Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the Loma Negra Second Quarter 2025 Conference Call and Webcast. [Operator Instructions] Also, Mr. Sergio Faifman will be responding in Spanish immediately following an English translation. [Operator Instructions] Please note, 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.

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 filings 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.

Thank you, Diego. Hello, everyone, and thank you for joining us this morning. I would like to start my presentation by discussion, the highlights of the quarter. Then Marcos will take you to our market review and financial results. Following that, I will share some final remarks before opening the call to your questions. Starting with Slide 2. As the Argentina economy continue to recover as reflected in the last GDP rise from index -- from the first quarter. Cement dispatches in the industry are accompanying this trend, supporting the growth seen in the 3 months of the year and maintaining a positive trajectory. That said, there is still the long way to go and we are currently navigating the initial phase of recovery. However, in terms of results and within still early stage of recovery for the sector, margin for the quarter stood at 21.2% on consolidated basis, showing a year-over-year decline. This was mainly driven by the impact of a more challenging competitive environment, typical of the recovery that is not yet fully consolidated. An 11% increase in volumes during the quarter helped offset the more difficult pricing dynamic that affected the top line. We are transiting into a lower inflation scenario where price assessments are more special out and more limited under current market conditions. We achieved an adjustment EBITDA of $34 million, down 31% in real terms when mentioned in pesos. EBITDA margin contracted primarily due to a softer top line through a strict cost control helping mitigate the impact. On the financial front, our balance sheet remains solid. During the quarter, net debt increased sequently to $215 million as the first half of the year is typical more capital intensive. Our net debt-to-EBITDA ratio remained at a comfortable level, reaching 1.34x. Following depth of the second quarter, we totally issued a new corporate bond for $112.9 million. The process will be used to address upcoming debt maturity, extending our debt duration and improving our maturity profile. I will now hand off the call to Marcos Gradin, who will go through for our market review and financial results. Please, Marcos, go ahead.

