Earnings Call: Q1 2024

May 15, 2024

Good morning, everyone. Thank you for being here with us today to discuss our first quarter's results release. My name is Indira Diaz. I am Cementos Argos IR, and I will be hosting today's call. On the call today are Juan Esteban Calle, our CEO, Felipe Aristizábal, our CFO, María Isabel Echeverri, the VP of Legal Affairs, Gustavo Uribe, the General Director of Central America, and Carlos Horacio Yusty, the VP of the Colombia division. First, I would like to ask you to carefully read the legal disclaimer that is currently being projected on the screen, which is also available on the presentation that is posted on our website. Please take into account that all the discussions of the financial and operational results held during the call will be based on the adjusted figures, excluding non-recurring and non-core operations. For a detailed reconciliation of the adjustments, please refer to the annexes of our presentation. Today, after the initial remarks, there will be a Q&A session. If you have a question, please raise your hand by pressing the icon at the bottom of your screen at any time during the conference. We will record this session and upload it to our webpage. It is now my pleasure to turn the call over to Juan Esteban. Thank you, Indira, and welcome to everyone joining our call today. During this first month of the year, we have materialized within our quest for delivering value to our shareholders through initiatives that have radically transformed our company. First, on January 12th, we successfully combined our U.S. operations with Summit to create a leading building materials platform in the U.S. and received in exchange a 31% stake of this new combined entity, valued today at market prices in $2.2 billion plus $1.2 billion in cash, which enhance our firepower to pursue future growth endeavors. Now, more recently, as announced on our previous call, we effectively executed the conversion of 99.8% of our common non-voting shares into common shares, consolidating all the float and liquidity in one single class and achieving $1.3 billion in float adjusted market cap in the common stock, which surpasses the minimum threshold required to enter the MSCI Emerging Markets Index. As a result, we are today a company with nearly 100% of its equity represented by common shares, making us more visible for the active or passive international investors. Our new business model has significant exposure to the U.S. building material industry through our 31% stake in Summit, operates directly cement and ready-mix assets in Colombia, Central America, and the Caribbean with a yearly EBITDA of $300 million, and has additional growth levers and ventures in trading, exports, calcined clays, and aggregates, plus the firepower to explore further growth in our main strip business lines or in these ventures across different geographies. One of the most relevant growth levers that we foresee in our future is our calcined clay patents and the know-how associated to its technology, chemistry, operations, and go-to-market strategies. Clay is the key supplementary cementitious material that our industry is embracing as one of the most important components of the low-carbon cement needed to hit the 2030 targets adopted in the 2050 roadmap to carbon neutrality. We have developed a blended cement that is not only more profitable than traditional cement by its lower CapEx and OpEx, but also greener, given that the CO₂ emissions per ton can be up to 50% lower. We currently operate the largest calcined clay plant of the Americas in Colombia, with a capacity of 450,000 tons per year. Approximately 30% of the cement that we sell locally has additions of this alternative cementitious material within the act mixtures. This leadership in clays has recently received recognition in the U.S. Argos USA, now fully part of Summit Materials, has been invited by the U.S. Department of Energy's Office of Clean Energy Demonstrations to negotiate for a grant of up to $215 million to develop four calcined clay facilities in the U.S. Summit is in the process of fully evaluating both the market and technology opportunities to understand their appropriate path forward. Nevertheless, it is our leadership in this innovative space that reaffirms our commitment to decarbonizing the industry through concrete actions that guide us towards our goals. Before diving into our quarterly results, I would like to ask Felipe to expand further on the share conversion program and the financial impact of our asset combination with Summit. Thank you, Juan. Good morning, everyone. I'd like to start by emphasizing on the importance of the share conversion and the overwhelming support that we received from our shareholders. As you may recall, this initiative was introduced as the cornerstone of our SPRINT 2.0 program during our 2023 results call in February. It was later submitted upon approval of our shareholders in the general meeting carried out on March 18th, where 100% of the attendees of both common and common non-voting shares voted in favor of the initiative. On May 3, following the approval of the Superintendencia Financiera de Colombia, plus a period of 10 business days where those investors that wished to maintain their common non-voting shares expressly informed us of their decision, the conversion was finally effective. The results were outstanding, as 99.8% of the common non-voting shares were converted into common