Cementos Argos S.A.

Thank you, Andreas and good morning, everyone. I would like to start with our consolidated numbers by emphasizing that for the purpose of facilitating the comparability of results during this call, we will be making reference to financial numbers net of the effect of IFRS 16.

More detail on our financials after the adoption of IFRS 16 can be found in the presentation and report already posted in our Investor Relations website. Cement dispatches reached 4.3 million tons during the third quarter, increasing 1% when compared to the same quarter of 2018, and ready mix dispatches reached 2.7 million cubic meters, posting a 1.1% increase.

These volumes reflect positive demand growth in the U.S., the still challenging market conditions in Honduras and Panama and the short-term effect of our strategy to record prices in Colombia. Our EBITDA decreased 8.8% during the quarter, reflecting two effects.

We recorded one-off non-cash expenses of $7.6 million in the U.S, and we got a positive impact from the peso devaluation in our consolidated P&L. This also affected the net income for the quarter.

We are pleased to announce that the commissioning of our calcined clay project in Rioclaro is going extremely well. We have already produced the first cement using our blending process with very promising results in terms of cost and technical properties.

This new facility is going to play an important role in the competitiveness of Argos in the Northwestern region of Colombia going forward. We are also extremely pleased with the start of operations of our new dry mortar plant in Panama.

The new product offering will help our clients to increase their productivity at their construction sites in a market where labor is scarce and expensive. Now to start with our results in each region, I would like to invite Bill to explain the performance of the business in the U.S.

and our view for the region.

Thank you, Juan, and good morning, everyone. I'd like to begin by talking about our volumes for both our cement and ready mix businesses, which are growing strongly versus last year even with hurricane Dorian affecting our operations along the Southeast coast.

The industry continues to be positive. We are seeing that in all of our markets, both in our strongest markets like Atlanta, Georgia, as well as our toughest markets like Houston and Dallas, Texas, where competition is resulting in lower profitability.

In cement, dispatches grew by 9.5% in the third quarter. And I'd like to specifically highlight our performance in Florida, the Deep South and the Carolinas, which are up double digits.

In the ready mix business, volumes grew 4.3% driven by the performance of Texas, up 21%, which offsets a decrease in demand of 15% in Florida given the hurricane mandatory evacuation. In Texas, we regained market share, especially in Houston, and increased our backlog, anticipating a recovery in pricing even though this affected the quarter profitability.

As for EBITDA, on a like-for-like basis, it decreased 6% in the third quarter as we reported significant one-off charges of $7.6 million, all of them non-cash. The EBITDA margin was also affected by around 50 basis points due to the impact of Hurricane Dorian that forced us to halt the Harleyville operation and increased delivery and maintenance costs in the Southeast.

In the ready mix segment, higher cost of aggregates and delivery costs drove the profitability down, more so since we grew in areas such as Texas where margins are impacted by competition, and it is more difficult to pass those increased costs to our clients. We continue working on BEST initiatives during the quarter.

Our energetics cost increased by 3.6% mainly due to higher electricity rates and more consumption in our Martinsburg kiln, where next week will be commissioning the alternative fuels project with an estimated savings of $1.3 million in 2020. In terms of the market, we maintain a positive outlook based on lower mortgage rates and increase in migrations to mid and small cities, a lot of them in our areas of operation, and a good momentum for the non-residential market.

The Architectural Billing Index, or ABI, which measures the non-residential construction momentum and is considered positive when it is above 50, closed at 52.3 in September for the south of the U.S, the highest levels for the country.

Thank you, Bill. We remain optimistic about the performance of our business in the U.S.

for the remaining of the year, maintaining a strong focus on the execution of risk and working in further improving the performance of the businesses to be closer to our full-year guidance. It is worth mentioning that the U.S.

posted a strong results in October. Moving on to Colombia.

I want to highlight the very positive dynamic of the market, even though during our strong commitment and the successful execution of our price recovery strategy, we have lost some market share. Tomas will now provide additional color on this region.

Thank you, Juan, and good morning. During the quarter, the cement market presented a positive trend posting a 6.7% growth, mainly in the retail segment in Antioquia and Valle.

We continue to see positive developments in demand and remain confident that these dynamics, together with the new announcement of large infrastructure projects beyond the 4G, will be key to maintain the profitability of our business in the coming years. However, resulting from an 11% increase year-over-year in FOB prices during the third quarter of 2019, we experienced a 368 basis points loss of market share.

