GCC SAB de CV

BMV:GCC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to GCC's Second Quarter Earnings Call for 2021. Before we begin, I would like to remind you that this call is being recorded and all participants will be in listen-only mode. Please also note a slide presentation will accompany GCC's earnings results webcast. The link is available on the company's website at gcc.com within the Investor Relations section. There will be an opportunity for you to ask questions at the end of today's presentation.

I will now turn the call over to Ricardo Martínez, Head of Investor Relations. Ricardo?

[Ricardo Martínez, executive]

Thank you, operator. Good morning, everyone, and thank you for joining our earnings call. With me on today's call are Enrique Escalante, our Chief Executive Officer; and Luis Carlos Arias, GCC's Chief Financial Officer.

As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. You can find more information about risks, uncertainties and other factors that could affect our operating results in our most recent filings with the Mexican Stock Exchange.

It is important to note that these statements include expectations and assumptions related to the impact of the COVID-19 pandemic. As seen on Slide 2, our forward-looking statements provide information on risk factors, including COVID-19 that could affect our financial results. In particular, there is significant uncertainty about the duration and contemplated impact of the pandemic. This means GCC's results could change at any time, and the impact of COVID-19 on the company's business, results and outlook is a best estimate based on information available as of today.

Let me now turn the call over to Enrique.

[Hector Enrique Escalante Ochoa, executive]

Thank you, Ricardo, and good morning, everyone. GCC is off to an excellent first half of the year, with a sound beginning of the U.S. construction season as economic growth and recovery continued at a healthy and steady pace. Positive momentum persists in our industry. Construction activity is expected to remain robust throughout the year. We are experiencing high and pent-up demand of our products as well as a substantial backlog all across markets where we participate.

Current cement demand is even stronger than at pre-pandemic levels. We are very pleased with the results delivered as of today. We have increased top and bottom line growth and EBITDA margin. Our balance sheet is strong and ready for growth. We will allocate more resources to our core business, cement and our distribution network to maintain our competitive advantage while we focus on our sustainability strategy and CO2 reduction targets.

In order to continue generating value for all of our stakeholders, we made a number of strategic decisions during the second quarter that will help us achieve our mid and long-term goals.

Let me now briefly discuss market conditions, key highlights from our performance and the strategic decisions we made this quarter. Luis Carlos, our CFO, will follow with GCC's financial performance and capital allocation priorities. He will then turn the call back to me for comments regarding full year guidance and closing remarks. Finally, we will take your questions.

Please turn to Slide 4 to comment on U.S. operating and strategic CapEx. GCC's results are encouraging. The U.S. market remains very strong with a solid demand from El Paso, Texas, all the way to the Canadian border. In the cement business, volumes grew 11% while prices rose 8% during Q2, somewhat offset by a decline in ready-mix volumes, as a result, sales in the U.S. are up 10%.

On accumulated basis, cement volumes grew 3%, and we have been able to increase prices by 6% year-to-date. Overall performance and market conditions were much better than what we expected. We are shipping our products at strong levels. However, labor shortages continue to influence and cap the pace and magnitude of the construction projects in some regions.

Worth mentioning that in response to the expected backlog and a stronger demand, every kiln at GCC is up and running to produce construction and oil well cement. For practical purposes, our system is sold out. We are facing some bottlenecks in our grinding, storage and shipping installed capacity. Consequently, we are turning all of our efforts on producing, maintaining operations and increasing terminal throughput to supply the demand that lies ahead.

GCC's cement operations will reach full capacity in the short term. We have not seen this situation in about 15 years, which shows signs that we are about to enter a new phase on the industry cycle.

In the near future, our cement business outlook promises -- is very promising across the board. Therefore, we have decided to invest in strategic CapEx to add cement capacity in several projects. First, an analysis and recommendation to update and expand one of our cement plants was presented to the Board. We will decide shortly which GCC cement plant expansion creates more value. We plan to build a new 1 million ton metric calcination line. We will inform you of our final decision in the coming months.

Second, logistics investments to strengthen our cement distribution network in the Minneapolis-Saint Paul, Minnesota and Salt Lake City, Utah areas with 2 new distribution terminals. Third, a debottlenecking project at our Samalayuca plant, which will add roughly 200,000 metric tons of cement per year by the end of 2022.

