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Edited Transcript of ELEMENT*.MX earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q2 2019 Elementia SAB de CV Earnings Call

MEXICO, D.F. Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Elementia SAB de CV earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfonso Molina Romo

Elementia, S.A.B. de C.V. - Corporate Treasury

* Fernando Benjamín Ruiz Jacques

Elementia, S.A.B. de C.V. - CEO

* Juan Francisco Sánchez Kramer

Elementia, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Anne Jean Milne

BofA Merrill Lynch, Research Division - MD and Head of the GEM Corporate Credit Research

* Cecilia Jimenez

Santander Investment Securities Inc., Research Division - Head of Cement and Construction

* Eduardo Altamirano

HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate

* Jamie Nicholson-Leener

Crédit Suisse AG, Research Division - Global Head of Emerging Markets Corporate Credit Research & MD

* Nikolaj Lippmann

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Ashley, and I will be your conference operator. At this time, I would like to welcome everyone to Elementia's Second Quarter 2019 Earnings Conference Call. (Operator Instructions).

I will now turn the call over to Mr. Alfonso Molina, he's Elementia's Corporate Treasury. Please go ahead.

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Alfonso Molina Romo, Elementia, S.A.B. de C.V. - Corporate Treasury [2]

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Good day, everyone, and welcome to Elementia's Second Quarter 2019 Earnings Conference Call. Joining us today is Chief Executive Officer, Fernando Ruiz Jacques; and Chief Financial Officer, Juan Francisco Sánchez Kramer. Please be advised that this call is for investors and analysts only. During this call, they will be discussing Elementia's performance as per earnings release issued yesterday. If you did not receive the report, it is available on the company's website in the Investor Relations section. All figures discussed today are in Mexican pesos, unless otherwise stated, and all growth comparisons relate to the corresponding period of last year.

Let me remind you that forward-looking statements may be made during the conference call. These are based on the information that is currently available and are subject to change due to a variety of factors. For more detail and complete disclaimer, please refer to the earnings release.

And with that, I'll turn the call to Fernando.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [3]

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Thank you, Alfonso. Thank you, Ashley, and good morning, everyone. Thank you for taking the time today to be with us to discuss our results and the status of our spinoff process. At the midway point of the year, I am encouraged by Elementia's performance as it demonstrates that the proactive actions we have taken helped us to better -- to be better prepared to face the challenging business climate. I will go through each of our business lines and the progress of the steps taken, but I want to start with the main takeaways for the second quarter 2019 result. Then Juan Francisco Sánchez Kramer will give you -- will give us an update on the spinoff process.

So the extraordinary recovery achieved in both Cement USA and Building Systems with positive results for the third quarter in a row were not enough to offset both Cement Mexico and Metal's results that were affected among other things about the market contraction in Mexico and the cost of raw material, respectively. And so, on a consolidated basis, we posted declines of 9% and 10% in revenues and EBITDA year-over-year. However, when compared to the first quarter, our net EBITDA reflects an improvement of 11%, thanks to the strong performance of both Building Systems and the U.S. cement business.

So now I will take you through the performance of each business unit. Starting with Cement Mexico, here we experienced a 17% decline in EBITDA, mainly driven by the continued market contraction, reflecting lesser economic activity in the construction sector, which is generally more sensitive to economic downturns than other economic factors, and of course, an increasing competition from other producers. However, the proactive steps we took in building a grinding facility in Yucatan to develop and penetrate the softer market has helped to mitigate the contraction in the market since we are sending volume to the region in order to prepare the market in advance to startup of the project, which is expected for first quarter 2020. We expect that this demand trend might remain for the rest of the year.

Let me now turn to Cement USA, where we have registered 173% increase in EBITDA versus last year. As you know, we had the planned stoppage in South Carolina in the second quarter of last year, but I'm pleased to report that we have successfully recovered our customer base, thanks to our effective redundancy plan and operation stabilization. The cement market in our 3 regions remained strong with demand growth being the highest in the South. In mid-Atlantic region, heavy rains delayed some projects, and in the North, we faced higher competitions in the fourth quarter 2018. However, we expect that the U.S. market, as a whole, will remain a positive contributor for the rest of the year.

