Cementos Argos S.A. (CMTOY) CEO Juan Esteban Calle on Q1 2019 Results - Earnings Call Transcript

|
About: Cementos Argos S.A. (CMTOY)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Cementos Argos S.A. (OTCPK:CMTOY) Q1 2019 Earnings Conference Call May 14, 2019 9:00 AM ET

Company Participants

Manuela Ramírez – Investor Relations Officer

Juan Esteban Calle – Chief Executive Officer

Carlos Yusty – Chief Financial Officer

Bill Wagner – Vice President-U.S. Division

Tomás Restrepo – Vice President-Colombia Division

Camilo Restrepo – Vice President-Caribbean and Central America Division

Conference Call Participants

Andres Soto – Santander

Juliana Aguilar – Bancolombia

Vanessa Quiroga – Credit Suisse

Gordon Lee – BTG

Rodrigo Sanchez – Davivienda Corredores

Mauricio Serna – UBS

Adrian Huerta – JP Morgan

Dan McGoey – Citi Group

Nicolás Erazo – Ultraserfinco

Roberto Paniagua – Corficolombiana

Paul Chabran – On Field Investment

Steffania Mosquera – CrediCorp Capital

Francisco Suarez – Scotia Bank

Manuela Ramírez

Good morning. My name is Manuela Ramírez, Cementos Argos IRO, and I welcome you to our First Quarter Results Call. On the call today are Juan Esteban Calle, our CEO; Carlos Yusty, our CFO; Rafael Olivella, VP of Legal Affairs; Bill Wagner, the VP of the U.S. division; Tomás Restrepo, the VP of Colombia division and Camilo Restrepo, VP of Caribbean and Central America division.

Please note that certain forward-looking statements and information during the call or in the report and presentation uploaded at www.argos.co/ir are related to Cementos Argos S.A. and its subsidiaries, which are based on the knowledge of current facts, expectations, circumstances and assumptions of future events. Various factors may cause Argos future results, performance or accomplishments to differ from those expressed herein.

The forward-looking statements are made to date, and Argos does not assume any obligation to update their statements in the future as a result of new information, future events or any other factors. Please note, that after the initial remarks, there will be a Q&A session. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Calle.

Juan Esteban Calle

Thank you Manuela and good morning everyone. On today’s call, I want to start by giving you an update on the recent developments, which are consistent with continuous and successful execution of our BEST program. I am extremely pleased to announce the on budget completion of our calcined clay project in Rioclaro. The use of alternative materials is an integral part of our strategy and our commitment to reduce our clinker to cement factor to comply with our CO2 emissions targets for 2025. We are sure that this project which has a clear competitive advantage in terms of sustainability, CapEx and OpEx per ton, will be the first of many to come in our operations. During the quarter we also continue with the execution of our divestment program, participating in a tender offer to sell our stake in the Cartón de Colombia at a price of COP 9,850 per share. We expect to receive close to $7 million from the sale. Regionally, we are completing the sale of our stake in Omya Andina in Colombia for a total amount of $19.3 million. The proceeds from both transactions will help us to exit leverage. Now moving onto our consolidated figures, I would like to start 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 effects 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 3.8 million tons during the first quarter, increasing 4.7% when compared to the first quarter of 2018. And ready-mix dispatches reached 2.5 million cubic meters posting a 2.3% grow. These volumes reflect the positive performance of the U.S. region and improving demand in the Colombian market.

Operating EBITDA increased 3.7% during the quarter as a result of increasing volumes and we started the execution of BEST 2.0 in the U.S. region. Another price environment in Colombia offsetting the impact of our challenging market in Panama and energy cost inflation in Colombia, where the higher coal prices led to a double-digit percentage increase in fuel expense.

Similarly in the Caribbean and Central America, the cost of energy grew by 16%, mainly driven by higher volumes in Puerto Rico. Finally in the U.S., our electricity plus energy costs per ton remain stable as a result of the execution of BEST 2.0.To start with our results in each region, I would like to invite Bill for explaining the performance of the business in the U.S. and our view for this region.

Bill Wagner

Thank you Juan and good morning everyone. We've had a promising start to 2019 and the weather which killed us last year has been in our favor so far, 70% of our business days were good in terms of weather in the states where we operate. With the weather on our side and additional efforts from us to increase the capacity utilization of our plants, cement volumes were up 25.8% in our Deep South district, 63% in our Florida district up 34% in Arkansas, up 10% in the Carolinas and up 1.2% in the northeast zone for a 13% total increase overall.

Our ready-mix business leveraged a favorable weather as well with 3.1% increase in volume. On a more granular level, our south central zone increased its volume by 9.2% overall, 25.6% in Houston and 28.9% in Little Rock. However, the southeastern fell slightly by 0.4% as a result of the sale of some ready-mix concrete clusters in December. Despite the outstanding efforts from North Carolina which stalled at 21.7% gain.

Other positive and very encouraging indicator of the healthy fundamentals of the U.S. region was the successful execution of our price increase in Florida. This makes us confident about the price increases that were rolled out in the other markets starting in April. EBITDA for the region totaled $37 million, which is an increase of 12.6% and our EBITDA margin was 9.9% just beating out the 9.8% margin of the first quarter of 2018.

