Loma Negra - Q2 2024
August 8, 2024
Transcript
Operator (participant)
Good morning, and welcome to the Loma Negra Second Quarter 2024 Conference Call and Webcast. All participants will be in the 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. Also, 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 Jalón, Head of Investor Relations. Please, Diego, go ahead.
Diego Jalón (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 start my presentation by discussing the highlights of the quarter. Then, Marcos will take you through our market review and financial results. Following that, I will share some final remarks before opening the call to your questions. Starting with slide two. We are glad to report another set of solid results. After starting the year in a very challenging scenario with significant year-on-year volume decline, our business delivered in the second quarter an adjusted EBITDA margin expansion, driven by our constant focus on profitability and cost control initiatives. This demonstrates our strong capability for efficiency and flexibility in adapting to challenging scenarios. Fortunately, we are starting to see a gradual but consistent recovery in cement volumes. But before diving into the details of the industry, let's review the financial highlights of the quarter.
As I mentioned before, in the second quarter, Loma has demonstrated resilience and its operational and competitive strengths. Our top line stood at ARS 166.1 billion, decreasing 28% in the quarter, with cement volume down 32.5%. The consolidated adjusted EBITDA reached $51 million or ARS 38 billion in the second quarter, only down 11.7%, despite the hard drop of volume dispatch. This result was possible due to the good expansion of the EBITDA margin of the cement segment. It pulls the consolidated EBITDA margin to 28.1%, expanding 520 basis points year-on-year. In the same sense, EBITDA per ton reached the record period of $45, up 23% year-on-year and 15% on the sequential basis.
On the financial side, our balance sheets remain strong, with net debt of $270 million. On the upcoming quarter, with less demanding capital needs, we will use our cash generation to gradually reduce our short-term peso indebtedness. 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 shown in the chart on the lower left, the Central Bank Market Expectations Report suggests that the economy might have experienced its most significant quarterly downturn in the first quarter of this year, with a more optimistic forecast for the second half. When we examine the figures for our industry, the construction activity indicator reveals a gradual improvement after hitting a low in March. The monthly cement sales chart for the industry reflects the same pattern of continuous sequential recovery. Even though June seems to break the trend when removing the effect of few working dates during the month, the average daily dispatches show that the positive trend is in place. Additionally, this July data suggests we are reaching a new level for the second half of this year.
The macroeconomic conditions remain challenging, but as economic variables stabilize, the industry can find a solid foundation for growth. The industry's bulk cement dispatches remain the most affected by this context, down 41% year-on-year, while bagged cement posted a contraction of 24%.
When looking at the breakdown by dispatch mode for the quarter, bulk shipments represent 39% of the total dispatches, while the bag format gained terrain, reaching 61%, 6 percentage points above the second quarter of 2023. Turning to slide five for a review of our top-line performance by segment. The first quarter top line showed a decrease of 28%, mainly due to a lower top-line performance of the cement business, followed by the rest of the segments. The cement, masonry cement, and lime segment was down 26.1%, with volumes contracting 32.5% year-on-year. The decline in volume was partially offset by a strong price performance. Although the contraction affected both dispatch modes, bulk cement was hit the hardest.
In our bulk client segmentation, industry and construction companies remained significantly down, while public works only began to show some early signs of activity towards the end of the quarter. Concrete revenues decreased by 47% in the quarter, mainly due to the 45% decrease in dispatches. The type of projects that are the core of our business are still lagging behind in terms of activity reactivation. Aggregates segment showed a decrease of 36%, with sales volumes down 25%, following the trend of the concrete segment. Finally, railroad revenues decreased by 14.5% in the quarter. Transported volumes were down 22.5%, primarily affected by the lower level of activity in the construction sector, partially compensated by improvements in transported volumes of frac sand and grains. The positive price dynamics also helped compensated for the lower volume.
