||||||
| Equity holders of the parent | 93,782 | 116,174 | 215,532 | ||||||||||||
| Non-controlling interests | (13,151 | ) | (3,280 | ) | (3,865 | ) | |||||||||
| 80,631 | 112,894 | 211,667 | |||||||||||||
| Earnings per share | 26 | ||||||||||||||
| Basic profit from continuing and discontinued operations attributable to equity holders of common shares and investment shares of Cementos Pacasmayo S.A.A. (S/ per share) | 0.21 | 0.21 | 0.38 | ||||||||||||
| Attributable to equity holders of the parent | ||||||||||||||||||||||||||||||||||||||||||||
| Capital stock | Investment shares | Treasury shares | Additional paid-in capital | Legal reserve | Unrealized gain (loss) on financial instruments designated at fair value | Unrealized gain on cash flow hedge | Retained earnings | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2017 | 531,461 | 50,503 | (108,248 | ) | 545,165 | 188,075 | 145 | (16,747 | ) | 677,086 | 1,867,440 | 112,589 | 1,980,029 | |||||||||||||||||||||||||||||||
| Profit for the year | - | - | - | - | - | - | - | 93,782 | 93,782 | (13,151 | ) | 80,631 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | (145 | ) | (26,952 | ) | - | (27,097 | ) | - | (27,097 | ) | |||||||||||||||||||||||||||||
| Total comprehensive income | - | - | - | - | - | (145 | ) | (26,952 | ) | 93,782 | 66,685 | (13,151 | ) | 53,534 | ||||||||||||||||||||||||||||||
| Appropriation of legal reserve, note 17(e) | - | - | - | - | 9,379 | - | - | (9,379 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Contribution of non-controlling interest | - | - | - | - | - | - | - | - | - | 491 | 491 | |||||||||||||||||||||||||||||||||
| Acquisition of investments shares holds in treasury, note 17(c) | - | - | (34,216 | ) | - | - | - | - | - | (34,216 | ) | - | (34,216 | ) | ||||||||||||||||||||||||||||||
| Splitting effects of equity block, note 1.2 | (107,593 | ) | (10,224 | ) | 23,459 | (118,569 | ) | (36,957 | ) | - | - | - | (249,884 | ) | (100,357 | ) | (350,241 | ) | ||||||||||||||||||||||||||
| Dividends, note 17(g) | - | - | - | - | - | - | - | (149,837 | ) | (149,837 | ) | - | (149,837 | ) | ||||||||||||||||||||||||||||||
| Terminated dividends, note 17(g) | - | - | - | - | 189 | - | - | - | 189 | - | 189 | |||||||||||||||||||||||||||||||||
| Impairment on brine project, note 1.3 | - | - | - | 6,759 | - | - | - | - | 6,759 | - | 6,759 | |||||||||||||||||||||||||||||||||
| Other adjustments of non-controlling interests | - | - | - | (576 | ) | - | - | - | - | (576 | ) | 576 | - | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 423,868 | 40,279 | (119,005 | ) | 432,779 | 160,686 | - | (43,699 | ) | 611,652 | 1,506,560 | 148 | 1,506,708 | |||||||||||||||||||||||||||||||
| Profit for the year | - | - | - | - | - | - | - | 76,699 | 76,699 | (1,553 | ) | 75,146 | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | 4,002 | 27,751 | - | 31,753 | - | 31,753 | |||||||||||||||||||||||||||||||||
| Total comprehensive income | - | - | - | - | - | 4,002 | 27,751 | 76,699 | 108,452 | (1,553 | ) | 106,899 | ||||||||||||||||||||||||||||||||
| Appropriation of legal reserve, note 17(e) | - | - | - | - | 7,670 | - | - | (7,670 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Contribution of non-controlling interest | - | - | - | - | - | - | - | - | - | 1,405 | 1,405 | |||||||||||||||||||||||||||||||||
| Dividends, note 17(g) | - | - | - | - | - | - | - | (161,396 | ) | (161,396 | ) | - | (161,396 | ) | ||||||||||||||||||||||||||||||
| Other | - | - | (2,253 | ) | - | - | - | - | - | (2,253 | ) | - | (2,253 | ) | ||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | 423,868 | 40,279 | (121,258 | ) | 432,779 | 168,356 | 4,002 | (15,948 | ) | 519,285 | 1,451,363 | - | 1,451,363 | |||||||||||||||||||||||||||||||
| Change in accounting policy, note 2.3.19 | - | - | - | - | - | - | - | (13 | ) | (13 | ) | - | (13 | ) | ||||||||||||||||||||||||||||||
| Restated total equity as of January 1, 2019 | 423,868 | 40,279 | (121,258 | ) | 432,779 | 168,356 | 4,002 | (15,948 | ) | 519,272 | 1,451,350 | - | 1,451,350 | �� | ||||||||||||||||||||||||||||||
| Profit for the year | - | - | - | - | - | - | - | 132,047 | 132,047 | - | 132,047 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | (6,105 | ) | (1,802 | ) | - | (7,907 | ) | - | (7,907 | ) | |||||||||||||||||||||||||||||
| Total comprehensive income | - | - | - | - | - | (6,105 | ) | (1,802 | ) | 132,047 | 124,140 | - | 124,140 | |||||||||||||||||||||||||||||||
| Terminated dividends, note 17 (g) | - | - | - | - | 280 | - | - | - | 280 | - | 280 | |||||||||||||||||||||||||||||||||
| Dividends, note 17(g) | - | - | - | - | - | - | - | (154,119 | ) | (154,119 | ) | - | (154,119 | ) | ||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 423,868 | 40,279 | (121,258 | ) | 432,779 | 168,636 | (2,103 | ) | (17,750 | ) | 497,200 | 1,421,651 | - | 1,421,651 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statements of other comprehensive income
For the years ended December 31, 2017, 2016 and 2015
| Note | 2017 | 2016 | 2015 | ||||||||||||
| S/(000) | S/(000) | S/(000) | |||||||||||||
| Profit for the year | 80,631 | 112,894 | 211,667 | ||||||||||||
| Other comprehensive income | |||||||||||||||
| Other comprehensive income to be reclassified to profit or loss in subsequent periods (net of income tax): | |||||||||||||||
| Change in fair value of available-for-sale financial investments | 9(a) | 37 | 221 | (308 | ) | ||||||||||
| Net (loss) gain on cash flows hedges | 30(b) | (38,230 | ) | (39,511 | ) | 10,832 | |||||||||
| Deferred income tax related to component of other comprehensive income | 15 | 11,339 | 11,039 | (4,019 | ) | ||||||||||
| Transfer to profit or loss of fair value of available-for-sale financial investments sold | 9(c) | (243 | ) | — | — | ||||||||||
| Other comprehensive income (loss) for the year, net of income tax | (27,097 | ) | (28,251 | ) | 6,505 | ||||||||||
| Total comprehensive income for the year, net of income tax | 53,534 | 84,643 | 218,172 | ||||||||||||
| Total comprehensive income attributable to: | |||||||||||||||
| Equity holders of the parent | 66,685 | 87,923 | 222,037 | ||||||||||||
| Non-controlling interests | (13,151 | ) | (3,280 | ) | (3,865 | ) | |||||||||
| 53,534 | 84,643 | 218,172 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statements of changes in equity
For the years ended December 31, 2017, 2016 and 2015
| Attributable to equity holders of the parent | ||||||||||||||||||||||||||||||||||
| Capital stock | Investment shares | Treasury shares | Additional paid-in capital | Legal reserve | Unrealized gain (loss) on available-for-sale investments | Unrealized gain on cash flow hedge | Retained earnings | Total | Non-controlling interests | Total equity | ||||||||||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | ||||||||||||||||||||||||
| Balance as of January 1, 2015 | 531,461 | 50,503 | — | 553,791 | 154,905 | 218 | 4,926 | 696,736 | 1,992,540 | 78,145 | 2,070,685 | |||||||||||||||||||||||
| Profit for the year | — | — | — | — | — | — | — | 215,532 | 215,532 | (3,865 | ) | 211,667 | ||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | (229 | ) | 6,734 | — | 6,505 | — | 6,505 | ||||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | (229 | ) | 6,734 | 215,532 | 222,037 | (3,865 | ) | 218,172 | |||||||||||||||||||||
| Appropriation of legal reserve, note 16(e) | — | — | — | — | 21,553 | — | — | (21,553 | ) | — | — | — | ||||||||||||||||||||||
| Acquisition of treasury shares, note 16(c) | — | — | (108,248 | ) | — | — | — | — | — | (108,248 | ) | — | (108,248 | ) | ||||||||||||||||||||
| Dividends, note 16(g) | — | — | — | — | — | — | — | (162,950 | ) | (162,950 | ) | — | (162,950 | ) | ||||||||||||||||||||
| Contribution of non-controlling interests, note 16(h) | — | — | — | — | — | — | — | — | — | 28,475 | 28,475 | |||||||||||||||||||||||
| Other adjustments of non-controlling interests, note 16(h) | — | — | — | (325 | ) | — | — | — | — | (325 | ) | 325 | — | |||||||||||||||||||||
| Balance as of December 31, 2015 | 531,461 | 50,503 | (108,248 | ) | 553,466 | 176,458 | (11 | ) | 11,660 | 727,765 | 1,943,054 | 103,080 | 2,046,134 | |||||||||||||||||||||
| Profit for the year | — | — | — | — | — | — | — | 116,174 | 116,174 | (3,280 | ) | 112,894 | ||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 156 | (28,407 | ) | — | (28,251 | ) | — | (28,251 | ) | ||||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | 156 | (28,407 | ) | 116,174 | 87,923 | (3,280 | ) | 84,643 | |||||||||||||||||||||
| Appropriation of legal reserve, note 16(e) | — | — | — | — | 11,617 | — | — | (11,617 | ) | — | — | — | ||||||||||||||||||||||
| Dividends, note 16(g) | — | — | — | — | — | — | — | (155,236 | ) | (155,236 | ) | — | (155,236 | ) | ||||||||||||||||||||
| Contribution of non-controlling interests, note 16(h) | — | — | — | — | — | — | — | — | — | 4,488 | 4,488 | |||||||||||||||||||||||
| Other adjustments of non-controlling interests, note 16(h) | — | — | — | (8,301 | ) | — | — | — | — | (8,301 | ) | 8,301 | — | |||||||||||||||||||||
| Balance as of December 31, 2016 | 531,461 | 50,503 | (108,248 | ) | 545,165 | 188,075 | 145 | (16,747 | ) | 677,086 | 1,867,440 | 112,589 | 1,980,029 | |||||||||||||||||||||
| Profit for the year | — | — | — | — | — | — | — | 93,782 | 93,782 | (13,151 | ) | 80,631 | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (145 | ) | (26,952 | ) | — | (27,097 | ) | — | (27,097 | ) | |||||||||||||||||||
| Total comprehensive income | — | — | — | — | — | (145 | ) | (26,952 | ) | 93,782 | 66,685 | (13,151 | ) | 53,534 | ||||||||||||||||||||
| Appropriation of legal reserve, note 16(e) | — | — | — | — | 9,379 | — | — | (9,379 | ) | — | — | — | ||||||||||||||||||||||
| Contribution of non-controlling interests, note 16(h) | — | — | — | — | — | — | — | — | — | 491 | 491 | |||||||||||||||||||||||
| Acquisition of treasury shares, note 16(c) | — | — | (34,216 | ) | — | — | — | — | — | (34,216 | ) | — | (34,216 | ) | ||||||||||||||||||||
