Loma Negra - Q3 2024

Transcript

Operator (participant)

Good morning, and welcome to the Loma Negra Third Quarter 2024 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 that this event is being recorded. I would now like to turn the conference over to Mr. Diego Jalón, Head of IR. 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)

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 pleased to present Loma Negra third quarter results. This quarter, key industry volume showed a strong sequential improvement, increasing by 25%, while still below last year's level. The steady recovery in activity indicates that we moved past the most challenging period. Diving into the numbers, our top line reached 180.7 billion pesos, marking a 21.2% decrease in the quarter, primarily due to the lower cement dispatches. This quarter, Loma achieved a consolidated Adjusted EBITDA of $55 million, or 43 billion pesos, down 18.5% compared to the same period last year.

Our EBITDA margin stood at 24%, reflecting an improvement of 78 basis points year over year, which is remarkable given the challenging scenario and its impact on demand. On a per-ton basis, EBITDA was $35.4, also maintaining a very solid performance. It's important to note that third quarter margins are lower due to seasonality factors such as higher energy costs. However, our flexibility and production strategy allow us to mitigate the full impact of winter cold. On the financial side, our balance sheet continued to strengthen, with net debt at $177 million. As mentioned in our last call, this quarter required less capital, enabling us to deliver and achieve a net debt ratio of 1.03 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. When looking at the evolution of monthly cement sales for the industry, it is clear that cement dispatches have reached a significantly better level than in the previous two quarters. Volumes have increased by 25% sequentially. The same sequential comparison shows an improvement of 6% in 2023, and recent figures for October are in line with September figures, despite the impact of a national strike that affected the dispatches. Bagged cement dispatches are recovering more quickly, gaining ground in the dispatch mode breakdown and reaching 62%. In contrast, bagged cement has been more affected by the economic environment, the standstill in public works, and lower activity levels in larger private projects.

The Central Bank's market expectation reports also point to an improved economic outlook, suggesting that the recovery will begin in the second half of this year, marking the end of the recession's most challenging phase. The construction activity indicator, though still below 2023 levels, reflects this trend as well, gradually narrowing the year-on-year comparison gap. Positive indicators such as a steady recovery of real wages, the downward-trending inflation, fiscal surplus, and lower interest rates are key factors that could enable a broader role for credit in our economy and encourage and accelerate foreign direct investment inflows. While macroeconomic conditions remain challenging, stable economic variables are essential for driving sustainable growth. Turning to slide five for our review of our top line performance by segment.

The third quarter top line showed a decrease of 21.2%, mainly due to a lower top line performance of the cement business, also followed by the rest of the segments. The cement measure, the cement and lime segment, declined by 21%, with volumes contracting 17.1% year on year, coupled with softer price performance. Although construction impacted both dispatch modes, bagged cement is performing significantly better, showing only a moderate decline, while bulk dispatches are lagging. Demand for bagged cement is more closely tied to larger projects, which typically require additional time planning and stable market conditions to consolidate. Concrete revenues decreased by 29.7% in the quarter, primarily due to a 22% drop in dispatches. The type of projects that are central to our concrete segment are still struggling to gain traction, mirroring the trend seen in bagged cement sales.

Similarly, the aggregates segment experienced a 42.7% decline, with sales volume down by 29%, reflecting the pattern of the concrete segment. The reduced level of activity has resulted in a more challenging competitive landscape. Finally, railroad revenues saw a modest decline of 4.7% in the quarter. Transported volumes dropped by 7%, mainly due to the reduced activity in the construction sector. However, this was partially offset by increased volumes of grains and chemicals. The positive trend also helped mitigate the impact of lower transported volumes. Moving on to slide seven, consolidated gross profit for the quarter declined 23.5%, with a margin contraction of 69 basis points to 22.6%. Margins remained stable despite the volume contraction of our core business. In the cement segment, our cost management efforts helped mitigate the impact of our lower top line.

