Earnings Call Transcript
CEMEX SAB DE CV (CX)
Earnings Call Transcript - CX Q2 2021
Operator, Operator
Good morning, and welcome to the CEMEX Second Quarter 2021 Conference Call and Webcast. My name is Chuck, and I will be your operator for today. I will now turn the conference over to Ms. Lucy Rodriguez, Chief Communications Officer. Please go ahead.
Lucy Rodriguez, Chief Communications Officer
Good morning. Thank you for joining us today on our second quarter 2021 conference call and webcast. I hope this call finds you and your families 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. I will now hand it over to Fernando.
Fernando Gonzalez, CEO
Thank you, Lucy, and good morning to everyone. I'm happy to report another strong consecutive performance. Second quarter results are another important milestone in our growth story. What we highlight include the achievement of our long-term leverage goal, a 39% increase in quarterly EBITDA, and our announcement of industry-leading climate action target. Additionally, consolidated sales have increased 15%, while EBITDA rose 31% relative to pre-pandemic levels of second quarter 2019. On a year-over-year basis, sales increased by 25% with all segments growing double digits. EBITDA for the quarter was $818 million, again, with all bases contributing. Margin improved by 2.1 percentage points to 21.2%, well above our Operation Resilience target. The improvement was largely due to volumes and cost savings initiatives. We continue to make important strides in cost and operating expenses as a percentage of sales at 7.4%, a company record. We did see an escalation in variable costs during the quarter. This was driven nationally by imports, maintenance, and rising energy costs. With strong demand momentum, we expect pricing in the near term to adjust accordingly. Free cash flow after maintenance CapEx of $401 million significantly outpaced the prior year and was the highest for the second quarter since 2015. In line with what we indicated at CEMEX Day in June, we ended the quarter with a 2.85x leverage ratio, achieving our September 2020 Operation Resilience target of less than 3x significantly ahead of schedule. Importantly, we are using this period of robust operational growth to prepare for what lies ahead and advance even more rapidly on our corporate purpose to build a better future. We are accelerating our investment in the business in the positioning of our products for a low carbon world as well as moving quickly to the carbonized power industry. Despite the favorable operating results, operations continue to be challenged by rising COVID infection rates in new countries. From the safety of our employees, we will remain vigilant and adhere to public safety protocols. We have not been untouched by the virus during the quarter and sadly have lost colleagues. These individuals are part of our connected CEMEX family and we grieve their loss. As you know, our Operation Resilience strategy is predicated on the belief that developed markets in Mexico will deliver the best growth opportunities over the next few years due to the unprecedented monetary and fiscal stimulus being deployed. This quarter certainly confirmed that view, with cement volumes in the U.S., Mexico, and Europe growing double digits versus pre-pandemic levels. Underlying demand trends in SCAC continue to show momentum, but quarterly cement volumes were disrupted by external events based in Colombia and the lockdown of the cement industry in Trinidad and Tobago due to rising COVID infection rates. Middle East, Africa, and Asia volumes have slowed down versus '19 pre-pandemic levels due to the quarterly performance of Egypt. With the recent government announcement of the cement capacity limitation program, we expect improved performance going forward. While we did benefit from a challenging prior year comparison in the quarter, we believe that underlying result momentum is significant and sustainable in most markets, with a moderate pace of modestly better comparisons moving forward. As you know, supply/demand dynamics in most other markets are exceptionally tight. In North and South America, in particular, with most countries operating at high capacity utilization. During the quarter, the industry saw a sharp increase in shipping costs for cement in the region. We believe that as shipping contracts expire alongside domestic growth, prices will need to reflect these increased costs. In this environment, our well-developed footprint and supply chain, as well as the introduction of new cement capacity in the Americas, will be an important competitive advantage. Our capital allocation strategy is dedicated to organic growth with capacity additions in our existing markets as well as bolt-on and margin enhancement projects. Due to positive projects, as well as debottlenecking of plants and the opening of the first line, we will be introducing 10 million metric tons of additional cement capacity over the next 2.5 years. The incremental investment to bring on this capacity is very compelling, with an average remaining spend of $43 a ton, and is highly accretive. Importantly, the timing is right with the majority of the capacity coming on in a sold-out market, with the Americas constituting 75% of the total. With regard to our bolt-on margin investment portfolio, we currently have a pipeline of projects set to deliver $270 million in EBITDA in 2022. These projects have a relatively low-risk profile and they are happening in markets that we know and the products related to our four core businesses. An important focus of the core portfolio is the ramp-up in our Urbanization Solutions product line. Urbanization Solutions are construction material products globally aligned to cement, concrete, and aggregate that meet the essential needs of cities of the future and are sustainable in nature. The products promote the circular economy, use of lower carbon cement and concrete, and employ greener and more efficient construction practices. At the business line, Urbanization Solutions is growing rapidly. Year-to-date EBITDA is 307% of total and has grown 50% year-over-year. We expect that 80% of the EBITDA coming from Urbanization Solutions this year will have a sustainable value proposition. Our 39% EBITDA growth was driven by higher volumes and prices, as