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Loma Negra Compañía Industrial Argentina Sociedad Anónima  (NYSE:LOMA)
Q4 2018 Earnings Conference Call
March 08, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Loma Negra Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode.

(Operator Instructions) Please note this event is being recorded.

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

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.

Speaking during today's call will be Sergio Faifman, our CEO and Vice President of the Board of Directors and Marcos Gradin, our CFO. 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 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. I would also like to remind you that the following recent categorization of Argentina as a hyperinflationary economy in accordance with IFRS standards starting in this fourth quarter of 2018, we began applying IFRS rules IAS 29.

For comparison purposes and a better understanding of our underlying performance, in addition to presenting as reported results. We're also disclosing selected figures as previously reported excluding rule IAS 29. Additional information in connection with the application of rule IAS 29 can be found in our earnings reports.

Now, I would like to turn the call over to our CEO Sergio Faifman.

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

Thank you, Gaston. Hello everyone and thank you for showing up today. It's a pleasure to welcome you to Loma Negra fourth quarter and full year 2018 earnings conference call. As we begin my presentation with a discussion of the highlights of the quarter, and then Marcos will take you through our market review and financial result, afterwards I will provide our outlook for 2019. We will then open the call to your questions.

Starting with Slide 3, we closed the year with another solid quarter in what has been a challenging year for our industry in Argentina. Importantly, we achieved despite a 16.3% year-on-year contraction in industry cement demand during the quarter.

Our top line for the quarter increased by 2.8% year-on-year to almost ARS7 billion, while 2018 turned out to be completely (ph) different on the macro and FX fronts than what we expect at this time last year. We delivered increase in adjusted EBITDA of around 21%, achieving a margin expansion of 459 basis points. This is a testament to our continued effort on balance sheet growth and profitability. Our core Argentine Cement business remains the main driver behind this strong result, further supported by our operation in Paraguay.

Let me also highlight the strong performance of our concrete segment which posted another quarter of record high volume, achieving in 2018 the record volume of more than 1 million cubic meters. Year-on-year however, our bottom line fell 29%, impacted by a negative variance in the income tax line, resulting from the tax reform approved in 2017.

As you can see on the slide, measured in US dollar and (inaudible) in this quarter we achieved an adjusted EBITDA of $58 million, down only 15% year-on-year, despite the 18% contraction in the cement volume and the sharp peso depreciation. And Net majority income of $34 million versus $38 million a year ago, despite the strong devaluation experienced in 2018.

Additionally our robust balance sheet with net debt to last 12 months EBITDA of 0.43 times provide us with a solid position to face the current volatility of the local financial markets. The Expansion of our L'Amali plant is on schedule and continue to be a key element of our long-term strategy, which will continue to support production efficiency and profitability along with additional capacity when demand recovers.

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

Marcos Isabelino Gradin -- Chief Financial Officer

Thank you, Sergio. Good day everyone. Turning to Slide 4, let me start by providing a quick overview of the macro environment and industry trends. We ended the year with an expected GDP for 2018 declining by 2.4%, slightly below consensus expectation at the time of our prior earnings call. Economist expectation and ours now call for a 1.3% contraction in GDP for this year, recovering gradually, reaching growth of 2.5% in 2020.

Against this backdrop, and as anticipated we saw contraction in overall private construction activity in the quarter, particularly in November and December. This brought about in a 15.3% decline in industry segment sales for the quarter and a 2.6% year-on-year of construction for the full year. By contrast, bulk cement demand continues to gain traction during the quarter, supported by public infrastructure works, gaining share over total cement sales.

Looking into 2019, we expect a negative cycle that began in the second quarter of 2018 to turn around by mid-year following consensus expectation of an overall macroeconomic recovery in Argentina. We see industry is having demand following these macro trends. While current public works are expected to continue moving ahead, particularly in the Buenos Aires metropolitan area, although facing tougher comps. For the full year, we expect an industry decline of a low single-digit.

Now please turn to Slide 5 for a review of our top line performance by segment. Consolidated revenues were up 2.8% in the quarter and 7.9% for the full year, despite softer cement sales volumes. For the quarter, cement sales volumes in Argentina dropped 18% year-on-year impacted by overall weaker demand, thus revenue fell only by 6% year-on-year, partially offset by the healthy pricing environment.

In Paraguay, revenues were up 57%, driven by the strong recovery in sales volume experienced in the quarter, up 13% and the Guarani appreciation against the Argentine peso.

We are particularly pleased with the results achieved in our concrete business that reached record high volume levels in October and November, driven by the sustained execution of current public infrastructure works in the Buenos Aires metropolitan area coupled with healthy pricing dynamics. With our new crusher up and running, our aggregate business reached record high sales volume in October, mainly driven by higher dispatches to the concrete segment which resulted in a 9% year-on-year increase during the quarter, driving revenues up 20%.

