Cemex SAB de CV

NYSE:CX

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the CEMEX Fourth Quarter 2021 Conference Call and Webcast. My name is Chuck, and I'll be your operator for today. [Operator Instructions] And now I would like to turn the conference over to Ms. Lucy Rodriguez, Chief Communications Officer. Please proceed.

[Lucy Rodriguez, executive]

Good morning. Thank you for joining us today on our Fourth 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?

[Fernando Olivieri, executive]

Thanks, Lucy, and good day to everyone. I'm quite proud of 2021 results, and I want to offer my congratulations and thanks to the men and women at CEMEX who make this happen any day.

First and most importantly, it's another year of COVID. We were able to keep our employees safe on our operations margin. This, in and on itself, is a huge success. As we also achieved an exceptional financial and strategic performance, during the year, we delivered 18% growth in EBITDA, the highest in a decade. Inflation, of course, [indiscernible] we probably had in June. We responded quickly within the constraints of the industry pricing paradigm to pass-through cost inflation in our business. While we achieved admirable cement pricing results with the best annual growth since 2015, it still was not sufficient to compensate for rising energy and transportation costs.

Traditionally, the most significant price action in our industry takes place in January and April in most markets around the world. While we expect that this year's annual increases will be important in our goal to recover margins, we will continue throughout the year to adjust our pricing strategy to reflect cost pressure. Adjusting for asset sales, we reached an 8% return of capital for the year, the highest level since 2007. Adjusting for goodwill the return on capital would exceed 40%.

Full year EBITDA margins improved 0.8 percentage points. This achievement comes despite inflation and margin headwinds from product mix as well as rightly inputs. Full year margins were just shy of our operation resilience goal of 20%. In terms of free cash flow, we generated more than $1.1 billion, a 15% increase from 2020, money that we used to deliver as well as fund our growth strategy. The 11% increase in sales was driven by strong growth in volumes and prices.

Consolidated volumes for cement, ready-mix and aggregates grew mid-single digits with all regions contributing to growth. The 6% growth in cement volumes is the highest since 2016. The model increase was complemented by strong pricing with consolidated cement prices rising 5%, while point-to-point pricing from December to December rose 10% is to share a strong runway for pricing momentum in 2022.

Importantly, all regions participated in the pricing gain. Full year EBITDA increased 18%, the largest increase in more than a decade driven by pricing or volume. Urbanization Solutions also contributed with EBITDA rising 22%. We expect this growth in Urbanization Solutions to continue in 2022 as our growth investment portfolio runs up. While the contribution of pricing is quite significant in the full year waterfall, it does not fully offset the rise in variable cost largely in energy, freight and inputs. And of course, the annual results will not show the rapid increase in cost we experienced in the second half.

The cost pressures were felt by primarily in our cement operations while ready-mix and aggregates margins were stable to improving. Our pricing strategy from 2021 got off to a strong start with our annual price increases in the first half calibrated to our expectations for input cost inflation in the year. Margins expanded 2.5 percentage points in the first half.

In cement, majority of pricing actions occurred in the period from January to April prior to the start of the construction season. Around midyear, we began to experience a significant runoff in cost, primarily energy and inputs that were not contemplated in our pricing strategy. While we moved quickly to adjust this year with additional [indiscernible] price increases, it was not sufficient to get paid with costs.

Consolidated margins declined 0.8 percentage points in the second half, While ready-mix and aggregate margins held up well, cement margins were impacted. And while we were quite successful in the year with cement prices, it was not sufficient. As you can see on this slide, Cement prices rose 5% in 2021, the best pricing we have seen since 2015. And prices are up 10% point-to-point from December to December.

Today, we are very prepared to manage the inflationary change. We have reflected the cost pressures in our customary 2022 price announcements scheduled for January and April. We are also assuming that inflation is not transitory, and we are prepared to respond quickly to changes in the environment. Our goal, of course, is to recover margins in line with our operation resilience targets.

2021 was a year of great progress in our strategic priorities. And in 2021, we continue to strengthen our capital structure with perhaps the most visible metric mean leverage dropping below 3x for the first time in years. You should expect that the leveraging will continue with the goal of an investment-grade rating insight. We advanced materially in our operations resilience goal to optimize and rebalance our portfolio for growth. We invested heavily in our growth portfolio 2021, spending [ $380 ] million, the most in the last decade and continue to reposition our business towards developed markets. And this was in spite of supply chain issues that delayed many growth projects.

For 2022, we plan to accelerate the pace with an expected $600 million investment in strategic assets. This includes execution on our pipeline of close to $900 million in approved bolt-on market enhancement projects are mainly in developed markets, as well as legacy cement capacity additions of 4.3 million metric tons. Importantly, our growth strategy is paying off resulting in $100 million of incremental EBITDA in 2021 and an estimated $100 million for 2022.

Our growth strategy also entails [ repositioning ] the existing portfolio towards developed markets. To that end, we announced in fourth quarter the pending sale of our operations in Costa Rica and El Salvador for [ $375 ] million. We expect this transaction to close in the first half and proceeds will support our growth investments in developed markets as well as deleveraging.

