Good morning. Welcome to the CEMEX First Quarter 2022 Conference Call and Webcast. My name is Hannah, and I'll be your operator for today's call. My name is Hannah, and I'll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions]. And now I would turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

Good morning. Thank you for joining us today for our first quarter 2022 conference call and webcast. I hope this call finds you and your families 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. I will now hand it over to Fernando. Fernando?

Thanks, Lucy, and good day to everyone. Before we begin, I will like to convey that our thoughts are very much with the people affected by the war in Ukraine as we witnessed the humanitarian crisis unfolding there. Our corporate purpose is all about building a better future: homes, infrastructure, school, hospital. And we are saddened to see this destruction and the refugee crisis it had sparked. We are supporting the UN refugee program and coordinating with local authorities in the communities in which we operate across Europe. We will continue to look for additional opportunities to support the people most affected by this crisis. Now moving on to our key achievements. I'm quite pleased with our first quarter results. We achieved a double-digit growth in sales with all regions contributing. In a supply chain constrained world, we have tried very hard to meet customer needs. Our EBITDA was higher than last year, led primarily by EMEA. These results were achieved despite a challenging macroenvironment to which our management team had to adjust in real-time. Growth was driven primarily by pricing with cement prices up double-digit. While significant, the pricing achievement was not sufficient to completely offset inflationary pressures with margins down year-over-year. Volumes for our 3 core products increased with the highest growth rates in Europe and the U.S. Our Urbanization Solutions business grew double-digits. We continue to roll out our growth investments. And this quarter, we approved over $200 million of additional bolt-on margin enhancement projects. During the quarter, we bought back a total of 1.5% of CEMEX outstanding shares. Since the initiation of our share buyback program in 2018, we have repurchased more than 6% of the company's shares. We believe that these transactions have been accretive to our shareholders. We continue to post impressive numbers in…

Thank you, Fernando. In a largely sold-out domestic market, our U.S. operations experienced impressive growth across all products. Sales expanded 18% on the back of high single-digit volume growth for the 3 products. This growth reflects strong demand from the residential and industrial sectors as well as milder weather. Pricing gains contributed significantly to sales with cement prices increasing 10%. Our January increases were highly successful. In markets which account for 40% of our U.S. cement volumes, cement prices rose between 8% and 10%. In April, our remaining markets received their first pricing increase for the year. We are optimistic that traction will be in line with January. We have already announced additional price increases for the summer in all markets and we have advised customers that further price increases may be necessary. On the cost side, imports, logistics and energy continued to be the biggest headwind to margins. With largely sold-out markets and rising shipping rates are increasing reliance on imports negatively impacts margins. While EBITDA margin declined year-over-year, sequential margins improved almost 1 percentage point. With today's challenging global shipping market, we will take full advantage of imports by rail and water from our Mexican operations in order to meet customer needs. We remain optimistic with regard to the outlook for the U.S. Despite rising interest rates, we have not seen evidence of softening residential demand in our markets. The industrial and commercial sector shows important recovery due to onshoring and manufacturing activity and the resurgence of the oil industry. We expect these industrial trends to persist with additional supply chain pressures from the Ukraine war. Finally, for infrastructure, we expect the new Infrastructure Investment and Jobs Act to yield incremental demand for our products towards the end of 2022. In Mexico, net sales grew 5%, driven by…

Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are very pleased with our first quarter performance. Despite higher EBITDA and lower financial expense, free cash flow after maintenance CapEx declined versus the prior year due to higher investments in working capital and maintenance CapEx. Investment in working capital increased due to higher sales, plus higher inventory to support customer demand as markets continue to face supply chain bottlenecks. We have been redesigning and introducing new technologies in our collections processes to make them more efficient. The credit quality and the turnover efficiency of our receivables are at record levels. This has led to a significant improvement in our receivables collection cycle. I would like to highlight that our working capital cycle is seasonal and investments in the first quarter typically turn around in the early part of the second half. The increase in maintenance CapEx relates primarily to the delayed delivery of mobile equipment originally slated for 2021. This is mostly due to supply chain disruptions. As a result of positive operating performance and lower financial expenses, net income for the quarter more than tripled when compared to that of last year, after adjusting for gains from sale of assets. Return on capital employed for the last 12 months stood at 13.7%, excluding goodwill, well above our cost of capital. Inflation for us has been felt mostly in energy in the production of cement, which represents approximately 30% of our total cement production costs. During the quarter, it increased 37% year-over-year. Unitary fuel cost is up 53%, driven primarily by the increase in petcoke and coal and partially mitigated by an increase in alternative fuel usage. This quarter, the alternative fuel substitution rate was 33.3%, 7.3 percentage points higher than last year. We expect our substitution…

We are quite pleased with first quarter performance, which exceeded our expectations underlying our February guidance. Today, we are not seeing signs of slowdown in our operations and pricing has accelerated significantly. We realize that first quarter is not always a good indicator of full-year performance in our industry. We are maintaining our EBITDA guidance of mid-single-digit growth. Although given the current environment, there might be some downside risk. However, we are confident that we will grow year-over-year. Growth should be driven primarily by pricing with flat to mid-single-digit consolidated volume increases. Given the successful price traction we have seen as well as additional pricing announcements, we believe that we can continue closing the gap between cost and prices. We are increasing our guidance for energy in the production of cement to 35% on a per ton of cement produced basis, assuming no further escalation in energy costs. We now expect CapEx of $1.2 billion with $700 million going to maintenance and $500 million going to strategic. If global supply chain issues improve, we could accelerate this CapEx spending. Our strategic CapEx will be primarily directed towards bolt-on margin enhancement projects. We continue to expect $100 million of incremental EBITDA for this year from our growth investments, such as ready-mix block plants in Florida, alternative fuels upgrade at our Rugby plant in the U.K., sustainable waste management and mortar production in Mexico, among others. Cash taxes are now expected to be $200 million. We recognize that cost headwinds will be a challenge, but we anticipate a favorable environment with moderate volume growth and strong pricing dynamics supported by high-capacity utilization. While it may take longer than we initially expected, we aim to recover margins in line with our Operation Resilience goal. And now back to you, Lucy.

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.

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 Francisco Suarez from Scotiabank.

[Technical difficulty] levers that allow you to have this positive price would costs this quarter and your sequential margin improvement, that was impressive. My question relates to the cost side of your equation on these levers that you are playing with. Do you see room for upside risk in better fossil fuel substitution rates, perhaps clinker factors, particularly outside Europe. And perhaps this is actually linked to your statements that made at the beginning on the incremental margin improvement investments that you have in the pipeline?

Thank you, Francisco. Let me comment on the cost side, and you were referring particularly, I think, to higher substitution of alternative fuels and lower clinker factor. And the answer to your question is definitely yes, we do have room, and we have been investing and preparing to doing more progress in those particular variables, both contributing economically and both contributing to our targets in our transition towards a lower carbon economy. We commented that increasing alternative fuels on a consolidated basis was 7 percentage points. It's from about 27% first quarter last year to 33% this year. Now that will continue growing a few explanations. We have already made installations in all our European plants to inject hydrogen, to improve the combustion of RDF, our main alternative fuel. That's one reason. The other one is that it was very recently announced, I think it was this week, a rule in Spain that will be very positive in order to promote the use of RDF in our cement plants in Spain, where we have the low substitution rate. And the other reason why we will increase is, because we have already finished the projects to increase the use of alternative fuels in our -- 2 of our largest plants in Europe, Rudersdorf in Germany and Rugby in the U.K. So that is done, and we are starting to see much higher levels of substitution in those plants, close to 80%, 90%, similar to what we have in Poland. Now as, you know, substitution rates or the use of alternative fuels in Europe are the ones contributing the most economically. So as of the first quarter, our substitution was around 65%, which is at -- in the very high end of the substitution we understand that is in the industry in…

Yes, that's helpful. Do you think that -- that the market might be overlooking those positive -- potential advantages that you may have in Europe?

