Loma Negra Compania Industrial Argentina Sociedad Anonima Q3 FY2024 Earnings Call

Good morning, and welcome to the Loma Negra Third Quarter 2024 Conference Call and webcast. All participants will be in a listen-only mode. Please note that 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.

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 start my presentation by discussing the highlights of the quarter. Then Marco will take you through our market review and financial results. Following that, I will share some final remarks before opening the call to our questions. Starting with Slide 2. We are pleased to present Loma Negra third quarter results. This quarter, industry volume showed a strong sequential improvement, increasing by 25%, while still below last year level. The steady recovery in activity indicates that we moved past the most challenging period. Diving into the numbers, our top line reached ARS 180.7 billion, marking a 21.2% decrease in the quarter, primarily due to the lower cement dispatches. This quarter, Loma achieved a consolidated adjusted EBITDA of $55 million or ARS 43 billion, down 18.5% compared to the same period last year. Our EBITDA margin stood at 24%, reflecting an improvement of 78 basis points year-over-year, which is remarkable given the challenging scenario and its impact on demand. On a per ton basis, EBITDA was $35.4, also maintaining a very solid performance. It's important to note that third quarter margins are lower due to seasonal factors such as higher energy costs. However, our flexibility and production strategy allowed us to mitigate the full impact of winter costs. On the financial side, our balance sheet continued to strengthen with net debt at $177 million. As mentioned in our last call, this quarter required less capital, enabling us to delever and achieve a net debt ratio of 1.03x. I will now hand off the call to Marcos Gradin, who will walk you through our market review and financial result. Please, Marcos, go ahead.

