U.S. markets open in 8 hours 25 minutes

Edited Transcript of CEMARGOS.BG earnings conference call or presentation 25-Feb-20 1:00pm GMT

Q4 2019 Cementos Argos SA Earnings Call

Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Cementos Argos SA earnings conference call or presentation Tuesday, February 25, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bill Wagner

Cementos Argos S.A. - VP of USA Regional

* Camilo Restrepo

Cementos Argos S.A. - VP of Caribbean Regional

* Carlos Horacio Yusty Calero

Cementos Argos S.A. - VP of Financial & Shared Services

* Juan Esteban Calle Restrepo

Cementos Argos S.A. - CEO & President

* Tomás Restrepo Pérez

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

================================================================================

Conference Call Participants

================================================================================

* Adrian E. Huerta

JP Morgan Chase & Co, Research Division - Senior Analyst

* Carlos Enrique Rodríguez

Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research

* Eric Neguelouart

BofA Merrill Lynch, Research Division - Research Analyst

* Francisco Suarez

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

* Gordon Lee

Banco BTG Pactual S.A., Research Division - Director of Latin America, Country Specialist & Strategist for Mexico

* Jairo Julián Agudelo Restrepo

Bancolombia S.A., Research Division - Head of Equity Research

* Paul Chabran

On Field Investment Research LLP - Analyst

* Roberto Carlos Paniagua Cardona

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

* Rodrigo Sanchez

Corredores Davivienda S.A., Research Division - Senior Equity Research Analyst

* Steffania Mosquera

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Andres, your operator. And I welcome you to Argos' fourth quarter results release. On the call today are Juan Esteban Calle, CEO; Maria Isabel Echeverri, the VP of Legal Affairs; Carlos Yusty, the CFO; Bill Wagner, the VP of the United States Division; Tomas Restrepo, the VP of the Columbia Division; and Camilo Restrepo, the 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 presentation uploaded at www.argos.co/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. The forward-looking statements are made to date. And Argos does not assume any obligation to update such statements in the future as a result of new information, future events or any other factors. (Operator Instructions)

We will record these questions and upload them in our webpage. 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, Andres, and good morning, everyone. I would like to start with our consolidated numbers by mentioning that these include the effect of the divestment of the ready mix assets completed at the end of December in the U.S.

We sold 28 ready mix plants in the state of Arkansas, Virginia, South Carolina and Georgia with a contract to supply cement in the coming years to SRM Concrete. This made our ready mix for a total cash inflow of $95 million. This transaction helped us to continue moving towards our delayering target of 3.2x net debt to EBITDA. And it's part of the reorganization, the remix business in the U.S., to balance our portfolio, where we are focusing our operations in urban and more profitable markets. Remember 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 financials after the adoption of IFRS 16 can be found in the presentation and report already posted in our Investor Relations website.

Cement dispatches reached 3.8 million tons during the fourth quarter, decreasing 0.5% when compared to the same quarter of 2018 and ready mix dispatches reached 2.4 million cubic meters, posting a 1.2% growth. These volumes reflect positive demand growth in the U.S. There's been challenging market conditions in Honduras and Panama and the total term effect of our strategy to record prices in Colombia. Our EBITDA generation improved by 2% during the quarter, reflecting, first, a $23 million positive impact from the divestment of ready mix assets in the U.S.; second, a $9.2 million of negative impact from one-off expenses also in the U.S.; and third, the positive impact from the peso devaluation on our consolidated P&L. These effects also impacted our net income for the quarter.

I also want to highlight the tremendous efforts from our team to optimize our cash flow, not only during the fourth quarter, but in general, during 2019. CapEx was below budget. Our working capital cycle was on target and the company-wide discipline in SG&A allow us to reduce $106 million in gross debt. In previous days, we posted in our website, the information for our shareholders meeting to be held on March 20, 2020 with a proposal to distribute COP 251.20 per share in dividends, which represents a dividend yield of 4.3%.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Juan, and good morning, everyone. I'd like to begin by highlighting our volume growth, both in our cement and ready mix businesses. Double-digit growth in cement dispatches shows that the industry continues to be positive in all of our markets with the Deep South and Florida, leading the pack. In ready mix, with milder weather, dispatches grew 9.1% in the quarter, and I'd like to specifically highlight our performance in Houston and Atlanta, which are up double-digit. Our revenues for the quarter followed the volumes with a 14.5% rise. As for EBITDA, on a like-for-like basis, it increased 33% in the fourth quarter as we recorded significant one-off charges of $9.2 million as well as the profit from the ready mix divestment of $23.6 million.

