Cemex SAB de CV

NYSE:CX

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. Welcome to the CEMEX First Quarter 2023 Conference Call and Webcast. My name is Bethany, and I will be your operator for today. [Operator Instructions]

And now I will turn the conference over to Lucy Rodriguez, Chief Communications Officer. Please proceed.

[Lucy Rodriguez, executive]

Good morning. Thank you for joining us today for our first quarter 2023 conference call and webcast. We hope this call finds you in good health. I am joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO. As always, we will spend a few minutes reviewing the business, and then we will be happy to take your questions.

And now I will hand it over to Fernando.

[Fernando Olivieri, executive]

Thanks, Lucy, and good day to everyone. I'm quite pleased with our first quarter growth achieved against a backdrop of difficult winter weather conditions in the U.S. and a strong prior year comparison base. Sales grew at a high single-digit growth rate. Importantly, our largest regions accounting for 90% of sales are showing good momentum growing at a high single or double-digit rate.

In terms of costs, for the first time since early 2021, there was evidence that inflationary pressure is easing. Cost of goods sold as a percent of sales was 1.1 percentage points lower than the prior year. EBITDA growth and the significant recovery in margin was driven by pricing, easing cost headwinds as well as incremental contributions from our growth investment and organization solutions business.

I believe this quarter marks an important inflection point in our mission to recover 2021 margins and compensate for the steep cost inflation we have experienced over the last 2 years. With our growth investment strategy paying off, we continue to pursue additional bolt-on and margin enhancement projects, primarily in developed markets. We closed one aggregate transaction, which will substantially boost our aggregate reserves for supply-constrained markets.

In Climate Action, we continue to achieve record CO2 reduction levels with a 3% decline versus first quarter of 2022. Leverage ratio stands now at 2.62x, a sequential reduction of 0.22x, driven by the issuance of a green subordinated perpetual notes, the first of its kind in our industry. Finally, our return on capital remains in the double-digit area, well above our cost of capital.

Net sales rose high single digits due to our pricing strategy. EBITDA grew by 6% against a difficult prior year comp as inflation escalated in our business after the onset of the Ukraine War in late February 2022. We EBITDA growth largely reflects success of our pricing strategy, decelerating cost inflation as well as the incremental contribution of approximately $40 million from our growth investment portfolio and expanding urbanization solutions business. While EBITDA margin is slightly lower than the prior year, it has shown significant improvement on both a sequential and year-over-year basis.

Free cash flow after maintenance CapEx rose due primarily to higher fixed asset sales, increasing EBITDA as well as lower working capital and maintenance CapEx. -- the decline in consolidated cement volumes results from difficult weather conditions in the U.S., continued weak back cement demand in Mexico, [ SCAC ] and the Philippines and slowing growth in Europe. In the U.S., Europe and Mexico, we expect recovery in volumes aligned to our guidance as we move through the rest of the year.

Consolidated prices accelerated in the quarter with growth of between 18% and 20%. The pricing momentum was driven by all regions with Europe showing significant progress in recovering inflationary costs. mid-single-digit sequential price growth speaks to the strength of our first quarter pricing actions.

We remain focused on managing costs with our energy diversification, supply chain and climate action strategies. EBITDA growth is largely explained by the contribution of pricing over incremental costs, our growth investments and growing urbanization solutions. This quarter showed considerable improvement versus prior quarters with pricing covering 132% of cost increases, allowing us for the first time to begin recuperating margins.

Importantly, the cost inflation while still elevated is easing. I believe this quarter marks an important inflection point in our margin recovery efforts. Margin performance over the last 2 quarters have confirmed that we have turned the corner in our mission to recover 2021 margins after the unprecedented cost inflation over the last 2 years. We have seen margin improvement sequentially as well as year-over-year. This improvement is driven not only by pricing but also by easing inflationary cost headwinds. While we still have work in front of us, we strongly believe we will continue to see margin improvements over the next few quarters.

In March, we published our seventh annual integrated report covering 2022, which details how our strategy, governance, ESG and financial performance intersect to create value for all our stakeholders. 2022 was a pivotal year in our sustainability journey. Our Vertua lower carbon concrete launched less than 3 years ago, now accounts for 33% of concrete sales. We achieved our second consecutive year of record CO2 reduction, driven by peak alternative fuel usage and a record low clinker factor. Our carbon reduction over the last 2 years was equivalent to what used to take us more than a decade to achieve. This performance convinced me that we could push our decarbonization targets using existing tools even further.

