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TimePosted 26/03/2019 16:04:02

Building a stronger Cemex

Fernando A González, Cemex's CEO, opened Cemex Capital Market Day on Wednesday, 20 March 2019 and stated that 'A Stronger Cemex' had been formed through a programme of accelerated deleveraging, bringing with it an improved credit rating and increased shareholder returns.

The group achieved a top-line growth of six per cent in 2018 and generated US$1bn of free cash flow, which was used to reduce total debt by approximately eight per cent. This also enabled a dividend payment of US$150m, the first company dividend since 1996.

In addition, Cemex bought back US$75m of its company shares. EBITDA in 2018 was resilient at US$2558m, but the group lost around US$600m EBITDA to price erosion in Egypt, Colombia and the Philippines.

Mr González forecast higher uncertainty and moderating global growth in 2019. Uncertainties include trading disputes, new governments in Mexico and Brazil, and Brexit. These are expected to lead to higher market volatility. At the same time, energy headwinds are slowing, labour markets strengthening and consumer confidence is becoming more resilient. Infrastructure spending is also positive in most of Cemex's markets.

Creating a path to investment
Meanwhile, Cemex is on course to achieve greater financial strength as a result of further asset sales. "We are pleased with the progress of our asset sale initiative under our 'A Stronger Cemex' plan," said Fernando González. "We remain completely committed towards the goal of achieving an investment grade capital structure and will continue our disciplined deleveraging and improvement of our capital structure."

Cemex will implement US$230m of cost savings, of which US$170m are expected to be realised in 2019. Portfolio optimisation will see Cemex make asset sales of US$1.5-2bn and leverage will be reduced to less than 3x while debt reduction is targeted at US$3.5bn by 2020.

Juan Pablo San Agustín, EVP Strategic Planning and New Business Development and José A González, CFO, presented the group outlook in terms of strategic planning, new business development and finance. They described how Cemex divestments are on track to reach the 2020 asset sale target, having announced the finalised sale of US$500m of assets and received binding/non-binding agreements on assets worth US$700m, including German assets and divesting most of white cement operations (including the Buñol plant in Spain) for US$180m to Çimsa (Turkey). A further US$1.2m in asset disposals are under negotiation. These adds up to a total divestment programme of US$2.4bn, which will help the company to reduce its total debt to US$7.4bn by 2020 (less than a third of the peak level debt). "Cemex's capital recycling strategy maximises value for shareholders by portfolio optimisation," said Mr San Agustín.

Cemex Mexico CEO, Ricardo Naya, said Cemex Mexico had a record year in 2018 despite headwinds from petcoke prices and input cost inflation. However, the company increased prices and managed its market position.

The slow start to 2019 was anticipated, but the company expects it to be temporary. Moreover, long-term government investment in social housing is forecast to support demand. "Some 15 per cent of total cement demand comes from infrastructure and although some projects have been delayed, large projects are expected to continue over the long-term," said Mr Naya.

"The three key levers to grow will be pricing strategy, cost containment measures and commercial growth strategies to increase revenues and explore new business opportunities," he added.

Cemex Mexico anticipates savings of US$29m in 2019. The company is optimising and debottlenecking some plants while closing less-efficient units. Rail deliveries will also be increased to rationalise costs. An alternative fuels target of 32.5 per cent is achievable in 2019, claimed Mr Naya. Furthermore, a clinker factor 71 per cent was achieved in 2018 and Cemex will target below 65 per cent in the mid-term, he added.

Central America and Caribbean
The Central American region saw like-for-like EBITDA slide from US$477m in 2017 to US$410m in 2018 as sales volumes declined and market share was lost in Colombia, a key market for the company. Moreover, markets in Panama and Nicaragua were weak and Costa Rican dispatches fell as Elementa started a new mill. Petcoke prices also rose. To reduce operating costs, the company has identified cost savings of US$23m, with the majority to be achieved this year.

In the next two years, Cemex plans to put its EBITDA on a positive track again by leveraging Colombia’s cement demand, expected to grow by 2-4 per cent and improve its position in the Caribbean’s expanding markets. Guatemala and El Salvador should see growth while Costa Rican demand is expected to be buoyed by road construction, but further deterioration continues in Nicaragua and Panama as well as infrastructure delays, said Jaime Muguiro, who heads the Cemex South, Central America and the Caribbean division.

While cement volumes remained largely stable in Europe, prices significantly improved in 2018, maintaining EBITDA at EUR363m. Underlying demand continues to grow on the back of higher infrastructure and commercial investment, while housing also remains a key driver, particularly in mainland Europe.

In addition, the increase in CO2 allowance prices from EUR8/t to EUR23/t as well as the new regulation for EU ETS Phase IV, which is due to start in 2021, are expected to trigger capacity rationalisation, especially in Cemex operations in Spain. Sergio Menéndez, Cemex Europe president, said Cemex Europe would focus on its key markets to drive organic growth and has targeted savings of US$75m by 2020, of which US$51m this year.

Asia, Middle East and Africa
Energy cost inflation in Egypt and a landslide in the Philippines, making the second-largest Cemex plant in the world inoperable in the 4Q18, affected Cemex performance in this region in 2018 although effective pricing policies were able to offset input cost inflation. In addition, the company identified around US$36m in cost savings for the 2019-20 period.

However, the Philippines remains one of the most-attractive markets, contributing 40 per cent to Cemex AMEA EBITDA. Moreover, Joaquín Estrada, president of Cemex AMEA, predicted imports into this market will disappear in 2-3 years as Cemex aims to increase its local capacity to 7.2Mta by the 4Q20. Furthermore, prospects for Israel, another key market (39% of EBITDA), are also positive as the country’s solid economy is expected to support major infrastructure projects as well as residential and non-residential construction.

He was more cautious in terms of the outlook for Egypt. "Egypt is the hot spot," said Mr Estrada. While it is the eighth-largest cement market in the world, its capacity growth is unsustainable and some companies have negative EBITDA. The situation is complex and a solution is needed.

Cemex USA's EBITDA advanced to US$644m in 2018, up from US$602 in the previous year. Cement prices rose by three per cent, compensating for cost inflation, which Cemex anticipates to subside. In addition, the company will also benefit from US$33m of cost savings in 2019, followed by an extra US$12m the year after.

Looking ahead, Ignacio Madridejos, president of Cemex USA, reported that cement demand was rising at approximately 2.3 per cent YoY and is on target to reach 110Mt by 2023. Cemex is well-positioned in the key states of Arizona, California, Florida and Texas, where demand from road programmes and residential construction is forecast to rise above the national average in 2019.


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