CEMEX, S.A.B. de C.V. (CX) Q1 2019 Earnings Report, Transcript and Summary

Good morning. Welcome to the CEMEX First Quarter 2019 Conference Call and Webcast. My name is Richard, 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 Instructions] Our host for today are Fernando González, Chief Executive Officer; and Maher Al-Haffar, Executive Vice President of Investor Relations, Communications and Public Affairs. And now, I will turn the conference over to your host, Fernando González. Please proceed. Fernando González: Good day to everyone, and thank you for joining us for our first quarter 2019 conference call and webcast. We will be happy to take your questions after our initial remarks. We are pleased with the 1% top line growth we achieved during the first quarter, despite important volume declines in our two most important markets, Mexico and the U.S. During the quarter, we enjoyed improved pricing performance in all our regions with favorable volume dynamics in Europe. In the U.S., ready-mix and aggregate volumes also grew despite adverse weather in part of our footprint. In addition, operating cash flow performance was bolstered by the ongoing successful implementation of our stronger CEMEX initiatives, realizing close to 1/4 of the targeted savings for this year. We were negatively impacted by lower volumes in our other regions, higher energy cost on purchased cement as well as increased raw material cost in our ready-mix business. This led to a 3% decline in our operating EBITDA and a 0.5 percentage point drop in our EBITDA margin. We expect our performance to improve in the following quarters. Our free cash flow after maintenance CapEx reached negative $337 million during the quarter. The deficit in free cash flow reflects the seasonality in our working capital needs. Average working capital days reached minus 10 days in this period. We expect this year-to-date investment in working capital to be reversed during the rest of the year, to reach our guidance of working capital investment in the $0 to $50 million range during the full year 2019. We continue to make advances on our stronger CEMEX initiatives during the first quarter. On asset sales, we have signed a binding agreement to divest our ready-mix and aggregates operations, including our stakes in two aggregates joint ventures in Central France. The combined value of the transaction is close to EUR 32 million and is expected to close during the third quarter. Considering completed divestments and transactions on which we have binding agreements, we are already at half of the lower range of our target. These sales have been done at multiples in the double digits. In addition, we currently have nonbinding agreements for about $400 million and ongoing negotiations for regional divestments totaling $1.2 billion. Regarding our cost-reduction efforts, as we commented in our CEMEX Day last month, we identify additional initiatives and now expect $230 million in savings, $170 million to be reflected this year and the remainder in 2020. During the first quarter, we achieved $37 million in savings from different initiatives, including operating expenses, low-cost sourcing, energy, operations and supply chain. We expect these savings to accelerate during the rest of the year. Total debt plus perpetuals increased during the quarter reflecting our working capital cycle. Proceeds from divestments and free cash flow generation in coming quarters are expected to be mainly used for debt reduction to achieve our 2020 target. And lastly, on dividends, at our Annual Ordinary Shareholders Meeting last month, our shareholders approved a cash dividend for $150 million for this year. This dividend will be paid in two installments in June and December. In light of our performance and the progress on our stronger CEMEX initiatives, we continue to expect growth in our operating EBITDA for 2019. As regard to success of our e-commerce strategy and our ability to deliver a superior customer experience enabled by digital technology, we are pleased to report that CEMEX Go, our end-to-end integrated platform, is now being used by 31,000 recurring customers in substantially all our markets. These clients represent about 90% of our recurring customer base worldwide and are now conducting half of their purchases with us through CEMEX Go. This means that currently about 45% of our total sales are being done through this platform. Now I would like to discuss the most important developments in our markets. In Mexico, we saw an expected slow start for the year. The transition phase of the new government resulted in lower infrastructure investment, intensified by the termination of important projects last year as well as reduced housing activity in anticipation of the announcement and implementation of the new housing policies and regulations. Our volume performance was also affected by our pricing strategy. On this last point, our objective continues to be to recover input cost inflation, which we have not fully achieved so far. Current cement prices in real terms are currently below those at the beginning of 2018. We implemented price increases in January, amid a two-year high market position. During the quarter, prices in peso terms increased for our three core products. Cement and aggregate prices increased by 3%, while ready-mix prices were 4% higher on a year-over-year basis. Sequentially, cement prices increased by 4%, while ready-mix and aggregate prices improved by 2%. Our operating EBITDA margin reached 36.1% during the quarter, a 0.8% percentage point improvement on a sequential basis, reflecting the traction of our price increases and an improvement in operating expenses, which more than offset the decline in volumes. The year-over-year margin decline of 2.4 percentage points was mainly due to lower volumes, increases in energy and transportation costs as well as higher cost in raw materials in our ready-mix operations. The recent drop in international pet coke prices has not been reflected in our cost structure for the first quarter as we are still using higher cost inventories. We expect these energy headwinds to reverse during the second half of this year. The industrial-and-commercial sector was a driver for cement consumption during the quarter, stimulated by the recent activity in the Pacific and Southeast regions. This sector should continue to perform well during the rest of the year. In the formal residential sector, the drop we saw in consumption during the first quarter was significant, reflecting as lower-than-anticipated start of new social