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

Good morning, everyone. Thank you for being here with us today to discuss our first quarter results. My name is Indira Diaz, I am Cementos Argos Financial Manager for the Columbia Division, and I will be hosting today's call. On the call today are Juan Esteban Calle, our CEO, Felipe Aristizabal, our CFO, Maria Isabel Echeverri, the VP of Legal Affairs, Gustavo Uribe, the Leader of Central America, and Carlos Yusty, the VP of the Columbia Division. First, I would like to ask you to carefully read the legal disclaimer that is currently being projected on the screen, which is also available on the presentation that is posted on our website. Please consider that all the discussions of the financial and operational results held during the call, will be based on the adjusted figures, excluding nonrecurring and non-core operations. For a detailed reconciliation of the adjustments, please refer to the annexes of our presentation. [Operator Instructions]. We will record this session and upload it to our web page. It is now my pleasure to turn the call over to Juan Esteban.

Thank you, Indira, and welcome to everyone joining us today. During the first month of the year, we continued advancing on the pillars of our SPRINT 3.0 program, reaffirming our commitment to generating sustainable long-term value for our shareholders. One of the most significant milestones of the quarter was the unanimous approval by both our bondholders and shareholders of the spin-off of Cementos Argos portfolio in Grupo SURA during the meetings held on March 21, and March 25, respectively. As a result, and in conjunction with the approval of this year's dividend distribution plan, Cementos Argos will distribute approximately COP 2.2 trillion to its shareholders consisting of COP 1 trillion in cash dividends and COP 1.2 trillion in shares of Grupo SURA, which entails a dividend yield of 17%, significantly above the industry average of around 2% and the highest among its peers. This transaction will allow our shareholders to directly capture the value of an asset that is not reflected in the price of our share. It was supported not only by our stakeholders, but also by credit rating agencies such as Fitch, which issued a report, confirming that the transaction would have no impact on our credit rating and performance. Moreover, as part of our long-term strategy and after receiving an offer to acquire 100% of the outstanding shares in Summit Materials in which we held a 31% stake, we announced during last quarter's result, our firm intention to reenter the U.S. market by building a new and sizable platform with the commitment to generate significant value to our shareholders. This decision is fully aligned with our strategic vision, which focuses on value creation and sustainable long-term growth in markets where we had proven capabilities and competitive advantages. Aligned with this vision, we are advancing in the consolidation of an aggregate platform in Central America and the Caribbean in assets with unique export capabilities driven by the high quality of their materials, proximity to the water, which significantly reduces logistical cost and a sufficient reserve base, to meet the growing demand in key coastal U.S. market, estimated at approximately 640 million tons per year, in this business line. This initiative would mark an important step forward in our international growth strategy with the potential to significantly contribute to both volume and EBITDA in the medium term. It forms part of a broader roadmap that combines organic and inorganic opportunities, including the possible incorporation of complementary assets such as port terminals, position in Cementos Argos for sustainable expansion and significant exposure to the U.S. market. In summary, we begin this new phase with solid fundamentals supported by a robust balance statement, strong execution capabilities and a clear strategic focus. Our disciplined use of capital and long-term vision reflects our firm commitment to creating sustainable value for our shareholders with the right structure, expertise and priorities in place, we are well equipped to continue driving Cementos Argos growth throughout 2025 and beyond. Now I would like to invite Felipe to discuss further, the execution of the third version of our SPRINT program.

