Golden Cariboo Resources Ltd.

Good morning and welcome to GCC's third quarter 2023 earning results conference call. Before we begin, I would like to remind you that this call is being recorded and that all participants will be in a listen-only mode. Please also note that a slide presentation accompanies today's webcast. The link is available on the company's IR website at gcc.com. At this time, I would like to turn the call over to Hori Oguchi, Head of Investor Relations, please go ahead.

Good morning, everyone, and thank you for joining. With me today are Mr. Enriquez Calante, our Chief Executive Officer, and Mike Streffer, Chief Financial Officer. The earnings release detailing our 2023 third quarter results was released yesterday after market close and is available on the company's website. This conference call is also being broadcast live within the investor section of the company's website at gcc.com, and both the webcast replays of the call and transcript will be available on the same site approximately one 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 these 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, Saori, and good morning, everyone. GCC again delivered double-digit top-line growth for the third quarter of 2023, which marks our tenth consecutive quarter of double-digit growth. It's also important to note that by the quarter's end, we have achieved more than $1 billion in accumulated sales, one quarter earlier than when we achieved this last year. This has been driven by a successful pricing strategy as well as our unwavering focus on client service and the strong client relationship, which have proved to be an enduring competitive advantage for our company. I want to thank the entire GCT organization for your focus on our key priorities. The team continues to navigate market conditions, enabling us to strengthen margins. We achieved 38% EBITDA margins, reflecting continued traction on our measures to improve overall operational efficiency with strong execution on our cost optimization across the organization. Let me share some highlights regarding the three pillars aligned with our 2025 vision, our people, profit, and planning. People. Starting with our people pillar, Our team's safety is central to our operations. I'm pleased to share that GCC was recognized as industry leader during the third quarter to both the PCA Safety Innovation Award and the 2023 Chairman's Safety Performance Award. These prestigious awards underscore our industry best practices and commitment to safety. as evidenced by the lack of reportable injuries and illness at our plants year to date. While we're proud of our track record, excellence in safety requires a commitment to continued improvement and ongoing evaluation. These are a core concept of GCC's strategic plan. As part of this program, We have trained over 450 supervisors and managers, prioritizing investment in responsible and safe operations. We also further our serious injury and fatality prevention system, establishing additional controls to reduce the probability of serious injury or fatality. GCC's training and development focus not only on safety, We continue to strengthen our workforce technical skill through the GCCCMN Training Institute. We are currently training employees through 14 high-priority programs, and to date, we have dedicated over 7,700 hours training 350 employees. While it's still early to quantify the results, we have received strong favorable feedback from employees enrolled. We're also investing in building our company's next generation of leaders through a two-year leadership program that's unique to GCC. As part of this talent development initiative, we've partnered with ICAMI, the Mexican Center for Integral Training and Management Development, to ensure a holistic approach that encompasses strategic, operative, and tactical training. This month, We have finished selecting candidates for the first cohort that will start the program in January 2024. Also of note, we initiated the Great Place to Work Annual Survey this week to identify potential areas of improvement with the goal of keeping a high level of retention of our talent. The programs and strategies I've described are particularly relevant in today's labor environment. While GCC benefits from a very stable workforce with low turnover levels and without labor pressure, our proprietary programs proved to be invaluable and an important differentiator.

Profit.

Turning to our profit pillar, during the quarter, we launched a comprehensive maintenance program to update key components of the cement mill, pre-heater, and kiln at our Chihuahua plant. This initiative will result in enhanced operational stability, increased efficiencies, and a more robust pyro-processing system with improved mean time between failures and decreased work stoppage that would otherwise result in time spent on maintenance and low production. In addition, We completed our new terminal north of Minneapolis, enabling us to strengthen GCC's position in the Minneapolis-St. Paul area while securing an outlet for Rapid City's expanded capacity. Fuel prices remained stable during the quarter, and we continued leveraging the flexible fuel strategy we have established over the last few years across our network to switch fuels at our operations. taking advantage of economic opportunities and the alternative fuels market. This strategy has proven to be an important driver of margin improvement, and we have therefore been delivering on the savings we had expected at the beginning of the year. Further, GCC hedges natural gas price opportunistically on a monthly basis for the Odessa plant. A base amount of 2020 forced consumption has already been hedged 4% below 2023 average cost.

Let me turn to planet.