well as an increased contribution from our growth investment portfolio. While all businesses were responsible for EBITDA growth, Mexico, EMEA, and SCAC had the largest contributions. We experienced an increase in variable costs during the quarter. While the timing of maintenance contributed, this increase was largely due to rising shipping costs associated with the cement industry in the U.S. as well as the cost of energy, which grew 16% year-over-year. Importantly, in the first half of the year, pricing has significantly outpaced variable cost inflation. We are moving quickly to adjust prices to reflect this new cost structure. Despite supply/demand dynamics in most markets, we have already announced additional pricing increases in the U.S. and Mexico. We continue to make progress on rationalizing trade and expenses, largely due to the cost savings program for this last year under our Operation Resilience strategy. Operating expenses as a percent of sales was 7.4% for the quarter, marking a record low, and 2.6 percentage points lower than the prior year. The new initiatives such as our Working Smarter program, our global initiative designed to utilize digital platforms and automation technology to standardize and centralize business processes, suggest we should expect continued savings on this front in 2022. Finally, we benefited from an important foreign exchange impact in the quarter of $47 million, stemming primarily from the appreciation of the Mexican peso, euro, and British pound. The favorable market backdrop and the decisive management actions that we have taken have led to earlier shipments of some of our operations. As a result, at our CEMEX Day a few weeks ago, we used the event as an opportunity to update the targets on future performance. The most significant changes were the leverage target, where we committed to achieve an investment-grade rating, and the climate action target, where we now have industry-leading carbon reduction goals. We are pleased with the rapid achievement of our Operation Resilience strategy to date and expect to continue making strides in the following quarters. With the rollout of Operation Resilience in September 2020, our climate action agenda was escalated to our top priority of the company. We did this because we are committed to the belief that building a better future is wise, a green, and sustainable world. We will continue to lead the industry in our efforts to decarbonize and the first step is establishing industry-leading carbon reduction rates. And of course, those are not enough, and we need to be transparent about our progress as we enter this critical decade. Therefore, similar to our other key targets, we intend to provide quarterly updates on our climate action levers, giving the same visibility as all other key financial metrics. I want to take this opportunity to update you on our digital initiatives. We are leveraging digital innovation in everything that we do. We were the first in the industry to roll out a global digital commercial platform, CEMEX Go. We employ a perpetual data approach that regularly updates the offering based on strong customer feedback. These innovations include a 100% paperless experience and direct field connectivity between CEMEX and select customers. In our operations, we apply artificial intelligence and data analytics for predictive maintenance, optimization of energy consumption, and reduction of carbon emissions. We are using virtual reality in our effective training courses and drones for inventory management. The latest innovation is our Working Smarter global initiative, which will put CEMEX at the forefront of new business processes. Its primary goal is to leverage technology in remote work environments to drive efficiencies in the organization by building global operational scale. CEMEX will enable new digital platforms and automation technologies to orchestrate and centralize processes while reducing costs.
Lucy Rodriguez, Chief Communications Officer
Thank you, Fernando. The U.S. continued to enjoy strong demand in the second quarter, with most of our markets sold out. Sales increased 13% while EBITDA rose 7% on the back of strong volumes and pricing. Despite heavy rains in Texas during the quarter, cement volumes grew high single digits. Volumes were again driven by solid residential demand. Residential construction spending grew 30% quarter-to-date in May. Forward-looking indicators remain strong, with single-family permits up 46% year-over-year in the second quarter and low housing inventory levels. The infrastructure sector was supportive and the outlook remains favorable, with May trailing 12-month contract awards for highways and streets rising 2% for our four key states versus flat at the national level. The industrial and commercial sector remains weak, but activity is accelerating as cement-intensive distribution facilities for e-commerce continue to grow. Our cement prices rose 3% sequentially, reflecting traction from our April pricing increase, which was implemented in all markets except Florida. To meet higher-than-expected demand, we significantly increased imports in the quarter beyond the level locked in for the full year. With industry spot shipping rates up more than 100% versus last year, these imports carried a steep cost and one that is not yet reflected in our prices. This led to a 1 percentage point decline in EBITDA margin. We expect this headwind to continue, and we are working hard to ensure that our pricing policy adequately reflects the true cost of imports. As a first step, we have announced a second round of price increases for July and August in most markets. In the case of imports, we believe we have superior supply chain capabilities with close to 9 million metric tons of maritime import cement capacity, rail capabilities, as well as a strong production footprint in the Americas. We estimate 2021 cement and ready-mix volume growth of between 4% to 6% with aggregates growth in the low single digits. For the medium term, we remain optimistic regarding approval late this year of an infrastructure plan, which we would expect to yield incremental demand for our products towards the end of 2022. In Mexico, our operations are experiencing exceptional supply/demand conditions, with the industry currently at historical peak