Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Loma Negra First Quarter 2019 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Gaston Pinnel, IR Manager. Please go ahead.

Thank you. Good morning everyone and thank you for joining us today. We appreciate everyone’s participation. By now, everyone should have access to our earnings press release and the presentation for today’s call bulk of which were distributed yesterday after close. Speaking during today’s call will be Sergio Faifman, our CEO and Vice President of the Board of Directors; and our CFO Marcos Gradin. Both will be available for the Q&A session. Before we proceed, I would like to make the following Safe Harbor statements. Today’s call will contain forward-looking statements and I refer you to the forward-looking statements section of our earnings release and recent filing with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Finally I would also like to remind you that the company is reporting results of its Argentina subsidiaries by IAS 29. Financial reporting in – balance. Now, I would like to turn the call over to our CEO, Sergio Faifman.

Thank you, Gastón. Hello, everyone, and thank you for showing up today. It's a pleasure to welcome you to Loma Negra first quarter 2019 conference call. I will begin my presentation with a discussion of the highlights of the quarter, and then Marco will take you through our market review and financial results. Afterwards, I will provide our outlook for 2019. We will then open the call to your questions. Starting with slide three. We ended the quarter with another solid set of results. Despite economic slowdown, cement demand in the first quarter contract to year-on-year around 10.6%. Our top line for the quarter increased by 3.6% year-on-year to ARS 7.4 billion, with an EBITDA increase -- an adjusted EBITDA of around 18%, achieving a margin expansion of around 350 basis points to 28.7%. During the quarter, we included some nonrecurrent expenditures related to a structural adequacy of administrative and commercial process, which results in a reduction of around 10% of this process headcount. Skewing this effect, the adjusted EBITDA margin would have been 30.6% or 528 basis points, higher than 1 quarter '18. This is a demonstration to our continued effort on balance sheet growth and profitability. Our core Argentine Cement business remain in the principal structure regarding this strong result, together with a good performance in Paraguay, Concrete and Railroad. It's resulting in year-on-year both online increase of 48%. As shown on this slide, using the pure accounting methodology and measured in U.S. dollar in this quarter, we achieved an adjusted EBITDA of $54 million. Excluding the nonrecurrent charge of adjusted EBITDA in the first quarter, we have been around $58 million, down by only 3% year-on-year despite the 13% contraction in the Cement volume and the sharp peso depreciation. Additionally, our robust balance sheet with net debt to last 12-month adjusted EBITDA of 0.59x provide us with a solid position to face the currency volatility of the local financial market. The expansion of our L´Amalí plant continues to be a key element of our long-term strategy and will continue to our production efficiency and profitability. The project continues be on track, and the startup date is effective to be in the second quarter of the next year. I will now hand over the call to Marcos Gradin. Please, Marcos, go ahead.

