Earnings Call: Q2 2021

Aug 12, 2021

Good morning, and welcome to the Loma Negra Second Quarter 2021 Conference Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Also Mr. Sergio Fifeman will be responding in Spanish immediately following an English translation. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Gaston Pinault, Head of IR. Please, Gaston, go ahead. Thank you. Good morning, and welcome to Lumenera's 2nd quarter earnings conference call. 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, Marco Gradin. Both of them will be available for the Q and A session. Before I turn the call over to Sergio, 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 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 showing us today. 1st, I hope you and your family are safe and healthy. So as usual, I'm going to mention a few highlights of the Q2 and then Marco will review for our market review and financial results. After that, I will provide some final remarks and then we will open the call to your questions. As you call, show from our release used yesterday, we are pleased with the Q2 great performance, which was mostly explained by our Cement business. It is quite encouraging that the strong momentum experienced in cement sales seen last year bottom continued and is already exceeding pre pandemic level with July posting the highest few days since 2016. Our world class operation enabled us to expand our EBITDA by 74% and expand our margin by 4 83 basis points, posting the best 2nd quarter since APO as higher operational level and cost control more than offset the impact of higher production during winter months compared to unusual Q2 of last year. Our adjusted EBITDA in the quarter was $48,000,000 $22,000,000 higher than in the same quarter last year, impacted by COVID-nineteen pandemic restriction and $9,000,000 higher when compared to pre pandemic Q2 2019, when measuring in U. S. Dollar per ton EBITDA increased compared with the same period last year, around 28% and standing at $34 per ton. Regarding our capital structure, we have a solid balance sheet with a low net debt ratio of 0.13 times and some debts profile. During the quarter, our bottom line was hurt by a one off deferred income tax charge related to recent tax reform. Marcos will elaborated on this later. Finally, in June, we navigated the new kiln in LAmali plant, which is now up and running and producing clinker. Full commissioning of the second line is moving toward completion and is now proramated for end of September. I will now hand off the call to Marco Bradin, who will walk you through our market review and financial results. Please, Marcos. Thank you, Sergio. Good day, everyone. As you can see on Slide 4, leaving behind the fierce double digit drop of GDP in 2020 is now expected to be partially recovered by year end. Construction activity remains strong and is recovering since last November. In the case of the Cement National Industry sales, the recovery was much stronger. Actually, the recovery cycle that started in September last year is now starting to exceed pre pandemic levels of 2018. Q2 of 2021 posted a total volume of 2,800,000 tons, 50.5% higher than Q2 2020 and 2% above Q2 2019. While breaking it down by segments, both BAG and BAG contributed positively to growth. Naturally, BAG segments accumulate a longer recovery cycle and is already above 11% in respect to Q2 2018. On the other hand, BAG is still down around 9% when compared to Q2 2019, yet it has experienced a sharper recovery year on year as this was the most hit segment by COVID-nineteen restrictions last year. Consequently, the share of salmon salted bag increased from 22% in Q2 of 2020 to almost 39% in this quarter. We expect this breakeven to remain rather stable on the following months with a moderate bulk recovery, seasonality and some higher public works activity from factory. Certainly, the economy as a whole still faces different tests, particularly on the macroeconomic outlook, expectation of our GDP growth for 2021 revolve around a 6.8% recovery, definitely far from pre pandemic levels. Turning to Slide 5 for a review of our top line performance by segment. Consolidated revenues year on year increased by 46.6%, mainly reflecting the positive momentum experienced by our core Cement business with all segments contributing positively to sales recovery. Cement, majorly Cement, Online segment was up 43.4% with volumes expanding 39.5% and good pricing performance. Concrete and Aggregates posted a standard recovery of 4 92% and 1,000 percent year on year respectively. Bear in mind that sales in the comparable quarter last year had collapsed due to COVID-nineteen restrictions. In the case of concrete volume expansion of 184% was partially offset by negative pricing performance. On the contrary, aggregates experienced sharp volume recovery of 6 20 percent together with positive pricing mix. Finally, railroad