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

Good morning, everyone. My name is Indira Diaz, Cementos Argos IRO, and I welcome you to our second quarter results release. On the call today, Juan Esteban Calle, our CEO; Felipe Aristizabal, our CFO; María Isabel Echeverri, VP of Legal Affairs; Camilo Restrepo, the President of the Cement business in the U.S. Carlos Yusty, the VP of the Colombia Division; and Gustavo Uribe, the General Manager of Argos Panama and Central America. Please note that certain forward-looking statements and information during the call or in reports and presentation uploaded at www.argos.co/ir are related to Cementos Argos S.A. and its subsidiaries, which are based on the knowledge of core impacts, 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 such statements in the future as a result of the information, future events or any other factors. Today, after the initial remarks, there will be a Q&A session. [Operator Instructions] We will record this Q&A session and upload it in our webpage. It is now my pleasure to turn the call over to Mr. Calle.

Thank you, Indira, and good morning, everyone. The sound execution of an [ ambitious ] pricing strategy together with the hedging of a significant portion of our fuel metrics and our ability to adapt the supply chain to the challenges of each market, delivered strong results in our consolidated financials. Our average price increased year-over-year up to 28% in cement and up to 16% in ready-mix concrete accompanied by some evolution of volumes, especially in the U.S. and in Colombia. Total volume stood at 4.2 million tons of cement and 2 million cubic meter of ready-remix concrete during the quarter, resulting in a 6.2% like-for-like growth in cement when excluding the trading business and a 13.4% comparable growth in ready-mix versus the same quarter of last year. As a result, our revenues achieved a new all-time high record of COP 2.9 trillion, increasing 15.3% versus the second quarter of 2021. Our adjusted EBITDA excluded a COP 525 billion, improving 2.6% versus 2021, aligned with our quarterly budget and remains on track with our full year guidance. Cost inflation and difficulties in the logistics chain due to strong demand and the shortage of manpower in some markets were the main challenges during the quarter. We estimate that our hedging contracts in fuels contributed to savings of around COP 84 billion along our footprint on the second quarter when comparing our fixed prices versus the spot price of the market. Nevertheless, the total cost of sales presented an increase of COP 350 million, of which COP 105 billion were directly related to the inflationary effects of fuel and energy in our 3 regions. Additional impacts related to higher volumes raw materials and maintenance also affected this figure during the quarter. We remain committed with our sustainability goals and our recently announced ambitions of achieving the production of 3 million tons per annum of calcine clays by 2030. And in that regard, I would like to mention that we have decided to start a pilot for testing our technology in the U.S. I would like to invite Camilo to provide more context on this achievement and on the overall performance of the region.

Thank you, Juan, and good morning, everyone. During the second quarter, we were remarkably successful at offsetting the inflationary pressures by partially transferring these cost increases to our customers via permanent price adjustments and temporary fuel fees by hedging a substantial portion of our energetics and by leveraging our robust supply chain network to take advantage of the strong demand while lessening the impact of labor shortages affecting the transportation industry countrywide. The second price increase in both cement and ready-mix was carried out during June, in addition to the fuel surcharge in both products that we continue to transfer to our customers during the quarter. Our average FOB quarterly prices increased 10% in cement and 12.4% in ready-mix year-over-year, setting again a record high in our recent history in the U.S. Additionally, to the date of this call, we have executed a third price increase in both cement and ready-mix of mid-single-digit applicable from July on, which has been carefully planned and executed to achieve the consolidated EBITDA guidance that we have provided to the market. We have executed our pricing strategy focused on offsetting inflation and will continue to do so during the rest of the year. In terms of demand, we experienced a strong performance along our footprint. Our like-for-like volumes increased 6.4% year-over-year in cement, driven mostly by Florida and the Carolinas. On the ready-mix business, our volumes increased 6.4% on a comparable basis versus 2021, with Georgia and the Carolinas exhibiting the best performance because of the unaltered availability of materials like rock and sand, which were difficult to procure in other markets, such as Texas and Florida, due to unforeseen supply issues and high demand in general, good weather conditions. During the second quarter, were also important to achieve this volume increase. the backlog had a positive evolution during the quarter and achieved in June, an improvement of 2.4% versus May, which we consider as a signal of the continuation of the solid demand for the following months. Our hedging strategy in energetics proved to be effective as we say during the quarter around $11 million versus spot prices. Nevertheless, we experienced year-over-year cost increases of around 9.4% in the unitary cost of cement and 15.1% in the unitary cost of ready-mix, mainly affected by fuel and energy with an estimated impact of $7.5 million for the quarter when compared to the same period of last year. For the remainder of the year, we have hedged 60% of the coal, 65% of the gas and 60% of the diesel forecasted consumption assuring an important portion of the demand, but leaving at the same time, some room to capture possible spot price improvements in the following months. In terms of EBITDA, I would like to highlight the upward monthly trend observed during the second quarter which led us to achieve on June, the highest monthly EBITDA in our history in the U.S. with a 17% increase versus June 2021 supported by the implementation of our pricing initiatives, our hedging strategy and the positive market dynamics in our footprint. The adjusted EBITDA for the quarter stood at $75 million, flat versus last year's results, with an adjusted EBITDA margin of 18.1% to 110 basis points lower than 2021 because of the increase in unitary costs. Additionally, our PLC brand, EcoStrong, is making important progress. As of June, ahead of our initial deployment strategy and in line with our commitment, the Roberta plant has now fully converted to PLC. From the second semester, Harleyville and Newberry will also be fully converted. Based on PLC adoption in our markets, interest from our clients in a sustainable future, we want to continue leading the company has decided to test and introduce our call sign play technology in our markets. We have conducted pilot industrial production runs and internal tests and will continue to do so under controlled conditions. Regarding market dynamics, as discussed before, we continue to observe a strong demand during the second quarter, and we expect this trend to continue during the second half of the year, supported by the dynamics of serving our markets, projects being carried out in the strength of our backlog. We keep on closely monitoring all the market variables and their foreseeable impact in our business while remaining confident about the midterm potential of the country based on the existing gaps in housing and infrastructure in the states where we operate.

