Loma Negra Compania Industrial Argentina SA (LOMA) 2021 Q2 法說會逐字稿

Good morning, and welcome to the Loma Negra Second Quarter 2021 Conference Call and Webcast. (Operator Instructions) Also, Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Mr. Gastón Pinnel, Head of IR. Please, Gastón, go ahead.

Thank you. Good morning, and welcome to Loma Negra's Second Quarter Earnings Conference Call. 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.

Joining me on the call this morning will be Sergio Faifman, our CEO and Vice President of the Board of Directors; and our CFO, Marcos Gradin. Both of them will be available for the Q&A session.

Before I turn the call over to Sergio, 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. This conference call will also include a discussion on non-GAAP financial measures. The full reconciliation to the corresponding financial measures is included in the earnings press release.

Now I would like to turn the call over to Sergio.

Thank you, Gastón. Hello, everyone, and thank you for showing us today. First, I hope you and your family are safe and healthy. So as usual, I'm going to mention a few highlights of the second quarter, and then Marcos will [roll] you through our market review and financial results. After that, I will provide some final remarks, and then we will open the call to your questions.

As you all saw from our release yesterday, we are pleased with the second quarter great performance, which was mostly explained by our cement business, which is quite encouraging that the strong momentum experienced in cement sales seen last year bottomed, continue and is already exceeding prepandemic level, with July posting the highest (inaudible) rate since 2016.

Our world-class operations enabled us to expand our EBITDA by 74% and expand our margin by 483 basis points, posting the best second quarter since IPO, as higher operational lever and cost control more than offset the impact of higher production during winter months compared to unusual second quarter of last year.

Our adjusted EBITDA in the quarter was $48 million, $22 million higher than in the same quarter last year, impacted by COVID-19 pandemic restriction, and $9 million higher when compared to prepandemic second quarter 2019. When mentioned in U.S. dollar per ton, EBITDA increased compared with the same period last year around 28% and standing at $34 per ton.

Regarding our capital structure, we have a solid balance sheet with the low net debt ratio of 0.13x and some debt profile.

During the quarter, our bottom line was hurt by a one-off deferred income tax charge related to recent tax reform. Marcos will elaborate on this later.

Finally, in June, we inaugurated the new kiln in L'Amali plant, which is now up and running and producing kilnker. Full commissioning of the second line is moving toward completion and is now [programmed] for end of September. I will now hand off the call to Marcos Gradin, who will walk you through our market review and financial results. Please, Marcos.

Thank you, Sergio. Good day, everyone. As you can see on Slide 4, leaving behind the previous double-digit trough of GDP in 2020, is now expected to be partially recovered by year-end. Construction activity measured by the ISAC remains strong and is recovering since last November.

In the case of the 7th national industry sales, the recovery was much stronger. Actually, the recovery cycle that started in September last year is now starting to exceed prepandemic levels of 2019.

Second quarter of 2021 posted a total volume of 2.8 million tons, a 50.5% higher than second quarter 2020 and 2% above second quarter 2019. While breaking it down by segments, both bag and bulk contributed positively to growth.

Naturally, bag segments accumulate a longer recovery cycle and is already above 11% in respect to second quarter 2019. On the other hand, bulk is still down around 9% when compared to second quarter 2019, yet it has experienced a sharper recovery year-on-year as this was the most hit segment by COVID-19 restrictions last year.

Consequently, the share of cement sold in bulk increased from 22% in second quarter 2020 to almost 39% in this quarter. We expect this return to remain rather stable in the following months with a moderate bulk recovery as seasonality and some higher public works activity could factor in.

Certainly, the economy as a whole still faces different tests, particularly on the macroeconomic outlook, expectation about GDP growth for 2021 revolve around 6.8% recovery, definitely far from prepandemic levels.

Turning to Slide 5 for a review of our top line performance by segment. Consolidated revenues year-on-year increased by 46.6%, mainly reflecting the positive momentum experienced by our core cement business, with all segments contributing positively to sales recovery.