Finally, a set of projects to improve operational efficiency and enhance our social and environmental responsibility to Chihuahua's plant in that community. Our cement capacity expansion and distribution terminals growth call for an estimated investment in the range of $450 million to $500 million in the next 3 years. All of these projects have a double-digit return on investment, well above our weighted average cost of capital or WACC.

Moving to Slide 6. In terms of U.S. cement pricing, based on the strong cost inflation pressures, we have announced a second price increase of $6 per short ton effective in August. We remain cautiously optimistic that market conditions will continue to tighten up. Therefore, we expect this second price increase will be accepted in several regions where we operate. We will be monitoring this closely region by region and give you updated in follow-on conversations.

Regarding U.S. segments, I would like to comment the following. Market dynamics by sector haven't changed substantially from what we saw during previous quarters. Infrastructure. This market has an upside in the short and midterm, while projects are running at a steady pace and several more are in the pipeline.

In regards to the long term, bipartisan infrastructure package, GCC as a member of the Portland Cement Association applauds the White House and the bipartisan group of 21 senators for moving with the Surface Transportation Reauthorization Act of 2021 and the House INVEST in America Act. From what is known, it might allocate an incremental funding of 30% to 50% over The FAST Act levels, which expires on September 30 after a 1-year extension.

U.S. economic vitality depends on an integrated national transportation network that moves goods and people safely and efficiently, while ensuring quality of life and an economic prosperity for all citizens.

As illustrated on Slide 7, the residential sector showed strong cement consumption as a result of an imbalance of housing supply and demand, low interest rates and favorable demographics. The nonresidential and commercial sector, these sectors show mixed demand again this quarter. There were projects which were favored by the pandemic while others remain on hold.

And regarding oil well cement demand in the Permian Basin, we can say that as the demand/supply balance in major Texas cities turned negative, mostly as a result of competitors' equipment failures, some participants in the Permian decided to exit the West Texas oil market to focus on construction cement for the Texas triangle. This movement, coupled with the surge in oil prices, has created a fast-growing demand for oil well cement. In GCC, part of our value proposition to long-term customers, it's precisely permanency and consistency in our supply chain, supported by our main competitive advantage of the systems that we have created with plants and terminals.

We have been able to leverage our unique distribution network to supply the incremental demand in this sector from our Odessa plant as well as from kiln 2 at the Chihuahua cement plant. We continue to build customer loyalty in the Permian.

Turning to our Mexico operations on Slide 8. We delivered strong second quarter results on the back of high volume growth in cement and ready-mix. We benefited from an easier comparison because most of our customers remain closed in compliance with the national lockdown in Q2 of last year. Market dynamics remain similar to our prior quarter, where industrial maquiladora plant, warehouse construction and robust mining projects drove sales volume. In Juarez City, the middle-income housing segment also continued to show a strong demand.

As a result of a V-shaped recovery in the State of Chihuahua, sales in Mexico division increased by almost 47% in the second quarter, supported by an increase in cement volumes of 17% and 41% in ready-mix volumes. On a year-to-date basis, sales increased 26% while volumes rose 12% and 23%, respectively.

Finally, turning to Slide 9. In regards to our sustainability strategy and CO2 reduction targets, we are currently working on our primary goal of reducing net CO2 emissions by 22% by 2030, supported by the Science Based Target initiative. We also are aiming to achieve the collective industry ambition for a carbon-neutral concrete by 2050. Therefore, we have made the following organizational changes.

First, we created a single department or area responsible for companywide strategy and sourcing of alternative fuels. Second, we added a Corporate Vice President of Sustainability and Environmental Strategy to the senior leadership team with direct report to me.

I would also like to share with you some of the key highlights from the 2020 Annual Sustainability Report we released in April. The full report is available on our website. You will see here that we reached our first benchmark by reducing net CO2 emissions by 10% from 2005 levels. We entered into a long-term agreement with a renewable energy provider to supply 50% of the electricity consumed at our Rapid City cement plant. This wind farm came online in late 2020.

The Pueblo Cement plant won the Portland Cement Association 2019 Chairman's Safety Performance Award, which recognizes outstanding performance. Two GCC cement plants earned the EPA's Energy Star certification, making the third consecutive year for the Pueblo plant and the first year for the Rapid City plant. We received the Great Place to Work designation for the second time in the U.S. and increased our ranking in Mexico to 7th place and 3rd place in times of crisis, reflecting GCC's response against COVID-19 challenges.

