Good morning and welcome to the Cemex Third Quarter 2023 Conference Call and Webcast. My name is Daisey, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instruction] And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer to begin. Lucy please proceed.

Good morning. Thank you for joining us today for our third quarter 2023 conference call and webcast. We hope this call finds you in good health. I'm joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO. As always, we will spend a few minutes reviewing the business and then we will be happy to take your questions. Before we begin, I would like to point out a few changes in our CEMEX quarterly reporting, reflecting the higher CEMEX ownership of CHP and CLH's delisting, we will be moving this quarter from a country reporting framework to more of a regional disclosure. Consequently, we will include quarterly regional results and full year guidance for South Central America and Caribbean and the Asia, Middle East, and Africa subregion, composed of the Philippines, Egypt, Israel, and the United Arab Emirates. Currently, this subgroup represents approximately a quarter of Europe, Middle East, Africa, and Asia's EBITDA. And now I will hand it over to Fernando.

Thanks, Lucy and good day to everyone. Before I begin, as we watch this terrible situation unfold in Israel and the Middle East, I would like to convey that our thoughts are very much with the people affected by these events. We have accounted for all our employees as well as our assets in Israel. We remain fairly committed to prioritizing our people's health and safety and as such, we are supporting in every possible way, our employees, their families and communities. Now, moving on to our third quarter performance. We continue delivering very strong results with EBITDA growing 32%, reflecting the success of our commercial and growth strategies. Decelerating input cost inflation, coupled with strong pricing led to a material margin expansion. For the first time since we launched our pricing strategy in mid-2021, our quarterly EBITDA margin exceeded our goal of recovering 2021 margins. The incremental EBITDA contribution from our growth investments continue to ramp up accounting for 11% of incremental EBITDA. In addition, our urbanization solutions business is expanding meaningfully. On the customer centricity front, we achieved a record Net Promoter Score of 73% in the quarter, a benchmark for the industry and similar to digitally native companies. In climate action, we continue to post record lows in CO2 emissions. Free cash flow grew significantly, driven by higher EBITDA and lower investment in working capital. Importantly, the strong earnings growth has amplified our deleveraging trajectory with the leverage ratio now at 2.16 times, a reduction of almost one-third of a turn. And our return on capital in the double-digit area keeps expanding relative to our cost of capital. While net sales grew by high single-digits, EBITDA expanded by 32% with contributions from all regions. EBITDA margin increased 350 basis points, the largest expansion in many years. EBITDA…

Thank you, Fernando. Our Mexican operations once again delivered strong results with sales supported by a double-digit increase in volumes and prices across all products and EBITDA growing by more than 30%. Cement volumes rose 10%, the second consecutive quarter of growth since the pandemic lockdown eased in the third quarter of 2021. Bag cement grew for the first time since 2021, and while bulk cement continued its double-digit growth trajectory driven by formal demand. Ready-mix and aggregates volumes also benefited from spring in formal construction. Volumes continued to be supported by accelerated execution of infrastructure projects ahead of national election and near-shoring investments. Cement prices were flat sequentially, while ready-mix and aggregates increased by 2% and 5%, respectively. On the back of strong pricing and volumes, accompanied by lower fuel costs, margin expanded significantly, posting the fourth consecutive quarter of growth. Higher transportation costs resulting from tight supply/demand conditions in the north and south, coupled with product mix, explain the sequential decline in the EBITDA margin. During the quarter, our 1.5 million ton capacity expansion in Tepeaca came online, allowing us to serve expected medium-term demand of the country at a lower cost than existing capacity. We have also initiated an expansion of our [Indiscernible] cement plant for an additional 400,000 tons to serve the long-term growth needs of the Southeast. This new capacity should be introduced in 2025. Despite lower volumes in cement and ready-mix, our US operations delivered another strong quarter. EBITDA grew by an impressive 36%, driven by pricing strategy and decelerating cost, helping us recover prior year cost inflation and bringing us closer to our margin goal. While EBITDA margin expanded significantly, it declined sequentially, mainly due to lower volumes and higher maintenance. Cement and ready-mix pricing rose double-digits, while aggregates increased 9%. On a…

