Earnings Call: Q1 2019

May 10, 2019

Good morning, and welcome to the Loma Negra First 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. I would now like to turn the conference over to Mr. Gaston Pinault, 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 Feitman, our CEO and Vice President of the Board of Directors and our CFO, Marco 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 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. Finally, I would like to remind you that the company is reporting results of its Argentinian subsidiaries by applying IAS 29, Financial Reporting in Hyperinflationary Economies. Now I would like to turn the call over to our CEO, Sergio Pazma. Thank you, Gaston. Hello, everyone, and thank you for showing up today. It's a pleasure to welcome you to Loma Negra Q1 2019 Earnings Conference Call. I will begin my presentation with a 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 2019. We will then open the call to your questions. Starting with slide 3. We ended the quarter with another solid set of results. Economic slowdown, cement demand in the Q1 contracted year on year around 10.6 percent. Our top line for the quarter increased by 3.6 percent year on year to ARS 7,400,000,000. We delivered an increase in adjusted EBITDA of around 18%, achieving a margin expansion of around 350 basis points to 28.7%. During the quarter, we included some nonrecurrence expenditures related to a structural adequacy of administrative and commercial process, which results in a reduction of around 10% of this process headcount. Excluding this effect, the adjusted EBITDA margin would have been 30.6% or 5.28 basis points higher than 1 quarter 2018. This is a demonstration to our continued focus on balance sheet growth and profitability. Our core Argentine Cement business remains the principal factor regarding this strong result, together with a good performance in Paraguay, concrete and drywall. This resulted in year on year bottom line increase of 48%. As shown on this slide, using the prior accounting methodology and measured in U. S. Dollar in this quarter, we achieved an adjusted EBITDA of $54,000,000 Excluding the nonrecurrent term charge, adjusted EBITDA in the Q1 would have been around $58,000,000 down by only 3 percent year on year despite the 13% contraction in the cement volume and the sharp peso depreciation. Additionally, our robust balance sheet with net debt should last 12 months adjusted EBITDA of 0 point 59 times provide us with a solid position to face the current volatility of the local financial market. The expansion of our Namali plant continues to be a key element of our long term strategy and will contribute to our production efficiency and profitability. The project continues on track and the start up date is expected to be in the Q2 of the next year. I will now hand off the call to Marcos Lavin. 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 PISAC declined in the 1st 3 months of the year, signaling that the downturn started last year has yet to carry over at the beginning of 2018. In this regard, economies' expectation called for a 1.3% construction in GDP for this year, recovering gradually only after the second half, reaching growth of 2.2% in 2020. During this quarter, the cement industry declined by a rate of 10.6% year on year, but showing a softer decline when compared to the same rate of the previous quarter. Taking a closer look at to the cement demand, bag and bulk segments continues to present different dynamics. Bag segment declined almost by 15%. By contrast, bulk cement demand only by 3.5%, continued to be supported by public infrastructure work, thus bulk cement demand continue to increase its share in total cement sales reaching 43% of total sales. Looking into this year, we still expect the negative cycle that began in the Q2 of 2018 to turn around by mid year following consensus expectation of an overall macroeconomic recovery in Argentina. We see industry selling demand following these macro trends, while current public works are expected to continue moving ahead, particularly in the Buenos Aires metropolitan area. Now please turn to Slide 5 for a review of our top line performance by segment. Revenues were up 3.6 percent despite softer cement sales volumes. For the quarter, cement sales volumes dropped 13% year on year, impacted by overall weaker demand, thus revenues fell only by 1% year on year, compensated by a healthy pricing environment. In Paraguay, revenues were up almost 34%, driven by the continued recovery in sales volumes that were up 8% in the quarter and the Guarani appreciation against the Argentine pesos. The Concrete segment continued to present good revenue generation with volume growth coupled with strong pricing. Revenue generated by the Aggregates segment was also benefited by a positive pricing. By contrast, revenues from our railroad segments decreased 1.6% year on year as a consequence of softer transported volumes. Moving on to Slide 6, consolidated