programs, but we expect this decline to be of a temporary nature. Once the national housing policy is announced, which should be soon, this sector should resume growth. We are encouraged by the announcement of the initial subsidies for social housing for the year as well as by favorable commercial bank mortgage portfolio and loans to homebuilders. The self-construction sector also experienced a decline during the first quarter, primarily due to lower demand for bagged cement sales related to government social housing programs. While indicators such as formal employment, aggregate wages and remittances continue to be favorable, their growth trend moderated. Regarding infrastructure, activity has been affected by the termination of important projects last year as well as by a slow start in the execution of the budget for this year. We have started to see activity related to the paving of rural roads. We continue to expect favorable medium-term prospects for this sector but remain cautious on its performance for this year. In this challenging environment, we are focusing on our stronger CEMEX and commercial strategies. We completed the debottlenecking and optimization of efforts at our Huichapan plant and are on schedule with our Tepeaca expansion. These two plants have cash costs, which are 20% below our average. As such, we are concentrating our production in our most efficient plants leading to an improvement in logistics and rationalization of our distribution network. Regarding energy, we are on track with our efforts to increase alternative fuel utilization from 28% during the first quarter to close to 33% by the end of the year. We expect to further increase the use of alternative fuels going forward to 36%. Given our performance during the first quarter, we now expect our cement and ready-mix volumes to decline in the mid-single digits for the full year. Mexico's economy continues to be resilient and the government is implementing significant investments to improve infrastructure and to address social housing needs. We strongly believe that the adjustments we saw in this quarter are temporary and anticipate improved performance during the rest of the year. In the United States, despite inclement weather that affected about half of our portfolio, our top line grew by 3% during the first quarter. Despite the positive impact of stronger CEMEX initiatives of $7 million during the quarter, higher logistics, energy and rising costs in raw materials to our ready-mix business translated into declines of 1% in EBITDA and 0 percentage points in EBITDA margin. We expect energy and logistics cost to subside and we go – as we go through the year. On an average daily basis, cement volumes declined by 2% while ready-mix and aggregate volumes increased by 3% and 7%, respectively, on a year-over-year basis. States representing approximately 50% of our cement volumes saw a 75% increase in precipitation year-over-year. The infrastructure and residential sectors are the principal drivers of demand in the quarter. 2019 pricing increases for the U.S. have been implemented and are showing positive traction. The January cement price increase in Florida, a state that represents approximately 20% of our cement volumes, has shown good success with prices up 5% sequentially. Price increases for regions representing the remaining 80% of our cement volumes went into effect in – earlier this month. The residential sector has low this year with year-to-date starts as of March down 10%, primarily due to weakness in the multifamily sector. We believe, weather is a contributing factor to the deceleration. Our four key states continue to outperform the national average. Permits for our key states trailing six months as of February are up 5% versus a national decline of 2%. Recent declines in interest rates, robust economic growth, strong labor markets and low single-family inventory suggest renew housing strength in the remainder of 2019. Yesterday's release of March new home sales, which were up 3% year-over-year reinforces this view. In the industrial-and-commercial sector, construction spending is up 3% year-to-date February, while the lodging and office segments continues to grow, the commercial sector has been soft. Infrastructure spending is up 5% year-to-date February, supported by investments in roads as well as waste and water management. Street and highway spending, the most cement-intensive cement of infrastructure is running 18% above prior year's level year-to-date February. State spending on the back of new highway funding initiatives is a driver of this growth. While national contract awards for the trailing 12 months as of February were up 3%, awards in our four key states grew 17% in the same period. We expect infrastructure, which accounts for approximately 50% of national cement consumption to be the primary driver of growth in 2019. In our South, Central America and the Caribbean region, we are cautiously optimistic with the stabilization in like-to-like sales and operating EBITDA during the first quarter. EBITDA margin expanded by 0.5 percentage points, favorable pricing, lower maintenance and labor cost as well as favorable product-mix effect offset the effect of lower volumes and higher cost related to energy and purchased cement. I will give a general overview of the region, for additional information, you can also see CLH's quarterly results, which were also made available today. Our cement volumes during the first quarter declined by 1%, ready-mix volumes decreased by 6% and aggregates volumes dropped by 11%. We saw cement volume improvements in Columbia, Dominican Republic, Guatemala and El Salvador. Our regional cement prices increased by 2% on a year-over-year basis, reflecting increases in all countries except for Panama. In Columbia, the positive trend in consumption for our products continue during the quarter, with our cement and ready-mix volumes increasing by 8% year-over-year. Cement prices were 3% higher sequentially reflecting our January price increase with no estimated change in our market position. Infrastructure activity continue its positive performance during the quarter with industry volumes to this sector growing in the double digits. Our volumes to this sector were supported by diverse projects, including the continuation of 4G activity. In the Bogotá area, projects for close to $500 million have been awarded recently and are expected to start construction soon. Additional projects, including the Bogotá Metro, should be awarded later this year and start construction in 