CEMEX, S.A.B. de C.V. (NYSE:CX) Q2 2023 Earnings Call Transcript

CEMEX, S.A.B. de C.V. (NYSE:CX) Q2 2023 Earnings Call Transcript July 27, 2023

CEMEX, S.A.B. de C.V. misses on earnings expectations. Reported EPS is $0.18 EPS, expectations were $0.19.

Operator: Good morning. Welcome to the Cemex Second Quarter 2023 Conference Call and Webcast. My name is Lauren, 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. [Operator Instruction] 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 second quarter 2023 conference call and webcast. We hope this call finds you in good health. I’m 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?

Fernando Gonzalez: Thanks, Lucy, and good day to everyone. I’m beyond pleased with our second quarter results. But before we drill down, I must congratulate our employees around the world who have been instrumental in our mission to recover profitability in the face of twoyears of extraordinary input cost inflation. It is your efforts and dedication that has led to this moment, and I am confident there is more to come. While sales grew 10% EBITDA rose almost 30% as a result of our pricing strategy, growth investment contribution and decelerating input cost inflation. Indeed, we have seen total cost as percent of sales declining for three consecutive quarters on a sequential basis and for the first time on a year-over-year basis.

This coupled with pricing has led to an expansion in our EBITDA margin in the quarter that is approaching our goal of recovering our 2021 margin. Our growth strategy of bolt-on margin enhancement investments, which we adopted in 2020 is paying off and continues to ramp up as projects are completed. Our urbanization solutions business, one of the beneficiaries of this strategy continues to expand rapidly. In climate action, we continue to execute on our future and action road map posting significant quarterly CO2 reductions since 2020. Free cash flow after maintenance CapEx is growing both sequentially and year-over-year. Importantly, the strong earnings growth is accelerating our deleveraging trajectory with the leverage ratio now under 2.5 times.

And our return on capital in the double-digit area continues to improve, expanding the margin to our cost of capital. Net sales rose double digit with contributions from all regions. EBITDA grew by 29%, reflecting not only the success of our pricing strategy and decelerating cost inflation, but also the incremental contribution of approximately $50 million from our growth investment portfolio and expanding organization solutions business. EBITDA margin expanded significantly, almost reaching second quarter 2021 levels. Free cash flow after maintenance CapEx rose as a result of higher EBITDA, coupled with lower working capital needs. While consolidated cement volumes were negative, the magnitude of the decline relative to first quarter shows improvement driven largely by Mexico, SCAC and the United States.

In Mexico, in particular, cement volumes turned positive for the first time in two years, while U.S. volumes rebounded some from the weather issues of first quarter. Aggregates volume increased, reflecting growing infrastructure demand in Mexico, SCAC and the U.S. Despite a soft volume backdrop, prices in all regions continue to catch-up to the cumulative cost inflation of recent years. Consolidated prices across our products rose between 11% and 18%. Importantly, cement and ready-mix prices increased sequentially with all regions showing growth. EBITDA growth is largely explained by the contribution of pricing over incremental cost, our growth investments and growing urbanization solutions business. The contribution of pricing relative to cost continues to grow, allowing us to increasingly cover the cost inflation of the last few years and expand our margins to levels close to our 2021 margin goal.

Importantly, while still elevated, input cost inflation is easing, after two extraordinary years of increases. Margin performance over the last three quarters has confirmed that we are well on our way to recover 2021 margins. Second quarter margin expanded by approximately three percentage point year-over-year and sequentially, reaching 21.1%. This is happening despite the margin headwinds of product mix and lower volumes. The improvement is driven not only by pricing, but also by recent cost inflation and operational efficiencies, as shown in the sequential decreases in COGS as a percentage of Sales, over the last quarters. We continue making significant inroads in our decarbonization efforts, executing against our plan-by-plan 2030 roadmap.

CO2 per ton decreased by 4.4% in the first half of 2023, with record levels for our two main decarbonization levers, Alternative fuels and Clinker factor. Since the launch of our Future in Action program in 2020, we have reduced CO2 by 11% in 2.5 years, a reduction that previously would have taken us 14 years to achieve. Importantly, our path to reach our 2030 decarbonization goal is profitable, as the levers we use either substitute for more expensive raw materials or fossil fuels. Indeed, the investments we make to deliver on our 2030 goals, must meet the same return criteria as all growth projects. Future in Action, however, is not limited simply to our production process, but rather through the carbonizing the entire life cycle of our products and industry value chain.

