GCC, S.A.B. de C.V. (GCC) Earnings Call Transcript & Summary

Good morning, and welcome to GCC's First Quarter 2025 Earnings Results Conference Call. Before we begin, I would like to remind you that this call is being recorded [Operator Instructions]. Please also note a slide presentation accompanies today's webcast. The link is available on the company's IR site at gcc.com. I would now like to turn the call over to Sahory Ogushi, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining. With me today are Enrique Escalante, our Chief Executive Officer; and Maik Strecker, Chief Financial Officer. The earnings release detailing this quarter's results was released yesterday after market close and is available on GCC's IR website. This conference call is also being broadcast live within the Investors section at gcc.com. And both the webcast replay of the call and transcript will be available on the same site approximately 1 hour after the end of today's call. Before we begin, I would like to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our quarterly report filed with the Mexican Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. With that, let me now turn the call over to Enrique.

Thank you, Sahory, and good morning, everyone. We entered 2025 with cautious optimism, and this quarter unfolded largely as anticipated. Three main factors challenged the comparison to a record first quarter in 2024, weather, tariffs and the exchange rate. This year presented a typical winter conditions with more normalized shipping volumes this year compounded by uncertainty around global trade and tariff discussions as well as a 20% depreciation of the Mexican peso. Against this backdrop, both sales and EBITDA declined year-over-year. Importantly, the first quarter represents the smallest contribution to our full year results, and our strategic fundamentals remain intact with encouraging backlog visibility in the U.S., particularly in infrastructure and energy, the largest sectors we serve. At GCC, we continue to rely on our financial strength, operational flexibility and experienced teams to navigate these cycles faces with discipline and focus. These capabilities are essential as we adapt to an evolving market environment. While broader visibility remains somewhat limited due to the ongoing inflationary pressures, interest and rate uncertainty and global trade dynamics, the strength of our strategy built on our people, planning and profit pillars, continues to support long-term value creation and resiliency. In this dynamic environment, our teams continue to demonstrate remarkable adaptability, focus and a strong commitment to execution. Their ability to respond to challenges remain and maintain safe and stable operations and support our customers without disruption reflects the strength of the culture and clarity of our priorities. A key part of our people pillar is our commitment to continue development. Training remains fundamental at GCC and essential investment in our people and future. Through the GCC cement Technical Training Institute, we are witnessing increased enthusiasm and proactive engagement from our employees who are actively identifying and participating in specific trainings to support their roles. Having covered foundational topics across cement plant, we are now delivering tailored programs to meet more specific plant needs. In the first quarter, we provided more than 4,200 hours of training to employees through 21 different programs, enhancing technical skills and reinforcing safer operations. In parallel, we continue advancing our safety strategy especially our SIFT process to reduce and eliminate exposure to severe injuries and fatalities. We held round tables at all cement plants and many ready-mix operations facilitating open dialogue with frontline employees. Their feedback was very constructive with valuable insights and suggestions from the teams on how to strengthen implementation on field verification of critical controls to keep them always safe. Our collaborator's input is invaluable as we continue deploying our serious injury and fatality prevention process. These efforts are driving greater ownership and consistency across our operations, achieving a 31% reduction in recordable and loss time incidents and 25% reduction in lost workdays compared to the same period last year. Turning to our planet pillar. As we navigate current market conditions, we remain firmly committed to our sustainability road map and long-term environmental goals. In the first quarter, our Pueblo plant once again was recognized by EPA for outstanding energy efficiency, receiving ENERGY STAR certification for another consecutive year. Additionally, we earn an A- rating from the carbon disclosure project for our 2024 climate change disclosure, our highest rating to date, and improve our water security rating to B-. These accomplishments reflect the progress we're making in reducing our environmental footprint while improving transparency. We also increased production of blended cements at our Tijeras and Rapid City plants. As a result, Blended cement represented 71.4% of total cement sales during the quarter, an increase of 1.7 percentage points year-over-year. This shift contributed to a 1% reduction in the Scope 1 CO2 emissions compared to the first quarter of 2024. In line with this strategy, we are conducting a study to convert CO2 at our Chihuahua plant to utilize calcined clay in cement production. Industrial