Good morning, and welcome to the CEMEX Fourth Quarter 2023 Conference Call and Webcast. My name is Brika, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

Good morning. Thank you for joining us today for our fourth quarter 2023 conference call and webcast. We hope this call finds you in good health. And even though it's already February, let us take this opportunity to give you our best wishes for 2024. While we are here to talk about 2023, we hit the ground running in January and are optimistic about the opportunities that 2024 presents. I am 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. And now, I will hand it over to Fernando.

Thanks, Lucy, and good day to everyone. Thank you for joining our call today, and I would like to extend my best wishes for a healthy and successful 2024. I am pleased to present to you today the results of what was an exceptional year where we delivered not only record results, but achieved our goal of recovering from the extraordinary inflationary pressures over the last few years. This performance is a testament to the focus and commitment of our employees around the world. 2023 results were achieved despite a challenging demand backdrop in most markets. Full year EBITDA grew 20%, reaching a record $3.35 billion. Growth investments contributed to 13% of incremental EBITDA, while organization solutions grew on the double-digit area. With margin expansion of 2 percentage points, driven by strong pricing and decelerating cost inflation, we reached our goal of recovering 2021 margins. Free cash flow after maintenance CapEx of $1.2 billion was a highlight, growing $655 million on the back of higher EBITDA and a turnaround in working capital investment. Our leverage ratio declined by 0.8x of a turn to 2.06x already within investment-grade credit parameters. And finally, our return on capital for the full year expanded by 1.5 percentage points to close to 14%, excluding goodwill. Importantly, our 2023 results add to several years of resiliency in EBITDA leverage and strength in free cash flow generation. This new foundation allow us more flexibility going forward for deleveraging, accelerating our existing bolt-on growth strategy as well as allowing us to propose the initiation of a sustainable shareholder return program. On the customer centricity front, we closed the year with an important improvement in our already high Net Promoter Score, a new record and a benchmark for the industry. In climate action, 2023 represents another year of important…

Thank you, Fernando. Our Mexican operations delivered strong results during 2023 with both sales and EBITDA growing in the mid-teen percentage area, supported by strong volumes and price increases. The recovery in cement volumes was driven by the formal sector, with bulk cement more than offsetting the decline in bags, while ready-mix and aggregate volumes grew high single-digits. Importantly, we have seen a pickup in bag cement demand in the back half of the year, which we believe bodes well for 2024. Formal demand was supported by infrastructure and nearshoring with particular strength in the North and Southeast. While our prices rose double-digits, the tight supply-demand conditions in the North and South put pressure on our supply chain. As a result, EBITDA margin decreased slightly, mainly impacted by an unfavorable product mix and higher transportation costs. For 2024, we expect the strong momentum in formal demand to continue, while informal demand recovers gradually, supported by decelerating inflation, lower interest rates and government social programs ahead of the election. We are guiding to low single-digit volume increases across all products. We implemented price increases during January that reflect the ongoing input cost inflation, particularly in labor, transportation and electricity. The U.S. posted record full year EBITDA of over $1 billion in 2023, an important milestone for the business. Despite low volumes in cement and ready-mix, EBITDA grew 37% as a result of our pricing strategy, growth investments and decelerating costs. The material margin recovery of 4.4 percentage points reflects our success in recovering multiyear cost inflation through pricing. Cement ready-mix and aggregate pricing rose 14%, 19% and 12%, respectively. The volume decline in cement and ready-mix relates to weather, winding down the few large industrial projects, a lower level of commercial construction activity as well as some loss of market share…