Cement, masonry segment and lime segment was up 43.4%, with volumes expanding 39.5% and good pricing performance. Concrete and Aggregates posted a standard revenue recovery of 492% and 1,000% year-on-year, respectively. Bear in mind that sales in the comparable quarter last year had collapsed due to COVID-19 restrictions.

In the case of Concrete, volume expansion of 584% was partially offset by negative pricing performance. On the contrary, Aggregates experienced sharp volume recovery of 620%, together with positive pricing mix.

Finally, Railroad revenues increased by 23.5% during the quarter versus the same quarter in 2020, as the higher transported volumes were offset by poor pricing performance due to product mix.

Moving on to Slide 7. Consolidated gross profit for the quarter was up 88% year-on-year, with margin expanding by 664 basis points, as a result, largely driven by our Cement business. Cement gross margin expanded by 411 basis points from 38% to 42.1% in the back of higher operational leverage and profiting from cost discipline, yet we experienced some pressure from seasonal energy charges as winter production in 2020 was abnormally low due to the sharp drop in demand, including cost initiatives to face last year uncertainty.

SG&A expenses as a percentage of revenues decreased by 83 basis points to 8.6% from 9.5% 1 year ago, mainly due to cost dilution from higher sales volume, which outweighted higher labor costs compared to last year's level.

Please turn to Slide 8. Our adjusted EBITDA was up 71.1% (sic) [74.1%] in the quarter, reaching ARS 4.4 billion, with consolidated EBITDA margin expanding by 483 basis points to 30.5%. In U.S. dollars, our EBITDA reached $48 million or $22 million higher than the same quarter a year ago or $9 million higher than the same quarter in 2019 previous to the COVID-19 outbreak.

Mainly thanks to our core business segment, cement, masonry and lime, with Concrete and Aggregates contributing in a lesser extent to EBITDA growth.

Cement segment adjusted EBITDA margin expanded by 472 basis points to a world-class 34%, mainly due to the increase in sales volume and higher cost dilution, posting the best margin for second quarter in recent years.

On a per ton basis, EBITDA increased compared with the same period last year around 28% and stood at $44 per ton. Concrete adjusted EBITDA increased ARS 81 million compared to second quarter 2020, explained by lower cost and SG&A in relation to revenues, yet margins remain negative at 6.8%.

Aggregates adjusted EBITDA improved drastically from negative ARS 41 million in second quarter 2020 to positive ARS 15 million in second quarter 2021, with margin of 7.7% as a better pricing mix and volume outweighted cost increases.

Finally, Railroad adjusted EBITDA margin deteriorated from 7.7% to 4.9%, mainly impacted by product mix and partially offset by higher transported volume and lower burden on SG&A as a percentage of revenues.

Moving on to the bottom line on Slide 10. Driven by EBITDA growth and net finance gain, profit before tax stood at ARS 3.3 billion. In this quarter, the bottom line was impacted by the recent tax reform, which increases income tax rate from 30% to 35%, including the suspension of the subsequent rate reduction of 25. This one-off effect is equivalent to ARS 3 billion of additional deferred tax charges, resulting in a debt loss of ARS 1.2 billion.

Besides this impact, our accumulated net profit for the year posted positive figures of ARS 1.6 billion. Total finance gains stood at ARS 292 million in this quarter compared to a net loss of ARS 1.6 billion in second quarter 2020, mainly due to a foreign exchange gain of ARS 193 million in this quarter, reverting a loss of ARS 864 million in second quarter 2020, as a result of lower net debt denominated in foreign currency and a real appreciation of the pesos.

Additionally, gain on net monetary position was ARS 552 million in this quarter compared to ARS 102 million last year. Finally, our net financial expense declined by ARS 381 million to ARS 453 million compared to same quarter last year, driven by lower net financial debt.

Moving on to the balance sheet. As you can see on Slide 11. We ended the quarter with a cash position of ARS 2.9 billion and total debt at ARS 5.4 billion. Consequently, our net debt-to-EBITDA ratio stood at 0.13x compared to 0.16x at the end of 2020.

