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Edited Transcript of LOMA.BA earnings conference call or presentation 12-May-20 2:00pm GMT

Q1 2020 Loma Negra Compania Industrial Argentina SA Earnings Call

May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Loma Negra Compania Industrial Argentina SA earnings conference call or presentation Tuesday, May 12, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gastón Pinnel

Loma Negra Compañía Industrial Argentina Sociedad Anónima - IR Manager

* Marcos Isabelino Gradin

Loma Negra Compañía Industrial Argentina Sociedad Anónima - CFO and Administration & Finance Director

* Sergio Damián Faifman

Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO

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Conference Call Participants

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* Alejandra Obregon Martinez

Morgan Stanley, Research Division - Research Associate

* Antonella Rapuano

Santander Investment Securities Inc., Research Division - Research Analyst

* Coleman Lee Clyde

HSBC, Research Division - Analyst, Global Consumer and Luxury Brands

* Nicolas Zalles

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Presentation

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Operator [1]

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Good morning. Welcome to Loma Negra First Quarter 2020 Conference Call and Webcast. (Operator Instructions) Also, Mr. Sergio Faifman will be responding in Spanish immediately following the 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, IR Manager. Please go ahead.

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Gastón Pinnel, Loma Negra Compañía Industrial Argentina Sociedad Anónima - IR Manager [2]

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Thank you. Good morning, and welcome to our first 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, 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.

This conference call will also include discussion on non-financial GAAP (sic) [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.

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [3]

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Thank you, Gastón. Hello, everyone, and thank you for joining us today. First, I hope you and your family are safe and well during this unprecedented time. Clearly, we are operating in a cyclical environment, and we expect from now on things will start improving gradually. I want to thank all our people in Argentina and Paraguay, who faced enormous struggle and showed a great resourcefulness to keep this business running, to produce and sell products that people rely on every single day to provide themselves, their family and their community the infrastructure and shelter they need. Our concern to our employee, our customer, our supply and our community has never been more imperative, and we treat it with the utmost importance. And we tend to do our best for our stakeholder.

I would like to mention a few highlights of the quarter. And then Marcos will take you through our market review and financial results. Afterward, I will provide some final remarks. And then we will open the call for your questions.

Starting with Slide 3. Let me share with you the key measure that we took in ad hoc crisis commitment that we create in order to manage the effect of coronavirus crisis. Our people's health and safety are nonnegotiable and is our main priority always. This is why we suspend national and international trips, and we implement as fast as possible a home-office scheme mainly to protect our people and their family.

On March 20, and in compliance with the government's declaration of wide ranging lockdown, we temporarily suspend our production facility and the L´Amalí expansion project. After the first week of April, we resumed production and dispatch of cement with the adoption of new sanitation protocols. As of today and after government permits were granted, L´Amalí expansion work have resumed.

During this situation, we strengthened our effort to securing working capital needed, tightening fixed cost structure and reformulating our capital expenditure priority. Of course, the speed of the recovery dynamic is yet uncertainly. And we remain alert regarding the evolution of the crisis.

Now turning to Slide 4. 2020 started with some headwind, particularly related with the fragile macroeconomic situation of the country and rampant recession. By the end of the quarter, the coronavirus pandemic outbroke, bringing additional challenges to the already adverse context. Cement demand in Argentina in the first quarter contract around 29% year-on-year. Our top line for the quarter decreased also around 30% year-on-year to ARS 7.8 billion, and our adjusted EBITDA declined by 17.9%. Still we were able to expand margin by 479 basis point to 33.5%, mainly reflecting rigorous focus in cost control and our commitment to maintaining a high productivity and healthy profitability levels. Our core Argentine Cement business remains the principal factor behind this margin expansion.

As shown on this slide, measured in U.S. dollar, we achieved an adjusted EBITDA of $42 million, down by 22.4% year-on-year, and our bottom line decreased year-on-year and stood at USD 10 million. Additionally, our net debt to last 12 months EBITDA of 1.26x, and our cash position provide us with a good position to manage our short debt maturity.

