Loma Negra's (LOMA) CEO Sergio Faifman on Q4 2019 Results - Earnings Call Transcript

Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Q4 2019 Earnings Conference Call March 11, 2020 10:00 AM ET

Company Participants

Gastón Pinnel – Head-Inventor Relations

Sergio Faifman – Chief Executive Officer and Vice President-Board of Directors

Marcos Gradin – Chief Financial Officer

Conference Call Participants

Operator

Good morning, and welcome to Loma Negra Fourth Quarter 2019 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 – by an English translation. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Gastón Pinnel, Head of IR. Please go ahead.

Gastón Pinnel

Thank you. Hi, good morning. Thank you for joining us today. We appreciate your participation in this conference call. By now, everyone should have access to our earnings press release and today's call's presentation, both of which were distributed yesterday after market closed.

Speaking during today's call will be Sergio Faifman, our CEO and Vice President of the Board of Directors together with our CFO, Marcos Gradin. Both will be available for the Q&A session right after the presentation.

Before we begin, 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.

Now I would like to turn the call over to our CEO, Sergio Faifman.

Sergio Faifman

Thank you, Gastón. Hello, everyone, and thank you for showing up today. I am pleased to welcome you to Loma Negra fourth quarter 2019 earnings conference call. We will begin our presentation with a discussion of the highlights of the quarter, and then Marcos will take you through our market review and financial results. Afterwards, I will make some closing remarks. Finally, we will open the call to your questions.

Once again, the company has shown the capacity to adapt to a challenging context of currency depreciation, high inflation, activity contraction, by optimizing the cost of production. Improving margin enabled us to sustain a profitability measured in U.S. dollar.

As shown on Slide 3, the fourth quarter was characterized by a long political transition amid great financial instability, both factors ending up postponing the economic recovery and negatively impacting the construction sector. As shown on this slide, net revenue declined by 15%, mostly impacted by Cement and Concrete segment in Argentina, particularly as much of the public and private infrastructure projects were put on hold. Adjusted EBITDA also declined by 13%, but thanks to positive pricing and the commitment in cost control, we were able to expand the margin by 69 basis points.

On the back of our competitive leadership and our determination to undertake structural change, we reached, in 2019, an adjusted EBITDA of $189 million. And when excluding the nonrecurring cost of structure adequacy, adjusted EBITDA will have reached $209 million, representing a margin expansion of 378 basis points. We continue executing our expansion project at L´Amali plant as it's part of our strategy and will allow us to continue increasing production, efficiency and profitability.

I will now hand off the call to Marcos Gradin. Please, Marcos, go ahead.

Marcos Gradin

Thank you, Sergio. Good day, everyone. Turning to Slide 4. Let me start by providing a quick outline of the macro environment and industry trends in Argentina. After the presidential elections in October last year, the outgoing government had to make some measures to recover the stability of the financial system, exchange and capital control and renegotiation of public debt, among others. These measures ended up deepening the ongoing economic and financial crisis, negatively impacting the construction activity, both from the public and private sector.

During the fourth quarter, the cement industry declined by 9.4% year-over-year. Taking a closer look at the cement demand by segment, we observed that the trend of the third quarter is maintained where the bag segment continues to recover percentage of sales at expense of bulk segment. Bag segment declined by 3.1% and bulk decreased by 17.2%. Consequently, the share of cement sold in bag increased by almost 4 percentage points from 57% in fourth quarter 2018 to almost 61% in fourth quarter 2019.

By the year-end, the incoming government took steps to achieve an economic recovery, reschedule sovereign debt maturities and regain confidence. We are still under this process. Therefore, we do not foresee an economic recovery before the second semester of the year. Last year ended up with an annual volume, 6.8% below that of 2018 and 9% below than 2017 historic record. Economy's expectation for 2020 GDP stands at minus 1.5%. Therefore, we expect a mid-single-digit decline by year-end, with a recovery only by the second half of the year.

Now please turn to Slide 5 for a review of our revenue performance by segment. Top line was down 15% in the fourth quarter as a persistent economic contraction impacted the construction activity. Cement revenues dropped by 9.1%, impacted by sales volume drop of 11.1%, which was partially compensated by real terms price increases. As a consequence of the suspension or postponement of large public and private projects, Concrete and Aggregates segment presented a sharp decline in sales volume, coupled with softer prices, resulted in a revenue drop of 15.2% and 25.1% year-over-year, respectively.

By contrast, in Paraguay, the demand remained strong. Although revenues were down 4.3%, with volumes declining 3.8% as the operation was affected by adverse weather conditions. For the Railroad segment, frac sand transported volumes contributed positively to revenues. However, it was not enough to compensate the drop in building materials and chemicals volumes, resulting in a total decline of 15.5%.