As such, we continue to develop our waste management solutions business, Regenera. We achieved some important milestones in the quarter to position this business for growth. First, we successfully opened a new state-of-the-art construction, demolition and excavation waste recycling center in Israel. This facility will be able to transform up to 600,000 tons of construction and demolition waste into recycled raw materials that can then be reintegrated into the construction value chain conserving virgin raw materials. Additionally, in May, we established a partnership with PASA, a leading waste collection company to operate a new facility in Puebla, Mexico’s fourth largest city. We expect the venture will manage over 50% of the city’s municipal and industrial waste by late 2025 and be an important source of alternative fuels for our operations.

This partnership has a direct impact on reducing waste sent to landfill and ensuring that non-recyclable waste is processed in an environmentally friendly manner, while avoiding methane emissions. And now back to you, Lucy.

Lucy Rodriguez: Thank you, Fernando. Our Mexican operations delivered strong results with a double-digit increase in sales and high single-digit growth in EBITDA, as our pricing strategy continued to make inroads in offsetting the inflation of the last two years, EBITDA grew for the third consecutive quarter. EBITDA margin decreased primarily due to an unfavorable product mix as ready-mix, bulk cement and urbanization solutions grew faster than higher margin bagged product and higher distribution, electricity and labor costs. The alternative fuels substitution rate reached a record of approximately 44%, with four plants operating at levels above 50%. Our ability to source alternative fuels will be enhanced by the recent acquisition of the Waste Management business in Puebla.

Cement volumes rose 1% and the first sign of demand recovery in two years and grew 12% sequentially. Demand was driven not only by continued strong bulk cement performance linked to formal construction, but also from market share recovery in bagged products. Ready-mix and aggregates volumes also benefited from strength in formal construction with growth of mid single digits and double-digit, respectively. Volumes remain supported by near-shoring investments in border states and the Bajio region as well as tourism construction and an accelerated execution of infrastructure projects ahead of national election. Next month, our 1.5 million tonne capacity expansion in Tepeaca will be fully operational, allowing us to serve the expected medium-term needs of the country.

Demand is picking up in Mexico and capacity utilization remained high, especially in the North and Southeast region. While we believe this new capacity fills an important demand need and will not be disruptive. As always, we have the ability to adjust overall production. With the aim to continue recovering margins, we have announced additional price increases for cement and ready-mix in July. For 2023, we now expect low single-digit growth for cement volumes and high single-digit growth for ready-mix and aggregates. The U.S. had a record quarter, benefiting from our pricing strategy, recent growth investments and decelerating costs. The 87% growth in EBITDA and margin expansion reflects these trends as well as the prior year’s comparative base that was significantly impacted by heavy maintenance costs and supply chain disruptions.

Cement and ready-mix pricing rose 15% and 21%, respectively, and increased low single digits sequentially. Price increases announced for the third quarter cover approximately 90% of our cement volumes. Aggregates pricing rose 11%, but declined 6% sequentially due to product mix. While cement and ready-mix volumes rebounded from the significant first quarter weather disruption, volumes continue to be impacted by weather as well as the lower level of construction activity declining by 8% and 10%, respectively. Cement volumes were also negatively impacted by the sale of the terminal and closure of some minor operations in 2022 as well as the conclusion of a major construction project. We estimate the impact of this along with weather, represents around 70% of the volume decline.

Aggregate volumes increased by 5%, benefiting from the opening of the new sand mines in Florida as well as the acquisition of the Atlantic Minerals quarry in Canada, which closed in April. Excluding the impact of these events, aggregate volumes would have been up 1%. During the quarter, the housing market continued to stabilize as tight inventory in the existing home market, supports demand for new home construction. Single-family housing starts increased 11.4% in the second quarter versus first quarter, with permits increasing by 12.9%. We continue to see increased manufacturing infrastructure construction in our markets, supported by the bipartisan infrastructure bill, the inflation reduction app and the chip act. Trailing 12-month infrastructure and industrial and commercial contract awards in our key states were up 26% and 4%, respectively, through June.

Once again, our EMEA region delivered solid results despite a challenging demand environment. This quarter marks the seventh consecutive quarter with year-over-year growth in EBITDA. Top line and EBITDA growth were mainly driven by our disciplined pricing and carbon strategy as well as important contributions from growth investments. Our growth investments are yielding results with expected incremental EBITDA contribution of more than $40 million in 2023 for the region. Some examples of these projects include the alternative fuels facility in our Rugby plant in the UK. The acquisition of the majority stake of ProStein company in Germany, which doubled our aggregate reserves in the country. The installation of state-of-the-art cement mill separators in Croatia that will allow for lower clinker factor and power consumption and the new concrete paving product machine in Israel, among others.