Thank you, Juan, and good morning, everyone. This quarter, we continued making significant progress in the execution of SPRINT 3.0. Since launching the first version of our strategic plan, our total shareholder return in dollar terms has reached approximately 380%, on the back of higher trading volumes and the successful execution of key initiatives to address frictions preventing the stock price to converge to its fundamental value. Regarding our first pillar of profitability we remain focused on our goal of achieving an EBITDA margin above 25% over the next 2 years. In this first quarter, we delivered a consolidated margin of 21% despite a challenging environment, demonstrating the effectiveness of our cost optimization initiatives and our strategic focus on higher-margin projects. We also remain committed to reaching a return on capital of between 14% and 15% by the end of the year. As part of the second pillar, focused on shareholder distributions, as Juan just mentioned. We held our Annual Shareholders Meeting on March 25, during which we approved COP 1 trillion dividend, split evenly between a base dividend and an extraordinary dividend funded by the proceeds from the sale of our 31% stake in Summit Materials. This represents a 71% increase compared to 2024 and when combined with the Grupo SURA portfolio to be distributed, this implies a total dividend yield of 17%, which reinforces our commitment to maximize shareholder returns. In terms of the third pillar related to our share repurchase program, we have executed approximately 60% of the COP 500 billion authorized under the current phase, equivalent to approximately COP 300 billion. With respect to the fourth pillar, improving liquidity and market visibility, we've made tangible progress. Trading volumes continue to rise and we believe we are well positioned for potential inclusion in the MSCI Emerging Markets Index's Standard section in the short term. Now turning to the fifth pillar. As Juan mentioned before, we achieved a key milestone with the approval of the spin-off of our Grupo SURA shares during the extraordinary shareholders' meeting held on March 25. Under this structure, our shareholders will receive approximately 2 Grupo SURA shares for every 100 shares of Cementos Argos, likely towards the end of 2025 or early 2026. This portfolio is currently valued at around COP 1.2 trillion and represents a significant step in allowing shareholders to directly realize the value of this asset, which, in our view, is not currently reflected in the price of our shares. Finally, aligned with our sixth pillar of growth. As we mentioned at the beginning of the call, we are in the final stages of acquiring a prime aggregates asset in the Caribbean. This marks a significant step forward in our strategy to reestablish our presence in the U.S. market. The asset is part of a broader series of strategic acquisitions aimed at strengthening our logistics and export platform, capitalizing on geographic advantages and the growing demand in key U.S. coastal markets. This transaction also reflects our disciplined approach to capital allocation, deploying the proceeds from the Summit Materials divestment in a thoughtful and value-driven manner. Phase 1, of our redeployment of capital in the U.S. market is comprised of organic growth opportunities and bolt-on acquisitions to complement our aggregates export platform. This strategy is designed to build a sustainable asset-light and export-oriented platform that will be later complemented with inorganic growth. Ultimately, all these efforts are aligned with our ambition to create a business capable of generating around $300 million in annual EBITDA over the next 3 to 5 years. Before concluding, I'd like to highlight that we are executing this strategy with disciplined focused and a clear long-term vision, backed by a strong progress across all strategic fronts and a robust financial position. We are confident in our ability to meet the goals we've set. Based on our performance so far this year, we remain firmly on track to achieve a 400% total shareholder return in dollar terms by the end of this year.

Thank you, Felipe, for your intervention. Before moving into the regions, I would like to share a few insights from our consolidated results for the first quarter of 2025. During the quarter, revenues reached COP 1.23 trillion and an adjusted EBITDA that totaled COP 258 billion with a margin of 21%. While this reflects a contraction compared to the same period of last year, it highlights the company's operational resilience and the positive impact of our efficiency initiatives across key regions. The 121 basis points compression in EBITDA margin is mainly explained by Honduras, that included a biannual scheduled kiln stoppage in our Piedras Azules plant and a challenging market in Panama. Adjusted net income reached COP 137 billion, representing a 7.5% increase versus the first quarter of 2024. This figure excludes the onetime gains from the sale of our stake in Summit Materials and adjustments related to the equity method, making it fully comparable to this year's results, which no longer include the U.S. operations. From an operational perspective, cement and ready-mix volumes declined by 6.3% and 19.4%, respectively, impacted by a combination of local demand dynamics and adverse work conditions that disrupted our export flows to the U.S. Nonetheless, we observed solid progress in initiatives such as the "Mine to Market" program in Colombia, as well as strong performance in some countries of Central America and the Caribbean, particularly in the Dominican Republic, Honduras and Puerto Rico which helped mitigate the effects of softer volumes in our geographies. The ready-mix volume declines are mainly explained by the transformation of the model of our ready-mix business in Panama that took place in the third quarter of 2024. Under the new model, our ready-mix plants and trucks are operated by our alias in the business, and we supply all their cement needs. Overall the company continues to operate with discipline, efficiency and a strong balance statement. We remain focus on capturing midterm growth opportunities across our core markets while leveraging our solid cash position to drive long-term value for our shareholders. Now I would like to invite Carlos to discuss further on the performance of Colombia and our strategic view for the market.