This led to a 2.2% reduction in cement volume. Likewise, ready mix posted a 9.5% decrease in volume during the quarter.

Nevertheless, our revenues grew 4.2% even though we still have a long way to recover profitability this quarter, saw a positive sequential EBITDA margin improvement of 340 basis points coming from: first, the price recovery commitment in the context of higher import parities resulting from the devaluation of the peso; and secondly, better energetics costs, which are sequentially down 9% coming from a reduction in the coal price and an increasing gas availability for our Cartagena plant. Regarding our outlook, we continue to see signals of recovery in the market with special momentum in Bogota where the contract signing for the Metro will ensure that demand for civil works will remain strong even after the peak for 4G declines.

The Metro is a $4.5 billion project awarded to Apca Transmimetro Consortium with China Harbour Engineering Company and Xi´An Metro Company Limited. The civil work is expected to start during the first half of 2020, and the construction schedule is five years with ready mix and cement dispatches starting in 2021.

We have been working in order to beat this project with the best value proposition possible and modern construction techniques that may help reduce the difficult logistics of this project and the time of construction below five years. Year-to-date through September, we have dispatched around 315,000 tons of equivalent cement to infrastructure and 150,000 tons to 4G projects with a 36% increase when compared to the same period of 2018.

We will continue to make progress in this segment to reaffirm and maintain our leadership based on our value proposition.

Thank you, Tomas. I would like to emphasize that we will continue our efforts to optimize energetic cost in Colombia and remain fully committed to the continuation of the execution of our price strategy to profitability and competitiveness.

Prices are still well below import parity. Demand has been recurring and the Colombian peso has been devaluing.

On the customer side, our go-to-market strategy to offer our clients the best value proposition through our portfolio of products and services in Argos ONE will be top priority. In this sense, I am glad to mention that we remain at the forefront of the industry.

As of September, 60% and 40% of our cement and ready mix dispatches were made through the platform. Moving on to the Caribbean and Central America region, results continue to be affected by the challenging environment we are facing in Panama and Honduras, where imports have also gained relevance.

However, I would like to point out that operations in the Dominican Republic continue with a positive performance, highlighting the importance of our diversified strategy in this region. Camilo Restrepo, who leads our business in the Caribbean and Central America, will explain the results.

Thank you, Juan, and good morning, everyone. Cement volume in our local operations decreased 12.5%, resulting from a slow market in Panama, where dispatches are 27% lower, and the increasing political turmoil that has affected Honduras since President Hernandez was reelected where imports have increased significantly year-to-date.

This reduction has been partially offset by an increase in volumes of 11% in Dominican Republic. As a consequences, revenues decreased 15.8% and EBITDA, 28%.

The EBITDA margins is 24% for the quarter. Panama and Honduras EBITDA fell double-digit.

While the generation of Dominican Republic, a significant smaller operation increased by almost 50%. In the midterm, we remain cautiously positive about Panama, considering the strong pipeline of infrastructure projects and the initiatives announced by the new government to boost the construction sector, both in the residential and infrastructure segment, and the positive messages from the recently elected President.

Thank you, Camilo. I would like to highlight that we'll continue focus in the execution of testing the region to continue gaining competitiveness in a diverse and challenging competitive market.

Now before we go to a Q&A, I will refer to our balance statement. We closed the quarter with a net debt-to-EBITDA ratio of 4.25 times, a little higher than our target.

We have been very clear that our top priority and obsession is to gain financial flexibility and reduce this ratio to a level of 3.2 times net debt-to-EBITDA by June of 2020 for which we need to accelerate our divestment program. Finally, I would like to close the call by thanking you all for your attention and reaffirming our commitment to continue transforming Argos to deliver more value to all of our shareholders.

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

Hi, good morning everyone and thanks for the call. I have two questions.

My first one is regarding the ready mix operations in the U.S. What's the difference in margins between Texas and rest of the markets in this ready mix business that you mentioned has lower margins in Texas?

And my second question is regarding taxes. I was wondering if you could comment on the reason behind the high income tax rate also this quarter of 57% consolidated.

Thank you very much.

Thank you, Juliana. Thank you for the question.

We are very pleased with the performance of the volumes of ready mix in Texas. They grew in a significant way during the quarter while we still are facing many challenges to make our business in Texas more profitable.

At this point in time, the difference in margins between Texas and the operations that we have in the East are more or less 400 basis points. So we know that we have an important task ahead of us to make the business much more profitable in Texas.

I would like to ask our CFO to explain the higher income tax rate in the third quarter.