| Splitting effects of equity block, note 1.1 | (107,593 | ) | (10,224 | ) | 23,459 | (118,569 | ) | (36,957 | ) | — | — | — | (249,884 | ) | (100,357 | ) | (350,241 | ) | ||||||||||||||||
| Dividends, note 16(g) | — | — | — | — | — | — | — | (149,837 | ) | (149,837 | ) | — | (149,837 | ) | ||||||||||||||||||||
| Terminated dividends, note 16(g) | — | — | — | — | 189 | — | — | — | 189 | — | 189 | |||||||||||||||||||||||
| Impairment on brine project, note 1.2 | — | — | — | 6,759 | — | — | — | — | 6,759 | — | 6,759 | |||||||||||||||||||||||
| Other adjustments of non-controlling interests, note 16(h) | — | — | — | (576 | ) | — | — | — | — | (576 | ) | 576 | — | |||||||||||||||||||||
| Balance as of December 31, 2017 | 423,868 | 40,279 | (119,005 | ) | 432,779 | 160,686 | — | (43,699 | ) | 611,652 | 1,506,560 | 148 | 1,506,708 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Consolidated statementsstatement of cash flows
For the years ended December 31, 2017, 20162019, 2018 and 20152017
| Note | 2017 | 2016 | 2015 | ||||||||||||
| S/(000) | S/(000) | S/(000) | |||||||||||||
| Operating activities | |||||||||||||||
| Profit before income tax | 127,112 | 185,122 | 297,909 | ||||||||||||
| Non-cash adjustments to reconcile profit before income tax to net cash flows | |||||||||||||||
| Depreciation and amortization | 10 and 11 | 124,206 | 111,266 | 70,810 | |||||||||||
| Finance costs | 24 | 73,759 | 75,397 | 36,807 | |||||||||||
| Impairment on brine project | 1.2 | 47,582 | — | — | |||||||||||
| Long-term incentive plan | 21 | 11,401 | 16,088 | 14,159 | |||||||||||
| Provision of impairment of inventories, net | 8 | 2,718 | 3,493 | 8,909 | |||||||||||
| Adjustment as a result of physical inventories | 2,700 | 4,683 | 2,548 | ||||||||||||
| Estimation of impairment of trade and other accounts receivables | 20 | 1,190 | 114 | 315 | |||||||||||
| Unrealized exchange difference related to monetary transactions | 185 | (1,268 | ) | (10,029 | ) | ||||||||||
| Finance income | 23 | (5,842 | ) | (3,251 | ) | (3,478 | ) | ||||||||
| Net (gain) loss on disposal of property, plant and equipment | 22 | (42 | ) | 3,445 | (6,674 | ) | |||||||||
| Net gain on sale of available-for-sale investments | 9(c) | (243 | ) | — | — | ||||||||||
| Change in the estimation of rehabilitation costs | 22 | — | 5,259 | 514 | |||||||||||
| Other operating, net | 477 | 220 | 1,217 | ||||||||||||
| Working capital adjustments | |||||||||||||||
| (Increase) decrease in trade and other receivables | (31,178 | ) | 28,079 | (6,230 | ) | ||||||||||
| Decrease (increase) in prepayments | 4,662 | (734 | ) | (1,985 | ) | ||||||||||
| (Increase) decrease in inventories | (31,863 | ) | (49,967 | ) | 5,135 | ||||||||||
| Increase (decrease) in trade and other payables | 14,083 | (36,203 | ) | 2,949 | |||||||||||
| 340,907 | 341,743 | 412,876 | |||||||||||||
| Interest received | 2,251 | 2,619 | 3,176 | ||||||||||||
| Interest paid | (52,346 | ) | (48,000 | ) | (43,200 | ) | |||||||||
| Income tax paid | (40,404 | ) | (54,683 | ) | (97,208 | ) | |||||||||
| Net cash flows from operating activities | 250,408 | 241,679 | 275,644 | ||||||||||||
| Which includes cash used in discontinued operations for | 1.1 | (2,611 | ) | (14,647 | ) | (9,421 | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Note | 2019 | 2018 | 2017 | |||||||||||
| S/(000) | S/(000) | S/(000) | ||||||||||||
| Operating activities | ||||||||||||||
| Profit before income tax | 194,353 | 116,141 | 127,112 | |||||||||||
| Non-cash adjustments to reconcile profit before income tax to net cash flows | ||||||||||||||
| Depreciation and amortization | 10 and 11 | 129,818 | 129,779 | 124,206 | ||||||||||
| Finance costs | 25 | 77,986 | 87,338 | 73,759 | ||||||||||
| Long-term incentive plan | 22 | 6,523 | 9,495 | 11,401 | ||||||||||
| Provision of impairment of inventories, net | 8 | 2,498 | 3,808 | 2,718 | ||||||||||
| Net loss (net gain) on disposal of property, plant and equipment and intangible assets | 23 | 1,846 | (4,599 | ) | (42 | ) | ||||||||
| Net loss (net gain) on the valuation of trading derivate financial instruments | 1,491 | (2,603 | ) | - | ||||||||||
| Accumulated net loss due to settlement of derivative financial instruments | - | 34,887 | - | |||||||||||
| Allowance for expected credit losses | 7(d) | 1,452 | 9,717 | 1,190 | ||||||||||
| Adjustment as a result of physical inventories | 939 | 1,910 | 2,700 | |||||||||||
| Impairment on brine project | 1.3 | - | - | 47,582 | ||||||||||
| Unrealized exchange difference related to monetary transactions | (483 | ) | (392 | ) | 185 | |||||||||
| Finance income | 24 | (2,576 | ) | (2,367 | ) | (5,842 | ) | |||||||
| Other operating, net | 728 | (1,168 | ) | 234 | ||||||||||
| Working capital adjustments | ||||||||||||||
| Increase in trade and other receivables | (23,391 | ) | (3,416 | ) | (31,178 | ) | ||||||||
| (Increase) decrease in prepayments | (4,383 | ) | (1,728 | ) | 4,662 | |||||||||
| Increase in inventories | (97,657 | ) | (59,637 | ) | (31,863 | ) | ||||||||
| (Decrease) increase in trade and other payables | (4,220 | ) | (6,409 | ) | 14,083 | |||||||||
| 284,924 | 310,756 | 340,907 | ||||||||||||
| Interest received | 2,252 | 2,353 | 2,251 | |||||||||||
| Interest paid | (47,155 | ) | (55,098 | ) | (52,346 | ) | ||||||||
| Income tax paid | (34,884 | ) | (54,383 | ) | (40,404 | ) | ||||||||
| Net cash flows from operating activities | 205,137 | 203,628 | 250,408 | |||||||||||
| Which includes cash used in discontinued operations for | 1.2 | - | - | (2,611 | ) | |||||||||
Consolidated statement of cash flows(continued)
| 2017 | 2016 | 2015 | Note | 2019 | 2018 | 2017 | ||||||||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | |||||||||||||||||||||||
| Investing activities | ||||||||||||||||||||||||||||
| Purchase of property, plant and equipment | (71,355 | ) | (126,449 | ) | (471,179 | ) | (77,680 | ) | (80,214 | ) | (71,355 | ) | ||||||||||||||||
| Purchase of exploration and evaluation assets | (6,331 | ) | (10,619 | ) | (12,187 | ) | ||||||||||||||||||||||
| Purchase of intangible assets | (5,335 | ) | (31,052 | ) | (6,331 | ) | ||||||||||||||||||||||
| Loans granted | (1,117 | ) | - | - | ||||||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 6,353 | 1,441 | 7,499 | 4,199 | 12,441 | 6,353 | ||||||||||||||||||||||
| Proceeds from sale of available-for-sale investment | 9(c) | 694 | — | — | ||||||||||||||||||||||||
| Proceed loans granted | 354 | - | - | |||||||||||||||||||||||||
| Proceeds from sale of financial instruments designated at fair value through other comprehensive income | 9 | - | - | 694 | ||||||||||||||||||||||||
| Net cash flows used in investing activities | (70,639 | ) | (135,627 | ) | (475,867 | ) | (79,579 | ) | (98,825 | ) | (70,639 | ) | ||||||||||||||||
| Which includes cash used in investment activities of discontinued operations for | 1.1 | (6,410 | ) | (22,352 | ) | (42,737 | ) | 1.2 | - | - | (6,410 | ) | ||||||||||||||||
| Financing activities | ||||||||||||||||||||||||||||
| Loan received | 29 | 638,281 | 656,845 | - | ||||||||||||||||||||||||
| Income from settlement of derivative financial instruments | 1,458 | 22,789 | - | |||||||||||||||||||||||||
| Payment for senior note purchase | 29 | - | (572,060 | ) | - | |||||||||||||||||||||||
| Paid loan | 29 | (610,999 | ) | (16,090 | ) | - | ||||||||||||||||||||||
| Dividends paid | (124,993 | ) | (154,401 | ) | (162,168 | ) | 29 | (120,647 | ) | (171,790 | ) | (124,993 | ) | |||||||||||||||
| Payment of hedge finance cost | 29 | (14,935 | ) | (26,443 | ) | (26,708 | ) | |||||||||||||||||||||
| Purchase of treasury shares | 16(c) | (34,216 | ) | — | (108,218 | ) | 17(c) | - | - | (34,216 | ) | |||||||||||||||||
| Payment of hedge finance cost | (26,708 | ) | (27,624 | ) | (15,898 | ) | ||||||||||||||||||||||
| Contribution of non-controlling interests | 16(h) | 491 | 4,488 | 28,475 | 1.3 | - | 1,405 | 491 | ||||||||||||||||||||
| Net cash flows used in financing activities | (185,426 | ) | (177,537 | ) | (257,809 | ) | (106,842 | ) | (105,344 | ) | (185,426 | ) | ||||||||||||||||
| Which includes cash provided by financing activities of discontinued operations for | 1.1 | — | 4,015 | 28,198 | ||||||||||||||||||||||||
| Net decrease in cash and cash equivalents | (5,657 | ) | (71,485 | ) | (458,032 | ) | ||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 18,716 | (541 | ) | (5,657 | ) | |||||||||||||||||||||||
| Net foreign exchange difference | (185 | ) | 1,268 | 35,540 | 483 | 392 | (185 | ) | ||||||||||||||||||||
| Cash and cash equivalents as of January 1 | 6 | 80,215 | 158,007 | 580,499 | 6 | 49,067 | 49,216 | 80,215 | ||||||||||||||||||||
| Cash transferred to discontinued operations | 1.1 | (34,178 | ) | — | — | |||||||||||||||||||||||
| Cash transferred to held assets for distribution | 1.2 | - | - | (34,178 | ) | |||||||||||||||||||||||
| Change in cash and cash equivalents of discontinued operations | 9,021 | (7,575 | ) | — | 1.2 | - | - | 9,021 | ||||||||||||||||||||
| Cash and cash equivalents as of December 31 | 6 | 49,216 | 80,215 | 158,007 | 6 | 68,266 | 49,067 | 49,216 | ||||||||||||||||||||
| Transactions with no effect on cash flows: | ||||||||||||||||||||||||||||
| Transactions with no effect in cash flows: | ||||||||||||||||||||||||||||
| Unrealized exchange difference related to monetary transactions | 185 | (1,268 | ) | (10,029 | ) | (483 | ) | (392 | ) | 185 | ||||||||||||||||||
| Purchase of property, plant and equipment, pending liquidation | — | — | 7,441 | |||||||||||||||||||||||||
| Sale of property, plant and equipment, pending collection | — | 8,419 | 4,034 | |||||||||||||||||||||||||
| Deferred income tax on costs related to the purchase of treasury shares | 15 | — | — | 30 | ||||||||||||||||||||||||
| Derecognition of impaired assets | - | 3,401 | - | |||||||||||||||||||||||||
| Outstanding accounts payable related to acquisition of property, plant and equipment | 8,698 | 4,627 | 5,368 | |||||||||||||||||||||||||
See transfer of net assets and impairment on brine project that did not generated cash flows in notes 1.11.2 and 1.2.1.3.