Moving on to Slide 6, consolidated gross profit for the quarter was down 13% year-on-year with a margin expansion of 68 basis points, reaching 30% in the quarter, reflecting production costs under control, and also the benefit from the footprint adequacy efforts achieved in the previous quarters.

SG&A expenses as a percentage of revenues increased by 146 basis points to 8.3%, impacted by the drop in revenues. Effective sales tax rate kept improving from 1.68% in fourth quarter 2018 to 1.5% in fourth quarter 2019. During the year, gross profit expanded by 3% and margin improved 230 basis points.

Please turn to Slide 7. Impacted by the plunge in month, our adjusted EBITDA declined by 13.1% in the fourth quarter in a year-on-year basis. However, due to a tight cost control and positive pricing, margin expanded by 69 basis points. Main cost benefits revolve around energy inputs and previous structural adequacy efforts. We reached consolidated adjusted EBITDA of around ARS2.9 billion or $49 million.

For the full year 2019, we reached $199 million of adjusted EBITDA. And when excluding the nonrecurring cost of structure adequacy, adjusted EBITDA would have reached $209 million or 5% below 2018's EBITDA. When excluding the application of inflation accounting, adjusted EBITDA for the Cement segment in Argentina posted a margin expansion of 135 basis points to 36%, likewise, Paraguay EBITDA margin improved 228 basis points compared to fourth quarter 2018, reaching 42.6%.

Our Concrete segment reported a decline in adjusted EBITDA, reaching negative ARS27.3 million, as this segment was more directly impacted by the hold in public and private infrastructure projects. Equally, Aggregates segment adjusted EBITDA declined year-over-year to ARS5.2 million. Encompassed with the building materials sector, our Railroad segment EBITDA contracted by almost 8%, partially compensated by transported goods with a margin of 12.3%. In terms of EBITDA per ton measured in U.S. dollars, our Cement business in Argentina remained strong, around $32 per ton, 1% over the year ago quarter.

Moving on to the bottom line on Slide 8. Net maturity income for the quarter reached ARS1 billion. Total financial results presented a loss of ARS200 million compared to a gain of ARS351 million in the fourth quarter in the previous year. The FX appreciated in real terms during the quarter resulted in a foreign exchange gain of ARS353 million, still ARS135 million lower than that of fourth quarter 2018. The higher interest rate environment and the higher gross debt resulted in higher net financial expense of ARS445 million, above the year ago figure. The net positive monetary position resulted in a gain of ARS89 million.

Moving on to the balance sheet. As you can see on Slide 9, we continue to make progress in our capital expenditure plan with investments for the quarter, reaching ARS2.4 billion or $40 million approximately. We finished the fiscal year 2019 with a net debt to adjusted EBITDA ratio of 0.86 times compared to 0.43 times at the beginning of the year.

Our net debt at the end of the quarter was $161 million, with a gross debt breakdown by currency of 49% in third currency, 25% in guarani and 26% in Argentina pesos. We recommended the Board to fully reinvest Loma Negra's 2019 earnings, but we continue to execute the expansion of our L´Amali plant, a key element of our long-term strategy.

I will now hand the call back to Sergio.

Sergio Faifman

Thank you, Marcos. Now please turn to Slide 10. I would like to conclude by combining our satisfaction with the results achieved in 2019. In the context of economic contraction and high financial volatility, the company showed its flexibility for the adaptation. Our competitive leadership and our determination were a critical factor to carry out structural change necessary to face the changing situation.

On the back of these factors, we had reached, in 2019, an adjusted EBITDA of $199 million. And when excluding the non-recurring cost of structure adequacy, adjusted EBITDA will have reached $209 million, with a margin of 31.6%. In this day of the current global uncertainty and volatility around the effect of the coronavirus and the oil price plummet, it's hard to provide an outlook for 2020.

However, our previous estimation considered a consensus showing another year of middle single-digit contraction, though with an expectation for a recovery by the second semester. Our long-term perspective has not been conditioned by these short-term challenges and we maintain our costs, betting and trusting in the progress and development of Argentina, contribute to narrow the housing and infrastructure deficit. This is the reason why we continued executing an expansion project at the current L´Amali plant as a part of our strategy and will allow us to continue increasing production, efficiency and profitability to let us thrive in the future.

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

Question-and-Answer Session

Operator

Gastón Pinnel

Thank you for joining us today. We appreciate your interest in our company, and we will look forward to meeting more of you over the coming months and providing financial and business updates for the next quarters. In the meantime, the team remains available to answer any questions that you may have. Thank you very much and enjoy the rest of your day.

Operator

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