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.

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Marcos Isabelino Gradin, Loma Negra Compañía Industrial Argentina Sociedad Anónima - CFO and Administration & Finance Director [4]

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Thank you, Sergio. Good day, everyone. I also hope you and your beloved ones are safe and well.

As you can see on Slide 5, Argentina is in the middle of economic activity contraction and neither the construction sector nor the cement industry are exceptions to this situation. Argentina faces important challenges to achieve sustainable growth over time, and forecast for the Argentine economy at the beginning of this year already reveal a drop in GDP for 2020 compared to 2019. On top of this negative expectation, we now need to factor in the health and economic crisis caused by the COVID outbreak by the end of March.

In the first month of this year, bulk segment was the most impacted by the delay in the execution of public and private construction project. By contrast, the bulk segment was better supporting the economic contraction. Consequently, the share of cement sold in bulk increased by almost 8 percent points from 56% in first quarter 2019 to almost 64%. This trend will continue in the following months, where bulk will continue to gain share as public and private infrastructure sectors are suffering the most.

Initially, on March 20, the national government declared a broad quarantine, providing for social preventing and mandatory isolation in the context of the COVID-19 pandemic. We virtually made a full stop in all of our production and in parallel, demand dropped by nearly 0 during the first few days since March 20. Afterwards, in April 3, the government decided to include mining and building material provided by building material depots in the special product list. Since that moment, some of the demand for cement was restored. Consequently, we resumed cement production.

Certainly, we are cautious and we are attentive to the development of the pandemic in the country and the effects that it may have in our production demand. Under this unprecedented situation, we decided to withdraw any sort of guidance regarding the industry growth by the end of the year. We hope to have more clarity in the following quarters.

In April, the market declined 55% with the particularity that the first days of the month cement sales were almost 0, with private construction not permitted and public works were insignificant. Therefore, the demand was mainly observed in the bulk segment through wholesalers.

Turning to Slide 6 for a review of our top line performance by segment. Revenues were down 29.6% as sales volumes fall, reflecting adverse economic context, and March was already impacted by COVID-19 pandemic. Cement sales volumes dropped 26.9% year-on-year. Thus revenues were marginally compensated by positive pricing, falling by 25% year-on-year.

In Paraguay, where the first 2 months of the year were affected by sluggish public and infrastructure works, volumes and revenues were down 13% and 13.5%, respectively. Revenues of Concrete and Aggregates in Argentina were the most impacted by the halt in public and private projects, plummeting 73.6% and 67.1%, respectively. Revenue from our Railroad segment decreased 24.9% year-on-year as a consequence of softer transported volumes in almost every sector.

Moving on to Slide 7. Consolidated gross profit for the quarter was down 25.6% year-on-year with a margin expansion of 164 basis points, reaching 30.5% in the quarter. This was mainly driven by our core cement operation in Argentina, reflecting production cost under control with significant reduction in energy input costs and the benefits from previous footprint adequacy efforts achieved last year. SG&A expenses as a percentage of revenues decreased by 29 basis points to 8.1% from 8.4%. First quarter 2019 included some nonrecurring cost of the structure adequacy, and we have contraction of 32% year-on-year.

Now please turn to Slide 8. The drop in demand explained the 17.9% decline of our adjusted EBITDA. Still, we achieved a consolidated margin expansion of 479 basis points to 33.5%, primarily explained by cost efficiencies in Cement segment in Argentina. When excluding the application of inflation accounting, adjusted EBITDA for the Cement segment in Argentina increased 34% year-on-year and the margin expanded by 656 basis points to 38.3% as we benefit by the significant reduction in energy input costs and also by the footprint adequacy efforts achieved last year.

