Loma Negra Compania Industrial Argentina SA (LOMA) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Loma Negra Third 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 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 our third quarter 2020 earnings release conference call. Above all, we hope you and your families are safe and well. 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 we proceed, I would like to make the following safe harbor statements. Today's call will contain forward-looking statements. 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 discussion of 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. Please, Sergio, go ahead.

Thank you, Gastón. Hello, everyone, and thank you for joining us today. First, I hope you and your family are safe and well. I am going to mention a few highlights of the third quarter, and then Marcos will review 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.

I would like to begin by thanking all our people and stakeholders, without whom the set of solid results would have been very difficult, particularly during these unprecedented times. During the third quarter, we achieved very important result with EBITDA growth and margin expansion. The recovery pathway of cement dispatch was considered as good experience and very strong sequential growth in evaluation of the country and overall volume increase of almost 3% in a year-on-year basis. As observed in previous quarter, the reason behind this rebound was the bulk segment, driven mainly by residential demand. On the contrary, the delay in larger private and public works execution is preventing the bulk segment to start its recovery and also harming our Concrete and Aggregates business.

Our adjustment EBITDA stood at $48 million with an expansion of 9.4% in the quarter compared to the same quarter last year as we remain diligent on our operation. We've been able to recover sales volume while improving our EBITDA margin by 454 basis points to 31.5%. Additionally, during the quarter, we decided to [execute] the sale of our under 51% stake in the Paraguayan company, Yguazú Cementos. This was an excellent deal in terms of value generation and timing, with an implied multiple of approximately 9x last 12 months EBITDA.

As our country and the world continue to battle the COVID-19 pandemic, economic activity remains weak and uncertainty high, yet lockdown are less restrictive and more sectors are operational, which is expected to bring additional dynamics to the economy as a whole. As a key element of our long-term strategy, L´Amalí expansion project is right on track, expecting it to be inaugurated by the beginning of 2021.

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 5 (sic) [Slide 4], we are leaving behind the bottom levels of the second quarter, where the GDP recorded a fierce drop of 19%. Auspiciously, the construction sector continues the sequential recovery started in May. In particular, the cement sector is experiencing a more vigorous rebound. After 14 months of year-on-year decline, September was the first month in recording a positive 10.5% growth. The main drivers behind this trend is bag segment sale, which is explained by a surge in self-construction and recent demand. This segment grew around 18% in the fourth quarter relative to the same quarter in 2019 and also posted in September a historic record. A similar trend was also observed in October with a 12.8% year-on-year growth for the industry.

By contract during this quarter, bulk segment, together with Concrete and Aggregates continues to suffer the most, hampered by the halt in infrastructure works as a constriction to operate combined with economic uncertainty. And surprisingly, the share of cement sold impact increased by almost 14% points from 58% in third quarter 2019 to more than 72% in third quarter 2020. We expect this breakdown to remain rather stable in the following months. Eventually, bulk demand would catch up as small restrictions are lifted on larger private and public works are going to gain some momentum. Definitely, the economy as a whole is yet far from turning around, and Argentina still faces different tests, particularly on the macroeconomic outlook. Expectation of our GDP growth for 2020 revolves around a double-digit decline. In this sense, we watch carefully the vigor of different economic sectors as they are reopening for business.

Turning to Slide 5 for a review of our top line performance by segment. While consolidated revenues dropped 4.5%, revenues of our core business cement, masonry and lime was up 5.3%, with sale volumes increasing by 2.9% year-on-year and favorable pricing environment. As mentioned before, bagged cement continues to be the driver behind as these vigorously rebound, growing in this quarter around 23% compared to the same quarter last year. Revenues from our Railroad segment decreased 29.8% year-on-year with volume drop of 8 -- 5.8%, further impacted by the change in product mix, namely a drop in transported, building materials and frac-sand, partially compensated by other services rendered. Revenues of Concrete and Aggregates are still the most hampered by the halt in public and private projects, plummeting 70.2% and 25.2%, respectively.