Thank you, Sergio. Good morning, everyone. Please turn to Slide 4. The results for Argentina economy in the first quarter were very positive with year-over-year growth reaching 5.8%. Current forecast for the full year remain around 5%, sustaining optimism in this recovery process. However, it is important to note that the recovery is not uniform across all sectors. In particular, the ISAC, the construction activity index continues to signal a positive rebound in our industry. Regarding Cement dispatches during the second quarter, volumes grew by 14% year-over-year with a strong recovery in bulk cement compared to bagged cement. As a result, bagged cement gained 3 percentage points in the overall dispatch mix, reflecting a rebound in this segment. For the first half of the year, community growth reached 13%. As we've mentioned previously, we are still in the early stages of recovery with a midterm election on the horizon that could introduce some political volatility. Nonetheless, we'll remain optimistic that the consolidation of the current economic model will lead to a more stable environment, enabling sustaining growth over time. Turning to Slide 5 for a review of our top line performance by segment. Second quarter top line declined by 8%, primarily due to a weaker performance in the Cement segment, followed by softer results across the remaining segments. The cement, masonry cement and lime segment posted a 9.9% revenue decline, despite an 11.1% year-over-year increases in volumes, continuing the recovery trend observed in the first quarter. Bulk cement dispatches began to show stronger momentum driven by industrial and commercial projects as well as larger housing developments. Additionally, certain provision-level public work started to gain traction, although they remain at a very early stage. Bag cement volumes continued the trend seen in the first quarter, posted single-digit year-over-year growth. However, the positive impact of higher volumes was offset by softer pricing conditions. In the context of an early stage recovery and a new low-inflation environment, the competitive landscape continues to limit pricing dynamics. Concrete revenues declined by 1.1% in the quarter as a 44% increase in volumes was offset by pressures stemming from a more competitive market. Volume growth was supported by private projects, mainly related to logistic infrastructure and residential development as well as a moderate uptick in public works. On the other hand, the aggregate segment posted a slight 0.8% revenues increase, a 44% decrease in volumes driven mainly by higher road construction activity in the provinces of Buenos Aires and Santa Fe offset the impact of softer pricing. Prices were also affected by the sales mix as the road construction projects primarily required fine aggregates, which carry a lower unit price and reduced the overall average. Railroad revenues declined by 8.6% in the quarter, a 10.6% increase in transported volumes help mitigate the effect of weaker pricing with volume growth primarily driven by higher transport of construction materials. However, the disruption of the railway line in Bahía Blanca in March, particularly affected longer-haul traffic, made in grains, gypsum, and frac sand, reducing ton-kilometers transported, and consequently, revenue generation. Moving on to Slide 7. Consolidated gross profit declined 30.5%, while gross margin contracted by 659 basis points year-over-year, reaching 20.4%. In the Cement segment, cost of sales decreased by 0.8% year-over-year despite the increase sales volumes, effective cost management and lower depreciation impact help offset the weaker pricing environment. Additionally, lower maintenance costs and improved energy input prices contributed positively to the quarterly cost structure. Continued the trend from previous quarter, the company continues to benefit from thermal energy contracts with year-over-year tariff reductions, including short-term agreements linked to our production. Margins also declined across the remaining business segments with the exception of railroad, which experienced margin expansion. Finally, SG&A expenses increased by 5.3%, mainly driven by higher salaries and insurance costs, partially offset by lower marketing expenses. As a percentage of sales, SG&A reached 10.7%, representing a year-over-year increase of 135 basis points. Please turn to Slide 8. Consolidated adjusted EBITDA for the quarter stood at $34 million, while in pesos, it reached ARS 37 billion, reflecting a 30.6% year-over-year decline. This decrease was primarily driven by lower EBITDA generation in the Cement segment. In line with this, the consolidated EBITDA margin contracted to 21.2%, representing a 691 basis points decline year-over-year. In the Cement segment, the adjusted EBITDA margin contracted to 24.8%, down 678 basis points, mainly due to a softer pricing environment. Cost declined by 10.7% on a per-ton basis, supported by lower energy input prices and maintenance costs. These efficiencies together with higher sales volume partially offset the weaker top line. The Concrete segment saw its adjusted EBITDA margin declined by 773 basis points, reaching minus 13%, compared to minus 5.3% in the second quarter of 2024. Although higher volumes and cost efficiencies contributed positively, they were not sufficient to fully offset the negative pricing impact. In the aggregates segment, adjusted EBITDA margin fell to minus 27.3% compared to minus 10.8% in the same quarter last year. While volumes continue to recover, a still challenging competitive environment and a favorable product mix weighted on the segment's profitability. On the other hand, the Railroad segment reported an adjusted EBITDA margin expansion, increased by 351 basis points to 9.8%, up from 6.3% in the same period of 2024. Volume growth driven by increased shipments of construction materials and cost control supported the performance. However, the disruption of the railway line in Bahía Blanca continues to affect volumes, particularly in longer-haul traffic such as grains, gypsum and frac sand. Moving on to the bottom line on Slide 10. Net profit attributable to owners of the company totaled ARS 0.4 billion for the quarter compared to a net gain of ARS 41 billion in the second quarter 2024. This decline was primarily driven by a decline in the financial results, combined with weaker operational performance. On the financial front, the main driver of the year-over-year ratio was a reduced gain from the net monetary position as inflationary effect of monetary liabilities moderated significantly compared to the same period of last year. In addition, exchange rate difference had a higher impact due to the valuation that followed the easing capital controls. As a result, the company reported a net financial loss of ARS 16.7 million for the quarter, compared to a gain of ARS 33.5 billion in the same period of 2024. Additionally, net financial expenses declined by 50%, reaching ARS 9.8 billion, primarily due to lower interest rates. Moving on to the balance sheet. As you can see on Slide 11. We ended the quarter with net debt of ARS 256 million and a debt-to-EBITDA ratio of 1.34x, up from 0.89x at the end of the quarter, as the first half of the year is typically more capital intensive. Cash flow used in operation activities totaled ARS 22.3 billion compared to the ARS 22.3 billion generated in second quarter of 2024. This performance was primarily driven by a lower operational result and higher income tax paid. The income tax paid during the quarter stood at ARS 45.5 billion, mainly correspond to the amount determined for the fiscal year 2024. Since the company reported a negative result in 2023, no advanced payments were made for 2024 until the final tax was assessed and became due in May 2025. Additionally, the company has already started making advanced payment for fiscal year 2025. This effect was partially offset by lower working capital needs in other areas where the beginning of the winter season, we began to minimize clinker production and increase the use of inventories. Additionally, we invested ARS 18 billion in capital expenditure this quarter, primarily allocated to the 25-kilogram bagging project. During the company, the company generated ARS 45.6 billion from financial activities finally from new borrowing, net of loan repayments and interest payments. In U.S. dollar terms, net debt stood at $215 million with valuation of less than 1 year. By the end of the quarter, dollar-denominated debt represented 71% of our total debt with the remainder in pesos. After the close of the quarter, the company successfully issued its Class 5 corporate bond for $113 million with a 2-year tenor and an interest rate of 8%. The new bond was partially subscribed through exchanges with holders of Class 2 and Class 3 bonds. Proceeds will be primarily used to repay the remaining balance of the Class 2 bond maturity in December as well as other short-term debt. With this issuance, the company extended the average duration of its debt and continues to maintain a well-balanced maturity profile. Now for our final remarks, I will hand the call back to Sergio. Thank you.

