Earnings Call Transcript - CX Q3 2023

Operator, Operator

Good morning and welcome to the CEMEX Third Quarter 2023 Conference Call and Webcast. My name is Daisey, and I'll 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 to begin. Lucy please proceed.

Lucy Rodriguez, Chief Communications Officer

Good morning. Thank you for joining us today for our third quarter 2023 conference call and webcast. We hope this call finds you in good health. I'm 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. Before we begin, I would like to point out a few changes in our CEMEX quarterly reporting, reflecting the higher CEMEX ownership of CHP and CLH's delisting, we will be moving this quarter from a country reporting framework to more of a regional disclosure. Consequently, we will include quarterly regional results and full year guidance for South Central America and the Caribbean and the Asia, Middle East, and Africa subregion, composed of the Philippines, Egypt, Israel, and the United Arab Emirates. Currently, this subgroup represents approximately a quarter of Europe, Middle East, Africa, and Asia's EBITDA. And now I will hand it over to Fernando.

Fernando Gonzalez, CEO

Thanks, Lucy and good day to everyone. Before I begin, as we watch this terrible situation unfold in Israel and the Middle East, I would like to convey that our thoughts are very much with the people affected by these events. We have accounted for all our employees as well as our assets in Israel. We remain committed to prioritizing our people's health and safety and as such, we are supporting in every possible way our employees, their families, and communities. Now, moving on to our third quarter performance. We continue delivering very strong results with EBITDA growing 32%, reflecting the success of our commercial and growth strategies. Decelerating input cost inflation, coupled with strong pricing led to a material margin expansion. For the first time since we launched our pricing strategy in mid-2021, our quarterly EBITDA margin exceeded our goal of recovering 2021 margins. The incremental EBITDA contribution from our growth investments continues to ramp up accounting for 11% of incremental EBITDA. In addition, our urbanization solutions business is expanding meaningfully. On the customer centricity front, we achieved a record Net Promoter Score of 73% in the quarter, a benchmark for the industry and similar to digitally native companies. In climate action, we continue to post record lows in CO2 emissions. Free cash flow grew significantly, driven by higher EBITDA and lower investment in working capital. Importantly, the strong earnings growth has amplified our deleveraging trajectory with the leverage ratio now at 2.16 times, a reduction of almost one-third of a turn. And our return on capital in the double-digit area keeps expanding relative to our cost of capital. While net sales grew by high single-digits, EBITDA expanded by 32% with contributions from all regions. EBITDA margin increased 350 basis points, the largest expansion in many years. EBITDA outperformance reflects not only strong pricing and decelerating input cost inflation but also the success of our growth investment strategy. As you know, for the last two years, we have been moving to recover margins impacted by a rapid spike in inflation stemming from the outbreak of the Ukraine war. For the first time, this quarter, we achieved this goal with margins exceeding those of the third quarter of 2021. Free cash flow after maintenance CapEx increased almost $300 million, reflecting EBITDA growth and a lower working capital spend. While consolidated cement volumes continued to decline year-over-year, we have seen improvement versus the first half performance. Mexico and SCAC both reported cement volume increases as formal sector demand growth more than compensated for lower back activity. Volume declines in the US and Europe reflect continued weakness in specific micro markets in the US and lower economic activity in Europe. Despite the soft volume backdrop in certain