revenues increased by 23.5% during the quarter versus the same quarter in 2020 as the higher Moving on to Slide 7. Consolidated gross profit for the quarter was up 88% year on year with margin expanding by 664 basis points as a result largely driven by our Cement business. Cement gross margin expanded by 411 basis points from 38% to 42.1% in the back of higher operational leverage and profiting from cost discipline, yet we experienced some pressure from seasonal energy charges as winter production in 2020 was abnormally low due to the sharp drop in demand, including cost initiatives to face last year uncertainty. SG and A expenses as a percentage of revenues decreased by 83 basis points to 8.6% from 9.5% 1 year ago, mainly due to cost dilution from fiber sales volume, which outweighed higher labor costs compared to last year's level. Please turn to Slide 8. Our adjusted EBITDA was up 71 point 1% in the quarter, reaching ARS4.4 billion with consolidated EBITDA margin expanding by 4 83 basis points to 30.5%. In U. S. Dollars, our EBITDA reached $48,000,000 or $22,000,000 higher than the same quarter a year ago or $9,000,000 higher than the same quarter in 2018, previously COVID-nineteen outbreak, mainly thanks to our core business segment, cement, masonry and lime, with concrete and aggregates contributed in a lesser extent to EBITDA growth. Segment segment adjusted EBITDA margin expanded by 4 72 basis points to a world class 34%, mainly due to the increase in sales volume and higher cost dilution, posting the best margin for our Q2 in recent years. In a per ton basis, EBITDA increased compared with the same period last year, around 28% and stood at $34 per ton. Concrete adjusted EBITDA increased ARS 81,000,000 compared to Q2 2020, explained by lower cost and SG and A in relation to revenues, year to margins remained negative at 6.8%. Aggregates adjusted EBITDA improved drastically from negative ARS41 1,000,000 in Q2 2020 to positive ARS15 1,000,000 in Q2 2021 with margin of 7.7% as a better pricing mix and volume outweighted cost increases. Finally, railroad adjusted EBITDA margin deteriorated from 7.7% to 4.9%, mainly impacted by product mix and partially offset by higher transported volume and lower burden of SG and A as a percentage of revenues. Moving on to the bottom line on slide 10, driven by EBITDA growth and net finance gain profit before tax stood at ARS3.3 billion. In this quarter, our bottom line was impacted by the recent tax reform, which increases income tax rate from 30% to 35%, including the suspension of the suspension of the subsequent rate reduction of 25. This one off effect is equivalent to ARS 3,000,000,000 of additional deferred tax charges, resulting in a debt loss of ARS1.2 billion. Besides this impact, our accumulated net profit for the year posted positive figures of ARS1.6 ARS1.6 billion. Total finance gain stood at ARS292 1,000,000 in this quarter compared to a net loss of ARS1.6 billion in Q2 2020, mainly due to a foreign exchange gain of ARS193 1,000,000 in this quarter reverting a loss of ARS864 1,000,000 in Q2 2020 as a result of a lower net debt denominated in foreign currency and a real appreciation of the pesos. Additionally, guidance net monetary position was ARS552 1,000,000 in this quarter compared to ARS402 1,000,000 last year. Finally, our net financial expense declined by ARS381,000,000 to ARS453,000,000 compared to same quarter last year, driven by lower net financial debt. Moving on to the balance sheet, as you can see on slide 11. We ended the quarter with a cash position of ARS2.9 billion and total debt at ARS5.4 billion. Consequently, our net debt to EBITDA ratio stood at 0.14 times compared to 0.16 times at the end of 2020. In this quarter, we reduced our debt in $21,000,000 standing at $56,000,000 83% of which is denominated in U. S. Dollars. Additionally, we repurchased share for a total amount of ARS111 1,000,000. During the quarter, our operational cash generation was almost fully dedicated to income tax payments and seasonal working capital requirement. As always, in the Q2, previous year's income tax payments are scheduled. Particularly in this quarter, the tax payment of ARS 3,000,000,000 included ARS1.5 billion charge related to last year's divestment in Paraguay. When compared to last year's Q2, we need to bear in mind that in 2020, working capital levels include several initiatives aiming to preserve liquidity under the pandemic uncertainty. Regarding capital expenditure, we spent ARS 1,600,000,000, 22% of which were dedicated to the Maria expansion project. As the second line is about to be completed, so are the capital requirements. Now for our final remarks, I would like to hand the call back to Sergio. Thank you, Marcos. Now to wrap up the presentation, I please ask you to turn to Slide 13. As we expect cement demand recovery from last year's volume to continue, we foresee an expansion compared