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

Good morning. Thank you for joining us today for our fourth quarter 2023 conference call and webcast. We hope this call finds you in good health. And even though it's already February, let us take this opportunity to give you our best wishes for 2024. While we are here to talk about 2023, we hit the ground running in January and are optimistic about the opportunities that 2024 presents. I am joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO. As always, we will spend a few minutes reviewing the business, and then we will be happy to take your questions. And now, I will hand it over to Fernando.

Thanks, Lucy, and good day to everyone. Thank you for joining our call today, and I would like to extend my best wishes for a healthy and successful 2024. I am pleased to present to you today the results of what was an exceptional year where we delivered not only record results, but achieved our goal of recovering from the extraordinary inflationary pressures over the last few years. This performance is a testament to the focus and commitment of our employees around the world. 2023 results were achieved despite a challenging demand backdrop in most markets. Full year EBITDA grew 20%, reaching a record $3.35 billion. Growth investments contributed to 13% of incremental EBITDA, while organization solutions grew in the double-digit area. With margin expansion of 2 percentage points, driven by strong pricing and decelerating cost inflation, we reached our goal of recovering 2021 margins. Free cash flow after maintenance CapEx of $1.2 billion was a highlight, growing $655 million on the back of higher EBITDA and a turnaround in working capital investment. Our leverage ratio declined by 0.8x of a turn to 2.06x already within investment-grade credit parameters. And finally, our return on capital for the full year expanded by 1.5 percentage points to close to 14%, excluding goodwill. Importantly, our 2023 results add to several years of resiliency in EBITDA leverage and strength in free cash flow generation. This new foundation allows us more flexibility going forward for deleveraging, accelerating our existing bolt-on growth strategy as well as allowing us to propose the initiation of a sustainable shareholder return program. On the customer centricity front, we closed the year with an important improvement in our already high Net Promoter Score, a new record and a benchmark for the industry. In climate action, 2023 represents another year of significant progress against our decarbonization roadmap with the achievement of another 4% reduction in CO2 emissions. Finally, CEMEX was once again recognized by CDP on its prestigious A list for transparency on climate change disclosure. Full year net sales increased 8%, while EBITDA grew 20%, reflecting not only the strong pricing momentum of our products and decelerating input cost inflation, but also the success of our growth investment strategy. EBITDA margin expanded by 2 percentage points, driven by the U.S. and Europe. Free cash flow after maintenance CapEx increased $655 million, reflecting EBITDA growth and a strong working capital turnaround. The working capital improvement resulted from a management initiative launched in the second quarter of 2023 to realign our inventories and accounts payable to pre-pandemic levels as inflation and supply chains normalize. This initiative paid off in the second half, and we expect additional reductions in 2024.

Thank you, Fernando. Our Mexican operations delivered strong results during 2023 with both sales and EBITDA growing in the mid-teen percentage area, supported by strong volumes and price increases. The recovery in cement volumes was driven by the formal sector, with bulk cement more than offsetting the decline in bags, while ready-mix and aggregate volumes grew high single-digits. Importantly, we have seen a pickup in bag cement demand in the back half of the year, which we believe bodes well for 2024. Formal demand was supported by infrastructure and nearshoring with particular strength in the North and Southeast. While our prices rose double-digits, the tight supply-demand conditions in the North and South put pressure on our supply chain. As a result, EBITDA margin decreased slightly, mainly impacted by an unfavorable product mix and higher transportation costs. For 2024, we expect the strong momentum in formal demand to continue, while informal demand recovers gradually, supported by decelerating inflation, lower interest rates, and government social programs ahead of the election. We are guiding to low single-digit volume increases across all products. We implemented price increases during January that reflect the ongoing input cost inflation, particularly in labor, transportation, and electricity.

