Cemex (CX) Q2 2022 Earnings Call Transcript – The Motley Fool

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Cemex (CX 0.50%)
Q2 2022 Earnings Call
Jul 28, 2022, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please remain holding. Conference will begin momentarily. Again, please remain holding. The conference will begin momentarily.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Good morning. Thank you for joining us today for our second quarter 2022 conference call and webcast. I hope this call finds you and your family in good health. I am joined today by Fernando Gonzalez, our CEO; and Maher Al-Haffar, our CFO.

As always, we will spend a few minutes reviewing the business and then we will be happy to take your questions. I will now hand it over to Fernando.

Fernando GonzalezChief Executive Officer

Thanks, Lucy, and good day to everyone. The number one challenge facing our industry at the beginning of the year was pricing and I’m quite pleased with our pricing response. Pricing for our products rose between 12% and 16%. As of the second quarter, our pricing strategy has fully offset inflationary cost in dollar terms.

We are now focused on the second phase of our strategy to recover 2021 margins. Despite significant macro volatility, our EMEA region demonstrated exceptional resiliency with a 17% EBITDA growth year to date. The Urbanization Solutions business continues to grow rapidly. While we are showing important success in our climate action targets, we continue broadening and aligning our sustainability goals across our business.

With regards to financial metrics, Fitch recently upgraded our credit rating to BB+, one notch away from our goal of an investment grade rating. Our return on capital, currently at 13%, continues to improve. We are prioritizing our growth strategy with an acceleration in project approval. And finally, we are embarking on the next stage of our CEMEX Go journey to evolve into a fully automated digital customer experience, the first in the industry.

From the beginning of this year, we expected pricing rather than volumes to drive growth. EBITDA growth was suspected to be primarily in the second half as we move out beyond the difficult first half 2021 comps that does not incorporate the surge in cost inflation since third quarter 2021. This quarter was expected to be the most difficult with second quarter 2021 EBITDA representing the highest since 2007 and highest margins since 2008. So far, the year is playing out in line with those expectations.

Strong growth in sales reflects a significant pricing contribution. Our pricing initiative, designed to recover 2021 margins, is showing important traction with prices of our core products up double digits. Higher energy, distribution, maintenance, and input costs explain the reduction in EBITDA and margins. Free cash flow declined due to higher maintenance capex spending and working capital.

Consolidated cement volumes declined, driven largely by Mexico. Volume performance in Mexico and SCAC reflects the normalization of bagged cement demand as we move out from the home improvement wave of the pandemic. The strength of ready-mix and aggregates in these markets speaks to the growing formal sector demand as bagged cement rebalances. While demand remains vibrant in the U.S., our volumes were impacted by numerous supply chain issues.

Finally, as expected, we have seen a slight slowdown in construction activity in Europe. Lucy will go into more detail. With the worst inflation headwinds since the ’80s, consolidated prices are up double digits. Pricing traction is across all regions, with cement pricing rising between 11% and 26%.

Cement prices rose 7% sequentially, reflecting second quarter pricing actions. We are in the process of implementing additional price increases across our portfolio. Pricing, however, is not the only lever and we remain focused on managing costs with our energy diversification, supply chain, and climate action strategies. The decline in EBITDA is largely explained by cement volumes.

Pricing was the strongest lever of growth and was able to more than offset total cost increases. We experienced a $21 million headwind in networks, mainly due to depreciation of European currency. With difficult prior year comp, consolidated margins declined 3.4 percentage points. Inflationary pressures began in the second half of 2021, with rising energy prices largely impacting the cement business.

We quickly adjusted our pricing strategy to take into account escalating input costs. The strategy is effective. Across all three businesses, we have been successful in recovering inflation year to date. The goal, however, is to recover 2021 margins and we still have work to do.

With additional pricing actions, less scheduled maintenance, and apparent inflection point in energy costs and some supply chain improvements, I’m confident that we will make progress in recovery in 2021 margins in the second half. We continue optimizing our portfolio for growth, focusing on our core businesses in the developed markets in which we operate. We are working to close the sale of Costa Rica and Salvador in third quarter. We announced earlier this week our partnership with a private equity firm, Advent, in our digital accelerator company, NEORIS.

This transaction will further strengthen our leadership in the industry digital transformation. Our pipeline of bolt-on and margin enhancement projects continue to expand. We recently acquired a majority stake in a German aggregates company, which will contribute important growth to our aggregates business while serving as a platform for our waste management vertical in our Urbanization Solutions business. Our Urbanization Solutions organized around four verticals is a key element of our growth strategy.