Moving on to Slide 6. Consolidated gross profit for the quarter increased by 3.9% year-on-year and margin expanded by 225 basis points, explained by our core business. In particularly, the recovery of revenues of the bag segment with good cost performance, especially in urgency inputs and lighter fixed cost structure, which reflects footprint adequacy efforts achieved last year. Energy inputs benefit from earlier prices renegotiations, together with improvements in unitary energy consumptions. SG&A expenses as a percentage of revenues increased by 67 basis points to 7.7% from 7%, mainly due to higher percentage of bag segment sales.

Please turn to Slide 7. Our adjusted EBITDA was up 11.6% in this quarter, reaching $48 million and consolidated EBITDA margin expanded by 454 basis points to 31.5%, thanks to margin expansion in our core business segment, cement, masonry cement and lime. Adjusted EBITDA margin in this segment expanded by 472 basis points to 34.3% as bag volumes recovery, coupled with significant reduction in energy input cost, a good pricing performance, allowed us to outperform previous year quarter. Railroad adjusted EBITDA margin worsened to 6.3% from 14%, impacted by lower volumes and costs declining less than proportional. Concrete and Aggregates posted a negative ARS 58 million and negative ARS 42 million, respectively, as they remain severely affected by the limited execution of larger public and private works. EBITDA in U.S. dollar per ton stood at $32 increasing around 16% compared with the same period last year and above 21% in a sequential basis versus second quarter this year.

Moving on to the bottom line on Slide 8. Net income for the quarter stood at ARS 6.4 billion or USD 113 million. This figure includes ARS 4.2 billion of income from discontinued operations in Paraguay. Income from continuing operations were ARS 2.2 billion comparing to a loss of ARS 180 million, mostly explained by a positive impact of exchange rate difference and adjusted EBITDA expansion, partially offset by impairment of assets in other segments. As a consequence of the change in business perspectives, we registered a noncash impairment loss of approximately ARS 851 million from which the biggest stake is the impairment on railway that amounted ARS 705 million and the remaining Aggregates.

Finally, net income was also affected by a charge of ARS 363 million related to the cash contribution done in Ferrosur to repay existing debt. Measured in U.S. dollar, our net income reached USD 113 million in the quarter from a loss of $12 million in the year ago quarter.

Moving on to the balance sheet. As you can see on Slide 9, as previously mentioned, during the quarter, we executed the sale of our Paraguayan operation, resulting in an excellent value creation opportunity for the company. The proceeds from the sales were mainly dedicated to the debt repayment and the distribution of an extraordinary dividend of approximately USD 31 million, which was performed in October 2020. Additionally, this transaction, together with our positive operating cash flow of ARS 3.4 billion enabled us to face capital expenditure payments of ARS 1.6 billion, 69% of which was dedicated to the expansion project and to repay ARS 8.9 billion of borrowings. And in the quarter, we had total cash position of ARS 4.7 billion, with manageable short-term debt maturities of ARS 3.9 billion. At the end of this quarter, our net debt was reduced to USD 19 million, and our net debt to EBITDA ratio was 0.12x from 1.17x in the second quarter this year.

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

Thanks, Marcos. Now to wrap up the presentation, I please ask you to turn to Slide 10. We proved resilience to these challenging times, and we are pleased to communicate these achievements. Our effort and adaptability to unknown worse translate to our results, once again, delivering margin and EBITDA growth. The initial recovery of cement demand observed at the end of the second quarter was confirmed during the last month, where bagged cement reached record high volume. We expect this improvement to continue. At some point in time, major private and public infrastructure works should resume reinforcing these positive trends. Certainly, the economy as a whole is yet far from turning around, and Argentina still face different challenges, particularly on the macroeconomic perspectives. In this sense, we got to [cover through] the dynamics of different economic sector as they are reopening for business and how this could affect our own sector.

We executed firmly on the sale of our Paraguayan operation. We consider it was an excellent deal in terms of timing and value generation. We optimized the proceeds from the transaction, creating value for our shareholders at the time we strengthen our already robust financial situation. We are now concentrating all our efforts in Argentina. [Internally], it is what we keep the pace on the execution of L´Amalí expansion project which is planning to be ready by the beginning of 2021.