In this quarter, we reduced our debt in $21 million standing at $56 million, 83% of which is denominated in U.S. dollars. Additionally, we repurchased share for a total amount of ARS 511 million. During the quarter, our operational cash generation was almost fully dedicated to income tax payments and seasonal working capital requirements. As always, in the second quarter, previous year's income tax payments are scheduled.

Particularly in this quarter, the tax payment of ARS 3 billion, including ARS 1.5 billion charge related to last year's divestment in Paraguay. When compared to last year's second quarter, we need to bear in mind that in 2020, working capital levels include several initiatives aiming to preserve liquidity under the pandemic uncertainty.

Regarding capital expenditures, we spent ARS 1.6 billion, 22% of which were allocated to L'Amali expansion project. As the second line is going to be completed, so are the capital requirements.

Now for our final remarks, I would like to hand the call back to Sergio.

Thank you, Marcos. Now to wrap up the presentation, I please ask you to turn to Slide 13. As we expect cement demand recovery from last year's volume to continue, we foresee an expansion compared to prepandemic level of 2019. For the second half, both seasonality and public works could play an important role, yet we are cautioned as macroeconomic context could affect the recovery. At this point in time, impact relative to COVID seems more distance. However, we remain watchful to evolution of the new variants, both locally and globally.

After inauguration in June, the brand new kiln in L'Amali started to produce clinker and it's already contributing to our world-class operation. Additionally, the new cement mill and dispatch center are planning to start up by end of September. As we recently communicated and in line with our expectation, a new open access scheme will rule in Argentina railroad network.

And Ferrosur Roca concession will not be extending beyond the original expiration date of March 2023. Detail regarding the new scheme are not yet available. Therefore, we are analyzing different scenarios, none of which should have a material impact on our current businesses, and where the most probably is to become an operator continue the current operation.

Last, but not least, I would like to thank all our people and stakeholder for their commitment to Loma's operational excellence without whom the set of solid results would have been much harder to achieve. We are confident that supported by a robust and efficient productive footprint, our solid capital structure and dedicated team, Loma has the pace to continue (inaudible) in the year to come.

We are now ready to take questions. Operator, please open the call for questions.

(Operator Instructions) Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. (Operator Instructions) And our first question today will come from Alberto Valerio with UBS.

I would like to know about the dynamics in Argentina. The impression that we have here (inaudible) making, we know that the second quarter is seasonally weaker than the first one. But we estimate that it's decelerating relative to the first quarter.

And with the preliminary data from July, it looks like Argentina is accelerating again. So my question is, this is true, the second quarter came a little bit weaker than the strong first quarter, and if we can expect to recover in the second half of the year?

Sorry, Alberto, you're speaking about margins or about volumes?

About margins. I think the volume come in as expected, but I think the price came a little bit below what we expect. So overall, the EBITDA that I was expecting was a little bit higher than what comes because we saw a very strong first quarter.

Valerio, thank you for your question.

[Interpreted] So typically, during winter months, there is a seasonality effect on our production costs. Additionally, when compared to the last year, we produced a very much lower amount of cement and including a lower price of gas derived from the pandemic situation.

Additionally, by this time of the year, we were expecting to be producing clinker with the new kiln in L'Amali plant, which ended up starting in June, okay? So the benefits were not collected in the second quarter, and we're still producing -- we were producing in the Olavarría plant.

Perfect. And if you could just provide a follow-up for the second half of the year, should we see the activity accelerating again?

[Interpreted] So yes, as you may saw on the AFCP reporting, July numbers were very good. And actually, they were the second best July in history. And the first days of August and also the -- what we foresee for the remaining of the year are quite optimistic. Forecasting for the full year for the industry numbers above the 2019 prepandemic levels.

And our next question will come from Carlos Peyrelongue with Bank of America.

My question is related to the new kiln in L'Amali and the expansions. Can you comment on the expected margin expansion once you're up and running and provide some timing as to when you think this new kiln will contribute to margin and we will be operating smoothly?

Carlos, thank you for the question.

[Interpreted] So the numbers of the market will not only depend on the demand volumes, but also the cost of the energy. So why we are saying that because the kiln in L'Amali plant is much more efficient than the kiln in Olavarría, but there are also many other factors playing in.