As a result, we upgraded our 2030 and 2050 goals and validated them with SBTI under the 1.5-degree scenario, the most aggressive pathway for our industry. Based on our transformation over the last 2 years, I'm confident our products are not only essential to society, but that industry decarbonization is possible and transition will be profitable. I encourage you to access our integrated report on our website. Our organization solutions business continued to show remarkable performance. EBITDA rose 34% with the important growth in all 4 verticals. I would like to highlight our admixture business, the largest business within the Performance Materials vertical.

Admixtures as specialized chemicals used to enhance specific properties of construction materials, such as water reduction, strength, setting time, carbon footprint, among others. They are important drivers of innovation and sustainability in the construction industry. The admixtures business has been experiencing outstanding growth and in the first quarter grew more than 60%. As a key contributor to our future inaction agenda, we plan to continue expanding this highly accretive business.

And now back to you, Lucy.

[Lucy Rodriguez, executive]

Thank you, Fernando. Our Mexican operations delivered strong results with double-digit growth in sales and high single-digit growth in EBITDA. As our pricing strategy continued to make meaningful inroads in offsetting the inflation of the last 2 years, EBITDA rose for the second consecutive quarter. EBITDA margin rose sequentially, 4.7 percentage points, the first sequential margin expansion in 4 quarters and showed year-over-year improvement. The alternative fuel substitution rate reached a record in Mexico of approximately 42%, with some plants reaching levels of up to 77% in the quarter.

Industry demand is improving as bulk cement growth more than offset the decline in bag product in the quarter. We estimate that industry cement volumes rose low single digits in the quarter. Our low single-digit decline reflects market share loss in bag cement as a consequence of our pricing strategy. We intend to recover this market share over the following quarters. Our bulk cement and ready-mix volumes continued to grow double digit, while aggregate volumes rose mid-single digits, reflecting the dynamism of formal construction in the country. The formal sector continues to benefit from near-shoring investments in border states in the Bajio region, tourism construction and infrastructure projects.

For 2023, we expect flat cement volumes with high single-digit growth in ready-mix and [ aggregates ]. In the U.S., despite significant weather challenges in most of our markets as well as a strong first quarter 2022 comparison, EBITDA rose 15% to a record first quarter result. Growth was primarily driven by pricing with cement and concrete rising approximately 20% while aggregates rose 30%. Volumes declined double digits, primarily due to severe winter weather in much of our portfolio that significantly affected construction activity. We estimate the impact of weather conditions on cement volumes explain approximately 60% of the decline. EBITDA margin has expanded, benefiting from higher prices and a lower level of imports. However, we still have more work to do to recover margin lost to substantial inflation.

On the cost side, raw materials and energy continued to be the biggest headwind to margins. We should start to see the benefit of lower fuel prices, but do expect a continued headwind in the cost of electricity over the next few quarters. We closed the Atlantic Minerals Limited acquisition in late April, expanding our U.S. reserves by 20% and further strengthening our position in aggregate constrained markets such as Florida and along the Southeastern seaboard. On the pricing side, first quarter price increases were successful and additional price increases have been announced in the third quarter in most of our markets.

Going forward, we remain optimistic that the bipartisan infrastructure bill, the inflation Reduction Act and the chip back will be supportive of volumes. We are seeing an important boost in highway contract awards and have also seen the start-up projects for onshoring and the redefinition of supply chain. According to the financial times, companies have announced roughly $204 billion in large-scale projects to boost U.S. semiconductor and clean tech production. This amount is almost double the announced spending commitments made in the same sectors in 2021 and nearly 20x the amount of 2019.

EMEA delivered strong financial results despite a tough comparative base and a challenging volume backdrop. Sales and EBITDA grew double digit, reflecting a successful pricing and carbon strategy as well as a large contribution from our growth investment portfolio and urbanization solutions business. EBITDA margin declined slightly. As a result of first quarter price announcements, pricing momentum continued with regional sequential increases of between 8% and 10% for all products and in Europe with sequential increases of between 9% and 14%.

