Q4 2022 Cemex SAB de CV Earnings Call
Good morning, and welcome to <unk> fourth quarter of 2022 conference call and webcast. My name is David and I'll be your operator for today.
At this time all participants are in a listen only mode.
We will conduct a question and answer session.
Any time you require operator assistance. Please press star followed by zero and we will be happy to a fixed year 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 2022 conference call and webcast. We hope this call finds you in good health and let us to take this opportunity to give you our best wishes for 2023.
I'm joined today by Fernando Gonzalez, our CEO and Mark <unk>, 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.
Thank you Lucy and good day to everyone.
2020, do once a year of unexpected challenges for many businesses as inflation spike the 40 year highs.
I am pleased with how we're responding and expect to continue to see the benefits of our strategy in 2023.
Now, let's move to the fourth quarter.
Our top line growth grew double digit driven by strong pricing performance.
EBITDA was higher in three of our Florida regions in fact the.
<unk> reported record fourth quarter results.
As you know.
Our top priority has been to recover 2021 margins.
Fortunately after several quarters in which we have been able to offset inflation in dollar terms.
I am seeing growing evidence that actual margin recovery is underway.
We continue to rollout our growth investment strategy with the recent announcement of the acquisition of Atlantic minerals.
Which will increase our U S aggregate reserves by approximately 20%.
The growth strategy has proven to be quite accretive with an approximately 100 million, but our contribution to EBITDA in 2022.
We continue our work on rebalancing the portfolio with divestments of more than $600 million during the year.
Achieving an investment grade rating remains a top priority.
During the quarter standard <unk> Poor's upgraded our rating to double B, plus one notch away from investment grade.
And climate action.
Led the industry in validating our new 2030 targets in 2015 net zero goals with the SVT I under the newly announced one and a half degrees scenario.
And even more importantly, we continued to achieve record reductions in tier two emissions.
Since we introduced our future interaction program in 2020, we have reduced emissions by 9% to date.
We continue to explore new ways to take our existing the carbonization laborers, even further in our sustainability journey.
Yeah.
During the quarter we.
We launched our new business, Virginia.
Is the voted to waste management and <unk> solutions on the latest addition to our organization solutions segment.
Net income after adjusting for a noncash impairment of goodwill rose 36%.
Finally, our return on capital remains in the double digit area, well above our cost of capital.
For the full year.
Net sales rose double digit the strong pricing momentum.
With the sudden spike in inflation in second quarter attributable to energy and distribution costs Unaccepted rated by supply chain disruptions stemming from the Ukraine War margin declined by two five percentage points.
Lastly, due to our effective pricing strategy, we were able to contain the impact on EBITDA to a 3% drop.
Free cash flow after maintenance Capex declined due primarily to working capital and maintenance.
Fourth quarter sales growth continues to reflect significant pricing contribution of all regions.
Inflationary headwinds, particularly in energy, where significant but our year long effort to offset rapid rising costs is paying off with stable year over year EBITDA.
While EBITDA margin declined the construction was the lowest of the year and sequential margins stabilizing in the quarter, what do we historically see a significant decline due to seasonality.
As is typical for the fourth quarter, we experienced strong free cash flow conversion generating close to $60 million more than the prior year.
The decline in fourth quarter consolidated cement volumes results from difficult weather conditions in the U S.
Weak back cement demand in Mexico, and Scott and slowing growth in Europe .
We continued to see strong growth from the foremost sector in Mexico, and Scott, but not sufficient to completely offset the informal sector decline.
Consolidated prices accelerated in fourth quarter with cement prices rising between 12 and 35% across all regions.
Europe remains the standout performer with price increases that have been able to compensate for much of the margin pressure.
The 2% sequential growth in consolidated prices speaks to the strength of our fourth quarter price increases executed in select markets.
We are implementing price increases in the first quarter that will reflect the cumulative input cost inflation, we have experienced across our portfolio.
I am pleased that the January price increases covering more than 70% of our volumes are evolving well.
Despite weaker demand dynamics in certain markets.
Pricing however is.
Not the only lever.
And we remain focused on managing costs with our energy diversification supply chain and climate action strategies.
The declining EBITDA continues to be largely explained by a lower margin caused by persistent input cost inflation.
We are seeing an important inflection point however.
In fourth quarter, the net contribution of pricing over cost was the highest in the year.
The evolution of the net price contribution as well as the outperformance of four quarter year over year margins versus full year.
Gives me confidence margin recovery is happening.
In our effort to recover margins, we monitor progress on a product basis.
Cement due to its energy intensity has been the product most impacted by inflation and the biggest headwind to margins.
In second quarter, we have successfully offset input cost inflation in cement in dollar terms.
But in fourth quarter, we began to see actual margin recovery.
EBITDA margin for cement reached its highest level in the year driven by the U S. M M.