EBITDA margin in EMEA expanded by almost 1 percentage points to the highest level in seven quarters. Europe continues showing strong cement pricing momentum with 28% growth year-over-year. Sequential cement prices rose 3% on the back of April increases in Germany and the UK. EBITDA in Europe rose 32%, while margins increased by 3.2 percentage points. Europe continues to post new records climate action, and the region is well on its way to match the EU’s 55% 2030 carbon emissions reduction target. While volumes are currently depressed, we remain optimistic over Europe’s prospects for the near future as the region pivots decisively towards a more circular economy and construction is supported by multibillion euro projects related to green renovation, transportation, climate adaptation energy reconfiguration and onshoring investment opportunities.

In the Philippines, cement volumes declined as a result of continued weakness in construction activity, driven by high inflation and interest rates, lower infrastructure spending and a tough comparative base. EBITDA margin continued to be impacted by lower volumes and inflationary pressures, particularly energy. We believe second quarter marks an inflection point in energy costs as we adjust our fuel sourcing to a more efficient energy mix. For more information, please see our CHP quarterly earnings, which will be available this evening. Net sales and EBITDA in the South Central American Caribbean region grew double-digit, driven by strong pricing contribution and decelerating energy costs. Cement volumes continued to be pressured by weak bag cement demand, although bulk cement ready-mix and aggregates showed positive performance supported mainly by the infrastructure sector.

After five consecutive quarters of EBITDA margin contraction, second quarter marks an inflection point with an expansion of 1.4 percentage points as a result of our pricing strategy and decelerating input cost inflation. In Colombia, cement volumes declined low single-digit, driven by weak residential sector, which was partially offset by strong infrastructure-related activity. We are optimistic on the medium-term outlook in Colombia with ongoing work on the 4G projects and the rollout of additional infrastructure investments such as the 5G projects and the Bogota Metro. In the Dominican Republic, while weak in formal cement demand weighs on bag cement volumes, we continue to see robust activity in formal construction, primarily in tourism and infrastructure-related projects.

In Panama, cement and ready-mix volumes increased, mainly driven by infrastructure projects related to the metro, the fourth bridge over the canal and highway expansions. Our operations in Panama remains an important export hub for sold-out markets in stack. And now, I will pass the call to Maher to review our financial developments.

Maher Al-Haffar: Thank you, Lucy, and good day, everyone. We are very pleased with our second quarter results with strong growth in sales, EBITDA, EBITDA margin and free cash flow generation. These results speak to the success of our pricing strategy and increased operating efficiency, coupled with decelerating cost inflation and contributions from our growth strategy and urbanization solutions. As Fernando noted, we are achieving record levels of alternative fuels utilization and clinker factor. We also continue to increase our sales of blended cement among other operating efficiencies, which not only get us closer to our decarbonization goals, but also reduce our cost and improve our margins. We have seen a significant improvement in our EBITDA margin year-over-year as cost inflation eased.

This is particularly true in energy, with market prices for our main fuels trending down in the quarter. While fuel costs on a per ton of cement basis increased 10.7% year-over-year. It declined 7.7% sequentially. We expect to see this improving trend in fuel costs to continue into the second half of the year. Higher EBITDA, coupled with a lower investment in working capital, partially offset by higher taxes delivered incremental free cash flow of $243 million in the first half of the year versus last year. Working capital investment this year is lower than last year by $114 million and we expect to end the year with an investment of less than half of what it is today. Working capital days for the quarter stood at roughly zero, up six days from 2Q last year.

This increase is due primarily to the inflationary impact in inventories as well as higher fuel stocks that should be consumed as the year progresses. The increase in cash taxes is a consequence of stronger results as well as the tax effect of foreign exchange on our US dollar-denominated debt. Net income was slightly higher than the prior year. The increase was driven primarily by better operational results and a positive foreign exchange effect partially offset by higher taxes and the premium paid for calling our 7 3/8 bonds earlier this year. We are happy with our accelerating glide path towards an investment-grade rating. As you know, this has been a strategic priority for us as we believe it holds enormous value creation for our shareholders.

We have focused on delivering on results and reducing debt, translating into a reduction of leverage of approximately 1.7x over the past 2.5 years. This year alone, our leverage ratio has declined 0.39x, ending the quarter at 2.45, reaching the lowest leverage level since we started measuring this metric in 2009 in connection with our syndicated bank facility. As we get into the second half of the year, when our working capital cycle turns positive for us, we expect to further reduce leverage as EBITDA continues to grow and debt continues to trend lower. And now back to you, Fernando.

