Loma Negra Compania Industrial Argentina Sociedad Anonima Q1 FY2024 Earnings Call

Good morning, and welcome to the Loma Negra First Quarter 2024 Conference Call and Webcast. Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. Please note, this event is being recorded.

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 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.

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 levels amid the follow-up of the stabilization plan carried out by the Milei administration. In a short time, the new government has achieved some hopeful accomplishments such as reducing inflation and achieving a 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 macroeconomic scenario. In this context, Loma has focused on its main strengths, our leadership position, and the operational flexibility and efficiency to navigate through this transition period. Our top line stood at ARS 114.9 billion, decreasing 27% in the quarter, with cement volumes down 31%. The consolidated adjusted EBITDA reached $42 million or ARS 26 billion in the first quarter of the year. The 31% decline in cement shipments tightened our EBITDA margin, which reached 22.6%, contracting by 360 basis points year-on-year. However, this 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 a sequential basis. On the financial side, our balance sheet remained 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.

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 while the effect of the stabilization plan, coupled with weather conditions, also affects cement shipments. The political transition and the consequent effects of the tighter economic policies under the transition period 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 decrease of 27%. When looking at the breakdown by dispatch mode for the quarter, bulk shipments represent 41% of the total dispatches, while the bag segment 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 top line performance by segment. The first quarter top line shows a decrease of 27%, mainly attributed to the decline in the Cement segment, also followed by the other businesses. The cement, masonry segment, and lime segment were down 25.4% with volumes contracting by 31.3% year-on-year, mainly due to the impact of the economic environment, partially compensated by 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. The Aggregates segment showed 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 impacted our main cargo shippers, especially in Aggregates. Additionally, a storm that hit Bahía Blanca in December affected the chemical plants of the region. The transportation of chemicals 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 in our core business. Regarding the Cement segment, the lower volume also impacted the cost per ton due to a lower dilution of our fixed costs on a per ton basis. This effect was partially offset by lower energy inputs. We recorded improvements in both thermal and electrical energy costs. Finally, SG&A expenses decreased by 6.7% year-on-year, mainly due to lower turnover tax and freight costs 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 top line. Please turn to Slide 8. Our adjusted EBITDA for the quarter stood at USD 42 million. In pesos, adjusted EBITDA was down 37.1%, reaching ARS 26 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 margin stood at 26.1%, contracting 356 basis points. The positive price performance and better energy inputs mitigated the lower sales volume. On a per ton basis, EBITDA reached $49 per ton with a slight variation year-on-year, remaining flat on a sequential basis. Concrete adjusted EBITDA decreased ARS 724 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 in 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 ARS 50.7 billion, compared to a net profit of ARS 20.4 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 FX in December. Moving on to the balance sheet. As you can see on Slide 11, we ended the quarter with a cash position of ARS 5.8 billion and a total debt at ARS 183.1 billion. Consequently, our net debt-to-EBITDA ratio stood at 1.3x compared to 1.4x at the end of 2023. Our operating activities used cash stood at ARS 7.7 billion, where the decrease in the net profit adjusted to reconcile to net cash provided by operating activities was coupled with higher working capital needs, mainly due to the 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 kiln's shutdown to perform our maintenance. Regarding capital expenditures, we allocated ARS 8.5 billion, mostly for maintenance 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 and financial activities for ARS 16 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 hand the call back to Sergio. Thank you.

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 levels. The effect of the transition to the new government, the repercussions of the stabilization plans, and adverse weather conditions combined to create a scenario full of challenges for the construction industry. It is at a moment like this that we will reaffirm our conviction to bet on future development, trading on our strength and efficiencies. We are convinced that the country has huge wealth 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 infrastructure gap. Loma made very important investments in capacity in the same parts that are now contributing to support our results through better efficiencies. We are determined to protect our profitability and are very focused on our cash management and resuming 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 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 respond in Spanish immediately after the English translation. The first question comes from Alejandra Obregon with Morgan Stanley.

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.

Thank you for your question, Alejandra. Currently, our capacity is over 50%. With this level of activity, we are seeing a reduction in costs thanks to improved efficiencies. When the facility is not operating, we benefit from lower operational costs due to reduced external labor and related expenses. Additionally, because of agreements we established previously, the winter downtime will follow a similar schedule as last year. During this four-month period, we will likely utilize the time for the planned maintenance.

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 consider as a more normalized figure?

We believe that this first quarter will likely be the most challenging regarding activity levels, primarily due to the impacts of the stabilization plan and the transition to the new government, as well as unfavorable weather conditions. Despite ongoing rainfall in April, we are beginning to observe improved activity levels. Looking forward, we expect a gradual recovery, contingent upon the government's next actions and the changing political landscape. For instance, if the omnibus bill is approved by Congress, that would likely lead to increased public works in the near future.

The next question comes from Pedro Maulhardt with Latin Securities.

I want to know, with the help of National Public Works and low FX gap, which do you believe will be the main drivers for demand in the coming months?

Thank you for the question. We believe the recent stabilization in foreign exchange and inflation could indicate a potential recovery in the coming months. For instance, the news about the offering of mortgage loans might reflect this recovery, along with the omnibus bill and agreements with governors likely stimulating public works at the provincial level. Increased investments are expected to drive many projects that are awaiting more favorable conditions to start.

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

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 then overall, the industry responding to the challenges you're seeing.

Thank you for your question, Daniel. As we mentioned, the industry dynamics will remain largely the same; in terms of profitability, we expect to maintain similar levels to what we've previously shown. Regarding volumes, we are hopeful that the worst may have occurred in the first quarter and that we will see some improvement in the upcoming quarters. We anticipate that in the second half of the year, potential gains in energy inputs will contribute to enhancing our results.

If I may follow up on that one, you mean natural gas prices and the ability to acquire gas at the competitive rates, right?

Yes, we are referring to thermal energy, mainly gas. While we have demonstrated year-on-year improvements in the first half of the year, we anticipate further enhancements in the second half as we begin utilizing the new contracts.

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

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.

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