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.

In EMEA, despite a challenging demand environment, EBITDA continues to grow, while margin expanded to the highest level in several years. This performance was largely anchored by another quarter of solid results in Europe. EBITDA in Europe rose 17%, while margin increased 2.6 percentage points to a record high of 17.3%. In a quarter where European volumes declined double-digits, these achievements speak to the success of our One Europe strategy implemented in 2019, where we consolidated and integrated our value chain footprint, accelerated our climate action efforts, while rationalizing cost and pursuing bolt-on growth investments in integrated urban micro markets. The most recent examples of our growth investment strategy are the purchase of aggregate quarries near Madrid that will bolster our reserves in this fast-growing metropolis and the acquisition of [Indiscernible], a Motors and Adhesives technological leader that serves the German, French, Polish, and Czech Republic markets.

Pricing in Europe remained resilient with cement prices up 21% commensurate with the still elevated input cost inflation environment, while prices were flat sequentially. Ready-mix and aggregate prices also showed significant growth, but declined slightly sequentially due to geographic mix. While European construction demand is currently challenging, we remain optimistic over the regions, medium-term prospects as Europe pivots decisively towards a more circular economy and construction is supported by multibillion euro projects related to green renovation, transportation, climate spend, energy reconfiguration, and onshoring investment opportunities. EBITDA from Asia, Middle East, and Africa increased low single-digits, while margins contracted by 1.2 percentage points, primarily due to the competitive environment in the Philippines.

As Fernando mentioned, we are deeply saddened by the recent events in Israel and the Middle East and we remain focused on supporting our employees and communities during these challenging times and keeping them as safe as possible. Net sales and EBITDA in the South Central America and Caribbean region rose 11% and 18%, respectively, driven primarily by prices and slowing energy inflation. Margin improved one percentage point with a slight decline in sequential margin, largely explained by higher maintenance. Regional cement prices rose high single-digits. Despite continued pressure in bag cement in the region, volumes grew for the first time in two years, driven largely by positive performance in Panama, the Dominican Republic and Jamaica. Demand has been supported by formal construction related to infrastructure projects, such as the Bogota Metro, the fourth bridge over the canal in Panama and [Indiscernible] related projects in the Dominican Republic and Jamaica.

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. We are very pleased with our performance this year, with EBITDA growing at an increasing rate for three consecutive quarters. EBITDA grew 40% on a reported basis and 32% on a like-to-like, reaching the highest third quarter in recent times and growing at 2.5 times sales growth. This performance was achieved through three levers. First, is the successful execution of our robust pricing strategy across our businesses and markets. The second, contributions from our growth strategy and urbanization solutions. And lastly, decelerating input cost inflation, coupled with cost efficiency measures. With respect to slowing inflation, fuels and electricity for the production of cement are the most important contributors.

We have seen year-over-year growth rates in unitary fuel costs decelerate for four consecutive quarters. In the third quarter, we saw unitary fuel costs reversed for the first time since the inception of the Ukraine War and declined by 5% versus the prior year. Unitary electricity costs rose 10% in the third quarter, the lowest growth rate in eight quarters. In the context of our sustainability agenda as well as our strategy to lower the volatility of our fuels, we continue to expand the use of alternative fuels, which are significantly less expensive than non-renewables and an important source of biomass. Year-to-date, free cash flow after maintenance CapEx of almost $700 million was $535 million higher than the same period last year, primarily due to higher EBITDA and lower investment in working capital, which was partially offset by higher taxes.

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. Working capital days stood at minus two, two more days on a year-over-year basis, but importantly, improving by two days sequentially driven primarily by inventories. We expect to further reduce our working capital investment as supply chain challenges normalize. After adjusting for an extraordinary gain from the sale of assets in the prior year, net income declined approximately $130 million due to the higher taxes as discussed previously. During October, we successfully completed two transactions aimed at further streamlining our debt maturity profile and diversifying our sources of funds. First, on October 30th, we expect to close the refinancing of our syndicated bank facility, consisting of a $1 billion term loan and a $2 billion committed revolving credit facility.

