Loma Negra - Q3 2022

Transcript

Operator (participant)

Good morning, and welcome to the Loma Negra Third Quarter 2022 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. 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 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 (VP of the Board and CEO)

Thank you, Diego. Hello, everyone, and thank you for joining us today. 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 questions. Starting with slide three. We are glad to present a very good third quarter, with results that shows the robustness of Loma on the back of positive momentum for the cement industry, despite the challenging macroeconomic scenario. Leverage in our recent capacity expansion that got us more productivity, flexibility, and more efficiency. We are accompanying the growing demand with solvency, being prepared to absorb future market growth.

As you could see from our release just yesterday, our adjusted EBITDA for the quarter reached $68 million, compared with $51 million in the third quarter of 2021, achieving a record for the quarter. When measuring pesos, it showed a decline of 12.7% compared with the third quarter 2021, adjusted by inflation. As third quarters are usually impacted by higher energy inputs, our consolidated adjusted EBITDA margin stood at 22.1%, while the U.S. dollar EBITDA per ton reached $34.9, 16% above 2021's first quarter. As we mentioned in our last call, in July, we distributed a second dividend of $81 million for an accumulated total of $126 million this year.

In the same sense, we recently approved a new share repurchase program for ARS 1 billion that will be in place till the end of the year. I will now hand off the call to Marcos Gradin, who will lead you through our market review and financial results. Please, Marcos, go ahead.

Marcos Gradin (CFO)

Thank you, Sergio. Good morning, everyone. As you can see on slide four, the GDP forecast for 2022 was adjusted upwards in the last market expectation report from the central bank, reaching 4.1% from the previous 3.4%, as the preliminary figures for the second quarter stood at 6.9% growth. When looking at the construction activity figures, the level of activity measured by the ISAC shows that the tendency of the previous quarter remains strong, showing resilience amid political and macroeconomic turbulences. In particular, cement national industry sales are going through outstanding momentum, ending this quarter in a new historical level, up 10% from third quarter 2021, while the nine-month accumulated volumes show an increase of 11%. Sales of bagged cement maintain a solid evolution, supported by the robust demand of the retail sector.

While bagged cement continues to be the dispatch modality that is exhibiting the greatest dynamism, driven by a higher level of activity in private infrastructure projects, residential and industrial, accompanied by a moderate level of activity in public works, mainly the municipal and provincial levels. When seeing the breakdown by dispatch mode, bagged shipments continues to gain terrain, showing a participation of 43% against 40% in third quarter of last year. The tendency of the previous quarter continues. Even though the recent October data show a slight decline compared to October 2021, and also a sequential decline against September, this is mainly explained by the least working days of October. When looking at the average daily volume dispatched, October's remained above September figures. We are optimistic that the industry will break 13 million tons for the first time in history this year.

As we mentioned before, even though we are optimistic for the new quarter, the macroeconomic challenges, especially the increasing inflation and the FX distortion, could overshadow future growth. On the other hand, the political scenario will probably increase its tension as we approach the upcoming presidential election of next year. Turning to slide five for a review of our top-line performance by segment. Top-line was up 4.2% in the third quarter, mainly due to the increase in cement revenues, coupled with a positive performance of concrete and aggregates that compensated the decrease in railroad. Cement, masonry and lime segment was up 4.8% with a strong expansion of volume of 12.9% year-on-year, with a softer pricing dynamic. Concrete revenues increased sharply 40.7% in the quarter.

Volumes were up 35.6% in line with the strong momentum of bulk cement, coupled with good pricing performance. In the same way, aggregates show a robust revenue expansion of 54.7%. Volumes increased 65% primarily on the back of concrete demand, while average price performance was affected by product mix. Finally, railroad revenues decreased 7% in the quarter year-on-year. Transported volumes were up 5.5%, boosted by construction materials, while price was negatively impacted by product mix that contributed to a lower average transported distance due to the contraction of transported volumes of frac sand. Moving on to slide seven. Consolidated gross profit for the quarter declines 13.9% year-on-year, with the margin contracting by 448 basis points to 21.3%.

Mainly impacted by a lower price performance of our core segment, higher depreciation due to the commissioning of L'Amalí's second line, and higher energy inputs related to the winter period. Partially offset by a proper cost management due to our operational improvements and more natural gas availability. Cement, masonry cement and lime gross margin contraction was slightly offset by a better performance of concrete and good results in aggregates, both reversed negative margins in third quarter 2021. SG&A expenses as a percentage of revenues remain flattish, slightly increasing by 11 basis points to 7.8% from 7.6%. Please turn to slide eight. Our adjusted EBITDA for the second quarter stood at $68 million, setting a new record for the quarter, up 33.9% from $51 million in the same quarter a year ago, boosted by our top line and adequate cost management.

In pesos, adjusted EBITDA was down 12.7% in the quarter, reaching ARS 7.5 billion with consolidated EBITDA margin of 22.1%, contracted by 426 basis points year-on-year, mainly affected by cement margin contraction and the higher participation in the top line of the other segments with lower margins. Cement segment adjusted EBITDA margins reached 24.3%, contracting 516 basis points, mainly due to a softer pricing dynamic and higher energy inputs, partially offset by an increase in sales volume. Aggregates with margin expansion of 637 basis points, reaching 2.4% and reverting negative figures.