We formed the Diversity and Inclusion Committee to strengthen our diverse culture, promote labor inclusion and ensure equity for each employee. We signed on to the women empowering principles established by the United Nations. 2020 was also GCC's 16th consecutive year recognized as a Social Responsible Company awarded by the Mexican Center for Philanthropy. We're embracing our part of the challenge to build a more sustainable planet. We're adapting faster to the changes presented to us and creating better strategies across all our business units.

Let me now turn the call over to Luis Carlos to discuss the quarter's financial results and capital allocation priorities. Then I will return for comments regarding our full year guidance and closing remarks. Carlos?

[Luis Carlos Arias Laso, executive]

Thank you, Enrique, and good morning, everyone. Turning to Slide 12, our second quarter results were above expectations. Consolidated net sales increased by 18%. During Q2, we saw a sharp increase in ready-mix in Mexico and cement volumes in both countries, coupled with a positive pricing environment in the U.S. These gains were offset by a decline of 17% in U.S. ready-mix volumes, which we already expected.

On Slide 13, cost of sales as a percentage of revenues decreased 1.2 percentage points to 67.2% in the quarter, mainly reflecting better prices in both countries and operating leverage as well as the continuation of the expense reduction plan. SG&A expenses as a percentage of sales decreased 0.4 percentage points in the quarter to 7.2%. This was mainly due to the continuation of the expense reduction plan and operating leverage, partially offset by depreciation of the Mexican peso relative to the U.S. dollar. As a result, as we illustrate on Slide 14, EBITDA increased 19% in the quarter, while the EBITDA margin was 33.8%, basically unchanged quarter-to-quarter.

On a year-to-date basis, EBITDA margin has increased 1.5 percentage points to 31.5%. We are satisfied with the increase in profitability achieved even though we are incurring additional expenses this year. Our results show that we are controlling cost of sales and SG&A effectively. As a reminder, this year, we will have to compensate for $14 million of cost and expenses that were saved last year. The latter is the difference between last year's total savings and 2021 permanent savings due to the financial lessons learned during the COVID-19 crisis. We remain focused on continuing to increase profitability on a yearly basis.

Turning to Slide 15. Net financial expenses totaled $10 million due to an increase in the effective interest rate, partially offset by lower debt balance. As a result, earnings per share and consolidated net income increased 44% to $48 million during the quarter.

Moving to our cash generation on Slide 16. Free cash flow was $41 million in the second quarter of 2021 compared to $35 million in 2020. This translates into a free cash flow conversion rate of around 43% in the second quarter. This was mainly driven by increased EBITDA generation as well as lower interest expenses and cash taxes, partially offset by higher maintenance CapEx and working capital requirements.

I would like to point out GCC's improvement in controlling payables, receivables and inventories. Based on the last 12 months of sales as of the first half of the year, we reduced days net working capital from 69 to 57, a total reduction of 12 days.

Turning to our balance sheet. We ended the quarter with $593 million in cash and equivalents. Our net debt to EBITDA ratio dropped to 0.06x, basically 0 at the end of June. We are on track to achieve our guidance in this ratio, reaching negative net leverage even before year's end. By any standard, our leverage and other debt ratios are way better than industry averages.

Moving to our capital allocation priorities on Slide 18. As Enrique already covered, market trends remain positive with some regions already reaching capacity. Our balance sheet is ready for growth. Therefore, in addition to the projects already described where we will invest in the next years to increase cement capacity and improve our logistics and distribution network, we are actively looking for inorganic growth opportunities in the cement and materials businesses.

As we implement our clear growth strategy, we are only looking for cement plants that can be plugged into our connected system. We acknowledge that our inorganic growth options are somehow limited based on a strong construction outlook and valuations are high. However, we are confident that with prudence and patience, we will be ready when the right opportunity arises. If we do not find an appropriate asset that fits into our strict criteria, we will pay down debt to save on interest expenses in the next quarters.

As a last comment, during our Annual Shareholder Meeting in April, an annual dividend payment of MXN 1.0105 per share was declared. And the Board of Directors approved yesterday to pay it on August 17 of this year.

With that, I will now hand the call to Enrique to discuss the guidance for the year and to share his closing remarks.

[Hector Enrique Escalante Ochoa, executive]

Thank you, Luis Carlos. Please turn to Slide 19. My final topic is GCC's updated guidance for 2021. Based on a strong first half performance, our backlog and the underlying market trends, I already commented on, we are revising upwards our guidance for 2021. Starting in Mexico, we now expect GCC's cement volumes to increase 4% to 6% and ready-mix volumes 10% to 15% with price increases in the 2% to 3% range in both businesses.

