Earnings Call: Q2 2019

Aug 9, 2019

And welcome to the Loma Negra Second 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 Feifman 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 Pino, IR Manager. Please go ahead. Thank you. Good morning, everyone, and thank you for joining us today. We appreciate everyone's participation. 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. Speaking during today's call will be Sergio Pajcan, our CEO and Vice President of the Board of Directors and our CFO, Marcos Gradin. Both 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 the 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 Pacman. Thank you, Gaston. Hello, everyone, and thank you for joining us today. It's clear to welcome you to Loma Negra Second Quarter 2019 Earnings Conference Call. I will begin my presentation with discussion of the highlights of the quarter and then Marco will take you through our market review and financial results. Afterwards, I will provide our outlook 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. As we remain focusing looking for profitability and government initiative. Our top line decreased by 2.2%, still affected by a weak economy that start to show sign of stabilization. In the sense, in the last month, cement demand presented a couple of positive number in year on year basis, starting to observe an incipient recovery of the rate consumption. In the back of a positive pricing environment and our cost efficiency initiative, because our EBITDA grew by 7.1%, a margin expansion of 225 basis points. During the quarter, we continue with our effort to streamline our production footprint. And this is the reason why we converted the Baccarat facility into a bribing and distribution center. Consequently, we incurred in some nonrecurring costs. Therefore, excluding this effect, the EBITDA margin for the Q2 to have been 28.3% or 4 76 basis points higher than Q2 2018. As shown on this slide, using the peer accounting methodology and mainly in U. S. Dollar. In this quarter, we achieved an adjusted EBITDA of $44,000,000 Excluding the nonrecurrent charge mentioned before, EBITDA in the second quarter would have been around $49,000,000 remaining flat year on year despite the 10% contraction in the cement volume and the sharp pressurization. The bottom line increased 525% year over year as a consequence of a good operation result and the reversal of the financial loss in the Q2 of last year. Additional of our robust balance sheet with net debt to last 12 months EBITDA of 0.76x provide us with a solid position to execute our strategy. Expansion of our Lomali plant continued to be a key element of our long term strategy and will contribute to our production efficiency and profitability. The project continue on track and the key team date is expected to be at the end of the Q2 next year. I will now hand the call to Marcos Gradin. 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. Construction activity measured through the ISAC declined in the Q2 of the year, signaling that the downturn started last year has yet a carryover. Thus, economists' expectations still call for a 1.4% contraction GDP for this year, recovering gradually only after the second half, reaching growth of 2.2% by 2020. During this Q2, the cement industry declined by a rate of 5.1% year over year. In a sequential basis, Q2 remained almost flat when compared to the Q1 this year. Taking a closer look to the cement demand, bulk and bulk segments continue to present different dynamics. Bulk segment declined by 9%. By contrast, bulk segment demand increased by 2.8%, continued to be supported by public works, coupled by increasing demand driven by private projects. Consequently, bulk cement demand continues to increase its share in total cement sales, reaching 44% of total sales. According to recent data, we started to see some signs of stabilization with year on year growth in May July, explained by a mild recovery of private consumption driven by a higher purchasing power as deflation keeps trending down and wages increase in real terms. Looking into top twenty nineteen second half, we still expect a negative cycle that began in this Q2 of 2018 to turn around following consensus expectation of an overall macroeconomic recovery in Argentina. Now please turn to Slide 5 for a review of our top line performance by segment. Revenues were down 2.2%. For the quarter, severance revenues remained almost flat, impacted by sales volume drop of 10%, but compensated by healthy pricing environment. In Paraguay, revenues were up 11%, driven by the Guaraniya appreciation against the peso with volumes rather stable. Concrete segment presented a decline of 17.6% in revenues as both sales volume and prices were down when compared to the strong Q2 in the year ago period. Several large infrastructure projects that have commenced in recent years were in completion phase and during this year, other new large projects did not ramp up yet. Railroad revenues decreased 6.5% year on year as price decreased in real terms and sales volumes slipped 2%, mostly affected by lower transported cement. By contrast, aggregate revenues were up 24.6% year on year during the period, driven by improving volumes and prices. Moving on to Slide 6. Consolidated gross profit for