Lastly, revenue from our railroad segment decreased 3% year-on-year. While we continue to benefit from strong prices, transported volumes of cement and aggregates were impacted by the slowdown in the construction activity, partially offset by higher growth of frac sand transportation for the Vaca Muerta oil and gas basin.

Moving on to Slide 6, consolidated gross profit for the quarter was up slightly over 13% year-on-year with a margin expansion of almost 270 basis points reaching 29.5% in the quarter. This was mainly driven by our core cement operation in Argentina and further supported by our cement business in Paraguay and our concrete segment.

The application of IAS 29 impacted in a reduction of 380 basis points in the consolidated gross margin during the quarter affected mainly by an increase in depreciation and amortization by the inflation adjustment of fixed assets. For the full year, gross profit was up 8% with gross margin remaining stable at almost 26%.

SG&A expenses as a percentage of revenues decline over 80 basis points to 7% in the fourth quarter and 71 basis point to 7.2% for the full year of 2018, driven by successful cost management and a lower effective sales tax rate.

Please turn to Slide 7, despite weak industry demand, we achieved consolidated adjusted EBITDA growth of 21% in the quarter, reaching nearly ARS2.2 billion or $58 million with margin expanding 459 basis points to 31%. Mainly driven by the seven segments in Argentina and Paraguay and further supported by growth across all other segments.

The application of IAS 29 impacted in a reduction of 75 basis points in the consolidated EBITDA margin in this quarter. When excluding the application of inflation accounting, adjusted EBITDA for the cement segment in Argentina increased almost 70% year-over-year and the margin expanded by 554 basis points to 34.6%, while Paraguay posted around 120% growth in adjusted EBITDA, with the margin remaining almost flat at 40.3%.

Adjusted EBITDA margin for our concrete segment expanded over 210 basis compared to the year-ago quarter, mainly driven by sales volume growth. We continue to post margin expansion in our railroad segment with adjusted EBITDA margin up almost 380 basis points year-on-year benefiting from higher revenues and lower fixed cost.

Lastly our aggregates segment's adjusted EBITDA margin show a strong recovery to 12% on the back of higher sales volume and favorable pricing environment. Importantly, despite the strong devaluation of the Argentine pesos in the fourth quarter year-over-year around 111%, our seven business in Argentina remained relatively stable in terms of EBITDA per ton measured in dollars, at $32 per ton when compared to the year ago quarter and improving from $26 per ton in the third quarter of 2018.

For the full year, consolidated adjusted EBITDA reach ARS7.1 billion. Measured in US dollars, consolidated adjusted EBITDA reached $220 million, down 7.9% year-on-year with adjusted EBITDA margin expanding by 204 basis points from 25.8% to 27.8%.

Moving on to the bottom line on Slide 8, Net Majority income for the quarter were impacted by not recovering the sales from previous year, resulting in a 29% year-on-year decline reaching ARS1.1 billion. In addition to adjusted EBITDA growth, much of the income benefited from higher total net financial gains. This however was more than offset by a positive income impact of the tax reform approved at the end of 2017, in the 2017 deferred tax provision.

Measured in US dollars and excluding the obligation of a IAS 29, our net majority income decreased 10% to $34 million in the quarter from ARS38 million in the year ago quarter. For the full year 2018, net majority income declined 49% to ARS1.8 billion or 23% when measured in US dollars, impacted mainly by exchange rate difference and income tax expenses.

Moving onto the balance sheet, as you can see on Slide 9, our robust balance sheet provide us with a solid position to face the current volatility of the local financial markets or more flexibility around the funding of our meaningful investments done. We've closed the year with a net debt to adjusted EBITDA ratio of 0.43 times compared to 0.28 times in December 2017.

For the full year 2018, we generated cash flow from operating activities of ARS4.2 billion pesos compared to ARS5.1 billion in 2017. This was mainly explained by higher income taxes paid. We continue to make progress in our capital expenditure plan with investments for the full year reaching ARS4.2 billion or approximately $124 million.

Of the total amount in pesos, around 35% was invested in the second production line at our at our L'Amali plant. During the quarter, we continue to move ahead with civil works and many equipment are under the delivery-to-site process. We are moving according to our schedule and within budget. As of December, we were at 47% (ph) of the execution of this project. We foresee savings in dollars, mainly impacted by costs tied to Argentine pesos.

I'll now hand the call back to Sergio.

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

Thanks Marcos. Now please turn to Slide 10. To wrap up this presentation, I would like to make a few final remarks. Despite the challenging macroeconomic environment in Argentina, we closed the year with another solid quarter. In particularly, our core Argentine cement business delivered both adjusted EBITDA growth and margin expansion, even with weaker volume demand in the country and we are also pleased to see that our concrete operation continuing to deliver a strong result, reaching record quarterly and annual volumes.

