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Loma Negra Compania Industrial Argentina Sociedad Anonima (LOMA) Q1 2020 Earnings Call Transcript

By Motley Fool Transcribers - May 12, 2020 at 11:01PM

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LOMA earnings call for the period ending March 31, 2020.

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Loma Negra Compania Industrial Argentina Sociedad Anonima (LOMA 4.24%)
Q1 2020 Earnings Call
May 12, 2020, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, welcome to Loma Negra First Quarter 2020 Conference Call and Webcast. [Operator Instructions] After today's presentation, there'll be an opportunity to ask question. Also, Mr. Sergio Faifman will be responding in Spanish, immediately following the English translation. [Operator Instructions]

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, 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 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.

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

Thank you, Gaston. Hello, everyone, and thank you for showing up today. First, I hope you and your family are safe and well during this unprecedented time. Clearly, we are operating in a difficult environment, and we expect from now on think to 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. We produce and sell products that people rely on every single day to provide themselves the 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 treated 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 [Indecipherable] commitment that we create in order to manage the effect of coronavirus crisis. Our people first and safety are non-negotiable. And it's our main priority always. This is why we suspend national and international trips, and we implement as fast as possible the 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 under L'Amali 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'Amali expansion works have resumed. During this situation, we strength our effort to security working capital needed, tightening fixed cost structure and reformulation our capital expenditure priority. Of course, the speed or breadth of the recovery dynamic is yet uncertainty. And we remain alert regarding the evolution of the crisis.

Now turning to Slide 4, 2020 is started with some headwind, particularly related with the fragile macroeconomic situation of the country and the ramp-up 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 topline for the quarter decreased also around 30% year-on-year to ARS7.8 billion, and our adjusted EBITDA declined by 17.9%. Still, we were able to expand margin by 479 basis points to 33.5%, mainly reflect rigorous focus in cost control and our commitment to maintaining a high productivity and healthy profitability levels. Our core Argentine cement business remained the principal factor behind this margin expansion.

As shown on this slide, mentioned 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 $10 million. Additionally, our net debt to last 12 months EBITDA of 1.26 times and our cash position provides 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.

Marcos Isabelino Gradin -- Chief Financial Officer

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 construction, and neither the construction sector nor the cement industry are exceptions to this situation. Argentina faces important challenges to achieve sustainable growth over time. Our 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 bag segment was better supporting the economic construction. Consequently, the share of cement sold in bulk increased by almost 8 percentage 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 zero during the first few days since March 20. Afterwards in April 3rd, the government decided to include mining and building material provided by building material depots in the social 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 clarify in the following quarters. In April, the market declined 55%, with the particularity that the first days of the month cement sales were almost zero. With private construction not permitted and public works were significant. Therefore, the demand was mainly observed in the bulk segment through wholesalers.

Turning to slide 6 for a review of our topline performance by segment. Revenues were down 29.6%, as sales volumes fall reflects that 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 two months of the year were affected by sluggish public and infrastructure works, volumes and revenues were down 13% of 13.5% respectively. Revenues of concrete and aggregates in Argentina were the most impacted by the halt in the public and private projects, plummeting 73.6% and 67.1% respectively. Revenue from our railroad segment decreased 24.9% year-on-year as a consequent 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 segment 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, as a percentage of revenues, decreased by 29 basis points to 8.1% from 8.4%. First quarter 2019 included some non-recurrent costs of the structure adequacy, and with a contraction of 32% [Phonetic] year-on-year.

Now please turn to Slide 8, the drop in demand explained the 17.9% decline in -- of our adjusted EBITDA. Still, we achieved our 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 35% year-on-year and the margin expanded by 656 basis points to 38.3%, as we benefit by the significant reduction in energy input cost 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 our margin contraction to 3.8%. Adjusted EBITDA margin of our concrete and aggregates segment presented a strong contraction [Phonetic] 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 continue improving in terms of EBITDA per ton measured in U.S.dollars, around $26 per ton [Phonetic] 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 ARS857 million, resulted mainly from an adjusted EBITDA construction and a negative impact total financial loss. Total financial results represented a loss of ARS456 million compared to a loss of ARS199 million in the first quarter in the previous year. The foreign exchange loss of ARS170 million compared to ARS239 million in the first quarter of 2019. The higher interest rate environment together with the higher gross debt resulted in a net financial expense of ARS410 million, or ARS148 million higher than in first quarter 2019. The net positive monetary position resulted in a gain of ARS124 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 ARS4 billion or approximately $66 million. 79% of which was dedicated to the expansion project. Our net debt at the end of the quarter was $226 million, with a gross net debt breakdown by currency of 49% in Argentine pesos, 38% in hard currency, and 13% in guarani. Net debt to adjusted EBITDA ratio of 1.26 times compared to 0.86 times at the beginning of the year. As the current situation continues to be conditioned by the COVID-19 restriction, we 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.

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

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 ourselves 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 stakeholder. At this moment, it seems pointless trying to provide a guideline for 2020 industry trends as recovery depend of the local economy turnaround, sovereign debt negotiation, and the evolution of 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'Amali expansion project were started. 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.

Questions and Answers:


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 Instruction] Our first question is from Alejandra Obregon from Morgan Stanley. Go ahead.

Alejandra Obregon -- Morgan Stanley -- Analyst

Hi. Good morning. Thank you for taking my question, and for the call. And this is related to infrastructure work 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? Thank you very much.

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

Good morning, Alejandra. Thank you for your question. Our view is the government is preparing on an ambitious infrastructure plan that once the sovereign debt and coronavirus situation are solved, they're going to start to implement. From our conversations with the government officials, they are going to be focusing on mainly on housing and middle to small size infrastructure works. We believe that this is one of the key elements that the government is a 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 eight 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 bag segment, mainly because the large infrastructure projects, either public or private, are hold. So, we are optimistic that once -- in the next few months, once these larger infrastructure projects start to being execute again, the volumes should increase consequently.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you very much. This is very clear.


And this concludes our question-and-answer session. I'd now like to turn the conference back to Gaston Pinnel for closing remarks. Oh, wait we have a question -- we have two questions. One moment. And the next question is from Nicolas Zalles from LW Investment Management. Go ahead.

Nicolas Zalles -- LW Investment Management -- Analyst

Hi. Good morning. Thank you for taking the call. 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? Hello?

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

Good morning, and 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 till 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.


Our next question is from Antonella Rapuano from Santander. Go ahead.

Antonella Rapuano -- Santander -- Analyst

Hi. Thank you all for taking my question. Actually, I had two questions, 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 relies on the L'Amali project. How -- I was wondering how much capex -- remaining capex is spending for the rest of the year to be deployed in this project? Thank you.

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

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'Amali 2 [Phonetic], 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.

Antonella Rapuano -- Santander -- Analyst

Great. Thank you. Very clear.

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

You're welcome.


Our next question is from Coleman Clyde from HSBC. Go ahead.

Coleman Clyde -- HSBC -- Analyst

Hi, gentlemen. Thank you for taking my question. 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'Amali plant expansion? I mean, you've made some impressive improvement 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 under way? 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 two questions.

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

Thank you, Clyde, for your question. Yes. Clearly, L'Amali 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.

Coleman Clyde -- HSBC -- Analyst

Thank you very much. Very clear.


And this concludes our question-and-answer session. I would now 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 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.


[Operator Closing Remarks]

Duration: 35 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

Alejandra Obregon -- Morgan Stanley -- Analyst

Nicolas Zalles -- LW Investment Management -- Analyst

Antonella Rapuano -- Santander -- Analyst

Coleman Clyde -- HSBC -- Analyst

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