2020. In the residential sector improved demand from the informal and social housing segments were offset by a decline in the mid to high income segment. We expect informal and social housing activity to continue to be strong during the rest of the year and translating to a low single-digit increase in industry volumes through the residential sector during 2019. We expect national cement consumption for this year to increase in the 1% to 3% range. Considering our pricing strategy and the expected changes in the competitive landscape, we anticipate our cement volumes in Columbia to be from flat to growing 1%. In Panama, our cement volumes declined by 14% during the quarter, affected by high levels of inventory in apartments and offices as well as increased participation of imported cement. The Infrastructure sector is expected to drive cement demand during the year. In Europe, we are very pleased with the 12% growth in sales driven by favorable volume and pricing dynamics. Operating EBITDA increased by 77% and EBITDA margin expanded by 2.7 percentage points as a result of our stronger cement initiatives and favorable operating leverage. Strong domestic demand and a mild winter contributed to a 12% growth in regional domestic gray cement volumes. All countries experienced double-digit increases, except the United Kingdom, which grew 4%, and Croatia, which had a slight decline. Ready-mix volumes in the region rose by 11% during the period with increases in all our geographies, except Germany. Aggregate volumes increased by 13% with most countries growing in the double digits. Favorable demand conditions contributed to good pricing dynamics. Regional prices for cement increased by 4% year-over-year and 5% sequentially. We introduced price increases in the United Kingdom and Spain during the quarter and in Germany, Poland, Czech Republic and Croatia starting in April. Both ready-mix and aggregates prices were up 3% year-over-year and grew in the mid-single digits sequentially. Infrastructure was the key driver of the month for our products during the quarter. Activity in Poland was supported by EU-funded highways and growth projects. The 2030 Federal Transport Infrastructure Plan in Germany and the Grand Paris and other regional projects in France also boosted volumes to the sector. The residential sector continues to grow in most countries in the region. In the case of Spain, construction permits and mortgages are growing in the double digits with favorable credit conditions, income perspectives and pent-up housing demand. In Poland, recently completed home construction and housing starts grew in the high single digits year-to-date February. In the United Kingdom, this sector continues to be supported by the government's Help to Buy program and is growing outside of the London market. In Germany, favorable credit conditions and low unemployment levels are sustaining housing demand. Activity in the industrial-and-commercial sector is expected to contribute to volume growth in all countries, except the United Kingdom, reflecting continuous uncertainty around Brexit. In summary, we expect consolidated cement volumes for our three core products in Europe to grow from 3% to 5% during 2019. In addition, given favorable volume and pricing dynamics as well as $50 million in savings from our cost reduction initiatives in the region, we anticipate an increasing regional EBITDA of at least two percentage points for 2019. In our Asia, Middle East and Africa region, our cement and ready-mix volumes declined by 14% and 8%, respectively, during the quarter. These declines were mainly driven by supply/demand conditions in Egypt, the ramping up of operations at our APO plant in the Philippines after the landslide and adverse weather conditions in Israel. The decline in operating EBITDA reflects lower contribution from our operations in Egypt, Israel and the United Arab Emirates. In the Philippines, our domestic gray cement volumes declined by 1% during the quarter. Our volumes at the beginning of the year were still recovering from the impact of the landslide in Naga near our APO plant, which occurred last September. Our monthly cement volumes in the country show a strong recovery during February and would reach all-time high monthly volume levels during March. Our quarterly cement prices in local currency terms increased by 7% year-over-year and by 4% sequentially. Our volumes benefited from an acceleration in the residential sector as reflected in the double-digit increase in building permits approved in the previous quarter and sustained growth in remittances. Volumes to the infrastructure sector remain steady during the quarter. For additional information on our Philippines operations, please see CHP's quarterly results, which will be available late tonight, Friday morning in Asia. In Egypt, our cement volumes decreased by 31% during the quarter, partially reflecting changes in supply/demand dynamics as temporarily stopped capacity resume operations and new capacity came online. In addition, the government has taken some actions to stop construction of buildings, which do not meet certain administrative requirements. During the quarter, our cement prices in local currency terms increased by 4% year-over-year. On a sequential basis, however, cement prices declined by 7% as a result of our efforts to defend our market position, coupled with a product mix effect. For 2019, we now expect national cement volumes in Egypt to decrease in the mid-single digits. We are guiding to a steep reduction in our volumes to continue challenging supply/demand dynamics. In Israel, our ready-mix volumes declined by 3% during the quarter, mainly due to adverse weather conditions. This winter was the rainiest in the last 10 years. Israel continues to benefit from a strong economy and high employment levels. The nonresidential sector was the main driver of volumes in the quarter, supported by activity in office buildings. The infrastructure sector also contributed to growth with a continuation of several projects, especially in the south of the country. In summary, during the first quarter, we experienced favorable pricing dynamics in most of our operations. We expect volume dynamics to improve in upcoming quarters, especially in Mexico, the U.S. and the Philippines, which were affected by temporary factors during the first quarter. As regards our cost-reduction initiatives under our Stronger CEMEX plan, we expect savings to accelerate during the rest of the year. And now I will turn the call over to Maher to discuss our financials.