markets, prices in all regions maintained strong momentum. Consolidated prices across our products rose between 9% and 14%. On a sequential basis, consolidated cement prices declined 1% due primarily to the competitive situation in the Philippines. EBITDA growth continues to be explained by the contribution of pricing over incremental costs, growth investments, as well as our rapidly growing organization solutions business. As our growth investment strategy scales, investments are contributing more and more to improve profitability accounting for 10% of total EBITDA and 11% of incremental EBITDA in the quarter. As I mentioned earlier, the third quarter margin of 19.9% reflects the success of our pricing strategy, exceeding our goal of recovering 2021 levels for the first time, despite margin headwinds from lower consolidated volumes and product mix. Increasingly, margin expansion is being driven by easing cost inflation and operational efficiencies, as shown in the decrease in COGS as a percentage of sales over the last four quarters. In second quarter 2021, when we announced our action plan to cope with the unprecedented inflation, we oriented our pricing efforts around an inflation-based strategy. Now, for the first time in almost two years, pricing increases in cement, our most energy-intensive products have more than compensated for incremental costs. This achievement has been driven by a marked deceleration in cost inflation since third quarter of 2022, where the key contributor to this decline is energy with the cost per ton settling at a 1% increase for the quarter. With year-to-date margins approaching 2021 levels, we believe we will have fully accomplished our goal of recovering input cost inflation by fourth quarter. You should expect that we will continue to calibrate our pricing strategy going forward to reflect inflationary costs of the business. Since the launch of our future action program in 2020, we have reduced Scope 1 carbon emissions by 12%, a reduction that previously would have taken us almost 15 years to achieve. We have been equally successful in Scope 2 emissions with an 11% decline. This year is no different with a 3% decline in Scope 1 carbon emissions and a record high alternative fuel usage and record low clinker factor. During the quarter, we achieved an important milestone, becoming the first company in the industry to provide third-party validated environmental impact information globally for all core products in our main markets. This transparency is an essential step to support our clients in the design of sustainable construction and to decarbonize the built environment. Over the last year, we have been working to enhance our future action program with biodiversity and water goals. We are working with the science-based targets network to establish targets on nature and biodiversity. We recognize that our industry can play a vital role in reversing biodiversity loss. Our quarries can make important contributions at the end of their life cycle to biodiversity and the ecosystem. By 2025, we have committed to developing biodiversity baselines for all active quarries, providing the foundation for a nature-positive approach. Organization solutions continued to enjoy double-digit growth with EBITDA rising more than 30% year-to-date and contributing 7% of quarterly incremental EBITDA. On a compounded annual growth basis, EBITDA has grown at a rate above 20% since the inception of the business in 2019. Growth has been achieved through both organic and inorganic investments. Organically, we have completed numerous CapEx projects that have full-year average payback period and 50% IRR. On the inorganic front, we have executed transactions at an average of three times EBITDA multiples with acquisitions immediately accretive. The business is closely aligned to the mega trends rolling out in the construction industry, including carbonization, resiliency, sustainability, and urbanization. We believe the business is well-positioned for continuous sustainable growth. And now back to you, Lucy.