In the U.S., we expect GCC cement volume to increase 4% to 6% year-over-year. In the ready-mix business, some remarkable projects with record volumes created a very high comparison base. Thus, we expect volumes to decline between 15% to 20%, returning basically to historic levels. In terms of prices, in light of the announcement we have already made, we anticipate a price increase in the 6% to 7% range in cement and 4% to 5% in ready-mix.

Regarding profitability, we expect 2021 EBITDA to increase between 8% to 13% year-over-year. This implies a range of $333 million and $348 million. As previously stated, GCC's cement plants are running at high capacity. In order to keep our operations running optimally as well as to catch up on a number of maintenance projects, we will invest a total of $75 million in capital expenditures this year. As a result, free cash flow conversion rate is going to reach above 60% and the net debt to EBITDA ratio would be negative.

With that, this concludes our prepared remarks. Let's now turn to your questions. Operator, please go ahead.

[Operator]

[Operator Instructions] And our first question is from Nikolaj Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

Congrats on the numbers. Enrique, as you can imagine, you're going to get abundant questions on that capacity expansion. So I'll kick it off there. And then a second question on pricing for the second half. Whatever you are prepared to talk about here, but I would love to get more color on where you think you can add capacity. If you have the permit in Odessa, you have a wet capacity planned up in Montana, several markets that you operate in are in a good shape, in particular, in the United States. So whatever you can say there. I'm also a little intrigued of how you're thinking of supplying that Salt Lake City plant given that Colorado looks to be in a good shape at the moment. So the long-term thinking around supplying Salt Lake City. And then the second question relates to how are you feeling about a price increase for the second -- into the second half? And what sort of the magnitude in your different markets?

[Hector Enrique Escalante Ochoa, executive]

Thanks for your question, Nikolaj. All right. Let me address first, I mean, the increased capacity. We have been commenting that the short-term expansions for one of our plants are really an internal debate between expanding one of the plants in Chihuahua and the Odessa plant. Montana, it's not -- I mean, at this very moment, one of the top priorities in terms of expansion, and it's a little bit further down the road in our plant.

The issue between Odessa the Chihuahua plant basically lies on the difference in construction cost in Mexico and in the United States that is significant. Obviously, we're in deep discussions with equipment manufacturer suppliers. I mean 3 or 4, we have bids, we have designs. And that's basically the same amount irrespective of where you're going to build. However, the construction cost, as I said, it's significantly more in the U.S.

On the other hand, the cost to operate a plant in Mexico is also more competitive. But the market is developing more in the U.S., short term. So the cement will have to travel, obviously, either from the Odessa or from the Chihuahua or Samalayuca plant into those markets. So it's a matter of optimization between construction cost, operating long-term costs and transportation rates. Again, we're in the final decision process, and we will have a decision pretty soon. Time is of the essence here, we understand that. Market conditions are very good, and we're ready to move.

In terms of permitting, as you know, we have always said that we have a permit on hand for the Odessa expansion, which is a big plus in the U.S. So we will inform you in more detail about this plant shortly. In terms of the Salt Lake City, Utah terminal. Well, this is part of our original strategy as we expanded the Rapid City plant. So the Rapid City plant incremental cement is going to travel east more and more into the Minneapolis-Saint Paul area, where we are building the second phase of the Albertville terminal, already approved by the Board.

And then as we free up cement from that area that was shipped from Pueblo into Iowa and South Dakota, that cement is coming back to Colorado. And of course, Colorado's market conditions are very good, as you mentioned. But Utah, it's also in a very pronounced shortage in terms of cement supply. And so our strategic plan calls for growth west into Utah with the excess cement that we're bringing back to Colorado to Pueblo from our original shipments into Iowa and South Dakota. So that's the rationale of how we're going to supply that market.

Additionally, as I said, we're building a project in the Samalayuca plant to produce approximately 200,000 more tons in the next 18 months. So that cement can also obviously be exported to complement our system in the U.S., either for Utah through a ladder moving upward in our system, or can stay also around West Texas, where we're seeing a very high demand increase.

We have even temporarily shipped Samalayuca cement all the way basically up to Colorado and Utah. So the market conditions are there. Our balance sheet is prepared for that growth and more and we're just in the final decision again as of which new line is going to be built.