shares, leaving us with nearly 100% of our equity represented in common shares. With the conversion, the company achieves a market capitalization size adjusted for floating of approximately $1.3 billion, exceeding the lower limit established for a stock to be considered for inclusion in the MSCI Emerging Markets Index, and creating the appropriate conditions to develop further initiatives that will allow us to achieve an increased and consistent liquidity in a range of $3 million-$5 million of average daily trading volume. To close further the gap between the fundamental value of our company and the market value of our shares. Now, referring to the asset combination with Summit that was executed and registered during the first quarter, I'd like to spend a moment to go in detail through the gain on sale generated by the transaction and the equity method that we will use from now on to reflect the results of our 31% stake in the company. In relation to the gain on sale of the transaction, we registered a one-time gain of $1.4 billion during the first quarter of the year, in the line of discontinued operations. At the exchange rate of January 12, the final entry in Colombian pesos accounted for COP 5.3 trillion. As you already know, following the asset combination with Summit, the Argos USA operations will not be consolidated on our results. Instead, we will register as equity method the 31% of the net income generated by Summit's operations. For the first quarter, Summit recorded non-recurring transaction costs of $62 million related to the asset combination with Argos North America that were adjusted proportionally in our results. Net of this effect, as well as the non-recurring gain on sale, our net profit for the first quarter stood at COP 55 billion, 53% lower than last year. This is mostly explained by the higher seasonality of Summit's legacy operations located in states with colder and rainier winters when compared to states where Argos North America operations are located, in the southern area of the country where winter is usually milder. Typically, Argos North America was generating around 11% of its net profit during the 1st quarter of the year versus Summit's legacy operations that were usually leading to break even or negative net income. This trend typically reverses in subsequent quarters as most of the income for normal years generating during the 2nd and 3rd quarters. It is crucial to highlight that Summit's operational results exceeded analyst consensus. The incorporation of Argos operations in the Southeast strengthens the company's footprint, benefiting from fewer weather-related disruptions in this region due to its geographic location. Thank you, Felipe. Moving on to the results achieved during the first quarter of 2024, which is the first one operating with this new business model. Cement and ready-mix volumes experienced an increase of 13% and 6% respectively in line with market dynamics in Colombia, as well as local markets in Central America and the Caribbean. Partially explained by fewer business days during the quarter vis-à-vis last year because of the timing of the Holy Week in 2024. Nevertheless, strategies put in place since last year to adjust to headwinds in the local markets proved once more to be effective and regardless of a 9% decrease in revenues, adjusted EBITDA totaled COP 291 billion, which is 2% of last year's, and enabled a margin expansion of 238 basis points, totaling 22.2%, which as you may recall, stands within our guidance for the year. With that being said, let's move on to the regional results details. Starting with Colombia, I would like to ask Carlos Obeso to explain further the results of the country, which reflects the continuing efforts made by the team to successfully overcome a challenging market. Thank you, Juan, and good morning. To accurately evaluate the region's results, it is important to consider that during 2024, the Holy Week was in March, affecting the comparability of the results versus 2023, when the Holy Week was in April, which implies fewer business days for the first quarter of the current year. Consistent with trends from previous quarters and in line with our expectations, the Colombian market saw a 9.1% decline in cement dispatches. Cementos Argos also experienced a decline, with total cement dispatches decreasing by 8.7% and ready-mix dispatches by 6.3% during the quarter. In response to the current challenging market dynamics during the quarter, we continued our ongoing comprehensive strategy, focusing on operational efficiencies and reliability projects from our quarries to the customer. This approach enabled us to adapt and adjust to the evolving market landscape, building on our successful track record from previous quarters. The results of the operational excellence strategy stand out in the improving financial results. Pricing dynamics for cement and ready-mix, which increased quarter-over-quarter in line with local inflation rate, coupled with operational efficiencies and rigorous cost discipline, led EBITDA to stand at a COP 197 billion for the quarter, 8.8% above last year's. Margin EBITDA was 26.5%, which is 263 basis points higher than the first quarter of last year. The results were driven by both of our business lines. In the cement business, notable efficiencies were achieved in production cost, amounting to COP 6 billion compared to last year. Logistic costs were reduced by COP 6.2 billion versus the first quarter