Lucy Rodriguez, Chief Communications Officer

Thank you, Fernando. Our Mexican operations once again delivered strong results with sales supported by a double-digit increase in volumes and prices across all products and EBITDA growing by more than 30%. Cement volumes rose 10%, the second consecutive quarter of growth since the pandemic lockdown eased in the third quarter of 2021. Bag cement grew for the first time since 2021, and while bulk cement continued its double-digit growth trajectory driven by formal demand. Ready-mix and aggregate volumes also benefited from spring in formal construction. Volumes continued to be supported by accelerated execution of infrastructure projects ahead of national elections and near-shoring investments. Cement prices were flat sequentially, while ready-mix and aggregates increased by 2% and 5%, respectively. On the back of strong pricing and volumes, accompanied by lower fuel costs, margin expanded significantly, posting the fourth consecutive quarter of growth. Higher transportation costs resulting from tight supply/demand conditions in the north and south, coupled with product mix, explain the sequential decline in the EBITDA margin. During the quarter, our 1.5 million ton capacity expansion in Tepeaca came online, allowing us to serve expected medium-term demand in the country at a lower cost than existing capacity. We have also initiated an expansion of our cement plant for an additional 400,000 tons to serve the long-term growth needs of the Southeast. This new capacity should be introduced in 2025. Despite lower volumes in cement and ready-mix, our US operations delivered another strong quarter. EBITDA grew by an impressive 36%, driven by pricing strategy and decelerating cost, helping us recover prior year cost inflation and bringing us closer to our margin goal. While EBITDA margin expanded significantly, it declined sequentially, mainly due to lower volumes and higher maintenance. Cement and ready-mix pricing rose double-digits, while aggregates increased 9%. On a sequential basis, cement and ready-mix prices rose low single digits, reflecting the success of second half pricing increases implemented in most of our states. We are currently in the process of announcing first quarter 2024 price increases. The volume decline in cement and ready-mix primarily relates to continued weakness in California, along with the winding down of a few large industrial projects. Commercial and residential activity slowed in the quarter, while infrastructure activity continued to grow. In response to the demand environment, we've reduced cement imports to support margins. Aggregate volumes grew, benefiting from recent acquisitions in Florida and Canada. While we expect higher interest rates to impact some commercial and residential projects in the near term, our states have healthy financial positions and remain key beneficiaries from onshoring and clean technology spending, continuing to have a long-term deficit of housing supply. Furthermore, the tailwinds from the well-funded government fiscal stimulus program will continue to drive construction activity and are expected to be supportive of volume over the medium term. In EMEA, despite a challenging demand environment, EBITDA continues to grow, while margin expanded to the highest level in several years. This performance was largely anchored by another quarter of solid results in Europe. EBITDA in Europe rose 17%, while margin increased 2.6 percentage points to a record high of 17.3%. In a quarter where European volumes declined double-digits, these achievements speak to the success of our One Europe strategy implemented in 2019, where we consolidated and integrated our value chain footprint, accelerated our climate action efforts, while rationalizing cost and pursuing bolt-on growth investments in integrated urban micro markets. The most recent examples of our growth investment strategy are the purchase of aggregate quarries near Madrid that will bolster our reserves in this fast-growing metropolis and the acquisition of a Motors and Adhesives technological leader that serves the German, French, Polish, and Czech Republic markets. Pricing in Europe remained resilient with cement prices up 21% commensurate with the still elevated input cost inflation environment, while prices were flat sequentially. Ready-mix and aggregate prices also showed significant growth, but declined slightly sequentially due to geographic mix. While European construction demand is currently challenging, we remain optimistic over the region's medium-term prospects as Europe pivots decisively towards a more circular economy and construction is supported by multibillion euro projects related to green renovation, transportation, climate spend, energy reconfiguration, and onshoring investment opportunities. EBITDA from Asia, Middle East, and Africa increased low single digits, while margins contracted by 1.2 percentage points, primarily due to the competitive environment in the Philippines. As Fernando mentioned, we are deeply saddened by the recent events in Israel and the Middle East and we remain focused on supporting our employees and communities during these challenging times and keeping them as safe as possible. Net sales and EBITDA in the South Central America and Caribbean region rose 11% and 18%, respectively, driven primarily by prices and slowing energy inflation. Margin improved one percentage point with a slight decline in sequential margin, largely explained by higher maintenance. Regional cement prices rose high single digits. Despite continued pressure in bag cement in the region, volumes grew for the first time in two years, driven largely by positive performance in Panama, the Dominican Republic, and Jamaica. Demand has been supported by formal construction related to infrastructure projects, such as the Bogota Metro, the fourth bridge over the canal in Panama and related projects in the Dominican Republic and Jamaica. And now I will pass the call to Maher to review our financial development.

