GCC SAB de CV

BMV:GCC

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the GCC Fourth Quarter and Year-end 2021 Earnings Call. Before we begin, I would like to remind you that this call is being recorded. [Operator Instructions] Please also note a slide presentation will accompany GCC's earnings results webcast. The link is available on the company's IR website at gcc.com.

At this time, I would like to turn the call over to Ricardo Martinez, Head of Investor Relations. Please go ahead.

[Ricardo Martínez, executive]

Thank you, operator. Good morning, everyone, and thank you for joining our earnings call. We will begin today's discussion with remarks from Enrique Escalante, our Chief Executive Officer, followed by financial highlights from the quarter by Luis Carlos Arias, Chief Financial Officer. And we will then close with your questions.

As you will note on Slide 2, our call will include projections and other forward-looking statements, and it's important to note that actual results could differ materially from those projected. GCC undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the Mexican Stock Exchange.

In particular, uncertainty remains about regulation and impact of the COVID-19 event. This means all could change at any time due to the pandemic impact on the company's business results. Management's outlook is, therefore, a best estimate based on the information available as of today.

With that, let me now turn the call [Technical Difficulty].

[Hector Enrique Escalante Ochoa, executive]

Thank you, Ricardo, and good morning, everyone. Turning to Slide 3, please. 2021 was another extraordinary year. GCC delivered strong results, particularly in the second half. For the first time, surpassing an important milestone of $1 billion in sales and record high EBITDA for the company, which enabled us to upwardly adjust full year guidance despite continued supply change labor and energy cost headwinds. We saw robust customer demand in both Mexico and the U.S. during the year, which continued in the fourth quarter, supported by a long construction season and strong trends persisted in infrastructure, commercial, oil well drilling and in global economic growth. Along these lines, we continue to prioritize meeting today's heightened customer demand while operating in an unusually complex labor and supply chain environment. I thank our 2,800-plus employees in Mexico and the U.S. for delivering record revenue and EBITDA under these circumstances. And in particular, I want to offer a special thanks to our employees that plan, drivers and service people as well as supervisors and managers and other staff that had to be in the field or travel to support our business for their incredible dedication, agility and resilience to serve our customers during this particularly challenging year as they always do.

We have developed an array of growth drivers to position our business to capture this opportunity. We are continuing to invest in innovation, inventory, in our plants and logistics, in particular, as well as in previously announced projects to improve operational efficiency and enhance GCC's social and environmental responsibility, while we meet the strong demand in the near term and fuel sustainable growth over the medium and long term.

Further, our operations teams remain focused on ensuring our plants are producing at a consistent level also to accommodate these years' extended construction and shipping season due to favorable weather for the third consecutive year with strong backlog complicated by an ongoing labor shortage. The industry will, therefore, continue to be challenged by low inventories.

As I mentioned last quarter, over the first time in 15 years, every GCC team continues producing clinker for both construction and oil well cement.

Turning to pricing on Slide 5. As we noted in the third quarter, last spring, we informed our customers of a second price increase of $6 per short ton, which took effect in August in most of our markets. It is also important to note that a second price increase is unusual for GCC and the industry, something we have not seen since the last cement demand peak which enables us to capitalize on current opportunities while offsetting incremental costs. We remain optimistic about early signs that this trend could be permanent across the board to ensure we pass freight, diesel and commodities' increased pricing true to clients as quickly as possible. As we are focused on maintaining EBITDA margins, we are extremely vigilant and agile in identifying market opportunities to further increase prices, particularly with tight supply and demand dynamics.

In light of the current operating environment, we announced an additional 6% to 8% price increase per short ton in construction cement, which came into effect earlier this month on January 1. And for oil well cement, we announced a $15 per ton price increase effective April 1, 2022. To date, these price increases have been well received by our customers. In the current environment, most of our customers are significantly more concerned about ensuring uninterrupted supply and GCC has had an important competitive advantage when uniquely positioned to guarantee product availability.

As Luis Carlos will review, despite planned strategic CapEx investments in 2021, directed towards incremental capacity, GCC ended the year with the balance sheet strength that the insurers were particularly well positioned to capture the right opportunities in today's unprecedented market conditions.

Another important development during the year was that the U.S. House of Representatives finally passed the Bipartisan Infrastructure Investment and Jobs Act in November 2021. To reiterate, the Portland Cement Association estimates the $550 billion in new spending included with the Infrastructure Investments and Jobs Act should result in approximately 48 million metric tonnes of increased cement consumption over the life of the program.

To provide context on the magnitude of this additional funding, should everything be consumed within the bill's 5-year time frame, cement consumption would increase by around 9% annually as compared to the 2020 levels on top of the 2% to 3% normal organic growth. But it's also important to note that we will only expect to see initial related benefits beginning roughly a year from now and thereafter.