Looking more at our business, we are seeing very positive trends both in terms of economic indicators as well as booked business. Our Architectural Billing Index or ABI, that measures the nonresidential construction momentum in which is considered positive above 50 points closed at 54.2 in March, where the southern region in the U.S. becoming the best performer during the quarter, mainly in the commercial industrial segment. This segment is the most important one for this region in terms of growth and revenue share.

And based on our own business we have to agree, we're booking projects like the Google project in Dallas where we will supply concrete from our Midlothian dedicated ready-mix plant over the next three years. And the Facebook data center project just outside of Atlanta, Georgia, where we also set up a dedicated ready mix plant to supply more than 156,000 cubic meters of concrete.

Construction spending remains positive despite the 0.8% decrease compared to the same quarter of 2018, driven mainly by an 8.4% drop in the residential segment, the highest since 2010. On the other hand, the nonresidential and public segments grew 4.8% and 8.6% year-over-year respectively. Results had strengthened our outlook considering our value proposition focused in the nonresidential and infrastructure segments. This boost has been driven by programs like the Transportation Infrastructure Finance Innovation Act or TIFIA, which has been funding projects like the I-4 Ultimate project and Gateway Expressway in Florida as well as the North Tarrant Express in Texas, all of which we are supplying the concrete floor.

Another great example is the Railroad Rehabilitation and Improvement Financing or RRIF, which this year will provide $908 million to finance the Cotton Belt Corridor of regional rail project in Dallas, a significant portion of which we are providing the concrete floor. BEST 2.0 is off to a great start in the U.S. region with more than $5 million of savings as of March, which represents 12.5% of our 2019 total goal.

In terms of BEST 2.0, I'd like to make special emphasis on three points, the first of which is that we're focusing our Ready-Mix Concrete network more specifically on the seven urban markets that represent about 70% of our total volume for us and putting our efforts into optimizing our operations in those markets. Secondly, we have seen great savings thus far in terms of our energetics due to our negotiation on coal prices, which has saved us about $1 million to $1.5 million per metric ton.

In addition, we were able to reduce our electricity costs by 10% to act as the management for our Roberta and Harleyville cement plants, we're in the testing phase for the use of pet coke in Roberta, utilizing the refinery mix to the plant and we are advancing the implementation of alternative fuels and our commissioning in the Newberry plant. And the last point I'd like to emphasize is our great stride in closing the gap in terms of our driver shortage. In March through new hiring events and a revamp target strategy, we hired 64 drivers compared to historical average of 50. So we will continue to keep that pace over the next course of this year.

Juan Esteban Calle

Thank you, Bill. It is important to point out that with a word on our site and the focus on the execution of BEST 2.0, we expect the U.S. operations to post a growth of 7% in 2019, closer to our cost of capital.

Moving on to Colombia, we are pleased to report volume growth in both cement and ready-mix. As the market continues its positive trend in our healthier competitive and pricing volume mix. Tomás will provide additional color on the region.

Tomás Restrepo

Thank you, Juan, and good morning. The effort to recover prices continues to be our main goal for this year and we are very pleased to have achieved an 8% increase in our average FOB prices during the quarter, when compared to our prices at the end of 2018. We experienced better dynamics in the market, especially in the retail segment and in cement dispatches to ready-mix operations with 11.3% and 11.8% growth respectively, particularly on the North – Northwest and Southwest region, we improved our market competitive position during the quarter.

Continuing with the same trend explained in the last call energy cost affected our EBITDA margin in around 300 basis points. To counter these effects during this year, we have taken several steps. On the second week of March, we started burning imported pet coke at a price 22% lower than coal in our Cartagena plant, where we continue to advance in the implementation of impregnated fuels and biomass to complement the tires we are already using as alternative fuel.

We also completed a major maintenance in Rioclaro plant, for restarted operations of the calcined clay project that we mentioned before. We are very excited with this milestone, which we will not only – which will not only make our Rioclaro cement plant the most competitive in the country, but will allow us to stamp the green cement seal in our bags, guaranteeing lower CO2 emissions and the first large scale materialization of our innovation pledge.

We continue to be cautiously optimistic for the rest of the year. Making progress on the infrastructure segment and improving our share in those markets with lower cost to serve, we'll ensure that we will successful defending our leadership in the Colombian market, based on our superior value proposition and go-to market strategy.

In the infrastructure front, I am happy to tell you that we recently closed two new contracts Bucaramanga-Barrancabermeja-Yondó and the new Chirajara bridge. In the meanwhile, the infrastructure plan will – with the support of the new government, is advancing with the materialization of our new financial closing, [indiscernible]. The approval of a new port in Ethiopia and the proposals received for the Bogota metro by six concessionaries. We remain focused on maintaining our leadership in this segment.

Finally, I would like to mention that we are pleased to see the progressive evolution of our new aggregates business, posting positive results, driven by our growth of around 40% in the number of active third-party clients, although still in an early stage this business is increasing the volumes sold and revenues by double-digit.

Juan Esteban Calle

Thank you, Tomás. I would like to point out our efforts to optimize energy cost in our operations in Colombia and the commitment of our team to continuously improve the experience of our clients. Concentrating our efforts in those markets, where our value proposition is more valuable with a low cost to serve, with the goals to improve profitability and become much more competitive.