Thank you, Lucy, and good day to everyone. We are very pleased with our performance this year, with EBITDA growing at an increasing rate for three consecutive quarters. EBITDA grew 40% on a reported basis and 32% on a like-to-like, reaching the highest third quarter in recent times and growing at 2.5 times sales growth. This performance was achieved through three levers. First, is the successful execution of our robust pricing strategy across our businesses and markets. The second, contributions from our growth strategy and urbanization solutions. And lastly, decelerating input cost inflation, coupled with cost efficiency measures. With respect to slowing inflation, fuels and electricity for the production of cement are the most important contributors. We have seen year-over-year growth rates in unitary fuel costs decelerate for four consecutive quarters. In the third quarter, we saw unitary fuel costs reversed for the first time since the inception of the Ukraine War and declined by 5% versus the prior year. Unitary electricity costs rose 10% in the third quarter, the lowest growth rate in eight quarters. In the context of our sustainability agenda as well as our strategy to lower the volatility of our fuels, we continue to expand the use of alternative fuels, which are significantly less expensive than non-renewables and an important source of biomass. Year-to-date, free cash flow after maintenance CapEx of almost $700 million was $535 million higher than the same period last year, primarily due to higher EBITDA and lower investment in working capital, which was partially offset by higher taxes. The increase in cash taxes is a consequence of stronger results as well as the tax effect of foreign exchange on our US dollar-denominated debt. Working capital days stood at minus two, two more days on a year-over-year basis, but importantly, improving by two…

Based on our strong results year-to-date, we are improving our 2023 EBITDA guidance from $3.25 billion to in excess of $3.3 billion, representing at least a 23% increase versus 2022. As always, our guidance is based on the foreign exchange rates in effect at the time of guidance, in this case, as of the end of September. As we look forward, we are confident that despite softer volume outlooks in several markets, our pricing strategy will be successful in reflecting current input cost inflation. We also expect that absent a major macro shock, we should continue to experience a more refined input cost backdrop than that of the past two years. For CapEx, we now expect a total of $1.35 billion with $900 million for maintenance and $450 million for strategic. For working capital, we now expect an investment of $100 million. Finally, we are increasing our cash tax guidance to $550 million, driven by the tax effect of a stronger peso on debt and by better results primarily from Mexico. We have made some adjustments in regional volume guidance, which you can find detailed in the appendix. And now back to you, Lucy.

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 Carlos Peyrelongue from Bank of America. Carlos?

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

Hi Carlos. Let me comment on what you are asking. But let me clarify that we're not necessarily giving guidance on 2024 volumes yet. We are in the middle of getting us much updated info as we can to have a better understanding and view and in the future, provide a better guidance on 2024 volumes. But despite that, I think there are trends that will continue current trends that we can see in that will continue evolving in 2024. So, specifically, in the case of volume, for instance, we've seen how different markets are performing differently, meaning not all markets are synchronized in volume trends. They are different. You saw the numbers in Mexico when compared to the numbers in Europe and so they are materially different. Now, I think the trends or the reasons why make us believe that there might be positive changes in current trends in volumes is, for instance, in the case of the US and Europe is our exposure to relevant fiscal stimulus and public or private projects in the US and Europe. The type of initiatives related to infrastructure in the US, the $1.2 trillion infrastructure plan -- the Inflation Reduction Act, the CHIPS Act. So, there are a number of positives or reasons to make us believe that trends in this case in the US might be better than the ones we've seen in 2023. The negative impact this year is because of, let's say, commercial and housing. Again, this is not a guidance. We still need more updated info, but in the case of housing, you have the data, the level of inventories is at historical lows. The level of unemployment is at record levels. Economy is still growing. The challenging part is the cost of mortgages. But at some point in time, housing should react just because of house formation, the regular one or the demographics in the US. Now in the case of Europe, again, it was heated, it's hit this year in volumes. Many reasons to -- for volumes to be impacted last year and this year. But at the same time, we still have the initiative of the renovation wave, which is around $700 billion the $1 billion in transport mean Energy and other incentives in manufacturing. So although we are not providing any specific guidance, we believe that in the case of the U.S. and Europe, those variables could be supportive of, let's say, a flat volume for next year and perhaps even moderate growth on them. To be confirmed, afterwards in our former guidance for 2024. Maybe I should

