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Edited Transcript of CEMARGOS.BG earnings conference call or presentation 13-Aug-19 1:00pm GMT – Yahoo Finance

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Cementos Argos SA earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00pm GMT

Cementos Argos S.A. - VP of USA Regional

Cementos Argos S.A. - VP of Caribbean & Central America Regional Division

Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services

Cementos Argos S.A. - CEO & President

Cementos Argos S.A. - IR Officer

Cementos Argos S.A. - VP of Colombia Regional Division

* Adrian E. Huerta

Santander Investment Securities Inc., Research Division - Head of Andean Research

Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities

Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst

CrediCorp Capital, Research Division - Senior Analyst of Transport, Telecom, Media and Technology and Information Technology

Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil

Manuela Ramírez, Cementos Argos S.A. - IR Officer [1]

Good morning. My name is Manuela Ramírez, Cementos Argos IRO, and I welcome you to our second quarter results call. On the call today are Juan Esteban Calle, our CEO; Rafael Olivella, our VP of Legal Affairs; Carlos Yusty, our CFO; Bill Wagner, the VP of the U.S. division; Tomás Restrepo, VP of the Colombian division; and Camilo Restrepo, VP of the Caribbean and Central America division.

Please note that certain forward-looking statements and information during the call or in the reports and presentations uploaded at www.argos.com/ir are related to Cementos Argos S.A. and its subsidiaries, which are based on the knowledge of current facts, expectations, circumstances and assumptions of future events. Various factors may cause Argos future results, performance or accomplishments to differ from those expressed here.

The forward-looking statements are made today, and Argos does not assume any obligation to update statements in the future as a result of new information, future events or any other factors.

Today, after the initial remarks, there will be a Q&A session. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Calle.

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [2]

Thank you, Manuela, and good morning, everyone. As part of our divestment strategy, we completed during the second quarter the sale of our stake in Omya Andina and in Carton de Colombia, raising around $27 million. These divestments reflect our ongoing commitment to concentrate all of our resources, energy and efforts on the growth and development of our core business. In addition, we continued with the transformation of Argos in our goal to become a leaner, more agile and customer-oriented organization. As part of this, we have been very successful in streamlining our operations and significantly adjusting headcount and contractors in our plans to become more competitive. We are complementing that effort with a significant change in our corporate structure by simplifying the design and service areas and empowering the business units at our regions.

We are now operating with a leaner structure and a smaller and more agile Executive Committee, comprised of 3 regional VPs: U.S.A.; Colombia; and the Caribbean and Central America; and 3 design areas: finance, legal and sustainability and HR.

Our key core [transformation] capability, such as innovation, technical excellence, supply chain and alternative materials and fuels are operating out of the regions under the global sponsorship of our regional VP with the goal of generating more value to the businesses and to our clients.

Now moving on to our consolidated figures. I would like to start by emphasizing that for the purpose of facilitating the comparability of results during this call, we will be making reference to financial numbers net of the effect of IFRS 16. More detail on our financial after the adoption of IFRS 16 can be found in the presentation and report already posted in our Investor Relations website.

Cement dispatches reached 4.1 million tons during the second quarter, decreasing 1.8% when compared to the second quarter of 2018, and ready mix dispatches reached 2.6 million cubic meters, posting a 6.8% decrease. These volumes reflect the impact of heavy rains in the south-central region of the U.S., challenging market conditions in Honduras and Panama and the short-term effect of our strategy to recover prices in Colombia.

On a like-to-like basis, EBITDA posted a 5.7% decrease during the quarter as a result of the adverse weather in the U.S., the temporary loss of market share in Colombia resulting from our price recovery strategy and the challenging political environment in our main markets in Central America and the Caribbean.

To start with our results in each region, I would like to invite Bill to explain the performance of the business in the U.S. and our view for the region.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [3]

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Thank you, Juan, and good morning, everyone. I'd like to begin by talking about our cement volumes, which grew 2.2% in the second quarter. I'd like to specifically highlight our performance in Florida, which is up 16%; the Deep South, which is up 13%; Arkansas, which is up 2.7%; and the Carolinas, which is up 2.5%. Our ready mix volumes cannot keep up as well as cement, decreasing 9.8% mostly due to the incredible amount of rain we've seen across the region, specifically in the south-central zone. In this zone, only 60% of the quarter saw dry days, compared with 82% of the same period last year. As a result, EBITDA decreased 6.1% during the quarter. However, I want to point out the good momentum of the concrete market in the south-central region, where as of June, our backlog posted a 24% increase on a year-over-year basis.