Despite the weak demand environment, Europe continued to show strong cement pricing traction with prices up 35% year-over-year. EBITDA in Europe grew 46%, while margin rose 2.5 percentage points, reflecting not only our pricing efforts and carbon strategy but also the strong contribution from our growth investments. Europe has been very active in executing our growth strategy, particularly in the areas of decarbonization, urbanization solutions and expanding aggregate reserves.

Our European operations continue to lead the way on climate action and are well on the way to achieving EU emission reduction targets of at least a 55% decline by 2030. These efforts paid off in 2022 with the decline in our carbon emissions being sufficient for us to stay within our EU carbon allocation for the year. We believe we were the only company in the industry to achieve this distinction and it highlights a competitive advantage in the most expensive carbon market in the world.

For 2023, based on better-than-expected first quarter cement volume performance, we are now expecting a mid-single-digit decline for cement. We continue to be optimistic over Europe's medium-term outlook. Supported by public and private projects worth more than EUR 2 trillion related to transportation, climate adaptation and energy reconfiguration as well as onshoring investment opportunities.

In the Philippines, cement volumes declined due to continued macro challenges and bad weather as well as a tough comparison base. EBITDA margin was impacted primarily by higher energy costs, which we are expecting to gradually ease in the coming quarters. For this year, we now expect cement volumes to decline low single digit. For more information, please see our CHP quarterly earnings, which will be available this evening. In Middle East and Africa, EBITDA grew double digit, mainly driven by Egypt, which showed strong pricing and margin performance.

Net sales in the South-Central America and Caribbean region grew 4%, driven by a disciplined pricing strategy. Cement volumes remain pressured by weak bag cement demand, while bulk cement continued to grow, supported by the formal sector, mainly in the infrastructure and tourism segments. The decline in EBITDA and EBITDA margin resulted primarily from higher energy and maintenance costs and lower cement volumes. We expect energy cost in the region to ease in the following quarters. In Colombia, cement volumes declined mid-single digits, largely attributable to a slow start of the year in formal construction activity and weak bag cement demand.

Cement pricing increases picked up some momentum with a double-digit sequential increase. In the Dominican Republic, cement volumes declined due to a drop in retail cement demand, while ready-mix volumes posted a double-digit growth, mainly related to a recovery in the formal sector. In April, CLH shares were delisted from the Colombian Stock Exchange. Further information on CLH can be found on CLH's website.

And now I will pass the call to Maher to review our financial developments.

[Maher Al-Haffar, executive]

Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are very pleased with our first quarter performance showing growth in revenues, operating results and free cash flow generation. The increase in EBITDA speaks to the success of our pricing strategy, coupled with decelerating cost inflation and contributions from our growth strategy and urbanization solutions. Our sequential margin expanded by almost 2 percentage points, while our slight year-over-year margin decline was the smallest in 5 quarters. We expect improving margins going forward. As Fernando mentioned, we have seen 2 consecutive quarters of decline in cost of goods sold as a percentage of sales.

The decline has been driven by easing energy cost inflation, lower imports and pricing traction. Energy costs remained high with fuel increasing 32% and electricity up 16% on a per ton of cement basis. Recent market prices for pet coke still our largest fuel source are the lowest level since August 2021, and it bodes well for fuel costs in the back half of the year. In Europe, one of the hardest hit electricity markets last year, we delayed locking in contracts and have been able to take advantage of lower prices in the first quarter. We expect better trends in energy costs in coming quarters as prior year comps get easier, and we expense higher-priced fuel inventories.

Higher fixed asset sales, improving EBITDA generation, coupled with a lower investment in working capital and maintenance CapEx, delivered incremental free cash flow of $120 million versus the prior year. As regards working capital, working capital days increased by 8% versus the prior year. This increase is due primarily to the inflationary impact on inventories. The credit quality and turnover of our receivables remains at a healthy level.

Net income was $225 million, 14% higher than the prior year. The increase was driven primarily by better operational results and a positive foreign exchange effect, mainly due to the appreciation of the Mexican peso. We executed a series of transactions that strengthened and simplified our capital structure, further aligned our financial strategy with our sustainability agenda and accelerated our path to investment grade.

In order to support our future in action program in March, we updated our green financing framework to reflect our alignment to SBTi's 1.5-degree scenario and subsequently issued $1 billion in green subordinated perpetual notes. As part of the green framework commitments, CEMEX will invest an amount equal to the net proceeds in eligible green projects between 2021 and 2027. These notes similar to those issued in 2021 are considered equity under IFRS and benefit from a temporary 50% equity treatment from rating agencies, resulting in a reduction of leverage of approximately 0.4x in the quarter.

