Loma Negra Compañía Industrial Argentina Sociedad Anónima Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Loma Negra Third Quarter 2023 Conference Call and Webcast. All participants will be in listen only mode. Please note that this event is being recorded. I would like now to turn the conference over to Mr. Diego Halon, Head of Investor Relations.

Operator

Jalon, Head of Investor Relations. Please, Diego, go ahead.

Speaker 1

Thank you. Good morning and welcome to Llanagra'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 Feichman, our CEO and Vice President of the Board of Directors and our CFO, Marco Radin. Both of them will be available for the Q and A session.

Speaker 1

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 resume 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.

Speaker 1

Now I would like to turn the call over to Sergio.

Speaker 2

Thank you, Diego. Hello, everyone, and thank you for showing 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 questions. Starting with Slide 2.

Speaker 2

I'm pleased to share the result of the Q3 with you today. The tendency for the volume of the key industry persists amid the election period and the secondly uncertainty. As we mentioned in the previous conference call, cement volume also lower compared to the last year, still showed strong shipping in fuels. The high record from the last year set a challenging benchmark for the comparison. The volume reached in this period is the 2nd best quarter of the history for the industry and the recent February of October compared almost flat with the same period of 2022.

Speaker 2

As we navigate this election period amidst economic challenges, Both the semi industry and Loma have demonstrated resilience. When we dive into the numbers, we see another robust quarter for Loma. Our top line reached ARS74 billion, decreasing 8.3%, primarily due to volume contraction of our core cement. Despite this effect, EBITDA stood at ARS70 billion with a margin expansion of 105 basic points and reaching a consolidated margin of 23.2%. Let's keep in mind the 3rd quarter are the most challenged in terms of EBITDA margin due to the seasonal impact of higher energy inputs.

Speaker 2

In this sense, the U. S. Dollar EBITDA per ton stood at 36.5 dollars for the quarter, 4.5 percent above last year, 3rd quarter and stable in the secondary basis. On the financial side, we use our Class III domestic bond, receiving an outstanding response from the market. Inference enabled us to resonance cross border debts, thereby reducing our financial cost and extending the maturity while keeping a strong balance sheet with leverage ratio below 1x.

Speaker 2

I will now hand off the call to Marco Gradin, who will lead you through our market review and financial results. Please, Marcos, go ahead.

Speaker 3

Thank you, Sergio. Good morning, everyone. Please turn to Slide 4. As you can see on the upper left chart, the market expectation report from the Central Bank indicate a negative performance for the economy for 2023, showing a decrease of 2.3%, while the results published by the deck show a decrease of almost 5% for the 2nd quarter. In a context where the construction activity indicator shows a decline for the sector, the National Cement Industry sales have demonstrated resilience.

Speaker 3

Despite a 5.6% decrease, this third quarter ranked as the 2nd best in history, with accumulated volume just 1.8% below the same period in 2022. Furthermore, the recent figure published for October indicates a sequential recovery with volumes slightly below the ones reached in 2022. Dispatch mode that is affected by the construction of the demand from the retail sector. On the other hand, concrete producers remain as a primary driver of growth for the bulk mode. In this sense, when seeing the breakdown by dispatch mode, bulk shipments now represents 44% of the total dispatches from 43% in the Q1 of 2022.

Speaker 3

As we near the conclusion of a very challenging year, we foresee the strength for volumes to persist. We maintain a cautious optimistic that the resolution of the electoral process will alleviate volatility and pave the way for economic recovery. Turning to Slide 5 for our view of our top line performance by segment. The 3rd quarter top line saw an 8.3% decrease, mainly attributed to declines in the segment followed by Concrete and Railroad, partially offset by the performance of Aggregates. Cement, Major General Cement and Lime segment was down 12.8%, with volumes from Cracking 7.1% year on year, mainly due to a decline in bag cement sales, coupled by softer price dynamic, which, despite adjusting for inflation, experienced a decline owing to elevated monthly inflation figures and the timing of price adjustments.

Speaker 3

Concrete revenues decreased 4.2% in the quarter. Volumes were down 9.4%, offset by a good pricing performance. Some major projects, which are the market target for our concrete operations, under a pace affected by the macroeconomic volatility. Aggregate segment showed an expansion of 17 0.5%, with sales volumes almost flat. The good price performance boosted the top line.

Speaker 3

On the other hand, rail gold revenues decreased 4.5% in the quarter year on year. Transported volumes were down 4.2%, affected by a decrease in transported volumes of aggregates and frac sand, while the price remained almost flat. Despite the negative effect of the lower volume of Roxanne, that negatively affects the average price per ton, a cedar product with longer average transported distance. Moving on to Slide 7. Consolidated gross profit for the quarter remained almost flat, showing a slight increase of 0.2% year over year with a margin expansion of 186 basis points to 23.3 percent, mainly due to cost improvements in the Cement and Railroad segments.

