CEMEX, S.A.B. de C.V. (NYSE:CX) Q3 2023 Earnings Call Transcript

CEMEX, S.A.B. de C.V. (NYSE:CX) Q3 2023 Earnings Call Transcript October 26, 2023

CEMEX, S.A.B. de C.V. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.23.

Operator: Good morning and welcome to the Cemex Third Quarter 2023 Conference Call and Webcast. My name is Daisey, 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 to begin. Lucy please proceed.

Lucy Rodriguez: Good morning. Thank you for joining us today for our third 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. Before we begin, I would like to point out a few changes in our CEMEX quarterly reporting, reflecting the higher CEMEX ownership of CHP and CLH’s delisting, we will be moving this quarter from a country reporting framework to more of a regional disclosure. Consequently, we will include quarterly regional results and full year guidance for South Central America and Caribbean and the Asia, Middle East, and Africa subregion, composed of the Philippines, Egypt, Israel, and the United Arab Emirates.

Currently, this subgroup represents approximately a quarter of Europe, Middle East, Africa, and Asia’s EBITDA. And now I will hand it over to Fernando.

Fernando Gonzalez: Thanks, Lucy and good day to everyone. Before I begin, as we watch this terrible situation unfold in Israel and the Middle East, I would like to convey that our thoughts are very much with the people affected by these events. We have accounted for all our employees as well as our assets in Israel. We remain fairly committed to prioritizing our people’s health and safety and as such, we are supporting in every possible way, our employees, their families and communities. Now, moving on to our third quarter performance. We continue delivering very strong results with EBITDA growing 32%, reflecting the success of our commercial and growth strategies. Decelerating input cost inflation, coupled with strong pricing led to a material margin expansion.

For the first time since we launched our pricing strategy in mid-2021, our quarterly EBITDA margin exceeded our goal of recovering 2021 margins. The incremental EBITDA contribution from our growth investments continue to ramp up accounting for 11% of incremental EBITDA. In addition, our urbanization solutions business is expanding meaningfully. On the customer centricity front, we achieved a record Net Promoter Score of 73% in the quarter, a benchmark for the industry and similar to digitally native companies. In climate action, we continue to post record lows in CO2 emissions. Free cash flow grew significantly, driven by higher EBITDA and lower investment in working capital. Importantly, the strong earnings growth has amplified our deleveraging trajectory with the leverage ratio now at 2.16 times, a reduction of almost one-third of a turn.

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Q&A Session

And our return on capital in the double-digit area keeps expanding relative to our cost of capital. While net sales grew by high single-digits, EBITDA expanded by 32% with contributions from all regions. EBITDA margin increased 350 basis points, the largest expansion in many years. EBITDA outperformance reflects not only strong pricing and decelerating input cost inflation, but also the success of our growth investment strategy. As you know, for the last two years, we have been moving to recover margins impacted by a rapid spike in inflation stemming from the outbreak of the Ukraine war. For the first time, this quarter, we achieved this goal with margin exceeding that of third quarter 2021. Free cash flow after maintenance CapEx increased almost $300 million, reflecting EBITDA growth and a lower working capital spend.

While consolidated cement volumes continued to decline year-over-year, we have seen improvement versus the first half performance. Mexico and SCAC, both reported cement volume increases as formal sector demand growth more than compensated for lower back activity. Volume declines in the US and Europe reflect continued weakness in specific micro markets in the US and lower economic activity in Europe. Despite the soft volume backdrop in certain markets, prices in all regions maintained strong momentum. Consolidated prices across our products rose between 9% and 14%. On a sequential basis, consolidated cement prices declined 1% due primarily to the competitive situation in the Philippines. EBITDA growth continues to be explained by the contribution of pricing over incremental costs, growth investments, as well as our rapidly growing organization solutions business.

As our growth investment strategy scales, investments are contributing more and more to improve profitability accounting for 10% of total EBITDA and 11% of incremental EBITDA in the quarter. As I mentioned earlier, third quarter margin of 19.9% reflects the success of our pricing strategy, exceeding our goal of recovering 2021 levels for the first time. And this is happening despite margin headwinds from lower consolidated volumes and product mix. Increasingly, margin expansion is being driven by easing cost inflation and operational efficiencies, as shown in the decrease in COGS as a percentage of sales over the last four quarters. In second quarter 2021, when we announced our action plan to cope with the unprecedented inflation, we have oriented our pricing efforts around an inflation-based strategy.

