Earnings Call: Q1 2020

May 12, 2020

Good morning. Welcome to La Loma Negra First 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 Faifman will be responding in Spanish immediately following the English translation. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Gaston Pinnel, IR Manager. Please go ahead. Thank you. Good morning, and welcome to our Q1 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 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 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 on non financial GAAP 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, Gaston. Hello, everyone, and thank you for showing us today. 1st, I hope you and your family are safe and well during this unprecedented time. Clearly, we are operating in a difficult environment and we expect from now on think to start improving gradually. I want to thank all our people in Argentina and Paraguay who face enormous obstacles. I showed a great resourcefulness to keep this business running. We produce and sell products that people rely on every single day to provide themselves, their family and their community, the infrastructure and shelter they need. Our concern to our employee, our customer, our supply our community has never been more imperative and we treat it with the utmost importance and we tend to do our best for our stakeholder. I would like to mention a few highlights of the quarter, and then Marcos will take you through our market review and financial results. After a while, I will provide some financial remarks. And then we will open the call for your questions. Starting with Slide 3, let me share with you the key measure that we took in above crisis commitments that we create in order to manage the effect of coronavirus crisis. Our people's health and safety are non negotiable and it's our main priority always. This is why we suspend national and international trips, and we implement as fast as possible a home office scheme and meaning to protect our people and their family. On March 20, and in compliance with the government's declaration of widening lockdown, we temporarily suspend our production facility and the L'Amali expansion project. After the 1st week of April, we resumed production and dispatch of cement with adoption of new sanitation protocols. As of today and after government permits were grading, LAmali expansion work have resumed. During this situation, we have strengthened our efforts to security working capital needed, tightening fixed cost structure and reformulation our capital expenditure priority. Of course, the steep upgrade of the recovery dynamic is yet uncertainly, and we remain alert regarding the evolution of the crisis. Now turning to slide 4. 2020 started with some headwind particularly related with the fresh macroeconomic situation of the country and a ramp up recession. By the end of the quarter, the coronavirus pandemic outbroke bringing additional challenges to the already adverse context. Cement demand in Argentina in the Q1 contract around 29% year on year. Our top line for the quarter decreased also around 30% year on year to ARS 7,800,000,000 and our assessment EBITDA declined by 70.9%. Still, we were able to expand margin by 4 79 basis points to 33.5%. Mailing reflects rigorous focus in cost control and our commitment to maintaining a high productivity and healthy profitability levels. Our core Argentine Cement business remains the principal factor behind this margin expansion. As shown on this slide, mentioning U. S. Dollar, we achieved an adjusted EBITDA of $42,000,000 down by 22.4 percent year on year and our bottom line decreased year on year and stood at $10,000,000 Additionally, our net debt to last 12 months EBITDA of 1.26 times and our cash position provide us with a good position to manage our short debt maturity. I will now hand off the call to Marcos Urabin, 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 5, Argentina is in the middle of economic activity construction and neither the construction sector nor the cement industry are exceptions to this situation. Argentina faces important challenges to achieve sustainable growth over time and forecast for the Arlington economy at the beginning of this year already reveal a drop in GDP for 2020 compared to 2019. On top of this negative expectation, we now need to factor in the health and economic crisis caused by the COVID outbreak by the end of March. In the 1st month of this year, bulk segment was the most impacted by the delay in the execution of public and private construction project. By contrast, the Bags segment was better supporting the economic construction. Consequently, the share of cement sold in Bags increased by almost 8% points from 56% in Q1 2019 to almost 64%. This trend will continue on the following months where PAC will continue to gain share as public and private infrastructure sectors are suffering the most. Initially, on March 20, the national government declared a broad quarantine providing for social preventing and mandatory isolation in the context of the COVID-nineteen pandemic. We virtually made a full stop in all of our production and in parallel demand dropped by nearly 0 during the 1st few days since March 20th. Afterwards, in April 3, the government decided to include mining and building material provided by building material depots in the Sascha product list. Since that moment, some of the demand for cement was restored and consequently, we resumed cement production. Certainly, we are cautious and we are attentive to development of the pandemic in the country and the effects that it may have in our production demand. Under this unprecedented situation, we decide to withdraw any sort of guidance regarding the industry growth by the end of the year. We hope to have more clarified in the following quarters. In April, the market declined 55% with the particularity that the 1st days of the month's cement sales were almost 0, with private construction not permitted and public works were