That's very helpful.

Let me add a – okay. Thank you.

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

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

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

Let me take this one, I don't see the pricing strategy is necessarily defined by the levels of margin, at least not under conditions that have been prevailing in the last 2 years, let's say. I think just to clarify, I think our pricing strategy has been for prices to cope with inflation, so we can protect our margins. It happens that after many years of very moderate inflation in our cost structures. In 2021, second, third quarter of 2021, high levels of inflation started showing up, and we reacted with the pricing strategies to cope with those new very high levels of inflation. To simplify the story, in 2022, inflation continued growing our own inflation, cost inflation, and it went up as much as 20%, 22% while prices started reacting at lower level of increases, and that's why we lost margin in 2022. Now the trends are changing. Our prices started being increased more and more. And in the first quarter of this year, for the first time since almost 2 years, then price increases were higher of the level of inflation, which in the first quarter of 23 started receiving -- so what we see this year is -- let's say, is the second part of the pricing strategy, pricing strategies cannot be executed in a very short period of time. So what we see in 2023 is that on the one hand, prices are increasing at the levels of 18%, 20% and inflation, which is decelerating is decreasing from the levels of 18% to 10%, 11%. So I think the basis of our pricing strategy will continue being the idea of at least recovering input cost inflation. Now if inflation continues its trend and been lower and lower -- of course, price increases will follow that inflationary trend. That's what you can expect that what defines or has been defining our pricing strategy in the last couple of years.

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

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

Let me comment on general terms, and then I will pass the word to Mace and Lucy. But the general dynamic in the U.S. when combining our, let's say, cement domestically produce and cement we input in order to sell. -- imports are complementary to our core activity in cement, which is local production. We've been importing around maybe market or Lucy have the SAC proportion, but we've been importing around, let's say, 30% of the cement we sell in the U.S. Now our capacity utilization, which is you know, very important in order to succeed in pricing strategies. Our capacity -- cement capacity utilization in the U.S. is full, is 100%. And whenever there are either the clients like it is the case this year or growth in volumes, what we do is we do adjust imports, given that imports have lower margins than locally produced. So that's the dynamic in general terms. So we do not impact the local, let's say, the local dynamics that we are trying to put in place in the market. I don't know if you lose your market wants to complement

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

Perfect. That's what I was hoping for.

The next question comes from Anne Milne from Bank of America.

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

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

Yes. So thanks, Ann. I mean first, we -- our currency split right now is about 75% in dollars and the other 25% is in primarily euros and Mexican vessels. As you know, we have about $300 million equivalent in Mexican pesos. The way that we manage our funding strategy is really getting the lowest cost that we can get in the different markets. We believe in dollar funding because at the end of the day, we think that most of our cash flow is fairly dollarized, as has been demonstrated by the pricing strategies that we have implemented successfully recently. The transaction that we did in Mexico was taking advantage of very interesting liquidity situation where despite the fact that local pricing was relatively high when we swapped it to the dollars, it actually represented almost a 20% reduction in our spread compared to a straight issuance in dollars today. So it was a very attractive funding cost and we use that money to essentially reduce our exposure under the under the term loan that we have with the bank facility. The way that we cover our currency risk is primarily through our hedging strategy through the derivatives through the currency derivatives market. We manage a derivatives position notional in Mexican pesos against dollars that is roughly commensurate with the operating cash flow generation of our Mexican business. So we run a position of about $1.5 billion. in primarily straight forward. We sometimes do cap forwards in order to reduce the cost. We sometimes use options to reduce the cost we prefer, frankly, to manage our hedging strategy that way rather than borrowing outright in pesos because that is much more expensive. Derivatives. So far, we're running at almost half the carry cost on average. So it's economically much…