production levels. EBITDA increased almost 60% due to higher volumes and prices as well as our cost reduction initiatives. Cement maintained its growth trajectory with volumes increasing 18% and continue to be supported by a high level of remittances, home improvements, government social programs, and pre-electoral spending. The 28% increase in cement volumes, however, was driven by an almost 60% growth in bulk cement, reflecting the second quarter 2020 industry lockdown measures which restricted the delivery of cement and ready-mix. Importantly, we have seen significant recovery of formal sector demand over the last few quarters, and bulk cement volumes are slightly above second quarter 2019 pre-pandemic levels on a daily sales basis. While ready-mix volumes are up 56% and show important sequential growth, they still lag pre-pandemic levels. We expect ready-mix to continue to recover as formal sector demand reactivates. Activity on the formal residential sector is gaining momentum, as evidenced by the growth in housing steps and permits of 40% year-to-date. Going forward, low levels of inventories and attractive mortgage rates should support volumes. We are also seeing activity in the industrial segment with the construction of warehouses along the border states related to near-shoring opportunities with the U.S. While the commercial sector remains subdued, increasing tourism and consumer confidence should imply a restart to previously delayed projects. Sequential prices increased 2% for cement, reflecting our March price increase of 4% as well as tight supply/demand dynamics. While margins improved 3.2 percentage points, sequential margin declined, mainly due to higher maintenance and fuel. In order to recover increasing input cost inflation, we announced a price increase of mid-single digits for bagged and bulk cement effective July 1. Given favorable dynamics, we are increasing cement volume guidance for Mexico to now grow between 10% and 12%. We expect that bagged cement growth rates will slow in the second half as the comparison base becomes more challenging, while bulk cement, ready-mix, and aggregates growth continues to improve, supported by the housing sector and a favorable base. In our EMEA region, EBITDA grew 25%, driven by a strong performance in Europe and the Philippines. EBITDA margin improvement is due largely to the Philippines. EBITDA margin in Europe was flat, impacted by rising energy, raw materials, and logistic costs despite better volumes and prices. European volumes for our three core products were up between 14% and 23%, reflecting an easy comparable base in Western European operations last year due to the impact from COVID and an acceleration in residential and infrastructure activity. We implemented cement price increases in Germany, Poland, Czech Republic, and Croatia. The sequential decline in prices in Europe results from geographic mix, with the U.K., the country with the highest cement price in the region, growing its sequential volumes at a slower pace than the rest of the countries. We are raising our 2021 volume guidance for Europe. For cement, we now anticipate 2% to 4% growth, 3% to 5% for ready-mix and 6% to 8% for aggregates. In the Philippines, cement volumes grew by 45%, reflecting not only the low comparison base resulting from strict government lockdown last year but also increasing construction activity. Our average daily sales volumes have now recovered to levels higher than the second quarter 2019. In the Philippines, we are increasing our cement volume guidance to 12% to 14%, supported by strong public construction. For more information, please see our CHP quarterly earnings, which will be available this evening. In Israel, we continue to see strong demand dynamics, particularly from transportation as the government moves to execute its ambitious long-term infrastructure plan. Ready-mix volumes were up high single digits on an average daily sales basis, while aggregates were down mid-single digits. In Israel, we expect ready-mix and aggregate volumes to decline between 3% to 5% for the year. The guidance reflects the record pace of business in 2020 as well as the completion of several large projects. Finally, in Egypt, we are encouraged by the recent decree from the government to rationalize cement production capacity for all players. We are pleased with the performance in our SCAC operations, the region that experienced the most severe government lockdown measures in the second quarter of 2020. Regional cement volumes rose 43% with all countries reporting growth. Regional cement prices rose 2% sequentially due to successful price increases in Jamaica, Costa Rica, and Nicaragua. Favorable volume and price performance drove a 50% increase in net sales. The close to 80% increase in EBITDA reflected higher contributions from the Dominican Republic, Panama, and Colombia. EBITDA margin rose 4.5 percentage points due to volume and prices, coupled with our cost reduction initiatives. In Colombia, cement growth momentum driven by housing and infrastructure was interrupted by social protests in May, which restricted the ability of the industry to deliver products. The protests were largely resolved by early June, and industry activity returned to first quarter levels. We believe the outlook for cement volumes remains favorable, supported by the self-construction sector, record home sales, existing major highway projects as well as the rollout of new infrastructure programs. For the full year, we expect cement volumes in Colombia to increase between 9% to 11%. For Trinidad Cement Limited, our listed subsidiary in the Caribbean, despite an industry lockdown in Trinidad and Tobago in the quarter, cement volumes grew by 28%, mainly due to Jamaica and a favorable base effect. In the Dominican Republic, cement volumes grew 72% on the back of a dynamic self-construction sector. Favorable fundamentals, including a slight pickup in tourism, support our increase in cement volume guidance of 19% to 21% growth. We continue to take advantage of our strong regional logistics network to meet local demand while we introduce cement capacity additions to the region. I invite you to review CLH's quarterly results, which were also published today. And now I will pass the call to Maher to review our financial performance.