Looking into 2019, we expect a turnaround in cement demand in Argentina and starting midyear following the economy environment, which is anticipated to begin to recover in the second half of the year. In this context, we remain focused on managing the business to deliver a strong result despite the macro environment. Our history and leadership position provide us with strong base to continue balance sheet growth and profitability.

And part of our strategy is the expansion in L'Amali plant, which will allow us to continue delivering production efficiency and profitability, while will provide much needed capacity when demand recovers. 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

We will now begin the question-and-answer session. (Operator Instructions) And our first question today comes from Dan McGoey with Citigroup. Please go ahead.

Dan McGoey -- Citigroup -- Analyst

Thank you. Good morning gentlemen, congratulations on the results. First question I have is basically on the EBITDA margin expansion. I understand IAS 29 mostly affect the depreciation, so therefore -- not EBITDA, but given the strength of the margin expansion, I'm wondering if you could comment whether the accounting change helped at all that margin, and assuming that the answer is quite little, I wonder if you could talk a little bit about how much of that expansion is related to the cost side of the equation. It should have cash cost per ton coming down either on the energy side or not or if it is mostly pricing? Let me stop there. Thanks.

Marcos Isabelino Gradin -- Chief Financial Officer

Hi Dan, this is Marcos. The IAS 29 impacted negatively in our margins. Yes, it's impacted by 75 basis points, reducing our margin for the quarter on a consolidated basis.

Dan McGoey -- Citigroup -- Analyst

Got it. So that margin expansion is primarily on the price front, the price increases. On cash cost production, is there anything that helped lower cash cost production in the period?

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

Good morning Dan. So, for the quarter, we have a double impact. On one hand the increase in prices and on the other, the price -- the cost control for the company. So regarding cost, as we were talking in the previous calls, the lower volume has a benefit on the better logistics and the way we operate our plants.

So another point is that in Argentina, we are having some improvements in tariffs both for electrical energy and thermal energy. Also the high volatility inflation and FX led us negotiate in a better way the other costs. So we have an enhancement of our labor cost, both in amount and also in quantity of headcount. And the drop in volume and let us be more efficient in terms of logistics costs.

Dan McGoey -- Citigroup -- Analyst

Great thank you. And one last follow up. I don't have it at hand, but cash cost of production per ton, was it stable year-on-year or was it up but just considerably less than the price increase?

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

The cash cost year-over-year it -- there is reduction in dollars terms. The cost of our inputs, those are in dollars, they were reduced and of course the ones that are in pesos, they were also reduced, measured in dollars. And regarding the EBITDA per ton in US dollars, it remained practically the same compared to the last year.

Dan McGoey -- Citigroup -- Analyst

Understood. Great, thank you very much.

Operator

(Operator Instructions) And our next question comes from Alejandra Obregon from Morgan Stanley. Please go ahead.

Alejandra Obregon -- Morgan Stanley -- Analyst

Hi, good morning, and thank you for the call. My question is related to cement volumes in Argentina. Looks like your figures for the quarter came slightly below the industry average. So I was just trying to understand if this could be related to market share losses maybe or just exposure to an under-performing region. So any color on your granular performance by province perhaps would be great. Thank you.

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

Good morning Alejandra. Thank you for your questions. So last year when we take a look to the volumes of Loma Negra, It is important to bear in mind the price movements that we did. As we always mentioned, we are always the first mover and our competitors, they follow us a few days afterwards. That leads to the premium price to increase during that time where the competitors (technical difficulty) prices.

So during those periods we tend to lose (technical difficulty] that we afterwards tend to recover. So with high inflation price increases are more often they tend to be every month and that (technical difficulty) this effect in market share is more permanent. There are other factors and it's also -- there is also a difference within regions in the country. But our market share values for current and from last year make us feel comfortable in terms of our short, medium and long term.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you this is very helpful. And a follow up if I may. In terms of demand could you give us some color on what you've been seeing so far into the second quarter -- into the first quarter, I'm sorry?

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

(technical difficulty) observing we need to keep in mind that last year until April, the demand was rather high. So it could be expected that until April the volumes should have a drop. However since mid-January the volumes that we are observing, they are slightly better than what previously expected.

So as you could see from today's release, the February figures, they remain almost flat compared to last year. Therefore this value make us feel more confident that our expectation for the whole year should be something like a drop compared to -- a slow drop compared to the previous year, for the full year.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you very much. This was very helpful and congratulations on the results.

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

Thank you, Alejandra.

Operator

(Operator Instructions) And this will conclude our question-and-answer session. I would 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 updates next quarter. In the interim, the team remains available to answer any questions you may have. Thank you and enjoy the rest of your day.

Operator

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

Duration: 29 minutes

Call participants:

Gaston Pinnel -- Investor Relations Manager

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

Marcos Isabelino Gradin -- Chief Financial Officer

Dan McGoey -- Citigroup -- Analyst

Alejandra Obregon -- Morgan Stanley -- Analyst

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