Q&A Session

Fernando Gonzalez: Based on first half results, I’m quite optimistic for the rest of the year. We have additional pricing increases scale into rollout in several markets during the third quarter. We expect to see continued deceleration in key input costs, while the benefit from our growth investment portfolio should continue to scale. As a result, we are upgrading our EBITDA guidance to be in the $3.25 billion area, an approximate 21% increase year-over-year. For cash taxes, we now expect $400 million driven largely by Mexico. The expected increase reflects stronger results as well as the tax effect of foreign exchange on debt. We have made some minor adjustments in regional volume guidance which you can find details in the appendix. And now back to you, Lucy.

A – 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 a law, all references to pricing initiatives, price increases or decreases refer 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. [Operator Instructions] And the first question comes from Ben Theurer from Barclays. Ben?

Ben Theurer: Yeah. Good morning, Fernando, Lucy, Maher, congrats on the very strong results, first of all.

Maher Al-Haffar: Good morning.

Ben Theurer: And then my one question is really around the announcement you’ve just made and said that you continue to increase prices and targeting like, I think, 90% of the volume in the US, you said was an upper price increase. Clearly, we have seen in some regions, maybe a little bit of an impact on volumes. My question really is how should we think about your willingness to continue to boost pricing even in light of maybe some of an impact on volume and maybe some market share losses? Or would you consider at some point also being maybe a little less aggressive on pricing as cost pressure comes down to ultimately gain back some of the volume, which then in turn also be somewhat margin accretive. So just the balance between pricing versus a little bit of volume loss, how you think about this?

Fernando Gonzalez: Thanks, Ben. As you mentioned, we have to carefully balance the equation. But let me start by saying that our pricing strategy in the last — during 2022 and the first half of the year, and the months to come is really adjusted because of the very high level of our inflation, I mean, our cost and expense inflation. So it’s really the level of inflation that is guiding the level of pricing. And as we have mentioned, inflation is moderating, but it’s still double digits, meaning it’s not disappearing at all. So we need to continue monitoring the impact of this inflation. As an example, inflation of the cost per ton in US dollars at a consolidated level was — in the second quarter was 13%. So we cannot let’s say, stop considering these levels of inflation and considering them in our future pricing strategies.

Now regarding the balance, or the potential impact of this pricing or price strategies, regarding our market position or participation in every market might be different because of different reasons, but we are always evaluating the contribution of pricing and also evaluating our position in the market. And what we see is a process that takes months takes quarters, particularly when you are the one leading the price increase, which in some markets that is the case, in other markets, that is not the case. We don’t lead, sometimes we follow. But we have to evaluate the consequences in our market position and then taking the time to — if a market position was impacted, then taking the time for us to recover that market share. In our experience, it might take a period of six months to nine months for the full process to go through, meaning increasing prices, evaluating the impacts, rethinking on what is it that needs to be done, et cetera.

Now there is a there is a say to miss kind of simple. Your market share loss to pricing, you can gain it back through pricing. But so far, I don’t — or we don’t observe a particular deterioration in market shares because of our pricing strategies. So what you can expect is that as long as inflation continue at these high levels we should continue similar pricing strategies.

Ben Theurer: Okay. Perfect. Thank you very much. Congrats again.

Fernando Gonzalez: Thanks.

Maher Al-Haffar: Thank you, Ben.

Operator: The next question comes from Anne Milne from Bank of America. Anne, please go ahead.

Anne Milne: Good morning, Fernando, Maher, Lucy. Congratulations on the great quarter. It must feel very good to have such good numbers. So first of all, I just want to congratulate you as well.

Fernando Gonzalez: Thank you.

Anne Milne: Sure. On the change in the outlook from Fitch last night on your BB+ rating to a positive outlook. So that just leaves a hair now before you get on investment-grade rating. So I was just wondering, did they provide a time frame for the upgrade? And does this upgrade change anything on pricing on your financial instruments, which would probably be loans in this particular case?

Fernando Gonzalez: Yes. Thanks, Ann, for the question. And yes, we’re quite happy with the Fitch action. And just for those who may not have seen it, we’ve got a positive outlook on the external debt, and we also had an upgrade in our long-term debt in Mexico from AA minus to AA with a positive outlook as well. So pretty much on all categories, as you said, we’re a hair away from the next potential upgrade. Now typically, when Fitch and this is my perception is that typically, when they do get to a positive outlook, they have an internal — I don’t know if it’s a requirement or a tendency to review the rating within 6 months to 12 months. And they’ve kind of indicated that from reading between the lines and talking to them that we’re probably within close to half a turn based on the way that we measure our leverage from their investment-grade kind of parameters.

