Good morning. Welcome to the CEMEX Second Quarter 2019 Conference Call and Webcast. My name is Richard, and I'll be your operator for today. [Operator Instructions]. Our host for today are: Fernando Gonzalez, 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 Gonzalez. Please proceed. Fernando González: Thank you. Good day to everyone, and thank you for joining us for our Second Quarter 2019 Conference Call and Webcast. We will be happy to take your questions after our initial remarks. The second quarter proved to be one of our most difficult quarters in several years due to the challenging global economic environment. Weaker-than-expected industrial activity and continued trade conflicts have resulted in lower investment in several of our markets. Mexico, in particular, has been affected by these factors, which, together with the post-electoral transition process led to lower-than-expected volumes. Adverse weather in the U.S. also translated into muted activity during the quarter. In contrast, our Europe region performed well. Despite lower quarterly volumes due to weather, favorable pricing dynamics translated into EBITDA growth and EBITDA margin expansion. We continued to focus on our pricing strategy and cost reduction initiatives under our stronger CEMEX program to mitigate the lower-than-expected volumes. During the quarter, prices improved in all our regions. On the volume side, we saw the clients in our consolidated cement, ready-mix and aggregate volumes, reflecting lower volumes in most of our markets with the exception of ready-mix and aggregates in the U.S. Our EBITDA during the first six months of the year declined by 10%, with a 1.5 percentage point drop in our EBITDA margin, out of which 0.9 percentage points were due to the decline in volumes and 0.3 percentage…

Thank you, Fernando. Hello, everyone. On a like-to-like basis, our net sales decreased by 3% during the quarter, while operating EBITDA decreased by 14%. More than 2/3 of the EBITDA decline is explained by lower contribution from Mexico. Our quarterly operating EBITDA margin declined by 2.3 percentage points. About half of this drop was due to volumes and the rest to product mix and other items. Favorable pricing and the contribution from stronger CEMEX savings offset the increase in our costs and transportation expenses. We had a negative FX impact on EBITDA of $7 million during the quarter. Cost of sales as a percentage of net sales increased by 2.1 percentage points during the second quarter, driven mainly by higher purchase cement and clinker, mostly in markets where we are operating at high-capacity utilization as well as higher maintenance costs. Operating expenses, also as a percentage of net sales, grew by 0.8 percentage points, about half of the decline was due to increased selling and marketing expenses in Mexico. In addition, there were higher distribution and logistics expenses in the U.S. and our South Central and Caribbean region due to weather. Our kiln fuel and electricity bill on a per ton of cement produced basis was 2% lower year-over-year. This is the first quarterly decline since the fourth quarter of 2016. Our energy bill was flat during the first quarter of the year, reflecting a 2% increase in kiln fuels, as during the quarter, we still consumed higher-priced inventories and a 3% decline in electricity. During the rest of the year, we expect fuel cost to decline, but anticipate an increase in electricity costs. We anticipate energy, including kiln fuels and electricity on a per ton of cement produced basis to be from flat to declining 1% during 2019. Our…

Before we go into our Q&A session, I would like to mention that in the appendix of our results presentation, we have included regional sales and EBITDA information per quarter for 2018, adjusted for IFRS 16 and discontinued operations. Also, 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 during our -- beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to our prices and to our products. And now we will be happy to take your questions. Operator?

[Operator Instructions]. Our first question on the line comes from Benjamin Theurer from Barclays.

Just two quick ones. So first of all, the -- you mentioned various times in some of the regions and also on a consolidated basis, advanced maintenance costs having impacted some of the profitability. Now particularly in the U.S., I mean, obviously, volume was relatively good, considering the situation of weather and so on, pricing was really strong sequentially on a year-over-year basis. Nonetheless, EBITDA was down 12% and margin contraction of about 3.5 percentage points. Can you give a little more detail on how much of that margin contraction was actually associated with the maintenance, you've mentioned in the report, that would be great if we could get some details here? And essentially the same question for the SAC region.

