Cementos Argos S.A. (CEMARGOS) Earnings Call Transcript & Summary

Good afternoon. My name is Carolina Londoño. I welcome you to our fourth quarter results release. On the call today, we have Juan Esteban Calle, our CEO; Carlos Yusty, our CFO; Maria Isabel Echeverri, the VP of Legal Affairs; Bill Wagner, the VP of the U.S. Division; Juan Enrique Navarro, Chief Marketing Officer of the Colombia Region; and Camilo Restrepo, the VP of the Caribbean and Central America Division. Please note that certain forward-looking statements and information during the call or in the reports and presentation uploaded to our website are related to Cementos Argos and its subsidiaries, which are based on the knowledge of current facts, expectations, circumstances and assumptions of future events. Various factors may cause Argos' future results, performance or accomplishments to differ from those expressed herein. The forward-looking statements are made to date, and Argos does not assume any obligation to update said statements in the future as a result of new information, future events or any other factors. [Operator Instructions] We will record this Q&A session and upload it in our web page. It is now my pleasure to turn the call over to Mr. Calle.

Thank you, Carolina, and good afternoon, everyone. I would like to start by highlighting the remarkable results that we achieved during the unpredictable and challenging times that we faced during 2020, which required our very best to adjust our company and our businesses to the new reality. The design and execution of RESET provided us with the road map to safely and efficiently run our businesses through a period of high uncertainty and low visibility of demand in most of our markets. On the health and safety dimension, we successfully implemented biosafety protocols across the regions, which allow us to operate under safe conditions at minimum level of positive cases even during the peak month of the pandemic. We also continue expanding this couple of initiatives associated with operational excellence, such as Argos ONE, which significantly increased its adoption level by our clients on cement and ready-mix orders during the year. And the rollout of digital twins in the operations of cement kilns and grinding stations delivering very promising results on the variability of our products, cost efficiencies and energy consumptions. On liquidity, after securing and disbursing new facilities for COP 640 billion as a safety measure during the first semester of the year, we were able to generate free cash flow during 2020 for COP 1 trillion and closed the period with a healthy cash position of COP 621 billion. Regarding SG&A and cost efficiencies, we obtained savings of $150 million for the full year, exceeding our initial goal of $94 million. For 2021, we are committed to preserve around 40% of the dollar SG&A and cost efficiencies captured in 2020. Moving on to our consolidated results. I would like to start by clarifying that all percent changes in ready-mix dispatches on EBITDA are calculated based on pro forma numbers that excluding 2019, the EBITDA generated by the ready-mix plants and income from their divestment and COP 25 billion of land appraisals in Colombia. In 2020, adjusted EBITDA excludes the impact of the payment of $20 million that Argos U.S. agreed to pay to the Department of Justice of the U.S. as part of a deferred prosecution agreement subscribed to close contingencies related to historic acquisitions in that market. We would like to reaffirm this strong commitment that the company has to our culture of transparency and respect for the competition laws in all the countries where we have presence. As a result, we will continue strengthening our ethics and compliance programs across all of our regions to prevent this type of conducts in the future. As a result of the successful execution of RESET and the recovery of the construction industry in most of our markets, which led to a sequential improvement of cement volumes, EBITDA reached COP 448 billion during the fourth quarter, increasing 16.3% on a like-for-like basis when compared to the same period of 2019. For the full year, EBITDA reached COP 1.68 trillion, increasing 4.5% on a like-for-like basis. Cement dispatches reached 3.9 million tons during the quarter, increasing 2% positively impacted by the strong performance of exports from Cartagena and the trading business in the CCA region. On the other hand, ready-mix volumes reached 1.9 million cubic meters during the quarter, posting a 15.8% decrease year-over-year, reflecting a lower dynamic in the formal construction segment in Colombia and the commercial segment in the U.S. Now to start with our results in each region, I would like to invite Bill to provide more context about the performance of the U.S. region and our view for the market.