Moving on to slide seven, the consolidated gross profit for the quarter declined 18.1%, with a margin expansion of 329 basis points to 27%. That partially offset the volume contraction on our core business. Regarding the cement segment, the favorable price trend and strict cost management, along with reduced depreciation, partially mitigate the impact of lower sales volume. Concerning the cost of cement sales, the clinker used during this quarter was mostly produced during the warmer month, when energy inputs were lower. To mitigate higher energy costs and a potential natural gas shortage, most of our kilns were shut down during this quarter. We plan to utilize our clinker stock until spring, at which point we will restart kiln operations. In terms of electrical energy, the company decreased its energy requirements by halting the primary grinding phase on the cement production process.
This enabled us to increase the proportion of renewable energy in our matrix to 61%, up from 36% in the second quarter of 2023, consequently reducing energy costs. Railroad also showed a margin expansion, while concrete and aggregates posted significant contraction, as these segments were more affected by the current context. Finally, while SG&A expenses decreased sharply by 28.5%, mainly due to lower salaries, a decrease in turnover tax and freight costs related to lower volume, and a decrease in insurance cost. As a percentage of sales, it remains flat at 9.4%, despite a decrease in the top line. Please turn to slide eight. Our consolidated adjusted EBITDA for the quarter stood at $51 million.
In pesos, adjusted EBITDA was down 11.7%, reaching ARS 38 billion, with a consolidated EBITDA margin of 28.1%, showing an expansion of 520 basis points year-on-year. On a sequential basis, the margin showed an even higher increase, jumping 552 basis points. Cement segment adjusted EBITDA margin stood at 31.5%, expanding 565 basis points. The positive price performance, a tight cost management, and better energy inputs mitigates the lower sales volume. On a per ton basis, EBITDA reached $45 per ton, increasing 22.6% year-on-year. Concrete adjusted EBITDA decreased ARS 1.1 billion compared to the same quarter of last year, with a margin contraction of 796 basis points, reaching -5%.
It is primarily due to the sharp drop in dispatches, as the recovery of the these types of works that are targeted by these segments are still lagging behind in the recovery. The adjusted EBITDA margin of aggregates contracted to -10.8% from 5.3% in the second quarter of 2023, mainly due to lower volumes, lower fixed cost absorption, and a price performance affected by product mix. Finally, the adjusted EBITDA margin of the railroad segment expanded by 153 basis points in the quarter to 6.3%, primarily due to the positive price performance and boosted by an increase on the average transported distance. Moving on to the bottom line on slide 10.
This quarter, we posted a net profit attributable to owners of the company of ARS 29.6 billion, compared to a net profit of ARS 9.5 billion in the second quarter of 2023. The solid operational performance, despite reduced volumes and a higher overall financial gains, account for the improved results. Financially, the positive effect of inflation on the net monetary position is a primary factor for this variation, along with a reduced impact from exchange rate difference due to the reduced pace of devaluation, a lower net financial cost. However, this gain was partially offset by increase in income tax expenses. Moving on to the balance sheet, as you can see on slide 11, we ended the quarter with a net debt of ARS 119 billion.
Consequently, our net debt to EBITDA ratio stood at 1.26x, compared to 1.4x at the end of 2023, maintaining a comfortable indebtedness position. Our operating activities cash generation stood at ARS 16 billion, compared to a cash generation of ARS 44 billion in the same period, 2023, where the decrease is mainly due to a lower operating performance and higher working capital needs. Our clinker inventories will mostly be used during the winter seasons, when most of the kilns will remain shut down. Regarding capital expenditures, we allocated ARS 16.3 billion, mostly for maintenance CapEx and for the 25 kg bag projects. During the quarter, the company used ARS 2.1 billion in financial activities, primarily for interest payments, which were mostly offset by proceeds from borrowings net of repayments.
In dollar terms, our total debt reached $220 million, standing our net debt at $217 million at the end of this quarter, with a duration of one year. Breaking it down by currency, the dollar-denominated debt represents 63% of the total debt, while the rest is in pesos. The company will address the maturity of the Class 1 bond issued in pesos during this third quarter. As the second half of the year require less capital due to the utilization of stocks during the winter, we will meet the short-term obligation with our cash generation and our bank credit lines. 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. Now, to finalize the presentation, I please ask you to turn to slide 13. Following a challenged start to the year, where the macro environment had a significant impact on the cement dispatch, the second quarter started to show clear signs of recovery, which have continued to strengthen in the recent months, with July figures being very promising. By leveraging our expertise and operational efficiencies, Loma achieved another robust quarter by notable margin growth. We are hopeful that the activity level will maintain the encouraging recovery trajectory. With the establishment of crucial economic factors, including a significant reduction in inflation and measures aimed at attracting foreign direct investment among other initiative, we are confident that the construction industry has a remarkable opportunity on the horizon. 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.
