Earnings Call: Q1 2021

May 13, 2021

Good morning, and welcome to Loma Negra's First Quarter 2021 Conference Call and Webcast. All participants will be in listen only mode. Also, Sergio Faitzman 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 Pinnel, Head of Investor Relations. Please go ahead. Thank you. Good morning, and welcome to Loma Negra's Q1 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 Feifman, our CEO and Vice President of the Board of Directors and our CFO, Marco Geradin. 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 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 healthy. As always, I am going to mention a few highlights of the 1st quarters, and then Marco will guide 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 questions. As you could saw from our release issued yesterday, in the Q1, we had a great performance, mainly on the back of our Cement business. The strong momentum experienced in cement sales seen last year's poton is now decelerating and volumes are stabilizing around pre pandemic levels. The higher operational leverage, together with good performance in production inputs, translate to world class profitability levels, enabling us to grow our EBITDA by 49.6 percent and expand our margin by 341 basis points. Our assessment EBITDA in the quarter was $52,000,000 compared to $36,000,000 in the Q1 2020, when COVID-nineteen pandemic lockdown were established. Our top tier profitability levels, our focus on our working capital management and our recent deleveraging result into a strong cash flow generation and solid capital structure with a net debt ratio of 0 point 0 four times. Finally, we continue to move towards completion of our Strategic La Malie expansion project, which we expect to start producing clinker in the upcoming days. Full commissioning of the second line is programming for the next month. I will now hand off the call to Marco Gradin, who will walk you through our market review and financial result. Please, Marcos? Thank you, Sergio. Good day, everyone. As you can see on slide 4, leaving behind the fierce double digit drops of beginning of 2020, the year ended with an estimate GDP drop of 4.3% in the Q4 of 2020. And in the 1st 2 months of 2021, the economic activity contracted around 2.4%. In the case of the 7 national industry sales, the recovery was much stronger, especially in the bank format. After a steady increase in sales volumes since the collapse of demand of the 3rd and second quarter last year, demand seems to have stabilized around pre pandemic figures. Q1 2021 posted a total volumes of 2,700,000 tonnes, a 38.6 percent higher than Q1 2020, but only 2% lower than Q1 2018. The main driver behind this trend is bagged cement sales, which posted an increase of 35.6% year on year and almost 9% when compared to Q1 2018. Bulk segment, which started to contribute with positive year on year growth, is still lagging behind Q1 'nineteen figures by around 16%. Consequently, the share of cement sold in bulk increased by almost 200 percentage basis points from 36% in Q1 'twenty to almost 38% in Q1 'twenty one. We expect this breakdown to remain rather stable on the following months with a moderate bulk recovery. The macroeconomic context together with COVID-nineteen second wave could increase uncertainty and affect major construction projects resumption. Naturally, when total industry figures are compared to last year, March April presented an outstanding 94% and 135%, respectively, as those months were the most affected by the initial lockdowns. Certainly, the economy as a whole still faces different tests, particularly on the macroeconomic outlook, expectation about GDP growth for 2021 revolve around our mid single digit expansion, definitely far from pre pandemic levels. In this sense, we carefully watch the strength of different economic sectors as they are reopening for businesses. Turning on to Slide 5 for a review of our top line performance by segment. Consolidated revenues increased year on year by 35.4%, mainly reflecting the positive momentum experienced by our core Cement business, which is now stabilizing around pre pandemic levels. Additionally, and bear in mind that by the end of the quarter last year, it was established a lockdown to contain the COVID-nineteen outbreak. In the Q1, all segments sales volumes experienced a strong recovery. Cement, Major, Cement and Lime segment was up 38.4% with volumes expanded 38% with stable pricing. Concrete potedale revenue increase of 64.8%, continuing with the mild recovery path in sales volume, yet distant from pre pandemic levels, but with a negative pricing environment. By contrast, Aggregate posted a revenue increase of 47.3% as higher volume sales coupled with a positive pricing mix. Railroad revenues decreased by 12.7% in Q1 2021 versus the same quarter in 2020 and the higher transported volumes were more than offset by poor pricing performance. Moving on to Slide 7. Consolidated gross profit for the quarter was up 61% year on year with margin expanded by 577 basis