Earnings Call Transcript - CX Q3 2022

Louisa Rodriguez, Chief Communications Officer

Good morning. Thank you for joining us today for our third quarter 2022 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. Before we begin, I would like to quickly remind you about our CEMEX Day event taking place on Wednesday, November 16. This event will be a live webcast presentation where our CEO and top management will focus on climate action, our digital and growth strategy and provide a medium-term outlook on our regions. You can find further details on our website. And now I will hand the call over to Fernando. Fernando?

Fernando Gonzalez, CEO

Thanks, Lucy, and good day to everyone. Before I begin, during the quarter, we experienced severe weather events that impacted our local communities in Florida and the Caribbean. We are doing whatever we can to support reconstruction efforts in the communities in which we serve. Our thoughts are with all of those who have been affected. And now to discuss the quarter. Our top line grew 13%, driven by double-digit price increases across all products. While the magnitude of our pricing increases has been significant, it has been more than matched by relentless input cost inflation, particularly in energy, with consequences for our EBITDA and margin. To date, pricing has been able to offset inflationary cost in dollar terms, but has not yet succeeded in regaining margins. We continue to see inflationary headwinds that outpaced our pricing efforts, particularly in Mexico. We are making some progress, however, as in the quarter, we did see two regions begin to recover margins in cement, our most energy-intensive product. While U.S. results were significantly impacted by Hurricane Ian in September, the region showed a nice recovery from the supply chain disruptions and the maintenance cost of the second quarter. Once again, our EMEA region showed remarkable resiliency, growing its EBITDA for four consecutive quarters. The urbanization solutions business continues to grow rapidly. On climate action, we continue our streak of sequential declines in carbon emissions. During the quarter, we submitted a revised climate action roadmap to SBTi for alignment under the 1.5-degree scenario. We have made progress against our goal of rebalancing our portfolio with almost $600 million in divestments year-to-date. Regarding our deleveraging efforts, we reduced total debt by approximately $540 million, while our leverage ratio decreased to 2.82x. Net income, excluding goodwill impairment charges, was approximately $450 million higher than the third quarter of last year. Finally, our return on capital remains in the double-digit area, well above our cost of capital. Double-digit growth in sales reflects the significant pricing contribution from all regions. Despite the pricing efforts, EBITDA and EBITDA margin declined due to stubbornly high inflation, particularly in fuels and electricity. The reduction in EBITDA margin was mainly driven by Mexico, where higher maintenance and outages in the tight Northern markets led to a significant increase in distribution costs as we travel longer distances to deliver the product to our customers. Free cash flow declined due to higher investment in working capital, lower EBITDA, and higher maintenance CapEx. The decline in consolidated cement volumes relates primarily to demand in Mexico and South Central America and the Caribbean, where we saw continued normalization of bag cement consumption in the post-pandemic period as well as difficult weather. While bag cement volumes declined in these markets, the growth in ready-mix, bulk cement, and aggregate volumes speak to the strength of the formal sector. In the U.S., a category 4 hurricane and continued supply chain challenges capped volume growth of all three products to low single digits. Volumes in Europe have begun to reflect a slowdown in construction activity. In SCAC, a keen outage in the Dominican Republic, a sold-out operation for us, and weather contributed significantly to the regional drop. Consolidated prices continued to accelerate in the third quarter with cement prices rising between 15% to 30% across all regions. Europe is the standout with price increases that have been able to offset much of the margin pressure. The 3% sequential growth in consolidated cement prices attest to the strength of our summer price increases. We are in the process of announcing January increases that will reflect the significant input cost inflation we are experiencing across our portfolio. Pricing, however, is not the only lever, and we remain focused on managing costs with our energy diversification, supply chain, and climate action strategies. The decline in EBITDA is largely explained by a lower margin related to persistent input cost inflation. The drop in volumes also contributed to the EBITDA drop. Pricing was the strongest lever of growth and was again able to more than offset total cost increases. While margins declined, the net contribution of price over cost has grown since the second quarter, suggesting some progress in beginning to recover margins. We experienced a $30 million FX headwind, largely due to the depreciation of European currencies. The FX movement with our euro debt exposure acting as a financial hedge did allow us to reduce debt by $46 million. Across all three businesses, we have recovered inflation in dollar terms year-to-date. But recovery in 2021 margins remains our primary goal and cement remains the largest pain point in that effort given its energy intensity. Since last year, it has been our primary focus in our efforts to recover margins. It is encouraging to note in the quarter that in two of our four regions, we not only compensated for inflation in cement on a unitary dollar basis, but actually began to recover EBITDA margins. We still have work to do, and of course, we don't expect linear progress. Volatility in the energy market will likely continue, but we remain committed to recovering input cost inflation in our business. I am pleased to announce that in early October, we submitted for validation our 2050 net-zero roadmap and revised 2030 decarbonization goals to SBTi. The new roadmap is aligned to the SBTi's recently issued 1.5-degree scenario for our sector and includes Scope 3 emission targets. CEMEX was a member of the expert advisory group that worked with SBTi to develop this scenario. Our success in reducing carbon emissions since we introduced our Future in Action program, a decline of more than 8% since December 2020 gives us the confidence to commit to a more accelerated 2030 pathway. With receipt of validation, CEMEX will continue to have the most ambitious decarbonization pathway in the cement concrete sector. Our CO2 emissions have declined more than 4% year-to-date and progress is in line with our 2021 record reduction. We will provide a more detailed discussion during our CEMEX Day event. We have continued to execute on our operational resilience goal of rebalancing the portfolio towards developed markets; year-to-date, we have done close to $600 million in asset sales. Proceeds will be used primarily to fund our bolt-on investment strategy along with debt reduction. And now back to you, Lucy.