The accompanying notes are an integral part of these consolidated financial statements.
Cementos Pacasmayo S.A.A. and Subsidiaries
Notes to the consolidated financial statements
As of December 31, 2017, 20162019, 2018 and 20152017
| 1. | Corporate information |
Cementos Pacasmayo S.A.A. (hereinafter “the Company”) was incorporated in 1957 and, under the Peruvian General Corporation Law, is an open stock corporation, with publicly traded shares.its shares are listed in the Lima and New York Stock Exchanges. The Company is a subsidiary of Inversiones ASPI S.A., which holdsheld 50.01 percent of the Company’s common shares as of December 31, 20172019 and 2016.2018. The Company’s registered address is Calle La Colonia No. #150,No.150, Urbanización El Vivero, Santiago de Surco, Lima, Peru.
The Company’s main activity is the production and marketing of cement, blocks,precast, concrete and quicklime in La Libertad region, in the North of Peru.
The issuance of the consolidated financial statements of the Company and its subsidiaries (hereinafter “the Group”) as offor the year ended December 31, 2017 and 20162019 was authorized by the Company’s ManagementAudit Committee, delegated by the Board of Directors, on April 27, 2018.29, 2020. The consolidated financial statements as of December 31, 2018 and for the year ended that date were approved by the General Shareholders’ Meeting on March 11, 2019.
As of December 31, 2017,2019 and 2018, the consolidated financial statements comprisecomprised the financial statements of the Company and its subsidiaries: Cementos Selva S.A. and subsidiaries, Distribuidora Norte Pacasmayo S.R.L., and subsidiary, Empresa de Transmisión Guadalupe S.A.C., Salmueras Sudamericanas S.A. and Calizas del Norte S.A.C. (in liquidation). As of the date of the consolidated financial statements, the Company maintained a 100 percent interest in all of its subsidiaries.
The main activities of the subsidiaries incorporated in the consolidated financial statements are described as follows:
| - | Cementos Selva S.A. is engaged in production and marketing of cement and other construction materials in the northeast region of Peru. Also, it holds 100 percent of the shares in Dinoselva Iquitos S.A.C. (a cement and construction materials distributor in the north of Peru, which also produces and sells |
| - | Distribuidora Norte Pacasmayo S.R.L. is mainly engaged in selling cement produced by the Company. Additionally, it produces and sells |
F-9
Notes to the consolidated financial statements (continue)
| - | Empresa de Transmisión Guadalupe S.A.C. is mainly engaged in providing electric energy transmission services to the Company. |
| - | Salmueras Sudamericanas S.A. (“Salmueras”) |
| - | Calizas del Norte S.A.C. (in liquidation) |
| - | Soluciones Takay S.A.C., |
As explained above,The table presented below shows the summary of the main captions of the audited financial statements of the subsidiaries controlled by the Group as of December 31, 20172019, 2018 and 2016, the Company has a 100% interest in all its subsidiaries, except the following listed below:2017:
| 2017 | 2016 | |||||
| Subsidiary | % | % | ||||
| Salmueras Sudamericanas S.A. | 74.90 | 74.90 | ||||
| Fosfatos del Pacífico S.A. | — | 70.00 |
| Assets | Liabilities | Net equity | Net income (loss) | |||||||||||||||||||||||||||||||||
| Entity | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | ||||||||||||||||||||||||||||
| Cementos Selva S.A. and subsidiaries | 279,818 | 240,844 | 41,506 | 30,149 | 238,312 | 210,695 | 27,713 | 24,261 | 37,467 | |||||||||||||||||||||||||||
| Distribuidora Norte Pacasmayo S.R.L. and subsidiary | 326,949 | 308,158 | 184,904 | 178,905 | 142,045 | 129,253 | 13,108 | 4,867 | (220 | ) | ||||||||||||||||||||||||||
| Empresa de Transmisión Guadalupe S.A.C. | 46,068 | 41,971 | 4,941 | 846 | 41,127 | 41,125 | 588 | 386 | 124 | |||||||||||||||||||||||||||
| Salmueras Sudamericanas S.A., note 1.3 | 213 | 46 | 35 | 674 | 178 | (628 | ) | (94 | ) | (2,620 | ) | (50,942 | ) | |||||||||||||||||||||||
| Calizas del Norte S.A.C. (in liquidation) | 694 | 703 | 2 | - | 692 | 703 | (11 | ) | (3 | ) | (121 | ) | ||||||||||||||||||||||||
| Soluciones Takay S.A.C. | 2,120 | - | 2,588 | - | (468 | ) | - | (1,674 | ) | - | - | |||||||||||||||||||||||||
| Fosfatos del Pacífico S.A., note 1.2 | - | - | - | - | - | - | - | - | (1,216 | ) | ||||||||||||||||||||||||||
F-10
Notes to the consolidated financial statements (continued)
| 1.1 | Business combination – |
On October 5, 2018, Distribuidora Norte Pacasmayo S.R.L. acquired certain assets of a third party through the disbursement of US$12,335,000.
The assets´ purchase was classified as the acquisition of a business in accordance with the IFRS 3 “Business Combinations” and was recorded under the “Acquisition” method reflecting their fair values at the purchase date in accordance with IFRS 3. These values were recorded in the separate financial statements of Distribuidora Norte Pacasmayo S.R.L. as of that date, as well as the resulting goodwill. The carrying amounts and fair values of the assets identified as of the acquisition date were as follows:
| Fair value | ||||
| S/(000) | ||||
| Inventories | 6,849 | |||
| Machinery and equipment | 2,749 | |||
| Brand and other intangibles, note 11 (c) | 25,152 | |||
| Deferred income tax asset | 1,866 | |||
| 36,616 | ||||
| Goodwill, note 12 | 4,459 | |||
| Total assets acquired | 41,075 | |||
The methodology used to determine the fair values at the acquisition date for each of the items evaluated are the following:
| (i) | Inventories - |
The fair value corresponded to the estimated sale price, less the estimated costs to carry out the sale.
| (ii) | Fixed assets - |
For the determination of the fair value of the fixed assets, technical reports prepared by an independent appraiser were used.
| (iii) | Brand and other intangibles - |
The fair valuesof identifiable intangible assets at the acquisition date were determined using the income approach, based on the present value of the gains attributable to the asset or costs avoided as a result of owning the asset. Under this approach, the fair value of intangible assets is determined through the methodology of discounted future cash flows using the rate of return that considers the relative risk of obtaining cash flows and the value of money over time.
F-11
Notes to the consolidated financial statements (continued)
The methods used by the Management of the Company to estimate the fair valuesof the intangible assets identified at the acquisition date were the “With / Without Method” (WWM) which estimates the value of the intangible as the differential between the value of the cash flows with and without the intangible asset, after discounting the returns for all the assets that contribute to the flow and the “Relief from Royalty” (RFR) method, which estimates the cash flows that the company saves for the payment of royalties that it would do if it did not have its own brand.
| (iv) | Goodwill - |
Goodwill comprises the fair value of the expected synergies that the Company expects to obtain when acquiring the assets. This goodwill is recorded at cost and corresponds to excess of the cost of acquisition (consideration transferred) and the fair value of the identifiable assets, including the brand and other intangible assets.
| 1.2 | Spin-off project - |
InOn September 2016, the Company’s General Shareholders’ Meeting approved a spin-off project that will allow the transfer of a portion of net assets (composed by the assets and liabilities related to the Company’s interest in Fosfatos del Pacífico S.A.) in favor of Fossal S.A.A. (enterprise created as a subsidiary of Inversiones ASPI S.A.). The purpose of the spin-off project iswas to allocate the assets and liabilities of the Company in accordance with the specialization of each business, creating greater flexibility for shareholders and greater clarity in long-term operations.
The project contemplatesspin-off contemplated that for each common and investment share of Cementos Pacasmayo S.A.A., the Company, each shareholder willshareholders would receive approximately 0.20 common and investment shares of Fossal S.A.A. and approximately 0.80 common and investment shares of Cementos Pacasmayo S.A.A.
On March 1, 2017, the spin-off project was executed; in that sense,consummated; consequently, capital stock, investment shares, additional capital and legal reserve of the Company decreased by S/107,593,000, S/10,224,000, S/118,569,000 and S/36,957,000, respectively. The related non-controlling interest was reduced byin the amount of S/100,357,000.
As
On the other hand, as of the date of the spin-off’s execution,consummation, part of the investment shares transferred to Fossal S.A.A. were owned by the CompanyCementos Pacasmayo S.A.A. (treasury shares). As a consequence, the Company received 9,148,373 investment shares of Fossal S.A.A. The transaction wastransactions were recorded with a debit to available-for-sale investments,financial instruments designated at cost, infair value through other comprehensive income, for an amount of S/21,206,000 and a credit to equity offor S/23,459,000. The difference between the financial and tax value of those investments generated a deferred income tax asset of S/2,253,000. See2,253,000, see note 9(a).
Notes to the consolidated financial statements (continued)
9.
As of December 31, 2016, Fosfatos del Pacífico S.A. was classified as a group of assets (along with related liabilities) held for distribution to shareholders and as a discontinued operation.
The net assets to be transferredresults from discontinued operations are presented in the segment denominated “Other”consolidated statement of profit or loss, in Note 31.
Belowa single line as a post-tax result from discontinued operations, related to the detail of the resultsnet losses generated by Fosfatos del Pacífico S.A. (net of intercompany eliminations), which have been included inwere presented as “net loss of discontinued operations” for the year 2017 and amounted to S/754,000.