Thank you, Marcos. Now, to finalize the presentation, I please ask you to turn to slide 13. The recovery trend observed in the first quarter has continued, though we are still in the early phase of the process and market conditions remain challenging. The 5.8% GDP expansion in the first quarter is a very positive signal for what lies ahead. Bases on that, and on the evolution of cement dispatch during the first half of the year. We are seeing our expectation of achieved double-digit growth in 2025. While demand remain in early stage of recovery, the industry is well positioned for the future expansion. In this context, we continue to preside operational efficiency and remain focused on delivering solid results. Despite the ongoing challenging, I want to highlight Loma a strong commitment to innovation and the continued development of our industry as well as the healthy uncertainty of everyone involved in construction activity. A clear example of this is the transition to 25 kilos cement bags, a project that requires significant effort and investment and 1, we are proved to have successfully implemented. While the current environment remain demanding, we are encouraged by road ahead and remain confident in Loma ability ride. This is end of our prepared remarks. We are now ready to take questions. Operator, please open the call for questions.

[Operator Instructions] And the first question will come from Mario Sampaio[indiscernible] with Morgan Stanley.

My question is regarding pricing. I just want to know if you could provide more color if the weaker-than-expected pricing in second Q could be explained by the timing of the price increase or like maybe they were closer to the end of the quarter? Or are you guys seeing more structural trends that could make pricing more challenging in the near term? And second, if you could -- if possible, could you please also share how are these competitive and pricing trends behaving heading to third quarter and the second half of the year.

Hello, Mr. Diego Jalón, your line may be muted.

[Interpreted] Mario, thank you for your question. Regarding pricing, it has more to be with the competitive environment of the last 5 months. Particularly, once the set off, the restrictions on certain contracts were lifted that had an impact on the FX, one year ago and so was this last month with the hike on the FX as well. I also say that in the last 2 months, the competitive environment is better than the previous month. We are foreseen to end the year with an increase in pricing above inflation. And so on, a recovery in pricing on the remaining of the year. Regarding the competitive environment, it's stable. We are not seeing major valuations for the month to come.

And our next question will come from Sofia Vatta with Latin Securities.

Regarding the sector, what is your outlook for the construction in the second half of the year, and which are the potential drivers?

[Interpreted] Sofia, thank you for your question. The contraction that we have in this past few months is similar to the 1 that we have previously. We are seeing a slow recovery, but a recovery in this last couple of months. And regarding drivers looking forward, there are many of those that should be -- that should have a positive impact. Nonetheless, obviously, those drivers, in order to have a significant impact on dispatches, is going to take some time. We keep our forecast for the year, but considering that we should have a gradual moderate growth for the remainder of the year. In the last couple of months, we are starting also to see some increase in the level of activity of public works in the provinces of Buenos Aires and Santa Fe. And we believe that this activity in public works should have a positive dynamic in the upcoming months. And also, there are projects linked to private investments in infrastructure that should start in the remaining of the year.

Our next question will come from Marcelo Furlan with Itau.

The first one, just a follow-up regarding volumes you guys mentioned that you still expect volumes to increase by double digit in 2025. So just like to give more color on that if you guys are expecting more close to low-double-digits or could expect mid-teens of cement volumes growth for the year. And my second question is related to the cost efficiency that you guys expect to post ahead. So I just would like to understand what is the company perspectives in terms of cost efficiencies for the second half of this year? And also, what could we expect in terms of margins? And if I may, just 1 more final question here is regarding dividends. I just would like to understand what is the management's view regarding potential dividends for this year. So these are my points.

Sorry, Marcelo, the audio is very bad. I don't know if you're -- if you can repeat the question. I know if you -- if the first one was regarding volumes.

Sure. Can you hear me better now?

Yes, that's better.

Okay. So my question for volumes is if you're guys expecting volumes more close to low double digit increase for this year? Or could you expect volume maybe increase by mid-teens for 2025? So this is my first question. My second is related to the margins, what could expect for margins in the second half of 2025. And finally, if I may, 1 further question is regarding dividends, I'd like to understand the company's view for dividends this year.