Maher Al-Haffar, CFO

Thank you, Lucy, and good day to everyone. We are very pleased with our performance this year, with EBITDA growing at an increasing rate for three consecutive quarters. EBITDA grew 40% on a reported basis and 32% on a like-to-like basis, reaching the highest third quarter in recent times and growing at 2.5 times sales growth. This performance was achieved through three levers. First, is the successful execution of our robust pricing strategy across our businesses and markets. The second, contributions from our growth strategy and urbanization solutions. And lastly, decelerating input cost inflation, coupled with cost efficiency measures. With respect to slowing inflation, fuels and electricity for the production of cement are the most important contributors. We have seen year-over-year growth rates in unitary fuel costs decelerate for four consecutive quarters. In the third quarter, we saw unitary fuel costs reverse for the first time since the inception of the Ukraine War and declined by 5% versus the prior year. Unitary electricity costs rose 10% in the third quarter, the lowest growth rate in eight quarters. In the context of our sustainability agenda and our strategy to lower the volatility of our fuels, we continue to expand the use of alternative fuels, which are significantly less expensive than non-renewables and an essential source of biomass. Year-to-date, free cash flow after maintenance CapEx of almost $700 million was $535 million higher than the same period last year, primarily due to higher EBITDA and lower investment in working capital, which was partially offset by higher taxes. The increase in cash taxes is a consequence of stronger results as well as the tax effect of foreign exchange on our US dollar-denominated debt. Working capital days stood at minus two, two more days on a year-over-year basis, but importantly, improving by two days sequentially driven primarily by inventories. We expect to further reduce our working capital investment as supply chain challenges normalize. After adjusting for an extraordinary gain from the sale of assets in the prior year, net income declined approximately $130 million due to the higher taxes as discussed previously. During October, we successfully completed two transactions aimed at further streamlining our debt maturity profile and diversifying our sources of funds. First, on October 30th, we expect to close the refinancing of our syndicated bank facility, consisting of a $1 billion term loan and a $2 billion committed revolving credit facility. This represents an increase of $250 million in our revolver and a reduction of $500 million in our term loan. Final maturity under the syndicated bank facility is now 2028. We are pleased that in a volatile market where yields have been rising to be able to maintain terms and conditions, including the pricing grid established in 2021 as well as being able to increase our committed revolver. Second, in early October, we've taken advantage of our recent upgrade in our credit ratings. We issued $6 billion in peso-denominated sustainability-linked long-term notes in Mexico, the equivalent of approximately $335 million in three and seven-year tranches, which were then swapped into dollars, achieving a US dollar cost approximately 130 basis points below our dollar curve. This was the first time in 15 years that we tapped the Mexican debt capital markets. The book was oversubscribed by 2.5 times. Proceeds were used to reduce exposure under our bank facility. On the slide, you can see our debt maturity profile as of the end of the third quarter, pro forma for the refinancing of our bank facility and the issuance of the notes in Mexico. As you can see, we now have a flatter debt maturity profile with no significant maturities in any year, and with an average life of five years. I expect our free cash flow after maintenance CapEx generation should be sufficient to meet our maturities in any given year. Leverage at the end of the quarter stood at 2.16 times with a trailing 12 months EBITDA of $3.2 billion. This is the third consecutive quarter of declining leverage and the lowest leverage in recent times. These transactions, along with our improved performance and continued declining leverage should continue to pave the way to reaching investment grade. And now back to you, Fernando.

Fernando Gonzalez, CEO

Based on our strong results year-to-date, we are improving our 2023 EBITDA guidance from $3.25 billion to in excess of $3.3 billion, representing at least a 23% increase versus 2022. As always, our guidance is based on the foreign exchange rates in effect at the time of guidance, in this case, as of the end of September. As we look forward, we are confident that despite softer volume outlooks in several markets, our pricing strategy will be successful in reflecting current input cost inflation. We also expect that absent a major macro shock, we should continue to experience a more refined input cost backdrop than that of the past two years. For CapEx, we now expect a total of $1.35 billion with $900 million for maintenance and $450 million for strategic. For working capital, we now expect an investment of $100 million. Finally, we are increasing our cash tax guidance to $550 million, driven by the tax effect of a stronger peso on debt and by better results primarily from Mexico. We have made some adjustments in regional volume guidance, which you can find detailed in the appendix. And now back to you, Lucy.

Lucy Rodriguez, Chief Communications Officer

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.

Carlos Peyrelongue, Analyst

Thank you, Lucy. Congratulations on the strong results. My question is related to US volumes. If you could comment on your outlook for residential, commercial, and infrastructure for next year, just some general views as to what you see as the drivers and the risks for next year would be very helpful. Thank you.

Fernando Gonzalez, CEO

Hi Carlos. Let me comment on what you are asking. But let me clarify that we're not necessarily giving guidance on 2024 volumes yet. We are in the middle of gathering as much updated information as we can to have a better understanding and view and in the future, provide better guidance on 2024 volumes. But despite that, I think there are trends that will continue to evolve in 2024. Specifically, in the case of volume, for instance, we've seen how different markets are performing differently, meaning not all markets are synchronized in volume trends. They are different. You saw the numbers in Mexico when compared to the numbers in Europe, and they are materially different. Now, I think the reasons that lead us to believe that there might be positive changes in current trends in volumes include our exposure to relevant fiscal stimulus and public or private projects in the US and Europe. The type of initiatives related to infrastructure such as the $1.2 trillion infrastructure plan, the Inflation Reduction Act, and the CHIPS Act. So, there are a number of positives that suggest to us that trends in the US might be better than those we've seen in 2023. The negative impact this year comes from commercial and housing. Again, this is not guidance. We still need more updated information, but in the case of housing, you have the data; the level of inventories is at historical lows, the level of unemployment is at record levels, and the economy is still growing. The challenging part is the cost of mortgages, but at some point in time, housing should react just because of house formation and demographics in the US. Now in the case of Europe, again, it was heated; it hit this year in volumes. Many reasons for volume impacts last year and this year. But at the same time, we still have the initiative of the renovation wave, which is around $700 billion in transportation and other incentives in manufacturing. So although we are not providing any specific guidance, we believe that in the case of the US and Europe, those variables could be supportive of a flat volume for next year and perhaps even moderate growth on them. To be confirmed in our formal guidance for 2024.