If we move to the Caribbean and Central American region, results were affected by the challenging conditions faced in markets such as Panama and Haiti, that were partially offset by the positive developments in Puerto Rico, Dominican Republic and the islands of the Eastern Caribbean. Camilo Restrepo, who leads our business in this region will explain these results.

Camilo Restrepo

Thank you, Juan, and good morning to everyone. Cement volume in our local operations decreased by 2.5% resulting from the still challenging market conditions in the Panamanian market, where we expect some improvement after Laurentino Cortizo Nito, the recent elected President and who is known for being pro-business, takes off it in July and commits to the execution of attractive pipeline of infrastructure projects, supported on the country's healthy fiscal situation.

Nevertheless, I would like to highlight the good momentum for our operations in Dominican Republic, Puerto Rico and the Eastern Caribbean, which posted a 22%, 12% and 10% volume growth respectively during the quarter. Our ready-mix volume decreased 20% explained by the already mentioned performance in Panama, which accounts for around 70% of our total volume and that was partially offset by 7% growth in the business in Dominican Republic.

In spite of the challenging environment, in some of our markets in the region, we remain optimistic for the remainder of the year. The performance of markets such as the Dominican Republic, which had the highest increase in economic activity in Latin America during 2018, driven mainly by 12% growth in housing construction activity in Puerto Rico, where we foresee a positive trend in the construction segment, as a result of the execution of the reconstruction plan, whose funds are being focused on infrastructure projects, roads and housing, make us feel confident about the performance of our business in 2019.

Finally, I would like to mention some achievements regarding the implementation of BEST in the region. In this sense, we have advanced in our digital strategy, whereas April, 55% and 4.5% of their cement orders in Dominican Republic and Honduras, a 13% of the concrete orders in Panama were placed through different digital platforms, including our pilot to receive orders through WhatsApp in Panama. Cost optimizations through efficiencies and distribution cost in Panama and Honduras, electricity including Panama, Honduras and Dominican Republic in the reduction of clinker to cement ratio in Honduras. Also we have added some products to our portfolio aligned with our goal to give our customer extraordinary solutions.

Juan Esteban Calle

Thank you, Camilo. The execution of BEST in the region is going well on all the efficiencies that we are capturing are helping us to navigate equivalent demanding competitive environment in our region, where inputs are gaining relevance.

Now, before we go to the Q&A, I will refer quickly to our balance statement. We’ve closed the quarter with a net debt to EBITDA of 3.96 times. Our goal and our commitment is to continue focus on reducing these ratio and gaining more financial opportunity. We will continue divesting non-current strategic assets working in the reduction of working capital, controlling CapEx is being that the execution of BEST 2.0 in the U.S., where we have a great opportunity that as we already mentioned and improving the operating performance of our businesses in all of our regions.

We continue to make progress in our working capital management, releasing about COP 83 million during the quarter as we are using in 11 days our financial cycle, a dividend of COP 242 per share was approved in our [indiscernible] last March and will be paid in four instalments of COP 60.5 during the year. You can find all the information regarding the dividend in our investors webpage. During this year, our priority and obsession will continue to be the reduction of leverage in order to reach our 3.2 times debt to EBITDA target by June of 2020.

Now, I would like to close the call by thanking you all for your attention and reaffirming our commitment to continue transforming Argos to delivery more value to all of our shareholders.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes the line of Andres Soto from Santander. You may begin.

Andres Soto

Good morning, everyone, and thank you for the presentation. I have two questions. The first one related to competitive dynamics in Central America. I would like to understand what markets specifically are facing the biggest challenges? And what has been Argos responsible for, be that price decreases to sustain market share or stable prices to protect margins?

Juan Esteban Calle

Thank you, Andres. I mean, the markets where we are facing the more challenges in Central America and Caribbean or Honduras and Panama. Panama because since last year after the construction strike, the reality is that the amount has been low. So volumes are not strong and when volumes are not strong, I mean, you face more competition.

On top of that, I mean inputs are increasing into Panama, so there is price pressure. Our response has been to try to keep prices as stable as we can, gain in efficiencies and transferring those efficiencies to our clients to continue having a profitable business in Panama. In our opinion, we had been extremely successful in that regard, prices in Panama, Haiti is more or less $15 in the last two years and we have been able to keep our profitability in that market through the gain of efficiencies. And we plan to continue in that same direction, complementing our portfolio into using new products to the market and continue to improve our value proposition to our clients.

The other market that is facing challenges with Honduras. Honduras as you know, I mean was facing a tough political situation since last year, but the reality is that things have improved in a significant way. And the Government restated tariffs, tariffs are now back to 10%, so that will help our business in Honduras. Inputs are being increasing as well into Honduras, but the reality is that importers have been having a tough time selling imported cement in the Honduras market. So we are confident that our competitive position in Honduras will continue strong going forward. Prices in that market have decreased more or less $10 per ton, but the reality is we are compensating most of that decrease through gains in efficiencies as well.

The other market as Camilo was mentioning are having a very good performance compensating in a big way, the challenges that we are facing in Honduras and Panama.

Andres Soto

Perfect. Thank you, Juan Esteban, that's very clear. My second question is related to your calcined clay project in Colombia. Can you help me quantify the potential margin expansion extending from this project? And more generally speaking, you'd all look for costs and margins in Columbia in the second half of the year?