F-12
Notes to the consolidated financial statements of profit or loss for the years 2017, 2016 and 2015:(continued)
| Fosfatos del Pacífico S.A. (net of intercompany transactions) | |||||||||
| 2017 (From Jan 1, 2017 to March 31, 2017) | 2016 | 2015 | |||||||
| S/(000) | S/(000) | S/(000) | |||||||
| Sales | 11 | 2,044 | — | ||||||
| Cost of sales | (626 | ) | (6,881 | ) | — | ||||
| Administrative expenses | (660 | ) | (6,352 | ) | (8,868 | ) | |||
| Other income (expense) | 153 | (1,006 | ) | (212 | ) | ||||
| Finance income | 2 | 11 | 62 | ||||||
| (Loss) gain from exchange difference, net | (185 | ) | (804 | ) | 157 | ||||
| Loss from discontinued operations before income tax | (1,305 | ) | (12,988 | ) | (8,861 | ) | |||
| Income tax | 551 | 6,399 | 3,141 | ||||||
| Loss for the year from discontinued operations | (754 | ) | (6,589 | ) | (5,720 | ) | |||
As of December 31, 2016,March 1, 2017, the assets and liabilities transferred of Fosfatos del Pacífico S.A. (net of intercompany eliminations), which have been classified as held for distribution mainly comprise the following:
| S/(000) | ||||
| Assets - | ||||
| Cash and cash equivalents | ||||
Notes to the consolidated financial statements (continued)
As of March 1, 2017, the assets and liabilities of Fosfatos del Pacífico S.A. (net of intercompany eliminations), that were transferred mainly comprise the following:
| 34,178 | ||||
| Accounts receivable from related parties | 5,822 | |||
| Inventories | 2,694 | |||
| Income tax prepayments | 3,892 | |||
| Other current assets | 5,126 | |||
| Other receivables | 50,200 | |||
| Property, plant and equipment, net | 204,975 | |||
| Exploration and evaluation assets | 52,578 | |||
| Deferred income tax assets | 23,173 | |||
| 382,638 | ||||
| Liabilities and equity - | ||||
| Trade and other payables | 8,938 | |||
| Capital stock | 107,593 | |||
| Investment shares | 10,224 | |||
| Additional paid-in capital | 118,569 | |||
| Other reserves | 36,957 | |||
| Non-controlling interest | 100,357 | |||
| 382,638 |
Notes to the consolidated financial statements (continued)
| Impairment on brine project - |
TheIn 2017, the Company has decided to prioritize its investments in the development of products related to the manufacture and sale of cement and constructionconstructive solutions; therefore, the disposal of investments that are not in line with the strategic plan has been approved.
As a result of this decision, in the fourth quarter of 2017, the Company has decided not to continue with the brine project. The consolidated financial statements of the Company includeproject recording a charge to results related to the impairment on the assets of this project as detailed below:amounted to S/47,582,000, which is presented in the item “impairment on subsidiary investment” in the consolidated statement the profit or loss of the year 2017.
| Salmueras Sudamericanas S.A. | Cementos Pacasmayo S.A.A. | Total | |||||||
| S/(000) | S/(000) | S/(000) | |||||||
| Assets - | |||||||||
| Income tax prepayments | (5,654 | ) | — | (5,654 | ) | ||||
| Property, plant and equipment (note 10) | (1,732 | ) | — | (1,732 | ) | ||||
| Exploration and evaluation assets (note 11) | (33,469 | ) | — | (33,469 | ) | ||||
| Other current liabilities | 32 | — | 32 | ||||||
| Additional paid in capital | — | (6,759 | ) | (6,759 | ) | ||||
| Total impairment | (40,823 | ) | (6,759 | ) | (47,582 | ) | |||
| Income tax | (6,937 | ) | 17,087 | 10,150 | |||||
| Total | (47,760 | ) | 10,328 | (37,432 | ) | ||||
| Attributable to - | |||||||||
| Equity holders of the parent | (35,772 | ) | 10,328 | (25,444 | ) | ||||
| Non controlling interests | (11,988 | ) | — | (11,988 | ) | ||||
| (47,760 | ) | 10,328 | (37,432 | ) |
The impairment was attributed to the equity holders of the parent and to the non-controlling interest for the amounts of S/25,444,000 and S/11,988,000, respectively, net of deferred income tax amounting to S/10,150,000.
F-13
Notes to the consolidated financial statements (continued)
The table
On the other hand, non-controlling interest made contributions during 2018 and 2017 amounted to S/1,405,000 and S/491,000, respectively, and were presented below showsin the summaryconsolidated statement of changes in equity as “contributions from non-controlling interest”. It should be noted that the main captions of the audited financial statements of the subsidiaries controlledcontribution made by the Group asnon-controlling interest in 2018 was originated by the payment of December 31, 2017, 2016 and 2015:
| Assets | Liabilities | Net equity | Net income (loss) | ||||||||||||||||
| Entity | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | |||||||||||
| Cementos Selva S.A. and subsidiaries | 244,386 | 260,927 | 34,969 | 36,477 | 209,417 | 224,450 | 37,467 | 37,361 | 244,386 | ||||||||||
| Fosfatos del Pacífico S.A. | — | 339,236 | — | 3,495 | — | 335,741 | (1,216 | ) | (9,010 | ) | — | ||||||||
| Distribuidora Norte Pacasmayo S.R.L. and subsidiary | 243,568 | 211,787 | 119,182 | 87,182 | 124,386 | 124,605 | (220 | ) | 11,242 | 243,568 | |||||||||
| Empresa de Transmisión Guadalupe S.A.C. | 42,136 | 49,339 | 1,397 | 724 | 40,739 | 48,615 | 124 | 504 | 42,136 | ||||||||||
| Salmueras Sudamericanas S.A. | 587 | 47,661 | — | 382 | 587 | 47,279 | (50,942 | ) | (2,300 | ) | 587 | ||||||||
| Calizas del Norte S.A.C. (in liquidation) | 713 | 1,219 | 7 | 409 | 706 | 810 | (121 | ) | 407 | 713 | |||||||||
Notescertain penalties corresponding to the consolidated financial statements (continued)concessions contributed in previous years by the non-controlling interest.
| 2. | Significant accounting policies |
| 2.1 | Basis of preparation |
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for some available-for-sale financial investmentsinstruments designated at fair value through other comprehensive income (OCI) and derivative financial instruments that have been measured at fair value. The carrying values of recognized assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortized cost are adjusted to record changes in fair values attributable to the risks that are being hedged in effective hedge relationships. The consolidated financial statements are presented in Solessoles and all values are rounded to the nearest thousand (S/000), except when otherwise indicated.
The consolidated financial statements provide comparative information in respect of the previous period, there are certain standards and amendments applied for the first time by the Group during 20172019 that did not require the restatement of previous financial statements, as explained in Note 2.3.20.note 2.3.19.
| 2.2 | Basis of consolidation - The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31, 2019 and 2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if it has: i) power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee), ii) exposure, or rights, to variable returns from its involvement with the investee, and iii) the ability to use its power over the investee to affect its returns. |
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31, 2017 and 2016. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if it has: i) power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee), ii) exposure, or rights, to variable returns from its involvement with the investee, and iii) the ability to use its power over the investee to affect its returns.
Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: i) the contractual arrangement with the other vote holders of the investee, ii) rights arising from other contractual arrangements, and iii) the Group’s voting rights and potential voting rights.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
F-14
Notes to the consolidated financial statements (continued)
Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies ininto line with the Group’sGroup´s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group losses control over a subsidiary it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in the consolidated statement of profit or loss. Any investment retained is recognized at fair value.
| 2.3 | Summary of significant accounting policies - |
| 2.3.1 | Cash and cash equivalents - |
Cash and cash equivalents presented in the statements of cash flows comprise cash at banks and on hand and short-term deposits with original maturity of three months or less.
| 2.3.2 | Financial instruments-initial recognition and subsequent measurement |
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
| (i) | Financial assets - |
Initial recognition and measurement -
Financial assets are classified at initial recognition as financial assetsmeasured at amortized cost, fair value through other comprehensive income (OCI) or fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial assets are recognized initially at fair value plus, in the case of assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset.loss.
The Group’s financial assets include cash and cash equivalents, tradecommercial and other receivables, call options, available-for-sale financial investments and derivativesderivative financial instruments.
Notes to the consolidated financial statements (continued)
Subsequent measurement -
For purposepurposes of subsequent measurement, financial assets are classified in fourinto the following categories:
| - | Financial assets at amortized cost (debt instruments). |
| - | Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments). |
| - | Financial assets designated at fair value through OCI with not recycling of cumulative gains and losses upon derecognition (equity instruments). |
| - | Financial assets at fair value through profit or |
The classification depends on the business model of the Company and the contractual terms of the cash flows.
F-15
Notes to the consolidated financial statements (continued)
Financial assets at amortized cost (debt instruments) -
The Group measures financial assets at amortized cost if both of the following conditions are met:
| - |
| - | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding |
Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.
Financial assets are not reclassified after their initial recognition, unless the Group changes its business model for its management.
The Group’s financial assets at amortized cost includes trade and other receivables.
Financial assets at fair value through OCI (debt instruments) -The Group measures debt instruments at fair value through OCI if both of the following conditions are met:
| - |
| - |
The Group does not have debt instruments classified in this category.
Financial assets at fair value through OCI (equity instruments) -
Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity and are not held for trading. The classification is determined on an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment.
F-16
Notes to the consolidated financial statements (continued)
The Group elected to classify irrevocably its non-listed equity investments under this category, see note 9.
Financial assets at fair value through profit or loss -
Financial assets at fair value through profit or loss includesinclude financial assets held for trading andassets for trading derivate financial instruments, financial assets designated upon initial recognition as at fair value through profit or loss.loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives,Financial assets with cash flows that are not solely payments of principal and interest are classified as held for trading unless they are designated as effective hedging instruments as defined byand measured at fair value through profit or loss, irrespective of the International Accounting Standard (IAS) 39.business model.
Financial assets at fair value through profit andor loss are carried in the consolidated statement of financial position at fair value withand net changes in such fair value are presented as financefinancial costs (negative net(net negative changes in fair value) or financefinancial income (positive net(net positive changes in fair value) in the consolidated statement of profit or loss.
The Group has not designated any financial assets at fair value through profit or loss as
As of December 31, 2017 and 2016.
Loans and receivables -
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using31,2019, the effective interest rate method (EIR), less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the consolidated statement of profit or loss. The losses arising from impairment are recognized in the consolidated statement of profit or loss in finance costs for loans and in selling and distribution expenses for receivables.
This category applies to trade and other receivables. For more information on receivables, refer to Note 7.
Held-to-maturity investments -
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using the EIR, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance income in the consolidated statement of profit or loss. The losses arising from impairment are recognized in the consolidated statement of profit or loss as finance costs.
Notes to the consolidated financial statements (continued)
The Group did not have any held-to-maturity investments during the years ended December 31, 2017 and 2016.
Available-for-sale (AFS) financial investments -
AFS financial investments include equity and debt securities. Equity investmentsinstruments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss.
