CEMEX SAB de CV Q4 FY2023 earnings call

Management Statement and Operational Highlights

• 2023 Performance: Full year EBITDA grew 20% to $3.35 billion, margin expanded by 2 percentage points, free cash flow after maintenance CapEx was $1.2 billion, leverage ratio declined to 2.06x, return on capital expanded to close to 14%. Net Promoter Score reached a new record, and CO2 emissions reduced by 4%.
• Regional Dynamics: Mexico had positive volumes due to formal sector demand; U.S. volume decline was due to weather, lower demand, and market share loss; EMEA volumes declined due to economic slowdown in Europe.
• Growth Investments: 2023 had 295 completed projects with an investment of $1.3 billion, generating $325 million of EBITDA and $86 million of incremental EBITDA. Total approved project pipeline is $2.9 billion.
• Shareholder Return: Board intends to propose initiation of a sustainable dividend program with a 2024 dividend of $120 million payable quarterly commencing in second quarter.

Segment Performance

• Mexico: 2023 saw strong results with sales and EBITDA growing in the mid-teen percentage area, supported by strong volumes and price increases. Formal sector demand related to infrastructure and onshoring activity drove cement volume recovery. For 2024, low single-digit volume increases across all products are expected.
• U.S.: Posted record full year EBITDA of over $1 billion in 2023. Despite low volumes in cement and ready-mix, EBITDA grew 37% due to pricing strategy, growth investments, and decelerating costs. 2024 expects low single-digit increases in volumes across all products, with optimism in industrial infrastructure sectors and potential improvement in the residential sector.
• EMEA: Full year EBITDA rose 7% while EBITDA margin expanded by 0.3 percentage points. However, the fourth quarter was impacted by slowdown in construction activity in Europe and major maintenance in the Philippines. For 2024, flat to low single-digit increase in cement volumes is expected, with mid-single-digit declines for ready-mix and aggregates.
• South Central America and the Caribbean: After a challenging 2022, sales and EBITDA rebounded in 2023. For 2024, flat volumes across all products are expected as formal construction continues to scale on the back of infrastructure projects.

Guidance

• EBITDA expected to grow between low to mid-single digits in 2024 based on December 31 FX rates and operations.
• Cost inflation to continue decelerating, with energy cost per ton expected to decline mid-single digit.
• CapEx expected to be $1.6 billion in total, with $1 billion for maintenance and $600 million for strategic.
• Working capital expected to reduce by $300 million as continuing to execute on working capital initiative.
• Cash taxes expected to be approximately $1 billion, including the tax fine in Spain.

Risks

• Macro economic challenges in some markets, such as slowdown in economic activity in Europe and adverse competitive dynamics in the Philippines.
• Potential market share loss in some regions due to pricing strategies.
• Exchange rate fluctuations impacting debt and financial performance.

Question and Answer

Q: Congrats on exceptional 2023. Would it be possible to share with us where you see maybe upside risks to your current volume expectations, but also the downside risk in Mexico and the U.S.?

A: Ben. Well, that could be the case, but we are taking that builds our base case scenario. Remember, in both countries this year is an election year earlier in Mexico than in the U.S., but anyhow, in both cases, there will be this election process. We will continue observing the dynamics. There are positives. For instance, in the case of Mexico, demand coming from the strong activity because of nearshoring, particularly in the north of the country. And then the projects in the Southeast, they are not finished yet, meaning there is activity still going on for the rest of the year. So again, it's -- there are reasons to believe that the way volumes are going to go is going to be positive. We would like to take this stance, which we believe is reasonable. We will monitor, and we will continue guiding according to the way we see the variable evolving. Maher Al-Haffar: And if I could add, Ben, also in the case of Mexico, I mean, we -- as you saw, I mean, volumes were actually accelerating in the second half of the year. And we expect that to continue, particularly with the large projects in the southern part of the country and the demand for industrial in the northern part of the country. Also, bag cement turned positive in the second half of the year last year in the third quarter and continue to proceed. And with a deceleration in inflation and an expectation of interest rate cuts, we do expect some improvement in housing going into the year. So -- and again, I mean, you also have to take a look at historically, the dynamics around elections also translate to positive kind of dynamics for our business as well. So the outlook for Mexico in terms of volume should be fairly healthy. The market is pretty sold out. And so there should be also very interesting supply-demand dynamics as well and supporting recovery of inflation in our business in Mexico. Now as far as the U.S. is concerned, we're quite optimistic about the U.S. Obviously, we're coming from a very challenging year from a volume perspective in the U.S. volumes declined around 13%. A good portion of that -- one-third of that was due to weather last year that we were not able to recover during the course of the year. Another piece of that is really slowdown in demand and completion of some projects that we have in our portfolio. And one-third of that was due to competitive dynamics because of pricing. And as Lucy mentioned in her remarks, loss of market share that we expect to responsibly recover in the short-term. Now we're guiding towards low single-digit increases in cement, and we're pretty constructive about that. We think that we have been one of the biggest laggards in our business in the U.S. is the residential sector. And that is beginning to show some very strong signs of stabilization with some consecutive quarterly improvements, particularly in single-family residential starts and permits. And as inflation, again, continues to decelerate and the outlook for interest rates improves, we think there's an enormous amount of pent-up demand in residential. So that should help a lot. Infrastructure continues to be half of our business. And again, as mentioned in the remarks, there's a lot of fiscal projects supporting that and that are accelerating, particularly in an election period as well. And if you take a look at construction put into place and infrastructure has been quite positive. And the area that their headwinds, I would say, is on the commercial side, which we're seeing it pretty much everywhere. But it's somewhat being offset by what's happening on industrial. And that's -- most of industrial projects are being driven by supply chains, being reconfigured and redefined, energy issues, clean tech initiatives. So we are expecting after an important headwinds in volumes last year to be doing much, much better in terms of volumes coming into '24.

Q: My question is related to your pricing strategy. The last two years, you've implemented an increase in prices in 2x during the year, beginning of the year and then in the summer. Should we expect something similar? Or will you be going back to increasing prices once a year? That's primarily for Mexico and the U.S.

A: I think the pricing strategy that we are going to be displaying this year in essence, is the one that we defined in late '21, early '22 when we saw inflation going to much higher levels than whatever number of years before, meaning our pricing strategy should be designed or it is designed to recover input cost inflation, meaning protecting our margins. So what is it that you can expect in 2024, the same principle. Now '22 and '23 were very different and '24 is going to be even more different. Meaning, in '22, inflation started going up at a higher rate than what we thought and our prices did manage to recoup that inflation. The opposite happened in 2023 when our pricing strategy are already a tailwind, and we continue with the idea of recovery in input cost inflation thinking that inflation was not going to drop as fast as it did, meaning a very material drop of inflation in the second quarter of last year. So starting 2024, our pricing strategy is designed to recover the levels of inflation that we are estimating to have during the year. Things might change, scenarios might change, and we are prepared to make a number of additional increases if that's what it takes for us to cope with inflation. So the strategy is not defining how many price increases we're going to have in a year, but how are we doing with the objective of recovering cost inflation. We are guiding for our cost, particularly energy to decrease by mid-single digit. So you can expect a much lower inflation in our input cost structure. And because of that, a lower level of price increases. And again, if needed, we will do a number of price increases in different markets to assure that we at least maintain the margins we already recovered during 2023.