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Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA)
Q1 2019 Earnings Call
May. 10, 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 First Quarter 2019 Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. 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 ever 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 close.

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 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.

Finally, I would like to remind you that the company is reporting results of its Argentinian subsidiaries by applying IAS 29 Financial Reporting in hyperinflationary economies.

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 the Loma Negra first quarter 2019 earnings conference call. I will begin my presentation with a discussion of the highlight of the quarter. And then Marcos will review our financial results. Afterwards, I will provide our outlook for 2019.

We will then open the call to your question. Staring with slide three. During in the quarter, with another solid set of results, despite the economic slowdown, payment demand in the first quarter contract year-on-year around 10.6%. Our top line for the quarter increased by 3.6% year-on-year to ARP7.4 million with increased adjusted EBITDA of around 18% achieving a margin expansion of around 350 basis points to 28.7%. During the quarter, we included some non-recurrent expenditure, related to structure adequacy of administrative and commercial process, which has had a reduction of around 10% of this process headcount.

Excluding this effect, the adjusted EBITDA margin will have been 30.6% or 528 basis points, higher than one quarter 2018. This is an illustration to our continuous balancing sheet growth and profitability. Our core Argentene cement business remains a critical factor behind this strong results, together with a good performance in Paraguay, concrete and railway.

Thus resulting in year-on-year bottom line increase of 48%. As shown on this slide using the prior accounting methodology and measuring in this quarter, we achieved an adjusted EBITDA of $54 million, excluding the non-recurrent structure, adjusted EBITDA in the first quarter would have been around $58 million, down by only 3% year on year despite the 13% contraction in cement volume, and the sharp peso depreciation.

Additionally, our robust balance sheet, we maintained to last month adjusted EBITDA of set upon 0.59 times provide us with a solid position to face the currency volatility of the local financial markets. The expansion of our L'Amali plan continue to be a key element of our long term strategy and will continue with our efficiency and profitability. The project continue on track and the start-up date is expected to be in the second quarter of the next year.

I'll 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 market environment and industry trends in Argentina. Construction activity measured through the (inaudible) declined in the first three months of the year signaling that the downturn started last year, I see it a carryover at the beginning of 2019. In this regard, economists have protection for our 1.3% construction in GDP for this year, recovering relatively only after the second half, reaching growth of 2.2% in 2020.

During this quarter, the cement industry declined by a rate of 10.6% year on year, but showing a softer decline when compared to the same rate of the previous quarter. Taking a closer look at the cement demand, bag and bulk segments continues to present different dynamics. Bag segment declined almost by 15%, by contrast bulk sale demand only by 3.5% continued to be supported by public infrastructure work that's about 70 month continued to increase its share in total cement sales reaching 43% of total sales.

Looking into this year, we still expect the negative cycle that began in the second quarter of 2018 to turn around by media, following consensus expectation -- of an overall macroeconomic recovery in Argentina. We see industry cement demand following these macro trends, while current public works are expected to continue moving ahead. Particularly in the metropolitan area.

Now, please turn to slide five for a review of our top line performance by segment. Revenues were up 3.6% despite softer cement sales volumes. For the quarter, cement sales volumes dropped 13% year-on-year impacted by overall weaker demand, thus revenues fell only by 1% year-on-year compensated by a healthy pricing environment.

In Paraguay, revenues were up almost 34% driven by the continued recovery in sales volumes that were up 8% in the quarter, and the appreciation against the Argentine pesos. The concrete segments continue to present good revenue generation with volume growth, coupled with strong pricing. Revenue generated by the aggregates segment was also benefited by a positive pricing. By contrast, revenues from our railroad segments decreased 1.6% year-on-year as a consequence of softer transported volumes.

Moving on to slide six, consolidated gross profit for the quarter was up by 28.6% year-on-year with a margin expansion of almost 560 basis points, reaching 28.8% in the quarter. This loss may be driven by our call segment operation in Argentina, and further supported by our segment business in Paraguay in our concrete and railroad segments.