Thank you, Juan. In Colombia, although the year began with significant challenges, we are seeing signs of the positive impact from the transformation we started a couple of years ago. Aimed at building a more flexible and resilient operation through our "Mine to Market" program. Despite tough market conditions, we consider our first quarter performance solid. As the quarter progressed, we began to see signs of recovery, inflation has stabilized and interest rates are beginning to decline, slowly reactivating investment, especially in the housing sector. A clear sign of this is, the 35% year-over-year increase in new home sales, which has already surpassed the monthly average seen in 2024. This rebound is a positive signal that supports our outlook for the rest of the year, where we see the greatest growth potential. Market recovery is also reflected in our operations. Cement volumes have shown consistent month-over-month growth with a 25% increase from January to February, and 12% from February to March. That said, total local market volumes for the quarter were down 10% compared to last year. Regarding exports, volumes declined by 21.4% mainly due to disruptions at the Savannah port closed by adverse weather conditions, which limited product storage capacity and caused a lower demand from our supply agreement in the U.S. In our ready-mix business, volumes increased by 25% and 6.5% in February and March, respectively. Although they ended the quarter with a 15.5% decrease compared to last year's result. Our financial figures reflect our continued focus on operational efficiencies through the "Mine to the Market" program. This has allowed us to maintain an EBITDA margin of around 26% despite incurring one-off expenses related to the profitability optimization program and a challenging external environment. This result was achieved, thanks to the program philosophy of prioritizing profitability, combined with an effective pricing strategy that has allowed us to maintain a leadership position in industrial and large-scale projects. Additionally, the ongoing cost [ utilization ] strategy we have developed over the past few years, has enabled us to navigate the current complex environment successfully. Looking ahead, we remain optimistic about the Colombian market. We expect an improved performance in the second half of 2025, supported by major projects such as Quora had COP 2 trillion development currently and the construction in Bogota, which stands as the most important urban renewal project in the country and the Bogotá Metro for our key work fronts, we have been actively progressing since February as well as by the strong backlog of the ready-mix business which in total accounts for more than 1.4 million cubic meters for the upcoming months. Moreover, housing starts which are a fundamental driver for our industry are expected to recover towards the end of 2025 and into early 2026, adding further momentum to the sector for recovery and reinforcing our positive outlook.

Thank you, Carlos. Now I would like to invite Gustavo to comment on the results of Central America and the Caribbean.

Thank you, Juan, and good morning, everyone. During the first quarter of the year, we once again saw the value of having a geographically diverse footprint. Even with ongoing challenges in markets like Panama and Haiti and the scheduled kiln maintenance in Honduras, we managed to grow our local cement volumes by 2.8%, totaling 792,000 tons. That growth was mainly fueled by our strong performance in the Dominican Republic and Puerto Rico. Starting with Central America, quarterly results were mainly impacted by the ongoing market slowdown in Panama and a 33-day kiln shutdown in Honduras. These factors drove a 29% EBITDA decline with a margin of 20.7%, down 680 basis points year-over-year. Honduras explains approximately 365 basis points of the decline in the EBITDA margin, mainly driven by the scheduled kiln stoppage. It is important to highlight that we are still forecasting to close the year with an annual EBITDA margin similar to the 29% posted in 2024. By country, the results are as follows. In Honduras, strong market demand drove a 6.2% year-over-year increase in volumes, combined with stable average prices, this resulted in a solid top line growth. However, EBITDA margin was impacted by a planned major kiln shutdown, part of a 5-year maintenance cycle, which in a high-demand environment required us to purchase costly clinker from third parties. On a positive note, the pozzolana dry project, which began operations earlier this year, is now in stabilization phase and set to deliver operational improvements, particularly in mill productivity. This validates our initial investment thesis and is expected to drive further efficiencies throughout the year. Moving to Panama, the housing market continues to be impacted by the elimination of the Social Housing Fund, which has significantly affected demand. It is estimated that over the past year, the construction sector may have lost around $300 million in related housing transactions. Overall, the country's gray cement market has declined by 15%, in line with our cement volumes. Anticipating a challenging year and in response to current market conditions, we continue to execute our fixed cost management program at the cement plant. The goal is to create a more flexible operation layout and allow us to efficiently navigate the decline in demand. That said, in March, we saw a recovery in volumes compared to January and February, and we expect this positive trend to continue in the coming months. Finally, I would like to highlight the monetization of our port Bahia Las Minas, which after the dredge carry-out last year, we are now able to offer more attractive services to third parties, which will serve as an additional revenue stream and a cost optimization level throughout the year. Beyond that, it plays a key role as a complementary port for Aggregates export platform. Moving to the Caribbean region, a 5.7% increase in volumes, EBITDA of $13 million and a margin of 20.2% speak for themselves. Record monthly EBITDA in March, along with strong quarterly performance was driven by solid dynamics in the Dominican Republic and Puerto Rico and notably by positive EBITDA in Haiti, making the first time in 18 months that the operation has posted positive figures. In the Dominican Republic, market conditions continue to support strong results. The additional volume from the capacity expansion that came online in January has been fully absorbed by the market. In March, we reached the record dispatch volumes, and for the quarter, volumes grew 14.4% year-over-year, driving a 26% increase in EBITDA and a 259 basis points margin expansion. A similar trend was seen in Puerto Rico, where the overall market grew by 9% during the quarter. Our gross volumes increased by 6.7% year-over-year with a notable margin expansion of 295 basis points. In summary, despite temporary pressures in a mixed market environment, our divisional strategy continues to yield encouraging results. In Central America and the Caribbean, we remain committed to our long-term goals and are well positioned to face current challenges. Our focus on operational excellence allows us to capitalize on opportunities and adapt effectively to changing market conditions.

