CEMEX, S.A.B. de C.V. (NYSE:CX) Q4 2022 Earnings Call Transcript February 13, 2023
Operator: Good morning, and welcome to the CEMEX Fourth Quarter 2022 Conference Call and Webcast. My name is Daisy, 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. And now, I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.
Louisa Rodriguez: Good morning. Thank you for joining us today for our fourth quarter 2022 conference call and webcast. We hope this call finds you in good health, and let us take this opportunity to give you our best wishes for 2023. 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. And now I will hand it over to Fernando.
Fernando Gonzalez: Thanks, Lucy, and good day to everyone. 2022 was a year of unexpected challenges for many businesses, as inflation spiked to 40-year highs. I’m pleased with how we responded and expect to continue to see the benefits of our strategy in 2023. Now let’s move to the fourth quarter. Our top line growth grew double-digit driven by strong pricing performance. EBITDA was higher in three of our four regions. In fact, the U.S. reported record fourth quarter results. As you know, our top priority has been to recover 2021 margins. Importantly, after several quarters in which we have been able to offset inflation in dollar terms, I’m seeing growing evidence that actual margin recovery is underway. We continue to roll out our growth investment strategy with the recent announcement of the acquisition of Atlantic Minerals, which will increase our U.S. aggregate reserves by approximately 20%.
The growth strategy has proven to be quite accretive with an approximately $100 million contribution to EBITDA in 2022. We continue our work on rebalancing the portfolio with divestments of more than $600 million during the year. Achieving an investment-grade rating remains a top priority. During the quarter, Standard & Poor’s upgraded our rating to BB+, one notch away from investment-grade. In Climate Action, we led the industry in validating our new 2030 targets and 2050 net zero goals with the SBTi under the newly announced 1.5 degree scenario. And even more importantly, we continue to achieve record reductions in CO2 emissions. Since we introduced our future in Action program in 2020, we have reduced emissions by 9% to date. We continue to explore new ways to take our existing decarbonization levers even further in our sustainability journey.
During the quarter, we launched our new business, Regenera, which is devoted to waste management and circular solutions and the latest addition to our Urbanization Solutions segment. Net income after adjusting for a non-cash impairment of goodwill rose 36%. Finally, our return on capital remains in the double digit area, well above our cost of capital. For the full year, net sales rose double-digit due to strong pricing momentum. With the sudden spike in inflation in second quarter attributable to energy and distribution costs and exacerbated by supply chain disruptions stemming from the Ukraine war, margin declined by 2.5 percentage points. Largely due to our effective pricing strategy, we were able to contain the impact on EBITDA to a 3% drop.
Free cash flow after maintenance CapEx declined due primarily to working capital and maintenance. Fourth quarter sales growth continued to reflect significant pricing contribution of all regions. Inflationary headwinds particularly in energy were significant, but our year-long effort to offset rapid rising cost is paying off with stable year-over-year EBITDA. While EBITDA margin declined, the contraction was the lowest of the year and sequential margins stabilized in the quarter where we historically see a significant decline due to seasonality. As is typical for fourth quarter, we experienced strong free cash flow conversion, generating close to $60 million more than the prior year. The decline in fourth quarter consolidated cement volumes results from difficult weather conditions in the U.S., weak back-cement demand in Mexico and SCAC and slowing growth in Europe.
We continue to see strong growth from the formal sector in Mexico and SCAC, but not sufficient to completely offset the informal sector decline. Consolidated prices accelerated in fourth quarter with cement prices rising between 12% and 35% across all regions. Europe remains the standout performer with price increases that have been able to compensate for much of the margin pressure. The 2% sequential growth in consolidated prices speak to the strength of our fourth quarter price increases executed in select markets. We are implementing price increases in the first quarter that will reflect the cumulative input cost inflation we have experienced across our portfolio. I am pleased that the January price increases covering more than 70% of our volumes are evolving well despite weaker demand dynamics in some markets.