Thank you, Lucy, and good day to everyone. 2023 was an outstanding year, reaching a record EBITDA and achieving margins substantially in line with 2021. EBITDA for the year grew 25% on a reported basis, 2x the rate of growth in sales. This performance was achieved through the successful execution of our robust pricing strategy across our businesses and markets. In addition, we had a very healthy contribution from our growth investment strategy and Urbanization Solutions, which in total now represent close to 20% of our annual EBITDA, with the latter growing almost 30% in 2023. Our results also benefited from a deceleration of input cost inflation coupled with cost efficiency measures across our businesses, such as our Working Smarter initiative and our Climate Action roadmap, among others. These efforts more than compensated for volume headwinds in some markets. Energy cost per ton of cement grew 9% in 2023, slightly below our guidance and at a significantly slower pace than the prior year. The containment of energy cost was due to a combination of a deceleration in market prices as well as proactive efforts to align our portfolio towards lower-cost alternative fuels. In 2023, we continued to increase alternative fuel usage, growing almost 2 percentage points and reaching 37% of total fuels. As we mentioned before, alternative fuels are significantly less expensive than non-renewables, have different supply-demand dynamics and are critical in our decarbonization roadmap. We are particularly focused on alternative fuels with biomass, which currently account for approximately one-third of our alternative fuel mix. In 2023, we more than doubled our free cash flow after maintenance CapEx to $1.2 billion. The increase in free cash flow was driven primarily by significantly better operating performance, including working capital management, which more than offset higher taxes. The increase in cash taxes is a consequence of stronger results as well as the tax effect of foreign exchange on our U.S. dollar-denominated debt. This year, we had no incremental investment in working capital despite higher sales and continued inflationary and supply chain pressures. As Fernando mentioned, this is the consequence of targeted management actions to optimize working capital, which we will further deploy in 2024, seeking to maximize free cash flow generation. Despite significantly better operating performance, net income for the year was lower due to an extraordinary gain in the prior year of $234 million as well as a tax provision in 2023 for a fine related to a case in Spain dating to 2006. We currently expect the majority of the tax provision to be paid in 2024. We ended the year with a stronger financial position, reflecting greater liquidity and average life of debt of close to five years, a flatter debt maturity profile with no outsized maturities in any year. We believe our expected free cash flow generation alone should be sufficient to meet our maturities in any given year. Our leverage ratio stood at 2.06x, down three-quarter returns from last year's level, driven by strong operating performance, including working capital management and a reduction of over $700 million in our consolidated net debt.

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

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to prices for our products. And now we will be happy to take your questions.

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

Ben, that could be the case, but we are taking that builds our base case scenario. Remember, in both countries this year is an election year earlier in Mexico than in the U.S., but anyhow, in both cases, there will be this election process. We will continue observing the dynamics. There are positives. For instance, in the case of Mexico, demand coming from the strong activity because of nearshoring, particularly in the north of the country. And then the projects in the Southeast, they are not finished yet, meaning there is activity still going on for the rest of the year. So again, there are reasons to believe that the way volumes are going to go is going to be positive. We would like to take this stance, which we believe is reasonable. We will monitor, and we will continue guiding according to the way we see the variable evolving.

In Mexico, we saw an acceleration in volumes during the second half of the year, and we expect this trend to continue, especially with significant projects in the south and strong industrial demand in the north. Bag cement volumes turned positive in the latter half of last year and have continued to improve. With inflation slowing and potential interest rate cuts, we anticipate a boost in housing activity this year. Historically, election dynamics have also had positive effects on our business. Overall, the outlook for Mexico in terms of volume appears healthy, with the market being quite sold out, leading to favorable supply-demand dynamics that should support recovery from inflation in our operations there. Regarding the U.S., we remain optimistic despite facing challenges last year, with volumes down about 13%. One-third of this decline was due to weather impacts we weren't able to recover from, another part stemmed from reduced demand and project completions, while competitive pricing dynamics also contributed. We believe we can responsibly regain lost market share in the short term. We're projecting low single-digit increases in cement and are optimistic about the outlook. We believe that one of the primary challenges in our U.S. business has been the residential sector. However, we are beginning to see strong signs of stabilization with consecutive quarterly improvements, especially in single-family residential starts and permits. As inflation slows down and the outlook for interest rates improves, we anticipate a significant amount of pent-up demand in residential, which should be beneficial. Infrastructure remains a major part of our business, and as previously noted, various fiscal projects are supporting and accelerating this sector, particularly during an election period. Construction activity in infrastructure has also been quite positive. On the commercial side, we are experiencing some challenges, but this is being somewhat balanced out by developments in the industrial sector. Most industrial projects are fueled by reconfigured supply chains, energy concerns, and clean tech initiatives. Therefore, after facing significant headwinds in volumes last year, we expect much better performance in 2024. I'm not sure if that fully addresses your question, Ben.

