Edited Transcript of ELEMENT*.MX earnings conference call or presentation 30-Apr-20 5:00pm GMT

The second pillar is a pillar to ensure the financial viability of the company. We created a corporate and regional contingency committee that meets daily. We are dedicated to strengthening our cash flow through strategies to accelerate collections and control credit lines to specific clients, make use of inventories, aligning procurement to demand and limiting CapEx to only maintenance, compliance and strategic projects.

We initiated programs to accelerate the inventory reduction objective we mentioned in our fourth quarter report and executed an all-country expense reduction program that reaches every single area of the company. We started by triggering the ring-fences established in the annual budget, but we are going much deeper, all the way to temporary salary reductions.

I am proud and touched to report that once again, the team is showing an outstanding commitment and dedication to the company. I’m also proud to say that we have had a great support, not only from our controlling shareholders, but from most of our creditors who have granted us special terms to overcome the cash flow challenges the pandemic is causing. So I want to thank every member of the Elementia team, our shareholders and all our creditors for believing in us and giving us their support.

The third pillar is to maintain our operational continuity. By government decree, we have stopped all of our Central and South American operations, except for Costa Rica, which is operating normally. In the U.S., we have been classified as an essential industry. And in Mexico, we are linked to various essential sectors designated by the Health Ministry. So we continue to operate, but we have implemented special measures like dividing the facilities by zones to restrict personal mobility and reduce the risk of contagion. Likewise, everyone’s temperature is scanned before entering our facilities. And if symptoms are detected, they are immediately tested and treated, followed up by contact tracing, of course.

Other measures include staggered hours and shifts, mandatory use of mask and antibacterial gel, additional transport and staggered hours for canteens to make sure safe distance is kept at all times. We are regularly sanitizing common areas among many, many other measures and, of course, following all the provisions recommended by local authorities.

And last but not least, the fourth pillar, which is to transform challenges into opportunities. We are adapting quickly to the constant changes in the global economy and these new circumstances. We are enacting strategies to turn them into opportunities to continue creating value, and we have solid basis in each business line to surpass this event. We have maintained contact with our distributors and local governments to offer solutions that are carefully required, like critical infrastructure, including hospitals, temporary shelters, water storage and conductions, among many others, looking always for the development of new products, channels and markets.

Turning now to the first quarter results. Let me begin with materials, which is the way we call now the Building Systems and Metal business units. So starting with Building Systems U.S. or distribution U.S., how we call it now, we are moving on the right path, reaching an 11% volume growth and 15% revenue growth in the first quarter, thanks to the value proposition of our product offering as well as the commercial strategy implemented since last year.

Nevertheless, our EBITDA dropped 83% due to the class action provisions we made, plus the capitalization expenses which were returned to last year results. It is worth mentioning that right from COVID-19 and the effect it has had and will have on the demand for construction materials in the U.S., we have decided to idle the Indiana plant. We will restore operations there once the market returns to normal. Meanwhile, this decision will help us reduce our operating costs during the low-demand period since we will consolidate volume into the other 3 plants.

Likewise, we have put in place different measures to lower our costs and improve our cash position. Some of these measures are an aggressive program to accelerate inventory reduction and SG&A reduction, cost reduction as a result of R&D, and limit CapEx only to maintenance and essential projects. In terms of the class action suit filed against Allura, we expect to reach an agreement in the following months. We are striving to continue growing in terms of both volume and profitability.

Going now to Building Systems or distribution LatAm. As I mentioned, since mid-March, all the operations, except Costa Rica and Mexico, were halted by government decree. This affected the figures for the quarter despite the fact that the trend up until February was a solid growth for the region. Because of this, revenues registered a 5% decline, while volume was 9% down. EBITDA registered a 60% reduction versus first quarter 2019.

Cash flow is and will be our top priority, and we are strongly working in that sense. The ring-fence has been activated along with a much deeper reduction of expenses and CapEx. Notwithstanding the fact of this challenging time, we managed to continue progressing in our target to supply building solutions through efforts such as advanced. Advance is our new business model we’ve talked about. We are delivering construction kits to construction sites. So far, the results have been above our expectations. Today, we have more than 40 projects in pipeline, including shelters and health clinics for government health systems and multifamily buildings.