Now whether they will take us there this year, early next year. That’s up to them, of course, we have to wait and see how things evolve. But I think they’re constantly in touch with us, and we’re updating on our results, and we’re quite excited by the actions that they have taken on a day like today. I mean it was great. Now in terms of refinancing, Yes, I mean we — although we’re quite comfortable with our maturity profile for our liabilities, as you’ve seen from the presentation that was distributed this morning. Clearly, this upgrade and the feedback we’re getting from the capital markets should give us the opportunity before the end of the year to do some liability management that should improve the desk back going forward. So — but I can’t say exactly what that will be.

Now in terms of — in terms of improving our cost of borrowing, I mean the answer is yes. I can’t speculate on that impact at this point in time. I mean, it depends when we will do it. It depends on what the capital market conditions are. But if I were to take a look at our, where our bonds are trading. And I think you know better than I do on a daily basis when those — our bonds are trading. But the longer bonds are trading at these spreads that are close to around $250 million, $25 million if I compare those bonds to some of our peers, the peers albeit have higher ratings are materially tighter than that. But I don’t want to recommend — I don’t want to speculate on when we — and if we go about any refinancings, what the pricing impact is likely to be.

And we see this as a journey. And I mean, obviously, as you could imagine, we see this as a journey. And as we continue to improve our credit ratings, we do expect to reduce our cost of financing and increasing free cash flow. I don’t know if that answers the question. If there’s any follow-ups, I’ll be more than happy to address.

Anne Milne: Yes. Just the only follow-up would be how are the conversations with S&P going? That would be the second one that you — that also has a BB+.

Fernando Gonzalez: I really can’t comment, but I think I think today, with the results that we’ve seen today and with the track record and the acceleration on pricing, and the recovery and the expansion of price compared to cost on a consolidated basis should be good news for both of our rating agencies. But I can’t comment on any ongoing conversations with them.

Anne Milne: Okay. Well, thank you very much. Congratulations the positive outlook upgrade, and it’s a great quarter.

Fernando Gonzalez: Thank you very much,

Maher Al-Haffar: Thank you.

Operator: The next question comes from the webcast from Paul Roger from Exane BNP Paribas.

Paul Roger: It looks like your CO2 per ton of cement fell 4.4%, and clinker factor fell 1.1 percentage points in the first half. This is a bigger decline than peers. What’s driving this outperformance? Is it catch-up or something specific in your decarbonization strategy.

Fernando Gonzalez: Okay. Well, thanks for the question, Paul. Let me start by saying that the foreign fraction present of this quarter is pretty well aligned to what has happened in the last maybe 10 quarters. In ’21, ’22, we started making reductions of this size. When we put in place our future in action strategy and started speeding up, complementing and properly executing in that strategy. So if you remember, we’ve been reporting that in ’21 and ’22, we have reduced CO2 per tonne of cement by around 9.5%, which is in 2 years is a reduction that used to take us a decade. So — what I’m saying is that late ’20, we put in place a strategy started executing in ’21 and is paying off, and it’s paying off not only this quarter but for the last 10 quarters.

Now is this a catch-up, because we have realized that the reduction that we have systematically doing in the last two years and a half is higher than the one from our competitors. And maybe in very early stages, that was the case. But by the end of last year, using the CO2 per ton of cement as a proxy, our numbers were either equal or better when compared to other peers. So, I particularly referring to this quarter or to last quarter, we cannot call it a catch-up. Now what is it that we are doing? Well, what we’ve been commenting, which is using as much as possible the — let me call them the traditional levers to reduce CO2 introduction of Automap, which is offering lower carbon products in the market through our Vertua family of products, reducing the clinker factor, offering more composite cements in different markets, increasing the level of alternative fuels, particularly the ones with high contents of biomass.

In the second quarter of this year, the use of alternative fuels was 36.5%, which is the highest in the industry at least when compared to companies that make public reporting on this data. A couple of notes on this regard. In Europe, in particular, 70% of our fuels are alternative fuels is the highest figure in Europe. In Mexico, our largest plant at Baka [ph] more than 60% in alternative fuels and Mexico as a whole is around 40% of fuels. So we’ve been making lots of progress through some investments and increasing and improving all these levers, which, by the way, I have to always to remind everybody that these are very profitable investments. The last couple of investments we did in Europe in [indiscernible] to increase the use of alternative fuels up to 90% alternative fuels that where we are paid to use them.