Thank you, Camilo. The combination of our existing capabilities in both commercial and operational performance, together with our ambition to expand the calcine clay technology into the U.S. will play a key role in our future performance in the region. Now moving to Colombia, I would like to highlight the unparalleled commitment of this team which has been agile, resilient and flexible to adapt to the challenging industry and global trends while delivering outstanding results. Carlos Horacio will now provide additional color on this region.

Thank you, Juan, and good morning. The solid market dynamics continued during the second quarter of the year, supported by the retail segment, residential construction and infrastructure projects. Industrial cement dispatches grew over 12% versus the same period of last year, which was affected by social [ instability ] in the country. Additionally, the price environment was strong during the period. Throughout the year, the company has been successfully deploying its commercial strategy by increasing prices in the entire portfolio in every region of the country with a differentiated approach in terms of timing and magnitude, considering the competitive landscape in each market. This approach has demonstrated to be appropriate and it has allowed us to more than offset the inflationary pressures while capturing more volume within a context of strong demand. Local prices for cement posted a 14% year-over-year increase and raised the highest FOB price in pesos in the history of the company. On the same line, ready-mix prices rose 8% year-over-year, also reaching an all-time high price. The strong demand conditions led to a 12% year-over-year growth in cement volume for the local market. Exports from Cartagena increased 21% compared to the same period of last year, resulting from our strategy to replace trading volumes with our owned production due to the high prices of clinker and cement worldwide. In the cement line, we plan to restart our second kiln in [indiscernible] during the third quarter with an additional capacity of 200,000 tons of clinker per year and a total investment of around $7 million. The project, which started its execution at the end of last year will allow us to attain our goal of exporting 1.3 million tons of cement from Colombia during 2022, an increase of approximately 30% versus the exported volumes of from last year that will replace additional volumes from third parties in the CCA region. The favorable dynamics on the resiliency and infrastructure segments and the lower comparison base led to 25% year-over-year growth on the ready-mix volumes during the quarter, ratifying the full recovery of the business. As expected, cost inflation remain the main challenge for our operations. During the quarter, we were mainly focused on containing the steep hike in the cost of energetics and procuring enough fuels in the local context of scarcity. Our team successfully tackled these issues by modifying our kilns and our fuel metrics. This modification also entailed a carefully planification of our logistics network to ensure the supply of materials for longer distances into our plans. To the date, of this call, we have modified the source of around 70% of our coal purchases in the country to reduce the cost impact and ensures the permanent availability of fuels. Unitary costs increased 31% in the cement business and 5.4% in the ready-mix business, impacted mainly by COP 67 billion of higher costs in the -- in Energy and Fuels. For the second semester, we expect a more stable cost structure as we have successfully fixed the price of around 60% of our coal and 70% of the gas needed by our cement operations. Additionally, we have already performed an important portion of the programmed maintenance activities. So we expect lower fixed cost for the rest of the year. The previously mentioned effects of the extra price and volume momentum and our successful cost control initiatives led to an EBITDA growth of 28% year-over-year when excluding the results from the exports division. Overall, EBITDA reached COP 136 billion which is 13% higher compared to the same period of last year. EBITDA margin was 20.1% on the quarter and posted a decrease of 257 basis points based on the increase of unitary cost. We would also like to highlight the positive evolution of our aggregates business, which has been consistently improving and its EBITDA during the first semester nearly doubled versus the same period of last year. Regarding market conditions, the residential segment in Colombia continues with encouraging indicators, especially on social housing. During the first semester of the year, social and nonsocial housing sales grew 7% and 1%, respectively, year-over-year as a continuation of the upward trend evidenced since fourth quarter of 2020. Housing starts reached 10.5 million square meters during the last 12 months, growing 17% year-over-year and posting the highest levels in 7 years, while the [ Finnish ] housing inventory is 35% lower and rotation is below 10 months in the main cities. In connection with the development of the residential segment in the country, and supported by our higher purpose of making possible the construction of housing and infrastructure dreams to -- that enable a more sustainable prospers and inclusive society we have inaugurated a plan of modular construction near Bogota that will allow us to produce houses in series with benefits in terms of cost and time for the end users. The plant that has an investment of COP 17 billion during 2021 will produce of around 400 houses during the current year with additional investment could grow up to 4,000 houses in 2025. On infrastructure projects, 4G continues positively