Earnings Call: Q4 2023

Feb 21, 2024

Good morning, everyone, thank you for being here with us today to discuss our 2023 results. My name is Indira Diaz. I am Cementos Argos IRO, 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 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 the 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 these adjustments, you can refer to the annexes of our presentation and our report. We have also included in the annexes pro forma of our most relevant figures, simulating the effects of the U.S. asset combination with Summit in our financials to provide some context for the comparable basis of the 2024 guidance and to facilitate the investors' forecasts. Today, after the initial remarks, there will be a Q&A session. If you have a question, 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. Juan please go ahead. Thank you, Indira. Good morning, everyone. As you know, in January, we successfully closed the asset combination with Summit in the U.S., a milestone that enables the transition towards a new business model to manage our presence in the U.S. With our vision and commitment to long-term value creation, we executed disciplined growth strategy in the U.S., fully convinced of the huge potential of the American market and our ability to generate value for our investors. Our journey began back in the early 2000s with the acquisition of ready-mix operations in Texas and the Carolinas. Over the course of almost 2 decades, we faced different economic cycles and approached the American market in 3 different stages. First, as a sole ready-mix player. Second, as a vertically-integrated player with cement assets. Third, as a consolidated local player that has strategically optimized its footprint and business model to consolidate a fully vertical integrated operation across all markets in a constant quest for profitability. After 24 transactions between both acquisitions and divestitures and a total net investment of close to $2 billion, we multiplied our EBITDA in the U.S. by four times, increased the return on capital of these assets by 700 basis points from 4% in 2005 to 11% in 2023, and achieved a record high EBITDA margin of 21.4% last year. With this transaction, which recognized the value of our U.S. assets at $3.2 billion, we embark on a new promising chapter for our company. With the 31% stake in Summit, Cementos Argos now stands as the largest shareholder of a vertically integrated market leading company with national scale and multiple opportunities for continued growth in the U.S. Additionally, the $1.2 billion cash consideration radically transforms the capital structure of the company, opening a new chapter for Cementos Argos, in which we will take advantage of the opportunities to supply a large platform in the U.S. with cement aggregates and other materials as well as enhanced possibilities to grow within the Latam region. Our 2023 results strongly support this long-term vision of value creation, not only in the U.S., but also in our Latin American markets. The overall adjusted operational EBITDA of the company stood at COP 2.7 trillion, increasing 30% versus last year and standing as the highest result ever achieved by Argos. Moreover, our adjusted EBITDA margin stood at 21.1%, achieving our midterm guidance two years in advance of what we had forecasted at the beginning of last year. These outstanding results were achieved despite an overall reduction of our volumes of 3% in cement and 9% in ready-mix, generated to some extent by the slowdown in demand in some local markets like Colombia and to a greater extent to our constant quest for profitability. Turning our attention to the 2023 result of the U.S. region, I would like first to recognize the efforts of our employees in the U.S. that are now part of Summit and the leadership of Simon Bates and his management team that resulted in exceptional financial performance for both the year and the quarter. The results were driven by the ongoing implementation of our profitability focus strategy in addition to the robust pricing dynamics throughout the year and favorable condition in fuel costs. This strategy led to the accomplishment of results above expectations and an EBITDA growth of $116 million compared to the previous year, along with a year-to-date expansion of the EBITDA margin by nearly 523 basis points. In the cement business during the last quarter, the average selling price saw a notable improvement of 13.1% year-over-year, while volumes experienced a modest increase of 1.3%. Despite operational disruptions previously disclosed at our Newberry plant, which have since been addressed. Volumes for the year remain flat compared to those observed last year. Our financial results on the Cement segment were driven by a combination of pricing dynamics and a softened fuel cost, leading to an EBITDA margin of 31% that entails an expansion of 595 basis points. In our ready-mix business, results were similarly bolstered, primarily by pricing strategies. Our average sales price grew by 16.6% year-over-year, offsetting a volume decrease of 10.6% compared to the fourth quarter of 2022. However, our unwavering focus on profitability despite volumes challenges resulted in an EBITDA margin of 7.9%, expanding 400 basis points versus last year. Total EBITDA for 2023 reached $365 million, the total margin EBITDA achieved 21.4%, which are the best results that these assets have yielded during the last two decades. We enter 2024 fully confident of this newly integrated entity that, with its augmented capabilities, is well-positioned to capture every market opportunity stemming from the robust construction cycle in the U.S. in the years ahead. Our commitment remains unwavering as we strive to unlock