So it’s a very accretive investments in these terms. At the same time, we’re increasing the use of — I repeat and things you all know, increasing the use of renewable electricity in electricity. And just to mention a few examples in Scope 1 in cement, but I think the important part is we — by now, after introducing our strategy future in action two years and half ago. What we’re doing is showing is demonstrating that we are also delivering. We are proving action, not just promises. And at the same time, we are very pleased because economically, it’s been an attractive transition so far. What is it that you can expect more of the same, plus the five projects we are developing in carbon capture, that’s not for the next quarter or the next couple of quarters, and I will take — we will take a little bit longer.

But the process continues and hopefully as successful as it has been in the last two and a half.

Lucy Rodriguez: Thank you, Fernando. And the next question comes from Vanessa Quiroga from Credit Suisse. Vanessa?

Vanessa Quiroga: Yes hi. Thank you. Congrats on the results. I want to go back to the topic of US pricing because you already reached the 2021 margin but you are indicating that you still need price increases to catch up with cost inflation. So, how can we understand that your target in this case should we expect maybe a slowdown in margin recovery in the second half? Or how can we understand this term strategy on prices with margins at these levels already? Thank you.

Fernando Gonzalez: Thank you, Vanessa. Maher you want to-

Maher Al-Haffar: Sure. Vanessa, I think that, first, obviously, the comp in the second quarter, as Lucy mentioned in the remarks, right, I mean it’s a tough comp and because of because of weather, because of heavy maintenance costs, supply chain disruptions, all the comments that Lucy made. And I think that one quarter doesn’t make — it doesn’t complete a pricing strategy, right? I mean I think we’re looking long term, and we certainly continue to see, as Fernando said, we continue to see input cost inflation, although it’s decelerating and demand is quite tight. So, I think that our pricing strategy continues to be in place, and we have some announcements that have been made for July and August in several of our markets. Lucy, I don’t know if you want to comment on that, but — and we’re reasonably confident that we should get an important part of that.

But leaving that aside, even if we were just to take a look at prices as they are if they don’t change throughout the year. Throughout the rest of the year, we’re looking at probably another 13% of pricing increase effect in the second half of the year. But this is something that we have to continue modulating, frankly, and we have to continue monitoring the inflation in our business in the US. And certainly, things are slowing down, but they’re still inflation, and we need to make sure that we continue to recover that, frankly. Lucy, I don’t know if you want to add to that?

Lucy Rodriguez: Sure. I mean, maybe just a couple of things. We did announce a second round of pricing increases in all markets in the US except for Northern California, which was hit by very, very bad weather, as you know, in the first quarter. And obviously, we’re in the process of rolling those out. So, we’ll have to wait and see how it goes. But we are — very helpful. I think on the cost side, too, it’s important to remember that as we’ve seen volumes come down in the United States, it’s allowed us to moderate imports, which were obviously lower margins, and we’ve been able to slow those down, which has been helpful. And then finally, on the cost side, we also — in the case of fuel, the United States is more heavily dependent on fossil tools as we ramp up our alternative fuels strategy in the US.

And much of our fossil fuels that we’re using this year are actually locked in at higher prices than what you’re seeing in the market. So, I think as we go forward, we should see some relief as those contracts start to reprice. So, I think that’s it. Thank you very much.

Vanessa Quiroga: Thank you . Thank you.

Lucy Rodriguez: Vanessa. So hopefully yes. Great. Okay. And the next question comes from Nik Lippmann from Morgan Stanley. Nik?

Nik Lippmann: I think some of your peers and certainly some of your clients on the ready-mix side are trying to push for kind of a cost plus pricing structure in parts of the US market. It’s been mentioned by, I think, Martin and a couple of other of your peers? And we shared a lot with some of the ready-mix guys. Is that something that you’ve looked at, at all? You have been — if not, it’s a very quick answer that you haven’t looked at it.

Lucy Rodriguez: Maybe I will start out on the imports just quickly. The imports on a year-over-year basis were slightly higher than last year. And I think this really reflects that in the first quarter of this year, we’ve reduced imports significantly. So we’ve begun to see those come into play. And maybe with regard to the second question, we do have escalators in place in our contract. So I think I don’t have the exact specific mix, it’s primarily in ready-mix and we can get back to you with further information on that. But we do have escalators in place. And they are working very well.

Nik Lippmann: Is it something that affects a material percentage of your cement volumes in the US, say, above one-third?