Juan Esteban Calle

Well, I mean we are just starting to commission because clay project in Colombia and most of the benefits will be seen in 2020, but the reality is that we expect that OpEx per ton is going to be more or less 60% of the OpEx per of ton of using clinker. And we will be extremely conservative in producing calcined clay into our cement. So, we will take the rest of the year just to make a progressive introduction of that type of cement into the market, but the benefits will be seen in 2020.

And Tomás will expand a little bit more about our strategy to keep in control the cost of energetic in the remaining of 2019.

Tomás Restrepo

Hi, Andres, this is Tomás, the – as Esteban was explaining the calcined clay project, we are being conservative about the results, but the best goal that we have there is to expand capacity at our most efficient plant. And thus being able to recover about 60 basis points in our margins by not only the ex-works cost reduction, but also being able to shut down other plants and other processes outside of Rioclaro. So that project will allow us to concentrate a lot of our production in our most cost efficient plants.

And as Juan Esteban was saying, the fuel costs – that there are impacting us about 300 basis points in our margins this year. And we are running many different strategies, the first is importing fuels for Cartagena, so we've imported pet coke and also coal from Utah, Cartagena has been the first import of coal in Columbia in the history of the country. And the cost reduction when we started using those fuels will be around 22% in the few line.

Also there are opportunities in the gas industry because of the new gas coming from Sucre in the South on the Coast in the second half, and we are seeing lot of different opportunities, one of them would be like putting in the market some excess capacity of power generation that will help us a lot into offsetting these fuel costs inflation. We hope by – that by the second half of the year, costs in fuel will be pretty much in line with our budget.

Andres Soto

Thank you, Tomás. And just to follow-up, can you please help me quantify how much in terms of cash costs or these reduction in fuel costs will represent for Columbia in the second half of the year?

Juan Esteban Calle

No. The impact of the cost inflation in our numbers is like $3.5 per ton of excess cost in Columbia is because of the prices of coal in Columbia in the first quarter. We expect that by the end of the year the total cost increase including Columbia will be maximum 5% to 6%. So the reality is, we are expecting that reduction of more or less $2.5 per ton going forward.

Andres Soto

Perfect. Thank you so much.

Operator

Thank you. And our next question comes from the line of Juliana Aguilar from Bancolombia. You may begin.

Juliana Aguilar

Hi, good morning everyone, and thanks for the call. I have two questions. My first one is regarding the implementation of BEST in the Caribbean. How much have you already achieved and what's your target for this year? And my second question is, if you expect to make further price increases in Colombia during 2019. Thank you very much.

Juan Esteban Calle

Thank you, Juliana. The execution of BEST in the Caribbean and Central America is advancing extremely well. But we are not yet where we want to be. The reality is that we want to continue compensating the price pressure that we are facing in Panama and Honduras, making continuous improvement to our operations. We are targeting these $3 per ton in each of our operations Honduras and Panama going forward in terms of savings.

We are expecting further price increases in Columbia this year, we made a price increase in May – the first week of May. And we have an additional price increase estimated in Columbia before the end of the year. Prices have been moving in the right way in Columbia, they are at the $6 per ton FOB prices higher than what they were at the end of the year. But our target for the year is to bring prices more in light with import parities. Prices in Columbia continue to be below import parity prices, in our opinion that doesn't make any sense. So we are extremely happy with the way prices are going in Colombia.

Juliana Aguilar

Perfect. Thank you very much.

Operator

Thank you. And our next question comes from the line of Vanessa Quiroga from Credit Suisse. You may begin.

Vanessa Quiroga

Yes. Thank you for taking my question. Good morning. My first question is regarding the Panama volumes. Are you able to separate, how much of the decline is due to lower demand in the industry in cement and ready-mix? And how much is coming from greater competition? And the second question that I have is regarding the U.S. – the improvements that you mentioned in the ready-mix network optimization. Can you provide more color of what exactly you are doing to optimize? Thank you.

Juan Esteban Calle

Thank you, Vanessa. We estimated – probably half of the lower volumes coming from lower demand with the inauguration of the new President in Panama and the important infrastructure projects that are in the pipeline, we expect volumes in Panama to start recording in the second half of the year. On the other half decreasing volumes is most likely related to the increasing inputs into Panama. In terms of the improvement in the network operating mix, I would like Bill Wagner to give you a little bit more color about the successful execution of BEST 2.0 in the U.S.

Bill Wagner

Yes, Vanessa. Thanks for the question. With respect to the network of assets, we continue to look for ways to optimize our footprint and we continue to focus on an urban – more of an urban market strategy. So the reality is we did take a look at some of our rural markets and we were able to make a divestment last year, which will help realign our footprint to follow our strategy.

Vanessa Quiroga

Okay. So mainly closing plants and improving logistics, would that be Bill?

Bill Wagner

No, we've not actually closed plant, it’s really focused on taking a look at the plant that were either underperforming or had not been operational for a number of years and time to put those packages together and make the divestment, and which we were able to successfully do last year at the end of the year.

Vanessa Quiroga

Okay, great. Thank you.

Operator

Thank you. And our next question comes from line of Gordon Lee from BTG. You may begin.

Gordon Lee

Yes. Hi. Good morning. Thanks very much for the call. A couple of questions. The first one Juan, I was wondering you mentioned in the – or it’s in the release that you're seeing the strengths from areas outside of residential. And I was wondering whether that weakness or lack of strength in residential is particular certain regions in the U.S. in which you operate or have you seen that across the board?

