Cemex SAB de CV

NYSE:CX

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to the CEMEX Second Quarter 2021 Conference Call and Webcast. My name is Chuck, and I'll be your operator for today. [Operator Instructions]

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

[Lucy Rodriguez, executive]

Good morning. Thank you for joining us today on our second quarter 2021 conference call and webcast. I hope this call finds you and your families in good health. I'm 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.

I will now hand it over to Fernando.

[Fernando Olivieri, executive]

Thank you, Lucy, and good morning to everyone. I'm happy to report another strong consecutive performance. Second quarter results are another important milestone in our growth story. What we highlight include the achievement of our long-term leverage goal, a 39% increase in quarterly EBITDA and our announcement of industry-leading climate action target. Additionally, consolidated sales have increased 15%, while EBITDA rose 31% relative to pre-pandemic levels of second quarter 2019.

On a year-over-year basis, sales increased by 25% with all ratings growing double digit. EBITDA for the quarter was $818 million, again, with all bases contributing. Margin improved by 2.1 percentage points to 21.2%, well above our Operation Resilience target. The improvement was largely due to volumes and cost savings initiatives. We continue to make important strides in cost and operating expenses as a percentage of sales at 7.4%, a company record.

We did see an escalation in variable cost during the quarter. This was driven nationally by imports, maintenance and rising energy costs. With strong demand momentum, we expect pricing in the near term to adjust accordingly.

Free cash flow after maintenance CapEx of $401 million significantly outpaced the prior year and was the highest for the second quarter since 2015. In line with what we indicated at CEMEX Day in June, we ended the quarter with a 2.85x leverage ratio, achieving our September 2020 Operation Resilience target of less than 3x significantly ahead of schedule.

Importantly, we are using this period of robust operational growth to prepare for what lies ahead and advance even more rapidly on our corporate purpose to build a [ better future ].

We are accelerating our investment in the business in the positioning of our products for a low carbon world as well as moving quickly to the carbonized power industry. Despite the favorable operating results, the operations continue to be challenged by rising COVID infection rates in new countries. From the safety of our employees, we will remain vigilant and adhere to public safety protocols. We have not been untouched by the virus during the quarter and sadly have lost colleagues. These individuals are part of our connected CEMEX family and we grieve their loss.

As you know, our Operation Resilience strategy is predicated on the belief that developed markets in Mexico will deliver the best growth opportunities over the next few years due to the unprecedented monetary and fiscal stimulus being deployed. This quarter certainly confirmed that view, with cement volumes in the U.S., Mexico and Europe growing double digits versus pre-pandemic levels. Underlying demand trends in SCAC continues to show momentum, but quarterly cement volumes were disrupted by exogenous event based in Colombia and the lockdown of the cement industry in Trinidad and Tobago due to rising COVID infection rates.

Middle East, Africa and Asia volumes have slowed down versus '19 pre-pandemic levels due to the quarterly performance of Egypt. With the recent government announcement of the cement capacity limitation program, we expect improved performance going forward.

While we did benefit from [ a messy ] prior year comparison in the quarter, we believe that underlying result momentum is significant and sustainable in most markets, a way at a moderated pace to [ modestly better ] comparisons moving forward.

As you know, supply/demand dynamics in most of other markets are exceptionally tight. In [indiscernible], the Americas [indiscernible], in particular with most [ countries ] operating at high capacity utilization. During the quarter, the industry saw a sharp increase in shipping costs for [indiscernible] in the region. We believe that as shipping contracts [ aspired ] on the [ noncountry's ] growth, prices will need to reflect these increased costs.

This environment, our well-developed footprint and supply chain as well as the introduction of new cement capacity in the Americas will be an important competitive advantage.

Our capital allocation strategy is dedicated to organic growth with capacity additions in our existing markets as well as bolt-on and margin enhancement projects. Due to negative projects as well as debottlenecking of plants and the opening of first line, we will be introducing 10 million metric tons of additional cement capacity over the next 2.5 years. The incremental investment to bring on this capacity is very compelling, with an average remaining spend of $43 a ton, and is highly accretive. And importantly, the timing is right with the majority of the capacity coming on the sold-out market and the Americas constituting [ 75% ] of the total.

With regard to our bolt-on margin investment portfolio, we currently have a pipeline of a [indiscernible] sector to deliver $270 million in EBITDA in 2022. These projects have a relatively low risk profile and they are happening in markets that we know and the products related to our 4 core businesses. An important focus of the core portfolio is the ramp-up in [indiscernible] product line of Urbanization Solutions.

Urbanization Solutions are construction material products globally aligned to cement, concrete and aggregate that meet the essential needs of cities of the future and are sustainable in nature. The products promote the circular economy, [ use of lower painted ] cement and concrete as well as greener and more efficient construction practices.

At the business line, Urbanization Solutions is growing rapidly. Year-to-date EBITDA is [ 307% ] of total and has grown 50% year-over-year. We expect that 80% of the EBITDA coming from Urbanization Solutions this year will have a sustainable value proposition.

Our 39% EBITDA growth was driven by higher volumes and prices as well as an increased contribution from our growth investment portfolio. While all business were responsible for EBITDA growth, Mexico, EMEA and SCAC has the largest contributions. We experienced an increase in variable cost during the quarter. While the timing of maintenance contributed, this increase was largely due to rising shipping costs associated with cement industries in the U.S. as well as the cost of energy, which grew 16% year-over-year.

Importantly, in the first half of the year, pricing has significantly outpaced variable cost inflation. We are moving quickly to adjust prices to reflect this new cost revenue. Despite supply/demand dynamics in most markets, we have already announced additional pricing increases in the U.S. and Mexico.