The business has been growing rapidly and now accounts for 8% of consolidated EBITDA. We expect to continued expansion as we offer a wide array of complementary products and solutions to build a sustainable and resilient cities of the future. Our Vertua brand of lower carbon products continues gaining traction with our customers. From a commercial standpoint, we are evolving the Vertua umbrella to include all products with sustainable attributes such as design optimization, energy efficiency, water conservation, and recycled materials.

We will provide more color at our November Capital Markets Day. Again, this year we are advancing on our climate action goal with a 3% CO2 emissions reduction in the first half, driven by record levels of alternative fuel usage and clinker factor. With a participation rate reaching 32%, alternative fuels are fast becoming our primary fuel source. Importantly, the world benefits from our industry’s ability to co-process waste.

By reducing the amount of society’s waste going to landfills with significant methane emissions, as well as substituting for fossil fuel usage, we are contributing to a transition to a more sustainable planet. Our European operations continue in leadership in climate action. Achieving a 40% emissions reduction, our consolidated 2030 target, eight years ahead of schedule. Europe is not alone, however.

Eight of our plants representing 20% of cement production are already operating at emissions levels below our 2030 goals, and half of these plants are outside of Europe. We are expanding our 2030 targets to include Scope 3 emissions in a new circular economy target for managed waste. We continue aligning our sustainability efforts throughout our operations with climate action goals now factored into variable compensation of more than 4,500 executives. Our green financing framework launched in the quarter is an important step in reaching our 2025 goal of 50% of our debt linked to sustainability.

Finally, I want to highlight the progress that we are making in innovation and due to our 2050 net zero target. For example, we recently announced our collaboration with Coolbrook to develop a technology to electrify our clean heating process. In 2017, we launched CEMEX Go, the first and only global digital platform in the industry to cover the full customer journey. CEMEX Go has been quite successful in adoption, now processing almost 60% of our global sales and covering cement ready-mix and aggregates.

Our leadership with CEMEX Go also give us an enormous amount of data, which we can put to good use in delivering an even better customer experience. While CEMEX Go encompasses our commercial offerings, our digital journey also includes production and management processes. NEORIS has been a key factor in our success. The recently announced sale of our majority stake will allow us to continue leveraging the expertise of NEORIS while providing the company with the capital to grow the business rapidly.

Our digital journey is far from over. We intend to go even further to the next level of digital experience for our customers with the goal of 100% optimization and adoption fully digital with real time supply chain integration. This means that every production facility, truck, operator, dispatch center, and salesperson share real time information on product and logistics availability, providing accurate and real time commercial alternatives to our customers. NEORIS will be an important partner in this initiative.

In the construction ecosystem, where multiple actors participate, delays are endemic and time is of the essence. A fully automated digital customer experience is essential. We intend to be the first in the industry to achieve this. And now back to you, Lucy.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Thank you, Fernando. In Mexico, net sales grew on the back of double-digit pricing increases in ready-mix and aggregates volume growth. Cement volume performance largely reflects a difficult prior year comparison. Bagged cement, the majority of demand in Mexico, reached the highest level in a decade in the second quarter of 2021, driven by pandemic-related home improvement and government social spending ahead of the midterm elections.

Since that time, cement volumes have declined, driven by a normalization in bagged cement while bulk product grows. With much of this adjustment process now behind us in bagged cement at pre-pandemic levels, we expect volume comparisons to ease in the second half. To illustrate, second quarter average daily cement volume are roughly the same level as second 2021. Volumes continue to be driven by the industrial sector with the build out of electronics in furniture manufacturing in the northern states.

The commercial sector is also improving, supported by hotel construction as the country embraces an influx of tourists. The decline in EBITDA and margin largely reflects cement volume decline, continued energy cost pressure, supply chain disruptions, and product mix effects. We encountered significant rail disruptions in the quarter, causing a shift from rail to more expensive truck transports and reducing our exports to the U.S. We expect some improvement in the supply chain in the second half while we continue to implement our pricing in cost containment initiatives.

We have announced double-digit price increases effective July 1st. Our Urbanization Solutions Business continues to expand on the back of our waste management, admixtures, and Construrama supply operations. Year to date, we co-processed 250,000 tons of waste, equivalent to 15% of the waste produced by Mexico City for that period and reached a record alternative fuel usage of 33.6% in the quarter. Finally, while our export levels were disrupted in the quarter, a sold-out U.S.

market not only allows us to support the needs of our U.S. business in a cost effective manner, but also to maintain high capacity utilization in Mexico. Before we begin, our U.S. business is challenged by supply chain disruptions in the quarter amid strong demand with most markets sold out in on allocation.

