Earnings Call Transcript
CEMEX SAB DE CV (CX)
Earnings Call Transcript - CX Q1 2025
Operator, Operator
Good morning. Welcome to the CEMEX First Quarter 2025 Conference Call and Webcast. My name is Bailey, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. Now, I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.
Lucy Rodriguez, Chief Communications Officer
Good morning and thank you for joining us for our first quarter 2025 conference call and webcast. We hope this call finds you well. We have several changes to talk about on this quarterly call, beginning, of course, with the appointment of our new CEO. In February, our Board of Directors appointed Jaime Muguiro as Chief Executive Officer, effective April 1. This appointment is part of a planned leadership transition following our former CEO Fernando Gonzalez's decision to retire after a successful career at CEMEX. Jaime has almost three decades of experience at CEMEX, where he has held senior executive positions in different regions. Most recently, he served as President of CEMEX in the United States. Additionally, we have new regional presidents who are bringing extensive experience and new eyes to our operations. We have also made some changes to our quarterly documents, moving our free cash flow disclosure closer to a cash basis as well as providing more detailed sources and uses information. Starting this quarter, we are reporting price variations for our products on an FOB basis. We believe this is more reflective of actual pricing dynamics as well as industry practice. In March, we published our 2024 integrated report discussing our strategy, ESG efforts, metrics as well as financial performance. I encourage you to review it on our website. And now it is my pleasure to introduce Jaime Muguiro, and of course, Maher Al-Haffar, our CFO, both of whom are joining us today. As always, we will spend a few minutes reviewing the business and outlook for the rest of the year, and then we will be happy to take your questions. And now, I will hand the call over to Jaime.
Jaime Muguiro, CEO
Thanks, Lucy, and good day to everyone. I am excited and deeply honored to take on the role of CEO at CEMEX. While I am still settling into my new role, I'd like to highlight several of my strategic priorities that will guide my tenure as CEO. This is a pivotal moment in our company's history as we close in on realizing our deleveraging objectives. And having substantially consolidated our operations, we're now well positioned to drive sustainable and profitable growth. Our strategic focus will be to continue investing in the U.S. while enhancing shareholder return and creating long-term value for all the stakeholders. Since the CEO transition announcement, I have spent the last few weeks speaking to as many people within the Company as possible, reviewing our key objectives, areas of improvement within the Company and the main risks and opportunities in our markets. I am looking forward to expanding further on these discussions with external stakeholders such as yourselves over the next few months. From what I have learned so far, there is much to be done, but my first priority will be on the basics: achieving industry-leading excellence throughout our operations while shaping an agile organization that delivers profitable growth to our shareholders. Core to my plan is Project Cutting Edge, our cost-savings program introduced by Fernando Gonzalez last quarter. While it was originally conceived to address a challenging market environment, I intend to use this program as the foundation to drive lasting and transformational change. A key element is to simplify and streamline our corporate structure to empower our regional operations, enhancing execution speed and accountability throughout the organization. Project Cutting Edge should enhance our EBITDA margin, increase free cash flow and improve our free cash flow conversion rate. As I look to reshape our business, I bring tremendous energy, ideas and commitment, and I am supported by a superb management team. My recent experience in the U.S., where we optimized our footprint and improved key efficiency metrics, should serve as a template for other areas. I'd like to recognize the exceptional talent of our operating teams. Our new regional presidents will be addressing challenges in their markets with a fresh perspective, sharing best practices and working to achieve best-in-class operations. We will continue working on our profitable decarbonization pathway, making progress towards our 2025 targets. Finally, with expectations for higher free cash flow and divestment proceeds, an early priority for me will be a more balanced capital allocation policy. I will concentrate on additional deleveraging, pursuing growth through accretive small to midsized acquisitions in the U.S. while enhancing shareholder returns. I am committed to providing the highest possible returns to our shareholders by being the best partner to our customers, having a laser-like focus on operational efficiency and a disciplined capital allocation strategy. This is a tall order, but I'm confident we have the right team to accomplish it. I look forward to meeting with all of you over the next few months and communicating with you as my plans materialize. And now allow me to review our first quarter performance. Our consolidated net sales proved to be resilient with pricing strategy partially mitigating volumes in Mexico and the U.S. It is important to highlight that first quarter results are aligned with our expectations of flat EBITDA for the full year. As discussed in our previous earnings call, we forecasted a challenging first half, followed by more favorable second half dynamics. EBITDA performance is explained primarily by our Mexican operations with peso depreciation resulting in a $65 million headwind, a strong pre-election base in the first half of 2024 and the usual seasonality of the first year of a new government. In addition, adverse winter conditions in the U.S. and Eastern Europe also impacted our results. EBITDA margin was supported by higher prices, lower energy and freight costs, which partially offset volume impact, higher labor costs and maintenance