[Interpreted] Marcelo, thank you for your question. As I mentioned before, and regarding our expectations for the year, we are keeping this double digit forecast for the year. Specifically for the performance of July, which was below the year-on-year in comparison, we have to remember that July of last year was the one of the peaks of the year so that there was a very challenging base of comparison. With the volumes for the second half of last year, we are not seeing that situation to happen again. Regarding margins and along as what I mentioned about our pricing, we are expecting a recovery in the upcoming months. Probably in next quarter, even though we're going to have some impact of the cost of winter, we're expecting some recovery and then continuing this tendency of recovery for the fourth quarter. The last question was about dividends?

Yes.

[Interpreted] We are still analyzing every alternative on the financial front for our shareholders, analyzing the structure of capital of the company, but we don't have any provision for paying dividends so far this year.

Our next question will come from Andres Cardona with Citigroup.

I was wondering if part of the pressure on margin may have come from the readjustment in energy prices.

Andres, sorry, you are asking for energy prices. We are not having the best audio.

Yes. Sorry. No, I'm asking if the pressure of margins, may be partially explained by the increase in electricity prices that we have seen in the year-to-date, but just a matter of the pricing strategy.

[Interpreted] Andres, thank you for the question. Yes, as I mentioned before, in this past few months, we have a competitive dynamic, which was more challenging. And if we see what happened in the last 2 months and our forecast for the remainder of the year, we have a more positive expectation. And when you see our -- the numbers that we published that are adjusted by inflation, you also have to compare them given the increases on pricing in the first semester of last year. If you adjust those numbers by inflation, those numbers are not very accurate. Clearly, in the upcoming months, there's going to be a recovery in terms of pricing that when you see the comparison, against adjusted by inflation figures, sometimes the comparisons, it's difficult to assess. But we are expecting that in a reasonable time, we expect to see again the figures of pricing in U.S. dollar terms and cost and margins that we previously saw.

Our next question will come from Daniel Rojas with Bank of America.

Can you hear me?

Yes, Daniel, we can hear you.

So I wanted to go back to the pricing question, and sorry for -- maybe it's the third time you've answered this, but I just wanted to get it very, very clearly. So as the industry moves from this high inflation environment and the competitive environment you discussed becomes more challenging I just wanted to get a better sense of your commercial strategy. I'm guessing that you -- previously, you had to increase prices at a very high pace to keep up with inflation. And now maybe that changes and structurally, the whole industry has to rethink their approach to pricing increments. And maybe that explains the pricing situation? Or is it more of competitive dynamic where the competition is not increasing prices and you have -- you're not able to increase as much. I just wanted to drill down on those dynamics, so we can get a better sense of how in the second half, you're going to be able to catch up. I'm sorry for asking this so much.

[Interpreted] Daniel, thank you for the question. I would say that there is -- this is a combination of these 2 situations. On 1 hand, the sudden decrease on inflation, it changes the strategy in pricing, not only by the amount of this increases on prices that you can have, but also in the timing of the adjustments. And also, at the same time, once these adjustments are more spaced out, the competition might not take this price adjustment with the same timing that before. And that was a little difference and can impact the competitive environment. In a scenario of high inflation, this dynamic was very fast, and these valuations did impact that much in our clients or clients of our competitors. And in these first months of this transition from a high-inflation scenario to a low-inflation scenario. These new dynamics affected a little bit our -- the competitive environment. Once the scenario is more stable, that what we commented before of this last 2 months of a different dynamic, and we expect that to continue in the coming months. And that's what we are expecting for the remainder of the year.

Thank you for the additional color. And if I may have a follow-up. The President announced a privatization program for 10,000 kilometers of roads and other initiatives to try to push for an increment in public works in Argentina. I know it's early, and there are a few details, but I just wanted to get a better sense of how the public work program is recovering. You mentioned a couple of regions in the country that are seeing better prospects and more activity. What's your outlook for the second half and the outlook for these programs, the President is announcing?

[Interpreted] What we believe, there is a lot of potential in terms of public infrastructure. We have no doubt that this will come. As we do understand that given that these projects need a framework to make the private sector access these projects. This might require some time. We think that probably the impact of this in the second semester is not going to be very high, but we do believe it is a very interesting driver for the -- for next year and so on.

And this concludes our question-and-answer session. I would like to turn the conference back over to Diego Jalón for closing remarks.

Thank you once again for joining us today. We sincerely appreciate your continued interest and support. And as always, we look forward to reconnecting with you on our next call. In the meantime, please don't hesitate to reach out with any questions that you may have. Take care, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]