To our customers, we are working hard to resolve these disruptions as fast as possible. We understand that our inability to deliver cement in a timely manner creates significant bottlenecks in your construction projects and we strive to be a reliable and consistent partner. So now, let’s discuss the quarter. Growth in ready-mix and aggregates volume strengthened demand in our markets.

Despite decline in cement volume is a consequence of low inventory after quarters of sold-out domestic production, heavy maintenance, and imports and supplier disruptions. Delays in imports arose due to rail issues in Mexico and the U.S., the Ukraine war, as well as the Chinese COVID lockdown. Cement demand continues to grow, driven by the industrial and commercial and residential sectors. Our visible order book is strong and we have secured additional sources of inputs for the back half of the year.

On the pricing side, our U.S. operations was very successful, achieving double-digit pricing growth for our products. Strong sequential price growth is evidence of April price increase traction. However, price increases have still not been sufficient to cover the unprecedented level of input cost inflation.

This has significant consequences for our profitability. Supply chain issues resulted in late deliveries of spare parts, delaying much of first quarter planned maintenance to the second quarter. Maintenance days rose significantly with over half of our scheduled ’22 maintenance occurring in the second quarter. Input costs and volume increased materially.

Logistics costs also rose. And of course, energy costs were a major headwind. With 80% of our scheduled shutdowns in the first half and less pressure on supply chain, we are confident that margins should improve. We remain optimistic of the U.S.

outlook with little evidence of softening residential demand currently in our markets, although we recognize this as a risk for 2023. The industrial and commercial sector shows important growth due to on shoring of manufacturing activity. We expect this to be a multi-year phenomenon that will drive volumes. Finally, for infrastructure.

The new infrastructure investment in Jobs Act should yield incremental demand as we head into 2023. We believe the challenge for the U.S. business remains on the supply side in 2023. Despite significant macro volatility, our EMEA region stands out for its resiliency year to date, benefiting from a consolidated vertical footprint, diversified businesses, and its leadership in alternative fuels and renewable energy.

Top-line growth was driven by double-digit price increases and a growing urbanization emissions business. Volumes were flattish, reflecting softness in certain European markets, holidays in Egypt, as well as bad weather in the construction contract band, and the run-up to elections in the Philippines. Second quarter price increases showed strong traction in cement prices rising 11% sequentially. We are currently rolling out additional increases in select markets.

Despite EBITDA growth margins declined due to energy and transportation costs, as well as lower volume. As Fernando mentioned, our European region achieved an important decarbonization milestone, reaching a 40% reduction, our global target for 2030 in the quarter. Europe is well on its way to reach its regional goal of a 55% reduction by 2030. An important lever in the decarbonization effort, and one supported by the EU circular economy construct, is alternative fuel.

It is also an important factor in our European business resiliency story with alternative fuel usage reaching 70% in the quarter, among the highest in the industry, and there is still more we can do. We inaugurated our Climafuel facility at our U.K. plant, which will allow us to fully replace fossil fuels with alternate fuels under normal operations. With this latest investment, the EMEA region is expected to process wastes equivalent to the annual residue of a city the size of Madrid.

In this quarter, we had seen some evidence of softening demand in Europe. We recognize we can see some weakness in the private sector demand, but we believe that infrastructure spending in the form of a renovation wave, energy transition, defense spending, and other investments should support volumes. Moving on to the rest of the region. In the Philippines, cement volume declined 11%, while sequential prices increased 3%, the fifth consecutive quarter of improvement.

For more information, please see our CHP quarterly earnings, which will be available this evening. In Israel, construction activity remains strong with ready-mix and aggregates volumes and sequential prices growing mid-single digits. Finally, in Egypt, we continue to see strong EBITDA growth, driven by the industry rationalization plan last year. Net sales in South Central America and the Caribbean grew double digit, driven by cement prices.

We continue to experience the recovery of the formal sector supported by a pick up in tourism and housing while bagged cement volumes returning to more normalized levels. The decline in EBITDA is largely due to higher energy and maintenance costs and lower cement. In Colombia, as a result of our pricing strategy, cement volumes declined 6% while cement prices increased 8%. Construction activity is supported by the rollout of infrastructure projects and formal housing.

The outlook remains favorable with ongoing work on 4G projects, infrastructure projects in Bogota, and formal housing activity. In the Dominican Republic, a 4% decline in volumes reflects bagged cement dynamics while cement prices increased 17%. The formal sector continues to grow, led by tourism, formal housing, and the initiation of large infrastructure projects. Our Panama operation has become a regional hub, with exports almost doubling year to date, reducing our reliance on third-party cement suppliers while increasing our regional operating leverage.