Let me now share a more detailed review of our key business drivers during the fourth quarter. Luis Carlos will then provide color on our financial results and he will then turn the call back to me regarding 2022 full year guidance and closing remarks.

Turning to Slide 7, please. As I have commented, we are very pleased with the results we achieved during this year in both of our markets. We delivered another record high fourth quarter in the U.S. cement volumes, which rose 5% for the fourth quarter, with a 6% increase for the full year as we were able to shift our considerable backlog.

I will review some key performance drivers in the U.S. and then touch upon GCC's Mexico operations. The El Paso market remained strong during the fourth quarter of the year, and we don't expect this to change. With extraordinary near assuring demand and warehousing projects were driving tight supply and demand dynamics in every U.S. market.

Turning to Slide 8. In West Texas, drilling continues to rebound during the fourth quarter with related demand for oil and well cement in the Permian Basin market, which was higher than expected and challenging to fully supply. We expect to see continued strength in 2022, while the $15 per tonne price increase has been fully accepted by our clients in this market. To reiterate, both teams at our Odessa cement plant are running at full capacity with one team at the Chihuahua plant, complementing our supply to produce this type of cement. Separately, while the Odessa plant run older teams, price increases have also enabled us to offset increased costs.

Turning to Slide 9. In Colorado, we maintained a strong performance in every market segment, particularly in residential and industrial warehousing driven by today's elevated consumer demand environment and the e-commerce boom as well as infrastructure projects. Salt Lake City, Utah, continues to surprise on the upside with cement volumes reflecting a more than 50% year-on-year increase, where I'm pleased to note that we're to successfully build a solid customer base in one of if not the hardest market in the U.S. Our customers are bullish about this market's prospects and remain focused on ensured cement supply as a paramount concern.

Turning to the Northern Midwest and Plains states, agriculture drivers are particularly strong within this region and represent a stable long-term source of business for GCC as companies continue to move production and processing as close as possible to their end markets and also a trend that is favorably impacting our northern markets. However, during the year, we noticed a decrease in cement volumes for wind farm projects that to date haven't materialized with more farms than available projects. And while the Midwest and Plains states appear to be saturated, and we don't see the trend reversing, we note that the industry has been migrating to other locations along the wind corridor. We, therefore, expect related demand will surface in other states where GCC has cement presence, including the Dakotas and Montana.

Turning to Slide 10. Today, Montana is essentially sold out. We have begun introduction of Portland-limestone cement in this market, which is one of the sustainable products of the future in the U.S. The Montana cement plant is now fully converted to produce only Portland-limestone cement, or PLC, a high-quality cement that reduces our carbon footprint with a lower clinker factor while still providing the strength, workability and durability of regular portland cement. This is an important milestone in our blended cement effort to reduce our clinker factor and expand the range of our products as part of GCC's sustainably toolkit. GCC has been actively working with Nexus to address current flyers scarcity and plan to expand PLC production to more of our U.S. plants in the near future.

Also on the innovation front, GCC has been working with and will invest in carbon capture technology and have made important initial steps to date. We have developed internal targets to ensure we're close to technology developers working with them to identify the right technology to fit each of our plants. These steps are part of our broad-based sustainability strategy and entails a long-term process.

Briefly touching upon the Montana market on Slide 12. It's important to note that we limited the volume shift of this market during 2021 as part of our overall strategy as a concerted decision not to ship volumes to this previously well-supplied area and to instead shift to higher margin regions within the U.S. We expect to increase our shipments to Minnesota in 2022 and have been pushing more product due to the supply issues we are now seeing. We are working to free up additional capacity in Rapid City, where re-doing this have capacity. The team has, therefore, been focused on running the plant in the first quarter to unlock this additional capacity.

Separately, work progressed during the year towards completing the new Albertville cement rail terminal to solidify our important position in Minneapolis, St. Paul, and to expand and strengthen our distribution and storage capacity in this market overall, in line with our strategic plan. We expect this will continue to be a booming market in the years ahead.

Turning to Slide 13. Looking ahead, related to pricing, as I noted, the percentage and frequency of increases during 2021 are encouraging. This past summer, we successfully passed through a price increase as one of the few companies among our peers to announce a second price increase. We also expect cost increases will continue in the short term, including the increases in trade, diesel and certain commodity prices we're already seeing. Our goal is then to calibrate our pricing to fastest cost increases as quickly as possible with an eye towards improved margins also on ensuring we remain agile in identifying important market opportunities, particularly in today's current environment.

