Good morning. Welcome to the CEMEX Third Quarter 2022 Conference Call and Webcast. My name is Lauren, and I'll be your operator for today. [Operator Instructions] And now, I will turn the conference over to Louisa Rodriguez, Chief Communications Officer. Please proceed.

Good morning. Thank you for joining us today for our third quarter 2022 conference call and webcast. I hope this call finds you and your families in good health. I'm joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO. As always, we will spend a few minutes reviewing the business, and then we will be happy to take your questions. Before we begin, I would like to quickly remind you about our CEMEX Day event taking place on Wednesday, November 16. This event will be a live webcast presentation where our CEO and top management will focus on climate action, our digital and growth strategy and provide a medium-term outlook on our regions. You can find further details on our website. And now I will hand the call over to Fernando. Fernando?

Thanks, Lucy, and good day to everyone. Before I begin, during the quarter, we experienced severe weather events that impacted our local communities in Florida and the Caribbean. We are doing whatever we can to support and reconstruction efforts in the communities in which we serve. Our thoughts are with all of those who have been affected. And now to discuss the quarter. Our top line grew 13%, driven by double-digit price increases across all products. While the magnitude of our pricing increases has been significant, it has been more than matched by relentless input cost inflation, particularly in energy, with consequences for our EBITDA and margin. To date, pricing has been able to offset inflationary cost in dollar terms, but has not yet succeeded in regaining margins. We continue to see inflationary headwinds that outpaced our pricing efforts, particularly in Mexico. We are making some progress, however, as in the quarter, we did see 2 regions begin to recover margins in cement, our most energy-intensive product. While U.S. results were significantly impacted by hurricane Ian in September, the region showed a nice recovery from the supply chain disruptions and the maintenance cost of the second quarter. Once again, our EMEA region showed remarkable resiliency, growing its EBITDA for 4 consecutive quarters. The urbanization solutions business continues to grow rapidly. On climate action, we continue our streak of sequential declines in carbon emissions. During the quarter, we submitted a revised climate action road map to SBTi for alignment under the 1.5-degree scenario. We have made progress against our goal of rebalancing our portfolio with almost $600 million in divestments year-to-date. Regarding our deleveraging efforts, we reduced total debt by approximately $540 million, while our leverage ratio decreased to 2.82x. Net income, excluding goodwill impairment charges, was approximately $450 million higher…

Thank you, Fernando. Despite the decline in cement volumes, net sales in Mexico grew 9% on the back of our pricing strategy and a pickup in formal sector demand. While year-over-year comps became easier in the third quarter, we continue to experience volume declines in bag products. We attribute this movement to the normalization of bag cement demand from the pandemic peak, inflationary pressures impacting retail consumption as well as temporary market share loss related to our pricing strategy. Bulk cement and ready mix continued to grow, supported by the industrial and commercial sector and infrastructure. Near-shoring activity in the border states, the construction of distribution and logistics networks as well as tourism are driving volumes in the formal sector, with year-to-date projects announcements of more than $12 billion in private investments for industrial and logistics base. EBITDA and EBITDA margin declined due to higher fuel, maintenance, distribution, raw materials as well as product mix. Maintenance outages coupled with flooding and supply chain issues, disrupted logistics in the northern part of the country, where supply-demand dynamics are the tightest. This led to a significant increase in distribution costs in the quarter as we sent product longer distances and had to rely on more expensive spot freight to meet customer demand. We estimate that these issues, which we believe are temporary, accounted for a headwind in year-over-year margins of approximately 2.2 percentage points. With our objective of recovering margins in mind, we announced a 7.5% increase in bag cement prices effective October 10. Additionally, we continue making strong inroads in our alternative fuel strategy. Alternative fuel usage reached 38% in Mexico, almost 14 percentage points higher than the prior year. The move to alternatives, not only benefits society, but is also an important lever in combating energy inflation. Finally, the high…

Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are pleased with our strong pricing traction in all of our core businesses throughout the year. We continue to manage our pricing strategy to recover the margin loss to input cost inflation. We had a positive free cash flow after maintenance CapEx in the third quarter, but lower than last year due to higher investment in working capital and maintenance CapEx. The higher investment in working capital year-to-date is primarily driven by healthy top line growth as well as the inflation effect in our inventories, in addition to the inventory buildup necessary to address continued supply chain tightness. We expect to partially reverse the investment in working capital during the remainder of the year. The increase in maintenance CapEx relates primarily to the delayed delivery of mobile equipment and spare parts last year, which pushed our maintenance calendar into this year. During the quarter, we generated net income of $494 million versus a loss of $376 million in last year's third quarter. This increase was driven primarily by asset impairments in the prior year, lower financial expense, a gain from liability management activities and the sale of Costa Rica and El Salvador. Return on capital employed for the last 12 months stood at 12.7%, excluding goodwill, well above our cost of capital. As regards to our balance sheet, we're pleased with the evolution of our debt with a reduction during the quarter of our total debt of $540 million and consolidated net debt of $454 million. As we did earlier in the year, during the quarter, we repurchased $654 million of our bonds at very attractive discounts, contributing to a reduction in debt of $91 million. Year-to-date, we have purchased $1.2 billion of our bonds. We partially funded…

Our progress in regaining margins has been delayed due to persistent inflationary headwinds. Therefore, we are adjusting our EBITDA guidance to better reflect the current cost reality as well as FX volatility. We now expect 2022 EBITDA to be around $2.7 billion. As always, our guidance is based in like-to-like assets as well as the foreign exchange at the time of guidance. With higher-than-expected fuel and electricity costs, we expect energy cost per ton of cement produced to increase around 40%. Investment in working capital is expected to be around $250 million, $50 million more than our previous guidance. We now expect maintenance CapEx to increase by $50 million to $850 million, with anticipated total CapEx of $1.35 billion. And now back to you, Lucy.

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to prices for our products. And now we will be happy to take your questions. In the interest of time and to give other people an opportunity to participate, we kindly ask that you limit yourself to one question. If you wish to ask a question, please press followed by 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press followed by 2. Press 1 to begin. And the first question comes from Carlos Peyrelongue from Bank of America. Carlos?

My question is related to the U.S. Can you provide some color for next year regarding volumes. The PCA is seeing housing volumes declining double digits next year. But as you mentioned, infrastructure spending is helping to compensate. If you could provide some color as to the expectation of both of these forces. And if you think infrastructure can compensate the expected drop or at least partially compensate the expected drop in housing?

Fernando, would you like me to take that, please?

Yes, go ahead. Go ahead, Maher.

Yes. Very quickly, Carlos. I mean, the market that we have seen softening in the U.S. is residential. And really, we've only seen that softening in some of our markets. One of the areas, for instance, selectively has been the Bay Area in San Francisco. I mean, first, I would like to say that for us, demand for the housing market is probably around 30% to 35%. That's the expectation in terms of the volume. And of course, we do expect some downturn, mild downturn, they're tightening credit lending conditions. However, I'd like to say that households are stronger, jobs are better. There are low inventories, for instance. True that mortgage rates have gone up, but they are likely to normalize. Rents are also going up quite rapidly, which at some point in time will translate again into increased demand. So on the housing side, we're seeing a little bit of a slowdown. But then offsetting that, which is about 2/3 of our business is infrastructure, which is about 50%. And then you have industrial and commercial, which is somewhere between 15% to 20%. And in infrastructure, we see actually quite a bit of backlog right now. I mean if you take a look at contract awards, in our key states, they're up 11% on a trailing 12-month basis, and that's very healthy. And frankly, with elections coming up and with elections coming up in '24, the pressure on the government is going to be very high to continue to disburse. There are other fiscal stimulus programs that are there. There's the Inflation Reduction Act. There's the CHIPS Act. There's a number of spending programs that are likely to translate into an acceleration in infrastructure going into '23. Now Industrial and Commercial is another area that we're beginning to see a very important uptick, not only in the U.S. but also an impact of that is happening in Mexico as well. And that is a function, frankly, from a lot of the near-shoring or French shoring, let's say, that is taking place. You've heard of the recently CHIPS Act, that's a $53 billion funding program that is translating to a build-out of chip manufacturing infrastructure in the U.S. You have the Inflation Reduction Act, which we mentioned, that's $370 billion. The only reason I'm throwing a lot of these numbers at you is that, yes, we do expect housing to moderate, but moderating under very healthy conditions, totally unlike the last time that we've seen a situation like this. But then on the other hand, we think that there are some countercyclical measures that are likely to kick in, which are infrastructure and industrial and commercial. Now it's a bit too late. We're just in the budgeting process. So I can't give you kind of where we have in terms of guidance in terms of next year, but on balance, I mean, we're expecting the situation to be probably neutral to sort of modestly weaker going into next year.