After initial measurement, AFS financial investments are subsequently measured at fair value with unrealized gains or losses recognized in OCI and credited in the unrealized gain on available-for-sale investments until investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the consolidated statement of profit or loss in finance costs. Interest earned whilst holding AFS financial investments is reported as interest income using EIR method.
Investments in equity instruments that do not have an active market price and whose fair value cannot be measured reliably are measured at cost.
The Group evaluates whether the ability and intention to sell its AFS financial investments in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to reclassify these financial assets if the management has the ability and intention to hold the assets for foreseeable future or until maturity.
The Group has classified equity securities as available-for-sale financial investments asthis category. As of December 31, 2017 and 2016. See note 9.2018, the Group held assets for trading derivate financial instruments classified in this category.
Derecognition -
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:
| The rights to receive cash |
| The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a |
Notes to the consolidated financial statements (continued)
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’sits continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
F-17
Notes to the consolidated financial statements (continued)
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
| (ii) | Impairment of financial assets - |
The Group recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
Further disclosures relating to impairmentECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of financial assets are also provided in the following notes:exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Group assesses, at each reporting date, whether there is any objective evidence thatconsiders a financial asset orin default when contractual payments are 360 days past due. However, in certain cases, the Group may also consider a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred “loss event”), has an impact on the estimated future cash flows of the financial asset to be in default when internal or the group of financial assets that can be reliably estimated. Evidence of impairment may include indicationsexternal information indicates that the debtors or a group of debtorsGroup is experiencing significantunlikely to receive the outstanding contractual amounts in full before considering any credit enhancements held by the Group. A financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as economic conditions that correlate with defaults.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial assets, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment.
Notes to the consolidated financial statements (continued)
The amount of any impairment loss identified is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of profit or loss. Interest income (recorded as finance income in the consolidated statement of profit or loss) continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans together with the associated allowance are written off when there is no realistic prospectreasonable expectation of future recovery and all collateral has been realized or has been transferred torecovering the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If write-off is later recovered, the recovery is credited to finance costs in the consolidated statement of profit or loss.
Available-for-sale (AFS) financial investments
For AFS financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as AFS, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated statement of profit or loss – is removed from OCI and recognized in the consolidated statement of profit or loss. Impairment losses on equity investment are not reversed through profit or loss; increases in their fair value after impairment are recognized in OCI.
The determination of what is “significant” or “prolonged” requires judgment. In making this judgment, the Group evaluates, among others factors the duration or extent to which the fair value of an investment is less than its cost.
Notes to the consolidated financial statements (continued)contractual cash flows.
| Financial liabilities - |
Initial recognition and measurement -
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
F-18
Notes to the consolidated financial statements (continued)
The Group’s financial liabilities include trade and other payables, interest-bearing loans and borrowings.
Subsequent measurement -
The subsequent measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss -
Financial liabilities at fair value through profit or loss include financial liabilities held for trading, trading derivate financial instruments and financial liabilities designated upon initial recognition as at fair value through profit or loss.
TheFinancial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term; gains or losses on liabilities held for trading are recognized in the statement of profit or loss. This category also includes derivative financial instruments entered into by the Group hasthat are not classified any financial liabilitydesignated as hedging instruments in hedge relationships as defined by IFRS 9.
Financial liabilities designated upon initial recognition at fair value through profit or loss asare designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.
As of December 31, 2017 and 2016.2019, the Group held liabilities for trading derivatives financial instruments classified in this category.
Loans and borrowings -
This is the Group’s most relevant category. After their initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the consolidated statement of profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into accountconsidering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statement of profit or loss.
This category includes trade and other payables and interest-bearing loans and borrowings. For more information refer to notes 1213 and 14.15.
Derecognition -
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another one from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amount is recognized in the consolidated statement of profit or loss.
F-19
Notes to the consolidated financial statements (continued)
| Offsetting of financial instruments - |
Financial assets and financial liabilities are offset, and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.
| Derivative financial instruments and hedge accounting – |
Initial recognition and subsequent measurement:
The Group uses derivative financial instruments, cross currency swaps (CCS), to hedge its foreign currency exchange rate risk. These derivative financial instruments are initially recognized at their fair valueson the date on which the derivative contract is entered into and subsequently are remeasured at their fair value. Derivatives are accounted for as financial assets when their fair value is positive and as financial liabilities when their fair value is negative.
For the purpose of hedge accounting, hedges are classified as:
| - | Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. |
| - | Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment. |
| - | Hedges of a net investment in a foreign operation. |
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge.
The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges expect to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
F-20
Notes to the consolidated financial statements (continued)
A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:
| - | There is ‘an economic relationship’ between the hedged item and the hedging instrument. |
| - | The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. |
| - | The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. |
Hedges that meet all the qualifying criteria for hedge accounting are recorded as cash flow hedges.
Cash flow hedges
In case the cross currency swaps contracts are designated as hedging instrument, any gains or losses arising from changes in the fair value of derivatives is taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognized in OCI and later reclassified to profit or loss when the hedge item affects profit or loss.
For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss.
In addition, we have cash flow hedges for trading, its changes in fair value are recorded directly in profit or loss.
In the case that the cash flow hedge is discontinued, the amount accumulated in other comprehensive income must remain in other comprehensive income accumulated if the covered cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After discontinuation, once the covered cash flows are given, any amount that remains in other comprehensive accumulated results must be recorded considering the nature of the underlying transaction.
| (vi) | Fair value measurement |
The Group measures financial instruments such as derivative financial instrumentsderivatives, and some available-for-sale investmentsequity investment, at fair value at each statement of financial positionbalance sheet date. Fair value related disclosures for financial instruments that are measured at fair value or where fair values are disclosed are summarized in note 30.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
| - | In the principal market for the asset or liability, or |
| - | In the absence of a principal market, in the most advantageous market for the asset or liability. |
F-21
Notes to the consolidated financial statements (continued)
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value accounting hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
| - | Level 1 |
| - | Level 2 |
| - | Level 3 unobservable |
Notes to the consolidated financial statements (continued)
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
The Group’s financial management determines the policies and procedures for both recurring and non-recurring measurement.fair value measurements.
At each reporting date, the financial management analysesManagement of the movementsCompany analyzes the changes in the values of the assets and liabilities which are requiredthat must be measured or determined on a recurring and non-recurring basis according to be re-measured or re-assessed as per the Group’s accounting policies. For this analysis, Management contrasts the financial management verifies the major inputs appliedmain variables used in the latest valuation by agreeing theassessments made with updated information available from valuations included in the valuation computation to contracts and other relevant documents.
Financial managementManagement also compares the changes in the fair value of each asset and liability with the relevant external sources to determine whether the change is reasonable.
F-22
Notes to the consolidated financial statements (continued)
For the purposepurposes of disclosure of fair value, disclosures, the Group has determined classes of assets and liabilities based on the basis of theinherent nature, characteristics and risks of theeach asset orand liability, and the level of the fair value accounting hierarchy as explained previously.
Initial recognition and subsequent measurement:
The Group uses derivative financial instruments, such as cross currency swaps, to hedge its foreign currency risk. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flows hedges, which is recognized in other comprehensive income (OCI) and later reclassified to profit or loss when the hedges item affects profit or loss.
For the purpose of hedge accounting, the cross currency swap instrument was classified as cash flow hedge.
At inception of the hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Notes to the consolidated financial statements (continued)
Hedges that meet the strict criteria for hedge accounting and are between a range of 80 and 125 of effectiveness, are accounted for as described below:
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income in the caption “Unrealized gain on cash flow hedge”, while any ineffective portion is recognized immediately in the consolidated statements of profit or loss as finance costs.
Amounts recognized as other comprehensive income are transferred to the consolidated statements of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs.
If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognized in OCI hedge reserve remains separately in equity until the forecast transaction occurs or the foreign currency firm commitment is met.above.
| 2.3.3 | Foreign currencies - |
The Group’sfunctional and presentation currency for the consolidated financial statements are presented in Soles,of the Group is soles, which is also the parent company’s functional currency. Each subsidiary determines its own functional currency and items included in financial statements of each subsidiary are measured using that functional currency.for its subsidiaries.
Transactions and balances
Transactions in foreign currencies are initially recorded by the Group at their respective functional currency spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognized in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.
Notes to the consolidated financial statements (continued)
| 2.3.4 |
The Group classifies non-current assets and disposal groups as held for distribution to equity holders of the parent if their carrying amounts will be recovered principally through a distribution rather than through continuing use. Such non-current assets and disposal groups classified as held for distribution are measured at the lower of their carrying amount and fair value less costs to distribute. Costs to distribute are the incremental costs directly attributable to the distribution, excluding finance costs and income tax expense.
The criteria for held for distribution classification is regarded as met only when the distribution is highly probable and the asset or disposal group is available for immediate distribution in its present condition. Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the decision to distribute will be withdrawn. Management must be committed to the distribution expected within one year from the date of the classification.
Assets and liabilities classified as held for distribution are presented separately as current items in the statement of financial position.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit or loss.
Additional disclosures are provided in note 1.1. All other notes to the financial statements include amounts for continuing operations, unless indicated otherwise.
| Inventories - |
Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and conditions are accounted for as follows:
Raw materials
| - | Purchase cost determined using the weighted average method. |
Finished goods and work in progress
| - | Cost of direct materials and supplies, services provided by third parties, direct labor and a proportion of manufacturing overheads based on normal operating capacity, excluding borrowing costs and exchange currency differences. |
Inventory in transit
| - | Purchase cost. |
Net realizable value is the estimated selling price in the ordinary course of business, less estimated cost of completion and the estimated costs necessary to make the sale.
Notes to the consolidated financial statements (continued)
| Borrowing costs - |
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
F-23
Notes to the consolidated financial statements (continued)
Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of rates applicable to relevant general borrowings of the Group during the period. All other borrowing costs are recognized in the consolidated statement of profit or loss in the period in which they are incurred.
| Leases - |
The determinationGroup applied IFRS 16 for the first time on January 1, 2019, using the modified retroactive transition method, see effects of adoption in note 2.3.19. Under IFRS 16, the Group assesses at contract inception whether an agreement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangementcontract is, or contains, a leaselease. That is, if fulfillment of the arrangement is dependent oncontract conveys the right to control the use of an identified asset for a specific asset orperiod of time in exchange for consideration
Group as a lessee:
The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets andrepresenting the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.underlying assets.
i) Right of use assets
The Group as a lessee:
A lease is classifiedrecognizes right-of-use assets at the inceptioncommencement date asof the lease (the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a financestraight-line basis over the shorter of the lease or an operating lease. A lease thatterm and the estimated useful lives of the assets. If ownership of the leased asset transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between financial charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the consolidated statement of profit or loss.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term or the assetcost reflects the exercise of a purchase option, depreciation is depreciated over the shorter ofcalculated using the estimated useful life of the asset andasset.
The right-of-use assets are subject to impairment assessment if indications of impairment are presented.
ii) Lease liabilities
At the commencement date of the lease, term.
An operatingthe Group recognizes lease isliabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a lease other than financial lease. Operatingrate, and amounts expected to be paid under residual value guarantees. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.