We still have work to do to return to 2021 margin.
In 2023, with easy cost pressures and pricing momentum.
I expect to see further margin improvement, particularly in the second half.
Progress however will.
It will not be linear due to seasonality and timing differences on maintenance on pricing increases.
This has been another important year in our sustainability efforts.
<unk> was among the first companies in our industry to receive validation from the science based target initiative of our 2030 and net 002 goals under the one and a half degrees scenario. The most aggressive by the way for our industry covering scope, one two and three emissions.
But it is not about the goals.
It's about performance.
And in that regard <unk> has also delivered.
In the two years since we first rollout our sustainability program. So you're shooting action, we have achieved a record reduction in carbon emissions driven largely by an expansion in alternative fuel usage and a lower clinker factor.
During this period, our tier two nations declined by more than 9% a reduction but in the past took more than a decade to achieve.
This is equivalent to the annual emissions of approximately 700000 cars that drawn on gasoline.
In 2022.
Alternative fuels hit a record 35% of total fuel usage.
The introduction of innovative <unk> technology in more than 40% of our plants accelerated our progress.
Record alternative fuels is occurring at an opportune moment and serves as an important hedge too elevated wholesale fuel prices.
Clinker factor declined one five percentage points.
Opening up capacity in highly constrained cement markets.
Critical to over to journey is customer acceptance in three short years, our family of sustainable products and solutions has gained widespread acceptance across all regions.
Plus sales now account for 41% of cement volumes on 33% of our concrete sales.
If I watch simex transform.
I am more convinced than ever that.
Our products are essential to society, our goals are achievable and the path to get there is profitable.
Over the last three years, our organization solution business has been focused on the products and services to serve the needs of growing sustainable cities of the future. It includes four birthday coast and one of these verticals circularity received a big push in fourth quarter with the launch of our new business Regeneron.
Regeneron will focus on recovering managing recycling and copper assessing key waste streams.
First municipal and industrial.
Second construction demolition and excavation waste.
Finally third by products of industrial processes.
The business will leverage <unk>.
Global footprint and our more than 20 years of experience in managing non recyclable refuse and industrial byproducts.
As well as it is defined more sustainable substitute for foreseen in fuels and natural raw materials.
We are already making big strides for example in Mexico, we're processing around 25% of Mexico city's municipal waste.
On a global basis, we are recovering in municipal waste equivalent to the combined annual total produced by the series of Paris and Berlin.
And now back to utility.
Thank you Fernando 2000, 2010 brought new challenges for our Mexican operations, our business experienced significant cost pressures, mainly in the form of higher fuel and distribution cost coupled with a post pandemic rebalancing banks in Thailand.
While pricing increases where some of the highest on record it was still not sufficient to margins.
In the fourth quarter with continued inflation pressure in retail demand bank cement volumes moderated while bulk cement grew high single digits.
Formal sector benefited from near shoring investments in border States tourism, construction and distribution and logistics activity in the central part of the country.
As our pricing strategy continued to make inroads in catching up to inflation year over year EBITDA for the first time in five quarters.
Margins declined due to higher energy raw materials freight and wages as well as product mix the decline moderated versus full year performance.
We remain committed to recovering margins and with that objective, we announced price increases for all of our products effective January 1st.
As part of our cost containment and de Carbonization effort, we have moved aggressively in Mexico to substitute fossil fuels with alternative fuels for our accounts in the quarter alternative fuel exceeded 40% a record representing a 12 percentage point year over year increase.
For 2023, we expect cement volumes to remain flat, while ready mix and aggregates grow at mid and high single digits respectively.
The industrial and commercial sector, driven by near shoring and tourism should remain the driving force behind 2023 volumes one government social programs should help offset continued weakness in household demand.
In the U S. Despite significant weather challenges impacting much of our markets EBITDA grew mid teen percentage points to a record fourth quarter result.
Growth was fueled by price gains in excess of 20% more than offset lower volumes.
We estimate that weather impacted EBITDA by approximately $18 million in the quarter.
Year over year EBITDA margin expanded for the first time since early 2021, while sequential margins also improved for the second straight quarter benefiting from higher prices lower maintenance and lower imports full.
Full year EBITDA was driven by mid teen percentage point growth in pricing and low single digit volume growth. We remain focused on regaining margins lost due to the significant levels of inflation of the past year.
We announced a price increase effective January 1st and to date, we are seeing good traction.
In January we signed an agreement to purchase Atlantic Minerals limited in a transaction that will expand our U S aggregate reserves by 20%. We expect this deal to close shortly and to be accretive in 2024.
For 2023, we expect low single digit volume declines across all products driven by the residential sector.
We remain optimistic on growth in industrial and commercial and infrastructure sectors underpinned by near shoring trends along with funding available under the chip back in.