the quarter was down by 4.9% year on year with a margin expansion of 72 basis points, reaching 25.7% in the quarter. Non recurring costs related to the reconverting Barcare accounted approximately ARS 188,000,000 or $4,200,000 If excluded, gross profit would have grown by 4.5% with margin expansion of 179 basis points to 28.2%. Energy cost continues to decline as a result of crushed cost opportunities related to natural gas and electricity supply, affecting positively our gross profit. SG and A expenses as a percentage of revenues decreased by 108 basis points to 6.5%, positively impacted by previous structural adequacy measures adopted in the Q1 of 2018, together with a further reduction in the effective sales tax rate. Please turn to Slide 7. Despite the softer demand, we reached consolidated EBITDA growth of 7.1 percent in the quarter, over ARS 1,900,000,000 or $44,000,000 with margin expanding 2 25 basis points to 25.8 percent, mainly driven by the 7 segments in Argentina and Paraguay and further supported by growth in railroad. Excluding the nonrecurring charges, the EBITDA margin would have been 28.3%, reaching ARS 2,100,000,000 or US49 $1,000,000,000 This EBITDA in U. S. Dollars remained flat when compared to a year ago. When excluding the application of inflation accounting, adjusted EBITDA for the cement segment in Argentina increased 62% year on year and the margin expanded by 113 basis points to 29%. And excluding the nonrecurring cost, it would have been 32.6%. Also Paraguay posted around 112% growth in adjusted EBITDA with the margin of more than 41%, improving 7.45 basis points compared to Q2 of 2018 when we had to acquire clinker to a 3rd party. Our Concrete segment reported a decline in adjusted EBITDA reaching ARS 15,500,000 with the margin contraction of ARS 186 basis points from 3.4% to 1.5%, mainly as a result of lower sales volume and a more competitive price environment. We continue to post margin expansion in our Railroad segment, with adjusted EBITDA margin up more than 950 basis points year on year to 12.8% as a result of structure and equity efforts. Aggregate segment adjusted EBITDA remained almost flat as higher volume and favorable pricing environment was compensated by higher cost of sales. Notably, despite the strong devaluation of the Argentine pesos in the Q2 year on year, around 90%, together with a decrease in volumes, our cement business in Argentina remained relatively stable in terms of recurring EBITDA per ton measured in U. S. Dollars, above $30 per ton, 8% over the year ago quarter. Moving on to the bottom line of Slide 8, net majority income for the quarter increased by 525% year on year, reaching ARS 1,100,000,000, mainly due to an improvement in financial results. Total financial results represented a gain of ARS264 1,000,000 compared to a loss of ARS954 1,000,000 in the Q2 last year, which have been impacted by the FX depreciation. Accordingly, measured in U. S. Dollars, our net majority income increased by 114 percent to $16,000,000 in the quarter from $8,000,000 in the year ago quarter. Moving on to the balance sheet. As you can see on Slide 9, our robust balance sheet provide us with a solid position to move ahead with our meaningful investment plan. We continue to make progress in our capital expenditure plan, which we invested for the quarter reaching ARS 2,700,000,000 or approximately US61 million dollars We finished this quarter with a net debt to adjusted EBITDA ratio of 0.76x compared to 0.69x in the previous quarter and 0.43x in fiscal year 2018. Our net debt at the end of the quarter was $164,000,000 with a gross debt breakdown by currency of 37% in currency, 33% in maranir and 30% in Argentine pesos. I will now hand the call back to Sergio. Thank you, Marcos. Now please turn to Slide 10. Before talking your question, I would like to mention that we are pleased to continue delivering a strong result. We'll executing on our innovative priority. In the sense on the last quarter, we put our effort in streamlining our production footprint in the no side of the region. The Mali plant expansion is part of this strategy and will allow us to continue increasing production efficiency and profitability, while providing much needed capacity for when demand full recovers. Certainly, some volatility could be expected associated with election process in Argentina. Although some signs of stabilization in the economy, together with the recovery momentum in the industry, are encouraging us to remain positive for the 2nd semester of the year. Our history, leadership and determination in the search for greater productivity provide us solid base to keep on delivering strong results. This is now 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 Alejandra Obregon with Morgan Stanley. Please go ahead. Hi, good morning and thank you for taking my question. I have 2, if I may. The first one is on the volume side. It seems like the negative 10% volume for the 2nd quarter is lower than that for the industry. So just trying to understand if there is some share losses during the quarter or that's driven by a regionality case perhaps? And then my second question is with regards to the competitive environment. I was just trying to understand the pricing behavior in the cement space. It seems like cement inflation in the country is running at close to 84% for the quarter. And if I'm not mistaken, price increases on your operations were somewhat below that. So just trying to understand if you saw some more aggressive pricing strategies in certain areas or maybe by certain competitors perhaps? Thank you. Regarding the volume, we have in this quarter an impact in our market share, in line what we have been talking about. So basically, regarding the price increases, as we are the leaders, we are the 1st movers. And the competitors, they have a lag in the time that they increase prices. So additionally, we had 2 other impacts. 