to pre pandemic level of 2019. For the second half, both seasonality and public works could play an important role, yet we are cautioned as macroeconomic context could affect the recovery. At this point in time, impact relative to COVID seems more distant. However, we remain hopeful to evolution of the new variants, both locally and globally. After inauguration in June, the brand new kiln in LAmali started to produce clinker and is already contributing to our world class operation. Additionally, the new cement mill and dispatch center are planning to start up by end of September. As we recently communicated and in line with our expectation, a new open access scheme will rule in Argentina railroad network. And Faro Sur Roca concession will not be extending beyond the original expiration date of March 2023. Details regarding the new scheme are not yet available. Therefore, we are analyzing different scenarios, none of which should have a material impact on our current businesses and where the most probably is to become an operator continuing the current operation. Last but not least, I would like to thank all our people and stakeholders for their commitment to Loma's operational excellence without whom the set of solid result could have been much harder to achieve. We are confident that supported by a robust and efficient productive footprint, our solid capital structure and dedicated team, Loma has the base to continue thriving in the year to come. We are now ready to take questions. Operator, please open the call for questions. Thank you. And we will now conduct a question and answer If you have additional questions, you may re queue for those questions and they will be addressed. Also, please note that Mr. Sergio Feifman will be responding in Spanish immediately following an English translation. Please hold momentarily while we assemble the roster. And our first question today will come from Albert Valerio with UBS. Please go ahead. Hi, Sergio and Marcos. Thank you for taking my question. I would like to know about the dynamics in Argentina. The impressions that we have here with our cementing, we know that the Q2 is seasonally weekly, weaker than the first one. But we estimate that it's decelerating relative to the Q1. And with the preliminary data from July, looks like Argentina is accelerating again. So my question is, this is true, the Q2 come a little bit weaker than the strong Q1 and this we can expect to recover in the second half of the year? Thank you. Sorry, Alberto, you're speaking about margins or about volumes? About margins, I think the volume come as expected, but I think the price come a little bit below what we expect. So overall, the EBITDA that I was expecting was a little bit higher than what to come because we saw a very strong Q1. So typically, during winter months, there's a seasonality effect on our production costs. Additionally, when compared to the last year, we produced a very much lower amount of cement and including a lower price of gas derived from the pandemic situation. Additionally, by this time of the year, we were expecting to be producing clinker with a new kiln in Namaoli plant, which ended up starting in June, okay. So the benefits were not collected in the Q2 and we still producing we were producing in the Olavarria plant. Perfect. Thank you very much. And if you could just provide a follow-up a call for the second half of the year. Should we receive the activity accelerating again? So yes, as you may saw on the AFCP reporting, July numbers were very good and actually they were the 2nd best July in history. And the 1st days of August and also the what we foresee for the remaining of the year are quite optimistic. Forecasting for the full year for the industry, numbers above the 2019 pre pandemic levels. You're welcome, Alberto. And our next question will come from Carlos Perelonge with Bank of America. Please go ahead. Thank you. Thank you, Sergio and Marcos for the call. My question is related to the new Q1 in La Male and the expansions. Can you comment on the expected margin expansion once you're up and running and provide some timing as to when you think this new kiln will contribute to margin and we will be operating smoothly? Thank you. Carlos, thank you for the question. So the numbers of the market will not only depend on the demand volumes, but also the cost of the energy. So why we are saying that because the kiln in LAmali plant is much more efficient than the kiln in Lavalia, but there are also many other factors playing in. So the efficiency of the new kiln regarding the specific consumption in kilocalories is around 10% better than the Olavarria kiln and we are now analyzing if it's better to run during the summer with summer costs of energy or during the winter with using pet coke and naturally higher energy costs. So now we are running the kiln and it's already working above the guarantee levels and