Pricing, however, is not the only lever, and we remain focused on managing costs with our energy diversification, supply chain and climate action strategies. The decline in EBITDA continues to be largely explained by a lower margin caused by persistent input cost inflation. We are seeing an important inflection point, however. In fourth quarter, the net contribution of pricing over cost was the highest in the year. The evolution of the net price contribution as well as the outperformance of fourth quarter year-over-year margins versus full year gives me confidence margin recovery is happening. In our effort to recover margins, we monitor progress on a product basis. Cement, due to its energy intensity has been the product most impacted by inflation and the biggest headwind to margins.
Since second quarter, we have successfully offset input cost inflation in cement in dollar terms. By the fourth quarter, we began to see actual margin recovery. EBITDA margin for cement reached its highest level in the year driven by the U.S. and EMEA. We still have work to do to return to 2021 margin. In 2023, with easing cost pressures and pricing momentum, I expect to see further margin improvement, particularly in the second half. Progress, however, will not be linear due to seasonality and timing differences on maintenance and pricing increases. This has been another important year in our sustainability efforts. CEMEX was among the first companies in our industry to receive validation from the Science-Based Target initiative of our 2030 and net zero CO2 goals under the 1.5 degree scenario, the most aggressive pathway for our industry, covering Scope 1, 2 and 3 emissions.
yuttana Contributor Studio/Shutterstock.com
But it is not about goals, it’s about performance. And in that regard, CEMEX has also delivered. In the two years since we first rolled out our sustainability program, Future in Action, we have achieved a record reduction in carbon emissions driven largely by an expansion in alternative fuel usage and a lower clinker factor. During this period, our CO2 emissions declined by more than 9%, a reduction that in the past, took more than a decade to achieve. This is equivalent to the annual emissions of approximately 700,000 cars that run on gasoline. In 2022, alternative fuels hit a record 35% of total fuels usage. The introduction of innovative hydrogen technology in more than 40% of our plants accelerated our progress. Record alternative fuels is occurring at an opportune moment and serves as an important hedge to elevated fossil fuel prices.
Clinker factor declined 1.5 percentage points, opening up capacity in highly constrained cement markets. Critical to our journey is customer acceptance. And in three short years, our Vertua family of sustainable products and solutions has gained widespread acceptance across all regions. Vertua sales now account for 41% of cement volumes and 33% of our concrete sales. As I watch CEMEX transform, I am more convinced than ever that our products are essential to society, our goals are achievable and the path to get there is profitable. Over the last three years, our Urbanization Solutions business has been focused on the products and services to serve the needs of growing sustainable cities of the future. It includes four verticals and one of these verticals, circularity, received a big push in fourth quarter with the launch of our new business, Regenera.
Regenera will focus on recovering, managing, recycling and co-processing three waste streams: first, municipal and industrial; second, construction, demolition and excavation waste; and finally, third, byproducts of industrial processes. The business will leverage CEMEX global footprint and our more than 20 years of experience in managing non-recyclable refuse and industrial pipe products as well as identifying more sustainable substitutes for fossil fuels and natural raw materials. We are already making big strides. For example, in Mexico, we are processing around 25% of Mexico City’s municipal waste. And on a global basis, we are recovering municipal waste equivalent to the combined annual total produced by the cities of Paris and Berlin.
And now back to you, Lucy.
Louisa Rodriguez: Thank you, Fernando. 2022 brought new challenges for our Mexican operations. Our business experienced significant cost pressures, mainly in the form of higher fuel and distribution costs, coupled with a post-pandemic rebalancing of bagged cement volumes. While pricing increases were some of the highest on record, it was still not sufficient to recoup margins. In fourth quarter, with continued inflation pressuring retail demand, bagged cement volumes moderated while bulk cement grew high-single digits. The formal sector benefited from near-shoring investments in border states, tourism construction and distribution and logistics activity in the central part of the country. As our pricing strategy continued to make inroads in catching up to inflation, year-over-year EBITDA rose for the first-time in five quarters.
