CEMEX, S.A.B. de C.V. (NYSE:CX) Q1 2023 Earnings Call Transcript

CEMEX, S.A.B. de C.V. (NYSE:CX) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Good morning. Welcome to the CEMEX First Quarter 2023 Conference Call and Webcast. My name is Bethany and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. And now, I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

Louisa Rodriguez: Good morning. Thank you for joining us today for our first quarter 2023 conference call and webcast. We hope this call finds you in good health. I am joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO. As always, we will spend a few minutes reviewing the business, and then we will be happy to take your questions. And now I will hand it over to Fernando.

Fernando Gonzalez: Thanks Lucy and good day to everyone. I’m quite pleased with our first quarter growth achieved against a backdrop of difficult winter weather conditions in the U.S. and a strong prior year comparison base. Sales grew at a high single digit growth rate. Importantly, our largest regions accounting for 90% of sales are showing good momentum growing at a high single or double digit rate. In terms of costs, for the first time since early 2021, there was evidence that inflationary pressure is easing. Cost of goods sold as a percent of sales was 1.1 percentage points lower than the prior year. EBITDA growth and the significant recovery in margin was driven by pricing, easing cost headwinds, as well as incremental contributions from our growth investment and urbanization solution business.

I believe this quarter marks an important inflection point in our mission to recover 2021 margins and compensate for the steep cost inflation we have experienced over the last two years. With our growth investment strategy paying off, we continue to pursue additional bolt-on margin enhancement projects primarily in developed markets. We closed one aggregate transaction which will substantially boost our aggregate reserves for supply constrained markets. In climate action, we continue to achieve record CO2 reduction levels with a 3% decline versus first quarter of 2022. Leverage ratio stands now at 2.62 times, a sequential reduction of 0.22 times, driven by the issuance of a green subordinated perpetual note, the first of its kind in our industry.

Finally, our return on capital remains in the double digit area, well above our cost of capital. Net sales rose high single digit due to our pricing strategy. EBITDA grew by 6% against a difficult prior year comp as inflation escalated in our business after the onset of the Ukraine war in late February 2022. EBITDA growth largely reflects success of our pricing strategy, decelerating cost inflation, as well as the incremental contribution of approximately $40 million from our growth investment portfolio and expanding urbanization solutions business. While EBITDA margin is slightly lower than the prior year, it has shown significant improvement on both a sequential and year-over-year basis. Free cash flow after maintenance CapEx rose due primarily to higher fixed asset sales, increasing EBITDA, as well as lower working capital and maintenance CapEx. The decline in consolidated cement volumes results from difficult weather conditions in the U.S., continued weak back-cement demand in Mexico, SCAC and the Philippines and slowing growth in Europe.

In the U.S., Europe, and Mexico, we expect recovery in volumes aligned to our guidance as we move through the rest of the year. Consolidated prices accelerated in the quarter with growth of between 18% and 20%. The pricing momentum was driven by all regions, with Europe showing significant progress in recovering inflationary costs. Mid-single-digit sequential price growth speaks to the strength of our first quarter pricing actions. We remain focused on managing costs with our energy diversification, supply chain, and climate action strategies. EBITDA growth is largely explained by the contribution of pricing over incremental costs, our growth investments, and growing urbanization solutions. This quarter showed considerable improvement versus prior quarters with pricing covering 132% of cost increases, allowing us for the first time to begin recuperating margins.

Importantly, the cost inflation, while still elevated, is easing. I believe this quarter marks an important inflection point in our margin recovery efforts. Margin performance over the last two quarters have confirmed that we have turned the corner in our mission to recover 2021 margins after the unprecedented cost inflation of the last two years. We have seen margin improvements sequentially as well as year over year. This improvement is driven not only by pricing but also by easing inflationary cost headwinds. While we still have work in front of us, we strongly believe we will continue to see margin improvements over the next few quarters. In March, we published our seventh annual integrated report covering 2022, which details how our strategy, governance, ESG, and financial performance intersect to create value for all our stakeholders.

2022 was a pivotal year in our sustainability journey. Our Vertua lower carbon concrete, launched less than three years ago, now accounts for 33% of concrete sales. We achieved our second consecutive year of record CO2 reduction, driven by peak alternative fuel usage and a record low clinker factor. Our carbon reduction over the last two years was equivalent to what used to take us more than a decade to achieve. This performance convinced me that we could push our decarbonization targets using existing tools even further. As a result, we upgraded our 2030 and 2050 goals and validated them with SBTi under the one and a half degree scenario, the most aggressive pathway for our industry. Based on our transformation over the last two years, I’m confident our products are not only essential to society, but that industry decarbonization is possible and transition will be profitable.