Yes. I think the I think about the leverage ratio, I can describe it in the following manner. Since more than a decade, we have been insisting in gaining back our investment grade. And to be precise, it's been like 14 years. Since we started insisting, basically, when we said gaining back investment grade, we were always thinking in a leverage ratio as defined in the FA below 3x. Of course, we don't create ourselves. That's the job done by the rating agencies. But it's been some time now that we believe we are in the range of our objective of gaining back investment grade. Now -- if you remember, in 2020, we communicated adjustments to our strategy. And then on top of continued allocating resources to continue reducing our leverage ratio -- we started with the idea of investing in growth. And the basic definition was to invest in growth in cement ready-mix, aggregates and added urbanization solutions. And we mentioned mainly in the U.S. and Europe, to some extent, in Mexico. And an important part of the strategy we communicated is that we were going to be growing through both on investments and acquisitions. -- which is what we have been doing already for 3 years, around 3 years. So I think with that definition, -- the leverage ratio we are having by the end of the year, very close to 2x. We think that we feel let's say, comfortable with it. Now the good financial results of this year did accelerate our deleveraging process. So do we have a target of a very or extremely low leverage ratio? No, we don't. What we have is the target of growing in a very disciplined manner and keeping our leverage ratio? No, we don't. What we have is the target of, growing in a very disciplined manner and keeping our leverage ratio always in the investment grade parameters. What are those parameters? Well, it could be around more or less around 2.5 times around that figure. So I think there is a ceiling to the leverage ratio that we are willing to take, again, not putting at risk the investment grade that we are expecting sometime early next year, but at the same time, giving us the opportunity to allocate capital in a different manner, as we've been saying, to start paying systematically dividends to shareholders and to, and to do some additional, very accretive investments in growth. As we've been commenting, the bolt-on investments we've been doing, except for the very large cement expansion projects, are investments with a very attractive profile. Paybacks of four to six years and IRRs of around 40%. So I think it's been a good combination and we will for sure continue having or looking for this equilibrium in the parameters that I have already mentioned. Q - Thank you very much.

Thank you.

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

Let me comment directly on the question and then I think it might be helpful to share some additional context to the objectives we have on reducing CO2. Specifically, we have seven CO2 capture and storage reuse projects in the company. Four out of the seven you can consider them as industrial level projects. The other three are projects in which we are trying and proving certain technologies because we will live through the first investments in CO2 capture, we would like to learn on the different options and the different characteristics. Those options have in capturing and storing CO2. The four industrial projects we have, all of them are either in Europe or the U.S. In the case of the U.S., it's in Victorville in California and Balcones in Texas. And in the case of Europe, we have Rudolf in Germany and Alcanar in Spain. The projects are in development as we speak. We are forming or we have formed consumptions for each one of them in order to have the full solution or the full spectrum from the very capture to how to store or convert this bad carbon into good carbon. So we don't have specific amounts to share yet. And also because these four industrial level projects, we are participating and potentially we will be getting grants that will reduce our investments in those projects. And so that's the specific answer to the specific question. Now let me add something else. If we sort of, it's kind of an arbitrary definition, but if we divide the CO2 or the transition towards carbon neutrality in our industry, I see two steps or two phases. The first one is when we can implement and apply all the practices, processes, materials, technologies, fuels that we know will reduce materially…