With high shipping cost in a largely sold-out region, our logistics network, coupled with our cement capacity conditions, should be an important competitive advantage. I invite you to review CHL’s quarterly results, which were also published today. And now I will pass the call to Maher to review financial developments.

Maher Al-HaffarChief Financial Officer

Thank you, Lucy, and good day to everyone. As Fernando mentioned, we are pleased with our strong pricing traction, which accelerated during the second quarter and more than compensated for inflation. We remain committed to fully recovering our 2021 margins. We had positive free cash flow after maintenance capex in the quarter, but lower than last year due to working capital and maintenance capex.

The investment in working capital increased due to higher sales and inventory as markets continue to face supply chain bottlenecks. I would like to highlight that our working capital cycle is seasonal and investments in the first half of the year typically turn around during the second half. The increase in maintenance capex relates primarily to the delayed delivery of medical equipment due to supply chain disruptions. During the quarter, we generated net income of $265 million, down 2% versus the prior year.

Our return on capital employed for the last 12 months stood at 13.2%, excluding goodwill, well above our cost of capital. In light of recent market volatility, I would like to do a recap of the key aspects of our financial strategy. First, with no relevant debt maturities before 2025, there is no need to tap the debt capital market any time soon. We have, however, taken advantage of this volatility to execute a fleet of transactions, such as tendering for our bonds and buying back our shares.

Second, we have very limited exposure to rising interest rates with approximately 81% of our debt at fixed rates. The remaining floating is primarily exposed to euro rates, with substantially lower base rates than U.S. dollars. We are well positioned to mitigate debt associated with currency fluctuations in most of our non-U.S.

dollar markets, as well as protecting our interest expense from raising rates. We had a negative EBITDA impact of $21 million year to date from currency fluctuations, primarily from the depreciation of the euro. This negative impact has been offset by a positive translation effect on our debt, as well as gains in our debt derivatives totaling more than $130 million. Additionally, we generated gains of over $100 million year to date in our remaining derivatives portfolio, mainly related to our energy hedges.

And lastly, our leverage ratio stood at 2.88 times. That is 0.17 times higher than December 2021, driven by the usual negative free cash flow in the first half of the year. We expect our leverage ratio to decline in the back half of the year as we generate free cash flow. We will continue to be prudent in our financial strategy, maintaining an adequate risk profile consistent with an investment grade capital structure, and a bias toward debt reduction and further strengthening of our balance sheet.

On that note, I would like to highlight that last month, Fitch upgraded Cemex’s credit rating to BB+ with stable outlook, one notch below investment grade, citing solid operating results and our debt reduction efforts. We remain committed to regaining our investment-grade status. We continue to align our capital structure to our sustainability goals. Last month we published a green financing framework, a first of its kind in the building materials sector, which will allow us to issue financing instruments under the green bond and green loan principles.

Net proceeds from any financing under this new framework will be utilized to fund the new taxonomy compliance investments in areas such as CO2 emission reduction, clean electricity, circular economy, and waste management, among others. We have identified projects worth over $500 million that meet these criteria. These projects are not only aligned with our climate action goals, but they are also profitable. The framework reflects the roadmap and objectives of Future in Action, our climate action program, and has an investment timeline from 2021 to 2025.

Sustainalytics, a global leader in ESG research and analysis, provides the second-party opinion under the framework, confirming that our efforts are credible, impactful, and aligned to international principles. This new framework, together with our sustainability-linked financing framework published last year, provide the basis to meet our goal of linking 50% of our debt to our sustainability goals by 2025 and 85% by 2030. And now, back to you, Fernando.

Fernando GonzalezChief Executive Officer

Our performance, so far, is in line with our expectations at the beginning of the year. And while things have gone as expected, we must acknowledge increased downside risk amid rising economic uncertainties. Therefore, we’re adjusting our debit guidance from mid-single digit growth to low to mid single digit growth. While the outlook for fuels is improving, we’re maintaining our energy guidance.

We now expect maintenance capex to increase by $100 million to $800 million with anticipated total capex of $1.3 billion. We have slightly increased our working capital investment guidance to $200 million. While it may take longer than we initially anticipated, with our pricing and cost containment strategies, we are confident that we can recover 2021 margins. And now, back to you, Lucy.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future given a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to prices for our products. And now we will be happy to take your questions. [Operator instructions] And our first question comes from Ben Theurer from Barclays.