You know very well that the income taxes quarter-by-quarter will try to catch up with the rest of the year. And in the case of every one of our operations in Sogamoso, we are making losses.

That is the case of the Colombian legal entity for the reason we have to measure what is the value of the deferred tax. And for that reason, this year – maybe in this quarter, we will have tax rate higher than in the last two quarters.

But for the whole year, we are estimating a tax rate at around 27% to 30%.

Perfect. Thank you very much.

Okay, thank you, Juliana.

Hi, good morning. I just have one question.

I want to know what are you expecting in 2020 in prices and volumes dynamic in different regions. Thank you very much.

Okay, thank you, Roberto. Thank you for your question.

In the U.S, we continue seeing that the fundamentals are strong. Volumes are growing extremely well in all of our markets, and we are foreseeing that for 2020, we will continue seeing volume growth and positive and constructive price dynamics.

In Colombia, the reality is that we haven't seen in a long, long time such a strong growth in the demand in the market. Year-to-date, the demand is growing at 4%.

The last quarter, it grew close to 9%. Prices have been increasing in a significant way.

In our case, prices are up close to 11% when compared to December of last year. But we can see here that price in Colombia is still well below import parity prices.

In our opinion, the gap is between $10 and $15. So the reality is that with the strong demand that we are foreseeing for 2020, we still think that price in Colombia will have to continue going up.

In Central America and the Caribbean, it is market by market. In Honduras and Panama, the main challenge has been demand.

Demand in Honduras has been slowing down because of the political problems that Honduras is facing. In Panama, we are shorter in 2020.

Demand will start growing again because the country has a lot of interesting large infrastructure projects in the pipeline. So we are foreseeing a constructive volume and price scenario for Panama going forward.

In Honduras, it's just wait and see, because until the political situation doesn't get resolved, the reality is that most likely, demand will continue to be slow.

Thank you. But when you talk about prices in Colombia, are you expecting it to increase?

What is the effect of the Ecocementos plant production in the market related to prices in 2020? What are you seeing?

Yes. What we think is that in spite of the entrance of Ecocementos to the market, with growth in demand, the reality is that if the market continues growing above 4% to 5%, it will have solved half of the capacity of Ecocementos.

On top of that, Colombia is still importing close to 600,000 tons of clinker, so most likely, with the entrance of Ecocementos, they or somebody else could start supplying that imported clinker. And in any case, we think that nobody wants to continue competing at prices below import parity.

So we are positive that prices in Colombia will continue growing above the inflation rate in 2020.

Thank you very much.

Good morning, gentlemen. Thank you for the presentation.

Thank you for taking my question. Just one question from me.

Your guidance for 2019 is unchanged after the couple of headwinds that you have seen in Q3. It implies strong EBITDA growth in Q4.

If you can give some guidance. My question is simple, what makes you confident enough that you will achieve this guidance of – that you will achieve the guidance of EBITDA for 2019?

Okay. Thank you, Paul for the question.

We are still confident that we will get to hit the lower range of our guidance, that is COP 1.6 billion without IFRS 16 and COP 1.8 with IFRS 16. It includes more or less $20 million from divestments in the last quarter of 2019.

Okay, thank you very much.

Yes, good morning. Thank you for taking my questions.

The first one is considering the current leverage levels. Are you worried that the 4.0x total debt-to-EBITDA as you have mentioned won't be reached by the end of the year and this may lead to a rating cut by Fitch?

And in this sense, should we expect any significant divestments during the last quarter? And my second question is considering that the Chinese consortium was awarded the Metro project, are you worried that they might use Chinese materials in the constructions?

And also in the – related to this question, do you have an estimate on the transportation costs per ton from the coast to Bogota? Thank you.

Thank you, Rodrigo for the questions. We are working hard to finish the year with a net debt-to-EBITDA ratio below 4x.

We continue fully committed to lowering that ratio to a level at least 3.2x by June of 2020 and we are accelerating our divestment process. We are fully confident that we will be able to finalize divestment of a cluster of ready mix plants in the U.S.

before the year-end, and we will continue selling real estate properties, and we have similar non-core strategic assets that we will continue selling into 2020. So the reality is that we are fully committed to reaching a better level of debt.

About the China Harbour, I mean, the reality is that, to bring imported cement to Bogota doesn't make any sense. The freight from the coast to Bogota could be more or less $50 per ton, so the reality is that we are completely sure that they will use only Colombian produced cement and ready mix.