Louisa Rodriguez, Chief Communications Officer

Thank you, Fernando. Despite the decline in cement volumes, net sales in Mexico grew 9% on the back of our pricing strategy and a pickup in formal sector demand. While year-over-year comps became easier in the third quarter, we continue to experience volume declines in bag products. We attribute this movement to the normalization of bag cement demand from the pandemic peak, inflationary pressures impacting retail consumption as well as temporary market share loss related to our pricing strategy. Bulk cement and ready-mix continued to grow, supported by the industrial and commercial sector and infrastructure. Near-shoring activity in the border states, the construction of distribution and logistics networks as well as tourism are driving volumes in the formal sector, with year-to-date project announcements of more than $12 billion in private investments for industrial and logistics base. EBITDA and EBITDA margin declined due to higher fuel, maintenance, distribution, raw materials as well as product mix. Maintenance outages coupled with flooding and supply chain issues disrupted logistics in the northern part of the country, where supply-demand dynamics are the tightest. This led to a significant increase in distribution costs in the quarter as we sent product longer distances and had to rely on more expensive spot freight to meet customer demand. We estimate that these issues, which we believe are temporary, accounted for a headwind in year-over-year margins of approximately 2.2 percentage points. With our objective of recovering margins in mind, we announced a 7.5% increase in bag cement prices effective October 10. Additionally, we continue making strong inroads in our alternative fuel strategy. Alternative fuel usage reached 38% in Mexico, almost 14 percentage points higher than the prior year. The move to alternatives, not only benefits society, but is also an important lever in combating energy inflation. Finally, the high level of integration of our business with our sold-out U.S. operations remains a unique competitive advantage, allowing us to meet the needs of the U.S. in a cost-effective manner while also supporting capacity utilization domestically. In the U.S., sales and EBITDA grew by double digits, supported by growth in all products. Cement and aggregate volumes rose low single digits, while ready mix was flat. Volumes were impacted by the arrival of Hurricane Ian, a category 4 hurricane that hit Florida, one of our largest states in late September. We estimate that the storm had an EBITDA impact of approximately $11 million in the quarter or close to 1 percentage point in margin. Demand was largely driven by the industrial and commercial sector, which we expect to remain an important source of future growth. Trailing 12-month contract awards in our four key states are up 31%. Residential demand continued to grow in the quarter, albeit at a slower pace. We have seen the first signs of weakness in the residential sector materialized in our business in Northern California. Infrastructure contributed to volumes in the quarter, and we are seeing encouraging signs for the rollout of the Infrastructure Bill as trailing 12-month Highway and Street contract awards rose 14% for our four key states. Supply-demand dynamics remain quite tight in our markets with many of our customers on allocation. To fulfill the strong demand, we are increasingly relying on imports from our Mexican operations as we continue to strategically leverage our unique distribution model. Third quarter pricing announcements in states that represent 80% of our volumes saw strong traction. We have already announced additional pricing increases for the remainder of the year in January. Despite the impact of the hurricane, we secured a 2.4 percentage point sequential improvement in EBITDA margin, reflecting recovery in the supply chain disruptions and maintenance cost of the second quarter. On the cost side, energy remains an important headwind. While import costs