Earnings Call: Q3 2020

Nov 11, 2020

Good morning, and welcome to the Loma Negra Third Quarter 2020 Conference Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Also, Mr. Sergio Feichman 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 Panel, Head of IR. Please, Gaston, go ahead. Thank you. Good morning and welcome to our Q3 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 Feiffman, our CEO and Vice President of Board of Directors and our CFO, Marco Gradin. Both of them will be available for the Q and A session. Before we proceed, I would like to make the following Safe Harbor statements. Today's call will contain forward looking statements. 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. Please, Sergio, go ahead. Thank you, Artem. Hello, everyone, and thank you for joining us today. First, I hope you and your family are safe and well. I am going to mention a few highlights of the Q3 and then Marco will review 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. I would like to begin by thanking our people and stakeholders without whom this set of solid results will have been very difficult, particularly during these unprecedented times. During the Q3, we achieved very important results with EBITDA, growth and margin expansion. The recovery pathway of cemented patch was considered as we experienced a very strong sequential growth in every region of the country. And overall volume increase of almost 3% in year on year basis. As observed in previous quarter, the reason behind this rebound was the bulk cement, driven mainly by residential demand. On the contrary, the delay in larger private and public works execution is preventing the bulk segment to start its recovering and also harming our concrete and aggregate business. Our assessment EBITDA stood at $48,000,000 with an expansion of 9.4 percent in the quarter compared to the same quarter last year as we remain diligent on our operation, enabled to recover sales volume while improving our EBITDA margin by 4.54 basis points to 31.5%. Additionally, during the quarter, we decided to execute the sale of our under 51% stake in the Paraguay Company, Iguacu Cementos. This was an excellent deal in term of value generation and timing. With a high implied multiples of approximately 9 times last 12 months EBITDA. As our country and the world continue to battle the COVID-nineteen pandemic, economic activity remained weak and unsettled heights. Yet, lockdowns are less restrictive and more sectors unoperational, which is expected to bring additional dynamics to the economy as a goal. As a key element of our long term strategy, L'Amali expansion project is right on track, expecting it to be inaugurated by the beginning of 2021. I will now hand off the call to Marco Radin, 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 5, we are leaving behind the bottom levels of the 2nd quarter where the GDP recorded a fierce drop of 19%. Ouspiciously, the construction sector continues the sequential recovery started in May. In particular, the cement sector is experiencing a more vigorous rebound. After 14 months of year on year decline, September was the 1st month in recording a positive 10.5% growth. The main drivers behind this trend is bagged cement sales, which is explained by a surge in self construction and recent demand. This segment grew around 18% in the Q1 relative to the same quarter in 2018 and also posted in September a historic record. A similar trend was also observed in October with a 12.8% year on year growth for the industry. By contrast during this quarter, pulp segment together with concrete and aggregates continues to suffer the most hampered by the halt in infrastructure works as the construction to operate combined with economic uncertainty. As surprisingly the share of segment sold in bank increased by almost 14% points from 58% in Q3 2019 to more than 72% in Q3 2020. We expect this breakdown to remain rather stable in the following months. Eventually, bulk demand would catch up as more restrictions are lifted on larger private and public works are going to gain some momentum. Definitely, the economy as a whole is yet far from turning around and Argentina still faces different tests, particularly on the macroeconomic outlook. Expectation of our GDP growth for 2020 revolve around a double digit decline. In this sense, we watch carefully the vigor of different economic sectors as they are reopening for business. Turning to slide 5 for a review of our top line performance by segment. While consolidated revenues dropped 4.5%, revenues of our core business cement, masonry and lime was up 5.3% with sales volumes increasing by 2.9% year on year and favorable pricing environment. As mentioned before, bagged cement continues to be the driver behind this vigorously rebound, growing in this quarter around 23% compared to the same quarter last year. Revenues from our railroad segment decreased 29.8% year on year with volume drop of 5.8% further impacted by the change in product mix, namely a drop in transported building materials and frac sand, partially compensated by other services rendered. Revenues of concrete and aggregate are still the most hampered by the health in public and private projects plummeting 70.2% and 