Thank you, Juan, and good afternoon, everyone. I'd like to start by highlighting strong EBITDA performance of the U.S. region during the fourth quarter of 2020, which reached $66 million. This represents an increase of 15.8% on a like-for-like basis versus the same quarter of 2019. These results reflect the successful implementation of the RESET program, which allowed us to generate savings of $4.6 million during the quarter. For the full year, our objective to increase profitability in the region continued to deliver outstanding results. Adjusted EBITDA margin reached 17.7%, posting an improvement compared to the previous year on a like-for-like basis. This achievement was driven by our strategy of focusing on integrated assets and rebalancing our portfolio mix by increasing the participation in the residential civil infrastructure segments. The combination of slightly higher prices and lower volumes led to a revenue contraction of 9% during the quarter. Cement prices remained stable, while volumes decreased 3%. In the ready-mix business, prices increased 2% and dispatches were 16% lower than the fourth quarter of 2019. Regarding cement volumes, we highlight the Carolinas and Deep South performance, where volumes grew double-digit year-over-year as relevant projects such as distribution centers and warehouses in Georgia and South Carolina have been recently added to our backlog. Ready-mix dispatches were impacted by challenging market conditions the commercial segment. This was partially offset by the increased participation in our portfolio mix of residential and infrastructure projects. The construction sector maintained the positive trend evidenced over the past months, driven by the strong momentum of the residential market. Building permits increased 17% on reaching 2006 levels, housing starts rose 5% and residential construction spending grew 20% in December. A high level of permits and low housing inventories across the country support a positive outlook for the segment in 2021. Warehouses and data center projects have partially offset the commercial segment's weaker performance as offices and retail have been the most impacted during the pandemic. The ABI index, which is an indicator of the dynamic of the nonresidential construction in the next 9 to 12 months and is considered to be stable at 50 points has improved sequentially but remains below its stability level since March. Following this trend, the Dodge Momentum Index is 4.8% below 2019 for the full year due to a 13.5% drop in the institutional component and a 1% improvement in its commercial component linked to warehouse planning. After the Fast Act renewal in September, the infrastructure segment posted a slight improvement in public construction spending. In December, projects in highway and street education, sewage and waste disposal and water supply presented the most significant growth. For 2021, we foresee public construction spending to remain stable as we expect the federal infrastructure plan to be announced in order to boost the segment in the midterm. We will continue to focus on balancing our portfolio mix and asset base, adjusting to the dynamic market additions. We remain optimistic as macroeconomic conditions support a stable environment for our sector, and vaccination program starts delivering positive results that will allow the economy to fully recover.

Thank you, Bill. As we mentioned, the macroeconomic indicators in the U.S. region provide a positive perspective for the company in 2021. I am sure that with our focus on efficiency and flexibility, we will achieve extraordinary results this year. Moving on to Colombia, I would like to highlight the past record of the industry, which reached 2019 levels ahead of expectations. Juan Enrique will now provide additional color on this region.

Thank you, Juan, and good afternoon, everyone. Over the last months, we have prioritized volume without directly affecting price. Seeking to continue recovering market share after the slight deterioration evidenced in the second quarter as a result of the pandemic, and the divergent speed of recovery of the infrastructure and industrial segments of the market when compared to consumer cycle. Consequently, our cement volumes improved sequentially during the quarter but decreased 1.6% year-over-year as we are less exposed to the retail segment that has driven the recovery of the industry. In the ready-mix business, volumes decreased 12% during the quarter versus the same period of 2019, reflecting a slower pace of recovery in formal construction. Lower volumes has increase in maintenance costs and distribution costs led to an EBITDA decrease of 1.7% in the fourth quarter. This result was partially offset by higher prices compared to the same period of 2019 and $1.9 million of savings within RESET that reflect our commitment towards efficiency and operational excellence. During the quarter, the Colombian market presented a positive dynamic in terms of volume, driven by strong momentum in the retail segment due to the self-construction trend that has prevailed since the market reopened. According to the statistics published by DANE, the cement industry grew for 3 consecutive months from September to November, reaching an all-time high of 1.17 million tons in October. The retail segment in Colombia grew 6% in the quarter when compared to 2019, while the industrial segment continued its recovery path reaching 2019 levels in cement dispatches for each month of the quarter, supported by the excellent performance of the residential segment, especially in social housing. During the year, we continue to deliver value by consolidating the company as a leader in customer service, knowledge and experience. Our objective to always provide innovative products and solutions that improve our clients' productivity and our digitalization strategy, where Argos ONE reached an adoption of 76% of cement orders in December ratifies the company as a key partner within the industry. In 2021, we will strengthen our position as leader in the infrastructure segment by being a supplier of relevant projects such as MAR 2, Bucaramanga-Barrancabermeja-Yondó and the Transmilenio project in Soacha and 68th Avenue in Bogotá, among others. We expect the trends evidenced in the previous months to continue a strong retail segment and residential projects will support industry volumes, while the infrastructure programs announced by the government will boost the sector as they start demanding materials in the second half of the year.

