GCC, S.A.B. de C.V. (GCC) Earnings Call Transcript

Good morning, and welcome to GCC's Third Quarter 2026 Earnings Results Conference Call. Before we begin, I would like to remind you that this call is being recorded. [Operator Instructions] Please also note that a slide presentation accompanies today's webcast. The link is available on the company's IR website at gcc.com. I would now like to turn the call over to Sahory Ogushi, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining. With me today are Enrique Escalante, our Chief Executive Officer; and Maik Strecker, Chief Financial Officer. The earnings release detailing this quarter's results was released yesterday after market close and is available on GCC's IR website. This conference call is also being broadcast live within the Investors section at gcc.com. Both the webcast replay of the call and transcript will be available on the same site approximately 1 hour after the end of today's call. Before we begin, I would like to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by the forward-looking statements. Factors that could cause these results to differ materially are set forth in yesterday's press release and in our quarterly report filed with the Mexican Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. With that, let me now turn the call over to Enrique.

Thank you, Sahory, and good morning, everyone. This quarter, GCC marked its 85th anniversary. Over 8.5 decades, we have operated through economic cycles, high interest rates, energy shocks, and shifts in trade flows. What has allowed GCC to keep growing is not the ability to predict every change, but the way we have built the business: investing in the right markets, maintaining a flexible network, staying close to customers and taking a long-term view. The third quarter reflected both this approach and the short-term variability of our markets. We entered the quarter with good momentum. July and August developed well with healthy activity and volume growth across much of our footprint. September then brought unusually heavy rainfall across several of our states where we operate during one of the strongest months of the construction season. Job sites paused, concrete pours were rescheduled and some activity built through the summer shifted out of the quarter. Weather in September was the main reason for slower shipments in the quarter. Importantly, the underlying demand has not disappeared. Projects remain in place. Customer backlogs are healthy in the areas where we are most active. And year-to-date, cement volumes are up 6% in the U.S. and 7.7% in Mexico. Before discussing those markets in greater detail, let me begin with our people strategy. Our 85th anniversary was an opportunity to recognize the generations of employees who built GCC and the teams who will lead the company forward. During the quarter, we conducted our Great Place to Work survey company-wide for the 12th year in a row. The feedback gives us a direct view of what our people value, the areas to improve and how it will help shape our talent priorities for 2027. We are also strengthening the capabilities required to operate in an increasingly connected environment. As technology evolves, including the broader adoption of artificial intelligence, cybersecurity becomes even more important to protecting our operations and information. We continue enhancing our tools and expanding training across the company. This is a top priority for management and for the Board. Our anniversary also highlighted how closely GCC's history is tied to the communities that have grown alongside with us. We partnered with Fundacion Grupo Mexico and the Chihuahua State government to support Dr. Vagon, a hospital on rails that provides free medical care, diagnostic services and medicine to communities where access can be limited. This October, during Breast Cancer Awareness Month, the program placed particular emphasis on women's health services focused on prevention and early detection, an effort we are proud to support as it brings essential care to some of the most economically vulnerable people in our communities. Under our planet strategy, we are advancing initiatives that improve environmental performance while strengthening our operations. Year-to-date, we have increased the use of natural gas and reduced coal in our energy mix while continuing projects to expand access to natural gas and alternative fuels across the network. These investments give our plants more flexibility as relative cost and operating conditions evolve. They also support the transition toward lower carbon energy sources, improve supply reliability and reduce our exposure to fuel price volatility. Turning now to our growth strategy. In the United States, cement volume remained essentially flat during the quarter, while concrete volumes declined 18.6% against last year's exceptional wind, mill and paving project activity. We had anticipated that this high comparison in both our original outlook and the July guidance update, which assumed lower concrete volumes during the second half. Aside from the weather disruption, the quarterly results were in line with our expectations and therefore, did not change our assessment of the underlying demand base. Let me review the primary demand drivers, beginning with infrastructure. Infrastructure remains our most active segment. Across Texas and the broader footprint, we continue supplying highway, paving and other transportation work. The backlog remains solid, and the long-term U.S. policy direction continues to support investment in core transportation infrastructure. Data centers are also contributing to current demand and remain an important source of opportunities. During the quarter, we worked in 4 data center developments, including the Meta project in El Paso and participated in related infrastructure and power generation work. We continue tracking the pipeline closely and are well positioned to participate as additional projects move into construction. Oil and gas activity remained at a good level through the third quarter. Although oil prices were elevated, customers largely follow the work programs established at the beginning of the year rather than materially expanding them. Oil well cement, therefore, remain an important and steady source of demand across the Permian Basin and other Western energy markets. We are optimistic about the outlook for 2027. The additional Odessa capacity increases our ability to serve this market from a plant located closer to demand, both for oil well and construction-grade cement. Wind energy remains one of our