Thank you, Sergio. Good day, everyone. Turning to Slide 4. Let me start by providing a quick overview of the macro environment and industry trends in Argentina. Construction activity measured through the site declined in the first three months of the year, signaling that the downturn started last year is yet to carryover at the beginning of 2018. In this regard, economics expectation call for a 1.3% contraction in GDP for this year, recovering gradually only after the second half, reaching growth of 2.2% in 2020. During this quarter, the Cement industry declined by a rate of 10.6% year-on-year, but showing a softer decline when compared to the same rate of the previous quarter. Taking a closer look at the cement demand, bag-on-bulk segments continues to present different dynamics. Bag segment declined over by 15%, by contrast, bulk segment demand only by 3.5%. Continued to be supported by public infrastructure work, thus, bulk segment demand continue to increase its share in total cement sales reaching 43% of total sales. Looking into this year, we still expect the negative cycle that we had in the second quarter of 2018 to turn around by midyear following consensus expectation of an overall macroeconomic recovery in Argentina. We see industry Cement demand following these macro trends while current public works are expected to continue moving ahead, particularly in the Buenos Aires metropolitan area. Now please turn to Slide 5 for a review of our top line performance by segment. Revenues were up 3.6% despite softer Cement sales volumes. For the quarter, Cement sales volumes dropped 13% year-on-year, impacted by overall weaker demand. Thus, revenues fell only by 1% year-on-year, compensated by a healthy pricing environment. In Paraguay, revenues were up almost 34%, driven by the continued recovery in sales volumes that were up 8% in the quarter and the Guarani appreciation against the Argentine pesos. The Concrete segment continued to present good revenue generation with volume growth coupled with strong pricing. Revenues generated by the Aggregates segment were also benefited by a positive pricing. By contrast, revenues from our Railroad segment decreased 1.6% year-on-year as a consequence of softer transported volumes. Moving on to Slide 6. Consolidated gross profit for the quarter was up by 28.6% year-on-year, with a margin expansion of almost 560 basis points, reaching 28.8% in the quarter. This was mainly driven by our core cement operation in Argentina and further supported by our Cement business in Paraguay and our Concrete and Railroad segments. On the cost side, upward pressure continued due to the impact of the peso depreciation and hyperinflation in the company’s cost structure, mainly in thermal and electricity costs. This impact was partially mitigated by savings in energy costs measured in U.S. dollars, both thermal and electrical. SG&A expenses as a percentage of revenues increased by 74 basis points to 8.4%, principally due to nonrecurrent expenditures related to the structure adequacy in our administrative and commercial process of approximately ARS 95 million, and partially compensated by the reduction of effective sales tax rate. If the nonrecurrent structure adequacy is included, SG&A as a percentage of revenues would have declined to 7.1%. Please turn to slide seven. Despite the softer demand, we reached consolidated adjusted EBITDA growth of 17.9% in the quarter, over ARS 2.1 billion or $54 million, with margin expanding 347 basis points to 28.7%, mainly driven by the Cement segments in Argentina, Paraguay, and further supported by growth in Concrete and Railroad. Excluding the nonrecurrent charges, EBITDA margin would have been 30.5%, reaching ARS 2.3 billion or USD $58 million. The application of IAS 29 impacted in a reduction of 98 basis points in the consolidated EBITDA margin in this quarter. When excluding the application of inflation accounting, adjusted EBITDA for the cement segment in Argentina increased 68.5% year-on-year, and the margin expanded by 310 basis points to 31.8%. Also, Paraguay posted a 110% growth in adjusted EBITDA, with the margin improving 126 basis points to almost 45%. Adjusted EBITDA margin for our Concrete segment presented a strong expansion of 620 basis points compared to the year ago quarter, mainly driven by sales volume growth and favorable pricing. We continue to post margin expansion in our Railroad segment with adjusted EBITDA margin up almost 580 basis points year-on-year, benefiting from higher revenues and a lower fixed cost structure. By contrast, Aggregates segment adjusted EBITDA margin deteriorate as the flavor of pricing environment could not compensate lower volumes and higher cost of sales. Importantly, despite the strong devaluation of the Argentine pesos in the first quarter year-on-year, around 110%, together with value-accretion volumes, our cement business in Argentina remained relatively stable in terms of EBITDA per ton measured in U.S. dollars, above $32 per ton, slightly over the year-ago quarter. Moving on to the bottom line on slide eight. Net majority income for the quarter increased by 51% year-on-year, reaching ARS 1 billion, resulted primarily from an adjusted EBITDA growth and a positive impact in the income tax line as we decided to exercise the tax revaluation option of the latest tax reform. Measured in U.S. dollars, our net majority income decreased 6% to $25 million in the quarter from $27 million in the year-ago quarter. Moving on to the balance sheet. As you can see on Slide 9, our robust balance sheet provide us with a solid position to face the current volatility of the local financial markets and more flexibility around the funding of our meaningful investment plan. We finished this quarter with a net debt to adjusted EBITDA ratio of 0.59x compared to 0.43 times in the fiscal quarter of 2018. Our net debt at the end of the quarter was USD113 million, with a gross debt breakdown by currency of 46% in U.S. dollars, 40% in Guarani and 14% in Argentine pesos. We continue to make progress in our capital expenditure plan with investments for the quarter reaching ARS 1.9 billion or approximately $40 million. Of the total amount in pesos, around 67% was impacted in the second production line at our L´Amalí plant. I will now handle the call back to Sergio.