Ben?

Ben TheurerBarclays — Analyst

Perfect. Thank you very much, Lucy. Fernando, good morning.

Fernando GonzalezChief Executive Officer

Good morning.

Ben TheurerBarclays — Analyst

Good morning. Let me get this into one question. So we saw the step up in maintenance and you’ve raised the guidance on maintenance and I think you’ve talked about the acceleration of maintenance in the U.S. Is that’s what’s been driving the SG&A cost up so much in the quarter? And is that really more of a one time thing? And how should we think conceptually about the maintenance needs, given the demand environment and being sold-out and how that all puts into a framework of a potential recession in the U.S.? So just about the timing and the needs for maintenance in the current environment, that will be my question.

Fernando GonzalezChief Executive Officer

Sure. Thanks, Ben. Let me comment that in the case of the U.S., there are impacts related to energy that are similar to any other geographies, same reasons. And that that impact will continue happening the same way it’s happening all over the company.

But there are two other reasons why costs were higher during the second quarter or during the second half, mainly second quarter. One has to do with maintenance. In the case of maintenance, there were some maintenance expenses that will carry forward from last year. And on top of that, there were some delays in — shutdowns some programs for the first quarter and those were delays through the second quarter.

So we had, on the one hand, more maintenance expenses because of those delays. The shutdowns were really — some of the shutdowns were really needed for the first quarter, but it happened in the second quarter and they were delayed mainly because of supply chain issues, meaning not getting all the parts needed for those shutdowns. So maintenance was under specific issue in the case of the U.S. And what you can expect is that is not going to be repeated in the second half.

By the way, maintenance in the U.S. in the second half should be much lower because around 80% of all shutdowns have been already done. So maintenance is not repetitive — is not going to be a repetitive impact for the rest of the year. And the other issue is also specific to our import sourcing.

We are importing about 30% of cement that we are selling in the U.S., most of it is maritime transportation. So we do have some — we did have some delays in those imports as well as some supply chain constraints in our exports from the Campana plant in Sonora to the U.S. as well as some impact in locally produced cement because of the maintenance work that were done during the second half. So those impacts because of volume constraints, we are not expecting for those to happen during the second half.

So in summary, is energy. Energy will continue about the same pace. We’ve seen some reduction in the prices of petcoke but that is the phenomena that is happening everywhere. And maintenance and imports, we can consider those as a very specific and one-off type of impact.

Ben TheurerBarclays — Analyst

Thank you.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

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

Gordon LeeBTG Pactual — Analyst

Hi. Good morning. Thank you very much for the call.

Fernando GonzalezChief Executive Officer

Morning.

Gordon LeeBTG Pactual — Analyst

Hi, good morning. One question on the outlook for price increases, specifically with sort of concerns around recession escalating, bad macro data out of the U.S., how concerned are you that you’ll start seeing more pushback from customers, particularly in the U.S. and Europe, where you’ve got less reliance on bagged cement and that your ability to drive the normalization of the EBITDA margin via prices is sort of compromised by that more difficult macroenvironment. How big of a concern is that for you at this point? Thank you.

Fernando GonzalezChief Executive Officer

Well, thanks for the question. It’s not a big concern for us. I mean, we still see strong order books. We understand there are certain segments in certain markets softening or about to soften, but that has not been an issue to us.

It was not an issue at all in the first half. We are already executing our second half pricing strategy and we don’t see any major impact because of that concern of — on a recessive type of scenario, reducing volumes. So, so far, so good. And we do expect the same performance or the same success in pricing execution for the rest of the year.

Gordon LeeBTG Pactual — Analyst

Thank you very much.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Maher, did you want to add something?

Maher Al-HaffarChief Financial Officer

Yeah. I just wanted to say that in the case of the U.S., Gordon, I mean, don’t forget that imports are quite an important element. And even if there is some softness in demand as we go forward, there is that very sizable buffer that has accumulated. And right now, all markets are sold-out and we’re having to import.

And people generally are short, some markets are in allocation, so I think the pricing environment going forward into the rest of — certainly into the rest of the year and into — I don’t want to speculate into ’23, but we think the supply demand dynamics are quite favorable.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

And the next question comes from the webcast from Paul Roger, BNP Paribas. It’s a two-part question. The first is, can you talk more about the green incentives for managers? What level of seniority do they apply to? And what proportion of their variable compensation can be affected by sustainability performance? The second part of the question is how does the margin profile on virtual concrete compared to OPC? And is the product sufficiently unique for any advantage to be whittled away as others start to roll out green offerings?