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

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

My question is related to your pricing strategy. The last two years, you've implemented an increase in prices twice during the year, at the beginning of the year and then in the summer. Should we expect something similar? Or will you be going back to increasing prices once a year? That's primarily for Mexico and the U.S., the question.

I think the pricing strategy that we are going to be displaying this year, in essence, is the one that we defined in late '21, early '22 when we saw inflation going to much higher levels than whatever number of years before, meaning our pricing strategy should be designed or it is designed to recover input cost inflation, meaning protecting our margins. So what is it that you can expect in 2024? The same principle. Now '22 and '23 were very different, and '24 is going to be even more different. Meaning, in '22, inflation started going up at a higher rate than what we thought and our prices did manage to recoup that inflation. The opposite happened in 2023 when our pricing strategy had already a tailwind, and we continued with the idea of recovery in input cost inflation thinking that inflation was not going to drop as fast as it did, meaning a very material drop in inflation in the second quarter of last year. So starting 2024, our pricing strategy is designed to recover the levels of inflation that we are estimating to have during the year. Things might change, scenarios might change, and we are prepared to make a number of additional increases if that's what it takes for us to cope with inflation. So the strategy is not defining how many price increases we're going to have in a year, but how are we doing with the objective of recovering cost inflation. We are guiding for our cost, particularly energy to decrease by mid-single digits. So you can expect a much lower inflation in our input cost structure. And because of that, a lower level of price increases. And again, if needed, we will do a number of price increases in different markets to assure that we at least maintain the margins we already recovered during 2023.

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

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

Yes. The process of our growth investments has been like a fine-tuned machine that has been started for now the last two or three years. So the stream of projects that have been identified and earmarked are quite developed. All of these projects are quite clearly defined. And we feel very comfortable that the timing should be fairly even throughout the year. And however, I have to tell you that in some instances, you do have timing, very specific tactical execution timing for some of these projects being made. But we feel very, very reasonable that we will be able to execute on the guidance that we're giving, the strategic CapEx of $600 million, which is a big increase compared to last year. Last year, we wanted to do a little bit more. We underperformed our guidance, and we wanted to do a little bit more primarily because of some delays that took place because of supply chains and negotiations or whatever. So we do feel fairly strong that we should be able to execute that amount. And the additional contribution from our growth portfolio should be quite healthy. I mean, we're expecting a similar contribution to this year. This year, the growth portfolio was close to about $86 million, $84 million. We're expecting a similar amount. And we did say that the total contribution of our growth portfolio to EBITDA last year in '23 was around $325 million. So if you add the incremental amount, you're talking about close to $400 million of contribution going into this year, which is a big percentage now of our total consolidated EBITDA. Now the investments are split into a number of types of activities, climate action, cement expansion, and so forth and so on. So it's very well balanced, and it addresses key opportunities in our markets. Aggregates replenishment is another area that we are very focused on as well.