<unk> reduction act and the infrastructure investment and jobs Act.
December trailing 12 month contract awards in our key states for highly constrained and industrial and commercial were up 16, and 29% respectively.
In EMEA sales and EBITDA grew double digit in 2022 in the fourth quarter, while sales continued to show strong growth driven by pricing EBITA growth slowed due primarily to energy cost declining volumes and higher maintenance.
Pricing remained strong with sequential increases in cement and ready mix, reflecting fourth quarter price increases in several markets.
Europe showed strong net pricing traction with a 5% sequential increase and 35% year over year growth.
We are in the process of executing additional price increases, which will roll out over the next few months.
In Europe , EBITDA growth of 9% in fourth quarter, largely reflected our pricing efforts while volumes declined as a result of recessionary fears.
Margin declined by less than one percentage point due primarily to energy costs.
During the year, our European operations continued to lead the way on climate action, achieving a 41% reduction in carbon emissions since 1990.
The region is well on its way to achieving the EU emissions reduction target of at least a 55% decline by 2030.
For 2023, we expect cement volumes in Europe to decline mid to high single digit with ready mix volumes. Following the low to mid single digits and aggregates volumes relatively flattish to down.
Over the medium term volumes should be supported by public and private projects worth more than two trillion year as related to transportation climate adaption and energy reconfiguration as well as onshoring investment opportunities in.
In the Philippines cement volumes declined as the country transition to a new government and macro challenges impact demand.
Margin was impacted primarily by higher energy costs and major maintenance.
This year, we expect volumes to perform between flat and a low single digit decline for more information. Please see our CHP quarterly earnings which will be available. This evening.
Our operations in Egypt, and Israel continued to show strong topline and EBITDA growth.
For Israel, while demand remains robust, we expect ready mix and aggregate volumes to decline low single digits, reflecting our capacity constraints.
Net sales in our South Central America, and the Caribbean region slowed in the fourth quarter.
Pricing remained the driver of topline growth with cement prices up 12% year over year.
Similar to Mexico cement volumes in the region have been pressured by rebalancing, our bagged cement post pandemic.
Cement ready mix and aggregate volumes continue to grow supported by formal sector demand, mainly in the industrial and residential sectors.
The decline in EBITDA, and EBITDA margin reflects energy freight and raw material cost headwinds.
In Colombia cement volumes were up slightly in the quarter driven by social housing.
For 2023, we expect cement volumes in Columbia to be flat, while ready mix volumes to increase high single digit.
Struction activity should continue to be supported by social housing and infrastructure projects, particularly in the Bogota area in the Dominican Republic cement volumes declined in the quarter due to a drop in retail cement demand that was partially offset by higher bulk cement related to tourists.
Some projects.
For the year, we expect cement volumes in the Dominican Republic to remain flat to slightly down.
Activity should be supported by tourism in industrial investments in.
In Panama, we continue operating as an export hub, sending back cement volumes to nearby markets within the region, reducing dependency from third party suppliers.
You should use the IHS quarterly results, which were also published today and now I will pass the call them out here to review, our financial and development.
You Lucy and good day to everyone. As we all saw financial markets experienced unprecedented volatility with inflation, reaching levels not seen in decades, and central banks implementing monetary tightening measures globally.
Now our industry. This volatility played out largely in the form of rising energy and transportation costs as well as continued supply chain disruptions.
Our pricing and energy hedging strategies were able to offset much of the inflationary impact.
Of course this is an ongoing effort and you should expect continued execution of our pricing strategy in 2023 to regain our 2021 margins.
Additionally, we remain focused on several initiatives to improve efficiency and lowering the cost of managing our business.
The stable year over year EBITDA in the quarter. The first three quarters speaks to the success of our pricing strategy.
The improving EBITDA trends, coupled with a higher turnaround in working capital and lower maintenance Capex delivered approximately $60 million more in free cash flow after maintenance capex than last year's fourth quarter.
On a full year basis free cash flow after maintenance Capex was $553 million down from the prior year due to a higher investment in working capital and maintenance Capex.
The investment in working capital reflects strong revenue growth and the inflationary impact on inventory as well as the need to run higher inventories to address persistent supply chain issues.
On the collections front, the credit quality and the turnover efficiency of our receivables are at record levels, leading to a significant improvement in our receivables collection cycle.
The increase in maintenance Capex for the year relates primarily to some catch up maintenance as well as the delayed delivery of mobile equipment and spare parts in 2021, which pushed our maintenance calendar into 2022 the decline in quarterly net income results from the noncash impairment of goodwill for.
$365 million, primarily in the U S and Spain adjusting for this impairment net income for the quarter would have been $266 million, 36% higher than last year's fourth quarter.
Last year, we took advantage of market volatility to conduct several accretive transactions, we bought back about $1 2 billion of our bonds at an attractive discount, resulting in an NPV of approximately $160 million.