points, a result reinforced by the pulse of our core Cement business. Cement gross margin expanded in the back of higher operational leverage and profiting from cost discipline. Energy inputs benefit from early prices or negotiations together with improvement in unitary energy consumption. SG and A expenses as a percentage of revenues decreased by 57 basis points to 8.2% from 8.8%, mainly due to cost dilution from higher sales volume and higher level of cost compared to last year's level. Please turn to Slide 8. Our adjusted EBITDA was up 49.6 percent in the quarter, reaching $52,000,000 consolidated EBITDA margin expanded by 314 basis points to 35.7%, mainly thanks to margin expansion in our core business. This segment expanded by 322 basis points to a best in class 40.8%, mainly due to an increase in sales volumes and improved energy inputs. In a per ton basis, EBITDA increased compared with the same period last year sequentially, around 6% 5%, respectively, and stood at $38 Railroad adjusted EBITDA margin deteriorated to 107 basis points, mainly impacted by pricing performance and partially offset by higher transported volumes. Concrete adjusted EBITDA decreased 63% compared to Q1 2020 at softer price and a higher SG and A cost, a weighted increase in sales volumes and the reduction in unitary cost of sales. Finally, aggregate adjusted EBITDA margin improved to minus 11.2% from minus 25.2% with better pricing down weighted but still depressed sales volumes and low operational leverage. Moving on to the bottom line on Slide 10, driven by EBITDA, growth and net finance gain, net profit surged by 104 percent to $37,000,000 compared to Q3 'twenty levels affected by initial lockdowns. Total finance gain stood at ARS141 1,000,000 in Q1 'twenty one compared to a net loss of ARS170 1,000,000 in Q4 'twenty as our net monetary position presented a gain of ARS558 1,000,000 in Q4 2021 compared to a ARS176 $6,000,000 loss on Q4 2020. Additionally, the exchange rate difference also presented a gain of ARS21 1,000,000 reverting a loss of ARS239 1,000,000 in Q4 'twenty. Finally, our net financial expense declined by ARS70 1,000,000 to ARS438 1,000,000 compared to same quarter last year, driven by lower total financial debt. Measured in U. S. Dollars, our net income for the quarter was dollars was $47,000,000 compared to $10,000,000 in Q1 2020. Moving on to the balance sheet. As you can see on Slide 11, our top tier profitability level, our focus on our working capital management and our recent deleveraging results into a strong cash flow generation and solid capital structure. We ended the quarter with a cash position of ARS6 1,000,000,000 and total debt at ARS6.7 billion. Consequently, our net debt to EBITDA ratio stood at 0.04 times compared to 0.16x at the end of 2020. During the quarter, we made capital expenditure for MXN1 1,000,000,000, which 1 third was dedicated to the L'Amali expansion project. Additionally, we canceled ARS443 1,000,000 of financial debt and repurchased share a total amount of ARS255 1,000,000. 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 13. Although we are guiding to coexist with the virus and the vaccination plan is progressing, cement demand seems to be stabilizing around pre pandemic level, and we expect a moderate growth perspective for the remainder of the years. In this sense, current macroeconomic context, together with potential restriction related to a second wave pool, increase than certainly and affect large construction project reopening. Yet, our world class profitability level, our focus on our working capital management and our recent deleveraging result into a strong cash flow generation and solid capital structure. This, together with capital expenditure in L'Amali plant, which will start producing clinker in the next days and which will be fully commissioned in the next months, are for us a solid ground to rely on the year to come. Last but not least, I would like to thank all our people and stakeholders without who this set of solid result would have been very difficult. We are now ready to take questions. Operator, please open the call for questions. Thank you. We will now conduct our question and answer session. We would you may requeue for these questions, and they will be addressed. Also, please note that Mr. Sergio Paisman will be responding in Spanish immediately following an English translation. Our first question comes from Nicolas Lipmann from Morgan Stanley. Go ahead. Thank you. Thanks for taking my question here. And congratulations on both the results and also on finishing the plant out in L'Amali. My question and it's hard just to go down to one, but my question is you're generating a lot of cash, and it looks likely that you will continue to generate a lot of cash. What can you do? What are the potential M and A opportunities? I don't know if you see anything in the aggregate. So what is the thinking around your balance sheet and the use of cash over the next couple of years? Thank you very much. Again, congrats. Hi, Nicolas. Thank you for