We are working on some good and positive initiatives that are really starting to pay off for our region. We decreased our energetics cost by 5%, mainly due to lower power rates, especially in Roberta, and consumption optimization.

In addition, as of July, we've achieved $11 million in cost efficiencies, thanks to our BEST 2.0 program. These cost efficiencies were seen across our operation and were driven through continuous improvement initiatives. We continue to advance in the analysis of our supply chain network optimization with a goal of improving overall profitability and sourcing from the most profitable location. In addition, our Newberry cement plant started in July using alternative fuels and we have an ambitious goal for December 2019 of 10% replacement and a 20% replacement for 2020 December.

We are working more closely with our customers and continuously seeking to improve the customer experience, specifically through our digital strategy. As of June, we are proud to say that 21% of cement orders were placed through Argos ONE. Also, in our cement business, we are seeing better prospects for increasing market share in the Northeast.

The Carolinas are seeing great growth of soil stabilization projects, and we are getting a big demand/supply distribution and fulfillment center like the one at Sparrows Point. In Florida, we are seeing a pickup in cement sales to third parties. Along those same lines, we're improving the customer experience and our level of service through driver recruitment for our ready mix business. We have had a net increase of 83 drivers, with 21 of those being women, as a result of our new recruitment strategy.

In terms of market, despite the dynamics of construction spending in the residential segment, we maintain a positive outlook, as our operation is more oriented towards the commercial segment, which makes up around 66% of our ready mix business.

The Architectural Billing Index, or ABI, which measures the nonresidential construction momentum and is considered positive when it is above 50 points, closed at 50.3 in June for firms oriented to commercial/industrial segment. Billings have softened except in the South region where Argos has presence, where it sits at 51.9.

The Dodge Momentum Index, a monthly measure of the first report for nonresidential building projects in planning, which leads construction spending by a full year, posted a 4% growth in June to 146.1. This improvement suggests stability in the construction segment, considering the number of projects at planning stage in the near term. Our own insights also suggest the same.

As for infrastructure, the U.S. Department of Transportation announced $495 million in infrastructure grant for 327 airports in 46 states and the Pacific Islands. In addition, we're participating in the Georgia 400 Highway and I-285 junction, which will be about 60,000 cubic yards.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [4]

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Thank you, Bill. We remain optimistic about the performance of our business in the U.S. for the remainder of the year, especially taking into account the strong backlog in ready mix, the healthy volume in cement and the progress observed in the execution of BEST 2.0.

Moving on to Colombia, I want to highlight the positive dynamic of the market and our strong commitment with the execution of the price recovery strategy. Tomás will now provide additional color on this region.

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Tomás Restrepo Pérez, Cementos Argos S.A. - VP of Colombia Regional Division [5]

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Thank you, Juan, and good morning. During the quarter, the cement market presented a positive trend, posting a 2.3% growth. However, and resulting from a 12% recovery in FOB prices in June, when compared to year-end 2018, we experienced a 233 basis points loss of market share in the quarter, mainly in the Central and Southwestern regions of the country. This, added to the effect of Easter week that took place in April this year, led to an 8.2% reduction in cement volume. Likewise, ready mix posted a 2.1% reduction in volume during the quarter.

As mentioned in previous calls, EBITDA margin continued to be impacted by increasing energetic costs in 195 basis points. We expect a better cost dynamic for the second half of the year considering a better international trend in the coke price since June and the actions that we have taken in the past months, such as the negotiation of better coke prices and an increase in the usage of natural gas and alternative fuels in our operations.

Also, our EBITDA margin was affected in 154 basis points by major scheduled maintenances in Tuluá and Cartagena plants during May and June, respectively. For the rest of the year, we expect improving dynamics in the residential inventories as the government announced multiple initiatives to consolidate the social housing segment and reactivate the regular housing and, therefore, cement demand.