We continue to make progress on rationalizing the trade and expenses, largely due to the cost savings program for this last year under our Operation Resilience strategy.

OpEx as a percent of sales was 7.4% for the quarter, marking a record low, and 2.6 percentage points lower than the prior year.

The new initiatives such as our Working Smarter program, our global initiative designed to utilize digital platforms and automation technology to standardize and centralize business processes, we should expect continued savings on this front in 2022.

Finally, we benefited from an important FX sales in the quarter of $47 million. Again, came primarily from the appreciation of the Mexican peso, euro and British pound.

The favorable market backdrop and the decisive management actions that we have taken has led to earlier a shipment of some of our [indiscernible] operation in [indiscernible]. As a result, at our CEMEX Day a few weeks ago, we used the event as an opportunity to update the targets on the future [indiscernible].

The most significant changes were the leverage target when we committed to achieve an investment-grade rating, and the climate action target when we now have industry-leading [indiscernible] production also [indiscernible] as well as go-forward on the previous 2020 time to 2025, thereby providing transparency on the short-term project.

We are pleased with the rapid achievement on the Operation Resilience to date and expect to continue making strides in the following quarters.

With the rollout of Operation Resilience in September 2020, our climate action agenda was escalated to our top priority of the company. We did this because we are committed to the belief building a better future is wise, a green and sustainable world. We will continue to lead the industry in our efforts to decarbonize and the first step is establishing industry-leading carbon reduction rates. And of course, those are not enough, and we need to be transparent on our progress as we enter this critical decade. Therefore, similar to our other key targets, we intend to provide quarterly updates on our climate action levers given the same visibility of all other key financial metrics.

I want to take this opportunity to update you on our digital initiatives. We are leveraging digital innovation in everything that we do. We were the first in the industry to roll out a global digital commercial platform, CEMEX Go. We employ a perpetual data approach that regularly updates the offering base on strong cost [indiscernible]. These innovations include 100% paperless experience and direct field time connectivity between CEMEX and select customers.

In our operations, we apply artificial intelligence and data analytics, so predictive maintenance, optimization of energy consumption and the reduction of carbon emission. We are using virtual reality in our effective training courses and drones for inventory managing.

The latest innovation is our Working Smarter global initiative which will put CEMEX at the forefront of the new business in [indiscernible]. Its primary goal is to leverage technology in remote work environments to drive efficiencies in the organization by building global operational scale.

CEMEX will enable new digital platforms and automation technologies to orchestrate and centralize processes while reducing [indiscernible].

Now I will pass it on to Lucy so she can talk [indiscernible]. Lucy?

[Lucy Rodriguez, executive]

Thank you, Fernando. The U.S. continued to enjoy strong demand in the second quarter, with most of our markets sold out. Sales increased 13% while EBITDA rose 7% on the back of strong volumes and pricing. Despite heavy rains in Texas during the quarter, cement volumes grew high single digit. Volumes were again driven by solid residential demand. Residential construction spending grew 30% quarter-to-date in May. Forward-looking indicators remain strong, with single-family permits up 46% year-over-year in the second quarter and low housing inventory levels.

The infrastructure sector was supportive and the outlook remains favorable, with May trailing 12-month contract awards for highways and streets rising 2% for our 4 key states versus flat at the national level.

The industrial and commercial sector remains weak, but activity is accelerating as cement-intensive distribution facilities for e-commerce continue to grow.

Our cement prices rose 3% sequentially, reflecting traction of our April pricing increase, which was implemented in all markets except Florida.

To meet higher-than-expected demand, we significantly increased imports in the quarter beyond the level locked in for the full year.

With industry spot shipping rates up more than 100% versus last year, these imports carried a steep cost and one that is not yet reflected in our prices. This led to a 1 percentage point decline in EBITDA margin. We expect this headwind to continue, and we are working hard to ensure that our pricing policy adequately reflects the true cost of imports. As a first step, we have announced a second round of price increases for July and August in most markets.

In the case of imports, we believe we have superior supply chain capabilities with close to 9 million metric tons of maritime import cement capacity, rail capabilities as well as a strong production footprint in the Americas.

We estimate 2021 cement and ready-mix volume growth of between 4% to 6% with aggregates growth of low single digit.

For the medium term, we remain optimistic regarding approval late this year of an infrastructure plan, which we would expect to yield incremental demand for our products towards the end of 2022.

In Mexico, our operations are experiencing exceptional supply/demand conditions, with the industry currently at historical peak production levels. EBITDA increased almost 60% due to higher volumes and prices as well as our cost reduction initiatives. That cement maintained its growth trajectory with volumes increasing 18% and continue to be supported by a high level of remittances, home improvements, government social programs and pre-electoral spending.

The 28% increase in cement volumes, however, was driven by an almost 60% growth in bulk cement, reflecting the second quarter 2020 industry lockdown measures which restricted the delivery of cement and ready-mix.

Importantly, we have seen significant recovery of formal sector demand over the last few quarters, and bulk cement volumes are slightly above second quarter 2019 pre-pandemic levels on a daily sales basis.

While ready-mix volumes are up 56% and show important sequential growth, they still lag pre-pandemic levels. We expect ready-mix to continue to recover as formal sector demand reactivates.

Activity on the formal residential sector is gaining momentum, as evidenced by the growth in housing steps and permits of 40% year-to-date. Going forward, low level of inventories and attractive mortgage rates should support volumes.