Going to Cement Costa Rica, our operations are in full swing and posting outstanding results. This unit contributed MXN 27 million in EBITDA for a 26% margin. These proactive steps in the diversification of our cement business to underserved areas with growth potential is another example of our successful strategy. As a result of the mix performance in cement, consolidated EBITDA for this region was flat year-on-year.

Moving now to Metal Products business. EBITDA declined 77% as result of the following factors: First, we continued to have tough comps, as you saw in first quarter 2019. Last year, during the first half, we were greatly benefited from the upward trend of copper prices and the depreciation of the Mexican peso. This meant that we were buying copper at a lower level than we were selling it. However, this year, we have had the reserve -- the reverse effect. To help mitigate this, we continued to reduce our inventory levels by more than 30% from our peak point. This is also impacting results since we are using some more expensive layers of inventories.

Second, the construction market contraction in Mexico also affected this business, impacting not only volumes but also margins. To partially mitigate this effect, we continue focusing on higher-value add products.

Third, we are buying our raw materials at a higher cost, mainly due to the limited availability in the market.

Fourth, due to the aggressive competition that remains from Chinese companies in LatAm, we've taken some of our products off of the market, therefore, losing volumes. Also the threats of the U.S. tariffs escalating in retribution for illegal immigration issues halted U.S. sales together for almost 10 days in this quarter. On top of this, we still have side effects from the high turnover in our workforce, standing from the automotive industry demand for skilled labor. Among many things, we implemented a salary increase and improved benefits packages in our operations. We recognize the challenges we continue to face in this business and are undertaking the necessary measures to best address them, such as reducing our conversion period, inventory levels, headcount and SKUs while improving and increasing our operations and sales across Mexico, respectively.

Last, it's our Building Systems division whose consolidated EBITDA was up nearly 70% as we reported the third consecutive quarter of outstanding EBITDA growth in both regions, up 7% in the U.S. and 175% in LatAm. In the U.S., Indiana plant is contributing positively, having reached the breakeven point at the end of 2018. Our fiber and cement products are having a tremendous success in the growing cladding segment and the preference for our products over the alternatives remains strong. The 2% decline we reported in the U.S. net sales was due to a logistical problem in supply from Central America, which has since been corrected. However, our focus on higher value-added products contributed to our improved

(technical difficulty)

Sorry, we have some technical problems. So I'm going back to business systems, Latin America, is where we left. So regarding this business division, we posted another quarter of profitable growth, thanks to the improved sales mix and control over the new technology, which was reflected in much better cost levels and the savings was generated by the rationalization and rightsizing of all operations. We expect positive effect to continue the remainder of the year.

In closing, I want to reiterate that Elementia will continue pursuing its strategic growth path for each business while the reorganization is underway. So in Cement LatAm, our eyes will be on growth and expansion through both the new business model and the traditional business model. Nevertheless, it is important to highlight that we remain committed to delivering results with or without the spinoff.

In Cement U.S., our priority will remain in stabilizing our operations, recovering clients and continuing the path to recover our firm market share. In Building Systems LatAm, we will remain focused on recovering profitability and making the necessary changes to maximize our capacity utilization rate by reducing business complexity, continue improving the operations with the new technology and higher-margin products.

In Building Systems U.S., our efforts will go towards further ramping up the Indiana facility, implementing cost efficiencies, achieving a profitable product mix and developing the modular repair and remodeling market.

And finally, in Metal Products, we will continue reducing our exposure to copper and exchange rate volatility, improving our operations and normalizing our raw material supply.

With this, I conclude my remarks and now turn the call over to Juan Francisco Sánchez Kramer for further details on our financials. So please, Juan Francisco, go ahead.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [4]

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Thank you, Fernando, and hello, everyone. Before going into the spinoff process, I would like to make an announcement. Alfonso Molina that has recently joined the company as Treasurer has also -- is taking responsibilities for Investor Relations.