1 was regarding an adverse weather and the other one regarding the large infrastructure in certain regions that had a consequent impact in our national market share. And in particular, the reconversion of the Barker plant, this brought some issues with the unions, and this may have a minor impact in our market share as well. So considering both the market share the Barker conflict and the other two aspects that we mentioned, together with the inflation trending down, we expect this effect in our market share to reverse in the coming months. So regarding the other question about prices, actually, our prices increased above inflation in the last year. And actually, the inflation number is 55%. Understood. This was very helpful. Thank you very much. Thank you. And our next question comes from Mauricio Serna with UBS. Please go ahead. Hi, good morning. Thanks for taking my question. My questions are regarding the L'Amali plant project. Just wanted to get a sense, you mentioned that it should be the expansion line should be operational by the Q2 of next year. So how much of the CapEx for this project has already been deployed? And in that sense, how should we think about the ramp up? Meaning, I know you discussed about the lower variable cost per ton of production in this plant, but how fast will that company be actually be able to materialize this lower variable production cost? And on that note, I mean, what kind of utilization level should we think about? Meaning, are you pretty much reallocating a lot of the production from other plants to this one to fill up its capacity? Or how should we think about this project going forward? Thanks. Good morning, Mauricio. Thank you for your question. With respect to the CapEx de la Amali, So regarding your first question about the CapEx, accumulated until the Q2 this year, We already spent $200,000,000 For the 2nd semester, we expect $50,000,000 and the remainder for 2020 would be around $80,000,000 The estimated start up date for the project would be at the end of the Q2 next year. So as any project of its size, it will have a ramp up period of 2 to 3 months. Therefore, we expect that all the benefits coming from this project, from productivity and variable cost, will materialize by the 2nd semester of Q4 of 2020. Okay. And is that assuming like it's on a high utilization level, like, I don't know, like 80%, 90% or how should we think about utilization of that capacity? So the volume, of course, will depend on the size of the market. But we are always going to have this plant as the priority to produce on top of the other one. Okay. Okay. Makes sense. And if I may, just very quickly, on the second half of the year? So we're always seeking for this kind of opportunities in order to reduce our variable costs and our fixed costs. And in we're going to do as much as we can. Thanks. Very helpful. And our next question comes from Eric Gaylord with Bank of America. Please go ahead. Hi, good morning. Thank you for the call. A couple of follow-up questions on Alejandra's point. Out of the 3 impacts you mentioned, could you give us can you maybe quantify how much comes from each impact? Or which of the three impacts is the most important for the decreasing in volumes? And regarding the lower demand from the large infrastructure projects you mentioned, should we expect seeing this during the second half of the year or at least until the elections come by and then the new administration takes office by the beginning of next year? Or was this just a temporary situation that happened during the Q2? Thank you. Good morning, Eric. Thank you for the question. So we do not give specific numbers around the market share. But the order of priorities, first, the delay in prices the impact of the delay in prices second, the impact of the adverse weather conditions and third one, the completion phase of the large infrastructure projects. And finally, although it was a minor effect, the reconversion process of Barker the Barker facility also had an impact. So regarding the infrastructure projects, we are observing that the schedule is in line what it was previously expected. Although new projects are lagging to ramp up, especially the large infrastructure projects. What we are observing now is an easy and growth in the private demand and also a reversion on the bag segment starting to grow again. Understood. Thank you very much. Thanks, Eddie. And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Gaston Pinault for any 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. Thank you very much, and enjoy the rest of your day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a wonderful day.