Maher Al-Haffar, CFO
Thank you, Lucy, and good day to everyone. As Fernando and Lucy mentioned earlier in their remarks, this was another very strong quarter, with significant improvements in most of our financial metrics. Our business continued to show important operating leverage, with top line growing 25% and EBITDA expanding 39% on a like-for-like basis. Free cash flow for the quarter was up 187% when compared to 2Q 2020 and 85% better than 2Q 2019 pre-pandemic. This was driven primarily by strong EBITDA performance helped by savings from our Operation Resilience program, lower financial expenses, and lower investment in working capital. Continuously improving our working capital management and with particular attention to credit quality and receivables collection translated into a record for a second quarter of negative 13 days in average working capital. Net income increased $314 million year-over-year, driven mainly by better operating earnings and lower financial expenses. All of this culminated in the doubling of our return on capital employed to 10.2% when compared to last year. With regards to our debt maturity profile, we have the best runway to next maturities in a decade. We achieved a debt profile with very manageable maturities for the foreseeable future and still with ample potential for improvement in our debt stack. We have an average life of debt of just over 6 years, and our expected free cash flow generation alone would be sufficient to meet our maturities in the near term. We were active during the quarter in terms of liability management and the enhancement of our capital structure. In addition to lengthening our maturity profile, our liability management efforts this year translated into about 50 basis points reduction in our average cost of debt, which today is around 4.6%. During the quarter, we repaid around $370 million of bank debt under the facilities agreement, $320 million of the 5.7% notes due in 2025, and $450 million of the perpetual instruments. Additionally, in June, we issued $1 billion of subordinated notes, which are deeply subordinated and without a fixed maturity. Under IFRS, these notes are treated as equity and are not considered in the calculation of our leverage ratio as per the facilities agreement. In addition, rating agencies give us 50% equity credit for these notes. This transaction propels us forward in our path towards investment-grade rating, optimizing our capital structure and accelerating our deleveraging path. Finally, after the closing of the second quarter, we paid down EUR 450 million of the 2.75% notes due in 2024. During the quarter, we accelerated our path to investment-grade ratings. As Fernando mentioned earlier, we significantly reduced our leverage ratio in Q2 due to increased EBITDA, strong free cash flow generation, and the issuance of the new subordinated notes. As we can see on this slide, during the quarter, we reduced net debt by $743 million, which resulted in a leverage ratio of 2.85x, a 3-quarter return reduction compared to end of Q1 and a 1.7x reduction versus second quarter 2020. Our current $3.1 billion EBITDA guidance for 2021 coupled with the expected free cash flow during the second half of the year would suggest further improvements in our leverage ratio for the rest of the year. And now back to you, Fernando.
Fernando Gonzalez, CEO
Thank you, Maher. As discussed in our CEMEX Day a few weeks ago, we expect EBITDA for the year to be around $3.1 billion. EBITDA should be supported by consolidated volume growth in the range of 5% to 7% for cement, 3% to 5% for ready-mix, and 2% to 4% for aggregates. Please note that our regional volume guidance is included in the appendix. Regarding pricing, we believe supply/demand dynamics are supportive of pricing increases. And as I mentioned before, we have announced additional price increases in the U.S. and Mexico. For cost of energy, we now expect a 12% increase, with both fuels and electricity costs rising. Incorporating some savings from our Working Smarter initiative, we now expect $60 million in annual cost savings this year relative to 2020. Guidance for total CapEx, working capital, cash taxes, and interest expense is unchanged. As we move beyond the favorable year-over-year comp, we expect more granular growth in most regions. We believe we will see isolated flare-ups of COVID in our markets, but the governments have learned how to more effectively manage the pandemic with little disruption to the industry. A significant amount of government stimulus still sits on the balance sheets of households and should be deployed as economies reopen. Growth will be driven by consumer spending and investment in supply chain and manufacturing, coupled with the resumption of former construction projects. Over the medium term, developed markets should benefit from additional stimulus in the form of infrastructure. With tight supply/demand dynamics in most markets and rising energy and import costs, we expect prices to reflect inflationary pressures. While we do not give guidance a year ahead, all of this gives us confidence in the outlook we expressed at CEMEX Day in June that EBITDA should grow double digits in 2022. We will take advantage of the market environment and focus on our bolt-on investment strategy, deleveraging, and investing to reach our new climate action target. 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.
Gordon Lee, Analyst
A quick question on U.S. cement imports. I was wondering if you could give us a sense of how much of that is being sourced by other CEMEX operations and how much of that is being sourced through third parties? And if you could give us a sense of where in the CEMEX network this is happening, just to get a sense of whether what the other regions are that might be benefiting on the other side of the higher import costs into the U.S.
Fernando Gonzalez, CEO
Can you take that one, Maher?
Maher Al-Haffar, CFO
Thank you, Fernando. A significant portion of our imports into the U.S. is now coming from Mexico, along with some from Europe and Asia. We have started the CPN plant, which has improved logistics for the U.S. market and has had a low startup cost. So, most of the imports are from Mexico, with smaller amounts from Europe and Asia. This has resulted in a shift over the last couple of years due to our ability to ship from Mexico. We will continue to seek the most competitive pricing and quality. As Lucy and Fernando mentioned earlier, we have natural advantages in trading and importing into the U.S. market. I hope that answers your question, Gordon.