Thank you, Fernando, and hello, everyone. Before I start the discussion of our detailed financials, I would like to mention some changes to our reporting starting this quarter. First, we have changed our reporting currency from the Mexican peso to the U.S. dollar. The U.S. dollar is the currency that CEMEX management uses to operate the company and under International Accounting Standards we have the option to adopt this currency for reporting purposes. This should improve and facilitate the analysis of our consolidated financial statements. Second, our first quarter 2019 financial information as well as comparable first quarter 2018 figures, now reflects the introduction of IFRS 16, under which there is now a single accounting treatment for all leases. As of the end of last year, the U.S. and Europe each had about 40% of our operating leases while 15% were in Mexico. And third, as we have commented before, as a part of our Stronger CEMEX plan, we have changed the way that we are managing our European region. Going from a country-based to a functional product-focused organization across the whole region, further strengthening our customer-centric organization and improving our commercial offering while achieving operational efficiencies. As such, starting this quarter, our discussion and disclosure of information on this region will be in line with these recent changes. And now to our financials. On a like-to-like basis, our net sales increased by 1% during the quarter, while operating EBITDA declined by 3%. Our quarterly operating EBITDA margin declined by 0.5 percentage points, despite significant volume declines in our two largest markets and was supported by an important contribution from Stronger CEMEX savings offsetting other cost headwinds. During the quarter, we had favorable impact of foreign exchange fluctuations on our EBITDA of $16 million. Cost of sales as a percentage of net sales increased by 1.1 percentage points during the first quarter, driven mainly by higher energy cost as well as higher purchased cement. Operating expenses also as a percentage of net sales remained flat, reflecting our cost-reduction initiatives. Our kiln fuel and electricity bill on a per ton of cement produced basis increased by 2% during the first quarter. This reflects a mid-single digit increase in kiln fuels, as during the quarter, we still consumed higher priced inventories and a low single-digit decline in electricity. During the rest of the year, we expect lower fuel costs, however, we anticipate an increase in electricity costs related to renegotiation of contracts, mainly in Europe and the continued elimination of subsidies in Egypt. For 2019, we are targeting to reach an excess of 30% in alternative fuel utilization from the 27% achieved last year. In addition, about 40% of our energy expenditures, including kiln fuels, electricity and diesel are already fixed for this year via either contracts or hedges. I would also like to comment on the upcoming implementation of Phase 4 of the European Emissions Trading System in 2021. This is new phase will reduce the carbon credits allocation to the industry, probably causing the price of CO2 emission allowances currently at EUR 27 per ton to keep rising. Our strategy of consuming a growing proportion of electricity from clean sources and increasing our use of alternative fuels with high biomass content has allowed us to reserve enough CO2 allowances to cover our needs throughout all of Phase 4, which ends in 2030. Our quarterly free cash flow after maintenance CapEx was negative $337 million compared with negative $198 million last year, mainly explained by a higher working capital need during the quarter largely due to the unfavorable effect in suppliers. However, on a sequential basis, the difference is explained by two to three days – higher days in inventories and two to three days lower in days payable. We expect the year-to-date investment in working capital to reverse during the rest of the year and to reach our guidance. We maintained a comfortable level of negative 10 working capital days during the quarter. We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. During the quarter, we issued EUR 400 million euro-denominated senior secured notes due in 2026 with a coupon of 3.125%. We also called our 4.375% euro-denominated notes due in 2023. Of these notes, EUR 400 million were redeemed on April 15 and the remaining EUR 150 million will be redeemed on April 30. During the quarter, our total debt plus perpetual securities increased by $87 million. This debt variation includes a favorable translation effect of $54 million. We use the proceeds from the asset divestments in the Baltic and Nordic regions and the increase in debt during the quarter to meet the free cash flow deficit and for other corporate purposes. Our leverage ratio reached 3.88x at the end of the quarter. At the beginning of this month, we successfully completed the amendment process under our credit agreement. This included the extension of approximately $1.1 billion of certain maturities by three years as well as making certain adjustments for the implementation of IFRS 16 on the calculation of leverage ratio for covenant purposes. The pro forma debt maturity profile reflects this extension in maturities as well as the full redemption of our 2023 notes using our revolving credit facility. Currently, we do not have any relevant debt maturities until July 2021, other than our subordinated convertible notes, which mature in March 2020. And now Fernando will discuss our outlook for this year. Fernando González: The growth outlook for 2019 is favorable. We expect our consolidated ready-mix and aggregate volumes for the year to grow from 2% to 4%, while cement volumes should be in the minus 1% to plus 1% range compared with those in 2018. Regarding our cost of energy, on a per ton of cement-produced basis, we expected to be from flat to increasing by 3% from last year's levels. As Maher mentioned, the headwinds this year will come predominantly from electricity cost, mainly in Europe and Egypt. Our guidance for CapEx now reflects the adjustments related to IFRS 16. For 2019, we expect total CapEx to be about $1.15 billion and this includes $850 million in maintenance CapEx and $300 million in strategic CapEx. On financial expenses, we expect a reduction of $25 million from last year's levels. Our guidance for investment in working capital and cash taxes remains unchanged from the one provided last quarter. We will continue to focus on variables we control. We are committed to continue with our pricing and commercial strategies and deliver our Stronger CEMEX targets. This should support a better performance in upcoming quarters. We expect our EBITDA generation to grow during the full year 2019. Thank you for your attention.