The improvement in profitability besides volume growth is a direct consequence of our execution of our best program. During this quarter, we achieved a reduction of 5% in cost of energetics and an 8.6% substitution of alternative fuels in our Newbury plant. For 2019, our operating EBITDA increased 4% on a like-for-like basis. Our cement business posted a 6% increase in EBITDA. Our main goal for 2020 is to improve the performance of our ready mix business with the execution of a very detailed plan. In terms of the market, we maintain a positive outlook based on lower mortgage rates, which have driven housing inventories to a minimum, and we highlight the significant increase in public construction spending. The Architectural Billing Index or ABI, which measures the nonresidential construction momentum and is considered positive when it is above 50 points, closed at 52.3 in December of 2019 for the U.S. in the south, the highest level for our country.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Bill. We remain optimistic about the performance of our business in the U.S. for 2020, maintaining a strong focus on pricing and the execution of best, with emphasis, in the ready mix business.

Moving on to Colombia. I want to highlight the very positive dynamic of the market in terms of demand and pricing. Even with this expansion in cement consumption, we temporarily lost some market share as a result of our strong commitment and the successful execution of our price recovery strategy. Tomas Restrepo will now provide additional color on this region.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Juan, and good morning. During the quarter, our dispatches were severely impacted by the closing for 13 days of the Bogotá-Medellin road due to a major landslide a few kilometers from our Rioclaro plant that serves both of the 2 largest markets in Colombia, Bogotá and Medellin. The market also suffered from the frictions on ready mix and cement deliveries to job sites and hardware stores as a result of the social protest experienced at the end of November and beginning of December in all major cities in Colombia. These 2 elements impacted our volume during the quarter. Cement and ready mix volumes decreased 4.9% and 13%, respectively. In 2019, FOB prices increased 16% comparing the levels of the fourth quarters 2019 for the same period in 2018.

At the same time, the cost of our energetics decreased in a significant way from the levels of share during the first half of 2019. The reduction in coal prices during the second half of the year helped to lower the overall cost of energetics 3.27% year-over-year. Coal prices are more than 20% lower today than at their peak during the first quarter of 2019. As a result, I'm very happy to report an 8.5% growth in EBITDA during the quarter with a 22.4% margin. Excluding the effects of nonrecurring items, our EBITDA grew 12% on a like-for-like basis. This result ratifies our positive outlook for 2020, taking into account our 4% to 5% growth in volume estimate for the market. One of the main drivers for growth will continue to be the revolvement of infrastructure, not only 4G, but several other regional projects, such as the expansion of Transmilenio on the 68 Street in Bogotá, the construction of the Bogotá Metro and regional trains in Cundinamarca and Rionegro and the new water treatment plant in Bogotá, among others, will support high demand for building materials.

Similarly, we are expecting a better performance of housing in 2020. Even though 2019 was a record year in sales for the Colombian housing market propelled by an increase of 26% in sales of social housing units, housing start decreased by 4.4% during the quarter -- during the year, sorry. The record sales in 2019 should be reflected in a better dynamic of housing starts in the second half of the year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Tomas. The growing demand, the successful execution of our price strategy, and the increase in the internal coal prices will help us in the recovery of the profitability and competitiveness of our business in Colombia. I'm particularly excited to share with you the start of our operations of our calcined clay plant in Rioclaro and the successful launch of our new low-carbon green cement in Colombia.

This is a cement low in emissions and high in alternative cements materials with similar technical properties as our regular cement. It generates 38% less CO2 emissions and consumes 30% less energetics during its manufacturing process. We strongly believe that green cement, such as ours will be the future of our industry and the present and the future of our company. Moving on to the Caribbean in Central America, in Panama and Honduras, we continue facing these challenges that we experienced during the second and third quarters of 2019. However, I would like to point out that the operations in the Dominican Republic and Haiti, continued a positive performance, highlighting the importance of our diversified strategy in this region. Camilo Restrepo, who leads our business in the Caribbean and Central America, will explain the results.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Juan, and good morning, everyone. Unfortunately, the same conditions explained during our last call prevailed during the fourth quarter. As a result, cement volume in our local operations decreased 4.4%, particularly the still slow market in Panama and the increasing political turmoil in Honduras caused dispatches to fall by 28% and 8%, respectively. This reduction has been partially offset by an increase in volumes of 11% in Dominican Republic. Therefore, and with a 5% lower FOB price for the region, revenue decreased 14.2%; and EBITDA, 29%. The EBITDA margin was 21% for the quarter. Panama and Honduras EBITDA fell double digits while the generation of Haiti, a significantly smaller operation increased double digits.