Well, hard to know. What I've seen is that there was an expectation of Europe being [hardly heated] for good reasons, meaning for obvious reasons, the war, inflation in fossil fuels, inflation in electricity because of this reference of electricity prices being based in gas prices. But what I can comment in our case is, in the case of Europe about 50% of our EBITDA comes from cement. The other 50% comes from ready-mix, aggregates and Urbanization Solutions businesses that are less impacted by inflation in fuels. And this 50%, as I already mentioned, alternative fuels, which in the case of Europe, their cost is much lower than fossil fuels. And in most instances, alternative fuels are even an income stream. And the real impact of inflation in fossil fuels for us in Europe is on 35% of cement production or related to 35% of EBITDA. So the potential impact at least as of first quarter it was -- because of the inflation in fossil fuels was 18% of our EBITDA in Europe. And what we can expect because of what I have just explained, I'm not going to repeat that. It's given that we are going to continue increasing the use of alternative fuels in Europe and in other regions, that exposure, that 80% will be lower. So it's hard to say if these facts have been other look, but this is what I can comment.

Maybe I would just add to that because I think you asked a question about alternative fuel usage even outside of Europe. And while we saw a 12% increase, I think, year-over-year in alternative fuel usage in Europe, we shouldn't neglect Mexico where we've had almost a 10% increase in alternative usage as well year-over-year. Just to keep that in mind. The next question comes from Paul Roger from BNP Paribas and this question is from the web. So I'll read it. It's a continuation of Europe. What impact would gas stoppage in Europe have on CEMEX, assuming it also pushes up power cost. What's the hedging position for European electricity? Has the group seen any project cancellation and is there a risk of demand destruction due to higher prices?

Well, on the first part, First clarification is, we don't use gas for cement production. So gas shortages shouldn't impact us directly in our production, processes or facilities. As we have said, 65% of fuels are RDF mainly, alternative field, the rest is pet coking coal. So gas is not one of -- it's not a part of our fuel mix in Europe. Regarding electricity, about 60% of our electricity is contracted for the year. And the good news is that in Spain, where we don't have this type of contracts for the year, there was a very recent news on an agreement made by Spain and Portugal to the European Union or with the European Union regarding this post this idea of fixing electricity prices based in gas prices. So that very recent decision will have a material impact in the prices of electricity in Spain. Material, meaning -- material meaning maybe have to be seen. So that's the situation regarding our fuels inflation coverage or our hedge in electricity.

And there was a second part to the question on has the group seen any project cancellations, yes.

No, we have not seen a material credit cancellations. What we have seen through time and this might not be that new is that because of supply chain issues, there are delays -- there are delays in projects. There are delays in developments, in construction. Now the latest news -- latest meaning conflict between Ukraine and Russia that might add to that process of delays. So far, order books are strong. We still don't see any sizable deterioration. But of course, we will continue monitoring that situation.

Okay. And the next question comes from Alejandro Azar from GBM.

Mine is on the pricing side, if you could remind us where have you made a second price increase in Mexico and SCAC and where did you already announce one? And if there is a possibility of a third price increase later in the year in some of your markets.

Sure. Thanks for your question. Let me take the opportunity to give a better explanation or a clarification on our pricing strategy because this year, we have very high inflation. Sometimes I already qualified as hyperinflation in our industry. So pricing strategy is of the most important. The 7% increase sequentially from December to March that we commented was achieved impacting only 60% of our cement volumes consolidated -- at a consolidated level because of the timing of price increases in different markets. So in the case of the U.S., this price increase impacted 20%-40% of our volumes. In the case of Europe it's 60%. And in April, which is still part of our first half pricing strategy, our pricing strategy is not executed in one single quarter. So in April, we are increasing again double-digit increases in 50% of our cement volumes. Now in the case of the U.S. and Europe, increases in April are the first increases in certain regions. In other countries like Mexico, like Germany, Poland, Croatia, Colombia and other markets this might be the second price increase, if not in 100% of all cement products, in the most relevant part. Now with these price increases in April and some in May and June, will be -- we will be completing the first phase of our 2022 pricing strategy. We believe that the same way we achieve price increase -- double-digit price increases in the first quarter, that will be the same case when comparing December to June, meaning double-digit price increases, and that will be half of our pricing strategy. We have already announced price increases for the summer, beyond June, July. In the case of the U.S. and Europe will be the second price increase, in other markets might be the third price increase. And that is the main reason why we feel so confident on affirming our guidance of $3 billion EBITDA. Pricing strategy is -- our pricing strategy is based in the idea of recovering margins -- and recovering 2021 margins. And so far, so good. It has been effectively implemented.