While margins declined due to higher energy, raw materials, freight and wages as well as product mix, the decline moderated versus full year performance. We remain committed to recovering margins. And with that objective, we announced price increases for all of our products effective January 1. As part of our cost containment and decarbonization efforts, we have moved aggressively in Mexico to substitute fossil fuels with alternative fuels for our accounts. In the quarter, alternative fuels exceeded 40%, a record, representing a 12 percentage point year-over-year increase. For 2023, we expect cement volumes to remain flat while ready-mix and aggregates grow at mid and high-single digits, respectively. The industrial and commercial sector, driven by near shoring and tourism should remain the driving force behind 2023 volumes, while government social programs should help offset continued weakness in household demand.
In the U.S., despite significant weather challenges impacting much of our markets, EBITDA grew mid-teen percentage points to a record fourth quarter result. Growth was fueled by price gains in excess of 20% that more than offset lower volumes. We estimate that weather impacted EBITDA by approximately $18 million in the quarter. Year-over-year EBITDA margin expanded for the first-time since early 2021, while sequential margins also improved for the second straight quarter, benefiting from higher prices, lower maintenance and lower imports. Full year EBITDA was driven by mid-teen percentage point growth in pricing and low-single digit volume growth. We remain focused on regaining margins lost due to the significant levels of inflation of the past year.
We announced a price increase effective January 1, and to-date, we are seeing good traction. In January, we signed an agreement to purchase Atlantic Minerals Limited in a transaction that will expand our U.S. aggregate reserves by 20%. We expect this deal to close shortly and to be accretive in 2024. For 2023, we expect low-single digit volume decline across all products, driven by the residential sector. We remain optimistic on growth in industrial and commercial and infrastructure sectors, underpinned by near shoring trends along with funding available under the CHIPS Act, the Inflation Reduction Act and the Infrastructure Investment in Jobs Act. As of December, trailing 12-month contract awards in our key states for highways and street and industrial and commercial were up 16% and 29%, respectively.
In EMEA, sales and EBITDA grew double-digit in 2022. In fourth quarter, while sales continued to show strong growth driven by pricing, EBITDA growth slowed due primarily to energy costs, declining volumes and higher maintenance. Pricing remained strong with sequential increases in cement and ready-mix, reflecting fourth quarter price increases in several markets. Europe showed strong cement pricing traction with a 5% sequential increase and 35% year-over-year growth. We are in the process of executing additional price increases, which will roll out over the next few months. In Europe, EBITDA growth of 9% in fourth quarter largely reflected our pricing efforts while volumes declined as a result of recessionary fears. Margin declined by less than 1 percentage point due primarily to energy costs.
During the year, our European operations continued to lead the way on climate action, achieving a 41% reduction in carbon emissions since 1990. The region is well on its way to achieving the EU emissions reduction target of at least a 55% decline by 2030. For 2023, we expect cement volumes in Europe to decline mid to high-single digit, with ready-mix volumes falling low to mid-single digits and aggregates volumes relatively flattish to down. Over the medium term, volumes should be supported by public and private projects worth more than EUR2 trillion related to transportation, climate adoption and energy reconfiguration as well as onshoring investment opportunities. In the Philippines, cement volumes declined as the country transitions to a new government and macro challenges impact demand.
Margin was impacted primarily by higher energy costs and major maintenance. For this year, we expect volumes to perform between flat and a low-single digit decline. For more information, please see our CHP quarterly earnings, which will be available this evening. Our operations in Egypt and Israel continued to show strong top line and EBITDA growth. For Israel, while demand remains robust, we expect ready-mix and aggregate volumes to decline low-single digit, reflecting our capacity constraints. Net sales in our South, Central America and the Caribbean region slowed in fourth quarter. Pricing remained the driver of top line growth with cement prices up 12% year-over-year. Similar to Mexico, cement volumes in the region have been pressured by the rebalancing of bagged cement post-pandemic.