This represents an increase of $250 million in our revolver and a reduction of $500 million in our term loan. Final maturity under the syndicated bank facility is now 2028. We are pleased that in a volatile market where yields have been rising to be able to maintain terms and conditions, including the pricing grid established in 2021 as well as being able to increase our committed revolver. Second, in early October, we’ve taken advantage of our recent upgrade in our credit ratings. We issued $6 billion the peso-denominated sustainability-linked long-term notes in Mexico, the equivalent of approximately $335 million in three and seven-year tranches, which were then swapped into dollars, achieving a US dollar cost approximately 130 basis points below our dollar curve.

This was the first time in 15 years that we tapped the Mexican debt capital markets. The book was oversubscribed by 2.5x. Proceeds were used to reduce exposure under our bank facility. On the slide, you can see our debt maturity profile as of the end of the third quarter, pro forma for the refinancing of our bank facility and the issuance of the notes in Mexico. As you can see, we now have a flatter debt maturity profile with no significant maturities in any year, and with an average life of five years. I expect our free cash flow after maintenance CapEx generation should be sufficient to meet our maturities in any given year. Leverage at the end of the quarter stood at 2.16 times with a trailing 12 months EBITDA of $3.2 billion. This is the third consecutive quarter of declining leverage and the lowest leverage in recent times.

These transactions, along with our improved performance and continued declining leverage should continue to pave the way to reaching investment grade. And now back to you, Fernando.

Fernando Gonzalez: Based on our strong results year-to-date, we are improving our 2023 EBITDA guidance from $3.25 billion to in excess of $3.3 billion, representing at least a 23% increase versus 2022. As always, our guidance is based on the foreign exchange rates in effect at the time of guidance, in this case, as of the end of September. As we look forward, we are confident that despite softer volume outlooks in several markets, our pricing strategy will be successful in reflecting current input cost inflation. We also expect that absent a major macro shock, we should continue to experience a more refined input cost backdrop than that of the past two years. For CapEx, we now expect a total of $1.35 billion with $900 million for maintenance and $450 million for strategic.

For working capital, we now expect an investment of $100 million. Finally, we are increasing our cash tax guidance to $550 million, driven by the tax effect of a stronger peso on debt and by better results primarily from Mexico. We have made some adjustments in regional volume guidance, which you can find detailed in the appendix. 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 to prices for our products. And now we will be happy to take your questions.

A – Lucy Rodriguez: 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 Carlos Peyrelongue from Bank of America. Carlos?

Carlos Peyrelongue: Thank you, Lucy. Congratulations on the strong results. My question is related to US volumes. If you could comment on your outlook for residential, commercial, and infrastructure for next year, just some general views as to what you see as the drivers and the risks for next year would be very helpful. Thank you.

Fernando Gonzalez: Hi Carlos. Let me comment on what you are asking. But let me clarify that we’re not necessarily giving guidance on 2024 volumes yet. We are in the middle of getting us much updated info as we can to have a better understanding and view and in the future, provide a better guidance on 2024 volumes. But despite that, I think there are trends that will continue current trends that we can see in that will continue evolving in 2024. So, specifically, in the case of volume, for instance, we’ve seen how different markets are performing differently, meaning not all markets are synchronized in volume trends. They are different. You saw the numbers in Mexico when compared to the numbers in Europe and so they are materially different.

Now, I think the trends or the reasons why make us believe that there might be positive changes in current trends in volumes is, for instance, in the case of the US and Europe is our exposure to relevant fiscal stimulus and public or private projects in the US and Europe. The type of initiatives related to infrastructure in the US, the $1.2 trillion infrastructure plan — the Inflation Reduction Act, the CHIPS Act. So, there are a number of positives or reasons to make us believe that trends in this case in the US might be better than the ones we’ve seen in 2023. The negative impact this year is because of, let’s say, commercial and housing. Again, this is not a guidance. We still need more updated info, but in the case of housing, you have the data, the level of inventories is at historical lows.