grow, we are seeing signs of cost stabilization as shipping rates decline. We expect the residential sector to become a headwind to growth starting next year, but we believe near-shoring, the recently passed Inflation Reduction Act, and the Infrastructure Investment and Jobs Act will act as a catalyst for future demand. We are seeing positive signs from the Jobs Act that money is being deployed. We are in the preliminary stages of this investment cycle, and we are excited by the multiyear impact on the part business. Despite the macro challenges, EMEA continued to show remarkable resiliency with sales growing double digits while EBITDA rose high single digits. Top line growth was driven by double-digit price increases across all products. Cement volumes declined 3%, reflecting a drop in the Philippines and some weakness in private sector demand in Europe, which we would attribute to the economic slowdown. We now expect 2022 volumes across our products in Europe to show a flat to low single-digit decline. We experienced sequential price growth in the region, reflecting the successful implementation of summer increases. Europe, in particular, showed strong cement price traction with a 5% sequential increase and growing 30% year-over-year. Despite the pricing efforts, however, cost, particularly fuels and electricity continued to escalate as evidenced by the decline in EBITDA margin. We are in the process of executing additional pricing increases, which will roll out over the next 3 months. In the face of significant energy volatility, our European business continues to exhibit strength due to a consolidated vertical footprint, diversified businesses, and leadership in decarbonization. Year-to-date EBITDA has grown 70% in Europe. In the quarter, our European operations continued to lead the way in carbon action achieving for the first time a more than 40% reduction in carbon emissions. The region is well on its way to comply with the EU emissions reduction target of at least a 55% reduction by 2030. In the Philippines, cement volumes declined double digits as the country transitions to a new government and macro challenges impact demand. Sequential prices increased 4%, the sixth consecutive quarter of improvement. For more information, please see our CHP quarterly earnings, which will be available this evening. Our operations in Egypt and Israel continued to show strong top-line and EBITDA growth. Net sales in our South Central American and the Caribbean region grew 2%, driven by a strong cement price contribution. Cement volumes declined 12%, while ready-mix volumes grew 8%. The cement volume decline reflects bag cement rebalancing as well as operational and weather issues in the Dominican Republic, now our largest market in the region. The strength in ready-mix volumes is evidence of the recovery in formal demand as bag cement reverts to pre-pandemic participation levels. The decline in EBITDA and EBITDA margin largely resulted from higher energy costs, lower cement volumes as well as geographic and product mix. In Colombia, while our pricing strategy has led to a 12% growth in local currency prices, it has come at the cost of market share with volumes declining 5% in a market showing mid-single-digit volume growth. Construction activity in Colombia is largely supported by the rollout of infrastructure projects in formal housing. In the Dominican Republic, with our production largely sold out and very low inventory levels, cement volumes declined double digits due to the stoppage of the cement count in the quarter as well as the impact of Hurricane Fiona. We estimate that industry cement volumes remain flat during the quarter, supported by tourism, formal housing, near-shoring activity, and large infrastructure projects. With high shipping costs in a largely sold-out region, our logistics network, leveraging our operations in Panama, coupled with our cement capacity additions should be an important competitive advantage. 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 developments. Maher?