Bulk cement, ready-mix and aggregate volumes continue to grow, supported by formal sector demand, mainly in the industrial and residential sectors. The decline in EBITDA and EBITDA margin reflects energy, freight and raw materials cost headwinds. In Colombia, cement volumes rose slightly in the quarter, driven by social housing. For 2023, we expect cement volumes in Colombia to be flat while ready-mix volumes to increase high-single digit. Construction activity should continue to be supported by social housing and infrastructure projects, particularly in the Bogota area. In the Dominican Republic, cement volumes declined in the quarter due to a drop in retail cement demand that was partially offset by higher bulk cement related to tourism projects.
For the year, we expect cement volumes in the Dominican Republic to remain flat to slightly down. Activity should be supported by tourism and industrial investments. In Panama, we continue operating as an export hub, sending record cement volumes to nearby markets within the region, reducing dependency from third-party suppliers. I invite you to review CLH’s quarterly results, which were also published today. And now I will pass the call to Maher to review our financial developments.
Maher Al-Haffar: Thank you, Lucy, and good day to everyone. As we all saw, financial markets experienced unprecedented volatility, with inflation reaching levels not seen in decades and central banks implementing monetary tightening measures globally. In our industry, this volatility played out largely in the form of rising energy and transportation costs as well as continued supply chain disruptions. Our pricing and energy hedging strategies were able to offset much of the inflationary impact. Of course, this is an ongoing effort, and you should expect continued execution of our pricing strategy in 2023 to regain our 2021 margins. Additionally, we remain focused on several initiatives to improve efficiency and lowering the cost of managing our business.
The stable year-over-year EBITDA in the quarter, the first in three quarters, speaks to the success of our pricing strategy. The improving EBITDA trend, coupled with a higher turnaround in working capital and lower maintenance CapEx, delivered approximately $60 million more in free cash flow after maintenance CapEx than last year’s fourth quarter. On a full year basis, free cash flow after maintenance CapEx was $553 million, down from the prior year due to a higher investment in working capital and maintenance CapEx. The investment in working capital reflects strong revenue growth and the inflationary impact on inventory, as well as the need to run higher inventories to address persistent supply chain issues. On the collections front, the credit quality and the turnover efficiency of our receivables are at record levels, leading to a significant improvement in our receivables collection cycle.
The increase in maintenance CapEx for the year relates primarily to some catch-up maintenance as well as the delayed delivery of mobile equipment and spare parts in 2021, which pushed our maintenance calendar into 2022. The decline in quarterly net income results from the non-cash impairment of goodwill for $365 million, primarily in the U.S. and Spain. Adjusting for this impairment, net income for the quarter would have been $266 million, 36% higher than last year’s fourth quarter. Last year, we took advantage of market volatility to conduct several accretive transactions. We bought back about $1.2 billion of our bonds at an attractive discount, resulting in an NPV of approximately $160 million. We partially funded these bond purchases through the closing of a EUR500 million sustainability linked loan with similar terms and conditions as our current bank credit agreement.
Overall, we reduced total debt by $409 million during the year. Also, we maintained robust risk management strategies that in 2022 partially shielded us from the impacts of rising interest rates, a stronger dollar and higher energy costs. As a consequence and despite market volatility, our leverage ratio stood at 2.8 times, relatively flat to December 2021. In 2022, we further aligned our funding strategy with our Climate Action agenda. During the year, we linked our new EUR500 million loan and migrated our accounts receivable securitization program to our sustainable finance framework. This is, of course, the same framework linked to our umbrella $3.5 billion credit agreement. The price under these programs will now be indexed to certain sustainability KPIs. With the inclusion of these programs, we now have approximately 42% of our debt linked to sustainability KPIs, and we remain on track to reach our goal of 50% by 2025 and 80% by 2030.
We will continue to undertake strategies that bolster our capital structure and remain focused on achieving investment grade in the short term. With the recent upgrades from S&P and Fitch, we are now only one notch away from our goal. And now back to you, Fernando.
See also 13 Stocks Big Short Michael Burry is Buying and Selling and 10 Jim Cramer Stocks This Month.
To continue reading the Q&A session, please click here.