Operator (participant)
Yes, 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 a key. Once again, star then one on your telephone keypad. We'd also like to ask you, please limit your questions to one question and to one follow-up. Please, if you have 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 Paul Smith with UBS.
Alberto Valerio (Executive Director)
Hi, good morning. Actually, it's Alberto Valerio, I think [audio distortion]. Thank you, Sergio, Marcos, and Diego, for taking my question. I have two. The first one, it's about July volumes and price. We see a much better print for the month. Is this a trend or it was a one-off [audio distortion]? And if you permit, my second question, it's about margins. In terms of we see volumes dropping strong, more than 30% year-over-year, but we see margin increase. My question is, is it sustainable for the future? Was an amazing job done for you guys in terms of energy savings, given the inventory over the summer.
But I would like to see for the future if you can keep on this pace or if you could see some reversal on margins. Thank you very much.
Sergio Faifman (CEO and VP of the Board of Directors)
Hi, Alberto. Thank you for your question. [Foreign language].
Speaker 8
Volumes of July, as you have seen, had a very interesting recovery from the volumes shown in June.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language]
Speaker 8
We believe that this trend is going to continue with similar volumes of the ones that we saw in July.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language]
Speaker 8
We believe that, due to several steps that we have achieved in Argentina, we are reaching a new level of dispatches.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
The consolidation of lower inflation, the gap between FXs.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
And are some of the factors that are improving the situation in Argentina.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
The recovery of real wages and the increase in credit, especially in mortgage loans, are also factors that are boosting the dispatches.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
We are starting to see some moderate increases in the level of activity of public works. But we expect to see that trend also improving in the second semester.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
We believe that it will improve in the upcoming months.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
Regarding prices, we expect to maintain this level of prices.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
Our politics regarding prices, as we always say, it follows different issues as the FX, but also the evolution of our internal costs.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
We are not seeing any change in this strategy for the future.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
Regarding margins, even though we might see some impact in the upcoming quarter due to thermal energy.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
But this effect must be very soft. We don't expect a huge change there. And also, we have to consider that in September, we are going to start using the contract that we already signed, and this contract showed a very significant decrease from the levels of the energy inputs that we have been using.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
So for the rest of the year, we are expecting to maintain our margins and even see some improvement in the fourth quarter of the year.
Alberto Valerio (Executive Director)
[Foreign language]. Congrats for the results.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Operator (participant)
Thank you. Thank you, and the next question comes from Marina Mertens of Latin Securities.
Marina Mertens (Head of Corporate Debt Research)
Hi, good morning. Thanks for taking my question. So you mentioned that you expect the recent uptick in activity to continue during the second half of the year. What do you believe will be the main drivers of recovery? Will it be the resumption of public works or private projects? And could the approval of the RIGI have any positive impact on cement dispatches?
Sergio Faifman (CEO and VP of the Board of Directors)
Hi, Marina. Thank you for your question. [Foreign language].
Speaker 8
The drivers are the ones that we just mentioned, and they are impacting more in private works than in public works.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
As we believe, in the next two weeks, we are going to see what the regulation for the RIGI program.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
There are projects, especially in the mining sector, that are on standby, and probably with this new regime, they will be ready to start.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
So with the RIGI and also with the increase in credit lines and with the start of several private works that we have been seeing in the past few weeks or months are the pillars that we expect to see the future growth to sustain with.
Marina Mertens (Head of Corporate Debt Research)
Thank you.
Operator (participant)
Thank you. And the next question comes from Marcelo Furlan with Itaú BBA.