Maybe I could just add. I think the real question in this is an issue of timing, and that is so far, we really haven't seen the impact of residential anywhere except in Northern California. But we are, of course, expecting it to weaken. It's difficult to project how fast that happens. And at the same time, it's very difficult to project how quickly the contract awards numbers, which are extremely healthy for our 4 key states, not only for infrastructure but also for industrial and commercial, how that ramps up. So it anyway..

Carlos, one thing I wanted to mention also that is very important is that as you probably know, a big percentage of our sales in the U.S. right now are imports. And so to the extent we see and those imports are coming in at because of transportation costs are coming in at a very low margin at the margin. And so we think, if we see a moderation coming into '23, the big relief valve is going to be through reduction in imports, which are not big contributors to EBITDA at the end of the day or EBITDA margin. So that's another, I would say, risk mitigator to a possible slight turndown in the U.S. demand.

Great. And the next question comes from Vanessa Quiroga from Credit Suisse. Vanessa?

Yes. Can you clarify on what led to the above-average investment in inventories in the quarter, and if this is coming from a specific region or country? And maybe if it's possible to quantify the impact on Mexico margins from weather, diesel prices, and other logistics challenges?

Fernando, do you want me to take the inventories?

Yes. Go ahead with inventory. I will take the other one.

Yes. Vanessa, if I could go very quickly, and I think it's important to review the whole working capital thing, not just the inventory. As you know, the working capital investment increased by around $431 million so far. And very important to stress that close to $285 million of that is due to clients. And the reason for that is very simple, because of higher sales. However, I would like to stress that if we take a look at days receivables in our business, those have been flat. So really, the increase that we're seeing, the biggest chunk of increase in working capital is coming from clients, and it's totally as a reflection of higher sales. There are no deterioration in credit terms for our portfolio. There are no changes in suppliers. The big issue, as you highlighted, is in inventories. And the increase in inventories is about $170 million, or 6 days of inventory. Now 3 days of the 6 are essentially a build-out of product inventory. So you have finished goods, you have goods in progress, you have goods in transit. That's about $70 million out of the $170 million. Then the next piece that is very important, which is accounting for the other half, it's essentially 2 days that are for materials and spare parts and one day is for petcoke. And most of the petcoke increase is due to an increase in price, and 40% is because we've actually increased inventories of petcoke as time passed by. And so that's -- and then there's some other items that are close to $78 million that are essentially because of special items that occurred last year that did not occur this year. But on the inventories part -- and frankly, this is happening throughout our portfolio. I would say, if I wanted to highlight one particular country in terms of petcoke, would be Mexico, and that's because Mexico has the highest exposure to petcoke, and they've built out the highest inventory. So that's, in summary, what's happening to working capital and inventories in particular.