Turning to industrial metals. We are focused on operational efficiency in an effort to turn around the low availability of the specific rates of raw materials and the resulting incremental cost. Without a doubt, here is where we have the greatest challenge. The global situation is not helping at all. It is causing volatility in copper prices, which have a direct impact on both operating cost through inventories and selling price since it is assigned using COMEX as its reference.

Despite this, we are taking many actions such as new — a new management team, cost reductions, raw material yield improvements, operational efficiencies, among many others. The results for the first quarter are not at the levels we want to achieve with a 12% decrease in revenue year-over-year, but the efforts are beginning to pay off with a 13% increase compared to last quarter. EBITDA showed a 59% decrease versus first quarter 2019, affected by higher metal costs and nonrecurring expenses, such as severance expenses.

On the road to reinvention, we are finding opportunities and need problems to exploit copper’s antimicrobial properties by launching new products. Additionally, we’re working around the clock on an inventory reduction plan to help cash flow and liquidity. We will continue to search for new opportunities abroad through our U.S. metal commercial operation and help to strengthen this market as we have the know-how and capability to make this happen. This, combined with a strong operation, gives us the confidence that there is an enormous potential. And once the COVID situation is over, we expect a strong recovery in our results.

Turning to our Cement business unit, let’s begin with Mexico. In the first quarter, we continued operating under a weak economy, which is slowing down further due to the pandemic. In order to support our results, we are aiming for a correct mix between bags and bulk. Likewise, we have been able to supply some of the Mexican government projects, which are helping us as well to support our volumes.

In the first quarter, volume showed a small increase of 5% versus first quarter 2019. Nevertheless, revenues decreased 5% versus first quarter 2019, which led to a 7% decrease in EBITDA. We maintained our focus on business profitability by optimizing expenses and costs. With that, we have been able to achieve a margin of 41%. That is higher than what we achieved in the first quarter of 2019.

For the Cement business in the U.S., we registered a 15% increase in revenue due to the combination of pricing and volume increase, which, combined with a better climate and control in expenses, allowed us to post a 157% growth in EBITDA compared to the same period of 2019. During this period, our main markets in the Southeast and Maine were not affected by the pandemic. However, the Mid-Atlantic market presented some decreases in volumes since the last week of March due to the health measures made by governors of each state, and this does have some potential risk. We are aware that these conditions may change. So we continue with our commitment to reduce cost with an emphasis on generating cash flow.

Last, we remain engaged in completing the development of Keystone in the second half of the year and remain committed to using the proceeds of this transaction to reduce our leverage levels. Going to the Cement operations in Costa Rica, this business proves that our strategy is working with a 15% higher volume. Nevertheless, our EBITDA decreased 3% versus first quarter 2019 because of FX impact. As of today, we continue to operate normally in Costa Rica. However, this could change in the coming months.

Before asking Juan Francisco Sánchez Kramer to elaborate on the first quarter figures, the spin-off process and the Keystone development, I would like to share with you our expectations for the rest of the year. First, we believe that the economic impact of the pandemic will not only affect this year, but likely 2021 to recover overall levels by 2022. This, of course, will be different for each country and the measures that each of them take in order to control and overcome the pandemic and its side effects.

Furthermore, the second quarter will be the one that will show the worst part of the effects of the pandemic, given that overall demand is decreasing sharply in every sector and every country. And last but not least, now more than ever, cash is king.

So with this, I turn the call over to Juan Francisco Sánchez Kramer for further details on the financials. So please, Juan Francisco, go ahead.

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

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Thank you, Fernando, and welcome, Mariana. Mariana joined Elementia just a couple of months ago as Corporate Treasurer and Investor Relations Officer. She has more than 11 years of experience, mainly in finance, treasury and risk management. I’m sure her experience and capabilities will be key during these challenging times.

Before going into the figures, let me try to summarize both the impacts and actions we have taken related to the COVID pandemic. As Fernando mentioned, cash is king, so we are managing in a cash flow mode. For starters, we executed several programs to reduce SG&A, among which, first, we canceled or reduced services that third parties used to supply, which will bring savings of close to $50 million on an annual basis.