Thank you, Gustavo. Now moving to the balance statement. Our net debt-to-EBITDA ratio stands at minus 7.6% for the first quarter, a reflection of the strong cash position generated from the Summit transaction. While we carefully evaluate the most strategic opportunities for deploying these resources, the funds have already generated $16 million in interest income year-to-date with an average yield of SOFR plus 11 basis points. Looking ahead, we remain firmly committed to our 2025 guidance, supported by favorable market dynamics for the remaining quarters of the year, ongoing optimization efforts and the flexibility built in our regional operations. Indira, we can proceed now with the Q&A section.

[Operator Instructions] First question comes from Marcelo Furlan from Itaú.

I have two. The first is related to this goal to increase this exported-oriented business to the U.S. So -- I would like to have more details regarding what are the assets that the company has seen so far? And also regarding the U.S., specifically, if you guys have already advanced in some research regarding potential assets to be acquired in the U.S. region? So this is my first question. And my second question is related to the Columbia Division. You mentioned that the housing market has improved so far. So I'd like to understand how are the company's forecast for the cement markets -- in the local cement markets in Colombia and ahead of this improved housing market? So these are my two questions.

Thank you, Marcelo, for your questions. I mean in terms of our Aggregate export platform, I mean we are making significant progress. We have secured sources both in Central America and the Caribbean that allow us to have like a complete portfolio of AGS, both Limestone and Granite with very interesting sources. We will be giving additional color in the second half of the year, but I can highlight that we will have plenty of reserves, high-quality materials, sources very close to the water and very competitive operational cost. So we are extremely happy with the progress so far. And we are complementing that with securing import terminals in the U.S. But once again, we will be giving additional color and we will explain more of the size and the scope of the effort in the second half of the year. In terms of the market in Colombia, as Carlos mentioned, new housing sales have been improving, but the reality is that [ still ] housing start, at what we consider the bottom of the market. The last 12 months, I mean, the housing start has been close to 7.5 million square meters at the peak of the market in 2022. They were in excess of 11 million square meters. So we are foreseeing with the pickup in housing sales that the market has already bottomed and that is why we are seeing better perspective for the second half of the year and for the remaining months of 2025 going into 2026. But overall, we are forecasting a total demand of cement in Colombia of close to 12 million tons for 2025.

Next question comes from Adrian Huerta from JP Morgan.

Good morning, everyone, and Juan, Camilo congrats on the announcements and on the efforts to enhance shareholders' value. I understand you're going to give more details in the second half of 2025 on this Aggregate export platform. What else do you have today? And I mean, in terms of vessels, in terms of -- I guess, in terms of import capacity in the U.S., you don't have any. So, what is the size of total investments that you think will be required to generate this roughly $300 million on EBITDA?

Thank you for your question, Adrian. The $300 million target is not only organic growth. I mean, it will include inorganic growth in the U.S. as well. So the first phase of our effort, which is the, Aggregate export platform will not use a significant portion of the resources that we have available, but we would be complementing that effort with the acquisition of terminals in the U.S. and bolt-on acquisitions in AGS to complement that export platform, plus more transformational inorganic opportunities going forward. So Phase 1 is only the export platform, and that will not require the use of a significant portion of the resources that we have available.

It will not repair...

It would not require any transaction.

So this first phase, what you have in place already, it's a total capacity to export what size of volumes in a year?

What we are foreseeing is that, to reach at least 6 million to 8 million tons of volumes by year 5.

Under the first phase and then the second phase you will add in to that?

Under the first phase without including bolt-ons plus more inorganic opportunities in the U.S. in the local market.

Next question comes from Paco Suarez from Scotiabank.

On your strategy to create this new platform from scratch, it is my understanding that the terminals that you might seek are considerably low CapEx-intensive compared to the typical specialized assets that are seen in cement isn't it. So my guess is that the overall likelihood to actually execute this in an accretive way is higher compared to adding cement dedicated assets. Is that the case? And in that question, if I may, just remind me, and apologies for the question, but just to make -- I want to make sure that the maritime terminal that you had in Houston was also part of the deal with Summit Materials, and that is out of the question at the moment? And lastly, if there is any impact whatsoever of tariffs on your agreement to supply cement in this case to Quikrete?

