Loma Negra Compania Industrial Argentina Sociedad Anonima Q3 FY2023 Earnings Call

Good morning, and welcome to the Loma Negra Third Quarter 2023 Conference Call and Webcast. Please note that this event is being recorded. I would like now to turn the conference over to Mr. Diego Jalón, Head of Investor Relations. Please, Diego, go ahead.

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 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.

Thank you, Diego. Hello, everyone, and thank you for joining us 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 results of the third quarter with you today. The tendency for the volume of this industry persists amid an election period and the uncertainty that follows it. As we mentioned in the previous conference call, cement volume, although lower compared to last year, still shows strong shipment levels. The high records from last year set a challenging benchmark for comparison; the volume reached in this period is the second best quarter in the history of the industry, and the recent few days of October compared almost flat with the same period of 2022. As we navigate this election period amidst economic challenges, both the cement industry and Loma have exhibited the most resilience. When we dive into the numbers, we see another robust quarter for Loma, where our top line reached ARS 74 billion, decreasing 8.3% primarily due to volume contraction in our core segment, Cement. Despite this effect, EBITDA stood at ARS 17 billion with a margin expansion of 105 basis points, reaching a consolidated margin of 23.2%. Let's keep in mind the third quarters are the most challenging in terms of EBITDA margin due to the seasonal impact of higher energy inputs. In this sense, the U.S. dollar EBITDA per ton stood at $36.5 for the quarter, 4.5% above last year’s third quarter and stable on a quarterly basis. On the financial side, we used our Class III domestic bond, receiving an outstanding response from the market. The issuance enabled us to refinance cross-border debt, which will reduce our financial costs and extend the maturity while keeping a strong balance sheet with a leverage ratio below 1x. Now I hand off the call to Marcos Gradin, who will review our market and financial results. Please, Marcos, go ahead.

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 indicates a negative performance for the economy in 2023, showing a decrease of 2.3%, while the results published by the INDEC show a decrease of almost 5% for the second quarter. In a context where the construction activity indicator shows a decline for the sector, national cement industry sales have demonstrated resilience despite a 5.6% decrease; the third quarter ranked as the second best in history, with accumulated volume just 1.8% below the same period in 2022. Furthermore, the recent figures published for October indicate a sequential recovery, with volumes slightly below those reached in 2022. Bulk cement has maintained its tendency, being the dispatch mode most affected by the construction demand from the retail sector. On the other hand, concrete producers remain as a primary driver of growth for the bulk mode. In this sense, when seeing the breakdown by dispatch mode, bulk shipments now represent 44% of the total dispatches, up from 43% in the first quarter of 2022. As we near the conclusion of a very challenging year, we foresee these trends in volumes to persist. We maintain a cautiously optimistic outlook that the resolution of the electoral process will alleviate volatility and pave the way for economic recovery. Turning to Slide 5 for a 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. The Cement, masonry cement, and lime segment was down 12.8%, with volumes contracting 7.1% year-on-year, mainly due to a decline in bag cement sales, coupled with a 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 target for our concrete operations, were affected by macroeconomic volatility. The Aggregates segment showed an expansion of 17.5%, with sales volumes almost flat. The good price performance boosted the top line. On the other hand, Railroad revenues decreased by 4.5% in the quarter year-on-year. Transported volumes were down 4.2%, affected by a decrease in transported volumes of Aggregates and fracsand, while the price remained almost flat, despite the negative effect of the lower volume of fracsand, which negatively affects the average price per ton due to the 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 sectors. Regarding the Cement segment, the decrease in energy inputs compensated for a lower top line performance. In the Railroad segment, lower costs were mainly driven by reduced depreciation. The margin expansion of the Cement and Railroad segments was partially offset by contractions in Concrete and Aggregates, primarily 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 USD 66 million, down 3.1% from the same quarter a year ago and reaching a very solid level. In pesos, adjusted EBITDA was down 3.9% in the quarter, reaching ARS 17.2 billion, with a consolidated EBITDA margin of 23.2%, posting a year-on-year expansion of 105 basis points. This is mainly attributable to improved margins in Cement and Railroad. The Cement segment adjusted EBITDA margin stood at 26.8%, an improvement of 252 basis points, mainly due to cost efficiencies that offset the lower top line performance. Regarding costs, we saw a reduction of 9% on a per-ton basis, primarily driven by reduced energy inputs, enhanced by increased utilization of natural gas in our thermal energy mix, combined with a lower price for this input. Similarly, the cost of electrical energy has significantly decreased as electrical generation has taken 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 a transportation system, reducing dependence on imported liquefied natural gas. On a per-ton basis, EBITDA reached $36.5 per ton, increasing 4.5% from last year's third quarter. Concrete adjusted EBITDA decreased ARS 128 million compared to the third quarter of '22, where the good price performance couldn't compensate for our volumes and increasing costs. The margin contracted 179 basis points, reaching 0.6%. Aggregates' adjusted EBITDA decreased ARS 130 million this quarter from ARS 242 million in the second quarter of '22, reaching a margin of 4.8%, mainly due to higher sale costs that were partially offset by a positive price performance. Finally, Railroad adjusted EBITDA reached ARS 247 million, a significant improvement from a negative ARS 7 million in the same period of 2022, with a margin of approximately 4.16%, mainly explained by cost improvements that offset a weaker top line. Moving on to the bottom line on Slide 10, this quarter, we posted a net profit attributable to owners of the company of ARS 7.4 billion compared to a net loss of ARS 28.9 billion in the third quarter of 2022, primarily due to a reduction in total financial costs. Total net financial costs stood at ARS 1.6 billion this quarter, compared to ARS 36.4 billion loss in 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 ARS 20.9 billion and a total debt of ARS 96.1 billion. Consequently, our net debt-to-EBITDA ratio stood at 0.97x compared to 0.37x at the end of 2022. Our operating cash generation stood at ARS 14.6 billion, while the decrease in net profit adjusted with the non-cash effects was coupled with a lower positive effect of working capital, mainly resulting from a lower utilization of inventories and higher income tax advances. Regarding capital expenditures, we allocated ARS 4.4 billion, mostly for maintenance CapEx. During the quarter, the company used cash in financial activities for ARS 19.8 billion, mainly due to the payment of dividends announced in late June, interest, and repayment of borrowings, partially compensated by the issuance of the Class III bond and the net proceeds from borrowings. In dollar terms, our debt reached $274 million, and our net debt stood 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 III domestic bond for a total amount of ARS 55 million with maturity in the first quarter of 2026 and accruing an interest rate of 7.49% per year. This issuance allowed us to cancel gross order dollar-denominated debt, which reduces the financial cost and extends its maturity.