Maher Al-Haffar, CFO

Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are pleased with our strong pricing traction in all of our core businesses throughout the year. We continue to manage our pricing strategy to recover the margin loss to input cost inflation. We had a positive free cash flow after maintenance CapEx in the third quarter, but lower than last year due to higher investment in working capital and maintenance CapEx. The higher investment in working capital year-to-date is primarily driven by healthy top line growth as well as the inflation effect in our inventories, in addition to the inventory buildup necessary to address continued supply chain tightness. We expect to partially reverse the investment in working capital during the remainder of the year. The increase in maintenance CapEx relates primarily to the delayed delivery of mobile equipment and spare parts last year, which pushed our maintenance calendar into this year. During the quarter, we generated net income of $494 million versus a loss of $376 million in last year's third quarter. This increase was driven primarily by asset impairments in the prior year, lower financial expense, a gain from liability management activities, and the sale of Costa Rica and El Salvador. Return on capital employed for the last 12 months stood at 12.7%, excluding goodwill, well above our cost of capital. As regards to our balance sheet, we're pleased with the evolution of our debt with a reduction during the quarter of our total debt of $540 million and consolidated net debt of $454 million. As we did earlier in the year, during the quarter, we repurchased $654 million of our bonds at very attractive discounts, contributing to a reduction in debt of $91 million. Year-to-date, we have purchased $1.2 billion of our bonds. We partially funded these bond purchases through the closing of a EUR500 million sustainability-linked loan with similar terms and conditions as our current bank credit agreement. Even after the liability management exercise, we remain with limited exposure to rising interest rates with approximately 74% of our debt at fixed rates. Our floating rate debt is mainly exposed to euro rates, which, as you know, are substantially lower than U.S. dollar rates. Our risk management strategy focuses on mitigating FX risks associated with our operations in non-U.S. dollar currencies as well as fluctuations in interest rates and energy commodities. Given the depreciation in many of the currencies in which we operate and the sharp rise of interest rates and energy during this year, these strategies have had a positive offsetting effect of approximately $360 million. This includes gains in our FX, interest rates, and energy hedging strategies as well as debt reduction from FX translation effects from our non-U.S. dollar debt. These gains have had a positive effect on leverage and partially in EBITDA. Net-net, as a consequence of all of the above, our leverage ratio stood at 2.8x, down from the prior quarter. We expect our leverage ratio to decline in the fourth quarter as we generate free cash flow and pay down more debt. We will continue with our strategies that bolster our capital structure and remain focused on achieving investment grade in the short term. As we have said in prior calls, we have a bias towards debt reduction and further strengthening of our balance sheet, particularly during these volatile and uncertain times. And now back to you, Fernando.

Fernando Gonzalez, CEO

Our progress in regaining margins has been delayed due to persistent inflationary headwinds. Therefore, we are adjusting our EBITDA guidance to better reflect the current cost reality as well as FX volatility. We now expect 2022 EBITDA to be around $2.7 billion. As always, our guidance is based on like-to-like assets as well as the foreign exchange at the time of guidance. With higher-than-expected fuel and electricity costs, we expect energy cost per ton of cement produced to increase around 40%. Investment in working capital is expected to be around $250 million, $50 million more than our previous guidance. We now expect maintenance CapEx to increase by $50 million to $850 million, with anticipated total CapEx of $1.35 billion. And now back to you, Lucy.

Louisa 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. In the interest of time and to give other people an opportunity to participate, we kindly ask that you limit yourself to one question. If you wish to ask a question, please press followed by 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press followed by 2. Press 1 to begin. And the first question comes from Carlos Peyrelongue from Bank of America. Carlos?

Carlos Peyrelongue, Analyst

My question is related to the U.S. Can you provide some color for next year regarding volumes? The PCA is seeing housing volumes declining double digits next year. But as you mentioned, infrastructure spending is helping to compensate. If you could provide some color as to the expectation of both of these forces. And if you think infrastructure can compensate the expected drop, or at least partially compensate the expected drop in housing?

Maher Al-Haffar, CFO

Fernando, would you like me to take that, please?

Fernando Gonzalez, CEO

Yes, go ahead. Go ahead, Maher.

