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

Good morning. My name is Indira Diaz of Cementos Argos IRO, and I welcome you to our first quarter results release. On the call today are Juan Esteban Calle, our CEO; Felipe Aristizabal, our CFO; María Isabel Echeverri, VP of Legal Affairs; Simon Bates, the CEO of Argos USA; Carlos Yusty, the VP of the Columbia 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 the 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 new information, future events or any other factors. All these questions of the financial and operational results held during the call will be based on the adjusted figures, excluding nonrecurring and noncore operations. For a detailed reconciliation of the adjustments, please refer to the annexes of our quarterly report. Today, after the initial remarks, there will be a Q&A session. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Calle.

Thank you, Indira, and good morning, everyone. In line with our commitment of delivering strong operational and financial results with a special emphasis on profitability, we have achieved remarkable results during the first quarter of 2023. The stable market dynamics throughout our regions, coupled with an exceptional execution of our platinum strategy and a more controlled cost environment led us to achieve COP 3.4 trillion of revenue, 35.2% higher than the first quarter of 2022 and a record high EBITDA for the first quarter in our history of COP 597 billion, 7.8% higher versus a comparable basis of 2022, which led to an exceptional margin expansion of 368 basis points for the quarter. In terms of pricing, we achieved double-digit increases on a yearly basis for the Cementos business in the U.S. and in Colombia, which together with the cost efficiencies implemented during the past quarters and operational improvements carried out recently increased not only our EBITDA, but also our margins amid a context of stable market dynamics. In the CCA region, as we have discussed on past quarters, we have been focused on increasing the sourcing from our Cartagena plant, allowing us to improve our cost structure and increase the overall profitability within the company. More recently, we have also been strengthening our portfolio of solutions for our clients in countries such as Panama with important benefits for both our clients in terms of pricing and performance and for ourselves in terms of profitability and volumes. Overall, we experienced during the quarter, the stable market dynamics in most of our markets with sequential improvements on cost, especially on fuels, energy and in some cases, raw materials . And with mixed macroeconomic signals that have kept us cautiously optimistic about the midterm trends of the market. Volumes during the quarter were stable in cement with a mild decrease of 0.6% pursuits quarter of last year, and the ready mix business experienced a contraction of 2.3%, explained by minor volume affectations in the U.S. and in Colombia. Regarding our corporate structure, I would like to highlight that during our general shareholders meeting Carolina so was elected as a new independent member of our Board of Directors in replacement of Centerra that serve as such, for the past 11 years. Carolina is an economist from the University of the Los Andes with a master's degree on economy from this [indiscernible] University and a Master's degree in administration and public policy from Columbia University with more than 15 years of experience in both the public and the private sector to [indiscernible] for his wisdom, strategic acumen and the selfless service that he has tended to our company and to Carolina, a warm welcoming message to our Board of Directors. Now continuing with our results, I would like to reiterate our commitment towards the execution of Sprint, which encompasses our main initiatives to close the gap between the current market share price and its fundamental volume. In that regard, I would like to invite Felipe to dig deeper in the latest achievements of the program.

In relation to the recent development of our Sprint program, I'd like to go through each of its pillars. Regarding the first one, we achieved an all-time record EBITDA for our first quarter of COP 600 million and an EBITDA margin expansion of 368 basis points. As Juan mentioned earlier, reflecting our commitment to continue delivering a strong financial and operational results with a special emphasis on profitability. Additionally, in terms of adjusted net income, we reached COP 118 billion, which is 10x higher than the same quarter of last year. In relation to the second and third pillars of the program, which are associated to the distributions to shareholders, our first portion of COP 128 billion was approved and effectively paid last month. Regarding the additional dividend payments and the share buyback program, we would like to reaffirm our commitment with our shareholders to distribute these funds before our 2024 general shareholders' meeting. We continue to work on these objectives and expect to release an update in the near future. On the fourth pillar of the program, which includes the listing of the U.S. operation in the New York Stock Exchange, as we have discussed in previous calls, we continue to deliver strong results in the U.S. region and remain ready to tap the market as soon as the conditions are appropriate. Finally, on the fifth pillar, we are glad to announce that as of April 17 of this year, our common shares are once again eligible for repo operations on the back of improved liquidity. Consequently, our shareholders will once again have access to the source of financing. As Juan mentioned earlier, we intend to continue motoring closely the development of the plan and make the necessary adjustments to achieve the objectives of the program.

e. Now moving to the regions. I would like to invite Simon to discuss the result of the U.S. But as mentioned previously, we experienced important improvements during the quarter.

