Earnings Call: Q3 2019

Nov 8, 2019

Good morning, and welcome to the Loma Negra Third 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 Fifeman 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 Pinnel, Head of IR. 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 conference presentation, both of which were distributed yesterday after market close. Speaking during today's call will be Sergio Faifman, our CEO and Vice President of the Board of Directors and our CFO, Marco Cadin. 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 filings 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 Paimo. Thank you, Gaston. Hello, everyone, and thank you for joining us today. I am pleased to welcome you again to Lomaeda's Q3 2019 earnings conference call. We will begin our presentation with discussion of the highlights of the quarter and then Marcos will take you through our market review and financial results. Afterwards, I will share some thoughts for the remainder of the year. Finally, we will open the call to your questions. Starting with Slide 3, we ended the quarter with another solid set of results amid a challenging context. Prospective results in the August primary election lead to a high financial economic volatility that eroded the NCIBM recovery previously observed in some of the macroeconomic variables. The peso depreciated sharply and inflation surge again affecting overall activity levels and the already weak growth expectation. In this line, our cement demand dropped by 7.5 percent in a year on year basis as a major infrastructure, public work and better consumption is lower down. Or even put on hold probably until the economic landscape become more foreseeable. Our EBITDA grew by 2.7% with margin expansion of 289 basis points as we were able to control our cost and start capturing benefit from previous efficiency initiative. During the quarter, we continued with our thoughts to strong lining our production footprint. And this is the reason why we reconverted the San Juan facility into a grinding and distribution center. In this quarter, we achieved an adjustment EBITDA of $52,000,000 and when excluding the non rego rental cost, the figure reached $53,000,000 at most equal to the third quarter last year. The expansion of our Lamali plant continue on track as it's a key element of our long term strategy and will contribute to our production efficiency and profitability. The kick in date is expected to be at the end of the Q2 next year. Finally, our strong balance sheet should enable us to walk through a more complex financial environment in Argentina. I will now hand the call to Marcos Rodino. Please Marcos, go ahead. Thank you, Sergio. Good day, everyone. Turning to Slide 4, let me start by providing a quick overview of the macro environment and industry trends in Argentina. The Rada Afong Sin, Mid August primary election outcome impact the fueling shipping signs of stabilization that we have observed in previous months. This higher financial and political uncertainty during the period triggered a sharp peso depreciation and a higher than expected inflation level, both impacting the economy in general and the construction activity in particular. During this quarter, the cement industry declined by a rate of 2.9% year on year. On a sequential basis, the 3rd quarter surged by almost 9.5% compared to the Q2 this year, but mostly explained by the seasonality effect in our industry. Taking a closer look at the cement demand, unlike previous quarter, the bulk segment declined less than the bulk segment. Bulk segment declined by 2.4% and bulk decreased by 3.2%. Consequently, the share of cement sold in bulk remained almost unchanged at 42% when compared with the same period 1 year ago. Looking towards the last part of the year, we expect the industry to continue suffering from a weak economy and a high volatility environment. In this line, economies and greater GDP growth expectation for 20.19 to minus 3% from our pre peso level of 1.4%. Additionally, economies' expectation for 2020 also deteriorated drastically from an expansion of 2.2% to a contraction of 1.7%. In this sense, at this moment, we choose to be more cautiously until the key guidelines are defined by the new administration. Now please turn to Slide 5 for a review of our top line performance by segment. Revenues were down 7.6%. For the quarter, revenues dropped by 4%, impacted by sales volume drop of 7.5% and partially compensated by real term price increases. In Paraguay, revenues were down 1.7% with volumes declining 1.1%, affected by a slower than expected public works execution and in part offset by the private sector demand. Prices remain practically unchanged. Concrete segments presented a decline of 37.7% in revenues as both sales volumes and prices were down when compared to the strong Q3 in the year ago period. Several large infrastructure projects that had commenced in recent years were in completion phase and during this year other new large projects were either slowdown or even put on hold. For the railroad segment, transient volume transported contributed positively to revenues. However, it was not enough to compensate the drop in building materials and chemical volumes, resulting in a total decline of 9.4%. By contrast, aggregates revenues were up 2% year on year during the period, driven by improving volume. Moving on to Slide 6, consolidated gross profit for the quarter was up 7.3% year on year with a margin expansion of 3 68 basis points reaching 26.6 percent in the quarter, reflecting that production costs were under control and benefits from the footprint and equity efforts achieved in the Q2 this year. Non recurrent costs related to the conducting San Juan accounted approximately to ARS 61,000,000 or $1,200,000,000 If excluded, gross profit would have grown by 10% with margin expansion of 4 35 basis points to 27.2%. SG and A expenses as a percentage of revenues decreased by 22 basis points to 6.6%, positively impacted by commercial