value within this new platform through the strategic direction of Summit Materials, actively pursuing opportunities and synergies arising from the combination. Moving to Colombia, much in line with our consolidated results, I would like Carlos to explain further the extraordinary result of the country, both on profitability and total EBITDA, despite a challenging market context. Thank you, Juan. Good morning. I am pleased to walk you through the very good results that we obtained in Colombia during 2023, resulting from the deployment and execution of a comprehensive strategy throughout the value chains. Above all, reflecting the commitment and alignment of the entire Colombian team overcoming the challenging market conditions to achieve these results. In 2023, the Colombian market experienced a 4.5% contraction in cement dispatches due to various factors such as decreased housing activity, a stable yet improved deployment of infrastructure projects, and uncertain macroeconomic conditions. Cementos Argos experienced, in the same line, a decrease of 7% in gray cement dispatches and 10% in ready-mix dispatches during the year. However, despite these challenges, we recorded an EBITDA of COP 744 billion, the highest in eight years, alongside significant growth in margins and historic free cash flow generation that increased 180% when compared to the previous year. Our disciplined capital management played a pivotal role, resulting in a working capital release of COP 37 billion, maintaining efficient inventories and healthy receivables despite the challenging economic landscape. Our success was fueled by incremental operational efficiencies, a strategic pricing approach, and rigorous cost discipline. Notably, our focus on profitability led to a substantial increase in the EBITDA margin of 283 basis points, reaching 25.2%. The improvement of 10% in our overall equipment effectiveness, OEE, that measures the reliability of our plants, significantly contributed to our financial performance, generating substantial savings of around COP 118 billion, arising from saving in costs from a total of COP 82 billion, plus savings associated to logistics costs of COP 36 billion. Our assertive pricing strategy enabled us to boost revenues by 9.2% for the year. Despite lower volumes, not only during the last quarter, our cement and ready-mix prices surged by 14.1% and 21.1% respectively, in line with previous quarters trends. Moreover, our export division achieved a new milestone with a record 1.4 million tons exported from our Cartagena plant, mitigating some of the local market contraction. As we enter 2024, we remain cautious about market dynamics, anticipating stable volumes versus last year on the back of a weaker residential segment and some additional infrastructure projects such as Hidroituango, Malla Vial del Cauca, Túnel del Toyo, and Puerto Antioquia, that we believe will provide additional volumes on this front. However, we remain committed to maintain momentum and enhancing operational excellence across our value chains from our mines to the market. Our focus on reliability and operational excellence will continue to drive our strategic endeavors and position us for sustained success in the Colombian market. Thank you, Carlos. Moving on to the Caribbean and Central America. Gustavo will now go over the main developments of the region during the year and last quarter. A region that, despite challenging conditions in certain countries, proved to be resilient overall. Thank you, Juan, and good morning, everyone. 2023 was a favorable year for our operations in Central America and the Caribbean. Market dynamics remained stable in most of our countries of operations, generating a positive evolution of volumes and prices in the local markets. That successfully offset the inflationary pressures still present in the region from raw materials and energetics. On a full year basis, volumes in Central America that include our operations in Panama, Honduras, and Guatemala increased 2.3%, reaching 1.6 million tons for 2023. EBITDA decreased 6.3%, reaching $68 million for the full year, and EBITDA margin stood at 26.5%. Within this region, I would like to highlight the recovery of the construction activity in Panama. That allowed us to increase our volume 6% in the country on a full year basis, driven mainly by new projects associated to the residential sector. Prices increased accordingly, and EBITDA improved consequently year-over-year. The commercial efforts and the market dynamics were only mildly hindered by the country-wide protests that took place during the fourth quarter, affecting both volumes and financial results. Despite this protest, the year was very positive for operations in Panama. We expect this recovery trend to continue forward and improve volumes in the current year. Honduras was steady in terms of volumes and prices on a full year basis, affected partially by weather-related issues in the north of the country during the last quarter and the lack of governmental construction activity during the year. Cost also affected the results of the country, mainly given by a higher petcoke price, which is the fuel that we use for our kiln, and a major maintenance associated to the kiln that was executed during the first quarter of the year and was not initially scheduled. In consequence, both the EBITDA and the EBITDA margin were affected. For the current year, we expect better market dynamics associated with the recovery of the governmental construction activity and improved consumer confidence that will positively impact the retail market. Now moving to the Caribbean, which is comprised of Dominican Republic, Puerto Rico, Haiti, French Guiana, Suriname, and Antilles. The overall performance of the region