As a brief update on prioritizing our planet, GDC remains unscheduled to achieve our year-end CO2 reduction commitment. Our flexible fuel strategy is again playing an important role here, switching to natural gas further enables us to deliver on our plant emissions reduction. We are committed to alternative fuels use, with the Pueblo plant already burning almost 23% alternative fuels, representing the most significant steady increase of our plants to date resulting from an improvement in fuel quality and our investment in the alternative fuel injection system of the plant. We're also working on sourcing for Rapid City, and the team has been assessing various technologies to increase alternative fuel substitution at these plants.

U.S.

Turning next to an update on our markets, our U.S. third quarter results benefit from July price increases, which will continue to favorably impact our revenues for the remainder of the year. Moreover, this month, we have advised customers of an $8 per short-term price increase for construction cement, effective January 1, 2024, and potentially another mid-year increase based on cost, input, and inflation. US cement demand declined during the third quarter, particularly in the residential segments. According to the latest report from the U.S. Census Bureau, building permits and starts for residential construction in September were down 7% compared to September 2022. The metropolitan areas where GCC participates, such as Colorado and South Lake City, were the most impacted by the softer market. However, Oil and gas driven cement demand remains strong in the Permian Basin, and we continued work on the Denver International Airport expansion and the I-10 project in El Paso. In response to changing market conditions, we have shifted our approach in the infrastructure segment, and we are pursuing a broader range of projects to capitalize on larger volume opportunities. The agriculture and renewable energy driven demand positively contributed to our Iowa and South Dakota operations. I'm pleased to report that our operations are running smoothly with no plant or rail disruption during the quarter. As I have previously noted, GCC's reputation for outstanding customer service and strong customer relationship is an important differentiator in our industry. We take a proactive approach in collaborating closely with our customers to help them with better solutions for their construction projects. To further enhance their knowledge, our technical teams are delivering seminars that show the benefits and advantages of our products. Importantly, our customers have voiced their appreciation for our proactive response to their needs. Our ongoing commitment to working alongside with them and delivering effective solutions continue to strengthen their trust and loyalty, aligned with our strong reputation in the industry. Touching up our Odessa plant expansion, we remain on schedule. All contracts relevant to our critical path have been signed, equipment deliveries to the plant have commenced, and construction is underway as planned. Our teams have been diligently working on the civil and construction aspects of the project, making substantial progress in terms of site and utility preparation, as well as foundation construction. In parallel, we are negotiating the remaining pending contracts. Disclosing an estimated CAPEX at this time would compromise negotiations, since we are actively working to optimize this investment. The Odessa Plant Expansion Project represents significant value with anticipated benefits of synergies and logistics optimization across our Samalayuka, Pueblo, and Tijeras plants, as well as a substantial increase in our annual cement production capacity by more than 1 million metric tons. Further, our strategic positioning in this dynamic market Coupled with the flexibility of the Odessa plan to produce construction cement when needed enhances our resiliency should we experience future market fluctuations.

We will continue to provide updates on our progress as appropriate. Mexico. Turning to our Mexico operations,

Third quarter results again reflected GCC's ability to capitalize on the near-shoring trend. Demand volumes increased 3%, while concrete volumes increased 6%. This growth in concrete demand was driven by 17% year-over-year increase in the industrial segment. The surge of demand for our product during the quarter was mainly driven by 25 industrial projects under construction inquiries and 11 in Chihuahua. This heightened demand has also begun to positively impact the residential segment with five multifamily projects under construction in Juarez. During the third quarter, GCC took delivery of 11 more trucks to meet this incremental demand. It was in addition to the 44 new ready-mix trucks we received over the last two years. And we expect to receive another five trucks in the fourth quarter and 30, 30, 22, and 32 in 24. Mining continued to contract after 10 years of sustained growth. And while two of GDC's mining customers are reaching the end of their mine life cycle with depleting reserves, we have partially upset this volume decrease with the volumes required by two other mining clients that are increasing their production. Price increases are also mitigating volume decreases. While we have visibility on new projects for the year end and years ahead, we foresee the segment recovering by 2026. As we shift our attention to the situation in the US-Mexico border, it is important to highlight that GCC's strategic network has been instrumental in addressing the logistical challenges arising from this immigration search. Delays at the border crossing have impacted the ability to transport product across the border. Nevertheless, our distribution network has the flexibility to ship product from alternative plants, allowing us to maintain uninterrupted customer supply. GCC's unique market presence positions us well to continue delivering a high level of service, even in the face of these logistical challenges. With that, let me now turn the call over to Mike for some further financial highlights of the quarter and our latest outlook.