As I noted, our strong performance in 2021 was due to GCC's unique ability to supply our clients when some of our competitors were unable to do so since they turned down production at the end of 2020. GCC instead made the decision to continue to run plants and build our inventories during the pandemic, while tightly managing employees. Crucially, this enabled inventory during the first quarter of 2021, for which many of our clients appreciated our support and our ability to fulfill orders when many peers were unfortunately sold out.

Turning to our Mexico operations on Slide 14. We are very pleased with our fourth quarter results and for our overall full year performance in the Mexican market. Cement volumes grew 5% and concrete 14%. On a yearly basis, cement grew 7% and concrete 9%. Mexico continued to surprise on the upside during the year and in the fourth quarter with solid performance and a strong backlog in the Chihuahua region overall and particularly the worst area where demand remains strong with continued industrial warehouse construction and plant expansion as benefits of USMCA new sharing and high operating levels in the mining sector. Importantly, GCC again successfully maintained market share on a customer by customer and project-by-project basis in the Chihuahua market. And while projects do continue to drive employment, we are seeing self-construction demand normalized to pre-2019 levels in this market.

In closing, while 2021 was an outstanding year for our company, enabling us to achieve our updated guidance, we expect similar positive performance in the year ahead. Also with the expectation that 2023 and '24 will be even better with benefits of the U.S. infrastructure bill. There are several positive secular demand trends that are benefiting our businesses, and we remain bullish on the residential and non-res construction markets as well as oil well and industrial recovery in Mexico and the U.S. As a company, we are laser focused on ensuring we are best positioned for the considerable market growth we're anticipating, supported by the overall resiliency of industry and of GCC.

So we will continue to see bottlenecks, particularly related to equipment lead times. We have already begun planning and are placing orders much earlier than normal to anticipate this challenge. Our close customer relationship also enables and ensures we maintain better visibility with tight control of orders and demand for our products.

Further, we have important projects under development with one cement plant expansion, a debottlenecking project in Samalayuca, Mexico, 2 new terminals under construction in the U.S., several projects to improve operational efficiency and enhance our social and environmental responsibility. GCC has committed to invest roughly $500 million related to these projects over the next 3 years.

With that, let me now turn the call over to Luis Carlos to review the quarter's financial results, and I will return for some brief closing comments.

[Luis Carlos Arias Laso, executive]

Thank you, Enrique, and good morning to everyone. Turning to Slide 17. Consolidated net sales for the fourth quarter increased by 11%, this was mainly driven by the increase in ready-mix volumes in Mexico and cement volumes in both countries, along with better prices in the U.S. This was partially offset by an 8% decline in ready-mix volumes in the U.S., impacted by a difficult year-on-year comparison related to the wind farm projects that Enrique explained.

For the full year 2021, net sales increased 11% as well. I would like to highlight the strong performance of our Mexican operations, where we closed the year exceeding our guidance in both cement and ready-mix volumes.

Please turn to Slide 18. Cost of sales as a percentage of revenues remained relatively stable in the fourth quarter and decreased 1 percentage point to 68.1% in the full year 2021, mainly reflecting efficiencies derived from our vertical integration, better selling prices in both countries, and higher fixed cost dilution as well as a more significant share of higher-margin cement sales compared to ready-mix sales. SG&A expenses as a percentage of sales increased 1.6 percentage points in the quarter to 9.9%, reflecting the nonpermanent savings associated with expense reduction plan implemented in 2020. For the full year 2021, SG&A expenses remained relatively stable compared to the prior year period.

Turning to Slide 19. As a result, we closed the quarter with an EBITDA of $81 million, while the EBITDA margin was 31.5% compared to 35% in the fourth quarter 2020. For the full year 2021, EBITDA increased 10% year-on-year, in line with our guidance, and EBITDA margin decreased 0.4 percentage points to 32.5%. We are very pleased with the savings achieved as a result of the cost control initiatives implemented at the onset of the crisis, particularly during 2021, given the record high inflation we saw in Mexico and the U.S. Despite this challenging environment, we were able to maintain our margins. We continue working towards recovering our pre-financial crisis margins, focusing on controlling costs and expenses, while we face an inflationary environment and higher energy costs. Along these lines, we are leveraging our coal mine in Colorado, which enables us to lower our energy costs, while reducing exposure to gas and coke price hikes. During the year, we also signed a 1-year contract to lock in the natural gas price for our Odessa cement plant. As a reminder, in 2021, we successfully offset $14 million in cost and expenses, which were saved during 2020 in response to the pandemic. The number is the difference between 2020 total savings and 2021 permanent savings, thanks to the financial lessons learned in the COVID-19 crises.

Turning to Slide 20. Net financial expenses totaled $7 million in the fourth quarter 2021 due to a positive foreign exchange variation in GCC's cash position and a lower debt balance partially offset by an increase in the effective interest rate. For the full year period, net financial expenses decreased 2%. Consolidated net income increased 2% in the fourth quarter of 2021 and 15% for the full year 2021. Earnings per share increased 2% in this quarter and 15% for the full year period.