Now going into the spinoff process, last week, we held an Extraordinary Shareholders Meeting and received approval to continue with the process. Let me remind you that the spinoff implies that the shareholders' structure does not change. It can be summarized as a copy-paste of the shareholders from existing company to the newco. This means that for every share any investor has in Elementia, he or she will receive a share of the newco. The splitting company will keep the cement business and later will be named Fortaleza Materiales. And the spinoff company will hold the Building Systems and Metals business, and will be named Elementia Materiales.

Regarding management changes, until execution, all management structures and reporting channels will remain the same. Once that the spinoff is executed, Fernando Ruiz will lead Elementia Materiales, and Jaime Rocha will be leading Fortaleza Materiales. Management will continue to perform under the same business principles.

On corporate governance, we will maintain substantially the same proportions in the Board of Directors of both companies. The controlling shareholders remain committed to both companies. And as of today, there is no intention to either decrease or increase the current ownership.

Now let me spend a moment on explaining how the cross guarantees work. As you know, within existing credit facilities, some of the subsidiaries are the guarantors. By law, in Mexico, whenever there is some spinoff, these guarantees remain for 3 years. As part of the split, some of these guarantors will be spinoff to the newco, but they will remain guarantors of the mother company. In the same way, considering the distribution of their outstanding debt in an 80%-20% basis, the newco will be born with debt that has guarantors that will remain in the mother company and they will remain guarantors for the newco. Regarding timing and based on the ways things are now, we expect that the spinoff might be executed by the end of September or beginning of October.

Let me now turn to a review of our consolidated figures. During the second quarter of the year, our strong performance in the U.S. Cement and Building Systems in both regions, the U.S. and LatAm, were not enough to offset the declines experienced in Mexico Cement and Metal, where we continued to see the effects of a soft Mexican economy among other factors. Consolidated revenues decreased 9% and EBITDA by 12% versus the same quarter of 2018. In terms of the EBITDA margin, this remain at a stable 14% compared to the second quarter '18, mainly due to the combination of our focus on a more profitable sales mix and cost-cutting initiatives.

Going to cash flow. We generated close to MXN 140 million from working capital, which is a decrease from the one generated in 2018 as expected. Our income tax rose by 130% in the first half of 2019, mainly as we have run out of the fiscal shield for the cement operations in Mexico.

Financing cost improved by 24% versus the same period of last year, reflecting a stronger management of working capital that yield lower interest cost as well as the benefits of our hedging strategy to mitigate exchange rate fluctuations. Free cash flow before CapEx represented 51% of EBITDA. In terms of our balance sheet, at this time, 43% of our gross debt is in U.S. dollars while 71% is at a fixed rate, which offers us a better stability with regards to exchange rate and interest rate fluctuations. Additionally, 94% of our debt is long-term, and I want to point out here that Elementia's total net debt did increase slightly, given the reduction in cash and cash equivalents. However, we are in full compliance of our financial covenants, given our leverage ratio for the last 12 months of 3.68x and an interest coverage ratio of 2.71x.

Lastly, we adopted IFRS 16, beginning January 2019, which increased our assets and liabilities, and in the income statement, it is reflected in depreciation. These figures were not considered in 2018.

At this point, I want to ask the operator to please proceed with the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Nikolaj Lippmann with Morgan Stanley.