work that was brought forward in the U.S. We continue making progress on the implementation of Project Cutting Edge. These initiatives will support our consolidated EBITDA and free cash flow going forward. We reduced our net CO2 emissions per ton of cement equivalent by 1.6% on a year-over-year basis. We posted record net income mainly driven by the gain on divestment of our Dominican Republic operations. Free cash flow is largely explained by lower EBITDA, severance payments and the effect of discontinued operations. We expect working capital investment to fully reverse in the year, while the timing of maintenance capital expenditures should result in lower spending during the rest of the year compared to 2024. Maher will provide additional details on our financial results. Consolidated sequential prices are increasing across all three products with a stable to positive performance in all markets. Sequential cement and ready-mix prices rose 2%, while aggregates prices increased by 4%. In Mexico, despite the current demand environment, pricing dynamics remain constructive. In the U.S., we continue to see supportive conditions for aggregates pricing, while cement increases have been delayed due to adverse weather. Our pricing strategy continues to achieve its goal of more than recovering cost inflation in our markets. Consolidated cement volume variation is mainly explained by a strong pre-election comparison base combined with the typical first year seasonality of a new government in Mexico. In the U.S., cement and ready-mix volume dynamics were mostly driven by weather. Volume growth in EMEA partially offset conditions in Mexico and the U.S. with solid cement demand in Western Europe and the Middle East and Africa. European demand was disrupted by unfavorable weather in Eastern European countries. Our Urbanization Solutions portfolio was impacted by the conclusion of large infrastructure projects in Mexico related to pavement services and by lower demand in our U.S. concrete block business. Despite a 14% decline in sales, EBITDA margin proved to be resilient and expanded by 0.5 percentage points. This improvement was driven by our circularity business, which posted an EBITDA growth of 5% on flat sales, driven by the strong performance in the repurposing of industrial byproducts. Our circularity business with a margin in excess of 20% has been one of the fastest-growing business verticals in our portfolio with a compounded annual growth rate of 27% over the last two years. We are optimistic about our Urbanization Solutions portfolio as it addresses the changing landscape of the construction industry. Volumes and fixed costs, driven by operating leverage and maintenance, largely explain our EBITDA performance in the quarter. Variable costs remained relatively steady, driven mainly by a 17% decline in unitary energy costs. These savings in energy are in line with our full year guidance of a high single-digit percentage decline. Operating expenses as a percentage of net sales remained stable as lower freight and logistics were offset by higher SG&A expense. Half of the EBITDA margin variation is explained by geographic mix with a lower contribution from high-margin regions. Going forward, we expect improving demand conditions in most of our markets, along with cost-reduction efforts and our pricing strategy to drive increased profitability. As announced in February, Project Cutting Edge is a transformational savings program that addresses the way we work, aiming to reduce costs while increasing efficiency. Under this program, we expect to realize recurring yearly EBITDA savings of at least $350 million by 2027 and $150 million expected in 2025. Project Cutting Edge centers on three main elements of our operating model. First, it addresses our supply chain, logistics, and procurement on a global basis. Second, it optimizes our operations footprint and entails a review to ensure every operation delivers a sufficient return on capital. The U.S. serves as a model. Two years ago, we assessed the return on capital of each individual facility in the region and then made significant adjustments to our footprint, including closure or sale of certain operations. While the work in the U.S. is still not complete, it has allowed us to recognize substantial margin improvement. The final leg of Project Cutting Edge centers around free cash flow initiatives with savings in 2025 and onwards. While it's still early in the process, we saw tangible benefits of Project Cutting Edge in the quarter, such as the improvement in operational efficiency in the U.S. and margin enhancement in Europe and overall reduced headcount. The actions already taken this quarter have effectively locked in approximately $40 million in full year savings. I want to highlight that as part of my transition, I am conducting an exhaustive review of our costs and organizational structure, which may lead to additional savings. With expectations for increased free cash flow from operations as well as proceeds from asset divestments, we will follow a disciplined capital allocation strategy. I am currently reviewing every ongoing project in our growth investment pipeline to ensure that they meet the required return metrics under the expected demand environment. For those ongoing projects that meet the return criteria, you should expect that we will continue to invest in them. As these projects reach completion, we will transition from growth capital expenditures to more accretive small- to mid-sized acquisitions in the U.S. We remain committed to maintaining a strong liquidity position and to continue paying down debt, reducing our interest cost. Additionally, I am determined to boost shareholder return. We will continue to follow a progressive dividend policy and look at opportunistically using our share buyback program. While we want to maintain a balanced capital allocation, capital allocation decisions will be driven by maximum return to shareholders. Let me emphasize that given the heightened uncertainty in the current global macroeconomic environment, we will ensure that our capital allocation decisions do not compromise our financial metrics. And now, back to you, Lucy.