In terms of pricing, several months ago, we announced a second price increase for August. I think we're were one of the first producers that visualize at least in our area that the demand supply conditions are very tight and will be and continue to be like that for the rest of the year and the coming years.

On another hand, we have a very strong cost inflation that we obviously need to offset. So we now announced a $6 per ton price increase. Initially, I don't -- I have to be honest, I didn't think that we had a very strong traction. But as we kept moving into the summer, many customers are saying, yes, we're up for it, and please continue making sure you supply us the committed volumes. So I have very optimistic views that the price increase will take on most of the regions where we are operating.

[Operator]

And our next question is from Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Congrats on the good results. Two quick questions. Number one is on Mexico, cement volumes from the infra sector. What have you seen there recently? And are you starting to see a pickup in demand from the infra side, or is this something that could come in the next couple of quarters? I believe demand in the infra sector has been relatively low for a couple of years.

And the second question is oil well cement. What type of recovery you have seen so far on oil well cement? And what type of recovery is included on the guidance and the new guidance that you provided for cement volumes in the U.S.?

[Hector Enrique Escalante Ochoa, executive]

Thank you, Adrian. Let me start with the second question, because I had problems hearing the first question. So let me start with the second question on oil well cement. Luis Carlos will give you the exact numbers. But in contrast to last year, when we said that last year, we would have grown in construction cement, if it was not for the decline in oil well cement, this year with COVID is the reversal.

I think that we are growing at approximately 4% excluding oil well cement and 10.6% when we include oil well cement in our mix. So we're having exactly the reverse effect that we had last year when we hit the oil well -- the oil crisis. So for practical purposes, again, we're completely sold out on the Odessa plant with very low inventories and we're pushing as hard as we can from Mexico on kiln 2 and we have been talking with our customers to protect them as best as we can, but we're maxed out. And we don't see a different scenario going forward than continue to be super occupied in those products.

Adrian, can you repeat for me the first question?

[Adrian Huerta, analyst]

Sure, can you hear me better now?

[Hector Enrique Escalante Ochoa, executive]

Yes.

[Adrian Huerta, analyst]

It's basically demand from the infra sector in Mexico. I know it has been relatively low for quite some time. Are you seeing any signs that it could start to recover at some point?

[Hector Enrique Escalante Ochoa, executive]

Demand for cement in Mexico is basically what you're asking, right?

[Adrian Huerta, analyst]

From the infrastructure sector, yes.

[Hector Enrique Escalante Ochoa, executive]

Yes. Okay. We've been discussing internally precisely our expectations in terms of infrastructure work in the Chihuahua state, it's been very low, as you mentioned, I mean actually, the last 2 government terms. So we have been basically 12 years -- almost 12 years with very low infrastructure work in the state. So we are optimistic that the new administration is going to, of course, have an improvement in the number of projects, but we don't have yet enough visibility. Adrian, we're very close to both the local and state authorities trying to understand their plans. I think that we are going to be able to give you more color on this probably in the next conference call.

What I have to -- let me add, Adrian, that again, we try to see the glass half full here because it is obvious to us that the direction is obviously up. It cannot go really any lower than what it has been in the last 2 terms. And Chihuahua, as a state, I mean its economy is doing very well as a result of the free trade agreement. So we're again cautiously optimistic that infrastructure is going to improve.

[Adrian Huerta, analyst]

Yes. Very clear. And just one on -- regarding cement prices in the U.S., you were seeing, as you said, for the first time in many years, a second price increase and the system is sold out, import parity prices are coming up pretty significantly. What could be the case next year? Probably an announcement of a stronger increase in January and then wait to see in the second half? Or are we entering a phase where we're going to start seeing 2 price increases throughout the year or even more like it is in Mexico? I mean, I remember many years back in Mexico was also the case where there was only one price increase in the year and that changed 5 years back and now it a matter of being revised every month to see the possibilities to increase prices. Do you think that we're entering a point in the U.S. where the way that cement price increases have happened in the past is going to change going forward?

[Hector Enrique Escalante Ochoa, executive]

I'm of that view, Adrian, that it's going to be different, faster and stronger. And let me just say, obviously, this is the result of a very tight demand supply balance on one hand, and of course, the concerns of a strong cost inflation as I was alluding earlier in my remarks.