Okay. If I can take your second question, Vanessa, regarding margin deterioration, particularly in Mexico. Let me start by saying that on the 6.4 percentage point decline, about 47% of that decline is explained either by timing on maintenance, meaning different timing of maintenance same quarter last year compared to this quarter; some one-offs and product mix, for instance, as you saw, our volumes in Mexico in cement are dropping while our ready-mix volumes are increasing. So that combination it changes the mix of products with different margins, and that is impacting about 0.8 percentage points, just this mix effect. On higher maintenance, which is not necessarily highest expense, but it is during the quarter. That is impacting about 1.5 percentage points during the quarter. And then there were a few plant disruptions because of floods and the likes impacting also for 0.7 percentage points, which -- and when these disruptions happen, there are some additional logistics expenses to support the markets from other plants. And the rest, the other 53% is basically what we've been commenting is fuels and raw materials in cement and ready-mix. So the pricing contribution of 10.8% was not enough, as we commented, to gain back margins. So we have already recovered input cost inflation, but recovery in margins is still work in progress.

Okay. That's helpful, Fernando. And anything related to issues on the railways and having to use ground transportation for products or volumes got -- where [indiscernible]?

Those are the type of disruption, I used the example of floods, but there were a couple of issues with railroads, one in Sonora in the exports from Campana to the U.S., and the other one in the east [indiscernible], those were temporary. Both are solved. So -- but yes, it did impact together with the floods and other type of disruptions.

And the next question comes from the webcast from Francisco Chavez from BBVA. How sustainable is your pricing strategy with increasing signs of weakness in cement volumes, particularly in Mexico, [APAC], and Europe?

Well, what can I say, we've been -- since early this year, we've been saying that we are targeting a pricing strategy in order to recover our 2021 margins, and that's what we've been doing. And that's what we'll continue doing, given that [indiscernible] to achieve that target. It is challenging to continue executing this strategy, but I do believe it's doable. I think pressures are spread all over the industry. And although we don't have a certain outcome, we do believe that it's doable. Look at the example of Mexico this year, look at volumes, look at market share, look at pricing. So we'll continue with this strategy. By the way, the strategy in 2022 has not finished. More than 40% of our volumes were -- we did increase prices for more than 40% of our volumes in October, depending in each market, in conditions, but we are moving from -- in some cases, from a low-single-digit to a high-single-digit in tin October to continue executing this strategy of recovering margins. So challenging but doable.

Okay. The next question comes from Gordon Lee from BTG Pactual. Gordon?

Just a very quick question on Europe. Thinking a little bit about the programs announced both by Germany and the U.K. to soften the impact of rising energy prices in the winter. I was wondering whether you have either a qualitative or quantitative comment on where you think that might help costs and overall demand maybe as well as we move into the winter and it's early next year?

Gordon, I'll take -- try and take a stab at that in answering your question. Number one, very important that in Europe on -- you're specifically talking about electricity or you're talking about fuels as well? Just electricity?

Electricity.

Yes. So, just to put into perspective to everybody, the European business accounts for roughly 15% 0of our consolidated EBITDA. And very importantly, close to 70% of electricity needs are actually fixed for this year, and close to 30% of that is fixed for next year. And these contracts range between 1 to 1.5 years on average. Now the -- in the case of Europe, in terms of cement, the electricity represents about close to 20% of total cost. And within our footprint, it's very important, the area that is probably most exposed to what's happening in Europe in terms of Russian gas and the impact on the cost of electricity is Germany. And in the case of Germany, actually, we don't use gas as fuel. And most of our electricity prices are fixed, close to 90% of our electricity prices are actually fixed, and they come from waste-to-electricity system that is owned by a third party that is fed with RDF. And that contract is going to be renewed for another 15 years, and we should not have any problems in terms of the escalation in the price of electricity in Germany. Spain is probably the most floating rate exposure that we have. And there, the capping of the nat gas that started in June, and it doesn't expire until the middle of next year essentially. In the U.K., I think we will be favorably impacted, frankly, by what's happening there. So bottom line, at the end of the day, despite of the volatility that has been taking place in the spot market, number one, we do think that the markets will settle down to something more stable as a consequence of these dampening programs that are being put into place. But our exposure to electricity there is not as material as some of the other industrial players that may be out there. And in particular, like I said, in Germany, it's fairly de minimis from our perspective. Does that answer your question, Gordon?

Yes, it does.

Great. And the next question comes from Anne Milne from Bank of America. Anne?