Moving to our cash generation on Slide 21. Free cash flow was $89 million in this quarter and $292 million for the full year. This translates into a free cash flow conversion rate of approximately 109% in the fourth quarter and 72% for the full year. I would like to point out GCC's improvement in controlling payables, receivables and inventories. Based on the last 12 months of sales, we reduced days in net working capital from 47 to 39, an 8-day decrease in total.

Turning to our balance sheet on Slide 22. We ended the quarter with $683 million in cash and equivalents. At the end of December 2021, our net debt-to-EBITDA ratio dropped to minus 0.4% or equivalent to $143 million net cash, achieving our full year guidance of reaching negative net leverage in the third quarter. In line with our strategy of further strengthening our balance sheet while supporting our ESG initiatives, we successfully completed the issuance of a 10-year $500 million sustainability-linked bond with an interest coupon of 3.6% and a maturity date of April 2032. Net proceeds from decisions were used to redeem the full amount of GCC 5.25% notes, which come due in 2024 and prepay bank debt. This bond received investment-grade ratings by both S&P and Fitch Ratings and is aligned with the sustainability-linked bond principles and will enable us to ensure GCC's sustained growth while reducing interest expenses and significantly improving our maturity profile. Notably, with the closing of this transaction, we became the first cement company in the America to issue an SLB bond. And it was the largest issuance ever completed by a cement company globally, positioning GCC at the forefront of the industry's decarbonization strategy. We expect the issuance of GCC's sustainably-linked bond will inspire other companies to follow the same path truly committing to a low carbon economy. As Enrique noted, we are entering 2022 with a very strong financial position that provides us with the flexibility to capture future growth opportunities, and we will focus our efforts to ensure the company is prepared for a new phase of the industry cycle.

In terms of organic growth, as we announced last quarter, we will expect to invest around $500 million over the next 3 years to increase GCC's cement capacity and improve our logistics and distribution network. Regarding inorganic growth, we continue to look for opportunities to acquire cement assets that can be plugged into our connected system or eventually begin the construction of a new system in the U.S. We remain strongly committed to improving returns and delivering strong stakeholder value. while investing in the future growth of our business.

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

[Hector Enrique Escalante Ochoa, executive]

Thank you, Luis Carlos.

Please turn to Slide 25. I would like to now take this opportunity to discuss our 2022 outlook. We are expecting the current positive momentum to continue as the underlying trends of GCC's business remain favorable. As I mentioned earlier, there are a number of positive trends benefiting our business, and we expect robust customer demand to continue in the year ahead, driving sales volume growth with a positive pricing environment in both divisions. Therefore, we expect GCC's cement and concrete sales volumes to increase low- to mid-single digits year-over-year in both countries.

In terms of prices, considering the momentum and the announcements already done in the market, coupled with the tight supply and demand dynamics, we anticipate another year of price increases in the mid- to high-single digits range for cement and concrete in Mexico and in the U.S.

Regarding profitability, we expect 2022 EBITDA to increase between high-single digit to double digits against 2021 levels. We approximate our capital expenditures at $260 million. This includes $180 million allocated to the relevant strategic and growth projects already described. $65 million related to maintenance expenses and $15 million of maintenance that carried over from last year to the current year, totaling $80 million for maintenance. As a result, the free cash flow conversion rate before strategic and growth CapEx is expected to reach more than 60% with a net debt-to-EBITDA ratio, which would remain 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 comes from the line of Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Enrique, can you tell us if there are plans for new capacity or new cement capacity in your territories in the U.S. from peers? And if none, which are the tightest markets at the moment? And how do you think that -- do we see this increased demand over the next 2 to 3 years? And once we start seeing these regions operating at full capacity, how demand is going to be satisfied? Is that going to be just buying from other states or it will have to be actually imports from abroad? And if that is the case and given the long distance that it will have to travel, should we see a stronger price increases in the central region of the U.S. versus the coastal regions?

[Hector Enrique Escalante Ochoa, executive]

Thank you for your questions. Let me try to address one by one. First, on new capacity increase plans within our region from any of the peers. We have not heard anything specific of capacity increases where we are, except for our own projects, of course. The only capacity increase that is coming online that we know of, it's in Alabama, and that doesn't touch our region or our system. So we feel, I mean, pretty positive that we can capitalize on the market growth with our capacity increase planned for the following years ago.