We will continue exploring investment opportunities in our emerging market assets and remain committed to our goal of increasing the weight of developed market within our portfolio. But 2021 achievements were not just financial. We accelerated our climate action ambition by committing to the most aggressive 2030 goals in our industry and developed a detailed plant by plant growth mark to get us there. These targets were validated by SBTi under the well below 2-degree scenario, currently most ambitious pathway for the industry. And we signed the Business Ambition for 1.5 commitment, stating that we will align our strategies once there is a pathway available for our industry. And most importantly, we made significant progress against our climate goals in the third year.

Carbon emissions declined 4.4 percentage points, the largest annual decline we have achieved. The goal of our future action strategy is, of course, to provide green products and services for the customers so that the built world of the future is more sustainable and [indiscernible]. As of March 2021, we have successfully rolled out net-zero low-carbon concrete and low-carbon cement under the best drop label in our market. Our Vertua net zero low-carbon concrete, the first in the industry, allows our clients to customize the carbon footprint to their particular need.

These products complement our existing family of sustainable products and solutions, the time the meet the needs of a green and circular economy, reducing energy consumption, improving insulation, enhancing the capacity structures to withstand climatory factors and, of course, reducing carbon emissions. We have seen very favorable customer activity to those products with Vertua cement volumes growing almost 50% since its launch in March.

Finally with Danish modular 3D printing company COBOD, we successfully launched D.fab, a ready-mix solution for 3D printing that's costs 1/5 of the cost of specialized motors traditionally used in 3D printing. This construction modality optimizing the use of concrete minimizes the transportation cost and weight and make use of readily available local resources. This product has been successfully used in 2 residential projects, including the world's largest 3D printed building.

With our enhanced decarbonization road map in place, we'll reduced our current emissions by 4.4% to a historic low for CEMEX. And almost 2 percentage point decline in clinker factor coupled with a 4 percentage point increase in alternative fuel usage drove the carbon reduction. Our clinker factor performance is attributable to the introduction of lifestyle cement and other cementitious materials into our processes.

In U.S., we have introduced limestone cement in 5 of our 8 plants, and we are retrofitting our plants to support additional limestone cement utilization in the future. Our decarbonization experienced in 2021 supports our strong belief that climate action is a tremendous opportunity and that the cement industry can shine in a circular economy.

As I have said before, we have the knowledge and tools in place today to achieve our 2030 goal. The technological challenge lies on the period beyond 2030 to reach net zero. There are many possible decarbonization options that are there. We view this decade as the [indiscernible] scale developing technologies, partnered with one class expert, identified the most promising and put in place the infrastructure necessary for deployment.

Carbon capture in many forms offers the most encouraging prospects to get to net zero. I'm excited about what I see in terms of our innovation pipeline. We are engaged in 7 carbon capture industrial pilots, which set various methodologies. Three of the projects currently have cofinancing in place from the EU and the U.S. Department of Energy. With our ongoing Synhelion partnership, we announced last week that for the first time, we have produced clinker using solar energy. Historically, solar has not been able to reach a high enough temperature to substitute fossil fuels in the game. We will continue to build this breakthrough at scale.

For the first ever, we are introducing electric vehicles into our ready-mix fleet in 3 countries. This work is closely aligned to our founding membership in the First Mover Coalition where we have committed to support breakthrough technology in the development of electric heavy-duty truck.

As the largest ready-mix cement in the western world, our ability to transition our fleet to electric would be a high event. We continue to lead the industry in hydrogen technology using hydrogen injection to augment alternative fuel usage in [indiscernible]. We are currently using hydrogen injection throughout Europe and are rolling it out globally. Our recent announced partnership with HiiROC on the new hydrogen injection technology will further accelerate this strategy, allowing us to increase hydrogen usage fivefold.

We are also working with ACCIONA and Energas on the green hydrogen project in Majorca, Spain. We believe the experience and knowledge we gained in this project will be instrumental in eventually filling a cement plant with hydrogen. These are just a few of the many technologies we are looking at to meet our net zero goal.

The world is rapidly outgrowing the brand's national response reserves. the world map embrace , a truly circular economy and the cement industry play an important role in this. Our industry can provide a valuable service to communities or one society's most intractable challenge, waste. Through our use of alternative fuels and raw materials, CEMEX absorb 50x the waste that we generate. The ability of cement plants to use society waste as alternative fuel reduce fossil fuel consumption as well as the amount of waste deposited in landfills when it produces methane, a greenhouse gas that is 80x more harmful to the environment than CO2.

In 2021, alternative fuels constituted 29% of our fuel mix, a record substitution rate. Europe, of course, leads the way with approximately 60% of our fuel mix in alternatives. Outside of Europe, we are moving quickly to boost its usage. Our Mexican operation is still facing this effort with a 9% volume increase in alternative fuels in 2021. This trend is possible due to our growing sustainable waste management business in Mexico ProAmbiente.

During 2021, our Mexican operation consumed approximately 13% of the total waste generated in Mexico City. We continue to expand this business in fourth quarter, announced the acquisition of a sustainable waste management facility in Querétaro. I would like to emphasize that our transition for a no-carbon economy is not only good for the world, but it's also profitable for CEMEX. While there are a number of leverage I would like to focus on our alternative fuel strategy.

In 2021, alternative fuels accounted from 29% of our fuel mix and produced ratings of $200 million versus fossil fuel. These savings were achieved through the significant price differential between fossil fuels and alternatives.