So the efficiency of the new kiln regarding the specific consumption in kilocalories is around 10% better than the Olavarría kiln. And we are now analyzing if it's better to run on during the summer with summer costs of energy or during the winter with using pet coke and naturally higher energy costs.

So now we are running the kiln and it's already working above the guarantee levels. And we are now planning to produce with these levels.

So a follow-up on this. So the margin expansion that you mentioned assuming that the things are going smoothly and we don't have major surprises on the cost side is 200 to 300 basis points on EBIT margin on a consolidated basis? Did I get that correct?

Yes. That's correct. It's 2% to 4% of margin increase.

And our next question will come from Nikolaj Lippmann with Morgan Stanley.

I'd like -- and congrats on good numbers. Two questions or 1 question, I guess, I'm allowed to. So I'll bag it into 1. I was wondering if you can give a bit of details on asset allocation. Given the change in the concession, if you're thinking about a bit of a plan B, maybe expanding your fleet of trucks in case there could be some disruption? And also -- so the second part of the question would be, how do you guys feel about Aggregates in Argentina these days?

[Interpreted] Sorry, Nikolaj, could you repeat the questions because we can't hear the first part.

Sorry about that. My question relates to whether you got -- as the rail concession comes to an end, and of course, every time that happens, there's a certain amount of risk associated with the new framework. Are you considering increasing -- you have a very strong balance sheet, are you considering buying, a bit of increasing the fleet for logistics in case there's any sort of disruption?

And also, how are you seeing the Aggregates market? Is that something that you're looking at in terms of possible use of cash, making acquisitions in that space?

Nikolaj, thanks for your question.

[Interpreted] So regarding the railroad, we do not foresee cost increases from now on. Initially, we are planning to keep our operation as an operator in that -- in those trucks. So yes -- besides the fact that, yes, there are no -- the details from the government regarding (inaudible) and other factors, we expect either to maintain or to even increase regarding the lower CapEx requirements.

Got it. And can you comment on whether you are seeing any opportunities in the Aggregates market in Argentina?

[Interpreted] So we are not thinking on expanding on the Aggregate business, but we are increasing margins, thinking on what happened during the pandemic. So one important point regarding the railways, we're considering L'Amali 2. We have an advantage, yes, because -- an additional because we are not going to rely that much on LomaSer and we're going to increase the dispatch capacity from L'Amali 2.

And our next question will come from Agustina Isidro with AR Partners.

So going back to the estimate for the cement shipments for this year. So the construction sector is showing this interest dynamic that you were talking about and many attribute these to the FX gap. So what do you think is behind the recovery? That's our first question. And then as a second question, do you think that bulk cement will recover to prepandemic levels during this year?

Agustina, thank you for the question.

[Interpreted] So there are no doubts that the gap between the FX rates, it has an impact on demand. We also observe an increase in public works, especially small public works, while larger public works are still hampered. And we also observe a consumer behavior to expand the places where they live, and this is additionally driving demand.

Yes, we can hear you now, Sergio.

Okay. Thank you.

[Interpreted] So when we observe July, yes, we observe that we are above prepandemic levels. Then when you take a look to bulk, it's slightly lower than 2019, and bag is slightly higher than 2019. And we are already with both volumes closer to 40% of total market volumes.

And our next question will come from Alberto Valerio with UBS.

Just another one. Now about dividends. You know that Argentina has remained with the restriction of capital. And my question is how further can you guys go with the buybacks?

Sorry, Alberto, how -- you're asking about the buyback?

Yes. How much more you can do it?

The volume that we are applying for the second pilot program is what we are allowed to do in the local markets, yes. So in the -- it's (inaudible) $2 million per month. That's the one that we are achieving. We spent almost $5 million during the quarter.

Perfect. And for how long can you keep doing the buyback? There is a limit or is -- the limit is $2 million per month?

The limit is 10% of total capital of Loma Negra. So still plenty of room.

And this concludes our question-and-answer session. I would like to turn the conference back over to Gastón Pinnel for any closing remarks.

Thank you for joining us today. We appreciate your participation and your interest in our company. 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. Thanks again, and stay safe.

The conference has 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.]