LOMA - Loma Negra Compania Industrial Argentina Sociedad Anonima (LOMA) Q3 2023 Earnings Call Transcript

2023-11-09 15:25:06 ET

Loma Negra Compania Industrial Argentina Sociedad Anonima (LOMA)

Q3 2023 Earnings Call Transcript

November 09, 2023, 10:00 AM ET

Company Participants

Diego Jalon - Head of IR

Sergio Faifman - CEO and VP of Board of Directors

Marcos Gradin - CFO

Conference Call Participants

Alejandra Obregon - Alejandra Obregon

Rodrigo Nistor - Latin Securities

Daniel Rojas - Bank of America

Presentation

Operator

Good morning, and welcome to the Loma Negra Third Quarter 2023 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 followed by an English translation. [Operator Instructions] Please note that this event is being recorded.

I would like now to turn the conference over to Mr. Diego Jalon, Head of Investor Relations. 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 statements section of our earnings release and recent filings with the SEC. We resumed 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 showing up this morning. I would like to begin my presentation with a discussion of the highlights of the quarter and then Marcos will take you 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.

Starting with Slide 2, I'm pleased to share the result of the third quarter with you today. The tendency for the volume of the industry persists amidst the election period and the secondary uncertainty. As we mentioned in the previous conference call, cement volume was lower compared to the last year, still shows strong shipment fuel. The high records from the last year set a challenging benchmark for the comparison. The volume reached in this period is the second best quarter of the history for the industry and the recent figures of October compare almost flat with the same period of 2022. As we navigate this election period amidst economic challenges, both the cement industry and Loma have demonstrated resilience. When we delve into the numbers, we see another robust quarter for Loma where our top-line reached ARS74 billion, decreasing 8.3%, primarily due to the volume contraction of our core cement.

Despite this effect, EBITDA stood on ARS70 billion with a margin expansion of 105 basis points and reaching a consolidated margin of 23.2%. Let's keep in mind the third quarter are the most challenging in term of EBITDA margin due the seasonal impact of higher energy inputs. In this sense, the US dollar EBITDA portion stood at $36.5 for the quarter, 4.5% above last year per quarter and stable in the secondary basis. On the financial side, we issue our Class 3 domestic bond, receiving an outstanding response from the market. Issuance enable us to refinance cross-border debt, thus reducing our financial costs and extending the maturity while keeping a strong balance sheet with leverage ratio below one times.

Now hand off the call to Marcos Gradin, who will view through our market review of 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 upper-left chart, the market expectation report from the central bank indicate a negative performance for the economy for 2023, showing a decrease of 2.3% where the results published by the deck show a decrease of almost 5% for the second quarter. In a context where the construction activity indicator shows a decline for the sector, the national cement industry sales have demonstrated resilience. Despite a 5.6% decrease, this third quarter ranked as the second best in history, with the cumulated volume just 1.8% below the same period in 2022. Furthermore, the recent figure published for October indicates a sequential recovery with volumes slightly below the ones reached in 2022.

Bulk cement maintained its tendency, being the dispatch mode that is affected by the construction of the demand from the retail sector. On the other hand, concrete producers remain as the primary driver of growth for the bulk mode. In this sense, when seeing the breakdown by dispatch mode, bulk shipments now represents 44% of their total dispatches from 43% in the first quarter of 2022. As we near the conclusion of a very challenging year, we foresee the strengths for volumes to persist. We maintain a cautious optimistic that the resolution of the electoral process will alleviate volatility and pave the way for economic recovery.

Turning to Slide 5 for our view of our top-line performance by segment. The third quarter top-line saw an 8.3% decrease, mainly attributed to declines in the Cement segment followed by Concrete and Railroad, partially offset by the performance of aggregates. Cement, masonry & cement, and lime segment was down 12.8% with volumes contracting 7.1% year-on-year, mainly due to a decline in bagged cement sales coupled by softer price dynamic, which despite adjusting for inflation, experienced a decline owing to elevated monthly inflation figures and the timing of price adjustments. Concrete revenues decreased 4.2% in the quarter. Volumes were down 9.4%, offset by a good pricing performance.

Some major projects which are the market target for our concrete operations, found their pace affected by the macroeconomic volatility. Aggregate segment show an expansion of 17.5% with sales volumes almost flat. The good price performance boosted the topline. On the other hand, Railroad revenues decreased 4.5% in the quarter year-on-year, transported volumes were down 4.2%, affected by a decrease in transported volumes of aggregate and fracsand, while the price remained almost flat, despite the negative effect of the lower volume of fracsand that negatively affects the average price per ton, as it's a product with longer average transported distance.

Moving on to Slide 7, consolidated gross profit for the quarter remained almost flat, showing a slight increase of 0.2% year-over-year with a margin expansion of 196 basis points to 23.3%, mainly due to cost improvements in the Cement and Railroad segments. Regarding the Cement segment, a decrease in energy inputs compensated the lower topline performance. In the Railroad segment, the lower cost was mainly driven by lower depreciations. The margin expansion of the Cement and Railroad segments was partially offset by constructions in Concrete and Aggregates, mainly due to cost pressures. Finally, while SG&A expenses decreased by 1.8% as a percentage of revenues, they increased by 55 basis points, rising from 7.8% in the quarter of 2022 to 8.3%.

