Cementos Argos S.A.

Manuela Ramirez - IR Juan Esteban Calle - CEO Rafael Olivella - VP, Legal Affairs

Andres Soto - Santander Alejandra Obregon - Morgan Stanley Mauricio Serna - UBS Angela Rodríguez - Corredores Davivienda Francisco Suarez - Scotiabank

Thank you, Samuel. Good morning and thank you for joining us for the Cementos Argos' third quarter results.

On the call today are Juan Esteban Calle, our CEO; Carlos Yusty, our CFO; and Rafael Olivella, our VP of Legal Affairs. We have posted English and Spanish versions of the presentations and reports at www.argos.co/ir.

We will upload the conference in audio format to our website. It is now my pleasure to turn the call over to Mr.

Calle.

Thank you, Manuela, and good morning, everyone. I will start on the Slide 3 with some highlights for the quarter.

Cementos Argos was included in the Global and Emerging Dow Jones Sustainability Index for the fifth consecutive year. We were also selected to be part of Dow Jones Sustainability Mila Pacific Alliance Index which closed the best-in-class companies in terms of environmental, social and corporate governance policies in the Pacific Alliance region.

As we have informed the market, we were notified on October 12 by the Colombian Superintendent of Industry about the preliminary result of the ongoing pricing investigation initiated in 2013. The delegated superintendent for the protection of competition made public the report in formality recommending sanctions for Cementos Argos and to our companies for alleged antitrust violations.

I will explain in detail our position regarding the allegations at the end of the call, but it is important to understand that investigation is still at an intermediary stage and our final decision has not been made. At Cementos Argos we are not only confident in but also extremely proud of our conduct throughout our 40 year history.

Moving onto Slide 4; we will discuss our consolidated results. During the third quarter, our results improved notwithstanding the impact of the three hurricanes which affected our U.S.

and Eastern Caribbean operations. The encouraging results are proof of the benefits derived from the successful execution of BEST.

Our consolidated revenues reached 2.2 trillion pesos including 3.9% when compared to Q3 2016. During the quarter, we continued reporting non-recurring expenses associated with the severance payments and anticipated pensions derived from BEST.

Excluding those non-recurring items, we posted an operating EBITDA of 428 billion pesos with a margin of 19.5%, 64 basis points higher than last year 3Q. The improved operating results allow us to obtain a net income of 65 billion pesos making the result of this quarter the best result so far in a challenging 2017.

On the next slide, our consolidated cement volumes were 4.2 million tons during the quarter, increasing 16.7% driven by positive volume dynamics across all regions. I buy the consolidation of Martinsburg.

In ready-mix, volumes decreased 6.1%, impacted by lower volume dispatches in Texas and Columbia, as we will discuss in detail during this call. On Slide 7, we will present the results for the U.S.

Between August and September, our operations in Claudia and Houston were affected by hurricane Harvey and Irma; together they are considered the most devastating storms in the history of the U.S in terms of economic impact. Consequently, our cement and ready-mix dispatches were severely impacted for almost 15 days as rainfall reached historic levels and nullified operations.

Our assets did not suffer material damage. In Houston, 17 out of our 18 ready-mix plants in that city are already fully operational.

In Florida, all of our ready-mix plants, our incubated client in Newberry and our grinding facilities in Tampa and Fort Monte [ph] did not suffer significant damage and are in good condition. Dispatches in both regions start by now to return to pre-hurricane levels.

Notwithstanding these challenging conditions in September, total cement volumes grew by 49% in the quarter, 5.7% if we exclude Martinsburg which compares well with the 1.5% growth of the U.S. market quarter-to-date through July.

Ready-mix volumes decreased by 5.7% explained by the challenging market conditions in Houston. Regarding financial results, our U.S.

business reported revenues of $404 million increasing 15% over Q3 of 2016 and EBITDA of $73 million, increasing 50% over the same period. EBITDA margin was 18.2% which is 427 basis points higher than the margin during the same quarter of 2016.

Due to the impact of the storms during this quarter, the EBITDA generation of our U.S. business wasn't their budget.

As a result, we have decided to lower the guidance for [indiscernible] to $230 million to $240 million from the $260 million to $280 million previously announced. Moving onto Slide 8, our comments on the U.S.

market; the positive fundamentals of the U.S. continues reporting our positive expectations for 2018.