testing and technical analysis are currently underway. Once completed, we would assess the equipment modifications and investments required to determine the next steps. This initiative will allow us to continue operating Kiln 2, which is currently used for oil well cement production, once the new line at the Odessa plant becomes fully operational and no longer requires Kiln 2 support. It also enhances our goal of expanding our portfolio of low-carbon cement products. As a follow-up to our carbon capture initiative, we announced last quarter we are currently completing the front-end loading Phase II of the FEED study for the pilot cryogenic carbon capture system at our Odessa cement plant. This phase includes a thorough assessment of both capital and operating costs. Once completed, we will evaluate the project's financial viability and determine the appropriate next steps with the decision expected this year. This approach reflects our commitment to advancing innovative low-carbon solutions while maintaining a rigorous capital allocation framework. Finally, moving to our profit pillar and market updates. In the U.S., weather significantly impacted operations through mid-March. The Polar Vortex brought record-breaking cold, snow and blizzards, particularly in our Northern and Rocky Mountain operations. In New Mexico, we experienced sustained low temperatures and heavy snowfall, while Texas has had some periods of unusual cold and windy weather. This contrasted with Q1 2024 when mild winter weather allowed for an early and strong start to the year. In addition, we had an unplanned outage in one of the finished mills at our Odessa cement plant that temporarily impacted our production volumes. Anticipating a longer repair time, we proactively communicated with our customers to ensure they could secure alternative supply and avoid disruptions. Thanks to the quick response of our team, repairs were completed within 2 weeks. While we did lose some volume during the outage, our priorities remain clear, protecting customer relationships and maintaining their trust. Today, the plant is running well and customers have returned to their normal purchasing levels. With the weather-related and outage interruptions now behind us, underlying demand remains encouraging. March volumes hit an all-time record. Customers continue to report healthy project backlogs and they anticipate 2025 demand will remain consistent with last year, supporting our current outlook. We are seeing good momentum in project execution. Work on the SunZia transmission project continues strong. We started Phase II of the I-10 project in El Paso, completed 1 wind farm and started another in Texas, and we are set to begin 4 new wind projects in Q2 across Colorado and the [ Dakota ]. In infrastructure, we're seeing strong bidding activity across our market. And this month, we began to work on the I-25 highway project in Denver. With less than 2 years remaining in the 5-year Infrastructure Investments and Jobs Act, only about 1/3 of the total DOT funding has been allocated. The states where we participate are estimated to receive around 20% of the highways program funding, providing a solid pipeline for the years ahead. Turning to Mexico. The first quarter was challenging, though not unexpected. We don't foresee a recovery in growth this year. But also, we don't expect Q1 pressure to persist. Weather disruptions were more severe than usual with quarters recording 33 days and Chihuahua 19 days of disruption, primarily due to sustained high wind. These conditions created quality and safety challenges that temporarily slowed construction projects. Volumes were further affected by the ongoing pause in the Industrial segment, especially at the border. Developers remain cautious in light of the macro trade and tariffs policy uncertainty and excess industrial buildings supply from accelerated construction in the previous years is still being absorbed. In addition, we no longer have the contribution of our 2 largest mining clients, whose operations closed in the second half of last year due to the depletion of their mineral reserves. Despite these headwinds, the residential segment continued to outperform with strong double-digit growth year-over-year. This helps to balance overall segment's performance and confirms the diversity of our customer base. Our Mexican plants continue to enjoy a low cost for natural gas and power, which combined with the depreciation of the peso, maintain a very competitive position to keep exporting into the U.S. From a capital allocation standpoint, our Odessa cement plant expansion remains on track and within budget. We recently took advantage of favorable financing conditions for equipment purchases totaling $135 million, secured 2 bank loan agreements with maturities of 5 and 10 years, further extending and strengthening our debt profile. Additionally, we are fully integrating the aggregate businesses acquired in Texas last year and have further expanded through the acquisition of property with limestone reserves to develop greenfield operations in Abilene, Texas. Abilene has been chosen as 1 of the key locations for the Stargate project with a major artificial intelligence infrastructure initiative and several new AI data centers, positioning GCC well to serve this expanding market consistent with our aggregate growth strategy in adjacent markets to our network. With that, let me turn the call over to Maik for his financial review.

