Earnings Call: Q4 2020

Mar 11, 2021

Good morning, and welcome to Loma Negra 4th Quarter 2020 Conference Call and Webcast. All participants will be in listen only mode. After following an English translation. Please note this event is being recorded. I would now like to turn the conference over to Mr. Gaston Pinnel, Head of Investor Relations. Please, Gaston, go ahead. Thank you. Good morning, and welcome to Loma Negra's 4th quarter and fiscal year 2020 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 Pfeifferland, our CEO and Vice President of the Board of Directors and our CFO, Marco Gerdin. 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 press 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, Artem. Hello, everyone, and thank you for joining us today. First, I hope you and your family are safe and healthy. As always, I'm going to mention a few highlights of the Q4 and then Marco's world view 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 you saw from our release yesterday, in the Q4, we achieved an outstanding performance on the back of our cement business. The momentum is quite encouraging as the bulk cement are showing the bulk of cement on the volume expansion in the same months. The recovery pathway of cement dispatch was consolidated as cement demand in the 4th quarter experienced as a strong sequential growth and an overall volume increase of around 23% with every division of the country undergoing similar dynamics. Coupled with volume increase, our diligence on cost control and our pricing discipline enabled us to grow our EBITDA, expand our margin by 4.15 basis points and reach our record high EBITDA per ton. Our assessment EBITDA in the quarter was $58,000,000 with an expansion of 33% compared to the same quarter last year. For the full fiscal year 2020 and bearing in mind the uncertainty we face is along the year, I would like to highlight the resiliencies and determination of our organization. Together, we were able to deliver again excellent results and EBITDA of $171,000,000 with margin of 33%, while strengthening further our solid balance sheet and executing our strategic L'Amali expansion projects. We will expect to start producing clinker later this month and to be fully operational by middle 2021. Although we are getting to court cease with the virus, we need to stay alert and focus as our country and the world continue to battle the COVID-nineteen pandemic. We face additional challenge as Argentina economic environment remains delicate and with several restriction. Yet, we trust that the right stimulus and CIMIAL could bring additional dynamics to the economy as a whole and the construction sector in particular. I will now hand off the call to Marco Gradin, who will walk you through our market review and financial results. Please, Marcos, go ahead. Thank you, Sergio. Good day, everyone. As you can see on Slide 4, leaving behind the fierce drop of beginning of 2020, the year ended with an estimated GDP drop of 4.4% in the Q4 2020 and a full year drop of 10%. For the full year 2020, the cement industry dropped by 11.5 percent to 9,750,000 tons, needing to go back almost a decade to fund similarly industry volumes. During the last quarter of 2020, we have observed a strong recovery momentum in the construction activity and the cement demand with a volume expansion of 24.1%. Promisingly, in the 1st couple of months of 2021, the industry posted similar positive growth dynamic with January February volumes expanding by 20% and by 18%, respectively. The main driver behind this trend is bagged cement sales, which even posted a record high level in October and which is explained by a with positive year on year growth. Certainly, the economy as a host it faces different tests, particularly on the macroeconomic outlook, expectation of GDP growth for 2021 revolve around a 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. As surprisingly, the share of cement sold in bag increased by almost 6 80 percentage points 61% in Q1 'nineteen to almost 68% in this quarter. We expect this breakdown to remain rather stable on the following month. We expect bag demand continues to catch up as Liptus restriction on larger private construction works and public works are making the segment to gain some momentum again. Turning to Slide 5 for a review of our top line performance by segment. Consolidated revenues increased year on year by 20.6% on the back of our core cement, masonry and lime business, which expanded revenues by 26.9% due to higher demand, higher market participation together with stable pricing. As mentioned before, bagged cement continues to be the main driver behind this energy recovery, growing in this quarter around 39% compared to the same quarter last year and bulk cement grew mildly around 7% as previous COVID-nineteen restrictions in private works were being lifted. Concrete segment was also positively impacted by execution of the Metropolitan Airport Expansion Project in the Buenos Aires City. Thus, sales volumes increased by 12.8% year on year, the first positive figure since Q1 2019. Yet concrete revenues declined by 17% as softer pricing affected the higher sales volume. Railroad revenues decreased by 19.1% year on year versus the comparable quarter in 2018 as the higher transported volumes were more than offset by lower pricing mix. Finally, aggregates decreased by 4.7% as pricing performance partially compensated 9.5% volume decline. For fiscal year 2020, net revenues increased 12.8 percent to ARS41.6 billion from ARS47.7 1,000,000,000 in 2018 with revenues declines across all segments with our core cement business suffering a milder annual decline of 4.7%. Moving on to Slide 6, consolidated for the quarter was up 46.1 percent year on year with margin expansion by 6 32 basis points, an extraordinary result underpinned by the strength of our core cement business. Cement gross margin expanded in the back of higher sales volume and benefiting from cost discipline. Energy inputs benefit from early prices renegotiation together with improvements in unitary energy consumptions. SG and A expenses as a percentage of