And the second question has more to do with CCA, although it could have a little bit of an overlap with some markets in the U.S. I was wondering in those markets where you're seeing pressure from imports, how much do you think that pressure could benefit from the reduction or the shuttering of capacity in Europe, that's expected from the change of the emissions regulations starting next year? Either to – because you are facing direct imports from Europe, because it can change flows from the Mediterranean into other regions. So I was wondering if you could comment on that. Thank you.

Juan Esteban Calle

Sure. So for the first question, Bill, I would like you to add some color.

Bill Wagner

Yes. Sure. Thanks, Gordon. With respect to the residential – the strength – I think there are – it is market specific, Florida operations are doing extremely well in all segments, it is slower in some other footprints, however, it is in the commercial sector, we're finding it to be very strong across our entire footprint both in the infrastructure side and the non-residential side. So at this point, it's more than offsetting the weaker residential market outside of the Florida operation which has been very strong so far this year.

Juan Esteban Calle

Yes. For the second question, Gordon, yes, we expect some improvement going forward from the changing environmental regulations when they enter into effect at the end of the year, especially, we foresee that freight costs are going to increase, demand is going – I mean supply of additional clinker and cement coming from the Europe will be lower. So the reality is that, that is that is going to be positive for our businesses in the region. The reality is that in Honduras, the main market is far from the Coast, so the reality is that prices are fairly close to import parity in Honduras and with the improvement in demand that we foresee from the restart of infrastructure projects now that the political situation is in a much better shape, we are extremely optimistic about operation in Honduras.

And similarly in Panama with the start of the new government and the increasing demand coming from a project as large as the fourth visual, the Panama Canal, we are expecting a more healthier market in Panama during the second half of the year.

Gordon Lee

That's very clear. Thank you very much.

Operator

Thank you. And our next question comes from the line of Rodrigo Sanchez from Davivienda Corredores. You may begin.

Rodrigo Sanchez

Good morning, everyone. Thanks for the presentation, I've got two questions. And the first one is if you could please give us an EBITDA contribution, breakdown per country per day in Central America region? And if you could comment on the clinker core dynamics that are used in that specific region, since we have heard that some countries are experiencing price increases, typically when it comes to clinker. And my second question is, I would like to understand the rationale behind selling your stake at Cartón with about 30% discount to its book value, maybe, if you could comment about these or maybe, tell us the internal rate of return of these investments that you have had since you initially invested? Thank you.

Juan Esteban Calle

Thank you, Rodrigo. I mean we don't provide EBITDA guidance or contribution for marketing in Central America and the Caribbean, I mean what we can tell you is that we are expecting to close a year very close to the numbers that we posted last year. The reality is that the diversification of markets that we have in the region allow us to compensate for the challenges that we may face in one or two markets in every single year. But we do not provide EBITDA contribution for market in Central America and the Caribbean. In terms of the dynamics in the region, most of our markets are performing extremely well, we have challenges as I mentioned in Honduras and in Panama, but we are fairly comfortable with our competitive position and our value proposition in those markets. And we expect those markets continue being key for Argos in the years to come about the rationale for sending Cartón de Colombia, where minority shareholders, it was not a code investment on us. We have mentioned in this call and in our previous calls and we were focusing our efforts in our core business and selling, all the non-strategic, non-operating assets that we can in order to gain more financial flexibility. Carlos will explain a little bit more about the rationale for selling Cartón about the price recovery.

Juan Esteban Calle

Really biting that more than comparing with the book values comparing with the makeup value that the stock of Cartón has had during the last, I don’t remember, four or five years. It has very stable like between $5,000 to $6,000 per chair and they suspect – and we consider that this can offer for their own is Smurfit Kappa is very attractive for all the minority stakeholders. For that reason, we made the decision to the best, because we can share there is an excellent time to get that invested, but to get the cash from that investment.

Tomás Restrepo

It was domestic opportunity that we couldn’t pass. that is the reality and we feel extremely comfortable with the exit price.

Rodrigo Sanchez

Okay. And just a quick follow-up, related to your stake up Grupo Sura still expect any interesting from you about selling these stakes at some point?

Juan Esteban Calle

Yes, we have reiterated that. I mean we are concentrated our portfolios has been cement, RMC and aggregate, I mean it’s sooner, I mean they’re better, but we have shown that we are serious about it. I mean with the sale that I was taking bank Colombia and we’d have always stated, I mean we’ll sell the Grupo Sura shares at the right time and at the right price.

Rodrigo Sanchez

Okay. Thank you.

Operator

Thank you. And the next question comes from the line of Mauricio Serna from UBS. You may begin.

Mauricio Serna

Hi, good morning and thanks for taking my questions. Just a couple, in the U.S., we’ve seen very strong volumes. So, just wanted to get a sense of what was the main reason why we didn’t see that much of a margin expansion on a year-over-year basis. Despite the best of program already – already reaching some improvements here at that effort. And also if you could provide us maybe a little more details on how should we think about Colombia’s energy sources going forward as you are beginning to import petcoke. I mean, how should we see the breakdown between the different energy sources. and lastly, on the cash flow, if you could provide more details on how you expect to improve or generate working capital efficiencies throughout this year? Thank you.