Now I think it's too soon for us to say if there is going to be 1 or 2 or what magnitude. I mean most likely we will be ready with that -- our position for that in the next quarter to make up an announcement for next year. But on the other hand, as you know, the system is very tight and imports are going to get more and more expensive, want it or not because of ocean freights on one hand are super high, and on another hand, of course, the pressures on CO2 cost going forward, more in some countries than in others, but that's also going to influence the price at which the cement can land in the U.S. So with a sold-out market, increased cost of exports, I definitely expect a higher and stronger price increases for next year.

[Luis Carlos Arias Laso, executive]

And Adrian, just to complement. This is Luis Carlos. Just to complement on the oil well cement, year-to-date, we are around 40% above what we expected at the beginning of the year, but we are still around 8% lower volumes than 2020. So we’ve had a much better than expected trend in oil well cement, but still below the previous year's level. So we definitely see more potential of upside trend in that market.

[Adrian Huerta, analyst]

Luis Carlos, you said that 8% level versus which level? 2020?

[Luis Carlos Arias Laso, executive]

2020 year-to-date.

[Adrian Huerta, analyst]

Okay.

[Luis Carlos Arias Laso, executive]

For 6 months in 2021 and then 6 months 2020.

[Adrian Huerta, analyst]

And versus 2019, you know what that would be?

[Luis Carlos Arias Laso, executive]

I don't have the number, but the peak in '18 and '19 were pretty high levels of consumption.

[Operator]

And our next question is from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

I have a couple of questions. One, about the strategic projects that you mentioned. Can you give more details about the debottlenecking of the Samalayuca plant and how this would work along with a potential capacity expansion if you decide to go on the Mexico expansion?

And the other question is regarding in general, that competitive situation in your markets in the U.S. Just on -- just to get more details whether there's any competitor that seems to be less sold out with some capacity to give more competitive prices? Or is it a situation where everybody is now on the same situation regarding being sold out?

[Hector Enrique Escalante Ochoa, executive]

Thank you, Vanessa. Let me address the first question on the strategic projects. The debottlenecking of Samalayuca, as I mentioned, it's around 200,000 metric tons. Today, those can entirely go and will entirely go to the U.S. market. So that means that we still will need to eventually expand a new kiln also in Mexico, either a second line in Samalayuca or the kiln 5 project in Chihuahua that is well advanced in terms of design and planning. So the Samalayuca project is just, as I mentioned, debottlenecking and it's a short term, and it's not contingent on any of the other new kiln lines in the system. So we're moving forward with that as we speak.

In terms of competitiveness in the U.S. market, again, we believe that most of the plants where we're operating, basically, are not sold out in the process of continuing going into that direction. Market conditions seems very tight in Colorado. New Mexico is doing well. West Texas and the whole state of Texas, it's impressive, what is going on there. So more than thinking that there are going to be a weakness in terms of price increases, I think that most competitors today, I cannot assure that, of course, but it will be my assumption that most or all of the competitors are today looking at how they can increase production capacity for the coming years in the U.S. So we feel pretty confident that the imbalance in supply demand is going to prevail for the next years, Vanessa.

[Operator]

And our next question is from Carlos Peyrelongue with Bank of America.

[Carlos Peyrelongue, analyst]

Congratulations on the results. I would like to go back to your capacity utilization. If you take out Texas that you said you're sold out in Odessa, what's your utilization in the rest of the U.S.? And can you also comment on your utilization in Mexico? And the second question, with regards to the expansions, are the total expansions for 1.2 million? That's 1 million in the U.S. and the other 200,000 in Samalayuca, is that correct?

[Hector Enrique Escalante Ochoa, executive]

Thank you for your questions, Carlos. First, in terms of our utilization, so we've been ramping up as we go through this year. We fired kiln #2 in Chihuahua because we started to see a very robust demand increase both in Chihuahua and the U.S., as I said. Then we fired #2 in Chihuahua, also to supply complementary oil well cement. So having said that -- with all that, all of the kilns are working, and we're scheduled to continue full steam ahead in every plant for the year -- for the full year.

Even at that pace, we think we may be having some inventory challenges at the end of the year. So that means our system today, we basically cannot take on any more customers or orders. Actually, we have been telling our customers that we will protect our permanent customers, but new customers are very difficult that we could take on anyone. Even incremental volumes for permanent customers are in discussion with some of them. So we're completely sold out going forward.

Suffice to say that we even bought some clinker that we found from one competitor to supplement our supply this year. If I could find today a relatively good price delivered to one of our plants more clinker, I would buy. So that's how we're operating. In terms of the projects, yes, the expansion is going to be around 1 million metric ton line and it's in addition to the debottlenecking of Samalayuca of 200,000. So we're looking to add at least 1.2 million metric tons.

