Earnings Call: Q4 2019

Mar 11, 2020

Good morning, and welcome to Loma Negra 4th Quarter 2019 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 in English by 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 ER. Please go ahead. Thank you. Hi, good morning. Thank you for joining us today. We appreciate your participation in this conference call. By now, everyone should have access to our earnings press release and today's call presentation, both of which were distributed yesterday after market closed. Speaking during today's call will be Sergio Paetman, our CEO and Vice President of the Board of Directors, together with our CFO, Marco Gradin. Both will be available for the Q and A session right after the presentation. Before we begin, 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. Now, I would like to turn the call over to our CEO, Sergio Pazman. Thank you, Artem. Hello, everyone, and thank you for showing us today. I am pleased to welcome you to Loma Negra Q4 2019 earnings conference call. We will begin our presentation with a discussion of the highlights of the quarter And then, Marco will take you through our market review and financial result. Afterwards, I will make some closing remarks. Finally, we will open the call to our questions. Once again, the company has shown the capacity to adapt to a challenging context of currency depreciation, high inflation, activity contraction by optimizing the cost of production, improving margin and enable us to sustain a profitability mentioned in U. S. Dollar. As shown in Slide 3, the 4th quarter was characterized by a long political transition and mid grade financial instability, both factors ending up postponing the economic recovery and negatively impacting the construction sector. As shown in this slide, net revenue declined by 15%, mostly impact by Cement and Concrete segment in Argentina, particularly as mature public and private infrastructure projects were put on hold. Assafment EBITDA also declined by 13%, but thanks to positive pricing and the commitment in cost control, we were able to expand the margin by 69 exit points. On the back of our competitive leadership and our determination to undertake structural change, we reached in 2019 an assessment EBITDA of $199,000,000 and when excluding the nonrecurring cost of structural adequacy, assessment EBITDA will have reached 209,000,000 dollars representing a margin expansion of 3.78 basis points. We continue executing our expansion project at LAmali plant as it's part of our strategy and will allow us to continue increasing production efficiency and profitability. I will now hand off the call to Marcos Gradin. Please Marcos, go ahead. [SPEAKER MARTIN PEREZ DE SOLAY:] Thank you, Sergio. Good day, everyone. Turning to Slide 4, let me start by providing a quick outline of the macro environment and industry trends in Argentina. After the presidential elections in October last year, the outgoing government had to make some measures to recover the stability of the financial system, exchange and capital control and renegotiation of public debt among others. These measures ended up deepening the ongoing economic and financial crisis, negatively impacting the construction activity both from the public and private sector. During the Q4, the cement industry declined by 9.4% year over year. Taking a closer look at the cement demand by segment, we observed that the trend of the Q3 is maintained where the Bags segment continues to recover percentage of sales at the expense of bulk cement. Bulk segment declined by 3.1% and bulk decreased by 17 0.2%. Consequently, the share of cement sold in back increased by almost 4 percentage points from 57% in Q4 2018 to almost 61% in Q4 2019. By the year end, the incoming government took steps to achieve an economic recovery, reschedule sovereign debt maturities and regain confidence. We are still under this process. Therefore, we do not foresee an economic recovery before the 2nd semester of the year. Last year ended up with an overall volume 6.8% below that of 2018 and 9% below that 2017 historic record. Economies' expectation for 2020 GDP stands at minus 1.5%. Therefore, we expect a mid single digit decline by year end with a recovery only by the second half of the year. Now please turn to Slide 5 for a review of our revenue performance by segment. Top line was down 15% in the 4th quarter as the persistent economic contraction impacted the construction activity. Cement revenues dropped by 9.1%, impacted by sales volume drop of 11.1%, which was partially compensated by real terms price increases. As a consequence of the suspension or postponement of large public and private projects, concrete and aggregate segment presented a sharp decline in sales volume, coupled with softer prices, resulting in revenues drop of 15.5% and 35.1% year over year, respectively. By contrast in Paraguay, the demand remains strong, although revenues were down 4.3% with volumes declining 3.8% as the operation was affected by adverse weather conditions. For the railroad segment, frac sand transported volumes volumes, resulting in a total decline of 15.5%. Moving on to Slide 6, consolidated gross profit for the quarter was down 13% year on year