Gordon Lee, Analyst
Yes, that's very clear.
Vanessa Quiroga, Analyst
My question, I want to focus on Europe. Obviously, the comparison base reflects the pandemic versus 2020. So I'm wondering if you can give any color versus 2019, how the volumes of each of the main European markets are performing currently.
Fernando Gonzalez, CEO
Maher, can you take it?
Maher Al-Haffar, CFO
Sure. Yes, Vanessa, in Europe, all three products are up between 14% to 23%. Obviously, it reflects an easy comp because of from last year. The biggest contributors, Vanessa, to the business have been residential and infrastructure throughout the region. And that's why we raised the volume guidance for the year, as Lucy mentioned, from 2% to 4% growth in cement, from 3% to 5% in ready-mix, and so on. Also, as a consequence of the most of these markets are fairly sold out. And so as a consequence, we did implement pricing increases in Germany, Poland, Czech Republic, and Croatia, and we've gotten very good responses to that. Now in terms of volume increases, I mean it's a little bit difficult to compare the quarters because in individual countries, because of the varying lockdowns and the easy comps, it doesn't really make sense to present them that way. It's better to take a look at what's happening in the first half of the year. But the major drivers are residential and infrastructure.
Lucy Rodriguez, Chief Communications Officer
Maher, I would like to add that last year in the second quarter, our Western European operations were significantly affected by lockdowns, while our Central European markets were not. This has been reflected in the results. That said, as Maher mentioned, we are experiencing strong growth in residential and infrastructure across our portfolio. The U.K. is particularly notable for its strong residential demand, as well as several large infrastructure projects. Currently, residential permits are at decade-high levels.
Carlos Peyrelongue, Analyst
Congrats on the results. Yes, my question is related to U.S. pricing. I mean there's obviously several factors that are supporting much higher prices, whether it's shipping, as you mentioned in the call, increasing more than 100% of the cost sold at market and the potential for an infrastructure package. So my question is, do you think that the probability of moving to now adjusting prices at least two times a year or more is increasing materially? Do you think that's something that we're entering a new phase or instead of having just price increases once a year, not just this year, but going forward, we might, you might have to adjust prices more than once a year?
Fernando Gonzalez, CEO
Thanks for your question. I think the dynamics, Carlos, are kind of clear and it's the one that we've been describing for some time now. The market is demanding a higher amount of imported cement capacity is fully utilized almost everywhere. For sure in ourselves, that's the case. And so what we see is imports serving additional needs from our customers. And as you know, imports nowadays have an additional component on inflation, which is the high inflation in shipping costs. So now we have additional portions of imported cement at a higher cost. And what I expect is for the dynamics to continue evolving, meaning we cannot offset inflation immediately. Not with shipping costs increasing 100% or even increasing due to fuels. But what we can expect is for price increases either once or twice a year, but a price adapting to the new supply structure of the market. So yes, the time we've been describing once we get to full utilization, the dynamics on the pricing side should improve materially. Now is it going to happen with increases once or twice a year? That's difficult to say. This time, we thought it was the right thing to do. That's why we announced price increases for July and August, and we will continue trying to offset inflation, whether it’s mainly shipping inflation, but other types of inflation to pricing.
Francisco Suarez, Analyst
Congrats on super results, and thank you for the great disclosure on your progress on carbon intensity. That's fantastic. My question is on pet coke prices, your primary fuel in the U.S. and Mexico. Can you tell us a little bit about what you are doing in the U.S. and Mexico to cope with the huge increases in pet coke including the use of alternative fuels? And if that has anything to do with the major cut in carbon intensity that we saw in the first half?
Fernando Gonzalez, CEO
Can you repeat the last part of the question, please?
Francisco Suarez, Analyst
Yes, I just wanted to know that if you, among your strategy to deal with the increases in pet coke, if that includes the higher use of alternative fuels. And if that explains the major cut in carbon intensity that you are reporting in this half of the year?
Fernando Gonzalez, CEO
Thank you for the clarification. We continuously monitor the availability, quality, and cost of our fuel mix. Recently, we have observed significant increases in pet coke prices. Our approach is to seek cheaper sources while also reducing the amount of coke in our fuel mix. In the second quarter, we successfully increased our use of alternative fuels, reaching nearly 30%, which is the highest level we've ever achieved. We will maintain our strategy regarding this aspect as part of our climate action plan. We aim to further increase the utilization of alternative fuels, especially those with high biomass content, which we have been doing for several years. We are working on new projects for alternative fuels in the U.S. and are nearing completion of two significant alternative fuel projects in Europe, specifically in the U.K. and Germany. Therefore, the increase in alternative fuels during the second quarter contributes to the overall fuel costs.
Lucy Rodriguez, Chief Communications Officer
And the next question comes from the webcast from Paul Roger, continuing on the climate action theme. Congratulations on the new CO2 targets. What has changed to give you confidence the group can go further and faster by 2030? Has the group validated the new carbon reduction targets with independent third parties like SPTI and aligned management incentives with the new targets?
