Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Q1 2024 Earnings Call Transcript

Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Q1 2024 Earnings Call Transcript May 10, 2024

Operator: Good morning, and welcome to the Loma Negra, First Quarter 2024 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 over to Mr. Diego Jalon, Head of IR. Please Diego, go ahead.

Diego Jalon: Thank you. Good morning, and welcome to Loma Negra’s earnings conference call. 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 statement 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 of the corresponding financial measures is included in the earnings press release. Now, I would like to turn the call over to Sergio.

Sergio Faifman: Thank you, Diego. Hello everyone, and thank you for joining us this morning. I would like to start my presentation by discussing the highlights of the quarter. Then, Marcos will take you over market review and financial results. Following that, I will share some final remarks before opening the call to your questions. Starting with Slide 2, we’re starting a year full of new challenges, and it is my pleasure to present the highlights of the quarter, which was marked by a significant drop in activity level, I mean the follow-up of the stabilization plan carried out by the Milei administration. In a short time, the new government has achieved some hopeful accomplishment such as reducing inflation and achieving fiscal surplus.

After the sharp devaluation of last December, and the correction of relative price, the construction industry has experienced a significant drop in demand, with industry stakeholders awaiting the consolidation of the new macro-economic scenario. In this context, Loma has focused on its main straits, our leadership position, and the operational flexibility and efficiency to navigate through this transition period. Our topline stood at ARS114.9 billion, decreasing 27% in the quarter, with cement volumes down 31%. The consolidated Adjusted EBITDA reached $42 million, or ARS26 billion in the first quarter of the year. The 31% decline in cement shipment tightened our EBITDA margin which reached 22.6%, contracting by 360 basis points year-over-year.

However, it remained stable on a sequential basis despite the significant drop in volume. In the same sense, EBITDA per ton stood at $39.3 for the quarter, maintaining a similar level when compared year-on-year and on sequential basis. On the financial side, our balance sheet remain very strong with net debt of $207 million, and a very comfortable maturity schedule. 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 Gradin: Thank you, Sergio. Good morning, everyone. Please turn to Slide 4. As you can see on the lower left chart, the market expectation report from the central bank signals that the first quarter might indicate the deepest quarterly contraction of the economy for this year with a better outlook for the second half. When we dive into the numbers of our industry, we can see that the construction activity indicator shows a significant drop in the first months of the year, deepening the drop in March. The monthly industry cement sales chart shows the same trend where the effects of the stabilization plan coupled with weather conditions also affect cement shipments. The political transition and the consequent effects of the tighter economy policies under the equation effects distortions took a hit on the construction activity.

The industry’s bulk cement dispatches were the most affected by this context, down 33% year-on-year, while bulk cement posted a contraction (ph) of 27%. When looking at the breakdown by dispatch mode for the quarter, bulk shipments represent 41% of the total dispatches, while the bag-format regained terrain reaching 59%, 2 percentage points above the first quarter of 2023. We are cautiously optimistic that in line with the market expectations, we will start to see signals of recovery in the upcoming quarters. Turning to Slide 5 for a review of our topline performance by segment. The first quarter topline show a decrease of 27%, mainly attributed to the decline in the cement segment, also followed by the other businesses. The Cement, masonry cement and lime segment was down 25.4% with volumes contracting by 31.3% year-on-year, mainly due to the impact of the economic environment partially compensated by a solid price performance.

Although the contraction impacted both dispatch modes, bulk cement was the most affected in our segmentation of clients. Concrete producers and industries were significantly down, while public works remain halted. Concrete revenues decreased by 41% in the quarter, due to the 41.7% decrease in dispatches. The larger scale projects, our operations target market are either halted or experiencing a low level of activity as they seek more stable conditions with the consolidation of economic measures. Aggregate segment show a decrease of 40.5% with sales volumes down 38.7% following the trend of the concrete segment. Finally, railroad revenues decreased by 19.5% in the quarter. Transported volumes were down by 28.1%, primarily affected by the lower level of activity in the construction sector which impact our main cargo shippers, especially in aggregates.

Additionally, a storm that hit Bahia Blanca in December affected the chemical plants of the region. The transporter of chemical was normalized by the end of the quarter. On the other hand, we improved the transported volume of fracsand. Moving on to Slide 7. Consolidated gross profit for the quarter declined 32.8% with a margin contraction of 217 basis points to 25.3%, mainly due to the volume contraction on our core business. Regarding the cement segment, the lower volume also impacted the costs per ton due to a low dilution of our fixed cost on a per ton basis. This effect was partially offset by lower energy inputs. We recorded improvements in both thermal and electrical energy cost. Finally, with SG&A expenses decreased by 6.7% year-on-year mainly due to lower turnover tax and freight cost related to lower volumes as well as a decrease in insurance and marketing expenses.