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Nikolaj Lippmann, Morgan Stanley, Research Division - Equity Analyst [2]

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Two questions, if I may. First on the U.S. fiber cement business. You're improving profitability, but it appears that the volume growth and thus the capacity utilization is still fairly low. I know weather was a bit of an issue, but is there any color that you can provide with regards to sort of your expected second half volume growth in '19 and also your strategy to get there? So that's number one. Number two, and very quickly, on Mexican cement. Can you provide any color on demand in Mexico bulk versus bag cement? And would it be correct to assume that there is a degree of decoupling between the 2, with both material underperforming the bag market?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [3]

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Thank you, Nikolaj. And regarding your first question on Building Systems U.S., we have, as you have pointed out, improved profitability. That was one of the key targets. As you well pointed out, volume was not and sales were not growing as we expected. And the main reason is we have a logistic problem on the volumes coming from Central America. That is at the ports, we have some issues that have been sold, and volume is flowing now. Nevertheless, it affected the second quarter. We are still ramping up the Indiana facility. It has, since the fourth quarter of last year, achieved its breakeven point, and now it is in contribution of profits, so going according to plan.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [4]

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And expanding on that, Nikolaj, also we've been very careful, and we have analyzed truly that profitability per product per clients in the U.S. operations. So something very similar to what we performed in Mexico. So we stopped some sales that were not -- that did not have the profitability that we were looking for.

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Nikolaj Lippmann, Morgan Stanley, Research Division - Equity Analyst [5]

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Got it. But bottom line, you feel that the demand is still very strong in the U.S. and you would expect, would it be fair to assume that you would expect the positive volume growth in second half? Can you provide any kind of color in terms of the magnitude if it's sort of mid-single digit or above or below that?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [6]

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I believe the demand is there. The use market is performing quite well. As Juan Francisco stated a few moments ago, we have this supply issue from our material that we sent from Central America that complement our offer in the U.S. So that's why it affected us -- part of the volume, this problem has been solved already. So yes, we see a high single-digit growth for the rest of the semester, volume-wise.

And regarding your second question, Francisco, you want to address it?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [7]

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Sure. It was, if I understand it correct, color on the demand for Cement in Mexico. We've mentioned the market is contracted. We have not seen signs of reactivations. So our expectation is that it will remain fairly the same for the second half, and we have better expectations for the next year, depending on macroeconomic conditions.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [8]

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And you might see something very similar or a bit below of the second semester of last year, Nikolaj. That would be our expectation.

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Operator [9]

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And we'll take our next question from Cecilia Jimenez with Santander.

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [10]

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I had actually two questions, both related to Mexico Cement. The first one, in terms of EBITDA for the division, it was down 17% in your case, versus 10% volume decline for the market. So my question is, is the additional deterioration coming from only from higher expenses and costs in energy, or are you already seeing cuts in prices? That's question number one. And then the second question has also to do with one of the opening remarks Fernando did. Specifically, you mentioned higher competition in Mexico Cement, if I understood it correctly. So my question is, where is it coming from? Is it from local players, Mexican players? Or is it coming from foreign players based in Mexico? Those are my two questions.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [11]

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Thank you, Cecilia, and nice hearing from you. Yes, EBITDA was 17% below last quarter or the second quarter last year. This is because our combination of cost on energy, mainly freight, because we are now reaching more distance from our facilities that are basically in the state of Hidalgo. And also there is -- because of the higher competition, some impact on pricing. On that regard, let me remind you that we remain committed to our strategy that is premium quality, premium brand and highest quartile of pricing. Also something else is affecting that is the mix of bulk and bags that has -- have some impact on our pricing -- overall pricing. On the question of higher competition, what we mean is that -- given that the market is contracted, all players are kind of same, fighting for the volume and that is what we meant. There is no imports that is reaching the central part of the country that we have seen.

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [12]

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No, I didn't -- I wasn't talking about import. Or I wasn't thinking about imports, but increasing competition in terms of pricing. So is it fair to assume at this point, we are not seeing price contraction yet or not?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [13]

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I mean we are not. It depends on regions, segments, bulk, bags, et cetera, et cetera. Now let me do some emphasis on energy. As you remember, the first half of last year, we have the lowest rates in more than 10 years. And in the second half of last year, energy cost increased close to 50%, or more than 50%. That is the level that we are still seeing and of course, it is affecting the cost. As you know, Cement is energy, make it solid.

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Operator [14]

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And we'll take our next question from Jamie Nicholson with Crédit Suisse.