Thank you, Lucy, and good day to everyone. 2023 was an outstanding year, reaching a record EBITDA and achieving margins substantially in line with 2021. EBITDA for the year grew 25% on a reported basis, 2x the rate of growth in sales. This performance was achieved through the successful execution of our robust pricing strategy across our businesses and markets. In addition, we had a very healthy contribution from our growth investment strategy and Urbanization Solutions, which in total now represent close to 20% of our annual EBITDA, with the latter growing almost 30% in 2023. Our results also benefited from a deceleration of input cost inflation coupled with cost efficiency measures across our businesses, such as our Working Smarter initiative and our Climate Action road map, among others. These efforts more than compensated for volume headwinds in some markets. Energy cost per ton of cement grew 9% in 2023, slightly below our guidance and at a significantly slower pace than the prior year. The containment of energy cost was due to a combination of deceleration in market prices as well as proactive efforts to align our portfolio towards lower-cost alternative fuels. In 2023, we continued to increase alternative fuel usage, growing almost 2 percentage points and reaching 37% of total fuels. As we mentioned before, alternative fuels are significantly less expensive than non-renewables, have different supply-demand dynamics and are critical in our decarbonization road map. We are particularly focused on alternative fuels with biomass, which currently account for approximately one-third of our alternative fuel mix. In 2023, we more than doubled our free cash flow after maintenance CapEx to $1.2 billion. The increase in free cash flow was driven primarily by significantly better operating performance, including working capital management, which more than offset higher taxes. The increase in cash…

I'm optimistic for 2024, especially regarding our main markets of Mexico and the U.S. For 2024, based on December 31 FX rates and operations, we expect EBITDA to grow between low to mid-single-digits. We expect cost inflation to continue to decelerate and our commercial strategy to continue to focus on recouping inflation in the business and will recalibrate to reflect current lower inflation. The ultimate goal is to maintain and increase margins. We also continue expecting important incremental contributions from our growth investments. Energy cost per ton is expected to decline mid-single digit, primarily driven by lower fuel costs. For CapEx, we expect a total of $1.6 billion with $1 billion for maintenance and $600 million for strategic. For working capital, we expect a reduction of $300 million as we continue to execute on our working capital initiative. Cash taxes are expected to be approximately $1 billion, which includes the tax fine in Spain, the FX effect on our U.S. dollar-denominated debt and improved profitability in our main markets. Our cost of debt is expected to remain flat at $694 million, including the coupons from our subordinated perpetual notes. 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.

[Operator Instructions] And the first question comes from Ben Theurer from Barclays.

Congrats on a exceptional 2023. I wanted to pick up on the final comments and the outlook and particularly Fernando's comments around the strength and the outlook for Mexico and the U.S. in two key markets. Would it be possible to share with us where you see maybe upside risks to your current volume expectations, but also the downside risk? So just about the puts and takes in those two regions as it relates to volume.

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.

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…

It does very complete. Thanks, Fernando. Thanks, Maher.

Thank you.

Thanks, Ben. I think I would just add to what Maher said that we are seeing U.S. construction spending growing at the highest rate in decades, double-digit level and that is very much supported by rollout of infrastructure, streets and highways, and we're also seeing very good turnaround in the residential sector when you look at single family in particular. So just to give you a little more back up to Maher's comments. Moving on to the next question. It comes from Carlos Peyrelongue from Bank of America.

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., the question.

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.

The next question comes from the webcast from Paul Roger from Exane BNP Paribas. What drove the sequential price increase in EMEA? And could this become a trend, including in Europe where CO2 costs are down quite materially? Fernando, do you want me to take this? Okay. We did have a slight decline sequentially in Europe, Middle East and Africa prices. I think what's important to remember here is that the bulk of EBITDA, the weight of Europe is very, very high. It's about 65% to 70% of EMEA. And what we saw happening was a decline in prices due to geographic mix, specifically Europe, which has the highest prices had a much larger decline in volume than EMEA, Asia, Middle East and Africa experienced in cement. So this is the geographic mix issue. If you look at the disclosure, European prices were fairly stable from -- moving from third to fourth quarter. So we do not believe that CO2 prices and the decline in prices that we've seen in the CO2 markets are contributing to any type of price deterioration because we aren't experiencing it in Europe, okay? Thank you very much. And the next question comes from Alejandra Obregon from Morgan Stanley.