The level of unemployment is at record levels. Economy is still growing. The challenging part is the cost of mortgages. But at some point in time, housing should react just because of house formation, the regular one or the demographics in the US. Now in the case of Europe, again, it was heated, it’s hit this year in volumes. Many reasons to — for volumes to be impacted last year and this year. But at the same time, we still have the initiative of the renovation wave, which is around $700 billion the $1 billion in transport mean Energy and other incentives in manufacturing. So although we are not providing any specific guidance, we believe that in the case of the U.S. and Europe, those variables could be supportive of, let’s say, a flat volume for next year and perhaps even moderate growth on them.

To be confirmed, afterwards in our former guidance for 2024. Maybe I should

Carlos Peyrelongue: That’s very helpful.

Fernando Gonzalez: Let me add a – okay. Thank you.

Lucy Rodriguez: Okay. Fernando, did you want to add anything? It seems as though we might have cut you off.

Fernando Gonzalez: Well, I was going to say that the case of Mexico, which is a very relevant market for us, again, not a guidance, but the trends are positive. And next year is an election year, which tends to be also a positive context. And most probably, we will see next year an acceleration of the infrastructure — the large infrastructure projects, like, for instance, the mine train and smooth because it’s the last year of the current federal government. So Mexico might have also a positive trend in volumes next year. But again, clarifying, this is not necessarily a guidance. This is an indication. And afterwards, we will provide more detailed guidance.

Lucy Rodriguez: Okay. Thank you, Fernando. The next question comes from the webcast from Bruno Amorim from Goldman Sachs. And the question is what level of margins would trigger a halt in the sequential price increases you have been implementing

Fernando Gonzalez: Let me take this one, I don’t see the pricing strategy is necessarily defined by the levels of margin, at least not under conditions that have been prevailing in the last 2 years, let’s say. I think just to clarify, I think our pricing strategy has been for prices to cope with inflation, so we can protect our margins. It happens that after many years of very moderate inflation in our cost structures. In 2021, second, third quarter of 2021, high levels of inflation started showing up, and we reacted with the pricing strategies to cope with those new very high levels of inflation. To simplify the story, in 2022, inflation continued growing our own inflation, cost inflation, and it went up as much as 20%, 22% while prices started reacting at lower level of increases, and that’s why we lost margin in 2022.

Now the trends are changing. Our prices started being increased more and more. And in the first quarter of this year, for the first time since almost 2 years, then price increases were higher of the level of inflation, which in the first quarter of 23 started receiving — so what we see this year is — let’s say, is the second part of the pricing strategy, pricing strategies cannot be executed in a very short period of time. So what we see in 2023 is that on the one hand, prices are increasing at the levels of 18%, 20% and inflation, which is decelerating is decreasing from the levels of 18% to 10%, 11%. So I think the basis of our pricing strategy will continue being the idea of at least recovering input cost inflation. Now if inflation continues its trend and been lower and lower — of course, price increases will follow that inflationary trend.

That’s what you can expect that what defines or has been defining our pricing strategy in the last couple of years.

Lucy Rodriguez: Thank you, Fernando, very clear. The next question comes from Ben Theurer from Barclays. Ben?

Ben Theurer: Yes. Good morning. Congrats on the results Fernando, Maher and Lucy, well done, I would say. My question is also on the U.S. and volumes and kind of a little bit of a follow-up on Carlos’ question. So we’ve seen volumes year-to-date down by about 13% guidance as roughly a 12% decline. So same trends kind of guided for into the fourth quarter. But one thing you’ve highlighted was the decreased share of imports into the U.S. market. So if you could help us understand where do we stand right now as it relates to imports into the U.S. market? Is that decline that we saw year-to-date really all decline in imports, which has helped so much to drive the 500 basis points EBITDA margin expansion. How much more imports is left? And how do you think about that just in the general context of your margin potential in the U.S. if imports were to come down more as it relates to be even more profitable of what you’re selling produced in the U.S.

Fernando Gonzalez: Let me comment on general terms, and then I will pass the word to Mace and Lucy. But the general dynamic in the U.S. when combining our, let’s say, cement domestically produce and cement we input in order to sell. — imports are complementary to our core activity in cement, which is local production. We’ve been importing around maybe market or Lucy have the SAC proportion, but we’ve been importing around, let’s say, 30% of the cement we sell in the U.S. Now our capacity utilization, which is you know, very important in order to succeed in pricing strategies. Our capacity — cement capacity utilization in the U.S. is full, is 100%. And whenever there are either the clients like it is the case this year or growth in volumes, what we do is we do adjust imports, given that imports have lower margins than locally produced.