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Jamie Nicholson-Leener, Crédit Suisse AG, Research Division - Global Head of Emerging Markets Corporate Credit Research & MD [15]

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My questions relate to your debt and particularly the implications of the spinoff. I have a couple of questions. First is regarding the rating agencies, which have you on watch negative, based on uncertainty about the structure following the spinoff. Have you had recent discussions with them on the structural issues? Is there any update you can give us? And also they cited your leverage ratio, which has picked up a little bit this quarter, I'm wondering if you have any update on what targets you're trying to achieve by year-end? Or what targets you need to avoid downgrades?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [16]

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Thank you, Jamie. Yes, I mean we've had that discussions with the rating agencies since we began with the spinoff process. From there, they issued their market watch that was, in summary, negative. We have had some other discussions with them. The market watch remains until now. There is some scenario in which it might change, but it is not clear yet. So I'd rather not to go into there.

On your second question that is the leverage ratio, yes, it has remained fairly stable or increased a little bit. As we mentioned, we are still targeting to be in the range of 3.5x by year-end. And considering the spinoff, as we've mentioned, we're planning to split the debt in an 80%-20% basis. 80% will remain in Fortaleza Materiales and 20% in Elementia Materiales. In that pro forma basis, this means that for the Fortaleza Materiales, the leverage ratio was close to 4.2 by year-end 2018, and we believe that it can go down to some 3.5 to 3.7 by year-end 2019. In the same way, Elementia Materiales, pro forma basis, was close to 2.2x, and we believe that it can go down to some 1.7, 1.6 by year-end 2016. Now it is important because of this cross guarantees that we will be still issuing the combined metrics that is in -- according to the discussions we have had with the banks and different financial advisors, that will be the best approach.

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Jamie Nicholson-Leener, Crédit Suisse AG, Research Division - Global Head of Emerging Markets Corporate Credit Research & MD [17]

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Okay. And then just to clarify, the cross guarantees stay in place for 3 years. And then will they fall away, and it will be standalone credit metrics? And also just to confirm your bond is going to be at Fortaleza and Elementia, will remain that, right?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [18]

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Yes. I mean let me do some clarification on the cross guarantees. I mean by low, in Mexico, it is 3 years, but we have decided to extend the call guarantees for the lifetime of the bonds, that is roughly 5 years. So the bond will stay in Fortaleza Materiales and the newco, or Elementia Materiales, will be a guarantor of that facility.

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Jamie Nicholson-Leener, Crédit Suisse AG, Research Division - Global Head of Emerging Markets Corporate Credit Research & MD [19]

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Okay. And just one final question. Have you received all the waivers and consents that you need for the spinoff from your banks? And what is remaining in terms of consents -- possible consents you need from your bondholders?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [20]

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We are in the process for both. So we haven't -- I mean we have had discussions with the banks. And we are, I would say, in agreement, but it is not in written yet. And one of the reasons is the newco hasn't been born, so we cannot sign in our company, it does not exist yet. With bondholders, we are still analyzing several alternatives to make -- to get the agreement. So we believe that we can disclose that in about a week or 2.

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Operator [21]

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And we'll take our next question from Eduardo Altamirano with HSBC.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [22]

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Just a little bit further into the environment in Mexico. Are you expecting any sort of increase in your relationship with sort of government contracts that you may be entertaining at one point, all these sales to the government either within Cement or with any of your other Building Systems divisions?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [23]

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Eduardo, thank you for your question. For the moment, we don't. Historically, how we manage this is we've done all these sales through our distribution force. So we basically never sell directly to the government. So we do not foresee it in the near future.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [24]

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All right. And then are you taking on any effects, let's say, to mitigate the impact of lower Cement sales? For example, are you increasing your marketing expenses? Are you seeing, let's say, some sort of increase in the competitive environment, whether it's maybe a breakdown in terms of, let's say, a little bit of a more friendly environment where no one has been overly pushing on the price levers too hard lately? Or -- and if you can give us a little bit more color on the competitive dynamics right now?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [25]