Speaker 3

Regarding the Cement segment, a decrease in energy inputs compensated the lower top line performance. In the railroad segment, the lower cost was mainly driven by lower depreciations. The margin expansion of the Cement and Railroad segments was partially offset by contractions in computer and aggregates, mainly due to cost pressures. Finally, while SG and A expenses increased by 1.8%, as a percentage of revenues, they increased by 55 basis points, rising from 7.8% in the quarter of 2022 to 8.3%. Please turn to Slide 8.

Speaker 3

Our adjusted EBITDA for the quarter stood at $66,000,000 down 3.1% from the same quarter a year ago and reaching a very solid figure. In pesos, adjusted EBITDA was down 3.9% in the quarter, reaching ARS 17,200,000,000 with consolidated EBITDA margin of 23 point 2 percent, posting a year on year expansion of 105 basis points. This is mainly attributable to improved margins in Cement and Revenue. Cement segment adjusted EBITDA margins stood at 26.8%, improving 252 basis points, mainly due to cost efficiencies that offset the lower top line performance. Regarding cost, we saw a reduction of 9% in a per ton basis.

Speaker 3

The primary reason for this was a reduction in energy inputs, primarily driven by increased utilization of natural gas in our thermal energy metrics, combined by a lower price for this input. Similarly, the cost of electrical energy is significantly decreasing as electrical generation take advantage of lower liquefied natural gas prices. Additionally, by the end of the quarter, the new pipeline began injecting natural gas from Vaca Muerta into a transportation system, while the leader using the dependence of imported liquefied natural gas. In a per ton basis, EBITDA reached $36.5 per ton, increasing 4.5% from last year's Q3. Concrete adjusted EBITDA decreased ARS 128,000,000 compared to Q3 'twenty two, where the good price performance wasn't able to compensate the lower volumes and increasing costs.

Speaker 3

Margin contracted 179 basis points, reaching 0.6 percent. Aggregates adjusted EBITDA decreased ARS 130,000,000 this quarter from ARS242,000,000 in Q2 'twenty two, reaching a margin of 4.8%, mainly due to higher sales costs that were partially offset by a positive price performance. Finally, railroad adjusted EBITDA reached ARS247,000,000 from negative ARS7,000,000 in the same period of 2022, with a margin of 4.16 percent, mainly flying by cost improvements that offset a weaker top line. Moving on to the bottom line on Slide 10. This quarter, we posted a net profit attributable to owners of the company of ARS 7,400,000,000 compared to a net loss of ARS 28,900,000,000 on Q3 2022, mainly due to a lower total financial cost.

Speaker 3

Total net financial cost stood at ARS 1,600,000,000 this quarter from a total financial cost of ARS36.4 billion the same quarter last year, primarily due to the impact of the cancellation of dollar denominated debt with local funding that took place in the Q3 of 2022. Moving on to the balance sheet. As you can see on Slide 11, we ended the quarter with a cap position of ARS 20,900,000,000 and a total debt of at ARS 96,100,000,000. Consequently, our net debt to EBITDA ratios to that 0.97x compared to 0.37x at the end of 2022. Our operating cash generation stood at ARS 14,600,000,000 where the decrease in the net profit adjusted with the non cash effects coupled with a lower positive effect of the working capital, mainly due to a lower ticket saving of inventories and higher income tax advances.

Speaker 3

Regarding capital expenditures, we allocated ARS 4,400,000,000 mostly for maintenance CapEx. During the quarter, the company used cash in financial activities for ARS19.8 billion, mainly due to the payment of dividends announced in late June, interest and the repayment of borrowings, partially compensated by the issuance of the Class III bond and the net proceeds from borrowings. In dollar terms, our debt reached $274,000,000 standing our net debt at $215,000,000 at the end of this quarter. Breaking it down by currency, the dollar denominated debt represents 64% of the total debt, while the rest is in pesos. Additionally, as mentioned before, during the quarter, the company issued its Class III domestic bond in immediate U.

Speaker 3

S. Dollars for a total amount of $55,000,000 with maturity in the Q1 of 2026 and accruing an interest rate of 7.49 percent per year. This issuance gave us the possibility to cancel gross order dollar denominated debt, reducing the financial cost and extending its maturity. Now for our final remarks, I would like to hand the call back to Sergio. Thank you.

Speaker 2

Thank you, Marcos. Now to finalize the presentation, I please ask you to turn to Slide 13. To conclude the presentation, I'd like to highlight a few key points. As we mentioned before, we can see a continuity of the trends from the previous quarter, where Hinge's free volume have a sharpened downwards from the record highs of the last year, reflecting the reduced economic activity. We are struck by away from the presidential election, and we are currently navigating a period of high uncertainty in a very positively robustness is unquestionably.