I encourage you to access our integrated report on our website. Our urbanization solution business continues to show remarkable performance. EBITDA rose 34% with the important growth in all four verticals. I would like to highlight our admixture business, the largest business within the performance materials vertical. Admixtures are specialized chemicals used to enhance specific properties of construction materials, such as water reduction, strength, setting time, carbon footprint, among others. They are important drivers of innovation and sustainability in the construction industry. The admixtures business has been experiencing outstanding growth and in first quarter grew more than 60%. As a key contributor to our future in action agenda, we plan to continue expanding this highly accretive business.

And now, back to you, Lucy.

Louisa Rodriguez: Thank you, Fernando. Our Mexican operations delivered strong results with double-digit growth in sales and high single-digit growth in EBITDA. As our pricing strategy continued to make meaningful inroads in offsetting the inflation of the last two years, EBITDA rose from the second consecutive quarter. EBITDA margin rose sequentially, 4.7 percentage points, the first sequential margin expansion in four quarters and showed year-over-year improvement. The alternative fuel substitution rate reached a record in Mexico of approximately 42%, with some plants reaching levels of up to 77% in the quarter. Industry demand is improving as bulk cement growth more than offset the decline in bagged product in the quarter.

We estimate that industry cement volumes rose low single-digit in a quarter. Our low single-digit decline reflects market share loss in bagged cement as a consequence of our pricing strategy. We intend to recover this market share over the following quarters. Our bulk cement and ready-mix volumes continued to grow double-digit, while aggregate volumes rose mid-single-digit, reflecting the dynamism of formal construction in the country. The formal sector continues to benefit from nearshoring investments in border states and the Bajio region, tourism construction, and infrastructure projects. For 2023, we expect flat cement volumes with high single-digit growth in ready-mix and aggregates. In the U.S., despite significant weather challenges in most of our markets, as well as a strong first quarter 2022 comparison pace, EBITDA rose 15% to a record first quarter result.

Growth was primarily driven by pricing, with cement and concrete rising approximately 20%, while aggregates rose 30%. Volumes declined double-digit primarily due to severe winter weather in much of our portfolio that significantly affected construction activity. We estimate the impact of weather conditions on cement volumes explain approximately 60% of the decline. EBITDA margins expanded, benefiting from higher prices and a lower level of imports. However, we still have more work to do to recover margins lost to substantial inflation. On the cost side, raw materials and energy continue to be the biggest headwind to margin. We should start to see the benefit of lower fuel prices, but do expect a continued headwind in the cost of electricity over the next few quarters.

We closed the Atlantic Minerals Limited acquisition in late April, expanding our U.S. reserves by 20% and further strengthening our position in aggregate-constrained markets such as Florida and along the southeastern seaboard. On the pricing side, first quarter price increases were successful, and additional price increases have been announced for the third quarter in most of our markets. Going forward, we remain optimistic that the bipartisan infrastructure bill, the Inflation Reduction Act, and the CHIPS Act will be supportive of volumes. We are seeing an important boost in highway contract awards and have also seen the start of projects for onshoring and the redefinition of supply chains. According to the Financial Times, companies have announced roughly $204 billion in large-scale projects to boost U.S. semiconductor and Cleantech production.

This amount is almost double the announced spending commitments made in the same sectors in 2021 and nearly 20 times the amount of 2019. EMEA delivered strong financial results despite a tough comparative base and a challenging volume backdrop. Sales in EBITDA grew double-digit, reflecting a successful pricing and carbon strategy, as well as a large contribution from our growth investment portfolio and urbanization solutions business. EBITDA margin declined slightly. As a result of first quarter price announcements, pricing momentum continued with regional sequential increases of between 8% and 10% for all products, and in Europe with sequential increases of between 9% and 14%. Despite the weak demand environment, Europe continued to show strong cement pricing traction with prices up 35% year-over-year.