was positive, but the results were affected by the situation of Haiti that continued to worsen during the entire year. Excluding Haiti, cement volumes and EBITDA increased 6% and 20% respectively on a full year basis. From this region, I would like to highlight the performance of Dominican Republic, where volumes improved 6% during 2023, driven by the construction activity associated to tourism that continues to boost the country's economy. This increase in volumes added to the price increase and cost control initiatives allowed us to achieve a record high in terms of EBITDA for the full year. For 2024, we expect volumes to remain stable given the continuation of the positive macro scenario to the country. Puerto Rico also exhibited good results, reaffirming the success of our current commercial and operational model in the country, where we import cement and blend it locally. Volumes were relatively stable, with a 2% improvement on a full year basis. The EBITDA exhibited a greater increase given the successful implementation of several initiatives that resulted in a year-over-year EBITDA increase of over 15%. The trading business obtained an EBITDA of COP 17 million during the entire year, which is 10% higher than 2022, despite the decrease in volumes given mainly by better negotiations of the services associated with shipping. The entire Central American and Caribbean region exhibited for the full year an EBITDA of COP 124 million, an EBITDA margin of 22.8%, steady versus 2022. For the current year, we expect better volumes and, in consequence, better financial results given by all the dynamics that I have just discussed. We believe that our presence in the region is key to develop new businesses such as the aggregates platform that we continue to explore in the region, leveraging our local presence, logistics capabilities, and knowledge of the local markets to seize new opportunities and drive further expansion. Thank you, Gustavo. Having thoroughly reviewed the exceptional results from the regions during last year, I would like to highlight that all the individual efforts that drove such results led us to successfully deliver on all of our guidance metrics announced at the beginning of last year. More specifically, I want to highlight that, as mentioned earlier, we successfully met our medium-term profitability target for EBITDA margin, achieving the upper limit of the range at 21%, two years in advance to what we expected. We exceeded the revised EBITDA guidance by over COP 134 billion. On the net debt to EBITDA during the year, we saw a 7.5% decrease on our indebtedness ratio, which stood at 2.6 times ending 2023 due to the cash and EBITDA generation. Regarding our CapEx expectations, we successfully deployed over COP 200 million during the year. Finally, we managed to comply and over-deliver on our ROIC guidance, which closed the year at 12.6%. It is precisely due to the outstanding results achieved during 2023 and the overwhelmingly positive outcomes achieved over the past year since the implementation of our comprehensive strategy SPRINT that we are pleased to announce an aggregate approach within SPRINT 2.0. This initiative will continue our commitment to close the gap in value of our stock price. Felipe will now provide more detail on this subject. Thank you, Juan, and good morning, everyone. 2023 marked a year of exceptional achievements for us, with remarkable operational and financial results. To some extent, the market recognized a fraction of the hidden value of the company, evidenced by a total return in dollar terms of approximately 200% since the announcement of SPRINT. However, despite these gains, we recognize that there still exists a considerable gap between the current market price and the fundamental value of the business. This is a situation that needs to be addressed. This is why we have decided to continue and enhance our share price recovery initiative program by launching SPRINT 2.0. The plan is comprised by six pillars. The first one, related to our continuous focus to deliver strong financial and operational results, consists of a commitment to deliver an improved EBITDA margin of between 21% and 22% in 2024, which at the upper end of the range represents an increase of close to 100 basis points vis-a-vis 2023. The second pillar consists of a proposal to increase dividend distributions by 31% vis-a-vis 2023 to COP 585 billion. This distribution includes an ordinary dividend of COP 485 billion and an extraordinary pre-payment of COP 100 billion. We expect to secure shareholder approval in two separate stages. First, an approval of COP 160 billion during the ordinary general meeting, and a second approval of an additional COP 425 billion in an upcoming extraordinary shareholder meeting on the back of the net income generated by the closing of the Summit transaction. Regarding the third pillar, and following the successful execution of the first phase of the share buyback program, which is expected to be fully finalized by the end of this quarter, we're proposing a second phase consisting of the approval of an additional COP 500 billion to be executed over a 2-year period. Similar to the approval of dividends, this next phase of the program will be presented to shareholders in the same 2 stages described above. Next, regarding the fourth pillar, we will continue to support the seamless integration of Summit Materials on Argos USA. Regarding the fifth pillar, we have entered into an enhanced agreement with our designated market maker to improve the parameters of the program. We expect that these changes will result in a notable increase in the daily trading volume operated by the market maker. We anticipate that over the course of 2024, this volume will on