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Sure. What I can tell you is that we're working extremely in our costs and in our expenses. We have put a plan that has -- we foresee this situation more than a year ago, and we've been working a lot to lower considerably our expenses and costs. So we have been working on this. Likewise, regarding the marketing expenses, we are really taking in consideration where are we putting our money. So we're being very careful to make sure that every dollar that we spend in that sense give us the right returns on the investments.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [26]

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In other words, we are taking basically the same steps that we take for CapEx investing. For many of the expenses, among them marketing. And in summary, we are targeting where we are shooting or putting our bullets.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [27]

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And then in terms of sort of the general competitive environment, if you can just share some color on that?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [28]

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Sure. As we mentioned, the market is somehow contracted. There is not strong demand as we have in the first half of last year. So everybody is looking for opportunities to capture more volume, and that happens for Cement, for Building Systems and for Metals. We don't really see a trigger that changes that in the short term. And as we mentioned, we believe that the market dynamics will remain fairly the same for the second half of that year.

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Operator [29]

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And we'll take our next question from Anne Milne with Bank of America.

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Anne Jean Milne, BofA Merrill Lynch, Research Division - MD and Head of the GEM Corporate Credit Research [30]

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First, I would also like to say that a number of my questions have been answered. I would like to thank Jamie Nicholson for her questions on debt, and I'd like to thank you for your very clear answers because those were some of my questions. I guess a final one that wasn't answered was, could you just remind us again, in Mexico, on Cement, what is the breakdown of the customer base between housing, formal and informal industrial and infrastructure? And I guess maybe if it's housing, which is the main market for you, is the driver GDP growth? Is it other factors? Could you help us understand the dynamics of that part of the market?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [31]

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Sure. Thank you, Anne, for your question. I would say, we are more targeted to do-it-yourself market, which has been our strategy from the very beginning. This market, they -- I mean the index as you can look at it, of course, the GDP growth, but also the remittances. The remittances can give you a good idea of how this customer can perform. So Juan Francisco, I don't know if you want to expand on that?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [32]

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Yes. I mean as Fernando mentioned, basically we are focused on the do it yourself that is more linked to banks. And therefore, we have very little exposure to big projects, infrastructure projects. And as Fernando mentioned, because of that, we have little-to-none relationship to government projects or we haven't until now. And to your question on how the demand comes from or where, rough numbers in do it yourself or self-consumption, is about 60%. I mean private projects, medium size is roughly 15%, ready mix is roughly 20% and government project is the remaining roughly 5%.

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Operator [33]

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We'll take our next question from [Elizabeth Genning] with [Prudential].

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Unidentified Analyst, [34]

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I have a question about your Metals business. You commented earlier that you plan to minimize your exposure to copper spot prices as well as foreign currency moves. Could you just elaborate a little more how you plan to do this?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [35]

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Sure. [Elizabeth], thank you for the question. So as you know, copper is very much related to the commodity international price and because of that, there is a fluctuations in its pricing. Also since we report in pesos and the base is dollars, we have also exposure to currency fluctuations. Last year, we faced several problems. One of the main problem we faced was high labor turnover that lead to several problems, like higher maintenance, longer time to do the maintenance, less available, of course, of qualified working force and because of that, the machines were not utilized in the best or proper way. And again, that leads to additional maintenance. To solve that, we took several steps. And this comes along also with reducing the exposure to the fluctuations that I mentioned on copper and currency exchange. So for one, we have -- we did salary increases to retain people, not only in monetary ways but also emotional salary. So we are increasing benefits and things like that. We are attracting different sectors of the population and a lot of things there. And we believe that we have done some progress. Because of that, last year, we faced incremental inventory levels that increased our exposure to fluctuations. We have had reduced more than 30% our inventory levels in order to reduce that exposure. Also we are, again, making an SKU reduction to focus on the more profitable SKUs and the ones that we have defined as core. And because of that, we have also reduced inventories and improved our conversion time. Now on reducing inventories, we have also faced that we are using more expensive layers of our inventories that were not used for some time and that is also affecting our costs. On top of that, we are trying to improve our logistics and demand programs to be more in -- I mean I love the work -- but we're trying to improve the time frame in which we agree to deliver it to customers, to the one that we actually deliver the products. And on top of that, we are analyzing options to make hedges on both currency exchange and commodity hedging.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [36]

