Loma Negra - Q1 2023

Transcript

Operator (participant)

Good morning. Welcome to the Loma Negra Q1 2023 conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. 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 translation. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note 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.

Diego Jalon (Head of Investor Relations)

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. 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.

Sergio Faifman (CEO and VP of the Board of Directors)

Thank you, Diego. Hello, everyone, and thank you for joining us this morning. As usual, I would like to begin my presentation with discussion of the highlights of the quarter, and then Marcos will take you our market review and financial result. After that, I will provide some final remark, and then we will open the call to your question. Starting with slide 2. We started the year in a very good shape, and we are very pleased to share with you another quarter of solid result. Amid the increasing macroeconomic uncertainty, the industry remained recently, maintain the positive momentum and setting another quarter of growth. Bulk cement demand is contributing to the strength boosted by private and public small infrastructural works. Our top line for the quarter increased 2.9%, with same volume growing above the industry and boosted by the increased activity of concrete and aggregates.

Our adjustment, EBITDA, for the Q1 stood at $63 million, up 15% from Q1 2022. When measuring pesos, it showed a decrease of 19.7% compared to the same quarter last year, adjustment by inflation. Although margin suffered some compression to the higher energy inputs in the cement segment and increased participation in the top line of the other segments with lower margin. We keep on delivering world-class EBITDA margin. In this sense, the U.S. dollar EBITDA per ton stood at some $40 for the quarter, 1.6% above 2022 Q1. Continuing our focus of maximizing value to our shareholder at the beginning of the year, we distribute a dividend payment of $19.5 million.

Additionally, we recently announced and distribute in kind another dividend for the amount of ARS 22.2 billion, always maintaining a strong balance sheet with a low indebtedness ratio of 0.46 times. 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.

Marcos Gradin (CFO)

Thank you, Sergio. Good morning, everyone. Please turn to slide 4. As you can see on slide 4, even though 2022 ended posting a 5% growth, the Q4 started to show a deceleration. The last market expectation report from the Central Bank shows a shift in the estimations for 2023, driving the growth expectation to negative terrain and reflecting the increase in the economic uncertainty. While the construction activity shows mixed results for the first month of 2023, with a retraction in February, the cement national industry sales shows a resilient growth of 3.1% for the quarter, despite the strong base of comparison and the challenging environment. Although still in high figures, bagged cement shows a year-on-year contraction, while bulk cement continues to be the dispatch modality boosting growth.

Concrete producer demand is a principal contributor to bulk performance, driven mainly by private infrastructure projects, both residential and industrial, coupled with a small and midsize public works that are gaining more incidence in the shipments.

In this sense, when seeing the breakdown by dispatch mode, bulk shipments continues to gain terrain, showing a participation of 43% against 40% in first quarter of last year. Even this positive start of the year, we remain cautiously optimistic for the upcoming month, as economic volatility will probably increase as we approach the elections, this might affect the level of activity. Turning to slide five for a review of our top-line performance by segment. Top line was up 2.9% in the Q1, mainly due to increase in concrete and aggregates revenues. That mode compensated the decrease in the second segment. Cement, majorly cement online segment, was down 3.5%, with volumes growing 4.3% year-on-year, with a softer pricing dynamic. Concrete revenues increased sharply 32.8% in the quarter.

Volumes were up 26.2% in line with the strong momentum of bulk cement, coupled with good pricing performance. In the same way, aggregates show a significant top line expansion of 65.3%, with the sales volume increasing 47%, primarily on the back of concrete demand, coupled with strong price performance. Railroad revenues decreased 5.7% in the quarter year-on-year. Transported volumes were down 7.4%, where the strong transported volumes of aggregates partially upset the decrease in cement and fraction. Despite the negative effect in price of the lower volume of fraction due to its higher transported distance, the prices had a good performance in this quarter.

Moving on to slide 7, consolidated cost profit for the quarter declined 15.3% year-on-year, with margin contraction by 591 basis points to 27.5%, mainly impact by a lower price performance of our core segment, higher costs related to higher thermal energy inputs, mainly due to stimulus plans to increase natural gas production, partially compensated with a decrease in electrical energy inputs and depreciations. The significant increase in sales volumes in segments with lower margin also contributed to the compression of the consolidated figure. The contraction in cement, railroad and concrete, gross margin was slightly upset by a better performance of aggregate. Finally, SG&A expenses as a percentage of revenues decreased 44 basis points to 9% from 9.5% in the Q1 of 2022. Please turn to slide 8.