of 2023. In the ready-mix business, we have consistently focused on improving profitability, achieving a margin expansion of 60 basis points. The strict control over the employed working capital, together with a higher EBITDA, allowed for the conversion of free cash flow to increase by 30% versus the same period of last year. Despite the challenging market conditions, we continue to believe in the potential that lies ahead in the Colombian market. We plan to invest $75 million of CapEx in the country during the current year, of which 60% in maintenance and 40% is growth. The growth CapEx is mostly related to our quarters to the customer efficiency programs, which will allow us to further reduce our cost of the upcoming years. Among these projects, I would like to highlight the construction of the dome silo in our Cartagena port, that is currently being executed, and will allow us to dispatch bigger ships, reducing freight cost per ton, and enhancing the efficiency of the port. Looking ahead, we anticipate that major infrastructure projects such as TransMilenio lines, the Bogotá Metro, as well as the new phases of Triángulo del Tolima, and other road projects in the main cities will drive demand starting from the second quarter onwards. We will continue to develop our reliability and operational excellence strategy, aiming to navigate market conditions and challenges in the region efficiently. Thank you, Carlos. Now moving on to the Caribbean and Central America. Gustavo will now go over the financial and operational results of the region. Thank you, Juan. Good morning, everyone. I would like to begin by addressing the dynamics in the Central America region. As a general note, the markets in Honduras, Panama, and Guatemala remained stable during the first quarter of the year and within our estimates. With regional cement volumes trading 417,000 tons, stable when compared to last year. For the quarter, EBITDA increased 2.5%, reaching $80 million. EBITDA margins stood at 27.5%, 116 basis points above last year. Overall, we experienced quarter-over-quarter improvements in prices and costs that, in a scenario of stable volumes, led to better margins. On a country level basis, Panama exhibited a moderate volume contraction of 3% year-over-year due to the holidays of the Holy Week that for the current year were within the first quarter, affecting the p-comparable basis versus last year. On the competitive landscape, the tariff of 30% for imported cement was renewed for one year, which will continue to incentivize the local production and preserve the positive market dynamics. Moving on to Honduras, the quarter results were affected by a longer and more expensive than expected operational maintenance. Nevertheless, volumes remained stable year-over-year. We continue to expect volumes to exhibit a moderate recovery during the year as governmental construction activity and improved consumer confidence positively impact the retail market. Regarding our operations in Guatemala, the positive evolution in cement dispatches increased by 20% year-over-year in the first quarter. It supports our vision of the country. We are continuing to develop our business model where we seek to consolidate our position in the territory, confident that we are a valuable player capable of contributing both to the development of the industry and the country. On the Caribbean region, it's worth noting that the volume contraction of 13% compared to previous year is due entirely to the situation in Haiti that continued to worsen versus last year. The social and political issues in the country intensified in the 2Q of 2023, for which we continued to observe an unfavorable year-over-year comparison basis for this quarter. Excluding this impact, cement volumes in the rest of the region exhibited a 4% year-over-year increase. Within the Caribbean, it is worth highlighting that the results in Dominican Republic, Puerto Rico, and the Antilles, which were the main three drivers of the expansion of 36.5% in terms of EBITDA of the quarter and an overall EBITDA margin of 19%, 668 basis points above last year's first quarter results. In Dominican Republic, we continue to operate at full capacity given the strong and stable conditions of local demand consumption that remains positively impacted by tourism, mining, and other services and products associated to the free trade zones of the country. Volumes and prices remained stable during the quarter and cost dynamics improved, bolstering the EBITDA generation. Given the improvement in local consumption, as we have previously mentioned, we are investing COP 7 million in CapEx during 2024 to increase our grinding capacity in this country by 25%, which will allow us to participate of the benefits arising from the market growth. Puerto Rico solid dynamics posted a 5% increase in volumes and remarkable financial results for the quarter. EBITDA doubled versus last year, EBITDA margin expanding 456 basis points, reinforcing the success of our new business model of cement blending. Finally, the tailwind in the Antilles can be attributed largely to the increase of cement demand driven by the construction of the airport in Dominica. This led to a 20% expansion in cement volumes and an EBITDA that was 1.8 times higher than last year. Now, regarding the trading business, we started during the first quarter to operate the new ancillary agreement with Summit, where Argos manages all the imports of cementitious