Once again, I would like to thank our all people and stakeholder, without whom these above-mentioned results would have been impossible, especially during these unprecedented times. Let's keep moving forward with the same responsibility and resourcefulness we have shown so far. United, we are able to overcome challenges and grasp every opportunity on our way.

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

(Operator Instructions) And please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. (Operator Instructions) Our first question is from Alejandra Obregon from Morgan Stanley.

I actually only have one. If you could please elaborate on your utilization rates across the different regions or assets. And whether you are optimistic of getting more pricing power in the next months?

[Interpreted] Alejandra, thank you for your question. The utilization rate in the plants, it depends on a monthly basis, and it's currently approximately 90% of its utilization. It is hard to talk about utilization rate because in this month of September, October and November, we are usually with a higher demand. If we take a look to the clinker capacity utilization, we should be around 80%. In this last month due to the bag cement recovery, we do have more utilization rates in the dispatching -- in the bagging and dispatching sectors.

For the coming months, we are optimistic about the volumes. And we also think that it could be a slight decrease in the bagging cement. And most probably a recovery on the Bulk because it's the one lagging behind. Importantly, that -- to remark that the large infrastructure projects, not only in the metropolitan area of Buenos Aires but also in the rest of the country has been virtually nonexistent. And in the last -- for the last time, there has been some news about some infrastructure projects that are starting in the near future.

And maybe a follow-up here. Is it fair to assume that the retail demand or the strength that we have seen in the retail demand is coming from the Buenos Aires area? Or is there any other region that has outperformed as well?

[Interpreted] No, actually, demand is quite stable along the country. In the metropolitan area, the bulk cement was more affected due to the lockdown restrictions.

Our next question is from Coleman Clyde from HSBC.

I have 2 really quick ones. My first one is on margins. I'm just wondering what your more medium-term outlook is for margins in light of the fact that the L´Amalí plant expansion is going to come online next year. And I know that you were initially expecting to see some improvements from that plant. We've already seen some pretty big improvements on the margin front. So are you still expecting to see further improvement? What do you -- what's your more medium-term outlook on that front?

And then the second question would be, in light of the sale of your assets in Paraguay, would -- could you envision a scenario in the future where you pursue assets outside of Argentina again? Those are my 2 questions.

[Interpreted] Coleman, thank you for your questions. Regarding margins, with L´Amalí expansion, we should have margin improvement. Certainly, this margin improvement will not be next year due to the ramp-up in the plant, should also have a ramp-up in the margin improvement. Additionally, there are 2 other things. One is the energy, the thermal energy costs. That -- due to the savings that we observed recently, the savings with L´Amalí should be less than what we had expected. The other factor has to do with the volumes, yes, and the size of L´Amalí. And once we are ramping up production in that plant, we should also be diluting fixed costs.

Regarding Paraguay, we believe that the sale proves the capacity of the company to develop a project and then to sell it with the right timing and value generation. So at this moment, in the Board of Directors, and the Finance Committee, we are revising -- reviewing the strategy for the next 5 years. And in this strategic plan, we are not discussing any alternative. It could be growth in Argentina, either vertical integration or also abroad in other geographies. But as of today, we do not have any decision made about these future steps.

Our next question is from Eric Neguelouart from Bank of America.

So I'd just like to know if you have some more color on the stimulus program that were announced by the government earlier this year. Just anything you could comment.

[Interpreted] Sorry, Eric, could you repeat your question? We didn't get it actually.

Okay. Can you hear me better?

[Interpreted] Yes. Now it's better.

Okay. So any color you could give us on the stimulus package announced by the government earlier this year? Have those projects started? Or are they going to start anywhere in the near future? Just any color you can give us would be good.

[Interpreted] So the plans -- the governmental plans that we have knowledge about are focused on housing adequacy, like sewages, houses and roads. We believe that with the approval of the budget 2021 this week, we should have a better outlook for this plan.

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

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

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