Thank you, Juan. We are confident that our value strategy and the full recovery of the industry will allow us to achieve our goals in this year. Now moving on to the Caribbean and Central America. I would like to highlight the great results achieved during the quarter despite adverse weather conditions that impacted Honduras and Panama. Camilo will provide more information about the performance of the region.

Thank you, Juan, and good afternoon, everyone. During the quarter, we experienced a positive dynamic across all countries in the region, influenced by the self-construction trend and the fact that the operations in Panama remained open during the whole quarter. These factors partially offset the impact of 2 major hurricanes that affected the region in November, especially Honduras, where they hit ground, and Panama due to increased rainfall. Cement dispatches increased 13.5% year-over-year with Puerto Rico and Dominican Republic posting high single-digit growth. Additionally, the integration of the Houston ready-mix operation, which began in October, led to an increase of 25% on exports out of the Cartagena plant. Even though Honduras faced adverse weather conditions in November, a quick recovery after being closed for several days, led to an 80% increase of cement volume compared to the fourth quarter of 2019, influenced mainly by self-construction as infrastructure projects have been on hold since the start of the pandemic. On the other hand, Haiti, affected by the revaluation of the gourde remained stable in terms of volume and Panama still facing challenging conditions, evidenced lower cement dispatches during the quarter. Nevertheless, I want to highlight the excellent performance of the ready-to-use portfolio in Panama in terms of volume, market coverage and customer satisfaction. The weighted average cement price in the CCA region decreased 3% year-over-year, but remained stable sequentially. EBITDA decreased 1.7% during the quarter year-over-year as a consequence of lower prices and currency revaluation in Haiti, while higher volumes and $1.8 million of savings with our reseat program partially offset the performance. Our outlook for the Caribbean and Central America region remains cautiously optimistic, supported by the strong self-construction trend evidenced in emerging markets, which we expect to continue. Additionally, in Honduras, the government recently announced investments to dynamize the construction sector and rebuild infrastructure impacted by the hurricanes. In the residential segment, they launched a program to materialize the dream of low-income families to own a home by lowering the 20-year mortgage rate for social housing from 9.7% to 5%. Regarding the situation in Panama, even though there is still uncertainty, in our opinion, there is some room for the market to recover in 2021. During the fourth quarter, the residential segment posted a modest improvement in housing sales, which may suggest a better performance for this year. Also, the country has a relevant pipeline of infrastructure projects, including the fourth bridge over the Canal and the third line of the metro, which have been on hold for a few years and would be a catalyst for the economic recovery.