F-24
Notes to the consolidated financial statements (continued)
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the assessment of an operating expenseoption to purchase the underlying asset, a change in the amounts expected to be paid under residual value guarantee or changes to future payments resulting from a change in an index or rate used to determine such lease payments.
The Group’s lease liabilities are included in “lease liabilities” in the consolidated statement of profitfinancial position.
iii) Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or loss onless from the commencement date and do not contain a straight-line basis overpurchase option). It also applies the lease term.of low-value assets recognition exemption to leases of office equipment that are considered to be low value.
Group as a lessor:
Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in other income in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.
Notes toDuring 2017 and 2018, the Group applied previous lease standard (IAS17), the main difference is that under this standard, payments for operating expenses in the consolidated statement of profit or loss on a lineal amortization basis throughout the lease period. The criteria for accounting for financial statements (continued)
leases and income for leases when the Group acts as lessor were similar to those established in IFRS 16.
| Property, plant and equipment - |
Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing component parts of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met.met (see note 2.3.6). The capitalized value of a finance lease is also included within property, plant and equipment. When significant parts of plant and equipment are required to be replaced at intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciated them separately based on their specific useful lives. Likewise, when major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in profit or loss as incurred.
F-25
Notes to the consolidated financial statements (continued)
The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. ReferReference is made to significant accounting judgments, estimates and assumptions (note 3) and decommissioning provisions (note 13)14).
Depreciation of assets is determined using the straight-line method over the estimated useful lives of such assets as follows:
| Years | ||
| Buildings and other constructions: | ||
| Administrative facilities | Between 35 and 48 | |
| Main production structures | Between 30 and 49 | |
| Minor production structures | Between 20 and 35 | |
| Machinery and equipment: | ||
| Mills and horizontal furnaces | Between 42 and 49 | |
| Vertical furnaces, crushers and grinders | Between 23 and 36 | |
| Electricity facilities and other minors | Between 12 and 35 | |
| Furniture and fixtures | 10 | |
| Transportation units: | ||
| Heavy units | Between 11 and 21 | |
| Light units | Between 8 and 11 | |
| Computer equipment | 4 | |
| Tools | Between 5 and 10 |
The asset’s residual value, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate.
An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of profit or loss when the asset is derecognized.
Notes to the consolidated financial statements (continued)
| Mining concessions |
Mining concessions correspond to the exploration rights in areas of interest acquired. Mining concessions are stated at cost, net of accumulated amortization and/or accumulated impairment losses, if any, and are presented within the property,“Property, plant and equipment caption.equipment” on the consolidated statement of financial position. Those mining concessions are amortized starting from the production phase following the units-of-production method based on proved reserves to which they relate. The unit-of-production rate for the amortization of mining concessions takes into accountconsiders expenditures incurred to the date of the calculation. In the eventIf the Group abandons the concession, the costs associated are written-off in the consolidated statement of profit or loss. As of December 31, 2017, the Company has recognized an impairment on the brine project. See note 1.2.
As of December 31, 20172019 and 2016, no amortization under units-of-production method was determined since the2018, mining concessions of the Group are not yet on production phase.corresponded to areas that contain raw material necessary for cement production.
F-26
Notes to the consolidated financial statements (continued)
MineQuarry development costs –-
MineQuarry development costs incurred are stated at cost and are the next step in development of mining projectsquarries after exploration and evaluation stage. MineQuarry development costs are, upon commencement of the production phase, presented net of accumulated amortization and/or accumulated impairment losses, if any, and are presented within the property, plant and equipment caption. The amortization is calculated using the unit of-productionstraight-line method based on proved reservesuseful live of the quarry to which they relate. The unit-of-production rate for the amortization of mine development costs takes into account expenditures incurred to the date of the calculation. Expenditures that increase significantly the economic reserves inlife of the mining unitquarry under exploitation are capitalized.
As of December 31, 2017 and 2016, no amortization under units-of-production method was determined since the projects of the Group are not yet on production phase.
Stripping costs -
Stripping costs incurred in the development of a mine before production commences are capitalized as part of mine development costs and subsequently amortized overit’s the life of the mine on a units-of-production basis, using the proved reserves.
Stripping costs incurred subsequently during the production phase of its operation are recorded as part of cost of production.
| 2.3.10 | Intangible assets |
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding capitalized development costs, are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite live are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of profit or loss in the expense category that is consistent with the function of the intangible assets.
The Group’s intangible assets with finite useful lives are amortized in an average term of ten years.
F-27
Notes to the consolidated financial statements (continued)
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. As of December 31, 2019 and 2018, the Company maintained as intangible assets with an indefinite useful the fair value of the brand acquired in the transaction described in note 1.1. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss. Exploration and evaluation |
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource. Exploration and evaluation activity includes:
| - | Researching and analyzing historical exploration data. |
| - | Gathering exploration data through geophysical studies. |
| - | Exploratory drilling and sampling. |
| - | Determining and examining the volume and grade of the resource. |
| - | Surveying transportation and infrastructure requirements. |
| - | Conducting market and finance studies. |
License costs paid in connection with a right to explore in an existing exploration area are capitalized and amortized over the term of the license.
Once the legal right to explore has been acquired, exploration and evaluation costs are charged to the consolidated statement of profit or loss, unless management concludes that a future economic benefit is more likely than not to be realized, in which case such costs are capitalized. These costs include directly attributable employee remuneration, materials and fuel used, surveying costs, drilling costs and payments made to contractors.
In evaluating if costs meet the criteria to be capitalized, several different sources of information are used, including the nature of the assets, extension of the explored area and results of sampling, among others. The information that is used to determine the probability of future benefits depends on the extent of exploration and evaluation that has been performed.
Exploration and evaluation costs are capitalized when the exploration and evaluation activity is within an area of interest for which it is expected that the costs will be recouped by future exploitation and active and significant operations in relation to the area are continuing or planned for the future.
F-28
Notes to the consolidated financial statements (continued)
The main estimates and assumptions the Group uses to determine whether is likely that future exploitation will result in future economic benefits include: expected operational costs, committed capital expenditures, expected mineral prices and mineral resources found. For this purpose, the future economic benefit of the project can reasonably be regarded as assured when mine-site exploration is being conducted to confirm resources, mine-site exploration is being conducted to convert resources to reserves or when the Group is conducting a feasibility study, based on supporting geological information.
As the capitalized exploration and evaluation costs asset is not available for use, it is not amortized. These exploration costs are transferred to mine development assets once the work completed to date supports the future development of the property and such development receives appropriate approvals. In this phase, the exploration costs are amortized in accordance with the estimated useful life of the mining property from the time the commercial exploitation of the reserves begins. All capitalized exploration and evaluation costs are monitored for indications of impairment. Where a potential impairment is indicated, assessment is performed for each area of interest in conjunction with the group of operating assets (representing a cash generating unit) to which the exploration is attributed.
Notes to the consolidated financial statements (continued)
Exploration areas in which resources have been discovered but require major capital expenditure before production can begin, are continually evaluated to ensure that commercial quantities of resources exist or to ensure that additional exploration work isare under way or planned. To the extent that capitalized expenditure is no longer expected to be recovered it is charged to the consolidated statement of profit or loss. The Group assesses at each reporting date whether there is an indication that an exploration and evaluation assets may be impaired. The following facts and circumstances are considered in this assessment:
| (i) | the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future and is not expected to be renewed. |
| (ii) | substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned. |
| (iii) | exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area. |
| (iv) | sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. |
If any indication exists,F-29
Notes to the Group exploration and evaluation assess for impairment is required. As of December 31, 2017, the Company has recognized an impairment on the brine project. See note 1.2.consolidated financial statements (continued)
Intangible assets includes software licenses with defined useful lives between one and ten years and are amortized using the straight-line method over the estimated useful lives of such assets.
| Ore reserve and resource estimates - |
Ore reserves are estimates of the amount of ore that can be economically and legally extracted from the Group’s mining properties and concessions. The Group estimates its ore reserves and mineral resources, based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body, and requires complex geological judgments to interpret the data. The estimation of recoverable reserves is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs, along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may impact upon the carrying value of exploration and evaluation assets, provision for rehabilitation and depreciation and amortization charges.
Notes to the consolidated financial statements (continued)
| Impairment of non-financial assets – |
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required (goodwill and Intangible assets with indefinite useful lives), the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs of disposal and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset of CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account.considered. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.
The Group supports its impairment calculation onwith detailed budgets and forecast calculations, which are prepared separately for each of the Group’sGroup´s CGUs to which the individual assets are allocated.
Impairment losses of continuing operations, including impairment on inventories, are recognized in the consolidated statement of profit or loss in expense categories consistent with the function of the impaired asset.
AnF-30
Notes to the consolidated financial statements (continued)
In addition, an assessment is made at each reporting date to determine whether there is any indication that previously recognized impairment losses may no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of profit or loss.
Exploration and evaluation assets are tested for impairment annually as of December 31, either individually or at the cash-generating unit level, as appropriate, and when circumstances indicate that the carrying value may be impaired. As a result of the analysis performed, on December 31, 2017, the Company recognized an impairment charge on the brine project. See note 1.2.
Notes to the consolidated financial statements (continued)
| Provisions - |
General -
Provisions are recognized when the Group has a present obligation (legal or constructive)as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss net of any reimbursement.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects where appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as finance cost in the consolidated statement of profit or loss.
Rehabilitation provision -
The Group records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. Rehabilitation costs are provided at the present value of expected costs to settle the obligation using estimated cash flows and are recognized as part of the cost of that particular asset. The cash flows are discounted at a current risk freerisk-free pre-tax rate. The unwinding of the discount is expensed as incurred and recognized in the consolidated statement of profit or loss as a finance cost. The estimated future costs of rehabilitation are reviewed annually and adjusted as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.
As of December 31, 2017 and 2016, the Group only has a rehabilitation provision for the closing of the quarries exploited in operations and for the Bongara mine (fully impaired in 2011), accordingly, changes in estimated future costs have been recorded directly to the consolidated statement of profit or loss.
Environmental expenditures and liabilities -
Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed.
F-31
Notes to the consolidated financial statements (continued)
Liabilities for environmental costs are recognized when a clean-up is probable, and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites.
The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure.
| Employees benefits - |
The Group has short-term obligations for employee benefits including salaries, severance contributions, legal bonuses, performance bonuses and profit sharing. These obligations are monthly recorded on an accrual basis.
Notes to the consolidated financial statements (continued)
Additionally, the Group has a long-term incentive plan for key management. This benefit is settled in cash, measured on the salary of each officer and upon fulfilling certain conditions such as years of experience within the Group and permanency. According to IAS 19 “Employee benefits”, the Group recognizes the long-term obligation at its present value at the end of the reporting period using the projected credit unit method. To calculate the present value of these long-term obligations the Group uses a government bond discount rate at the date of the consolidated financial statements. This liability is annually reviewed on the date of the consolidated financial statements, and the accrual updates and the effect of changes in discount rates are recognized in the consolidated statement of profit or loss, until the liability is extinguished.
| Revenue recognition - |
RevenueThe group is recognizeddedicated to the extentproduction and trading of cement, precast, concrete and quicklime, as well as trade of construction supplies. These goods are sold in contracts with customers. The Group has concluded that it is probable thatprincipal in its sales agreements because it controls the economic benefits will flowgoods or services before transferring to the Group and the revenue can be reliably measured, regardless of when the payment is received. customer.