As a percentage of sales, it showed a year on year increase of 251 basis points reaching 11.5% due to the decrease in the topline. Please turn to Slide 8. Our adjusted EBITDA for the quarter stood at $42 million. In pesos, adjusted EBITDA was down 37.1% reaching ARS26 billion with a consolidated EBITDA margin of 22.6%, contracting 360 basis points year-on-year. On a sequential basis, the margin remained stable despite the sharp volume decrease. Cement segment adjusted EBITDA margins stood at 26.1%, contracting 356 basis points. The positive price performance and better energy inputs mitigated the lower sales volume. In a per ton basis, EBITDA reached $39 per ton with a slight variation year-on-year and remaining flat on a sequential basis. Concrete adjusted EBITDA decreased ARS724 million compared to the same quarter of last year, with a margin contraction of 883 basis points, reaching minus 10% primarily due to the sharp drop of dispatches.

The adjusted EBITDA margin of aggregates contracted to minus 1.1% from 17.6% in the first quarter of 2023, mainly due to lower volumes and lower fixed cost absorption. Finally, the adjusted EBITDA margin of the railroad segment expanded to 0.4% in the first quarter from negative 1.2% a year ago, primarily due to the positive price performance and a better result in other gains that compensated the lower transported volumes. Moving on to the bottom line on Slide 10. This quarter, we posted a net profit attributable to owners of the company of ARS50.7 billion, compared to a net profit of ARS20.4 billion in the first quarter of 2023. The higher total net financial gain was boosted by the positive effect of inflation on the net monetary position.

This effect was partially offset by a higher net financial expense due to a higher net debt position. In the same sense, the foreign exchange loss decreased due to a slower pace of devaluation following the sharp movement of the effects in December. Moving on to the balance sheet, as you can see on Slide 11, we ended the quarter with a cash position of ARS5.8 billion, and a total debt at ARS183.1 billion. Consequently, our net debt to EBITDA ratio stood at 1.3 times compared to 1.4 times at the end of 2023. Our operating activities used cash stood at ARS7.7 billion where the decrease in the net profit adjusted to reconcile to net cash provided by operational activities was coupled with higher working capital needs, mainly due to an increase in clinker inventories that we will use during the upcoming winter.

During winter, we will minimize our production to avoid higher energy inputs while using the kilns shutdown to perform annual maintenance. Regarding capital expenditures, we allocated ARS8.5 billion mostly for maintaining CapEx. As a result of the slowdown in demand, we are working on adjusting our CapEx and maintenance plans to the current scenario. During the quarter, the company generated cash in financial activities for ARS16 billion mainly from new borrowings. In dollar terms, our total debt reached $214 million, standing our net debt at $207 million at the end of this quarter, with a duration of 1.3 years. Breaking it down by currency, the dollar-denominated debt represents 65% of the total debt, while the rest is in pesos. Now, for our final remarks, I would like to handle the call back to Sergio.

Thank you.

Sergio Faifman: Thank you, Marcos. Now, to finalize the presentation, I please ask you to turn to Slide 13. As we mentioned, we started a new year in a very challenging environment marked by a significant drop in activity level. The effect of the transition to the new government, the repercussion of the stabilization plans and adverse weather conditions combined to create a scenario full of challenges for the construction industry. It is in moments like this where we reaffirm our conviction to debate on future development, trailing on our strength and efficiencies. We are convinced that the country has huge growth potential waiting to be unlocked. The decreasing inflation and the normalization of some key economic variables make us believe that we are on the right path to lay the groundwork for addressing the infrastructural gap.

Loma made very important investments in capacity in the recent past that are now contributing to support our results through better efficiencies. We are determined to protect our profitability and very focused on our cash management and positioning (ph) our CapEx programs for this transition period. We are confident that we are in an excellent position to embrace the upcoming positive economic cycle. Finally, I would like to thank all our employees for their commitment and extend my gratitude to the rest of our stakeholders. This is end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

Q&A Session

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. Please hold momentarily while we assemble our roster. The first question comes from Alejandra Obregon with Morgan Stanley. Please go ahead.