We partially funded these bond purchases through the closing of a 500 million euro sustainability linked loan with similar terms and conditions as our current bank credit agreement overall, we reduced total debt by $409 million during the year.
Also we maintained robust risk management strategies that in 2022, partially shielded us from the impacts of rising interest rates, a stronger dollar and higher energy costs.
As a consequence and despite market volatility our leverage ratio stood at two eight times relatively flat to December 2021.
In 2022, we further aligned our funding strategy with our climate action agenda.
During the year, we linked our new 500 million Euro loan and migrated our accounts receivable securitization program to our sustainable finance framework.
This is of course, the same framework linked to our umbrella $3 $5 billion credit agreement.
Price under these programs will now be indexed to certain sustainability kpis.
With the inclusion of these programs, we now have approximately 42% of our debt linked to sustainability Kpis and we remain on track to reach our goal of 50% by 2025 and 80% by 2030.
We will continue to undertake strategies that bolster our capital structure and remain focused on achieving investment grade in the short term.
With the recent upgrades from S&P and Fitch, we are now only one notch away from our goal.
And now back to you Fernando.
We expect low single digit growth in EBITDA in 2023.
As we assumed continued pressure on volumes due to global recessionary concerns.
While we acknowledge moderate risk to volumes, we believe that markets will remain supportive of pricing.
We do expect continued headwinds from cost, particularly in electricity.
But the impact should be less than what we experienced in 2022.
Energy cost per ton of cement produced is expected to ease estimating 10% increase for this year.
Our efforts to recover to 2021 margins will continue.
I expect the progress it will not always be linear.
Total capex is expected to be lower than the prior year at approximately $125 billion.
We continue to expect an investment in working capital in 2023.
Afflicting, the higher sales, but overall days working capital should improve.
Taxes are expected to increase by approximately $50 million.
Finally.
Our cash cost of debt, including the coupons of our subordinated notes is expected to increase around $70 million.
Reflecting the repricing of our limited floating rate debt exposure.
As always our guidance is based on like to like assets as well as the foreign exchange at the time of guidance.
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 won't 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 only one question. If you wish to ask a question. Please press star followed by one on your Touchtone telephone.
If your question has been answered or you wish to withdraw your question Press Star followed by two.
Press Star one to begin.
And first question comes from Carlos <unk> from Bank of America Carlos. Please go ahead.
Thank you Lucy good morning, Fernando and Maher my.
Question is on costs.
On your total cost Cogs plus as Jim what is the most relevant energy input cost is it diesel or pet Coke and can you comment last year what percentage of these two costs.
Just to get a sense of the impact for this year. Thank you.
Yeah.
Yes, Thank you Carlos.
Take that.
Question.
In terms of fuel and electricity.
Last year about $1 $7 billion were 12% of our Cogs.
We are represented by that.
And as you know the we have a guidance of 10% growth for the for the year in that most of that is due to electricity in fact, 90% of that is due to electricity now just to put it into perspective.
Diesel.
Compared to the $1 seven was around $340 million or 2% of Cogs now in the case of diesel. We currently have about 75% hedged for 2023.
And so we may get a little bit of a higher cost because of the hedging activity that we did towards the second half of last year, but on the on the pet Coke side that is predominantly a spot market and so we should be benefiting from the important drop.
In the price of petrol from the towards the third and fourth quarter of last year.
Well I don't know if that answered here.
Just one quick follow up on the head should be on diesel.
Primarily in the fourth quarter or second half of last year.
It was probably done closer to the fourth quarter.
Perfect great. Thank.
Thank you so much mark.
Thank you very much Carlos.
And then next question comes from the webcast from Paul Roger.
Exane BNP Paribas.
Do you expect a 5% rate of reduction to accelerate in coming years as new technologies play a role or could it get harder if a lot of the conventional solutions have already been widely adopted.
A follow on to that what were the most exciting developments in this format debentures portfolio last year.
Thanks for your question Paul.
The first part on tier two reduction.
Maintaining or accelerating.
The ratio that we managed to reduce close to 5%.
In 2002 and also in 'twenty one.
Let me start by clarifying that the reductions that we have been making and the ones related to our <unk> two reduction targets.
Related to what you are calling conversion conventional technology sort of conventional mode processes or.
Our materials. So in these numbers, we are not including the benefit of potential reductions, because so should capture and storage or youth.
Which might come through time because of the type of.
The pilots that we are.
They are developing as we speak but on the conventional part.
The 5%.
A couple of years I think.
<unk>.
We took opportunities.
We're there.
Speeded up the process in order to make them a reality.
Is it really fair.
So the public part of it we have just to use one example on tier two production.
We have a target in 'twenty five or five <unk>.
<unk>, Brazil too.