This innovation is central to all that we do at CEMEX, including our commercial outreach, our operations, as well as our administrative management. On the commercial side, CEMEX Go is the first and only global digital platform in the industry that covers the full customer journey. 61% of our sales are now processed through CEMEX Go. We are continuously innovating with the version responding to customer's feedback. And when it wasn't built for the pandemic, it's been an important competitive advantage for us over the last few years.

We use advanced analytics to predict behavior and improve decision-making across our supply chain. CEMEX Go and service is a key factor in our security, the highest cement promoter score ever for 2 consecutive years. On the operations side, machine learning is helping us along our cement plants more effectively and we use to optimize energy efficiency, fuel mix, carbon production and scheduled maintenance in our team. Our operational experience, coupled with our open innovation platform, have allowed us to solve our pain points in the industry.

To deal with the complexities of the revenue business, we have developed a proprietary cloud-based ready-mix management system that is now being commercialized externally under the [indiscernible] name. This solution gives independent ready-mixes the capacity to integrate end-to-end commercial and order fulfillment processes. In our administrative functions, we generate [indiscernible] digital partners and expertise to optimize our processes. Maher will speak in more detail on this.

To our open innovation platform, CEMEX Ventures and [indiscernible], we are exploring disruptive digital technologies in the construction space. Today, CEMEX Ventures have invested in 16 start-ups, including [indiscernible], which provides last-minute last-mile delivery of building materials and voice control and just site delivery coordination platform. And now back to you, Lucy.

[Lucy Rodriguez, executive]

Thank you, Fernando. Our U.S. operations experienced strong demand dynamics throughout the year across all products with most of our markets sold out. Sales grew 9%, driven by volumes and pricing. Cement, ready-mix and aggregate volumes were up 6%, 8% and 1%, respectively, with the residential sector as the main engine of growth.

Despite difficult prior year comps, cement volumes in the fourth quarter were flat with double-digit growth in Florida and Arizona, offset by winter weather in California. With the rapid rise in input costs in May, we moved aggressively to address cost pressures. For the first time in 15 years, we introduced a successful second national pricing increase. As a result, fourth quarter sequential cement prices rose 1%, while year-over-year prices increased 6%. Our efforts to align price with cost inflation continue in 2022 with double-digit cement pricing announcements scheduled for the first half.

January price increases took effect in Florida, Southern California and Colorado, regions which represent approximately 40% of our cement volumes. Given the continued cost pressure, we have advised customers that they should expect a second pricing increase in the year. Energy cost, primarily fuels, rose more than 20% in the second half, while imports increased almost 30% year-over-year. As a result, EBITDA margin declined 1.2 percentage points in 2021.

To offset some of the rising import costs pressure in 2022, we will take full advantage of imports from our Mexican operations, a key competitive strength. As we look forward, we remain optimistic. We expect a low single-digit growth in volumes for cement, ready-mix and aggregate, driven by the residential sector and the recovery in industrial and commercial. Despite rising interest rates, we are confident we will continue to see residential growth driven by backlog in housing demand.

Finally, for infrastructure, we expect the new Biden Infrastructure Build to yield incremental demand for our products towards the end of 2022. 2021 was a great year in Mexico with sales rising 17% to record annual sales in peso terms. The industry is operating at a high capacity utilization rate with no new capacity additions apart from our own. Top line growth was driven by high single-digit volume growth and mid- to high pricing growth for all of our products. In 2021, we saw double-digit bag cement growth during the first half, supported by government social programs and record level remittances slow in the second half as the comps became more difficult and we move out beyond the midterm elections.

As the formal economy picked up steam, bulk cement and ready-mix volumes benefited from higher formal housing and industrial activity. Industrial activity was supported by growth in manufacturing and warehouses, onshoring as well as the build-out of logistics networks. In fourth quarter, cement volumes declined largely due to a difficult comparison base with fourth quarter 2020 volumes, the highest since 2014, driven by pandemic housing improvements and government social programs. While plan prices grew 9% point-to-point in Mexico in 2021, this increase was not sufficient to compensate for rapidly escalating cost inflation in the second half driven largely by energy.

While full year margins expanded 0.5 percentage points, we saw a deterioration in margins in the second half with fourth quarter margin declining 3.2 percentage points. The compensate for input cost inflation, we announced mid-teen percentage price increases for our products effective January 1.

In addition, our climate action strategy is also helping us to respond to cost pressures in Mexico. In fourth quarter 2021, our alternative fuel consumption in Mexico reached 28%. Regarding 2022, we expect our cement volumes to be flat or decline low single digit, while ready-mix and aggregates increase between 2% and 5%. Our cement volume guidance is driven by a difficult comparison base in bagged cement in 2021 due to pre-electoral spending and stay-at-home renovations. We expect bagged cement growth in Mexico to adjust to a more normalized trend as formal sector demand accelerates. We will take advantage of expected lower cement volume growth to support the needs of our U.S. business. With high capacity utilization and the entire industry facing similar cost challenges, we are confident that we should be able to recover input cost inflation.

In EMEA, top line annual growth of 6% was driven by higher prices and volumes in most markets. European volumes were up mid-single digits across our core products, led by increasing infrastructure and residential activities in the U.K., Poland, France and Spain. We achieved record cement volumes in Europe, led by double-digit growth in the U.K. with most markets above pre-COVID levels. A second round of price increases was implemented in the second half of the year to respond to the sudden run-up in input cost inflation. As a result, our European cement prices in local currency terms rose 1% sequentially and were up 4% for the year.