To start, I'd like to announce that Kathleen Phelps joined our executive team as our new Chief Financial Officer in April. Kathleen joins us from WestRock, a leader in the paper and packaging industry. She is an accomplished finance leader with significant experience in global publicly traded companies. Kathleen's background and qualifications included degree in international business from the University of Georgia and an MBA from Columbia University. Her expertise in connecting strategy to financial outcomes, FP&A and financial systems and building strong teams will be an incredible asset to our business as we continue to advance the organization by supporting healthy growth. I'm also delighted to introduce Charles [indiscernible] who was recently appointed as the new President of our ready-mix business. Charles joined us from CRH, a leading provider of engineered solutions for the construction industry. Charles has over 25 years of experience, an impressive track record of improving businesses. He has a BS in mechanical engineering and an MBA. Now moving on to Q1 results. As you may remember from our last earnings call, we discussed the margin erosion in our business space throughout 2022. Last year, the significant cost inflation in our business outpaced our ability to raise prices across both our cement and ready mix businesses. Our primary focus for 2023 has been to improve our EBITDA margin by carefully managing both costs and pricing. For the first quarter of 2023, we saw that our North American revenues grew by 22.2% when compared to the same period in 2022. This was driven by both price and volume expansion. As a result, our EBITDA margin was 15.7% for Q1, an expansion of 483 basis points versus the first quarter of 2022. Our EBITDA for the first quarter of 2023 reached 65 million, which is a year-over-year improvement of 76.6%. During the first quarter, the average selling price improved by 15.2% in the Cement business. Volumes also improved by 7.1%. Our production in Q1 was constrained given planned outages at several of our facilities. We were able to supplement our domestic production with imports, about 6% of our 7% growth in Q1 came through imported cement. We consider our extensive port and terminal network, a significant strategic advantage that enables us to meet customer demand when domestic production is constrained. In our ready-mix business, we saw a slightly softer demand in Georgia and Texas, with volumes declining on a like-for-like basis by 2.5%. However, average selling prices improved by 21.3% year-over-year. Regarding our cost metrics, during the quarter, we experienced lower inflationary pressures than the ones we observed during the last quarter of 2022. On a sequential basis, our unitary costs in the Cement business decreased 3% in fuels, mainly due to gas and 10% in power. On raw materials, we continue to experience inflationary pressures on a sequential basis. However, we expect some stabilization in fuels power and raw material costs to continue. During the first quarter, we experienced strong demand overall with year-over-year growth in volumes and revenue and demand in the states we serve remain positive despite some short-term sector slowdown on certain macro indicators and the bad weather condition experience, specifically in Georgia. In terms of segments, industrial and infrastructure continue to gain traction partly explained by our commercial efforts to further diversify our portfolio away from residential construction. We expect the positive effects of the inflation Reduction Act and the works associated to the IIJA to have an impact later in the year. Our backlog remains stable and we do not foresee any substantial change in this trend. I'd like to reinforce once again our positive view for the U.S. market, supported by our latest results and by the recent improvement in some macro indicators surrounding the U.S. economy and the building materials industry.

In Colombia, even though we are seeing an important deterioration on the sales of housing, we are not experiencing yet any significant impact on the overall country consumption of cement nor in our dispatch. Carlos Yusty will now share the detail on the region.

During the first quarter, we continued executing price increases to offset inflation and regain profitability, resulting in a year-over-year increase of the average cement and ready mix prices of 24.2% and 34.4%, respectively. As we have mentioned in the previous calls, we have been very concentrated on improving our end-to-end processes. -- and particularly the profitability of our ready-mix and aggregates business by optimizing our client portfolio segments and distribution logistics. In consequence, our financial results for the quarter are remarkably positive with an EBITDA of COP 181 billion, which is 39.4% higher than last year's 3 year review. In terms of profitability, we have also experienced significant improvements with an EBITDA margin for the quarter of 25.4%, which implies an expansion of 488 basis points versus the same quarter of last year. Regarding our cost structure, even though inflationary pressures in the country have not complete ceased -- it is important to highlight that during the first quarter, we evidenced an important slowdown in terms of unitary fuel cost, with a sequential decrease of 3.4% in the cement business. Together, with sequential stability on power and raw materials, we expect this trend to continue in the following quarters of the year. In terms of volumes, the overall market in Colombia experienced during this quarter a contraction of 5.3% on a year-to-year basis, particularly due to a strong comparable basis for the last year when we have all-time highs in terms of cement consortium in the Colombian market, but also due to avocation on the informal residential segment that has been impacted by inflation and the deterioration of the other macro indicators. Our total shipment volume decreased 4.6% year-over-year, resulting from the combination of our local market dispatches that decreased 9.8% and our exports that increased 15.9% in relation to the local market, I would like to highlight that in terms of ready cement, which is a product that is fully comparable to the cement dispatches polished by the [indiscernible]. The decrease was 8.8%, caused by the overall market affectations the culture of the road between Popagan and Pasto that affected our dispatches in this region where we have an important market share. And also due to some domestic markets loss during January that was rapidly regained in the following months. In terms of export -- the increase is mainly caused by the increase of 81% of the sales to the U.S. region. Finally, on the ready mix business, volumes also decreased by 4.3% on a year-over-year basis, in line with the market trends. Regarding market dynamics, we expect a similar behavior for the remainder of the year on the basis of a strong formal housing infrastructure and commercial sectors and some headwinds are rising from the informal housing segment. We will continue to deploy for the strategies that will allow us to be more efficient and to capture more profitability from the current market conditions.