Ben. Outages were -- I mean, I guess, maintenance, we call it outages or maintenance, but out of the drop that we saw and the margin decline that we saw of a little bit under 3.5 percentage points. Roughly -- almost 1/3 -- about close to 1 percentage points of that came due to maintenance costs. We have close to 10 days of additional outages year-over-year, and that represented one of our plants in Texas, Balcones and then the Knoxville plant. So that's the one -- that's one variable that was impact. Of course, freight was impacting as well. And of course, for the whole business, raw materials essentially cement going into ready-mix also impacted the margins in the U.S. now, of course, for the second half, we expect things to get better because also one of the things that are happening in the U.S. is the stronger CEMEX, almost 1/3 of the stronger CEMEX savings actually only 1/3 occurred in the first half. So we're expecting 2/3 to happen in the second half, we are expecting future -- fewer outages in the second half of the year. And also, we do see energy, in general, kind of abating and should be a source of savings during the second half of the year. And of course, not referring the -- to the volume effect that clearly is implied by our guidance in the back half of the year. And one thing -- and Ben, one thing also that's very important to mention is that close to 90% of the maintenance expenses that are expected for the year happened in the first half of the year. So there is a disproportionate amount of maintenance costs in the first half of the year that exacerbated that EBITDA margin drop. And in South…

Yes, totally. And then just a very technical one. Can you pay the second installment of the dividend now that the leverage is above 4x again, how does that work? What's the restriction here from the covenants? Can you remind us quickly on that?

Yes. Ben, there shouldn't be any issue. I mean, there is no issue. It's -- because the covenant setting is -- once the approval is done, it's not an issue.

Our next question online comes from Cecilia Jimenez from Santander.

I have a follow-up on U.S. margins and another one on Mexico. In U.S. margins, would it be fair to say that at least half of the 340 basis points margin decline is related to maintenance, and we shouldn't see that impact in following quarters. Would that be fair to say? And second, in Mexico, you managed to increase prices 2% despite the volume decline. So how likely you see prices sustainable at this level considering the weaker outlook for the second half. And our old industry players behaving in a rational way regarding prices? I know you don't talk about competitors, but in a general basis, do you think everyone is behaving rationally? Fernando González: Thanks Cecilia. Let me start with your question about Mexico. I think what you see, what is -- what we have been doing already for some time in the sense of what is the pricing strategy we are following in Mexico as well as other markets. There has been stability in pricing in Mexico, even though at a market level, volumes have declined between -- estimates between 10% and 11%. As you saw, our volumes are declining, like 3 to 4 percentage points more, which suggest loss in market share. As you know, our strategy goes beyond a quarter, meaning competitive dynamics, takes some time for strategies to be executed. The good news is that prices are stable, slightly growing. The bad news to put it in our way is that in peso terms, cement prices have declined in real terms, meaning, we have not been coping with accumulated inflation in the country. We think, although we don't have yet public info, but with info -- public information up to May and making some internal estimates, we believe that in the dynamics of our…

And regarding U.S. margins?

Yes. Cecilia, if I can address that. Again just by way of reminder to everybody margin decline is 3.4 percentage points. And as I mentioned earlier, the direct impact of the outages was probably a percentage point of that. But what's also important is...

Okay. I didn't get that, sorry.

Yes. But there are other impacts, right? I mean there are several impacts due to outages. And let me just enumerate the impacts, okay? You have an impact from an increased cost of freight. There is an impact that is coming out of inventory variation and there is a labor impact. Now freight for the quarter, about 1.5 -- 1.5 percentage point was impacting our EBITDA margin. Most of it was because of longer distances traveled due to outages. We also have an inventory variation effect, I mean, part of it from cement because of the outages. And also, lastly, we had an impact because of labor costs. And labor cost contributed to almost 1 percentage point of the 3.4%. So if I had to add all of these things together, it's probably more -- well above half of the 3.4 percentage terms. And frankly, these things in the second half of the year may -- can be a turnaround somewhere between $40 million to $50 million. I mean this is not a guidance, but that's the magnitude of the potential impact. And as I said in my comments earlier that 90% of the maintenance activity took place in the first half of the year. So many of these impacts that were related to the maintenance shutdowns are not going to happen in the second half of the year. I hope that addresses your question, Cecilia?