Second, in trying to figure out what will be the required organizational structure for the coming months, we reduced headcount and will have savings of close to $120 million per year. Of course, it had a onetime cost of close to $40 million during the first quarter.

Third, we executed the ring-fence that were — we included in the budget process to eliminate the expenses that were nice to have but not most has. Also, focusing on cash flow, we have established specific programs that are reducing the need for cash, like we did a CapEx review and redefinition focusing only on strategic projects, maintenance and compliance that will reduce the cash requirements by close to $20 million for the year or roughly at 30% of our regular CapEx.

Second, inventory optimization acceleration plan. In the fourth quarter conference call, we mentioned the plans we established to reduce inventories. In summary, we are accelerating those plans, mainly focusing on Metals and Building Systems U.S. Also, we have put in place new strategies to accelerate collection and being more cautious on our analysis of credit lines. Lastly, we have received support from our creditors to ease amortizations for the following quarters or through working capital lines to protect cash.

Regarding the spin-off process, there is not really any news from the fourth quarter report. In summary, it has been postponed in order to execute it under the best possible terms and conditions. As we have previously mentioned, an intermediate step is to conclude the divestment of the Pennsylvania cement facility. It is still under review by the antitrust authorities. And considering the COVID implications, we are changing our estimated time frame to the end of the third quarter. It is important to mention that both parties remain interested and committed.

Moving to the results of the first quarter, I will begin with the consolidated figures. During the first quarter of this year, revenues were 2% lower than the same quarter of 2019, mainly due to the cessation of operations in LatAm since mid-March. The 15% incremental sales in the U.S. for both Cement and Building Systems helped reduce the negative impact of the market contraction in other regions.

Consolidated EBITDA showed a 23% decrease, mainly due to close of $65 million impact from COVID coming from the demand contraction and production health in LatAm; roughly $60 million of negative impact on inventories because of the downward trend of copper price; and close to $65 million from one-offs related to the headcount reduction and class action provisions. Financing costs represented a 34% reduction, mainly because of rate reductions and the foreign exchange rate profit.

Moving on to cash flow. Before CapEx, it was more than $100 million negative, mainly because of a nonrecurring payment on cash taxes coming from the end of the fiscal disconsolidation program in Mexico, which almost doubled the figure of the last quarter of last year. Lower EBITDA and working capital consumption mainly because of, at the beginning of the pandemic, we decided to acquire safety stock of products we bring from China. Also, we began the building of inventories, preparing for the seasonally higher demand, mainly in the U.S., and have currency fluctuations from the dollar-based operations.

In hindsight, these decisions were not the best ones due to the unprecedented situation. And as I mentioned, we are accelerating plans to reduce inventories. Capital structured operations include debt repayment according to maturities, and stock buyback consumed close to $300 million and CapEx totaling roughly another $300 million in the quarter. As a result, free cash flow was a consumption of close to $700 million.

In terms of our balance sheet, around 90% (sic) [94%] of our debt is long term. And our leverage ratio, considering the last 12 months of EBITDA, was 5.42x (sic) [5.14x], which is above our leverage ratio of 3.5x, while the interest coverage ratio was 2.29x. The increase of net debt was mainly because of exchange rate impacts on cash consumption.

Moving now to figures by business units. Moving now to figures by business units, and starting with Building Systems U.S., let me give you an update on the status of the class action lawsuit. Considering the commitment in the situation, we think that the process might slow down. Nevertheless, we think we may be able to reach a formal settlement agreement during this year. Revenues for the first quarter show a 15% growth by a combination of 11% more volume and pricing, but EBITDA was down by 83%, mainly due to the class action provision on the Indiana facility not reaching yet the breakeven point. The factors mentioned before, along with the slow in demand due to the COVID-19 crisis, were some of the facts that lead to the decision to close the Indiana plant for the time being.

For Building Systems LatAm, revenues decreased 5%, but EBITDA was down 60%, mainly due to the halt in operations we did since mid-March and the resulting less fixed cost absorption, along with the severance costs. According to the latest official information, some of the facilities might resume operations at the beginning of May. It’s important to mention that in some countries, we took some government stimulus such as a delay in utilities or tax payments that have helped us to retain liquidity.