But when comparing to the 2022.
Reported that the.
A reduction of 9%, which implies a reduction of 3% per year.
Meaning we are expecting that this five percentage points of reduction will start little by little declining and they will remain for the whole period from now or from 23 up to 20 to 30 in the range of three to three <unk> percent.
That will.
Do that that will allow us to comply with commitments on perhaps in 2025, they will allow us to complete them, even before that date or exceed those targets.
In that.
Now another clarification that I would like to make.
Is that the conventional ways to reduce <unk>.
Two.
It happens that arent.
There is innovation in those conventional ways.
Proving or the increasing the impact the historically had for instance.
The use of certain amounts of hydrogen.
The plants, you've seen high levels of RDF for it.
Waste so few.
It's been working very well.
So.
As reported in the last quarter of last year.
First time in history, we have as much use of alternative to build when compared with what has been our principal source of fuels, which is pet coke.
And considering that the month of December .
That proportion for alternative uses even higher.
Think in 'twenty two 'twenty three.
We are witnessing.
Most of alternative fuels will become the principal source of.
In our plants with all the advantages advantages in cost they got less than half of.
Primary fuels.
The benefits in terms of contribution to participating in the use of.
And recover the waste.
As we have commented before they.
They can get off 25% of waste of Mexico, CD and we use most of that.
Our plants a few in the case of Europe , which last year.
Even though we had a large proportion of those two fields, we increase it for another eight percentage points nowadays, we're consuming the equivalent of that.
Waste facility like barely.
There are many advantages.
We continue doing progress 22, we increased our use of alternative fuels six percentage points.
And for the target. We have 25 is an additional increase of five percentage points in three years. So.
I think that that reduction was that we would see that.
A reduction moving from the.
$4 five 5% to the range of three to three 5% until we are ready to go meet with reductions because of steel production.
On the on the second part exciting developments.
I think what excites me or what excites us is.
Nonetheless, suddenly one particular event and I will mention one or two but I think what excites us is to see how <unk> debenture is allowing us to attract.
And to invest and to integrate a number of different technologies that nowadays nowadays have to be integrated into our cement plants and referring for instance of this idea of.
<unk> injections of hydrogen in our plants nowadays more than 40% of our production to have these type of hydrogen injection im referring to the possibility of elect to find more of the changes in process like electrifying the process itself so to in order to use more electricity in this fuels other.
Processes completely different processes to produce cement.
Sure.
The process that we announced through our partnership with Sun helium, meaning to produce clinker.
Now that it is feasible to concentrate solar energy into very high temperatures the ones needed.
Flickr.
But what I see is that we have we have a very large map of different technologies.
<unk> will be integrated into cement production or distribution.
And that's what we're excited we.
Having a very good response and interest in the cost of the Tech World.
That is moving forward.
We just announced for instance.
I mean, the ability of the first full electric ready mix truck that kind of work all day long.
With its battery.
Produced by Boyd within the sort of agreement we made two years ago. So we're very happy with those advances.
They make us believe that we will continue delivering our commitments.
Thank you Fernando.
And our next question comes from Ben Theurer from Barclays.
Hey, good morning, Lucy Thanks for that Fernando Maher.
My one question would be on the pricing traction what are you seeing and how you think about pricing initiatives for 2023 <unk>.
Particularly in key markets like the U S and Mexico any comments you have on the recently announced increases and how we should think about pricing throughout the year to offset these 10% cost headwinds. Thank you.
Yes, Ben maybe I'll take a stab at that.
The.
We're coming in from a very healthy pricing environment, albeit and you saw the results the pricing contribution to our EBITDA for the year and certainly for the quarter.
It has been in excess of inflation.
However.
We continue with our pricing strategy, because the inflation acceleration has been much higher than our ability to raise prices and thats part of the reason why.
We saw.
And EBITDA margin erosion.
So there is definitely the job is not done completed yet on the pricing strategy. We continue to to accelerate now the good thing about this is that.
We're coming in with good momentum, we have tailwind of about 5% coming into assuming assuming the December 22 prices in local currency terms and this assumes no additional increases okay now having said that.
We've seen very good evolution of pricing increases in all of the markets more than 80% of our volume.
<unk> is being repriced.
So just to give you an idea for instance, Mexico, we have a pricing increase double digit <unk>.
20% in the U S. We have a high single digit increase.
In January March.
We have double digit increases.
Mid to high teens in several of our European markets, Spain, Poland, Czech Republic, Croatia.
The Philippines is also experiencing a pricing increase January March double digit increases in Colombia.
In the high teens, 20% range and the story goes on.
Essentially more than 80% of our volume is being repriced in the early part of the year and we think that there is very good.
Traction in Europe , a very important part of the pricing pressure on everybody is the continued pressure on the price of carbon.
And so that's a very important part of inflation there.