Fernando GonzalezChief Executive Officer

Sure. Thanks for the question. As I mentioned, the modifier, the CO2 considerations and variable compensation, I think, is very relevant, is impacting, either positively or negatively, our top and middle management in the company, 4,500 people — executives and technicians related to CO2 issues. And the way it’s designed, it’s a modifier of a base and it can modify as much of 20% the compensation received by an executive.

Meaning, it can increase it 10% or it can reduce it 10%. And as you can imagine, this is one of the elements that we are putting in place in our transition toward a low CO2 economy. And even though we are at various stages and have been implementing this very recently, it is working very well. Fortunately, the modifier is working on the plus side, meaning increasing compensation.

As you know, we’ve been successfully reducing CO2 in cement production last year for around four and a half percentage points, and this year it’s 3% sequentially, more than 4% compared to the first half of last year. So it’s working very well. On the second question, on Vertua, in the case of Vertua, a few considerations. The first one, Vertua is a family of products and different products in the family of Vertua do have different margins.

So we cannot consider that there is only one simple margin for all the family of products included in Vertua. Remember that we are including in concrete and cement with a lower CO2 content. But we are including also as part of the Vertua family, products that do have sustainability characteristics or contributions like thermal contributions, meaning allowing constructors to reduce CO2 in their development. So I can hardly say that margins are going to behave in the manner.

What I can say is that Vertua, in general, do have either the same or better margins than ordinary either cement or concrete products. Now, for the time being, we are concentrated in the introduction of Vertua. We started a few years ago. Last year, we managed to sell about 20% of our volumes as Vertua-labeled products.

And nowadays, I mean, or in the first half, it was slightly more than 30% for both ready-mix and cement. And if you remember, we do — we recently defined the target of having half of our product portfolio as Vertua products by 2025.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Thank you, Fernando. I think it’s a number. The next question comes from Vanessa Quiroga from Credit Suisse. Vanessa?

Vanessa QuirogaCredit Suisse — Analyst

Yes. Hi. Good morning. Thanks for taking my question.

I [Inaudible] choosing just one, but let me go with can you be a little more forward looking questions regarding the infra bill? And if — I mean, what scenarios are you considering in terms of potential delays of execution of those projects, given the supply chain constraints and inflation, overall in materials? And I guess is that — I mean is imports are buffer? In case of lower volumes or lower demand, in general, would that impact pricing dynamics going forward? Thank you.

Fernando GonzalezChief Executive Officer

Sorry. I’m not sure I got the last part, then the second. Can you repeat it? About input volumes and prices.

Vanessa QuirogaCredit Suisse — Analyst

Well — yeah, if imports came down because demand is softer, if that would affect pricing dynamics.

Fernando GonzalezChief Executive Officer

I see. So let me let me answer that one first. As Maher mentioned, most of our market — we’re sold-out in most of our markets or in all of our markets. And the situation in those markets, in most of them, is that they are on allocation.

So what you can expect and it’s a robust thing. I mean, it’s a mid-term thing. We don’t think this is going to be changing in the next three or four months or I mean, for the rest of the year. So imports are playing a very important role, complementing the supplies of cement into these markets.

Now, what if we we start seeing volumes easing, meaning the housing sector softening and the likes? Then the most natural thing to happen is for input volumes to being reduced. Does that affect the pricing dynamics in the markets? I don’t think so. I think that considering current import parity, prices of inputs, allocation in the markets, and solid growth in the U.S. in several markets, I don’t think that will be a negative on the pricing strategy.

It may be the other way around.

Vanessa QuirogaCredit Suisse — Analyst

Excellent, Fernando. Thank you [Inaudible]

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

[Inaudible]  

Fernando GonzalezChief Executive Officer

Thanks, Vanessa.

Vanessa QuirogaCredit Suisse — Analyst

Yes, of course, Lucy.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

I was just going to add, Vanessa, that — very quickly. We don’t have any change in outlook regarding infrastructure and the infrastructure bill rolling out next year. We’re still very optimistic that it will add to volume. I would also say that the new overnight package, of the second round of stimulus in the United States having gone through the Senate, but it looks as though the Democrats at least have a consensus around it, should also be positive going forward.

So the simple stimulus situation in the U.S., I think, looks very good right now. And now to move on, the next question comes from Nik Lippmann from Morgan Stanley.

Nik LippmannMorgan Stanley — Analyst

Good morning. Thanks for taking my question and thanks for the call. Could you provide a bit more color on the sort of regional pricing, and the U.S. is a big, sort of the Florida, Georgia market versus Texas versus the Pacific market, if you will? That would be very helpful.