Fernando Gonzalez, CEO
Thank you for the question. I'll address the second part first. We are currently validating the targets with BPA, and we will have those validated soon. We decided to advance our previous 2030 targets to 2025 and set new targets for cement and ready-mix by 2030 due to the progress we've made in understanding climate change and our confidence in how quickly we can act. We have aligned our climate action strategy and targets with the well below 2-degree scenario, which provides clear, specific numbers. The new target of 475 kilograms of CO2 per ton of cement and 165 per cubic meter was established because we believe we can achieve these without relying on new CO2 capture technologies, although we are investing in those. We have a solid roadmap to reach these objectives without needing this new technology. Our approach includes reducing clinker factor, using more alternative fuels with high biomass content, incorporating additional fillers for blended cements, and exploring alternative raw materials for cement production, among other strategies. We are confident this is achievable. We have already made significant progress in Europe, achieving a 35% reduction based on 1990 figures, and we're now aiming for nearly a 40% reduction from the same baseline. While there are challenges and a lot of work ahead as we transition towards a circular economy across various markets, we are confident we will meet these targets.
Lucy Rodriguez, Chief Communications Officer
Fernando, there was one last part of Paul Roger's question that maybe you'd like to address, and that is, are management incentives aligned with the new targets?
Fernando Gonzalez, CEO
We are incorporating CO2 reduction targets for our personnel this year, especially regarding the various levers for CO2 reduction. This initiative began earlier this year. Recently, we've added another component to our variable compensation for the second half of the year to test its effectiveness for implementation next year. We are referring to this as the CEMEX ETS, which is a variable compensation structure aimed at adjusting our EBITDA based on CO2 costs and the resulting effects on meeting our targets, as well as the economic implications of achieving or not achieving them for our executives' compensation. We initially started this year by focusing on pricing performance, including a substantial portion of CO2 valuation in our CO2 reduction plan. Now, we are incorporating the ETS concept to adjust our EBITDA. We are currently testing this with the European ETS for our operations in Europe and using the California ETS price for our other businesses. This second part of variable compensation is experimental, and we will refine it and communicate details next year.
Lucy Rodriguez, Chief Communications Officer
Thank you, Fernando. And the next question comes from Nik Lippmann from Morgan Stanley.
Nikolaj Lippmann, Analyst
I'm going to try to cheat here a little bit. I want to ask two questions. So I'm just going to put them into one, and they both allude to pricing. But sort of Macroeconomics 101, you're doing a negative supply shock into Latin America. You're exporting more up to the U.S. What is sort of the reflection on pricing locally in Latin America? And similarly, in Europe, where the marginal cost of production seems to be going out in line with the higher cost of carbon emissions, what's the reflection there on cement pricing in Europe? And congrats on the numbers.
Fernando Gonzalez, CEO
Can you take that one, Maher?
Maher Al-Haffar, CFO
Yes, Nik, you raised an excellent point. Our market's supply and demand are tight almost everywhere. Starting with Mexico, particularly in the central and southern regions, my company and most of our competitors are largely sold out, and we are trying to expand our capacity as much as possible. Although bringing the CPN plant online to serve the U.S. market does impact Mexico, the effect is minimal. The tight supply-demand situation in Mexico is creating favorable pricing conditions, which we expect to persist. We anticipate significant growth in both the residential and infrastructure sectors. Additionally, we are observing an increase in inshoring from China to Mexico, contributing to growth in industrial and manufacturing. Consequently, we are definitely benefiting from these dynamics in Mexico. In the U.S., we are indeed sold out, with some markets facing allocations. As we mentioned, we've significantly increased our imports into the U.S. However, transportation pressures are escalating, which Fernando highlighted. Pricing must respond to these pressures, and it is doing so. We’ve raised prices for the second half of the year, and we expect to see the benefits of these increases. Europe is facing a similar situation with tight supply and demand. In some ready-mix markets, we can now choose our most profitable projects due to high capacity utilization. This has created a favorable pricing environment, and we've implemented price increases in most European markets, which are gaining traction. Let me know if I've missed anything or if there's more you'd like to discuss.
Nikolaj Lippmann, Analyst
Yes, I think it clearly addresses the issue. I'm curious about the extent to which you're generating profit from imports into the U.S. I understand that's a profitable area for you. My question revolves around whether, if you're selling 2 million or 3 million tons to the U.S., you're also adjusting the prices for the 20 million tons of cement sales in Latin America due to the increased demand in the north. What would prevent you from leveraging that pricing power in the U.S. as conditions tighten in the region?
Maher Al-Haffar, CFO
Markets are quite fragmented when it comes to cement, especially when it needs to be transported overland. It's not quite accurate to say that exporting from Mexico to the U.S. directly raises prices throughout Latin America; the situation is more nuanced. Each local market has its own dynamics, which is why I mentioned the differences between northern, central, and southern Mexico, as the latter two areas are less affected by U.S. exports and more influenced by local supply and demand. We are increasing capacity and addressing bottlenecks in central and southern Mexico. Tepeaca is coming online to support this effort. Therefore, the relationship between exports to the U.S. and price increases in Mexico and Latin America is more complex.