In terms of – and we're extremely optimistic that we have a very good value proposition, and we are working hard to try to secure the contract with the Chinese firm.

Excellent, Juan Esteban, thank you.

Hi, good morning and thank you for the taking question. I have just a follow-up.

I think you mentioned how much is market share you lost during the quarter in Colombia, and I'm just wondering if you can kind of repeat that for me, because I'm not sure I got it right. And then in that same line, would it be fair to assume that you would continue with this price increasing strategy, regardless if it comes at a cost in terms of market share for 2020?

Thank you.

Yes. Tomas, why don't you give us a little bit more color about the market in Colombia and our strategy to increase prices?

Sure, Alejandra. So we lost 368 basis points of market share, 368.

We expect that market share to be more or less stable. We know that a new entrant is coming into the industry.

And while some market share loss is foreseeable, however we are very confident that our value proposition is the best in the market so far. In the last months, we have been including new products in our product portfolio.

So now we have masonry cement, we have structural cement, which makes a big chunk of our sales both in the retail and industrial segments. We also have what we call the industrial cement.

It's the best cement in 12 hours of compressive strength in the market. And as far as Tomas said in the call before, 60% of our customers are already acquiring our products through Argos ONE.

That is a unique number in this industry. That makes us the best possible value proposition in our country and in our region.

We're very confident that the next year, all segments will be growing as they are right now. This is the first time in, I would say at least two or three years that all segments from retail to construction to ready mix to contractors and pre-cutters, and all of the segments are growing year-to-date.

And that is a very healthy metric. And prices for next year, as Juan Esteban said, will be still trying to reach the import parity levels, which are still pretty low compared to our current prices.

So next year, it's going to be a very interesting period of the industry, and I believe it's going to be as strong as we are right now.

Thank you. And just a quick follow-up, if I may.

Going into the fourth quarter, as you continue to increase prices, have you seen competition follow those price increases so far? Or not yet?

I mean, we're doing our job. And in our opinion, what we should do is to continue leading the price increases in the market.

It is up to any of our competitors to continue their strategy, but we are completely happy with ours.

Understood. Thank you very much.

And thank you for taking my question again.

Good morning, thank you for the presentation. I have a question related to profitability in Colombia.

I see several reasons to be optimistic about margins in 2020, including higher prices, the starting of your calcined clay project, the capacity of the administration that you're conducting. With all those factors, what is your expectation in terms of margin improvement in 2020?

Thank you.

Yes. Thank you, Andres.

I mean the reality is that every single month in 2019, we are seeing our margins going up. We are already making $27 to $28 per ton in Colombia.

Energy plus electricity prices have been decreasing in a significant way. It was a problem during the first quarter and the second quarter of the year.

But energetics decreased almost 10% in the third quarter. And with the pickup in demand, the reality is that we are expecting our margins to continue improving in Colombia in 2020.

Our midterm goal is to get back our margins at least to 25% and we have still a long way to go, but we are working hard trying to recover the profitability for our business in Colombia, and 2020 is looking good.

Perfect. Thank you, Juan Esteban.

Thank you. My question is returning to the margin difference in the two ready mix businesses in the U.S., and the question is two parts to it, please.

Firstly, that 400 basis point difference, how much of it do you think is structural? Because I don't think you have cement in that region.

And then second question, the cluster of ready mix plants you talked you'll be divesting in the fourth quarter, are those businesses where you also don't have cement. Thank you.

Thank you, Mike. I would like Bill to give you a little bit more color about the profitability for our ready mix business in the U.S., and I will take the question about the divestment.

Mike, thank you for the question. I mean as far as the ready mix business, the difference between the South Central and Southeast, it's about a 4% difference in pricing.

And we feel like we get squeezed a little bit in the Texas market. So generally, there's a lot of more price competition there than you see in the South or the East of the U.S., and that's causing us some lower pricing in that market.

On the second question, which is about the divestment in the U.S., some of the businesses that we are selling are vertically integrated with cement, and there are some that are not. So I think probably, on a volume basis, about evenly split, some with and some without internal cement.

If I could just follow up then, please. How are you determining what you divest?

Well, the reality is that we want to concentrate our operations in large metropolitan areas in our top markets. And we are divesting the noncore, nonstrategic assets that we have in rural areas basically, markets where volumes are lower and they are not contributing as much as they should be toward EBITDA.

Understood. Thank you very much.

Thank you.

Once again, thanks a lot for attending our conference call and looking forward to the conference call of the end of 2019. Have a great day.