Business Context and Reporting Period
Loma Negra Compania Industrial Argentina Sociedad Anonima (Loma Negra) filed a Form 6-K on August 10, 2018, reporting results for the second quarter ended June 30, 2018. The company operates primarily in the cement, concrete, railroad, and aggregates sectors in Argentina and Paraguay. The reporting period was characterized by a macroeconomic slowdown in Argentina, which drove slower demand growth, though the company maintained a healthy pricing environment in its core cement business.
Key Financial Metrics
| Metric | 2Q 2018 | 2Q 2017 | Change |
|---|---|---|---|
| Net Revenues (AR$ million) | 4,757 | 3,467 | +37.2% |
| Net Revenues (US$ million) | 202 | n/a | n/a |
| Adjusted EBITDA (AR$ million) | 1,153 | 909 | +26.9% |
| Adjusted EBITDA Margin | 24.2% | 26.2% | -197 bps |
| Gross Profit (AR$ million) | 1,331 | 1,035 | +28.5% |
| Gross Margin | 28.0% | 29.9% | -189 bps |
| Net Profit Attributable to Owners (AR$ million) | 179 | 276 | -35.0% |
| Net Profit Attributable to Owners (US$ million) | 8 | 19 | -59.4% |
| Cash and Cash Equivalents (AR$ million) | 1,618 | 298 | +443% |
| Total Debt (AR$ million) | 5,390 | n/a | n/a |
| Net Debt (AR$ million) | 3,772 | n/a | n/a |
| Net Debt / LTM Adj. EBITDA | 0.83x | 0.3x (FY17) | Increased |
Note: US$ figures are converted using the Central Bank reference rate. Total debt calculated as sum of current (2,872) and non-current (2,518) borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 37.2% year-over-year, driven by a 33.4% increase in Argentine cement revenues (healthy pricing offsetting flat volumes), an 80.3% surge in concrete revenues (23.7% volume growth), and a 49.2% rise in Paraguay cement revenues.
- Profitability Pressure: While Adjusted EBITDA grew 26.9%, the margin contracted by 197 basis points. This was due to lower profitability in the Railroad and Paraguay segments and the faster growth of the lower-margin Concrete business.
- Net Income Decline: Net majority income fell 35.0% in peso terms and 59.4% in US dollar terms. The decline was primarily caused by a significant non-cash foreign exchange loss of AR$515 million (compared to AR$130 million in 2Q17) due to Argentine peso depreciation.
- Balance Sheet: Cash position strengthened significantly to AR$1.6 billion. However, Net Debt increased to AR$3.8 billion, raising the Net Debt to LTM Adjusted EBITDA ratio to 0.83x from 0.3x in FY17.
- Operating Cash Flow: Net cash generated by operating activities for the first half of 2018 was AR$153 million, a significant decrease from AR$558 million in the same period in 2017, largely due to increased inventory levels and value.
Guidance, Outlook, and Risks
- Outlook: Management expresses "cautious optimism" despite the adverse macro environment. They anticipate full-year 2018 cement demand could reach similar levels to 2017.
- Strategic Focus: The company is maintaining a focus on profitability and leveraging its leading market position. The L'Amalí plant expansion remains on schedule for completion in 2020, with 52% of H1 2018 capital expenditures (AR$1,334 million) allocated to this project.
- Risks: Key risks include changes in general economic and political conditions in Argentina, fluctuations in inflation rates, and volatility in the peso exchange rate. The company notes that forward-looking statements are subject to these uncertainties.
- Unusual Items: The financial results were heavily impacted by non-cash foreign exchange differences resulting from currency depreciation, which significantly reduced net income despite strong operational performance.
Investor Verification Checklist
- Verify the sustainability of the pricing environment in the Argentine cement sector given the macroeconomic slowdown.
- Assess the impact of continued peso depreciation on future net income and US dollar-denominated earnings.
- Monitor the progress and capital expenditure requirements of the L'Amalí plant expansion.
- Review the trend in operating cash flows, specifically the increase in inventory levels and its effect on liquidity.
- Confirm the stability of the Net Debt to Adjusted EBITDA ratio as debt levels rise relative to earnings.