revenues decreased by 115 basis points from 9% to 7.9%, mainly due to higher sales volume. Please turn to slide 7. Our adjusted EBITDA was up 40.8% in the quarter, reaching 58,000,000 dollars and our consolidated EBITDA margin expanded by 5 13 basis points to 35.6%, thanks to margin expansion in our core business. This segment expanded by 6 0 4 basis points to an outstanding 40.4%, mainly due to the increase in sales volume and improved energy inputs. In a per ton basis, EBITDA stood at 37 dollars uptick at record high level and increasing around 11% compared with the same period last year and above 17% in a sequential basis versus 3rd quarter. Railroad adjusted EBITDA margin deteriorated to minus 0.6 percent, mainly impacted by pricing mix and partially offset by higher reported volumes. Group's adjusted EBITDA declined compared to Q4 'nineteen with margin worsening to 19 0.2% negative as softer pricing and higher cost had weighted increase in sales volume. Finally, aggregates adjusted EBITDA margin decreased to minus 9% from minus 4.6% with better pricing being ad weighted by lower sales volume and higher cost. EBITDA in 20 20 was $171,000,000 compared to $172,000,000 in 20 18, which included $9,000,000 of non recurring costs associated to administrative, commercial and productive structural equity efforts. Moving on to the bottom line on Slide 8, driven by EBITDA growth and net finance gain, net income surged by 93.9 percent to $46,000,000 Income from continuous operation was ARS3 1,000,000,000 compared to a loss of ARS1.2 billion, most explained by the adjusted EBITDA expansion and lower financial expenses driven by lower total financial debt. By contrast, foreign exchange rate was ARS199 1,000,000 lower due to lower debt position denominated in foreign currency and a real depreciation of the peso. Measured in U. S. Dollars, our net income for full fiscal year 2020 was $189,000,000 compared to $50,000,000 in fiscal year 2018. When excluding the income from discontinued operations related to the sale of our stake, Isamiento Iguacu, the net profit reached $97,000,000 in 20.20 or $60,000,000 higher than in 2018. Moving on to the balance sheet. As you can see on slide 9, our higher profitability outweighed the higher working capital needs in the quarter, resulting in a healthy operational cash flow generation of ARS 4,000,000,000, a 52% year on year raise. During the quarter, we made capital expenditure for ARS1.7 billion, 45% of which were dedicated to L'Amali expansion project. Additionally, we paid out an extraordinary dividend of approximately US31 $1,000,000 related to the sale in Paraguay. On February, we announced our share repurchase program with the purpose of efficiently applying a portion of the company's cash position expected to generate a greater return on value for our shareholders given the current attractive value of the share. During the year, our financial situation was further strengthened. We ended 2020 with a net debt reduction of 100 and $62,000,000 reaching $25,000,000 as of year end with a net debt to EBITDA ratio of 0.16x compared to a 0.83x by the end of 2018. Now for our final remarks, I would like to hand the call back to Sergio. Thanks, Marcos. Now to ramp up the presentation. I please ask you to turn to Slide 10. Definitely, 2020 will be remembered as one of the most challenging years in Decadot. We are proud of the action taken to look after our people, our community and our customers. Since the beginning of this crisis, our priority has been the health and safety of our people and their families. This is why we quickly formed and adopted committed to manage and monitoring the situation. Firstly, we temporarily suspend production in our plant as well as the requisition of our expansion project. During the situation, we never lost focus on the importance of securitin working capital needs, optimizing costing and reforming our capital spending priorities. Under this context and supported by the resonances and sense of propose of our organization, we were able to deliver again excellent results, a strong EBITDA generation in 2020 of $171,000,000 with margin of 33%. Our solid balance sheet and the approaching completion of our strategic L'Amali expansion project made us feel confident that we are ready to face new challenges. Forecast for the Argentine economy revealed CDP growth of around 5.5% year on year for 2021, which will be a partial recovery after the sharp decline in 2020. In top line, could we expect the construction sector will experience a stronger recovery in the 1st semester, leaving the 2nd semester subject to how the economic and sanitary situation of the country evolves. One could say that up to some extent, we are getting used to coexist with the virus, yet we need to remain alert and focus as our country and the world continue to battle the COVID-nineteen pandemic. In Argentina, we face additional challenge as the economic environment remains, delicate and with several restrictions. Having said that, we trust the right stimulus and senior could bring additional dynamics to the economy as a whole and the construction sector in particular. We are confident that we have positioned ourselves for a sustainable growth and cash flow generation in the future. Finally, I would like to thank all our people and stakeholders with whom this set of solid results would have been very difficult, particularly during these unprecedented times. We are now ready to take questions. Operator, please open the call for questions. For those questions and they will be addressed. Also, please note that Mr. Sergio Faizan will be responding in Spanish immediately following the English translation. Please hold momentarily while we assemble our roster. Our first question is from Nikolay Lippmann from Morgan Stanley. Go ahead. Thank you very much and thanks for taking my questions. Congrats on the very solid strong numbers there. My question is really related to costs, so two elements of that. First, the sustainability of this cost reduction at a cash cost level for U. S. As winter approaches. To what degree do you think that you can rely on