Loma Negra - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Loma Negra Second Quarter 2023 Conference Call and Webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 that this event is being recorded. I would like now 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, 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.

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

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 question. Starting with the slide two. I'm very pleased to present you this second quarter, as we are highly satisfied with the results achieving during this period. The macroeconomic struggle and the increasing political uncertainty as we approach the presidential election, started to affect the level of economic activity. In this context, the contraction activity at the cement industry remained resilient, with sale volume tracking second for the second quarter in historical terms, despite showing a decrease year-on-year.

Moreover, for first six months of the year, set a new record, slightly surpassing the mark reached in 2022. Our top line for the quarter reached ARS 51 billion, decreasing 6.5%, primarily due to contraction of our core segments, Cement, partly compensated for the good performance of Concrete, reflecting the positive momentum of the bulk dispatch model. Our adjustment, EBITDA, for the second quarter stood at $63 million, flat from the second quarter 2022. When measuring pesos, it showed a decrease of 26.1% compared the same quarter last year, adjusted by inflation. Consolidated margin suffered some compression, primarily due to decrease in the Cement segments and increased participation in the top line of Concrete with lower margin. Despite the contraction, the margin for the Cement segment continued to rank among the world-class EBITDA margin in the industry.

In this sense, the U.S. dollar EBITDA per ton stood at $36.8 for the quarter, 1% above last year, second quarter. This set of results allowed us to keep on maximizing value to our shareholder. In this sense, this quarter, we announced two dividend payments that, adding the one we distributed in January, sums the total amount of approximately $120 million, representing approximately $1 per share. We achieved the always maintain a strong balance sheet with a low indebtedness ratio to stood at 0.82 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 four. As you can see on this slide, the last market expectation report from the Central Bank worsened their estimates for 2023, reflecting the increase in economic uncertainty and a lower level of overall activity. While the construction activity shows mixed results for the first half of 2023, the cement national industry sales show resilience. Despite posting a decrease of 1.9% for the quarter, this second quarter is the second best in history, only behind.

... Second quarter of 2022, and the cumulative figure for the first half of this year is record for a semester for the whole industry. Although still in high figures, bag cement is a dispatch mode showing contraction, reflecting lower demand from the retail sector. On the other hand, bag cement continues to show solid growth, underpinned by concrete producer demand, boosted mainly by private infrastructure, projects, and public works. In this sense, when seeing the breakdown by dispatch mode, bulk shipments continue to gain terrain, showing a participation of 45% against 43% in second quarter of 2022, and reaching a record high for the quarter.

Even considering the strong resilience of the cement industry, the lower activity level of the economy in the recent months, together with a high inflation, reflects the effect of the economic challenges, coupled with an increased uncertainty driven by the upcoming elections. For the second half of the year, we expect volumes to be slightly below the 2022 figures, but to remain in robust shape in historic terms. Turning to Slide five for a review of our top-line performance by segment. Top line was down 6.5% in the second quarter, where the good top-line performance of concrete and aggregates partially offset the declines in cement and railroad.

Cement, masonry cement, and lime segment was down 12.4%, with volume contracting 3.6% year-on-year, mainly due to a decline in bag cement sales, coupled by softer price dynamic that even moving with inflation, show a decrease due to higher monthly inflation figures and price adjustment timings. Concrete revenue strongly increased 26.6% in the quarter. Volumes were up 14.8%, in line with the strong momentum of bulk cement, coupled with good pricing performance. Private construction and public works, especially urban pavement and routes projects in the province of Buenos Aires, boosted dispatches. Aggregate segments show an expansion of 1.8%, with a sales volume down of 8.3%, mostly due to operational setbacks that affected the dispatching, compensated with strong price performance.

On the other hand, railroad revenues decreased 13.4% in the quarter year-on-year. Transported volumes were down 9.6%, affected by the decrease in transported volumes of rock, sand, and aggregates. The lower volumes of rock and sand also affected the average price per ton, as it is by far the products with longer average transported distance. Moving on to Slide seven. Consolidated gross profit for the quarter declines 21.1% year-over-year, with margin contracting by 437 basis points to 23.7%. Mainly impacted by a lower price performance and sales volumes of our core segment, partially compensated by better performance in concrete. Regarding the cement segment, a decrease in electrical energy inputs and lower depreciations helped to mitigate the gross profit compression.