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 our prices for our products. And now we will be happy to take your questions. Operator?

[Operator Instructions] And our first question online comes from Mr. Dan McGoey from Citigroup. Please go ahead.

Good morning, gentlemen. Thanks for the call. First question is on pricing. The pricing in Mexico looks to have been short of the inflation and input cost. I'm wondering if you could talk about whether it fully reflects what was implemented in the first quarter. And then also, if you could talk a little bit more about on the energy cost front, we kept some of the – you mentioned in terms of how much was secured for the remainder of this year and where we should see declines? Fernando González: So regarding pricing in Mexico, as we commented, during the first quarter 2019 in local currency terms, prices were up 4% sequentially. As we – I think we also commented, this is – we did comment again that our pricing strategy is offsetting input cost inflation and we have not managed to achieve that yet. So we need to continue paying attention to our pricing strategy in the country. But at the same time, we are pleased with the price increases that we manage to get during the first quarter, particularly when considering the situation in the market. So again, in – we have not offset completely the input cost inflation, 4% sequentially, it's – again, considering market conditions, we were very pleased with it.

And Dan, I just wanted to clarify on the energy. You're talking about on a consolidated level, right?

That's right, on a consolidated basis.

Yes. I mean the first quarter was a bit of an aberration because, as you know, we're guiding for the full year energy, which is fuels plus electricity to be somewhere between 0% to plus 3%. And of course, our expectation for the full year is for fuels to be declining. Unfortunately, in the first quarter, fuels were up 6%, electricity was down 3%. The primary driver I would say on the increases in fields was coming out of our U.S. operation partially and to some extent also from Mexico because we are continuing to consume some higher inventories, higher cost inventories, which we – as you know, we, kind of, have inventories for fuels, somewhere between three to six months but closer to the six months period. So it takes us a little bit of time to digest. In the case of the U.S., we had some one-offs, where we had to purchase some fuels on the spot market and arrange for the relevant transportation. And then a tight transportation situation in the U.S., translates to slightly higher fuel cost. But we think that situation is going to reverse itself, and we should be well within the guidance for our energy for the rest of the year.

Thank you.

Thank you. Operator?

Thank you. We currently have a question from the webcast. Please go ahead.

Yes, the question that we have from the webcast is from Paul Roger from Exane BNP Paribas, and it's a three-part question. Maybe what I'll do is I'll read each one of the questions and then we'll answer them. The first question is, this was the first yearly increase in South America margins since mid-2016, given there isn't historically much margin seasonality, should we assume 24% is now the floor and divisional margins improved further from here through 2019? And yes. Paul, I mean, as you know, we don't guide to EBITDA and certainly we didn't do it by regions, but certainly, we're quite encouraged with what's happening in Columbia. We think situation both on the volume side and on the pricing side is improving and Columbia is obviously the biggest mover there. In addition to that, Colombia is a very important contributor to the Stronger CEMEX initiatives. In the quarter, we estimate about $7 million of contribution and we do see the situation stabilizing in Panama, which is the offsetting market to some of the positives that we are seeing in Columbia. So well, I don't want to guide you, but we do think that we are kind of stabilizing this quarter on a regional basis. The second question is how broad-based were European price increases? Was the 5% sequential cement prices rise typical? Or were there some outliner countries? And I would say that we had – I mean, as you know, of course, first in Europe, we're not – we don't lead the pricing increases, we tend to follow our European competitors. But prices were, I would say, fairly universally in the just kind of mid- to low single digit increases for the UK, Germany, Poland, Spain was a little bit better but we're coming down from a lower base but on a sequential basis, in local currency terms, prices were up 5%. And then the last part of Paul's question was a competitor report, a very weak start in the UK, what's your view on the outlook? I can't comment on what our competitors say. All I can tell you is that, as we mentioned, volumes for us in the UK were up 4%. It was the weakest performance in Europe of the majors. But we are guiding flat in the UK and in February and in the first quarter, we're are above that. We're seeing very good demand on the infrastructure side, and residential markets outside of London continue to be actually fairly good and have experienced a low single digit pricing in the UK in the first quarter. So I can't comment on the other guys for us. Obviously, the UK is not as robust as the other markets but it's doing fairly well. Fernando González: An additional comment on the price side just to complete what Maher just said, is that in some parts in Europe, Central Europe, lets say, Poland, Germany, capacity utilization, I'm referring to cement, of course, capacity utilization is gearing to very high levels and in some markets, in some regions, its capacity is even sold out, which is another factor for the pricing strategies to be successful.

Operator, next question?

Yes. Our next question on the line comes from Vanessa Quiroga from Crédit Suisse. Please go ahead.

Thank you. Hi Fernando and hi Maher.

Hi Vanessa.