average be 4 times higher than in 2023. Finally, we're including a new pillar to the program, a proposal to merge the common onboarding shares into common shares at a ratio of 0.85 to 1 following the analysis carried out by an independent advisor. We anticipate that the successful realization of this conversion will trigger a series of positive outcomes for the stock. Among these, we anticipate benefits such as the simplification of the capital structure and the improvement of the corporate governance of the company. Furthermore, the consolidation of market transactionality into a single name and the expansion of the float should enable increased weighting in indices and the inclusion in new ones, such as the MSCI Emerging Markets. The flows associated to these inclusions are significant and should act as a catalyst to accelerate the convergence of the stock price to its fundamental value. Finally, we want to reiterate that the primary objective of SPRINT 2.0 is to build upon the progress made last year and to unlock the fundamental value for stock in the marketplace. Moreover, we will continue to assess the relevance of these initiatives and consider the incorporations of new ones as necessary. Thank you, Felipe. Lastly, before moving to the Q&A section, I would like to go through our proposed guidance for the year 2024 that you can follow on the slide that is currently being projected on the screen, which reflect the new financial and operational structure of Cementos Argos. Certainly, 2024 will be a transitional year for Cementos Argos, in which we will focus on the execution of SPRINT 2.0 to continue delivering strong operational results and value creation for our shareholders. Thank you all for your attention, indeed. We can now proceed with the Q&A section. Thank you, Juan, and everyone. We will have now the Q&A session. Please keep in mind that in order to ask a question, you need to raise your hand using the icon that is at the bottom of your screen. First question comes from Juan Camilo Dauder from Bancolombia. Good morning. Thank you very much. Hello? Good morning, Juan Camilo. Go ahead. Thank you, Juan Esteban. I have a couple of questions for you in this quarter. The first question is in regard to the non-recurring tax we identified in close to the bottom line. I would like to have a little more detail on the reasons of that tax. On the second hand, in consideration of the decreased volumes we are seeing overall in the operation and mostly in Central America, what is your strategy for these years in terms of pricing? Do you plan to continue with pricing or do you plan to continue like capitalizing the cost moderation in order to improve margins? If you can provide us a little bit more color on that. Thank you very much. Thank you for your question, Juan Camilo. I will take the second one, and then Felipe will answer your first one. In terms of the dynamics in our regions, in Central America and the Caribbean, we're expecting flat volumes. I mean, we're not expecting any slowdown in demand. As Gustavo was explaining, Honduras, which is one of our main markets in Central America, we're expecting a recovery vis-à-vis last year. On top of that, energetics are under control, so that means that prices have been going down and petcoke is at way better prices than last year, and it is an important component of our cost structure in Honduras. The reality is that we don't see volumes decreasing in Central America and the Caribbean in 2024. We had an impact last year because of the political and social situation in Haiti. We changed the business model. Now we are basically exporting cement into Haiti. The reality is that the numbers vis-à-vis 2024 should look better for the Caribbean markets as well. In Colombia, as Carlos was mentioning, yes, we saw a slowdown in demand last year. Most likely the market will see a moderate slowdown in demand in 2024 as well, with all the value generation strategies that Carlos and the team has put in place in Colombia, we are foreseeing a better result at the end of the year for the Colombian market as well. Basically, that is going to be our strategy in 2024. Prices will continue increasing on top of inflation. The reality is that we are expecting margin expansions in accordance to our SPRINT program in 2024 as well. Now I would like Felipe to answer your question, the non-recurring taxes. Good morning, Juan Camilo, and thank you for your question. As you might remember, in the earnings call for the third quarter, we announced that we were planning on repatriating close to $200 million of dividends from our operations in the U.S. and the Caribbean for around $200 million. This repatriation represented a tax impact of around COP 242 billion, which was fully offset, fully offset by some tax credits that we had on our balance sheet. These tax provisions impacted our P&L but had a neutral effect on our cash flow. That is the effect that you see there. This was a very specific transaction. It was a one-off transaction, and this is the reason behind it. Thank you very much. If you allow me one more question, I will ask about the SPRINT program and the change of ordinary shares for preferred. What can you tell us about the ratio you are considering? What are the rationales behind? What information could you provide us on that regard? Thank you. Go ahead, Felipe. Sure. As you see, the sixth pillar of the SPRINT 2.0 program is that conversion and the merger of the two securities into the common shares. The ratio we're proposing is 0.85 common shares for each common non-voting shares rendered tendered in the conversion. This ratio was determined based on the recent market ratio. And again, I mean, we expect this pillar to be the cornerstone of the SPRINT 2.0 program