So I have a question or questions related just to the debt structure. I like that you guys have been reducing debt. I think that's great. Maher, you said that there would be likely further reduction maybe in the fourth quarter, obviously, going forward. And so I just have a couple questions, but it's all related to debt. Don't get upset, Lucy. Will this likely take the form of buybacks at a discount since some of the -- many of your bonds are trading at discounts right now? Also, I see that you shifted a little bit from fixed to floating rate in the quarter. I think you mentioned, Maher, that the floating rate has linked to the euro. So would that offset any higher interest rates you might have as a result of that? And then just how much of the perpetual is in your debt total? Is it $500 million of the $1 billion you have outstanding? That's it. Just a little bit of information on that.

Yes. Obviously, as you know, we've been very active this whole year, right? We bought close to $1.2 billion, and we generated about $160 million of net present value for our shareholders. Whether we'll continue or not? I have to say the prices out there are very attractive. Unfortunately, our bonds are not very liquid. And the last tender offer that we did, which I was expecting to get a big oversubscription, we barely just got under the line with the amount, which meant that we priced it properly and there's not loose bonds out there. Now of course, we're always on the lookout, right? And we do have a fairly sizable committed revolving credit facility that is attractively priced that we can, from time to time, take advantage of the -- of market discounts. And for the time being, I think we're lying low because we're also not interested in shortening duration that much and clustering a lot of the maturities in the middle of our debt stack. But we're always on the lookout. Now in terms of fixed versus floating, as you know, when rates were very low, we went into overweight fixed. And as rates started rising, we started switching slowly from fixed to floating. We think our natural mix is somewhere between 70:30, 75:25. We're awfully close to that, and we'll be there by the end of the year. Now most important is the point that you mentioned is that the portion that is floating is currently 56% based on EURIBOR. And EURIBOR is about 300 basis points lower than dollar LIBOR. And we expect that differential maybe not to stay 100% where it is, but we certainly expect to have a healthy differential between that and dollar. So we feel reasonably comfortable with that. And of course, to the extent that euro start appreciating, we will trim back some of our cross-currency swap position that we have on the books to reduce that. In terms of the perp, that's trading at a very interesting and very attractive rate, and so we'll continue to look at that.

Great. And the next question comes from the webcast from Yassine Touahri from On Field Research. Would you expect some fuel deflation in 2023, given the recent decline in petcoke and coal prices?

Let me take that one. Well, we've seen a positive trend already in production of certain type of fuels. Now going deeper into the reasons, we do believe that this trend might continue, but still in a very volatile manner, particularly when referring to petcoke. There are some dynamics that can change pricing trends. But in general terms, we've seen positive adjustments since the peak after the war. And to some extent, we should continue seeing those trends. Now let me make one clarification. When you think in the impact in our production cost, we cannot directly relate the reduction of this type of fuels to our input cost inflation. There is an inventory effect. Our fuel mix has been changing. You know that we are increasing materially our alternative fuels and reducing other primary fuels, for instance, petcoke primarily. So there could be a delay in different regions. There could be a delay on prices or the impact in our cost for about 4 to 5 months. So when taking that into consideration, please don't forget that there is a delay because of inventories.

And the next question comes from Alberto Valerio from UBS. Alberto?

Just a question on looking forward to next quarter. Hello, can you guys hear me?

Yes.

Yes, Alberto, you're a little weak. Yes.

Okay. I'll try to speak a little bit louder. My question is about next quarter, the results that we need to have next quarter to meet the guidance, so if you take quarter-over-quarter, adjusted by seasonality, the fourth quarter is not a stronger one. So I would like to know [indiscernible] to improve? And what are you seeing as improvement for next quarter? You mentioned the hurricane that impact $11 million was for next quarter. We need a little bit more to improve to meet the guidance. So if you could provide any color why you guys are seeing that's better in the fourth quarter than the third quarter to meet the guidance.

Yes. Just a second.

You want me to start off, Maher.