We foresee opportunities in infrastructure and strong housing sector. The data on housing starts on new home sales and residential construction spending which is increasing 9.6% year-to-date is supportive of increasing volumes and prices going forward.

In infrastructure, there are problems on the state level in Maryland, Virginia and Florida totaling $38 billion. In our region, South Carolina increased the gasoline tax for the first time in 30 years to allocate more resources to infrastructure projects.

Finally, we anticipate the $50 billion budget approved by the U.S. Congress to finance the construction of Texas and Florida after the hurricanes; it will be a positive catalyst for the month in those two states which are very important for our U.S.

operations. On Slide 10, I will comment on the performance of our business in Columbia.

I'm pleased to highlight the continuous improvement of our cost competitiveness in Columbia. We have consistently made $27 of EBITDA per tons of cement during the last four months and there are challenging price environment.

Adjusted EBITDA for the quarter was 113 billion pesos, and the EBITDA margin was 20.1%. This improvement is the result of our continuous focus and efficiency which has allowed us to increase the cash cost per ton by $10 out of our total goal of $12 by year end.

And a slightly better price environment due to global dynamics, lower inputs and the recently implemented 5% in portal [ph]. We increased prices last July and last October and are confident that bottom of the cycle is already behind us.

During the quarter, we dispatched at 1.3 million tons growing 1.6% in relation to the third quarter of last year. In the ready-mix business, our volumes decreased 8.3%.

Columbia continues to experience a slowdown in the non-social segment of the housing market. Year-to-date, ready-mix volumes for the industry have decreased 11%.

We will continue to focus on the implementation of BEST advancing the optimization of our network and the execution of projects to increase the usage of alternative fuels and materials such as sand-clay project in Rio Claro. We have streamlined our structure and headcount in the region reducing by more than 1,800 employees, both direct and indirect personal.

On Slide 11, I will comment on the outlook for the market. In Columbia, we expect a recurring demand for 2018 supported by improvement in housing segment.

This sector is benefiting from historically low mortgage grades and from the extension of interest rate subsidies by the government. Regarding infrastructure, our dispatches for the 4G projects are growing steadily and reached 60,000 tons year-to-date.

The pace of execution of the 4G programs in 2017 has been slower than expected. However, the first wave of concession is already under construction and we are dispatching cement and ready-mix to eight 4G projects.

For 2018, we expect these projects to consume between 200,000 and 300,000 tons of cement. Big demand will materialize in 2019 and 2020.

In the coming years, Bogota will regain its Tier volume dynamic of the industry in Columbia. In Bogota [ph], through secured financing from the local and central governments and there are several PPP projects in the pipeline.

On Slide 13, I will present the results for the Caribbean and Central America. During the quarter, the region reported a 5.9% volume growth in cement and 1.7% growth in ready-mix.

Even after suffering the impact of hurricanes Irma and Maria. Puerto Rico, Saint Martin, Saint Thomas and Dominica were the markets affected by the storms.

In Puerto Rico, our integrated plant is still not operational due to the disruption in the supply of electricity from the public network. We are serving the market importing cement through our port terminal on the island.

At our terminals in Grandiose [ph], we are still quantifying the damage which is not material. In the meantime, we have started importing cement to those markets, the region reported revenues of $145 million with a 3.6% growth and adjusted EBITDA of $44 million, adjusted EBITDA margin was 30%.

On the next slide, I will comment on the main drivers in our core markets in the Caribbean and Central America. The grade rating for Honduras was subjugated by moves due to its improving fiscal position and the healthy growth of its economy.

We expect that the country will continue securing infrastructure and housing programs in the years ahead. The 2020 plan will provide four types of subsidies to tackle the housing basket and reduce the gap of one million units required over the next 20 years.

In Panama, we maintain our positive outlook in infrastructure based on its healthy fiscal position and higher import revenues from the canal. Currently, we are participating in the construction of the third bridge over the canal, development [ph] port and the metros second line.

We also expect public housing programs such as Statues Esperanza to boost demand. On Slide 16, I would like to comment on our debt structure and leverage ratios.

At the end of the third quarter, our net debt to EBITDA plus demonstration was 4.5 times. The ratio is higher than our target level due to the acquisition of Martinsburg and the lower EBITDA in Columbia.

By years end, these ratios should close below 4 times, once the ongoing divestment of non-core and non-operating assets is completed. The divestment plant is as bad and balancing on the schedule.

We had recently completed the sale of real estate assets in the U.S. for $20 million.