as it will consolidate all liquidity into a single security. It will allow us, hopefully, to be included in the MSCI Emerging Markets Index, which will drive significant volumes into the stock. We do expect this conversion to be finalized in 2024, probably between the second and third quarter of the year. Thank you very much. Thank you, Juan Camilo. Next question comes from Pablo Ricalde from Santander. Hello, everybody. Thanks, Indira. Two questions. Well, maybe one question and one confirmation. On the question side is I don't know if you can talk on your 2024 pricing strategy in the U.S. and in Colombia. I just want to double-check that now with this new accounting, everything that is sold from Cartagena to the U.S. will be reported in the Colombia region. Thank you, Paul. I mean, we will not comment on the pricing strategy in the U.S. since our business in the U.S. is already part of Summit Materials. We will comment on our pricing strategy in Colombia. Our Colombian business already made a price increase early January, and it is sticking. The reality is that we will continue with our strategy to continue recording prices in Colombia. By the way, prices in Colombia are now FOB close to COP 115, which is a significant improvement vis-a-vis the prices that we were seeing in the last few years. We are extremely happy with the way in which our commercial strategy is going in Colombia. Exports from Cartagena to the U.S. will be part of the Colombian region, and all the exports out of Cartagena are now part of the numbers of Colombia. Perfect. Thanks a lot, Juan. Thank you, Paul. Next question comes from Steffania Mosquera from Credicorp Capital. Good morning. Thank you very much for the presentation, and congratulations on the announcements. I have two questions. My first question is, if you have any advances on what you are considering to do with your investment in Grupo Sura common shares. The second question is regarding your dividend policy and just to double-check whether you are planning to use the proceeds from the Summit transaction entirely for debt payment. Thank you, Steffania. No, regarding Grupo Sura, we are fully optimistic about the future of Grupo Sura going forward. We will benefit in a significant way with the new strategy of Grupo Sura once all the final arrangements are made. That is part of our portfolio. At one point in time, we have been totally vocal that at one point in time, it will be an important asset of Cementos Argos to divest. We will wait until the new strategy of Grupo Sura is in place. Regarding our dividend policy and the proceeds from the transaction, I mean, the reality is that we are deleveraging the company in a significant way, and main use of the resources of the transaction is going to be the decrease in the debt of the company. I don't know, Felipe, if you want to give a little bit more color on that? Sure. Just to clarify that regarding our dividends, we have to find a total distribution proposal for 2024. We're gonna seek shareholder approval in two separate stages. First, in the ordinary or in the ordinary general assembly, we will first approve a first package of dividends. Then we will convene a second general assembly, probably by the end of the first half of the year in order to seek approval for the latter part of the package. We are expecting to distribute around COP 585 billion in dividends in the form of ordinary and extraordinary dividends. They are gonna again be approved in two stages and are expected to be fully distributed before the general assembly of 2025. Next question comes from Juan Guillermo Agüero from Inversiones Odisea. Hi. Hi, everyone. Can you hear me well? Yes, Juan Guillermo. Perfect. Please go ahead. Well, thank you. Thank you for the call, and congratulations for the full year results and the success you have had with the SPRINT program. I have a question following up on the, on the 2.0 version, and the 0.6 about the unification of the share classes. I'm wondering, how does the approval work, thinking that preferred shares don't have voting rights, but the decision at the end affects them directly economically wise. I'm wondering, is this optional for the holders of the preferred shares? What are the required quorums for the approval, et cetera? Could you please elaborate? Thank you, Juan Guillermo. We need super majority in the general shareholder meetings, super majority for the preferred shareholders to approve and super majority for the common shareholders approve at 70% in the general shareholders meeting. It will be optional, so there is an opt-out if somebody doesn't want to convert. I don't know if María or Felipe would like to complement my answer. Yeah. I just wanna clarify that in general, preferred shareholders don't have a vote in the general assembly, but for decisions that directly affect them, they do actually have the ability to vote. For this decision, preferred shareholders, are gonna be able to attend the general assembly and cast their vote on this proposal. I don't know, Juan Guillermo, if that was clear. Yeah. Pretty clear. Just to be clear on. You need the approval of the super majority, only in the preferred shares and only in the common shares, right? Because thinking that the preferred shares are only 15%, we're not thinking as all the shareholders as a whole, but each group, preferred and common, need to approve in super majority. Am I right? You're right. Yeah. You're right. It's true. Yeah. We're gonna carry out 2 separate votes. Very clear. Thank you. Thank you for your answer. Thank you all. Juan, we have no more questions. Thank you so much, for connecting to our fourth quarter conference call, and we look forward to the conference call of the first quarter of 2024. Have a great day.