[Carlos Peyrelongue, analyst]

Okay. Perfect. So you're sold out across the U.S. and in Mexico as well, right?

[Hector Enrique Escalante Ochoa, executive]

In Mexico as well. Absolutely.

[Carlos Peyrelongue, analyst]

Okay. And then the final question. I think you guys mentioned that the conversion -- the cash conversion would be 60% for this year. I just wanted to verify 6-0, 60%.

[Luis Carlos Arias Laso, executive]

Yes, Carlos.

[Carlos Peyrelongue, analyst]

Okay. With that in mind and having, as you said, you're going to become cash positive, are you considering dividends as well potentially for next year? Or you're thinking more just expansions and potentially some M&A?

[Luis Carlos Arias Laso, executive]

Carlos, as we’ve expressed in the past, we want to continue increasing our cash, our firepower for M&A. The expectation in terms of dividend is based on the historical levels of dividends. So we're not expecting that the Board is going to propose special dividend in the future.

[Operator]

And our next question is from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Congrats on the results. The 2 questions that I have, how do you see yourselves and your cost structure across different geographies? How do you think your cost structure is much more competitive or might be vulnerable to your peers in the sense of the following, pet coke prices have gone through the roof, other people sources their fuel needs by coal, you are more integrated and you have the option to use natural gas if the economics are there. Do you think that the push from pet coke may give in certain geographies an additional reason to consider price hikes in cement for these players and that you ultimately might be actually benefiting because of that because perhaps you are not seeing the cost pressures on the energy side as many of your peers? Can you discuss a little bit on that?

[Hector Enrique Escalante Ochoa, executive]

Francisco, thank you for the question. Yes, absolutely. As I have mentioned, we see across the board, in general, for the industry cost inflation pressures, definitely. However, I have to say that in terms of fuel, we feel very, very comfortable given our internal hedge with our coal production that supplies most of our plants. We don't consume any pet coke. So we can continue consuming our own coal at most of our plants, as I said.

In some plants, we consume natural gas, like in Odessa, for example, which historically has been cheaper than the rest of the fuels because of all these reasons they're in the Permian. However, natural gas prices are going up very fast and so lot of the competitors that use higher proportion natural gas than what we use, of course, are going to be a little bit of a disadvantage.

We are trying to protect as much as we can our contracts for natural gas in terms of buying blocks of gas when we think that the price justifies it. And so between that and our coal production, we feel very comfortable in terms of our fuel cost. As I have said, we have entered also into several renewables projects at fixed prices in the U.S., which also is a good cost containment strategy on top of, obviously been -- working to a more sustainable company.

In Mexico, we also enter into a power contract. Mow the Chihuahua plant is entirely consuming power from a local generator, more competitive prices than what we were receiving from CFE. So we feel, again, comfortable, still we are continuing to work on more strategies to maintain our fuel and energy costs in line with what we budgeted for the year. I definitely think that the competitors burning coke are obviously at a disadvantage. I think that's a lot of cost inflation pressures for them, and I would presume that they will obviously try to offset that through a better pricing in the market.

[Francisco Suarez, analyst]

Perfect. The second question that I have is on liability management probably for Luis Carlos. The question that I have is that now your bonds are callable, you are now an investment-grade company. You may or may not consider to issue a sustainable linked bond to get an excess benefit on the spreads. Is this the right time to think about engaging in issuing long-term bonds considering these factors? Is this something that we should be starting to model in GCC?

[Luis Carlos Arias Laso, executive]

Thanks, Paco. Yes, definitely, we want to take advantage of our investment-grade rating. And of course, we have that bond at 5.25 that we can reduce the costs. So yes, we definitely are planning to execute on liability management in the coming months.

[Operator]

Our next question is from Alberto Valerio with UBS.

[Alberto Valerio, analyst]

Congrats on the results, really strong second quarter. If you could provide any additional color. I think you mentioned in the initial remarks that you will spend between $450 million and $500 million in CapEx for expansion in the next 3 years. How much capacity would GCC add with this CapEx?

[Hector Enrique Escalante Ochoa, executive]

Thank you, Alberto. This is basically what we -- the projects that we have mentioned that includes a new kiln line in one of the plants, the expansion in Samalayuca and the 2 terminals. The terminals we're talking here, as I said, in cement capacity that will translate to 1.2 million, perhaps 1.3 million metric tons of capacity. And then the throughput in the terminals, we're talking about at least 200,000 metric tons of additional throughput in Albertville, in Minnesota. And also, 250,000 to 300,000 tons of throughput in the new terminal for Salt Lake City. Those are more or less the numbers that we are planning in these whole projects.