So that’s the dynamic in general terms. So we do not impact the local, let’s say, the local dynamics that we are trying to put in place in the market. I don’t know if you lose your market wants to complement

Maher Al-Haffar: Maybe I’d just add, I mean, obviously, even with that 13% decline in cement volumes, we had a great quarter in the U.S. with EBITDA rising 36% and part of that certainly was that reduction in imports as we calibrated that drop in cement volumes. So import volumes in the quarter dropped about 1/3 from where they had been to compensate for the decline in overall volumes we were seeing. And that was very supportive of margins. And there’s probably about a 300 basis point impact in terms of margin, so quite significant.

Ben Theurer: Perfect. That’s what I was hoping for.

Lucy Rodriguez: The next question comes from Anne Milne from Bank of America.

Anne Milne: Congratulations on another pretty spectacular quarter. I know that you were involved this quarter in a local peso issuance for the first time in a long time. So I guess the question is, will you continue to try to match your debt with the currencies and which you operate and what other currencies might there be? And again, on the debt side, your debt levels continue to decline pretty rapidly. You’re well below your — at least your previously stated goal of below debt-to-EBITDA. Will there be a point when you might actually look at sort of a an ideal debt level versus just a leverage level that if you are below that 3x you don’t need to go below a certain debt level. And if there’s anything else you could tell us on the loan agreement that you have — you said that you will be signing soon in terms of covenants or pricing Fernando, would you like me to take that?

Fernando Gonzalez: Why don’t you take the part of what you are renegotiating with banks and the strategy you’ve been developing this year — and I will take the second part of the question related to the — how to call it the ideal or the care or the fire debt level. So why don’t you start with the first part?

Maher Al-Haffar: Yes. So thanks, Ann. I mean first, we — our currency split right now is about 75% in dollars and the other 25% is in primarily euros and Mexican vessels. As you know, we have about $300 million equivalent in Mexican pesos. The way that we manage our funding strategy is really getting the lowest cost that we can get in the different markets. We believe in dollar funding because at the end of the day, we think that most of our cash flow is fairly dollarized, as has been demonstrated by the pricing strategies that we have implemented successfully recently. The transaction that we did in Mexico was taking advantage of very interesting liquidity situation where despite the fact that local pricing was relatively high when we swapped it to the dollars, it actually represented almost a 20% reduction in our spread compared to a straight issuance in dollars today.

So it was a very attractive funding cost and we use that money to essentially reduce our exposure under the under the term loan that we have with the bank facility. The way that we cover our currency risk is primarily through our hedging strategy through the derivatives through the currency derivatives market. We manage a derivatives position notional in Mexican pesos against dollars that is roughly commensurate with the operating cash flow generation of our Mexican business. So we run a position of about $1.5 billion. in primarily straight forward. We sometimes do cap forwards in order to reduce the cost. We sometimes use options to reduce the cost we prefer, frankly, to manage our hedging strategy that way rather than borrowing outright in pesos because that is much more expensive.

Derivatives. So far, we’re running at almost half the carry cost on average. So it’s economically much better. We can be much more agile. Obviously, we’re not traders. We’re following very strict rules on how we put the position we lay our positions every month based on free cash flow generation out of our Mexican business. So that’s how we manage the currency risk, and we run a pretty kind of leverage neutral position in the positions that we have in place. And we do have a single borrowing in $300 million, like I said, that is in pesos, we’re leaving it in pesos because when we took that borrowing, we swapped the vessel rate into a fixed rate very attractive borrowing rate, which is like 4.75%. Today, TI rates are like 1.5% — so at that rate, it was very attractive to have a loan borrowing in pesos.