Congratulations on the record numbers. I have a question on your strategic CapEx. It's going up a little bit in your guidance. So if you could perhaps elaborate a little bit on whether this CapEx is already earmarked, meaning if you have already identified the projects in which you will invest, and if you could elaborate a little bit on what spaces will be more interesting for you during the year? And what timing should we think of for these CapEx outflows for the year? That would be very helpful.

Yes. The process of our growth investments has been -- it's like a fine-tuned machine that has been kind of started for now the last two or three years. So the stream of projects that have been identified and earmarked are quite developed. All of these projects are quite clearly defined. And we feel very comfortable that the timing should be fairly even throughout the year. And -- however, I mean, I have to tell you that in some of the instances, you do have timing, very specific tactical execution timing for some of these projects being made. But we feel very, very reasonable that we would be able to execute on the guidance that we're giving, the strategic CapEx of $600 million, which is a big increase compared to last year. Last year, we wanted to do a little bit more. We underperformed our guidance, and we wanted to do a little bit more primarily because of some delays that took place because of supply chains because of negotiations or whatever. So we do feel fairly strong that we should be able to execute that amount. And the additional contribution from our growth portfolio should be quite healthy. I mean, we're expecting a similar contribution to this year. This year, the growth portfolio was close to about $86 million, $84 million. We're expecting a similar amount. And we did say that the total contribution of our growth portfolio to EBITDA last year in '23 was around $325 million. So if you add the incremental amount, you're talking about close to $400 million of contribution going into this year, which is a big percentage now of our total consolidated EBITDA. Now the investments are split into a number of types of activities, climate action, cement expansion and so forth and so on. So it's very well balanced, and it addresses key opportunities in our markets. Aggregates replenishment is another area that we are very focused on as well. I don't know if that answers all of your -- the question.

Yes, yes, that's very clear.

And the next question comes from Francisco Suarez from Scotiabank.

Thanks for the call. It is actually a follow-up question on Alejandra's question. The question I had on your strategic CapEx. I mean, it seems that you have reached a point guys, in which you are flexible enough to provide more strategic CapEx, return money to investors, which is great. But can you walk us a little bit more on the rationale on how your dividend policy will evolve further? How -- what to expect on that? I mean much more on the dividend policy as such. And also, if you can elaborate a little bit more on your strategic CapEx on how to allocate across Urban Solutions or if it's much more focused towards aggregates, if you can give us a little bit of granularity what to expect across regions and the rationale behind it, that would be very helpful. Thank you for that.

Maybe I'll take that, Fernando, the question. And Paco, thank you very much for the question. I think in terms of -- maybe I'll start in terms of geographic allocation, right? Number one, this is in terms of the investments. We are -- we have been very consistent for the last three years saying that we are very biased in our investments towards the U.S., Europe, developed Europe and Mexico. And I think that as we see Mexico increasing stability, increasing integration into the U.S. market, we're evaluating the bias between U.S. and Mexico. But clearly, our focus is additional investment in the U.S. because the outlook on a risk-adjusted basis is the most attractive in all of our portfolio. And the growth prospects in the U.S. is probably one of the best in our portfolio. I mean, we are seeing aggregate demand very positive. We're seeing GDP growing, inflation is much more under control than other places. So in terms of geographic allocation, it's the U.S., Northern Europe, Mexico and Mexico is kind of rising in its importance in terms of allocating investments there as there's further integration. In terms of the areas that we're investing in, I mean, clearly, there is some completion of investments in cement in many of the right markets that are sold out that we're being capacity in. And the other is, as I mentioned, is aggregate replenishment, particularly in the U.S. and Europe. In the U.S., we've made several investments, and that's an area that is very attractive and that is going to continue to be an area of interest to us. And then investments that we believe are extremely important that have double materiality in our future in action area and climate agenda area, a lot of the use of alternative fuels,…

No, no, Maher that this is perfect and wonderful rational that we think for that.

The next question comes from Adam Thalhimer from Thompson Davis.

I wanted to ask quickly about the EBITDA guidance for 2024. I'm wondering if low to mid-single-digit growth is a touch conservative if we've got flat volumes, but pricing up, margins up some. I'm just curious if there's a little bit of upside to that in your view?