Thank you, Camilo. I would like now to make reference to our balance statement. We closed the year with a net debt-to-EBITDA ratio of 4.54x, which is higher than what reported on the third quarter of 2020. This result is explained by the fact that the divestment of ready-mix assets done in December of 2019 is no longer included in the calculation of the ratio. And the 2020 EBITDA is impacted by the $20 million the company agreed to pay in the U.S. as part of the DPA previously mentioned. I would like to emphasize that we are committed to reduce our level of net debt-to-EBITDA ratio to 3.2x by the end of 2021. We are making progress on the divestment process of the Dallas ready-mix assets, and we expect to close the sale during the first semester of 2021. The proceeds from this transaction will be used entirely to reduce our leverage. The average life total debt improved significantly during the second semester of 2020 as short-term debt decreased from a weight of 25% to 14%. This is the result of the amortization of loans that had short-term maturities, the renegotiation of certain credit facilities that were extended into the long term and a successful COP 250 billion bond placement in November with a bid-to-cover ratio of 1.81x, which ratifies the trust of the market in the company. I would like to mention that we published the information for our shareholders' meeting to be held on March 24, 2021, which includes the proposal to distribute a dividend of COP 127.6 per share to be paid either in cash or in shares. This proposal is aligned with our strategy and commitment to deleverage the company in 2021. We believe that the potential appreciation of the shares is a great opportunity for our shareholders, as in our opinion, the current price do not reflect the fundamental value of the company. I would like to end the call by thanking each of -- one of our employees for their full commitment and resilience during 2020. I believe the experience we will overcome over the last year will lead us to be even stronger and more prepared to face the opportunities and challenges of the future. Thank you all for your attention. And Carolina, we can proceed to open now the Q&A.

[Operator Instructions] The first question comes from Rodrigo Sanchez from Davivienda Corredores.

I've got a couple of questions here, like the first one is how much of the savings achieved through RESET in 2020 are expected to be maintained in 2021? And my second question is how much of your leverage target is expected to be achieved through divestments? And how much through organic recovery?

Thank you very much, Rodrigo, for your questions. And we expect to keep at least 40% of our savings from the RESET program in 2021 and that is the savings that regarding fixed cost and traveling expenses and so on with SG&A. So we expect at least to keep 40% of those savings into 2021. In terms of the impact of the divestment into improving our leverage ratio, more or less 40% will come from the sale of the assets. And then the 60% remain from improving in our operational results in 2021.

The next question comes from Vanessa Quiroga from Crédit Suisse.

It's about the -- again, about the savings that you expect to be able to maintain in 2021. Do you think that the savings achieved in the fourth quarter 2020 is more or less a run rate that we could expect for the coming quarters? And the other question that I have is regarding exports in Central America. Can you -- Central and Caribbean. Can you give us more color about what you are seeing in terms of the exports dynamics?

Sure. Thank you, Vanessa. I mean the reality that we were in full operations in all of our regions in the fourth quarter of 2020. So the reality is that, that is a good indication of the structure of the cost of the company going forward. Regarding exports in Central America and the Caribbean, I would like Camilo Restrepo to provide you with the answer.

Vanessa, just to clarify, when you say the -- are you referring to a 25% increase in -- from Cartagena? Or do you want more clarification on how the exports are behaving in Central America and the Caribbean?

I think both, both would be very relevant.

All right. So we've had an increase because we've -- we're now dispatching cement directly to Houston, and that accounts for a big part. But we have also been working on increasing our exports from the Cartagena plant and also in other areas of the Caribbean and other countries. So that also turns into a larger number of exports. So we have third-party clients in the U.S. that we're serving both from Cartagena and also through trading and then we also have exports that we're doing from Honduras to Guatemala and also exports that we're doing from Dominican Republic and Puerto Rico to some of the other islands in territories in the Caribbean, plus what we normally do out of the Cartagena to serve our markets in the Caribbean and Central America.

If I could have a third quick question. So if I understand correctly, your focus will be on deleveraging and continue to work in more efficiency and maybe some divestments. Do you expect to be active on the acquisition side?

Vanessa, for 2021, we are fully concentrating on executing our divestment plan and continue improving the operational results of the company.

The next question comes from Xintong Ouyang from On Field Research.

So I've got 3. The first one is, if you could kindly provide us a little bit color on the price inflation, cement price inflation expected in Florida and the South -- the rest of South Atlantic and North Atlantic, it will be very helpful. And then the second one is on the ready-mix concrete prices in Texas. Just wondering, would you see some kind of margin expansion as you have a cost advantage versus competitors who are importing from Colombia? And then the third one is it would be great to understand what kind of energy deflation you've achieved in 2020. And also what kind of inflation you're expecting in 2021 for cement, please?