Thank you, Marcos. Now to finalize the presentation, I please ask you to turn to Slide 13. To conclude the presentation, I'd like to highlight a few key points. As we mentioned before, we can see a continuation of the trends from the previous quarter where industry volume has adjusted downwards from the record highs of the last year, reflecting the reduced economic activity. We are just days away from the presidential election, and we are currently navigating a very volatile economic environment, which poses significant challenges for decision-making; yet cement volume remains solid at Loma. As the year draws to a close, our confidence remains strong that even in this challenging environment, Loma will attain its objectives and continue to contribute to the industry development from our leadership position. I'd like to convey my appreciation to our employees, customers, business partners, and the community in which we operate for their continued support. I'm excited about the continuous advancements ahead, building on the strong foundation we have created together. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately followed by an English translation. Our first question comes from Alejandra Obregon of Morgan Stanley.

My first question is related to your energy metrics. You mentioned seeing some changes in the future. Could you discuss how you see your energy mix evolving into 2024? I understand that you have some long-term contracts for some of your energy needs, but you also have many moving parts regarding gas in the country. Additionally, on top of that, you have your decarbonization target. Could you elaborate on how this will pan out in 2024? Where do you see your energy cash costs going for the year? That would be very helpful.

This year, we secured contracts at prices lower than those from last year. Some of these contracts are starting now in September and will last for 2 to 3 years. We expect a decrease in our thermal energy costs, likely falling below the figures we are presenting this quarter. We also observed a reduction in our electrical energy costs and anticipate further decreases compared to the costs from 2023. Essentially, next year, we plan to base all of our energy metrics on natural gas.

That was very clear. If I can ask another question, this one is related to Ferrosur. If I remember correctly, your concession might come due next year. Could you remind us when that will be renewed? Do you think it could be renewed under the same terms given that we are witnessing a change in administration? Is there anything we should expect regarding this for next year?

Ferrosur was initially set to conclude in March this year. The government has extended the concession for an additional 18 months. We are currently discussing the details of the new contract with the government, especially whether it will follow an open-access model similar to the one previously suggested. However, the election process in recent months has caused some delays in this discussion. We anticipate that progress will pick up next year as the current concession transitions to new operators. To clarify, under this open-access model, the national government will oversee the infrastructure while the operators will handle the trucks and wells.

Our next question comes from Rodrigo Nistor from Latin Securities.

My first question is, what are your expectations for cement demand in 2024? Do you foresee any variation in demand depending on which party or candidate wins the upcoming election?

We are currently finalizing our projections for next year, but we do not provide guidance on volumes for that period. In terms of the elections, we are not noticing significant differences between the candidates regarding volumes. Each candidate offers certain advantages and disadvantages. We may see some changes at the start of the year that could affect volumes in the first quarter.

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

Our pricing strategy is influenced by various factors such as general inflation, exchange rates, and our internal cost inflation. Our pricing is closely tied to our costs, and typically, our competitors adjust their prices in accordance with ours. This competitive environment leads to minor shifts in market share. We do not have specific regional data from the last two months to accurately gauge variations in market share. Nonetheless, we have market intelligence that enables us to make some informed assumptions about shifts. We believe that our national market share remains consistent with previous levels.

The next question comes from Daniel Rojas from Bank of America.

Going back to your first question regarding your energy metrics, it's very helpful for us to understand how the benefits you're seeing in natural gas will translate into margin expansion. If you can provide a range of where we might see margins next year, that would be very helpful. That’s my first question.

The impact on our margins is not just about cost efficiency; it's also related to our pricing strategy. It's important to note that with our recent investment in L’Amalí, we anticipate significant production efficiencies. We have successfully stabilized production in line 2 of L’Amalí, and all the figures are looking promising. For the upcoming year, we expect EBITDA margins to be similar to what we are currently experiencing.

Okay. Could you remind us at what operational capacity you're running L’Amalí II?

L’Amalí II has a capacity of 5,800 tons of clinker. We are currently operating above 6,000 to 6,200 tons per day. It's a line designed for 2.8 million tons a year, and we believe we can reach 3 million tons.

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

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

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