Alejandra Obregon: Hi, Loma Negra team. Thank you for taking my question. I guess, it’s related to your comment on maintenance. You mentioned that you’re doing some maintenance during the winter. So, I was just wondering if you can talk about how this compares versus last year. Meaning, how long will it last this time around and how much of your capacity will be carrying out this sort of maintenance? That’s perhaps the first question on my end.

Sergio Faifman: [Foreign Language] [Interpreted] Hi, Alejandra. Thank you for your question. Nowadays, our capacity is more or less at 50%. With this level of activity, we have an improvement in cost due to cost efficiencies. When the facility is in halt, we can gain from less working cost due to extra hours and all that stuff. And also due to the contracts that we signed in the past, the halts in the winter are going to maintain a similar schedule. So during the term, in those four months, probably we’re going to use that to more gradually use that period for the maintenance that we have planned.

Alejandra Obregon: Got you. That was very clear. And I guess a second question related to your utilization and dispatches. So, we’re coming from a period where you potentially reached like 7 million tons per year. That was the peak of your dispatches during 2022, 2023 maybe. And now we are seeing things normalizing. So, what would be like a fair assumption? Where do you think dispatches will normalize in the foreseeable future once things stabilize? Is perhaps 6 million tons a run rate level where you guys are thinking of your capacity, or is there any other level that we should think of as a more normalized figure?

Sergio Faifman: [Foreign Language] [Interpreted] We are seeing that probably this first quarter is going to be the toughest in terms of level of activity. Not only because of the fallout of the stabilization plan and the transition of the new government, but also due to inclement weather. Even though the rains continue in April, we are seeing some better level of activity. So looking ahead, we foresee a gradual recovery, obviously, depending on what the next movements of the government and the evolution of the political dynamics. For example, if the omnibus bill passes through the Congress, that would be a third point that would show some more public works in the near future.

Alejandra Obregon: Got it. Thank you for the very comprehensive response, and thank you for taking my question.

Operator: [Operator Instructions] The next question comes from Pedro Maulhardt with Latin Securities. Please go ahead.

Pedro Maulhardt: Hi, Sergio, Marcos, and Diego. Thank you for taking my question. I want to know if, with the help of national public works and [indiscernible] exchange, which do you believe will be the main drivers for demand in the coming months?

Sergio Faifman: [Foreign Language] [Interpreted] Hi, Pedro. Thank you for the question. We understand that the macro stabilization that we are seeing in terms of FX and inflation could be part of the recovery that we might see in the — in a couple of months. For example, the recent news on the offering of mortgage loans could be another sign of this recovery. And that probably this omnibus bill and the agreements made with the governors would boost the public works at a provincial level. And the boost on investment that this law also has that would be also a driver. There are a lot of projects waiting for more favorable conditions in order to start.

Pedro Maulhardt: Thank you very much for your answer. It was really helpful.

Sergio Faifman: You’re welcome.

Operator: The next question comes from Daniel Rojas with Bank of America. Please go ahead.

Daniel Rojas: Good morning, gentlemen. Thank you for taking my question. It’s really simple. I was just hoping for you guys to give us some sense of the pricing environment, what you’ve gone through in the last couple of months with the difficult economic environment. How do you see pricing going forward? And overall the industry responding to the challenges we’re seeing. Thank you.

Sergio Faifman: [Foreign Language] [Interpreted] Hi, Daniel. Thank you for your question. Hi, Daniel. Because we just mentioned the dynamics of the industry are going to — in terms — for example, in terms of profitability, we should keep more or less the same levels that we have shown. And regarding volumes, we are optimistic that the worst phase might have happened in the first Q and that we are going to see some gradual improvement in the next few quarters. We are seeing for the second half of the year probably some gains in energy inputs that will help us improve our results.

Daniel Rojas: If I may follow up on that one. You mean natural gas prices and the ability to acquire gas through the Nestor Kirchner, right?

Sergio Faifman: [Foreign Language] [Interpreted] Yes, we mean thermal energy and primary gas. Even though we have shown in this first part of the year an improvement year-on-year, probably we are going to see further improvements for the second half of the year with — when we start using the new contracts.

Daniel Rojas: Okay. Thank you again for taking my questions.

Sergio Faifman: You’re welcome.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Diego Jalon for closing remarks.

Diego Jalon: Thank you very much for joining us today. We really appreciate your interest in our company, and we look forward to meeting you again in our next call. In the meantime, we remain available for any questions that you may have. Thank you very much. Bye.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.