advancing, reaching around 65% overall progress with 10 projects completed: 17 in construction phase; and 2 that have not yet begun. Regarding 5G, the process advances [ Artifactory ] has 6 projects has been already awarded and 2 others are on their bidding process. Regarding the Bogota Metro, we have currently supplied 35% of the project demand for the [indiscernible] where we are exclusive suppliers of the ready-mix concrete. We expect to complete this project by November 2022 and the next phase of the metro to be in construction during 2022 and 2023 where we expect to play an important role given our comprehensive portfolio of products and services. Overall, we expect the solid performance of the contract experienced during the last years to continue as ongoing projects are finalized by the [ road ] project pipeline supports demand. For the rest of 2022, our outlook is positive given the solid demand conditions in both cement and ready-mix evidenced during the first semester, which are expected to continue, supported by the residential and infrastructure sale [ volume ] events. We remain focused on value maximization and growth taking advantage of our national presence and contributing to the development and competitiveness of the country.

Thank you, Carlos. We want to [indiscernible] Central America region. I would like to highlight the efforts from our team to increase prices in countries that are more exposed to inflationary pressures. Gustavo will provide additional information on this subject.

Thank you, Juan, and good morning, everyone. During the second quarter of 2022, the solid pricing dynamic throughout the region allows us to alleviate inflationary pressures. Cement prices grew 28% year-over-year and posted for the second straight quarter, a double-digit sequential improvement. The important yearly growth was a combination of rising prices across the board and an important reduction in trading volumes, which have lower prices. Local market cement dispatches improved in comparison to the first quarter of 2022, but remained 5% lower due to the continuation of operational difficulties in Haiti and the governmental transition in Honduras. Meanwhile, trading volumes decreased 68% year-over-year as the company has reduced opportunistic shipments for third parties due to a significant increase in international prices. And as we have prioritized exports from Cartagena to supply our local markets. In Honduras, we continue to successfully deploy our price recovery strategy, reaching a double-digit improvement year-over-year. Cement dispatches for the quarter were 18% lower versus the same period of last year, affected by a tough comparison base and by the period of transition of the new government elected in November 2021, which has slowed down public infrastructure and housing projects. The Dominican Republic continue with strong demand and pricing conditions supported by a strong retail segment, housing projects and the positive momentum of the economy associated mainly to tourism. This led to an all-time high EBITDA result in June. Additionally, the second quarter marked a new all-time high in cement dispatches, growing 5% year-over-year. Pricing dynamics were very strong, leading to a 20% year-over-year growth and reaching the highest price in 10 years. In Panama, cement volumes recovered significantly, posting a 13% growth compared to the same quarter of last year as infrastructure projects such as third and first lines of the Panama Metro are gaining traction and their recovery of the residential segment, especially, and social housing continues. During the first 2 quarters of the year, our operations in Haiti posted the largest price increase of the region, but our volumes were affected by the industry performance of the country that we estimate has decreased in cement dispatches around 38% versus the first semester of last year. In contrast, our volumes decreased during the second quarter, 25%, year-over-year, with an upward monthly trend led to flattish monthly volumes during June when compared to the same month of 2021. We remain optimistic for the rest of the year based on the [ market ] evolution observed during the last quarter as well as by the fact that the technical problems that we have in our operations were completely solved in June. Puerto Rico continues with a positive pricing dynamic with a double-digit growth. Cement volumes improved around 9% sequentially but remains slightly below the same period of the last year due to a tough in-person base. Cost inflation also impacted the CCA region during the second quarter of the year. Unitary costs increased 20.8% in cement, mainly affected by an impact of $5 million in raw materials and $2 million in power and fuel. EBITDA closed at $32 million, 19% below the second quarter of last year, affected by the combination of lower volumes and inflationary pressures that generate the cost impact across the region previously explained. In line with our constant quest for innovation, we successfully performed an industrial pilot of [indiscernible] injection in our Piedras Azules plant in Honduras. With this technology, the plant will increase its production by around 55,000 tons of clinker per year, reduced the pet coke consumption by around 2% and increased the potential substitution of alternative fuels by 58%. Additionally, the optimization of these variables leads to lower CO2 emissions from the operation. We remain cautiously optimistic with our operations in the Caribbean, focused on offsetting inflation via pricing and managing efficiently our cost structure by sourcing as much cement and clinker as possible from our operations in Cartagena and Tolu as well as by properly managing our fuel metrics.