We believe that the first half of 2020 will continue to be challenging. Nevertheless, in the midterm, we remain moderately optimistic about Honduras, considering the slightly improving political climate and demand and cautiously optimistic about Panama, considering the strong pipeline of infrastructure projects and the initiatives announced by the new government to boost the construction sector, especially in the subsidized housing market where they are starting to see new projects.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Camillo. I would like to refer now to our balance statement and cash flow. Despite a very challenging year, we were able to achieve our target free cash flow by optimizing working capital and CapEx and by closing the divestment of the cluster of ready mix assets in the U.S. We closed the quarter with a net debt-to-EBITDA ratio of 4.1x. We have been very clear that our top priority and obsession is to gain financial flexibility. I want to reiterate once more, our objective to reduce our level of net debt-to-EBITDA to 3.2x by the end of 2020.

We set a target with improving operational performance and the continuation of our divestment program. We are executing a program this year with a target to bring around $400 million from the sale of nonintegrated ready mix assets in the U.S. and real estate in Colombia, Panama and the U.S.

Our guidance in terms of consolidated EBITDA for 2020 is a range between COP 1.65 trillion to COP 1.8 trillion, not including the mentioned divestment, which implies a flat volume growth in Colombia, volume growth and pricing discipline in the U.S. and is still challenging performance in the Caribbean and Central America.

Finally, I would like to close the call by thanking you all for your support and attention and reaffirming our commitment to continue transforming Argos to deliver more value to our shareholders.

From next week, we will welcome Indira Diaz, our new IRO. Indira is returning to Argos, where she worked for over 10 years before moving on to work for (inaudible) and then for Viva Air. She will be available to answer your questions and provide you with all the needed support going forward. We're extremely grateful with Manuela Ramirez. We miss her dearly and wish are all the best in her future endeavors.

Operator, we may now continue with the Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And first question comes from Gordon Lee with BTG S.A.

--------------------------------------------------------------------------------

Gordon Lee, Banco BTG Pactual S.A., Research Division - Director of Latin America, Country Specialist & Strategist for Mexico [2]

--------------------------------------------------------------------------------

Two quick questions. The first, I was wondering if maybe you could provide a little bit more detail on the asset divestments on the $400 million target, in particular, more or less -- first, the speed, how advanced are you in some of these conversations? And of the $400 million, how much do you think will actually come from operating assets? And how much will come from the, say, more idle real estate type of assets?

And the second question is, I was wondering if in the areas where you're active on the trading front or in the markets in the U.S. in which you're present, have you've seen any impact at all in trading flows or imports from what's happening in China, coronavirus, and whether that's affected any of the flows that you've seen in those markets where you do see imports regularly?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Gordon, for the questions. The first one. We plan to bring more or less $400 million from divesting first noncore, nonintegrated assets in the U.S., we may be a strategic decision to divest our ready mix business in Texas. We have been trying to integrate that business for more or less 10 years to cement an aggregate without success. So we made the strategic decision to sell those assets. The process is well advanced, and we plan to close the process before the end of the second quarter of the year. More or less, 80% of the proceeds from the divestment of $400 million will come from that divestment. And the other 20% will come from the divestment of real estate assets in Colombia, Panama and the U.S. In terms of changes in the inflow of inputs to the U.S., we haven't seen any material difference from the coronavirus, to tell you the truth. In the markets where we operate, most of the imports come from Europe and (inaudible). So the reality is that we haven't seen any significant changes.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Paul Chabran, On Field Investment Research LLP - Analyst [5]

--------------------------------------------------------------------------------

First of all, could you please talk about the pricing trends in Q4 2019 in the U.S. and Colombia?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The fourth quarter in Colombia was very positive. Not only fourth quarter, but in general, the second half of the year in Colombia was extremely positive in terms of demand and pricing. The market grew 4.2% in terms of consumption in Colombia in 2019. That is close to 500,000 tons. So we haven't seen the market grow that much in a long time. And the positive news is that the positive trend continues towards 2020. So in Colombia, we'll continue seeing that the recovery of the market in terms of prices will continue going forward. In the U.S., all the fundamentals are strong, and the reality is that we've posted the highest growth in volume in our history in cement in the U.S. with more than 9%, close to 540,000 tons more in 2019 compared to 2018. So the reality is that we still see that the continuation of the growth cycle in the U.S. will continue into 2020.