Although higher, thermal, and electrical energy inputs tightened margins on a sequential basis, this effect was partially offset year over year by our production strategy of holding several kilns and utilizing clinker stock produced at lower energy costs during the warmer seasons. In the year-over-year comparison, thermal energy costs showed considerable improvement. Additionally, reduced electrical energy needs from an extended hold in the length of grinding phase increased the share of renewable energy in our energy matrix to 66%, up from 39% in third quarter 2023, further contributing to lower energy costs. On the other hand, the railroad and concrete segment experienced margin expansion, while aggregates, more impacted by current economic conditions, posted a significant contraction. For railroad, the moderate decrease in volumes combined with positive price performance helped boost its margins.

Finally, SG&A expenses fell by 12.9%, primarily because of reduced salaries, a lower cost from turnover tax, and freight due to decreased volumes. As a percentage of sales, it stood at 9.2%, an increase of 87 basis points from 8.3% because of the declining revenues. Please turn to slide eight. Our consolidated adjusted EBITDA for the quarter stood at $55 million, while in pesos, adjusted EBITDA reached ARS 43 billion, down 18.5%. Despite the volume decline and the challenging scenario, the consolidated EBITDA margins remained resilient and stood at 24%, expanded by 78 basis points from last year. On a sequential basis, it's important to note that the third quarter showed a larger margin due to higher seasonal costs. The cement segment's adjusted EBITDA margins stood at 25.5%, a slight drop of 20 basis points.

Tight cost management and improved energy inputs helped mitigate the impact of a lower top line. Concrete adjusted EBITDA increased $484 million compared to the same quarter of last year, with a margin expansion of 355 basis points, reaching 4%. Cost control measures and gains from the sale of obsolete assets offset the lower top line. The adjusted EBITDA margin of aggregates contracted to negative 17%, from 4.8% in third quarter 2023. The low level of activity and more complex competitive environment affected the segment operational result. Finally, the railroad segment adjusted EBITDA margin expanded by 840 basis points in the quarter, reaching 12.6%. Transported volumes experienced a moderate decline, mainly due to increased grain transport, while prices showed solid growth. Expected cost control further supported these positive results.

Moving on to the bottom line on slide 10, this quarter will post a net profit attributable to owners of the company of ARS 20.9 billion, compared to a net profit of ARS 22.9 billion in the third quarter of 2023. The lower operational results, mainly due to the drop in volumes, were partially compensated with a higher total financial gain. Financially, we posted a total net financial gain of ARS 12.6 billion for the quarter, compared to a financial cost of ARS 4.9 billion in the same period last year. Key variations include the reduced impact of exchange rate difference due to a slower devaluation pace and a lower net financial expense, primarily driven by lower interest rates. This was partially offset by a smaller gain on the net monetary position, as we held a lower passive monetary position during the quarter, and by a softer effect from inflation adjustments.

Moving on to the balance sheet, as you can see on slide 11, we ended the quarter with a net debt of $172 billion, bringing our net debt-to-EBITDA ratio to 1.03 times, down from 1.4 times at the end of 2023. As anticipated in our last call, we reduced our indebtedness by $40 billion during the quarter, further strengthening our balance sheet. Cash generation from operating activities reached $64 billion, up from $45 billion in the same period of 2023, primarily driven by positive working capital effects. During the quarter, clinker production was minimized to lower energy inputs, resulting in reduced inventory levels. This was further supported by decreased accounts receivable and reduced income tax payments. We allocated $17.4 billion to capital expenditure this quarter. Approximately 40% of this amount was invested in the 25-kilogram bags project, with the remainder primarily directed towards maintaining CAPEX.

During the quarter, the company used $34.8 billion in financial activities, primarily for the repayment of borrowings and interest payments. In dollar terms, our debt reached $177 million at the end of this quarter, with a duration of one year. Breaking it by currency, the dollar-denominated debt represents 77% of the total debt, while the remaining portion is in pesos. This quarter, we addressed the maturity of the Class I bond issued in pesos, thereby reducing the weight of our local currency debt. Regarding the remaining bonds, the Class II bonds are set to mature in the fourth quarter of 2025, while the Class III and Class IV bonds will mature in 2026. We have a very clear horizon ahead in terms of our structured debt. Now, for our final remarks, I would like to hand the call back to Sergio. Thank you.