Lucy Rodriguez, Chief Communications Officer
Thank you, Jaime. First quarter results from Mexico are aligned to our guidance for the year, which anticipated a challenging first half with improving conditions in the back half. First half expectations were based on the typical construction slowdown in the first year of the new administration in Mexico, a strong prior year comparison base driven by pre-electoral spending and a significant peso headwind. Peso depreciation accounted for $65 million or 60% of the variation in EBITDA. The prior year pre-electoral spend in infrastructure projects and rural roads explain about 50% of the decline in cement volumes. Volume drop was most acute in the South, which benefited disproportionately from 2024 pre-electoral spend. Importantly, we are seeing sequential improvement in daily cement volumes in April month-to-date. In the case of ready-mix, the Northeast region continues to outperform, supported by ongoing industrial projects and state-level infrastructure works, such as the new metro line in Monterrey. The decline in aggregates volumes is attributable to large infrastructure projects in the prior year, where we supplied low-margin-based products. Adjusting for these volumes, our aggregates volumes declined by 1% with a significant expansion in EBITDA margin. There is positive traction from our January pricing increase with cement and aggregate prices rising 5% sequentially, while ready-mix increased 3%. Effective April 1, we announced a 9% price increase in bagged cement. We will continue to look for opportunities to at least recover input cost inflation going forward. EBITDA margin was supported by favorable pricing and lower energy and freight costs, which offset much of the volume effect. In our path of profitable decarbonization, we achieved a new record in clinker factor of 65.9%. In the second half, we expect a pickup in construction activity as the new government settles in and begins to execute its budget for rural roads and social housing while we lap the prior year's comparison base. Additional government spending in railroads, highways and water, along with ongoing projects at the state level, like the San Miguel de Allende, the Lotus Highway, the metro in Monterrey, and Luis Multi Airport, among others, should further support growth. We are encouraged by the progress in establishing the national housing program. The government recently increased its 2025 target for social housing to about 180,000 homes. There are several projects already under negotiation, which could start construction in the upcoming months. Finally, we are also seeing a healthy ready-mix backlog mainly driven by industrial projects in the Northeast and Central regions. In the U.S., unusually cold winter weather in many of our key markets disrupted construction activity. In fact, these conditions in January and one less working day explain the entirety of our cement and ready-mix volume decline. In aggregate, about half of the volume variation is explained by inclement weather, fewer shipping days and the previously communicated closure of several depleted quarries. Volumes across all products are supported by continued infrastructure spend as well as the industrial and commercial sector where we see construction in data centers, chip manufacturing, health care, and education. This is offset, however, by lower residential activity, particularly in Arizona and Florida. With weather impacting demand, we brought forward maintenance, completing almost 50% of annual scheduled outage days in the U.S. in the first quarter. In the case of pricing, we continue to see strength in aggregates with prices adjusted for product and geographic mix increasing 3% sequentially and 7% year-over-year. Cement and ready-mix prices were stable sequentially as price increases were delayed due to weather-related inventory buildup in many of our coastal markets. We are currently rolling out summer price increases in most markets. In the quarter, EBITDA margin, excluding maintenance spend and volume loss, remains stable, indicating that pricing continued to offset input cost inflation. Despite the volume decline, aggregates margin remained in excess of 30% driven by higher prices. We are making progress on Project Cutting Edge with additional adjustments to our ready-mix network in the quarter as well as a significant improvement in operational efficiency, allowing us to substitute imports for more profitable domestic production. In a cement tariff scenario with the market structurally dependent on imports, we expect this improvement in domestic production as well as our ability to flex Mexican imports to be an important competitive advantage. For 2025, we anticipate demand to be driven by infrastructure as IIJA transportation projects continue to roll out. About 35% of funds under IIJA have actually been spent to date, and we expect to reach peak spending in 2026. Solid growth in construction for its data supports this view. We are optimistic about the outlook for the industrial and commercial sector with several semiconductor and data center projects being planned in our markets as well as large projects in Cape Canaveral. While