On the cost side, upward pressure continued due to the impact of the peso depreciation and inflation in the company's cost structure, mainly in thermal and electricity cost. This impact was partially mitigated by savings in energy costs measured in US dollars, both thermal and electrical. SG&A expenses, as a percentage of revenues increased by 74 basis points to 8.4% principally due to non-recurrent expenditures related to the structure adequacy in our administrative and commercial process of approximately ARP95 million and partially compensated by a reduction of the affected sales tax rate.

In the non-recurring structure excluded, SG&A as a percentage of revenues would have declined to 7.1%. Please just on slide seven, despite the softer demand, we reached consolidated adjusted EBITDA growth of 17.9% in the quarter, over ARP2.1 billion or $54 million with margin expanding 347 basis points to 28.7%, mainly driven by the cement segments in Argentina, Paraguay and further supported by growth in concrete railroad. Excluding the non-recurring charges, the EBITDA margin would have been 13.5% reaching ARP2.6 or US$58 million.

The application of IAS 29 impacted a reduction of 98 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 68.5% year-on-year and the margin expanded by 310 basis points to 31.8%. Also Paraguay posted around 110% growth in adjusted EBITDA, with the margin improving 126 basis points to almost 45%.

Adjusted EBITDA margin for our concrete segment presented a strong expansion of 620 basis points, compared to the year ago quarter, mainly driven by sales volume growth and favorable pricing.

We continue to post margin expansion in our railroad segment, with adjusted EBITDA margin up almost 518 basis points, year-on-year, benefiting from higher revenues and a lower fixed cost structure. By contrast, aggregate segment adjusted EBITDA margin deteriorated as the favorable pricing environment will not compensate lower volumes and higher cost of sales.

Importantly, despite the strong devaluation of the Argentine pesos in the first quarter, year-on-year around 110% together with value creation volumes, our cement business in Argentina remained relatively stable, in terms of EBITDA per ton measured in US dollars above $32 per ton, slightly over the year ago quarter.

Moving onto the bottom line on slide eight. Net majority income for the quarter increased by 61% year-on-year reaching ARP1 billion, resulted primarily from an adjusted EBITDA growth and a positive impact in the income tax line, as we decided to exercise the tax revaluation option of the latest tax reform. Measured in US dollars, our net majority income decreased 6% to $25 million in the quarter from $27 million in the year ago quarter.

Moving on to the balance sheet. As you can see on slide nine, our balance sheet provide us with a solid position to further current volatility of the local financial markets and more flexibility around the funding of our meaningful investment plan. We finished this quarter with a net debt to adjusted EBITDA ratio of 0.59 times compared to 0.43 times in the fiscal quarter of 2018. Our net debt at the end of the quarter was $113 million with a rough debt breakdown by currency of 46% in US dollars, 40% in (inaudible) and 13% percent in Argentine pesos.

We continue to make progress in our capital expenditure plan with investments for the quarter reaching ARP1.9 million or approximately $14 million. Of the total amount in pesos, around 67% was invested in the second production line at our L'Amali plant.

I will 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 highlight a few final takeaways. The challenging macroeconomic environment in Argentina make us remind ever more focused on our result, leveraging our leadership position while seeking productivity gain. We are planning to see that our core Argentine cement business delivering both adjustment EBITDA growth and margin expansion even with weaker volume demand in the country and that's Paraguay concrete had strong performance. For the third quarter cement demand in Argentina declined 10.6% year-on-year, (inaudible) an increase compared to the previous quarter. With respect to the trend to remind in the following quarter. In this context, remain focused on managing the business to deliver strong results. We are going to continue optimizing our process and structure to make Loma Negra a more efficient and a safe company for the challenges to come.

In this direction, is that we have relationship with our administrative and commercial process. Our history and leadership position provide with a strong base to continue on balancing our growth and profitability. And part of our strategy is the expansion in L'Amali plant which will allow us continue on delivery production efficiency. On profitability, we'll provide much needed capacity for when the demand arises.

This ends our of our prepared remark. We are now ready to take questions. Operator, please open the call for question.