We are also seeing activity in the industrial segment with the construction of warehouses along the border states related to near-shoring opportunities with the U.S. While the commercial sector remains subdued, increasing tourism and consumer confidence should imply a restart to previously delayed projects.

Sequential prices increased 2% for cement, reflecting our March price increase of 4% as well as tight supply/demand dynamics. While margins improved 3.2 percentage points, sequential margin declined, mainly due to higher maintenance and fuel.

In order to recover increasing input cost inflation, we announced a price increase of mid-single digits for bagged and bulk cement effective July 1. Given favorable dynamics, we are increasing cement volume guidance for Mexico to now grow between 10% and 12%. We expect that bagged cement growth rates will slow in the second half as the comparison base becomes more challenging, while bulk cement, ready-mix and aggregates growth continues to improve, supported by the housing sector and a favorable base.

In our EMEA region, EBITDA grew 25%, driven by a strong performance in Europe and the Philippines. EBITDA margin improvement is due largely to the Philippines. EBITDA margin in Europe was flat, impacted by rising energy, raw materials and logistic costs despite better volumes and prices.

European volumes for our 3 core products were up between 14% and 23%, reflecting an easy comparable base in Western European operations last year due to the impact from COVID and an acceleration in residential and infrastructure activity.

We implemented cement price increases in Germany, Poland, Czech Republic and Croatia. The sequential decline in prices in Europe results from geographic mix, with the U.K., the country with the highest cement price in the region, growing its sequential volumes at a slower pace than the rest of the countries.

We are raising our 2021 volume guidance for Europe. For cement, we now anticipate 2% to 4% growth, 3% to 5% for ready-mix and 6% to 8% for aggregates.

In the Philippines, cement volumes grew by 45%, reflecting not only the low comparison base resulting from strict government lockdown last year, but also increasing construction activity. Our average daily sales volumes have now recovered to levels higher than the second quarter 2019. In the Philippines, we are increasing our cement volume guidance to 12% to 14%, supported by strong public construction. For more information, please see our CHP quarterly earnings, which will be available this evening.

In Israel, we continue to see strong demand dynamics, particularly from transportation as the government moves to execute its ambitious long-term infrastructure plan. Ready-mix volumes were up high single digit on an average daily sales basis, while aggregates were down mid-single digits. In Israel, we expect ready-mix and aggregate volumes to decline between 3% to 5% for the year. The guidance reflects the record pace of business in 2020 as well as the completion of several large projects.

Finally, in Egypt, we are encouraged by the recent decree from the government to rationalize cement production capacity for all players.

We are pleased with the performance in our SCAC operations, the region that experienced the most severe government lockdown measures in the second quarter of 2020. Regional cement volumes rose 43% with all countries reporting growth. Regional cement prices rose 2% sequentially due to successful price increases in Jamaica, Costa Rica and Nicaragua. Favorable volume and price performance drove a 50% increase in net sales. The close to 80% increase in EBITDA reflected higher contributions from the Dominican Republic, Panama and Colombia. EBITDA margin rose 4.5 percentage points due to volume and prices, coupled with our cost reduction initiatives.

In Colombia, cement growth momentum driven by housing and infrastructure was interrupted by the social protest in May, which restricted the ability of the industry to deliver product. The protests were largely resolved by early June, and industry activity returned to first quarter levels. We believe the outlook for cement volumes remains favorable, supported by the self-construction sector, record home sales, existing 4G highway projects as well as the rollout of the new infrastructure programs. For the full year, we expect cement volumes in Colombia to increase between 9% to 11%.

For Trinidad Cement Limited, our listed subsidiary in the Caribbean, despite an industry lockdown in Trinidad and Tobago in the quarter, cement volumes grew by 28%, mainly due to Jamaica and a favorable base effect.

In the Dominican Republic, cement volumes grew 72% on the back of a dynamic self-construction sector. Favorable fundamentals, including a slight pickup in tourism, support our increase in cement volume guidance of 19% to 21% growth.

We continue to take advantage of our strong regional logistics network to meet local demand while we introduce cement capacity additions to the region. I invite you to review CLH's quarterly results, which were also published today.

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

[Maher Al-Haffar, executive]

Thank you, Lucy, and good day to everyone. As Fernando and Lucy mentioned earlier in their remarks, this was another very strong quarter, with significant improvements in most of our financial metrics. Our business continued to show important operating leverage, with top line growing 25% and EBITDA expanding 39% on a like-for-like basis. Free cash flow for the quarter was up 187% when compared to 2Q 2020 and 85% better than 2Q 2019 pre-pandemic. This was driven primarily by strong EBITDA performance helped by savings from our Operation Resilience program, lower financial expenses and lower investment in working capital. Continuously improving our working capital management and particular attention to credit quality and receivables collection translated into a record for a second quarter of negative 13 days in average working capital.

Net income increased $314 million year-over-year, driven mainly by better operating earnings and lower financial expenses. All of this culminated in the doubling of our return on capital employed to 10.2% when compared to last year.

With regards to our debt maturity profile, we have the best runway to next maturities in a decade. We achieved a debt profile with very manageable maturities for the foreseeable future and still with ample potential for improvement in our debt stack. We have an average life of debt of slightly more than 6 years, and our expected free cash flow generation alone would be sufficient to meet our maturities in the near term. We were active during the quarter in terms of liability management and the enhancement of our capital structure.

In addition to lengthening our maturity profile, our liability management efforts this year translated into about 50 basis points reduction in our average cost of debt, which today is around 4.6%.

