GCC SAB de CV

BMV:GCC

Earnings Call Transcript 2018-Q1

[Operator]

Thank you for standing by. Good morning, and welcome to the GCC First Quarter 2018 Earnings Conference Call.

Before we begin, I'd like to remind you that this call is being recorded, and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's earnings report regarding forward-looking statements.

At this time, I'd like to turn the call over to Mr. Enrique Escalante, Chief Executive Officer. Please go ahead, sir.

[Hector Enrique Escalante Ochoa, executive]

Thank you, operator, and good morning, everyone. Joining me today are Luis Carlos Arias, our CFO; and Ricardo Martinez of Investor Relations.

Business is off to an excellent start this year with an outstanding first quarter. I will discuss the main drivers of our performance in the U.S. and Mexico. Luis Carlos will review the financial result. I will then review our outlook for 2018. We will then open the call to your questions.

First, GCC's performance drivers. Our U.S. operations are catching the tailwind from the strong market in 2017, especially the fourth quarter, and the benefit of relatively mild early winter weather in some of our markets, although that has not been the same case more recently.

Activity in the Permian Basin oilfield in West Texas continues to be very strong. Since April 2016, the rig count in the basin increased almost 275% from 134 to 501 rigs. The main demand includes both oil well cement and also construction cement for the 15-plus fracking sand facilities that are being developed in the basin. As many of you know, the process of fine sand suitable for fracking are now being developed in West Texas to eliminate the high shipping cost for Wisconsin frac sand, which has been the industry standard in the development of the fracking technology. This sand mining projects need construction cement that we're supplying mostly with exports from the Samalayuca plant.

In New Mexico, housing construction demand is picking up. In the upper Midwest, wind farm construction is continuing to be a very attractive market for GCC. All our other regions are also growing.

One exception to the generally mild weather were storms in the final weeks of the quarter that resulted in a near shutdown in ready-mix activity. This affected ready-mix sales for the quarter.

In general, the backlog in the U.S. ready-mix continues to be very strong, despite the first quarter decrease in ready-mix volumes. As a result, U.S. cement sales volume increased 20% in the first quarter, while ready-mix volume were down 10%. Cement prices were up 3% year-over-year.

The Rapid City expansion is advancing rapidly with the scheduled start of operation in the second semester. Construction was 86% advanced at end of March. The exact date for starting operations depend on inventory level when we can execute the tie-in with the existing line, which requires a shutdown for several weeks. We will need to schedule the tie-in, so that it doesn't affect our ability to meet customer commitment. We expect the Rapid City expansion, which represent a capacity increase of 440,000 metric tons, to make a material contribution starting in 2019.

In Mexico, sales volumes were above our expectation. Cement volumes grew 2%, and ready-mix volumes increased 5%. The housing sector is getting stronger in Chihuahua. Mining projects in the Southwestern part of the state continue to generate the strong demand for cement. State government infrastructure spending rose very slightly for the first time in several years with a few new projects. However, aside from several new maquiladora plants, the commercial and industrial sector appears to be on hold, pending the outcome of the Mexican elections and the NAFTA negotiation. Increased exports to the U.S. are increasing Mexico capacity utilization and boosting margin. Around 40% of Mexico cement production was exported to the United States in the quarter.

Sales of specialty cement is another strong point. GCC has formed a joint venture with Deacero named Technovia Express for providing a patent solution for rapid highway concrete repair using GCC Fraguamax cement and Deacero steel mesh. This solution makes it possible to restart traffic only 12 hours after the highways have been shut down and makes it ideal for high traffic arterial highways. The contractor for renovating part of the Mexico City Queretaro highway awarded Technovia the supply contract for the project in February. No one else in Mexico can provide this kind of solution, and we hope to be able to use this first project to attract new client across the country.

Let me turn the call over to Luis Carlos to review the quarter's financial results. Luis Carlos?

[Luis Carlos Arias Laso, executive]

Thank you, Enrique, and good morning to everyone. Our first quarter result were above expectations. Sales grew 14% in dollars with growth coming from both the U.S. and Mexico. U.S. sales grew 12% and Mexico sales grew 18% as a result of higher volumes, prices and exchange effects. Cost increased only 7%. As a percentage of sales, cost decreased 4.5 percentage points, and operating expenses decreased 1.6 percentage point.