Questions and Answers:

Operator

Thank you. We will now conduct a question-and-answer session. (Operator Instructions). And our first question comes from Mauricio Serna with UBS. Please go ahead.

Mauricio Serna -- UBS -- Analyst

Hi, good morning and thanks for taking my question. One question on demand is you seem to be a little bit more optimistic on the second half of the year. So, I was wondering what kind of guidance are you having for the Argentina volumes on a full year basis, and on that same note, we have seen some volume underperformance over the last quarters, probably as you prioritize the pricing.

Do you believe this market share losses will be recovered in the medium term, or how should we think about this -- should this be more a structural share losses. And then finally, you also mentioned the restructuring affecting your expenses on the SG&A front, this quarter just wondering if this was only a one quarter thing or could it occur again in the following quarters? Thank you.

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

(Foreign Language) Good morning Mauricio. Thank you for your question. (Foreign Language) So regarding the volumes, we keep our estimations for the full year. We are observing a certain recovery in volumes and we expect positive numbers from June. (Foreign Language) Regarding the market share as we usually say, given the high inflation and the high turnaround in prices, we do have some impacts in our market share.

(Foreign Language) These are temporary variations in our market share, this is included in our strategy. (Foreign Language) We are in the structure of equity. (Foreign Language) So, we are in our administrative and commercial structure, we have done all the adjustments that we needed to do to gain efficiencies in these areas.

(Foreign Language) And regarding operational efficiencies, we're going also make some -- take some measures in this direction, and they're are going to be reflected in the coming times.

Mauricio Serna -- UBS -- Analyst

Thank you. Thank you, very much. Very helpful. And one follow-up, if I may, just on the margins they've been doing very strong especially on the gross profit level. Just want to understand how much of that was due to pricing and how much was it to actually better costs or better trends in terms of electricity and thermal fuels? Thank you.

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

(Foreign Language) So the improvement that we have it is actually a combination of different factors. (Foreign Language) There is no doubt that pricing has an impact. (Foreign Language) As well, we also have many improvements regarding costs. (Foreign Language) which are basically related to thermal and electrical energy.

(Foreign Language) Also packaging and overall higher efficiency in our facilities. (Foreign Language) And specifically regarding thermal and electrical costs, we have reductions of around 10%.

Mauricio Serna -- UBS -- Analyst

Got it. Thank you very much.

Operator

(Operator Instructions) And our next question comes from Antonella Rapuano with Santander. Please go ahead.

Antonella Rapuano -- Santander -- Analyst

Hello. Well thank you, for taking my question. I was wondering on the latest news that they were published this week on several media, there was some rumors on the close of better plant and also that Lomo was going to fire around 100 employees. So, I think this is part of your restructuring plant and I think, well I just want to know while this is true, in the first place. And then, when do you plan to do so. How is the impact in the restructuring margins, and if that is part of the L'Amali expansion plan, so you're going to transfer part of the production of the Barker plant to L'Amali, and that's my first question. And I have a second question, if you could give us an update on the class action against Loma related to the IPO. That would be helpful. Thanks.

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

(Foreign Language) Good morning Antonella, thank you for your questions. (Foreign Language) So the information is about the Barker plant, they are correct. We do have a conflict with the union in the plant. (Foreign Language) It is within our measures to stay within our operational structure considering the current situation on the ground future situations in the market.

(Foreign Language) So, regarding the class action, it is over the regular process of the trial. (Foreign Language) So, there was an amendment to the demand and actually that there was a new parts on top of the original tax. (Foreign Language) The next step is the company to answer this amendment. (Foreign Language) And the (inaudible) regarding the results on this class action. (Foreign Language) And one important concept here is that it is not yet a class action, therefore this -- the judge needs to certify this class action with which didn't happen yet.

Antonella Rapuano -- Santander -- Analyst

Okay, very clear. Thank you.

Operator

And this will conclude 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 updates on 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: 26 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

Mauricio Serna -- UBS -- Analyst

Antonella Rapuano -- Santander -- Analyst

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