Maher Al-Haffar, CFO

Yes. Very quickly, Carlos. I mean, the market that we have seen softening in the U.S. is residential. And really, we've only seen that softening in some of our markets. One of the areas, for instance, selectively has been the Bay Area in San Francisco. I mean, first, I would like to say that for us, demand for the housing market is probably around 30% to 35%. That's the expectation in terms of the volume. And of course, we do expect some downturn, mild downturn, there are tightening credit lending conditions. However, I'd like to say that households are stronger, jobs are better. There are low inventories, for instance. True that mortgage rates have gone up, but they are likely to normalize. Rents are also going up quite rapidly, which at some point in time will translate again into increased demand. So on the housing side, we're seeing a little bit of a slowdown. But then offsetting that, which is about 2/3 of our business is infrastructure, which is about 50%. And then you have industrial and commercial, which is somewhere between 15% to 20%. And in infrastructure, we see actually quite a bit of backlog right now. I mean if you take a look at contract awards, in our key states, they're up 11% on a trailing 12-month basis, and that's very healthy. And frankly, with elections coming up and with elections coming up in '24, the pressure on the government is going to be very high to continue to disburse. There are other fiscal stimulus programs that are there. There's the Inflation Reduction Act. There's the CHIPS Act. There's a number of spending programs that are likely to translate into an acceleration in infrastructure going into '23. Now Industrial and Commercial is another area that we're beginning to see a very important uptick, not only in the U.S. but also an impact of that is happening in Mexico as well. And that is a function, frankly, from a lot of the near-shoring or French shoring, let's say, that is taking place. You've heard of the recently CHIPS Act, that's a $53 billion funding program that is translating to a build-out of chip manufacturing infrastructure in the U.S. You have the Inflation Reduction Act, which we mentioned, that's $370 billion. The only reason I'm throwing a lot of these numbers at you is that, yes, we do expect housing to moderate, but moderating under very healthy conditions, totally unlike the last time that we've seen a situation like this. But then on the other hand, we think that there are some countercyclical measures that are likely to kick in, which are infrastructure and industrial and commercial. Now it's a bit too late. We're just in the budgeting process. So I can't give you kind of where we have in terms of guidance in terms of next year, but on balance, I mean, we're expecting the situation to be probably neutral to sort of modestly weaker going into next year.

Louisa Rodriguez, Chief Communications Officer

Maybe I could just add. I think the real question in this is an issue of timing, and that is so far, we really haven't seen the impact of residential anywhere except in Northern California. But we are, of course, expecting it to weaken. It's difficult to project how fast that happens. And at the same time, it's very difficult to project how quickly the contract awards numbers, which are extremely healthy for our four key states, not only for infrastructure but also for industrial and commercial, how that ramps up. So it anyway..

Maher Al-Haffar, CFO

Carlos, one thing I wanted to mention also that is very important is that as you probably know, a big percentage of our sales in the U.S. right now are imports. And so to the extent we see and those imports are coming in at because of transportation costs are coming in at a very low margin at the margin. And so we think, if we see a moderation coming into '23, the big relief valve is going to be through reduction in imports, which are not big contributors to EBITDA at the end of the day or EBITDA margin. So that's another, I would say, risk mitigator to a possible slight downturn in the U.S. demand.

Louisa Rodriguez, Chief Communications Officer

Great. And the next question comes from Vanessa Quiroga from Credit Suisse. Vanessa?

Vanessa Quiroga, Analyst

Yes. Can you clarify on what led to the above-average investment in inventories in the quarter, and if this is coming from a specific region or country? And maybe if it's possible to quantify the impact on Mexico margins from weather, diesel prices, and other logistics challenges?

Maher Al-Haffar, CFO

Fernando, do you want me to take the inventories?

Fernando Gonzalez, CEO

Yes. Go ahead with inventory. I will take the other one.

Maher Al-Haffar, CFO

Yes, Vanessa, I’d like to quickly address the working capital situation, not just the inventory aspect. The working capital investment has risen by approximately $431 million so far, and it’s crucial to note that around $285 million of this increase is related to clients, primarily due to higher sales. It's worth mentioning that days receivables in our business have remained stable. Therefore, the primary contributor to the working capital increase is from clients, reflecting the rise in sales. There have been no declines in credit terms for our portfolio, nor changes in suppliers. The main concern, as you pointed out, lies in inventories, which have increased by about $170 million, equivalent to 6 additional days of inventory. Of these 6 days, 3 are essentially related to a strategic build-up of product inventory, including finished goods, goods in progress, and goods in transit, totaling about $70 million. Furthermore, an important part of the increase comes from materials and spare parts, taking up 2 days, while the remaining day is related to petcoke. Most of the increase in petcoke is attributed to rising prices, with 40% of the increase reflecting our expanded inventories over time. Additionally, there are around $78 million in other items connected to special occurrences last year that did not happen this year. This inventory situation is consistent across our portfolio. If I were to pinpoint one region, it would be Mexico since it has the highest exposure to petcoke and has accumulated the most significant inventory. That summarizes the current developments regarding working capital and inventories.