We plan to finalize the sales of the inside of generation assets in Columbia before the end of the year. The process is on-track.

Taking into account, the non-recurring EBITDA; from our divestment plan we expect to close the year with a consolidated EBITDA of between 1.65 trillion and 1.75 trillion pesos, to continue gaining more financial succesivity and lower our debt to EBITDA ratio to between 3.5 times and 3.6 times in 2018. Our main goal for next year will be to generate positive free cash flow from operations.

We will be working on three fronts, first, the improvement in EBITDA generation across all of our operations. In Columbia, we will continue to achieve a leaner cost structure and expect to drive recovery in volumes and prices going forward.

In the U.S., we expect volume and price increases in 2018, as well as better margins in these businesses coming from the execution of BEST. In the Caribbean and Central America, we have a very positive outlook for Honduras and expect it's stability for all over operations.

Secondly, we will work on optimizing working capital by between $50 million and $60 million, targeting especially receivables in the U.S. Finally, between growth [ph] and cash flow generation, we are reducing the consolidated CapEx for 2018.

We are providing our guidance of between $150 million and $170 million for the three regions including maintenance. Going back to positive free cash flow, we allow us to produce gross debt and improve the competitiveness of the company in the long-term.

Before we conclude, I want to refer to the most evaded report released by the Superintendents of Industry & Commerce in Columbia. I want to start by saying that we have conducted a lot of businesses with transparency and the utmost respect for the law and our stakeholders in all of our markets.

We are confident that we will be successful in making our case to a superintendent and his external advisory board. We look forward to presenting our closing arguments and explanations.

We look forward to having our case heard by the superintendent and his external advisor aboard in order to convince them of our values and behavior. So far, we have meet with most of our clients in Columbia and we are overwhelmed by their tremendous support.

Situations like these ones motivate us to work harder, to become champions in efficiency and to continue providing our clients with the best value proposition to build together a prosperous future. Now I would like to open the call for questions.

My first question is just -- if you could clarify please your consolidated EBITDA guidance for 2017 between 1.65 and 1.75, it does include divestments; which exact -- or which divestments are actually included here? Is it the $20 million real estate assets in the U.S.

and the power assets in Columbia or do you also include there the -- almost $700 million from the divestment of Columbia that you concluded in the first quarter? And my second question regarding the pricing environment in Columbia, you announced a couple of price hikes over the past couple of months; if you could comment a bit on how the implementation of this price is going and if we could already -- we should already expect to see prices increasing on a sequential basis in the third quarter versus the second quarter?

That would be it. Thank you.

Yes, our consolidated EBITDA guidance include all of our divestment planned for this year and that includes the self-generation assets in Columbia and the real estate that we just saw in the U.S. as well.

Regarding price included in Columbia, prices has been increasing since May-June. The average prices for us have included three roles in the last three months.

In the retail segment of the market, the price increases have been more or less $8 per ton so far, so we expect prices to continue increasing towards the end of the year. Average prices for us will continue increasing.

Okay. So the EBITDA guidance does not include the $100 million on the Bancolombia divestments, right?

No, it doesn't include that.

Okay, thank you.

My question is probably a follow-up to your previous response Juan Esteban on the traction in Bancolombia. When I review your numbers and I do my estimates for prices -- price evolution of this quarter I see that there was very little change of average prices in Columbia in the third quarter compared to those of the second quarter while at the same time I see that you have lost almost three points of market share.

Can you help me reconcile these two elements? So is this price increasing driving market share losses and going forward, what will be your priority if it's to regain market share or is to keep on increasing prices?

Thank you.

Thank you, Andres. Our priority going forward is to generate value for our shareholders.

Temporarily we are losing a little bit of market share but in our opinion that is temporarily and we will continue increasing prices going forward. Because the reality is that the fundamentals -- all the fundamentals that we look at import FOB prices into key freight tariffs, all of them are helping us to continue increasing prices going forward.

Perfect. And my second quarter is regarding the ongoing [indiscernible] investigation.

You mentioned that you are expecting a favorable outcome out of this, however, assuming that a negative outcome -- my numbers suggest that you will be -- the penalty will be between $50 million and $70 million. Can you please confirm this will be the amount that you're looking at and if this amount shall be paid in this scenario in 2017 or in 2018?

Yes, we are fully convinced about the arguments that we are presenting to a superintendent and his advisory board. Maximum penalty would be $50 million.