Thank you, Enrique, and good morning to everyone. Starting with our financial results on slide 19, Consolidated net sales for the third quarter increased 18% on a year-over-year basis to 416 million US dollars. This was mainly driven by successful pricing in both of our markets and a 3.5% year-on-year increase in concrete volumes, mainly driven by higher demand in Mexico. Third quarter, 2023 cement volumes were softer compared to the same quarter last year due to a 4% decrease at our U.S. operations, which was partially offset by a 3% increase from our Mexico operations. Please turn to slide 20. Cost of sales as a percentage of revenues decreased 700 basis points in the third quarter to 60%. the lowest level in 20 years. This was due to our successful pricing strategy, increasing operating leverage, and lower fuel prices as well as production costs. Please turn to slide 21. SG&A expenses as a percentage of sales increased 80 basis points in the quarter to 7.5%. Our focus on prudent price increases and intentional operational initiatives have improved margins across the organization. Third quarter EBITDA increased by 35% to 159 million U.S. dollars, with 480 basis point EBITDA margin expansion to 38.1%. 79% of third quarter EBITDA was generated by our U.S. operations and 21% by our Mexico operations. Moving down the income statement on slide 22, net financial income totaled 9.6 million U.S. dollars in the third quarter of 2023 compared to net financial expenses of 0.1 million U.S. dollars in the prior year quarter, as we continue to benefit from a higher cash balance and higher levels of interest rates both in the United States and Mexico. Consolidated net income increased 52% to $106 million in the third quarter, and earnings per share increased 53% year on year. Please note, that during the quarter we repurchased a net amount of 73,000 shares, equivalent to 0.6 million U.S. dollars under our current share buyback program. Turning to our cash generation on slide 24, free cash flow increased 17% to 124 million U.S. dollars in the third quarter of 2023. reflecting higher levels of EBITDA generation and higher levels of interest income. These were partially offset by increased cash taxes and working capital requirements. With respect to our balance sheet, we ended the quarter with $857 million in cash and equivalents and $500 million in total debt from our sustainability-linked bond, unchanged when you compare to the prior year third quarter. Our net debt to EBITDA ratio stood at a negative 0.82 times. I would like to provide some additional granularity on GCC's capital allocation. Over the last 12 months, we have invested $149 million in maintenance and growth capital, including 54 million for the Odessa expansion project and 30 million for the Samalayuka de-bottlenecking project, which we completed during the first half of 2023. We have returned 45 million U.S. dollars to shareholders. We have a combination of $25 million in dividends and $20 million in share repurchases. A relevant update regarding GCC's mandate related to our M&A activities is that our board has authorized a broader M&A scope. Moving forward, we will continue to actively pursue value-creating initiatives through acquisitions of cement assets in the United States that can be plugged into our network and are aligned with our long-term strategic vision. However, we will also proactively explore aggregate business opportunities within the United States. With that, I will now hand the call back to Enrique to share his closing remarks.

Thank you, Mike. We are not revising our full-year guidance. Although there are some variations in cement volumes in the US, we don't think this will materially change the overall expected results for the year. We remain steadfast in our pursuit of our strategic objectives. The dedication and hard work of our teams have been instrumental to our success, and together we will continue to innovate and adapt, driving the business forward. With that, I will now turn the call over to your questions. Operator, please begin with the first question.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Pablo Recald with Santander, Mexico. Please proceed.

Hi, thanks. Good morning, Mike and . I have two questions. The first one is regarding the that you're taking a presentation. I don't know if you can provide more details on that.

Thank you, Pablo.

Yeah, so in aggregates, we are, I mean, widening our scope of potential strategic investments in the U.S. market. And since we have always been focused on our core business on cement plants that can be plugged into our network, we are now opening up the scope to also look for potential aggregates, mainly in the same area, at the beginning of this strategy that can be integrated with some of our operations. Again, as a first step, so we start developing an aggregate business in the U.S. That doesn't mean that with time, we will not look at other aggregate opportunities, I mean, countrywide.

Okay. My second question is regarding U.S. profitability. How should we see profitability in the U.S. going forward? Or how sustainable is the capital margin above 40%?