Okay. And the next question comes from Ben Theurer at Barclays.

Fernando, Maher, congrats on the results. I wanted to follow up on some of the comments you made during your prepared remarks on the import dynamics from Mexico into the United States and the advantages you have from a proximity point of view, disruption in logistics. If I remember right a year ago, you started to face some issues because you haven't had contracted enough on the logistics side and hence the import margin came down. Can you share any comments on the dynamics here and where we spend on import margins now given that you knew about the need for logistics, so maybe you've been able to lock that in. And so any incremental color here, please?

Let me make some general comments, and I will ask Maher to complement, if necessary. As you can imagine, serving from Mexico, the needs of our customers in the south part of the U.S., it's much more convenient because this is a sort of a nearshore supply chain issue. That means response times are much shorter, they are much faster. Transportation is less exposed to nowadays high inflation levels. I'm referring particularly to maritime transportation, meaning instead of serving these volumes from Mexico, we bring it from Asian countries or from other Middle East or European countries, then the exposure to maritime cost is huge. So that is very convenient. So in that case, both Mexico and for the U.S., margins on these imports or exports are much more attractive than the ones that we do from third parties through maritime transportation. I don't know if you want to complement anything, Maher, on the cost or the margin specifically. Maher I cannot hear you.

I think you are on mute. While Maher regains his voice, maybe I'll add one comment. Yes, go ahead, and then I'll add.

Sorry about that. I don't know what happened. I must have hit the phone the wrong way or something like that. Sorry, Ben. I mean, one thing, of course, we're expecting imports to grow. Last year, imports into the U.S. were about $2.5 million. We're expecting this year to be close to about 4 million tons of imports. And of course, we, as you know, have ramped up our production for the export market from Mexico significantly through CPN, Huichapan, Tamuin, Torreon. These are all plants that have very good transportation and logistics into very attractive markets within the U.S. that are showing probably some of the highest growth and some of the strongest pricing dynamics. So fortunately, we're almost doubling the amount of imports for the year from Mexico directly into the U.S. and capturing clearly a big chunk of the third party, let's say, profit within consolidated CEMEX profits. And I mean, we don't break out the specific details in terms of margins of third-party imports and CEMEX imports and all of that. But clearly, the imports are not as profitable as the domestically produced cement, but they are very profitable, and it's very important that we are using them to satisfy demand from our customers, which is extremely important. We're able to -- this shortens our supply chain. It gives us assurance of good quality cement. We've heard of some traders, for instance, because of a lot of reasons, have not been able to deliver on their contract. So I think that reduces increasingly certainty of being able to deliver. And so because of that, we think it's important that we continue to do that. And Mexican imports are probably almost 30% less expensive than third-party imports. So you could imagine the benefit swing from last year to this year when you see volumes are growing and you see the substitution of third-party product by CEMEX product coming in from Mexico. So those are the -- I guess, I don't think we -- I mean, Lucy, is there anything else that we need to add to that question.