Carlos Peyrelongue, Analyst

That's very helpful.

Lucy Rodriguez, Chief Communications Officer

Okay. Fernando, did you want to add anything? It seems as though we might have cut you off.

Fernando Gonzalez, CEO

Well, I was going to say that in the case of Mexico, which is a very relevant market for us, again, this is not guidance, but the trends are positive. Next year is an election year, which tends to be a positive context. Most probably, we will see an acceleration of the large infrastructure projects, such as the mine train, because it's the last year of the current federal government. So Mexico might have also a positive trend in volumes next year. But again, clarifying this is not necessarily guidance; this is an indication, and afterwards, we will provide more detailed guidance.

Lucy Rodriguez, Chief Communications Officer

Okay. Thank you, Fernando. The next question comes from the webcast from Bruno Amorim from Goldman Sachs. The question is: what level of margins would trigger a halt in the sequential price increases you have been implementing?

Fernando Gonzalez, CEO

Let me take this one. I don't see the pricing strategy as necessarily defined by the levels of margin, at least not under conditions that have been prevailing in the last two years. Our pricing strategy has been for prices to cope with inflation, so we can protect our margins. It happens that after many years of very moderate inflation in our cost structures, in 2021, high levels of inflation started showing up, and we reacted with the pricing strategies to cope with those new very high levels of inflation. To simplify the story, in 2022, inflation continued growing while prices started reacting at lower levels of increases, and that's why we lost margin in 2022. Now the trends are changing. Our prices started being increased more and more. In the first quarter of this year, for the first time since almost two years, price increases were higher than the level of inflation. We see in 2023 that on the one hand, prices are increasing at levels of 18%, 20%, while inflation is decreasing from levels of 18% to 10% or 11%. I think the basis of our pricing strategy will continue being the idea of at least recovering input cost inflation. If inflation continues its trend of being lower, of course, price increases will follow that trend. That's what has defined our pricing strategy for the last couple of years.

Lucy Rodriguez, Chief Communications Officer

Thank you, Fernando, very clear. The next question comes from Ben Theurer from Barclays. Ben?

Ben Theurer, Analyst

Yes. Good morning. Congrats on the results Fernando, Maher and Lucy, well done, I would say. My question is also on the US and volumes, and kind of a little bit of a follow-up on Carlos' question. So we've seen volumes year-to-date down by about 13%; guidance is roughly a 12% decline, same trends kind of guided for into the fourth quarter. But one thing you've highlighted was the decreased share of imports into the US market. Can you help us understand where do we stand right now as it relates to imports into the US market? Is that decline that we saw year-to-date really all decline in imports, which has helped to drive the 500 basis points EBITDA margin expansion? How much more imports is left? And how do you think about that just in the general context of your margin potential in the US if imports were to come down more as it relates to being even more profitable on what you're selling produced in the US?

Fernando Gonzalez, CEO

Let me comment in general terms, and then I will pass the word to Maher and Lucy. But the general dynamic in the US is that imports are complementary to our core activity in cement, which is local production. We've been importing around 30% of the cement we sell in the US. Now our capacity utilization, which is vital for pricing strategies, is at 100%. Whenever there are either the clients like this year or growth in volumes, we adjust imports, given that imports have lower margins than locally produced. So that's the dynamic in general terms; we do not impact the local dynamics we are trying to put in place in the market. I don't know if Maher or Lucy want to add anything.