gross profit for the quarter was up by 28.6% year on year with a margin expansion of almost 560 basis points reaching 28.8% in the quarter. This was mainly driven by our corn cement operation in Argentina and further supported by our cement business in Paraguay and our concrete and Railroad segments. On the cost side, upward pressure continued due to the impact of the peso depreciation and higher inflation in the company's cost structure, mainly in thermal and electricity costs. This impact was partially mitigated by savings in energy costs measured in U. S. Dollars, both thermal and electrical. SG and A expenses as a percentage of revenues increased by 74 basis points to 8.4%, principally due to non recurrent expenditures related to the structural adequacy in our administrative and commercial process of approximately ARS 95,000,000 and partially compensated by a reduction of effective sales tax rate. If the nonrecurring structure adequacy is excluded, SG and A as a percentage of revenues would have declined to 7.1%. Please turn to slide 7. Despite the softer demand, we reached consolidated adjusted EBITDA growth of 17.9% in the quarter, over Ps. 2,100,000,000 or $54,000,000 with margin expanding 347 basis points to 28.7 percent, mainly driven by the Cement segments in Argentina and Paraguay and further supported by growth in concrete and railroad. Excluding the non recurring charges, the EBITDA margin would have been 13.5 percent, reaching Ps. 2,300,000,000 or $58,000,000 The application of IAS 29 impacted in a reduction of 98 basis points in the consolidated EBITDA margin in this quarter. When excluding the application of inflation accounting, adjusted EBITDA for the cement segment in Argentina increased 68.5 percent year on year and the margin expanded by 3 10 basis percent growth in adjusted EBITDA with the margin improving 100 and percent growth in adjusted EBITDA with the margin improving 126 basis points to almost 45%. Adjusted EBITDA margin for our Concrete segment presented a strong expansion of 6 20 basis points compared to the year ago quarter, mainly driven by sales volume growth and favorable pricing. We continue to post margin expansion in our Railroad segment with adjusted EBITDA margin up almost 5 18 basis points year on year, benefiting from higher revenues and a lower fixed cost structure. By contrast, Aggregate segment adjusted EBITDA margin deteriorate as the favorable pricing environment could not compensate lower volumes and higher cost of sales. Importantly, despite the strong devaluation of the Argentine pesos in the Q1 year on year, around 110%, together with our decrease in volumes, Our Cement business in Argentina remained relatively stable in terms of EBITDA per ton measured in U. S. Dollars, above $32 per ton, slightly over the year ago quarter. Moving on to the bottom line on Slide 8, net majority income for the quarter increased by 51% year on year reaching ARS 1,000,000,000, resulted primarily from an adjusted EBITDA growth and a positive impact in the income tax line as we decided to exercise the tax revaluation option of the latest tax reform. Measured in U. S. Dollars, our net majority income decreased percent to $25,000,000 in the quarter from $27,000,000 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 further current volatility of the local financial markets and more flexibility around the funding of our meaningful investment plan. We finished this quarter with a net debt to adjusted EBITDA ratio of 0 point 59 times compared to 0.43 times in the fiscal quarter of 2018. Our net debt at the end of the quarter was $113,000,000 with a gross debt breakdown by currency of 46% in U. S. Dollars, 40% in Guarani and 14% in Argentine pesos. We continue to make progress in our capital expenditure plan with investments for the quarter reaching MXN 1,900,000,000 or approximately $40,000,000 Of the total amount in pesos, around 67% was invested in the 2nd production line at our LAmali plant. I will now hand the call back to Sergio. Thanks, Marcos. Now please turn to Slide 10. To wrap up this presentation, I would like to highlight a few final takeaways. The challenging macroeconomic environment in Argentina make us remain even more focused on our results, leveraging our leadership position while seeking productivity gains. We are pleased to see that our core Argentine Cement business delivered both adjustment EBITDA growth and margin expansion even with weaker volume demand in the country. And that Paraguay concrete and drywall had strong performance. For the Q3, cement demand in Argentina declined around 10.6% year on year. Although, in factional adjustment terms volume percent an increase compared to the previous quarter. We expect this trend to remain in the following quarter. In this context, we remain focused on managing the business to deliver strong results. We are going to continue optimizing our process and structure to make Loma Negra a more efficient and agile company preparing ourselves for the challenging