--------------------------------------------------------------------------------

Paul Chabran, On Field Investment Research LLP - Analyst [7]

--------------------------------------------------------------------------------

And I think in the U.S.A., you mentioned a focus on pricing. Have you planned already some price increases in 2020? And can you share a bit about that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Our focus in the U.S. this year is going to be price disciplined and the profitability of the ready mix business, and I would like Bill Wagner to give you a little bit of -- more of color.

--------------------------------------------------------------------------------

Bill Wagner, Cementos Argos S.A. - VP of USA Regional [9]

--------------------------------------------------------------------------------

Yes. Thanks, Juan. No, our focus, as Juan said, this year is mainly around pricing and margin improvement, specifically in ready mix and in some markets in cement. So we've taken a pretty ambitious approach on announcing prices in all of our markets, specifically strong in Texas and in the Southeast. And then the Northeast, pretty strong on the cement side. So those have already been announced and should be in effect by end of first quarter.

--------------------------------------------------------------------------------

Paul Chabran, On Field Investment Research LLP - Analyst [10]

--------------------------------------------------------------------------------

Okay. And last quick question, if I may. Regarding your guidance. Does your EBITDA guidance include the impact from IFRS 16?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [11]

--------------------------------------------------------------------------------

Yes. Our guidance includes IFRS 16.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from the line of Francisco Suarez with Scotiabank.

--------------------------------------------------------------------------------

Francisco Suarez, Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities [13]

--------------------------------------------------------------------------------

Congrats on the opening up of your calcined clay project in Rioclaro, quite remarkable. First question on that, are you planning to update your overall targets and emission costs because of the opening of that project, or that was already included in your previous targets regarding emissions and the reductions?

And the second question, can you provide a little bit about the overall color that you have on your operating cycle, how the working capital has it balled through to 3 regions? Is there every year where you would just see more opportunities to improve things? Those are my questions.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [14]

--------------------------------------------------------------------------------

Thank you, Francisco. We're extremely happy with the operation of our new calcined clay project in Rioclaro. We will not update our target emissions because they already included the commission and operations on that project of Rioclaro. But our plan is to continue expanding green cement to all of our geographies. In our opinion, that is going to the future of the industry. And we are extremely proud to be leading the industry in that way.

In terms of our working capital cycle, I would like Carlos to give you more color about our strategy in that sense.

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [15]

--------------------------------------------------------------------------------

Francisco, really, we -- we have run a lot of work in the working capital in the different spacing, the different lines. And the accounts receivable, we have decreased last year about 10 days in all of our regions. The best in this line is the Colombian region. The Colombian regional cycle is below 14 days, and that's really a very good number. But we have -- like I was mentioning, we have decreased the number as well in the U.S. and in the CCA region. What is the opportunity that we are seeing, is the issue in the case of the inventories? And this is very different for each region in the Colombian region last year. We imported some pet coke in the Caribbeans for the Cartagena's plant and some coal as well. We have to decrease this inventory during this year because at the end of the year, we finished with a high level of inventory.

In the case of the Caribbean, the situation is quite different because in some cases, or in some operations, we don't have a vertical integrated plan for that region. We have to import all of the raw materials, starting with the clinker, plus gypsum, plus, in some cases, slag. And -- but we have a very focused target with the inventories in the Caribbean as well. But the situation with different regions is very similar in the case of the U.S., we have a very good opportunity in order to reduce the level of inventories there. And for that reason, for this year, we consider that the target is not growth in amount of money in the financial cycle for the year. Zero increase -- $0 of increase in the case of the working capital cycle for 2020.

--------------------------------------------------------------------------------

Francisco Suarez, Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities [16]

--------------------------------------------------------------------------------

Which is very great, considering the overall prospects for the U.S.A. So that could be a very interesting accomplishment.

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

And our next question comes from the line of Carlos Rodrïguez with Ultraserfinco.