Thank you very much.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

As you know, we don’t provide that level of detail in terms of state by state. But let me tell you what I think is pretty evident in terms of our pricing in the United States. Pricing for our green core products is up between 12% and 17% year over year in the U.S. As you know, in April, we had increases that represented 60% of our cement volume that took place in the mid-south, Arizona, Texas, northern California.

And in those markets, we saw 9% sequential increases on average. We have additional pricing increases that we already announced in Florida for June, where 20% of our volumes are repricing and we’re expecting kind of mid-single digits sequentially there. And in July, we have implemented that we’ve announced additional pricing increases really for the remainder of our cement volume, 18% ex Florida. We have announced pricing increases of around $13 a ton.

So I think in general, extremely strong pricing traction in very much sold-out market. Just going back to, I think, an earlier question that was asked, the supply disruption that we had in the United States both because of the maintenance as well as disruptions to import supply, represented about 11% of our quarterly volume. Those are volumes that if we had them, we would have sold them. So the issue here is a supply issue at the moment, and I just want to be very clear about that.

So hopefully that answers your question.

Fernando GonzalezChief Executive Officer

And also then I would also add, I mean, again, Nik, I mean, you have to take a look at that percentage of total demand last year and expected this year that is coming from imports. It’s a very sizable percentage of the total market. And so that, again, kind of supports the hypothesis of the increasing prices. And elasticity of demand for our products and is very low.

So we haven’t seen any kind of demand destruction or softness as a consequence of the pricing and other building materials are doing the same. I mean, so it’s not like we’re getting more expensive compared to other building materials or other options.

Nik LippmannMorgan Stanley — Analyst

OK. Thank you very much.

Fernando GonzalezChief Executive Officer

Thank you.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

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

Anne MilneBank of America Merrill Lynch — Analyst

Good morning, Lucy. Thank you. Hi, Maher. Hi, Fernando.

I hope you’re doing well.

Fernando GonzalezChief Executive Officer

Hello, Anne.

Anne MilneBank of America Merrill Lynch — Analyst

Hi. My question has to do with something you mentioned in the section of the presentation where you were talking about emission reductions. You mentioned that there were a number of plants that are already operating below some excess 2030 goal. I was just wondering if you could, one, give us a little bit of an update of maybe why they are.

Is it the form of fuels they’re using or the age of the plants or other factors? And maybe just an update on your initiatives outside of Europe, where you’re most active right now in the reduction of emissions or alternative fuels.

Fernando GonzalezChief Executive Officer

OK. Thanks for the question. Yeah, it’s eight plants already with generating less than the 475 kilos per ton of some additional material. That is our target for 2030.

Not all of them are in Europe. I think it’s about half of them in Europe and the rest are in Mexico and other countries. And if you remember on the elements of our strategy and the reason I’m addressing this is because there is not only one reason, is given that we are already introducing lower carbon content products in the market — again, I mentioned 30% already and we’re on our way to increase it to 50%. Then that allows us for a larger proportion of composite cements with lower clinker factor.

And of course, the lower clinker factor means lower CO2 content per ton of cementitious, meaning adding more pozzolans, limestone, slack, fly ash, whatever the material that we can use with cementitious properties. So let me explain one example. In the case of the U.S., the norms on products are completely different than the ones that do exist in Europe. So it’s been kind of — in the last few years that the rules have been adjusting, considered in this type of composite cement for most type of works U.S.

wide. And that’s why, for instance, in our case, we have already adopted six out of our eight plants to produce limestone cement, allowing us for the first time to reduce clinker factor in the U.S. And this is norm-derived opportunity. So that’s one example.

The other example is that we do continue doing progress. And I’m very pleased with the progress we have done in the use of alternative fuels. We are increasing the alternative fuels already up to 33%, around 33% worldwide. That’s an increase of about five percentage points for a year.

In my view, the first time that we increase five percentage points in a year. And we are, as I think Lucy mentioned, in the case of Europe for the first time during the second quarter, we went as high as 70% of alternative fuels, which on top of being very helpful financially, as you can imagine, alternative fuels particularly RDF, which is household and some other residues from other industries, are detached from the primary fuels dynamics. So it’s been very convenient. And on the other side, we are using this type of alternative fuels, not only as a fuel in the kiln, but in the case of Germany, which is one of the concerns with all these geopolitical issues and energy risk in the case of Germany, 90% of electricity consumed by our [Inaudible] plant is coming from a waste to energy plant.