Moving to Metals. Revenues were 12% lower than the first quarter of last year, and EBITDA was 59%, mainly coming from slower market dynamics and lower inventory costs in the first quarter of ’19. It’s important to mention that despite the market contraction, we have a recovery compared to the last quarter showing an EBITDA growth of 150% as a result of the seasonality, operational efficiencies, SG&A reduction, the launching of new products and a more selective SKU model.

Now on to Cement. Cement U.S. showed a 15% increase in revenues and an impressive 157% increase in EBITDA, mainly stemming from cost and expenses rationalization. The U.S. government is considering cement production as an essential activity. And because of that, we didn’t have a COVID impact in the quarter. For the following quarters, we expect some market contraction with the Mid-Atlantic region being the most affected. For the Cement business in Mexico, there was a slight decrease of 1% in volume compared to the last quarter and a decrease of 5% compared to the same period of last year, in line with the expected economic slowdown published by several firms, including Moody’s, due to the COVID-19.

It’s important to mention that the production of cement was also considered as essential. Our business focus will be [premiums], those maintaining credit lines, monitoring cash flow, rationalization expenses, taking advantage of the low oil prices and keep production and inventory levels in line with the market demand.

Finally, our Cement business in Costa Rica showed a 2% decrease in revenues and a 3% contraction in EBITDA, mainly coming from currency fluctuation. In dollars, the business showed a 6% and 30% increase in revenues and EBITDA, respectively, mainly coming from price and volume increases.

With this, I conclude my remarks and 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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We can take our first question from Alejandra Obregon with Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division – Research Associate [2]

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I just have one related to Mexico. I was just trying to understand what you meant on your operating rates in Mexico. So you did mention that you have been allowed to operate to service specific projects or areas. So I was just trying to understand what that means for your volumes and operating rates in your plants. So if you could help us quantify that and give us more color on what plants are you operating and at what rates, of course? And maybe just give us some color on how is that playing out in April, that would be very helpful.

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

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Okay. Thank you. Thank you, Alejandra, for your question. First, I would like to apologize for the audio. As you know, the situation is making us — make us call from our homes. So please rest assured that in a couple of days, we will make the full transcript available in our IR website. So rest free of that. Now turning to our question, Alejandra, let’s split it in what is cement and material. So Jaime, would you like to jump in, Cement, and let us know your answer, please?

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [4]

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Sorry, I was on mute. So the answer for that about Mexico, we are all open. We have the 3 plants open in Mexico. We just closed to date 2 [labor] days, let’s say, it was started in the 2nd and the Monday, the 4th of April. And we were included into the [intuit] in which cement was considered as an essential activity. So for cement, the production and the open activities is not an issue.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [5]

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Okay. Thank you. Thank you, Jaime. And regarding, Alejandra, the Material business. Today, we have 8 of the 21 plants — 22 plants closed. So basically, all Central and all South America is closed, except Costa Rica. So today, we are operating, I would say, Metals at 80%, Building Systems at 59%. So the virus has spread a lot, as you know, in basically all the countries where we currently operate. And in Costa Rica and in Salvador, they have had a good contagion strategy, and it hasn’t spread that much. So given — having said that, our sales have — this has impacted our sales. So in the U.S., it has impacted us around 22% of sales; in Mexico, I would say around 20%; and in Latin America, as I said, basically all sales are frozen. So I don’t know if we answered your question, Alejandra.

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Operator [6]

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And we can 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 [7]

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You mentioned that you had renegotiated some of your amortizations. Can you tell us what percentage of your short-term debt coming due this year has been renegotiated? And then related to that, do you have any — do you have access to any undrawn committed credit line?

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

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Thank you, Jamie. Juan Francisco, do you want to address that question, please?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [9]

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Sure. Thank you, Jamie, for your questions. So we have been in discussions with our operators, the…

(technical difficulty)

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [10]

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Juan Francisco, we’re having problem hearing you. So can you speak louder, please, and closer to the mic?