materials and other raw materials for their operation in the U.S. During the quarter, we managed 123,000 tons of cement for this company and 83,000 tons of other raw materials such as slag. In total, our trading unit exceeded a 17% EBITDA expansion, given mainly by better fuel cost and operational efficiencies implemented on our fleet management. We will continue to strengthen and if possible, expand our trading business unit considering these new ancillary agreements. In sum, Central American Caribbean region demonstrated solid performance in the first quarter, achieving an EBITDA of $34 million and an EBITDA margin of 23.6%. These figures represent a significant year-over-year increase of 14% in EBITDA and 301 basis points in the EBITDA margin. We are optimistic about the region's continued growth through the year and remain committed to capitalize on valuable opportunities that complement our operation. Thank you, Gustavo. In relation to our balance statement, the assets combination with Summit strengthen our financial position by allowing us to significantly reduce our indebtedness with the $1.2 billion received in cash. For the first quarter, the ratio of net debt to EBITDA closed at 2 times, decreasing 24% from our last report. Since last quarter, net debt has decreased by 65% in line with our deleveraging process, as we have effectively repaid $653 million of outstanding debt. This financial flexibility given by the low indebtedness and by the existing of other assets, such as the Grupo SURA shares that we expect to monetize in the midterm, will grant us the possibility to explore further growth in our mainstream business lines as well as in our growth levers and ventures in different geographies. Before moving to the Q&A, I would like to ask Felipe one more time to intervene in order to give us a brief update of the SPRINT 2.0 program execution. Thank you, Juan. We continue to deliver positive results to the market as we advance on every pillar of SPRINT 2.0. First, we have successfully converted almost the entirety of our common non-voting shares into common shares, consolidating the liquidity and the float of the company into one single type of share. Second, the integration of our U.S. operations with Summit is progressing satisfactorily, and we have closed our first quarter with our new operating model. Third, on our focus on strong results, we have obtained the first quarter an EBITDA margin that is 21 basis points above the guidance and 238 basis points above last year's. Fourth, our market maker has increased in 42% the traded volume during the last 3 months since the implementation of the new enhanced program. Finally, on our share repurchase program and our dividend payments, we approved in the shareholders' meeting held in March, COP 125 billion in share repurchases, of which to date we have executed 38% on COP 160 billion in dividends that we paid back in April. Today, we have summoned a new shareholders meeting to be held on June 13th, where we will submit upon approval of our shareholders an additional COP 375 billion in share repurchases to be executed within two years on almost COP 430 billion in dividends to be paid between July of 2024 and January 2025. We remain fully committed to deliver value to our investors. Thank you, Felipe, for these closing remarks. Indira, we can proceed now with the Q&A section. Thank you, Juan. We will proceed now with the Q&A session. Please remember that in order to ask a question, you need to raise your hand using the icon that is at the bottom of your screen. I will say your name and company and will enable your microphone. Take into account that you need to unmute your microphone before you speak. First question comes from Alberto Valerio from UBS. Thank you, Indira. Good morning, Grupo Argos team. My name is Alberto Valerio from UBS, as Indira mentioned it. I have 2 questions today about the price environment. We see health environment in this 1st quarter. I'd like to have your thoughts for the next quarter and the remainder of the year. Usually we see cement volumes going down and price pressure, but have been different since the pandemic and I would like to hear if you can keep in this way in terms of price for the future. My 2nd question is about the balance sheet. I see that most of your lease liabilities leave with the transaction of Summit, but remain COP 150 billion still on the balance sheet. I wonder how much rent it pay on these lease liabilities to will improve our forecast for the future here. Thank you very much. Good morning, Alberto Valerio, and thank you for your questions. I will take the first one regarding the pricing environment. I mean, we are seeing a healthy pricing environment both in Colombia and Central America, the Caribbean, and we don't foresee, like, any changes going into the second, third and fourth quarter. Usually in Colombia, the second quarter is even better than the first one in terms of demand. The reality is that we remain fully confident that the pricing strategy is working extremely well, as you have been seeing the, with the expansion of margins. We don't foresee any changes. In terms of your second question, Felipe will answer your question about the leases. Good morning, Alberto. Regarding the financial cost of those leases, I'd say they're around 13%, so we're paying around $5 million in interest equivalent for these leases. Very clear. Thank you both. Next question comes from Alejandra Obregón from