EBITDA in Europe grew 46% while margin rose 2.5 percentage points, reflecting not only our pricing efforts and carbon strategy, but also the strong contribution from our growth investments. Europe has been very active in executing our growth strategy, particularly in the areas of decarbonization, urbanization solutions, and expanding aggregate reserves. Our European operations continue to lead the way on climate action and are well on the way to achieving EU emission reduction targets of at least a 55% decline by 2030. These efforts paid off in 2022 with the decline in our carbon emissions being sufficient for us to stay within our EU carbon allocation for the year. We believe we were the only company in the industry to achieve this distinction, and it highlights a competitive advantage in the most expensive carbon market in the world.

For 2023, based on better than expected first quarter cement volume performance, we are now expecting a mid-single-digit decline for cement. We continue to be optimistic over Europe’s medium-term outlook, supported by public and private projects worth more than €2 trillion related to transportation, climate adaptation, and energy reconfiguration, as well as on-shoring investment opportunities. In the Philippines, cement volumes declined due to continued macro challenges and bad weather, as well as a tough comparison base. EBITDA margin was impacted primarily by higher energy costs, which we are expecting to gradually ease in coming quarters. For this year, we now expect cement volumes to decline low single-digit. For more information, please see our CHP quarterly earnings, which will be available this evening.

In Middle East and Africa, EBITDA grew double-digit, mainly driven by Egypt, which showed strong pricing and margin performance. Net sales in the South, Central America, and Caribbean region grew 4%, driven by a disciplined pricing strategy. Cement volumes remain pressured by weak bag cement demand, while bulk cement continued to grow, supported by the formal sector, mainly in the infrastructure and tourism segments. The decline in EBITDA and EBITDA margin resulted primarily from higher energy and maintenance costs and lower cement volumes. We expect energy costs in the region to ease in the following quarters. In Colombia, cement volumes declined mid-single-digit, largely attributable to a slow start of the year in formal construction activity and weak bag cement demand.

Cement pricing increases picked up some momentum, with a double-digit sequential increase. In the Dominican Republic, cement volumes declined due to a drop in retail cement demand, while ready mix volumes posted a double-digit growth, mainly related to a recovery in the formal sector. In April, CLH shares were delisted from the Colombian Stock Exchange. Further information on CLH can be found on CLH’s website. And now, I will pass the call to Maher to review our financial developments.

Maher Al-Haffar: Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are very pleased with our first quarter performance showing growth in revenues, operating results, and free cash flow generation. The increase in EBITDA speaks to the success of our pricing strategy, coupled with decelerating cost inflation and contributions from our growth strategy and urbanization solutions. Our sequential margin expanded by almost two percentage points, while our slight year-over-year margin decline was the smallest in five quarters. We expect improving margins going forward. As Fernando mentioned, we have seen two consecutive quarters of decline in cost of goods sold as a percentage of sales. The decline has been driven by easing energy cost inflation, lower imports, and pricing traction.

Energy costs remained high, with fuel increasing 32% and electricity up 16% on a per ton of cement basis. Recent market prices for Petco, still our largest fuel source, are the lowest level since August 2021, and it bodes well for fuel costs in the back half of the year. In Europe, one of the hardest-hit electricity markets last year, we delayed locking in contracts and have been able to take advantage of lower prices in the first quarter. We expect better trend in energy costs in coming quarters as prior-year comps get easier, and we expense higher-priced fuel inventories. Higher fixed-asset sales, improving EBITDA generation, coupled with a lower investment in working capital and maintenance CapEx delivered incremental free cash flow of $120 million versus the prior year.

As regards working capital, working capital days increased by eight versus the prior year. This increase is due primarily to the inflationary impact on inventories. The credit quality and turnover of our receivables remains at a healthy level. Net income was $225 million, 14% higher than the prior year. The increase was driven primarily by better operational results and a positive foreign exchange effect mainly due to the appreciation of the Mexican peso. We executed a series of transactions that strengthened and simplified our capital structure further aligned our financial strategy with our sustainability agenda and accelerated our path to investment grade. In order to support our future in action program in March, we updated our green financing framework to reflect our alignment to SBTi’s one and a half degrees scenario and subsequently issued $1 billion in green subordinated perpetual notes.

As part of the green framework commitments, CEMEX will invest and amount equal to the net proceeds in eligible green projects between 2021 and 2027. These notes similar to those issued in 2021 are considered equity under IFRS and benefit from a temporary 50% equity treatment from rating agencies resulting in a reduction of leverage of approximately 0.4 times in the quarter. Through this issuance, we are able to invest in ROI positive projects that lower our carbon footprint at a cash cost equivalent to our senior debt while at the same time immediately improving our capital structure and bringing us closer to an investment grade rating. With this transaction on a pro forma basis, 50% of our debt is now linked to sustainability KPIs, essentially reaching our 2025 target two years ahead of time.

