Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA)
Q3 2020 Earnings Call
Nov 11, 2020, 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 2020 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 Gaston, go ahead.

Gaston Pinnel -- Investor Relations Manager

Thank you. Good morning, and welcome to our third 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-GAAP financial 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, Vice-President of the Board

Thank you, Gaston. Hello, everyone, and thank you for joining us today. First, I hope you are your family are safe and well. I'm going to mention a few highlights of the third quarter. And then Marcos will review through our market review and financial results. After that, I will provide some final remarks, and then we will open the call to your questions.

I would like to begin by thanking our people and stakeholders, without whom the third solid result would have been very difficult, particularly during these unprecedented times. During the third quarter, we achieved very important result with EBITDA growth and margin expansion. The recovery pathway of cement demand was considerate as we experienced and very strong sequential growth in value generation of the country. An overall volume increase of almost 3% in a year-on-year basis. As observed in previous quarter, the reason behind this rebound was the Bulk segment, driven mainly by resiliency of demand. On the contrary, the larger private and public works execution is preventing the bulk segment to start its recovery and also harming our concrete and aggregate business.

Our adjustment EBITDA stood at $48 million with an expansion of 9.4% in the quarter, compared to the same quarter last year as our mining divisions on our operation enabled to recover sales volume, while improving our EBITDA margin by 454 basis point to 31.5%. Additionally, during the quarter, we decided to [Indecipherable] the sale of our under 51% stake in the Paraguayan company, Yguazu Cementos. This was an excellent deal in terms of value generation and timing with a implied motive of approximately nine times last 12-months EBITDA. As our country and the world continued to battle the COVID-19 pandemic, economic activity remain with an uncertain height. Yet, lockdown on less restrictive and more sectors and operational, which is expected to bring additional demanding to the economy assembled. As a key element of our long-term strategy, L'Amali expansion project is right on-track, expecting it to be inaugurated by the beginning of 2021.

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. As you can see on Slide 5, we are living beside the bottom levels of the second quarter where GDP recorded a fierce drop of 19%. Auspiciously, the construction sector continues as the sequential recovery started in May. In particular, the cement sector is experiencing a more vigorous rebound after 14-months of year-on-year decline, September was a first month in recording a positive 10.5% growth. The main drivers behind this trend is Bag segment sales, which is explained by a surge in self construction and recent demand. This segment grew around 18% in the first quarter relative to the second quarter in 2018 and also posted in September a historic record. A similar trend was also observed in October with about 12.8% year-on-year growth for the industry. By contract even this quarter bulk segment together with computer Concrete and Aggregates continues to suffer the most, hampered by the halt in infrastructure works as a restriction to operate, combined with economic uncertainty.

Surprisingly, the share of cement sold in bag increased by 14% points from 58% in first quarter 2019 to more than 72% in third quarter 2020. We expect this rate terms to remain rather stable in the following months. Eventually, bulk demand would catch up as small restrictions are lifted and larger private and public works are going to gain some momentum.

Definitely, the economy as a whole is yet far from turning around. And Argentina still faces different test, particularly on the macroeconomic outlook. Expectation our GDP growth for 2020 revolve around the double-digit decline. In this sense, we will watch carefully the lever of different economic sector as they are reopening for business.

Turning to Slide 5 for a review of our top-line performance by segment. While consolidated revenues dropped 4.5%, revenues of our core business cement masonry & lime was up 5.3% with sales volumes increasing by 2.9% year-on-year and favorable pricing environment. As mentioned before, Bag segment continues to be the driver behind this vigorously rebound, growing this quarter around 23% compared to the same quarter last year.

Revenues from our railroad segments decreased 29.8% year-on-year with volume drop of 5.8% further impacted by the change in product mix, namely a drop in supported building materials and production, partially compensated by other services sector. Revenues of Concrete and Aggregates are still the most hampered by the halt in public and private projects, plummeting 70.2% and 25.2% respectively.

Moving on to Slide 6. Consolidated gross profit for the quarter increased by 3.9% year-on-year and margin expanded by 225 basis points, explained by our core business. In particularly, the recovery of revenues of the Bag segment with good cost performance, especially in energy inputs and lighter fixed cost structure, which reflects footprint adequacy efforts achieved last year. Energy inputs benefited from earlier prices renegotiations, together with improvements in unitary energy consumptions. SG&A expenses as a percentage of revenues increased by 67 basis points to 7.7% from 7%, mainly due to higher percentage of Bag cement sales.