Hi, Pablo. Good morning. This is Mike. Thanks for the question. So, you know, we feel pretty positive about the, you know, the profitability in the U.S. specifically and to make this, you know, a sustainable journey. Again, we still see good momentum on the pricing front. We're very proactive on that, and we work with customers. And as Enrique mentioned, it's not only about the price, but also the services that we provide, the products, the work with the customers. And therefore, we see pricing will continue to be a strong momentum. And then, as I mentioned, we have some very specific operational initiatives really to optimize how we run the business and the plants. that's supported by, you know, we see some, you know, stable input cost, fuel cost. So all of that, you know, we're working hard to, again, continue to build on the profitability and make that really sustainable for the company.

Perfect. Thanks. And then congrats.

Our next question is from Alejandra Obregon with Morgan Stanley. Please proceed.

Hi. Good morning, GCC team. Thank you for taking my question and congratulations on the numbers. I have two questions. The first one is on capacity. If you can elaborate a little bit as you put the backlog and your inventories together, if you can help us have a sense of where you see utilization landing towards 2024, I mean, end of 2023, perhaps, and in the beginning of 2024 in your different soft markets? Where do you see that going? And then the second question is, let's say on this other category in Mexico, the wallboard, the blocks, this had a very significant performance, I mean, solid performance during the quarter. If you can elaborate a little bit on what's driving that outperformance, that would be very helpful. Thank you very much.

thank you alejandra uh this is enrique so in terms of capacity i mean we've seen a little bit of a slow i mean down this year because of what we commented on the residential market mainly so on average we're running around 80 percent of capacity this day we expect i mean that to i mean uh come back up a little bit more uh next year based on some of our plans and the introduction of our new terminals that are, I mean, now, obviously, I mean, make an opportunity for customers to reach out further in terms of their cement shipments. So our target will be to raise that capacity to, I mean, 83%, 84% next year. And, of course, that's also, I mean, predicated on what we expect from the infrastructure, I mean, build projects that should start hitting, I mean, next year. And that will also help, I mean, increase, I mean, our utilization of capacity. Of course, that's the main reason why we're expanding. I mean, Odessa, we killed three because, I mean, we see going forward that we'll stay at a very high utilization level. In Mexico, as you mentioned, I mean, well, I guess, I mean, with the new short-term effect, I mean, that has had a very direct impact on commercial construction, but a very... robots also indirect impact in the rest of the economy, which drives a lot of, I mean, housing growth and some other commercial retail level, I mean, projects in the cities. And so it's helping a lot in terms of, I mean, block aggregates, precast, I mean, you name it. I mean, all segments, except for the mining that we comment, I mean, that's a very different segment. are being benefited by the new shoring in effect, and we expect that trend to continue.

Excellent. That was very clear. Thank you, Alejandra.

Our next question is from Rafael Simonetti with UBS. Please proceed.

Hello, Enrique, Mike, and Saori. Good morning. Congrats on the result. My question is regarding the Odessa plant expansion. You stated that $54 million in capex was used in the last 12 months. If you could comment more about the capex pipeline and also about the total cost of the expansion and if any material changes happened to it. Thanks.

Good morning, Rafael. Thanks for the question. So yeah, as we communicated, we had kicked off the construction in Odessa And that's progressing very nicely over the last couple of months. And now that we have all the key contracts in place, we expect that that will accelerate and we will see a lot of activities going into 2024. From an overall CapEx flow, 2024, 2025 will be the main years, the heavy years, where we will spend most of the CapEx. Again, that's the natural flow of that project. And then regarding the overall number or the overall cost, as we said, we're still negotiating some of the elements. So giving a new number, we're not ready for that. What we communicated in the past, that was really the high watermark. If you remember that was driven during a time when inflation was really strong, when supply chain challenges, and we had to get these quotes in and work through our budget. And really the goal is to optimize that as we've said, and we're very, positive that that will happen over the coming couple of months and two years to get this project completed.

Great. Thanks.

As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question is from Yazine Tahari with Anfield Investment Research. Please proceed.

Yes, could you give us a little bit of color on the pricing development throughout the year? I think that there was a second price increase which was announced in the US over the summer. Has it been successfully implemented? Are prices higher in the third quarter than in the second quarter? And then a second question, have you already sent a price increase letter for 2024? And if so, what is the order of magnitude in the US?

