Executive Summary / Key Takeaways

• Cementos Pacasmayo (CPAC) is strategically positioned as a leading building solutions provider in Northern Peru, capitalizing on the nation's significant infrastructure and housing deficit through its integrated offerings and "Obras por Impuestos" program participation.
• The company is undergoing a robust digital transformation, leveraging AI and machine learning to enhance operational efficiency, customer interactions, and supply chain optimization, evidenced by successful pilot projects and ISO 27001 cybersecurity certification.
• CPAC demonstrated strong financial recovery in H1 2025, with sales volumes up 7.1% year-over-year in Q2 2025 and consolidated EBITDA increasing by 9%, driven by infrastructure demand and operational efficiencies, despite short-term project-related cost pressures.
• Management projects continued "single high digits" volume growth for the second half of 2025 and an EBITDA margin between 28% and 29% for the full year, supported by stable CapEx and a commitment to maintaining or increasing its solid dividend policy.
• While facing competitive pressures from larger global players and risks associated with project execution and local security, CPAC's localized expertise, innovative building solutions, and decarbonization efforts provide a resilient foundation for long-term growth.

A Foundation for Growth: Cementos Pacasmayo's Strategic Imperative

Cementos Pacasmayo S.A.A. (CPAC), incorporated in 1949 and headquartered in Lima, Peru, has long been a cornerstone of the Peruvian construction industry. The company has strategically evolved beyond a traditional cement producer to become a comprehensive provider of "building solutions," a critical shift in a nation still grappling with a significant infrastructure and housing deficit. This strategic pivot, deeply rooted in its history, emphasizes delivering high-quality, resilient products and services that directly contribute to Peru's economic growth and social inclusion. CPAC's core business encompasses cement, concrete, mortar, precast materials, and quicklime, serving residential, commercial, and public sector projects.

The competitive landscape in Peru is dynamic, featuring both local and international players. CPAC competes directly with global giants like Cemex and Holcim , as well as regional players such as Cementos Yura and Argos (CCX). While larger competitors benefit from global scale, diversified revenue streams, and advanced technological capabilities, CPAC carves out its niche through a strong local distribution network, deep regulatory expertise, and integrated production capabilities. Its emphasis on direct sales to government and private entities, coupled with an extensive network of independent retailers, fosters strong customer loyalty and localized market penetration. This regional focus allows CPAC to offer tailored solutions and respond swiftly to local market demands, often leading to stronger market share in domestic segments where larger rivals may face higher customer acquisition costs or less agile operations. However, CPAC's smaller scale compared to global players can lead to higher operational costs and potential lags in innovation speed, particularly in areas like green cement, where Holcim, for instance, has a global lead.

Digital Transformation and Technological Edge

At the heart of CPAC's strategic evolution is a profound commitment to technological differentiation and innovation. The company has embarked on a significant digital transformation journey, aligning technology with its strategic objectives to enhance efficiency and innovation across its operations. This includes developing initiatives for the digitalization of operations, introducing a user-centric service model, and, crucially, integrating AI-driven solutions.

CPAC's AI strategy is a multi-phase approach, starting with a deep understanding of business needs and designing a robust operational and organizational model. The implementation roadmap focuses on preparing the organization for AI adoption, experimenting with AI solutions, and expanding AI's impact across the enterprise. This strategy has yielded tangible benefits, including high employee engagement with 86% participation and an 84% satisfaction grade. The company has successfully developed seven pilot projects, such as a fragmentation model, a commercial virtual assistant, and automatic back and cloud-based assistants. These initiatives are designed to optimize supply chain efficiency, modernize logistics, streamline operations, and improve customer interactions. The "so what" for investors is clear: these technological advancements contribute directly to CPAC's competitive moat by enhancing operational efficiency, potentially leading to lower costs, improved margins, and a more agile response to market demands. The ultimate goal is for Pacasmayo to become a "purely data and AI-driven company," positioning it for sustained long-term growth.