So that’s kind of the — now whether we will continue accessing the local market, the answer is yes. We — as you know, we’ve just been upgraded to A in the local market. We’re hoping to get higher rating as we rerate. The Mexican market is quite deep. We are a big issuer. We should be a frequent issuer in that market. Now going to the credit agreement. Credit Agreement, we have all the commitments, and we’re really going towards closing by the end of the month in a couple of days essentially. And there, I would like to say a few things. One is that we reduced the amount of the term loan by about $0.5 billion. So we’re now — the term loan will be $1 billion with a maturity by 28 million 5-year maturity, 36 months, and then we have amortizations of 20%.

And then we also managed to increase the amount of our committed revolver in pretty challenging times from the bank’s perspective. So we’re very pleased with the support that the banks have given us. And now we have $2 billion in a committed revolver — and the committed revolver very importantly, has a bullet payment 5 years, so it’s very attractive in terms of providing liquidity — very important is that we had the same grid pricing that we had 2 years ago. We’re paying less fees than we did 2 years ago. Also very importantly, as you know, and when — as of June, we had to switch from LIBOR to SOFR and the initial SOFR spread that was obtained by — that was agreed to by the market was, I believe, 26 basis points above LIBOR above. So for plus 26 basis points.

We also managed to negotiate a reduction in that spread. So bottom line, at the end of the day, I feel that we’re getting some very good price discovery in the bank market in our bank facility. And that is being reflected in the pricing and in the availability of the revolving credit facility — the committed revolving credit facility. And that should provide us with more than adequate liquidity in the medium term. And then I’ll turn it to Fernando to address the leverage issue.

Fernando Gonzalez: Yes. I think the I think about the leverage ratio, I can describe it in the following manner. Since more than a decade, we have been insisting in gaining back our investment grade. And to be precise, it’s been like 14 years. Since we started insisting, basically, when we said gaining back investment grade, we were always thinking in a leverage ratio as defined in the FA below 3x. Of course, we don’t create ourselves. That’s the job done by the rating agencies. But it’s been some time now that we believe we are in the range of our objective of gaining back investment grade. Now — if you remember, in 2020, we communicated adjustments to our strategy. And then on top of continued allocating resources to continue reducing our leverage ratio — we started with the idea of investing in growth.

And the basic definition was to invest in growth in cement ready-mix, aggregates and added urbanization solutions. And we mentioned mainly in the U.S. and Europe, to some extent, in Mexico. And an important part of the strategy we communicated is that we were going to be growing through both on investments and acquisitions. — which is what we have been doing already for 3 years, around 3 years. So I think with that definition, — the leverage ratio we are having by the end of the year, very close to 2x. We think that we feel let’s say, comfortable with it. Now the good financial results of this year did accelerate our deleveraging process. So do we have a target of a very or extremely low leverage ratio? No, we don’t. What we have is the target of growing in a very disciplined manner and keeping our leverage ratio?

No, we don’t. What we have is the target of, growing in a very disciplined manner and keeping our leverage ratio always in the investment grade parameters. What are those parameters? Well, it could be around more or less around 2.5 times around that figure. So I think there is a ceiling to the leverage ratio that we are willing to take, again, not putting at risk the investment grade that we are expecting sometime early next year, but at the same time, giving us the opportunity to allocate capital in a different manner, as we’ve been saying, to start paying systematically dividends to shareholders and to, and to do some additional, very accretive investments in growth. As we’ve been commenting, the bolt-on investments we’ve been doing, except for the very large cement expansion projects, are investments with a very attractive profile.

Paybacks of four to six years and IRRs of around 40%. So I think it’s been a good combination and we will for sure continue having or looking for this equilibrium in the parameters that I have already mentioned. Q – Thank you very much.

Fernando Gonzalez : Thank you.

Lucy Rodriguez : Thanks, Anne. Thanks, Fernando. Okay, and we have another question which is coming from the webcast from Paul Roger from Exane B&P Paribas. Several peers have provided a lot more information on their carbon capture pipeline. How many CCUS projects is CEMEX involved in? When will the group’s first industrial-scale project go live? And what kind of CapEx and OpEx does CEMEX plan to invest on this solution to 2030?