Lucy Rodriguez: I mean it’s primarily in ready mix rather than cement and cement typically has less contracts to begin with. So I think that it’s primarily on the ready-mix side more than the cement side.

Nik Lippmann: Got it. Thank you.

Lucy Rodriguez: Thank you, Nick. And the next question comes from the webcast from Francisco Chavez from BBVA. My question is on your guidance for cash taxes. Can you give us more color on the material increase in cash taxes and in your effective tax rate? Is this a one-off? Maher?

Maher Al-Haffar: Yes. Yes. Thank you, Francisco. And let me start by saying that we have kind of a unique situation because most of our debt is denominated in dollars, but that’s not the issue, but the fact that it’s in Mexico is the issue. And because of that, any FX appreciation. And as you have seen, the peso has appreciated almost 14% this year, that creates a taxable income for Mexican purposes. Now, that is a onetime event to the extent that we don’t continue to see and appreciation of the vessel because the comparison is always to the prior period. So I can’t tell you, I can’t speculate what the best is likely to do. But so far, it has appreciated and we have to pay on a monthly basis, the estimated cash taxes. So that’s a conversation that we have with the Mexican authorities, and we’re doing that.

But because of that appreciation and because of the outlook for the rest of the year, we felt that it’s important to change the guidance in terms of the cash taxes. Now, the other element that impacts taxes is the fact that our results are much better. I mean — and so clearly, we have to pay more taxes as a consequence of that. Now compared to last year, the reason that we have a bit of an uptick is because last year, we had and accumulated NOLs that were substantially consumed last year, again, because of a similar effect. We have the appreciation, we have high inflation. Both of those two items contribute to kind of increasing our taxable income for the Mexican authorities. Now this year, the inflation is likely to be less, and that’s an end of year kind of event.

Now in terms of effective tax rate, I think it’s very important that when you take a look at effective tax rate, the appreciation that is caused by the FX is not — does not show up in our revenues. So if you’re looking at taxes on the basis of net income or revenues, either of the two, you’re going to see an inflated tax rate. And you really need to kind of need to adjust for that effect. And then if you do, we think that our tax rate is pretty much in the middle of the pack of the industry. It’s not extraordinarily high. But we do believe unless you have further appreciation of the peso, which would have positive impact on our business, the effect should be one-off. I hope that answered your question.

Lucy Rodriguez: Great. Thank you, Maher. And the next question comes from Bruno Amorim from Goldman Sachs. Bruno?

Bruno Amorim: Yes. Thank you, Lucy. I have two questions. One is, is a follow-up on a prior question on where we are in terms of the margin recovery process. I do get your point that it takes time to offset higher costs. But as a matter of fact, if you deliver on your EBITDA guidance, this is going to be the highest level in several years, right? So it seems that the job to recover how input cost has already been done. So what’s next for the company? Should we expect higher volumes at maybe constant margins at the currently good levels in the next few years? Or — are you still going to push for higher margins in the next two years? That’s the first question. And then the second question is on the guidance. If we apply the typical seasonality between the second quarter and the second half of the year, this implies on an EBITDA closer to 3.5 billion for the full year, which is 8% above your guidance.

So any reason to believe seasonality would play out differently this year? Or is there any degree of conservativeness in your guidance. Thank you so much.

Fernando Gonzalez: Thanks for the question, Bruno. Let me start by commenting the process that we have gone to the way basic and relevant variables have been evolving. And our reaction, we saw high inflation hitting everybody hitting our cost structure and expenses in late 2021. And since then, what we’ve been doing — is putting in place a pricing strategy that allow us well, the original idea was for a pricing strategy, allowing us not to lose margins, but it didn’t happen that way. So we lost margins in 2022, but we continue with the idea of recovering margins of 21%, and that has been the north in this pricing strategy. As we commented in the previous question, we are almost there. We have almost recovered 2021 margins. But remember, it’s been a quarter, and we need to recover dollar loan.

And also, I also commented that even though this year, we are having the benefit of a pricing strategy plus a moderation in inflation, making the contribution in EBITDA larger than last year. We still have double-digit inflation. And as you can imagine, the margin can deteriorate. We do have a double-digit inflation the precise number, I mentioned was 13%. You better continue monitoring and do whatever it takes, not to deteriorate the level of margins that we finally achieved in the second quarter. So we want to continue our strategy, assuring that we will fully recover the margin that we used to have in 2021. Now, regarding the other comment or question you made on estimates and our guidance. If you remember, we gave guidance early during the year for the whole year and then after the first quarter, we decided not to comment on guidance, because it was — there were some positive signs but they were not conclusive.