Fernando Gonzalez, CEO

Okay. Regarding your second question about margin deterioration, particularly in Mexico, I want to note that the 6.4 percentage point decline is largely explained by several factors. About 47% of this decline comes from timing issues with maintenance, meaning the maintenance schedule this quarter differs from the same quarter last year, along with some one-offs and changes in product mix. For example, while our cement volumes in Mexico are decreasing, our ready-mix volumes are on the rise. This shift affects the product mix, which involves different margins, contributing approximately 0.8 percentage points to the decline. Additionally, higher maintenance, which isn't necessarily the highest expense but occurs within the quarter, impacts about 1.5 percentage points. We also experienced some plant disruptions due to floods, which contributed another 0.7 percentage points to the decline, along with extra logistics costs incurred to support the markets from other plants during those disruptions. The remaining 53% of the decline is essentially due to increases in fuel and raw material costs for cement and ready-mix products. While we did see a pricing contribution of 10.8%, it wasn't sufficient to recover margins. We've managed to recuperate input cost inflation, but regaining margins is an ongoing challenge.

Vanessa Quiroga, Analyst

Okay. That's helpful, Fernando. And is there anything to report regarding the issues on the railways and the need to rely on ground transportation for products or volumes?

Fernando Gonzalez, CEO

Those are the types of disruptions I mentioned, like floods, as well as some railroad issues—one in Sonora affecting exports from Campana to the U.S., and another in the east. Both were temporary and have been resolved. However, these did have an impact along with the floods and other disruptions.

Louisa Rodriguez, Chief Communications Officer

The next question comes from the webcast from Francisco Chavez from BBVA. How sustainable is your pricing strategy with increasing signs of weakness in cement volumes, particularly in Mexico and Europe?

Fernando Gonzalez, CEO

We've been targeting a pricing strategy since early this year to recover our 2021 margins, and we will continue to pursue that goal. While executing this strategy presents challenges, I believe it's achievable. The pressures we're facing are widespread across the industry, and although we cannot guarantee an outcome, we remain optimistic. For instance, consider Mexico this year—look at the volumes, market share, and pricing. We plan to stick with this strategy. Additionally, the strategy for 2022 isn't over; we've increased prices for more than 40% of our volumes in October, with variations based on market conditions. We're moving from low-single-digit to high-single-digit price increases to continue recovering our margins. It’s challenging but feasible.

Louisa Rodriguez, Chief Communications Officer

Okay. The next question comes from Gordon Lee from BTG Pactual. Gordon?

Gordon Lee, Analyst

Just a very quick question on Europe. Thinking a little bit about the programs announced both by Germany and the U.K. to soften the impact of rising energy prices in the winter. I was wondering whether you have either a qualitative or quantitative comment on where you think that might help costs and overall demand maybe as well as we move into the winter and it's early next year?

Maher Al-Haffar, CFO

Gordon, I will attempt to answer your question. First, it's important to clarify if you are specifically asking about electricity or if you are also referring to fuels. Just electricity?

Gordon Lee, Analyst

Electricity.

Maher Al-Haffar, CFO

Sure. To provide some context, our European business contributes approximately 15% to our overall EBITDA. Importantly, nearly 70% of our electricity requirements for this year are already secured, with around 30% fixed for next year. These contracts typically last between 1 to 1.5 years. In Europe, especially in the cement sector, electricity constitutes about 20% of the total costs. Germany, within our operations, is particularly sensitive to the impacts of Russian gas and electricity pricing. However, we do not rely on gas as a fuel source in Germany, and about 90% of our electricity costs are fixed, stemming from a third-party waste-to-electricity system supplied with RDF. This contract is set for renewal for another 15 years, which should mitigate concerns regarding electricity price fluctuations in Germany. Spain has the highest exposure to variable rates, particularly due to the natural gas price cap initiated in June, which lasts until mid-next year. Conversely, in the U.K., we expect to benefit from current market conditions. Ultimately, despite ongoing volatility in the spot market, we believe the markets will stabilize due to regulatory interventions. Our exposure to electricity prices is not significant compared to that of other industrial players, and specifically in Germany, it is quite minimal. Does that address your inquiry, Gordon?