Regarding infrastructure, we remain confident considering the growth of dispatches for civil works seen in the last months, the governmental support for 4G projects and an interesting pipeline of infrastructure projects in Bogotá, which includes the Metro. Year-to-date to June, we have dispatched around 195,000 tons of equivalent cement to infrastructure, including 4G, 63% more when compared to the same period of 2018. We will continue to make progress in this segment to reaffirm and maintain our leadership based in our value proposition.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [6]

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Thank you, Tomás. I would like to emphasize that we will continue our efforts to optimize energetic cost in Colombia and remain fully committed to implement our pricing strategy to improve profitability and competitiveness.

Prices are still well below import parity, demand has been recovering and the Colombian peso has been devaluing, adding momentum to more constructive prices in the market. On the customer side, our go-to-market strategy to offer our clients the best value proposition for our portfolio products and service in Argos ONE will be top priority. In this sense, I am glad to mention that we remain at the forefront of the industry. As of July, 63% and 44% of our cement and ready mix dispatches were made through the platform.

Moving on to the Caribbean and Central America, results were affected by the challenging environment we are facing in Panama and Honduras, where imports have also gained relevance. However, I would like to point out that operations such as the Dominican Republic and Haiti, continue with a positive performance, highlighting the importance of our diversified strategy in this region.

Camilo Restrepo, who leads our businesses in the Caribbean and Central America, will explain the results.

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Camilo Restrepo, Cementos Argos S.A. - VP of Caribbean & Central America Regional Division [7]

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Thank you, Juan, and good morning, everyone. Cement volume in our local operations decreased 6.8%, resulting from a slow market in Panama, the increasing political turmoil that has affected Honduras since President Hernandez was reelected, and a challenging competitive environment, both in Panama and Honduras, where imports have increased significantly year-to-date. To counteract the challenging conditions in the region, we are continuously working to achieve efficiencies through BEST and are committed to deliver a superior value proposition to our customers. In this regard, I would like to mention some of the developments.

In Panama, we have achieved around $5 per ton of savings in cement and around $6 per cubic meter of concrete through cost optimization in our plants and the implementation of new technologies. Nowadays, for example, the dispatch process in our brand-new facility is fully automated.

On the customer side, I'm glad to announce that this month we are commissioning the dry mortar plant that will allow us to offer our clients a more diverse portfolio of products. Also, we have been very successful in the implementation of our digital strategy through Argos ONE, the WhatsApp channel and Argos Express.

In Honduras, we have reduced the clinker-to-cement ratio 3 points. And despite the inflation in most of our raw materials, we have reduced the cost per ton in our operations. Also, we are working to strengthening our value proposition through an enhanced portfolio of products and superior experience to our clients.

In the midterm, we remain cautiously positive about Panama, considering the strong pipeline of infrastructure projects and the initiatives announced by the new government to boost the construction sector, both in the residential and infrastructure segments, such as the public/private partnership block, the extension of interest rate subsidies for social housing up to the $180,000 price bracket and the adoption of technical rules and regulations in cement are very encouraging.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [8]

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Thank you, Camilo. I would like to highlight that we will continue focus in the execution of BEST in the region to continue gaining competitiveness in a diverse and challenging competitive market.

Now before we go to the Q&A, I will refer to our balance statement. We closed the quarter with a net-debt-to-EBITDA ratio of 4.17x, a level higher than our target. We have been very clear that our priority and obsession is to gain financial flexibility and reduce this ratio to a level of 3.2x net-debt-to-EBITDA by June of 2020. You can count on our full commitment to continue working towards improving the operational performance of our businesses, executing BEST 2.0 in the U.S., accelerate our divestment strategy and optimize our working capital cycle and CapEx in all the regions. We plan to divest another cluster of nonstrategic or non-core ready mix assets in the U.S. before year-end. Taking into account the challenges that we are facing in the Caribbean and Central America, our EBITDA guidance for 2019 has been adjusted to a range of between COP 1.6 trillion to COP 1.7 trillion without the adoption of IFRS.

Finally, I would like to close the call by thanking you all for your attention and reaffirming our commitment to continue transforming Argos to deliver more value to all of our shareholders. Operator, we may now continue with the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Juliana Aguilar from Bancolombia.