Adam, I mean, look, we're taking -- I don't want to say cautious, but the world is volatile. And we -- I don't want to say that we're taking the same approach that we did in last year where we gave one guidance that turned out to be super exceeded, but we're definitely being cautious. As Fernando mentioned, the dynamics, both on pricing and on volumes are quite different from where they were last year. And so navigating into a dynamic is quite different requires prudence and caution on our part. I mean, there's -- frankly, I mean, we're very optimistic about what's happening in Mexico. We're very optimistic about what's happening in the U.S. We're cautious, obviously, on EMEA and Europe, and we're expecting stability there. We're cautious on South Central America, Caribbean. There are potentially upsides in energy. I mean, I know, for instance, in the case of Mexico, we have been taking advantage of the drop in the price of natural gas, for instance, Mexico typically, we've been using a big dose of alternatives and a big dose of petcoke And of course, natural gas has dropped quite materially. And in Mexico, the differential between nat gas and petcoke is almost one-third and many of our plants in Mexico are located near and are able to use nat gas. So there are potential input cost elements that may contribute to better performance than we had expected. We are locking in some of the lower cost of energy that we're doing. We're hedging some of our pet coke uses as well. We've already locked in a lot of the diesel cost. There may be some upside to that as well. So there are a number of things that they're on the cost side that may have some upside, but we need to be cautious. I mean, honestly, we need to be cautious, and that's where we are on our guidance.

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

Congratulations. It's very nice to see that EBITDA number for 2023. My question has to do with what the rating agencies still might be looking at for an IG rating? And I'm just thinking of other companies that I've seen that have been in positions where they were looking at upgrades. And there are two things that I see that when I look at your balance sheet, I -- that occurred to EMEA. And I just wanted to get your comments on them. One, it's large cash balances. You have a healthy cash balance, but some of these people have much larger. I think you have committed credit facility. So I was just wondering if you could comment on that. And the second one is a long runway in debt maturities, and you do have a relatively short debt maturity profile over the next few years. Have you thought about extending that?

Yes. Thanks, Anne. I mean, look, the -- we are probably right in the -- at the CHIP edge of being IG metrics from a leverage perspective, of course, the rating agencies don't just look at that. They look liquidity, they look at stability of earnings, they look at the cycle, they look at management's behavior and so forth and so on. And I think that we're looking at that matrix as well. And we're making sure that we're ticking every one of those, and I believe we've picked every one of them. Now specifically regarding cash balances. I mean, we typically have $500 million to $600 million of cash balances on an ongoing basis. That number gets a little bit lower, gets a little bit higher depending on when we are seasonally during the year. But because of that and because of the -- we want to make sure that we don't have anything that keeps us awake overnight in terms of liquidity. As you know, last year, when we refinanced our bank facility, we increased our revolving credit facility by $0.25 billion. And there are opportunities to further increase our liquidity on the euro side, which we are pursuing as well. So I think at the end of the day and last year, on average, we had between cash on hand and availability under the revolver, probably an average of about $1.8 billion, $1.9 billion of available committed liquidity on hand. With the additional -- with the increase in the revolver and even potential expected increase, we are going to probably be increasing our revolving facility a little bit more. We're going to have more than sufficient liquidity for us to go through any really cyclical or seasonal change to take place. So I'm not -- I'm really…

And could you just tell me what is the current amount of your -- the total amount of your revolving credit facility?

It's $2 billion. The committed revolving facility.

No, I would agree that your numbers are most definitely comfortable. I'm just thinking sometimes the rating agencies don't like things excessive. So I just wanted to get an update, and that was a very good one.

We have time for one last question. And the last question comes from Gordon Lee from BTG Pactual.