Good morning. So basically what we did is obviously announce, I mean, what we mentioned, the $8 price increase for a short term of cement across all markets in the U.S. for construction cement. And there have been a lot of questions about a second price increase for the year. I mean, I've received a lot of comments and questions asking me, and I think that we want to be prudent here. and just stay very close to our customer base and to what the market behavior is in next year. And based on that, we will, I mean, decide if a second price increase during the summer, it's something that we will, I mean, go forward or not. And this is, of course, going to be based in customer feedback and how the economy is doing and what inflation is doing. As we all know, inflation now, it's been referred to as continuing to be sticky. So we're concerned with that, of course, and we're vigilant. And depending on that, we'll decide to do a second price increase or not. That's our plan so far.

But last summer, there was no second price increase? Last summer? In July, August 2023, did you put a second price increase?

Yeah, this year, I mean, I think we informed, I mean, before too, I mean, we had a second price increase in July of $7 per short ton for construction cement. And I mentioned that it didn't, we didn't increase it in a couple of our markets just because of local, I mean, economic conditions. but it mainly went well across, I mean, the rest of the market, and that's for construction cement. Oil well cement price increase was $15 in July 1st also, and that was obviously, I mean, well received by the industry, I mean, wherever we ship oil well cement.

And for next year, have you announced, have you already sent a letter for an increase of, let's say, $10, $15, or is it too early for January or April next year?

Yeah, the $8 per ton that I am mentioning is only construction cement. We have not decided at this moment what's going to be our oil well cement price increase. That's something that is also under analysis at the moment.

And $8 is for January 2024, or is it for April?

Yes, sir. January 1st across all markets for construction cement. Correct.

And just to sum up, the $7 that you put for construction cement last July, Should we assume that half of it was successful, that overall you were able to increase prices by $3, $4 in July for the group as a whole?

I think that half is a very safe assumption, at least.

That's very clear. Thank you so much, and again, congratulations for the very strong results. Thank you.

Our next question is from Daniel Rojas with Bank of America. Please proceed.

Good morning, gentlemen. Thank you for taking my call. Most of my pricing questions have been asked. Maybe just following up, going forward, we've seen a lot of good follow through for concrete. What are you thinking for the rest of the year in terms of increasing prices sequentially and what should we expect for next year? Thank you.

We are, I mean, in concrete doing pretty well in price increases this year as we show. And we're still, I mean, analyzing what's going to be the exact, I mean, announcement. That's more market by market in our case. We have different segments that we go through, for example, the wind farm projects. I mean, Commander, different price and price increase because they're moving from areas to areas. Now we're doing projects in Texas, for example, compared to South Dakota. So we have not, I mean, disclosed what the price increase for concrete is yet. So we'll give you a poster on that.

But it's safe to assume that given the high demand for industrial projects in the southern part of the U.S., that this follow-through should be very strong or relatively strong.

It is very safe to assume that, and specifically to our markets. As I mentioned, the agricultural market is doing well in Iowa and South Dakota, and the wind power generation is also doing well. We're following several projects now. I mean, moving from those areas to Texas, for example. So that's doing pretty well in terms of concrete. And as I said, we expect some infrastructure, I mean, work, Coming online, I mean, next year that would, I mean, definitely support, I mean, a higher concrete price.

Okay. Thank you. Mathias, are you with us? I am.

Thank you for taking my question. Congrats on the results. I just wanted to hear some of your thoughts on the transaction between Summit and Argos. Maybe what markets that could mean increased competition and also whether you are looking to approach any player with a similar proposition or maybe have been approached by a similar proposition. Just wanted to hear your ideas on that. Thank you.

Hi, Mateus. Good morning. So, no, no comment. I mean, from our side, in terms of the Summit Argos announcement, I mean, I think the only thing I can say there is, I mean, we're in... certainly different markets than Argos, so no direct impact for our business. And in terms of our M&A, I mean, the strategy continues to be, I mean, as we have said, priority around, I mean, our network, and then we continue working hard with, I mean, potential prospects in that area. And as I said, also in the past, we're opening up, I mean, the scope now to, I mean, starting, I mean, another project system in other parts of the U.S. if the opportunity arises. But there is nothing specific that I can talk to you about at this moment.

Perfect. Thank you.

Thank you, ladies and gentlemen. That concludes our question and answer session. I will turn the floor back to Ms. Okashe.

Thank you, everyone. We appreciate everyone taking the time today to join us and for your interest in GCC. We look forward to speaking with all of you soon.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.