Fernando Gonzalez, CEO
If I add to what Maher said, I think perhaps this is not the moment to do it, but Maher has already mentioned that capacity utilization is very tight all over the Americas. It's tight in several markets, not only in the Americas but mainly in the Americas. So exporting to the U.S. might help, but that is not crucial. It's not the reason. Look at capacity utilization in the Dominican Republic, we already announced starting up of facilities that we're not using since ages because of capacity being fully utilized. We are proceeding with debottlenecking capacity projects in Jamaica. And we are doing the same everywhere. In the case of Mexico, debottlenecking Huichapan, increasing capacity in Tepeaca, starting up in Campana, that's for exports. So it's all over the place. I think the summary for me is the pandemic affected Latin America heavily last year. It came back very soon and it continues coming back and growing. The speed at which the recovery has happened has surprised most of the industry, and everybody's trying to use almost 100% capacity utilization while trying to debottleneck and expand capacities all over the market. So I think that's the part that we should go deeper to better understand the pricing dynamics currently.
Lucy Rodriguez, Chief Communications Officer
And the next question comes from Adrian Huerta from JPMorgan.
Adrian Huerta, Analyst
Quick question just to clarify. Did you say that the impact from the increased cement imports in the U.S. was 1 percentage point? Just to clarify that first, and then my second was also very specific.
Maher Al-Haffar, CFO
You mean in terms of the margin, you mean?
Adrian Huerta, Analyst
Yes, the margin impact from the increased cement imports was 1 percentage point on margins?
Lucy Rodriguez, Chief Communications Officer
That's at the consolidated level, Adrian. It was higher than that on the U.S. level, just it accounted for almost a 3% headwind in margins.
Adrian Huerta, Analyst
Okay. Perfect. And just to clarify. So my question is which regions the increased imports were to? Was that in California, Texas mainly?
Lucy Rodriguez, Chief Communications Officer
We don't break out where the imports are coming into, but the markets that we have been importing into have been Texas, California, as well as Florida. I can tell you that in the quarter, due to bad weather in Texas, we did have a problem actually taking the shipments into the ports because of bad weather. So I hope that gives you some insights into the import activities. Sorry. And then the next question comes from the webcast from Alan Alanis from Santander. What is the outlook for imports of cement to the U.S.? And is this a risk or an opportunity for CEMEX?
Fernando Gonzalez, CEO
Well, I think the outlook for imports is directly related to the outlook of volumes in the market. Again, once we have all of our local capacity utilized, the delta will need to come from imports. So we kind of expect for imports to continue increasing.
Maher Al-Haffar, CFO
If I can add also, Fernando. I hope I'm not interrupting, Fernando, may I add?
Fernando Gonzalez, CEO
No. Go ahead.
Maher Al-Haffar, CFO
Yes, I think we also need to consider the infrastructure developments over the medium term, particularly in 2022 and 2023. In the U.S., we are close to reaching an agreement on an infrastructure bill and an approval of the existing FAST Act. Recently, there has been a significant agreement between Republicans and Democrats. Despite a procedural vote last night, which was a crucial milestone, 17 Republicans, including McConnell, voted to advance the bill in the Senate. This bill is set to be $550 billion. While some may view this figure as less than what the Democrats initially proposed, it essentially aligns with what we consider cement-intensive projects. Regardless of perspective, the additional $550 billion, along with the current FAST Act likely to be extended by five years as proposed by Biden, is expected to generate a 20% to 30% increase in demand for cement in the U.S. We must also acknowledge the significant environmental pressures that hinder the addition of new capacity, ensuring that imports will remain vital. However, as Fernando mentioned, due to the current logistics situation, it is likely that pricing will need to increase for imports to be competitive with domestic products. I hope this answers your question, Alan.
Lucy Rodriguez, Chief Communications Officer
Thank you, Maher. And the next question comes from Anne Milne from Bank of America.
Anne Milne, Analyst
It took me a long time to review all the quarters to find the last instance when you had EBITDA exceeding $800 million, not just in the second quarter, so congratulations. I'd like to delve deeper into the topic of capacity utilization. It's clear you are bringing older kilns back online and looking to expand capacity in several markets. I've heard from other players in the U.S. and elsewhere that they are considering similar actions. Could you share how much additional capacity you anticipate could come online in your key markets over the next 24 months? Naturally, building a new plant would take longer, and with environmental considerations, that might extend the timeline even further. Additionally, could you provide some insights on Egypt and what the government plans to do, as well as how long you expect it might take for there to be a positive impact regarding reduced supply in the market there?
Fernando Gonzalez, CEO
Thanks, Anne. Regarding debottlenecking in the U.S., we are currently working on several projects at some plants. While we don't have a final figure yet, we are studying and engineering these debottlenecking opportunities. As a rough estimate, it could be around 300,000 tons related to these efforts. Additionally, we are exploring opportunities for expanding capacity beyond just debottlenecking, but we don't have any concrete details to share at this moment. We anticipate providing more information in the near future. As for Egypt, you are aware of the recent developments. We are backing the government’s initiative to create a reasonable environment for the industry, particularly following the large cement plant constructed by the government. Currently, the focus is on temporarily rationalizing that capacity to establish a sound economic context for investors. We expect to see improvements in pricing this year, not only due to this initiative but also because we foresee a market recovery leading to growth. Therefore, there are two reasons to anticipate better pricing in Egypt in the coming months.