and administrative structural adequacy measures previously adopted in Q1 of 2019, together with a further reduction in the effective sales tax rate. Please turn to Slide 7. Despite the softer demand, we reached consolidated adjusted EBITDA growth of 2.7% in the quarter, over ARS 2,600,000,000 or $52,000,000 with margin expanded 2 89 basis points to 28.8%, mainly driven by cement and further supported by growth in railroad. Excluding the non recurring charges, the EBITDA margin would have been 29.5 percent reaching US53 $1,000,000 as in the same period 1 year ago. When excluding the application of inflation accounting, adjusted EBITDA for the segment segment in Argentina increased 52.7% year on year and the margin expanded by 90 basis points to 31%. And excluding the nonrecurring cost, which has been 31.8%. Likewise, Paraguay posted around 57% growth in adjusted EBITDA with the margin of more than 45%, improving 156 basis points compared to Q3 2018. Our Concrete segment reported an increase in adjusted EBITDA reaching $47,800,000 with the margin expansion of 73 basis points from 4.1% to 4.8% as we adapted the productivity structure to the new demand level. We continue to post margin expansion in our Railroad segment with adjusted EBITDA margin up more than 3 57 basis points year on year to 14.5% as a result of the structure and equity efforts. Aggregate segment adjusted EBITDA margin reached 4.1%. Our cement business in Argentina remained relatively stable situation in terms of recurrent EBITDA per ton measured in U. S. Dollars, around $28 per ton, 7% over the year ago quarter. Please turn to Slide 8. Net majority income for the quarter reached ARS 50,000,000. Total final results presented a loss of ARS 1 point 6,000,000,000 compared to a loss of MXN 1,400,000,000 in the Q3 last year. The effect depreciation resulted in a foreign exchange loss of MXN 1,500,000,000 or MXN 200,000,000 higher than a year ago. The higher interest rate environment resulted in a higher net financial expense of $34,000,000 The net positive monetary position resulted in a gain of $276,000,000 Moving on to the balance sheet. As you can see on Slide 9, our balance sheet enabled us to move ahead with our meaningful investment plan. We continue to make progress in our or approximately ARS 59,000,000 or approximately US59 $1,000,000 We finished this quarter with a net debt to adjusted EBITDA ratio of 0.87 times compared to 0.43 times at the beginning of this year. Our net debt at the end of the quarter was 100 and $57,000,000 with a gross debt breakdown by currency of 47% in flat currency 28% in Guaranias and 26% in Argentine pesos. I will now hand the call back to Sergio. Thank you, Marcos. Now please turn to Slide 10. To wrap up this presentation, I would like to leave you a few key messages. Looking forward, the political transition seem to be evolving in an orderly way. And now the key factor will be the policies that the new administration is going to adopt in order to restore the financial stability and economic growth. Under this context, we are pleased to continue delivering strong results on the back of our history, leadership and determination in the search for greater productivity. We keep executing on our EMEA priorities. In this line of this Q3, we put our effort in further streamlining our production footprint in the Cucur region by the convert our San Juan plant into grinding and distribution center. LAmali plant expansion is part of this strategy and will allow us to continue increasing production efficiency and profitability that will 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 conduct a question and answer session. Our first question comes from Eric Nuvialik with Bank of America. Please go ahead, sir. Hi, good morning. Thank you for the call. I'd like to know if there's more visibility in terms of actual infrastructure spending during Fernandez administration. Has he been vocal about his plans? And how do you see 2020 coming down after this? Good morning, Eric. Thank you for your question. So, so far what we have heard from Alberto Fernandez due to these measures are towards to incentivize the consumption. And regarding the construction, housing plan that they are to put in place. So regarding other measures concerning infrastructure, we do not have additional information. Our next question comes from Alejandra Obregon with Morgan Stanley. Please go ahead. Hi, good morning. Thank you for the call and for taking my question. I just have one on the cost side. So just wondering if you could help us understand how should we think of the footprint and equity program going forward? And in that same line, whether there are some nonrecurring costs that we should consider for the next quarters? Thank you. Good morning, Alejandra. Thank you for your question. For the next quarter, we are not expecting any non recurring cost. And for the rest of the year, we do not foresee any further footprint adequacy. So the cost should be similar than the previous quarters. Thank you. Very helpful. And just a follow-up, if I may, on I think you mentioned earlier how bulk and bag were performing. Could you please repeat that for me? I wasn't sure I got that right. And if you could kind of elaborate how is that performing going into the 4th quarter? That will be very helpful. Thank you. In the Q3, what we observed is that the bulk decreased slightly higher than the bag. This has to do that some of the infrastructure plan go to completion phase and on the other hand a slight ramp up in the consumption. So until we don't have new measures from the new administration, we expect this trend to continue. This concludes our question and answer session. I would like to turn the conference back to Gaston Pinnel for closing remarks. Thank you for joining us today. We appreciate 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. And again, thank you very much for the rest and enjoy the rest of your day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.