Loma Negra Compania Industrial Argentina SA (LOMA) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Loma Negra third-quarter 2018 earnings conference call and webcast. (Operator Instructions). Please note that this event is being recorded.

I would now like to turn the conference ever to Mr. Gaston Pinnel, 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 Faifman, our CEO and Vice President of the Board of Directors; and Marcos Gradin, our CFO. Both will be available for the Q&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 in 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 Faifman.

Thank you, Gaston. Hello, everyone, and thank you for showing up today. It's a pleasure to welcome you to Loma Negra third-quarter 2018 earning conference call.

Starting with slide 3. We reported solid results this quarter despite the challenging macro framework in Argentina. We maintained our focus on balancing growth and profitability, delivering year-on-year consolidated top-line growth of 47%, while adjusted EBITDA increased almost 70%, and margin expanding by almost 360 basis points. As measured in US dollars, adjusted EBITDA declined only 9%, reaching $53 million in the quarter.

These good results were driven by robust performance, particularly our core Argentine cement business, where we achieved a 492 basis point expansion in adjusted EBITDA margin despite lower sale volumes.

Our bottom line, however, was impacted by foreign exchange losses that were mainly non-cash that resulted from a sharp peso depreciation experienced in the quarter. Our leading market position in (inaudible) by the healthy balance sheet, with net debt through last 12-month EBITDA of 0.88 times, providing a solid platform to continue implementing our strategic plans.

The L'Amalí plant expansion is an important element of our long-term strategy, which will allow us to [engage] production efficiency and profitability while providing much-needed capacity when demand recovers.

I will now hand over the call to Marcos Gradin, who will [through] our market review and financial results. Afterwards, we will open the call for questions. Please, Marcus, go ahead.

Thank you, Sergio. Good day, everyone. Please turn to slide 4 for a quick overview of the macro outlook and industry trends. Consensus expectation for GDP growth have been adjusted downward since our previous earnings call to negative 2.4% for 2018, recovering gradually to negative 1% in 2019, and to positive 2.4% in 2020. Overall, construction activity contracted during the quarter, resulting in almost 6% year-on-year decline in overall cement sales; where bag and bulk declined 8% and 2%, respectively, driven by public infrastructure works. But cement demand continued to gain share of total cement sales. We see current public works moving ahead, particularly in the Buenos Aires Metropolitan area.

We remain cautiously optimistic despite the contraction of cement demand that occurred over the last months. Expected industry cement demand levels for the full year to remain at similar levels to those in 2017.

Now, please turn to slide 5 for a review of our top line's performance in greater detail. Starting with our core segment, our Argentine cement business posted a robust performance with revenues up 42% year on year as we focused in balancing growth and profitability. We continue to see a favorable pricing environment this quarter, while sales volume declined by mid-single digits. Adding to the weaker overall demand environment, volumes were also impacted by less business sales this quarter.

Our concrete business also posted strong growth, with revenues more than doubling year on year, driven by record high volumes level for the quarter, and higher prices. Volumes benefit from the current infrastructure works in the market where we operate.

In Paraguay, we delivered a 73% increase in revenues compared to the prior-year quarter, supported by a continued appreciation of the guarani against the Argentine pesos. During the quarter, the improvement in market share partially offset the contraction of the industry. Aggregates revenues were relative flat as the healthy pricing was offset by a double-digit decline in volumes and a significantly higher share of FOB sales in the quarter.

While we posted strong growth in concrete volumes, leveraging from our strategic position to serve current infrastructure projects, it was not the case for overall aggregate demand, which faced lower demand from roads and our infrastructure projects.

Lastly, revenues from our railroad segment posted solid growth this quarter, up 37% year on year. Prices remained strong, while volumes remained relative flat compared to last year, with growth in cement and frac sand offsetting lower transported volumes of all and third-party aggregates.

Moving on to slide 6. Consolidated gross profit for the quarter increased 59% year on year, with gross margin up almost 230 basis points to 30% this quarter. It was mainly driven by our cement operation in Argentina and further supported by our cement business in Paraguay and our concrete segment. Gross margin for the Argentine cement segment increased over 400 basis points year on year to 34%, supported by healthy pricing and tight cost control, along with an efficient cost structure.

Our concrete cement contributed with margin expansion of over 330 basis points to 6.9%, benefiting also from higher sale volumes, coupled with lower input cost. While in Paraguay, we saw gross margins recovering sequentially back to historical levels, and we fully rely on our own clinker production. By contrast, we experienced loss -- lower gross margins in our aggregate and railroad segments.

SG&A expenses as a percentage of revenues declined close to 80 basis points to 6.7% in the third quarter, driven by cost management and a lower effective sales tax rate.

Please turn to slide 7. We turn in a 69% year-on-year increase in consolidated adjusted EBITDA, reaching nearly ARS1.7 billion with margin expanding close to 360 basis points to 27.6%. Measured in US dollars, adjusted EBITDA declined only 9%, reaching $53 million in the quarter despite the 85% peso devaluation year-over-year. Our Argentine cement business continued to deliver strong profitability, with adjusted EBITDA margin expanding over 490 basis points to 30%.