Thank you for the call. I would like to follow up on Alejandra's question regarding your strategic capital expenditures. It seems that you have reached a point where you can be flexible enough to provide more strategic CapEx and return money to investors, which is great. Could you elaborate on how your dividend policy is expected to evolve? I would appreciate more details on the dividend policy itself. Additionally, could you provide more insight into your strategic CapEx allocation, particularly in relation to Urban Solutions versus aggregates? It would be helpful to understand what to expect across different regions and the reasoning behind those decisions. Thank you.

Thank you for the question. I'll start with geographic allocation regarding our investments. For the past three years, we have consistently focused our investments in the U.S., Europe, developed Europe, and Mexico. As we observe Mexico becoming more stable and increasingly integrated into the U.S. market, we are reevaluating our investment balance between the U.S. and Mexico. However, our primary focus remains on further investment in the U.S. because, on a risk-adjusted basis, its outlook is the most promising within our portfolio. The growth prospects in the U.S. are among the best we see. Aggregate demand is strong, GDP is on the rise, and inflation is more manageable compared to other regions. Therefore, our geographic focus includes the U.S., Northern Europe, and Mexico, with Mexico gaining importance as we see further integration. Regarding specific areas of investment, we are finishing up investments in cement across key markets that are currently sold out, and we are also working on replenishing aggregates, particularly in the U.S. and Europe. We have made several attractive investments in the U.S., which will continue to be a focus for us. Additionally, we are prioritizing investments that are crucial for our future, especially in relation to our climate agenda. This includes the use of alternative fuels and environmentally-friendly products, such as sustainable cement and ready-mix. These investments are not only beneficial but also have average payback periods of four to six years. Concerning our dividend and cash flow allocation, we would not have announced the dividend payment unless we were confident in achieving our investment-grade rating this year. This reflects our strong belief in our business outlook, free cash flow generation, and our ability to consistently provide dividend payments. We are starting early compared to our peers, targeting about 10% of our operating free cash flow for dividends. We hope that as our business continues to grow, our dividend will also increase over time. We feel very comfortable with this approach.

The next question comes from Adam Thalhimer from Thompson Davis.

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

Adam, we're approaching the situation with caution due to the current volatility in the world. Unlike last year, when our guidance was significantly exceeded, we're being careful this time. As Fernando pointed out, the market dynamics regarding pricing and volumes have changed from last year, requiring us to be prudent. We are optimistic about developments in Mexico and the U.S., but we remain cautious regarding EMEA and Europe, expecting stability in those regions. We are also cautious about South Central America and the Caribbean. However, there may be potential advantages in energy costs; for example, in Mexico, we've been benefiting from the decline in natural gas prices. We've traditionally used a significant amount of alternatives and petcoke, but the cost of natural gas has decreased considerably. The price difference between natural gas and petcoke is now about one-third, allowing us to utilize natural gas at many of our plants in Mexico. There are several input cost factors that might lead to better performance than we initially anticipated. We are securing some lower energy costs and hedging our petcoke usage, having locked in many of our diesel costs. While there could be positive developments on the cost front, we still need to exercise caution, and that's reflected in our guidance.

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

Congratulations on the impressive EBITDA figure for 2023. I have a question regarding what the rating agencies may be considering for an investment-grade rating. I'm thinking of other companies that have been in similar situations seeking upgrades. There are two points that stood out to me when I reviewed your balance sheet. First, while your cash balance is strong, there are companies with even larger cash reserves. You also have a committed credit facility, so I would appreciate your thoughts on that. Second, there's the matter of your debt maturities; you have a relatively short maturity profile over the next few years. Have you considered extending that?