Also, Paraguay posted around 23% growth in adjusted EBITDA, with the margin going back 245 basis points to 42.2%. In line with the building material sector and the economic activity in general, our Railroad segment EBITDA contracted by almost 57% with a margin contraction to 3.8%. Adjusted EBITDA margin of our Concrete and Aggregates segment presented a strong contraction year-on-year to negative 7.7% and negative 11.7%, respectively, mainly as this segment were more directly impacted by the halt in public and private infrastructure projects. Despite the strong reduction in volumes in the first quarter, our Cement business in Argentina continued improving in terms of EBITDA per ton measured in U.S. dollars, around $36 per ton above the year ago quarter.

Moving on to the bottom line on Slide 9. Net majority income for the quarter decreased by almost 43% year-on-year, reaching ASR 857 million, resulted mainly from an adjusted EBITDA contraction and a negative impact total financial loss. Total finance results represented a loss of ARS 456 million compared to a loss of ARS 199 million in the first quarter in the previous year. The foreign exchange loss of ARS 170 million compare to ARS 239 million in first quarter of 2019.

The higher interest rate environment, together with the higher gross debt, resulted in a net financial expense of ARS 410 million or ARS 148 million higher than in first quarter 2019. The net positive monetary position resulted in a gain of ARS 124 million. Measured in U.S. dollar, our net majority income decreased 60% to $10 million in the quarter from $26 million in the year ago quarter.

Moving on to the balance sheet. As you can see on Slide 10, during the quarter and until March 20, we continued to make progress in our capital expenditure plan with investment for the quarter reaching ARS 4 billion or approximately $66 million, 79% of which was related to the expansion project. Our net debt at the end of the quarter was USD 226 million, with a gross net debt breakdown by currency of 49% in Argentinian pesos, 38% in hard currency and 13% in guarani. Net debt to adjusted EBITDA ratio of 1.26x compared to 0.86x at the beginning of the year.

As the current situation continues to be conditioned by the COVID-19 restriction, we'll remain particularly on top of our liquidity and our liability management. Our debt, which is bank debt only, we consider that has a manageable maturity profile. We are working on and have already rolled over part of our short-term debt. As we continue rolling over these maturities in coming months, we expect the share of local currency debt to continue increases in our balance sheet.

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

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [5]

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Thanks, Marcos. Now to wrap up the presentation, I please ask you to turn to Slide 11.

We believe that the unique time is an opportunity to prove to ourself our true values. Health and safety of our employee are always a priority as it is our commitment with our community, our supplier and customer and, of course, our shareholder. At this moment, it seem pointless trying to provide a guideline for 2020 industry trends as recovery depend on the local economy turnaround, sovereign debt negotiation and the evolution of the coronavirus pandemic, among other challenges.

Yet, at the beginning of April, we have already resumed production, adopting new sanitation protocols. And more recently, work on L´Amalí expansion projects were restarted. We need to keep looking forward, searching for alternative that will help us navigate through this new environment united and taking care of each other.

This is end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Also 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 with Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [2]

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This is related to infrastructure works and how do you think -- or how do you envision the outlook for infrastructure once we exit the coronavirus outbreak? And then if you could provide some color on what you're seeing for the month of April in terms of demand and dispatches in Argentina.

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [3]

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[Interpreted] Alejandra, thank you for your question. Our view is that the government is preparing an ambitious infrastructure plan that once the sovereign debt and the coronavirus situation are solved, they're going to start to implement. From our conversations with government officials, they're going to be focusing on -- mainly on housing and middle- to small-sized infrastructure works. And we believe that this is one of the key elements that the government is betting on in order to boost the economy once the coronavirus situation is over.

Regarding the April volume, the industry ended up with minus 56% drop in volumes compared to last year. We need to remind that in the first 8 to 10 days of the month, we had built really zero shipping since it was forbidden to produce and to operate in our plants. Considering only the last 15 days of the month, the average drop will be around 40%. One key factor from this volume is that it is mostly bulk segment, mainly because the large infrastructure projects, either public or private, are halt. So we are optimistic that once -- in the next few months once these larger infrastructure projects start being execute again, the volume should increase consequently.