--------------------------------------------------------------------------------

Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research [19]

--------------------------------------------------------------------------------

I have 2 questions. My first one is related -- I want to ask you about the sustainability of your dividend above 100% for several years and for how much longer a company is able to deliver this dividend where the source of the last year has been assets divestments?

And my second question is if you could give us more detail of your cement dispatch guidance in Colombia in order to achieve this flat number with our new competitor this 2020.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [20]

--------------------------------------------------------------------------------

Thank you, Carlos. We looked at dividends with a long-term perspective, and this company has been paying its dividend for 85 years, and we plan to continue paying dividends. The reality is that if we look at our cash flow, our cash flow improved in a significant way last year, and we are putting in place an aggressive divestment program that will delever us, our company, in a significant way that will make us a much sustainable company going forward to continue our expansion and to continue with our dividend policy.

In terms of our cement, despite this guidance in Colombia, we see that -- we foresee that the market will continue growing in 2020, in the low to mid-single digits, that will mean an additional 500,000 tons of demand, which, together with the growth of the market last year will allow for the entrance of the new competitor without causing much disruptions into the market. That is why we feel that we'll still be able to have flat volumes in 2020.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Adrian Huerta with JPMorgan.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

--------------------------------------------------------------------------------

Just on the last thing that you mentioned Juan Esteban on flat volumes in Colombia, what is your expectation for the industry? And you also mentioned that you expect the recovery of prices in Colombia to continue. Can we expect a similar recovery to the one that we saw last year?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [23]

--------------------------------------------------------------------------------

The reality is that we are leading the recorded prices in Colombia. We were extremely successful last year. Our average price increased 9% last year. And our goal this year is to increase prices more than that. We already made a -- some significant price increases in January and February. So we're now leveraging the consumer market, our prices are more or less 10% higher than last year. So the reality is that with the additional growth in the market and the import parity prices still well, well above our current prices in Colombia. We see that the traction in the market will allow us to continue executing our price strategy.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

--------------------------------------------------------------------------------

Perfect. And Juan, if you can give a...

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [25]

--------------------------------------------------------------------------------

(inaudible) are you listening well? Because some people were saying that they...

--------------------------------------------------------------------------------

Unidentified Company Representative, [26]

--------------------------------------------------------------------------------

They got cut off.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

They got cut off.

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [28]

--------------------------------------------------------------------------------

No, I was able to hear.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

--------------------------------------------------------------------------------

And, Juan, if I may add another question on the calcined clay project. Can you share with us a little bit more details on the economics of this project?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [31]

--------------------------------------------------------------------------------

This one is the largest calcined clay project currently operating in the world. But for us, it is still a pilot, and the first of many projects. The economics is CapEx per ton is well lower than CapEx per ton on a clinker project and the OpEx per ton is as well, way lower than a regular clinker project. In our business case, we succeed the target of at least a 50% reduction on OpEx per ton in our calcined clay project when compared to our clinker project.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

--------------------------------------------------------------------------------

And have you seen (inaudible)

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [33]

--------------------------------------------------------------------------------

(inaudible) from an economic standpoint?

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [34]

--------------------------------------------------------------------------------

Yes. And what has been the comments so far from clients on this?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We made a lot of trials in the market before launching the project and the product to the market. And the reality is that all the comments are extremely positive. I would like Tomas Restrepo to give you a little bit more color about the perception of our clients of the new [income].

--------------------------------------------------------------------------------

Tomás Restrepo Pérez, Cementos Argos S.A. - VP of Colombia Regional Division [36]

--------------------------------------------------------------------------------

Hello, Adrian. In fact, well, the first thing I would like to highlight is that many customers were silently waiting for this kind of news to come from the cement industry. So we -- the first reaction when we announced the product and the project was that they really found like this was like the best thing Argos could do for the industry and reminded, things like that have been coming to us from our customers.

Now on a technical standpoint -- from a technical standpoint, we see that first thing we did is we knew we needed to control the color because clay is reddish naturally. So we do have a proprietary technology that allows to get a gray-ish product coming out from the calcined clay kiln that Argos -- there's a lot of chemistry in there, and we managed to control color perfectly. Then in terms of the product, the products we are producing are from general use to send stabilization products to bulk products for ready mix, structural cement. So we have a full range of products that are produced with this new technological platform. So what we did is we formulated those products to comply exactly with the same aspects as our current product portfolio. And those are the trials that Juan Esteban mentioned that we run, not only at our labs, but also with customers.