Thank you, Anne. We are very close to being at the right level in terms of leverage metrics. However, rating agencies consider more than just that. They also look at liquidity, earnings stability, the economic cycle, and management actions. We're analyzing these factors too and ensuring we meet all these criteria, which I believe we have. Regarding our cash balances, we typically maintain between $500 million and $600 million on hand, with fluctuations depending on seasonal factors. It's important for us to avoid any potential liquidity issues. Last year, we refinanced our bank facility and increased our revolving credit by $250 million. We are also exploring ways to enhance our liquidity in the euro market. On average, last year, we had about $1.8 billion to $1.9 billion in available liquidity, which includes cash and our revolving facility. With the recent increase in our revolving credit, we expect to extend our liquidity further, ensuring we can handle any cyclical or seasonal fluctuations without concern. As for our maturity schedule, we’re finishing the year with a comfortable profile that aligns with our operational cash flow. We're constantly managing our liabilities and actively considering various transactions. We are currently in the market to reopen bonds and pursue euro transactions to extend our maturities. Ultimately, we anticipate a more balanced maturity schedule that meets rating agency expectations. If interest rates drop as expected, we might consider issuing longer-term debt, which would significantly extend the average maturity of our portfolio. Given our improved credit standing and the liquidity available in both the bank and bond markets, having an average maturity of five years is not an issue for us. We feel very secure about this.

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

Congratulations on the numbers. I have a question about the Urbanization Solutions business. Could you provide some insight into the geographic distribution of the EBITDA? Also, do you anticipate offering more details about that unit, considering its size now? Additionally, I want to clarify that in your $1 billion cash tax guidance, you are including the total amount of the one-off payment expected in Spain.

Yes. I'll address the second part of your question first, Gordon, because it's very important. We've never had a cash payment of $1 billion for taxes as far as I can recall. So the answer is definitely yes, we expect that to happen. However, it may be spread out over a longer period, which could lessen the impact on free cash flow this year. But yes, it is included. It's also crucial to analyze the cash taxes by adjusting for this payment. If we assume we pay the full amount this year and compare the cash taxes from operations last year to our guidance, you'll see that we're actually expecting cash taxes to decline for 2024, excluding this one-off payment. As you know, cash taxes increased significantly from '22 to '23 due to a couple of key factors. First, the Mexican business had a record year in earnings. Second, we've utilized most of our NOLs in '22, eliminating that benefit. Third, we experienced significant vessel appreciation and inflation persisted, resulting in extraordinary taxable income, which was the main reason for the increase in cash taxes. This situation is not likely to repeat in '24 or '25. If it did, and we saw another 15% appreciation of the Mexican peso, it might suggest higher cash taxes, but it would also likely have a very positive impact on our EBITDA in terms of cash flow generation in Mexico. When we exclude the effects of FX and inflation in Mexico and adjust our tax rate, the tax rate is actually decreasing from '22 to '23, and our guidance implies it will continue to decline in '24. I'm not sure if that fully addresses your tax question. A second question about Urbanization Solutions, Gordon. We're very excited about that business. It is experiencing high double-digit growth, and in 2023, EBITDA increased by 30%, nearly doubling our sales growth, indicating significant operating leverage. This business has undoubtedly become a core part of our operations. It complements our value offerings and solutions in cement, ready-mix, and aggregates, and is highly integrated with these businesses. The regions driving the most contributions and where we are investing heavily are mainly Mexico and the U.S. In Mexico, we are focusing on admixtures and circularity, where we have made investments. The multiproduct segment is also vital for growth. Meanwhile, the U.S. is contributing nearly one-third of our overall EBITDA. In 2023, Urbanization Solutions contributed almost $300 million with a double-digit EBITDA margin. We are very enthusiastic about this and our investment strategy will continue to support this area, which is well-diversified and relatively low risk. Some investments are even counter-cyclical to the rest of our business. Importantly, this area aligns with our future strategy and climate action initiatives by allowing us to accelerate our product strategy in our offerings, particularly in cement and ready-mix. As you have seen, we have surpassed our targets in cement and are close to achieving our goals in ready-mix. This segment is very complementary and central to our overall strategy.

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

Absolutely. The return on capital employed in this business aligns closely with our growth investment parameters, which are highly beneficial. We are looking at internal rates of return exceeding 25%, and particularly for admixtures, we see comparatively shorter payback periods.

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

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