Also, the increase in sales volumes in segments with lower margins, in this case, concrete, also contributed to compression of the consolidated figure. Finally, SG&A expenses as a percentage of revenues increased 68 basis points to 9.4% from 8.7% in the second quarter of 2022. Please turn to Slide eight. Our adjusted EBITDA for the quarter stood at $63 million, remaining flat from the same quarter a year ago and maintaining very strong figures. In pesos, adjusted EBITDA was down 26.1% in the quarter, reaching ARS 11.7 billion, with consolidated EBITDA margin of 22.9%, contracting 608 basis points year-on-year, mainly affected by cement margin contraction and the higher participation in the top line of concrete, a segment with lower margins.

Cement adjusted EBITDA margin stood at 27.1%, contracting 536 basis points, mainly affected by lower top-line performance. In a per ton basis, EBITDA reached $36.8 per ton, increasing 1% from last year's second quarter. Concrete adjusted EBITDA increased to ARS 187 million compared to second quarter of 2022, mainly explained by the positive price performance and higher volumes. Margin expanded 580 basis points, reaching 2.7%. Aggregates adjusted EBITDA decreased ARS 62 million this quarter from ARS 138 million in second quarter of 2022, reaching a margin of 5.3%. The segment's positive momentum encountered some operational setbacks in the quarter, which momentarily affected dispatches.

Railroad adjusted EBITDA decreased ARS 125 million to ARS 42 million for the quarter, with a margin of 0.8%, mainly explained by lower transported volumes of frac sand and aggregates that put pressure on cost, and the incidence of the decrease in frac sand in the average transported distance that negatively impact the average price per ton. Moving on to the bottom line on Slide 10. This quarter, we posted a net profit attributable to owners of the company of ARS 2.5 billion, compared with ARS 5.4 billion on the second quarter of last year, where the lower operational result was coupled with higher financial cost.

Total net financial cost to be adjusted with non-cash effects, coupled with a positive effect of the changes in operating assets and liabilities, explain the positive variation against second quarter of 2022. Regarding CapEx, we allocated ARS 3.1 billion, mostly for maintenance CapEx. During the quarter, we increased our debt in $77 million, standing our net debt at $186 million at the end of this quarter. Breaking it down by currency, the total denominated debt represents 53% of the total debt, while the rest is in Argentine pesos and a not significant part in euros. As we mentioned before, in the quarter, we announced dividends payments for ARS 35.9 billion.

The one announced in May was paid in kind through Argentine T-Bills, while the second one was announced in June. The payment was made effectively in July, and it was paid in cash. So far this year, we have paid approximately $120 million, which is equivalent to approximately $1 per ADR. Additionally, during the quarter, the company issued its Class two domestic bond, denominated in U.S. dollars, for a total amount of $71.7 million, with maturity in December 2025 and accruing interest at a rate of 6.5% per year. The response from the market was very positive and ratifies the investors' confidence in Loma. 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. Now, to finalize the presentation, I please ask you to turn to Slide 13. To finalize this presentation, I would like to highlight a few final takeaways. We managed to achieve this solid result despite the prevailing political and macroeconomic challenge during the period that are already affecting the economy, as indicated, the last monthly estimate of economic activity published by the INDEC. As we approach the presidential election, we are aware of the growing political uncertainty, which adds complexity to the business environment. Nevertheless, the industry remain resilient, and 2023 will probably end up being the second-best year in history in terms of sale volume. This robustness, coupled with our strategic approach, put us in good shape to navigate through this obstacle and maintain a strong performance. We have reached significant milestone, reflecting the hard work and dedication of our entire teams.

We extend our gratitude to our employee, customer, business partner, and the community where we operate for their ongoing support, and we look forward to a prosperous and sustainable future. This end of our prepared remarks. 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. 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 then one on your telephone keypad. We also would like to ask that you please limit your question to one question and one follow-up, please. If you have additional questions, you may requeue for those questions, and then they will be addressed. 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 with Rodrigo Nestor with Latin Securities. Please go ahead.

Speaker 5

Hi, this is Pedro Moura, filling in for Rodrigo Nestor. Thanks for the opportunity of asking questions. Well, I have two. Given the industry's recent deceleration, what are your projections for demand in the second half of the year, especially regarding the balance between bagged and bulk sales? That's the first one. Well, the second one is additionally considering election year and ongoing inflation, what do you expect in terms of pricing and cost pressures? What can you do to offset this negative impact?