We are seeing better performances in durability, for example. This is a pozzolan that goes into that cement. So pozzolans are known to be more durable than normal clinker cement. We are seeing a better ease-of-use for masonry applications. And the product, it's much more flexible as it is blended to a blending station at the end of the line. So it means that we can -- we can change faster from one product to the other because of the -- blending is much easier to operate than a grinding station as a whole. So all in all, we are very happy, and our customers are not only getting the same product but also they are also very satisfied with the environmental performance of this product.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [37]

--------------------------------------------------------------------------------

And if I just may add just one final question. When are you expecting to have the first sales? The price is going to be -- how is that price going to be relative to cement -- to the clinker?

--------------------------------------------------------------------------------

Tomás Restrepo Pérez, Cementos Argos S.A. - VP of Colombia Regional Division [38]

--------------------------------------------------------------------------------

The product is already going as a pilot into the market. In March, we will have a fully -- full-scale of that product in the marketplace. Even for -- as you have probably seen the bag cement that will go into the hardware stores and then into the job sites, is going to be packed differently with a kind of a palm leaf printed on the bag, which is also like a marketing statement of a green product in the job sites.

In terms of prices, well, as I said, those are going to be exactly the same product. So we will keep our price premiums exactly as they are. So the price range is going to be the same for all products coming into the market. The philosophy behind that is that we think that in a mainstream product, as we will have up to 2.2 million tons per year capacity from the real power plants with this technology, so for certain mainstream products, we need to keep it affordable for our customers. So that's why we intend to launch at the same price range as the rest of our product.

--------------------------------------------------------------------------------

Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [39]

--------------------------------------------------------------------------------

Congrats on this project.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And our next question comes from the line of Rodrigo Sanchez with Davividienda Corredores.

--------------------------------------------------------------------------------

Rodrigo Sanchez, Corredores Davivienda S.A., Research Division - Senior Equity Research Analyst [41]

--------------------------------------------------------------------------------

The first one is regarding your comments on the expected divestments in the U.S. I would like to understand how much of the capacity on the revenues and the EBITDA of the U.S. is currently coming from the ready mix operations in Texas. And also I would like to know if you could provide some guidance for the EBITDA in the U.S. and the expected savings from your best program, considering that these were figures that you traditionally disclosed to the market.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [42]

--------------------------------------------------------------------------------

Thank you, Rodrigo. Thank you for the question. We will not provide more information about the divestment of our assets in Texas, other than saying that it is quite an important platform in terms not only of ready mix, but also in terms of cement volumes and aggregate volumes. It is a platform to move close to 1 million tons of cement and close to 7 million tons of aggregates. So the strategic decision on our side is considering that those assets may have more value in some more hands. In the hands of a player who has cement and aggregate in Texas or excess clean cadence and export capacity into more markets. In our case, we don't have a -- assuming the excess capacity in Cartagena, which was a natural source for cement for our Texas operation. And we are not integrating in Texas. So that will allow us to balance more our portfolio in the U.S. and in our opinion, will make our assets, remaining assets much more profitable going forward. That is the rationale.

In terms of savings from BEST in the U.S. Bill and his team made a significant progress in the execution of BEST in the U.S., and I would like Bill to give you some color about their accomplishments.

--------------------------------------------------------------------------------

Bill Wagner, Cementos Argos S.A. - VP of USA Regional [43]

--------------------------------------------------------------------------------

Yes. Thanks, Juan. And Rodrigo, following along with our BEST initiative, as you -- I think you may remember the target was around $40 million. And so we had that under 5 pillars. So we looked at our organization and what that looked like and we targeted some improvements in efficiencies on the production side, on the supply chain side and the overall customer experience piece. And then the last one was our footprint. So again, our target was $40 million, and we ended up the year at -- right at $49 million in savings. So again, we exceeded our target and our guys did a really good job of trying to put specific initiatives together and we were successful in almost all of those. And we still have some work to do on the margin improvement, which Juan had discussed, and that's our key focus for this year. But last year, it ended very well.

--------------------------------------------------------------------------------

Rodrigo Sanchez, Corredores Davivienda S.A., Research Division - Senior Equity Research Analyst [44]

--------------------------------------------------------------------------------

Is that about your EBITDA guidance for the U.S.?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [45]

--------------------------------------------------------------------------------

No, we are providing consolidated guidance. We are not providing guidance by geography.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

And our question comes from the line of Jairo Agudelo with Bancolombia.