we are now planning to produce with these levels. So a follow-up on this. So the margin expansion that you mentioned, assuming that things are running smoothly and we don't have major surprises on the cost side, is 200 to 300 basis points on EBIT margin on a consolidated basis? Did I get that correct? Yes, that's correct. It's 2% to 4% of margin increase. Okay, great. Thank you so much. Appreciate it. And our next question will come from Nikolaj Lipman with Morgan Stanley. Please go ahead. Thank you. Good morning, gentlemen. Good morning, everyone. I'd like to congrats on Goodnumb. There's 2 questions or one question, I guess, I'm allowed to. So I'll bake it in one. I was wondering if you can give a bit of details on asset allocation. Given the change in the concession, if you're thinking about a bit of a plan B, maybe expanding your fleet of trucks in case there could be some disruption? And also, the second part of the question would be, how do you guys feel about aggregates in Argentina these days? Thanks a lot. Thanks for taking my question. Sorry, Nicolas, could you repeat the questions because we can't hear you on the first part. Sorry about that. My question relates to whether you guys as the rail concession comes to an end and of course every time that happens there's a certain amount of risk associated with the new framework. Are you considering increasing you have a very strong balance sheet. Are you considering buying a bit of increasing the fleet for logistics in case there's any sort of disruption? And also, how are you seeing the aggregates market? Is that something that you're looking at in terms of possible use of cash making acquisitions in that space? Hi, Nicolas. Thanks for your question. So regarding the railway, we do not foresee cost increases from now on. Initially, we are planning to keep our operation as an operator in those trucks. So, yes, besides the fact that, yes, there are no details from the government regarding Canon and other factors. We expect either to maintain or to even increase regarding the lower CapEx requirements. Got it. And can you comment on whether you are seeing any opportunities in the aggregates market in Argentina? [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] So we're not thinking on expanding on the aggregate business, but we are increasing margins thinking on what happened during the pandemic. So one important point regarding the railways, we considering LAmali 2, we have an advantage, yes, because an additional advantage because we are not going to rely that much on Loma Ser and we're going to increase the dispatch capacity from Loma And our next question will come from Augustina Isidro with AI Partners. Please go ahead. Hi, good morning and thanks for taking my question and for the presentation. So going back to the estimate for the cement shipment for this year. So the construction sector is showing this interest dynamic that you were talking about and many attribute this to the FX gap. So what do you think is behind the recovery? That's our first question. And then as a second question, do you think that bulk cement will recover to pre pandemic levels during this year? Thank you. So there are no doubts that the gap between the FX rates, it has an impact on demand? We also observe an increase in public works, especially small public works, while larger public works are still hampered. And we also observe our consumer behavior to expand the places where they live, and this is additionally driving demand. So when we observe July, yes, we observe that we are above pre pandemic levels. Then when you take a look to both, it's slightly lower than 2019 and back is slightly higher than 2019. And we are already with both volumes closer to 40% of total market volumes. Perfect. Thank you. And our next question will come from Albert Valerio with UBS. Please go ahead. Thank you for taking my question. Again Sergio and Marcos. Just another one, now about dividends, you know that Argentina has remained with the restriction of capital. And my question is how further can you guys go with the buybacks? Sorry, Alberto. How you're asking about the buyback? Yes. How much more you can do it? The volume that we are applying for the 2nd fiber program is what we are allowed to do in the local markets, yes? So in the it's more or less $2,000,000 per month. That's the one that we are achieving. We spent almost $5,000,000 during the quarter. Perfect. And for how long can you keep doing the buyback? There is a limit or the limit is $2,000,000 per month? The limit is 10% of total capital of Loma Negra. So it's still plenty of room. And this concludes our question and answer session. I would like to turn the conference back over to Gaston Pinault for any closing remarks. Thank you for joining us today. We appreciate your participation and your interest in our company. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.