Thank you, Paco, for your questions. I mean, to build our AGS export platform, I mean the reality is that we are leveraging on decades of presence in Central America and the Caribbean. On our local partners and the extensive knowledge of the market that we have. So the reality is that there is going to be a light CapEx deployment. Plus what you mentioned is certain, i mean to build our own network of terminals in the U.S. in the markets that we are targeting, the reality is that you can secure very interesting import terminals without deploying a significant amount of capital. So it will be very accretive in terms of generating value for our shareholders. You're totally right. I mean, we sold -- when Summit was sold, it included our terminal in Houston. So the reality is that we will not be using that terminal going forward. Your third question in terms of tariffs, we have seen no impact on our supply agreement with Quikrete. Moreover, they are asking for more volume. So the reality is that we haven't seen like any impact in the supply of imported cement to the U.S. because of the tariffs, at least not impacting our Cartagena source.

Next question comes from Gabriel Perez from Credicorp.

Regarding the Colombia segment, can you tell us more about your participation in the construction of the Metro Bogota. Do you have like a projected cement dispatches for this project for 2025?

Thank you, Gabriel. I would like Carlos Horacio to give you more color on our involvement in the construction of the Bogota Metro. Go ahead, Carlos.

Hi, Gabriel. Actually, we are -- just to give you a little more color. In the starting of the works in the Bogota Metro, really we offered a very interesting bid in terms of technical -- with a lot of technical values. But we just start to supply the metro in January. We have an amount of about 2,000 square meters per month. Now we are delivering about 7,000 square meters by month. We are attending some fronts of the work, and probably we are increasing the volume month by month because like you know very well, our value proposal is really, really good in comparison with other competitors for this kind of works.

Next question comes from Nicolás Gómez from Corredores Davivienda.

I have two questions for you. First of all, could you please share us the detail of the values of the net income of the controlling stake for the first quarter of this year and the first quarter of the 2024? And the second question is, could you please tell us the date or the month in which the resources start to generate revenues? As we see COP 121,000.

Sure, Nicolas. Thank you so much for your questions. I will ask Felipe to give you all the details.

Good morning, everyone. So regarding your second question, we received the funds on February 11. So we've been generating financial income from these resources from that date. So the results that we include in our financials correspond to around 6 weeks of returns from these resources. Regarding the net income of the controlling stake, remember that we have shareholders in some of our operations in Central America and the Caribbean. So the net income of the controlling stake correspond to the portion of that income that we effectively own in each of these operations. So we have minority stakeholders in Honduras, they own 47% of the company. So we own 53%. In the Dominican Republic, we have a partner with a 20% stake, so on and so forth. So the controlling stake, the net income of the controlling stake corresponds to our effective participation in the net income of these operations.

And how much it represents for this year, for the first quarter of the 2024?

So it is, the adjusted value is around COP 110 billion.

Next question comes from Laura Ardilla from Citi Bank.

Can you please explain what is the debt management strategy for the year? And what is the total debt-to-EBITDA target for 2025?

Thank you, Laura, and I will ask Felipe to give you more color as well. Please Felipe, go ahead.

Of course. So from a structural perspective, we're targeting total indebtedness level of around 2x EBITDA. Right now, as Juan mentioned, we're close to negative 8x. But over time, we're going to use these proceeds via organic and inorganic growth opportunities. So in the longterm, we are targeting a 2x leverage ratio. In the meantime, we're very active in optimizing the cost of our debt on a continuous basis. We actively manage both the FX and the interest rate risk. We're also very active in positioning our debt profile to take advantage of opportunities across the yield curve. So we're also actively manage the effective duration of our debt as a way to optimize the cost, without incurring in significant liquidity risk. Lately, we have reduced the average life of our debt given, our cash position, we have the ability to diminish the amount of debt we can incur in the short-term as a way to optimize the overall cost of our debt. And as you can see in our financials for the first quarter of the year, we have a positive net income, which means that the return on the cash almost fully offset the cost of our debt. And we expect that situation to remain around -- I mean in the short term, we expect that as a result of these financial income on revenues, our cost of debt is going to remain -- our effective cost of debt is going to remain very low up until the moment we start deploying the capital to pursue these growth opportunities.

Thank you all, Juan we have no more questions.

Okay. So thank you so much to everyone connecting to our quarterly results, and we look forward to presenting the results of the second quarter of the year. A very good day to everyone. Thank you so much.