I would just add maybe 1 or 2 comments. I mean, number one, what's very clear is that the issue in the United States right now is one of supply, and we are trying our hardest to meet customer demand. And this is a very important source for us of our ability to do that in a quicker reaction time. But that is the goal. I know we have some frustrating customers because of the shortages, but we are doing our best to ramp up imports as much as possible. Secondly, I think the other message that I would say here is that in first quarter, specifically, last year in the first quarter, we weren't importing as much as we did this year in the first quarter. and the imports that we were bringing in last year, this was before we began to see the ramp-up in transportation and energy costs. So it was at a very low-cost relative to we did contract, obviously, ahead of time for this year, as we always do. So we're seeing better transportation costs. But on a year-over-year basis, we have a hard comp versus first quarter. So just to keep that in mind, Ben. Next question comes from Adrian Huerta from JPMorgan.

My question is also with prices. When you gave guidance after 4Q results and you're reiterating the guidance now for EBITDA growth of mid-single digits. How much did your price assumption? I know you don't give guidance on pricing, but how much did the price increase assumption change from then up until now?

Let me start with a few comments and then either Maher or Lucy might complement. Adrian, I think we all have seen how things have changed since early last year meaning we started last year with a regular, now we can call it low inflation with a very positive outlook. And then at about mid-year, we saw an inflection point, meaning inflation started to escalate, particularly power, I mean, fuels and electricity. And growth expectations started to be adjusted to lower levels. When we saw that, we adjusted our -- as much as you can do in July or August of a year, but we adjusted our pricing strategy to cope with that newer assumptions of inflation that we did as much as we could mean start increasing prices again in July or September. Then we prepared our pricing strategy for this year, and we started executing in January the 1st, the trends continue being more or less the same. Just to find out in February, we, either the 24th or the 25th that there was a war and the -- on top of the humanitarian pain that comes with it, what we saw is these trends higher inflation and growth deterioration, GDP growth deterioration being accelerated. So the prices we executed in January didn't have yet the full -- or the current assumptions for inflation that we are updating in this call. Now, the rest of price increases in our strategy have been updated to the newest estimates of inflation. As you saw, we are increasing materially the assumption of inflation of fuels. So we have adapted our strategy and I think we have considered that for the rest of the year, we will continue having this high level of inflation. And we are prepared on the elements of the first phase and calling first phase, our full price strategy for the first half; second phase, the second price increases in the second half. And we are prepared to continue monitoring and continue adjusting our pricing strategy under the base that our aim is to recover margins. That's what we are aiming for. That's what we are adjusting. That's our other objectives, what we are executing. I hope that answers your question.

And the next question comes from Anne Milne from Bank of America.

I want to ask a question related to higher interest rates. I know that Fernando commented earlier that so far, you haven't seen or maybe will see an impact on the housing markets in the U.S. and maybe other markets. But I was wondering where do you see the impact of higher interest rates. Maher, I know you said that most of the debt is fixed rate. So until you have the opportunity to call these or on that small percentage that's floating. Where do you see the impact of interest rates on the business? And maybe, Mark, could you give us a little bit more information on the interest rate lock that you discussed?

Sure. Fernando, do you want me to address the impact of interest rate. And I imagine, Anne, you're talking about the impact of interest rates on potentially demand disruption on one side and then on the financing side. I mean the areas that potentially it could impact is probably more in the U.S. in the residential market, but affordability continues to be, I would say, okay, it's less affordable because prices have gone up quite a bit. rentals have gone up quite a bit. But if you take a look at inventories of existing houses and if you take a look at inventories of new homes, they continue to be very tight. I mean we certainly have seen a slowdown in refinancings, but demand for housing continues to be quite good. I mean, so we haven't seen yet a drop in demand in that perspective and the order book in the U.S. continues to be good. But clearly, there is expected moderation, right? I mean, that clearly is going to happen. But then on the other hand, what we're seeing on industrial and commercial actually doing better, frankly. If we take a look at certainly now and forward-looking, if we take a look at the order book. And in terms of infrastructure, we also think we are very well positioned when we take a look at our own at 4 largest markets in the U.S. I mean, DOT budgets for the year are all either stable to growing. I mean -- so that's also very healthy. So for the time being, we are not seeing and we're not expecting any major demand disruption as a consequence of the interest rate environment in the U.S. In Mexico, again, I think the housing area continues to affordability from a financing perspective continues…