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Juliana Aguilar Vargas, Bancolombia S.A., Research Division - Cement and Infrastructure Analyst [2]

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I have 2 questions. My first one is regarding Colombia. I was wondering if -- do you expect to recover the market share lost during this quarter this year in 2019? Or do you expect market share to remain stable given your pricing strategy? And my second question is regarding your operations in Central America, specifically in Honduras. In Honduras, if you could give us any color of how are you seeing the market dynamics going forward in this market.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [3]

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Juliana, thank you for your questions. In Colombia, we are clear that our top priority is to continue with our price strategy. In our opinion, prices are still well below equilibrium in Colombia, so we will continue moving forward. We plan to have better volumes in the remaining of the year and to finish the year probably flat to 1% to 2% increase. But most likely, due to our top priority of recovering prices, we will end up the year losing some market share. But in our opinion, we are looking to improve EBITDA and the results of our operations in Colombia, so we are okay with that.

In terms of what is going in Honduras, the reality is that, basically, demand has been impacted by the difficult political situation in the country. We don't expect any improvements in the Honduras economy during the remainder of the year. However, we remain bullish about the future of Honduras. It is a country in which our operations has always performed extremely well. It's just that after the reelection of President Hernandez, the reality is that the political turmoil has made it difficult for the main infrastructure projects to gain momentum.

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Operator [4]

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And the next question comes from the line of Rodrigo Sanchez from Davivienda Corredores.

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Rodrigo Sanchez, Corredores Davivienda S.A., Research Division - Senior Equity Research Analyst [5]

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I just have 2 questions. The first one is if you could give us some details about the initiatives you're expecting to use to reach the additional $30 million in savings in the U.S. And my second question is if you could give us some details about how you're expected to reach 3.2x leverage ratio and how much could come from debt reduction.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [6]

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Thank you, Rodrigo. I will answer first your second question. I mean our target of 3.2x is set by June 2020, so our expectation is with lower CapEx, better capital -- working capital cycle and additional divestments, plus the recovery of our operations, we will be able to meet that target by June of 2020. In terms of the execution of BEST 2.0, I would like Bill to give you a little bit of more color about the successful implementation of that program in the U.S.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [7]

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I think -- thank you very much for the question, Rodrigo. I think BEST has been moving forward very well. I think most of the savings so far has come through our cement optimization and efficiency programs. So we expect that to continue for the balance of the year. Our operations in Martinsburg have kind of turned the corner and are beginning to contribute fairly significantly, we expect, in the second half. So again, significant cost efficiencies in our cement operation. And in the ready mix operation, our efficiencies have really improved because of our driver headcount addition. Those drivers have added an additional 500,000 yards of capacity, and we're planning on taking full advantage of that in the second half of the year. So I think there's a lot of good things going on. I think you're going to see maybe some improved volumes. We've seen some market share gains in cement and some cost improvements in cement also. So we're looking forward to the second half.

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Operator [8]

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And our next question comes from the line of Regina Diaz from UBS.

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Regina Diaz, [9]

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It is also regarding prices. I was just wondering if you could give us some color on how much more pricing is Argos aiming for Colombia once Ecocementos enters in the first quarter of 2020 and how will that impact the market share?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [10]

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Yes. Thank you, Regina. Prices in Colombia are still below $90 FOB on average. In all of our calculations, the clearing price should be closer to $105 or $110. With the additional devaluation of the Colombian peso and the market is starting to gain momentum in terms of demand growth, we don't see any reason why prices shouldn't continue the recovery trend in Colombia. We have been able to increase prices already 12% through July in Colombia and we will continue increasing prices until the level that we consider it is equilibrium.

Molins is going to enter the market early January of next year, but the reality is that Colombia is still importing more or less 800,000 to 900,000 of equivalent tons of cement and there is still so many small players that are not having a great time and their performance is not that healthy. So most likely, the entrance of Molins will help to move the market towards consolidation as well.

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Operator [11]

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And our next question comes from the line of Alejandra Obregon from Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division - Research Associate [12]

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Actually, I have 2, if I may. The first one is with regards to the U.S. strategy. I was just trying to understand and we have seen a very active news flow with regards to M&A options and with regards to ready mix and cement in the U.S. space. So just trying to understand if you would be interested perhaps in any specific asset, like Vulcan or E.G.O. Materials, perhaps? And if this were the strategy to follow, would you be interested in looking at cement assets or maybe ready mix or anything that could help us understand what the strategy in the U.S. will be very helpful.