But we're optimistic I mean, we think that this momentum should continue.
Despite a little bit of backdrop of slow slower demand in some of the markets that we're operating in.
I don't know if thank you very much.
Yeah.
Perfectly yep. Thank you great. Thank you very much.
And the next question comes from the webcast.
With us from Jpmorgan.
Regarding deleveraging last year, you reduced $300 million in net debt and the implied free cash flow for this year looks around 300 $400 million well.
This poses a risk for your deleveraging pace for 2023 and to obtain the investment grade rating soon.
You expect additional divestments and used.
We used proceeds to continue paying down debt.
Dan do you want me to start that maybe.
You can win.
Yeah.
So again I think it's very important to clarify.
To you and to everybody else on this call why.
Is investment grade is so important for us investment grade on its own is not the issue. It's what it implies which is a the strength of our capital structure.
Lower volatility.
Our ability to generate more free cash flow per dollar of EBITDA.
Be able to eventually as a consequence of that consider returning capital to shareholders. So so for US investment grade is not just getting an investment grade. It's really continuing this journey of strengthening in bullet proofing, our capital structure and our business model.
And so in that direction.
My expectation is that yes, we will continue to reduce debt and potentially deleverage as well.
Now I'm not going to comment.
On the.
Your number of free cash flow.
I will turn over the call to Fernando to kind of share with us potentially some ideas on where we are likely to be able to continue this journey to reducing debt and potentially deleveraging Fernando.
Yes.
Thank you Margaret Thank you I'll, let him.
A couple of comments.
I think what you have observed.
Is pretty well aligned to the adjustments that we announced early 'twenty 'twenty adjustments to our strategy just to remind them a little bit is to strengthen our portfolio in the U S and Europe to include what we are calling organization solutions as a fourth leg.
In our.
Portfolio.
Throughout the year to continue reducing our leverage ratio.
And they are making some divestments.
In the emerging markets.
If you review what has happened in the last couple of years that it's precisely that.
The divestments, we did.
Costa Rica Salvador Nowadays.
And some other small.
<unk>.
Are aligned with that idea the investments that we have announced recently in the U S.
The aggregate business and kind of that to serve markets in <unk>.
<unk> in general the east cost of the U S.
Some ready mix business in Texas.
And all of our aggregate business in Europe . Those investments are also aligned with that strategy. We are also taking the opportunity to.
To invest and increase our EBITDA in one of the.
Sure.
Okay.
Issues that have proved very <unk>.
Useful unprofitable, which is who's going to fuels last year, we finished prudent in operation four investments when including Vodafone another one in drug B, one backup on Jack in Mexico.
Those.
Even though they were not fully operational for the 12 months.
Were very helpful for our increase of six percentage points.
Im very profitable you compare.
They were very profitable when we bought <unk>.
Plant them, but nowadays with the current cost primarily fuel there.
They have an extremely good.
Paybacks.
So what I'm, saying, what you see is pretty well aligned to what we have announced.
What what do you what is not.
Doable.
Or what we think.
We have to be flexible is that.
Given that these in both investments and divestments.
Yes.
Uncertainty in the events.
We in short terms in quarters or even in a year.
We don't have the let's say the proportion that we would like to have between debt reduction and growth investments. So if you take a couple of years you will see that the proceeds we used for the production them for growth investments are very similar.
Half on half.
If you take one year.
Might be a.
Different story, but we want to keep this pace of strengthening our position in the U S and Europe divesting in some emerging markets.
Creasing and growing our organization solutions.
Sector.
And.
Doing more and more portfolio management now our leverage ratio.
Below two times.
We were last year.
Upgraded to double B plus we continue.
The objective of getting to investment grade.
And we have to consider that as said for the investments that.
In cement expansion like the one in solid.
Marcel or or or.
Becca the rest of investments the bolt on.
The type of investments that we started making mid 2020.
With the characteristics of having high returns short payback and related to our current business base. So as we commented last year those in business already contributed with 100 more than $100 million of EBITDA and this year will be higher so even those investments with those.
That profile will start contributing.
We put in manner with a different profile, but will start to contribute.
Also in our deleveraging.
Objective.
That's what I can.
Comment other than hope that answers your question.
Thank you Fernando.
And the next question comes from Nick Let Lippmann from Morgan Stanley Nick.
Yeah, Hi, Thanks, Paul Thanks for the call and for taking my question I was wondering if you could provide a bit of color on how much you expect to import.
Into the U S market I think you've been talking about about a third in 2022.
Give us some color on that into 'twenty tree and also any potential color on some of the maintenance work that you've done.
In the U S and to what degree that's going to be continued into intervention III. Thank you very much.
Let me start by by commenting on on maintenance.
Related to the work we're doing to improve.
Efficiency in our cement plants in the in the U S.