Through this issuance, we are able to invest in ROI-positive projects that lower our carbon footprint at a cash cost equivalent to our senior debt. while at the same time, immediately improving our capital structure and bringing us closer to an investment-grade rating. With this transaction on a pro forma basis, 50% of our debt is now linked to sustainability KPIs, essentially reaching our 2025 target 2 years ahead of time.

To better position our debt maturity profile for the medium term, 2 weeks ago, we called our $1 billion 738 bond due in 2027. The full redemption should take place on June 5. This leaves a 2-year window in 2027 and 2028 with virtually no debt maturities. We completed the tender offer and delisting process for CEMEX LATAM Holdings, increasing our ownership to approximately 99.5% and a tender offer for shares of CEMEX Holdings Philippines, increasing our ownership to approximately 90%. We continue with the firm commitment towards strengthening our balance sheet with the goal of achieving investment grade in the short term. As you know, we are just one notch away from our goal.

And now back to you, Fernando.

[Fernando Olivieri, executive]

We are pleased with the momentum of the first quarter. We have made some minor adjustments in regional volume guidance, which you can find in the appendix. Given that the quarter represents the smallest EBITDA contribution in the year, we will revisit our EBITDA and free cash flow element guidance after our second quarter results. However, we acknowledge that cost, FX and pricing movements to date provide upside support to our EBITDA guidance given in February.

And now back to you, Lucy.

[Lucy Rodriguez, executive]

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to prices for our products.

And now we will be happy to take your questions.

[Lucy Rodriguez, executive]

[Operator Instructions] And the first question comes from Gordon Lee from BTG Pactual.

[Gordon Lee, analyst]

I have just one simple question for Fernando, which is it's obviously impressive how you and I would say the industry in general, but I think to a large degree led by you, has been able to implement your pricing strategy successfully and what are pretty difficult conditions. I was wondering how you feel about that going forward given the combination of sluggish volumes in many of your markets, the fact that it looks like cost headwinds maybe are declining as you've said, or those headwinds are less of a complication.

And finally, that you have managed to recover so much profitability. How do you feel about that sort of conversation with clients in that dynamic going forward in terms of being able to pursue further price increases?

[Fernando Olivieri, executive]

Sure. Thanks, Gordon. Let me start by commenting again that our objective is to gain back 2021 margins. Margins in terms of price minus cost, meaning to be sure that we are going to be fully recovering the impact of this period of very high inflation. I'm referring to the very high inflation in our cost structure. And we have done progress. We started by recovering input cost inflation in dollar terms. And now we have already started, as you saw, we saw already an inflection point moving from there to recover margins. And we will continue that pattern.

Now you know that pricing strategies are mid- to long-term strategies. And of course, we have to permanently evaluate the implications of our market position because of the strategies we put in place. Now how confident are we in the success of this strategy? I think after the results we've seen, we are very confident that we will continue the process again to gain our 2021 margins. We have seen -- and we -- you can see examples of radio last year than this first quarter.

For instance, at the impact of weather in the U.S. didn't derail our pricing strategy in the U.S. So, we think that will continue happening. And if you remember, last year in Mexico, there was also a decline in the market, and we managed to put in place, again, the piece of the pricing strategy needed last year to recover input cost of our margins.

So I think we will continue with the same objective. It is taking time. Our products, ready-mix cement aggregates, Historically, when there are periods of high inflation, it takes time. We are always kind of behind of the phenomena, but we will get there. We are getting there, and we are confident that we will get there.

[Maher Al-Haffar, executive]

Fernando, if I can just add, Gordon, a couple of comments. I mean, one very important thing is that if we take a look at prices the way they are in March, if we take that level of pricing, and even if we don't get any pricing increases further throughout the year, although we believe we will, we have pricing increases in several of our markets. But that in itself is a 15% tailwind going forward, which is very important. And if you take a look at that tailwind in Mexico or EMEA or the U.S., that's close to a double-digit pricing increase tailwind that we're experiencing. And the markets continue to be tight.

In the U.S., we reacted very quickly by reducing imports. As you have seen, we reduced imports by almost 45%. We have a very tight logistics operation there, and I think they've done a terrific job in managing that situation. And so close to 90% of our volumes repriced in the first quarter, which speaks very well to our ability to continue with that momentum during the rest of the year, as Fernando mentioned.