And then my second question is with regards to guidance. In the U.S., guidance seems to be unchanged, so just trying to have some sense on how to think about the slight guidance comp. Is it coming from the Caribbean or Colombia or maybe both? Anything that could give us some sense here will be very helpful.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [13]

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Thank you, Alejandra. In terms of our strategy in the U.S., I mean the reality is our main priority is to improve the profitability and the efficiency of our operations. We are extremely happy with our current footprint. On a company-wide basis, our top priority is to regain financial flexibility, so we are not looking in adding assets or acquiring anything in the U.S. at this point in time.

About our guidance, the U.S. is unchanged, but in the U.S., we are including the additional divestment of our cluster of ready mix assets before year's end. So it is unchanged, taking into account that we will be divesting some assets. So the [rebuild in] guidance will come from Central America and the Caribbean, mainly, and a little cut that we will have in Colombia as well.

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Operator [14]

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And our next question comes from the line of Adrian Huerta from JPMorgan.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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My question has to do with the U.S. cement volumes. If you can give us more color on which were the states and the -- that dragged the performance of volumes, considering that Florida was quite strong, up 16%. If you can give us more color on the other states, specifically Texas.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [16]

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Sure, Adrian. Thank you for your question. We're extremely happy with the performance of our cement business in the U.S., and Bill will provide additional color.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [17]

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Okay. Thank you for the question. Just to give specifics around the volume, we've had very good success, as you know, in Florida. I think the biggest opportunity is in Martinsburg. Because there were some reliability issues late last year in the plant, we actually had a little bit of blip in what was on the customer side. So we've recovered that now and moved into this year. So we're looking at picking up significant volume in the Northeast in the second half of the year and we have a pretty sizable amount of volume under contract already. So again, as things move forward, that's really where the shortfall was but we feel better about the second half.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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And in Texas?

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [19]

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Yes. The Texas volumes that we've done so far this year mainly have been impacted in the weather situation, predominantly in Dallas. So far, since then, Texas has picked up lately and we still feel pretty good about the second half of the year because we feel like the weather pattern may be behind us.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Perfect. And just to finish, and the ready mix volumes in Texas, how did they perform in the quarter?

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [21]

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The ready mix volumes started out pretty strong. Our -- we were significantly impacted in the last 2 months there because of really, really bad weather, again, mainly in Dallas. Our backlogs are up very strong for the second half of the year. So again, if we have some normal weather patterns there, we feel really good about recovery in our volumes in Texas.

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Operator [22]

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And our next question comes from the line of Vanessa Quiroga from Credit Suisse.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [23]

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My question is regarding pricing in the U.S. Do you think that there could be good pricing traction in the U.S. in the second half of the year with more normalized weather conditions? Or do you think that harsh weather has been an obstacle to continue moving prices further up?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [24]

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Bill, please answer that question as well.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [25]

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Well, I think -- yes, I do think that the weather has impacted the ability to [making] new prices. And I think when we -- if you have more of a normal circumstance and you can get your backlog through the system, the price increase that are announced will actually flow through into what equates to higher prices going forward, and that's actually what we're seeing in a number of our markets right now, specifically in Texas. So when the weather was pretty bad, we couldn't get the backlog out and so the backlog was at the lower prices before the price increase this year. And so now that things are moving through the system, we expect that to kind of push through and move forward. So our volumes in south-central were down 16%, actually, and so we are expecting a recovery and we had a very strong month here recently and we're expecting the same in August. So again, once the backlog goes through the system, we feel like we're going to have some strengthening in pricing as well.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [26]

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Great. And can I make a similar question for Colombia regarding prices and if you can tell us, more or less, what's the price increase that you achieved in the second quarter in Colombia?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [27]

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The price in Colombia have increased 12% year-to-date. We made a 6% increase, more or less, in the second quarter and a 6% increase in the first quarter. What we are happy about is that demand is growing again in Colombia. The market is growing at close to 3% and the ready mix market is growing at 5%. And we're starting to see very positive momentum for the recovery of demand that will help our price strategy going forward.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [28]

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Great. And do you expect to announce more price increases in the second half of the year or will you wait for competitors to catch up with Cementos Argos price increases?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [29]

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Since we strongly believe that prices are well below equilibrium, we will continue with our price strategy in this third quarter of the year.

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Operator [30]

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And our next question comes from the line of Steffania Mosquera from CrediCorp Capital.