Please turn to Slide 8. Our adjusted EBITDA for the quarter stood at $66 million, down 3.1% from the same quarter a year ago and reaching a very solid figure. In pesos, adjusted EBITDA was down 3.9% in the quarter, reaching ARS17.2 billion with consolidated EBITDA margin of 23.2%, posting a year-on-year expansion of 105 basis point. This is mainly attributable to improved margins in Cement and Railroad. Cement segment adjusted EBITDA margins stood at 26.8%, improving 252 basis points, mainly due to cost efficiencies that offset the lower topline performance. Regarding costs, we saw reduction of 9% in a per ton basis. The primary reason for this was a reduction in energy inputs, primarily driven by increased utilization of natural gas in our thermal energy matrix, combined by a lower price for this input. Similarly, the cost of electrical energy is significantly decreasing as electrical generation take advantage of lower liquefied natural gas prices. Additionally, by the end of the quarter, the new pipeline began injecting natural gas from Vaca Muerta into the transportation system, while indeed reducing the dependence of imported liquefied natural gas.

In a per-ton basis, EBITDA reached $36.5 per ton, increasing 4.5% from last year's third quarter. Concrete adjusted EBITDA decreased ARS128 million compared to third quarter '22, where the good price performance wasn't able to compensate the lower volumes and increasing cost. Margin contracted 179 basis points, reaching 0.6%. Aggregates' adjusted EBITDA decreased ARS130 million this quarter from ARS242 million in the second quarter '22, reaching a margin of 4.8%, mainly due to higher sell costs that were partially offset by a positive price performance. Finally, railroad adjusted EBITDA reached ARS247 million from negative ARS7 million in the same period of 2022, with a margin of 4.16%, mainly explained by cost improvements that offset a weaker topline.

Moving on to the bottom line on Slide 10, this quarter we posted a net profit attributable to owners of the company of ARS7.4 billion compared to a net loss of ARS28.9 billion on third quarter 2022, mainly due to a lower total financial cost. Total net financial cost stood at ARS1.6 billion this quarter from a total financial cost of ARS36.4 billion the same quarter last year. Primarily due to the impact of the cancellation of dollar-denominated debt with local funding that took place in the third quarter of 2022.

Moving on to the balance sheet, as you can see on Slide 11, we ended the quarter with a cash position of ARS20.9 billion and a total debt of at ARS96.1 billion. Consequently, our net debt-to-EBITDA ratio stood at 0.97 times compared to 0.37 times at the end of 2022. Our operating cash generation stood at ARS14.6 billion, where the decrease in the net profits adjusted with the non-cash effects, coupled with a lower positive effect of the working capital mainly due to a lower utilization of inventories and higher income tax advances. Regarding capital expenditures, we allocated ARS4.4 billion, mostly for maintenance CapEx. During the quarter, the Company used cash in financial activities for ARS19.8 billion, mainly due to the payment of dividends announced in the June, interest and the repayment of borrowings, partially compensated by the issuance of the Class 3 bond and the net proceeds from borrowings.

In dollar terms, our debt reached $274 million, standing our net debt at $215 million at the end of this quarter. Breaking it down by currency, the dollar-denominated debt represents 64% of the total debt, while the rest is in pesos. Additionally, as mentioned before, during the quarter the company issued its Class 3 domestic bond denominated in US dollars for a total amount of $55 million, with maturity in the first quarter of 2026 and accruing an interest rate of 7.49% per year. This issuance gave us the possibility to cancel cross-border dollar-denominated debt, reducing the financial cost and extending its maturity.

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 find Slide 13. To conclude the presentation, I'd like to highlight a few key points. As we mentioned before, we can see a continuity of the trends from the previous quarter where industry volume have adjustment downwards from the record heights of the last year, reflecting the reduced economic activity. We are just days away from the presidential election and we are currently navigating a period of high uncertainty in a very volatile economic environment which poses significant challenges for decision-making. Yet cement volume remains solid and Loma's robustness unquestionable.

As the year draws to a close, our confidence remains strong that even in these challenging environments, Loma will certainly attain its objectives and continue to contribute to the industry development from the -- our leadership position. I'd like to convey my appreciation to our employee, customer, business partner, and the community in which we operate, for their continued support. I'm excited about the continuous journey ahead building off the strong foundation we create together.

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

Question-and-Answer 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 followed by an English translation. [Operator Instructions] Our first question comes from Alejandra Obregon of Morgan Stanley. Please go ahead.

Alejandra Obregon

Hi, good morning, Sergio, Marcos, Diego. Thank you for the call. My first question has to do with your energy matrix. So you did mention some -- that you foresee some changes in the future. So if you could just talk about how do you see your energy mix evolving into 2024. I understand that you have some long-term contracts in some of your energy needs, but you also have a lot of moving parts for gas in the country. And of course, on top of that you have your decarbonization target. So if you can talk about how do you see that landing in 2024 and where do you see your energy cash cost going for the year, that'll be very helpful.