Now, for the first time in almost two years, pricing increases in cement, our most energy-intensive products have more than compensated for incremental costs. This achievement has been driven by a marked deceleration in cost inflation since third quarter of 2022, a key contributor to this decline is energy with the cost per ton settling at a 1% increase for the quarter. With year-to-date margins approaching 2021 levels, we believe we will have fully accomplished our goal of recovering input cost inflation by fourth quarter. You should expect that we will continue to calibrate our pricing strategy going forward to reflect inflationary cost of the business. Since the launch of our future action program in 2020, we have reduced Scope 1 carbon emissions by 12%, a reduction that previously would have taken us almost 15 years to achieve.

We have been equally successful in Scope 2 emissions with an 11% decline. This year is no different with a 3% decline in Scope 1 carbon emissions and a record high alternative fuel usage and record low clinker factor. During the quarter, we achieved an important milestone, becoming the first company in the industry to provide third-party validated environmental impact information globally for all core products in our main markets. This transparency is an essential step to support our clients in the design of sustainable construction and to decarbonize the build environment. Over the last year, we have been working to enhance our future inaction program with biodiversity and water goals. We are working with the science-based targets network to establish targets on nature and biodiversity.

We recognize that our industry can play a vital role in reversing biodiversity loss. Our quarries can make important contributions at the end of their life cycle to biodiversity and the ecosystem. By 2025, we have committed to develop biodiversity baselines for all active queries, providing the foundation for a nature-positive approach. Organization solutions continued to enjoy double-digit growth with EBITDA rising more than 30% year-to-date and contributing 7% of quarterly incremental EBITDA. On a compounded annual growth basis, EBITDA has grown at a rate above 20% since inception of the business in 2019. Growth has been achieved through both organic and inorganic investment. Organically, we have completed numerous CapEx projects that have full-year average payback period and 50% IRR.

On the inorganic front, we have executed transactions at an average of three times EBITDA multiples with acquisitions immediately accretive. The business is closely aligned to the mega trends rolling out in the construction industry, including the carbonization, resiliency, sustainability, and urbanization. We believe the business is well-positioned for continuous sustainable growth. And now back to you, Lucy.

Lucy Rodriguez: Thank you, Fernando. Our Mexican operations once again delivered strong results with sales supported by a double-digit increase in volumes and prices across all products and EBITDA growing by more than 30%. Cement volumes rose 10%, the second consecutive quarter of growth since the pandemic lockdown eased in the third quarter of 2021. Bag cement grew for the first time since 2021, and while bulk cement continued its double-digit growth trajectory driven by formal demand. Ready-mix and aggregates volumes also benefited from spring in formal construction. Volumes continued to be supported by accelerated execution of infrastructure projects ahead of national election and near-shoring investments. Cement prices were flat sequentially, while ready-mix and aggregates increased by 2% and 5%, respectively.

On the back of strong pricing and volumes, accompanied by lower fuel costs, margin expanded significantly, posting the fourth consecutive quarter of growth. Higher transportation costs resulting from tight supply/demand conditions in the north and south, coupled with product mix, explain the sequential decline in the EBITDA margin. During the quarter, our 1.5 million ton capacity expansion in Tepeaca came online, allowing us to serve expected medium-term demand of the country at a lower cost than existing capacity. We have also initiated an expansion of our [Indiscernible] cement plant for an additional 400,000 tons to serve the long-term growth needs of the Southeast. This new capacity should be introduced in 2025. Despite lower volumes in cement and ready-mix, our US operations delivered another strong quarter.

EBITDA grew by an impressive 36%, driven by pricing strategy and decelerating cost, helping us recover prior year cost inflation and bringing us closer to our margin goal. While EBITDA margin expanded significantly, it declined sequentially, mainly due to lower volumes and higher maintenance. Cement and ready-mix pricing rose double-digits, while aggregates increased 9%. On a sequential basis, cement and ready-mix prices rose low single-digits, reflecting the success of second half pricing increases implemented in most of our states. We are currently in the process of announcing first quarter 2024 price increases. The volume decline in cement and ready-mix, primarily relates to continued weakness in California, along with the winding down of a few large industrial projects.

Commercial and residential activity slowed in the quarter, while infrastructure activity continued to grow. In response to the demand environment, we’ve reduced cement imports to support margins. Aggregate volumes grew, benefiting from recent acquisitions in Florida and Canada. While we expect higher interest rates to impact some commercial and residential projects in the near-term, our states have healthy financial positions and remain key beneficiaries from onshoring and clean technology spending and continue to have a long-term deficit of housing supply. Furthermore, the tailwinds from the well-funded government fiscal stimulus program will continue to drive construction activity and is expected to be supportive of volume over the medium term.