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Steffania Mosquera, CrediCorp Capital, Research Division - Senior Analyst of Transport, Telecom, Media and Technology and Information Technology [31]

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I have 2 questions. The first is if you can give us a guidance on the EBITDA margin you're expecting in Colombia, considering your expectations on energy prices. And the second one is if you're considering divesting some of your stake in Grupo SURA.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [32]

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Our EBITDA margin guidance for Colombia is at least to be at 20%. In 2019, our midterm target is 25%, but with the energetic cost pressures that we faced during the first half of the year, our target for the whole year is 20% EBITDA, more or less, in Colombia. In terms of our stake in Grupo SURA, we have been extremely clear that at some point in time and with the -- at the right time and at the right price, we will sell that portfolio, similar to what we did with Bancolombia.

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Operator [33]

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And our next question comes from the line of Roberto Paniagua from Corficolombiana.

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Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [34]

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I have one question. Maybe you can tell us anything about -- any update about any possible Grupo Argos approach with Summit Materials in the United States about any merger between you and that company?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [35]

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Thank you, Roberto. Grupo was very clear when they released information to the market that there is nothing material or significant or relevant that they should inform to the market at this point in time. And we're extremely clear as well that our top priority is improving our current operations and deleveraging our company.

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Operator [36]

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And our next question comes from the line of Francisco Suarez from Scotiabank.

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Francisco Suarez, Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities [37]

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The first question, actually, apologies for this because I missed your comments earlier. What are your substitution rates in the U.S. in the short term and in the long term? And the second question relates to some of your competitors have mentioned a lot of weakness in the Northeast market, both demand falling, supply increasing. And I wonder if you can give us a little more color if that has impacted in any way the mid-Atlantic operations where you are operating? And if you can give us a little bit of color on how things are going in mid-Atlantic, that will be very helpful.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [38]

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Thank you for the questions. In the U.S., our current substitution rate is around 10% in some plants. I mean we've reached substitution rates above 20% and our midterm goal is to be above 20% in the U.S. and long term, at least 30%. We are trying to reach similar levels in Colombia, where we are just starting, but we are extremely bullish on the substitution opportunities in Cartagena and Rioclaro. In terms of our mid-Atlantic market, Bill can give you a little bit more color, but the reality is that we have seen that demand strong.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [39]

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Yes, Juan. I think that's exactly right. I mean I think we had some operational constraints, like I said, earlier last year. Those have been corrected and we feel very good about the market. We feel good about the structure. We feel good about our position there. So I think we're getting very, very strong position with the plant now to move forward in a really positive way. So we're excited about the next 6 months and going into 2020.

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Francisco Suarez, Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities [40]

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Okay. So you haven't seen any unusual shipments coming over from those regions in the Northeast going to the Mid-Atlantic at this moment?

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [41]

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No, I don't.

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Operator [42]

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And the next question comes from the line of Paul Chabran from On Field Investment.

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Paul Chabran, On Field Investment Research LLP - Analyst [43]

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Sorry if you already answered this question, I wasn't listening in the call, so sorry if that's the case. So in your results you mentioned that the revised guidance includes impact from divestments as well, if you could help me quantify this impact, especially in the U.S., your guidance didn't change, but does that include any impact from divestments? And second question be, I really appreciate if you could share some detail about the pricing in U.S. in July, if possible, in absolute terms or on a year-on-year basis. The last question, do you have clear view on when the new [Ecocementos Molins] plant would come on stream in Colombia?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [44]

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Okay, Paul. Thank you for your questions. And in terms of our guidance in the U.S., we're expecting $20 million to $25 million coming from the divestment of our cluster of ready mix assets in the U.S. It is included in the guidance. In terms of pricing in the U.S. in July, I would like Bill to give you a little bit of more color about that.

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Bill Wagner, Cementos Argos S.A. - VP of USA Regional [45]

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So I think in July, the prices remained somewhat consistent to June, but we're expecting that they're going to improve a bit. So in the south and in the east side of the ready mix business, Florida prices tend to be a little bit lower than the rest of the areas where we operate, but we're seeing some pretty good growth year-over-year there, and July will be consistent with that. It will depend a little bit on how Florida volumes are in going forward July and August. So in south-central, we've seen some improvement in pricing in July. We should see that continue because we -- as backlog pushes through, we're going to see some increases take place there in third and fourth quarter of this year. So again, I mean we're pretty optimistic. We had a couple of our largest clients in Texas that have taken their increase, so they should go into effect here soon.