significant. Therefore, the demand was mainly observed in the bag segment through wholesalers. Turning to Slide 6 for a review of our top line performance by segment. Revenues were down 29.6% as sales volumes fall reflected better economic context and March was already impacted by COVID-nineteen pandemic. Teman's sales volumes dropped 26.9% year on year, thus revenues were marginally compensated by positive pricing, falling by 25% year on year. In Paraguay, while the 1st 2 months of the year were affected by sluggish public and infrastructure works, volumes and revenues were down 13% and 14.5%, respectively. Revenues of concrete and aggregates in Argentina were the most impacted by the halt in public and private projects, plummeting 73.6 percent and 67.1 percent, respectively. Revenue from our railway segment decreased 24.9% year on year as a consequence of softer transported volumes in almost every sector. Moving on to Slide 7. Consolidated gross profit for the quarter was down 25.6% year on year with a margin expansion of 164 basis points, reaching 30.5% in the quarter. This was mainly driven by our core cement operation in Argentina, reflecting production cost under control with significant reduction in energy input cost and the benefits from previous footprint adequacy efforts achieved last year. SG and A expenses as a percentage of revenues decreased by 29 basis points to 8.1% from 8.4%. Q1 2018 included some nonrecurring cost of the structural adequacy and with a construction of 32% year on year. Now please turn to Slide 8. The drop in demand explained the $17,900,000 decline of our adjusted EBITDA. Still we achieved a consolidated margin expansion of 4 79 basis points to 33.5%, primarily explained by cost efficiencies in Cement segment in Argentina. When excluding the application of inflation accounting, adjusted EBITDA for the Cement segment in Argentina increased 34% year on year and the margin expanded by 6.56 basis points to 38.3 percent as we benefit by the significant reduction in energy input cost and also by the footprint adequacy efforts achieved last year. Also Paraguay posted around 23% growth in adjusted EBITDA with the margin going back 245 basis points to 42.2%. In line with the Building Materials sector and economic activity in general, our Redwood segment EBITDA contracted by almost 57% with a margin contraction to 3.8%. Adjusted EBITDA margin of our Concrete and Aggregate segment presented a strong construction year on year to negative 7.7% and negative 11.7% respectively, mainly as this segment were more directly impacted by the halt in public and private infrastructure projects. Despite the strong reduction in volumes in the Q1, our cement business in Argentina continue improving in terms of EBITDA per ton measured in U. S. Dollars, around $36 per ton above the year ago quarter. Moving on to the bottom line on Slide 9. Net majority income for the quarter decreased by almost 43% year on year, reaching ARS857 million, resulted mainly from an adjusted EBITDA construction and a negative impact total financial loss. Total finance results represented a loss of ARS456 1,000,000 compared to a loss of ARS189 1,000,000 in the Q1 in the previous year. The foreign exchange loss of ARS170 1,000,000 compared to ARS 239 1,000,000 in Q1 of 2018. The higher interest rate environment together with the higher gross debt resulted in a net financial expense of ARS410 1,000,000 or ARS148 1,000,000 higher than in Q1 2018. The net passive monetary position resulted in a gain of ARS124 million. Measured in U. S. Dollar, our net majority income decreased 60% to ARS10 1,000,000 in the quarter from $26,000,000 in the year ago quarter. Moving on to the balance sheet, as you can see on Slide 10, during the quarter and until March 20, we continue to make progress in our capital expenditure plan with investment for the quarter reaching ARS4 1,000,000,000 or approximately $66,000,000 79 percent of which was dedicated to the expansion project. Our net debt at the end of the quarter was $226,000,000 with a gross net debt breakdown by currency of 49% in Argentine pesos, 38% in half currency and 13% in Guarani. Net debt to adjusted EBITDA ratio of 1.26x compared to 0.86 times at the beginning of the year. As the current situation continues to be conditioned by the COVID-nineteen restriction, we remain particularly on top of our liquidity and our liability management. Our debt, which is bank debt only, we consider that has a manageable maturity profile. We are working on and have already rolled over part of our short term debt. As we continue rolling over these maturities in coming months, we expect the share of local currency debt to continue increases in our balance sheet. 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 11. We believe that the unique time is an opportunity to prove ourselves our true values. Health and safety of our employee are always a priority, as it is our commitment with our community, our supplier and customer and of course our shareholder. At this moment, it seemed pointless training to provide a guideline for 2020 each industry trends. As recovery depend of the local economy turnaround, sovereign debt negotiation and the evolution of the corona virus pandemic among other challenges. Yet at the beginning of April, we have already resumed production, adopting new sanitation protocols and more recently work on L'Amali expansion project were restarted. We need to keep looking forward, searching for alternative that will help us navigate through this new environment, uniting and taking care of each others. This is end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions. Thank you. We will now conduct a question and answer session. Reenter the queue for questions and they will be addressed. Also, 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. Thank you for taking my question and for the call. This is related to infrastructure works and how do you think or how do you envision the outlook for infrastructure once we exit