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

Hi, Rodrigo. Thank you for your question. Hi, Rodrigo. Con respecto a volúmenes para el año, lo que estamos previendo es una pequeña desaceleración respecto del año pasado, similar a lo que viene actualmente. Regarding volumes for what remains of the year, we are expecting a slight deceleration, more or less what we have seen in the last couple of months. Particularmente en julio, el volumen fue un poco menor por el impacto que tuvo los altos días de lluvia que tuvimos. Particularly in July, the volume was affected due to the bad weather. Si vemos los volúmenes ya de agosto, están similares a como venía junio, es levemente abajo del año pasado.

If we see what is going on in August, we, we can say that volumes are more like, more like of June, where the volumes were slightly below 2022. Con esa proyección prevemos terminar el año, abajo del año pasado, siendo el segundo mejor año de la historia en cemento. With these projections, we expect to end 2023, even down 2022 figures, but still remaining the second best year in, in the, in history. Respecto de, de precio y márgenes, seguimos con, con nuestra estrategia de, de aumentar precios en, en línea con nuestra inflación de costos. Regarding prices and, and margins, we keep on our strategy of implementing prices, keeping, keeping our margins and, and considering what is going on with our costs.

Lo que suele pasar en estos periodos con altos índices de inflación, que cualquier demora o cualquier pase tiene algún impacto en los márgenes. What happens with this high inflation periods is when you have some delay in adjusting prices, you may have some temporal impact in margins. No estamos viendo ningún cambio en la dinámica competitiva de pricing de los últimos años. We are not expecting any competitive change of what we have been seeing in the last couple of years.

Speaker 5

Okay, thank you very much.

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

You're welcome.

Operator (participant)

The next question comes with Daniel Rojas with Bank of America. Please go ahead.

Daniel Rojas (VP and Equity Research Analyst)

Good morning, gentlemen. Thank you for taking my call. Along those lines, for the second half of the year, and the outlook, regarding natural gas prices, what are you expecting, the trend to be, and how do you expect this to impact margins? This in light of the fact that you've started hooking up to the Néstor Kirchner gas pipeline. Thank you.

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

Hi, Daniel. Thank you for the question. Con respecto a los precios de gas, nosotros tuvimos durante el año pasado un aumento en los precios de los contratos de gas. Regarding natural gas, we had last year an increase in the contracts that we closed. Esos precios iban básicamente hasta este invierno. Those prices were up to this winter. A partir de septiembre, octubre, tenemos nuevos contratos de gas, que ya hemos firmado, con precios inferiores a los actuales. Starting September and October, we started new contracts with prices below the ones we closed last year. Adicionalmente, algunos de esos contratos, a diferencia de años anteriores, los hemos hecho por periodos más largos que un año, que era lo habitual.

As a difference from what we did in the past, these new contracts have longer terms than, than the ones that we signed in 2022. Y respecto de los márgenes, los márgenes para adelante deberían ser un poco mejores que el último trimestre, ya que el último trimestre claramente están impactados por, por el efecto del invierno y algunos otros efectos en costos producto de la inflación. Looking forward, margins should be better than the ones we, we, we saw because we're going to, we're, we're not going to see the, the effect of the, of the winter energy terms. De modo que vamos a ver a márgenes similares a lo, a lo inicio del año y a medio del año pasado.

Margins should be more alike than what we saw in, in the first Q of, of this year and the last Q of 2022. Siempre mirando por negocios, obviamente, en la medida en que los negocios con menor margen aumenten, eso va a impactar en el margen consolidado. Obviously, considering that if the, if the businesses with lower margins increase their, their, their weight in the aggregated figures, that, that is going to impact the consolidated margin.

Daniel Rojas (VP and Equity Research Analyst)

Thank you. In the concrete business, the high growth we've been seeing, do you think it will continue to the second half and early part of next year? Or should we expect it to normalize from here on? Thank you.

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

Creemos que aún el mercado de hormigón tiene para seguir creciendo en participación. We think that the concrete business has room to still growing. Al igual que en otros mercados, digamos, en la medida que haya más profesionalización de la industria y demás, el hormigón debería ser un canal que aumente y por consecuencia, el granel. In the ind-- if the industry gets more professionalized, the... This, this channel of selling cement should increase its participation.

Daniel Rojas (VP and Equity Research Analyst)

Okay. Thank you.

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

You're welcome.

Operator (participant)

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

Diego Jalon (Head of Investor Relations)

Thank you for joining us today. We truly appreciate your interest in Loma. As we look forward to meeting you again in our next call, we remain available for any questions that you may have. Thanks again, and have a nice day.

Operator (participant)

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