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

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Sure. Can you hear me better now?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [12]

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Yes, yes.

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [13]

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Much better.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [14]

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So Jamie, thank you for your question. So we have been in discussions with all the banks. And all the bilateral facilities, which has a maturity schedule, that is clearly quarterly or twice a year due. So we have negotiated with most of them a 6-month time frame. So it is not that much in terms of percentage, but it certainly helps to work through the critical moment a little bit.

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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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And then access to any committed undrawn credit lines?

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

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Sure. So we have a couple of uncommitted credit lines. We have already drawn one of them. That is roughly $13 million, and it’s just to protect cash. We have another that is still available and reduced to that committed credit line that we will do it at the beginning of the year.

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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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So I’m sorry, I didn’t quite hear. So what is the actual amount you said you had in that one undrawn credit line? What magnitude is that?

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

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It is roughly $50 million.

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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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Can you say it like 1-5 or 50?

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

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5-0.

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Operator [21]

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And we can take our next question from Elizabeth Gunning with Prudential.

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Elizabeth Gunning, [22]

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I just have a follow-up question on some debt also. Bear with me. You said you were renegotiating your short-term debt. Do you have any bank loan covenants that might be at risk of being breached?

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

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Juan, can you take that question, please?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [24]

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Sure. Yes. Thank you. Thanks, Elizabeth, for the question. Yes, I mean, we have not covered the covenants or not fulfill the covenant since the third quarter ’19. So we have requested for the waivers, the waivers discussions. And we have almost all the waivers for last year, and we have already let know the banks what our views for 2020. So they are all aware of what are we seeing in terms of covenant.

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Elizabeth Gunning, [25]

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Okay. And what — can you tell us what these covenants are? What is the metric?

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

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Sure. It is a net debt-to-EBITDA ratio that should be in 3.5x. In the first quarter, higher than that, 5.63x.

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Elizabeth Gunning, [27]

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I’m sorry, could you say that again? And can you get on speakerphone by chance? That might be helpful. It’s hard to understand you.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [28]

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Yes, speak louder, Juan.

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Elizabeth Gunning, [29]

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So it’s going from 5x to what?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [30]

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Can you hear me better now?

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Elizabeth Gunning, [31]

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Yes.

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

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Great. So the covenant is 3.5x net debt to EBITDA. And we are in the first quarter showing higher than 5x.

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Operator [33]

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And we can take our next question from [Andre Gonzales] with [Siquer].

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Unidentified Analyst, [34]

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I just wanted to ask if you could provide some color on how many COVID cases you have in the company so far? And what are the safety measures you are taking?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [35]

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Thank you. Thank you, [Andres], for your question. So far, we have 4 cases within the company. And unfortunately, as you may know, one of our Board members died 2 weeks ago. It’s a very sad story, Jaime Ruiz Sacristán, which was a great guy that we loved a lot. And we are taking many, many, many actions to prevent it. So let me tell you, I mean we have divided our facilities by tranche to restrict personal mobility and reduce the risk of contagion. We are taking everybody’s temperature, and they are scanned before entering our facilities. And if they present symptoms, they are immediately tested and treated, followed up by contact tracing, as I said.

Also, like I mentioned during my speech, we have staggered hours and shifts. We have mandatory use of mask and antibacterial gel. We have additional transport. We have staggered hours for canteens to make sure we have a safe distance and it’s kept at all times. We are regularly sanitizing common areas. And also, something very important is that we have an internal crisis response team. So we are meeting daily at 8:30 a.m. with this COVID committee. We have already deployed our crisis protocol, and we have documented all this in some sort of politics and procedures, and our internal auditor is getting full follow-up to this. So I don’t know if I answered your questions.

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Operator [36]

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And we will take our next question from Sean Glickenhaus with AIG.