most important sources of demand. Over several years, we have built the mobile capacity, technical expertise and customer relationships required to execute large projects across multiple states. We are comparing against an exceptional level of wind-related volumes in 2025, but this segment continues to generate strong sales this year. Current work remains active, and our 2027 backlog is already building up. Residential remains the most challenged U.S. segment. Persistently high mortgage rates continue to constrain affordability and new project decisions, and we do not expect a meaningful change during the remainder of 2026. Importantly, our near-term plans do not depend on a residential recovery. The industry has operated through conditions like this before, and we believe activity across our market is approaching the low point of the current cycle. From a commercial standpoint, the U.S. pricing environment remained challenging. Average cement prices were down during the quarter, reflecting the project and geographic mix effects we have discussed, together with a broader competitive supply environment. Imported cement continues to influence pricing across the industry, including in inland markets that historically have less exposure. However, our inland footprint provides relative protection compared with more import-exposed regions, although it does not fully isolate us from the broader market effect. GCC enjoys a competitive advantage over producers located closer to the U.S. coast and waterways, where exposure to imports is greater. We continue managing pricing market by market, prioritizing customer service supported by a robust, redundant distribution network, consistent product quality and long-term relationships. Against this backdrop, we have notified customers of a $12 per ton cement price increase for both construction and oil well cement effective January 1, 2027. We also continue working through industry associations with U.S. commerce authorities to support fair trade and a level playing field. The announced price increase should support our planned margin recovery. Higher diesel costs are an important consideration. We began applying fuel surcharges to cement and ready-mix deliveries where appropriate, helping align delivery pricing more closely with transportation costs and protect the economics of customer service. Overall, the U.S. project base remains active and healthy customer backlog support our outlook for the coming months. Turning to Mexico. The market followed a different pattern and again demonstrated the value of our geographic diversification. Sales grew during the quarter, supported by higher cement volumes and improved pricing. Rainfall affected activity during September, although to a lesser extent than in the United States. Our retail channel, self-construction and residential demand were among the strongest segments. This activity exists independently of the federal housing initiative, which represents an additional source of potential growth. Projects under the Vivienda para el Bienestar are beginning to move into construction, and we have contracted significant volumes of construction materials as well as thousands of precast concrete houses to participate as the program expands across the state. Infrastructure also remains strong. Several major bridge projects moved into construction during the quarter, including projects where GCC is supplying both concrete and precast products. Additional transportation projects are advancing towards execution, creating a solid pipeline in 2027. Concrete volumes were softer, reflecting rainfall and the timing of several residential and industrial projects. Those projects remain in the market and some are now moving forward. Industrial conditions were broadly unchanged with customers continue to place investment decisions carefully. We are not assuming a near-term acceleration, but the segment's long-term opportunity remains attractive, and we are positioned to respond as projects advance. Overall, Mexico enters the final part of the year with broader demand better than 12 months ago, supported by housing, infrastructure, self-construction and a strong retail channel. Let me now turn to capital allocation. The quarter's most important milestone was the first customer sales from the new Odessa production line. We began shipping both construction and oil well cement to customers, and we expect its contribution to build progressively through 2027. How we introduced the additional capacity matters. Sensitive to current market conditions and the broader supply environment, we're slowly pacing the ramp-up of our new kiln, in line with customer demand rather than pushing incremental tons into the market simply to increase utilization. We follow a similar approach with previous expansions under difficult market conditions with patience and a long-term view, favoring stability and returns over short-term gains in the market with lower margins. As output increases, Odessa will progressively replace higher-cost shipments to Texas from more distant plants, improving freight economics and strengthening the network. Its contribution will build through 2027 and beyond, giving GCC greater capacity to serve oil and gas, infrastructure and other end markets from a more efficient plant located closer to customers. We also continued integrating the aggregates and downstream business we have added across Texas. In July, we completed another acquisition of concrete operations in Midland-Odessa, further strengthening our integrated position. Together, this investment allows us to serve customers with cement, aggregates and concrete, enhance the strategic value of the Odessa expansion and create opportunities for operating and logistics synergies across the businesses. Year-to-date, we have deployed approximately $104 million in acquisitions and returned $54 million to shareholders through dividends and share repurchases while maintaining negative net leverage. Our balance sheet provides substantial financial flexibility, but does not change our investment criteria. We continue following the approach that has driven GCC's growth from the beginning, deploying capital ahead of demand, building around markets we understand well and maintaining a long-term perspective. The quarter includes short-term weather disruptions, but it also marked an important transition. Odessa is now serving customers. Our integrated platform is expanding. Mexico is gaining momentum, and the project base for 2027 is taking shape. With that, let me turn the call over to Maik for a review of the financial results.