Gordon Lee, Analyst

Yes, it does.

Louisa Rodriguez, Chief Communications Officer

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

Anne Milne, Analyst

I have some questions regarding the debt structure. It's encouraging to see that you have been reducing debt. Maher, you mentioned there may be further reductions in the fourth quarter and beyond. My questions are all related to debt. Will this likely take the form of buybacks at a discount since many of your bonds are currently trading at discounts? Additionally, I noticed a shift from fixed to floating rates this quarter. Maher, you indicated that the floating rate is linked to the euro, so would that help mitigate any higher interest rates you may face as a result? Lastly, how much of the total debt is comprised of perpetual bonds? Is it $500 million out of the $1 billion outstanding? That's all I need to know.

Maher Al-Haffar, CFO

Yes, we have been quite active this year, having acquired nearly $1.2 billion and generating about $160 million in net present value for our shareholders. While it's uncertain if we will continue, the current prices are very appealing. However, our bonds lack liquidity. During our last tender offer, which I anticipated would see significant oversubscription, we barely met the target amount, indicating that we priced it correctly and there aren't many loose bonds available. We remain vigilant and have a substantial committed revolving credit facility, which is attractively priced, that allows us to take advantage of market discounts when possible. For now, we are taking a cautious approach because we do not want to shorten our debt duration significantly or consolidate maturities in the middle of our debt stack. Regarding fixed versus floating rates, when rates were low, we leaned towards fixed rates, and as rates have risen, we have gradually transitioned from fixed to floating. Our ideal mix is around 70:30 or 75:25, and we're close to that and expect to achieve it by the end of the year. Importantly, the floating portion is currently at 56% based on EURIBOR, which is about 300 basis points lower than dollar LIBOR. We anticipate that this differential will remain favorable. Additionally, if the euro appreciates, we will adjust our cross-currency swap position accordingly. The perpetual bonds are trading at an attractive rate, and we will continue to monitor that situation.

Louisa Rodriguez, Chief Communications Officer

Great. And the next question comes from the webcast from Yassine Touahri from On Field Research. Would you expect some fuel deflation in 2023, given the recent decline in petcoke and coal prices?

Fernando Gonzalez, CEO

Let me take that one. Well, we've seen a positive trend already in production of certain type of fuels. Now going deeper into the reasons, we do believe that this trend might continue, but still in a very volatile manner, particularly when referring to petcoke. There are some dynamics that can change pricing trends. But in general terms, we've seen positive adjustments since the peak after the war. And to some extent, we should continue seeing those trends. Now let me make one clarification. When you think in the impact in our production cost, we cannot directly relate the reduction of this type of fuels to our input cost inflation. There is an inventory effect. Our fuel mix has been changing. You know that we are increasing materially our alternative fuels and reducing other primary fuels, for instance, petcoke primarily. So there could be a delay in different regions. There could be a delay on prices or the impact in our cost for about 4 to 5 months. So when taking that into consideration, please don't forget that there is a delay because of inventories.

Louisa Rodriguez, Chief Communications Officer

And the next question comes from Alberto Valerio from UBS. Alberto?

Alberto Valerio, Analyst

Just a question on looking forward to next quarter. Hello, can you guys hear me?

Fernando Gonzalez, CEO

Yes.

Louisa Rodriguez, Chief Communications Officer

Yes, Alberto, you're a little weak. Yes.

Alberto Valerio, Analyst

Okay. I'll try to speak a little bit louder. My question is about next quarter, the results that we need to have next quarter to meet the guidance, so if you take quarter-over-quarter, adjusted by seasonality, the fourth quarter is not a stronger one. So I would like to know what we need to improve? And what are you seeing as improvement for next quarter? You mentioned the hurricane that impact $11 million was for next quarter. We need a little bit more to improve to meet the guidance. So if you could provide any color on why you guys are seeing that's better in the fourth quarter than the third quarter to meet the guidance.