the coronavirus outbreak? And then if you could provide some color on what you're seeing for the month of April in terms of demand and dispatches in Argentina? Thank you very much. Good morning, Alejandra. Thank you for your questions. Our view is that the government is preparing an ambitious infrastructure plan that once the sovereign debt and the coronavirus situation are solved, they're going to start to implement. From our conversations with the government officials, they are going to be focusing on mainly on housing and middle to small size infrastructure works. And we believe that this is one of the key elements that the government is betting on in order to boost the economy once the coronavirus situation is over? Regarding the April volume, the industry ended up with minus 56% drop in volumes compared to last year. We need to remind that in the 1st 8 to 10 days of the month, we had virtually 0 shipping since it was forbidden to produce and to operate in our plants. Considering only the last 15 days of the month, the average drop will be around 40%. One key factor from this volume is that it is mostly bag segment, mainly because the large infrastructure projects, either public or private are hold. So we are optimistic that once in the next few months, once these larger infrastructure projects start to being executed again, the volume should increase consequently. Thank you very much. This was very clear. You're welcome. And this concludes our question and answer session. I would now like to turn the conference back to Gaston Pinnel for closing remarks. The next question is from Nicolas Saleh from LW Investment Management. Go ahead. Hi, good morning. Thank you for taking the call. I just have a quick question. I mean, against the possibility of a possible sovereign default, could you comment on how in general and how that would change the business environment in Argentina? Hello? Good morning. Thank you, Nicolas, for your question. Okay. We are working on a scenario that on a base case scenario that where there is no default. And according to the last signals, there should be an agreement with the bondholders. So even in the scenario of a default, of course, it will have an impact in the economy and in the economy growth and particularly in the financing of the public works, yes, and other government expenditures. But we need to remind that during 2002 till 2007 where Argentina was in a default, the economy grew. We also need to remind that our industry in particular, it's considered as value heaven. And in particular, for the infrastructure works, It's also a lever that the government can take in order to boost the economy and also to try to underpin the labor market. Our next question is for Andonella Rabuano from Santander. Go ahead. Hi, thank you all for taking my question. Actually, I have two questions, if I may. The first one is related to the EBITDA margins, which were very impressive in my view, considering the volume drop. So I was wondering how much of this cost efficiency is sustainable along the year? And regarding this, how much of the cost reductions came from lower energy cost and how much from the fixed cost from your adequacy effort on the fixed structure side? And my second question relies on the LAmali project. I was wondering how much CapEx or remaining CapEx is spending for the rest of the year to be deployed in this project? Thank you. Thank you for your questions. Regarding our margins, it is in line with all the structural deposits that we have implemented last year. Last year, we did these before mentioned restructurings and also including staff reduction. And this year, we already observed the benefits from this restructuring. The margins, we mainly have an effect in the Cement segment. And we did a few we took a few measures in order improve this margin even with the drop of volumes. Regarding energy, both thermal and electrical, on average, we have a reduction of around 25% compared to last year. Additionally, with the drop in volumes, we have the ability to produce in a more efficient way in our most efficient facilities. So regarding LAmali 2, we have already resumed our plan to for the expansion and we expect to be ready by the year end. And the remaining of the CapEx is approximately between $60,000,000 $50,000,000 Most probably part of this $50,000,000 to $60,000,000 are going to be disbursed in the following year in 2021. Great. Thank you. Very clear. You're welcome. Our next question is from Coleman Clyde from HSBC. Go ahead. Hi, gentlemen. Thank you for taking my question. I was going to ask on margins and a lot of that was already answered. But just to follow-up with that. Yes, do you what improvement do you expect to see from the La Male plant expansion? I mean, you've made some impressive improvements already in margins, and I know that you expected that plant to add to your efficiency. So do you still expect to see a further margin improvement once that plant is underway? And then my second question would be on prices. I see that prices were up 1% in the first quarter. How are you seeing prices during the Q2? Has it been more challenging to pass along cost inflation given the current environment? Those would be my 2 questions. Thank you for your question. Thank you, Clive, for your question. Yes, clearly, LAmali still has some further improvements in our EBITDA. We still have some minor improvements in variable cost and also some improvements in fixed cost structure. And regarding prices, we foresee the price environment similar to what we observed in the past, considering the inflation and the FX and always trying to keep our profitability under control. And this concludes our question and answer session. I would now like to turn the conference back to Gaston Pinnel for closing remarks. Thank you for joining us today. We appreciate your participation in these unprecedented times 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 be safe. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.