To better position our debt maturity profile for the medium term, two weeks ago we called our $1 billion seven and three eighths bond due in 2027. The full redemption should take place on June 5th. This leaves a two-year window in 2027 and 2028 with virtually no debt maturity. We completed the tender offer and de-listing process for CEMEX flat-dam holdings, increasing our ownership to approximately 99.5%. And a tender offer for shares of CEMEX holdings Philippines increasing our ownership to approximately 90%. We continue with the firm commitment towards strengthening our balance sheet with the goal of achieving investment grade in the short term. As you know, we are just one notch away from our goal. And now back to you Fernando.

Q&A Session

Fernando Gonzalez: We are pleased with the momentum of the first quarter. We have made some minor adjustments in regional volume guidance, which you can find in the appendix. Given that the quarter represents the smallest EBITDA contribution in the year, we will revisit our EBITDA free cash element guidance after our second quarter results. However, we acknowledge that cost, FX, unpricing movements to date, provide upside support over EBITDA guidance given in February. And now back to you Lucy.

Louisa Rodriguez: Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases referred to prices for our products. And now we will be happy to take your questions. In the interest of time, and to give other people an opportunity to participate, we kindly ask that you limit yourself to only one question. And the first question comes from Gordon Lee from BTG Pactual. Gordon?

Gordon Lee: Hi, good morning, everybody. Thank you very much for the call. And for the opportunity to ask questions. It’s just one simple question Fernando which is, obviously impressive how you, you, and I would say the industry in general, but I think to a large degree led by you, has been able to implement your pricing strategy successfully and what are pretty difficult conditions. I was wondering how you feel about that going forward given the combination of sluggish volumes in many of your markets. The fact that it looks like cost headwind is maybe a declining, as you’ve said, or those headwinds are less of a complication. And finally, that you have managed to recover so much profitability. How, how do you feel about that sort of conversation with clients and that dynamic going forward in terms of being able to pursue further pricing increases? Thank you.

Fernando Gonzalez: Sure, thanks, Gordon. Let me start right by commenting again that our objective is to gain back 2021 margins. But margins in terms of price, minus cost, meaning to be sure that we are going to be fully recovering the impact of this period of very high inflation. I’m referring to the very high inflation in our construction. And we have done progress. We started by recovering an input cost inflation in dollar terms. And now we have already started, as you saw, we saw an inflection point moving from there to recover margins. And we will continue that. But now you know that pricing strategies are made to long-term strategies. And of course, we have to permanently evaluate the implications of our market position, because of the strategies we put in place.

Now, how confident are we in the success of the strategy? I think after the results we’ve seen, we are very confident that we will continue the process again to gain our 2021 margins. We have seen and you can you can see examples of radio last year and this first quarter. For instance, the impact, the impact of weather in the U.S. didn’t derail our pricing strategy in the U.S. So we think that will continue happening. And if you remember, last year in Mexico, there was also a decline in the market and we managed to put in place. Again, the piece of the pricing strategy needed last year to recover input cost of our margins. So I think we will continue with the same objective. It is taking time. Our products ready-mix met aggregates. Historically, when there are periods of high inflation, it takes time.

We are always kind of behind of the phenomena. But we will get there. We are getting there. We are confident that we will get there.

Maher Al-Haffar: Fernando, if I can just add Gordon a couple of comments. One very important thing is that if we take a look at prices the way they are in March, if we take that level of pricing. And even if we don’t get any pricing increases further throughout the year, although we believe we will, we have pricing increases in several of our markets. But that in itself is a 15% tailwind going forward, which is very important. And if you take a look at that tailwind in Mexico or EMEA or the U.S., that is close to a double-digit pricing increase tailwind that we are experiencing. And the markets continue to be tight in the U.S. We reacted very quickly by reducing imports. As you have seen, we reduce imports by almost 45%. We have a very tight logistics operation there.

And I think that is a terrific job in managing that situation. And so close to 90% of our volumes reprised in the first quarter, which speaks very well to our ability to continue with that momentum during the rest of the year as Fernando mentioned.