Please turn to Slide 7. Our adjusted EBITDA was up 11.6% in this quarter, reaching $48 million and consolidated EBITDA margin expanded by 454 basis points to 31.5%, thanks to margin expansion in our core business segment, cement, masonry segment and lime. Adjusted EBITDA margin in this segment expanded by 472 basis points to 34.3% as Bag volumes recovery, coupled with significant reduction in energy input cost, a good pricing performance allowed us to outperform previous year quarter. Railroad adjusted EBITDA margin worsened to 6.3% from 14%, impacted by lower volumes and cost declining less than proportional.

Concrete and Aggregates posted a negative ARS58 million and negative ARS42 million, respectively, as they remain severely affected by the limited execution of larger public and private works. EBITDA in US dollar per ton stood at $32million, increasing around 16% compared with the same period last year and above 21% in a sequential basis versus second quarter this year.

Moving on to the bottom line on Slide 8. Net income for the stood at ARS6.4 billion or $113 million. This figure includes ARS4.2 billion of income from discontinued operations in Paraguay. Income from continuing operations were ARS2.2 billion comparing to a loss of ARS180 million, mostly explained by a positive impact of exchange rate difference and adjusted EBITDA expansion, partially offset by a permit of assets in other segments. As a consequence of the changing business perspectives, we registered a noncash impairment loss of approximately ARS851 million from which the biggest stake is the impairment on Railway that amounted ARS705 million and the remaining Aggregate. Finally, net income was also affected by a charge of ARS363 million related to the cash contribution done in Ferrosur to repay existing debt. Measured in US dollar, our net income reached $113 million in the quarter from a loss of $12 million in the year ago quarter.

Moving on to the balance sheet. As you can see on Slide 9, as previously mentioned, during the quarter, we executed the sale of our Paraguayan operation, resulting in an excellent value creation opportunity for the company. The proceeds from the sales were mainly dedicated to the debt repayment and the distribution of an extraordinary dividend of approximately $31 million, which was performed in October 2020. Additionally, this transaction, together with our positive operating cash flow of ARS3.4 billion enabled us to face capital expenditure payments of ARS1.6 billion, 69% of which was dedicated to the expansion project and to repay ARS8.9 billion of borrowings. And in the quarter we had total cash position of ARS4.7 billion, with manageable short-term debt maturities of ARS3.9 billion. At the end of this quarter, our net debt was reduced to $19 million, and our net debt to ratio was 0.12 times from 1.17 times in the second quarter this year.

Now for our final remarks, I would like to hand the call back to Sergio.

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

Thanks, Marcos. Now to wrap up the presentation, I please ask you to turn to Slide 10. We proved resilient to these challenging times, and we are pleased to communicate these achievements. Our effort and adaptability to unknown worse translate to our results, once again, delivering margin and EBITDA growth. The initial recovery of cement demand observed at the end of the second quarter was confirmed during the last month, where cement features record high volume. We expect this improvement to continue at. At some point in time, major private and public infrastructure works should resume by forcing these positive trends.

Certainly, the economy as a goal is yet far from turning around, and Argentines still face different challenges, particularly on the macroeconomic perspectives. In this sense, we watch carefully the dynamics of different economic sector as they are reopening for business and how this could affect our own sector. We execute firmly on the sale of our Paraguayan operation. We considered it was an excellent deal in terms of timing and value generation. We optimized the proceeds from the transaction, creating value for our shareholders at the time with strengthening our already robust financial situation. We are now concentrating all our efforts in Argentina. Underlying this is what we keep the pace on the execution of L'Amali expansion which is planning to be ready by the beginning of 2021.

Once again, I would like to thank our all people and stakeholder, without whom the above-mentioned result will have been impossible, especially during these unprecedented times. Let's keep moving forward with the same responsibility and the responsiveness we have shown so far. United, we are able to overcome challenges and growth opportunity on our way. We are now ready to take questions. Operator, please open the call for the questions.

Questions and Answers:

Operator

Thank you.

[Operator Instructions]

And please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. Our first question is from Alejandra Obregon from Morgan Stanley.

Alejandra Obregon -- Morgan Stanley -- Analyst

Hi good morning and thank you for taking my question. I actually only have one. If you could please elaborate on your utilization rates across the different regions or assets and whether you are optimistic of getting more pricing power in the next months? Thank you.