Yes, it's very clear Maher. Fernando González: Okay. If I may add some comment over Maher's. He already said that about 90% of our program shutdowns of cement plant for the year have been done during the first half. And on top of the direct maintenance costs related to it, meaning, most of them being concentrated in the first half, there are also other impacts because of the outages that we are not going to have the second half, for instance, when you are shooting down kiln, the consumption of energy is higher so we would not have that effect in the second half. When you are shooting down kiln, you have to support markets moving materials for longer distances, affecting freight cost, we will not have that in the second half. Because of not being producing as much cement as needed because of most of the concentration of shutdowns during the first half, then you have to use your inventories with a negative impact on the cost of it, a temporary one, but it is what it is. So what I'm saying is -- what you can expect in the second half is a sizable increase in margin because of us being able to have a very little maintenance during the second half. And the other reason why we think, and we have already commented, the other reason why we think second half should be much better than first half is because the -- how price increases that were announced in April in 80% of our markets are sticking. So that will be another contribution for our EBITDA and our margins in the U.S. for the second half of the year.

Thank you very much, Cecilia. Any other comments. Operator, I think we can go to the next question.

Our next question online comes from Dan McGoey from Citi Group.

I was wondering if you talk a little bit on the U.S. price increases the -- from April. And you managed to get some, but not near all of what was announced. Could you comment a little on the sort of regional success? And how much some of those might have been undermined by adverse weather in the different regions? And then secondly on Mexico, I think, Fred, you mentioned closing down about 10% of the ready-mix plants. So I'm wondering, given the depressed level of demand and volumes in Mexico, if there's other sort of more aggressive strategies to take cost out of the business in Mexico to improve the margins going forward? Fernando González: Yes. I think what we are doing in Mexico, there is a EBITDA rightsizing effort because of the drop of volumes. And we continue doing so depending on how volumes evolve. The -- on top of the rightsizing, Mexico is already contributing in our stronger CEMEX savings plan. And we do expect that contribution to continue for the rest of the year. I don't have any specific additional measure to communicate, let's say, particularly on things like shooting down ready-mix plants because that will depend on how volumes evolve. So hopefully, in the future, we will continue updating how the trading activity is evolving, and what type of measures we're taking to be sure that we adjust to this part of the cycle.

Yes. And then, if I can address the -- your question on pricing. I mean, obviously, we would have liked to have better pricing in our market. But just as a reminder, I mean, U.S. cement prices were up 4% in the second quarter and 3% sequentially. We're getting, I would say, good traction of our April pricing increase. We've implemented by now all of our markets. As you recall, Florida had a pricing increase in the beginning of the year. And unfortunately, do competitive situation there, I think the pricing performance was probably not as good as expected. But approximately 80% of our volumes received pricing increases effective April. In markets like Texas, Northern California, prices increased sequentially by close to 5%, maybe a little bit of -- a little bit better than 5%. We're getting better pricing traction, frankly, than in prior years. And that's not just for us, it's -- I would say that we're noticing that pretty much all over our markets. The weather has been a factor in very select markets. I would say that probably, maybe Colorado was one of the markets that they've had tremendous snow, as you know, late in the season, very surprised. And so that may have had some impact there, some pressure on the pricing, but I would say, the general dynamics are pretty good. And while our cement volumes were a little bit, let's say, less than expected. If we take a look at what's happening to our aggregates business. Aggregates volumes are doing exceptionally well in the U.S. as a demonstration of what's happening in the infrastructure side of the business. I mean, our volumes in the quarter, in aggregate, are up 9%, and pricing in the aggregate sector is also very positive. It's in the low single digits increase. That pricing dynamic is mostly a function of product mix, we're selling less valuable aggregates, but that could certainly change depending on our order book. But the outlook for the second half of the year in terms of demand in cement and in aggregates and ready-mix is pretty positive. We have a very good solid order book, and we think we should see continued strength in pricing in the U.S. I don't know if there are any other clarifications that you would like us to go over?