Operator: Okay. Thank you, Gordon. And the next question comes from Adrian Huerta from JPMorgan. Adrian?

Adrian Huerta: Hi. Thank you, Lucy. Hi, Maher, Fernando. I have a question as to — is related to the U.S. outlook. You are now guiding for a mid-tingled digit decline in volumes for all products versus low single digits before. So my question is if this is mainly related to the weak first quarter, that was pretty much a weather related or if you are seeing larger weakness versus previous views that you have. And can you say what do you expect on demand from each one of the segments and which states should be performing better and which states should be performing weaker doing this year?

Maher Al-Haffar: Yes. Fernando, would you like me to go ahead and take the question?

Fernando Gonzalez: Please go ahead.

Maher Al-Haffar: So Adrian, I mean, we are actually quite constructive about the U.S. business. And yes, the adjustment in volume outlook was primarily predicated on the weather that we have seen in California, Arizona, Texas and parts of Colorado. I mean, we had terrific weather, as you know, snow, weather, and all of that. The interesting thing is when we take a look at the recovery and volumes in April, we see quite a positive recovery. It’s not 100% there, of course, because the ground is still wet and there are still somewhat of patterns, but we are definitely seeing some recovery from that perspective. I mean, in terms of the, the drivers of demand in the U.S., clearly the strongest driver is the industrial sector. I mean, I think that there, we are seeing definitely a lot of benefits from the CHIPS Act, from the Inflation Reduction Act from the just beginning of spending meaningful spending under the highway bill that we have in place.

So I think that on the infrastructure side, which represents 50% of our business, we’re quite constructive looking forward with the rest of the year. The industrial side is extremely positive and it’s benefiting also from a lot of the spending. And if we take a look at, it’s semiconductor, it’s green-tech, it’s battery manufacturing, it’s electronic, electric vehicles. The area that we’re seeing weakness is residential. But again, I think that we need to be very careful when we take a look at residential on a national level. I think it’s very important to take a look at residential in our markets, California, Arizona, Texas, Florida. There, the household formation is I can’t remember exactly, but it’s an, it’s an X-factor higher than the rest of the national household formation.

And because people are moving into, to our, to those states. And so that’s creating a positive impact on residential. But definitely the whole market is it’s softening a little bit as, as interest rates go up. Now, with that, there’s some interesting dynamic. As interest rates go up, people who are, who have six rates that are very attractive are not willing to sell their houses and put them on the market. And so what we’re seeing is a very, very tight inventory in existing homes, in existing homes for sale. And that’s forcing more demand, mostly, multifamily construction in the markets that we’re in. So, and then when we take a look at, our customers, our, contractors, developers, builders, we hear from them that their order books are quite healthy going forward.

So, we’re quite, we’re quite constructive. And, and we think that, while we did adjust our expectations for volumes, because of because of the weather factor, I think the pricing looks like should continue with very good momentum in the, in the U.S. I don’t know if that answers your question. If there’s a follow-up, we’d be happy to address it.

Louisa Rodriguez: If, if maybe I could just add one point, Maher. The guidance that we’re giving is not assuming that in this year we can actually recover those lost volumes to weather up first quarter. And the major reason to that is because of tightness still in the construction markets. It’s the ability of home builders to be able to find workers, supplies, there’s still shortages out there in the industry, which I think continues to speak to the resilience of residential and particular.

Adrian Huerta: Thank you.

Louisa Rodriguez: Sorry, Adrian, I don’t know, if you have anything else. But, thank you.

Operator: Thank you. The next question comes from the webcast, from Paul Roger from Exane BNP Paribas. The IRA includes provisions to help states tighten building regulations and the federal government tests new green products. To what extent could this boost demand for ranges like Vertua and give CEMEX a competitive advantage?

Fernando Gonzalez: Yes. Well, if I take this one. I think what we have seen during last year and this year is that the different levels of authorities are exploring thinking or already changing the way products, cementitious products or ready-mix are used in the market. So we’ve been transforming several of our cement plants to the products that are already permitted in the market in the U.S. limestone cement, cement, composite cement, and definitely this flexibility or this trend to for the U.S. to move forward into composite cement is very positive. It is, it is the, the critical way or the most powerful way to be able to produce lower carbon products in the states because these products do require proportionally less quantities of clinker.