But we are fully confident that the superintendent and the advisory board will pay a lot of attention to our arguments and we are fully convinced that the case will be resolved in our favor.

Perfect. Thank you very much.

Good morning, everyone and thank you for the call. I was just trying to understand what's embedded on your outlook for the U.S.?

What does the $640 million in EBITDA implies as related to pricing in the region for the first quarter or is this profitability driven? And then if you could break it down for us, the 1.75 billion pesos, what does this mean for Columbia and the Caribbean?

So any color on this would be great.

Price in the U.S. have been increasing through the year, volumes are growing and prices are performing well.

In our U.S. operation, heavy cash will provide more or less $180 million of EBITDA and Martinsburg, more or less $60 million.

That is why the new guidance is $240 million.

Okay. So -- but basically you're seeing price increases continuing in the region and could you please give us some color on where are these price increases perhaps on a region-by-region basis?

We see price increases in all of our regions. Going forward in the U.S., the demand is strong and they are foreseeing about better price environment for 2018.

Okay, thank you very much. And for the rest of the regions, what does this decline in consolidated EBITDA mean for Columbia and the Caribbean?

The Caribbean -- our guidance for the Caribbean is pretty similar to last year. We don't foresee any major changes in our operations in the Caribbean, they are performing extremely well and Columbia is starting to show us better results and we are following the market for these third quarter.

Okay, thank you very much. This was very helpful.

Good morning. Thanks for taking my question.

Just one first, as you could clarify on Columbia, you were mentioning that you have achieved in the last three to four months and EBITDA per ton of $27. I just wanted to know if this is adjusted EBITDA or the reported EBITDA?

And on the other hand, if you could just talk a little bit more about next year you expect actually to generate some cash flow from working capital and improvements in the working capital, where are those initiatives aimed at and specifically which regions should we be seeing there these improvements from? Thank you.

In Columbia its [indiscernible] is starting to show great results. Our EBITDA target in Columbia before the end of the year is $30 per ton and we are almost there already.

The $27 since not adjusted EBITDA and we can expect to the profitability of our Columbian business to continue improving towards the future. Our main working capital initiatives will target our U.S.

operations, especially receivables. We have a room for improvement and we will see positive cash flow, consolidated positive cash flow because we are making a huge effort to control CapEx with the guidance that we are providing for next year.

So it will be based on working capital management and CapEx.

Okay, great. Thank you very much.

Good morning, thanks for the presentation. I have one question; how much volume increase do you expect from infrastructure projects in Bogota?

We're expecting single digit volume growth in Columbia for next year. In Bogota with the announcement of the financing of the metro on the ORTPP projects totaling 25 trillion pesos, we expect Bogota to start driving demand growth in Columbia but it will take some time.

So the reality is that we're not expecting major volume growth in Columbia for 2018, we think that the market will grow between 1% and 2% next year.

Thank you.

Good morning. I have two questions in the U.S., on your pricing strategy for 2018, I just want to confirm maybe you have already send the letters of price increases and in which magnitude are you thinking about?

And the second one, it's on a factor -- on a per factor basis; I don't know if you can share your outlook for each of the sectors in the U.S.?

Yes, we have sent already letters in the U.S. but we cannot comment on price increases yet but we have already sent the letters.

Okay. And on the outlook on a per factor basis?

In the U.S. we continue in the housing market as the main driver of demand growth but we're starting to see a lot of infrastructure projects at the state level.

So we expect strong demand at the state levels or infrastructure projects as well but it will be balanced growth between infrastructure and the housing market.

Okay, thanks.

Good morning, thank you very much for the presentation. I have two questions; the first one is regarding the pricing investigations.

I understand you have already send comments to a superintendent; so my question would be, when would you expect a decision from the superintendent from this regards? And my second question is a follow-up on your guidance over expected increase in volumes in Columbia from 1% to 2%.

Is the need a little bit conservative considering that they are tremendous searches for 3Q '17 already increased 2.2%?

Thank you for your question. We will be handling in our closing arguments that the superintendents in a few hours.

And we expect a final decision to be made by the superintendent before the end of the year. And our volumes expectation for Columbia are a bit conservative but with the delays that we have been seeing in the infrastructure projects, I think they are good estimates.

Okay, perfect. Thank you very much.

My question on the -- a follow-up question on investigation. I further reviewed your comments on [indiscernible] on the industry for that matters for what I've read.