We've already announced price increases for January and April in Europe, which we expect will offset inflationary pressures from energy and raw materials. With our favorable carbon credit position, we have not been affected by the rapid run-up in carding cost in 2021. Finally, in Europe, our urbanization solutions business was an important driver of EBITDA growth. EBITDA from the EMEA region rose 4% in 2021 with a slight decline in EBITDA margin.

In the Philippines, cement volumes were up 7% with all sectors growing. Volumes were heavily impacted in fourth quarter by tightening of debt, which caused significant disruptions in the central part of the country. However, we do expect the construction activity to begin in 2022. Pricing has been improving in the Philippines with 3 consecutive quarters of growth. For more information, please see our CHP quarterly earnings, which will be available this evening.

In Israel, construction activity was strong in 2021, with average daily sales volumes for ready-mix growing double digits and with low single-digit growth for aggregates.

Finally, in Egypt. Since the government announced an industry rationalization plan, we have seen an important improvement in pricing. For 2022, we are expecting volume growth across our EMEA region, supported by fiscal stimulus and the renovation wave in Europe, as well as strong fundamentals in most markets.

2021 was a very strong year for our South Central America and the Caribbean operations. Net sales rose 18% on a like-to-like basis, the highest annual growth since 2012. While the region did benefit from an easy comp due to COVID lockdowns in 2020, 2021 cement volumes stood 13% and surpassed pre-pandemic levels. This double-digit growth occurred in spite of sporadic pandemic lockdowns in some markets as well as social protest in Colombia in the second quarter. With volume breaks and high capacity utilization, the region experienced strong pricing momentum with cement prices up 8% in the fourth quarter. As a result of tight cost management control, EBITDA grew 25%, while EBITDA margin expanded approximately 2 percentage points.

Volumes in fourth quarter declined slightly, primarily due to Colombia as a result of our pricing strategy. With continuous cost pressures, we announced price increases in cement for the beginning of the year of approximately mid-single digits to the region. In Colombia, our full year cement volumes grew 8%, supported by housing, self-construction and infrastructure. The outlook for the country in 2022 remains positive with a healthy self-construction sector, 4G highway projects, as well as the rollout of new infrastructure programs.

In the Dominican Republic, we saw strong demand growth in 2021 with cement volumes up 22%. Due to unexpected maintenance in the fourth quarter, our volumes declined 5%. Demand is supported by the self-construction sector and the reactivation of tourism projects. Going forward, we expect the self-construction sector to continue to benefit from a high level of remittances while the formal sector maintains its recovery trajectory. We believe that with higher global shipping costs, our strong logistics network, coupled with our planned cement capacity additions into a sold-out region will be an important competitive advantage.

I invite you to review CLH's quarterly results, which were also published today. So now I will pass the call to Maher to review our financial development.

[Maher Al-Haffar, executive]

Thank you, Lucy, and good day, everyone. As you heard from Fernando, our 2021 results were quite strong with sales and EBITDA growing the most in a decade and generating around $1 billion in free cash flow for the second year in a row.

On the debt management and capital structure side, our results last year were also quite strong and transformational for us, a year of many records and first. We issued the lowest cost U.S. dollar bond in our history. We refinanced our syndicated bank facility at a cost never achieved before, slightly above 1%, and with investment-grade style structure. The first in over a decade. We also introduced a sustainability-linked financing framework, which is unrivaled in our industry and includes 3 key performance indicators and a second-party opinion from the leading provider.

We paid or refinanced over $7.5 billion in debt and applied free cash flow and asset sales proceeds to reduce debt. During the year, our consolidated net debt as measured under our credit agreement declined by $2.3 billion, and we reduced interest expense by $141 million, representing savings of 20% versus the prior year. We also reduced our leverage ratio by the most ever, reaching 2.73x, a reduction of 1.4x and significantly lengthened our average life of debt to 6.2 years, the highest in more than a decade.

All these achievements were noted by our rating agencies. During the year, Fitch upgraded our credit rating by 1 notch to BB, and both Fitch and S&P raised their outlook to positive. In December, we became a founding member of the recently created United Nations Global Compact CFO Taskforce for the sustainable development goals, which aims, among other things, to attract more capital towards sustainable development. In line with the task force's goal, we aim to have at least 50% of our debt stack sustainability linked by 2025.

We approached 2022 with a very strong financial position. We do not have any refinancing needs for the next 3 years. We have minimal exposure to interest rates with 90% of our debt at a fixed rate, a very favorable position in an environment of rising rates. Our liquidity position today is stronger than ever. We have a strong cash position with a record of $1.75 billion committed revolving credit facility that allows us to comfortably navigate through our business cycle.

On our risk management side, we are adequately positioned to mitigate risks associated with currency fluctuations in most of our non-U.S. dollar markets. We have great debt in various currencies when pricing is attractive, such as the euro, Mexican peso, Philippine peso and the Colombian peso, among others, which translated into a positive $140 million translation effect on our debt this year.

In addition, we have an ongoing Mexican peso hedging strategy that effectively lowered the volatility of the exchange rate at which we convert pesos to dollars for tenders of up to 18 months.

