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CEMEX, S.A.B. de C.V. (CX) Q4 2023 Earnings Call Transcript

CEMEX, S.A.B. de C.V. (CX)

Q4 2023 Results Conference Call

Company Participants

Lucy Rodriguez - Chief Communications Officer

Fernando Gonzalez - CEO

Maher Al-Haffar - CFO

Conference Call Participants

Ben Theurer - Barclays

Carlos Peyrelongue - Bank of America

Alejandra Obregon - Morgan Stanley

Francisco Suarez - Scotiabank

Adam Thalhimer - Thompson Davis

Anne Milne - Bank of America

Gordon Lee - BTG Pactual

Presentation

Operator

Good morning, and welcome to the CEMEX Fourth Quarter 2023 Conference Call and Webcast. My name is Brika, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]

And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

Lucy Rodriguez

Good morning. Thank you for joining us today for our fourth quarter 2023 conference call and webcast. We hope this call finds you in good health. And even though it's already February, let us take this opportunity to give you our best wishes for 2024. While we are here to talk about 2023, we hit the ground running in January and are optimistic about the opportunities that 2024 presents.

I am 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.

And now, I will hand it over to Fernando.

Fernando Gonzalez

Thanks, Lucy, and good day to everyone. Thank you for joining our call today, and I would like to extend my best wishes for a healthy and successful 2024.

I am pleased to present to you today the results of what was an exceptional year where we delivered not only record results, but achieved our goal of recovering from the extraordinary inflationary pressures over the last few years. This performance is a testament to the focus and commitment of our employees around the world.

2023 results were achieved despite a challenging demand backdrop in most markets. Full year EBITDA grew 20%, reaching a record $3.35 billion. Growth investments contributed to 13% of incremental EBITDA, while organization solutions grew on the double-digit area. With margin expansion of 2 percentage points, driven by strong pricing and decelerating cost inflation, we reached our goal of recovering 2021 margins.

Free cash flow after maintenance CapEx of $1.2 billion was a highlight, growing $655 million on the back of higher EBITDA and a turnaround in working capital investment. Our leverage ratio declined by 0.8x of a turn to 2.06x already within investment-grade credit parameters. And finally, our return on capital for the full year expanded by 1.5 percentage points to close to 14%, excluding goodwill.

Importantly, our 2023 results add to several years of resiliency in EBITDA leverage and strength in free cash flow generation. This new foundation allow us more flexibility going forward for deleveraging, accelerating our existing bolt-on growth strategy as well as allowing us to propose the initiation of a sustainable shareholder return program.

On the customer centricity front, we closed the year with an important improvement in our already high Net Promoter Score, a new record and a benchmark for the industry. In climate action, 2023 represents another year of important progress against our decarbonization road map with the achievement of another 4% reduction in CO2 emissions.

Finally, CEMEX was once again recognized by CDP on its prestigious A list for transparency on climate change disclosure. Full year net sales increased 8%, while EBITDA grew 20%, reflecting not only the strong pricing momentum of our products and decelerating input cost inflation, but also the success of our growth investment strategy. EBITDA margin expanded by 2 percentage points, driven by the U.S. and Europe.

Free cash flow after maintenance CapEx increased $655 million, reflecting EBITDA growth and a strong working capital turnaround. The working capital improvement resulted from a management initiative launched in second quarter 2023 to realign our inventories and accounts payable to pre-pandemic levels as inflation and supply chains normalize. This initiative pay off in the second half, and we expect additional reductions in 2024.

Volumes were lower in a number of our markets in 2023. But despite this, capacity utilization in our key markets remains high. Mexico reported positive volumes with strong formal sector demand related to infrastructure and onshoring activity. Volume decline in the U.S. largely reflects bad weather, lower residential and commercial demand, completion of some large industrial projects as well as some market share loss due to our pricing strategy. The decline in EMEA volumes largely results from a slowdown in economic activity in Europe. Lucy will speak in more detail on regional dynamics.

Despite the backdrop of lower volumes in several regions, our pricing maintained strong momentum across our footprint. Consolidated prices across all products rose between 11% and 16% in 2023 and were stable sequentially. The pricing achievements of the last two years result from the extraordinary cost inflation our industry has faced and management's focus on reflecting this inflation in pricing. 2023 EBITDA growth was driven by the contribution of pricing over costs, growth investments as well as our rapidly expanding organization solutions business.

As our growth strategy continues to scale, growth investments now account for 10% of total EBITDA and 13% of incremental EBITDA. The margin recovery over the last year reflects the success of our pricing strategy as well as easing cost inflation and operational efficiencies. We saw a significant deceleration in cost in 2023 with COGS as a percent of sales dropping 2.7%, largely due to energy.