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And just, [Elizabeth], complementing Juan Francisco's answer. So from an operative side, I mean, he mentioned many, but I think we are also considering investing CapEx for operational efficiencies. We have a good opportunity there also for CapEx for operational stability, also for better raw material yield and most important of all, to be able to produce value-added products. We think and we see a great opportunity in the fittings. Today, we are sold out here. So we see a great opportunity there. And from a strategy standpoint, I think we can integrate upstream to value-added products, such as the fittings that I was talking about. But likewise, I think we can -- we have a great opportunity by simplifying the business, just as we did in Building Systems. So as Juan Francisco was saying, we -- with less SKUs, stop producing those products which are not profitable enough and so on, so forth. Likewise, we see a tremendous opportunity in exports, taking profit of this situation that today there is between the U.S. and China, we believe there is a nice opportunity for us. And last but not least, commercialization. We want profit from our brand, from our channels, distribution channels. We began this effort a year ago and it has proven to be quite successful. Today, we're moving a nice chunk of our tons with basically no investment other than working capital, and the margins are quite interesting. And so we're taking many, many different initiatives such as we did in Building Systems. So we still foresee a third quarter -- a complicated third quarter for Metals, but from the fourth quarter, you will see an interesting turnover. I don't know, we answer your question, Elizabeth .

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Unidentified Analyst, [37]

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Yes. No, you did. That was actually extremely helpful. I do have a follow-up question. So on the hedging of FX and copper prices, you -- it sounds like you currently don't hedge anything. Is that correct? Or are you hedging anything right now? And if so, how much you plan to increase it?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [38]

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Sure. I mean we had a hedging mechanism that is hedging roughly 20% of the renewal of our inventory levels, and it goes very smoothly throughout the month with a very steady volume per day. And it is working according to the expectations. Nevertheless, we believe that we can fine-tune that. I'm trying to link really from the buying day to the selling day. And by doing so, we can increase our coverage and reduce the exposure. So we have something in place, but we are analyzing ways to improve it.

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Unidentified Analyst, [39]

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Okay. And it sounds like you're trying to do some kind of just-in-time inventory delivery, is that correct? Or am I not understanding that correctly?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. - CFO [40]

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Yes. That was precisely the idea. Nevertheless, there is conversion time that we have to fine-tune and logistics to fine-tune. We are doing so. We are improving or making changes in our distribution centers, et cetera, et cetera. So yes, that is the area.

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Operator [41]

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(Operator Instructions) And it appears that we have no further questions at this time. I will turn the call back over to Fernando Ruiz Jacques. Your line is open, go ahead.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. - CEO [42]

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Thank you. Thank you, Ashley, and thank you, once again, for your interest in Elementia. We will do our best to keep you updated on the progress of our spinoff in the months ahead.

So let me just close with this final remarks. So in Building Systems, continues to perform on its path to recovery. This is the third quarter in a row of better results, and in our opinion, this is already -- this already represents a trend.

Regarding Cement USA, here it is showing the recovery of our customer base and the stabilization of the operations. The Mexican market is contracted and is affecting our business, mainly Cement and Metals and we expect this to remain for the rest of the year. Elementia will continue its proactive approach to generate value for its stakeholders.

And last but not least, we continue analyzing the possible outcomes of the spinoff, being our main objective to create and free up value for our investors.

So having said that, that concludes our call. Please feel free to contact me or Juan Francisco if you have any further questions. Have a nice rest of the day.

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Operator [43]

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This does conclude today's program. Thank you for your participation. You may now disconnect.