--------------------------------------------------------------------------------

Jairo Julián Agudelo Restrepo, Bancolombia S.A., Research Division - Head of Equity Research [47]

--------------------------------------------------------------------------------

I have 2 questions. The first one is if you can give us any detail on why the tax rate was so high for the fourth quarter last year that increased something close to 100% versus fourth quarter 2018. And my second question is regarding Colombian prices -- cement prices. We have seen a high increase from your side and also from your competitors in 2019. What are you expecting to happen during this year? And if local prices are still below import parity prices, given that international arising cost have been -- the fleet has been decreasing strongly given the coronavirus disease in China? If you can give us any type of color in that sense, if local prices are definitely below import parity prices? And maybe what's the difference in both of them.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [48]

--------------------------------------------------------------------------------

Thank you, Jairo for your questions. And Carlos will just explain why the tax rate was higher in the fourth quarter.

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [49]

--------------------------------------------------------------------------------

Jairo. Let me going back to the acquisitions, because this is a very technicality answer -- technical answer. When we bought the AMCC and sort in 2005, 2006, we made 2 stock acquisitions. And the last year, when we sought the 28 plants in -- like Esteban mentioned in the conference in Arkansas, North Carolina and Florida, these plants were part of these 2 stock acquisitions. And regarding the fiscal law of the U.S., the goodwill that we paid in these 2 acquisitions is not deductible for fiscal purposes. It means that we made $23 million of EBITDA in these divestitures. But the fiscal gain was about the triple -- was $68 million because the goodwill, which was about $36 million or $30 million -- between $36 million to $39 million were -- was not part of the fiscal cost. For that reason, in accounting -- for accounting purposes, we had a tax rate of -- very close to $5 million, but for fiscal purposes we really did or have to register tax labor, very close to $14 million. This is a one-off charge because it's totally related to the divestitures and is totally related to the treatment of the goodwill when we are selling some assets that were -- that was acquired as a stock acquisition.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [50]

--------------------------------------------------------------------------------

Thank you, Carlos. Regarding prices, in our opinion, on average import parity price in Colombia is close to $110 when you take into account all the markets. And prices are still close to $90, between $88 and $90 on average in Colombia. So the reality is that, yes, we have seen a slight decrease in freight in our opinion. This is going to temporary, that is a slight decrease, but still prices in Colombia are well below import parity prices. And with demand growing, we consider that there is a space to recover the prices in the market. So that is why we will continue executing our price recovery strategy in Colombia in 2020.

--------------------------------------------------------------------------------

Carlos Horacio Yusty Calero, Cementos Argos S.A. - VP of Financial & Shared Services [51]

--------------------------------------------------------------------------------

Jairo, just one thing more in the case of the tax provision for the last quarter. This is -- this will be no cash because in the case of the U.S., we have a -- really a very significant amount of NOLs, and we can absorb this provision within these NOLs, and really for the 2020, this extra $9 million will not be [taxed] (inaudible) for the U.S. operation.

--------------------------------------------------------------------------------

Jairo Julián Agudelo Restrepo, Bancolombia S.A., Research Division - Head of Equity Research [52]

--------------------------------------------------------------------------------

If I may have another question regarding the EBITDA guidance for the full year of 2020. That EBITDA includes the operation of the Texas ready mix operation or that EBITDA excludes what you are expecting to have in terms of EBITDA from those assets?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [53]

--------------------------------------------------------------------------------

That -- it excludes that EBITDA.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

And our next question comes from the line of Eric Neguelouart with Bank of America.

--------------------------------------------------------------------------------

Eric Neguelouart, BofA Merrill Lynch, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

So going back on Adrian's question. You're expecting the market to grow from 4% to 5% and the new player has been bringing around 10% of new capacity. And you're going to be increasing prices while keeping volumes up. Do you expect the new player to be slow in its slow rollout? Or how does the equation match because I'm having trouble with it.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [56]

--------------------------------------------------------------------------------

Thank you, Eric. We expect that gradual in terms of their capacity to the market, and since -- taking into account the significant investment that we made in the new plant, we expect them to be rational in the market. So that is why during the level of import parity prices, we see that the market in Colombia is completely ready to continue recording prices.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Our next question comes from Roberto Paniagua with Corficolombiana.