25.2% respectively. Moving on to Slide 6. Consolidated gross profit for the quarter increased by 3.9% year on year and margin expanded by 225 basis points explained by our core business. In particularly the recovery of revenues of the Bags segment with good cost performance, especially in energy inputs and lighter fixed cost structure, which reflects footprint adequacy efforts achieved last year. Energy inputs benefit from earlier prices renegotiations together with improvements in unitary energy consumptions. SG and A expenses as a percentage of revenues increased by 67 basis points to 7.7% from 7% mainly due to higher percentage of back cement sales. Please turn to Slide 7. Our adjusted EBITDA was up 11.6% in this quarter, reaching $48,000,000 and consolidated EBITDA margin expanded by 4 54 basis points to 31.5 percent, thanks to margin expansion in our core business segment, Cement, Majorie Cement and Lime. Adjusted EBITDA margin in this segment expanded by 172 basis points to 34.3 percent as back volumes recovery coupled with significant reduction in energy input costs, a good pricing performance allowed us to perform previous year quarter. Revenue adjusted EBITDA margin worsened to 6.3% from 14% impacted by lower volumes and cost decline in less than proportional. Concrete and Aggregates posted a negative ARS58 million and negative ARS42 million respectively as they remain severely affected by the limited to execution of larger public and private works. EBITDA in U. S. Dollar per ton stood at 32%, increasing around 16% compared with the same period last year and above 21% in a sequential basis versus 2nd quarter this year. Moving on to the bottom line on Slide 8, net income for the quarter stood at ARS6.4 billion or $113,000,000 This figure includes ARS4.2 billion of income from discontinued operations in Paraguay. Comparing to a loss of ARS180 1,000,000,000 comparing to a loss of ARS180 1,000,000, mostly explained by a positive impact of exchange rate difference and adjusted EBITDA expansion, partially offset by impairment of assets in other segments. As a consequence of the change in business perspectives, we registered a non cash impairment loss of approximately ARS851 million from which the biggest stake is the impairment on railway that amounted ARS705 million and the remaining on aggregate. Finally, net income was also affected by a charge of ARS363 1,000,000 related to the cash contribution done in Forozul to repay existing debt. Measured in U. S. Dollar, our net income reached US113 $1,000,000 in the quarter from a loss of $12,000,000 in the year ago quarter. Moving on to the balance sheet, as you can see on Slide 9, as previously mentioned, during the quarter, we executed the sale of our Paraglari operation, resulting in an excellent value creation opportunity for the company. The proceeds from the sales were mainly dedicated to the debt repayment and the distribution of an extraordinary dividend of approximately $31,000,000 which was performed in October 2020. Additionally, this transaction together with our positive operating cash flow of ARS3.4 billion enable us to face capital expenditure payments of ARS1.6 billion, 69% of which was dedicated to the expansion project and to repay ARS8.9 billion of borrowings, ending the quarter with a total cash position of ARS4.7 billion with manageable short term debt maturities of ARS3.9 billion. At the end of this quarter, our net debt was reduced to US19 $1,000,000 and our net debt to EBITDA ratio was 0.12x from 1.17x in the Q2 this year. 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. We proved resilient to these challenging times and we are pleased to communicate these achievements, our effort and our ability to unknow words translate to our results, once again delivering margin and EBITDA growth. The initial recovery of cement demand observed at the end of the second quarter was confirmed during the last month, where Vargas cement reached record high volume. We expect this improvement to continue at some point in time, major private and private infrastructure works shall resume reinforcing these positive trends. Certainly, the economy as a world is yet far from turning around and Argentine still face different challenges, particularly on the macroeconomics perspectives. In this sense, we got to cover through the dynamics of different economic sector as they are reopening for business and how this could affect our own sector. We executed firmly on the sale of our Paraguay operation. We considered it was an excellent deal in terms of timing and value generation. We optimized the proceeds from the transaction creating value for our shareholders at the time we strengthened our already robust financial situation. We are now concentrating all our efforts in Argentina. In total line, we suppose we keep the pace on the execution of LAmali expansion project, which planning to be ready by the beginning of 2021. Once again, I would like to thank our old people and stakeholders without whom this above mentioned result would have been impossible especially during these unpleasant times. Let's keep moving forward with the same responsibility and the falsiness we have shown so far. United, we are able to overcome and challenge