The market, of course, it's going to continue to remain tight, more in some areas than another. I will suspect the whole Texas will still remain a tight market. Colorado, the same. Utah, obviously, I mean I mentioned in the report, one of the hottest markets in the U.S. And in these regions, I mean, the customers are especially concerned, as I said, with availability more than anything else. So we do expect to continue to see market growth in the 2%, 3% range on organic growth and of course, with the future benefits of the infrastructure build that I mentioned that should add around 9% per year on an annual basis. And that, of course, is national. We don't have, I mean, a lot of visibility yet in terms of how that national increase is going to be allocated to different markets where we participate. But we suspect that, I mean, it's going to be, I mean, very close to that 9% estimated by PCA. I'm pretty sure that given the market dynamics and the infrastructure bill, I mean, capacity is going to be strangled. I mean, in the U.S. at some point in time in the next few years, and that only means more imports from abroad. And traditionally, when this has happened, and we saw it before the Great Recession, that happened too, and of course, prices responded to that and nowadays with the cost inflation on freight, we expect this to be, I mean significant. So we're I mean -- we're very optimistic about the prospects of price increases that we're going to be able to also reflect in our market region again.

Of course, as we have mentioned in our model, in our system, we are better protected than any other regions in the country from precisely the imported cement. But still, I mean, since it's going to be tight, we're going to be able to increase our prices accordingly to what's happening in the cost lines.

[Adrian Huerta, analyst]

Excellent. And if I may add just a follow-up question regarding this and something that you mentioned. I think in Montana, where you're now producing PLC cement, where do you see the clinker factor moving over the next couple of years? I mean, which places you're seeing already more willingness from the governments, et cetera, et cetera, to allow for lower clinker factors?

[Hector Enrique Escalante Ochoa, executive]

Well, generally speaking, it's going to be across the board. I mean, of course, I mean in some states, we're more progressive in allowing the usage of PLC cement more than others. But in the markets where we are, the challenge is not for us on the market side, the challenge is on the speed at which we can convert and make sure that we supply that cement to the customers. It's more an operations, logistics issue in terms of mix of products in the silos and storage capacity. So it's -- so we have a plan to move first. I mean, as I said, with Montana and we're continuing -- in Tijeras, we're continuing with pozzolanic cement that we have been already producing, and we're targeting to cheaper around 80,000 tonnes of that pozzolanic cement this year from that plant.

In Rapid City, after we, I mean finalized with everything related to the project expansion pricing the last years in Rapid City, now we're targeting around 11% of production of PLC this year.

In Pueblo, we're also moving with some, I mean, testing with customers in the market. And as soon as we finish retrofitting some logistical issues there in terms of silo capacity and things like that, the second part of the year, we're going to start with PLC. So again, I mean we don't see a problem. I think the market is ready for it. Most of the peers are also announcing that they are moving into this sustainable cement as a first step lower than our clinker ratio. But we are going to continue not only with PLC to the following years, but also with an increase of pozzolanic cement. So like the one that I was mentioning for the Tijeras plant.

[Adrian Huerta, analyst]

But if you had to guess, Enrique, we should be seeing a reduction on the clinker factor in the U.S. on your operations, what 1% per year, 2 percentage points a year for the next couple of years? Just to get a rough sense of how this could be moving over the next couple of years.

[Hector Enrique Escalante Ochoa, executive]

In the sustainable linked bond that we just issued, obviously, we committed to some KPIs to get there. Part of that -- of the way to get to those numbers that we committed to and it's by lowering the clinker factor. I believe that in that projection, we have getting to about 85% clinker factor in our current U.S. plants over several years, of course.

[Operator]

And our next question comes from the line of Nikolaj Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

Congrats on your superb year. I have 2 questions. First, a follow-up on the comment I think colors about a new network. So also, I guess, a follow-up on Adrian's question. Are you currently -- do you have any ongoing permitting processes either in the existing state or in a new state? So that's question number one. And question number two, can you give us some color on what your breakeven pricing given the increase in energy cost? Your guidance suggests sort of mid-high single digit, your EBITDA growth is almost similar and you almost sold out. How should we think about breakeven pricing in 2022 to just stand still on an EBITDA per tonne?

[Hector Enrique Escalante Ochoa, executive]

Nikolaj, thank you for your questions. I'm going to answer, obviously, in the same order you asked them. Permitting. So yes, we do have, I mean, permitting process in our region. And I will reiterate again, we have a permit on hand to build more capacity in Texas. And as part of our environmental efforts, we're always maintaining those permits alive. And in this case, we're working on amending the permit to include, I mean, more equipment than what it's actually currently permitted and more capacity than what it's currently permitted. So everything is looking very positive on that regard.

Again, if we decide to build in that plant, which is an imminent decision. I mean -- and as I have said in other calls, we have several sites in competition to see which one is going to, I mean, be the site that we're going to expand. But in terms of permitting in the U.S., we're ready for that. We are not or we don't have at this moment any efforts of permitting outside of our network.