Thank you, Enrique, and good morning to everyone. Starting with consolidated performance. Third quarter sales totaled USD 433 million, a decrease of 1.2% compared with the same period last year. The weather effect Enrique described was concentrated in the United States, while Mexico offset part of the decline through higher cement volumes and pricing, together with the appreciation of the Mexican peso against the U.S. dollar. For the first 9 months, consolidated sales increased 9.3% to USD 1.1 billion, reflecting the contribution from the newly acquired businesses and our newer terminals as well as strong volume performance during the first half of the year. In the United States, third quarter revenues decreased 4.7%. Cement volumes declined 0.5%, while concrete volumes decreased 18.6%. Pricing also affected the comparison. Cement prices declined 2.8% year-over-year, reflecting project and geographic mix and the competitive environment Enrique discussed. Concrete prices decreased 2.2% as the project mix shifted away from last year's higher-value wind-related projects. This concrete comparison was already reflected in our July guidance update. Year-to-date, the U.S. revenues increased 6.2%. In Mexico, third quarter revenues increased 11.5%, with volume and pricing contributing to the growth. Cement volumes increased 4.7%, while local currency cement pricing rose 3.2%. Concrete volumes declined 7.8%, while concrete pricing increased 2.7%. For the first 9 months, Mexico's revenues increased 18.6%. Turning to our costs. Third quarter cost of sales as a percentage of sales increased 2.4 percentage points to 66.1%. The change reflects lower U.S. cement pricing, the ongoing cost profile of the newly acquired businesses this year, higher diesel prices and additional logistics costs. During the quarter, higher diesel prices increased delivery and internal transportation costs across our network. Transfer freight also remains elevated as we move cement from our plants both in the United States and Mexico to maintain uninterrupted customer supply during the Odessa ramp-up and to support our newer terminals. We deliberately used the broader network to protect customer service during this transition. We're beginning to shift production and distribution flows during the fourth quarter as Odessa assumes more of the market it was designed to serve. Some logistics efficiencies should begin to emerge as the transition progresses, but we expect the benefits to become more visible throughout 2027 as production stabilizes and the network moves towards its intended configuration. Over time, these changes should increasingly be reflected in our freight costs and in our margins. SG&A expenses for the quarter totaled USD 34 million, an increase of 13.6%. The change primarily reflects the appreciation of the Mexican peso, which increases the reported dollar value of our Mexico expenses as well as the acquired operations and annual salary adjustments. Importantly, the structural savings achieved in 2025 remain embedded in our cost base and spending in these areas addressed by those initiatives has remained stable. Taken together, these revenue and cost dynamics resulted in third quarter EBITDA of $148 million with a margin of 34.3% compared with 35.9% in the prior year period. The margin change primarily reflects shipping timing, pricing and product mix, and the additional freight associated with the Odessa project. These factors do not change our view of the underlying economics of the network. For the first 9 months, EBITDA increased 5.5% to USD 368 million. Net income for the quarter totaled USD 59 million. The year-over-year comparison also reflects a tax self-correction in Mexico related to prior period. Interest rate income was also lower as rates in Mexico declined. Free cash flow for the quarter totaled $121 million, representing a conversion of 82%. Higher cash taxes and lower EBITDA were partially offset by lower working capital requirements and maintenance capital expenditures. The resulting conversion rate remained strong, demonstrating the business' ability to generate cash even in a softer operating quarter. On capital allocation, growth capital expenditures totaled $27 million during the quarter and is down year-to-date. With the Odessa project moving beyond its investment phase, capital intensity is beginning to decline. During the quarter, we also funded the Midland-Odessa Concrete acquisition, and we repurchased $5.7 million in shares. We remain confident in the strength of the business and its long-term outlook. And given the current market conditions, we're evaluating the opportunity for additional share repurchases. Any decision will remain consistent with our broader capital allocation priorities and our disciplined approach to deploying capital. We ended the quarter with cash and equivalents of USD 888 million and a net debt-to-EBITDA of negative 0.51x. This position gives us substantial flexibility to pursue those priorities without changing our conservative financial profile. In summary, the quarter was shaped by weather-related shipment timing and the temporary cost of transitioning the network around Odessa. Year-to-date results remain solid and our balance sheet position is stronger. With that, I will turn the call back to Enrique.