[Lucy Rodriguez, executive]

Okay. Thank you, Gordon. And the next question comes from Adrian Huerta from JPMorgan.

[Adrian Huerta, analyst]

I the question it's related to the U.S. outlook, you're now guiding for a mid-single-digit decline in volumes for all products. versus low single digits before. So, my question is if this is mainly related to the weak first quarter that was pretty much weather related or if you're seeing larger weakness versus previous deals that you had? And can you say what do you expect on demand from each one of the segments? And which stage should be performing better and which states should be performing weaker during this year?

[Maher Al-Haffar, executive]

Yes. Fernando, would you like me to go ahead and take the question?

[Fernando Olivieri, executive]

Please go ahead.

[Maher Al-Haffar, executive]

I mean, we're actually quite constructive about the U.S. business. And yes, the adjustment in volume outlook was primarily predicated on the weather that we have seen in California, Arizona, Texas and parts of Colorado. I mean, we had terrific weather, as you know, snow weather and all of that. The interesting thing is when we take a look at the recovery in volumes in April, we see quite a positive recovery. It's not 100% there, of course, because the ground is still wet and there's still some weather patterns, but we are definitely seeing some recovery from that perspective.

I mean in terms of the drivers of demand in the U.S., clearly, the strongest driver is the industrial sector. I mean, I think that there -- we are seeing definitely a lot of benefits from the CHIPS Act from the Inflation Reduction Act from the just beginning of spending -- meaningful spending under the highway bill that we have in place. So, I think that on the infrastructure side, which represents 50% of our business, we're quite constructive looking forward with the rest of the year. The industrial side is extremely positive and is benefiting also from a lot of the spending.

And if we take a look at its semiconductor, it's [ Greentech ], it's battery manufacturing, it's electronic electric vehicles. The area that we're seeing weakness is residential. But again, I think that we need to be very careful when we take a look at residential on a national level. I think it's very important to take a look at residential in our markets, California, Arizona, Texas, Florida. There, the household formation is -- I can't remember exactly, but it's an x factor higher than the rest of the national household formation and because people are moving into our -- to those states. And so that's creating a positive impact on residential. But definitely, the whole market is softening a little bit as interest rates go up.

Now with that, there's some interesting dynamic. As interest rates go up, people who are -- who have fixed rates that are very attractive, are not willing to sell their houses and put them on the market. And so, what we're seeing is a very, very tight inventory in existing homes for sale, and that's forcing more demand in mostly multifamily construction in the markets that we're in. So -- and then when we take a look at our customers, our contractors, developers, builders, we hear from them that their order books are quite healthy going forward. So, we're quite constructive and we think that in a while we did adjust our expectations for volumes because of the weather factor, I think the pricing looks like should continue with very good momentum in the U.S. I don't know if that answers your question. If there's a follow-up, I'll be more than happy to address it.

[Lucy Rodriguez, executive]

If maybe I could just add one point, Maher. The guidance that we're giving is not assuming that in this year, we can actually recover those lost volumes to weather of the first quarter. And the major reason for that is because of tightness still in the construction markets. It's the ability of homebuilders to be able to find workers, supplies, there's still shortages out there in the industry, which I think continues to speak to the resilience of residential in particular. Sorry, Adrian, I don't know if you have anything else.

Thank you. The next question comes from the webcast from Paul Roger from Exane BNP Paribas.

The IRA includes provisions to help states tighten building regulations and the federal government test new green products. To what extent could this boost demand for ranges like Virtua and give CEMEX a competitive advantage.

[Fernando Olivieri, executive]

Yes. Well, if I take this one. I think what we have seen during last year and this year is that the different levels of authorities are exploring thinking are already changing the way products cementitious products or ready-mix are use in the market -- so we've been transforming several of our cement plants to the products that are already permitted in the market in the U.S., limestone, cement, [ fuselage, Lakeman ], composite cement. And definitely, this flexibility or this trend to -- for the U.S. to move forward into composite cement is very positive. It is the -- the critical way or the most powerful way to being able to produce lower carbon products in the States because these products do require proportionately less quantities of clinker.