Maher Al-Haffar, CFO

Maybe I'd just add, I mean, obviously, even with that 13% decline in cement volumes, we had a great quarter in the US with EBITDA rising 36%. Part of that was certainly due to the reduction in imports as we calibrated that drop in cement volumes. So import volumes in the quarter dropped about one-third from where they had been to compensate for the decline in overall volumes we were seeing. That was very supportive of margins, and there's probably about a 300 basis point impact in terms of margin, so quite significant.

Ben Theurer, Analyst

Perfect. That's what I was hoping for.

Lucy Rodriguez, Chief Communications Officer

The next question comes from Anne Milne from Bank of America.

Anne Milne, Analyst

Congratulations on another pretty spectacular quarter. I know that you were involved this quarter in a local peso issuance for the first time in a long time. So I guess the question is, will you continue to try to match your debt with the currencies you operate in, and what other currencies might there be? And again, on the debt side, your debt levels continue to decline pretty rapidly. Will there be a point when you might look at an ideal debt level versus just a leverage level that if you are below that 3x you don't need to go below a certain debt level? And if there's anything else you could tell us on the loan agreement that you will be signing soon in terms of covenants or pricing.

Fernando Gonzalez, CEO

Why don't you take the part of what you are renegotiating with banks and the strategy you've been developing this year, and I will take the second part related to the ideal or the care or the fire debt level.

Maher Al-Haffar, CFO

Yes. So thanks, Anne. Our currency split right now is about 75% in dollars and the other 25% is in primarily euros and Mexican pesos. We have about $300 million equivalent in Mexican pesos. The way that we manage our funding strategy is to get the lowest cost we can in the different markets. We prefer dollar funding because at the end of the day, most of our cash flow is dollarized, which has been demonstrated by our pricing strategies that we have implemented successfully recently. The transaction we did in Mexico took advantage of the liquidity situation where despite local pricing being relatively high, when we swapped it to dollars, it represented almost a 20% reduction in our spread compared to a straight issuance in dollars today. So it was a very attractive funding cost used to reduce exposure under the term loan that we have with the bank facility. The way we cover our currency risk is primarily through our hedging strategy through the derivatives market. We manage a derivatives position that is roughly commensurate with the operating cash flow generation of our Mexican business. Currently, we're running on a position of about $1.5 billion in straightforward derivatives. We sometimes use caps and options to reduce costs. We've been running at almost half the carry cost on average. When we took our borrowing, we swapped the vessel rate into a fixed rate, very attractive borrowing rate. So that's how we manage the currency risk, and we also have a single borrowing in $300 million that is in pesos, leaving it in pesos because that was a very attractive borrowing rate. We should be a frequent issuer in that market.

Fernando Gonzalez, CEO

Regarding the leverage ratio, we have been insisting on regaining our investment grade for more than a decade, specifically for around 14 years. In defining investment grade, we considered it to be a leverage ratio below 3x. Of course, we don't create ourselves; that is evaluated by rating agencies. If you remember, in 2020, we communicated adjustments to our strategy with a focus on investing in growth. We have been growing through both investments and acquisitions for about three years now. The leverage ratio we are having by the end of the year is very close to 2x, and we feel comfortable with it. The good financial results this year have accelerated our deleveraging process. We don't have a target for a very low leverage ratio, but we target steady, disciplined growth while keeping our leverage ratio aligned with investment-grade parameters around 2.5 times. So we will be careful not to risk our investment grade while allowing for capital allocation for dividends and accretive investments.

Lucy Rodriguez, Chief Communications Officer

Thank you very much. The next question comes from the webcast from Paul Roger from Exane B&P Paribas. Several peers have provided a lot more information on their carbon capture pipeline. How many carbon capture and utilization and storage projects is CEMEX involved in? When will the group's first industrial-scale project go live? And what kind of CapEx and OpEx does CEMEX plan to invest in this solution to 2030?

