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Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA)
Q3 2019 Earnings Call
Nov 8, 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 Third Quarter 2019 Conference Call and Webcast. [Operator Instructions] Also, Mr. Sergio Faifman will be responding in Spanish, immediately following an English translation. [Operator Instructions]

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

Gaston Pinnel -- Investor Relations Manager

Thank you. Hi. Good morning. Thank you for joining us today. We appreciate your participation in this conference call. By now, everyone should have accessed to our earnings press release and today's call presentation, 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 right after the presentation.

Before we begin, 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 filings 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 -- Chief Executive Officer, Vice President of the Board

Thank you, Gaston. Hello everyone and thank you for joining us today. I am pleased to welcome you again to Loma Negra third quarter 2019 earning conference call.

We will begin our 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 share some thoughts for the remainder of the year. Finally, we will open the call to your questions.

Starting with Slide 3. We ended the quarter with another solid set of result amid a challenging context. The unexpected result in the August primary elections lead to a high financial economic volatility that eroded the incipient recovery previously observed in some of the macroeconomic variables.

The peso depreciated sharply and inflation started again, affecting overall activity levels and the already weak growth expectation. In this line our Cement demand dropped by 7.5% in a year-on-year basis. As a major infrastructure public work completed, consumption is lower down or even put on hold probably until the economic landscape become more foreseeable. However EBITDA grew by 2.7% with margin expansion of 289 basis point as we were able to control our costs and start capturing benefit from previous efficiency initiative.

During the quarter, we continued with our effort to streamlining our production footprint and this is the reason why we converted the San Juan facility into a grinding and distribution center. In this quarter, we achieved an adjusted EBITDA of $52 million. And when excluding the non-recurrent costs the EBITDA reached $53 million almost equal to the third quarter last year.

The expansion of our L'Amali plant continue on track. As it's a key element of our long-term strategy and will contribute to our production efficiency and profitability. The kick in date is expected to be at the end of the second quarter next year. Finally, our strong balance sheet should enable us to work through a more complex financial environment in Argentina.

I will now hand 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 in Argentina. The rather [Indecipherable] mid August primary election outcome impacted a few incipient signs of stabilization that we have observed in previous month. This higher financial and political uncertainty during the period triggered a sharp peso depreciation and higher than expected inflation level. Both impacting the economy in general and the construction activity in particular.

During this quarter the Cement industry declined by a rate of 2.9% year-on-year. On a sequential basis, the third quarter surge by almost 9.5% compared to the second quarter of this year, but mostly explained by the seasonality effect in our industry. Taking a closer look at the Cement demand unlike with previous quarter, the bag segment declined less than the bulk segment. Bag segment declined by 2.4% and bulk decreased by 3.2%. Consequently, the share of Cement sold in bulk remained almost unchanged at 42% when compared with the same period one year ago.

Looking toward the last part of the year, we expect the industry to continue suffering from a weak economy and a high volatility environment. In this line economy downgraded GDP growth expectation for 2019 to minus 3% from our previous level of 1.4%. Additionally economy's expectation for 2020 also deteriorated drastically from a expansion of 2.2% to a construction of 1.7%. In this sense, at this moment, we choose to be more cautiously until the key guidelines are defined by the new administration.

Now please turn to Slide 5 for a review of our top line performance by segment. Revenues were down 7.6%. For the quarter, Cement revenues dropped by 4% impacted by sales volume, drop of 7.5% and partially compensated by real term price increases. In Paraguay, revenues were down 1.7%, with volumes declining 1.1%, affected by a slower than expected public works execution, an impact offset by the product sector demand. Prices remain practically unchanged.

Concrete segment presented a decline of 37.7% in revenues as both sales volumes and prices were down when compared to the strong third quarter in the year ago period. Several large infrastructure projects that have commenced in recent years were in completion phase and during this year, other new large projects were either slow down or even put on hold.

For the Railroad segment, construction volume transported contributed positively to revenues. However, it was not enough to compensate the drop in building materials and chemical volumes, resulting in a total decline of 9.4%. By contrast, aggregates revenues were up 2% year-on-year during the period driven by improving volumes.

Moving on to Slide 6. Consolidated gross profit for the quarter was up 7.3% year-on-year, with a margin expansion of 368 basis points reaching 26.6% in the quarter, reflecting the production cost to earn the control and the benefits from the footprint adequacy efforts achieved in the second quarter this year. Non-recurrent costs relative to reconverting San Juan accounted approximately to ARS61 million or $1.2 million. This excluded gross profit would have grown by 10% with margin expansion of 435 basis points to 27.2%.

SG&A expenses as a percentage is up revenues decreased by 22 basis points to 6.6%, positively impacted by commercial and administrative structure adequacy measures, previously adopted in the first quarter of 2019 together with our farther reduction in the effective sales tax rate.