Beyond AI, CPAC has also made significant strides in cybersecurity, becoming the first Peruvian cement company to obtain an ISO 27001 certification in 2024. This international standard for safeguarding information confidentiality and integrity strengthens the protection of operational technologies and reinforces the company's commitment to digital risk management.

Operational Excellence and Sustainable Development

CPAC's operational strategy is deeply intertwined with its commitment to sustainability and efficiency. The company consistently focuses on optimizing its production processes, notably through the efficient operation of its newer kilns and a concerted effort to lower its clinker factor. Management aims to reduce the clinker factor to around 67%-68% in the coming years, primarily by focusing heavily on pozzolanic materials and roll line. This initiative not only effectively increases capacity without substantial capital expenditure but also aligns with decarbonization goals. From a commercial standpoint, CPAC is actively working to shift market perceptions, educating customers that cements with lower clinker factors are as effective as traditional Type 1 cements.

The company is also at the forefront of decarbonization efforts in Peru, recognizing that reducing coal usage is key to its medium and long-term environmental goals. CPAC is actively exploring cleaner alternatives, including biomass derived from sugarcane byproduct (sugar brush), with successful lab tests and promising dozen-scale trials. Parallel efforts are underway to utilize end-of-life tires and other waste-derived fuels. These initiatives aim to reduce environmental impact without compromising affordability, a crucial balance given the product's importance for Peruvians needing proper housing and basic services.

CPAC's dedication to sustainability has garnered significant recognition. For the seventh consecutive year, it was ranked as a top cement company in the MERCO Talent index and 19th overall across all industries. In 2024, it became the first Peruvian cement company to obtain an Environmental Product Declaration (EPD) from the global EPD program for three of its cement plants, covering an estimated 75% of its portfolio. Furthermore, CPAC has been included in the S&P (SPGI) Sustainability Yearbook for the fifth consecutive year and maintained its position as an industry leader in the MERCO responsibility ESG ranking for the ninth year in a row. These accolades underscore the company's integrated approach to economic, social, and environmental responsibility.

Financial Performance and Liquidity: A Resilient Trajectory

Cementos Pacasmayo has demonstrated a resilient financial performance, particularly in the first half of 2025, reflecting its strategic execution and improving market conditions. In the second quarter of 2025, the company reported an "extremely solid recovery in sales volume," increasing 7.1% year-over-year, primarily driven by stronger demand for cement and concrete, largely from infrastructure-related projects. Consolidated EBITDA for Q2 2025 rose 9% year-over-year to $130.2 million, even amidst increased expenses from collective bargaining negotiations. For the first six months of 2025, revenues increased 5.3%, and gross profit grew 8.2% year-over-year, attributed to efficiencies from the annual maintenance plan and lower raw material costs. EBITDA for this period increased 5%, with the EBITDA margin remaining consistent. Net profit saw a significant increase of 29.9% in Q2 2025 and 16.5% for the first six months, benefiting from higher revenues, gross profit, and reduced financing expenses due to decreased debt levels.

The "Building Solutions" segment, encompassing concrete, pavement, and mortar, saw sales increase by 9.8% in Q2 2025 and 16.1% for the first six months, fueled by major infrastructure projects like the Piura Airport, Motupe riverbank defenses, Tarata Bridge, and the Yanacocha project. While this segment experienced a gross margin decrease of 3.2 percentage points in Q2 2025 and 4.8 percentage points for the first six months due to exchange rate differences and extended execution periods on the Piura Airport project, management views these as "short-term learning curve additional costs" and remains confident in the long-term strategic value of this path. All cost overruns for the Piura Airport project were accounted for in the 2024 results, with no future impact on gross margins expected.