Juan Esteban Calle

Well, thank you, Mauricio. I’m extremely happy with the volume performance of our business in the U.S. you will see margin expansion going forward. I mean the reality is that we increase capacity utilization in our new replant and it will continue to happen going forward. I mean the first quarter is – I mean, it’s seasonal for us in the U.S. So, margin expansion will be seen going forward. But the reality is that all the fundamentals are in place and in place and we’re extremely happy with the performance of the business so far. energy costs in the U.S. were under control. I mean that was the region in which prices did increase, margins were basically flat. So, the reality is that you can expect that volume growth being reflected into margin expansion in the next quarters. In terms of Colombia energy source, I would like us to – Tomás to comment a little bit about our sources.

Tomás Restrepo

Yes. or if the other – the reality is that at Colombia’s main, one of the main experts in Colombia is coal. So, there is not much reason for – to be a net importer when Colombia exports coal. We pretty much, took advantage of two spot opportunities. One, call that was the Port of Mobile, Alabama coming from UDA and we – it was just waiting for us to take it at a very good price. and a petcoke, it was another opportunity from a trading stores. So, these are just, some opportunities we took, but at the end of the day, we expect coal prices to level ones. They start following the international coal prices, which are beginning to stabilize and lower a little bit.

But the reality is that the future in Columbia is alternative fuels. We, we are burning tires. Both are at Cartagena and Rioclaro. We just got a permit to burn impregnated fuels, as I told you before in Cartagena. which is a great, great breakthrough for us. those are some particular fuels that we will get paid to burn to dispose of them. So, that’ll help a lot, the future is that those two plants should be at least a 30% replacement of coal and gas for alternative fuels.

Cartagena will always come and go, depending on the energy, industry consumption. So for this year we're seeing good signals and there's gas coming from Sucre. So we like to keep it as flexible as we can, but the reality that coal from Colombia and alternative fuels are going to be very significant in our energy matrix in the future.

Operator

Thank you. And our next question comes from line of Adrian Huerta from JP Morgan. You may begin.

Adrian Huerta

Thank you. Good morning Juan Esteban. I have two questions, one on SG&A, you can just explain, why the $5 million reduction on corporate SG&A hedged from year-on-year basis? Where is this coming from and it is sustainable?

And the second question has to do with some cement volumes in Colombia. You mentioned that you are expecting industry volumes to grow low-to-mid single digits, what's your expectation on market share for the year and given the comps for the next couple of quarters will be more difficult. So should we see the next couple of quarters with the year-on-year declines on cement volumes in Colombia? Thanks.

Juan Esteban Calle

Thank you, Adrian. The SG&A is sustainable, I mean, the reality is that we have been going through a significant transformation of the company. And we haven't finished, we have accounting that in a significant way and making our company lighter and much more flexible. So the reality is that, that is a reflection of the jobs that we have done in the previous year and a half, but we will continue doing the same.

I was mentioning once the calcined clay project enters into production, I mean the reality is that we will continue restoring down to our old wet fumes and in terms of our corporate I mean, we will continue as well, controlling our head count.

In terms of volumes in Colombia, the reality is that we have seen already like seven months of continuous increase in cement demand in Colombia, when you look at infrastructure and 4G projects and the reality is that volume is coming from infrastructure including double-digit. Volumes coming from 4G projects are increasing even more. I mean like 40% in our case. So the reality is that we foresee that those segments of the market will continue performing well and we are posting recovery of the regular housing segments of the market as well.

So we are expecting that the market will grow in Colombia in 2019, we are not expecting a spectacular our growth, but we're expecting low single digit growth for the 2019 and in our case we expect our volumes to continue growing going forward.

Adrian Huerta

Thank you.

Operator

Thank you. And our next question comes from Dan McGoey from Citi Group. You may begin.

Dan McGoey

Good morning gentlemen, thanks for the call. Could you go back to U.S., I know you mentioned that you expect operating leverage benefit as volumes go going forward. But when you look at it on first quarter versus last year, the margins were relatively stable in spite of this strong demand growth, volume growth. I'm wondering if there's any cost you highlight there that inhibited the margin expansion including particularly with the strong volume growth, is that being incrementally supplied with imports or any cost factor there?

And then the second question is, I know you mentioned building success in the Florida price increases, if you could give an update on the timeframe for increases in the other markets and any sort of signs of success or lack thereof in those markets. Thanks.

Juan Esteban Calle

Thank you. Dan. We didn't see much increase in margin in the U.S., just basically from the volume mix more than anything else, but you will see margin expansion going forward as I mentioned. And in terms of prices, I would like Bill to give you an update on how prices are going in Florida and in our U.S. markets?

Bill Wagner

Yes, thanks Juan. We did have a successful implementation in Florida that was done earlier in the year. So we had price increases in all our markets announced for April 1. So at this point we're seeing some pretty good traction in both cement and in ready-mix. There's a little bit of price pressure on cement on the coast, but other than that we feel pretty confident that we'll achieve our price increases in both cement and ready-mix.

So, so far ready-mix is looking pretty good, in both our South Central Group and our Southeast Group. So we're optimistic, but then they bring for the rest of the year.

Dan McGoey

Sorry. What is the amount of price increase, I mean dollar per ton or percentage?

