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Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA) Q2 2019 Earnings Call Transcript

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Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE: LOMA)
Q2 2019 Earnings Call
Aug 9, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Loma Negra Second Quarter 2019 Conference Call and Webcast. [Operator Instructions] And I would now like to turn the conference over to Mr. Gaston Pinnel, IR Manager. Please go ahead.

Gaston Pinnel -- Investor Relations Manager

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 closed. Speaking during today's call will be Sergio Faifman, our CEO and Vice President of the Board of Directors; and our CFO, Marcos Gradin. 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 section of our earnings release and our 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.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

Thank you, Gaston. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Loma Negra Second Quarter 2019 Earnings Conference Call. I will begin my presentation with a discussion of the highlights of the quarter, and then Marco will take you through our market review and financial results. Afterwards, I will provide our outlook for the remainder of the year. Finally, we will open the call to your questions. Starting with slide three. We're ending the quarter with another solid set of results as with the margin focus on building profitability and enhancement initiative. Our top line decreased by 2.2%, still affect by a weak economy but start to show a sign of stabilization. In this sense, in the last month, during the month, present us a copy of positive number in a year-on-year basis, starting to sell initiating recovery of the wage consumption. In the back of a positive pricing environment and our cost efficiency initiative, it has our EBITDA grew by 7.1% and margin expansion of 225 basis points.

During the quarter, we continue with our effort to streamline our production footprint, and this is the reason why we're reconverting the Barker facility to a grinding and distribution center. Consequently, we included some nonrecurring cost, therefore excluding this effect, the EBITDA margin for the second quarter would have been 28.3% or 476 basis points higher than second quarter '18. As shown on this slide, using the pure accounting methodology and measured in U.S. dollar, in this quarter, we achieved an adjusted EBITDA of $44 million. Excluding the nonrecurrent charge mentioned before, EBITDA in the second quarter would have been around $49 million, remaining flat year-on-year despite the 10% contraction in the cement volume and the sharp peso depreciation.

The bottom line increased 525% year-over-year as a consequence of a good operation result and the reversal of the financial loss in the second quarter of last year. Additional, our robust balance sheet with net debt to last 12-month EBITDA of 0.76x provide us with a solid position to improve our strategy. The expansion of our L'Amali plant continued to be a key element of our long-term strategy and will continue to our production efficiency and profitability. The project continue on track, and the kick-in date is effective to be at the end of the second quarter next year.

I will now hand off the call to Marco Gradin. Please, Marcos, go ahead.

Marcos Isabelino Gradin -- Chief Financial Officer

Thank you, Sergio. Good day, everyone. Turning to slide four, let me start by providing a quick overview of the macro environment and industry trends in Argentina. Construction activity measured through ISAC declined in the second quarter of the year, signaling that the downturn started last year has yet to carry over. Thus, economic expectations still call for a 1.4% contraction in GDP for this year, recovering gradually only after the second half, reaching growth of 2.2% by 2020. During this second quarter, the cement industry declined by a rate of 5.1% year-over-year. In a sequential basis, the second quarter remained almost flat when compared to the first quarter this year. Taking a closer look to the Cement demand. Bag-on-bulk segments continue to present different dynamics. Bag segment declined by 9%. By contrast, bulk segment demand increased by only 2.8%, continue to be supported by public works, coupled by increasing demand driven by private projects.

Consequently, bulk cement demand continues to increase its share in total cement sales, reaching 44% of total sales. According to recent data, we started to see some signs of stabilization with year-on-year growth in May and July, explained by a mild recovery of private consumption driven by a higher purchasing power as inflation keeps trending down and wages increase in real terms. Looking into the 2019 second half, we still expect the negative cycle that began in this second quarter of 2018 to turn around following consensus expectation of an overall macroeconomic recovery in Argentina. Now please turn to slide five for a review of our top line performance by segment. Revenues were down 2.2%. For the quarter, cement revenues remained almost flat, impacted by sales volume drop of 10% but compensated by a healthy pricing environment. In Paraguay, revenues were up 11% driven by the Guarani appreciation against the peso with volumes rather stable. Concrete segment presented a decline of 17.6% in revenues as both sales volume and prices were down when compared to the strong second quarter in the year ago period.