After adjusting for volume and product mix effect, the resulting 2023 margin achieved our goal of recovering 2021 levels. Importantly, our pricing strategy has always been based on cost inflation for the business. With the recent cost deceleration, you should expect that our commercial strategy will incorporate this new level of inflation with a goal of gradually improving margin.

2023 was another year of remarkable progress in decarbonization with a 4% decline in Scope 1 emissions, driven by another record low clinker factor and alternative fuel usage. Since the launch of our Future in Action program in 2020, we have accelerated the pace of our decarbonization, reducing Scope 1 and 2 carbon emissions by 13% and 10%, respectively, a pace that previously would have taken us 15 years to achieve. However, while we lower our carbon footprint in our processes, we remain focused on creating demand for sustainable products and solutions, another pillar of Future in Action.

In September, we became the first company in the industry to provide third-party validated environmental impact information globally. This transparency is an essential step in working alongside our clients as a sustainable construction partner to the carbonized the build environment. And these efforts are paying off. We have already achieved two years ahead of time, our 2025 goal of 50% of our cement sales being best to our products. Finally, I'm very pleased that CEMEX was once again recognized by CDP on its A List for climate change disclosure. This A rating represents an elite group of less than 350 companies recognized in 2023.

Our Urbanization Solutions business has grown at a rapid pace since 2019, growing at a CAGR of 24%. The business now represents 9% of consolidated EBITDA and in 2023, contributed to 7% of incremental EBITDA. EBITDA margin has also been expanding, growing more than 3 percentage points since 2019. A key driver of growth is the circularity vertical housing our regenerative business focus on the repurposing of waste.

Urbanization Solutions is closely aligned to the mega trends rolling out in the global construction industry, including decarbonization, resiliency, circularity and urbanization. And it is an essential lever in our efforts to work with our clients in lowering the carbon footprint of the construction sector. We are excited about the growth prospects that Urbanization Solutions offers.

In 2020, we introduced our growth strategy focused on small bolt-on and margin enhancement investments across our four core businesses and in markets in which we operate, largely developed markets. While small and generally less risky investments, these projects are extremely profitable with IRRs greater than 25%. We've been scaling this strategy. And today, we have a total approved project pipeline of $2.9 billion.

The first investments from this strategy have been coming online and associated EBITDA contribution is accelerating, 295 completed projects representing an investment of $1.3 billion, generated $325 million of EBITDA and $86 million of incremental EBITDA in 2023. We continue to identify attractive investments in this space. Despite the significant macro challenges over the last four years, we have proven not only the resiliency of our business model, but also our ability to pivot and adjust rapidly to changing global conditions.

Our efforts and performance culminating in the strong 2023 results allow us to contemplate a new steady-state level of profitability and free cash flow generation. This foundation should give us additional flexibility in capital allocation, where we continue to focus on deleveraging and investment in our bolt-on growth strategy while allowing us to include a sustainable return to shareholders.

In our proxy for our Annual Shareholders Meeting in March, the Board intends to propose the initiation of a sustainable dividend program while continuing our existing share buyback program.

The proposal will provide for a 2024 dividend of $120 million, payable quarterly commencing in second quarter. The proposal to initiate a progressive dividend program demonstrates the Board's confidence in the company's operating performance, free cash flow generation and balance sheet strength as well as underscore its commitment to create value for shareholders. The full agenda for our Annual Shareholders Meeting will be published tomorrow. We look forward to a more robust discussion around capital allocation and shareholder return at our CEMEX Day on March 20.

And now back to you, Lucy.

Lucy Rodriguez

Thank you, Fernando.

Our Mexican operations delivered strong results during 2023 with both sales and EBITDA growing in the mid-teen percentage area, supported by strong volumes and price increases. The recovery in cement volumes was driven by the formal sector, with bulk cement more than offsetting the decline in bags, while ready-mix and aggregate volumes grew high single-digits.

Importantly, we have seen a pickup in bag cement demand in the back half of the year, which we believe bodes well for 2024. Formal demand was supported by infrastructure and nearshoring with particular strength in the North and Southeast. While our prices rose double-digits, the tight supply-demand conditions in the North and South put pressure on our supply chain.

As a result, EBITDA margin decreased slightly, mainly impacted by an unfavorable product mix and higher transportation costs. For 2024, we expect the strong momentum in formal demand to continue, while informal demand recovers gradually, supported by decelerating inflation, lower interest rates and government social programs ahead of the election. We are guiding to low single-digit volume increases across all products. We implemented price increases during January that reflect the ongoing input cost inflation, particularly in labor, transportation and electricity.

The U.S. posted record full year EBITDA of over $1 billion in 2023, an important milestone for the business. Despite low volumes in cement and ready-mix, EBITDA grew 37% as a result of our pricing strategy, growth investments and decelerating costs. The material margin recovery of 4.4 percentage points reflects our success in recovering multiyear cost inflation through pricing. Cement ready-mix and aggregate pricing rose 14%, 19% and 12%, respectively....

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