we expect the single-family home segment to be pressured in the short term with mortgage rates at elevated levels and increased economic uncertainty, we see substantial upside in housing over the medium term. In EMEA, we are pleased with our performance with EBITDA growing by 49% and margin expanding by almost 3 percentage points. These results were driven by higher volumes and prices, operating leverage as well as our Project Cutting Edge initiatives. In Europe, while we continue to see an improving demand trend, harsh winter conditions in February affected dynamics in our Eastern European operations. Growth resumed in March with better weather. During the quarter, we announced the expansion of our Urbanization Solutions business in the U.K. with a new lower-carbon mortar plant near London. This plan, which will begin operations in the third quarter, will reduce CEMEX's virtual mortar with a minimum 30% lower carbon footprint than a standard product. We continue making progress on profitable decarbonization in Europe with net CO2 emission declining by 1.2% year-over-year. We expect EU-funded infrastructure spending to drive construction activity in several of our markets. We are encouraged by the recently announced infrastructure package in Germany for €500 billion, which over the next 10 years is expected to translate to an 11% annual growth in construction output. Additional spending on defense could further increase construction activity. In Poland, the industrial and commercial sector and a potential ceasefire in Ukraine is expected to support demand, while in the U.K., the residential sector should drive demand. In the Middle East and Africa, we continue to experience strong volume growth as conditions stabilize. We remain optimistic on the outlook for EMEA and are adjusting upwards our volume guidance for the full year. In our South, Central America and the Caribbean region, prices posted a solid performance, while volumes grew by 3% in cement and 6% in ready-mix. The formal sector continues driving demand in the region with our ready-mix volumes in Colombia and Panama increasing by 8% and 10%, respectively. Ready-mix sales to the Bogota Metro accounted for nearly 1/3 of our total volumes in Colombia and are expected to remain strong going forward. On the operations front, higher kiln efficiency, along with lower clinker factors, continued to support profitability. Our Urbanization Solutions portfolio in the region posted an EBITDA growth of 16% with a margin expansion of more than 4 percentage points. And now, I will pass the call to Maher to review our financial developments.
Maher Al-Haffar, CFO
Thank you, Lucy, and good day to everyone. Our free cash flow from operations during the quarter reflects normal seasonality of our working capital needs in the early part of the year. Free cash flow was primarily impacted by EBITDA, free cash flow from discontinued operations, and severance payments related to Project Cutting Edge, which were partially offset by a reduction in cash taxes and net interest paid. Interest paid was $34 million lower than last year, while cash taxes due to timing effects were $113 million less. While investment in working capital during the quarter was higher than last year, the average working capital days declined by six days driven by the targeted management actions we implemented last year to improve our working capital. We expect this investment in working capital to reverse throughout the rest of the year. We remain on track to reach our expected savings of $500 million on free cash flow elements from operations versus the prior year. On the cost side, energy cost on a per ton of cement basis declined by 17% driven by lower power and fuel prices and a continued improvement in clinker factor and thermal efficiency. For 2025, we have closed hedges for 76% of our annual spend related to electricity, diesel, freight, pet coke, and natural gas. Record net income of $734 million was driven primarily by the sale of our operations in the Dominican Republic. Given the volatility in the Mexican peso, I would like to remind you of our ongoing Mexican peso hedging strategy, fully covering our operating cash flow from Mexico that effectively lowers the volatility of the exchange rate at which we convert pesos into dollars for tenors of up to two years. During April, we fully redeemed our $1 billion subordinated notes due to a change in methodology from S&P for these kinds of instruments. That triggered the option of redeeming the notes at 101. The redemption of these notes will result in important savings. Our leverage ratio stood at 1.9x, one-tenth of a turn higher versus December. In these volatile market conditions with heightened macro uncertainty, I want to underscore that we enjoy a strong liquidity position bolstered by recent divestitures, with substantial availability under our $2.3 billion in committed bank facilities after calling the $1 billion notes in April. We have a comfortable debt maturity schedule with no need to access the capital markets, and we remain committed to further strengthening our capital structure, as Jaime commented in his remarks. And now back to you, Jaime.
