Business Context and Reporting Period
Company: Loma Negra Compania Industrial Argentina Sociedad Anonima (NYSE: LOMA)
Reporting Period: Fourth Quarter (4Q) and Full Year (FY) ended December 31, 2018. Results announced March 7, 2019.
Accounting Standard Change: Commencing with 4Q18, the Company applied International Accounting Standard 29 (IAS 29) for financial reporting in hyperinflationary economies. This restates results to reflect changes in the general purchasing power of the Argentine Peso. Certain tables (1b and 11) present figures excluding IAS 29 for comparison.
Key Financial Metrics
| Metric (in Millions) | 4Q 2018 (IAS 29) | 4Q 2017 | FY 2018 (IAS 29) | FY 2017 |
|---|---|---|---|---|
| Net Revenue | Ps. 6,936 (US$ 182) | Ps. 6,747 | Ps. 26,807 (US$ 789) | Ps. 24,839 |
| Adjusted EBITDA | Ps. 2,159 (US$ 58) | Ps. 1,790 | Ps. 7,121 (US$ 220) | Ps. 6,218 |
| Adjusted EBITDA Margin | 31.1% | 26.5% | 26.6% | 25.0% |
| Net Profit | Ps. 1,265 | Ps. 1,712 | Ps. 1,951 | Ps. 3,678 |
| Net Profit Attributable to Owners | Ps. 1,193 | Ps. 1,670 | Ps. 1,800 | Ps. 3,510 |
| Earnings Per Share (Basic) | Ps. 2.00 | Ps. 2.92 | Ps. 3.02 | Ps. 6.15 |
| Net Debt | Ps. 3,061 (US$ 81) | Ps. 1,748 | Ps. 3,061 (US$ 81) | Ps. 1,748 |
| Net Debt / LTM Adj. EBITDA | 0.43x | 0.28x | 0.43x | 0.28x |
Material Changes vs. Prior Period
- Revenue Growth: 4Q18 revenue increased 2.8% YoY, driven by growth in Cement in Paraguay and the Concrete segment. FY18 revenue rose 7.9% YoY, supported by favorable pricing in Argentina.
- Profitability Expansion: Adjusted EBITDA margin expanded 459 basis points in 4Q18 to 31.1%. Excluding IAS 29 effects, the margin expansion was 496 basis points to 31.9%.
- Net Profit Decline: Despite EBITDA growth, Net Profit decreased 26.1% in 4Q18 and 47.0% in FY18. This was primarily due to a higher effective tax rate (30.5% in 4Q18 vs. -73.8% in 4Q17) and foreign exchange losses in FY18.
- Volume Trends: Cement volumes in Argentina declined 18.4% in 4Q18 due to weak demand and weather. Conversely, Concrete volumes in Argentina reached a record high, up 13.6% in 4Q18 and 30.0% for FY18.
- Debt Position: Net Debt increased 75.1% YoY to Ps. 3,061 million, reflecting increased capital expenditures and debt repayments. The Net Debt/EBITDA ratio rose to 0.43x.
Guidance, Outlook, and Risks
- Outlook: Management expects the negative demand cycle in Argentina, which began in Q2 2018, to turnaround by mid-2019 following an expected economic recovery.
- Strategic Investment: The expansion of the L'Amalí plant is a key growth driver, adding 2.7 million tons of annual capacity. Total project cost is estimated at US$ 350 million, with completion expected in early 2020. US$ 96 million was spent on this project in FY18.
- Hyperinflation Risk: Argentina is classified as a hyperinflationary economy. The Company must apply IAS 29, which adjusts financial statements for inflation. While regulatory changes in late 2018 now permit inflation-adjusted reporting to the CNV, the volatility of the Peso and inflation rates remain significant risks.
- Operational Risks: Risks include fluctuations in the exchange rate, changes in construction demand, and volatility in raw material and energy prices.
Investor Verification Checklist
- IAS 29 Impact: Verify the distinction between reported figures (IAS 29 adjusted) and non-IFRS figures (excluding IAS 29) to understand the true operational performance versus inflationary accounting effects.
- Volume vs. Price: Confirm the divergence between declining cement volumes in Argentina and rising revenue/EBITDA, ensuring price increases are offsetting volume losses.
- Cash Flow vs. Net Profit: Review the significant drop in Net Profit versus the relatively stable Operating Cash Flow (Ps. 4,179 million in FY18) to assess liquidity sustainability.
- Debt Maturity: Note that 56% of total debt is short-term and 51% bears floating interest rates, exposing the company to refinancing and interest rate risks.
- Capex Execution: Monitor the progress and cost overruns of the L'Amalí plant expansion, which represents a significant portion of the company's investment strategy.