Now how can that impact the demand for our beta family of products, it is impacting it already. By now, about 50% of the cement we sell do have EPDs, meaning certificates that our customers get evaluated or certified by third parties, and that is increasing the demand of these products. We do believe that this is a trend that will continue evolving. It will be very positive for us, for the industry and for the consumer.

By the way, by the end of the year, we are already prepared, but by the end of the year, 100% of our beta cement sold in the market will have the certificates or EPDs certified by a third party. And in the case of ready-mix, about 75% of those volumes will be already certified. So, in summary, this is a very positive trend -- the U.S. is moving towards the practices known already for some time in regions like Europe or other parts of the world in this type of cement.

[Lucy Rodriguez, executive]

Thank you, Fernando. The next one question comes from Vanessa Quiroga from Credit Suisse.

[Vanessa Quiroga, analyst]

I was wondering if you can tell us a bit of where you see the main risk for keeping the sequential expansion -- the pace in sequential expansion of margins that we saw, which was very impressive in the first quarter. So very good pace of expansion, but what could happen that could slow down this phase? Could it be some maintenance works expected for coming quarters, cost of labor, logistics, energy, further delays, I don't know. Just anything that you could highlight in terms of the risk.

[Fernando Olivieri, executive]

Thanks, Vanessa. Let me start maybe Maher or Lucy cannot comment to the question. But let me start by saying that the pricing dynamics are very local. They have to do with competitive dynamics. They have to do in this case, in the last few years, all pricing strategies have to do with impose cost inflation. I mean why increase in prices, 20%, 25%, if your inflation is not at that level.

So, I think what you can expect is for prices, I said in the previous question, for prices to increase as much as needed to recover our 2021 margins. We are getting close to it. And now we see that when we define when we establish this objective, we should have been more precise because now it is clear that we are referring mainly to the difference of price, meaning the spread, price minus cost impact.

In the last 1.5 years or so, the main contributor to inflation recuperation in margin compression has been pricing. And now you saw because of the inflection point in our cost base, I think from now on or starting in 2023 to pricing strategy will have the positive contribution of a decline in inflation increases. We are not still in a deflationary type of context. But definitely, the pace of inflation is materially decreasing.

So, we have to continue evaluating our pricing strategy considering the recovery of our margins, as we mentioned, the impact of the price increases that we have done recently and last year, as Maher said, even if we don't increase prices today, prices of 23 will be 15% higher than '22. We also have to consider the level of inflation. Again, we see lower -- a lower impact because of inflation. We hope and we expect that to be a trend for the rest of the year, but nothing is completely sure, but we do hope that will be the case.

And also, very important, a very different market per market is the impact in our market position because of dynamics, supply and demand. So, in order to understand what to expect, again, I think the main issue is look at margins, and we will try to recover them. Margins of 21, and we will try to recover them. We are close to it. The trends are positive. So hopefully, in the next few quarters, we will be updating achievements in that regard.

[Maher Al-Haffar, executive]

Yes. And if I can add, Fernando, I mean, Vanessa, as Fernando said, the North Star for us is recovering '21 margins, right? And if you take a look at where we are as of the first quarter, we continue to lag '21 margins even if you adjust for the volume effect, right? I mean because there is a huge -- there's a very important volume effect that has taken place. And we're still probably a good point and a fraction below where we'd like to be just for the quarter.

So, I think there's a lot more work to be done there. Now of course, recovery of inflation price effect against total inflation has been improving. And for the first time, it has been accretive to margins in the first quarter, and we expect that hopefully to continue. Now what could -- the question is, is there something that could risk that? And I mean, frankly, when we take a look at the input costs, we're seeing obviously still rising fuel, whether it's fuels or electricity, but everything is decelerating.

If we take a look at pet coke, which is our largest percentage of fuel that we use, it's almost half of what it used to be at its peak, for instance, and we see that declining a little bit more during the course of the year. So, we are reasonably confident that, that gap between total cost against the price effect should continue to improve, again, barring any kind of material adverse change from the market there.

Now in terms of maintenance, I mean, yes, we do have some incremental maintenance in the year, but that's because we have more operating assets. I mean, as you know, CPN, we have the [ Chapeco ] expansion. We have additional expansions in the Dominican Republic. The U.S. has a very important operating efficiency program in place. most of our plants are running at very high-capacity utilization.