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Operator [4]

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And this concludes our question-and-answer session. I would now like to turn the conference back to Gastón Pinnel for closing remarks -- we have a question -- we have 2 questions. The next question is from Nicolas Zalles from LW Investment Management.

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Nicolas Zalles, [5]

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I just have a quick question. I mean, against the possibility of a possible sovereign default, could you comment on how would you see a change in your operations just in general and how that would change the business environment in Argentina?

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [6]

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[Interpreted] Thank you, Nicolas, for your question. We are working on a scenario that -- on a base case scenario that -- where there is no default. And according to the last signals, there should be an agreement with the bondholders.

So even in the scenario of a default, of course, it will have an impact in the economy and in the economy's growth, and particularly in the financing of the public works, yes, and other government expenditures. But we need to remind that during 2002 until 2007, where Argentina was in a default, the economy grew. We also need to remind that our industry, in particular, is considered as value haven, and in particular, for the infrastructure works, it's also a lever that the government can take in order to boost the economy and also to try to underpin the labor market.

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Operator [7]

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Our next question is from Antonella Rapuano from Santander.

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Antonella Rapuano, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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Actually, I had two question, if I may. The first one is related to the EBITDA margins, which were very impressive, in my view, considering the volume drop. So I was wondering how much of this cost efficiency is sustainable along the year. Regarding this, how much of the cost reductions came from lower energy costs and how much from the fixed cost from your adequacy effort on the fixed structure side?

And my second question relates on the L´Amalí project. How -- I was wondering how much CapEx -- remaining CapEx spending for the rest of the year to be deployed in this project.

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [9]

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[Interpreted] Thank you, Antonella, for your question. Regarding our margins, it is in line with all the structure adequacies that we have implemented last year. Last year, we did this before-mentioned restructurings and also including staff reduction. And this year, we already observed the benefits from this restructuring. The margins we -- mainly have an effect in the Cement segment. And we did a few -- we took a few measures in order to improve this margin even with the drop of volumes.

Regarding energy, both thermal and electrical, on average, we have a reduction of around 25% compared to last year. Additionally, with the drop in volumes, we have the ability to produce in a more efficient way in our most efficient facilities.

So regarding L´Amalí II, we have already resumed our plan to -- for the expansion. And we expect to be ready by the year-end. And the remaining of the CapEx is approximately between $60 million and $50 million. Most probably part of this $50 million to $60 million are going to be disbursed in the following year, in 2021.

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Operator [10]

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Our next question is from Coleman Clyde from HSBC.

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Coleman Lee Clyde, HSBC, Research Division - Analyst, Global Consumer and Luxury Brands [11]

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I was going to ask on margins, and a lot of that was already answered. But just to follow up with that. Do you -- what improvement do you expect to see from the L´Amalí plant expansion? I mean, you've made some impressive improvements already in margins. And I know that you expected that plant to add to your efficiency. So do you still expect to see a further margin improvement once that plant is underway?

And then my second question would be on prices. I see that prices were up 1% in the first quarter. How are you seeing prices during the second quarter? Has it been more challenging to pass along cost inflation given the current environment? Those would be my 2 questions.

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Sergio Damián Faifman, Loma Negra Compañía Industrial Argentina Sociedad Anónima - Vice-President of Board & CEO [12]

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[Interpreted] Thank you, Clyde, for your question. Yes, clearly, L´Amalí still has some further improvements in our EBITDA. We still have some minor improvements in variable cost and also some improvements in fixed cost structure. And regarding prices, we foresee the price environment similar to what we observed in the past, considering the inflation and the FX and always trying to keep our profitability under control.

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Operator [13]

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

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Gastón Pinnel, Loma Negra Compañía Industrial Argentina Sociedad Anónima - IR Manager [14]

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Thank you for joining us today. We appreciate your participation in these unprecedented times 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 question that you may have. Thanks again, and be safe.

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Operator [15]

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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.]