We also achieved adjusted EBITDA margin expansion of over 230 basis points year over year in the Paraguay cement segment, and almost 370 basis points in the concrete business. Adjusted EBITDA margins for our railroad segment contracted 300 basis points year over year. However, sequentially, we recovered almost 800 basis points. We adjusted its cost structure, and margins recovered around 6%.

Moving on to the bottom line on slide 8, net majority income for the quarter declined 66% year on year to ARS101 million. We reported a net majority income of $3 million in the quarter, down from $17 million in the same quarter last year, affected by the sharp peso devaluation measured in US dollar terms. The positive contribution from a robust adjusted EBITDA growth and a lower effective tax rate was partially offset by foreign exchange losses and higher financial expenses.

We reported a foreign exchange loss of ARS1 billion, mainly non-cash, in the quarter, reflecting the peso devaluation of 42%. This compared to an FX loss of over ARS172 million a year ago, when the Argentine peso depreciated 4%. This FX represents around $16 million in our bottom line when compared to previous year.

Moving on to the balance sheet. As you can see on slide 9, our leadership market position is further underscored by a strong financial position that provides flexibility to carry out our strategic initiatives despite a more challenging macro backdrop.

We ended the quarter with a net debt to adjusted EBITDA ratio of 0.88 times compared to 0.3 times in fiscal year 2017. During the quarter, cash flow generated by operating activity was ARS1.7 billion compared to ARS66 million in the second quarter of the year, explained mainly by higher operating results which were positively affected by seasonal lower working capital needs after the end of the annual maintenance stoppage of our main facility.

We continue to move ahead with our investment plan, with CapEx for the nine months totaling ARS2 billion, approximately $85 million. Of this, around 40% was invested in a second production line at our L'Amalí plant. During the quarter, we continue to move ahead with civil works, and expect that main equipment will be delivered by year-end. Total investments remain on schedule and within budget, while we foresee savings in dollar terms, mainly impacted by costs tied to Argentine pesos.

I will now hand the call back to Sergio.

Thanks, Marcos. Now please turn to slide 10. Looking towards [the rest] for the year, we remain cautiously optimistic that we continue to balance the growth and profitability, leveraging our leadership position in challenging macro environment.

Given the contraction on cement demand that occurred over the last months, we are expecting cement demand levels similar to those in 2017. We will continue to focus in delivering margin and profitability improvements in our different segments.

The expansion of our L'Amalí plant is an important element of our long-term growth strategy, and we continue to make progress with this project. The expansion will not only allow us to realize production efficiency, and that support profitability; but it will also provide much-needed capacity for when demand recovers.

This ends our prepared remarks. We are now ready to take question.

Operator, please open the call for question.

(Operator Instructions). Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation.

Daniel Sasson, Itau BBA.

Congratulations on your results. My first question is on the performance of the cement [major line] business in Argentina, specifically on prices. You were able to increase prices by almost 20% quarter on quarter. How sustainable is that? Or asking another way: what is the limit for you to continue raising prices? What are the push-backs you are receiving in the negotiations? Is that sustainable, going into the fourth quarter? If you could give us some color on that, that would be great.

And my second question: if you could remind us what's the percentage of your CapEx for L'Amalí that is denominated in pesos? Because I expected the total CapEx for the project, that $350 million, to be actually slightly lower than that because of the peso depreciation, which would obviously improve the return on equity expected for the project. Those would be my questions. Thank you.

(interpreted) Good morning, Daniel. Thank you very much for your questions. So, regarding your question about prices, we do not give guidance -- specific guidance about that. But we can tell you that the increases were very much in line with the public information from the index.

So, regarding our margins, what we can tell you is that currently the margins are in the same level or even higher than what we've published in the third quarter; and the perspectives are -- we can say that are also in line. So, again, our strategy would be to balance our profitability and our market position. And we will try to increase our prices in order to compensate our cost inflation.

Regarding the L'Amalí expansion, CapEx -- around 50% of the CapEx is linked to peso, Argentinean peso; and the other 50% in US dollars. So regarding the share of the CapEx in Argentinean peso, that has a formula for the adjustment of that amount that follows different indicators. Therefore, we expect the total amount to be closer to $320 million.

Thanks a lot. Thank you, Sergio.

Dan McGoey, Citigroup.

Congratulations on the result. My question is: looking forward with the L'Amalí expansion and with the weaker demand outlook, I'm wondering if you could talk about what your base case plan is for shutting down capacity when L'Amalí comes online. And if you have any type of updated expectation as to how that would affect the -- either cash cost of production or limit the margin improvement that you anticipated from L'Amalí, given your current demand forecasts. Thanks.

(interpreted) Thank you, Dan, for your question. So, as we always said, L'Amalí project has many advantages, and one is the overall cost improvements. The L'Amalí 2 production cost, we estimate that it's going to be the lowest among all our facilities. And the arrangement of the new production scheme, it will depend also on the different dynamics in the different regions of the country, as the logistic cost also has a big impact.