Speaker 2

As the year draws to a close, our confidence remains strong that even in these challenging environment, Loma with SODAFLU attained its objective and continued to contribute to the industry development from our leadership position. I'd like to convey my appreciation to our employees, customers, business partner and the community in which we operate for their continued support. I'm excited about the continuous journey ahead building of a strong foundation we create together. This is end of our prepared remarks. We are now ready to take

Operator

Also, please note that Mr. Sergio Feifman will be responding in Spanish immediately followed by an English translation. Please hold momentarily while we assemble our Our first question comes from Alexandra Obregon of Morgan Stanley. Please go ahead.

Speaker 4

Hi, good morning, Sergio, Marcos, Diego. Thank you for the call. My first question has to do with your energy matrix. So you did mention some that you foresee some changes in the future. So if you could just talk about how do you see your energy mix evolving into 2024?

Speaker 4

I understand that you have some long term contracts in some of your energy needs, but you also have a lot of moving parts for gas in the country. And of course, on top of that, you have your decarbonization target. So if you can talk about how do you see that landing in 2024? And where do you see your energy cash cost going for the year? That will be very helpful.

Speaker 5

This year, we accomplished to close some contracts below the prices that we closed the year before. Some of those contracts are starting now in September and therefore 2 or 3 years term. And regarding our energy thermal energy metrics, we are expecting a decrease in our costs. Even below the numbers, the figures of these quarters that we

Speaker 2

are presenting.

Speaker 5

And in electrical energy, we also had a reduced cost in prices. And we are also foreseeing a reduction in cost in comparison with the cost of 2023. And basically for next year, we are foreseeing to use all of our energy metrics in natural gas.

Speaker 4

That was very clear. And if I have a chance for another question, this one is related to Ferros Sur. If I remember correctly, your concession might come due next year. So if you can just remind us when is that being renewed? And if you think that that could be renewed under the same terms given that we are seeing a change in administration?

Speaker 4

Or is there anything that we should expect there for next year? Thank you.

Speaker 5

And we and the government renew the concessions for 18 months. We are in conversations with the government regarding the characteristics of the new contract, if it's going to be an open access scheme like the one they foresee before. And due to the election process in the last couple of months, this process has been its pace, it's a little bit slower. We expect this process to keep up next year, where the actual concessionist will turn in operators. Just as a reminder, with this open access scheme, the national government will be in charge of the infrastructure and the operators are the ones that are going to take care of the trucks and the wells.

Speaker 4

Thank you. That was very clear.

Speaker 5

You're welcome.

Operator

Our next question comes from Rodrigo Nestor from Latin Securities. Please go ahead.

Speaker 3

My first question

Speaker 5

in demand contingent on which party or candidate wins the upcoming election. We are working in our projections for next year. And we don't give any guidance regarding volumes for next year. And regarding the elections, we are not seeing much differences between the two candidates regarding volumes. They both have some pros and cons.

Speaker 5

And probably what we have probably to expect is if there's any sudden changes at the beginning of the year that might impact the volumes for the 1st Q. I have another question, if I may. In the current high inflation environment, how are you adjusting your pricing strategy to sustain the profitability and also maintaining your market share? Our price strategy is linked to different factors. General inflation, FX and our internal inflation in our costs.

Speaker 5

And our price dynamics are related to our cost and that and the competition typically move prices like we do. And the competitive dynamic makes the market share to move slightly. But if you zoom up in different regions, then you can see some more bigger movements. From the last 2 months, we didn't have any data from the market per region. So we are not able to estimate the market share per region exactly.

Speaker 5

But we are market intelligence. We are able to assume some of this movement and we estimate that the market the national market share it's same as the one we had previously. Okay. That was very helpful. Thank you.

Operator

The next question comes from Daniel Roxas from Bank of America. Please go ahead.

Speaker 6

Good morning, gentlemen. Thank you for taking my questions. Going back to the first question regarding your energy matrix, it's very helpful for us to understand how the benefits you're seeing in natural gas will translate into margin expansion. I'm hoping not to drill you down within a specific number, but if you can give us a range of where you can where we can see margins next year, it will be very helpful. That's my first question.

Speaker 5

The impact in our margins doesn't have to be it's not entirely about cost efficiency, but also it's regarding our price strategy. We also have to keep in mind that with our last investment in Lamanidos, we do have a lot of efficiencies in terms of production. We were able to stabilize the production in the line 2 of Lomali and all the numbers are pretty good. And for next year, we are foreseeing EBITDA margins similar to the ones we are having now.

Speaker 6

Okay. Could you remind us at what operational capacity you're running La Malleto?

Speaker 5

The capacity of Lomalli 2, we bought a kiln of 5 1,800 tons of kinker. We are working above 6,200 tons a day. It's a line of 2,800,000 tons a year. And we believe we can reach up to 3,000,000.

Speaker 6

Okay. Thank you. Thank you for answering my questions. You're welcome.

Operator

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

Speaker 6

Thank you all for joining

Speaker 5

us today. As always, we really appreciate your interest in our company. And remember that we remain in touch for any questions that you may have. Thank you very much and have a nice day.

Operator

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

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Earnings Conference Call
Loma Negra Compañía Industrial Argentina Sociedad Anónima Q3 2023
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