[Alberto Valerio, analyst]

So close to 1.8 million to 2 million extra cement ton capacity, right?

[Hector Enrique Escalante Ochoa, executive]

From a capacity perspective, 1.2 million to 1.3 million metric tons. From a throughput capacity at the terminals we're talking between the 2 terminals, 400,000 to 500,000 capacity at those terminals to move into those terminals.

[Alberto Valerio, analyst]

Clear. Very clear. And about competitor -- have GCC seen any greenfield or brownfield development close to its markets being developing by competitors?

[Hector Enrique Escalante Ochoa, executive]

Can you repeat the question, Alberto? I couldn't hear you well.

[Alberto Valerio, analyst]

No problem. If you guys have seen any relevant projects of greenfield or brownfields close to GCC markets being developed?

[Hector Enrique Escalante Ochoa, executive]

No. That's -- no. Thank you for the question. No, we have not heard. I mean we don't know of any new project. We of course continuously search on what's going on in terms of permitting, that is public information. And in our market regions, we have not detected any movement to increase capacity to either brownfield projects or greenfield projects.

[Operator]

[Operator Instructions] Our next question is from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

So when you mentioned that the potential expansions would be calcinated lines, does this mean more focused on blended cement? And then, therefore, should we expect better margins versus what the current system has? And in that sense, to Enrique, could you update us on how are the DOT's willingness to accept more blended cement today versus, let's say, 6 months ago that we discussed this? And lastly, you mentioned looking for M&A opportunities in the materials business, too. Under which circumstances would you be willing to go into the aggregate business? Thank you.

[Hector Enrique Escalante Ochoa, executive]

All right, Froylan. Thank you for your questions. We wrote down 4 questions basically. The calcination line, yes, it's obviously, clinker that translated into cement after we -- blended clinker does the 1.2 million to 1.3 million metric tons of additional capacity. That's irrespective of our push to produce more blended cement. Some of that new capacity, of course, can be turned into blended cement, more specifically Portland limestone cement. So we continue to move forward in that regard irrespective of the increasing capacity.

In terms of more information on the DOTs, I don't think I have any new recent information. I can tell you that there is a big push in many states. And many of the DOTs are accepting or have accepted the use of limestone cement, including, Texas, Colorado, New Mexico. We have introducing to the market a pozzolan addition cement that is helping us compete much better by offering our customers a solution for the lack of enough fly ash in the market.

So the movement in terms of blended cement, and again, including Portland limestone cement, will continue to be strong in our opinion. And more and more, it gets actually facilitated by the supply-demand tightness. In Montana -- in our plant in Montana, we were increasing every month the proportion of Portland limestone cement that we are shipping. So the market is, again, looking promising for the acceptance of more blended cement.

In terms of M&A, we continue -- as we have said before, looking for opportunities that will make sense as inorganic growth in cement. It's our main priority. This is a permanent work that we do here to try to add a plant or 2 into our system as soon as we can. Obviously, with this market perspective, not many competitors that I know are really willing to entertain selling a plant at this moment. However, we're always analyzing where GCC could add more value because of synergies that we can create in our system than other competitors and that's our proposition to them.

If you think that we can create more value here than you, perhaps because of the synergies that we can create, we're open, obviously, to discuss any interest in an acquisition here. We have the balance sheet prepared in case we find an opportunity. Obviously, we have to be very careful because valuations are obviously on the high side at the moment.

In terms of aggregates, that's the second tier in our strategic plan after cement plant, is aggregates that can be integrated into any of our markets. We don't -- we're not looking for a stand-alone aggregate in different regions. We are more than anything focused on aggregates even ready-mix, only they can be vertically integrated in one of our plants or regions. So we continue to look actively against cement, aggregates and ready-mix.

[Operator]

And we have reached the end of the question-and-answer session. And I'll now turn the call over to management for closing remarks.

[Ricardo Martínez, executive]

Once again, thank you to everyone for your interest in GCC and for joining us today. We appreciate your questions this morning and look forward to talking with you again in the months ahead. This concludes our conference call, but our team is, of course, available for any follow-up questions you may have. Goodbye, and stay safe.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.