And of course, there's a little bit of inflation, right? I mean, that is taking place. So -- but that's totally expected in our operating results. We are not expecting, at least, again, today, we don't think there's anything extraordinary that should change the dynamics of profitability going into the next 3 quarters of the year and our expectation is that things should get better. And I don't know if I missed anything, Lucy, if you want to add anything to that?

[Lucy Rodriguez, executive]

No, I think you got it. Thank you very much. Thank you, both. And thank you, Vanessa. The next question comes from the webcast from Anne Milne from Bank of America.

Could you please walk us through the changes in the composition of CEMEX's debt structure between year-end 2022 and first quarter '23. Also, how are you thinking about this going forward? It looks like you used some of the proceeds of the perpetual and you also reduce bond and bank debt agreements. Did you buy back any bonds during first quarter? Will percentage change going forward by type of debt.

[Maher Al-Haffar, executive]

Yes. Thank you very much, Anne, for the question. We did -- I'm trying to remember now if it was within the quarter or right after the quarter, we did actually buy some of the 7 3/8. We bought about, I believe, $65 million ahead of the -- putting out the call. And then, of course, we put out the call a couple of weeks ago, and that should be done by June 5, as I mentioned in my remarks.

Now in terms of the debt stack structure, as we speak, giving pro forma effect to the call of the 7 3/8 gives us a breakdown of about 1/3 of our debt being bank debt, 35% as of the first quarter, again, pro forma the call of the 73. The high-yield notes, another 1/3, about 32%. -- leases are about 12%. And then, of course, we have the sub-notes which are -- again, I'm talking about the whole debt stack, including the sub-notes which, of course, under IFRS is considered to be equity. But if you include that in there, that represents 20% of the debt stack.

I don't expect this allocation to change that much. We do have a very interesting -- with the call of the bond, we will have a very nice window in '27, '28 and beyond to do some liability management, pushing out maturities. Whether we will make major changes between how much we take from banks versus the bond market is going to be very much dependent on what's happening in the capital markets.

I do think that the appetite, interestingly, very different from some other situations. The appetite from a bank for us has been very positive, frankly, and pricing has been very attractive. And as you know, our spreads have dropped as a result of the deleveraging process.

So, we're going to wait and see and take a look -- we're not in a hurry, fortunately. We've got tons of liquidity that we're sitting on. And so we're going to be taking a look at the markets and see, but I don't expect major changes in the structure of our debt stack.

[Lucy Rodriguez, executive]

Thank you, Maher. And the next question also comes from the webcast from Francisco Chavez from BBVA. Can you explain your margin improvement in Mexico? How sustainable is it to maintain that level or continue improving it? Is this margin level already incorporating the impact on electricity due to the expiration of some contract?

[Maher Al-Haffar, executive]

Yes. I think the impact of the -- the impact of the repricing of our electricity sources is being partially reflected as we speak and has been. So that's definitely there. I think the issue that is likely to more positively impact us going forward is the volume situation, right? I mean, we have to wait and see what happens in the first quarter. As Lucy mentioned in her remarks that our volumes are down by 3%, primarily because of a tactical view or position that we took on the bag cement business.

But very important to highlight is the whole market was actually -- we estimate up about 3%. So, the supply/demand dynamics in Mexico should be fairly good going through the rest of the year and driven by industrial, very importantly, followed by infrastructure and then housing. I mean we have -- as you saw the volumes in ready-mix have been way outstripping the volumes of cement, which is an indicator of what's happening to the underlying economy and where the construction activity is taking place. So, I really don't see -- pricing should continue to be fairly good. The tailwind in Mexico, Mexico's pricing is quite positive. It's in the double digits. So, I don't see the margin situation kind of deteriorating as we go as we go through the rest of the year.

[Lucy Rodriguez, executive]

Thanks, Maher. And the next question comes from Carlos Peyrelongue from Bank of America.

[Carlos Peyrelongue, analyst]

Congratulations on the results -- my question was answered, but on the cost side, but I just wanted to take the opportunity. I do not hear well the announced price increases for the second half if there's any specific number in the U.S. that you could comment?

[Maher Al-Haffar, executive]

Yes. In the U.S., we have -- we are expecting -- in terms of pricing -- let me see...

[Lucy Rodriguez, executive]

Do you want me to do it, Maher.

[Maher Al-Haffar, executive]

Yes. Would you, please, yes, I'm trying to have...