CPAC maintains a comfortable liquidity position, with a net debt-to-EBITDA ratio of 2.6x in Q2 2025, a level management is "very comfortable with." The company's capital expenditure strategy is disciplined, with sustaining CapEx projected at approximately PEN100 million annually, and no substantial additional CapEx planned for 2025 or 2026. This conservative approach, coupled with ongoing deleveraging, underpins a "solid dividend policy." Management has indicated a "higher chance of that dividend going higher than going lower," reflecting a commitment to returning excess cash to shareholders.

Outlook and Growth Catalysts

Management expresses strong optimism for the remainder of 2025, anticipating that the positive momentum will continue to build. For the second half of the year, cement sales volumes are expected to maintain a "single high digits" growth trend, heavily influenced by the progression of infrastructure projects. Concrete volumes are also projected to increase as major projects like Yanacocha gain traction and new initiatives, such as a potential Mochica new phase, come online. The company expects to close 2025 with "record results."

A key driver for this optimistic outlook is the Peruvian government's renewed focus on infrastructure. The "Obras por Impuestos" (Works for Taxes) program, an innovative mechanism allowing private companies to finance public infrastructure in exchange for tax certificates, is a significant catalyst. CPAC is a top-five contributor to this program, committing over $100 million in 2025, which not only secures demand for its products but also showcases the resilience of its concrete solutions in challenging climate conditions. The appointment of a new Minister of Economics with a strong background in infrastructure is also expected to unlock more projects, leading to increased central and regional government spending. Additionally, strong performance in agricultural exports and fishing is boosting employment in CPAC's core region, which directly translates into robust demand from the self-construction segment, accounting for approximately 80% of the company's cement sales.

Management has provided concrete guidance, projecting the EBITDA margin to remain "between 28% and 29%" for the full year 2025. This stability is underpinned by continued operational efficiencies, stable energy costs, and a disciplined pricing strategy.

Risks and Challenges

Despite the positive outlook, CPAC faces several pertinent risks. Project execution risk, as evidenced by the Piura Airport project, highlights the potential for cost overruns due to factors like exchange rate fluctuations and extended timelines. While these specific costs have been absorbed, future large-scale projects could present similar challenges. Weather-related operational risks, particularly the recurring impact of El Niño and severe climate events, pose a threat to construction activity and supply chains in Northern Peru. However, CPAC's innovative concrete solutions for riverbank protection have demonstrated resilience against such events, mitigating some of this risk.

Security concerns in Peru could also impact the self-construction market, as 80% of CPAC's sales depend on individuals' ability to work and engage in construction. While management views this as a "flat thing" that has been present for the last two years, it remains a factor to monitor. Competitive pressures from larger, more diversified players like Cemex (CX) and Holcim (HCMLY), particularly in terms of technological innovation and scale efficiencies, could challenge CPAC's market share and profitability. The potential for new port infrastructure, such as Chancay, could alter competitive dynamics, though CPAC believes its impact will be localized to Lima, with less influence on its core northern markets. Finally, the shift towards alternative building materials and sustainable construction methods could pose a long-term threat if CPAC does not continue to innovate and adapt its product portfolio effectively.

Conclusion

Cementos Pacasmayo stands as a compelling investment thesis, deeply embedded in Peru's developmental trajectory. The company's strategic evolution into a comprehensive building solutions provider, coupled with its aggressive embrace of digital transformation and sustainability, positions it favorably to capitalize on Peru's significant infrastructure and housing deficit. Despite facing short-term operational challenges and a competitive landscape featuring global giants, CPAC's localized expertise, commitment to innovation, and disciplined financial management have enabled a strong recovery and a positive outlook for 2025.

The projected "single high digits" volume growth and stable EBITDA margins, underpinned by robust infrastructure spending and a healthy self-construction market, suggest a resilient financial future. CPAC's technological leadership, particularly in AI adoption and cybersecurity, alongside its pioneering efforts in decarbonization and sustainable building solutions, reinforces its competitive moat. For discerning investors, CPAC offers a unique blend of regional market leadership, operational efficiency, and a commitment to shareholder returns through a solid dividend policy, making it a foundational play in Peru's ongoing development story.