this and grasp every opportunity on our way. We are now ready to take questions. Operator, please open the call for questions. Thank you. We will now conduct the question and answer And please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. Please hold momentarily while we assemble our roster. Our first question is from Alejandra Obregon from Morgan Stanley. Go ahead. Hi, good morning and thank you for taking my question. I actually only have one. If you could please elaborate on your utilization rates across the different regions or assets and whether you are optimistic of getting more pricing power in the next months? Thank you. Good morning, Alejandra. Thank you for your question. The utilization rate in the plants, it depends on a monthly basis and it's currently approximately 90% of its utilization. It is hard to talk about utilization rate because in this month of September, October November, we are usually with a higher demand. If we take a look to the clinker capacity utilization, we should be around 80%. In this last month, due to the bagged cement recovery, we do have more utilization rates in the dispatching in the bagging and dispatching sectors. For the coming months, we are optimistic about the volumes. And we also think that it could be a slight decrease in the back cement and most probably a recovery on the bulk because it's the one lagging Importantly that to remark that the large infrastructure projects not only in the metropolitan area of Buenos Aires, but also in the rest of the country, has been virtually non existent. And in the last for the last time, there has been some news about some infrastructure projects that are starting in the near future. Thank you. And maybe a follow-up here. Is it fair to assume that the retail demand or the strength that we've seen in the retail demand is coming from the Buenos Aires area or is there any other region that has outperformed as well? No, actually demand is quite stable along the country. In the metropolitan area, the bulk cement was more affected due to the lockdown restrictions. Understood. Thank you very much. Thank you, Vikram. Our next question is from Coleman Clyde from HSBC. Go ahead. Hi, gentlemen. Thank you for taking my question. I just have 2 really quick ones. My first one is on margins. I'm just wondering what your more medium term outlook is for margins in light of the fact that the L'Amali plant expansion is going to come online next year and I know that you were initially expecting to see some improvements from that plant. We've already seen some pretty big improvements on the margin front. So are you still expecting to see further improvement? What's your more medium term outlook on that front? And then the second question would be in light of the sale of your assets in Paraguay, would could you envision a scenario in the future where you pursued assets outside of Argentina again? Those are my 2 questions. Good morning, Colman. Thank you for your questions. Regarding margins, with LAmali expansion, we should have margin improvements. Certainly, this margin improvement will not be next year due to the ramp up in the plant. Should also have a ramp up in the margin improvement. Additionally, there are 2 other things. 1 is the energy the thermal energy costs. That due to the savings that we observed recently, the savings with LAmali should be less than what we had expected. The other factor has to do with the volumes, yes, and the size of LAmali. And once we are ramping up production in that plant, we should also be diluting fixed costs. With respect to the Paraguay? Regarding Paraguay? Regarding Paraguay, we believe that the sale proves the capacity of the company to develop a project and then to sell it with the right timing and value generation. So at this moment in the Board of Directors, in the Finance Committee, we are revising and reviewing the strategy for the next 5 years? And in this strategic plan, we are not discarding any alternative. It could be growth in Argentina, either vertical integration or also abroad in other geographies. But as of today, we do not have any decision made about these future steps. Our next question is from Ergo Nguilar from Bank of America. Go ahead. Yes. Thank you. Good morning. So I would just like to know if you have some more color on the stimulus program that were announced by the government earlier this year. Just anything you could comment? Thank you. Sorry, Eric. Could you repeat your question? We didn't get it actually. Okay. Can you hear me there? Yes. Yes. Now it's better. Okay. So, any color you could give us on the stimulus package announced by the government earlier this year? Have those projects have started? Or are they going to start anywhere in the near future? Just any color you can give us would be good. Thank you. Thank you, Eric. So the plans, the governmental plans that we have knowledge about are focused on housing adequacy, right, suages, houses and roads. We believe that with the approval of the budget 2021 this week, we should have a better outlook for these plans. And this concludes our question and answer session. I would like to turn the conference back over to Gaston Pinnel for 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.