Our adjusted EBITDA for the Q4 stood at $63 million, up 5.8% from $60 million in the same quarter a year ago. In pesos, adjusted EBITDA was down 19.7% in the quarter, reaching ARS 10.6 billion with consolidated EBITDA margin of 26.2%, contracting 738 basis points year-on-year, mainly affected by seven margin contraction and the higher participation in the top line of the other segments with lower margins. Cement adjusted EBITDA margin stood at 31.2%, contracting 625 basis points, mainly affected by a softer pricing dynamics and higher thermal energy inputs. In a per-ton basis, EBITDA reached $40 per ton, increasing 1.6% from Q1 of last year.

Concrete adjusted EBITDA decreased ARS 21 million compared to Q1 2022, mainly explained by higher cost of aggregates and freights, partially compensated by a positive price performance and higher volumes. Margin construction of 33 basis points, reaching a negative 1.2%. Aggregates adjusted EBITDA improved ARS 272 million this quarter from negative ARS 37 million in the Q1 of 2022, reaching a margin of 17.6%, reaffirming the good momentum for the segment, coupled with a better operational performance. Railroad adjusted EBITDA decreased to ARS 137 million to negative ARS 38 million for the quarter, with a negative margin of 1.2%, mainly explained by lower transported volumes that put pressure on cost, partially compensated with better price performance. Moving on to the bottom line on slide 10.

This quarter, we posted a net profit attributable to owners of the company of ARS 5.3 billion, compared with ARS 6.5 billion on Q1 2022, where the lower operational result was coupled with higher financial cost. Total financial cost stood at ARS 19 million this quarter from a total financial gain of ARS 452 million the same quarter last year, where the positive effect of the result of the monetary position partially compensated decrease of the net financial expense generated due to the higher debt position and the higher negative FX of the exchange rate. Moving on to the balance sheet, as you can see on slide 11. We ended the quarter with a cash position of ARS 19.4 billion and total debt at ARS 42.3 billion.

Consequently, our net debt to EBITDA ratio stood at 0.46x compared to 0.47x at the end of 2022. Our operation cash generation stood at ARS 4.43 billion, while increasing the net profit adjusted with the non-cash FX, partially compensated the negative effect of the changes in operating assets and liability. Regarding capital expenditures, we allocate ARS 1.8 billion, mostly for maintenance CapEx. During the quarter, we increased our debt in $19 million, outstanding our net debt at $109 million at the end of this quarter. Breaking it down by currency, the dollar-denominated debt represents 30% of the total debt, while the rest is in pesos.

As we mentioned before, in the quarter, we distributed dividends for $19.5 million. We recently approved a new dividend of ARS 22.2 billion that was paid in kind through Argentine Treasury bills. Additionally, in the quarter, the company issued its Class 1 domestic bonds for the total amount of ARS 25.6 billion, with maturity in August 2024. This first issuance was well received by the market and is a sign of the trust placed in our company. Now for our final remarks, I would like to handle the call back to Sergio. Thank you.

Sergio Faifman (CEO and VP of the Board of Directors)

Thank you, Marcos. To finalize the presentation, I please ask you to turn to slide 13. To wrap up this presentation, I would like to highlight a few final takeaways. At LOMA, we are pleased to see how firm the industry remaining at this start of the year, positing growth figures despite the already strong base of the corporation. We are following with attention the evolution of the economy as we approach the presidential election, which could affect the volume of the industry for the remain of the year. In this context, we remain focused on managing the business to keep on delivering strong results. We consider the maximization of value generation to our shareholder one of our main objectives.

This is why, in addition to the dividend payment that we distributed in January, we recently approved a second dividend payment that was distributed in kind, seeking to fulfill our goal in the most efficient way. I would like to conclude by thanking all our people and stakeholder for their commitments and supports. This is end of our prepared remark. We are now ready to take a question. Operator, please open the call for question.

Operator (participant)

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star then two if you would like to remove your line. For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the keys. Once again, star one on your telephone keypad. We also would like to ask that you please limit your questions to one question and one follow-up. Please, if you have any additional questions, you may re-queue for those questions, and they will be addressed. Also, please note that Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. Please hold momentarily while we assemble our roster.

The first question comes from Alberto Valerio with UBS. You may now go ahead.

Alberto Valerio (Associate Director and LatAm Transportation Equity Research Associate)

Hi, Marcos and Sergio. Thanks for taking my question. One thing that I was a little bit surprised on the results was the increase on the energy expense. On the other hand of the global energy price, maybe Argentina's dynamic is a little bit different. If you could give some color about the contracts that we have for the remainder of the year and what we should expect on this line. Thank you very much.