Revenue is measured at the fair value of the consideration received or receivable, taking into accountconsidering contractually defined terms of payment and excluding taxes or duty.
The Group has concluded that it is acting as a principal in all of its revenue arrangements.
The following specific recognition criteria must also be met before revenue is recognized:
Sales of goods -
Revenue from salessale of goods is recognized at the point in time when control of the significant risks and rewards of ownership have passedasset is transferred to the buyer,customer, generally on delivery of the goods. Revenue from
The Group considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of goods, is measured at fair valuethe Group considers the effects of variable consideration, the existence of significant financing components, noncash consideration, and consideration payable to the customer (if any).
F-32
Notes to the consolidated financial statements (continued)
Rendering of services -
In the business segments of cement, quicklime, concrete, precast and construction supplies, the Group provides transportation services. These services are sold together with the sale of the consideration received or receivable, netgoods to the customer.
Transportation services are satisfied when the transport service is concluded, which coincides with the moment of returns and trade discounts.delivery of the goods to the customers.
Operating lease income -
Income from operating lease of land and office was recognized on a monthly accrual basis during the term of the lease.
Notes to the consolidated financial statements (continued)
Interest income -
For all financial instruments measured at amortized cost and interest-bearing financial assets, interest income is recorded using the effective interest rate (EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the consolidated statement of profit or loss.
| Taxes |
Current income tax -
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxationtax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in Peru, where the Group operates and generates taxable income.
Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred tax -
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
F-33
Notes to the consolidated financial statements (continued)
Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except in respect of deductible temporary differences associated with investments in subsidiaries, where deferred assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
Notes to the consolidated financial statements (continued)
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized, or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax related to items recognized outside profit or loss is recognize outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Mining royalties –-
Mining royalties are accounted for under IAS 12 when they have the characteristics of an income tax. This is considered to be the case when they are imposed under government authority and the amount payable is based on taxable net income, rather than based on quantity produced or as a percentage of revenue, after adjustment for temporary differences. For such arrangements, current and deferred tax is provided on the same basis as described above for income tax. Obligations arising from royalty arrangements that do not satisfy these criteria are recognized as current provisions and included in results of the year.
Sales tax -
Expenses and assets are recognized net of the amount of sales tax, except:
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated statement of financial position.
Notes to the consolidated financial statements (continued)
OwnOwned equity instruments which are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the consolidated statement of profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. On January, 2017
F-34
Notes to the consolidated financial statements (continued)
| 2.3.18 | Business combinations and goodwill - |
A business consists of inputs and October, 2015,processes applied to those inputs that have the Companyability to create contribute to the creation of outputs. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses of the consolidated statement of profit or loss.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognized in the statement of profit or loss in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognized in profit or loss.
Goodwill
Goodwill is the excess of the aggregate of the consideration transferred on the asset’s acquisitions described in note 1.1, over the fair value of the acquire assets.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired 7,911,845 and 37,276,580, respectivelyliabilities assumed). If the reassessment still results in an excess of its investment shares whichthe fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are presented as a reductionexpected to benefit from the combination, irrespective of equity, for further details, see note 16(c).whether other assets or liabilities of the acquiree are assigned to those units.
F-35
Notes to the consolidated financial statements (continued)
The Group perform impairment tests of the goodwill annually. The impairment of the goodwill is determined estimating the recoverable amount of the cash generating units related to it. When the recoverable amount of the cash generating units is lower than the carrying value, an impairment is recognized. Impairment related to goodwill cannot be reversed in future periods.
| 2.3.19 |
IFRS 16 Leases
The Group applied IFRS 16 for the first time on January 1, 2019 through the modified retroactive transition method, the criteria for the recognition of asset for use rights and liabilities for leases are those described in note 2.3.6.
The Group presents assets andweighted average lessee’s incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 6.23 percent per year in soles.
The change in the accounting policy affected the following items of the interim condensed consolidated statement of financial position based on current/non-current classification. An asset is current when it is:position:
| - |
| - |
| - |
AllSeveral other assets are classified as non-current.
A liability is current when it is:
The Group classifies all other liabilities as non-current.
Deferred tax assetsamendments and liabilities are classified as non-current assets and liabilities.
The Group appliedinterpretations, including IFRIC 23 “Uncertainty over Income Tax Treatments” apply for the first time certain standards and amendments in 2017, although these new standards and amendments didas of January 1, 2019, but do not have a materialan impact on the consolidated financial statements of the Group. A summary of the new standards related to the Group is described below:
The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). The Group has provided the information for both the current and the comparative period in note 29.
The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary difference related to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. The Group applied amendments retrospectively. However, their application has no effect on the Group’s financial position and performance as the Group has no deductible temporary differences or assets that are in the scope of the amendments.
Notes to the consolidated financial statements (continued)
The Group has not adopted early adopted any other standard, interpretation or amendmentmodification that has been issued but is not yet effective.in force
| 3. | Significant accounting judgments, estimates and assumptions |
The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Other disclosures relating to the Group’s exposure to risks and uncertainties includes:
| - | Capital management, note 29. |
| - | Financial instruments risk management and policies, note 29. |
| - | Sensitivity analyses disclosures, note 29. |
F-36
Notes to the consolidated financial statements (continued)
Estimates and assumptions -
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
The significant areas are summarized below:
| - | Determination of useful lives of assets for depreciation and amortization purposes – notes 2.3.7, 2.3.8, 2.3.9 |
| - | Recognition of exploration and evaluation assets and mine development costs – notes 2.3.9, 2.3.10 |
| - | Ore reserve and resource estimates – note |
| - | Review of asset carrying values and impairment charges – |
| - | Income tax – notes |
| - | Cash flow hedges – notes |
Notes to the consolidated financial statements (continued)
| 4. | Standards issued but not yet effective |
The standards and interpretations relevant to the Group, that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective:
| - |
In July 2014,October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the final versiondefinition of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition‘material’ across the standards and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all threeto clarify certain aspects of the accounting fordefinition. The new definition states that, ‘Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginningstatements make on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparativethe basis of those financial statements, which provide financial information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.about a specific reporting entity’.
The Group plans to adopt the new standard on the required effective date and will not restate comparative information. During 2017, the Group has performed a detailed impact assessment of all three aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made availableamendments to the Group in 2018 when the Group will adopt IFRS 9. The Group expects an impact on its consolidated financial statements for the fair value valuationdefinition of its available for sale financial investments as, an increase on assets and equity, as follows:
The Group expects a significant impact on its balance sheet and equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value. Equity shares without an active market currently recognized as available-for-sale (AFS) at cost for S/21,206,000 will, instead, be measured at fair value through other comprehensive income (OCI), which will increase volatility in OCI. The impact of the change in measurement of AFS through OCI, has been estimated in S/4,002,000.
Loans as well as trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analyzed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instrumentsmaterial is not required.
IFRS 9 requires the Groupexpected to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Group will apply the simplified approach and record lifetime expected losses on all trade receivables. The Group has determined that, due to the nature of its loans and receivables, the loss allowance will be immaterial.
The Group determined that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. The Group has chosen not to retrospectively apply IFRS 9 on transition to the hedges where the Group excluded the forward points from the hedge designation under IAS 39. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a significant impact on the Group’s consolidated financial statements.
F-37
Notes to the consolidated financial statements (continued)
In addition to the adjustments described above, on adoption of IFRS 9, other items of the primary financial statements such as deferred taxes, assets held for sale and liabilities associated with them, will be adjusted as necessary.
In summary, the impact of IFRS 9 adoption is expected to be, as follows:
IFRS 15, issued in May 2014 and amended in April 2016, establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after January 1, 2018.
The Group plans to adopt the new standard on the required effective date using the full retrospective method. During 2016, the Group performed a preliminary assessment of the impact of IFRS 15, which was continued with a more detailed analysis completed in 2017.
The Group is in the business of production and commercialization of cement, blocks, concrete and quicklime, as well as the commercialization of construction supplies. These goods are sold in identified contracts with customers.
Notes to the consolidated financial statements (continued)
For contracts with customers in which the sale of goods is expected to be the only performance obligation, adoption of IFRS 15 is not expected to have any impact on the Group’s revenue and profit or loss. The Group expects the revenue recognition to occur at a point in time when control of the asset is transferred to the customer, generally on delivery of the goods.
In preparing to implement the requirements of IFRS 15, the Group is considering the following:
Variable consideration -Amendments to IFRS 3: Business definition
Some contracts with customers provide return rightsIn October 2018, the IASB issued amendments to IFRS 3 “Business combinations” to help entities determine when a set of acquired activities and trade discountsassets is a business or volume discounts.
If revenue cannot be reliably measured,not. The minimum requirements for a business are clarified, the Group defers revenue recognition until the uncertaintyevaluation of whether a market participant is resolved. Such provisions give risecapable of replacing any missing element is eliminated, a guide is added to variable consideration under IFRS 15,help entities assess whether an acquired process is significant, specifies definition of business and will be required to be estimated at contract inceptionproducts and updated thereafter.
IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognitionintroduces an optional test of revenue. The Group expects that application of the constraint will result in more revenue being deferred than under current IFRS.
The Group has commercial agreements for the sale of its products with certain customers. In accordancefair value concentration. New illustrative examples were provided along with the current accounting policy, the Group recognizes these payments as a debit in the caption “Selling and distribution expenses” with credit in the caption “Trade and other payables”.
In accordance with IFRS 15, contract combination criteria should be used if they are negotiated as a package with a single commercial objective. The Company applied the requirements of IFRS 15 and concluded that in 2017 it would be necessary to make an adjustment as follows: the revenue from the sale of cement and the selling and distribution expenses would both decrease by S/2,898,000.
Under IFRIC 13 Customer Loyalty Programes, the loyalty program offered by the Group in the sale of cement results in the allocation of part of the price of the transaction to the loyalty program using the fair value of the points issued and the recognition of deferred revenue in relation to the points issued but not yet redeemed or expired. The Group concluded that under IFRS 15 the loyalty programe gives rise to a separate performance obligation, since it generally provides a material right to the customer. According to IFRS 15, the Group will need to allocate a portion of the transaction price to the loyalty programe based on the relative stand-alone selling price, instead of the allocation using the fair value of points issued, as it is done in accordance with IFRIC 13. The Group determined that less revenue should be attributed to the goods sold compared to the existing accounting policy.
When IFRS 15 is adopted, the following adjustments are expected to the current fiscal year: the revenue from the sale of cement and the selling and distribution expenses would both decrease by S/1,819,000.
Notes to the consolidated financial statements (continued)
Transportation services are provide in the business of production and commercialization of cement, blocks, concrete and quicklime. These services are rendered together with the sale of goods to customers.