First question is about Mexico, Mexico's industries volumes in 2019. What's your assumption for that, for industry volumes in Mexico? And the second one – the second question that I have is regarding working capital. If there were any specific regions that affected on the inventories' and suppliers' changes in days that you mentioned on the script? Fernando González: Okay. Vanessa, regarding Mexico volumes as you know with public information coming from [indiscernible] January and February, volumes dropped about 10%, 10 and a fraction or nine and a fraction. And also our modified guidance now for Mexico for the full year is minus 5% or mid-single-digit. So that's our current expectation on Mexico. As you can imagine, there is still – we don't have as much transparency or clarity on what might happen as we mentioned the speed at which is the infrastructure expenditure comes, will be key to volume development during the year. As well as expenditure in social housing, which as we mentioned, we are expecting for a program to be announced or policies to be announced late this month or early May. So let's see how that goes. There are indicators like the budget of the secretariat in the Communication and Transportation Ministry that, in the first quarter was to – execution on the budget was too low, really low. So again, with what I just mentioned, let's see how fast the expenditure comes from infrastructure and social housing. But currently that's our estimate. And as you know, our volumes during the first quarter dropped more than what the estimate for the market is which is, let's say, minus 10% for the whole quarter. And as we have explained, that is an implication or a consequence of our pricing strategy. We are – through our value-before-volume strategy we are training to offset input inflation. And during the first quarter, there was an impact in our market position, in our market share. As we have commented before, the market dynamics and pricing strategies go beyond the quarter, meaning in a quarter you can see prices increase as market share being deteriorated, but we are constantly monitoring the situation and we will continue making decisions on these value-before-volume strategy.

Yes, if I can add maybe just a couple of points to what Fernando said. I think it's also very important, is that leading up to the year through out our commercial strategies, I think we were successful in reaching probably a market position that was the best position we have had for about 2.5 years. So it's from a fairly, let's say, solid position that we focused on our value-before-volume strategy, and we do expect, as Fernando said, for things to revert during the course of the year. And also another positive, frankly, that we are seeing that is very important in terms of the infrastructure and housing, particularly in housing, the data on mortgages for the first two months of the year is showing somewhere around 11% to 12% growth, specifically to the middle-class housing segment, which is probably the more – the bigger portion and that drives the needle. Now we do expect, again, social housing programs to resume growth after the rules are put out. So – and then on the infrastructure side, rural roads is something that we know the government is very keen on starting ASAP and so we thing we should be benefiting from that. And just as an indication, I mean, of what's been happening, we have been seeing a very nice improvement in our average daily sales sequentially from the beginning of the year until the first couple of weeks of this month, in fact. So we are encouraged, I mean – obviously, we did expect this kind of slowdown due to the transition. It's not a surprise to us, and of course, there is the added element of the pricing strategy that Fernando talked about. As far as the working capital is concerned, I mean, if we take a look at purely year-over-year basis, the increase was driven primarily by supplier days payable, essentially, which in a few of our markets, the main markets that were impacted was the U.S., Mexico and, to a lesser extent, the Philippines. I think what's more meaningful, however, in my view is to take a look at the average working capital days for payables and inventories, looking at the fourth quarter versus the first quarter. And what we have seen is, as I said in my remarks, a two to three day increase in inventories primarily in the U.S., Mexico and the Philippines, either because of weather or because of anticipation of market improvements. And then we have seen literally about two to three days deterioration in days payable. Again we think both of these two dynamics are temporary, and we do expect things to improve during the rest of the year and be within our guidance for working capital. I hope that answers your question, Vanessa.

Okay. Okay, yes. For sure, Mahar. And regarding Tepeaca, so your estimate is that it's going to be operational by the end of this year still, right? Fernando González: No, I think it's mid 2020. I'd say first half of 2020 or second quarter 2020.

All right, thank you. Fernando González: Thanks Vanessa.

Thank you very much, Vanessa. Operator?

Yes. Our next question on the line comes from Daniel Sasson from Itaú. Please go ahead.

Hi everyone. Good morning, thanks for taking my question. My first question actually comes on the divestment front. You mentioned at your CEMEX Day that you had something around $700 million in binding agreements and in MBOs and there was $1.2 billion already under negotiation. If you could provide us an update on that, how are the binding agreements going? And the deals under negotiation, if those amounts that you previously reported have changed meaningfully or if they are closer to becoming final and better agreements? And my second question would be on U.S. volumes. You mentioned that the residential segment is not that strong, but on the other hand you are seeing a higher infrastructure activity with increased state spending. The question is, how much of a drag do you think can be the retail sector or – sorry the residential sector would it be for the U.S.? And are you concerned about the potential deceleration in the U.S. construction industry, maybe not for 2019 but starting to look already for 2020? Those would be my questions. Fernando González: Okay, on your first question, there are no major changes of what we have already announced. So on the target of divesting until December 2020, $1.5 billion to $2 billion. We have achieved about half of the – it's close to $800 million, which is half of the lower figure in the range. We continue negotiating other options in our divestment strategy. And we think that we will achieve the divestment program timely. I don't have any specific concern on being able to do that, divesting some assets, some additional assets at reasonable prices.