Sergio Faifman (CEO and VP of the Board of Directors)

Hi, Alberto. Good morning, and thank you for your question. In energy, thermal energy, we had an increase this year and also by the end of last year. The good news there is that this increment was lower than you could see in other regions. The outcome for the near future is also positive. To have an idea, this year we should be around $3.2 the million BTU. Several contracts that we already signed for the next few years are below $3.

Alberto Valerio (Associate Director and LatAm Transportation Equity Research Associate)

Fantastic.

Operator (participant)

Our next question will come from Daniel Rojas with Bank of America. You may now go ahead.

Daniel Rojas (VP and Equity Research Analyst)

Good morning, gentlemen. Thank you for taking my call. Just to follow up on the last question in terms of thermal costs. That contract you say you signed below $3, it is related to the gas pipeline expansion? Can we assume that going forward, one of your competitive advantages will be your ability to tap into much lower gas costs coming from Vaca Muerta? I know it might be too early, but can you share with us the savings in terms of EBITDA or EBITDA margins that you think you can gain from this competitive advantage? Thank you.

Sergio Faifman (CEO and VP of the Board of Directors)

Daniel, Morning, Daniel, thank you for your question. The pipeline is moving forward in as scheduled. The forecast of production in Vaca Muerta for next year are very good. Several of the contracts that we signed are linked to this improvement in production. We're coming before the improvement in the price of the gas that we are paying is going to lead to an improve also in our margins for the next few years. Regarding gas supply, we don't see any competitive advantage with the other cement producers in Argentina.

Daniel Rojas (VP and Equity Research Analyst)

Thank you. A follow-up if I, if I may. I don't want. I'm sorry for trying to for you to become political analysts. If you could gauge a little bit of what's happening in the political scenario in Argentina. One of the candidates that's leading ground lately has talked a lot about changing the dynamics of how public bidding is done in Argentina or how public constructing is done. I know it's early, but what are your thoughts on the political change that may come and the implications for public spending?

Sergio Faifman (CEO and VP of the Board of Directors)

The macro political scenario is very volatile these days close to the elections. We would like to remark is that the participation of public spending in the total volume of cement demand is quite low. For every government, public spending, an incentive or a way to celebrate the level of activity of the economy. The infrastructural deficit in Argentina is a point that we can see even in housing and infrastructure in general. Minor point between all the political parties. Is how this infrastructure issue should be financed. If it's only the public sector, the private sector or a mix between the two.

We should all agree that, if we think that Argentina needs to grow in the, in the next few years, that this infrastructure deficit should be taken care of.

Daniel Rojas (VP and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Again, if you have a question, please press star then one. Our next question will come from Rodrigo Nistor with Latin Securities. You may now go ahead.

Rodrigo Nistor (Head of Equity Research)

Hi. Good morning. Thank you for taking my question. Given the current elevated inflation environment, could you please discuss your pricing strategies, specifically the frequency of price increases and how these adjustments are impacting demand for your cement products? If you have observed any changes in demand as a result of the recent fluctuations in the blue chip sector? Thank you.

Sergio Faifman (CEO and VP of the Board of Directors)

Sorry, Rodrigo, could you repeat the last time? We didn't hear you well. The last part.

Rodrigo Nistor (Head of Equity Research)

The whole question, please. If you have observed any changes in demand as a result of the recent fluctuations in the blue chip swap rate?

Sergio Faifman (CEO and VP of the Board of Directors)

Yeah. Rodrigo, [Foreign language]. Good morning, Rodrigo. Thank you for your question. [Foreign language]. Regarding prices, we are increasing prices in a monthly basis. [Foreign language]. As we always say, it's a combination between our cost inflation and obviously also the most inflation in general and the effects. [Foreign language]. This start of the year or the accumulator of the year, we are mostly in line with inflation. [Foreign language]

Regarding the volatility of the market. [Foreign language] The macro politics situation always bring some noise. [Foreign language] On the other hand, when the gap between the official effects and the blue chip, the blue chip effects widens, this typically brings some. It's a driver for the.

Operator (participant)

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

Diego Jalon (Head of Investor Relations)

Thank you all for joining us today. As always, we really appreciate your interest in Loma. As always, we will remain available for any other questions that you may have. Have a nice day. Thank you.

Operator (participant)

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