to come. In this direction is that we have presently adequate our administrative and commercial process. Our history and leadership position provide us with a strong base to continue balancing our growth and profitability. And part of our strategy is expansion in LAmali plant, which will allow us to continue delivering production efficiency and profitability, while providing much needed capacity for when demand recovers. This is the 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. Spanish immediately following an English translation. Please hold on momentarily while we assemble the roster. And our first question comes from Mauricio Serna with UBS. Please go ahead. Hi, good morning and thanks for taking my question. One question on demand is you seem to be a little bit more optimistic on the second half of the year. So I was just was wondering what kind of guidance are you having for the Argentina volumes on a full year basis? And on that same note, we've seen some volume under performance over the last quarters, probably as you prioritize the pricing. Do you believe this market share losses will be recovered in the medium term? Or how should we think about this? And should this be more structural share losses? And then finally, you also mentioned the restructuring affecting your expenses on the SG and A front this quarter. Just was wondering if this was only a 1 quarter thing or could it occur again in the following quarters? Thank you. Good morning, Mauricio. Thank you for your questions. So regarding the volumes, we keep our estimations for the full year. We are observing certain recovery in volumes and we expect positive numbers from June. Regarding the market share, as we usually say, given the high inflation and the high turnaround in prices, we do have some impacts in our market share. These are temporary variations in our market share, but this is included in our strategy. So regarding our administrative and commercial structure, We have done all the adjustments that we needed to do to gain efficiencies in these areas. And regarding operational efficiencies, we're going to also make some take some measures in this direction, and they're going to be reflected in the coming times. Thank you. Thank you very much. Very helpful. And one follow-up, if I may, just on the margins. They've been doing very strong, especially on the gross profit level. Just want to understand how much of that was due to pricing and how much was due to actually better cost or better trends in terms of electricity and thermal fuels? Thank you. So the improvement that we have, it is actually a combination of different factors. There is no doubt that pricing has an impact. But as well, we also have many improvements regarding the costs. Which are basically related to thermal and electrical energy. Also packaging and overall higher efficiency in our facilities. And specifically regarding thermal and electrical cost, we have reductions of around 10%. Got it. Thank you very much. And our next question comes from Antonella Rapuano with Santander. Please go ahead. Hello all. Well, thank you for taking my question. I was wondering on the latest news that they were published this week on several media. There were some rumors on the close of burger plant and also that Loma was going to fire around 100 employees. So I think this is part of your restructuring plant. And I think, well, I just want to know if well, this is true in the first place. And then when do you plan to do so? How is the impact in the structure in margins? And if that is part of the LAmali expansion plan, so you're going to transfer part of the production of the Barca plant to LAmali? And well, that's my first question. And And I have a second question. If you could give us an update on the class action against Loma related to the IPO? That would be helpful. Thanks. Good morning, Antonella. Thank you for your questions. So the informations about the Barquette plant, they are correct. We do have a conflict with the union in that plant. And it is within our measures to say regarding our operational structure, considering the current situation and the future situations in the market. So regarding the class action, it is over the regular process of the trial. So there was an amendment to the demand. And actually, there was new packs on top of the original packs. The next step is the company to answer this amendment. And the lawyers are still optimistic regarding the results of on this class action. And one important concept here is that it is not yet a class action For this, the judge needs to certify this class action, which didn't happen yet. And this will conclude our question and answer session. I'd like to turn the conference back over to Mr. Gaston Dino 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 on next quarter. In the interim, the team remains available to answer any questions you may have. Thank you and enjoy the rest of your day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.