In terms of breakeven prices, if I understood your question correctly. I think that with what we have announced already, Nikolaj, we are certain that we are not only maintain our market, our EBITDA margin, including, of course, what we have budgeted for energy cost increases, but we are in the position to, I mean, continue to improve, I mean, that EBITDA margin this year.

[Operator]

Our next question comes from the line of Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding your CapEx guideline. So the increase in strategic phase, does it reflect some progress already in the expansion plan or what explains the significant increase compared to the previous year in strategic CapEx? And the other question that I have is regarding pricing in the U.S. Do you think there is upside in your pricing indication given how tight the market is and the potential increase in imports and everything you mentioned about the fundamentals?

[Hector Enrique Escalante Ochoa, executive]

Thank you, Vanessa. I'll answer the second question, and then I will pass on the question on the CapEx guidance to Luis Carlos so we can give you more specific data there. Pricing in the U.S., yes, of course, I mean, the market, as we see specifically in some regions more than others, will continue to be very tight. So we are -- have already communicated to our customer base that they need to be prepared, perhaps for a second price increase during the year. We have not announced anything regarding that yet, but we have been having conversations with customers and trying to understand, I mean, on a one-on-one basis, their needs for the year and how tight we are. And so of course, we are reiterating that they should be prepared for a second price increase.

So I will pass it on now to Luis Carlos for your question on CapEx.

[Luis Carlos Arias Laso, executive]

Thank you, Enrique. Yes, Vanessa, we've included in that figure that Enrique gave for the guidance, we have included expansion projects both as we plan the debottlenecking of Samalayuca and the investment needed in the first year for the expansion of -- or the construction of a kiln line in one of our cement plants. And that also includes, as I said, $65 million of maintenance expenses, but also $15 million carryover from last year, if you see the numbers for that year, CapEx was well below our guidance. So we are carrying over from 2021 those $15 million.

[Operator]

Our next question comes from the line of Alberto Valerio with UBS.

[Alberto Valerio, analyst]

Congrats on excellent year in 2021. Enrique and Luis Carlos, my question is a follow-up on Vanessa's question about the CapEx. If you could provide a little bit more detail? And how much would you expand Samalayuca plant and how much would be the total CapEx of these investments, you should be doing the 2022 and 2023 or just 2022. If you could provide more color on that, it would be perfect.

[Hector Enrique Escalante Ochoa, executive]

Thank you, Alberto. I would, I mean, pass it on again to the team to see if they have the breakdown that you're asking handy here.

[Luis Carlos Arias Laso, executive]

Yes, Enrique. Alberto, well, the majority of the expansion CapEx relates to the construction of a new kiln line in terms of size, -- the Samalayuca project is much, much lower than the amount of -- for a new kiln because it's just a debottlenecking that we're doing during the plan. So it's going to be below $40 million. So the majority of it is going to be, again, the construction of a new kiln line.

We're also including -- yes, and we're also including in that number, the investments in terms of logistics that we're going to do next year in a couple of terminals. But the big chunk of that amount for expansion is the new kiln line.

[Operator]

Our next question comes from the line of Lisa Zach with GVM.

[Unknown Analyst]

Congratulations on a good year. My question goes in line with the other expenses that were around $9 million. Could you give us more color on what are they about? Is it related to the consulting expenses that you mentioned?

[Hector Enrique Escalante Ochoa, executive]

I'll defer to Luis Carlos on this, but the majority are what we call one-off, I mean expenses that are not going to be repetitive, but I'll -- Luis Carlos will give you a little bit more color on the breakdown of those numbers.

[Luis Carlos Arias Laso, executive]

Sure, Enrique. Yes, as Enrique was explaining, it's one-offs. We normally -- we normally accrued during the full year, some -- those type of expenses. And sometimes, we got -- we have some of the quarters that are hit the most in the year. And -- but also that comes from the nonpermanent savings that we have -- that we explained last year and this year. So part of it is those one-offs in terms of consulting expenses for operations. And the rest is the incorporation of the nonpermanent savings of the plan that we did on 2021 and 2020.

[Hector Enrique Escalante Ochoa, executive]

And you also had the revolver line, Luis Carlos.

[Luis Carlos Arias Laso, executive]

Yes. Yes. That's right. So we -- as you may recall, Lisa, we agreed with a syndicate of banks of new revolver line of credit for $240 million. And so the fees and expenses associated with that revolver, it also hit the -- I think it was in the third quarter. So that's part of the full year number that you see.

[Operator]

Our next question comes from the line of Collin Verron with Jefferies.

[Collin Verron, analyst]

I just want to follow up on the questions asked around U.S. cement pricing. Does your 2022 U.S. cement pricing guide for mid- to high-single digit increases include a second price increase in 2022? And is this -- what is the 6% to 8% price increase for construction cement on $1 per tonne basis?