Thanks, Marcos. Now please turn to Slide 10. To wrap up this presentation, I would like to highlight a few final takeaways. The challenging macroeconomic environment in Argentina makes us remain ever more focused on our result, leveraging our leadership position while seeking productivity gains. We are pleased to see that our core Argentine Cement business delivering both adjusted EBITDA growth and margin expansion even with weaker volume demand in the country, and that Paraguay, Concrete and Railroad have stronger performance. For the third quarter, Cement demand in Argentina declined around 10.6% year-on-year, as such, thus, volume present an increase compared to the previous quarter we expect this trend to remain in the following quarter. In this context, we remain focused on managing the business to deliver strong results. We're going to continue optimizing our process and structure to make Loma Negra a more efficient and agile company preparing ourselves for the challenges to come. In this direction is that we have presently adequated our administrative and commercial process. Our history and leadership position provide us with a strong base to continue on balancing our growth and profitability. And part of our strategy is the expansion in L´Amalí plant, which will allow us to continue delivering production efficiency and profitability while providing much needed capacity for when demand recovers. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

Thank you. We will now conduct a question and answer session. [Operator Instructions] And our first question comes from Mauricio Serna with UBS.

Hi good morning and thanks for taking my question. One question on demand is, you seemed to be a little bit more optimistic on the second half of the year. So, I was just was wondering, what kind of guidance are you having for the Argentina volumes on a full year basis. And on that same note, we’ve seen some volume underperformance over the last quarters probably as you prioritize the pricing. Do you believe these market share losses will be recovered in the medium term? Or how should we think about this in should this be more a structural share losses? And then finally, you also mentioned the restructuring affecting your expenses on the SG&A front this quarter. Just was wondering if this was only a 1-quarter thing or could it occur again in the following quarters? Thank you.

[Foreign Language]

Mauricio, thank you for your question.

[Foreign Language]

So regarding the volumes, we keep our estimations for the full year. We are serving certain recovery in volumes, and we expect positive numbers from June.

[Foreign Language]

Regarding the market share, as we usually say, given the high inflation and the high turnaround in prices, we do have some impacts in our market share.

[Foreign Language]

These are temporary variations in our market share, but this is included in our strategy.

[Foreign Language]

Regarding the structure adequacy...

[Foreign Language]

So regarding our administrative and commercial structure, we have done all the adjustments that we needed to do to gain efficiencies in these areas.

[Foreign Language]

And regarding operational efficiencies, we’re going to also take some measures in this direction, and they're going to be reflected in the coming times.

Thank you. Thank you very much. Very helpful. And one follow-up, if I may, on -- just on the margins. They’ve been doing very strong, especially on the gross profit level. Just want to understand how much of that was due to pricing? And how much was due to actually better costs or better trends in terms of electricity and thermal fuels?

[Foreign Language]

[Interpreted] So the improvement that we have, it is actually a combination of different factors.

[Foreign Language]

There is no doubt that pricing has an impact.

[Foreign Language]

But as well, we also have many improvement regarding costs.

[Foreign Language]

Which are basically related to thermal and electrical energy.

[Foreign Language]

Also packaging and overall higher efficiency in our facilities.

[Foreign Language]

And specifically regarding thermal and electrical costs, we have reductions of around 10%.

[Operator Instructions]. And our next question comes from Antonella Rapuano with Santander.

I was wondering on the latest news that were published this week on several media, there was rumors on the close of Barker plant, and also that Loma was going to fire around 100 employees. So I think this is part of your restructuring plan. And I think what I just want to know if, well, this is true in the first place. And then when do you plan to do so? How is the impact in the structure in margins, and if that is part of the L´Amalí expansion plan? So [you're] going to transfer a part of the production of the Barker plant to L´Amalí. And well, that's my first question. And I have a second question. If you could give us an update on the class action against Loma related to the IPO that would be helpful.

[Foreign Language]

Antonella, thank you for your questions.

[Foreign Language]

So the informations about the Barker plant, they are correct. We do have a conflict with a union in that plant.

[Foreign Language]

It is within our measures to strengthen our operation structure considering the current situation and the future situations in the market.

[Foreign Language]

So regarding the class action, it is over the regular process of the trial.

[Foreign Language]

So there was an amendment to the demand. And actually, there was new parts on top of the original tax.

[Foreign Language]

Next step is the company to answer this amendment.

[Foreign Language]

And the lawyers are still optimistic regarding the results on this transaction.

[Foreign Language]

And one important concept here is that it is not yet a class action. For this, the judge needs to certify this class action, which didn't happen yet.

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Mr. Gaston Pinnel for any closing remarks.

Thank you for joining us today. We appreciate your interest in our company. And we look forward to meeting more of you over the coming months and providing financial and business update on next quarter. In the interim, the team remains available to answer any questions you may have. Thank you and enjoy the rest of your day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.