This year, our operations generated $1.1 billion in free cash flow, an increase of $143 million versus the year before. This growth in free cash flow was driven primarily by higher EBITDA and savings on financial expenses. Investment in working capital was driven primarily by the 14% increase in sales this year. However, average working capital days reached minus 15 days, 1 day better than last year. We aim to continue improving our discipline in working capital management. For example, on the collections front, we are working on reducing the risk profile of our receivables by partnering with third parties that are using artificial intelligence and cognitive analytics to improve the sales to collection process. As a result, the credit quality and the turnover efficiency of our receivables are at record levels.

Finally, for strategic CapEx, we invested $380 million in highly accretive growth projects. We are currently undertaking the biggest and most comprehensive adoption of digital technologies ever to transform the way business services are provided at CEMEX. We're calling it Working Smarter. Working Smarter will fundamentally change the current shared services model into a fully digital, virtual and agile way of delivering business management services across our company and will create a unique competitive advantage.

With advanced platforms, analytics and automation services, we will deliver digital workplace solutions and collaboration frameworks to enhance the employee and workforce experience. Working Smarter will leverage remote work and virtual centers of excellence to allow business services to be provided seamlessly with the best talent anywhere in the world.

To accelerate innovation, we have signed separate multiyear contracts that, in the aggregate, are totaling $500 million with 6 leading service providers in the field of finance and accounting, information technology and human resources, replacing current expenditures with new supplier services at an optimized cost, effectively continuing to reduce our operating expenses. In addition, having access to our partners' collective research and development capabilities ensures that Working Smarter will remain at the forefront of technology and innovation for years to come.

Beyond all of these benefits I just discussed, we expect to capture accumulated savings up to $100 million per year once Working Smarter is fully implemented and achieve a return on investment of about 4x with short payback periods. Of course, as we go through the implementation of these various initiatives, we will fine-tune the timing, scope and magnitude of these savings. For more details about this initiative, I invite you to take a look at the press release we issued earlier this week.

And now back to you, Fernando.

[Fernando Olivieri, executive]

In 2022, we expect EBITDA growth of mid-single digits. This growth will be driven primarily by pricing with flat to low single-digit volume increases. Cost headwinds will continue to be with us in the first half of the year due to more difficult comps as we only began to experience inflationary pressures in the third quarter of 2021, but we expect these pressures to ease on a year-over-year basis in the back half. We expect energy to remain the largest cost headwind, and we estimate that energy for the production of cement will increase by 19% on a per ton of cement [indiscernible] basis. We expect CapEx of $1.3 billion with $600 million growing to strategic [indiscernible]

With rising sales, we anticipate an investment in working capital of $150 million. Cash taxes are expected to be $250 million. Based on our current debt portfolio, we expect cost of debt to decline by $10 million. Always, we will continue to look for market windows for financing opportunities. Overall, in 2022, we anticipate a favorable environment with more moderate volume growth in most markets and strong pricing dynamics that reflect high capacity [ utilization ] and input cost iteration.

Finally, we aim to recover margins in line with our operational resilience goal with our pricing strategy. 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 made 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 refers to prices for all products. And now we will be happy to take your questions. In the interest of time and to give other people an opportunity to participate, we kindly ask that you limit yourself to one question. [Operator Instructions] And the first question comes from Vanessa Quiroga from Credit Suisse.

[Vanessa Quiroga, analyst]

My question is the following. So considering your indications of double-digit pricing growth in key markets and the investments contributing to $100 million EBITDA, really the guidance of mid-single digit EBITDA growth is low in my view, even against the energy cost increase that you are indicating of 19%. So I'm wondering if there's some other factor affecting margins? I mean, is something happening with the PEMEX cycle volumes or are you expecting to having to import clinker at much higher cost because, yes, the EBITDA guidance is low given the present indication. .

[Maher Al-Haffar, executive]

Fernando, would you like me to take a stab at that?

[Fernando Olivieri, executive]

Please go ahead.

[Maher Al-Haffar, executive]

Okay. Vanessa, I think that you put your finger on the pulse there, I think that certainly, we're coming into 2022 assuming and expecting a lot of volatility, particularly on the cost side. And of course, we are planning for the inflation that we've seen to be fairly structural for the foreseeable future. And I'm sure you saw the CPI numbers this morning that really threw a curveball to the market. So we are being cautious. I mean we are expecting things to be volatile. It's just a reminder for everybody. If we take the energy price increases that we saw in the fourth quarter and hold them flat to the whole year, that would give us about a 15% increase. So we're guiding 19%.

We could be -- I don't know, who knows, we could be better, we could be worse. Of course, we're accelerating our efforts to switch to alternative fuels and lesser costly and more effective fuels. And so that's one big challenge. You mentioned the possibility of more important cement clinker. And the answer is yes. I mean, we are expecting growth in some markets that are sold out, and we do expect some growth in that. And of course, the costs are higher because of transportation and so forth and so on. Now it's very important that going into this year, we're expecting a bigger percentage of the amount of cement that we trade to be coming out of our own facilities, in particular, in Mexico, which on a consolidated basis should be more beneficial, right?

So I think that bottom line on the -- you heard our guidance on the volume side, we're expecting flattish volumes in cement, low single digits in aggregate, and low to mid-single digits in -- sorry, low to mid-single digits in aggregates and low single digit in ready-mix. Now very importantly is pricing. This is a year that is about pricing. That is very important. And we are aiming to reach our operational resilience margins of 20% and also recovering the cost gap from 2021. So coming into the year, of course, we have a little bit of a tailwind. If we take a look at the end-to-end -- sorry, December to December, '20 to '21 point-to-point pricing increase for the year, it was 10% and versus the year-over-year price increase of 5%.