During the quarter, we repaid around $370 million of bank debt under the facilities agreement, $320 million of the 5.7% notes due in 2025, and $450 million of the perpetual instruments.

Additionally, in June, we issued $1 billion of subordinated notes, which are deeply subordinated and without a fixed maturity. Under IFRS, these notes are treated as equity and are not considered for the calculation of our leverage ratio as per the facilities agreement. In addition, rating agencies give us 50% equity credit for these notes. This transaction propels us forward in our path towards investment-grade rating, optimizing our capital structure and accelerating our deleveraging path.

Finally, after the closing of the second quarter, we paid down EUR 450 million of the 2.75% notes due in 2024.

During the quarter, we accelerated our path to investment-grade ratings. As Fernando mentioned earlier, we significantly reduced our leverage ratio in Q2 due to increased EBITDA, strong free cash flow generation and the issuance of the new subordinated notes. As we can see on this slide, during the quarter, we reduced net debt by $743 million, which resulted in a leverage ratio of 2.85x, a 3-quarter return reduction compared to end of Q1 and 1.7x reduction versus second quarter 2020.

Our current $3.1 billion EBITDA guidance for 2021 coupled with the expected free cash flow during the second half of the year would suggest further improvement in our leverage ratio for the rest of the year. And now back to you, Fernando.

[Fernando Olivieri, executive]

Thank you, Maher. As discussed in our CEMEX Day a few weeks ago, we expect EBITDA for the year to be around $3.1 billion. EBITDA should be supported by consolidated volume growth in the range of 5% to 7% for cement, 3% to 5% for ready-mix and 2% to 4% for aggregates. Please note that our regional volume guidance is included in the appendix.

Regarding pricing, we believe supply/demand dynamic are supportive of pricing increases. And as I mentioned before, we have announced additional price increases in the U.S. and Mexico.

For cost of energy, we now expect a 12% increase, with both fuels and electricity cost rising.

Incorporating some savings from our Working Smarter initiative, we now expect $60 million in annual cost savings this year relative to 2020. Guidance for total CapEx, working capital, cash taxes and interest expense is unchanged.

As we move beyond the favorable year-over-year comp, we expect more [ granular growth ] in most regions. We believe we will see isolated flare-ups of COVID in our markets, but the governments have learned how to more effectively conquer the pandemic with little disruption to the industry.

Significant amount of government stimulus still sits on the balance sheets of households and should be deployed as economies reopen.

Growth will be driven by consumer spending and investment in supply chain and manufacturing, coupled with the resumption of some former construction projects.

Over the medium term, developed markets should benefit from additional stimulus in the form of infrastructure. With tight supply/demand dynamics in most markets and rising energy on import costs, we expect prices to reflect inflationary pressures.

While we do not give guidance a year ahead, all of this give us confidence in the view that we expressed at CEMEX Day in June that EBITDA should grow double-digit in 2022.

We will take advantage of the market environment and focus on our bolt-on investment strategy, deleveraging and investing to reach our new climate action target. 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] The first question comes from Gordon Lee from BTG Pactual.

[Gordon Lee, analyst]

A quick question on U.S. cement imports. I was wondering if you could give us a sense of how much of that is being sourced by other CEMEX operations and how much of that is being sourced through third parties? And if you could give us a sense of where in the CEMEX network this is happening, just to get a sense of whether -- what the other regions are that might be benefiting on the other side of the higher import costs into the U.S.

[Fernando Olivieri, executive]

Can you take that one, Maher?

[Maher Al-Haffar, executive]

Sure. Yes. Thank you, Fernando. A significant portion, Gordon, of our imports now into the U.S. are coming from Mexico. We also have some coming from Europe and Asia. As you are aware, we started the CPN plant which has -- is not only very positive logistics vis-a-vis the U.S. market, but also it's us producing and the marginal cost of starting up that capacity is fairly marginal. So it's primarily Mexico, some from Europe, some from Asia. And this has translated into a change over the last couple of years. I mean so we -- because of the ability to ship from Mexico.

Now of course, we will continue to look for the most competitive pricing and quality. And as Lucy mentioned earlier and Fernando mentioned earlier, we have natural competitive advantages in terms of trading and in terms of importing into the U.S. market. I don't know if that answers your question, Gordon.

[Gordon Lee, analyst]

Yes, that's very clear.

[Lucy Rodriguez, executive]

And the second question comes from Vanessa Quiroga from Credit Suisse. Vanessa, if you can give us one question, that would be great.

[Vanessa Quiroga, analyst]

My question, I want to focus on Europe. Obviously, the comparison base reflects the pandemic versus 2020. So I'm wondering if you can give any color versus 2019, how the volumes of each of the main European markets is performing currently.

[Fernando Olivieri, executive]

Maher, can you take it?

[Maher Al-Haffar, executive]

Sure. Yes, Vanessa, Europe, all 3 products are up between 14% to 23%. Obviously, it reflected an easy comp because of -- from last year. The biggest contributors, Vanessa, to the business has been residential and infrastructure throughout the region. And that's why we raised the volume guidance for the year, as Lucy mentioned, from 2% to 4% growth in cement, from 3% to 5% in ready-mix.

Also, as a consequence of the -- most of these markets are fairly sold out. And so as a consequence, we did implement pricing increases in Germany, Poland, Czech Republic, Croatia, and we've gotten very good responses to that.

Now in terms of volume increases, I mean it's a little bit -- to compare the quarters, it's kind of tough because in individual countries, because of the varying lockdowns and the easy comps, it doesn't really make sense. I think it's better to take a look at what's happening in the first half of the year. But the major drivers are residential and infrastructure.