Thank you, Maik. Before we open the call for questions, let me update how we're thinking about the balance of the year. Third quarter performance was below our expectations, and we are, therefore, updating selected elements of our full year outlook. In the United States, we now expect cement volumes to increase mid-single digits, reflecting the third quarter performance and the weather effects we discussed today. For concrete pricing, we now expect a low single-digit increase in the United States, reflecting the project mix and market conditions seen through the third quarter. Taking these assumptions into account, together with the third quarter performance, we now expect consolidated EBITDA to increase low single-digit for the full year. We're also lowering our 2026 capital expenditure guidance to USD 220 million from $270 million previously. Maintenance capital expenditures remain unchanged at $70 million, with the revision concentrated in strategic and growth investment. This reduction primarily reflects approximately $50 million in savings achieved on the Odessa expansion. All other elements of the guidance we provided in July remain unchanged. While the third quarter changes our full year expectations, it does not change how we view the underlying business. Customer backlog remains healthy. The projects affected by weather remain in place and the demand base across our core markets remain active. Our priorities are very clear: continue a disciplined ramping of the Odessa in line with customer demand, maintaining stability in our competitive environment, capture the benefits of the network we have built, and continue allocating capital where we see attractive long-term returns. The investments are already in place to strengthen GCC's earnings and cash generation potential as we move into 2027. We will continue executing to deliver strong results. With that, we will open the call for your questions. Operator, please proceed.

[Operator Instructions] And our first question will come from Mario Simplicio with Morgan Stanley.

I have 2. The first one is how are you seeing room for pricing in '27 and feedback from customers so far to the announced increase, especially considering you're seeing positive volume trends across your markets when we adjust for the weather impact this quarter? And the second one in support to that is how are you seeing the trends for energy costs next year?

Thank you for your question. This is Escalante. We see a very probable effect of the announced $12 price increase starting in January 1. We think the market conditions and our need, I mean, to recover cost inflation in the past are evident, I mean, to every customer, and they are sensitive to it. So we see that with I mean, optimism, and we will I mean, stay very focused on achieving that. I will ask Maik to take the second question on energy trends.

Yes. This is Maik. Yes, regarding the energy and the input for us, we see around fuel, natural gas, specifically at the moment, relatively stable pricing, and we're monitoring that very closely. But at the moment, relatively stable. On power, we see a little bit of pressure. The power costs have been increasing already this year. There's a lot of demand for power. So on power, we're a little bit more conservative. We see some inflation effects there going into 2027. And then on diesel, I mean, we all see it, diesel has been elevated and has impacted us in the third quarter. And at the moment, we still see the diesel prices elevated, and we're watching that also very carefully. That's our current assessment when it comes to fuel and power for the rest of this year and looking at '27. Mario, one item I would like to add is, as Enrique mentioned, we have implemented the fuel surcharge across the business, very focused, very diligent, lots of communication with customers explaining, a), the rationale, but also the mechanics. So far, we received good feedback. Again, our customers, of course, see the same inflation dynamics. So specifically around that diesel topic, we're trying to manage that very proactively via these type of tools.

Our next question will come from Adrian Huerta with JPMorgan.

Enrique, I just wanted to see if you can share with us a little bit how you're seeing opportunities for investments, what we could expect on that over the next 12 to 18 months?