Anne Milne, Analyst
Fernando, do you know how much they're going to reduce their capacity by to help out the whole overall market at, let's say, that large plant?
Fernando Gonzalez, CEO
I don't have the number with me. What I know is it's a sizable deduction. It might be slightly different on a per-player basis, I don't have the numbers with me to share with you.
Anne Milne, Analyst
Okay. And just are you aware of any other, outside of CEMEX, any other new cement plants that are being commissioned at the moment?
Fernando Gonzalez, CEO
Well, there were some grinding mills, and grinding mills in Yucatan, Mexico. I'm trying to remember if there are any others. I don't recall any new capacity, not in Latin America. No, I don't recall any specific expansion project. I can imagine that because of the context we just described before, everybody is thinking about funding capacity.
Lucy Rodriguez, Chief Communications Officer
We have time for one last question. Ben Theurer from Barclays, I think you're on deck.
Benjamin Theurer, Analyst
Yes. Congrats on the results. I want to close my questions with one of your favorite topics from the past, Fernando, a little bit about the digital innovation and what you've been doing over the last couple of years, be it on the commercial strategy with CEMEX Go. Now you're laying out a couple of other things around business services, manufacturing. So the question really is, within your global footprint, what would you say is a reasonable target where you can get and actually maximize and optimize your operations, ultimately driving margin expansion through all the digital innovations you've put in place, where you stand today, and how far do you still have to go to reach that target?
Fernando Gonzalez, CEO
Yes, it's a very interesting topic. Let me first describe what our current status is in our digital strategy, and then I will go through what it is that we can expect moving forward. Three domains. The first one is digitizing and developing a superior customer experience with a digital platform, and that's what we basically call CEMEX Go. And as you know, CEMEX Go allows our customers and ourselves to have a seamless process to relate, to transact, and to receive and to pay, hitting the whole spectrum of the commercial relationship. By now, with one segment, this platform is available globally for all our customers. We are very pleased with the acceptance of the platform. About 90% of our recurring customers do use it as the way for them to get information, get quotations, buy, pay, and receive—in short, everything. So we are very pleased with that platform. What's next for that platform? Think of the platform as a minimum viable product. The platform nowadays is different from what it was 2 years ago, and 2 years from now, it is going to be different from where it is today. We are adding functionalities. One of the last functionalities is digital confirmation in ready-mix, meaning now our customers can get into CEMEX Go and pick the slot at which they want the product. They will receive an answer, and voila, the transaction is done without any additional intervention. For our customers, we understand that's a very valuable functionality that they will start having durably very, very soon. The other feature or idea we have with this platform is that through that platform, by adding other pieces, we want to participate in the business models that are currently being developed in the construction space because of digital technologies being applied to them. So we have different ways to relate to other platforms through APIs we have developed at the CEMEX development center. This is a way for us to facilitate customers to connect with us through API, not necessarily to the platform itself, and make their life much simpler by them using their own systems. That applies mainly to the segment of very large customers. So we want to expand the scope of our platform into the construction space, and that's what we have been doing lately. The second domain is how to apply digital technologies, along with other types of practices in how we manage the company. You might remember that some time ago, we called it the global service center for CEMEX, outsourcing most of our back-office activities while keeping the ones that we kept internal trying to concentrate, standardize, and automate as much as possible. Now we are taking that concept into the 4.0 type of idea, and we are in the process of deploying a step forward in the concept with what we are calling now Working Smarter, which is part of the initiatives of Operation Resilience. Through this concept, we are going to go deeper into outsourcing and globalizing back-office solutions, standardizing. Through all those efforts covering all the back office and some portions of the service delivery model, we expect to be even more efficient with customers, more efficient with our resources, and to save about $100 million starting next year. That’s a domain on how we manage the company. When measuring OpEx to sales, last quarter, we just got 7.6%, which is our lower figure ever, meaning we continue finding ways to reduce the investment we do while managing the company. And the third element is operations or production. On that regard, we have been applying some digital solutions in energy for cement and in other areas, in the case of aggregates, to automate and facilitate the work queries and how our customers are served. Now what we can expect for the future is that these technologies will continue integrating, shall we say, into the way we work, serve, manage, and operate. This should be translated into efficiencies and should be translated, in the case of our customers, into a superior customer experience. I think the best feedback we have received from customers is that, again, about 90% of recurring customers are using it, meaning that's the way for them to relate to CEMEX. Thank you.
Lucy Rodriguez, Chief Communications Officer
Well, we appreciate you joining us today for our second quarter webcast and conference call. If you have any additional questions, as always, please feel free to reach out to the Investor Relations team, and we look forward to seeing you again on the third quarter results webcast. Many thanks.
Operator, Operator
Thank you for participating in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.