I'd like to add quickly on the U.S. side that volumes in the first quarter were up 9% year-over-year. And maybe people would think that, that somehow reflects an easy comp, but it doesn't. First quarter '21 volumes were also up 9%. We did have a weather impact in 2021 in Texas with the grade 3s. But interestingly enough, Texas out of our 4 key states had the lowest growth rate year-over-year. So there's more going on here. It's residential, like Maher said, it's industrial and commercial. We are seeing a lot of resourcing activity going on. We're seeing chip manufacturers in the Arizona. There's been a real pickup on that industrial and commercial side and residential continues to grow. A lot of this has given our footprint because so much of our footprint from migration, pandemic migrations have benefited. So just to keep that in mind, yes, of course, we're keeping our eyes out for weakness on the residential side in the U.S., but we certainly haven't seen it so far. And with that, the next question comes from Yassine Touahri from On Field.

Just one question for me. Have you seen any postponement or cancellation of construction works in Europe, in the U.S. or in Latin America because of increasing cost of building or because of building material shortages?

Hi, Yassine, as we briefly commented before, no, we have not seen it. Our order books are strong. What we have seen, but it's not that new, meaning it didn't start happening in the last couple of months is that there are several issues, construction has been impacted by supply chain issues. So there are delays in certain jobs in certain developments, but not to the point of suspension. Now the context, particularly in the case of Europe because of the work. It is a concern. I mean, what's going to be happening and it will depend on the conflict, the duration so many things. But so far, we have not seen a deterioration on our suspension in those type of projects.

Thanks, Yassine. I think we have time for one last question, and this comes from Vanessa Quiroga from Credit Suisse.

Congrats on the result. I guess I will ask you about the U.S. because the volume in the first quarter surprised on the upside and your guidance for the full year is more conservative than that. So what do you expect to happen during the rest of the year to get to the guidance? Or do you think there's upside to your current volume guidance?

Lucy, I'm going to let you answer that one.

Okay. I think, Vanessa, I kind of talked about the strength that we're seeing in the U.S. I think that our guidance, while we haven't seen any weakening in terms of demand, but I think it is being cautious and we are taking into account that there might be some softening of residential in the future. I think that, that's a quarter or 2 out. I don't think -- if it does happen, it's not going to be immediate because we have a lot of orders already on the books for residential and industrial and commercial continues to pick up. You can make a pretty good argument today with what's happening in Europe that supply chain issues are only going to get worse in the future. I would also add that the oil industry, while we don't directly sell, but you are seeing a pickup in Western Texas again on the sell side. And we benefit from that from our aggregates business, and we benefited from it because, of course, we have a large exposure in Houston where a lot of oil-related companies are. But again, Texas was the slower of the growth, we had a lot of other states that contributed more in Arizona, I would call out where there are 2 chip manufacturing facilities. These are enormous, but are being constructed. And we are involved in either one or both of those. So strong demand from onshoring, I think we're seeing the same thing in Mexico that will benefit. But what we're seeing in Europe is only going to make this onshoring trend even stronger, we believe, going forward. So that would be my commentary.

Okay, okay. No, that's great. And about the infra deal, are you starting to get already some backlog that indicates maybe frontloading of projects related to that deal?

We are seeing contract awards rising, which, of course, is the step before bidding, but we are seeing those rises fairly robustly at least as of February. So I think that we are optimistic that towards the end of the year and primarily beginning in 2023, we will start seeing the benefit of that for infrastructure. Remember that this year's guidance is primarily based on kind of more moderated volume growth in residential and significant growth in industrial and commercial, primarily the industrial piece. For the first time in a number of years, we're seeing that sector come back.

Well, we appreciate you joining us today for our first quarter webcast and conference call. If you have any additional questions, please feel free to contact Investor Relations, and we look forward to seeing you again on our second quarter results webcast. Many thanks.

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