Several large infrastructure projects that have commenced in recent years were in completion phase, and during this year, our new, large projects did not ramp up yet. Railroad revenues decreased 6.5% year-on-year as price decreased in real terms and sales volumes slipped 2%, mostly affected by lower transported cement. By contrast, aggregates revenues were up 24.6% year-on-year during the period driven by improving volumes and prices. Moving on to slide six. Consolidated gross profit for the quarter was down by 4.9% year-on-year with a margin expansion of 72 basis points, reaching 25.7% in the quarter. Nonrecurring costs related to the reconverting Barker accounted approximately ARS 188 million or USD 4.2 million. If excluded, gross profit would have grown by 4.5% with margin expansion of 179 basis points to 28.2%. Energy cost continues to decline as a result of drastic cost opportunities related to natural gas and adequacy of supply, affecting positively our gross profit. SG&A expenses as a percentage of revenue decreased by 108 basis points to 6.5%, positively impacted by previous structure adequacy measures adopted in the first quarter of 2019, together with a further reduction in the effective sales tax rate.

Please turn to slide seven. Despite the softer demand, we reached consolidated adjusted EBITDA growth of 7.1% in the quarter over ARS 1.9 billion or $44 million with margin expanding 225 basis points to 25.8%, mainly driven by the Cement segment in Argentina and Paraguay and further supported by growth in Railroad. Excluding the nonrecurrent charges, EBITDA margin would have been 28.3%, reaching ARS 2.1 billion or USD 49 million. This EBITDA in U.S. dollars remained flat when compared to a year ago. When excluding the application of inflation accounting, adjusted EBITDA for the Cement segment in Argentina increased 62% year-on-year and the margin expanded by 113 basis points to 29%, and excluding the nonrecurring costs would have been 32.6%. Also, Paraguay posted around 112% growth in adjusted EBITDA with a margin of more than 41%, improving 745 basis points compared to second quarter 2018 when we had to acquire clinker to a third party. Our Concrete segment reported a decline in adjusted EBITDA, reaching ARS 15.5 million with a margin contraction of 186 basis points from 3.4% to 1.5%, mainly as a result of lower sales volume and a more competitive price environment.

We continue to post margin expansion in our Railroad segment with adjusted EBITDA margin up more than 950 basis points year-on-year to 12.8% as a result of structure adequacy efforts. Aggregates segment adjusted EBITDA remained almost flat as higher volume and favorable pricing environment was compensated by higher cost of sales. Notably, despite the strong devaluation of the Argentine pesos in the second quarter year-on-year, around 90%, together with value-accretion volumes, our Cement business in Argentina remained relatively stable in terms of recurrent EBITDA per ton measured in U.S. dollars, above $30 per ton, 8% over the year ago quarter. Moving on to the bottom line on slide eight. Net majority income for the quarter increased by 525% year-on-year, reaching ARS 1.1 billion, mainly due to an improved financial results. Total financial results represented a gain of ARS 264 million compared to a loss of ARS 954 million in the second quarter last year, which have been impacted by the FX depreciation.

Accordingly, measured in U.S. dollars, our net majority income increased by 114% to $16 million in the quarter from $8 million in the year ago quarter. Moving on to the balance sheet. As you can see on slide nine, our robust balance sheet provide us with a solid position to move ahead with our meaningful investment plan. We continue to make progress in our capital expenditure plan that we invested for the quarter, reaching ARS 2.7 billion or approximately USD 61 million. We finished this quarter with a net debt to adjusted EBITDA ratio of 0.76x compared to 0.69x in the previous quarter and 0.43x in fiscal year 2018. Our net debt at the end of the quarter was USD 164 million with a gross debt breakdown by currency of 47% in term currency, 43% in Guarani and 14% in Argentine pesos.

I will now handle the call back to Sergio.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

Thank you, Marcos. Now please turn to slide 10. Before taking your questions, I would like to mention that we are pleased to continue delivering strong results. We're executing on our [indecipherable]. In this sense, on the last quarter, we did our report in streamlining our production footprint in Buenos Aires operation. The L'Amali plant expansion is part of this strategy and will allow us to continue increasing production efficiency and profitability while providing much needed capacity for when demand recovers.

Certainly, some volatility could be expected associated with election process in Argentina. Although, sometimes capitalization in the economy, together with the recovery momentum in the industry, are encouraging us to remain positive of the second semester of the year. Our history, leadership and determination in the search for a greater productivity provide us solid base to keep on delivering strong results. This is the end of our prepared remarks. We are now ready to take questions.