It’s been up — it’s been there already for a number of years, meaning reducing risks related to reduction of gas supplies to Germany in our case. So it is lower clinker factor in some countries, much higher in use of alternative fuels with high contents of biomass. Also, we are increasing — that’s sort of an effort that we’ve been pushing very hard in the last couple of years is increasing the carbonated raw materials instead of limestone. There is an opportunity there to increase both the carbonated materials and increasing the use of renewable energy.

But very pleased to say things like in Mexico, our alternative fuel consumption is very high and we are consuming the equivalent of 15% of waste produced by Mexico City or in the case of Europe, I already mentioned 70%. That’s equivalent to consume the waste produced by a city like Berlin in a year. So this is to highlight the contribution that our industry can do in a circular economy and how economically convenient a circular economy can be in our industry.

Anne MilneBank of America Merrill Lynch — Analyst

OK. That’s very clear and very interesting as well. Thank you very much for that great explanation.

Fernando GonzalezChief Executive Officer

Thank you, Anne.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Thanks, Anne. The next question comes from Yassine Touahri from On Field Research. Yassine?

Yassine TouahriOn Field Investment Research — Analyst

Good morning. Yes, can you hear me?

Fernando GonzalezChief Executive Officer

Yes, yes, yes.

Yassine TouahriOn Field Investment Research — Analyst

Can you hear me?

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Yeah.

Yassine TouahriOn Field Investment Research — Analyst

I would have just one question on your imports. Could you let me know what is the proportion of your U.S. cement sales that are imported as a percentage?

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

I think the question was what percentage of our U.S. sales are imported.

Fernando GonzalezChief Executive Officer

The number I have in my memory is like — is around 30%.

Maher Al-HaffarChief Financial Officer

Yeah. It is, Fernando. For the second quarter, around that level.

Yassine TouahriOn Field Investment Research — Analyst

Thank you very much.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

OK. And we have time now for one more question. The next question comes from Paco Suarez from Scotiabank.

Paco SuarezScotiabank — Analyst

Good morning. Thanks for all the remarks and it’s very helpful, the color that you’re sharing today. The question that I have relates with your overall comments on pressures related with logistics. The higher use of trucks rather to cheaper sources of shipping cement.

Do you think that you need to implement more capex in, say, ground terminals, multimodal terminals to try to overcome this feature? Is that actually needed? Or perhaps this is just something that, because of the disruptions, eventually will fade out and you will not need to enhance, in any way, your overall terminals and your — all the logistics side of your of the equation to make sure that these additional costs are not permanent? Thank you.

Thanks, Paco. Well, in some cases, there are certain investments because of the way the market has been evolving, meaning debottlenecking or expanding terminals, maritime or land terminals, like, for instance, the expansion we did in our terminal in Dallas, Texas. We almost doubled the capacity to bring cement from our Balcones plant to that market. So those are investments that are regular investments in order to cope with the way demand has been evolving.

Now, the main issue that is impacting us is other type of of supply chain disruptions like, for instance, domestic railroads in the U.S. They are having issues the same than the issues we had with — I referred to some supply chain issues on our exports from Mexico to the U.S. And all of those issues are related to railroad in Mexico, which, of course, is being — improving and improving as us as we’ve seen in the last few days and weeks. But in those situations, there is very little you can do except for try to work together with railroads and use alternative transportation means, which, as you can imagine, are more expensive.

But our industry is no different to other industries is is going through, material supply chain disruptions. We’ve been requesting, for instance, in advance changes in our procurement practices. We are requesting in advance modern equipment, but we think we need to replace, meaning well in advance, not three or six months. It’s a year or even more.

So those are the type of disruptions that we are dealing with.

That’s very good and very helpful. Thank you so much.

Fernando GonzalezChief Executive Officer

Thank you.

Maher Al-HaffarChief Financial Officer

Thank you.

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Thanks, Paco. We appreciate you joining us today for our second quarter webcast and conference call. If you have any additional questions, please feel free to contact Investor Relations and we look forward to seeing you again on our third quarter results webcast. Many thanks.

Questions & Answers:

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Lucy RodriguezExecutive Vice President of Investor Relations, Corporate Communications, and Public Affairs

Fernando GonzalezChief Executive Officer

Maher Al-HaffarChief Financial Officer

Ben TheurerBarclays — Analyst

Gordon LeeBTG Pactual — Analyst

Vanessa QuirogaCredit Suisse — Analyst

Nik LippmannMorgan Stanley — Analyst

Anne MilneBank of America Merrill Lynch — Analyst

Yassine TouahriOn Field Investment Research — Analyst

Paco SuarezScotiabank — Analyst

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