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

[Foreign Speech]

Good morning Alejandra Thank you for your question. The utilization rate in the plants, it depends on a monthly basis, and it is currently approximately 90% of its utilization. It is hard to talk about utilization rate because in these months of September, October and November, we are usually with a higher demand. If we take a look to clean capacity utilization, we should be around 80%. In this last month due to the Bag segment recovery, we do have more utilization rates in the dispatch -- in the bagging and dispatching sectors. For the coming months, we are optimistic about the volumes. And we also think that it could be a slight decrease in the Bag cement and most probably a recovery on the bulk because it is the one lagging behind. Importantly to remark that the large infrastructure projects, not only in the metropolitan area of Buenos Aires but also in the rest of the country has been virtually non-existent. And for the last time, there has been some news about some infrastructure projects that are starting in the near future.

Alejandra Obregon -- Morgan Stanley -- Analyst

Thank you. And maybe a follow-up here. Is it fair to assume that the retail demand or the strength that we have seen in the retail demand is coming from the Buenos Aires area or is there any other region that has outperformed as well?

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

[Foreign Speech]

No, actually, demand is quite stable along the country. In the metropolitan area, the bulk cement was more affected due to the lockdown restrictions.

Alejandra Obregon -- Morgan Stanley -- Analyst

Understood. Thank you very much.

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

Thank you Alejandra.

Operator

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

Coleman Clyde -- HSBC -- Analyst

Hi gentlemen thank you for taking my question. I have two really quick ones. My first one is on margins. I'm just wondering what your more medium-term outlook is for margins in light of the fact that the L'Amali plant expansion is going to come online next year. And I know that you were initially expecting to see some improvements from that plant. We have already seen some pretty big improvements on the margin front. So are you still expecting to see further improvement? What is your more medium-term outlook on that front? And then the second question would be, in light of the sale of your assets in Paraguay, could you envision a scenario in the future where you pursue assets outside of Argentina again? Those are my two questions.

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

[Foreign Speech]

Good morning Coleman, thank you for your questions. Regarding margins, with L'Amali expansion, we should have margin improvement. Certainly, this margin improvement will not be next year due to the ramp-up in the plant should also have a ramp-up in the margin improvement. Additionally, there are two other things. One is the energy, the thermal energy costs that due to the savings that we observed recently, the savings with L'Amali should be less than what we had expected. The other factor has to do with the volumes, yes, and the size of L'Amali. And once we are ramping up production in that plant, we should also be diluting fixed costs. Regarding Paraguay, we believe that the sale proves the capacity of the company to develop a project and then to sell it with the right timing and value generation. So at this moment, in the Board of Directors, and the Finance Committee, we are revising and reviewing the strategy for the next five-years. And in this strategic plan, we are not discussing any alternative. It could be growth in Argentina, either vertical integration or also abroad in other geographies. But as of today, we do not have any decision made about these future steps.

Coleman Clyde -- HSBC -- Analyst

Thank you very much. Very clear.

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

Thank you.

Operator

Our next question is from Eric Neguelouart from Bank of America. Go ahead.

Eric Neguelouart -- Bank of America -- Analyst

Yes. Thank you, good morning. So I would just like to know if you have some more color on the stimulus program that were announced by the government earlier this year. Just anything you could comment? Thank you.

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

Sorry, Eric, could you repeat your question? We didn't get it actually.

Eric Neguelouart -- Bank of America -- Analyst

Okay. Can you hear me there?

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

Yes. Now it is better.

Eric Neguelouart -- Bank of America -- Analyst

Okay. So any color you could give us on the stimulus package announced by the government earlier this year, how those projects have started or are they going to start anywhere in the near future? Just any color you can give us would be good. Thank you.

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

Thank you Eric.

[Foreign Speech]

So the governmental plans that we have knowledge about our focus on housing adequacy, right, sewages, houses and roads. We believe that with the approval of the budget 2021 this week, we should have a better outlook for this plan.

Operator

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

Gaston Pinnel -- Investor Relations Manager

Thank you for joining us today. We appreciate your participation and 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. Thanks again, and stay safe.

Operator

[Operator Closing Remarks]

Duration: 29 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

Alejandra Obregon -- Morgan Stanley -- Analyst

Coleman Clyde -- HSBC -- Analyst

Eric Neguelouart -- Bank of America -- Analyst

More LOMA analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.