Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA) Q2 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Loma Negra Second Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Also, Mr. Sergio Faifman will be responding in Spanish immediately following in English translation. [Operator Instructions] Please note, this event is being recorded. And I would now like to turn the conference over to Mr. Gaston Pinnel, IR Manager. Please go ahead.

Thank you. Good morning, and welcome to our second quarter 2020 earnings release conference call. Above all, we hope you and your families are safe and well. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after market close. Joining me on the call this morning will be Sergio Faifman, our CEO and Vice President of the Board of Directors; and our CFO, Marcos Gradin. Both of them 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. This conference call will also include discussion on non-GAAP financial measures. The full reconciliation to the corresponding financial measures is included in the earnings press release. Now I would like to turn the call over to Sergio.

Thank you, Gaston. Hello, everyone, and thank you for joining us today. First, I hope you and your family are safe and well. I would like to mention a few highlights of the quarter, and then Marcos will walk you through our market review and financial results. After that, I will provide some final remarks, and then we will open the call to your question. As a consequence of COVID-19 pandemic, we entered the second quarter amid an unprecedented nationwide lockdown, which impacted heavily on our businesses. Along the quarter and depending on how the sanitation situation developed in each jurisdiction, some of these restrictions were softened or even lifted. In anticipation to the effect of the COVID-19, we took proactive action with a special focus on protecting our communities and strengthening our financial condition. We adopt strict biosafety protocols in our operation. We remain diligent in our cash management, securing working capital needs, tightening fixed cost structure, reformulating our capital expenditure priorities and extending short-term maturities. Altogether, let us reduce our net debt and our net debt-to-EBITDA ratio to 1.17x. As our country and the world continue the battle to COVID-19 pandemics, economic activity remains weak. Our adjustment EBITDA stood at $32 million with a contraction of 24.6% in the quarter compared to the same quarter last year, heavily impacted in April and recovering since then. Relative to the cement demand, after the initial plummeting of sale in April, we are now more encouraged by the improvement of sales in May, June and July in the bag segment. Regarding the L´Amali expansion projects, and as we previously anticipated, work on-site were resumed on late April after the temporary restrictions due to COVID-19 were lifted. This extension, together with the biosafety protocols adopted, have delayed the inauguration date of the project, which is now expected to be at the beginning of 2021. Once again, I want to thank all our people in Argentina and Paraguay who faced enormous struggles and showed a great responsibility to keep this business running. I will now hand off the call to Marcos Gradin, who will walk you through our market review and financial results. Please Marcos, go ahead.

Thank you, Sergio. Good day, everyone. I also hope you and your beloved ones are safe as well. As you can see on Slide 4, in April, the construction sector and the cement industry in Argentina suffered a severe contraction [revealing] a high degree of evidence to the COVID-19 lockdown declared by the end of March, which is currently in different phases according to each jurisdiction. Since May, we observed a very strong rebound in the bag segment, which besides being positively surprising, it provides right our expectation that household demand and [indiscernible] contraction was going to be a more relevant driver in this new scenario. The rebound of this segment was observed across Argentina and also in Paraguay. In June, the bag segment posted a double-digit increase in a year-over-year basis. By contrast, during this quarter, bulk segment suffered the most, impacted by the halt in infrastructure works together with the restriction on private construction [work] in several areas of the country including the city of Buenos Aires and the Greater Buenos Aires area. Naturally, the share of cement sold impact increased by almost 15 percentage points from 56% in second quarter 2019 to more than 70%. We expect this trend to continue in the following months. Bulk demand could eventually start to catch up as main urban centers lift restriction on larger private construction works and when public works start to gain some momentum again. Expectation about GDP growth for 2020 revolve around a double-digit decline. However, we are cautious, and we are attentive to development of the pandemic in the country and to the before-mentioned upside risk. Turning to Slide 5 for a review of our topline performance by segment. Consolidated revenues were down 30.1%, mainly affected by the very strong contraction of economic activity in April. Cement sales volumes dropped 24.5% year-on-year, and revenues fell by 25.8%. As mentioned before, bag segment rebounded vigorously since May, achieving very good levels on June and thereon. In Paraguay, the situation is more favorable, not only because the economic momentum of the country pre-pandemic, but also because the lockdown was more flexible. Altogether, the volumes during the quarter improved by 3.3% year-on-year and posted a record high during June. Revenues from our Railroad segments decreased 36.1% year-on-year, closely related to the drop in transported building materials and frac sand and partially compensated by higher services rendered. Revenues of Concrete and Aggregates in Argentina were the most impacted by the halt in public and private projects, plummeting 93% and 94%, respectively. Moving on to Slide 6. Consolidated gross profit for the quarter declined by 32.2% year-on-year. A heavier burden of D&A impacted gross margin, which contracted by 151 basis points, reaching 24.1% in the quarter. Our core cement operation in Argentina contributed positively as we benefit from favorable input costs and lighter fixed cost structure, reflecting footprint adequacy efforts achieved last year. SG&A expenses as a percentage of revenues increased by 209 basis points to 8.6% from 6.5%, heavily impacted by the sharp decline in revenues. Please turn to Slide 7. Our adjusted EBITDA was down 24.6% in the quarter, reaching $32 million. Yet consolidated EBITDA margin expanded by 204 basis points to 27.9%, thanks to margin expansion in our Argentina-Paraguay Cement segments. When excluding the application of inflation accounting, adjusted EBITDA margin in our Cement, Masonry and Lime segment in Argentina expanded by 155 basis points to 30.7%, as we benefit by a significant reduction in energy input costs and also by the footprint adequacy efforts achieved last year. Also, Paraguay posted an adjusted EBITDA margin improvement of 104 basis points to 42.4%. Railroad adjusted EBITDA margin deteriorated to 6.9% from 12.8%, while Concrete and Aggregates posted a negative 83% and negative 173%, respectively. These two latter segments were much severely affected by the restriction to execute construction work in major urban centers. EBITDA in U.S. dollars per ton stood at $26, decreasing around 3% compared with the same period last year as it was affected mainly by the drop in volumes. Moving on to the bottom line on Slide 8. Net income for the quarter decreased by almost 93% year-on-year, reaching Ps. 111 million, resulted mainly from an adjusted EBITDA contraction and a negative impact total foreign exchange loss. Total finance results represents a loss of Ps. 1.1 billion compared to a gain of Ps. 377 million in the second quarter in the previous year, mostly explained by a foreign exchange loss of Ps. 560 million compared to a gain of Ps. 414 million in second quarter of 2019. The higher interest rate environment, together with the higher gross debt resulted in a net financial expense of Ps. 615 million, Ps. 78 million higher than in the previous quarter. The net passive monetary position resulted in a gain of Ps. 431 million. Measured in U.S. dollars, our net income decreased 59.1% to $10 million in the quarter from $25 million in the year ago quarter. Moving on to the balance sheet, as you can see on Slide 9. During the second quarter, we remain diligent in our cash management, securing working capital needs, tightening fixed cost structure, reformulating our capital expenditure priorities and extending short-term maturities. Altogether, let us reduce our net debt by $26 million to $200 million and our net debt-to-EBITDA ratio to 1.17x from 1.26x in the first quarter this year. Gross debt by currency breakdowns like this, 48% in Argentine pesos, 37% in hard currency and 15% in Guaranies. Our capital expenditure plan continued with investment for the quarter reaching Ps. 1 billion or approximately $15 million, almost entirely dedicated to the expansion project. As the current situation continues to be conditioned by the COVID-19 restrictions, we'll remain particularly on top of our liquidity and our liability management. During this quarter, we have rolled over short-term maturities, and we'll continue searching for opportunities that will allow us to further improve our capital structure. Now for our final remarks, I would like to hand the call back to Sergio.

