Earnings Call: Q2 2020

Aug 11, 2020

Good morning, and welcome to the Loma Negra Second Quarter 2020 Earnings 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 Fleissmann will be responding in Spanish immediately following an English translation. Please note this event is being recorded. And I would now like to turn the conference over to Mr. Gaston Pinault, IR Manager. Please go ahead. Thank you. Good morning, and welcome to our Q2 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 Faipan, our CEO and Vice President 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, 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 of 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, 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 Marco will follow 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 a consequence of COVID-nineteen pandemic, we entered the 2nd quarter, I mean, an unprecedented nationwide lockdown, which impacted heavily on our businesses. Along the quarter and depending on how the sanitation situation development in each jurisdiction, some of these restrictions were softened or even lifted. In anticipation to the effect of the COVID-nineteen, we took proactive action with a special focus on protecting our communities and strengthening our financial condition. We adopt strict deceptively 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 1.17 times. As our country and the world continue the battle to COVID-nineteen pandemics, economic activity remains weak. Our assessment EBITDA stood at $32,000,000 with a contraction of 24.6 percent in the quarter compared to the same quarter last year, heavy impact 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 observed in May, June July in the bagged cement. Regarding the L'Amali expansion projects and as we previously anticipated, work on-site were resumed on late April after the temporary restriction due to COVID-nineteen was lifted. This suspension together with the VOCEPT protocols adopt have delighted 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 face enormous obstacles and show a great responsibility to keep this business running. 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. I also hope you and your beloved ones are safe and well. As you can see on Slide 4, in April, the construction sector and the cement industry in Argentina suffered a severe contraction, rebelling a high degree of evidence to the COVID-nineteen lockdown declared by the end of March, which is currently in different phases according to jurisdiction. Since May, we observed a very strong rebound in the bag segment, which besides being positive surprising, it provides right our expectation that household demand and self construction 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 impact by the hot infrastructure works together with the restriction on private construction held in several areas of the country, including the city of Buenos Aires and the Greater Buenos Aires area. Naturally, the share of 7 sold in BAG increased by almost 15 percentage points from 56 percent in Q2 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 shift 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 attempting to development of the pandemic in the country and to the before mentioned upside risk. Turning to Slide 5 for a review of our top line 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, Bags 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 3.3% year on year and posted a record high during June. Revenues from our railroad segments decreased 36.1% and year on year closely related to the drop in transported building materials and frac sand and partially compensated by our service rendered. Revenues in concrete and aggregates in Argentina were the most impacted by the healthy 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 and 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 cost and lighter fixed cost structure reflecting footprint adequacy efforts achieved last year. SG and 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 $32,000,000 yet consolidated EBITDA margin expanded by 204 basis points to 27.9 percent, thanks to margin expansion in our Argentine and Paraguay 7 segments. While excluding the application of relation accounting, adjusted EBITDA margin in our cement, Masonry and Lime segment in Argentina expanded by 155 basis points to 30.7 percent 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%. Revenue adjusted EBITDA margin deteriorated to 6 0.9% from 12.8%, while concrete on aggregate posted a negative 83% and negative 173%, respectively. These two later segments were much severely affected by the restriction to execute construction works 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 ARS111 million, resulted mainly from an adjusted EBITDA contraction and a negative impact total foreign exchange loss. Total finance results represent a loss of ARS1.1 billion compared to a gain of ARS177 1,000,000 in the Q2 of the previous year, mostly explained by a foreign exchange loss of ARS560 1,000,000 compared to a gain of ARS414 1,000,000 in Q2 of 2018. The higher interest rate environment together with the higher gross debt resulted in a net financial expense of ARS615 1,000,000, ARS78 1,000,000 higher than in the previous quarter. The net passive monetary position resulted in a gain of ARS431 1,000,000. Measured in U. S. Dollars, our net income decreased 59.1 percent to $10,000,000 in the quarter from $25,000,000 in the year ago quarter. Moving on to the balance sheet. As you can see on Slide 9, during the Q2, we remained diligent in our cash management, securing work capital needs, tightening fixed cost structures, reformulating our capital expenditure priorities and extending short term maturities. Altogether let us reduce our net debt by $36,000,000 to 200 $1,000,000 and our net debt to EBITDA ratio to 1.17x from 1.26x in the Q1 this year. Gross debt by currency breakdowns like this: 48% in Argentine pesos, 37% in share currency and 15% in Guaranias. Our capital expenditure plan continued with investment for the quarter reaching ARS1 1,000,000,000 or approximately $15,000,000 almost entirely dedicated to the expansion project. As the current situation continues to be conditioned by the COVID-nineteen restrictions, we remain particularly on top of our liquidity and our liability management. During this quarter, we have rolled over short term maturities. We continue searching for opportunities that will allow us to further improve our capital structure. Now for 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 employees are always a priority as it exceeds our commitments with our communities, our supplier and customer and of course our shareholders. Our business suffered a heavy tollback in April with sales plummeting in all segments. However, we are now more encouraged by the strong recovery observed in May, June July in the bulk segment. At some point in time, bulk segment should also await, particularly in the Buenos Aires metropolitan area where the restriction are being more severe. From the macroeconomics 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 remind countries about providing a guideline for 2020 industry to grow. 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 VOCF T protocols adopt have delighted the inauguration that of the project, which is now expected to be at the beginning of 2021. We remain large and cautious regarding the evolution of the worldwide crisis, which ending seems hard to predict. I would finally like to thank our people who in this unprecedented COVID-nineteen situation show a great responsibility and the soulfulness 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. And we will now begin the question and answer session. Also please note that Mr. Sergio Feichman will be responding in Spanish immediately following an English translation. And our first question today will come from Eric Nagelard with Bank of America. Please go ahead. Yes. Hi, good morning. Thank you for your time. So just a quick question from my side. Thinking about bagged cement and the increase in demand seen 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. 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 situation is that there are 2 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 that this is also the case in the rest of the country, in some part of the rest of the country. So taking a look to some numbers, June July the Bags segment is approximately 50% above the year ago month and bulk is approximately 50% below the June 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 and the bulk cement should also increase the dispatches. Thank you. And our next question will come from Antonella Rambuano with Santander. Please go ahead. Hi. Well, congratulations for the results 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 the Peronist government? Thank you. Hi, Antonio. 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 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. And at this time, 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 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.