Bill Wagner

In the U.S. on a per ton basis it’s a range from $6 to $8 and in the ready-mix side it's also range from $6 to $8 and that's on per ton and per yard basis.

Dan McGoey

Great, thank you.

Juan Esteban Calle

Sorry. Let me just clarify to you that the short ton, not a metric ton.

Dan McGoey

Right. Understood.

Operator

And our next question comes from line of Nicolás Erazo from Ultraserfinco. You may begin.

Q– Nicolás Erazo

Hey, good morning gentlemen. Thank you for the conference call. And I have a question. Why did the financial expenses increased about 10% and how about increased – we saw an increase in depreciation and amortization of about 30% compared to the same period one year ago if this is an effect of the implementation of the IFRS 16? Thank you.

Juan Esteban Calle

Thank you Nicolas and Calros Yusty will answer your question.

Carlos Yusty

The depreciations are grown by 5.6% the [indiscernible] politicals and so our depreciation and amortizations are really almost for [indiscernible] year ago, really where number one don't, I am not seeing what is the figure that you are mentioning that is 5% to 6% between versus – they were assuming almost 30% related to estimates, almost 30% related to do the COGS and it is completely regarding to the implementation of the IFRS 16, obviously like every company we are moving from the expenses to the depreciation and amortization. And the financial expenses – really the impact in the financial expenses by March related to the IFRS 16 is only about $3 million.

The order increase is related to the increase in the LIBOR when you compare the LIBOR within the first three months of 2019 versus the first three months of 2018.

Q– Nicolás Erazo

Okay, perfect. Thank you. Okay.

Operator

And the next question comes from the line of Roberto Paniagua from Corficolombiana You may begin.

Roberto Paniagua

Hi, good morning. Thank you for the presentation. I have few questions. The first one, can you remember at least the input pricing in Colombia. And the second question is related to the administrative expenses in the first quarter, why it increased in this quarter and my last question is related to new account that I'm seeing in the balance sheet above the rate of use of assets in the Q1 asset and the lease liabilities in the liability section. I want to know where did that went before and how I'm going to expect their content movement looking forward?

Juan Esteban Calle

Thank you, Roberto. And our estimated third-party prices in the Northern parts of Colombia on the coast is more of a $80 per ton. But the average import price in Colombia, when you take into account all the markets should be more closer to one 110, 110 that is why, we will say that prizes in Colombia is still below the input price, prudently average price in Colombia more or less $88, so the reality is that they have a long way to go onto the reaching profit.

Your second question was about the assets by use.

Roberto Paniagua

I have one related to administrative expenses and the other one related to rate of used assets and the lease liabilities.

Juan Esteban Calle

Okay. Carlos can you answer those please?

Carlos Yusty

The administrative expenses increased by 9.2% really, in some cases when you analyze the SG&A as a total of the year, we are almost not increasing – mainly the increase is barely low when comparison over peso one year ago.

In this year, you have to compare as well the – because we are converting our financial statements from dollars into pesos, in the case of the U.S., Panama and other operation in the Caribbean that are may be related, those corners may be correlated with the U.S. dollar. For the nation, we will have an impact in that comparison in the SG&A, which is the same impact that we have in the revenues, for instance the revenues we are increasing by 14% but we analyze volume – volumes the price of region-by-region there is an positive effect because of the conversion for dollar to COP. That is the main reason in the case of the administrative expenses.

In the case of the right of use in the assets or asset by use, we have registered in our balance sheet, we have reduced that about COP 800 billion by January because the rule started in January of this year. We have registered about COP 800 billion in our assets and in our liabilities as well.

And these assets – the depreciation level of these assets is the increase in the account of the depreciation in the P&L. Now, there are no lease liabilities, we are consolidating all these leases, rents and all the things like these into a single account which is assets by use.

Roberto Paniagua

Okay. Thank you.

Juan Esteban Calle

Okay.

Operator

And our next question comes from the line of Paul Chabran from On Field Investment, you may begin.

Paul Chabran

Hi, good morning gentlemen. Thank you for the presentation and thank you for taking my question. Just two detailed questions for me. First of all, I would like to understand what caused the coal price increase in Colombia, given that coal price is being decreasing [indiscernible]? And does there anything to do with Chinese importing coal from Colombia instead of Australia? And if so, how will you hedge against that? And second question. I would like to have a sense of the total customer attrition in the USA for the full year?

Juan Esteban Calle

So Tomás, can you answer the question about the price increases in cola?

Tomás Restrepo

Paul, the coal price increase in Colombia due to couple of things, most is in the offer side because many, many coal mines, underground mines in the center of the country have been shutdown in the last four or five years, when the coal consumption in Colombia was pretty low at the moment. So when the demand picks up from the power generation industry, well then there's a cost inflation that naturally occurs as the coal industry adopts its capacity. So in the offer side, there's a factor in the increase and then there is – the coal that is increasing the most of the demand from Colombia is not the thermal coal, but the metallurgical coke kind of coal. So that coal, Columbia is only got about 4 million tons capacity of production of that metallurgical coal. And that is going mostly to Brazil at a time, then Turkey and also the Netherlands.