Aggregates adjusted EBITDA improved from ARS 1 million in third quarter 2021 to ARS 101 million this quarter, reaching a margin of 12.2% and showing a great recovery for the second, where higher sales volume was supported by strong productive performance coupled with logistic efficiencies. Finally, railroad adjusted EBITDA decreased ARS 204 million to ARS -3 million for the quarter, with a negative margin of 0.12%, mainly due to the impact of price performance affected by product mix and a lower average transported distance despite the volume expansion. Moving on to the bottom line on slide 10. This quarter, we posted a net loss of ARS 12.2 billion, compared with ARS 2.7 billion pesos profit in third quarter 2021, primarily affected by the financial result.

Total financial cost stood at ARS 15.3 billion this quarter, from a total financial cost of ARS 0.6 billion the same quarter last year, primarily explained by the effect produced by the cancellation of dollar-denominated debt with local funding, coupled with the increase of the total debt position. This increase in net financial expense was partially compensated by the gain on the net monetary position. Moving on to the balance sheet. As you can see on slide 11, we ended the quarter with a cash position of ARS 3.5 billion and total debt at ARS 23.2 billion.

Consequently, our net debt to EBITDA ratio stood at 0.54x compared to -0.12x at the end of 2021. Our robust operating cash generation stood at ARS 4.1 billion, reflecting a positive effect on taxes paid in the comparison year-on-year that compensated higher working capital needs. Regarding capital expenditure, we spent ARS 1.6 billion, mostly for maintaining CapEx after the termination of the L'Amalí expansion and the corresponding reduction in capital requirements. During the quarter, we increased our debt by $48 million, leaving our net debt at $134 million at the end of the quarter. Breaking it down by currency, we reduced our exposure to dollar-denominated debt that now represents 40% of total debt, while the rest is in pesos.

This rebalancing also seeks to take advantage of the current negative real rates in short-term pesos. Additionally, in July, we distributed a dividend of $81 million which, considering the dividend paid in April, represents a dividend yield of approximately 17% and $1 per share outstanding. Although the slight increase in indebtedness, the balance sheet of Loma Negra remains very strong with low leverage ratios. Now for our final remarks, I would like to hand the call back to Sergio. Thank you.

Sergio Faifman (VP of the Board and CEO)

Thank you, Marcos. Now to finalize the presentation, I please ask you to turn to slide 13. As you could see, the cement market is maintaining its good momentum, and we are confident that this tendency is going to continue as the main driver remains in place. Probably this year, the industry is going to set a new record, reaching for the first time the 13 million tons mark. In this context, we are profiting from our recent investment in capacity that not only allow us to efficiently attend the high level of activity shown by the industry, but also give us the platform to absorb future growth. On the other hand, the current political and macroeconomic situation remains very delicate. The FX restrictions and the increasing inflation are difficult challenges for the economy in the short term.

In addition, the political scenario could turn more complex as we get closer to the presidential election. Regardless of this difficult context, we are confident in the resilience of the industry, and we are cautiously optimistic for the upcoming quarter. Finally, this November, Loma commemorates its five-year listing anniversary, both in the New York Stock Exchange and the Buenos Aires stock market. Without a doubt, it has been an incredible journey where we have grown and evolved as a company. For that, I want to thank you, our people and stakeholder, for making this possible. This is the end of our prepared remarks. We are now ready to take question. Operator, please open the call for the 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, that's star one on your telephone keypad. We also would like to ask that you please limit yourself to one question and 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 today comes from Daniel Rojas with Bank of America. Please go ahead.

Daniel Rojas (VP)

Good morning. Thank you for taking my call. Your cash flow generation has been benefiting from your lower CapEx requirements after finishing L'Amalí. My question is regarding what level of CapEx should we expect going forward? Basically, is it just gonna be maintenance, the absolute level? Any color that you can give us. Thank you.

Marcos Gradin (CFO)

Hi, Daniel, this is Marcos. How are you? I would say that maintaining CapEx should be on the order of $40 million-$45 million for a year. Additionally, in the upcoming years, in this year, in 2023 and 2024, we'll be investing adequately in our facilities to 25 kg bags. Yes. That's gonna be a total sum of nearly $50 million for the next two to three years.

Daniel Rojas (VP)

Okay. In terms of pricing, it's been soft throughout the year in real terms. Going forward, do you see any possibility to recuperate pricing in real terms, or how do you think the challenging environment will make that more difficult?

Marcos Gradin (CFO)

Daniel, prices are moving by inflation or slightly above inflation and we are not seeing this year any delay in that movement.

Daniel Rojas (VP)

Okay. Thank you.

Marcos Gradin (CFO)

You're welcome.

Operator (participant)

As a reminder, if you would like to ask a question, please press star then one to enter the question queue. This concludes our question and answer session. I would like to turn the conference back over to Diego Jalón for any closing remarks.

Diego Jalón (Head of Investor Relations)

Thank you for joining us today. As always, we really appreciate your interest in Loma, and we look forward to meeting you again in our next call. In the meantime, the team remains available for any questions that you may have. Thank you, and have a good day.

Operator (participant)

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