[Hector Enrique Escalante Ochoa, executive]

Thank you for the question. Yes, some clarification here. The announced increases for 2022 are effective January 1, in the case of construction cement and April 1 in the case of all the oil well cement. So those price increases do not include yet a second price increase. These are increases that are already taking place.

In terms of the 6% to 8% increase depending on the market, I mean, where we are, should be around $10 per tonne.

[Collin Verron, analyst]

Great. That's helpful. And then just in terms of import parity price in your markets, can you provide any color as to how you're thinking about that as we start to need more imports in the U.S.?

[Hector Enrique Escalante Ochoa, executive]

I'm sorry, can you repeat the question? You break down a little bit here.

[Collin Verron, analyst]

Sorry. Can you just comment on the cost of importing cement into the U.S. market and what you guys view as the import parity price in your U.S. markets?

[Hector Enrique Escalante Ochoa, executive]

I don't have the numbers -- specific numbers in front of me here since we don't import cement currently into the U.S. I mean it just obviously, I mean heard the same thing that everybody in terms of huge increase in freight last year, but i cannot give a specific number compared to our cement FOB over tonne this moment. Probably we can followup on a separate call with most of it of interest to you.

[Luis Carlos Arias Laso, executive]

And maybe just to complement what Enrique called in, of course, the further you are away from the costs, the lower the import parity pricing should be right because we have to add for the trade cost in that cement from the terminals to the end market. So as Enrique explained in his remarks -- has been in the central part of the U.S., of course, we are further away from any import cement -- import of cement.

[Operator]

Our next question comes from the line of Daniel Rojas with Bank of America.

[Daniel Rojas, analyst]

I'm curious about the demand in Permian cement. What visibility do you have in the next few months? Do you think you can see upside in that segment? Can you give us any color on that? And my second question is on the acquisition of cement from third parties. Is this something that's going to become recurring. Can you just give us some color on what happened earlier in the quarter?

[Hector Enrique Escalante Ochoa, executive]

Daniel, thanks for the question. Again, I mean little bit of trouble here, but I understood your question about the or what demand in the Permian for the next months?

[Daniel Rojas, analyst]

Yes.

[Hector Enrique Escalante Ochoa, executive]

Okay. So no, we're running at full capacity to supply that market and with both kilns in Odessa are running 100%. Closed one kiln in Chihuahua supplementing in shipments area. Apparently, there is only one other competitor in the area supplying consistently and significantly oil well cement. So the rest of the producers that traditionally ship some oil well cement to that region last year decided to allocate that cement to other markets in Texas away from that area. So this complicate things a little bit, as I said, it was a challenge to be able to supply, I mean, this market 100%. So we're increasing production and supply this year with the trick that I described to you. I don't see any changes in the dynamics there. It's going to be tight the whole year, and we're doing our best to keep all our customers on supply as they need, but it's going to be tight.

In terms of cement acquisition from third party. This has been, I mean, the small volumes that we have had, we elected to purchase in the previous years for specific projects in some locations where either we needed a different type of cement or it was a more better economically for us to buy part of that. So we have our own cement shipments at a higher margin to other customers. We don't foresee this to continue this year as this has been more on a project-by-project basis. And -- but I know we don't have any specific needs to acquire any cement in our markets.

[Operator]

Our next question comes from the line of Federico Galassi with [indiscernible].

[Federico Galassi, analyst]

Just one question. We know the comfortable that you feel with the level of cash, negative debt, et cetera, et cetera. What's your view for dividends for this year at 50% of conversion rate, what you are expecting for $1 billion. That's the question.

[Hector Enrique Escalante Ochoa, executive]

Federico, thank you for your question. And well, I mean, pass it on to Luis Carlos.

[Luis Carlos Arias Laso, executive]

Federico, thanks for the question. We don't expect any major changes in terms of dividends for this year, I mean, for the proposal that will be made to the shareholders meeting -- in the shareholders' meeting. As you -- well, as we said, we have important expansion projects coming on. And also, we are very committed and focused on executing on the growth strategy that Enrique has explained. So -- but on the -- of course, on the other side, we are -- as we said, we are fully committed to giving the shareholder -- the returns to the shareholders that you all expect. So again, we don't expect major changes in dividends -- we have expansion projects to fund, and we'll continue looking for M&A opportunities, as we said, in the linking to our current footprint or beginning to think about a new system in the U.S.

[Federico Galassi, analyst]

Just another question, if I can. If you think in terms of your share power with an EBITDA of $1 billion, what's your maximum target or what would you think in again, firepower? If you're thinking of 3x net debt-to-EBITDA, we are talking about $3 billion, that is a huge amount of money. What do you think that will be that firepower for inorganic growth?