Fernando Gonzalez : Let me comment directly on the question and then I think it might be helpful to share some additional context to the objectives we have on reducing CO2. Specifically, we have seven CO2 capture and storage reuse projects in the company. Four out of the seven you can consider them as industrial level projects. The other three are projects in which we are trying and proving certain technologies because we will live through the first investments in CO2 capture, we would like to learn on the different options and the different characteristics. Those options have in capturing and storing CO2. The four industrial projects we have, all of them are either in Europe or the U.S. In the case of the U.S., it’s in Victorville in California and Balcones in Texas.

And in the case of Europe, we have Rudolf in Germany and Alcanar in Spain. The projects are in development as we speak. We are forming or we have formed consumptions for each one of them in order to have the full solution or the full spectrum from the very capture to how to store or convert this bad carbon into good carbon. So we don’t have specific amounts to share yet. And also because these four industrial level projects, we are participating and potentially we will be getting grants that will reduce our investments in those projects. And so that’s the specific answer to the specific question. Now let me add something else. If we sort of, it’s kind of an arbitrary definition, but if we divide the CO2 or the transition towards carbon neutrality in our industry, I see two steps or two phases.

The first one is when we can implement and apply all the practices, processes, materials, technologies, fuels that we know will reduce materially the CO2 generation in the case of cement. Our 2030 targets which is a reduction of 47% of CO2 generation per ton of cement using 1990 base is not considering a ton of carbon capture. We are pretty sure, and I will explain why, that we can achieve that level of reduction by increasing in our portfolio blended cements with lower clinker factor, using much more alternative fuels with much higher contents of biomass, using alternative decarbonated raw materials to produce ready mix, electrifying as much as possible our production process, meaning using more electricity and reducing the use of fuels, increasing the amount or the proportion of renewable electricity that we are using in the process.

So perhaps I’m not mentioning all the variables, but maybe those are the most relevant. So by doing that, we will be able to make a reduction of 47% by 2030, that according to our strategy and according to the 1.5-degree scenario we are subscribed and certified by SBTi, that will be able to be done. Now, why is it that I feel confident that that will be done? Because three years ago, we redefined our climate action strategy. We started developing plant-specific roadmaps on the transition. And that is why in the last two years and nine months, we have reduced the CO2 generation per ton of cement by 12%. Easy to say, 12 — the reduction of 12% in CO2 production is what it took us 15 years before the strategy we put in place in 2020 and started executing in 2021.

Now I mentioned that our 2030 targets does not include CO2 capture. That doesn’t mean that we are not decisively acting and developing these projects. As I mentioned, we have, we have seven, and we are developing the seven projects with different objectives, each one, because we want to include additional CO2 reduction by 2030 through these projects. And we want to be sure that we will properly prepare for the additional capture in all our cement plants, after 2030. So that’s the general context in our CO2 or our transition towards a carbon neutral production in our products.

Lucy Rodriguez : Thank you very much, Fernando. The next question comes from the webcast from Francisco Chávez from BBVA. My question is regarding cement prices. Consolidated quarter over quarter prices declined 1%. Is this a change in trend? What can we expect in coming quarters?

Fernando Gonzalez : Well, let me refer to what I commented in a previous question regarding prices. Again, inflation started declining materially in the first quarter of 2023. There was a reduction of three percentage points sequentially when compared to fourth quarter 2022. And then in second quarter 2023, inflation was 12%, which is a decline of six percentage points when sequentially compared to first quarter 2023. So a 1% decline in prices I think is a consequence and it’s natural, it’s not ringing a bell to me because as I mentioned our pricing strategy is and has been for the last couple of years in this period of very high inflation, is to recover input cost inflation. So if inflation is receding, inflation is much more moderate than what it was, you can expect our prices to follow the same trend.

Is that negative? Not at all. I think it is just that we are accommodating this same strategy, but with different levels of inflation. Now, having said that, what I’m saying applies in general terms. If, because in different markets we have different pricing levels, and in some cases we of course try to increase prices beyond the levels of inflation when we believe that the prices are not in a given market, are not enough or are not reflecting a reality and they are not enough for us to get reasonable returns. But what I explained before, I think it explains the general or the idea or the spirit of the pricing strategy. So my, at least in my opinion, if inflation is moving from 22% to 11%, half of it, price increases will follow the same trend.