And I think to add to Fernando's point, I mean, of course, we did – just as a reminder, I mean, we mentioned the France disposal, which probably is the only thing that was different from what we had, but it's not a material amount, but still that's a difference. But I think what's really important here is that we – virtually all of our divestitures have been in double-digit multiples – I'm sorry, I hope you heard me, I think, my mic was off. But what I was saying is that the only – probably small difference from what we talked about in CEMEX Day was a small divestment in France for about $36 million. And I think the – what's really important here, Daniel, to mention is the multiples at which we are divesting our assets. They are well into the double digits and we're – and it's very important to stress the none of these assets are at trough earnings. So these are very attractive businesses that are being sold at very attractive multiples. And we feel they will be very valuable to the folks that are purchasing these assets as they probably extract from some important synergies. If we can go to the U.S., clearly the biggest driver that is expected to continue to drive our business is infrastructure. I mean infrastructure represents a little bit over 50% of volumes, in particular, streets-and-highway construction spending, it was up 5% year-to-date February. More importantly in our own states, contract awards have been consistently double digits, with less data at 17% versus the national average of 3%. This is very much a reflection of what's happening in places like California, Texas and other states that have been very proactive in raising very specific taxation for infrastructure projects and they've been executing because they realize the value of differentiating their economies from other states within the U.S. So we are very constructive and positive on infrastructure. On the residential side, our assumption for the year is that we're going to be in the 1.3 million range of home starts for the year. Yes. There has been some slowdown in some of the very highly-priced markets like Northern California. But we're seeing continued housing demand. It's probably slowing down a little bit because there's been a slight bit of buildup in inventory, very slight. I mean, we're running at about six months worth of inventory of new homes. And when there was some doubt about interest rates, I think about there was a bit of a blip in the market. But we're seeing a resumption in mortgage applications and that speaks to future growth. The other thing that is very important that people don't focus on very much is the existing home inventories. Those, which are a leading indicator to future demand, those are at all-time lows. They continue to be somewhere around three months of – level. Now we do know that Millennials prefer new houses, but at the end of the day, prices talk, and so whatever happens in that segment will definitely dictate future demand. And we are reasonably constructive, especially in our markets. I mean, Houston has been turning around quite nicely in Texas, for instance, and Houston is probably one of the largest cities in the country in terms of housing market. Strong job market is going to continue to be a very good determinant of outlook. And mortgage, 30-year mortgage rates are down 80 basis points, I mean, that's a lot. I mean that's almost like a 25% drop in financing cost. So I think with higher employment and lower interest rates, we're definitely going to start seeing a nice pickup in the housing sector. So between those 2, I mean, that's what is giving us the confidence that volumes should continue to be within our guidance of 2% to 4% for the year in the U.S. business. I hope that answers your question.

It does, Maher. Thank you.

Thank you very, Daniel. Operator?

Our next question on the line comes from Adrian Huerta from JPMorgan. Please go ahead.

Thank you. Good morning and thank you for taking my call. My question is also on Mexico. You mentioned, Maher, that volumes, mainly volumes started to recover in April versus what you saw in early January. Have you seen years – as well as increasing prices, because when we look at the next year's prices, I mean, it feels like they have been rising, even as of March, increases that you have done. And so that's my first question. And if you don't see competitors increasing pricing in the next couple of quarters and you continue to lose market share, is there any chance that you could reduce prices? And the other question is just margins. You mentioned that on a quarter-over-quarter basis, margins in Mexico were up – I think you said up 0.5 or 0.6 percentage points despite the very weak volumes, benefited by prices. But can you give us more details on what else benefit margins on a sequential basis in Mexico? Fernando González: Thanks, Adrian. I will take your first question on prices in Mexico. Again, if you look at the pricing strategy what you have seen, not just this quarter but in other quarters, is we are timely announcing the market what our pricing strategy is, meaning, offsetting our cost inflation and we do increase prices accordingly. As we have mentioned before, during the first quarter and for the whole 2018, we didn't succeed on offsetting cost inflation, not last year, and not during the first quarter. So we will continue insisting in our pricing strategy. The dynamics in the market are complex, in the sense different players do have different strategies. So what we do is that we monitor market conditions, we monitor our market position and we will be reacting accordingly. Now are we willing to change our pricing strategy because of our quarter? No, we are not doing that. So will continue insisting in this strategy and we will continue monitoring market dynamics.

And Adrian, on the issue of the – on the sequential analysis, we thought that is very important to look at because, as you know, seasonality is not that big fourth quarter to first quarter. And that's – we thought that it was really impressive. And if you take a look at the volume declines from the fourth quarter to the first quarter, they were actually a little bit above the volumes that we experienced on a year-over-year basis. And despite that, we were able to deliver growth in margin. And that's got to be driven by – not got to be, is driven by two items. Number one is the pricing that we were able to realize, which testifies to our – the validity of our value-before-volume strategy. And second, and very importantly, is the stronger CEMEX cost-cutting initiatives. I mean, Mexico has been very diligent, I mean, everybody has been, but they have been specifically putting a lot of effort and we guesstimate SG&A savings are slightly below 1%. So a combination of those two things is what's driving that sequential improvement in EBITDA margin. And that's why we are also comported with our performance during the course of the year, both in terms of the demand outlook, pricing strategy and, of course, the cost initiatives that we have put in place. I hope that answers your question.

Yes, it does. Very good. Thank you, Fernando and Maher. Appreciate it. Fernando González: Thanks Adrian.

Thanks a lot, Adrian. Operator?