Jaime Muguiro, CEO
Thank you, Maher. As Maher pointed out, we're currently navigating an uncertain macro-outlook. And while first quarter results were very much in line with our full year expectations, we must recognize our lack of macro visibility. The organizational transformation I am envisioning is driven by strategy. Certainly, today's economic landscape only adds urgency and makes our plan even more relevant. In this environment, we will focus on managing the variables we can control. I will be expanding the scope of Project Cutting Edge and expect to deliver incremental EBITDA savings. We will keep you updated on the progress achieved on this important initiative. Recognizing the uncertain macro-outlook as well as our intention to drive incremental savings under Project Cutting Edge, we continue to expect a flat EBITDA performance with significant improvement in free cash flow from operations in 2025. 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 our prices for our products. And now, we will be happy to take your questions.
Adrian Huerta, Analyst
Jaime, first of all, congrats on your new role and best wishes. And I mean you spoke a lot already about this organization transformation and things that you would like to focus on. What other details can you give us in terms of, let's say, on the cost side on this program that you guys released at the end of the fourth quarter? Could we say that that is just the beginning of even more potential achievements in terms of cost reductions as the year progresses? Is that something that you want to look into detail, understanding the big opportunity that the Company has to reduce costs and enhance margins? And then as the year goes out, how can we think about your agenda in terms of what you would look in terms of geographical mix and investments? And I am assuming that these three things are key three things that you're going to be focusing on, unless there's something else that you would like to add.
Jaime Muguiro, CEO
Adrian, thank you for congratulating me. Good talking to you. I hope that you're doing great. Regarding Project Cutting Edge, the answer is yes. Beyond what we were working on, mainly significant savings around supply chain network, logistics, that includes freight on procurement, I'm also looking at incremental savings by reducing materially overheads. Basically, after deleveraging and after achieving great milestones, most of our past strategic initiatives, we can now move on and do many less but very relevant things with many fewer resources. And that's what we're planning to do. We will be empowering our regions to deliver significant improvements to margins, looking at every part of our portfolio, making sure that every asset in our portfolio delivers a return on capital employed above the weighted average cost of capital. I'm planning to, together with some of my peers, to engage very closely with the regions in two performance reviews every year in which we will talk about margin expansion, operational efficiency, and much higher free cash flow conversion rates. So yes, Adrian, do expect that we're working on incremental structural cost savings by reducing overheads materially. And that means overheads across the whole portfolio, not just corporate and central. So that was your first question. And could you remind me the second question, Adrian? Sorry about that.
Adrian Huerta, Analyst
Yes. The second topic you mentioned will also be a focus. What can we expect in terms of the timeline for changes or increased activity related to your geographic mix and investments?
Jaime Muguiro, CEO
Yes. Okay. On geographic mix, we will continue to focus on Mexico, the U.S., and Europe, as we've done so far. The difference might be that, whether it's emerging or a developed market, we're going to be focusing relentlessly on improving free cash flow conversion from every asset we operate. And we're going to be optimizing capital expenditures to reduce it by either improving pieces of our portfolio to the point that they should deliver a significant free cash flow conversion on a return on capital employed above the weighted average cost of capital or otherwise. If it's worth more to others, we might see some further divestments. So, we're going to be looking at that, and we're going to be working a lot on operational excellence, which means recovering competitiveness, being very agile and with a very competitive cost structure. I hope I have answered your question, Adrian. Thank you.
Francisco Suarez, Analyst
Congrats, Jaime, for the new role. The questions I have is actually a follow-up on Project Cutting Edge. To me, it seems that it's far more than just a cost-cutting reduction program, and it is about more aligning the entire organization with investors and your overall new strategic objectives. If the answer is yes, can you provide more details on how you expect to change the entire organization in ways that it could be better aligned with what investors care about, and if possible, to add any specific KPIs that you have in mind for these efforts?
Jaime Muguiro, CEO
Yes. Francisco, thanks for your question. The answer is yes. And what we're planning to do is to introduce EBIT free cash flow conversion, and return on capital employed over weighted average cost of capital. And we're going to be trickling down these KPIs to every P&L owner in the organization. We're going to be relentlessly reviewing them in these performance reviews that I will be doing with my peers twice a year across the portfolio. In addition, in the semester of the year, planning to review executives' compensation to align those with these additional KPIs, Francisco. So, I hope that I have answered your question.