local gas visavis buying pet coke? And related and a similar question related to the Lamanley expansion, to what degree do you think that any cost reduction that we'll have there will be basically an addition to EBITDA per tonne and that you will keep that and to what degree are you thinking of trying to invest some of that back into the market? Thank you very much. And again, congrats on the numbers. Regarding our cost, yes, we believe they are sustainable looking forward. This year, we had a considerable reduction in our variable cost in energy, electrical energy and thermal energy. We have an advantage to produce using natural gas comparing to pet coke. This advantage is going to be further increasing the future once we have the LAmali second line. Because in that way we're going to be able to optimize our working capital and to run more in winter. Regarding the benefits from the second line of LAmali, there is no doubt that most of those benefits we already implemented. Those related to structure and fixed cost were already implemented. Logically, since we already have improved our thermal and electrical costs, the benefits from a higher productivity in the second line are less. Looking forward, independently from what happened in the past, we're going to have a better performance in the second line. And also the higher volumes are going to be we're going to be able to produce them with the same structure. Thank you very much. You're welcome. Our next question is from Alberto Valerio from UBS. Go ahead. Muchas gracias, Sergio, Marco and Gaston for taking my questions. I have 3 quick ones on my side. The first one about debt payments, I saw that the maturity for the next year. And how long would pay this for? It's mostly in foreign currency, right? And how we would pay can Loma get official U. S. Dollars for those payments or must go for the blue dollar? Hi, Alberto. Thank you for your question. The maturity of our debt profile, it's not concentrated on one only maturity. There are several payments that we have to make and we are relying on getting access to official effects, yes. Obviously, the situation can change, but we are confident that we are going to use that we are going to be able to obtain those payments in U. S. Dollars. Perfect, Marco. Thank you very much. And my second one would be about the next steps for Loma when Loma Maria project is gone by mid of year and the company probably reaching the net cash in the next quarter. How long will we use its firepower? Are you thinking increased dividends if you can distribute them? Or there are any expansion plan or M and A? Hi, Alberto. Thank you for the question. So currently we are working on our Board of Directors within the financial committee. Where we are analyzing all the alternatives that we're going to present after the expansion project of Lamali. The further decision that was made that we took last year at the end of the year is the repurchase plan that is undertake now. So the other alternatives that for the use of cash, which have pros and cons and still under analysis. Eduardo. This concludes our question and answer session. We have Nikolay coming back. Nikolay Lieberman from Morgan Stanley has another question. And we have another person. Go ahead, Nikolay. Sorry for coming back and thanks for taking another question here. I was just wondering if you could your rail concession will expire shortly. If you can provide a bit of an update on sort of what's going to be the base case as you're seeing it right now and how it potentially could affect some of your operations? Thanks. The railway concession is due on 2023. So the original concession had a provision for an extension for additional 10 years and the government is starting this renewal. So the information that we have and the meetings that we are having with the government did not doesn't have a formal entity yet. And the idea would be to go to an open access scheme where the current concessionists are going to be able to operate on the trucks, on the current trucks. Tracks. So in that way, the government or the national government is going to should take care of the investments to maintain the railways. And each operator should take care of the maintenance of the wagons and then pay a fee to operate on those trucks. So we expect that this new structure should have a should be beneficial for Loma Negra, not only as the logistic costs should be reduced, but also the investments. Our next question is from Coleman Clyde from HSBC. Go ahead. Hi, gentlemen. Thank you for taking my question. Just had a quick one. Could you give us a little bit of color on the outlook for volumes and pricing in 2021? Obviously, you finished the year on a very strong note on the volume side. How much of that momentum do you see carrying through the year? And then as well, in terms of the bulk versus bag breakdown, obviously, is a lot more bagged cement sales this year. What kind of margin benefit did that have this year? And do you expect that reverse last year and do you expect that reversing in 2021? Thanks. Hi, Colleman. Thanks for your question. So for this year, we are expecting GDP growth between 5.5% 7%. So we still do not have a provision for the industry growth, the cement industry growth. But taking a look to the history, there has been a multiplier of 2x approximately. So our expectation for the price increases is to be in line with Lomenera cost inflation. Costs that has a component of U. S. Dollars. We do see a recovery in the bulk segment, which is coming from lower volumes. And also many announcements of different public works in the other provinces, which are starting to be implemented. Profitability in both bulk and bag are quite similar. So this shouldn't have an impact the consolidated profitability. Got it. Thank you very much. This concludes our question and answer session. I would like to turn the conference over to Gaston Pinnel for closing remarks. Thank you for joining us today. We appreciate your participation and your interest in our company. We always look forward to meeting 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.