In the last couple of years, we've been developing.
<unk>.
And initiative.
Cementing our future.
To improve the conditions of certain plants.
There were some plants in the U S for many years would not highly demanded.
Now that we are at full speed.
There are Delaware.
Some investments needed to bring those plants to Luis has capacity.
Higher.
Possible.
<unk> ability.
With think inputs because meeting local production will be slightly higher this year.
When when you engage in this type of projects.
And that was the case.
During last year, sometimes you need to make investments that you need to shut down your plants more than 15 days, which is model as the avalanche of regular.
Annual shutdown impacted production this year would be.
In better conditions, so there will be two reasons for a.
Moderate reduction in imports is markets.
Really adjusting to lower figures.
<unk> been able to.
To produce higher quantities of product locally.
And what was the other part of your question.
Nick.
Well there was if you could provide a bit of a sense, so youre, saying the imports.
It's going to be coming down a bit.
So for <unk> to maybe secondly, twenty-twenty effectively.
And then I think you answered the maintenance question as well.
Yes, okay very well thanks.
Nick.
Thanks, Nick.
And the next question comes from the webcast from the National Kit Olga <unk> from credit Suisse.
Does the 10% increase in energy cost per ton at the consolidated level already incorporate higher pulp cost, resulting from the Pemex contract expiration.
[laughter].
Yes, hi, Thank you Vanessa.
And it's too bad that youre not joining us on the call. So I can talk to you directly but.
So the answer to your question is that yes.
The.
The 10% increase in energy cost per ton that we have announced does incorporate the impact of those contracts.
Not being there anymore I think just two very important as distressed to everybody. If you don't if you're not aware.
The benefit of those contracts really was part of our electricity generation.
Part of our business in Mexico, and so that's where we're likely to feel that but I think again I would point you to.
The guidance, we're guiding towards total energy increase of 10%.
That's about $160 million, that's for the whole company.
And roughly 90% of that is electricity and Mexico is roughly about a quarter of that.
That does include.
Any impact that we may have.
Those contracts not being there.
So I hope that answers your question Vanessa.
Okay.
Next question comes from Gordon Lee from BTG Pactual.
Yes, hi, good morning, Thank you very much for the call.
Vanessa actually beat me to the punch that was going to be my question. So I'll ask another question Fernando which is.
The.
What's your how are you feeling generally in the U S.
On the sort of take up and the speed.
<unk>.
The infrastructure plan related projects are you seeing I mean I think.
Yeah.
When you spoke to sort of industry sources people thought by for the fourth by the fourth quarter of this year, you will have sort of perceptible traction on that is that still more or less a timing that youre seeing or do you think the sort of real infrastructure pickup will likely not occur until 2024.
I think.
The outlook that you described continues being valid.
Of course it is it is another way to put it is that it is clear that order books for the next three to six months are still not capturing.
And that type of.
But things are moving forward. So we do expect that for the.
Let's say late this year.
That will start.
Showing up.
So we don't have.
Additional.
In four or color.
We can observe in the market.
Maybe I could maybe maybe not.
Yeah.
Alright, I was just going to add unless you see went up.
I was just going to add two points certainly in contract awards for our footprint, we're seeing double digit increases both on the infrastructure side as well as the industrial and commercial which I think is very important.
To note and the other thing that we haven't talked about much on the call is the impact of weather in the fourth quarter, we haven't seen residential slowing a little bit in some of our markets, particularly northern California is the one that we've been citing the most.
Weather had a very large impact in our results, which were still very good in the U S.
And I think that's important to note, we attribute about an $18 million EBITDA headwind to the weather impact in the quarter. So that is not slowing demand. So much as it was weather disruption I wanted to be clear about that sorry go ahead Margaret.
Yeah, great. Thank you very much Lucia Gordon I just wanted to stress one thing is that our performance in the U S has been despite the fact that we've seen slower than expected spending on the infrastructure side.
<unk>.
It's good and bad right I mean, we wish we had higher spending and better volume performance, but on the positive side is that that should bode well for the U S business for the next couple of years, because there is a very material pent up fiscal stimulus in many ways, both because of the infrastructure.
Bill because of the chips.
And innovation Bill.
And so for the next couple of years the outlook should be quite positive for for volumes and if we take a look at what's happening in industrial and commercial which is which has been the sector that has been the best performer for us it's growing in the fourth quarter almost 9%.
It's because of all of this re shoring that is taking place with massive projects.
That are being constructed in several of our markets. So.
Youre right.
In 2022.
The contribution of infrastructure in terms of in terms of growth was not necessarily there, but as Lucy said the the contract.
Pent up demand and contract awards is very healthy.
The amount of unspent numbers under those contracts is quite material and also very importantly is the health of the states that we're in physical health of the states that we're in is also very positive and so we think that going into 'twenty three 'twenty four it should be.