No, that's helpful, Maher. Just on the -- and thank you for the detail on the margins and the impact of the maintenance cost. Just a question, when you talk about the first half maintenance, and you're looking at it year-on-year. So are these -- when you talk about the margin differences, are these non-annual maintenances or these multiyear maintenances to cause that effect, especially when you're looking at on a year-on-year basis?

I would say that we -- it's probably fairly normalized. I mean, there's nothing particularly exceptional. But the maintenance cycle is fairly normal. I don't think there's anything particular that is taking place in this year.

Our next question online comes from Adrian Huerta from JP Morgan.

Two questions. One is, given that the outlook for the year has clearly deteriorated, and there could be further downside risk, especially on lower CapEx investments globally. So considering this, and a much lower free cash flow generation for the year versus the original expectations early in the year. What changes could you implement to achieve your leverage goals? That's my first question. And the second one, and you were talking about that a little bit, just on the prior question, Maher, if you can explain just further this large disparity that we saw on growth on the U.S. Cement volumes versus ready-mix and aggregates. Is it just basically because of the strength of infrastructure versus the other sectors? What else could explain this? Fernando González: Regarding your first question, Adrian, as I commented, we continue committed to our target of gaining back investment grade, and the current estimate is December 2020. So we will continue executing all the variables that we are putting in place like -- as we commented savings in our stronger CEMEX program, divestments. And as you suggest, the deterioration of market conditions in our main markets -- or in Mexico, in particularly, we already commented that in the case of the years, we do expect a rebound in the second half. We will adjust accordingly. We don't have now any specific adjustments or changes to communicate and said that we continue committed and we will adjust on as needed basis depending on our trading activity. We still have almost 1.5 year to think and react and act and execute on different measures that we can think of. But again, for the time being, we continue with our current plan, divesting up to -- the range of divestments is from $1.5 billion to $2 billion. Now, we think, is more on the $2 billion side. And the savings and committing all proceeds to the production. That's as far as I can comment right now.

And, Adrian, if I can address the question on the U.S. And just to recap, I mean, to make sure that I understood you, you were just asking the disparate -- about the difference in growth rates in our cement business versus the aggregates and ready-mix, correct?

Correct.

Yes. So I mean, there is a few things that are driving that during the quarter. I would say that definitely, geographic footprint plays a lot into that. And of course, weather is a big issue plus the actual business mix. So number one, I mean, ready-mix and aggs are more exposed, at least in the second quarter to Florida. And as you may know, we had much better weather during the quarter in both Florida and California. And so that contributed largely also ready-mix in Texas, for instance, Houston is our biggest area for production of ready-mix in Texas, and that market was actually growing high teens during the quarter, which is -- has been very attractive. It's a turnaround situation. And certainly, we have easier comps for aggs when we compare it to last year. And also, there is the natural kind of garden-variety timing of specific projects frankly. When you add all of that together and then having weather impacting what's happening in cement, you get this disparity, but we definitely -- I mean, although we've lowered our guidance for the full year for cement, I mean, clearly, the back half performance is expected to be much better in the U.S. in cement, as you would see from the implied growth.

Our next question online comes from Yassine Touahri from On Filed Investment.