So what we are seeing is that, that particularly small piece of the market, which is the metallurgic coal is causing the mining industry operators to turn more into – the people and all the manpower is turning – have turned into that industry. And then, the legal offer that there was for thermal coal then got increased. So it's a problem of balancing offer and demand. But we are seeing less demand for this metallurgic coal and more mines being open or enhanced for thermal coal. So it will take a little bit of time, but we expecting the second half for the market to balance itself automatically.

Roberto Paniagua

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Steffania Mosquera from CrediCorp Capital. You may begin.

Steffania Mosquera

Good morning. Thank you very much for the presentation. My first question is regarding the Colombian market and what are you expecting in terms of the competitive environment towards year end especially considering the entrance of a competitor. What are you expecting in terms of prices and market shares? And the second question is regarding the US. If you could please give us a separate EBITDA margin for the cement and the ready-mix segment?

Juan Esteban Calle

Thank you, Steffania. We're expecting Columbia to continue leading the market. As I mentioned before, prices are below import parity, no new company is going to be sustainable at that level of prices. So we expect competition at different price level, closely in import parity prices. In our opinion, we have the strongest value proposition in Colombia. We are by far the market leaders in infrastructure and construction of flat housing projects. We are leaders in innovation. We have an extremely strong portfolio. In our opinion, we have the best go-to-market strategy in Colombia, it is proven day by day, every time that we win a new project.

So the reality is that we expect the market to consolidate with the entrance of the new competitors. We foresee in the future the smaller competitors exiting the market, they are not making any money. So in our opinion, the entrance of that new competitor would probably force decidable consolidation of the Columbian market. We expect the demand in Columbia to grow more than what it has been growing lately. So that will help to absorb that capacity as well. And we expect imports to continue, it's decreasing trends going forward. So that will open the space for additional capacity as well.

Steffania Mosquera

Thank you very much. And my second question is regarding the separate margins in the U.S. for the cement and ready-mix businesses. If you could provide that information?

Juan Esteban Calle

We expect margins for our cement business in the U.S. to be close to 30% in 2019 and our goal is that in ready-mix are going to be about 6% for the total year.

Steffania Mosquera

Okay. That's perfect. Thank you very much.

Manuela Ramírez

Steffan, we didn't answer the second question [indiscernible] before. So is it okay to be around [indiscernible]?

Bill Wagner

Sure. Sorry, I didn't jump. But on the materials side, I think we commented earlier, we're still waiting to see how the material inflation will take effect because we too would take increases at some level, beginning in April. So we can follow-up on that question later. But on the labor side, we're seeing around maybe 2% to 3%. And with respect to energetics, 1% to 2% increases both. Other than that, we don't expect anything else. And most of that, if not all, will be offset by our BEST program.

Operator

Thank you. And we do have a follow-up from Paul Chabran from On Field Investment. You may begin.

Paul Chabran

Yes. Thank you for taking my question. I also wanted to – give me a sense first of all

sense of total cost inflation in the U.S. for 2019?

Juan Esteban Calle

Yes. Total cost inflation as we mentioned in energetics plus electricity per ton was basically flat and with this strategy that we put in place, we were not expecting any impact from the energetic plus electricity cost inflation per ton in the U.S. As Bill was mentioning, labor inflation’s more or less 2% to 3%, so in our opinion cost inflation is knowing – not going to be effect. On top of that and we had – we are being extremely successful with the hiring of new drivers in the first quarter of the year. So from that standpoint and that will help us well our cost in the U.S. because we are being more efficient in hiring and retaining drivers, which is going to be a key factor for the performance of the business in the U.S.

Paul Chabran

Okay. That was very clear. Thank you.

Operator

And our next question comes from the line of Francisco Suarez from Scotia Bank. You may begin.

Francisco Suarez

Hi, thank you for the call. Good morning and congrats on the rollout on your CONCONCRET targets and your efforts seen in balancing your energy mix that is worth noting and congrats on that. Precisely on these matters, can you explain a little bit further what takes to get a green label in your cement bags and specific methods that we should have compared to the typical cement that you sell in kind of perhaps in COP per ton or any metric that’s grabbed you that the green seal on your cement bags. And also the second question relates with what is the current for some substitution rate that that occurs at the Cartagena plant and what are your expectations for this year or next year to make? Thank you.

Juan Esteban Calle

Thank you, Francisco. The cement coming out of our plant in Rioclaro is going to whether – the greenest cement in Colombia in terms of CO2 emissions is in terms of clinker substitution. So the reality that we will announce that once the cement is in the market, but you can be completely hear that it will be by far the greenest cement in Colombia. We are extremely happy with the project. It is not going to be the first one, it is going to be the first one in our footprint, but we book that it is going to be the first of many more to come. There’s the reality that in terms of making our industry more sustainable, in our opinion, there is the way to go.

About current positive substitution in Cartagena, we are just starting as Tomás mentioned before, but there is a huge potential to use much more alternative fuels incarnate in Cartagena, especially hazardous materials make the alternative fuels. Our target is to bring our substitution level to at least 30%, but we are just starting to use alternative fuels in Cartagena. So up to now is very marginal, but the good thing is that we have the – I mean we did the CapEx. We have this system in place and we have been sourcing already. So you will start seeing the fuels increased, I mean previous one.

Francisco Suarez

Perfect. Thank you so much.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to the speakers for closing remarks.

Juan Esteban Calle

Okay. Thank you all for the questions and for the continues support to our company. And we look forward to our next conference call. All have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.