--------------------------------------------------------------------------------

Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [58]

--------------------------------------------------------------------------------

I have a few questions. The first one is how much tons of cement are you expecting that the Bogotá Metro will need in the next year? Can we go one by one, please?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [59]

--------------------------------------------------------------------------------

We expect the Bogotá Metro to demand more or less 300,000 to 350,000 tons of cement. And next year -- we don't know yet, to tell you the truth. There's still some time until they break down. So a little -- as earlier said, we will wait until we have a little bit more information, but it is going to be a significant amount for the market.

--------------------------------------------------------------------------------

Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [60]

--------------------------------------------------------------------------------

Sorry, I didn't listen well, you told 315,000 tons?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [61]

--------------------------------------------------------------------------------

300,000 to 350,000 tons of cement, or equivalent.

--------------------------------------------------------------------------------

Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [62]

--------------------------------------------------------------------------------

I have 2 other questions. Just -- yes, it's okay? My second question is, how much market share are you expecting to lose the year with the EcoCementos operations?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [63]

--------------------------------------------------------------------------------

We expect to continue leading the market, and we do our job every single day to try to convince our clients that we have divested value proposition. And we are ready to compete with all our -- all the other players in the industry, not only Colombia but in all of our geographies.

--------------------------------------------------------------------------------

Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [64]

--------------------------------------------------------------------------------

Okay. I understand. And finally, you talked about the prices in Colombia. I want to know, maybe if you can give us an idea which was the price variation in U.S.A. and Panama in the year? And what are you expecting in these 2 countries this year?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [65]

--------------------------------------------------------------------------------

The Panama continues with a very depressed demand, with a decrease in demand and the reality is that we face price pressure. Prices in Panama, it was more or less $10 last year. We will continue to try to defend our prices and our market position in Panama because our goal is to maximize EBITDA generation in Panama. But the reality is that the market is going to be tough this year as well until all the major infrastructure projects break ground. We are very optimistic that fourth breach over the Panama Canal and the third line of the Metro will be a reality. But in our opinion, we are seeing those projects starting late this year or early next year. So Panama is going to continue to be a challenging market for us in 2020. In Honduras, the situation is better. We see that demand is growing again. Volumes in January were positive. But prices suffered a little bit last year as well, decreasing more or less $13. In our opinion, prices will continue to be similar that they are currently in Honduras. The advantage that we have is that we have a very diversified portfolio of markets in Central America and the Caribbean. And all the other markets are performing very well.

--------------------------------------------------------------------------------

Roberto Carlos Paniagua Cardona, Corporacion Financiera Colombiana S.A., Research Division - Variable Income Analyst [66]

--------------------------------------------------------------------------------

I want to know, yes, (inaudible) are expecting in your private strategy in U.S.A and Central America.

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [67]

--------------------------------------------------------------------------------

In Central America, our private strategy should try to keep prices at the level where they are in Honduras and Panama. In all the other markets, we are seeing prices increasing slightly. And in the U.S., we mentioned in the initial remarks that our target is going to be price discipline. So we're expecting our prices to increase slightly in the U.S.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Our next question comes from Steffania Mosquera with CrediCorp Capital.

--------------------------------------------------------------------------------

Steffania Mosquera, CrediCorp Capital, Research Division - Senior Analyst of Transport, Telecom, Media and Technology and Information Technology [69]

--------------------------------------------------------------------------------

I have 1 question regarding EBITDA margins in Central America. We saw historical low -- historically low EBITDA margin in 4Q '19. And since you are expecting price decreases in Panama and competition, what are you expecting in terms of EBITDA margins going forward?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [70]

--------------------------------------------------------------------------------

Our margins in Central America and the Caribbean are still the best margins of this company. And the return on the capital employed in Central America and the Caribbean is still the best of Argos. EBITDA margins in Honduras are fairly close to 44% still and margins in Panama, above 30%. So the reality is that we will try to continue keeping that margins at that level. Even though we are facing some challenges in those markets.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

At this time, there are no further questions. Cementos Argos executive team, do you have any other closing remarks?

--------------------------------------------------------------------------------

Juan Esteban Calle Restrepo, Cementos Argos S.A. - CEO & President [72]

--------------------------------------------------------------------------------

Well once again, thanks a lot for your interest in Cementos Argos and for your continuous support, and we look forward for the first conference call of 2020. Thanks a lot and have a great day.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.