Thank you, Sergio. Good morning, everyone. Please turn to Slide 4. When looking at the evolution of monthly cement sales for the industry, it is clear that cement dispatches have reached a significantly better level than in the previous two quarters. Volumes have increased by 25% sequentially. The same sequential comparison shows an improvement of 6% in 2023, and recent figures for October are in line with September figures despite the impact of a national strike that affected the dispatches. Bulk cement dispatches are recovering more quickly, gaining ground in the dispatch mode breakdown and reaching 62%. In contrast, bulk cement has been more affected by the economic environment, the standstill in public works, and lower activity levels in larger private projects. The central bank's market expectation report also points to an improved economic outlook, suggesting that the recovery will begin in the second half of this year, marking the end of the recession's most challenging phase. The construction activity indicator, though still below 2023 levels, reflects this trend as well, gradually narrowing the year-on-year comparison gap. Positive indicators such as the steady recovery of real wages, the downward trend in inflation, fiscal surplus, and lower interest rates are key factors that could enable a broader role for credit in our economy and encourage and accelerate foreign direct investment inflows. While macroeconomic conditions remain challenging, stable economic variables are essential for driving sustainable growth. Turning to Slide 5 for a review of our top line performance by segment. The third quarter top line shows a decrease of 21.2% mainly due to a lower top line performance of the cement business, also followed by the rest of the segments. The cement, masonry cement, and lime segment declined by 21%, with volumes contracting 17.1% year-on-year, coupled with softer price performance. Although the contraction impacted both dispatch modes, bulk cement is performing significantly better, showing only a moderate decline, while bulk dispatches are lagging. Demand for bulk cement is more closely tied to larger projects, which typically require additional time planning and stable market conditions to consolidate. Concrete revenues decreased by 29.7% in the quarter, primarily due to a 22% drop in dispatches. The type of projects that are central to our concrete segment are still struggling to gain traction, mirroring the trend seen in bulk cement sales. Similarly, the aggregates segment experienced a 42.7% decline, with sales volume down by 29%, reflecting the pattern of the concrete segment. The reduced level of activity has resulted in a more challenging competitive landscape. Finally, railroad revenue saw a modest decline of 4.7% in the quarter. Transported volumes dropped by 7%, mainly due to the reduced activity in the construction sector. However, this was partially offset by increased volumes of grains and chemicals. The positive trend also helped mitigate the impact of lower transported volumes. Moving on to Slide 7. Consolidated gross profit for the quarter declined 23.5%, with a margin contraction of 69 basis points to 22.6%. Margins remained stable despite the volume contraction of our core business. In the cement segment, our cost management efforts helped mitigate the impact of a lower top line. Although hydro, thermal, and electrical energy inputs tightened margins on a sequential basis, this effect was partially offset year-over-year by our production strategy of halting several kilns and utilizing clinker stock produced at lower energy cost during the warmer seasons. In the year-over-year comparison, thermal energy costs show considerable improvement. Additionally, reduced electrical energy needs from an extended halt in the limestone grinding phase increased the share of renewable energy in our energy metrics to 66%, up from 39% in the third quarter of 2023, further contributing to lower energy costs. On the other hand, the railroad and concrete segment experienced margin expansion, while aggregates, more impacted by current economic conditions, posted a significant contraction. For railroad, the moderate decrease in volumes combined with positive price performance helped to boost its margins. Finally, SG&A expenses fell by 12.9%, primarily because of reduced salaries, a lower cost from turnover tax, and freight due to decreased volumes. As a percentage of sales, it stood at 9.2%, an increase of 87 basis points from 8.3% because of the decline in revenues. Please turn to Slide 8. Our consolidated adjusted EBITDA for the quarter stood at USD 55 million, while in pesos adjusted EBITDA reached ARS 43 billion, down 18.5%. Despite the volume decline and the challenging scenario, the consolidated EBITDA margins remained resilient and stood at 24%, expanding by 78 basis points from last year. On a sequential basis, it's important to note that the third quarter showed a lower margin due to higher seasonal costs. The cement segment's adjusted EBITDA margin stood at 25.5%, a slight drop of 20 basis points. Tight cost management and improved energy inputs helped mitigate the impact of a lower top line. Concrete adjusted EBITDA increased ARS 484 million compared to the same quarter of last year, with a margin expansion of 355 basis points, reaching 4%. Cost control measures and gain from the sale of obsolete assets offset the lower top line. The adjusted EBITDA margin of aggregates contracted to negative 17% from 4.8% in the third quarter of 2023. The low level of activity and more complex competitive environment affected the segment operational result. Finally, the railway segment adjusted EBITDA margin expanded by 840 basis points in the quarter, reaching 12.6%. Transported volumes experienced a moderate decline, mainly due to increased grain transport, while prices showed solid growth. Strict cost control further supported these positive results. Moving on to the bottom line on Slide 10. This quarter we posted a net profit attributable to owners of the Company of ARS 20.9 billion compared to a net profit of ARS 22.9 billion in the third quarter of 2023. The lower operational results mainly due to the drop in volumes were partially compensated with a higher total financial gain. Financially, we posted a total net financial gain of ARS 12.6 billion for the quarter compared to a financial cost of ARS 4.9 billion in the same period last year. Key variations include the reduced impact of exchange rate differences due to a slower deferred devaluation pace and a lower net financial expense, primarily driven by lower interest rates. This was partially offset by a smaller gain on the net monetary position as we held a lower passive monetary position during the quarter and by a softer effect from inflation adjustments. Moving on to the balance sheet. As you can see on Slide 11, we ended the quarter with a net debt of ARS 172 billion, bringing our net debt-to-EBITDA ratio to 1.03x, down from 1.4x at the end of 2023. As anticipated in our last call, we reduced our indebtedness by $40 billion during the quarter, further strengthening our balance sheet. Cash generation from operational activities reached ARS 64 billion, up from ARS 45 billion in the same period of 2023, primarily driven by positive working capital effects. During the quarter, clinker production was minimized to lower energy inputs, resulting in reduced inventory levels. This was further supported by decreased account receivables and reduced income tax payments. We allocated ARS 17.4 billion to capital expenditure this quarter. Approximately 40% of this amount was invested in the 25-kilogram bags project, with the remainder primarily directed towards maintenance CapEx. During the quarter, the Company used ARS 34.8 billion in financing activities, primarily for the repayment of borrowings and interest payments. In dollar terms, our net debt reached $177 million at the end of this quarter with a duration of one year. Breaking it by currency, the dollar-denominated debt represents 77% of the total debt, while the remaining portion is in pesos. This quarter, we addressed the maturity of the Class 1 bond issued in pesos, thereby reducing the weight of our local currency debt. Regarding the remaining bonds, the Class 2 bonds are set to mature in the fourth quarter of 2025, while the Class 3 and Class 4 bonds will mature in 2026. We have a very clear horizon ahead in terms of our structured debt.

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. The third quarter showed a significant sequential improvement, clearly moving past the worst part of the recession. However, the recovery is still in its early stage, with future progress needing to fully close the year-over-year gap. Our operational flexibility and production strategy enabled us to maintain healthy margins, mitigating the full impact of winter cold despite the lower dispatch level and difficult economic conditions. We are closely and optimistically monitoring the evolution of the economic challenges as inflation and interest rates decline. The real economy and activity level will have a more solid foundation for growth. The expansion of credit and mortgage loans could be a significant driver for the construction sector in the near future. Similarly, the reduction in country risk, now below 1,000 points for the first time since 2019, signaling a positive step toward attracting foreign investment. Amid all the challenges, the country holds a growth potential ready to be unlocked, and Loma is well positioned to support and drive the show now forward. To conclude, I would like to thank all our employees and stakeholders for their commitment and continued support. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

Please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. And our first question today will come from Marina Mertens with Latin Securities.