And that shouldn’t be interpreted in a negative manner.

Maher Al-Haffar : Maybe if I could just also add on Fernando, if you look at sequential prices regionally, pricing for cement is either flatter up in Mexico, U.S., and Europe. And really the very slight decline that we have at the sequential level is due to the Philippines, which was down 4%, and it primarily relates to the competitive situation in the Philippines, just to put that into place, but it is fairly isolated.

Lucy Rodriguez : We have time now for one last question from the website, and the next question comes from the webcast from Marcelo Furlan from Itaú. My question is related to capital allocation. The company has a healthy financial leverage, strong liquidity position, and solid free cash flow generation. Thus, I would like to know what are the main strategies for capital allocation for 2024?

Fernando Gonzalez : If I may, I can start, making a few comments, and please, Lucy and Maher, feel free to compliment. I think the answer to the question, I think we’ve been commenting and guiding for something very similar to the question you are making. As I mentioned, we’ve been for years with a strategy of gaining back investment grade, meaning using all our resources to reduce debt and bring back our financial health. That was achieved at around 2020, of course depending on how you define that. In our definition, that was achieved in 2020. That’s why we started using part of our cash flow in EBITDA growth investments. That’s what bolt-on type of investments and that’s what we’ve been doing and that’s what we will continue doing.

What might be different for next year because the leverage ratio now, again, it’s going to be around or close to two times by year-end, and that is giving us additional flexibility. So maybe the difference of what we’ve been doing in the last couple of years compared to 2040s that once we get investment grade, we will start allocating capital in the form of dividends. As know we’ve been commenting that what we want to do is to start paying dividends and doing it systematically. So maybe that’s something that is going to be different on capital allocation next year. And I don’t know if Lucy or Maher do want to add any comment to the question.

Maher Al-Haffar : Yes, Fernando, I would just like to add, I think it’s very important, to say that we have this investment muscle now in, very well trained. We have an approved pipeline that is close to two and a $0.5 billion. We’ve already invested a fairly significant portion of that. The contribution of the growth investments for the full year is probably going to be close to 10% of the EBITDA of the company for this year. And the return or the IRRs of those projects, as Fernando mentioned, they’re close to about 40%. Now, of course, it’s very difficult at infinitum to continue to get 40% investments. We would like to, but that’s not what we’re guiding to. Our internal hurdle is above 20% and within an acceptable period.

A lot of these investments, as they get completed within the next couple of years, we’re expecting them to contribute steady state close to $600 million to EBITDA. So serious contribution to all of these investments and marginally, they are representing a huge part of the incremental improvement in our EBITDA. Now, when we see that, we take a look at what are the other possibilities for capital deployment? I mean, one is you can buy back debt. Today, our debt is yielding 7% and on an MPB basis, doesn’t compete at all with capital allocation to these projects. We can buy back stock, which today our cost of equity is about 15%. And again, does not compare very well to invested capital at 40 plus percent for very long periods of time. These are long projects that are expected to go for many, many years.

These are not short-term projects that we’re doing. So when you take a look at capital allocation, really investing in our business at a creative manners, like we’re saying right now, is really what shareholders pay us to do. And that’s what we intend to do. And of course, we’re making sure that we keep an eye on capital structure, making sure that we get investment grade. Getting investment grade means that we get it, we keep it, maybe improve on it, as time goes by. But that kind of gives you an idea. And of course, Fernando mentioned the possibility of returning cash to shareholders in terms of dividends. And that’s something, that definitely to consider and it should enhance our total shareholder return in the long term. But that should kind of in a nutshell give you our thinking about capital allocation and why and where we are doing it.

And I hope, I don’t know Lucy, if there’s anything else you’d like to add.

Lucy Rodriguez : No, I think you two covered it, thank you. So with that, we appreciate you joining us today for our third quarter webcast and conference call. If you have any additional questions, please feel free to contact the Investor Relations team. And we will look forward to seeing you all again for our fourth quarter webcast that will take place on February 8th. Many, many thanks.

Operator: Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a lovely day.

Lucy Rodriguez : Thank you, operator.