Thank you, Gustavo. Regarding our balance statement, our net debt-to-EBITDA plus dividends ratio slightly increased in the quarter, closing at 3x mostly affected by the [ gain on sale ] from the Dallas divestiture that was carried out during the second quarter of 2021 and is no longer included in our last 12-month EBITDA. Also, higher cash outflow generated by the inflationary pressure affected the leverage ratio. In terms of guidance, based on the performance of our operations during the second quarter and our forecast for the second half of the year, we would like to reaffirm the EBITDA guidance of between COP 2.5 trillion and COP 2.15 trillion for 2022 as well as the expected return of capital of around 10% for that same period. We are aware of the challenges currently faced by the countries where we operate and we remain cautiously monitoring of the market variables, but fully confident about the potential of our markets in the midterm. Thank you all for your attention. Indeed, we can proceed now with the Q&A.

Thank you, Juan. We will proceed then with the Q&A session. [Operator Instructions] The first question comes from Vanessa Quiroga from Credit Suisse.

I hope you can hear me well. My question is mainly regarding the U.S. because we saw revenues going up high single digit year-over-year while pricing is up about double digits. So that implies and imagining a decline in volume. So I wanted to get more details on what led to this implied decline in volumes year-over-year? And how do you expect that to evolve going forward? And the second part of that question would be more details about your pricing, your pricing announcements. Just to review what Argos has done in the U.S. in terms of pricing during the year, which months had pricing for which states, et cetera?

Thank you for your question, Vanessa. In reality, the performance of our volumes in the U.S. were very strong during the second quarter. I mean cement volumes increased 6% versus the first quarter of last year. Our revenue management strategy in the U.S. has been extremely successful. And we, as Camilo mentioned during the call, made some regional price increases in July. So the reality is that we are expecting a continuation of the good volumes in the U.S. in the second half of the year and an improvement in margins because of the additional price increases that we have in place. I don't know Camilo if you would like to add some color to the question of Vanessa.

No, Juan, I think that you're right on the spot. We -- the idea is that we will continue to do our price adjustments to maintain profitability, and we have done so -- we've been very successful at transferring inflationary cost to our -- to the market, and we still see very strong demand in the market, both in cement and ready-mix, so we'll continue to perform in that way.

Thank you, Camilo. Thank you, Vanessa, for your question.

Next question comes from Alberto Valerio from UBS.

If you can give some update on the listing process that you mentioned on the release that you spent $4.1 million in the quarter. How is the stage when you expected to be complete? And what would be the future projects in the U.S.? This is my first question. My second question is about the capacity in the U.S. How much more can we expect Argos to expand the capacity, the PLC cement can help on this. And if the DOT authority, they're also more flexible about the key [indiscernible] for the infrastructure projects? That's my question.