Now, how can that impact the demand for our Vertua family of products? It is impacting it already. By now, about 50% of the cement we sell, do have EPDs meaning certificates that our customers get evaluated or certified by third parties, and that is increasing the demand of these products. We do believe that this is a trend that will continue evolving. It will be very positive for us, for the industry and for the consumer. By the way, by the end of the year, we are already prepared but by the end of the year, 100% of our Vertua cement sold in the market will have these certificates or EPDs certified by a third party and in the case of ready-mix, about 75% of those — will be already certified. So in summary, this is a very positive trend. The U.S. is moving towards the practices known already for some time in regions like Europe or other parts of the world in this type of cement.

Operator: Thank you Fernando. The next one question comes from Vanessa Quiroga from Credit Suisse. Vanessa?

Vanessa Quiroga: Hi, Lucy. Hi, Fernando. Hi, Maher.

Fernando Gonzalez: Hi, Vanessa.

Vanessa Quiroga: Thank you for taking my question. I was wondering if you can tell us a bit of where you see the main risk for keeping the sequential expansion, the pay to the sequential expansion of margins that we saw, which was very impressive in the first quarter. So, very good pays of expansion but what could happen, that could slow down the phase. Could it be some maintenance works expected for coming quarters because the labor logistics and the further delay, I don’t know, just anything that you could highlight in terms of the risk. Thanks.

Fernando Gonzalez: Thanks, Vanessa. Let me start maybe Maher or Lucy cannot comment to the question, but let me start by saying that the pricing dynamics are very local. They have to do with competitive dynamics. They have to do in this case in the last few years, all pricing strategies have to do with input cost inflation. I mean why increase in prices 20% to 25% if your inflation is not that level. So, I think what you can expect is for prices, I say it in the previous question, for prices to increase as much as needed to recover our 2021 margins. We are getting close to it, and now we see that when we define when we establish these objectives, we should have been more precise because even now it is clear that we are refitting mainly to the difference of price, meaning the spread price minus cost impact.

In the last year and a half or so, the main contributor to inflation recuperation, margin of the comparison has been pricing and now you saw because of the inflection point in our cost base, I think from now on or starting in 2023 to pricing strategy will have the positive contribution of a decline in inflation increases. We are not still in a deflationary type of context, but definitely the pace of inflation is materially decreasing. So, we have to continue evaluating our pricing strategy considering the recovery of our margins, as we mentioned. The impact of the pricing increases that we have done recently last year. As Maher said, even if we don’t increase prices today, prices of 23 will be 15% higher than 22. We also have to consider the level of inflation.

Again, we see a lower impact because of inflation, we hope and we expect that to be a trend for the rest of the year, but nothing is completely sure, but we do hope that will be the case. And also, a very important, a very different market per market is the impact in our market position because of dynamics supply and demand. So, in order to understand what to expect Again, I think the main issue is look at margins, and we will try to recover them, margins of 21 and we will try to recover them. We are close to, the transfer positive. So, hopefully, in the next few quarters we will be updating achievements in that regard.

Maher Al-Haffar: Yes, and if I can add Fernando I mean, Vanessa as Fernando said the North Star for us is recovering 21 margins, right? And if you take a look at where we are as of the first quarter, we continue to lag 21 margins, even if you adjust for the volume effect, right? I mean, because there is a huge, there’s a very important volume effect that has taken place, and we’re still probably a good point in a fraction below where we would like to be just for the quarter. So, I think there’s a lot more work to be done there. Now, of course, recovery of inflation, price effect against, against total inflation, has been improving, and for the first time, it has been accretive to margins in the first quarter, and we expect that hopefully to continue.

Now, what could, the question is, is there something that could risk that? And I mean, frankly, when we take a look at the input costs, we’re seeing obviously still rising fuel, whether it’s, fuels or electricity, but everything is decelerating. If we take a look at Petco, which is our, largest by percentage of fuel that we use, it’s almost half of what it used to be at its peak for instance, and we see that declining a little bit more during the course of the year. So, we are reasonably confident that that gap between total costs against the price effect should continue to improve. Again, barring any kind of material at exchange from the market there. Now, in terms of, in terms of maintenance, I mean, yes, we do have some incremental maintenance in the year, but that’s because we have more, more operating assets.