[Lucy Rodriguez, executive]

Maher, if I could just add on -- if I could just add on there, Vanessa. Remember that last year, in second quarter, our Western European operations were hit significantly by lockdowns while our Central European markets were not. So you're seeing that come through in the results. Having said that, as Maher was saying, we are seeing strong growth in residential and infrastructure across the portfolio. The U.K. stands out in particular where we have seen very strong residential demand as well as several large infrastructure projects going out. So things are, I think when you look at residential permits and things there, they're operating at decade-high levels at the moment.

And I guess the next question comes from Carlos Peyrelongue.

[Carlos Peyrelongue, analyst]

Congrats on the results. Yes, my question is related to U.S. pricing. I mean there's obviously several factors that are supporting a much higher prices, whether it's shipping, as you mentioned in the call, increasing more than 100% of the cost sold at market and the potential for an infrastructure package. So my question is, do you think that the probability of moving to now adjusting prices at least 2 times a year or more is increasing materially? Do you think that's something that we're entering a new phase or instead of having just price increases once a year, not just this year, but going forward, we might, you might have to adjust prices more than once a year?

[Fernando Olivieri, executive]

Thanks for your question. I think that the dynamics, Carlos, are, is kind of clear and it's the one that we've been describing for some time now. The market is requiring a higher amount of imported cement capacity is fully utilized almost everywhere. For sure in ourselves, that's the case. And so what we see is imports serving additional needs from our customers. And as you know, imports nowadays have an additional component on inflation, which is the high inflation in shipping costs. So now we have additional portions of imported cement at a higher cost. And what I expect is from the dynamics to continue evolving, meaning we cannot offset inflation immediately, not in shipping costs increasing 100% or even increasing because of fuels. But what we can expect is for price increases either once or twice a year, but a price adapting to the new supply structure of the market. So yes, the time we've been describing once we get to full utilization, the dynamics on the pricing side should improve materially.

Now is it going to happen with increases once or twice a year? That's difficult to say. This time, we were -- we thought it was the right thing to do. That's why we announced price increases for July and August, and we will continue trying to offset inflation, either it's mainly shipping inflation, but other type of inflation to pricing.

[Lucy Rodriguez, executive]

And the next question comes from Francisco Suarez from Scotiabank.

[Francisco Suarez, analyst]

Congrats on super results, and thank you for the great disclosure on your progress on carbon intensity. That's fantastic. My question is on pet coke prices, your primary fuel in the U.S. and Mexico. Can you tell us a little bit about what you are doing in the U.S. and Mexico to cope with the huge increases in pet coke including the use of alternative fuels? And if that has anything to do with the major cut in carbon intensity that we saw in the first half.

[Fernando Olivieri, executive]

Can you repeat the last part of the question, please?

[Francisco Suarez, analyst]

Yes, I just wanted to know that if you, among your strategy to deal with the increases in pet coke, if that includes the higher use of alternative fuels. And if that explains the major cut in carbon intensity that you are reporting in this half of the year?

[Fernando Olivieri, executive]

I see. I see. Thank you for clarifying. Well, the first part, we are always monitoring the availability, quality and cost of our fuel mix. And now we see sizable increases in the prices of pet coke. So of course, what we try to do is to find the cheap sources on the one hand, but on the other, is to reduce coke in our fuel mix.

So in the case of this second quarter, we did manage to increase the use of alternative fuels, and I think we were at the highest levels ever. It's close to 30%. And we will continue -- we are -- we do continue with our strategy is one of the elements in our climate action strategy. We will continue increasing the use of alternative fuels with the preference for alternative fuels with very high contents of biomass, which is what we've been doing already for several years.

We are developing new projects of alternative fuels for our business in the U.S. And as you know, we are close to finish 2 very sizable alternative fuel projects in Europe, in the U.K. as well as included in Germany. So yes, the increment in alternative fuels in the second quarter do place a role in the cost of the whole fuels.

[Lucy Rodriguez, executive]

And the next question comes from the webcast from Paul Rogers (sic) [ Roger ], continuing on the climate action theme.

Congratulations on the new CO2 targets. What has changed to give you confidence the group can go further and faster by 2030? Has the group validated the new carbon reduction targets with independent third parties like [ SPTI ] and align management incentives with the new targets?

[Fernando Olivieri, executive]

Thanks for the question. Let me start with the second part. We are in the process of validating the targets with [ BPA ]. So we will soon have those targets validated.

Now the reason why we adjusted our -- we bring forward -- we brought forward our previous 2030 targets for 2025 and established a new target for cement as well as for ready-mix by 2030 is because in the process on how things are evolving in climate change and how much we have learned and how much and how fast we think we can do, now we feel very confident that we can align, and that's what we did. We did align our climate action strategy and targets to the well below 2-degree scenario, which is nowadays the one that you can adhere to with very specific numbers.

And the reason why we established this new target of 475 CO2 kilos per ton of cement and 165 per cubic meter is because we know and we are confident that we can achieve those without any -- without counting with any of the technologies -- new technologies needed to capture a new CO2, technologies that we are proactively investing in but that we already have the needed road maps to get to those objectives without the support of this new technology.

So I'm referring to additional clinker factor reduction, additional -- I just mentioned because of the previous, but additional alternative fuels with high contents of biomass, additional fillers like [indiscernible] for blended cements on top of the ones we currently use, things like alternative raw materials for cement production and a number of other levers we have to manage that reduction.