The increased gross and operating margins reflect several factors: higher prices and volumes; operating leverage; and the use of alternative fuels. In addition, electricity cost decreased in Mexico, and the first quarter of 2017 included some integration expenses for the 2016 acquisitions. As a result, EBITDA grew 41% to $46 million with a 24.3% margin or 470 basis points higher than the first quarter of 2017. Our EBITDA margin in Mexico reached an all-time record high of 42.7% and U.S. margins were 16.6%, the highest for our first quarter since the 2009 financial crisis.

Net financial expenses decreased 25%, principally because of lower interest expenses from the senior secured notes we financed in last June. As a result of these factors, consolidated net income increased more than 6x to $11 million.

First quarter 2018 operating cash flow was a positive $4 million compared to a negative $50 million last year. The $19 million favorable swing was a result of the strong growth in EBITDA and lower financial expenses that more than offset an increasing working capital. We are focused on improving working capital, especially the balance of payables in the U.S.

GCC's leverage ratio, which is defined as net debt over EBITDA, decreased slightly from the December level to 1.83x in March 2018, even with investment outflows for the Rapid City expansion.

I will now return the call to Enrique.

[Hector Enrique Escalante Ochoa, executive]

Thank you, Luis Carlos. My final topic is GCC's outlook for 2018. At present, we are keeping the outlook we provided during the last quarter conference call. There are several reasons for being somewhat conservative, despite the strong first quarter results.

First and foremost, the first quarter historically represents only about 15% of final sales, so it's hard to extrapolate to the full year.

Second, it is also hard to estimate how long the cement demand from the fracking sand mines in Texas will last. And several of these projects are being completed in the near future.

And finally, there is very little visibility on cement and ready-mix demand in our Mexican market. And some investments are on hold pending the outcome of the trade negotiations and the Mexican elections.

GCC's outlook is for the low single-digit growth in U.S. cement and ready-mix volumes, which is in line with the Portland Cement Association's forecast for our markets. We are seeing price increases of 3% to 5% range for both cement and ready-mix.

In Mexico, GCC's central forecast is for cement and concrete volume to be flat and for prices, in peso terms, to increase in the mid-single-digit range.

On a consolidated basis, GCC expects EBITDA to increase by mid-single-digits.

We are proud of our first quarter performance. GCC is building a strong consistent operational and financial track record. We have a solid capital structure and leverage profile. We have the operational and financial flexibility to take advantage of new market opportunities and navigate any external challenge we could face in our market. I'm confident that we're on the right path that will increase and deliver the highest value to our shareholders and other stakeholders.

This concludes our remarks today. At this time, we are ready to take your questions. Thank you, operator.

[Operator]

[Operator Instructions] And we'll go first to Mauricio Serna, UBS.

[Mauricio Serna Vega, analyst]

Just wanted to -- maybe you could provide a little bit more detail on why you're keeping the full year guidance. I mean, just taking a look at the numbers, I do recognize the first quarter is not as relevant as the other quarters in terms of sales and EBITDA. But still, I mean, in order for you to reach that mid-single-digit EBITDA guidance, that would imply that for the next 9 months, your EBITDA would have to drop, in average, around 13% from my calculations. So I just want to understand, like, what is the major concern because, also, this first quarter, you did face some tough comps in Mexico. Last year, you have 10% volumes and positive seasonal effect. And this time around, it was the reverse. And still, volumes grew. So maybe just want to understand where are causes on that? I mean, I guess, also if you could tell us a bit -- a little bit more on the Texas volumes. How much was that growth -- or that you are seeing, but you're keeping that caution for the rest of the year? And maybe if you could also provide us a little bit more details on the operational efficiencies that you discussed in the margin expansion in the U.S. Just want to get a sense on orders specifically. Are you -- what's -- what has been driving the higher U.S. margins in terms of cost control?

[Hector Enrique Escalante Ochoa, executive]

