Loma Negra Compania Industrial Argentina SA (LOMA) 2020 Q4 法說會逐字稿

Good morning, and welcome to Loma Negra Fourth Quarter 2020 Conference Call and Webcast. (Operator Instructions) Also, Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Gastón Pinnel, Head of Investor Relations. Please, Gastón, go ahead.

Thank you. Good morning, and welcome to Loma Negra's Fourth Quarter and Fiscal Year 2020 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 press 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 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 joining us today. First, I hope you and your family are safe and healthy.

As always, I'm going to mention a few highlights of the fourth quarter, and then Marcos will walk 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 question.

As you saw from our release we issued yesterday, in the fourth quarter we achieved an outstanding performance on the back of our cement business. The momentum is quite encouraging as the bulk cement -- [as shown in the] bagged cement on the volume expansion in the same month. The recovery pathway of cement dispatch was consolidated at cement demand in the fourth quarter experienced a strong sequential growth, and an overall volume increase of around 23%, with every division of the country undergoing similar dynamics. Coupled with volume increase, our diligence on cost control and our pricing discipline enabled us to grow our EBITDA, expand our margin by 415 basis points and reach our record-high EBITDA per ton. Our adjustment EBITDA in the quarter was $58 million with an expansion of 33% compared to the same quarter last year.

For the full fiscal year 2020, and bearing in mind the uncertainly we faces along the year, I would like to highlight the resiliencies and determination of our organization. Together, we were able to deliver again excellent results, an EBITDA of $171 million with margin of 33%, while strengthening further our solid balance sheet and executing our strategic L´Amalí expansion project. We will expect to start producing clinker later this month and to be fully operation by middle 2021.

Although we are getting to coexist with the virus, we need to stay alert and focused as our country and the world continue to battle the COVID-19 pandemic. We face additional challenge as Argentina economic environment remains delicate and with several restriction. Yet, we trust that the right stimulus and signal will being additional dynamics to the economy as a whole and the construction sector in particular. I will now hand off the call to Marcos Gradin, who will walk you through our market review and financial results. Please, Marcos, go ahead.

Thank you, Sergio. Good day, everyone. As you can see on Slide 4, leaving behind the fierce drop of beginning of 2020, the year ended with an estimated GDP drop of 4.4% in the fourth quarter of 2020 and a full year drop of 10%. For the full year 2020, the cement industry dropped by 11.5% to 9.75 million tons, needing to go back almost a decade to find similar industry volumes. During the last quarter of 2020, we have observed a sustained recovery momentum in the construction activity and cement demand with a volume expansion of 24.1%.

Promisingly, in the first couple of months of 2021, the industry posted similar positive growth dynamic, with January and February volumes expanding by 20% and by 18% respectively. The main driver behind this trend is bagged cement sales, which even posted a record high level in October, and which is explained by a surge in self-construction and retail demand. Positively since November 7 started to contribute with positive year-on-year growth. Certainly, the economy as a while still faces different tests, particularly on the macroeconomic outlook. Expectation of our GDP growth for 2021 revolve around a mid-single-digit expansion, definitely far from prepandemic levels. In this sense, we carefully watch the strength of different economic sectors as they are reopening for businesses.

Surprisingly, the share of cement sold in bag increased by almost 680 percentage points from 61% in first quarter '19, to almost 68% in this quarter. We expect this breakdown to remain rather stable on the following month. We expect bag demand continues to catch up as lifted restriction on larger private construction works and public works are making the segment to gain some momentum again.

Turning to Slide 5 for a review of our top line performance by segment. Consolidated revenues increased year-on-year by 20.6% on the back of our core cement, masonry and lime business, which expanded revenues by 26.9% due to higher demand, higher market participation, together with stable pricing. As mentioned before, bagged cement continues to be the main driver behind this energetic recovery, growing in this quarter around 39% compared to the same quarter last year. And bulk cements grew mildly around 7% as previous COVID-19 restrictions in private works were being lifted.

Concrete segment was also positively impacted by execution of the metropolitan airport expansion project in the Buenos Aires city. Thus sales volumes increased by 12.8% year-on-year, the first positive figure since first quarter 2019. Yet concrete revenues declined by 17% as softer pricing affected higher sales volume.

Railroad revenues decreased by 19.1% year-on-year versus the comparable quarter in 2019 as the highway transported volumes were more than offset by lower pricing mix.

Finally, aggregates decreased by 4.7% as pricing performance partially compensated a 9.5% volume decline. For fiscal year 2020, net revenues increased 12.8% to ARS 41.6 billion from ARS 47.7 billion in 2019, with revenue declines across all segments with our core segment business suffering a milder annual decline of 4.7%.