But actually my fear is that after I read the whole document of the superintendents, it was some sort of awkward to see that several arguments that seemed to be strong enough, they were rejected by these guys. So my question here is to what extent they could stick to their own view of things and if you are eventually penalized by these as you mentioned upto $50 million, what are the next steps that you can take in order to avoid that penalty payment, and of course, to get the whole think closed?

And the second question if I may, just if you can provide me the -- where you can disclose the amount of EBITDA that you generated in the quarter in the U.S. excluding Martinsburg?

Thank you.

Thank you for your question. We fully believe in the institutions in Columbia and that includes these superintendents of the industry, and we are completely sure that the superintendent and his advisory board will allow us to present our case.

That is why we are fully confident that we will be able to advance our arguments. The amount of EBITDA in 3Q '17 for Martinsburg was $20 million.

Thank you, Juan. But in case that the arguments don't stick and you still face the penalty, what are the next steps -- the next legal steps that you can take in order to avoid the penalty payment?

Rafael will answer that question.

[Indiscernible] with the legal courts in Columbia and demand for protection and for the -- therefore the protection of the judicial system on the decision of the Superintendents of Commerce; that will be our next step but to avoid the payments is really difficult because if we want to go to courts, we need to pay. But as Juan said, we are fully confident in our arguments [ph] that we'll be presenting to-date and we expect that -- we fully expect that the superintendents on the advisory board of the superintendents of commerce will review our arguments that are really clear and we are explaining all the points that they have argued in the motivated report.

Got it, very clear. Thank you so much.

Last question, if I may; you already bought some equipment on [indiscernible] for $90 million. And chance to use that equipment in any order of your plans for next year?

We are looking for options regarding the equipment that we brought for and we -- for 2018, our goal is to find a use for that equipment.

Got it. Thank you so much for the call.

Take care.

It's really two questions that I had. The first is, whether you're providing any sort of guidance or general comments around potential divestments in 2018?

What type of divestments would you be looking at? What type of cash inflows would that produce?

And the second question, I guess related to Pako's [ph] question earlier, is that, given the improved outlook for Columbia, the greater confidence that you have in terms of the rebound taking place there in 2018 and reaching peak volumes as you said in 2019, 2020. Whether you have changed your view in terms of the timing or ramping up Sogamoso [ph] or whether you're sticking to the plan that you've held for a few quarters now.

Thank you.

We are not yet providing guidance for divestment in 2018 but we will continue securing our program. Remember, that we are so adjusted for first 30 megawatts out of 120 megawatts that we have off inside the power plant.

So once we completed that transaction, we will continue to selling the remaining 90 megawatts. We haven't changed the timeline for the expansion of Sogamoso [ph], we don't foresee the need to expand capacity in Columbia in the near-term.

Remember that we are -- we will be entering into operation, our work on sand clay projects in Rio Claro in the second half of 2018. So we don't need any extra capacity yet in Columbia.

Understood, thank you. And just a quick follow-up based on your intelligence, are the two sort of expansions that we're seeing from your competitors, the import terminal from [indiscernible] plant, are those still sort of moving along with schedule or have you seen any delays there?

The plant is dancing, I mean, we don't foresee it before the end of 2019 to tell you the truth. We haven't heard anything new about the grinding facility of [indiscernible] in the south part of Columbia.

Perfect, thank you very much.

It's essentially just a follow-up in terms of your sense; more kind of a big picture, trying to understand going forward, how does this investigation really change beyond pricing -- how you can actually manage to get price increases going forward, especially when you have the eye of the regular constantly on your backs, you and some of the other players in the market? Thanks.

We haven't changed at all. I mean, we continue making in the price decisions that argues and we will not change because of this investigation.

We are fully confident of our actions; so we will not change going forward.

I mean, there was a follow-up here; what would you say is getting to the point of pricing, would you say that it could be pricing above inflation, pricing at inflation? Does it -- and more kind of a longer term view of kind of the pricing dynamics and what we could expect in Columbia, bearing in mind, [indiscernible] as Gordon mentioned.

Prices in Columbia are too low, $83 per ton and now that's still too low. So we see price in Columbia recording to a sustainable level going forward and that will mean increasing prices a little bit on top of inflation going forward.

Excellent, thank you.

Once again, thanks a lot to everyone for connecting to our conference call for the third quarter results and we look forward for our next conference call. Have a great day.