CEMEX, S.A.B. de C.V. (NYSE:CX) Q1 2024 Earnings Call Transcript

CEMEX, S.A.B. de C.V. (NYSE:CX) Q1 2024 Earnings Call Transcript April 25, 2024

CEMEX, S.A.B. de C.V. beats earnings expectations. Reported EPS is $0.17, expectations were $0.13. CEMEX, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to the CEMEX First Quarter 2024 Conference Call and Webcast. My name is Elliot, and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

Lucy Rodriguez: Good morning. Thank you for joining us today for our first quarter 2024 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 am pleased with our first quarter results, which outperformed our expectations underlying our 2024 guidance. In fact, EBITDA represents a first quarter record for the company. Despite fewer working days and difficult weather conditions in many markets, EBITDA grew 5%. Three of our four regions markets accounting for 90% of consolidated EBITDA, experienced a combined growth rate of 15%. Mexico deserves special mention, setting a record in terms of quarterly EBITDA generation. EBITDA margin expanded year-over-year and sequentially, driven by a favorable price cost dynamic. Our prices rose mid-single digits, while input cost inflation slowed. Growth investments and urbanization solutions continue to materially support EBITDA growth.

Net income grew 13%. Our return on capital 2.4%, was slightly higher relative to the same period last year despite the impact of the Spanish tax fine that we recognized in fourth quarter 2023. In other highlights, last month, we achieved an important milestone with the receipt of an investment-grade rating of BBB- from Standard & Poors. This rating action was recognition of our medium-term financial strategy as well as consistent financial performance. In late March, we hosted our 2024 CEMEX Day presenting additional insights into our regions, decarbonization progress and goals, capital allocation and strategy. I would encourage you to access the replay on our website. This month, we refinanced our Eurobank facility, further improving our maturity schedule and liquidity position.

In March, we published our eighth integrated report as we continue to set the pace for our industry towards a profitable climate action transition. As part of our portfolio rebalancing efforts, we have announced an agreement to divest our interest assets and operations in the Philippines for a total enterprise value of $800 million. We currently expect to finalize this transaction before the end of year, aligned to our strategy. The majority of divestment proceeds would be repurposed to fund our growth strategy in the U.S. market. Net sales rose 3% with increases in Mexico and [indiscernible] partially offset by volume declines in the U.S. and EMEA. EBITDA rose mid-single digits, reflecting growth in Mexico, SAC and the U.S. We estimate that the impact of fewer working days in the quarter amounted to an additional $20 million in EBITDA or 3% in year-over-year growth.

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Q&A Session

EBITDA margin increased 0.5 percentage point as our pricing strategy effectively outpaced input cost inflation. Free cash flow after maintenance CapEx was negatively impacted by higher taxes, maintenance as well as lower fixed asset sales. The decline in consolidated volumes results from difficult weather conditions in the U.S. and Europe, fewer working days and slowing economic growth in several EMEA countries. In the case of the U.S., we have seen volumes improve with better weather conditions in March and year-to-date April. In Europe, we also have seen volumes pick up over the last six weeks, and we expect volumes to continue to improve over the next few quarters with better economic conditions, the possibility of interest rate cuts and easier year-over-year comparisons.

Mexico stood out in the quarter with strong volume performance, driven by improved bagged cement activity and continued strength in the infrastructure and industrial segments. Despite the challenging volume backdrop, our consolidated prices were up year-over-year and sequentially. Sequential pricing was up in all markets and for all products as set for cement in the U.S. In the U.S., on a like-for-like basis, excluding a year-end adjustment, cement prices rose 1% sequentially. The sequential pricing achievement results from successful execution of first quarter pricing increases, reflecting the ongoing but decelerating input cost inflation. We continue to execute on our commercial strategy designed to reflect input cost inflation in our prices, recalibrating always to current inflation levels with the goal of maintaining or improving margins.

Our commercial strategy, along with our growth investments and organization solutions were instrumental in driving EBITDA growth in the quarter. The effectiveness of our pricing strategy is visible in the favorable price cost dynamics in the quarter, where the ratio of our pricing contribution to cost increased to 2x, about 0.3x higher than in 2023. Decelerating costs are also supported with cost of goods sold as a percentage of sales declining 1.6 percentage points. Margin increased on a year-over-year and sequential basis in a quarter where the trend behavior is for a decline in margins from fourth to first quarter. Our bolt-on investments continue to be an important component of growth, accounting for 10% of total EBITDA and 26% of incremental.

EBITDA was impacted by lower volumes as a result of bad weather, fewer working days and difficult demand conditions in EMEA. We expect better overall volume performance in the following quarters. In March, we published our eighth annual integrated report covering 2023, which details how our strategy, governance, sustainability and financial performance intersect to create value for our stakeholders. Some of our main accomplishments presented in this report related to climate action are since the creation of our future in action program in 2020. We have reduced Scope 1 and 2 CO2 emissions by 13% and 12%, respectively, a pace that previously would have taken 15 years to accomplish. We repurposed close to 28 million tons of waste and byproducts through the Regenera business line.