Thank you, Enrique, and good morning to everyone. Starting with consolidated sales, we saw a decline of 9.6% compared to Q1 of last year. partly due to the foreign exchange impact. Excluding the depreciation of the Mexican peso, consolidated sales decreased 3.8%, reflecting market conditions, including weather and macroeconomic headwinds. In the U.S., revenue decreased 3.3% driven by challenging weather conditions as this year's Polar Vortex had a more pronounced effect than typical. Additionally, volumes were affected by the temporary finish mill outage at our Odessa plant. As a result, cement volumes decreased 4.3% year-over-year, while concrete volumes increased by 4.7%, supported by renewable energy projects. Pricing dynamics have remained stable, with cement and concrete prices rising 3% and 12.1% year-over-year, respectively. Turning to Mexico. Revenue decreased 20.7%, mainly due to the depreciation of the Mexican peso. If we exclude this effect, sales declined 4.8%. Cement volumes declined 12.4% and concrete volumes were down 12.7%, reflecting cautious market activity and reduced contributions from our mining operations. Cement and concrete pricing increased 5.2% and 2.9%, respectively. From a cost perspective, our cost of sales represented 69.1% of revenues, up 2.3 percentage points compared to last year, mainly due to unfavorable operating leverage due to lower sales volumes. Our disciplined approach to expense management continued to deliver results. SG&A expenses were 11.4% of revenues, representing a 40-basis-point decrease year-over-year. As a result, EBITDA was $73.6 million for the quarter with a margin of 29.8%. Net financial income totaled $7.5 million, reflecting our effective cash management strategies, offset by a lower average cash balance during the quarter. Consolidated net income was $40.6 million, translating to earnings per share of $0.12. Free cash flow totaled $13 million, decreasing mainly due to lower EBITDA generation and interest income as well as higher cash taxes and maintenance CapEx. Regarding capital allocation, we remain focused on strategic investments, with $68 million allocated during the quarter, primarily towards the Odessa plant expansion. Our balance sheet remains strong, ending the quarter with cash and equivalents totaling $873 million and a net debt-to-EBITDA ratio of negative 0.56x. In closing, our disciplined financial management positions us well to effectively navigate short-term challenges, while capturing strategic opportunities to create sustained value. With that, I will hand the call back to Enrique for his closing remarks.

Thank you, Maik. Despite current market uncertainties, we remain confident in our strategic direction, supported by the resiliency and speed to adapt of our teams. While I mentioned at the beginning that we were and remain cautiously optimistic, we're always prepared for unexpected economic and market shifts. With that in mind, we will double down on our cost and expenses reduction plans to ensure we continue delivering solid results even under adverse conditions. We have successfully navigated multiple market cycles in the past, and this is yet another opportunity to demonstrate our strength, backed by our robust balance sheet, disciplined operational approach and strong customer relationships we're well prepared to navigate current conditions and emerge even stronger. With that, this concludes our prepared remarks. And I will turn the call over to your questions. Operator, please begin with the first one.

[Operator Instructions] Our first question is from Alejandra Obregon with Morgan Stanley.

I was wondering if you could talk a little bit about cash costs, both in the U.S. and Mexico. So I guess I'll split my question into 2 parts. The first 1 is on Mexico. I mean, as you sort of break down your cash costs structure in Mexico maintenance, transportation, energy during the quarter. I was just wondering if there's any unique consideration specific to the quarter in terms of your cash costs, any material change in trends and perhaps whether the headwinds are related to other things, then that is not perhaps lower dilution of fixed cost because of the volume headwinds. So that's the first part. And then the second part is in the U.S. I was wondering if there's any sort of change or material change in your energy matrix for the quarter? Any sort of perhaps benefit? And this is in connection with your coal sales to third parties dropping materially in the quarter. So Just wondering if there's anything here that you benefited from in the Durango facility? Those are my questions.

Thank you for the call. This is Enrique. I'll give you some color on what we see and then we'll allow Maik to probably get more specific if needed. Basically, we don't see any different conditions in our cost structure, both in Mexico and the U.S. And definitely, leverage is a big point of why we're seeing, I mean, a cost increase, but the cost structure remains very solid. I will say that, in terms of energy, even though gas prices have had an increase -- a slight increase in some of our purchases this quarter, it has remained at very competitive prices, and we expect that to continue throughout the year. According to the futures that we see for the Waha basin where we've purchased all of our [ gas ]. So our cost matrix remains the same, and we don't see any different things or issues for the remaining part of the year. Actually, we'll see -- continue seeing it as an advantage, I mean, for our performance this year. Maik, I don't know if you have any other specifics that you want to comment?