Fernando Gonzalez, CEO

Let me comment directly on the question and then I think it might be helpful to share some additional context to our objectives on reducing CO2. We have seven CO2 capture and storage reuse projects in the company. Four out of the seven can be considered industrial-level projects. The other three are in which we are testing certain technologies. Those four industrial projects are located in either Europe or the US. In the case of the US, it's in Victorville in California and Balcones in Texas. In Europe, we have projects in Rudolf in Germany and Alcanar in Spain. The projects are in development as we speak. We have formed consumptions for each one in order to have the full spectrum from capture to how to store or convert CO2. We do not have specific amounts to share yet because we are potentially seeking grants that would reduce our investment in those projects. Now let me add something else. If we sort of, it's kind of an arbitrary definition, but if we divide the CO2 transition path towards carbon neutrality in our industry into two steps or phases, the first phase involves implementing all the known practices, processes, materials, technologies, and fuels that significantly reduce CO2 generation. Our 2030 targets are to reduce CO2 generation per ton of cement by 47% using a 1990 base, without considering carbon capture. We are confident that we can achieve that level of reduction by increasing our portfolio of blended cements with a lower clinker factor, using more alternative fuels with higher biomass content, using alternative decarbonized raw materials for producing ready mix, electrifying our production processes, and increasing our renewable electricity usage. We’ve achieved a 12% reduction in CO2 generation per ton of cement in the last two years. Easy to say, but this took us 15 years previously. Our 2030 targets do not include CO2 capture, but we are decisively acting and developing these projects to include additional CO2 reduction by 2030.

Lucy Rodriguez, Chief Communications Officer

Thank you very much, Fernando. The next question comes from the webcast from Francisco Chávez from BBVA. My question is regarding cement prices. Consolidated quarter-over-quarter prices declined 1%. Is this a change in trend? What can we expect in the coming quarters?

Fernando Gonzalez, CEO

Well, let me refer to what I commented in a previous question regarding prices. Inflation started declining materially in the first quarter of 2023. There was a reduction of three percentage points sequentially when compared to fourth quarter 2022. Then in the second quarter 2023, inflation was 12%, a decline of six percentage points when compared to the previous quarter. So, a 1% decline in prices is a consequence and it's natural, not a concern for me because our pricing strategy has been to recover input cost inflation. If inflation is receding, our prices will likely follow the same trend. If because in different markets we have different pricing levels, we might try to increase prices beyond inflation in cases where the returns are not sufficient. In other words, if inflation is moving from 22% to 11%, price increases will likely follow the same trend. That shouldn't be interpreted negatively.

Maher Al-Haffar, CFO

If you look at sequential prices regionally, pricing for cement is either flatter or up in Mexico, the US, and Europe. The slight decline in cement prices is due primarily to the Philippines, which was down 4%, primarily relating to the competitive situation there, but it is fairly isolated.

Lucy Rodriguez, Chief Communications Officer

We have time now for one last question from the web, and the next question comes from the webcast from Marcelo Furlan from Itaú. My question is related to capital allocation. The company has a healthy financial leverage, strong liquidity position, and solid free cash flow generation. Thus, I would like to know what are the main strategies for capital allocation for 2024?

Fernando Gonzalez, CEO

I can start by making a few comments, and please feel free to complement. I think we've been guiding for something similar to your question. As I mentioned, we've been focused on regaining investment grade, using resources to reduce debt and restore financial health. This was achieved around 2020. That's why we started using part of our cash flow for growth investments, which we've been doing while also focusing on capital allocation. Once we get to investment grade, we'll start paying dividends to shareholders systematically. That's the difference in our strategic approach compared to prior years. To add, we have a healthy investment pipeline that has generated a significant portion of our EBITDA growth this year.

Maher Al-Haffar, CFO

Yes, Fernando, I would just like to emphasize that we have a robust investment strategy. We are approving a pipeline close to $2.5 billion. We are expecting around 10% of the EBITDA to be contributed from these growth investments this year. The return on these investments has been impressive with internal rates around 40%. As we complete these projects and bring in incremental EBITDA, we are optimistic about the contributions to our overall growth. Compared to other options like buying back debt or stock, investing back into the business is much more aligned with our strategic objectives and can significantly enhance shareholder value, particularly once we begin paying dividends.

Lucy Rodriguez, Chief Communications Officer

With that, we appreciate you joining us today for our third quarter webcast and conference call. If you have any additional questions, please feel free to contact the Investor Relations team. We will look forward to seeing you all again for our fourth quarter webcast that will take place on February 8th. Many thanks.

Operator, Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a lovely day.

Lucy Rodriguez, Chief Communications Officer

Thank you, operator.