Thanks, Marcos. Now to wrap up the presentation. I please ask you to turn to Slide 10. Health and safety of our employee are always a priority as it is our commitments with our communities, our supplier and customer and, of course, our shareholders. Our business suffered a heavy toll back in April with sales plummeting in all segments. However, we are now more encouraged by the strong recovery observed in May, June and July in the bag segment. At some point in time, bulk segment should also awake, particularly in the Buenos Aires metropolitan area, where the restrictions are being more severe. From the macroeconomic perspective, having the government reach an agreement with bondholder is a step in the right direction. In this context, we understand that the construction sector is going to be a key sector in the so much needed economic turnaround. Still the recovery path is uncertainly and rather challenging. Therefore, we remain country's about providing guidelines for 2020 industrial growth. And then of April, we had resumed works on L'Amali expansion project, which is now back on track. Naturally, the temporary suspension, together with the biosafety protocols adopted have delayed the inauguration date of the project, which is now expect it to be at the beginning of 2021. We remain alert and cautious regarding the evolution of the worldwide crisis, which ending seems hard to predict. I will finally like to thank our people who, in this unprecedented COVID-19 situation show a great responsibility and resourcefulness in order to overcome difficulties and to keep on running the business. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] Also, please note that Mr. Sergio Faifman will be responding in Spanish, immediately following an English translation. [Operator Instructions] And our first question today will come from Eric Neguelouart with Bank of America. Please go ahead.

Hi, good morning. Thank you for your time. So just a quick question from my side, thinking about bag segment and the increase in demand during the second half of the quarter, I'd like to know how much of this is from an actual increase in demand, and how much you think would come from low availability of bulk cement, and how sustainable the incremental demand would be for the remainder of the year? Thank you very much.

Good morning, Eric. Thank you for your questions. If you take a look to the demand, the strong driver of demand during the quarter was the bag segment and bulk represented approximately 20% of total demand. So what is behind this – the situation is that there are two points. The first one is that in the metropolitan area, basically, Buenos Aires city and the surrounding region, there is a restriction to operate in private constructions. And the other thing is this is also the case in the rest of the country, in some parts of the rest of the country. Taking a look to some numbers, June and July, the bag segment is approximately 50% above the year-ago month, and bulk is approximately 50% below the June and July figures of last year. So it's quite probable that considering the lift in the restrictions to operate together with the upcoming public works that we expect that bulk cement should also increase the dispatches.

Thank you.

[Operator Instructions] And our next question will come from Antonella Rapuano with Santander. Please go ahead.

Hi. Well, congratulations for the result and thank you for taking my question. I was wondering if you can comment a little bit on the pricing dynamic that you have seen so far. And also what you expect for the coming months considering that analysts are expecting an acceleration in inflation rate? And also, if you see any risk of price controls given your experience in the past with Peronist government? Thank you.

Hi, Antonella. Thank you for your question. So first, I would like to stand out that besides the price increases during the quarter that were below what we could have achieved, the important thing to stand out is that our cost control, together with the fixed cost structure – restructuring that we did last year enabled us to keep a certain level under control of our EBITDA per ton. So the price dynamic during the quarter was not as usual, especially due to the lockdown and the slow recovery path at the beginning of the lockdown. Already for June and July, the pricing dynamic came back to normal, and we expect for the rest of the year to be in line with inflation and other parameters that we take into account.

[Operator Instructions] And at this time, I would like to turn the conference back over to Gaston Pinnel for any closing remarks.

Thank you for joining us today. We appreciate your participation and your interest in our company, and we look forward to meeting more of you over the coming months and providing financial and business updates next quarter. In the meantime, the team remains available to answer any questions that you may have. Thanks again, and stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.