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Sean Glickenhaus, [37]

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I have 2 questions. One, you mentioned the extraordinary expenses related to layoffs. But I’m sorry, I didn’t hear how much that one-off expense was. And the second question is at the beginning of the call, you mentioned support from your — yes, support from your main shareholders. Can you explain what that means exactly?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [38]

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Sure. Do you want to address the first one, Juan, and I’ll address the second one?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [39]

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Sure. Thank you, Sean, for your question. The layoff cost was close to MXN 40 million, and that is all registered in the first quarter. We expect to have savings from that of close to MXN 120 million for the year.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [40]

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And regarding your second question, Sean, when I say that we have the support of our shareholders, what I mean is we have their total commitment to the company. They are more involved than ever. So they are very involved. They — as you know, they’re very strong business people in Mexico and in the world. So they are here for the long term. And they are helping us negotiate with banks. And as I told you, very, very involved. So they are over the business.

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Operator [41]

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And we will take our next question from Jean Bruny with BBVA.

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Jean Baptiste Bruny, BBVA Corporate and Investment Bank, Research Division – Chief Analyst [42]

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Just a quick one maybe on the spin-off process. I understand in your commentary that it’s not promising to happen pretty soon, probably not before the other sale of the assets in Pennsylvania, as you mentioned, in the third quarter. Did you have a timing in mind? Or you’re seeing something can happen by since this year, [I doubt it] but actually 2021? Or when you have some recovery, you’re saying that you will be back to normal in 2022. Can we project ourselves in expecting for the operations to open in ‘2022?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [43]

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Okay. Thank you, Jean. Unfortunately, I have a terrible time understanding your question. So I don’t know, Juan Francisco and Jaime, if you were able to catch that question and if you can address it. I just hear talking about the Pennsylvania assets, but I don’t know what else. So if you got the question, Juan Francisco, please address it.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [44]

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The first question, if I understand correctly, Jean, it was about the Pennsylvania time frame that we’re expecting?

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Jean Baptiste Bruny, BBVA Corporate and Investment Bank, Research Division – Chief Analyst [45]

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Actually, I don’t know if you hear me better now. It’s actually on the timing of the spin-off, the execution between one asset and the other one. So if you can expect it to happen in 2021, ’22 or where it will be.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [46]

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Okay. Okay, I can address that, if you want, Juan. Or go ahead, Juan. Go ahead.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [47]

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Okay. Thank you. So regarding the spin-off time frame, as you know, we have postponed it, waiting for better conditions for both parties. And as — I mean we didn’t expect or nobody expected this COVID crisis or pandemia. So probably, it will take longer than what we first anticipated. So there is no precise date. The latest that have is that it will jump into ’21 at least. But we will see how the conditions are in ’21. If the conditions are better, then we will execute it. If not, it is likely that we wait a little bit longer.

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Operator [48]

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And we will move next to Coleman Clyde with HSBC.

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Coleman Lee Clyde, HSBC, Research Division – Analyst, Global Consumer and Luxury Brands [49]

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I just wondered if you could maybe give a little bit more color on U.S. Building Systems. I know EBITDA — on margins, in particular, which were down. I know that you mentioned that part of that was provisions made for the class action process. But also, you mentioned the Indiana plant not reaching its breakeven point even though volumes were up. So just a little bit more color on that would be helpful. And then as well, the second question would be, how much of your U.S. Cement EBITDA came from your Pennsylvania plant?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [50]

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Okay. So let me address the first question, and then I leave the second question to Jaime. And please, Juan Francisco, jump in, so if you want to — if you have any additional comments. So as I mentioned during my intervention comment, we’re moving on the right path in Allura. We showed volume and revenue growth in the first quarter. The most important thing is that we have a great value proposition in a growing market. So our commercial strategy implemented since last year has proven to be successful.

Nevertheless, as you saw, our EBITDA dropped 83% due mainly to the class action provision we made, plus the capitalization expenses which we returned from — to last year results. So maybe when I finish addressing these questions, Juan Francisco, you can jump in and elaborate on that.

Going to the Indiana plant, idling this plant, Coleman, will help us reduce our operating costs during this low-demand period since we will consolidate volumes into the other 3 plants. So I think we will have a nice margin improvement there. So as we have been mentioning throughout all the call, we have been putting in place a lot of different measures to lower our costs and improve our cash position. Today, in Elementia, cash is king, and every decision we’re taking is towards that. So we are striving to continue growing in — as I said in my presentation, evolve the volume and profitability.