Moving on to Slide 6. Consolidated gross profit for the quarter was up 46.1% year-on-year with margin expansion by 632 basis points, an extraordinary result underpinned by the strength of our core cement business. Cement gross margin expanded in the back of higher sales volume and benefiting from cost discipline. Energy inputs benefit from early prices for negotiation, together with improvements in unitary energy consumptions. SG&A expenses as a percentage of revenues decreased by 115 basis points from 9% to 7.9%, mainly due to higher sales volume.

Please turn to Slide 7. Our adjusted EBITDA was up 40.8% in the quarter, reaching $58 million. And our contributed EBITDA margin expanded by 513 basis points to 35.6%, thanks to margin expansion in our core business. This segment expanded by 604 basis points to an outstanding 40.4%, mainly due to the increase in sales volume and improved energy inputs. In a per ton basis, EBITDA stood at $47, posting a record high level and increasing around 11% compared with the same period last year, and above 17% in a sequential basis versus third quarter.

Railroad adjusted EBITDA margin deteriorated to minus 0.6%, mainly impacted by pricing mix and partially offset by highway transported volumes. Concrete adjusted EBITDA declined compared to fourth quarter '19 with margin worsening to 19.2% negative as softer pricing and higher cost out-weighted decrease in sales volume. Finally, aggregates adjusted EBITDA margin decreased to minus 9% from minus 4.6%, with better pricing being out-weighted by lower sales volume and however cost. EBITDA in 2020 was $171 million compared to $172 million in 2019, which included $9 million of nonrecurring costs associated to administrative commercial and productive structure adequacy efforts.

Moving on to the bottom line on Slide 8, driven by EBITDA growth and net finance gain, net income surged by 93.9% to USD 46 million. Income from continuous operation was ARS 3 billion compared to a loss of ARS 1.2 billion, mostly explained by the adjusted EBITDA expansion and lower financial expenses, driven by lower total financial debt. By contrast, foreign exchange rate was ARS 189 million lower due to lower debt position denominated in foreign currency and a real depreciation of the peso. Measured in U.S. dollars, our net income for full fiscal year 2020 was $189 million compared to $50 million in fiscal year 2019. When excluding the income from discontinued operations related to the sale of our stake in Cementos Yguazú, the net profit reached $97 million in 2020 or $60 million higher than in 2019.

Moving on to the balance sheet. As you can see on Slide 9, our higher profitability out-weighted the higher working capital needs in the quarter, resulting in a healthy operational cash flow generation of ARS 4 billion, a 52% year-on-year raise. During the quarter, we made capital expenditure for ARS 1.7 billion, 45% of which were dedicated to L´Amalí expansion project. Additionally, we paid out an extraordinary dividend of approximately USD 31 million related to the sale in Paraguay.

On February we announced our share repurchase program with the purpose of efficiently applying a portion of the company's cash position, expecting to generate a greater return for value for our shareholders given the current attractive value of the share year. During the year, our financial situation was further strengthened. We ended 2020 with a net debt reduction of $162 million, reaching $25 million as of year-end, with a net debt-to-EBITDA ratio of 0.16x compared to 0.83x by the end of 2019.

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

Thanks, Marcos. Now to wrap up the presentation I please ask you to turn to Slide 10.

Definitely 2020 will be remembered as one of the most challenging years in decade. We are proud of the action taken to look after our people, our community and our customers. Since the beginning of this crisis, our priority has been the health and safety of our people and their families. That is why we quickly formed and [adopt] committed to manage and monitoring the situation. Firstly, we temporarily suspend production in our plant as well as the execution of our expansion project. [Indeed,] in this situation we never lost focus on the importance of security of working capital needs, optimizing costing and reforming our capital spending priorities. Under this context and supported by the resiliencies and sense of purpose of our organization we were able to deliver again excellent results, a strong EBITDA generation in 2020 of $171 million with margin of 33%.

Our solid balance sheet and the approaching completion of our strategic L´Amalí expansion project made us feel confident that we are ready to face new challenges. Forecast for the Argentine economy [PDL] GDP growth of around 5.5% year-on-year for 2021, which will be a partial recovery after the sharp decline in 2020. In that line, we expect the construction sector will experience a stronger recovery in the first semester, leaving the second semester subject to how the economic and sanitary situation of the country evolves.

One could say that up to some extent we are getting used to coexist with the virus, yet we need to remain alert and focused as our country and the world continue to battle the COVID-19 pandemic. In Argentina, we face additional challenges as the economic environment remains delicate and with several restriction. Having said that, we trust the right stimulus and signal could bring additional dynamics to the economy as a whole and the construction sector in particular. We are confident that we have positioned ourselves for a sustainable growth and cash flow generation in the future.

Finally, I would like to thank all our people and stakeholders without who this set of solid result would have been very difficult, particularly during these unprecedented times.