Thank you, Alberto. In terms of the listing process, and we remain fully committed. I mean it is a strategic decision, but we cannot comment any further. In terms of our capacity in the U.S., we have been very successful in the conversion of our plants to PLC. Three out of our 4 plants will have a 100% conversion to PLC before the end of the year, and the last one will be converting the first half of 2023. That will help with our capacity. And the other strategy that we are advancing is the upgrade and the increasing capacity of inputs in our terminals to be able to -- we feel additional growth in demand going forward. Remember that we have close to [ 5 million ] tons of import capacity in our terminals in the U.S. So in our opinion, there is a strategic advantage for Argos U.S. going forward.

To complement the answer regarding PLC, we have acceptance in all of our markets where we currently operate and sell. So there's acceptance of PLC from DOT in most in every DOT. We are monitoring and, of course, pushing for more flexibility in clinker, but there's still no more flexibility in clinker. That being said, we will continue to push for the increase in use of our supplementary cementitious materials. This is also part of what we mentioned regarding our concentrate, but we will also continue to work on our slag and other sources of cementitious materials. So there, we believe we can get also a little bit more capacity to produce in cementitious materials in the U.S.

Next question comes from Filipe Barragan from BTG.

It's Gordon Lee. Can you hear me.

Gordon, yes, we can hear you.

Yes. Just 2 questions. The first on Cartagena, the second one on the balance sheet. I was wondering what -- if you look at your volumes in the first half and also considering the target that you mentioned for the year, what share of those exports is going to the U.S. and how much of that is going to markets in the CCA region? And then the second question on the balance sheet. I mean, obviously, the cost of funding in Colombian pesos has increased pretty dramatically over the last several months and may rise further. And if you look at your balance sheet, you have a you're overexposed relative to your cash flow generations in terms of your leverage in Colombian pesos. So I was wondering if you are thinking in any way of changing that balance maybe more towards the dollar. And if not whether you're thinking about maybe more aggressive leverage reduction targets just to compensate for the lower coverage that the higher interest rates will produce.

Thank you, Gordon. I mean [indiscernible] Cartagena exports between 20% and 25% of our volumes to the U.S., but that is going to increase going forward, I mean with the increasing capacity in our ports in the U.S., we expect Cartagena to move probably to exporting 30% to 40% of our volumes to the U.S. in terms of our balance of that between pesos and dollars and all the strategy for financing going forward. I would like Felipe to give you more color.

Sure, Gordon. So regarding your comments, you're right, we are overexposed to pesos. The reason behind that is that most of our deleveraging process has happened in the U.S. Going forward, I mean, we're currently working on balancing our debt portfolio to match our cash generation profile. Regarding the cost of our debt, approximately 40% of that is linked to the CPI in Colombia. And that is the main reason behind the increasing interest expense. The remaining 60% is either fixed or linked to the short-term interest break here in Colombia, which has increased that dramatically as the CPI. I mean -- so we're working on both fronts. We are working on rebalancing our -- the currency profile of the portfolio as well as reducing the total and gross level of indebtedness for the company going forward. We do expect the total debt for the company by the end of the year is definitely going to be below the 3x mark.

Perfect. That's very clear. If I could just have a quick follow-up. When you said that you're focusing on reducing the gross level of indebtedness, that's still mostly through growth in EBITDA and free cash flow, right? You're not us, you're not going to reengage in divestments at this point.

That's correct, yes. At the moment, we are not pursuing any divestment across the portfolio. So most of the deleveraging process will come via free cash flow and initially it other than divestments.

Next question comes from Yassine Touahri from On Field.

So just 1 question on your U.S. operation. I understand that in June, your EBITDA is up 17%. Does it mean that the price increase that you implemented in July and in June are enough to fully pass on cost inflation? And does it mean that you're expecting the margin in the second part of the year in H2 2022 to be stable in the U.S. versus last year. So could we see the margin pressure coming to an [ end ] in the U.S.? That would be my first question. And then a second question on your import in the U.S. I think you are producing -- you are selling approximately 6 million tons of cement in the U.S. Could you tell us what proportion is imported and what proportion is produced locally. And then the third question, which is related to your import. If you're going to 100% limestone cement, does it mean that you will be able to replace some of the expensive imports by local production and improve your margin?

Thank you very much, Yassine. As Camilo mentioned, I mean June was our best month of EBITDA in the history of the company in the U.S. margins are improving sequentially because of our pricing strategy. So you can expect better margins in the second half of the year.

We see margin -- could we see the margin in the second half of the year being better than the margin in the second half of last year?

That is our expectation, Yassine, because with the revenue management strategies that we're already implementing in the U.S., yes, margins are improving sequentially. So you can expect that. Regarding the other 2 questions, Camilo will provide you the answers.