Maher Al-Haffar, CFO

Yes. Just a second.

Louisa Rodriguez, Chief Communications Officer

You want me to start off, Maher.

Maher Al-Haffar, CFO

I was just trying to recall. Alberto, to answer your question, it's important to discuss our starting point for guidance. We initially had guidance of about $2.9 billion, but some adjustments are necessary. We divested our interest in the digital accelerator Neoris, which accounted for $26 million of EBITDA, so we need to adjust our guidance for that. Additionally, we typically provide guidance considering the foreign exchange rates at the time of the announcement. With the changes in FX since our last guidance, we start with a base guidance of around $2.84 billion. We also updated our guidance on energy related to Hurricane Ian, which impacted us by about $20 million in EBITDA, along with the full year energy guidance which is approximately $60 million. Hurricane Fiona contributed a few more million, and there are some other adjustments resulting in a yearly total of $2.7 billion. This isn't a direct guidance number, but hitting our full year guidance would require an EBITDA of around $650 million in the fourth quarter, which represents about a 1% increase year-over-year; last year's fourth quarter was $644 million. Depending on developments, we anticipate that pricing will continue to perform well, and demand should also hold up. You can evaluate the sensitivity needed to reach that target, but we believe it’s a reasonable assumption for the fourth quarter to meet our full year guidance.

Louisa Rodriguez, Chief Communications Officer

And maybe if I would add that maintenance outages also we're expecting them to be fairly stable on a year-over-year basis and down on a sequential basis.

Maher Al-Haffar, CFO

Yes.

Louisa Rodriguez, Chief Communications Officer

The next question comes from Ben Theurer from Barclays. Ben? We might have lost him. Ben, are you there? Okay. I think this will be the last question, but Bruno Amorim from Goldman Sachs. Bruno, please go ahead.

Bruno Amorim, Analyst

Is it possible to share with us the percentage of your total cost that comes from transportation contracts with third parties? I'm just trying to understand to what extent you are indirectly exposed to energy costs. Your service provider, they probably adjust freight prices according to variations in diesel and bunker prices and so on. So anything you can share in that sense would be helpful. Also, if you could comment on how often they adjust the prices that they charge from you? Is it monthly, annual, or whatever, the periodicity is? And second, if you could make a quick comment on how effective this price increase announced on October 10 in Mexico has been so far?

Maher Al-Haffar, CFO

Fernando, do you want to comment on the pricing and then I'll deal with the...

Fernando Gonzalez, CEO

What I can share is that a little over 40% of our cement volumes will see an additional price increase in October. It's still early to assess the dynamics, as we've been experiencing them for about three weeks. The price increases have varied widely, ranging from low single-digit to high. We are optimistic about the trend, but it's too soon to determine how much we will achieve from this initiative.

Maher Al-Haffar, CFO

Okay. I can address the distribution question regarding diesel. Distribution, including in our ready-mix business, accounts for about 20% to 21% of both costs of goods sold and selling, general, and administrative expenses. The diesel component makes up approximately 3%, which translates to around $250 million for direct diesel over the full year. We estimate that the diesel or transportation used by third parties is about the same amount. This year, we've hedged nearly 75% of our diesel exposure. As we look into next year, we are already close to hedging about 75% as well. We are also actively working on hedging third-party exposure. There is a notable correlation between third-party transportation costs and diesel expenses in the market. I hope this answers your question.

Louisa Rodriguez, Chief Communications Officer

And maybe if I could just add, Bruno, what we guide to is the energy for the production of cement, which includes fuel and electricity for cement only and transportation is separate. So, okay?

Bruno Amorim, Analyst

Yes.

Louisa Rodriguez, Chief Communications Officer

Okay. We appreciate you joining us today for our third quarter webcast and conference call. If you have any additional questions, please feel free to contact Investor Relations, and we look forward to seeing you again at our CEMEX Day webcast on November 16. Many thanks.

Operator, Operator

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