I have two questions. The first one on prices. So, with inflation slowing, prices are becoming less frequent. How do you see these pricing dynamics moving forward? And what effect could it have in volumes and revenues? And the second one. The bulk segment, it continues to be more depressed than the bag segment. So what catalysts do you see as necessary for larger construction projects to begin and for demand in this segment to pick up?

Regarding price dynamics, we are closely watching how we can continue to follow our dynamic in adjusting prices. Besides the lower inflation in the last three months, we have continued to adjust our prices on a monthly basis. Perhaps with inflation of 2% or 1% per month, we can start thinking about adjusting prices on a three-month or four-month basis. With this level of monthly inflation, if we space the adjustments too far apart, the increases could become two-digit figures and that would be difficult for the market to absorb. Regarding volumes, as you mentioned, bag cement has been recovering more quickly, and bulk cement is still lagging. Regarding larger projects, which is the target of bulk cement, with the RIGI and other bigger projects that are starting to gain pace, they are likely going to positively affect our cement sales, particularly bulk cement sales. We are monitoring the evolution of many private projects and with the steady progress of these efforts in the last couple of months, we are starting to see a pickup in pace. Another important driver for bulk cement is public works, and in this case, we are observing how the new scheme involving the private sector in public works is evolving. We expect this to start impacting volumes next year. These two variables should influence bulk cement dispatches in the upcoming months.

And our next question today will come from Marcelo Furlan with Itau BBA.

I have one question related to dividends. I mean you guys posted deleveraging in this quarter at 1x net debt EBITDA. And you guys don't have any major projects underway. So my question is related to, if we could see some improvement in dividends maybe for the fourth quarter or for 2025 as you guys still have a healthy capital profile. So this is my question.

Historically, third quarters are the ones that have a lower EBITDA margin due to increased costs during the winter season. Additionally, this year, we faced some extra hikes in costs that impacted the second and third quarters. For example, the hike in transport prices and energy that increased between 400% and 700% impacted us between May and those effects hit the second and third quarters. In general, as typically happens in high inflation periods, Loma gains margin because we can adjust our prices more quickly than our costs. So, if you look at the margins of the third quarter, they are impacted by higher winter costs. You will probably see an improvement in the next quarters, primarily because now we are unlikely to face those winter cost impacts, especially in energy, not due to the other costs that have been moving with inflation.

Okay. And a follow-up question here. What are you thinking about dividends going forward?

So far, we have no plans for this year. For the coming months or next year, we are analyzing capital allocation alternatives, thinking about the best options for our shareholders.

And our next question today will come from Esteban Arietta with Balanz.

Does the InterCement situation impose any debt repayment covenants on Loma Negra if control changes? And additionally connected to that, would a change of control to another company trigger a tender offer for Loma Negra shares?

There is no covenant regarding change of control that may impact the Company. Regarding a tender, the regulations of the NYC and CMB will apply if an operation occurs.

And our next question today will come from Daniel Rojas with Bank of America.

Most of my questions have been asked, but I was curious and was hoping to get a bit more detail on the 25-kilo bag project you mentioned in the presentation. Does this form part of your strategy of selling smaller bags to achieve better prices? What are you hoping to get in that sense from selling that type of weight? Any additional insight you could provide? And additionally, you've been very specific about the sequential recovery of cement volumes. I know you've given some details on the call, but could you give us any additional color?

The profitability of cement and bulk are very similar. Obviously, bags yield more price but also incur more costs. So the margins are better in bulk. Regarding volumes, we noticed a first stage of recovery until June, followed by a rise in volumes starting in July. This recovery that we began seeing in July is approximately 30% up compared to the figures of the first six months. Maintaining this tendency suggests we could see a recovery or an increase in volumes for next year in double digits. A lot of news has been published around the potential recovery of the mortgage market in Argentina. Can you provide some insight on what you're observing on the ground? How strong might this recovery be? Are banks engaging in the mortgage market? Are you starting to see permit activity and related construction activity, or is it too early to tell? Yes. Clearly, this is something we have always emphasized as vital for growth. In recent months, we have noticed a recovery in real estate sales, and there is significant opportunity for growth in this area. Many of these sales will likely lead to future construction projects. If this trend continues, it will positively affect future cement sales.

We'll conclude our question-and-answer session. I would like to turn the conference back over to Diego Jalon for closing remarks.

Thank you, everyone, for joining us this morning. It was a pleasure for us to have this call. We look forward to meeting you again in our next call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a pleasant day.