Sergio Faifman

Hi, Alejandra, thank you for the question. [Foreign Language] This year we accomplished to close some contracts below the prices that we closed the year before. [Foreign Language] Some of those contracts are starting now in September, and they are for two or three years term. [Foreign Language] And regarding our energy -- thermal energy metrics, we are expecting a decrease in the -- in our costs, [Foreign Language] even below the numbers, the figures of the -- of this quarter as we are presenting. [Foreign Language] And in electrical energy, we also had a reduced cost in prices, [Foreign Language] and we are also foreseeing a reduction in costs in comparison with the costs of 2023. [Foreign Language] And basically, for next year, we are foreseeing to use all of our energy metrics in natural gas.

Alejandra Obregon

That was very clear. And if I have a chance for another question, this one is related to Ferrosur. If I remember correctly, your concession might come due next year. So if you can just remind us when is that being renewed and if you think that that could be renewed under the same terms given that the -- we are seeing a change in administration, is there anything that we should expect there for next year? Thank you.

Sergio Faifman

[Foreign Language] Ferrosur was originally expected to end in March this year, [Foreign Language] and we -- and the government renewed the concessions for 18 months. [Foreign Language] We are in conversations with the government regarding the characteristics of the new contract, if it's going to be an open-access scheme like the one they foresee before. [Foreign Language] And due to the election process in the last couple of months, this process has been -- that its pace, it's a little bit slower. [Foreign Language] We expect this process to keep up next year where the actual concessionist will turn operators. [Foreign Language] Just as a reminder, with this open-access scheme, the national government, it will be in charge of the infrastructure, and the operators are the ones that are going to take care of the trucks and the vans.

Alejandra Obregon

Thank you. That was very clear.

Operator

Our next question comes from Rodrigo Nistor from Latin Securities. Please go ahead.

Rodrigo Nistor

Hi. Good morning. Thank you for the opportunity. My first question is what are your expectations for cement demand in 2024 and if you foresee any variation in demand contingent on which party or candidate wins the upcoming election?

Sergio Faifman

Hi, Rodrigo, thank you for your question. [Foreign Language] We are working in our projections for next year and we don't give any guidance regarding volumes for next year. [Foreign Language] And regarding the elections, we are not seeing much differences between the two candidates regarding -- regarding volumes. They both have some pros and cons. [Foreign Language] And probably what we have probably to expect is if there are some sudden changes at the beginning of the year, that might impact the volumes for the first Q.

Rodrigo Nistor

Okay, thank you. I have another question if I may. In the current high inflation environment, how are you adjusting your pricing strategy to sustain the profitability and also maintaining the -- your market share?

Sergio Faifman

[Foreign Language] Our price strategy is linked to different factors, [Foreign Language] general inflation, FX, and our internal inflation in our costs, [Foreign Language] and our price dynamics are related to our costs and that it's related -- and the competition typically move prices like we do. [Foreign Language] And the competitive dynamic makes the market share to move slightly, but if you zoom up in different regions, then you can see some more bigger movements. [Foreign Language] From the last two months, we don't have any data from the market per region, [Foreign Language] so we are not able to estimate the market share per region exactly. [Foreign Language] But with our market intelligence, we are able to assume some of these movements, and we estimate that the market -- the national market share is -- it's similar to the one we had previously.

Rodrigo Nistor

Okay, that was really helpful. Thank you.

Operator

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

Daniel Rojas

Good morning, gentlemen. Thank you for taking my questions. Going back to the first question regarding your energy matrix, it's very helpful for us to understand how the benefits you're seeing in natural gas will translate into margin expansion. I'm hoping not to drill you down with any specific number, but if you can give us a range of where you can -- where we can see margins next year, it will be very helpful. That's my first question.

Sergio Faifman

Hi, Daniel. Thank you for the question. [Foreign Language] The impact in our margins doesn't have to be -- it is not entirely about cost efficiency, but also it's regarding our price strategy. [Foreign Language] You also have to keep in mind that with our last investment in L'Amali also, we do have a lot of efficiencies in term of production. [Foreign Language] We were able to stabilize the production in the line two of L'Amali, and all the numbers are pretty good. [Foreign Language] And for next year, we are foreseeing EBITDA margins similar to the ones we are having now.

Daniel Rojas

Okay, could you remind us at what operational capacity you're running L'Amali 2?

Sergio Faifman

[Foreign Language] The capacity of L'Amali 2, we bought a kiln of 5,800 tons of clinker. [Foreign Language] We are working above 6,000 -- 6,200 tons a day. [Foreign Language] It's a line of 2.8 million tons a year, [Foreign Language] and we believe we can reach 3 million tons.

Daniel Rojas

Okay. Thank you for answering the questions.

Sergio Faifman

You're welcome.

Operator

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

Diego Jalon

Thank you all for joining us today. As always, we really appreciate your interest in our company. And remember that we remain in touch for any questions that you may have. Thank you very much and have a nice day.

Operator

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

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