Thank you, Carlos. Now moving to Central America and the Caribbean during the first quarter of the year, we continued to evince good traction of demand dynamics for the local markets, especially in Panama, with solid economic conditions prompted the recovery of volumes. Gustavo will give more detail on the region.

Thank you, Juan, and good morning to everyone. The continuation of adequate pricing dynamics across the region and positive market conditions in Dominican Republic as well as the recovery of the Panamanian market were the highlights of our financial results for the first quarter of the current year. despite lower cement dispatches, which were mainly due to the trading business, a positive balance in the price cost dynamics led to positive evolutions in terms of EBITDA and margins versus the same period of last year. EBITDA reached $30 million during the first quarter with a year-over-year increase of 2.2% and EBITDA margin remained stable in 20.6%. Average cement prices increased 8.2% when compared to the same period of the last year. [indiscernible] dispatches were 4.9% higher when compared to the first quarter of 2022, supported mostly by volume increases in Panama and Dominican Republic that were partially offset by Haiti, which continues to present a very challenging social and political situation that has been deteriorating since the beginning of April. Trading volumes on the other side decreased 31.9% year-over-year, which as well as in present quarters is explained by our aim to maximize margins and capitalize the usage of our export capacity from our [indiscernible]. In consequence, total volumes for the region decreased 5.2% when compared to the same period of last year. In Panama cement volumes recovered satisfactorily with a 21.3% growth when compared to the same quarter of last year, with monthly volumes in March being equal to those evidenced in 2019. We expect positive market dynamics to continue throughout the year, given the optimistic changes in the growth perspectives for the country. Currently, Panama leads the growing prospects for the year in the region according to the international monetary fund that projected real GDP growth for 2023 to stand at 5%. We intend to capitalize this positive environment by expanding our portfolio of solutions, which provide a wide range of products for soft construction, aiming at offering cost affordable, practical and higher performance products that generate improved efficiencies for our clients and increase margins for our business. In Honduras, we evidenced a stable trend in market conditions for the quarter that led to a mild decrease in volumes of 1% versus the same period of the year. Pricing, we maintained steady reaching mid-single-digit improvements year-over-year. Guatemala, which is currently a trading business served from Honduras operation has been rapidly expanded. The total volumes hold in 2022 were around 65,000 tons and were doubled versus the present year, and we intend to achieve a similar growth for the current year. The Dominican Republic, on the other side, continued to exhibit strong pricing dynamics with 13% year-over-year growth in terms of cement prices remaining in historic highs. Demand conditions continue to be solid, which result in an increase of 14% in volumes versus last year. In Haiti, the challenging social and political situation continues to be the main setback for the operation, affecting some dispatches that were 20.9% lower than those observed during the first quarter of 2022. Nevertheless, it is Important to highlight that for the first time in the last 3 quarters, EBITDA was positive. Not standing that political situation has deteriorated significantly complete since the beginning of April, and volumes are expected to be further impacted in the second quarter. We remain confident about our capabilities to capitalize the strong momentum observed in most of the countries of the region and to carefully navigate the challenging situations that are present in some of our operations...

Now referring to our balance statement. The net debt-to-EBITDA ratio stood at 3.1x during the quarter increasing versus last year in a context of stable debt and increased EBITDA, mainly caused by sharp Colombian peso revaluation experienced at the end of March. In terms of financial expenses during the first quarter of the year, we started to experience lower refinancing costs, especially in Colombia, where we have found lower interest rates with banks post-Basel 3 implementation, which, together with our hedging program, focus on IBR, Colombian CPI and suffer prevented our financial expenses from increasing further. We are aware of the importance of optimizing our capital structure and improving further our financial expenses, and we'll continue to work on that for the remainder of the year. We continue to monitor all the market variables and remain confident of our positive performance for the months to come. I would also like to reinforce once again our commitment towards the execution of Sprint and the value generation for our shareholders. Thank you all for your attention. Indeed, we can now proceed with the Q&A section.

[Operator Instructions] The first question comes from Alberto Valerio from UBS.