Lucy Rodriguez, Chief Communications Officer
Thank you, Jaime. I'm going to try one more time to see if Gordon can hear. Gordon, he's actually on the line. So, Gordon, are you there? And if not, I'll read his question.
Gordon Lee, Analyst
I'm here. Can you hear me?
Lucy Rodriguez, Chief Communications Officer
Yes.
Jaime Muguiro, CEO
Yes, Gordon, I can hear you.
Gordon Lee, Analyst
Okay. Perfect. Super. Well, first of all, Jaime, let me again echo congratulations for your new role. And obviously, my best wishes, very exciting. I have a very quick question, going back to your sort of the priorities you mentioned at the beginning of the call as you take over the new role, but focusing a little bit more on the financial/capital allocation side of things. I was wondering if you could tell us where share buybacks rank in your list of capital allocation priorities and whether we can expect CEMEX to be more aggressive on that front going forward, given the stock's current valuation?
Jaime Muguiro, CEO
Gordon, thanks for congratulating me. The straight answer is that share buybacks are in our toolkit. The shareholders' general meeting approved a program for up to $500 million. As part of our capital allocation, I see three main buckets. I see opportunities to continue deleveraging because we can save materially on interest expenses and boost free cash flow conversion. So that's one. Number two, I do want to enhance shareholder returns with progressive dividends combined with share buybacks when they become opportunistic and at the right time. And third, we don't want to miss opportunities for growth through a very responsible accretive to free cash flow small to medium-sized acquisitions in the U.S., mainly. So, the answer is yes, share buybacks are in our toolkit. Having said that, I also want to share, Gordon, that in this uncertain macro environment, I do want to preserve cash on hand and definitely continue paying the principal on our debt to lower interest expenses. It makes a lot of sense. And finally, we're walking away from strategic capital expenditures. We've done enough. I will be working with the team to relentlessly make sure the incremental EBITDA and free cash flow from current strategic operational expenditures meet our targets over time. That doesn't mean that we wouldn't approve any strategic capital expenditures, but we're now shifting from strategic capital expenditures to other uses of capital. So, I hope that I answered your questions, Gordon.
Anne Milne, Analyst
Jaime, yes, I will also congratulate you on the role. I've known you for many years in different functions. It's very nice to see you in the CEO position. My question is on the financial side. Now that you have called the $1 billion subordinated notes, you haven't called the other perpetual notes. Obviously, it has a low coupon. Maybe you could just walk us through a couple of things on the financing side. I assume that you will pay down the other perpetual notes at least by the call date, if not sooner, just because it is expensive. Well, it's not so expensive, but it doesn't give you any sort of equity treatment. And then just your thoughts on delaying doing a new perpetual without the penalizing language going forward and if you have any other plans on doing anything else on the financial side this year?
Jaime Muguiro, CEO
Okay. Thanks, Anne. I will ask Maher to answer your question. Please, Maher.
Maher Al-Haffar, CFO
Thank you, Jaime. Let's address the questions sequentially. Our primary focus is on reducing interest expenses. Currently, our interest expenses, combined with the coupons on the subordinated notes, consume about a quarter of our EBITDA. Therefore, throughout the year, we will continue to look for opportunities to deleverage and lower our interest expenses, as Jaime mentioned. The S&P's change in ratings methodology provided us with the chance to call the notes at 101. We view the perpetual notes as a part of our capital structure for the foreseeable future, and we will keep an eye on the markets to refinance the remaining subordinated notes, ideally at notable savings compared to previous rates. To remind everyone, the coupon rate is 9 and 1/8, and we acquired it at 101. The other perpetual notes are currently trading below par, making them costly to call, so I don't foresee any immediate actions regarding those. We are also exploring some euro financings that might allow us to adjust or extend some of our euro-denominated obligations throughout the year. Regarding the $1 billion subordinated notes, we utilized a bit of cash and some revolver during the quarter due to seasonal factors. For now, it is mostly cash on hand. We are observing the market with the intent to potentially refinance later this year, but we are not in a rush. We are patient and will monitor the markets to evaluate our financial strategy.
Jaime Muguiro, CEO
Thanks, Maher.
Anne Milne, Analyst
Could you clarify the situation regarding the purchase or repayment of the perpetual notes? You mentioned that cash and some of the revolver were used, attributing the revolver to seasonality. Has that been repaid now, or is it expected to be repaid soon?