Thank you for your question, Xintong. I would like Bill to answer the first 2 questions for you.

Yes. Thank you, Xintong. As far as price inflation, specifically, I think your question was around Florida on the cement side. So we are -- we continue to pursue pretty aggressive price increases this year. We're projecting increases in all of our markets and specifically in Florida, maybe a bit higher than some of the other markets. And prices have already gone into effect in that market. And as far as the concrete prices in Texas, we're looking for some low single-digit growth there. We're changing a little bit of our focus on our portfolio mix. So we're shifting a little bit from commercial to residential and civil. And that's having a bit of an impact on our price. It's a pretty competitive market, but we feel pretty good about our opportunities this year.

And also just a quick follow-up on the pricing for cement. What about the rest of the South Atlantic and North Atlantic? I assume they're less aggressive than Florida. But a little bit color over there would be nice.

Yes. I mean we're expecting it to be a little bit less aggressive in Florida. So yes, your point is exactly right. But we do see some pricing inflation opportunities there for us. So -- and again, we have already pushed forward in that direction.

I will answer the last question, Xintong. I mean we got savings of close to $7 million because of the energy lower prices in 2020. We have a low exposure to pet coke in our geographies and the only country where we use pet coke is Honduras. So in the reality, we are not expecting such a high impact of the cost inflation in energetics in 2021 because of our mix of fuels in all the other regions.

The next question comes from Alberto Valerio from UBS.

First, if you could provide some color on the price dynamics, mainly in Colombia that we see some weakness in this quarter. And also, my second question comes about the market recovery. What should we expect in United States, Central America and Colombia? And what stage we are at the moment?

Thank you, Alberto. I mean we didn't see any price declines in Colombia. We were very successful with the continuation of our pricing recovery strategy in Colombia in spite of the lower volumes because of COVID. And we are seeing that January and February started very strong in terms of volumes on the market in Colombia. So we have not foreseen any reversal in our price strategy in Colombia. The reality is that the market reached the leverage of 2019 in the last 5 month of 2020. So in our opinion, most likely, the market in Colombia will be higher in 2021 than it was in 2019 because all of the stimulus that the government is placing into infrastructure and housing. So in Colombia, we are quite comfortable with the execution of our pricing strategy going forward. In Central America and the Caribbean, I mean, the recovery of our major markets has been impressive. We ended up with higher volumes in markets such as the Dominican Republic and Haiti. And the recovery in Honduras was impressive, the -- our sales ended up decreasing less than 5% during the year. And the reality is that the last quarter of last year was very good in terms of volumes and started strong in 2021 as well. We are seeing a potential for a slight price recovery in Honduras as well because of the strong demand. The only market in Central America and the Caribbean where the market is still depletes is Panama. But in reality is that the lockdown of the first 2 weeks of 2021, volumes have started to improve a little bit in February. Prices are stable and in all of our markets, I mean the price dynamics was positive. And in the U.S., we are foreseeing a strong demand as well. The reality is that January was a very good month and February before the cold front was extremely well -- was doing very well. So the reality is that we are seeing an opportunity to continue at least increasing prices at par with inflation still in the U.S. in 2021.

The next question comes from Roberto Paniagua from Corficolombiana.

Can you hear me?

Yes, Roberto.

I have 2 questions. The first one, maybe if you can tell us which consolidated EBITDA margin you have in mind in the future with the current savings? And the second question is, which will be your price strategy per region in 2021?

Thank you, Roberto. I mean our goal is to get a consolidated margin indexes of 20%. We are making good strides in margins improvement in the U.S. We are starting to see a recovery in Colombia. And as we've mentioned before, the dynamics in Central America and the Caribbean are starting to improve as well. So our target is to at least 20% in the midterm. And can you repeat your second question, please?

Yes, sure. I want to know which will be your price strategy per region in 2021.

Our strategy will continue to be -- to record pricing in Colombia, Panama, Honduras and when demand allow us to continue that strategy, and we're seeing that -- I mean, we will continue with our value strategy in all of our markets.