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

Well, let me refer to what I commented in a previous question regarding prices. Again, inflation started declining materially in the first quarter of 2023. There was a reduction of three percentage points sequentially when compared to fourth quarter 2022. And then in second quarter 2023, inflation was 12%, which is a decline of six percentage points when sequentially compared to first quarter 2023. So a 1% decline in prices I think is a consequence and it's natural, it's not ringing a bell to me because as I mentioned our pricing strategy is and has been for the last couple of years in this period of very high inflation, is to recover input cost inflation. So if inflation is receding, inflation is much more moderate than what it was, you can expect our prices to follow the same trend. Is that negative? Not at all. I think it is just that we are accommodating this same strategy, but with different levels of inflation. Now, having said that, what I'm saying applies in general terms. If, because in different markets we have different pricing levels, and in some cases we of course try to increase prices beyond the levels of inflation when we believe that the prices are not in a given market, are not enough or are not reflecting a reality and they are not enough for us to get reasonable returns. But what I explained before, I think it explains the general or the idea or the spirit of the pricing strategy. So my, at least in my opinion, if inflation is moving from 22% to 11%, half of it, price increases will follow the same trend. And that shouldn't be interpreted in a negative manner.

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

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

If I may, I can start, making a few comments, and please, Lucy and Maher, feel free to compliment. I think the answer to the question, I think we've been commenting and guiding for something very similar to the question you are making. As I mentioned, we've been for years with a strategy of gaining back investment grade, meaning using all our resources to reduce debt and bring back our financial health. That was achieved at around 2020, of course depending on how you define that. In our definition, that was achieved in 2020. That's why we started using part of our cash flow in EBITDA growth investments. That's what bolt-on type of investments and that's what we've been doing and that's what we will continue doing. What might be different for next year because the leverage ratio now, again, it's going to be around or close to two times by year-end, and that is giving us additional flexibility. So maybe the difference of what we've been doing in the last couple of years compared to 2040s that once we get investment grade, we will start allocating capital in the form of dividends. As know we've been commenting that what we want to do is to start paying dividends and doing it systematically. So maybe that's something that is going to be different on capital allocation next year. And I don't know if Lucy or Maher do want to add any comment to the question.

Yes, Fernando, I would just like to add, I think it's very important, to say that we have this investment muscle now in, very well trained. We have an approved pipeline that is close to two and a $0.5 billion. We've already invested a fairly significant portion of that. The contribution of the growth investments for the full year is probably going to be close to 10% of the EBITDA of the company for this year. And the return or the IRRs of those projects, as Fernando mentioned, they're close to about 40%. Now, of course, it's very difficult at infinitum to continue to get 40% investments. We would like to, but that's not what we're guiding to. Our internal hurdle is above 20% and within an acceptable period. A lot of these investments, as they get completed within the next couple of years, we're expecting them to contribute steady state close to $600 million to EBITDA. So serious contribution to all of these investments and marginally, they are representing a huge part of the incremental improvement in our EBITDA. Now, when we see that, we take a look at what are the other possibilities for capital deployment? I mean, one is you can buy back debt. Today, our debt is yielding 7% and on an MPB basis, doesn't compete at all with capital allocation to these projects. We can buy back stock, which today our cost of equity is about 15%. And again, does not compare very well to invested capital at 40 plus percent for very long periods of time. These are long projects that are expected to go for many, many years. These are not short-term projects that we're doing. So when you take a look at capital allocation, really investing in our business at a creative manners, like we're saying right now, is really what shareholders pay us to do. And that's what we intend to do. And of course, we're making sure that we keep an eye on capital structure, making sure that we get investment grade. Getting investment grade means that we get it, we keep it, maybe improve on it, as time goes by. But that kind of gives you an idea. And of course, Fernando mentioned the possibility of returning cash to shareholders in terms of dividends. And that's something, that definitely to consider and it should enhance our total shareholder return in the long term. But that should kind of in a nutshell give you our thinking about capital allocation and why and where we are doing it. And I hope, I don't know Lucy, if there's anything else you'd like to add.

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

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

Thank you, operator.