Again, we feel very confident that it's doable. To some extent, we have already done it in the case of Europe, with a reduction of 35% when we use figures based in 1990. And in this case, now it's a reduction again based in 1990 of about or close to 40%. So it is lots of challenges, lots of work, lots of [ proxy ] towards circular economy, different markets we participate, but again, it's doable, and we feel confident we will manage to achieve those targets.

[Lucy Rodriguez, executive]

Fernando, there was one last part of Paul Roger's question that maybe you'd like to address, and that is, are management incentives aligned with the new targets?

[Fernando Olivieri, executive]

Okay. Yes. Fully. We are, starting this year, we include in our variable compensation system the targets of CO2 reduction for our personnel, particularly the one directly related with the different levers of CO2 reduction. So that started early this year. But in the last month or so, we included another element in variable compensation. We decided to try for the second half of the year to see how it works so we can put in place starting next year.

We started -- we are calling it the CEMEX ETS, meaning a variable compensation, modifying our EBITDA with the cost of CO2 and resembling or trying to look at the impact of us achieving our targets and the economic impact of achieving them or underachieving them in variable compensation in all our executives.

Again, we started early in the year with performance of prices, including a sizable proportion of the valuation on CO2 on achieving the CO2 reduction plan. And now we are adding this ETS concept in order to modify our EBITDA.

We're currently trying using the European ETS for our business in Europe, and we are using currently our California ETS price for the rest of the businesses. Again, this is the second portion of the variable compensation is a trial, and we will fine-tune. And of course, we will communicate that the next year.

[Lucy Rodriguez, executive]

Thank you, Fernando. And the next question comes from Nik Lippmann from Morgan Stanley.

[Nikolaj Lippmann, analyst]

I'm going to try to cheat here a little bit. I want to ask 2 questions. So I'm just going to put them into one, and they both allude to pricing. But sort of Macroeconomics 101, you're doing a negative supply shock into Latin America. You're exporting more up to the U.S. What is sort of reflection on pricing locally in Latin America? And similarly, in Europe, where the marginal cost of production seems to be going out in line with the higher cost of carbon emissions, what's the reflection there on cement pricing in Europe? And congrats on the numbers.

[Fernando Olivieri, executive]

Can you take that one, Maher?

[Maher Al-Haffar, executive]

Yes. Nik, I mean I think that you hit on a very good point, Nik. And the reality is that our market supply/demand dynamics are tight virtually everywhere. I mean -- and of course, in the case of Mexico, I mean I'll start with Mexico. In the case of Mexico, especially in the central and southern central regions of Mexico. I mean we and I believe most of our competitors are pretty much in sold out positions, and we're expanding capacity as much as possible.

And so clearly, bringing in on the CPN plant to address the U.S. market, I mean it does have some impact in Mexico but not that much of an impact. But clearly, there are tight supply/demand conditions that are leading to positive pricing dynamics in the case of Mexico. And that is expected to continue. I mean we believe that the demand in the residential market and infrastructure, both of those 2 core businesses have a lot of legs. They will continue to contribute to demand. We're seeing also a lot more [ inshoring ] from China to Mexico. And so industrial and manufacturing is also beginning to grow. So I would say, definitely, we are benefiting from those dynamics in Mexico.

In the case of the U.S., absolutely right. I mean we're sold out. There are some markets on allocation. As we discussed, we're bringing in -- we've increased our imports into the U.S. quite materially. And there, you do have pressures of transportation, as Fernando mentioned, which are escalating quite a bit. And pricing has got to react to it, and it is reacting to it. And as you know, we've increased prices for the second half of the year, and we should be getting those pricing increases.

In Europe, you have a similar situation. You have tight supply/demand conditions. I mean even in some markets in ready-mix, we're able to start to cherry pick our most profitable projects because we're reaching capacity utilization even in ready-mix in some of the markets. So -- and that's what's leading to good pricing environment. And we've implemented pricing increases, I would say, in most of our European markets, and we're getting some very good traction on that pricing.

I don't know if, Nik, that covers your -- if I missed anything, please remind me.

[Nikolaj Lippmann, analyst]

Yes. No, look, I think it clearly covers it. What I'm sort of looking at is to what degree -- I understand you're making money on the imports into the U.S., right, and that's profitable freight. My question is really, to what degree are you -- say that you're selling 2 million tons, 3 million tons to the U.S., which is wonderful. But are you repricing, say, 20 million tons of cement sales in Latin America because, all of a sudden, all of that excess is going up north? If it -- to what -- is there anything that will really prohibit you from taking that U.S. pricing power and use it as things get tighter across the region?

[Maher Al-Haffar, executive]

Well, I mean markets are fairly -- Nik, markets are fairly -- I mean obviously are fairly fragmented when it comes to cement and especially when the cement needs to go overland. So I think if you're saying that just because we're exporting out of Mexico into the U.S., is that necessarily pulling up prices throughout Latin America. I think the situation is a little more complex than that. I think you need to get more granular on a local market by local market. And that's why I -- in my comments, I separated kind of the northern part of Mexico and the central and southern part of Mexico, where they're less impacted by the exports to the U.S. and much more impacted by local supply/demand conditions. And we are increasing capacity and doing debottlenecking in the Central and Southern regions in Mexico as well.

We are -- Tepeaca is coming onstream, and that should be supporting. But I think to talk about pulling up prices because of exports out of Mexico into the U.S., in Mexico and in Latin America, I think it's a little more complicated than that.