Sergio Faifman (CEO)

Thank you, Marcos.

Now, to finalize the presentation, I'd please ask you to turn to slide 13. The third quarter showed a significant sequential improvement, clearly moving past the worst phase of the recession. However, the recovery is still in its early stage for future progress needed to fully close the year-over-year gap. Our personal flexibility and production strategy enabled us to maintain healthy margins, mitigating the full impact of winter cold despite the lower dispatch level and difficult economic conditions. We are closely and optimistically monitoring the evolution of the economic challenges. As inflation and interest rates decline, the real economy and activity level will have a more solid foundation for growth. The expansion of the credit and mortgage loan could be a significant drive for the construction sector in the near future.

Similarly, the reduction in country risk now below 1,000 points for the first time since 2019, signaling a positive step toward attracting foreign investment. Amid all the challenges, the country holds vast growth potential ready to be unlocked, and Loma is well positioned to support and drive the journey forward. To conclude, I would like to thank all our employees and stakeholders for their commitment and continued support. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

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 that line.

For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the keys. Once again, that is star and then one on your telephone keypad. We would also like to ask you to please limit your questions to one question and one follow-up. 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 as we assemble our roster. And our first question today will come from Marina Mertens with Latin Securities. Please go ahead.

Marina Mertens (Analyst)

Hi, good morning. Thanks for taking my question. I have two questions. The first one on prices. So with inflation slowing, prices are becoming less frequent.

How do you see these pricing dynamics moving forward, and what effect could it have in volumes and revenues? And the second one, the bagged segment continues to be more depressed than the bulk segment. So what catalysts do you see as necessary for larger construction projects to begin and for demand in this segment to pick up? Thank you.

Sergio Faifman (CEO)

Hi, Marina. Thank you for the question. [Foreign language] With the current price dynamic, we are looking closely at the evolution of how can we continue to follow on our dynamic on adjusting prices.

[Foreign language] Besides the lower inflation, in the last three months, we have continued to adjust our prices on a monthly basis.

[Foreign language] Maybe with inflation of 2% or 1% per month, we can start thinking about adjusting prices on a three-month or four-month basis.

[Foreign language] With this level of monthly inflation, if we made them too spaced in time, when we have to increase our prices, it would be in a two-digit figure, and that would be difficult for the market to take that adjustment.

[Foreign language] Regarding volumes, as you mentioned, bagged cement has been recovering more fast, and bulk cement is still lagging.

[Foreign language] Regarding larger projects, which is the target of bulk cement, with the RIGI and other bigger projects that are starting to gain pace, they are probably going to affect or impact the bagged cement sales.

[Foreign language] Many private projects were monitoring the evolution of the FX and with the steady evolution of the FX in the last couple of months, they are starting to pick up this.

[Foreign language] Another important driver for bulk cement is public works.

[Foreign language] In that case, we are seeing how the new scheme involving the private sector in public works, how is this going to evolve. We are expecting this to start impact volumes next year.

[Foreign language] But these two variables should have an impact on bulk cement dispatches in the upcoming months.

Marina Mertens (Analyst)

Thank you. Very clear.

Sergio Faifman (CEO)

You're welcome.

Operator (participant)

Again, if you have a question, you need to press star and then one.

Our next question today will come from Marcelo Furlan with Itaú BBA. Please go ahead.

Marcelo Furlan (Executive Director and Senior Equity Research Analyst)

Hi everyone. Good morning. Thanks for taking my question here. I have one question related to dividends. I mean, you guys posted the leverage in this Q at 1x that had to be below. Sorry, at 1x that had to be below. And you guys don't have any major projects on the radar. So my question is related to if you could see some improvement in dividends maybe for the first Q or for 2025, as you guys still have a healthy capital profile. So this is my question. Thank you.

Sergio Faifman (CEO)

Hi, Marcelo. Thank you for the question. [Foreign language] Historically, third quarters are the ones that have a lower EBITDA margin.

[Foreign language] That's basically due to increased costs during the winter season.

[Foreign language] Additionally, this year we had some extra hike on some costs that impacted during the second and third quarter.