We increased alternative substitution rate to 37% and reduced clinker factor to 72%, both at record levels and contributing to the profitability of our business. In 2023, we increased the adoption of our low-carbon [indiscernible] brand currently a more than $7 billion brand to 56% for cement and 48% for concrete. I encourage you to access our integrated report on our website. Organization Solutions, our fastest-growing business continued its double-digit EBITDA growth rate with important margin expansion in the quarter. Now accounting for 12% of consolidated EBITDA. This business is now reaching scale as a cost. Mexico, with its dominant regenerative waste management business is currently the largest regional contributor. Main drivers of growth in the quarter were payment services and related to the high level of former construction activity in Mexico.

Additionally, EMEA is leading the development of our construction demolition and excavation materials vertical. And now back to you, Lucy.

Lucy Rodriguez: Thank you, Fernando. Our Mexican operations once again delivered strong results with EBITDA growing to record levels, supported by higher prices for our products strong volumes and decelerating input cost inflation. Despite two fewer working days, volume performance was strong. Bulk cement and aggregate volumes grew double digit on an average daily sales basis. while ready-mix volumes rose mid-single digits, reflecting the dynamism of formal construction in the country. Infrastructure and nearshoring with particular strength in the North and Southeast remain the principal growth drivers. We continue to see improvement in bag cement volumes with mid-single-digit growth resulting from increased social spending, lower inflation and a favorable comparison base.

Based on our first quarter performance, we are raising our cement and ready-mix volume guidance from low single digits to low to mid-single-digit growth for the full year. Sequential prices for our cement, ready-mix and aggregates rose low single digits, reflecting the traction of our January price increases implemented to offset the ongoing cost inflation of the business. On a year-over-year basis, our double-digit ready mix and aggregate price increases and a mid-single-digit cement increase as well as decelerating energy costs led to an expansion in EBITDA margin of 0.5 percentage point. In the U.S., quarterly performance was significantly affected by bad weather in much of our portfolio. Despite these weather challenges, EBITDA rose 3%, while EBITDA margins expanded almost 1 percentage point.

Margin growth was driven by higher prices and lower cost inflation, largely in the form of fuel, freight and imports. In aggregates, where volumes are less impacted by weather conditions. Volumes grew 9% on the back of increased base material sales for infrastructure work. Cement and ready-mix volumes declined high single digit and mid-teen percentage, respectively, due to heavy precipitation or deep free conditions in much of our portfolio. We estimate the impact of weather conditions on cement volumes explain approximately half of the volume decline. Over the last two months, with better weather, we have seen cement and ready-mix volumes recover sequentially. The difficult weather conditions, however, delayed cement and ready-mix pricing increases in several of our markets to April.

We implemented pricing increases in Florida in the first quarter and cement pricing in the state is up 2% sequentially, excluding freight to customers. In aggregate, sequential prices increased 6% on the back of price actions in Florida, Texas and California as well as favorable geographic volume mix. We expect to implement our pricing strategy in the rest of our aggregate markets over the next few months. Going forward, we remain optimistic on the underlying demand for our products supported by strong contract awards for highways and streets, announced industrial projects related to onshore and clean energy and residential market recovery. In EMEA, EBITDA declined 41%, driven by a challenging demand backdrop in Europe and geopolitical events in Asia, Middle East and Africa.

EBITDA in Europe experienced the largest decline of 44% due to a significant drop in volumes, while our prices for cement, ready mix and aggregates rose low to mid-single digits sequentially. Volumes were down between high single and double digit for cement, ready-mix and aggregates due to fewer working days, bad weather and a strong prior year comparison base. Demand conditions were very much a mixed bag with volume declines in the U.K., Germany and France, while the rest of our European portfolio showed a positive volume performance. We recognized that first quarter in Europe typically represents approximately 12% of full year European EBITDA and can be significantly disrupted by weather. It should not be seen as an indicator of full year performance.

In fact, our European results actually outperformed our expectations for the quarter. As a result, given the easier comp base going forward as well as an expected improvement in demand outlook, driven by lower inflation and prospects for a more benign interest rate environment, we are upgrading our cement volume guidance slightly to a flat to low single-digit increase. On climate action, we continue our reduced before capture CO2 strategy in Europe with sales of our lower carbon virtuous cement products increasing by 1 percentage point, reaching 93% of sales in the first quarter. Finally, EMEA also experienced a large decline in EBITDA of 35% due to ongoing tensions from the conflict in the Middle East. Our SCAC operations once again delivered solid results with its fourth consecutive year-over-year growth in EBITDA, led by strong pricing performance and decelerating input cost inflation.