Thank you very much, Mauricio. Yes, I may sound a little bit repetitive here in terms of the guidance and has been somewhat conservative. And the reason, again, Mauricio, it's mainly Mexico. Mexico is definitely -- it's a big concern given the lack of visibility that we have. I can tell you that the results for the first quarter are based mainly on projects that we knew of since last year and that were -- many of them are going on already, and those have developed very well. But we don't see really many projects in the pipeline, so far. And we hear there are some price on hold. But still, I mean, our backlog, it's dry now, I mean, for the second part of the year. And I don't think that we're going to learn, really -- I mean, how the second semester is going to develop until we are -- have the election. So yes, we're being cautious because the indicator backlog that we have is telling us, I mean, that we should be, I mean, on the very conservative side in Mexico. In the U.S., 2 main reasons, again, to be somewhat conservative. Again, first, I mean, what we saw with construction cement exported from Samalayuca to the Permian Basin was a record for the company. It's what we consider a bubble because of the construction of this fracking sand plant. We hear there are around 15 plants under construction, some people talk even about 20. But we also heard from customers that, that's going to, I mean, end between -- certainly in the second quarter. So that's a -- that's the demand that, we believe, is going to be obviously just, I mean, a very specific incremental demand, I mean, for the first and part of the second quarter. And last, but not least, of course, the bulk of our price increase in the U.S. takes place starting in April. And of course, I mean, there are some competitive, I mean, actions in several markets. We are still cautiously optimistic that the price will take, as we have announced it in the market, but that we're also conservative in that there may be some market where we are experiencing some stiffer competition. So those are the main reasons why we are, I mean, conservative in the forecast. Your second question in terms of the efficiencies in the U.S., let me give...

[Audio Gap]

Although, as you know, we're making, I mean, a strong effort in terms of alternative fuels, we are not -- we have not reached, I mean, yet in the U.S. the targets that we are, I mean, hoping for. So the main reason why the margins have been increasing, I mean, so much is basically leveraged. I mean, we have a strong -- very strong control of fixed expenses. And in light of the additional volume that we are pushing in those markets, and especially West Texas, as I mentioned, that's obviously, I mean, decreasing our fixed cost as a percentage of sales.

[Mauricio Serna Vega, analyst]

Okay, okay. And if you could just remind us very quickly the level of pricing that you are implementing for both U.S. and Mexico operations for this year.

[Hector Enrique Escalante Ochoa, executive]

Yes. In the U.S., although we said mid-single digits more specifically, we are increasing around $6, $7 price per ton, depending on the market. Some of them are -- I mean, so far -- I mean, the price has been accepted with little resistance, like the Northern markets, like Colorado, for example. Texas, for example, and New Mexico, the price increase is effective now April 1. As you know, in West Texas, we have, I mean, more competition given the new capacity that we saw coming online last year there. So we're hoping, I mean, competitors will also do, I mean, their job in terms of prices. But obviously, we have to be very careful here, as last year, in that specific area, the competitors, I mean, were very competitive. In Mexico, we mentioned also mid-single digits. I can tell you that in the first quarter, the price is much higher than that compared to the first quarter of last year. We're talking high single digits. And -- but that's also, I mean, the result of a mix of products not only the direct per ton price increase that we implemented in the market.

[Mauricio Serna Vega, analyst]

Okay, okay, okay. So -- but you're maintaining a mid-single-digit price increase in Mexico.

[Hector Enrique Escalante Ochoa, executive]

Yes, sir.

[Operator]

We'll go next to Dan McGoey with Citigroup.

[Daniel McGoey, analyst]

Quick question on West Texas. On the fracking sand plant that you mentioned, can you put specific volume number on that? How much you -- how much of the volume you expect directed towards that in the first and second quarter that, I think, you're calling somewhat sort of extraordinary? And then just overall, how much tonnage is being exported from Samalayuca to Texas these days? And what capacity utilization Samalayuca is running at?

[Hector Enrique Escalante Ochoa, executive]

Thank you, Dan. I don't have here exactly, I mean, the number of tons that have been allocated to the fracking sand projects -- plant projects, but I can tell you that Samalayuca has export, in the first quarter, a record volume of cement in the history of the plant mainly going to the Permian Basin. I can tell you that February, for example, was close to 80,000 tons going from Samalayuca. That also covers, of course, the traditional markets of El Paso and Southern New Mexico. But the main increase is coming from the Permian Basin. Samalayuca is today running at full capacity. Actually, we are -- we have plans to start, I mean, some other old kilns just to be just be prepared in case the demand continues to be as stronger than we had experienced in the first quarter, just a plan B to make sure that the system in GCC is ready to react. We always pride ourselves of our logistics network and how we can precisely take advantage of additional demand through starting up additional kilns or moving cement throughout our network of terminal. So we're preparing to do that, just in case. I mean, we'll miss our forecast, and we've been a little bit more conservative than we should.

[Operator]

[Operator Instructions] We'll go to Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Just going back to that you were saying that you were preparing to start a new kiln in Samalayuca. What -- how much would your capacity increase in Samalayuca with the new kiln? And also, what was the -- what is the current utilization rate at the Odessa plant?