with a margin expansion of 68 basis points reaching 30% in the quarter, reflecting production cost under control and also the benefits from the footprint of electricity efforts achieved in the previous quarters. SG and A expenses as a percentage of revenues increased by 146 basis points to 8.3%, impacted by the drop in revenues. Effective sales tax rate kept improving from 1.68% in Q4 2018 to 1.5% in Q4 2019. During the year, gross profit expanded by 3% and margin improved 2 30 basis points. Please turn to Slide 7. Impact by the plunging demand, our adjusted EBITDA declined by 13.1% in the Q4 in a year on year basis. However, due to a tight cost control and positive pricing, margin expanded by 69 basis points. Main cost benefits revolve around energy inputs and previous structural adequacy efforts. We reached consolidated adjusted EBITDA of around ARS 2,900,000,000 or $49,000,000 For the full year 2018, we reached $199,000,000 of adjusted EBITDA, and when excluding the nonrecurring cost of the structure adequacy, adjusted EBITDA would have reached $209,000,000 or 5% below 20 eighteen's EBITDA. When excluding the application of inflation accounting, adjusted EBITDA for the segment segment in Argentina posted a margin expansion of 135 basis points to 36%. Likewise, Paraguay EBITDA margin improved 228 basis points compared to Q4 2018 reaching 42.6%. Our Concrete segment reported a decline in adjusted EBITDA reaching negative COP 27,300,000 as this segment was more directly impacted by the hold in public and private infrastructure projects. Equally, aggregate segment adjusted EBITDA declined year over year to ARS 5,200,000. Encompass with the Building Materials sector, our regular segment EBITDA contract by almost 8%, partially compensated by our transported goods with a margin of 12.3%. In terms of the EBITDA per ton measured in U. S. Dollars, our cement business in Argentina remains strong, around $22 per ton, 1% over the year ago quarter. Moving on to the bottom line on Slide 8, net maturity income for the quarter reached MXN 1,000,000,000. Total financial results presented a loss of ARS205,000,000 compared to a gain of ARS351,000,000 in the Q4 in the previous year. The effects appreciated in real terms during the quarter resulted in a foreign exchange gain of ARS 353,000,000, still ARS 135,000,000 lower than that of Q4 2018. The higher interest rate environment and the higher gross debt resulted in a higher net financial expense of ARS 445,000,000 above the year ago figure. The net passive monetary position resulted in a gain of ARS 89,000,000. Moving on to the balance sheet. As you can see on Slide 9, we continue to make progress in our capital expenditure plan with investments for the quarter reaching ARS 2,400,000,000 or $40,000,000 approximately. We finished the fiscal year 2019 with a net debt to adjusted EBITDA ratio of 0.86x compared to 0.43 times at the beginning of the year. Our net debt at the end of the quarter was 161,000,000 dollars with a gross debt breakdown by currency of 49% in hard currency, 25% in Guaranias and 26% in Argentine pesos. We recommended the Board to fully reinvest Loma Negra's 2018 earnings. Will continue to execute the expansion of our LAmali plant, a key element of our long term strategy. I will now hand the call back to Sergio. [SPEAKER CARLOS GOMES DA SILVA:] Thank you, Marcos. Now please turn to Slide 10. I would like to conclude by conveying our satisfaction with the results achieved in 2019. In a context of economic contraction and high financial volatility, the company showed its flexibility for adaptation. Our competitive leadership and our determination were critical factor to carry out the structural change necessary to face the challenging situation. On the back of these factors, we had reached in 2019 an assessment EBITDA of $199,000,000 I'm going to include the nonrecurring cost of structural delinquency, as admin EBITDA will have reached $209,000,000 with a margin of 31.6%. In this day of the Kremlin global uncertainty and volatility around the effect of the coronavirus and the oil price plummet, it's hard to provide an outlook for 2020. However, our previous estimation considered a consensus showing another year of mid single digit contraction, though with an expectation for a recovery by the 2nd semester. Our long term perspective has not been conditioned by these short term challenges and we maintain our goals, betting and trusting in the progress and development of Argentina, contribute to narrow the housing and infrastructure deficit. This is the reason why we continue executing an expansion project at the current LAmali plant. As it's part of our strategy and will allow us to continue increasing production efficiency and profitability to let us thrive in the future. 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 close our conference. Gaston Pinnel, go ahead. Thank you for joining us today. We appreciate your interest in our company, and we will look forward to meeting more of you over the coming months and providing financial and business updates for the next quarters. In the meantime, the team remains available to answer any question that you may have. Thank you very much, and enjoy the rest of your day.