So Juan Francisco, can you elaborate on the EBITDA lower? Thank you.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [51]

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Sure. Thank you. So Coleman, thank you for the question. There were 2 main factors that affected the results of the Building Systems U.S., as you mentioned. One is the class action that is roughly MXN 50 million for the quarter. We are building up the provision that we expect to use once that we reach a final settlement there.

The second impact is the Indiana facility. It is losing money or the result for the quarter was negative, and it was close to $2.5 million in this case. So it is the biggest impact. Also, as Fernando mentioned, last year, we have a positive one-off that came from capital leasing in the part of the start-up of the facility.

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Coleman Lee Clyde, HSBC, Research Division – Analyst, Global Consumer and Luxury Brands [52]

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Understood.

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [53]

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The one that’s impacting about the Keystone results?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [54]

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Yes, please, just take it, Jaime. Please.

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [55]

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Okay. Thank you for the question because it’s very relevant to highlight that Giant Cement in the U.S. had the best quarter ever in — okay, not ever, but in the last 12 years was the best one. And Keystone was at the best result in the last 17 years for the first quarter. So the question about which percentage was Keystone on the total result, it’s a bit tricky because we have negatives and positives. And corporate cost has a relevant point there. But if we isolate the result from the corporate expenses, the Keystone result, first, was positive in the quarter; and second, it was about 25% of the total operational EBITDA.

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Operator [56]

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And we can now take a follow-up question from Alejandra Obregon with Morgan Stanley.

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Alejandra Obregon Martinez, Morgan Stanley, Research Division – Research Associate [57]

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My question has been answered.

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Operator [58]

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At this time, there are no additional phone questions. I’d like to turn the program over to Melanie Carpenter to address any web questions.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [59]

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Sure. Thank you. We have one from [Nicholas Fabianish] from Jefferies. He’s asking if there’s any possibility that the M&A of Pennsylvania is canceled.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [60]

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Okay. Jaime, do you want to address that one?

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [61]

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Okay. Sure. The answer to this question would be that today, both parties are enforced to do the deal. We have still many months togo to cancel — or not to cancel, to the agreement, the PPA is still valid until several months. And we are waiting for the FTC to approve. It had been taking some months — extra months to be approved because our first was Christmas and New Year holidays, and then we have the COVID and FTC was not working regularly. And we have a second request on detailed information in both companies. So that delayed a bit the process. But today, FTC is in the process of analysis of all this detailed information they asked in the second request, and it’s a matter of couple of months to have an answer from them. And we are going to be — still enforce both parties to do the deal.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [62]

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Okay. And he also had a question. Maybe Juan Francisco can take this one. What additional measures could you take to boost liquidity? You already discussed the support from the creditors, but he’s asking if there is detail you could provide on support from the shareholders that you mentioned.

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [63]

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Probably, I will let Fernando to answer the support on shareholders, but I will certainly go into deep on what we are doing regarding cash flow. So as we mentioned, we are reducing SG&A and COGS heavily. We have cut third-party services, and we are expecting to do $50 million savings for the year. Also, as I mentioned, we did a headcount reduction. We are expecting $120 million for the year. That comes with the one-off for severances. And as Fernando mentioned, we have also temporarily reduced salaries for the full organization.

In terms of working capital, we are accelerating plants that we have to reduce inventories, and we’re expecting to get — and there’s some $25 million for the year. On top of that, as we mentioned, we have had discussions with creditors. And so we are working also in working capital lines. And that will certainly help to ease these probably more critical months.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [64]

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So Melanie, if I could step in, just elaborating on Juan Francisco’s response, I would like to summarize that we have been taking all the actions in our power to maximize our cash flow. So that’s including all the actions that Juan Francisco has been talking about. So we’re working very, very hard to strengthen our balance sheet. And so in a few words, within this existing uncertainty, we see viability for the 3 divisions, for the Cement, Building Systems and Metals.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [65]

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Okay. Excellent. There was a question from Autumn Graham from Schroders. He’s asking if there’s a break fee for the asset sale in the U.S. And if so, how much is that?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [66]

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Juan?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [67]

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I think Jaime can answer that better.