[Lucy Rodriguez, executive]

Sure. Okay. We have announced high single-digit price increase in all states with the exception of California and Arizona. So, this would be about 65% or so of our total volumes. And this is for July, so it's the beginning of third quarter. So, I hope that answers your question, Carlos.

[Carlos Peyrelongue, analyst]

Yes, it was just a follow-up on California. If I remember correctly, there was no price increase in January also because of weather issues. Is that correct?

[Lucy Rodriguez, executive]

The January pricing increase was delayed. So, it happened depending on customers and regions, it happened somewhere from March to April in general, but it did take place. So, this would be a second pricing increase Well, from all the other markets, it's a second. We are not raising prices in California second time in July. Okay?

[Carlos Peyrelongue, analyst]

Got it.

[Lucy Rodriguez, executive]

Thank you and obviously, some of that reflects the weather issues that have taken place in the first quarter. And California was obviously the hardest hit the state from a weather perspective.

Okay. Great. And I think we have time for one last question, which is coming from Nik Lippmann from Morgan Stanley.

[Nikolaj Lippmann, analyst]

Thank you very much, congrats on the numbers. I have one question pertaining to maintenance and imports in relationship to the U.S. market, clearly an area where you guys have asymmetric information. So, we saw a lot of that last year in 2022.

Can you talk a little bit about how we should think about sort of extraordinary maintenance in the U.S. market and the levels of imports that we could expect this year for the rest of the year? And Maher the comment about a 45% decline in imports. Was that a year-on-year first quarter come in quarter-on-quarter? Or was it a forward-looking 23 or '22 kind of comment?

[Maher Al-Haffar, executive]

Yes. I mean -- and help me out, we see here if I missed that on -- I mean the drop in import volumes was a year-over-year drop first quarter. And of course, that's a very -- I mean, very important contributor also to improvement in margins in the U.S. business because you're essentially dropping away volumes that are less profitable, but profitable nevertheless.

And I think that, that was a very good reaction from our operators there to kind of redirect and/or try to change the timing of receipt of those shipments to coincide with what's happening in -- particularly in California, I would say, because of the weather patterns that we've already talked about there. And how is that likely to evolve during the rest of the year?

I mean, frankly, I mean, we are -- we need to take a wait-and-see attitude to see what happens to weather patterns and whether -- how demand is going to -- but we have a very robust logistics and supply chain management process, and we don't expect -- I mean, this was managed by us. This drop was a managed drop. It was not something that happened because of exogenous factors.

So, my -- our expectation is that we will continue to positively manage that situation. And to the extent that we need to modulate imports either upwards or downwards based on supply-demand dynamics, we will do that during the rest of the year. It should not be an issue. Now the other question you had was -- I'm sorry, can you remind me again?

[Fernando Olivieri, executive]

Yes, I think it's just very [ linked ]. If you're thinking about doing any extraordinary maintenance in any of your plans this year, and those have lower domestic U.S. production and import more for that reason.

[Maher Al-Haffar, executive]

I mean I don't know if I would…

[Fernando Olivieri, executive]

Go ahead, Lucy, go ahead.

[Lucy Rodriguez, executive]

Our expectation is that we will have increases in overall maintenance costs, nothing exceptional this year. But I would remind you that the timing of it on a quarterly basis is going to be important because second quarter of last year, we had quite a bit of maintenance that was consolidated in that quarter. We are not expecting -- we would expect more of a reversal in the second quarter.

We did have, in the first quarter some increase in terms of year-over-year maintenance. And I think in the third quarter, we would expect the same as well for the U.S. So, it will vary different quarter-to-quarter. Nothing exceptional, about a 10% increase, which is kind of in line with the consolidated level in terms of incremental maintenance. Now of course, you can't control for outages that may occur, but I think it's a good indication of where we expect the year to be.

[Maher Al-Haffar, executive]

And also, I mean, I would say in the maintenance side for all of the company, I mean, again, nothing extraordinary in the U.S., I mean, inflation. I mean there is definitely inflation in spare parts. There's inflation in labor. I mean there's -- I mean so if you see a slight uptick in maintenance, it's not because there's anything extraordinary. It's just part of the inflation effect. I mean...

Okay. Nic, I think we're done with that. So, we appreciate you joining us today for our first quarter webcast and conference call. If you have any additional questions, please feel free to contact Investor Relations, and we look forward to seeing you again on our second quarter webcast that will take place on July 27. Many thanks.

[Operator]

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