[Hector Enrique Escalante Ochoa, executive]

Sorry, Adrian. Probably, I was not too clear. No, I was not referring about starting a new kiln in Samalayuca. I was trying to say we're starting some old kilns that we have in Chihuahua, in this case. So that's I mean, around at -- we could think about shipping an additional 200,000 tons from the Chihuahua plant into West Texas, if needed, with this old kiln. Odessa is running at full capacity. It's running very tight. And that's why we're also starting this kiln in Chihuahua. We will supplement, if necessary, the production of oil well cement from one of the old kilns that we have in Chihuahua.

[Adrian Huerta, analyst]

Okay. And what would the -- what would be needed in order for you to make a decision to do the expansion, either at Samalayuca or Odessa? And how soon would that -- could that be, Enrique?

[Hector Enrique Escalante Ochoa, executive]

We have a very in-depth analysis now, including, I mean, technology companies, like [ FLS ] and the others in the industry doing this assessment to understand what's exactly the investment that it will take either to expand Samalayuca or Chihuahua or Odessa. So the 3 kilns are, as we speak, in competition amongst each other, the 3 projects. And by the second part of the year, we believe we're going to be ready with the decision, Adrian, that will tell us, I mean, what the next kiln. And if demand continues to be as we expect, we may take this up to the board for approval, I mean, in the second part of the year, so we're ready to start construction some time during 2019.

[Adrian Huerta, analyst]

And would you say, Enrique, just final question, there'll be a minimal of 500,000 tons of additional capacity, somewhere between 500,000 to 1 million or less than that?

[Hector Enrique Escalante Ochoa, executive]

You're totally right. It will be a minimum of around -- between 400,000 and 500,000. It would do something similar what we're doing today in Rapid City up to 1 million if we do an additional kiln in Samalayuca.

[Operator]

And we'll take our next question from [ Erwin Hee ] with TIAA-Cref.

[Unknown Analyst]

So I'm just curious about your -- for 2018, your free cash flow outlook. I mean, you are ramping up CapEx a little bit. And it seems like you may have burnt a little cash from working capital in the first quarter. So would you expect that you guys think you'll end up lowering that debt? And my second question is, do you think you -- outside of those potential funding needs on the operational side, do you have any intention to maybe come back to bond market where you guys have quite a bit of bank debt in the immediate 2020 to 2022 time frame? So do you think you'll retap the notes? Or how do you think about that?

[Hector Enrique Escalante Ochoa, executive]

Let me -- thank you for the questions, [ Erwin ]. Let me address first the CapEx question and then -- and working capital. And then I will pass it on to Luis Carlos, so he can give you more detail on that and also on the debt side. On CapEx, as you know, we put about $120 million of CapEx in the budget for this year. We are on track with that number. The majority of this goes to the [indiscernible] expansion in Rapid City about $58 million. So we continue with the plan in that regard. In terms of working capital, yes, we are, I mean investing this first quarter and part of the second quarter in working capital. Even just the nature of our seasonality in the northern market we need to of course build [log] inventories for the heavy construction season during the summer and fall in the US. Aside from that in this specific year we're building a visional [indiscernible] and cement inventory for the tie-in of the Rapid City plant that is going to be done several weeks during the summer. So that's the reason why you see the increase in working capital.

And now turning to Luis Carlos to talk to you about the debt side.

[Luis Carlos Arias Laso, executive]

Yes. Erwin, and just to compliment on Enrique's response to the cash flow, just to -- during the first quarter, we generated operating cash flow of $4 million against a negative $15 million last year, so even with the -- and even with the Rapid City expansion. So yes, as Enrique was explaining, there's a lot of seasonality in this first part of this year. So we're very optimistic about the cash flow generation for this year. And in terms of the debt, we're financially -- yes, we're actually looking at it. We are almost ready to make the decision, but we're not planning to open the bond to do another issuance. We -- we're comfortable with the mix that we have within bank debt and bond debt. So no, we're not planning to issue more bond.

[Adrian Huerta, analyst]

So the idea is to maybe roll over or refinance the bank debt in the bank market.

[Luis Carlos Arias Laso, executive]

Yes, that's correct.

[Operator]

With no additional questions, I'd like to turn the call back to Mr. Escalante for closing comments.

[Hector Enrique Escalante Ochoa, executive]

Thank you, operator. And thank you, everyone, for participating in today's call. Of course, as always, we look forward to seeing you -- many of you in the coming months. And please do not hesitate to contact us if you have any further questions. I mean, Luis Carlos, Ricardo and I are here to answer every question that you have. Thanks, again, to everyone for their participation.

[Operator]

And thank you again. That does conclude our call.