Therefore, in the future, with the L'Amalí 2, we're going to slow down productions in different facilities, trying to optimize the variable cost, the fixed cost, and the logistic cost.

Okay. Are you able to give a tonnage figure on that, or which specific plants? Or is it too early to say?

(interpreted) Without doubt, of course taking into account the distance between the Olavarría and Barker facilities to the L'Amalí plant, these are the most [probable] facilities are going to be slowing down its production. And also taking into account that the variable cost differential between the L'Amalí and the average is about $15 per ton.

Perfect. Thank you very much.

Alejandra Obregon, Morgan Stanley.

Just, very quick, two questions. The first one is related to raw materials. Last quarter you were mentioning that petcoke is typically bought in advance; and, therefore, you have an FX advantage in this sense. So, I was wondering if you could talk a little bit about the inventory turnover for petcoke and US-dollar-denominated raw materials. And how long do you expect this sort of inventory hedge to continue playing out at the cash cost level?

And then my second question is related to demand. You were talking earlier on infrastructure and public works in Buenos Aires. So I was wondering if you could give us an outlook of what are you expecting in this sense? And also in housing, if you can give us some color, that would be very helpful. Thank you.

(interpreted) Good morning, Alejandra. Thank you very much for your questions. So regarding the petcoke, the stock that we were carrying on our inventories, it was basically consumed; and the remaining, we're going to be consuming it along the year. And also regarding the petcoke, since the natural gas production in Argentine is increasing, the availability of natural gas is also increasing. And this higher availability of natural gas has basically a higher impact -- or benefit from the environmental perspective, the cost perspective, and also the operational perspective in our facilities.

And also regarding the infrastructure plan: the public works, as they were planned, they are being executed. And what we see is that many of them are also moving into the -- or also being executed in 2019, and some of them ending by mid-year, next year. And also, we see both at the national level and the provincial level that there is some projects that are being talked about. And regarding the PPPs, this is also something that we expect to have an impact next year.

Thank you very much. This was very helpful.

Dan Altman, Bradesco BBI.

Thanks for the very good disclosure in your report again this quarter. Just a question on your comment regarding being cautiously optimistic. It seems like the guidance that you are giving in your release is very short-term. It's related to how this year will end.

But I'm wondering, given the projection that you have in your presentation for, say, minus 1% GDP growth next year, I'm wondering if that's part of your cautious optimism. Do you see -- do you have visibility beyond the next month or two? And what is it that makes you optimistic about the current fundamentals in Argentina? Thanks.

(interpreted) Good morning, Dan. Thank you for your question. So, when we say that we are cautiously optimistic, it has to do with that during the last month of this year, we see, of course, a lower in demand; and this we expect to be also stepping into the beginning of next year. But by the second half, we expect a recovery.

There are some talks about projects and some different sources of information that give us a hint that by the second half there's going to be a higher activity, and that is why we expect also a higher demand.

So as you know, we do not give guidance regarding the next-year figures. But taking a look to the history and the correlation between the cement industry and the GDP, there is -- you have this multiplier of 2 times.

Okay, great. Thank you.

(Operator Instructions). Andressa Varotto, UBS.

First, I wanted to ask you if you could elaborate on cost controls. And second, we saw your SG&A expenses lag the inflation. So along which lines is the Company being able to contain expense growth? And lastly, just wanted to confirm if your pricing strategy focuses to preserve margins in terms of EBITDA per ton, or gross profit per ton in USD terms. Thank you.

(interpreted) Good morning, Andressa. Thank you for your question. When we talk about cost control, what we say is that the Company has different measures for the cost control. And here, we not only take into account the performance of our facilities, but also the cost controls in the tariffs, both in expenditures and different costs. And in situations like currently in Argentina, with very high inflation, our experience in order to manage different relative prices, it has an impact on our results.

And would you please repeat your second question, please?

Yes, sir. The second question is more specific on SG&A expenses, as these lagged inflation. Just curious to knowing among which lines is the Company being able to contain expense growth. And lastly, I just wanted to confirm if your pricing strategy focus is to preserve margins in terms of EBITDA per ton, or gross profit per ton in US dollars. Thank you.

(interpreted) So regarding the SG&A question, we do have control in all the lines of these expenditures. But in this quarter in particular, we have an important savings in freights and tax. So once again, this freight and tax, these are the most important. But we always keep focus in all the expenditures, especially in the current situation with very high inflation and price changes.

So regarding your profit question, we take into account different indicators to measure profit. But we prefer to choose the EBITDA per ton, both as a percentage of revenues and in measuring US dollar.

That was great. Thank you very much.

And at this point, there are no further questions. This concludes our question-and-answer session.

I'd like to turn the conference back over to Gaston Pinnel for closing remarks.

Okay. 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 we provide financial and business updates next quarter. In the interim, the team remains available to answer any questions you may have. Thank you, and enjoy the rest of the day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.