Our next question on the line comes from Carlos Peyrelongue from Bank of America Merrill Lynch. Please go ahead.

Thank you. Our question has been answered. Thank you. Fernando González: Thanks Carlos.

Operator?

Our next question online comes from Rodolfo Ramos from Bradesco BBI.

Good morning and thanks for taking my question. My first question is a follow-up to the previous question on Mexico and the housing program. Is this program that you are mentioning, that should be announced early next month, if this is a federal new program? Or is this related to an existing government program? If you can give more detail on that, that would be greatly really appreciated. And secondly, we saw that your maintenance CapEx for this year was increased 350 million, and you mentioned the IFRS change. Is this merely an accounting change? Or is there a cash outlay competent ascribed to this new estimate? Fernando González: On the first question, we are referring to – when we are referring to the social housing program, we are referring to the federal social housing program. Amd there is permanently a policy and a program on supporting social housing in Mexico. It is just that, according to the political times we are going through, meaning we are starting – we are just starting a new government in the country. So whenever there is a new federal government in place, they do make a deep review on all type of federal programs, just to check if the programs are according to their specific policies or intents as a federal government. I think it's no different to what happened in 2013 when the new government then made a deep review on housing policies and – by the way, I remember there were major changes then, conducive to some sort of instability in housing. So it is federal, we believe there is a – it's taking sort of a reasonable time for them to make this review. We are not – I'm not exactly sure when this will be communicated but I suppose that will be either sometime in April or early May and then we will have much more information to better understand the expectations on that segment of the market.

And Rodolfo, if I – just to clarify and maybe I will take a minute extra to just go beyond your question. First, just to clarify on the CapEx, the IFRS impact is $300 million, and if you recall in February when we gave our guidance for the year, we gave maintenance CapEx guidance of $550 million. So the guidance is not changed. There is only a $300 million IFRS adjustment, and that's really the only difference. And just for the rest of the audience, if you – just to recall, we did indicate that for 2018 at the EBITDA level, the IFRS adjustment was $280 million. We expect that adjustment to be roughly the same, maybe a little bit higher for this year. And we expect it, roughly, to be spread out evenly on a quarterly basis. And then the other thing on the debt side that was added was the leases which, obviously, impact the debt side and it impacts the interest cost on our free cash flow number. So I hope that answers your question, Rodolfo.

Okay, so it's not a cash...

No. It's not.

All right. If I may just squeeze in a follow-up. We have been tracking sales prices for cement in Mexico at the retail level, and we've seen prices increase over – quarter-over-quarter basis this quarter over January, February, March, below from the prices you announced. Are you seeing distributors eating up some of the margin? Or do you have any insight as to what is happening at that level and the retail distribution network? Fernando González: No. I don't have any specific info to share in that regard. Maybe just imagining a mix of regions can play a role. So I don't know the scope of the study, but I don't think there is a major issue on margins from distributors or other type. It is just different micromarkets. We do have pricing strategies on a micromarket level. I don't know the story so I just cannot compare – I cannot add the info to your question.

And also Rodolfo, I mean, the IMEI numbers are in line with what we are reporting. So I don't think there is that big a difference. So it could be a sample thing on your side.

Okay, all right. Thank you, Maher.

Thank you very much. Operator?

We have time for one more question. Our question comes from Cecilia Jimenez from Santander. Please go ahead.

Hi, good morning. Thanks for taking my question.

Good morning.

I have two very small questions. Number one is on U.S. volumes. I'm just making sure the contraction volume comes from mostly from weather effects and their underlying trends in the market continue to be robust, if you can confirm that? And number two, in Mexico, what kind of input cost inflation are you looking at for the – basically for the pricing strategy? So just to make sure what number are you actually seeing in terms of input cost? Those are my two questions.

Cecilia, on the U.S. volumes, it's pretty much all weather, I mean, and it's very important to note that to take the average daily volume differences, it's 2% versus the reported 4%. And it's very important that the impact of weather, impacted roughly 50%, a little bit under 50% of our cement sales in the U.S., and the precipitation that took place in that portfolio – in that part of the portfolio, was close to 90% increase versus last year. So it's all weather, and we think it's going to be reverting. So we don't see any structural changes in the demand outlook for the U.S. market from our perspective. And on the – I'm sorry, the other question was on the inflation. I mean, it's...

Input cost inflation…

Yes. It's – I have to say, it's very difficult to say, but when you take a look at – I mean, you have to take a look at what's happening to fuels and to diesel and to electricity prices. And it's – all of that is well above the increases that we're seeing in pricing. So we don't guide to inflation, but energy, for instance, was up 7%. And so you can kind of get an idea of roughly where that could translate, too, right? So I hope that answers your question, Cecelia.

So – partially, okay, I will follow up offline on the input cost part, just to hear a little bit more detail. Thank you very much.

Thank you very much, Cecilia. Fernando González: Thank you.

And thank you. I would like to turn the call over to Fernando González for closing remarks. Fernando González: Well, in closing, I would like to thank you all for the time and attention, and we look forward to your continued participation in CEMEX. Please feel free to contact us directly or visit our website at any time. Thank you, and good day.

And thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.