Maher Al-Haffar, CFO
Yes, exactly. Yes. Yes, exactly. It was just intra-quarter. And so now we're back to pretty much no drawn amounts under that.
Lucy Rodriguez, Chief Communications Officer
And the next question comes from Yassine Touahri from Onfield. Yassine?
Yassine Touahri, Analyst
Congratulations on your new position, Jaime, and best of luck for the future. My question pertains to your peers, Holcim and Hidden Materials, who are aiming for an EBITDA to free cash flow conversion rate above 50%. In contrast, your 2025 guidance indicates a rate of less than 25%. Do you believe CEMEX can reach a best-in-class cash conversion in the upcoming years? If so, what levels of cash financial expenses and strategic capital expenditures are you targeting in the mid-term? Additionally, does your higher exposure compared to peers in ready-mix pose a challenge to achieving improved cash conversion?
Jaime Muguiro, CEO
Yassine, thank you for your congratulations. Let me address your first question. That's exactly what I'm currently focusing on, benchmarking against those achieving better metrics. Our goal is to at least match the best in class. I believe we can achieve best-in-class cash conversion in the short to medium term. The drivers of this are as follows: First, we will work on increasing EBITDA, which should happen in the midterm as macro uncertainty decreases and we see a recovery in volumes across many of our markets, boosting our operational leverage. Second, we anticipate benefiting from additional EBITDA and free cash flow conversion from our current strategic capital expenditures, which are expected to generate around $0.68 million of incremental EBITDA with solid free cash flow. The third factor involves reducing strategic capital expenditures while focusing on realizing the committed incremental EBITDA and free cash flow from our ongoing top line. The fourth factor pertains to portfolio management from the perspective of return on capital employed versus the weighted average cost of capital, meaning we will divest assets that do not generate a return above our cost of capital and that may be more valuable to others. We will work diligently to improve margins and returns on assets. Regarding your question about ready-mix concrete, we are reviewing our positions similar to our approach in the U.S., where we exited certain ready-mix positions that, while contributing to vertical integration, could be achieved through other methods such as long-term supply contracts or joint ventures while retaining minority stakes. As part of our performance evaluations across our portfolio, we will re-examine our ready-mix concrete positions. In instances where they do not meet our return on capital employed to weighted average cost of capital metrics, we will take action. In summary, we have a clear understanding of what needs to be done, and I believe we can enhance our free cash flow conversion to meet the levels generated by others today. I hope this answers your question.
Lucy Rodriguez, Chief Communications Officer
And then the next question comes from Jose Espitia from BBVA. We might have lost him. So let me move on to the next one. And the next question comes from Alejandra Obregon from Morgan Stanley. Ali?
Alejandra Obregon, Analyst
Jaime, congratulations on your new position. My question is somewhat related to the previous ones. You mentioned Project Cutting Edge, cost savings, free cash flow generation, initiatives, and WACC returns. I'm interested in a broader perspective on this. From a regional or product viewpoint, where do you think you will see the most benefits from this strategy? Where are the greatest opportunities as you conduct an early assessment of the current situation?
Jaime Muguiro, CEO
Thank you for the question, Alejandra. First, let me outline the main components of Project Cutting Edge. The first is supply chain optimization, where we expect improvements, particularly in the cement and possibly the aggregate business. The second pillar is fuel sourcing, mainly focused on cement. We also anticipate significant enhancements in operational efficiency in the U.S., which applies to cement as well. Our team has successfully improved operational efficiency by 5 percentage points year-over-year in Q1. Additionally, we expect procurement savings targeting all third-party addressable spending, impacting not only cement but also aggregates and ready-mix across the company. We are also aiming for a substantial reduction in overheads that will affect all areas. Lastly, as we refine our ready-mix network, we anticipate improved margins in that sector. That is our approach to this initiative. I hope this addresses your question, Alejandra.
Lucy Rodriguez, Chief Communications Officer
Thank you, Ali. The next question comes from Ben Theurer from Barclays. Ben?
Ben Theurer, Analyst
I'll just follow suit, Jaime. Congrats. Best of luck in your new role as CEO. So, I wanted to follow up, taking advantage of the fact that you were in charge of the U.S. business in the past. You've been very detailed in terms of some of the issues in the first quarter. So wanted to understand what you're seeing in the U.S. market and the three main buckets of demand, i.e., infrastructure, but also you flagged industrial, commercial, and the softness in housing. How much do you think is already related to the fear of a potential slowdown in economic activity? Or how much of that is yet to come? And if you've seen any improvement in April versus what was clearly a challenging first quarter?