Marcelo Furlan (Equity Research Analyst)
Hi, Sergio. Hi, Marcos. Hi, everyone. Thanks for taking my question here. I have two. The first is related to capital allocation. I mean, the company has been able to deliver still decent results during the first half of this year, despite the economic headwinds and so on. And also the company still have a strong and healthy capital structure. So I'd like to understand, in terms of capital allocation, what are the company's or management's views regarding dividends and CapEx for this year? So this is my first question. And the second question is related to market share. You guys mentioned that you expect to maintain certain price levels for the second half of this year. So I'd like to understand, how is the company thinking about maintaining its market share in the cement market in Argentina?
These are my two questions. Thank you, guys.
Speaker 8
Hi, Marcelo. Thank you for your question. I'm going to start with the second question. The level of prices and market share are two things that we follow up close. And the market share obviously have monthly variations in a plus or minus variation, where we feel comfortable. But we don't have a policy of growing market share with lowering prices, because we believe that this will destroy value for the company in the long term. So the price in this quarter and the prices that you will see in the future are going to be alongside a level of market share in where we feel comfortable.
Regarding capital allocation, in the next quarter, we have some maturities of short-term debt, and we expect to address that with some cash generation and our short-term lines with the banks. Regarding also capital allocation, we are seeing all the alternatives that might add value to the shareholders. In the upcoming months, we will decide what is going to be the destiny of the cash generation of the second semester.
Sergio Faifman (CEO and VP of the Board of Directors)
Thank you.
Marcelo Furlan (Equity Research Analyst)
Okay, thank you so much, guys, and congrats on the results.
Sergio Faifman (CEO and VP of the Board of Directors)
Okay, thank you.
Marcelo Furlan (Equity Research Analyst)
You're welcome.
Operator (participant)
The next question comes from Alejandra Obregón with Morgan Stanley.
Alejandra Obregón (Executive Director)
Hi, good morning, everyone. Thank you for taking my question. I was wondering if you can give us some color on the mix of your volumes, meaning bag versus bulk today, and where do you see that going towards 2025? And finally, when you talk about maintaining prices for the second half of the year, just curious if there's a mix effect embedded into that comment as you shift away from that. Thank you.
Speaker 8
Hi, Alejandra. Thank you for your question. After that, I'm going to ask you to repeat the second question because we didn't actually get it. Regarding the first one, the percentages or the participation of bag and bulk are within the historic parameters. But in the case of actually what is happening in this past quarter, in June and July, we saw a recovery, a more sharp recovery of the bag mode of dispatch, and that should be due to a recovery of the real wages, and also the positive impact of the increased credit lines in mortgage lines.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
But the percentages are still 60% bulk bags and 40% bag, with some minor variations month-to-month.
Alejandra Obregón (Executive Director)
Gotcha. That's very clear. So perhaps a follow-up. So when you-- So you're mentioning 60%-40% mix today, but I would assume that maybe as we move forward into 2025, then bulk will start to contribute more to the mix. So how should we think of pricing, given that, you know, that there's a shift in mix where bulk will likely, you know, have a negative effect on the price mix? So when you talk about maintaining prices, does that mean that you are expecting perhaps more price increases on that side of the mix? I don't know if that's perhaps a little bit more clear.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
The strategy of pricing is very similar in both modes of dispatch.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
And the margins in both bulk and bags is also very similar.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
And our market share in both dispatch modes are also very similar.
Sergio Faifman (CEO and VP of the Board of Directors)
[Foreign language].
Speaker 8
We have seen cases in the past where we saw a variation in the participation of these two modes of dispatches, and we didn't see any impact in, on pricing.
Alejandra Obregón (Executive Director)
Gotcha, that's very clear. Thanks, thanks again for taking my questions.
Sergio Faifman (CEO and VP of the Board of Directors)
You're welcome, Alejandra.
Operator (participant)
Thank you, and this concludes our question and answer session. I will now turn the conference back over to Diego Jalón for any closing remarks.
Diego Jalón (Head of Investor Relations)
Thank you all for joining us today. We really appreciate your participation, and we expect to meet you again in our next call. Thank you very much, and have a nice morning.
Operator (participant)
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.