I mean, as you know, CPN, we have the Tepeaca expansion, we have additional expansions in the Dominican Republic. The U.S. has a very important operating efficiency program in place. Most of our plans are running a very high capacity utilization. And of course, there’s a little bit of inflation, right? I mean, that is taking place. So, but, but that’s totally expected in, in our operating results. We are not expecting, at least again, today. We don’t think there’s anything extraordinary that should change the dynamics of profitability going into the next three quarters of the year and our expectations that things should get better. And I don’t know if I miss anything. Lucy, if you want to add anything to that.

Louisa Rodriguez: No, I think you got it. Thank you very much. Thank you both.

Operator: And thank you, Vanessa. The next question comes from the webcast, from Anne Milne, from Bank of America. Could you please walk us through the changes in the composition of CEMEX’s debt structure between year-end 2022 and first quarter 23? Also, how are you thinking about this going forward? It looks like you use some of the proceeds of the perpetual and you also reduced bond and bank debt agreements. Did you buy back any bonds during first quarter? Will percentage change going forward by type of debt change?

Maher Al-Haffar: Thank you very much, Anne, for the question. We did. I’m trying to remember now, if it was within the quarter or right after the quarter, we did actually buy some of the seven and three eighths. We bought about I believe $65 million ahead of the, putting out the call. And then, of course, we put out the call a couple of weeks ago. And that should be done by June 5th, as I mentioned in my remarks. Now, in terms of the, the debt stack structure. As we speak, giving pro forma effect to the call of the seven and three eighths, gives us a breakdown of about a third of our debt being banked debt, 35% as of the first quarter. Again, pro forma the call of the seven and three eighths. The high yield notes, another third, about 32%, leases are about 12%.

And then, of course, we have the subnotes, which are, again, I’m talking about the whole debt stack, including the subnotes, which, of course, under IFRS is considered to be equity. But if you include that in there, that represents 20% of the, of the debt stack. I don’t expect this allocation to change that much. We do have a very interesting — with the call of the bond, we will have a very nice window in 27, 28, and beyond to do some liability management, pushing out maturities. Whether we will make major changes between how much we take from banks versus the bond market is going to be very much dependent on, what’s happening in the capital markets. I do think that, the appetite, interestingly, very different from some other situation, the appetite from, from a bank, that for us has been very positive, frankly, and pricing has been very attractive.

And as you know our spreads have dropped as a result of the leveraging process. So, we’re going to wait and see, and take a look, we’re not on a hurry. Fortunately, we’ve got tons of liquidity that we’re sitting on. And so we’re going to be, taking a look at the markets and see, but, but I don’t expect major changes in the, in the structure of our debt stack.

Operator: Thank you, Maher. The next question also comes from the webcast, from Francisco Chavez, from BBVA. Can you explain your margin improvement in Mexico? How sustainable is it to maintain that level or continue improving it? Is this margin level already incorporating the impact on electricity due to the expiration of some contract?

Maher Al-Haffar: Fernando, do you like me to take that? Yes. I think the, the impact of the electricity, the impact of the repricing of our electricity sources is being partially reflected as we speak and has been, so that’s definitely there. I think the issue that is likely to more positively impact us going forward is the volume situation, right? I mean, we have to wait and see what happens in the first quarter as Lucy mentioned in her remarks that, our volumes are down by 3% primarily because of a tactical view or position that we took on the back-cement business. But very important to highlight is the whole market was actually, we estimate up about 3%. So the supply demand dynamics in Mexico should be fairly good going through the rest of the year and driven, driven by industrial, very importantly followed by infrastructure and then and then housing.

I mean, we have, as you saw, the volumes in ready-mix have been way out stripping the volumes of cement, which is an indicator of what’s happening to the underlying economy and where the construction activity is taking place. So, I really don’t see pricing should continue to be fairly good. The tailwind in Mexico, Mexico’s pricing is quite positive, it’s in the double digits. So I don’t see the margin situation kind of deteriorating as we go through the rest of the, as we go through the rest of the year.

Operator: Thanks, Maher. And the next question comes from Carlos Peyrelongue from Bank of America.

Carlos Peyrelongue: Thank you, Lucy, congratulations on the results. My question was answered, but on the cost side, but I just wanted to take your opportunity. I did not hear well the amounts, price increases for the second half if there’s any specific number in the U.S. that you could comment.

Maher Al-Haffar: Yes. In the U.S., we have, we are expecting a, in terms of pricing, a, let me see.

Louisa Rodriguez: Do you want me to do it, Maher?