So we think that we're coming in with a good tailwind. And as you said, we've definitely made announcements in pricing of double digits in, I would say, most of our markets for January and April, and we're getting good traction on that. Now additionally, we are quite hopeful on the results from the growth portfolio. And as Fernando said, we are expecting about $100 million from that. Now the other thing that is also important that we remarked on -- I mean, I talked about it a little bit is Working Smarter. I mean that has actually started paying off in '21, and we're expecting it to continue to deliver in terms of cost reduction. So bottom line, I would say that we're being cautious, commensurate with the expected volatility and high inflation going into '22, I think to that.

[Fernando Olivieri, executive]

No, I think it is a very complete explanation, Maher.

[Lucy Rodriguez, executive]

I might just add 1 point, and Vanessa, I think that you're well aware of this, but we saw inflation in the spike in June. So what that means is that in the first half, we're going to -- because we had very low cost inflation in the first half of last year, the first half will be a very difficult comp and then things should normalize towards the back of the year.

And the next question calls from -- comes from the web, and it's Paul Roger from Exane BNP. "On the 4% reduction on CO2 on a per ton of cement produced basis, at this rate, given what you accomplished in 2021, you would easily achieve the 2030 target. How conservative is the 475-kilo goal? And could you consider revising it?"

[Fernando Olivieri, executive]

Okay. Well, let me -- let me start by saying that last year was for kind of a special year regarding our transition towards a low carbon economy. So one that is this 4.4 percentage points as reduction will be [indiscernible] every year. But anyhow, I think what we are showing with last year's results and then I will briefly explain what is that happened last year. I think we are showing that our industry is capable of its transition, effective and fast transition towards a low carbon economy while increasing profitability of the industry. .

Now what happened last year, as you know, we started adjusting our ambition of aligned to the most accepted scenarios, and we adjusted our objective, we broke our 2030 objectives to 2025, and we include new ones. But what we did at the same time, starting in [ 2020 ], developed a very comprehensive road map, a CO2 reduction road map per cement plant. And for the first time, it was executed last year all over the 12 months. So that tool or that process did allow us to assure that the intent, the ambition, it could be executed in an almost in an impeccable manner. So we continue the same idea, meaning of the execution on this reduction. We are very positive, but we will continue making the reductions needed to compose our objective. And any, it's still not too close, but yes, it seems like we might be able to achieve those targets before that day.

Now we continue monitoring and observing how this movement or process towards a low carbon economy evolves. My expectations is that through [indiscernible] it will be more stringent demands from society from different stakeholders, investors, customers, employees, everybody. And we will continue adjusting our target. So [indiscernible] for the 2021 results, very positive that we will continue with reductions. Again, I cannot promise [ 1.4 ] every year, but we now think we have really -- whatever we say is under control is under control to assure that our objectives, we've been met. And again, it's just a simple clarification because so many negative interpretations regarding our industry can be our possibility of capability of transition to a low-carbon economy.

And you know that the potential reduction in margins, the potential increases of CapEx with our returns, I think that for time, we will be the most that's the old wisdom and that is the new wisdom, which calls for a cement industry, in a circular and green economy, serving better society and being as profitable or even more profitable than it has been.

[Lucy Rodriguez, executive]

Thank you, Fernando. And the next question comes from Carlos Peyrelongue from Bank of America.

[Carlos Peyrelongue, analyst]

My question is -- my question is related to pricing. If you could comment a little bit on the traction you've gotten so far. You've announced important price increases in most of your geographies. So it would be interesting to see what type of traction you're getting. I understand, at least in Mexico, the traction is very solid. So it would be great to hear your comments on this issue of traction.

[Fernando Olivieri, executive]

Let me make a general comment, and then I will let Maher and Lucy to complement on some more specific data. I think it is clear that what happened last year is that we started with a fine and started and executed our pricing strategy considering a much lower inflation, meaning normally in the last quarter of the year, we plan for our strategy for the first 4 months of the next year, and that's what we did. Inflation started really going up materially in June, July more or less. So most of our pricing strategy it was already executed. So what we did [indiscernible] checking, monitoring, realizing and reacting with additional price increases in the second half when possible. And we have commented -- in the case of ready-mix and aggregates, we managed to maintain margins in the case of cement. But it was not the case. The problem that has been most affected. But when we saw that happening on top of trying to increase [indiscernible] for the second time during the year. [indiscernible] our price strategy for 2022, considering [indiscernible] high levels of inflation.

We had clarification that I think Lucy already made. We didn't buy or we didn't need -- take the idea of inflation in lower at some point in time of the year. We thought that it was not convenient based for our pricing strategy. So we start executing our pricing -- our 2022 pricing strategy already with the idea of recovering margins lost, not to lose more margins during 2022, and to achieve our operational resilience margin of 20%. Now what is it that we've seen lately, and I would like for either Maher or Lucy to comment, but we are very, very pleased and positive on what we have seen in January. It's just a month, but again, what we see is very positive. So if Lucy or Maher want to complement.