Please turn to Slide 7. Despite the softer demand we reached consolidated adjusted EBITDA growth of 2.7% in the quarter over ARS2.6 billion or $52 million with margin expanded to 189 basis points to 28.8%, mainly driven by Cement and further supported by growth in Railroad. Excluding the non-recurring charges, the EBITDA margin would have been 29.5% reaching $53 million in the same period one year ago. When excluding the application of inflation accounting, adjusted EBITDA for the Cement segment in Argentina increased 52% year-on-year and the margin expanded by 90 basis points to 41%. And excluding the non- recurring cost, would have been 31.8%. Likewise, Paraguay posted around 57% growth in adjusted EBITDA with a margin of more than 45%, improving 156 basis points compared to third quarter 2018.

Our Concrete segment reported an increase in adjusted EBITDA reaching ARS47.8 million with the margin expansion of 73 basis points from 4.1% to 4.8% as we have adopted the productivity structure to the new demand level. We continue to post margin expansion in our railroad segment, with adjusted EBITDA margin, up more than 357 basis points year-on-year to 14.5% as a result of structure adequacy efforts. Aggregates segment adjusted EBITDA margin reached 4.1%. Our Cement business in Argentina remained relatively stable situation in terms of recurrent EBITDA per ton measured in US dollars, around $28 per ton, 7% over the year ago quarter.

Please turn to Slide 8. Net majority income for the quarter reached ARS50 million. Total final results presented a loss of ARS1.6 billion compared to a loss of ARS1.4 billion in the third quarter last year. The FX depreciation resulted in a foreign exchange loss of ARS1.5 billion or ARS200 million higher than year ago. The current years rate environment resulted in a higher net financial expense of ARS34 million. The net positive -- the net positive monetary position resulted in a gain of ARS276 million.

Moving on to the balance sheet. As you can see on Slide 9, our balance sheet enables us to move ahead with our meaningful investment plan. We continue to make progress in our capital expenditure plan with investments for the quarter reaching ARS3.1 billion or approximately $59 million. We finished this quarter with a net debt to adjusted EBITDA ratio of 0.87 times compared to 0.43 times at the beginning of this year. Our net debt at the end of the quarter was $157 million with a gross debt breakdown by currency of 47%, in cost currency 28% in Guaranies and 26% in Argentine pesos.

I will now hand over the call back to Sergio.

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

Thank you. Marcos. Now please turn to Slide 10. To wrap up this presentation, I would like to give you a few key messages. Looking forward, the political transition seems to be evolving in an orderly way. And now, the key factor will be the policies that the new administration is going to adopt in order to restore the financial stability and economic growth. Under this context, we are pleased to continue delivering strong result on the work of our history leadership and determination in the search to a greater productivity.

We keep executing on our immediate priorities. In this line of this third quarter, we put our effort in further streamlining our production-footprint in the Buenos Aires region. By the convert our San Juan plant into grinding and distribution center. L'Amali plant expansion is part of this strategy and will allow us to continue increasing production efficiency and profitability that will let us try in the future.

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

Questions and Answers:

Operator

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. [Operator Instructions] Our first question comes from Eric Neguelouart with Bank of America. Please go ahead, sir.

Eric Neguelouart -- Bank of America. -- Analyst

Hi, good morning. Thank you for the call. I'd like to know if there is more visibility in terms of actual infrastructure spending during Fernandez administration. Has he been vocal about his plans and how do you see 2020 coming on after this?

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

[Foreign Speech] Good morning, Eric. Thank you for your question. [Foreign Speech] So far, what we have heard from Alberto Fernandez due to his measures are to incentivize the consumption. And regarding the construction housing plan that they are to put in place. [Foreign Speech] So regarding other measures concerning infrastructure, we do not have additional information.

Operator

Our next call -- our next question comes from Alejandra Obregon with Morgan Stanley. Please go ahead.

Alejandra Obregon -- Morgan Stanley -- Analyst

Hi. Good morning. Thank you for the call and for taking my question. I just have one on the cost side. So just wondering if you could help us understand how should we think of the footprint adequacy program going forward. And in that same line, whether there are some non-recurring cost that we should consider for the next quarters? Thank you.

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

[Foreign Speech] Good morning, Alejandra. Thank you for your question. [Foreign Speech] For the next quarter, we are not expecting any non-recurrent cost. [Foreign Speech] And for the rest of the year we do not foresee any further footprint adequacy, so the costs should be similar than the previous quarters.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you. Very helpful. And just a follow-up if I may on, I think you mentioned earlier how bulk and bag were performing. Could you please repeat that for me. I wasn't sure I got that right, and if you could kind of elaborate how is that performing going into the fourth quarter. That will be very helpful. Thank you.

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

[Foreign Speech] In the third quarter, what we observed is that the bulk decrease slightly higher than the bag. [Foreign Speech] This has to do that -- some of the infrastructure plan to completion phase. And on the other hand, a slight ramp up in the consumption. [Foreign Speech] So until -- we don't have new measures from the new administration. We expect this trend to continue.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you very much. This was very helpful.

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

You're welcome.

Operator

This concludes our question-and-answer session. I would like to turn the conference back to Gaston Pinnel for 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 meantime, the team remains available to answer any questions that you may have. And again, thank you very much for the rest -- and enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Gaston Pinnel -- Investor Relations Manager

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

Marcos Isabelino Gradin -- Chief Financial Officer

Eric Neguelouart -- Bank of America. -- Analyst

Alejandra Obregon -- Morgan Stanley -- Analyst

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