Maher Al-Haffar: Yes, would you please, yes, I’m trying to have…

Louisa Rodriguez: Sure. Okay. We have announced high single digit pricing increase in all states with the exception of California and Arizona. So, this would be about 65% or so of our total volumes. And this is for July, so it’s the beginning of third quarter. So, I hope that answers your question, Carlos.

Carlos Peyrelongue: Yes, it does. Just a follow up on California. If I remember correctly, there was no pricing increase in January also because of weather issues, is that correct?

Louisa Rodriguez: The January pricing increase was delayed, so it happened, depending on customers and region that happened, somewhere from March to April in general, but it did take place. So this would be a second pricing increase. Well, from all the other markets, it’s the second, we are not raising prices in California a second time in July. Okay.

Carlos Peyrelongue: Got it.

Louisa Rodriguez: Thank you, and obviously some of that reflects the weather issues that have taken place in first quarter. And the California was obviously the hardest hit the state from a weather perspective.

Operator: Okay. Great. And I think we have time for one last question, which is coming from Nick Lippmann from Morgan Stanley. Nick, please go ahead.

Nikolaj Lippmann: Thank you very much. Congratulations on the numbers. I have one question pertaining to maintenance and import in relationship to the U.S. market clearly an area, where you guys have asymmetric information. Did we see a lot of that last year in 2022? Can you talk a little bit about how we should think about sort of extraordinary maintenance and the U.S. market and the levels of imports that we could expect this year for the rest of the year. And Maher the comment about 45% decline in imports. Was that a year-on-year first quarter comment or quarter-on-quarter or was it a forward-looking 23 or 22 kind of comment? Thank you very much.

Maher Al-Haffar: Yes. I mean, and help me out Lucy here if I miss out on any — the drop in import volumes was a year-over-year drop first quarter and of course that’s a very, I mean, very important contributor also to improvements in margins in the U.S. business because, you’re essentially dropping away volumes that are less, less profitable, but profitable nevertheless. And I think that that was a very good reaction from our operators there to kind of redirect and or try to change the timing of receipt of those shipments, to coincide with what’s happening and particularly in California, I would say, because of the weather patterns that we’ve already talked about there. And, how is that likely to evolve during the rest of the year?

I mean, frankly, I mean, we are, we need to take away and see attitude to see what happens to weather patterns and whether, how demand is going to. But, we have a very robust logistics and supply chain management process and we don’t expect, I mean, this was managed by us. This drop was a managed drop. It was not something that happened because of exogenous factors. So, my, my, our expectations is that we will continue to positively manage that situation and to the extent that we need to modulate imports either upwards or downwards based on supply demand dynamics. We will do that during the rest of the year. It should not be an issue. Now, the other question you had was, was, I’m sorry, can you remind me again?

Nikolaj Lippmann: Yes, I think, I think it is just very length. If you’re thinking about doing any extraordinary maintenance and any of your plans this year and they will have lower domestic U.S. production, and import more for that region.

Louisa Rodriguez: I think Nick…

Maher Al-Haffar: Go ahead Lucy, go ahead.

Louisa Rodriguez: Our expectation is that we will have increases in overall maintenance costs, nothing exceptional this year. But I would remind you that the timing of it on a quarterly basis is going to be important because second quarter of last year, we had quite a bit of maintenance that was consolidated in that quarter. We are not expecting, we would expect more of a reversal in second quarter. We did have in first quarter some increase in terms of year-over-year maintenance and I think in third quarter, we would expect the same as well for the U.S. So, it will vary different quarter-to-quarter, nothing exceptional, about a 10% increase, which is kind of been lined with the consolidated level in terms of incremental maintenance. Now, of course, you can’t control for outages that may occur, but I think it’s a good indication of where we expect the year to be.

Maher Al-Haffar: And also, I mean, I would say, in the maintenance side for the whole of the company, I mean, again, nothing extraordinary in the U.S. I mean, inflation. I mean, there is definitely inflation in spare parts. There’s inflation in labor. I mean, there’s inflation. I mean, so, so if you see a slight uptick in maintenance, it’s not because there’s anything extraordinary. It’s just part of the inflation effect. I mean you know…

Louisa Rodriguez: Okay, Nick, I think we’re done with that. So, we appreciate you joining us today for our first quarter webcast and conference call. If you have any additional questions, please feel free to contact investor relations. And we look forward to seeing you again on our second quarter webcast that will take place on July 27. Many thanks.

Operator: Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.