Yes. Alejandra, again, on the energy front, we're really executing our flexible fuel strategy, for example, in the U.S., natural gas prices remain to be very competitive, and we're taking advantage of that. We've executed on some hedges for our Odessa plant as we have traditionally done. So we're now over 50% hedged for the Odessa plant with favorable conditions compared to last year similar for our Trident plant, we're more proactively looking at that. So I think those are benefits that we're going to see throughout the year from a fuel perspective. And for Mexico, very similar. We, again, still take advantage of the -- their competitive natural gas prices in addition to executing on our alternative fuel strategy, specifically for the Samalayuca plant, which we -- the plant we enhanced during the expansion almost 2 years ago now to more flexibility of alternative fuel. So all of that is intact. So we should see kind of the benefits throughout the rest of the year. So I think those are the main kind of drivers that you're going to see on the cost side.

Our next question is from Marcelo Furlan with Itau.

The first is related to U.S. cement demand going forward. So if you guys could explore a little bit further regarding what are the demand expectations ahead going through this U.S.-China trade war and potential impacts to the construction segment in the U.S. So if you guys could give your views regarding cement demand on that situation for the next quarters and also taking under consideration the infrastructure bill, IR Act and so on. And my second question is related to cement prices in the U.S. as well. You guys posted really good ready-mix prices in this Q. And so prices were resilient for the cement division in the U.S. So what are your expectations for prices going forward in this division? So these were my 2 questions.

Marcelo. Good morning. This is Enrique. As I mentioned in my remarks, we see a good, I mean, pipeline of projects and volume for the remaining of the year, especially in the U.S. So as I said, we are still within our guidelines in terms of volumes. I mean, it's too early to say if anything is related to the tariff, it's going to change or significantly change what we expect as of today, which is basically constant volumes very similar, I mean, to last year. In terms of prices, I mean, I'm very, I mean, encouraged by our price increase that took very well, I mean, during this April. And so everything is going well. As always, and as normal, small, I mean, hotspots here and there, but nothing major, nothing that tells us that the industry is not consistently, I mean, trying to recover cost inflation through these prices in April. So everything is going as expected.

[Operator Instructions] Our next question is from Ethan Cunningham with On Field Investment Research.

One of your questions just been answered. So I want to ask one of the questions that I already have regarding the volumes in U.S. and Mexico. Just some color, please. Is it fair to assume that the volumes will get worse compared to Q1, given that the uncertainty on tariffs? Or do you think that we can see better trends going forward into Q2 compared to Q1 of this year?

This is Enrique. I'm sorry, you were breaking up a little bit, and we couldn't get your questions here in the conference room. Can you repeat the question, please?

Yes, sure. I'm calling from London, that might be why the -- it's breaking up. So it's regarding volumes in U.S. and Mexico, is it fair to assume that volumes will be worse in Q2 compared to Q1 given the uncertainty on the tariffs? Or do you think that we'll see better trends in Q2 compared to Q1?

Thank you, Ethan. If I heard you correctly, I mean, we're talking about trends here on the first quarter compared to last year. I think the trends are, I mean, very consistent again with what we expected. We're not seeing really a change in trend actually. I mean, March shipments that were a lot stronger as I mentioned, a record high for March. April, going very well as expected. So no, we don't see any shift in trends at the moment. What I tried to explain it, onetime and variances related to basically weather and again, one issue that we had a mechanical issue that were in 1 mill in our Odessa plant. But aside from that, we're seeing a normal shipping patterns and expect, I mean, again, they used to perform well, very consistent with last year.

Our next question is from Erika Ross with Brown Advisory.

I guess there's a little bit of a follow-up on some of the previous questions with respect to the outlook for volumes. But I guess my question is specifically around oil well cement demand, given where oil prices have obviously gone and again, the pressure that you're likely to see around the uncertainty with respect to tariffs? And then my second question relates to the debt number that you reported as of the end of Q1. Obviously, you've got $100 million of additional debt. So I'm just wondering, specifically, if you've drawn on the RCF in Q1, and whether that will be repaid with the bank lines that you secured post the end of the quarter? So just trying to understand how to think about your debt figure and how that will trend going forward?