It should be it should be contributing we will have to wait and see what happens.
Perfect that's super helpful and I guess just.
It's still fair to say that in your footprint in the U S.
Sort of the some of your nonresidential segments is still around 70% of volumes right.
Yeah.
Yes, I mean.
Residential was 35% in 2020, two and industrial and commercial is about 15, and then infrastructure is about half is the remainder is half.
Perfect. Thank you very much.
Thank you Gordon.
Thanks Gordon.
And I think we have time for one more question I believe and Melanie your on gap from Bank of America.
Thank you good morning, Fernando my hair Lucy.
Well it hasn't been asked yet.
Can you hear me.
Yes, yes, we can.
Okay.
Hi.
So I wanted to ask you I think.
What your future expectations are for some of your.
New bolt on investments I think you indicated that previous ones added about $100 million.
In 2022.
If you have a range of what you think in the future and as part of that you just made an announcement recently about.
Fully electric vehicles joint venture with Volvo and let your timing is for the rollout of that and can that be something you do more globally.
Hi, Ann let me take the second part I will ask my head.
The first one.
Uh huh.
As somebody has before on some venture SME adventures.
We are excited because of what's going on.
Mobile is one of those partnerships agreements collaboration agreements.
For us to integrate a number of technologies that traditionally has not been part of the cement ready mix technologies, meaning.
We think we know how to make cement ready mix and aggregates, but.
For sure we needed to learn about how to use them to sign on to use electric heavy weight vehicles. The same way we needed to learn about solar energy. The same way we needed to learn on <unk> to be used in combination with our the air for so many.
Technologies and which.
We are not the experts, but there is knowledge experience and scale we can apply.
Two other parties are the partners that are interested in working with us. So in the case of mobile I think is one of those examples.
Our experience in ready mix, they put their experiences in vehicles and electric vehicles and on at the end they ended up producing these more than.
<unk>.
<unk> be a cold.
Fully electric can be enabled to work all day long with one battery charge.
And of course, we're excited of the type of examples now having said that the.
Electric.
Ready mix truck is not the only solution. We are working on is not perhaps the short term solution in the short term solution is what we are.
Already doing which is switching from diesel to natural gas that will reduce our emissions and scope three by about 30%.
We are trying a number of of different options some of them.
Commercial and available in the market some others needing some additional.
Develop and development before being available for I would use so that's what I can comment on that but.
Thank you and if I can complement.
Alright, alright.
Alright.
And did you have a follow up to Fernando Arca can I go ahead with the growth.
Please go ahead.
Yes, I mean on the growth side.
Yes on the growth side as you saw in 'twenty two the growth component contributed a little bit over $100 million in incremental EBITDA and that's a variety of projects that.
We've announced during the course of the year.
For this year for 23.
We're expecting a little bit more than that and we're expecting about $125 million contribution to EBITDA.
And we have a very important.
Pipeline.
And the pipeline is made up of as we've said always bolt on.
Investments and some acquisitions.
And on the bolt on side in addition to.
A number of projects, which I can give you. Some examples of we do have some completion of some legacy projects in terms of.
Cement production that is probably in excess of 4 million tons of additional capacity. Most of our investments are going to continue to be focused on the U S Europe and to a lesser extent in Mexico.
Areas, where we are continuing to focus on our.
Aggregates.
Supply chain sustainability and sustainability really the big part is the is the substitution of alternative fuels and the ability to improve.
The fuel efficiency in our kilns operational efficiencies are also an area of investment and urbanization solutions.
So those are the areas that we're going to be continuing to invest in these are going to be tending to be fairly smaller projects. Although the transaction that we did recently the aggregates transaction that you saw in the U S.
It's not that big but it's quite material increases our aggregates.
<unk> by almost 20%.
And we've done something like that in Germany, where it almost doubled our aggregates business. There so thats kind of the focus and.
We are quite confident because of the diversification of those investments.
Because of the fact that they are in very known markets complementing known footprint and existing business.
<unk>.
Fairly confident about the IRR is that we're expecting to get which are which continues to be well above.
20%.
And with quick paybacks.
Probably the quickest payback or in the sustainability area.
As it relates to.
Alternative fuel.
Consumption and or complementing our fuel consumption with hydrogen. These are these tend to be much shorter much higher.
Paybacks, especially in light of the escalation in fuel cost that we have seen.
So I don't know if that gives you.
If that's adequate.
Kind of response to the question. If you have any follow up I'll be more than happy to deal with that.
Okay, great. Thank you very much very helpful. Here.
Thank you very much Dan.
Great.
Thanks Mohit.
We appreciate you joining us today for our fourth 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 on our first quarter webcast that will take place on may 2nd many thanks.
Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect have a good day.
Goodbye.
[music].
Okay.
Yeah.
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Okay.