Morgan Stanley. Hi. Good morning, Cementos Argos team. Congratulations on the transaction. I have two questions on the aggregates front. First, I was hoping if you could elaborate on the Costa Rica project to export aggregates to the U.S. and whether this could be behind the 115 volume growth on the trading division. How is this project performing? If you can talk a little bit about the progress there. Second, if you can help us understand the Colombian 50% drop on the aggregate segment. Mainly what are the drivers here, especially if we compare this to cement and ready-mix, the decline seems to be significantly more material here. If you can give us some color here, that would be very helpful. Thank you. Good morning, Alejandra, and thank you for your questions. I mean regarding the Costa Rica asset, it is one of the, we hope several assets in Central America and the Caribbean that we are trying to put together to export aggregates to the U.S. The reality is that at this stage, we are still just doing some trial shipments to the U.S. We expect that to ramp up going into 2025. So far we are just scouting, you know, like different assets to put in place for our export platform. We are fully confident that it's going to be a significant component of the strategy of Argos Latam going forward. Regarding aggregates in Colombia, I will ask Carlos Horacio to answer your question. Hi, Alejandra. Regarding the aggregates decline in Colombia, I just like to say that in Colombia we mainly have two operations. One in the central part of Colombia, located close to Bogotá, which operates really flat versus 2023 in terms of volumes. The other, we have two operations in Medellín. One is owned by us and the other, really we were making trading for a third party. Really, we stopped this trading this year because the market has decreased a lot and for that reason, we stopped this trading. That is the reason of the decline in the case of Colombia. Gotcha. That was very clear. Thank you very much again for taking my question. Okay, Alejandra. Next question comes from Louis Blank from Onfield Research. Hello. Hi, Louis. Hello. Thank you for taking my question. I have 3 question. Firstly, I would like to have a little more information about your exports to the USA, what are your volume forecasts for 2024 and for 2025? I also would like to know what are the dynamic of this export. Are they profitable? Do you see an increasing competition from Turkish and Vietnamese exporters? I would like also to know if you see those Turkish and Vietnamese exporters that are importing to Latin America. My last question is, now that you're member of the board of Summit Materials, what can you do to support them to achieve their targets? Thank you very much Louis for your questions. In terms of exports to the U.S., we have a supply agreement signed with Summit to supply close to 500,000 tons of cement per year going forward for five years. We expect to hit those targets in 2024 and 2025. In terms of export of aggregates, we are just in the early stages of putting together our export platform, we haven't yet provided a guidance to the market. 2024 is like the year to put in place that export platform, we will start hopefully giving a guidance in 2025. In terms of our participation in the board of Summit, we are helping the company, you know, to move forward extremely optimistic about the future ahead and extremely happy with being part of the new history of Summit with the combination of Argos USA. Okay. Thank you. Next question comes from Felipe Pardo from BTG. Hey. Good morning, guys. Congrats on the results, and thanks for taking my question. Mine is any update on the growth CapEx. I understand you have a guidance of between COP 110 million-COP 130 million, and about half of that is for growth CapEx. Could you give any update on what you guys might be honing into, when we can expect that CapEx to be deployed? Thank you. Thank you, Felipe. We plan to be within the guidance. I don't know, Pipe, if you would like to give a little bit more color on that to Felipe. Sure. These close to $50 million in CapEx correspond to projects tackling some bottlenecks across our network and also projects that are mainly targeted at improving our availability of electricity or energy both in Colombia and in Central America. We're expecting to deploy this capital starting this year and probably end up finishing these projects through 2025. In Colombia in particular, we're expecting to initiate a process in which we will use municipal waste to replace part of our coal needs. In Honduras, we're expecting to build an additional power plant that will reduce our dependence on the local grid. Those are the main projects representing probably 80% of the growth CapEx. Going forward, they're gonna reduce our cost of electricity and energetics and will reduce our need for traditional sources of energy and reduce the overall cost of our energetics matrix. Got it. That was very helpful. Thank you, guys. Next question comes from Julián Ausique from Corredores Davivienda. Good morning, Julián. Go ahead. Hi, Julián. Can you listen to us? I think he's having some issues with his connection. Juan, we have no more questions. Okay. Thank you so much for connecting to our call. Extremely happy with the results of Cementos Argos. I'm fully confident about the remaining of the year. We look forward to our second quarter earnings calls coming soon. Thank you so much. Have a great day.