Operator, please open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Alejandra Obregon with Morgan Stanley. Please go ahead

Alejandra Obregon -- Morgan Stanley -- Analyst

Hi, good morning and thank you for taking my question I have 2, if I may. The first one is on the volume side. It seems like the negative 10% volume for the second quarter is lower than that for the industry. So just trying to understand if there is some shared losses during the quarter or that's driven by a originality chase, perhaps. And then my second question is with regards to the competitive environment. I was just trying to understand the pricing behavior in the cement space. Seems like cement inflation in the country is running up close to 84% for the quarter. And if I'm not mistaken, price increases on your operations were somewhat below that. So just trying to understand if you saw some more aggressive pricing strategies in certain areas or maybe by certain competitors, perhaps.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

Alejandra, thank you for your question.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

Regarding the volume, we have in this quarter an impact in our market share, in line what we have been talking about.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So basically, regarding the price increases, as we are the leaders, we are the first movers. And the competitors, they have a lag in the time that they increase prices.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So additionally, we had 2 other impacts. One was regarding an adverse weather, and the other one regarding the large infrastructure in certain regions that may -- that had a consequent impact in our major market share.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

And in particular, the reconversion of the Barker plant, this brought some issues with the unions, and this may have a minor impact in our market share as well.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So considering both the market share -- the Barker conflict and the other 2 aspects that we mentioned, together with the inflation trending down, we expect this effect in our market share to reverse in the coming month.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So regarding the other question about prices, actually, our prices increased above inflation in the last year. And actually, the inflation number is 55%.

Alejandra Obregon -- Morgan Stanley -- Analyst

Understood this was very helpful thank you very much.

Operator

And our next question comes from Mauricio Serna with UBS. Please go ahead.

Mauricio Serna -- UBS -- Analsyt

Good morning, Thanks for taking my question My questions are regarding the L'Amali plant project. Just wanted to get a sense -- you mentioned that it should be -- the expansion plan should be operational by the second quarter of next year. So how much of the capex for this project has already been deployed? And on that sense, how should we think about the ramp-up? Meaning I know you discussed about the lower variable cost per ton of production in this plant, but how fast will the company be actually be able to materialize this lower variable production cost? And on that note, what kind of utilization level should we think about? Meaning are you pretty much reallocating a lot of the production from other plants to this one to fill up its capacity? Or how should we think about this project going forward?

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

Mauricio, thank you for your question.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So regarding your first question about the capex, accumulated until the second quarter this year, we already spent $200 million. For the second semester, we expect $50 million, and the remainder for 2020 would be around $80 million.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

The estimated start-up phase for the project will be at the end of the second quarter next year.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So as any project of this size, it will have a ramp-up period of two to three months.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

Therefore, we think that all the benefits coming from this project, from productivity and variable cost, will materialize by the second semester -- fourth quarter of 2020.

Mauricio Serna -- UBS -- Analsyt

Okay. And is that assuming like it's on a high utilization level, like I don't know, like 80%, 90%? Or how should we think about utilization of that capacity?

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So the volume, of course, will depend on the size of the market, but we are always going to have this plant as a priority to produce on top of the other one.

Mauricio Serna -- UBS -- Analsyt

Okay. Okay. Makes sense. And if I may, just very quickly, on the restructuring cost. Are we done with these? Or should we continue seeing more of these on the second half of the year?

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So we're always seeking for these kind of opportunities in order to reduce our variable cost and our fixed cost. And in -- we're going to do as much as we can.

Operator

And our next question comes from Eric Degaybouard with Bank of America. Please go ahead.

Eric Degaybouard -- Bank of America -- Analyst

Hi good morning, thank you for the call a couple of follow-up questions on Alejandra's point. Out of the 3 impacts you mentioned, could you give us -- could you maybe quantify how much comes from each impact -- or which of the 3 impacts is the most important for the decreasing in volumes? And regarding the lower demand from the large infrastructure projects you mentioned, should we expect seeing this during the second half of the year or at least until the elections come by and then the new administration takes off by the beginning of next year? Or was this just a temporary situation that happened during the second quarter?

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

Eric, thank you for your question.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So we do not give specific numbers around the market share. But in the order of priority, the further delay in prices, the impact of the delay in prices; second, the impact of the adverse work conditions; and third one, the completion phase of the large infrastructure projects.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

And finally, although it was a minor effect, the reconversion process of Barker facility also had an impact.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

So regarding the infrastructure projects, we are observing that the schedule is in line with what was previously expected, although new projects are lagging to ramp up, especially the large infrastructure projects.

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

[Foreign Speech]

Gaston Pinnel -- Investor Relations Manager

What we are observing now is significant growth in the private demand and also a reversion on the bag segment starting to grow again.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Gaston Pinnel for any closing remarks.

Gaston Pinnel -- Investor Relations Manager

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 providing financial and business update next quarter. In the meantime, the team remains available to answer any questions that you may have. Thank you very much, and enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Gaston Pinnel -- Investor Relations Manager

Sergio Damian Faifman -- Vice President of Board and Chief Executive Officer

Marcos Isabelino Gradin -- Chief Financial Officer

Alejandra Obregon -- Morgan Stanley -- Analyst

Mauricio Serna -- UBS -- Analsyt

Eric Degaybouard -- Bank of America -- Analyst

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