No, I got it. I was just trying to recall. So Alberto, first, I think in order to answer your question, I think it's important to talk where we're starting from in terms of guidance, right? we had a guidance that was around [$2.9 billion] and there's some adjustments that needed to take place to take us to where we're thinking right now, right? And as you know, we divested our interest from our digital accelerator Neoris. That accounted for about $26 million of EBITDA. So you need to adjust the guidance to that. And then typically, as you know, when we give guidance, we give guidance with FX as of the time that we do it. So if you take -- if you give effect to the change in FX from the last time we gave guidance until now, bottom line, you start with a basis of guidance of around [$28.40 million], okay? And then we changed guidance on energy, we talked about Hurricane Ian. We talked about the impact of Hurricane Fiona. Ian had an impact of about $20 million worth of EBITDA. The energy guidance would have about a $60 million for the full year. Fiona had a few millions, and then there's a couple of other things that would adjust. So we ended up with $2.7 billion for the year. Now this is not a guidance. You're doing the numbers, but to reach the full year guidance, that would imply an EBITDA for the fourth quarter of about $650 million, which is around 1% higher year-over-year basis. Last year's fourth quarter was $644 million. Now depending on what happens, we'll see. But essentially, we do think that pricing is going to continue to do fairly well. We do think that demand is likely to be also doing fairly well. And so you guys -- you can do your own sensitivity in terms of what's likely needed to get that, but we think it's a pretty reasonable assumption to get to that fourth quarter to get us to the full year.

And maybe if I would add that maintenance outages also we're expecting them to be fairly stable on a year-over-year basis and down on a sequential basis.

Yes.

The next question comes from Ben Theurer from Barclays. Ben? We might have lost him. Ben, are you there? Okay. I think this will be the last question, but Bruno Amorim from Goldman Sachs. Bruno, please go ahead.

Is it possible to share with us the percentage of your total cost that comes from transportation contracts with third parties. I'm just trying to understand to what extent you are indirectly exposed to energy costs. Your service provider, they probably adjust freight prices according to variations in diesel and bunker prices and so on. So anything you can share in that sense would be helpful. Also, if you could comment on how often they adjust the prices that they charge from you? Is it monthly, annual, or whatever, the periodicity is? And second, if you could make a quick comment on how effective this price increase announced on October 10 in Mexico has been so far?

Fernando, do you want to comment on the pricing and then I'll deal with the...

What I can comment -- again, I commented that slightly more than 40% of our cement volumes we are executing an additional price increase in October. Early to say the dynamics are -- we're going through the dynamics already for about 3 weeks. And given that the increases have been a wide range from low single digit to high. We're positive on the trend, but early to say how much we're going to realize from this effort.

Okay. And if I can address the distribution question on diesel. Distribution, including in our ready-mix business, is about 20%, 21%, both COGS and SG&A. And it's roughly -- the diesel component represents about 3%, so that's about -- for the full year, it's about $250 million, and that's for direct diesel. We guesstimate that the amount of diesel or transportation that is done by third parties is about the same amount. Now we fairly actively hedge our diesel exposure. This year, we had close to 75% or so of the position hedged. Going -- looking into next year, we're already close to around 75% as well. Now we are also looking actively or more actively hedging third-party exposure as well. And there is definitely a correlation in terms of transportation cost by third parties to us and diesel expense -- diesel cost in the market. So I don't know if that answers your question.

Yes. That was very helpful. Just to clarify, this exposure to diesel through third parties, is it included in that breakdown of energy costs that you usually provide to the market or not?

No, it's not. The guidance that we give is on the directly managed item. That portion would come through the transportation cost element. And I'd like to say the hedging strategy this year has been quite successful and contributed importantly to the bottom line because that hedge goes through the EBITDA essentially and distributed to the businesses.

And maybe if I could just add, Bruno, what we guide to is the energy for the production of cement, which includes fuel and electricity for cement only and transportation is separate. So, okay?

Yes.

Okay. We appreciate you joining us today for our third quarter webcast and conference call. If you have any additional questions, please feel free to contact Investor Relations, and we look forward to seeing you again at our CEMEX Day webcast on November 16. Many thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.