Just a couple of question on my side. First, on your strategy, you visited a couple of countries in Europe. You saw the positions and position in Nordics. Some position in Germany, in France, or white cement plants in Spain. How do you see Europe going forward? Would you consider further disposal? Could you consider exiting completely the region? And then maybe just another question on the U.S. As I understand that you had some extra maintenance costs. Could you quantify this extra maintenance cost in a million of dollar? Or is it too difficult to do -- the extra maintenance cost that you had in the second quarter. Fernando González: Yassine, regarding your first question, we do have a portfolio consider for divestments. There might be other divestments in Europe as well as in Nordic regions. As you know, we don't disclose it for -- on a very specific manner on potential divestments. But what I'm saying is that, yes, there could be more divestments, but it's not, let's say, they're not specifically because of Europe. It's -- we have to comply and we want to comply with our commitment of divesting up to $2 billion. We are on our way to do it, and there is a variety of assets that we are considering in order to complete our target.

Yes. And Yassine, I think we -- I don't know if you've just turned the call, but we talked about the maintenance situation in the U.S. at length without going through it for the sake of everybody else. I did mention that when you add all of the impacts of maintenance, whether it's energy, transportation impact, labor and so forth and so on, because of the outages, we're expecting somewhere between $40 million to $50 million pickup in the second half as a consequence of not having that and as a consequence of having 90% of our maintenance costs occurring in the first half of the year. The other thing that that I think we did not mention is also what's been happening in maintenance in terms of efficiencies. I mean, we have reduced the number of maintenance per -- I mean, number of days per maintenance quite materially. And so that should also translate to better performance in that in the second half of the year. That's specifically to the U.S.

And maybe a quick follow-up on the energy cost inflation. So you gave a clear guidance for the year. But so you're expecting some decline in total energy cost. What do you expect for the second part of the year for H2 in terms of fuel costs and electricity costs, as you look at it this way? Fernando González: Glad you made the question, Yassine. I think I don't remember if we commented already. But this quarter, it is the first time in 2.5 years that our energy cost is lower than when compared to the previous year, same quarter previous year. That's why we did correct it slightly our guidance on energy. And what we see is a decline we have seen, and we think it will -- we will continue seeing a decline in the price of pet coke and other primary fuels. So that's -- it seems like this quarter is kind of an inflection point for inflation in fuels -- to a deflation in fuels, which we see very, very convenient. And on the other hand, we did comment at our -- the progress that we are doing in our alternative fuels plan, particularly, in the case of Mexico, which is increasing materially the use of this type of fuels, hoping to complete the year with a 30% substitution of alternative fuels compared to primary fuels. So I think what I'm saying is that on that front, there are good news, and we should continue seeing this trend for the -- for sure, for the second half because of all the inventory effect and everything and most broadly for -- at least for the first half of next year.

Our next question online comes from Vanessa Quiroga from Crédit Suisse. [Operator Instructions]. Okay. And we're moving on. Our next question. We have time for one more question from Daniel Sasson from Itaú.

Actually two pretty quick ones. In Mexico, given the lower volume growth expectations for 2019, is there any chance that you could change your estimates in terms of the start of Tepeaca, that if I'm not mistaken was supposed to be operational by mid-2020. Obviously, I'm talking about the expansion. Is there any chance that you could revise that plan? And my second question, on U.S., I mean, industrial-and-commercial sectors are doing well, how much of a drag do you think the residential segment could be -- maybe, if not, in 2019, maybe in 2020. So if you could give us more color on what do you expect for the residential segment, specifically in the U.S., that would be great? Fernando González: Starting with your question about Tepeaca. No, we are not stopping or freezing the investment in Tepeaca. Tepeaca expansion is already in a point of no return. We are very pleased with the decision we made on having Tepeaca, the same way, we are very pleased with the decision of increasing our capacity, which happened with a very low investment. What might change depending on how the market performs, let's say, once Tepeaca is finished, let's say, how the market performs in the second half of next year. What we will do is that we will be adjusting the way we serve the market. Remember that in the case of the central region for us, we were kind of short of capacity. And we were supporting the market with moving and transporting cement from other plants with some logistics, additional logistics cost. So what might change is the model on how we will serve the market in the central area. Now expansions like Tepeaca and the one in Huichapa, cost of those -- production costs on those plants is 20% to 30% lower than other plants in the area. So again, maybe what we will do, again, not now, it will be next year, during most probably second quarter of next year, we adjust in our models and see what's the optimal way to serve those markets.