Thank you for the question. This is Enrique. Again, here also, we continue to be, I mean, optimistic and active in searching for growth opportunities for the company, pretty much focused on aggregates as we have been doing this last month, and we're constantly, I mean, discussing opportunities in the -- with the strategy that we have outlined of, I mean, trying to grow around the network with small to medium-sized, I mean, opportunities to continue building progressively, I mean, that business. So very active there. Of course, I mean, we are seeing some activity in the cement market also. I mean, we know a couple of opportunities that are coming on the market, and we stay very close to that, I mean, all the time. So no changes in the strategy at all, and we have a very strong, I mean, balance sheet and that we are determined to use as opportunities arise in line with our return criterias, of course.

Moving next to Francisco Suarez with Scotiabank.

The question that I have relates with your very interesting remarks towards imports. I was surprised that it actually -- you saw some increased competition inland in your footprint. Can you elaborate a little bit further on where exactly is that more present? And what do you think about your additional price hikes beginning in January? Because at the end of the day, that will ultimately will attract more the imports for these guys, isn't it? And on a related question, the second question that I have is on Odessa's utilization rates. What are your overall expectations of this utilization rates, pardon me, by the end of 2026 and by the end of 2027, if I may?

Francisco, thank you for your questions. Again, Enrique here. On the imports, I mean, we have recognized throughout the last year that there has been, I mean, a very, very low price imports into the market, and that's why I referred to the industry efforts, I mean, talking to commerce authorities to try to establish a level playing field. This is a more a medium-term effect, I mean, that we're expecting could materialize to, I mean, protect the industry from an unfair competition. But aside from that, in the meantime, yes, I mean, imported I mean, prices at those levels have, I mean, resulted in shipments of cement -- of imported cement in markets that we traditionally haven't seen before. However, now trying to answer your question in terms of the price effect of those imports, energy and fuel cost, I mean, it's obviously, I mean, the base for cement manufacturing and transportation. And that also affects, I mean, significantly imports. And so we have recently seen or heard some importers also announcing price increases because they are also, of course, I mean, feeling the pressure, the same pressure on their cost side. So we think that, I mean, from now on, probably the situation in terms of competitiveness can have some slight improvements for us. If you couple that with our market position where we're far from coastlines and waterways, I mean, we think that, I mean, we have a very strong position to defend our network. Now let me turn to, I mean, to Odessa. We have been mentioning, I mean, several times that the company is very experienced in putting a new capacity online under adverse market conditions. Out of the 4 last increases or expansions of capacity of the company, 3 have been during challenging economic times, starting with the Pueblo introduction during the Great Recession. Then after our expansion in Rapid City, I mean, the conditions were not very favorable either. Now of course, we're seeing, the challenging situations, including this import comment that we just made for Odessa. So with the exception of Samalayuca a few years ago, market conditions were better. So in that context, the company has learned to be patient and long-term oriented. So we are introducing our capacity of this kiln 3 new line in Odessa, probably with a very different approach than what we forecasted, I mean, 2, 3 years ago when we were in the planning and execution of the construction project. We are flexible in the company to pivot towards, I mean, facing current market conditions, and that doesn't change in any way significantly, I mean, the returns we expect from this great investment that we have made over the medium term. So we'll continue to increase capacity slowly, but diligently as market conditions evolve it's stronger, I mean, for our new capacity. We'll not prefer to give you an exact number at this moment. We're precisely in the budgeting process reviewing carefully customer by customer to our sales teams. And in the next few weeks, we're going to have some more specific numbers where we can share, I mean, that with all of you.

Got it. So I think that it makes sense to -- while that happens, your plans to enhance your overall platform by the integration that you talked about will continue, isn't it? And of course, on the back of the strong balance sheet that you have?

Yes, sir. It will continue consistently and permanently.

Our next question will come from Daniel Rojas with Bank of America.

I was hoping you could elaborate on your comments on the backlog for the data center industry. I would love to understand if you're seeing with everything that's happening in terms of the cautiousness of the market in terms of if the buildout of the data centers is slowing down, will pause or will continue to grow exponentially. From your side, are you seeing the backlog increase significantly? Do you think -- has it paused? Anything you can give us would be welcome.