[Foreign language] For example, the impact of the hike in prices of transport, the energy that we had between 400% and 700% impacted between May and that effect impacted the second and third quarter.

[Foreign language] In general, as it typically happens in this process of high inflation,

[Foreign language] Loma gains margin because we have the capability of moving our prices quicker than our costs.

[Foreign language] So if you look at the margins of the 3Q, they are impacted due to higher winter costs, and probably you're going to see an improvement in the upcoming quarter.

[Foreign language] Basically, due to the fact that now we are not going to have the impact on the winter costs, primarily in energy, not because of the other costs that have been moving following inflation.

Marcelo Furlan (Executive Director and Senior Equity Research Analyst)

Okay. Thank you, guys. And a follow-up question here. What are you thinking about dividends going forward?

Sergio Faifman (CEO)

[Foreign language] For the upcoming months or next year, we are analyzing the capital allocation alternatives, thinking about the better alternative for our shareholders.

Marcelo Furlan (Executive Director and Senior Equity Research Analyst)

Okay. Thank you so much, guys.

Sergio Faifman (CEO)

You're welcome.

Operator (participant)

And our next question today will come from Esteban Arrieta with Balanz. Please go ahead.

Esteban Arrieta (Analyst)

Good afternoon. Thanks for taking my question.

Does InterCement situation impose any debt repayment covenants on Loma Negra if a control changes? And additionally, connected to that, would a control shift to another company trigger a tender offer for Loma Negra shares?

Sergio Faifman (CEO)

Hi, Esteban. Thank you for your question.

[Foreign language] There is no covenant regarding change of control that may have an impact on the company.

[Foreign language] And regarding a tender offer, then the regulations of the NYSE and CNV will apply considering that if an operation occurs.

Esteban Arrieta (Analyst)

Thank you.

Sergio Faifman (CEO)

You're welcome.

Operator (participant)

And our next question today will come from Daniel Rojas with Bank of America. Please go ahead.

Daniel Rojas (Analyst)

Hello, Sergio Faifman. Thanks for taking my call. Most of my questions have been asked, but I was curious and I was hoping to get a little bit more detail on the 25-kilo bag project you mentioned on the presentation. Does this make part of a strategy of selling smaller bags to get better prices? What are you hoping to get in that sense from selling that type of weight? Any color you can give us. And additionally to that, you've been very specific about the volume recovery of cement volumes. I know you've given some details on the call, but could you give us any additional color? Thank you.

Sergio Faifman (CEO)

Hi, Daniel. Thank you for your question. [Foreign language] The profitability of bagged cement and bulk are very close, are more or less the same.

[Foreign language] Obviously, bags had more price and also more costs, so the margins are better in bulk and profitability is more or less the same. [Foreign language] Regarding volumes, we can see one first stage until June, and then a hike in volumes starting in July.

[Foreign language] That recovery that we are seeing starting in July is more or less 30% up the figures of the first six months.

[Foreign language] So only keeping this tendency, we are speaking about a recovery or an increase in volumes for next year on a two-figure digit.

Daniel Rojas (Analyst)

Great. And if I may follow up, a lot of news has been published around the potential recovery of the mortgage market in Argentina. Can you give us any color on what you're seeing on the ground, how strong this recovery might be? Are banks jumping into the mortgage market, and are you starting to see permit activity, construction activity related to that,or is it too early? Thank you.

Sergio Faifman (CEO)

[Foreign language] Yes, clearly that's something that we have always said that would be very important for growth.

[Foreign language] Last few months, there has been a recovery on real estate sales.

[Foreign language] And many of those sales, those operations, end up boosting future construction projects.

[Foreign language] So this continues and growth for sure is going to have an impact on future cement sales. [Foreign language]

Daniel Rojas (Analyst)

Thanks.

Operator (participant)

We'll conclude our question and answer session.

I would like to turn the conference back over to Diego Jalón for closing remarks.

Diego Jalón (Head of Investor Relations)

Hi. Thank you, everyone, for joining us this morning. It was a pleasure for us to have this call, and we look forward to meeting you again in our next call. Thank you very much.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a pleasant day.