[Fernando Olivieri, executive]

If I add to what Maher said, I think perhaps this is not the moment to do it, but Maher has already mentioned that capacity utilization is very tight all over the Americas. It's tight in several markets, not only in the Americas but mainly in the Americas. So exporting to the U.S., it might help, but that is not crucial. It's not the reason. Look at capacity utilization in the Dominican Republic, we already announced starting up of [indiscernible] that we're not using since ages because of capacity is fully utilized. We are proceeding with debottlenecking capacity projects in Jamaica. And we are doing the same everywhere. In the case of Mexico, debottlenecking Huichapan, increasing capacity in Tepeaca, starting up in Campana, that's for exports. So it's all over the place.

I think the summary to me is the pandemic heated badly in Latin America last year. The -- mainly because of the informal economy, it came back very soon and it continues coming back and growing. And the speed at which the recovery has happened has surprised most of the industry, and everybody's trying to use almost 100% of capacity utilization and trying to debottleneck and expand capacities all over the market. So I think that's the part that we should go deeper to better understand the pricing dynamics currently.

[Lucy Rodriguez, executive]

And the next question comes from Adrian Huerta from JPMorgan.

[Adrian Huerta, analyst]

Quick question just to clarify. Did you say that the impact from the increased cement imports in the U.S. was 1 percentage point? Just to clarify that first, and then my second was also very specific.

[Maher Al-Haffar, executive]

You mean in terms of the margin, you mean?

[Adrian Huerta, analyst]

Yes, the margin impact from the increased cement imports was 1 percentage point on margins?

[Lucy Rodriguez, executive]

That's at the consolidated level, Adrian. It was higher than that on the U.S. level, just it accounted for almost a 3% headwind in margins.

[Adrian Huerta, analyst]

Okay. Perfect. And just to clarify. So my question is which regions the increased imports were to? Was that in California, Texas mainly?

[Lucy Rodriguez, executive]

We don't break out where the imports are coming into, but the markets that we have been importing into have been Texas, California as well as Florida. I can tell you that in the quarter, due to bad weather in Texas, we did have a problem actually taking the shipments into the ports because of bad weather. So I hope that gives you some insights in the import activities.

Sorry. And then the next question comes from the webcast from Alan Alanis from Santander.

What is the outlook for imports of cement to the U.S.? And is this a risk or an opportunity for CEMEX?

[Fernando Olivieri, executive]

Well, I think the outlook for imports is directly related to the outlook of volumes in the market. Again, once we have all of our local capacity utilized, the delta will need to come from imports. So we kind of expect for imports to continue increasing.

[Maher Al-Haffar, executive]

If I can add also, Fernando. I hope I'm not interrupting, Fernando, may I add?

[Fernando Olivieri, executive]

No. Go ahead.

[Maher Al-Haffar, executive]

Yes. I think also, Alan, I think what we need to also take into consideration here over the medium term, meaning into '22 and '23, what's happening on the infrastructure side.

I mean as you've probably been following in the U.S., we are coming awfully close now to an agreement on an infrastructure bill and also an approval of the existing FAST Act. I mean if you take a look at what happened literally in the last 48 hours, we had a confluence of agreement between Republicans and Democrats. You have -- even though last night there was a procedural vote, it was a very important milestone. You have 17 Republicans, including McConnell, kind of voting to take the bill forward within the Senate. And that's going to be a $550 billion bill.

Now a lot of people may say that, that bill is a smaller number than what Democrats wanted to do. But in reality, it's pretty much the same amount of what we consider to be cement-intensive projects. And no matter how you skin this cat, I mean $550 billion on top of the current FAST Act, which is probably going to be extended by 5 years, that's what's being proposed by the Biden proposal and the bill that has been put forward, is going to translate somewhere between 20% to 30% higher demand for cement in the U.S.

And we all know that there are some very important environmental -- I don't want to call it prohibitions, but certainly environmental, let's say, pressures and headwinds in adding new capacity. So imports are going to play -- are going to continue to play an important role. But I, as Fernando said, I think because of what's happening on logistics, I think in reality that pricing is going to have to go up to increase, to make those imports be at par with domestically produced product in terms of pricing. So I hope that answers the question, Alan.

[Lucy Rodriguez, executive]

Thank you, Maher. And the next question comes from Anne Milne from Bank of America.

[Anne Milne, analyst]

It took me a long time to go through all the quarters to see the last time you had EBITDA of over $800 million, not just even in the second quarter, so congratulations.

I'm going to take the last question a little bit further, this whole question of capacity utilization. Clearly, you guys are going -- are bringing older kilns back online and looking to expand capacity in a number of markets. I've heard from other players in the U.S. and other regions that they are looking to do the same. Maybe you could just tell us in some of your key markets, how much additional capacity you think that could be brought online in the next, just say, 24 months. Obviously, to build a new plant would take much longer, and given the environmental issues, that might take even longer than it used to. And then maybe you could just comment in that whole context on Egypt and what the government is going to do, and how long you think that might take till you have a positive impact on, sort of, let's say, reduced supply in the market in Egypt.

[Fernando Olivieri, executive]

Thanks, Anne. I think on debottlenecking, pass it in the U.S., we are already developing a few projects in some plants. We still don't have, let's say, a final number. We are right now studying and making engineering for some of those debottleneckings. And -- but you can expect -- let's say, for the time being, just to give an order of magnitude, it could be around 300,000 tons. Again, this is related to debottlenecking. At the same time, as you can imagine, we are looking for opportunities of expanding capacity, not just debottlenecking. But right now, we don't have a concrete info that we can share with you. We might be able to do that in the near future.

Regarding Egypt, well, you already know the news. What the government is doing is what we've been supporting an idea that we've been supporting, which is finding a way for the industry to have, let's say, a reasonable context. And after a very large cement plant was built by the government.