Pricing led top line growth with our cement prices increasing mid-single digit more than compensating for input cost inflation. Regional cement volumes were pressured by 2 fewer working days in the quarter as well as continued weak bag cement demand. EBITDA margin increased 3.8 percentage points, largely explained by the strong pricing contribution, lower energy and raw material costs as well as the timing of kiln maintenance. In the Dominican Republic, while weak demand in the informal segment continues to weigh on demand, formal construction remains robust, fueled by projects in the tourism and infrastructure sectors. In Jamaica, volumes were supported by strong growth in the tourism sector. And in Panama, cement volumes increased high single digits, mainly driven by infrastructure projects, such as the metro, the fourth bridge over the canal and highway expansions.

And now I will pass the call to Maher to review our financial development.

Maher Al-Haffar: Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are pleased with our first quarter performance. with growth in sales, EBITDA and EBITDA margin. This was a record first quarter for CEMEX and a record for our operations in Mexico. As we noted earlier, this quarter had fewer working days than last year. Adjusting for this difference, our EBITDA would be higher by approximately $20 million or an additional 3 percentage points on both a reported and like-for-like basis.. The 0.5 percentage point increase in EBITDA margin was driven primarily by pricing, easing inflation and disciplined cost management. Our improved performance speaks to the success of our pricing strategy, cost containment efforts and the result of our growth investment and urbanization solutions business.

On the cost side, we saw a 20% decline in fuel cost per ton of cement, driven by a decline in the market price of fuels as well as our efforts to increase the proportion of lower cost and lower carbon fuels. On a sequential basis, consolidated fuel cost per ton declined 11%. Free cash flow after maintenance CapEx was about $160 million lower than prior year. This is due primarily to higher taxes paid in Mexico and currency tax gains from a strong Mexican peso. Due to the seasonality of our working capital cycle, First quarter free cash flow is typically negative and turns around in subsequent quarters. Last year, we started implementing targeted actions to improve working capital, optimize our inventories and turns of trade throughout the company.

While first quarter working capital investment was substantially similar to the prior year, we expect to see a positive trend throughout the remainder of the year and remain on track to achieve our previously stated guidance of reducing more than $300 million in working capital this year. Net income increased 13% due primarily to better operational results and lower taxes. We are quite pleased with achieving our investment-grade rating from S&P. This should translate into significant value for all of our stakeholders and is a testament to the success of our financial strategy. As we have said before, we intend not only to reach investment grade but to maintain investment-grade ratings through our business cycle. During the quarter, we executed a series of transactions that further strengthened our financial position.

First, we reopened our sustainability-linked long-term notes in Mexico in Mexican pesos for an equivalent amount of approximately $320 million and swap them into U.S. dollars. We started tapping the source of funds last year for the first time in over 15 years at an attractive cost compared to our U.S. dollar curve. And second, we upsized and extended the maturity of our €500 million sustainability-linked loan facility. The new facility consists of a €450 million term loan maturing in 2029. And a new €300 million committed revolving credit facility. This brings our total committed revolving facilities to slightly over $2.3 billion, which puts us in the best liquidity position we’ve had in recent years. Our leverage ratio stood at 2.18x, up 0.12x versus December.

Typically, we see a sequential increase in leverage in the first quarter due to the seasonally negative free cash flow that reverses as we go through the year. As mentioned in our recent CEMEX Day, we are committed to reducing our leverage ratio by 0.5 turn in the next 24 to 36 months. And now back to you, Fernando.

Fernando Gonzalez: I’m happy with our performance in the first quarter and believe it sets us up well for the rest of the year. Our full year guidance has always assumed more EBITDA growth in the second half of the year. And as I said previously, first quarter outperformed our expectations. In Europe, the biggest headwind in the quarter, we do expect better performance going forward. We continue to expect favorable price to cost dynamics for the rest of the year. We also are expecting and already seeing volumes recovering in the U.S. with better weather. In addition, we expect more pricing traction from second quarter pricing increases. Despite better performance to date, as this is only the first quarter, we are maintaining our full-year guidance for EBITDA of a low to mid-single-digit increase as well as maintaining guidance for all free cash flow items. This assumes FX rate as of March 31 levels for the remaining of the year. And now back to you, Lucy.

Lucy 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 refer the prices for our products. And now we will be happy to take your questions.

A – Lucy Rodriguez: [Operator Instructions]. And the first question comes from Alejandra Obregon from Morgan Stanley. Ale?

Alejandra Obregon: Hi, good morning, CEMEX team. Thank you for taking my questions. And congratulations on the record quarter. I guess my question is on the Philippines asset sale. That’s a very positive for your free cash flow. So I was just wondering if you can help us understand with this transaction. Of course, you’ve approved means for you in terms of cash inflows. How much of your debt is in your balance sheet from this operation today? And maybe there’s some details with regards to what it means for working capital and CapEx. I mean anything that can help us assess the positive impact for free cash flow here? And anything on the timing you mentioned year-end, but would it be fair to assume fourth quarter? Or is that something potentially before that? Anything — any color here would be very helpful. Thank you.

Maher Al-Haffar: Thank you, Alejandra. Fernando, would you like me to take a stab at that?