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

(Operator Instructions) Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately following the English translation. (Operator Instructions) Our first question is from Nikolaj Lippmann from Morgan Stanley.

Congrats on the very solid strong numbers there. My question is really related to costs. So 2 elements of that. First, the sustainability of this cost reduction at a cash cost level for U.S. as winter approaches, to what degree do you think that you can rely on local gas vis-à-vis buying petcoke? And related -- and a similar question related to the L´Amalí expansion. To what degree do you think that any cost reduction that you will have there will be basically in addition to your - to EBITDA per ton and then you will keep that? And to what degree do you -- are you thinking of trying to invest some of that back into the market? And again, congrats on the numbers.

Nicolas, thank you for your question.

[Interpreted] Regarding our cost, yes, we believe they are sustainable looking forward. This year we had a considerable reduction in our variable cost in energy, electrical energy and thermal energy. We have an advantage to produce using natural gas comparing to petcoke. This advantage is going to be further increased in the future once we have the L´Amalí second line. Because in that way we're going to be able to optimize our working capital and to run more in winter. Regarding the benefit from the second line of L´Amalí, there is no doubt that most of those benefits we already implemented. Those related to structure and fixed costs were already implemented. Logically, since we already have improved our thermal and electrical costs, the benefits from a higher productivity in the second line are less. Looking forward, independently from what we -- what happened in the past, we're going to have a better performance in the second line. And also the higher volumes are going to be -- we're going to be able to produce them with the same structure.

Our next question is from Alberto Valerio from UBS.

I have 3 quick one on my side. The first one about debt payments, I saw that the maturities for the next year. And how long would be this more -- it's mostly in foreign currency, right? And how it would be can Loma get official U.S. dollars for those payments or must go for the new dollar?

Alberto, thank you for your question. The maturity of our debt profile, it's not concentrated on one only maturity. There are several payments that we have to make. And we are relying on getting access to official FX, yes. It's -- obviously the situation can change. But we are confident that we are going to use -- that we are going to be able to obtain those payments in U.S. dollars.

Perfect, Marcos. And my second one would be about the next steps for Loma when L´Amalí project is gone by mid of the year and the company probably reaching the net cash in the next quarter. How long will you use this firepower? Are you thinking increased dividends if you can distribute them? Or there are any expansion plan or M&A?

Alberto, thank you for your question.

[Interpreted] So currently we are working on our Board of Directors within the financial committee where we are analyzing all the alternatives that's going to present after the expansion project of L´Amalí. The further decision that was made that we took last year at the end of the year is the repurchase plan that is undertaken now. So the other alternatives that -- for the use of cash, which have pros and cons are still under analysis.

Nikolaj Lippmann from Morgan Stanley has another question.

I was just wondering if you could -- your rail concession will expire shortly. If you can provide a bit of an update on sort of what's going to be the base case as you're seeing it right now and how it potentially could affect some of your operations?

[Interpreted] the railway concession is due on 2023. So the original concession had a provision for an extension for additional 10 years, and the government is starting this renewal. So the information that we have and the meetings that we are having with the government did not -- doesn't have a formal entity yet. And the idea would be to go to an open access scheme where the current concessionists are going to be able to operate on the trucks, on the current trucks. So in that way, the government or the, yes, national government is going to -- should take care of the investment to maintain the railways. And each operator should take care of the maintenance of the wagons and then pay a fee to operate on those trucks. So we expect that this new structure should have -- should be beneficial for Loma Negra not only as the logistic costs should be reduced but also the investments.

Our next question is from Coleman Clyde from HSBC.

Just had a quick one. Could you give us a little bit of color on the outlook for volumes and pricing in 2021? Obviously, you finished the year on a very strong note on the volume side. How much of that momentum do you see carrying through the year? And then as well, in terms of the bulk versus bag breakdown, obviously there's a lot more bag cement sales this year. What kind of margin benefit did that have this year? And do you expect that reverse -- last year. And do you expect that reversing in 2021?

Coleman, thanks for your question.

[Interpreted] So for this year we are expecting GDP growth between 5.5% and 7%. So we still do not have a provision for the industry growth, the cement industry growth. But taking a look to the history, there has been a multiplier of 2x approximately. So our expectation for the price increases is to be in line with the Loma Negra cost inflation. And as we always mention, this -- we consider a mix between inflation and the FX depreciation as we have part of our cost with that -- as a component of U.S. dollars. We do see a recovery in the bulk segment, which is coming from lower volumes. And also many announcements of different public works in the province -- in the other provinces which are starting to be implemented. Profitability in both bulk and bag are quite similar. So this shouldn't have an impact in the consolidated profitability.

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

Thank you for joining us today. We appreciate your participation and your interest in our company. We always look forward to meeting 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.]