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [68]

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Maybe I didn’t understand the question. Could you repeat it, please?

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [69]

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If there’s a fee for breaking the asset sale in the U.S.?

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [70]

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Additional, you mean other (inaudible)?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [71]

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No. If I understand right, correctly, the question is if there is a penalty for a fee if the divestment is not done.

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [72]

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According to my knowledge, it’s not. There’s no penalty.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [73]

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Okay. Excellent…

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [74]

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Sorry, Melanie, just I want to clarify, please. If you can clarify for us about the $50 million line that we’re working on, now that we are optimistic that we will renovate this without a problem. So can you comment a bit of that — on that, please?

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Juan Francisco Sánchez Kramer, Elementia, S.A.B. de C.V. – CFO [75]

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Yes, of course. So as I mentioned, we are — we have an uncommitted credit line for $50 million. And also, we are working on other alternatives on working capital facilities. So with all of this, we believe that we will be able to go through the 5x development, protecting the cash and protecting the company.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [76]

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Okay. There was a follow-up from Autumn regarding — maybe this one is for Jaime Rocha here. Do you see resilience in Mexico bag cement? And what is the difference in infrastructure demand compared to bag demand?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [77]

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Jaime, can you address that one, please?

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Jaime Emilio Rocha Font, Elementia, S.A.B. de C.V. – Director of Cement Division [78]

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Sure. Well, the first quarter, I would say, was the market moving in the same way as normally usual. I would say bag and bulk were more or less in the same proportion than previous quarters. After the COVID, pricing was established and many construction work started to stop, then we had, of course, a decrease on the bulk demand. The recent bag demand, that was more concentrated in specific cities and states, not overall. And I would say also a rise in the demand on bag cement also in some specific states.

What is supporting the demand, in my opinion, today is mainly the sub-construction, the bag cement and also the governmental infrastructure projects that — in which we are, I would say, less well positioned according to the whole market and working in the new airport construction and also in the important highway that is built in the Southeast. So I would say, today, bulk, in total, maybe have dropped 50% of the regular numbers. And some of the — some number or some percentage of this total decrease was compensated by higher demand in bag cement.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [79]

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Okay. Anything else on the line?

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [80]

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Yes. There’s another question that came from [Greg Laurimar] from [Poncho Investment Research]. And he asked, how long do you think your operations will be affected in Costa Rica? And how much will this impact your activity?

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [81]

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Okay. Let me address that one. And maybe I was not clear during my speech. Costa Rica is operating, likewise for Cement and Building Systems. So it’s operating. So those operations which are not operating are Salvador, the Colombia, Ecuador, Bolivia and Peru. With the information that we have today, we expect those operations to be back on track in the following 2 weeks. That might change because of governments’ decrees. But with the information we have today, all of those operations should be back on at 100% in a 2-week time frame. As we speak, this week, Barranquilla already began operations. And yesterday, we had the approval of the Colombian government to continue operations in Bogotá and in Cali. So 3 plants are already going back to work. And the other one, as I told you, it’s a matter of a 2-weeks time frame with the information we have today.

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Melanie Carpenter, i-advize Corporate Communications Inc. – Co-Founder & MD [82]

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Okay. And all the other questions have been answered, so I’ll turn it back to our operator. Aaron?

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Operator [83]

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There are no additional phone questions at this time. I’d now like to turn the program back over to Fernando Ruiz for any closing remarks.

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Fernando Benjamín Ruiz Jacques, Elementia, S.A.B. de C.V. – CEO [84]

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Thank you. Thank you, operator, and thank you all once again for your interest in Elementia. I would like to thank again our shareholders and directors for supporting us throughout these challenging times.

So let me just close the call with 2 final thoughts. First, COVID-19 is a black swan. I have no doubt that once the storm is over, it will bring new and better opportunities. In the meantime, rest assured we are taking every required measure to protect our people, ensure the financial viability of the company and maintain operational continuity. We are ready to move forward as the sand company that we are. And second, we are committed to finding the best strategies to deliver value to all our shareholders.

So that concludes our call. Please feel free to contact me or Juan Francisco if you have any further questions. We hope that you and your families stay safe. Have a nice rest of the day.