My first question is about the guidance. Usually, we have a first quarter weaker than the remainder of the year in terms of EBITDA. And this year, if you take the linear base, you already reached the guidance with the first quarter EBITDA. So my question is how can we achieve the guidance? And if not so, what we can expect in terms of second, third and fourth quarter, that would be challenged? This would be my first question.

I mean we're extremely happy with the results of the first quarter, but we are keeping the guidance that we provided to the market of COP 2.3 billion to COP 2.4 billion of EBITDA for the year. We will have more [indiscernible] in guidance.

Juan, could you repeat the last part of the answer? I believe this sound was interrupted there.

I was just saying, Alberto, that we are keeping this in guidance. We will wait until having the results of the second quarter of the year to have more visibility. But so far, we are very confident with the guidance that we provided to the market of COP 2.3 billion to COP 2.4 billion of EBITDA for 2023.

My second question would be about energy costs. How should we expect Argos cost on this line for the remainder of the year. I know that you guys have some contracts of long term, medium term. And we already saw some inputs on this line like coal and natural gas price decreasing during the past 12 months. So if you could give some details how should we see this line for the remainder of the year would be very helpful. This is my 2 questions.

We are seeing a slowdown, a significant slowdown in the cost of fuels and erogetics. and we expect to continue seeing a margin expansion in the remaining quarters of the year. I mean, the reality is that the expansion that we saw in the first quarter. We are sure that we are building momentum to deliver on the first pillar of our Sprint program, which is precisely to continue expanding the profitability of the business. And with the work that has been done already in the execution of pricing plus the slowdown in inflation, we remain very confident that we will be able to accomplish our targeted improvement in margins for 2023.

Next question comes from Gordon Lee from BTG.

Yes. Just a couple of -- well, one question really, which in a way as a follow-up to the previous one. And this is really more related to the U.S. business. But I was wondering if you could tell us -- give us a sense of sort of what percentage of your regions or your footprint is covered by price announcement increases that you have already made and more or less what percentage of overall business that covers? And then the second one is related to that is given the environment that you just described in terms of costs beginning to sort of decline or at least the headwind is declining. How easy will it be to implement those cost increases, those price increases, at what point do you fear that you might start getting some pushback from customers?

Thank you, Gordon, and I will ask Simon to answer your 2 questions.

Yes. I think first, a quick answer is that 100% of our business is covered by price increases that were announced in January and in April. That would be a simple answer to the first question. I think the second thing that we tell our customers is that we want to be able to invest in our business. And therefore, when we look at the margin erosion of last year, it's crucial for us to restore our historic margin position. I think that's a simple response to our customers. We are still experiencing cost increases, both in energy year-over-year. And for the U.S., it's a particular situation, we were very well hedged with some great historic agreements that ended about halfway through last year. So when we look at energy and fuel costs year-over-year, our costs have increased, but we see that, that rate of inflation has slowed significantly. And in some elements, it is decreasing. But I think another thing to remember, and this is particularly relevant for our ready-mix business. We are still seeing some fairly significant year-over-year material cost increases, in particular, for aggregates and hence, our reasoning and our need for further price increases.

Next question comes from Steffania Mosquera from CrediCorp.

My question is regarding the risks or if you see any risks from the banking turmoil that we are seeing in the U.S. in terms of financing for the commercial sector. And also, if you see any midterm risks for the Colombian dispatches from the prescriptive of a lower social housing sector.

Thank you, Steffania. I mean so far, demand in the U.S. continues to be very strong. The U.S. economy has tend to be very resilient. And we are not foreseeing like any impact on our volumes in the second quarter of the year. We will continue monitoring all the macro indicators for the remaining of the year. But with the visibility and the information that we have so far, we remain very optimistic about the result of the U.S. business for 2023. In Colombia, I mean, there is a reality. Sales of new homes have decreased in a significant way in the last several months. And -- but housing starts are still very robust. But with the declining new home sales, what we are foreseeing is probably an impact on the volumes in the last quarter of 2023 and in 2024. Notwithstanding, we're optimistic with the latest announcement of the government of the addition of COP 1 billion for [indiscernible] for subsidies and the commitment as well to support 75,000 subsidies in 2023. Those signals in my opinion, will start to help the trend that we have been seeing in the market.

Next question comes from Vanessa Quiroga from Credit Suisse.

I have a couple of questions. The first one about the U.S. and the high import volumes. Do you expect this trend or share of imports to continue? And how does that impact your margins in the U.S.? And the second question is regarding margins in Colombia. Do you expect to continue with these levels that you achieved in the first quarter going forward? Or what are the risks or the specifics to the first quarter that could lead to some volatility in margins in the following quarters in Colombia?

Simon will take your first question about the volume mix in the U.S.