So what is going on now is rationalizing that on a temporary basis. It's 1 year, rationalizing that capacity, so the basic economics of the industry can be reasonable for investors. So we do expect that during this year, prices should be improving, not only because of that but also because we do expect the market to recover to growth. So it's 2 reasons why we should expect better pricing in Egypt in the next few months.

[Anne Milne, analyst]

Fernando, do you know how much they're going to reduce their capacity by to help out the whole overall market at, let's say, that large plant?

[Fernando Olivieri, executive]

I don't have the number with me. What I know is it's a sizable deduction. It might be slightly different on a per-player basis, I don't have the numbers with me to share it with you.

[Anne Milne, analyst]

Okay. And just are you aware of any other, outside of CEMEX, any other new cement plants that are being commissioned at the moment?

[Fernando Olivieri, executive]

Where, in Egypt or in the U.S.?

[Anne Milne, analyst]

No, just in your footprint globally.

[Fernando Olivieri, executive]

Well, there were some grinding mill cement and grinding mills in Yucatan, Mexico. I'm trying to remember if there is any other [indiscernible], I don't remember any new capacity, not in Latin America. No, I don't recall any specific expansion project. I can imagine that because of the context we just described before, everybody is thinking on funding capacity.

[Anne Milne, analyst]

Yes, I'm sure they're thinking about it with trepidation, do we do it or not?

[Lucy Rodriguez, executive]

We have time for one last question. Ben Theurer from Barclays, I think you're on deck.

[Benjamin Theurer, analyst]

Yes. Congrats on the results. I want to close my questions with one of your favorite topics from the past, Fernando, a little bit about the digital innovation and what you've been doing over the last couple of years, be it on the commercial strategy with CEMEX Go. Now you're laying out a couple of other things around business services, manufacturing.

So the question really is, within your global footprint, what would you say is a reasonable target where you can get and actually maximize and optimize your operations, ultimately driving margin expansion through all the digital innovation you've been put in place, where you stand today, and how far do you still have to go to reach that target?

[Fernando Olivieri, executive]

Yes, it's a very interesting topic. Let me first describe what our current status in our digital strategy, and then I will go through what this is that we can expect moving forward.

Three domains. The first one is digitizing and developing a superior customer experience with digital -- with a digital platform, and that's what we basically call CEMEX Go. And as you know, CEMEX Go allows our customers and ourselves to have a seamless process to relate, to transact and to receive and to pay and to hit the whole spectrum of the commercial relation. And by now and with one section, this platform is available globally for all our customers.

We are very pleased with the acceptance of the platform. About 90% of our recurring customers do use it as the way for them to get information, to get quotations, to buy, to pay, to receive, everything. So we are very pleased with that platform.

What's next for that platform? Think on the platform as a minimum viable product. The platform nowadays is different to what it was 2 years ago, and 2 years from now is going to be different to where it is today. We are adding functionalities. The last one -- one of the last functionalities is digital confirmation in ready-mix, meaning now our customers can get into CEMEX Go and pick the slot at which they want the product, they will receive an answer and voila, transaction is done without any additional intervention. For our customers, we understand that's a very valuable functionality that they will start having durably very, very soon.

The other features or the other ideas we have with this platform is that through that platform, but adding other pieces, we want to participate in the business models that are nowadays being developed in the construction space because of digital technologies being applied to them. So we have different ways to relate to other platforms through APIs we have developed at the CEMEX development center. I mean this is a way for us to facilitate customers to connect with us through API, not necessarily to the platform itself, and make their life much simpler by them using their own systems. That applies mainly to the segment of very large customers. So we want to expand the scope of our platform into the construction space, and that's what we have been doing lately.

The other domain is how to apply digital technologies, a company with other type of practices in the way we manage the company. And you might remember that some time ago, with [indiscernible], what we called then the global service center for CEMEX, outsourcing most of our back-office activities, and the ones that we kept internally trying to concentrate, standardize and to automate as much as possible.

Now we are taking that concept into the, let's say, the 4.0 type of idea. And we are in the process of deploying a step forward the concept with what we are calling now Working Smarter, which is part of the initiatives of Operation Resilience. And so that concept, we are going to go deeper into outsourcing. We're going to go deeper into globalizing back-office solutions, standardizing. And through all those efforts covering all the back office and some portions of the service delivery model, we do expect to be even more efficient with customers, more efficient with our resources and saving about $100 million starting next year. But that's a domain on how we manage the company.

When measuring at OpEx to sales, last quarter, we just got 7.6%, which is our lower figure ever, meaning we do continue finding ways to reduce the investment we do while managing the company.

And the third element is operations or production. And on that regard, we have been applying some digital solutions in, say, energy in the case of cement and others, in the case of aggregates, to automate and facilitate the work, a query works and how our customers are served to queries.

Now what we can expect for the future is that these technologies will continue invading, let's put it that way, the way we work, the way we serve, the way we manage, the way we operate. And that should be translated into efficiencies and should be translated, in the case of our customers, into a superior customer experience. I think the best feedback we have received from customers is that, again, about 90% of recurring customers are using it, meaning that's the way for them to relate to CEMEX. Thank you.

[Lucy Rodriguez, executive]

Well, we appreciate you joining us today for our second quarter webcast and conference call. If you have any additional questions, as always, please feel free to reach out to the Investor Relations team, and we look forward to seeing you again on the third quarter results webcast. Many thanks.

[Operator]

Thank you for participating in today's conference. This concludes the presentation, and you may now disconnect, and have a great day.