[Maher Al-Haffar, executive]

Yes. Thank you, Fernando. I'll jump in. I mean, Carlos, first, I mean, as Fernando said, I mean the -- we see some very good response for the January pricing increases. I mean they're going well. I think you saw in Mexico, in particular, I think yesterday, [indiscernible] came out announcing prices sequentially going up by a little bit over 8%. This is from December. And we're obviously an important part of the market. So without kind of saying what we did, I think you can pretty much extrapolate from that.

In the case of U.S. and Europe, which are more seasonally -- pricing increases are more seasonally affected, for those markets where we announced pricing increases for January. And for those customers, the prices sequentially were up in the mid-single digit to low double-digit area. So we've gotten some very good traction in those markets that -- and to those customers that have been affected. Now obviously, as you know, the U.S., because of seasonality, pricing -- most of the pricing happens in the spring in April. And so that is going to be impacting the biggest part of the -- of our sales there. In the U.S., the January pricing increase is affecting about 40% of our sales versus -- the April 1 will be more 60%. Europe is along the same line.

And in the SCAC region, we also got some very good traction versus the fourth quarter. We got around a mid-single digit increase. Now to summarize, I mean we're going into January with somewhere between 50% to 60% of our markets with pricing increases starting as of January. And we're expecting the balance to come in, in April in the spring. Now something very important that we need to mention here is that we have communicated with our customers in many of our markets, particularly markets that are sold out, that they should expect a second round of pricing increases in the summer and fall. And this is based on our expectations of the structural nature of inflation, which we expect to continue.

Now at the same time, as I said earlier, I mean, on the cost side, we're not sitting on our hands. We're taking actions to make sure that we're disciplined on the cost side. We're making sure that we're investing more and executing more to switch to alternative fuels, which are 60% less expensive on a [ giga ] calorie per ton basis than fossil fuels. So I think that we're pushing on all fronts, frankly, on the pricing side and on the cost side. And on the pricing side, it's looking good. So Lucy, I don't know if you want to add anything to that?

[Lucy Rodriguez, executive]

No, I think you did a great job covering that. That's it for me. Let's move on to the next question, Ben Theurer from Barclays.

[Benjamin Theurer, analyst]

Perfect. So to understand a little bit the dynamic in Mexico, what happened in the quarter. I suspect the margin under 30% is not precisely what you're looking for. Was it maybe shift driven, lower cement, more aggregates and ready-mix? And how do you think about the level of profitability looking into 2022 also given the guidance for likely declining cement volumes but growing ready-mix and aggregates. That would be my question.

[Fernando Olivieri, executive]

Well, if I may comment, then I think there is -- as you are suggesting, there is a mix effect in our ready-mix volumes and aggregate volumes are stable or growing when compared to cement that the declines of it is, to some extent, a mix effect. On margins, I think in Mexico, we have highest impact of energy costs when compared to other geographies. And for 2022, in Mexico or our team in Mexico is following exactly the same criteria that we define company. We [indiscernible] and to announce and to execute price increases at the level of what we are estimating as the most probable inflation inflation for the year. And that will be all.

They already started executing and as Maher mentioned, and using the data from [indiscernible] in the , sequential increase of cement prices in Mexico is 8%. And that is not [indiscernible] of our cost result. I think it will improve. I think Maher mentioned also our aim with our pricing strategy this year is to recover margin, achieve over 20% margin [indiscernible] we're close to it [indiscernible] margin established in our operational procedures [indiscernible] plan or initiative.

On top of what we have already executed -- executing, we will continue monitoring how inflation develops, and we will be increasing prices again from [indiscernible] basis to comply with this objective.

[Maher Al-Haffar, executive]

Fernando, can I maybe also add to Ben, just a couple of things. I mean, this is -- I mean, this is just to complement what Fernando was saying. I mean, I think it's very important also to take a look at the comparison, right? I mean the fourth quarter of 2020, cement volumes grew by like 17%. And within that, bagged cement grew like almost 22%. So -- and we had like the highest, I think, amount of growth since 2014, probably. And so the comparison is very tough. And you had really kind of in the quarter coming into people probably becoming more back to normalized life and focusing less on renovation and all of that, that kind of accelerated quite a bit. So that's what was kind of driving the specific quarter, I would say, more than anything else.

[Lucy Rodriguez, executive]

And the next question comes from Gordon Lee from BTG Pactual.

[Gordon Lee, analyst]

Just a quick question. At some point last year and admittedly, this was before the inflation spike. But at some point last year, you were contemplating the possibility of maybe introducing a dividend in 2022, which you decided not to do. So I was wondering what the thinking was behind that and what you would need to see to either implement an ordinary dividend policy or a more systematic share buyback given where the stock price is trading, given how much your balance sheet has improved and how, even in the face of the cost inflation, you're still generating significant amounts of -- what time can we -- when could we expect something more, let's say, a more sort of forceful decision on starting to return capital to shareholders?

[Fernando Olivieri, executive]

Yes. Well, what I can say is that perhaps more than when [indiscernible] under which conditions we are willing to proceed with a systematic dividend. We want to do that. I think it's the right thing to do. We were planning for that. But when we saw the way things started moving in the second half of last year, we decided to postpone that possibility. We want to be sure that we consolidate our current positive balance sheet structure because we don't want to go back to giving out dividend 1 year and then suspending again. So you can expect that in the future -- in the future, but again, pending more on conditions rather than timing, that is going to be happening.