Congratulations on the numbers. I just have a question sort of on the Urbanization Solutions business. I was wondering if you could just give us general color on maybe the geographic breakdown of where that EBITDA is coming from. And whether you expect to provide more disclosure on that unit, given how large it is now? And I'm going to -- this is a clarification, not a question. So we see [indiscernible] set. But just wanted just to confirm that in your $1 billion cash tax guidance, you are including the full amount of the sort of one-off payment that you're expected to make in Spain?

Yes. Maybe I'll take the first -- the second part of your -- the second question first, Gordon, because that's very important. I mean we've never had a cash payment of $1 billion for taxes, I don't know, ever that I remember. So the answer to that is definitively yes. We are expecting that to happen. Now having said that, it may be tranched out for a longer period of time. So it may be not as bad in terms of free cash flow draw this year. But yes, it is included. And I think it's very important, however, to take a look at if we adjust the cash taxes for the payment, assuming that we pay 100% of that this year and you compare the cash taxes that we paid last year versus what is implied in our guidance, I think you would see that we're actually expecting cash taxes from operations, excluding this one-off to actually be declining for 2024. Now the -- as you know, the cash taxes from '22 to '23 stepped up the biggest two drivers of cash taxes stepping up between '22 to '23 are two things, maybe three things. Number one is that the Mexican business had a spectacular year, had a record year in terms of earnings. Second thing is that we've consumed all of our -- or most of our NOL’s in '22. And so we did not have the benefit of that. And third, we have this incredible situation where the vessel appreciated dramatically inflation did not go down. And so we had this kind of extraordinary income that is taxable that -- which was probably the biggest contributor to our increase in cash taxes. That dynamic is not likely to happen in '24, '25. And if it did, the positive impact of that, meaning if we have another 15% appreciation of the Mexican peso, yes, that might imply a little bit more cash taxes. But guess what, that is probably going to be phenomenally positive to our EBITDA in terms of cash flow generation in Mexico. And when you take out the impact of the FX and the inflation in Mexico and adjust our tax rate, the tax rate is actually going down from '22 to '23, and the expectations, the implication of our guidance is that it will go down as well in '24. So I don't know if that answers the tax question.

Perfect. It was a clarification [indiscernible]

A second question, Urbanization Solutions, Gordon. We're very excited about that business, okay? I mean, that business is growing high double-digits, as you saw this year, EBITDA grew -- I mean, '23, EBITDA grew 30%, almost twice as much as sales, very high operating leverage. This business has become definitely without any doubt, a core business. It complements all of the value offerings and solutions that we have in cement, ready-mix and aggregates, highly integrated into those businesses. The areas -- the regions that are contributing the most and where our investments are the most are really Mexico and the U.S. And the areas that we're focusing on in the case of Mexico, for instance, is admixtures -- we're certainly focusing on circularity. You know that we purchased -- we invested into that area. The multiproduct area is also another very important area of expanding. And then the U.S., the U.S. is also almost contributing one-third of the overall EBITDA. Now in '23, the contribution of our Urbanization Solutions is almost $300 million and with a double-digit EBITDA margin. And so we're very excited about that, and we're likely -- part of our investment strategy definitely is going to continue supporting this area. It's very broadly diversified. It's relatively low risk. Some of the investments are countercyclical to our -- the rest of our business. And very importantly, it complements our future in action and our climate action strategy as well because it enables us to accelerate the strategy in our product strategy in the virtual family of products, whether in cement or ready-mix. As you have seen, I mean, we've exceeded our targets in cement. We're about to get to our target in ready-mix. And so it's very complementary, and it's a very important part of our strategy.

And there presumably also, presumably a very ROIC accretive business as well, right, to your overall mix?

Absolutely. I mean a lot of the -- I would say the return on capital employed in this business, it's very much in line with our growth investment parameters, I mean, which are very accretive. We're talking 25% plus IRRs, and we're talking about, and particularly in the case of the admixtures, relatively speaking, shorter payback periods.

We appreciate you joining us today for our fourth quarter results. We hope you will join us again for CEMEX Day taking place on March 20 and then again for our first quarter 2024 webcast on April 25. If you have any additional questions, please feel free to contact Investor Relations. Many thanks for your time today.

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