Jaime Muguiro, CEO
Thank you, Ben, for your congratulations and your question. The first quarter in the U.S. was quite sluggish. The challenging weather conditions, including heavy snow in places like Florida, played a significant role. However, since January, we have observed a steady increase in daily sales in cement, ready-mix, and aggregates each month, thanks to improved weather in Florida. This growth is not just seasonal; it reflects a genuine uptick in sales, which is encouraging. Infrastructure spending remains strong, with more projects on the horizon. Our analysis indicates that only 35% of the infrastructure bill's funding has been utilized, so we expect even better times ahead, particularly around 2026. We maintain a solid backlog in ready-mix, and our operations are well-integrated with aggregates and cement. The backlog in ready-mix is particularly strong in industrial and heavy commercial sectors, including data centers and phase two of semiconductor facilities, with significant projects happening around Cape Canaveral. However, we are seeing weaknesses in the residential sector, particularly in both multifamily and single-family homes. It'll be interesting to monitor the multifamily segment after its notable decline over the last 18 months and see if it reacts differently than the single-family market, which is struggling due to high mortgage rates and affordability issues. Thus, residential is the weak spot in our outlook for the coming months. We hope for a swift resolution to macroeconomic uncertainties, as many investors have paused their planned projects until clarity returns. I trust I've addressed your question, Ben.
Lucy Rodriguez, Chief Communications Officer
Thanks, Ben. The next question is coming from Carlos Peyrelongue from Bank of America. Carlos?
Carlos Peyrelongue, Analyst
My question has been answered, but I want to thank Jaime as well on the new position and wish him the best of luck.
Jaime Muguiro, CEO
Thanks, Carlos.
Lucy Rodriguez, Chief Communications Officer
So, I think we have time for one last question, and it's coming from Jorel Guilloty from Goldman Sachs. Jorel?
Jorel Guilloty, Analyst
Congrats, Jaime. So just wanted to focus a little bit more on the near term. So, we're nearly about a month from the initial tariff announcements that came on and came off. But just wanted to get a sense of how this uncertainty might be impacting the flows that you're seeing for cement imports. It can be at an industry level, it can be at your level, but just wanted to get a sense if you're seeing any changes in how flows have been changing by country of origin. And also, you mentioned that you could flex your imports from Mexico, but I just wanted to get a sense of how much of your imports Mexico can address total imports and which states would be impacted. Those are my questions.
Jaime Muguiro, CEO
Thank you for your question, Jorel. To provide an overview, if the targets are confirmed within 90 days, sources like Vietnam would face a 46% tariff, while there are currently no Chinese imports to the U.S. The remaining imports would be subject to 10%, except for those from Canada and Mexico under the free trade agreement. Now, regarding the West, if the 46% tariff is confirmed, we plan to implement a surcharge to adjust our prices. We successfully managed a similar situation in 2022 when faced with significant cost increases. Most imported cement in the West comes from Vietnam, and we are prepared to communicate this surcharge to our customers. Additionally, we chose not to book all required imports for the year to maintain flexibility in sourcing, allowing us to depend more on our Mexican network and meet our West needs with cement covered by the free trade agreement. In the East, particularly Florida and the Gulf Coast, we see some imports from Vietnam, but the primary sources are Turkey, Saudi Arabia, and certain European countries, with Turkey being the largest. The tariff there is 10%. We have already informed our customers that if these tariffs are enforced, we will implement a surcharge to recover those costs. We have maintained flexibility by not fixing costs for all inputs and plan to utilize both rail and maritime options from our Torreon plant and East Mexican capacity to replace those impacted by the 10% tariff. We own two vessels for effective transport. Importantly, we are enhancing our operational efficiency in the U.S. by 5 percentage points year-over-year and believe we are well-positioned to navigate the current tariff uncertainties. I hope this answers your question, Jorel.
Lucy Rodriguez, Chief Communications Officer
Thanks, Jorel. We appreciate you joining us today for our first quarter results. We hope that you'll come back again for our second quarter 2025 webcast on July 24. If you have any additional questions, please feel free to reach out to Investor Relations. Many thanks.
Operator, Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.