your question. Regarding the cash, exceeding cash, we are working as we mentioned before, we're working on the Board of Directors under the Committee of Finance into a long term plan. In the last time to now, we have been working with 2 banks in order to think about and to strengthen our strategy and to think what to do with this exceeding cash. So under this analysis, we are thinking on a more aggressive dividend policy, some acquisition locally or some deal abroad. So yes, the strategy is not defined. And in the short term, we are using our resources for the repurchase plan that is coming to an end by the end of the month. Our next question is from Alberto Valerio from UBS. Go ahead. Hi, everyone. Hi, Gaston, Anterio and Marcos. Congrats on the results. I think it was the best results in Argentina market ever. I would like to ask you additional color on margin gains. I think it was close to 3.5% year over year. And even with the prices in U. S. Terms dropping a little bit, if you could provide additional color, it would be very helpful on these margin expansions. Sorry, Alberto, we are not clear if we understood the question. It's regarding the margin expansion? Exactly, Gaston. If you could just provide additional color, how you achieved this 36% of EBITDA margin, maybe 3.5% expansion from Q1 2020? Hi, Valerio. Thank you for your question. The DMDs and El Meze Marso? So regarding the margin expansion, there are a few factors playing in. First, we have to remember the lockdown that happened in March last year. So logically, the higher volume this year comes together with a higher cost dilution per Additionally, last year between April May, we signed some natural gas contracts, which had an impact not only last year, but also in this Q1. So, and finally, our performance that we improved as a continuous operation and also the pricing policy, which was also positive during the period. Just a follow-up. Can we have the level of capacity that Loma is running at the moment? And at what capacity it will be running at the LomaDI plant start to operating? Thanks. That's all my questions. Currently, we are working at 80% to 85% of our capacity. And you should remember that the expansion of LAmali represents additional 40% of our total capacity. Obviously, the second line will enable us to further optimize our production and to benefit from the costs, the seasonality in our costs. Our next question is from Go ahead. Hi, good morning. Hope you're doing well and congratulations on another great quarterly results. I have one question regarding your gas supply contracts. How do you see the new pricing environment in the gas market impacting on margins as you start to renovate these contracts? I don't know if you have meaningful maturities this year. And trying to understand if these are sort of a straightforward revolving of the contracts or given your long standing relationship with these suppliers, you usually are able to perhaps negotiate some discount versus market prices? Thanks. Thank you for your question, So as you know, there has been some issues with the supply of natural gas, they're related from some conflicts in the natural gas basins in Argentina. Last month, we had renovated our natural gas contracts for the next 12 months. Many of those contracts we were they raised the awareness that we may have some issues of supply due to the supply problem that we mentioned before. So given that situation, we took 2 concrete actions. 1 related to the import pet coke, yes, to supply our to guarantee our winter production and the other one to renew some of the contracts that we were mentioning. And as a consequence, the other risk that was mitigated is our capacity to produce cement during the winter. This concludes our question and answer session. I would like to turn the call back to Gaston Pinnel for closing remarks. Oh, I'm sorry. There's more questions. Nikolay Littmann from Morgan Stanley. Go ahead. Nikolay? Sorry, I was muted. So sorry for coming back, but just a clarifying question here. Did I understand this correctly, you're importing pet coke for the winter period to some degree, but you don't expect to have a negative impact on your cash cost. It sounds very counterintuitive. I was just wondering if I got that correct. Thank you, So, yes, we are importing 1 vessel of pet coke and we're going to produce during the winter with a mix between pet coke and natural gas. Additionally, during winter, just to remember that we do the overhauling of our equipment and that's why we typically we produce in a lesser extent during winter. So with that mixture of petco and natural gas and the contract that we already have signed for natural gas, we do not expect volatility in our production costs. Got it. So it's more like an insurance policy? Thanks for clarifying. And so now it concludes our question and answer session. I would like to turn the conference back over to Gaston Pinnel for closing remarks. Well, 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 you may have. And thanks again and stay safe.