And Daniel, I'll address your question on -- you're absolutely right. I mean, we're definitely seeing much healthier performance in infra and industrial and commercial. I mean, and we're also seeing contract awards in infrastructure are very strong, and particularly for streets and highways. I mean, year-to-date, May, we've seen about 18% growth in contract awards. And it's very important to mention that a lot of these contracts are very long, are multi-year contracts. So the tails on execution are very strong and important. And that translates to a very predictable backlog in that sector. And as I mentioned earlier, our Aggregates business is probably more indicative of what's happening in infrastructure than anything else at this point in time. We continue to see very healthy spending at the state and local level from our Top 4 states. And the same thing with industrial and commercial, we're seeing very good pickup in spending. The year-to-date spending is -- to May, is up 3%. It's primarily office, lodging, manufacturing, spending. Now on the housing side, you're right. We have seen sluggish performance up to now, but we have to kind of put things into perspective. I mean, if you recall, last year, towards the end of the year, October, November, we had tons of volatility about the outlook for interest rates. It spilled over into all of the capital markets, created a lot of volatility, frankly, in that environment, plus affordability was still not as good as we are seeing it now. So a couple of things are happening, and we have some fairly good indicators that lead us to believe that with more accommodating interest policies in the back half of the year and into 2020, with better affordability, we're clearly seeing much better affordability, both for first-time buyers and in general. And we've seen a deceleration in the cost of houses in many markets. One of the top markets that we have seen a little bit of slow -- of deceleration in pricing is the West Coast, California in particular. And so when you see lower rates -- and then you take a look at mortgage rates. I mean, mortgage rates from a peak late last year to now, they've gone from 10% to almost a little bit over 3%, 3.2% as we speak. That's a 25% drop in -- potentially in rates. So that plus availability of credit. If we take a look at any of the credit indices, so lower interest rates, availability of credit, better affordability. And now it seems like there's a better outlook for rates going down and staying down. We do think that there should be renewed momentum in the housing sector.

We have a question online from Eduardo Altamirano from HSBC.

I wanted to just follow up on the rationale between the dividend now in place, considering the slowdown that you've had already seen? And what the view is going forward and using maybe just all the sources of cash internally for deleveraging purposes?

Sorry, Eduardo, I don't know, the line is breaking up. Can you repeat the question? I don't know if you're using a headset or something, maybe it would -- can you repeat the question, please? We didn't hear you very well.

Sure, Maher. Apologizes on that. No, the question was, essentially, what the rationale is with keeping currently the cash dividend program, especially in light of the slowdown that we're seeing right now and maybe there could be a little bit more prolonged, especially in Mexico. I understand that the outlook is that the second half will improve. But more than anything, why not use all the sources of cash that the company is generating organically for debt reduction purposes.

Yes, Eduardo. I mean, good question. I mean, as you know, of course, and for the benefit of everybody on the call. I mean, we did not -- we purposely, we did not announce an ongoing program. I mean, we announced a dividend for this year, and we said that we would evaluate things. We obviously have the intent to do so, but clearly, we have to evaluate things. Now in terms of the second half -- the second half of the dividend payment. I mean, we've announced it, we're committed to it. It is going to be paid in December and there's no change of that in our business plan and deleveraging plans incorporate those assumptions.

Understood. Makes sense. And then -- so with your current, let's say, debt reduction targets, how comfortable are you that you can pretty much achieve this by 2020? Is it still a firm target? Or is this a little bit more directional at this point?

I think we can't -- we really can't say. I mean, it's too early. We still have the second half of the year. And so it's really too early. I mean, we have to evaluate it, and this is something that the board and ultimately, shareholders will have to approve.

And that was our final question. I'd like to turn the call over to Fernando Gonzalez for closing remarks. Fernando González: Thank you. 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 have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.