[Hector Enrique Escalante Ochoa, executive]

I think that we can spend in growth projects, let's say, around $1 billion without exceeding our leverage ratio that the Board has been very specific about continuing with the conservative financial strategy. So I think that range will be something that we can do comfortably with obviously considering the EBITDA of the target plus our EBITDA growth.

[Operator]

Our next question comes from the line of Alan Miranda with REDD Intelligence.

[Alan Miranda, analyst]

I would like to ask about the statements that trade group, an interested trade group made yesterday in Mexico. They said that with the electricity reform that is currently being discussed and that is expected, well, that is expected to be approved later on in the year. CSD said they would be unable to cover -- to offer additional demand for expansion or for new companies setting up plants in several states, but particularly in Chihuahua, Queretaro in Baja California. So I wanted to ask GCC whether the reform actually poses any threat to -- well to the expansion of the plant in the state of Chihuahua. And also whether the fact that CSD is not guaranteeing that it will offer renewable energy, does that pose also any threat to your KPIs under the new -- the sustainability bond that you issued?

[Hector Enrique Escalante Ochoa, executive]

Thank you for the question. Well, it's a little bit of a speculation at the moment, obviously, what's going to be, I mean, the end result of the energy reform. We're not too concerned at this moment with the capacity that we have and the electricity that we need, I mean, because we're not talking big expansions in that -- in this region at the moment. That's on one hand.

But on another hand, we are cautiously optimistic that perhaps the energy reform will allow some projects of what we call behind the meter, right, [Foreign Language] in Spanish. And we have had, I mean, a project developed in our plant in Mexico and completed all the permitting process which is in front of the [ krai]. So depending on what happens with the reform, we may be benefiting from the [indiscernible] part of the reform that we think has high probability of success. So that will give us, I mean, long-term the comfort that we need both in terms of expansions and requirements of new power capacity in the future on one hand and also our progress on the renewable energy plan consumption that we have according to the sustainability target that we have.

In terms of the bond, the bond is today linked exclusively to basically what we call Scope 1 emissions, which are the direct emissions that we produce, I mean, in our cement process and our plans, I mean, to decrease the CO2 intensity per tonne of cementitious material, it doesn't consider the Scope 2 emissions that come from power generation. So from the bond perspective, it's not a concern. Of course, I mean, we're looking at this more as an opportunity to enhance our carbon footprint in the future, but it's not a concern from the bond per se.

[Operator]

And our next question comes from the line of Alejandro Azar with GBM.

[Alejandro Azar Wabi, analyst]

My question is on the comments on the press release that about purchasing cement from third parties. How should we think about this when there is no additional volumes in the U.S.? Are you buying clean clay or cement from the cost producers that import. I just want to better understand the GCC operation?

[Hector Enrique Escalante Ochoa, executive]

Alejandro, I think you're referring to our purchases of cement in the past years. Am I correct?

[Alejandro Azar Wabi, analyst]

Yes. In the fourth quarter, you mentioned that some of the cost -- the higher cost of production came from purchasing cement and coal from third parties.

[Hector Enrique Escalante Ochoa, executive]

Yes. Okay. No, that's what I thought I heard. I just wanted to clarify. No. I mean, we don't have any issues with purchase cement going forward, as I explained, I mean, we're going to be running at a full capacity. And in the past, we have only purchased small amounts of cement from third party for a specific project needs. For example, last year, what we purchased was type 3 cement, which we could have produced. But since we're running at capacity, for us it was better to purchase that cement and Tria grinding capacity for, I mean, Type 2 or Type 25 cement which, of course, gives us a much larger volume compared to Type 3. So it was just an optimization decision. But of course, when you purchase cement, even though it makes sense marginally because we make a profit on it, of course, the cost is very high compared to our production cost. So that, I mean, of course, affects the margin on a percentage basis. But that's, again, a onetime project, a specific project -- and we're not planning to continue to do that going forward, unless there is a specific situation which again makes sense for us to try to acquire a small amount of cement. I don't know if that was a failure.

[Alejandro Azar Wabi, analyst]

Yes, that's excellent, Enrique, so no material purchase of demand from third parties in the future?

[Hector Enrique Escalante Ochoa, executive]

Yes, sir.

[Operator]

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

[Hector Enrique Escalante Ochoa, executive]

I'm not sure...

[Ricardo Martínez, executive]

Once again, thank you to everyone for your interest in GCC and for joining us today. As always, we appreciate the opportunity to discuss your questions and look forward to talking with you again in the months ahead, virtually or perhaps in person. This concludes our conference call, but our team and I are, of course, available for any follow-up questions. Goodbye for now.

[Operator]

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