Under the current policy, the Group registers transportation services as separate benefits from sales of goods when they are sold together. The consideration of the transportation services is differentiated from the consideration for the sale of goods, and is assigned using prices list of each operation.
Under IFRS 15, allocation will be made based on relative stand-alone selling prices. Hence, the allocation of the consideration would not be affected.
The Group concluded that the transportation services are satisfied over time given that the customer simultaneously receives and consumes the benefits provided by the Group. Consequently, under IFRS 15 the Group would continue to recognize revenue for these service in conjunction with the revenue from the sale of goods.
The presentation and disclosure requirements in IFRS 15 are more detailed than under current IFRS. The presentation requirements represent a significant change from current practice and significantly increases the volume of disclosures required in the Group’s financial statements. Many of the disclosure requirements in IFRS 15 are new and the Group has assessed that the impact of some of these disclosures requirements will be significant. In particular, the Group expects that the notes to the financial statements will be expanded because of the disclosure of significant judgments made: when determining the transaction price of those contracts that include variable consideration, how the transaction price has been allocated to the performance obligations, and the assumptions made to estimate the stand-alone selling prices of each performance obligation. In addition, as required by IFRS 15, the Group will disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It will also disclose information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment. In 2017 the Group continued testing of appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information.
Notes to the consolidated financial statements (continued)
In addition to the major adjustments described above, on adoption of IFRS 15, other items of the primary financial statements such as deferred taxes, will be affected and adjusted as necessary. The recognition and measurement requirements in IFRS 15 are also applicable for recognition and measurement of any gains or losses on disposal of non-financial assets (such as items of property and equipment and intangible assets), when that disposal is not in the ordinary course of business. However, on transition, the effect of these changes is not expected to be material for the Group.
In summary, the impact of IFRS 15 adoption is expected to be, as follows:
Impact on equity (increase/(decrease)) as December 31, 2017:
The profit per share will not be affected by the adoption of IFRS 15.
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
Notes to the consolidated financial statements (continued)
IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain exemptions.
In 2018, the Group will continue to assess the potential effect of IFRS 16 on its consolidated financial statements.
The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the transaction date for each payment or receipt of advance consideration. Entities may apply the amendments on a fully retrospective basis. Alternatively, an entity may apply the Interpretation prospectively to all assets, expenses and income in its scope that are initially recognized on or after:
The Interpretation is effective for annual periods beginning on or after January 1, 2018. Early application of interpretation is permitted and must be disclosed. However, since the Group’s current practice is in line with the Interpretation, the Group does not expect any effect on its consolidated financial statements.
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.
Notes to the consolidated financial statements (continued)
The Interpretation specifically addresses the following:
An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition exemptions are available. The Group will apply interpretation from its effective date. Since the Group operates in a complex tax environment, applying the Interpretation may affect its consolidated financial statements and the required disclosures. In addition, the Group may need to establish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis.
These improvements include:
IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters - Short-term exemptions in paragraphs E3–E7 of IFRS 1 were deleted because they have now served their intended purpose. The amendment is effective from January 1, 2018. This amendment is not applicable to the Group.
IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice. The amendments clarify that:
Notes to the consolidated financial statements (continued)
The amendments should be applied retrospectively and are effective from January 1, 2018, with earlier application permitted. If an entity applies those amendments for an earlier period, it must disclose that fact.modifications.
These amendmentsmodifications are not applicable to the Group.
The IASB has made the following amendments to the rules:
IFRS 3 Business Combinations – Interest previously held in a joint operation
These amendments clarify that, when an entity obtains control of a business that was previously a joint operation, it must apply the requirements of the business combinations carried out in stages, reassessing the fair value of the shares previously held in the assets and liabilities of the joint operation. These changes will be applied to business combinations whose acquisition date is in the periods beginning on January 1, 2019 or later, allowing early application.
IFRS 11 Joint arrangements - Units previously held in a joint operation
These amendments clarify that, when an entity participates, but has no control, in a joint operation and obtains joint control of that joint operation, which is a business in accordance with IFRS 3, it will not revalue previously held participation in the assets and liabilities of the joint operation to fair value. These modifications will be appliedprospectively to transactions in which joint control is obtained for the periods beginning on or after January 1, 2019, allowing early application.
IAS 12 Income tax - Consequences of payments of financial instruments classified in equity
The amendments clarify that the tax consequences of the dividends depend more on the transactions or past events that generated that distributable profit than on the distribution to the owners. Therefore, an entity recognizes the tax consequences of a dividend in results, in other comprehensive income or in equity depending on how the entity recorded those transactions or past events. These modifications will be applied to the periods beginning on January 1, 2019 or later, allowing early application. When an entity applies these amendments for the first time, it will do so from the start date of the oldest comparative period.
Notes to the consolidated financial statements (continued)
IAS 23 Interest costs - Capitalized interest costs
The amendments clarify that an entity considers part of its general interest costs any interest costs originally incurred to develop a qualified asset when substantially all the activities necessary to prepare the asset for its use or sale have been completed. These modifications will be applied to the interest costs incurred in the periods beginning on January 1, 2019 or later, allowing early application.
Amendments to IAS 28 - Long-term investments in associates and joint arrangements
These amendments clarify that an entity must apply IFRS 9 Financial Instruments to long-term investments in associates or joint arrangements to which the equity method is not applied, but which in substance form part of the net investment in the associate or in the joint agreement. This clarification is relevant, since it implies that the expected credit loss model of IFRS 9 must be applied to said investments. It is also clarified that, when applying IFRS 9, the entity will not take into account any loss of the associate or the joint arrangement or any impairment loss of the net investment that was recorded as an adjustment to the net investment in the associate or in the joint agreement for the application of IAS 28 Investments in associates and joint agreements. The amendments include an example that illustrates how entities should apply the requirements of IAS 28 and IFRS 9 to these long-term investments. These modifications will be applied retroactively, with certain exceptions, to the periods beginning on January 1, 2019 or later, allowing early application.
Modifications to IAS 40 - Transfers of investment properties
The amendments clarify when an entity should transfer real estate, including those that are under construction or development, from or to investment properties. The modifications establish that the change of use occurs when the property meets, or fails to meet, the definition of investment property and there is evidence of such change in use. A mere change in management intentions does not provide evidence of change of use. Entities must apply the changes prospectively to changes in use that occur on or after the beginning of the year in which the entity applies the amendments for the first time. An entity should reassess the classification of property held on that date and, if applicable, reclassify the property to reflect the conditions existing on that date. The retroactive application in accordance with IAS 8 is only permitted if it is possible to do so without using information obtained subsequently. These modifications are effective for the periods beginning on January 1, 2018 or later, allowing early application. The Group will apply these modifications when they comeentry into force. However, given that the Group’s current practice is in line with the clarifications issued, the Group does not expect any effect in its consolidated financial statements.
Notes toforce, the consolidated financial statements (continued)of the Group will not be affected by these modifications.
| 5. | Transactions in foreign currency |
Transactions in foreign currency take place at the open-market exchange rates published by the SuperintendentSuperintendence of Banks, Insurance and Pension Funds Administration.Administration (the “SBS”). As of December 31, 2017,2019 the exchange rates for transactions in United StatesU.S. dollars, published by this institution,the SBS, were S/3.2383.311 for purchase and S/3.2453.317 for sale (S/3.3523.369 for purchase and S/3.3603.379 for sale as of December 31, 2016)2018).
As of December 31, 20172019 and 2016,2018, the Group had the following assets and liabilities in United StatesU.S. dollars:
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| US$(000) | US$(000) | US$(000) | US$(000) | |||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | 1,157 | 3,371 | 993 | 4,007 | ||||||||||||
| Trade and other receivables | 7,764 | 5,517 | 5,741 | 5,135 | ||||||||||||
| Advances to suppliers for work in progress | 5,534 | 2,733 | ||||||||||||||
| Assets held for distribution | — | 1,885 | ||||||||||||||
| Advances to suppliers | 2,586 | 1,250 | ||||||||||||||
| 14,455 | 13,506 | 9,320 | 10,392 | |||||||||||||
| Liabilities | ||||||||||||||||
| Trade and other payables | (18,274 | ) | (15,224 | ) | (5,975 | ) | (29,618 | ) | ||||||||
| Liabilities held for distribution | — | (379 | ) | |||||||||||||
| Interest-bearing loans and borrowings | (300,000 | ) | (300,000 | ) | (157,263 | ) | (149,612 | ) | ||||||||
| (318,274 | ) | (315,603 | ) | |||||||||||||
| (303,819 | ) | (302,097 | ) | (163,238 | ) | (179,230 | ) | |||||||||
| Cross currency swap position | 300,000 | 300,000 | 150,000 | 150,000 | ||||||||||||
| Net monetary position | (3,819 | ) | (2,097 | ) | (3,918 | ) | (18,838 | ) | ||||||||
As of December 31, 2017 and 2016, the Group maintains cross currency swaps contracts (“CCS”) designated as cash flow hedges for its Senior Notes denominated in US dollars. See note 14.F-38
During 2017 and 2016, the net loss originated from exchange differences was approximately S/2,226,000 and S/2,541,000, respectively; during 2015 the net result from exchange differences was a gain of S/12,194,000. All these results were presented in the “(Loss) gain from exchange difference, net” caption in the consolidated statements of profit or loss.
Notes to the consolidated financial statements (continued)
As of December 31, 2019 and 2018, the Group had cross currency swap agreements for its bonds (denominated in U.S. dollars), see note 15. Of the US$150,000,000 shown in the cross currency swap position, there are underlying liabilities for US$131,612,000. The difference of US$18,388,000 is maintained as trading derivative financial instruments.
During 2019, the net gain originated by the exchange difference was approximately S/729,000 (net loss from exchange difference of approximately S/8,377,000 during 2018), all these results are presented in "Gain (loss) from exchange difference, net" in the consolidated statement of profit or loss. The net loss from exchange difference for the year 2018 included a loss of S/4,293,000 originated by cash flow hedging instruments that changed to trading condition.
| 6. | Cash and cash equivalents |
| (a) | This |
| 2017 | 2016 | 2015 | 2019 | 2018 | ||||||||||||||||
| S/(000) | S/(000) | S/(000) | S/(000) | S/(000) | ||||||||||||||||
| Cash on hand | 1,088 | 1,391 | 1,388 | 149 | 152 | |||||||||||||||
| Cash at banks (b) | 24,128 | 28,424 | 46,419 | 16,617 | 18,821 | |||||||||||||||
| Short-term deposits (c) | 24,000 | 50,400 | 110,200 | 51,500 | 30,094 | |||||||||||||||
| 49,216 | 80,215 | 158,007 | 68,266 | 49,067 | ||||||||||||||||
| (b) | Cash at banks is |
| (c) | As of December 31, |
During the years 2017, 2016 and 2015, the term deposits generated interests of S/1,342,000, S/2,154,000 and S/2,587,000, respectively. See note 23. From these amounts S/159,000 and S/114,000 are pending of collection as of December 31, 2017 and 2016, respectively. See note 7(a).F-39
Notes to the consolidated financial statements (continued)