[Lucy Rodriguez, executive]

Thank you, Fernando. The next question comes from Anne Milne from Bank of America.

[Anne Milne, analyst]

The question is on your refinancing. Maher, I think you said you have a target of 50% under your -- I guess, your green targets by 2025. Is that correct?

[Maher Al-Haffar, executive]

Yes, Anne. Yes, exactly. I mean we -- by 2025, yes.

[Anne Milne, analyst]

Okay. And just because you don't have a lot of bonds that have calls in the short term, I think one in euros and maybe one in dollars next year. Is there any other plan on the liability management side right now. I assume it will be the same targets you'll put in your bonds as you have in your financial agreement?

[Maher Al-Haffar, executive]

That is correct, yes. I mean we're -- obviously, there are -- I mean there's the [ 7 and 3/8 ], that something could happen in '23. They're, I believe, in '24, there's another bond that is callable. There is the EUR 400 million bond that is callable already. So I think there's sufficient refinancing opportunities plus, as we deleverage, I mean, what's going to happen is that the amount that will be [ refi-ed ], that will be sustainability linked, will become more important as a percentage of the total debt stack. But we're seeing a lot of demand, frankly, for sustainability-linked bonds. And as you know, our debt is -- the bank debt is all sustainability-linked, including recently, we secured a peso-denominated loan that is close to about $250 million. That is in addition to the bank facility, the credit agreement that we have. That's also sustainability-linked. So I think we're slowly putting in slices that are like -- that we feel reasonably comfortable that by 2025, should get us to a level of 50% or more.

[Anne Milne, analyst]

Okay. And you think -- well, I guess you don't know yet if the penalties or premiums would be similar.

[Maher Al-Haffar, executive]

I mean for SLBs, we're going to be using the sustainability-link framework. But of course, the [ greeniums ] as they call them, are subject of negotiation at the time that we structure a bond, as you know, and we will make sure that we are very market-driven and making sure that the [ greeniums ] are meaningful to the market, that they're not just -- unlike some of the -- some other issuers that have come to the market that have been criticized, frankly. I mean we're very convinced with that and we want to make sure whatever we do is viewed favorably by the market that is looking at that type of financing.

[Lucy Rodriguez, executive]

Okay. And the next question comes from Paco Suarez from Scotiabank.

[Francisco Suarez, analyst]

Thank you for the last comments. I can't agree more with that. The question that I have is precisely on your overall targets for this year and EBITDA projections or guidance related with -- on the cost side. Basically, what are you assuming on fuel substitution rates this year? And can we see actually an offset risk on the cost side from the initiatives of rolling out your capabilities to inject hydrogen and the lag to your cement plants across all regions?

[Fernando Olivieri, executive]

I'm not sure we are sharing that info -- that specific info. But let me start by commenting that we continue our strategy on increasing the use of alternative fuels with high contents of biomass. That's our specific preference and objective. And as an example of what can happen in here, the -- there are 2 projects that will increase even more, even further, the use of alternative fuels of 2 of our largest plants in Europe that's Rugby and [indiscernible]. We are finishing as we speak this month or last month, and one of the plants and in March the other one. So starting in April, May, we will increase the use of alternative fuels in these 2 plants to 90% plus. And we continue developing these alternative fuels projects everywhere. So what you can expect is that we win from 29%, now we will continue increasing that proportion.

A while ago, I made a comment about how profitable it would be to transition towards low-carbon economy. I think this element specifically on alternative fuels is proof that our investments in order to reduce CO2 are profitable. Very profitable in the case of Europe in particular. So this is what you can expect. I'm not sure we are disclosing more specific info on our proportion. Lucy and Maher, have you got that info?

[Lucy Rodriguez, executive]

No, I think you're correct. At the moment, we aren't disclosing year-by-year targets. Thank you, Paco. And I think we have time for 2 more questions. The next question comes from [ Adrian West. ] from JPMorgan. I think I will move to the last question then. Please let me know if you are available. The next question comes from Yassine Touahri from On Field Research.

[Yassine Touahri, analyst]

So I would have just 1 question. Could you tell us how much of your fuel bill and electricity bill for 2022 is hedged and how much is not hedged?

[Maher Al-Haffar, executive]

I mean on the electricity? I mean, I don't think -- we don't -- we have some fixing on the electricity side. I'm trying to see here what's the percentage. What I can tell you is that in terms of the transportation bill, for instance, diesel, a big chunk of our diesel is hedged for [ 22% ], 75% -- close to 75%. And in terms of the fossil fuels, I mean -- I don't want to call them hedges, but I would say that probably more than half of our fuels are fixed cost-based fuel, whether they're fossil fuels or alternative fuels. And then -- on the power side, Lucy, can you help me out on the power side?

[Lucy Rodriguez, executive]

Yes, I can help you out here. I think roughly about 60% of power is under some type of fixed contract. Now of course, some of these are regulated. There can be provisions that are under extraordinary situation. They can petition for a hike, but roughly 60% was under contract, I believe, for this year.

Well, I think that kind of wrapped it up. We appreciate you joining us today for our fourth quarter webcast and conference call. If you do have any additional questions, please feel free to contact Investor Relations, and we look forward to seeing you next quarter. Thank you very much.

[Operator]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.