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Tomás Restrepo Pérez, Cementos Argos S.A. - VP of Colombia Regional Division [46]

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Your question about Ecocementos and when do we think they will start. I mean in our opinion, they will start last quarter of this year or first quarter of 2020. The good thing for us is that we are already commissioning our calcined clay plant in Rioclaro, and that will make our Rioclaro plant our most cost-competitive plant in Colombia, with not only extremely important environmental advantages, but also, in our opinion, low OpEx and extremely high substitution rate for clinker, so we are ready.

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Operator [47]

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And our next question comes from the line of Froylan Mendez from JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [48]

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Regarding margins in the U.S., can you remind us the outlook for this year's margin? And how much is it coming from cement and how much is coming from ready mix?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [49]

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Thank you, Froylan. We are expecting cement margins to be close to 30%. While we had been having some challenges in the ready mix margins, Bill explained the challenges that we are facing in Texas because of the weather, but our target for the ready mix business is to have margins of at least 5%.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [50]

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So in average, you're expecting around 20% margin or how much is that in the full mix?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [51]

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That will bring us to 19%, a little bit below 20%.

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Operator [52]

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(Operator Instructions) Our next question comes from the line of Andres Soto from Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [53]

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My question is related to financial expenses. We saw a significant increase this quarter, and I would like to understand if this is -- even compared with 1Q I mean, and I would like to understand if this is your recurring financial expenses or there is something extraordinary that we should take into account in this quarter numbers?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [54]

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Yes. Thank you, Andres, and Carlos Horacio will take your question.

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Carlos Horacio Yusty Calero, Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services [55]

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The main reason is because of the dividend from SURA that we recognized during the first quarter of the year, it was about COP 17 billion. The other important point is that we are fine-tuning the recognition of the IFRS 16, and we have more impact during the second quarter than in the first quarter. But really, that is part of the normalization of the adoption of this rule. This is about 80% or 85% of the difference.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [56]

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Thank you, Carlos. But just to be clear, when you mean the full reflection of IFRS 16, you mean that there is something additional being recognized in the second quarter that was not recognized in the first quarter?

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Carlos Horacio Yusty Calero, Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services [57]

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And the split between the depreciation and finance expenses.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [58]

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Correct. So to make it clear, my question is if this COP 135 billion is what we can expect that should recur in financial expenses at this level of leverage?

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Carlos Horacio Yusty Calero, Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services [59]

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Probably, but not only that amount. Probably it's more -- during the year, the forecast of the finance expenses is to be at around COP 450 billion, COP 460 billion for the total year.

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Operator [60]

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Our next question comes from the line of Brett Parker from MUFG Bank.

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Brett Parker, [61]

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I just want to understand and clarify the impact of IFRS 16 and the numbers being presented. Your leverage of 4.17x, does that include the impact? Do you know what that leverage number would have been without that impact? Similarly, for your target leverage of 3.2, is that based on inclusion or exclusion of IFRS 16?

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [62]

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Thank you, Brett. Carlos will give you more color.

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Carlos Horacio Yusty Calero, Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services [63]

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The ratio doesn't include the debt under IFRS 16 and the projection that Juan Esteban mentioned of the forecast for the target, that 3.2x, will not include the debt under IFRS 16.

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Operator [64]

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And our next question comes from the line of Roberto Paniagua from Corficolombiana.

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Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [65]

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I want to understand just why the other -- increases in other income in the second quarter.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [66]

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Carlos, go ahead.

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Carlos Horacio Yusty Calero, Cementos Argos S.A. - Former CFO and VP of Finance & Shared Services [67]

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Roberto, no, the other income is really the impact of the divestitures -- of the divestments in the second quarter, the Carton de Colombia and Omya Andina.

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Operator [68]

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And I'm actually showing no further questions. I'd like to turn the call back to the speakers for closing remarks.

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Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [69]

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Okay. Thank you all for tuning in to our conference call and your continued support of our company. And looking forward to our next conference call. Have a great day.

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Operator [70]

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Ladies and gentlemen, thank you for participating in today's conference call. This does conclude the program and you may all disconnect. Everyone, have a great day.

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