So we prefer to wait until today. So now we are guiding to the €3.25 million and you know what, there might be, who knows, there might be some upside risk as you have suggested because of the basic ratio of the proportion of the first half compared to the second one. That might be the case. But for the time being, we feel more comfortable with the current figure. The fact that we’ve been able to almost recover margins is not a guarantee of the success we will have important strategies in the next six to 12 months. So we want to be prudent. And let’s see how it goes. But I think your observation is solid.

Bruno Amorim: Thank you so much. Very clear and congratulations …

Lucy Rodriguez: Thank you, Bruno.

Bruno Amorim: …on the results. Thank you, everyone.

Fernando Gonzalez: Thank you. Operator: And the next question comes from Adrian Rodriguez from JPMorgan.

Adrian Rodriguez: Thank you, Lucy. Hi everyone. My question is a bit also related to the previous one, but in a different way. What did you imply in terms of margins for the second half for the guidance for the new guidance that you have?

Maher Al-Haffar: I mean…

Lucy Rodriguez: Maybe I’ll start

Maher Al-Haffar: Yes. Go ahead.

Lucy Rodriguez: Just I think Adrian, as you know, we don’t typically guide to margin. So I think that, that’s probably the best answer any of us can give you right now. But I don’t know if you have a different question, we’re happy to take it. But as you know, we do not normally guide margin.

Adrian Rodriguez: Okay. Fine. Fine. Let’s see. So I’ll take another question then.

Lucy Rodriguez: You could try Adrian, please.

Adrian Rodriguez: Yes. Thanks. Thanks. Why the increase in net debt in the quarter when you have positive free cash flow.

Maher Al-Haffar: Well, I mean, why the increase in net debt, I mean, we do have a number of investments that we are making that are below the line sometimes like the acquisitions of Atlantic Minerals. We bought some additional land and reserves in the U.S. In addition to that, we made a small acquisition in Israel. There’s a negative impact because of derivatives. There’s the coupons on the perpetuals, for instance. So all of that adds up, and that’s kind of what gave us a little bit of an increase in net debt. But it’s a minor increase. I mean, it’s nothing to write home about Adrian.

Adrian Rodriguez: Okay. Thank you, Maher.

Lucy Rodriguez: And maybe just to just add on, Adrian, the acquisitions that Maher suggested the Atlantic Minerals, Israel, for example, it amounts to about $100 million in total, which I think would explain that difference that you’re talking about.

Adrian Rodriguez: Okay. Good. Thanks

Lucy Rodriguez: Okay.

Maher Al-Haffar: Thanks a lot

Lucy Rodriguez: Thank you, Adrian. And we have time for one more question. We’re trying to be cognizant those analysts who have a lot of earnings calls today. And the last question comes from Gordon Lee from BTG Pactual.

Gordon Lee : Hi, everybody. Thank you very much for the call. And I’d like to have my congratulations. I have a question that’s similar to Anne, but from the equity perspective, Fernando, which is given the — obviously, the very robust operating outlook, the fact that on your guidance, you would be close to 2.2 times leverage at the end of the year, assuming flat net debt. I was wondering what your latest thinking was in terms of the potential timing and the form as well of returns to — of cash returns to shareholders. I don’t know whether you have any sort of updated views on that now that we’re past the first half? Thank you.

Fernando Gonzalez : Thanks for the question, Gordon. I think what we’ve been commenting is that we would like to systematically start paying dividends and – and having and continue having the option of share buybacks once we achieve investment grade. Now the question is when is it that we’re going to be achieving investment grade. And it seems like we are closer to that option. So I think, by early next year, we will know what the situation will be. And we might — let’s see how it goes. At this point in time, we don’t know, but we might start paying dividends or buying back shares. We cannot disclose the specific way we might be doing it, but we will communicate that timely. Again, the depending on us achieving investment grade or at least to be so close to it.

So we might start paying dividends next year. It’s not a commitment, it’s not a statement. It’s just a comment to sort of answer your question in terms of when and how. And whenever we start, we want to start with — as you can imagine, if we are at a leverage ratio of two times, and we have already some commitments with investments in growth and others, we are going to start with not a small, but a moderate type of dividend to be increased to time. That’s what I can comment on.

Gordon Lee: Perfect. Thank you very much. That’s very clear. Thank you.

Fernando Gonzalez: Thank you.

Lucy Rodriguez: We appreciate you joining us today for our second 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 third quarter webcast that will take place on October 26. Many thanks.

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