Erika, this is Enrique. I want to take your first question on cement volumes, especially related to energy. And Maik will address, I mean, your question on the additional debt. So far, we're confident, I mean, the Permian Basin will continue, I mean to work, I mean, as expected with oil prices around 60s, low 60s. We know that the premium basin is very competitive, probably the most competitive basin in the U.S. So as long as we, I mean, continue with oil prices around those levels, we're confident that the demand will stay strong, I mean, for our shipments of oil well cement in the -- and so far, we have not had any negative comment from our customers, although some of them say, I mean, there's obviously a little bit of wait and see what the policies, I mean, will then result in, I mean, for the investments in further exploration and drilling, I mean, over next year.

Erika, this is Maik. Regarding the additional financing, here, we took advantage of some good conditions related to the equipment for the Odessa expansion, very competitive market conditions we got there. And importantly, part of that debt is over a 10-year period. So it gives us some additional flexibility. The other part is over 5 years. Those were the main drivers to kind of take advantage of that and to further kind of strengthen the flexibility and the balance sheet that we have as we're still continuing to look for M&A opportunities and additional growth, both on cement and -- so those were the main drivers why we did that.

Okay. So the $100 million of additional debt that we see at the end of Q1, will that go up by a further $135 million or...

No. The $100 million that was recorded in Q1, there is an additional $35 million depending on the delivery schedule of the equipment that we'll record. So there's a little bit of timing, again, based on the equipment in order to take advantage of those financing conditions. So the only addition that to come is $35 million.

Understood. And then if I may, just 1 final question. I think, in 2024, if memory serves me correctly, it was approximately 10% or 11% or so of Mexican volumes that you were exporting presumably to the U.S. Given where we are with tariffs, what -- are we expecting that essentially to go to 0 and be redirected towards the Mexican market and then still have Mexican volumes flat?

No, Erika. This is Enrique again. No, we so far don't expect any negative effect from tariffs on Mexican cement coming into the U.S. So we are planning to continue exporting as usual. It's mostly from our Samalayuca plant and some oil well cement from our Chihuahua plant with no interruptions. So we're good to go.

But presumably passing on higher prices than to customers?

No, we followed, I mean, our policies about pricing are, I mean, the same irrespective of where the cement has been sourced in our case.

Our next question is from Daniel Rojas with Bank of America.

My first question is regarding blended cement. You've given some idea for where you're moving in this direction in the U.S. But could you give us more color on how you see this in terms of cash cost and your ability to extract more profitability from returns on that you sell? I know it's hard, but just to give us an idea of how this impact profitability would be of help? And my second question is regarding carbon search. It looks like you're moving along with this project, but there are a lot of moving pieces, especially how much in terms of tax credits you're going to be able to extract, which kind of CO2, the upfront cost? Any idea of the economics that you can share with us will also be very helpful.

Daniel, this is Maik. Let me take the question on cash cost and then Enrique will take your second part there. As we already remarked, the first quarter was more driven by the leverage of a little bit lower production and the lower sales. That should all normalize as we're now going into kind of the main shipping season. As already commented, we see some good shipments, good demand. And on the cost front, again, we're very positive that the key drivers on costs, we have them under control, mainly through the fuels, energy, raw materials. So big picture, you should see a normalization of the cash cost as we're working through the year and no specific events or items that we at the moment, foresee changing that outlook.

On your second question, Daniel, this is Enrique, as I mentioned in the remarks also, we continue firmly with our road map in terms of sustainability. And even though there are, I mean, uncertainties about what's going to happen in the U.S., especially with subsidies like the 45Q, I mean, tax credits and a grant from the DOE, et cetera., I mean, we continue working in our pilot project, I mean, specifically under the FEED study at this moment to evaluate if there is, I mean, a future for this technology, and if it's financially viable or not, we don't know much yet about what's going to happen with this subsidy. So this is obviously going to play in the financial analysis and see if, I mean, the lack of those potentially tax credits will make this project viable or not. So we are evaluating that as we speak and we'll continue and we'll have a decision during this year.

Ladies and gentlemen, thank you. This will conclude our question-and-answer session. I'll turn the floor back over to Ms. Ogushi for closing remarks.

Thank you again for your time and continued interest in GCC. We look forward to speaking with you again soon.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.