Cemex SAB de CV (CX) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cemex third quarter 2002 conference call. At this time all lines are in the listen-only mode. Later we will have an opportunity for questions-and-answers with instructions given at that time. If you should require assistance during the conference call, please press zero followed by a star. As a reminder, your conference call is being recorded. I would now like to turn the conference call over to your first speaker, Mr. Hector Medina. Please go ahead.

Good morning and thank you for joining us for the third quarter conference call. I will first briefly comment on the company's performance during the third quarter of 2002 and our view to the remainder of this year on the different markets in which we operate. Our chief financial officer, Rodrigo Trevino, will conclude with a discussion of our financial results.

Let me start by reinforcing what many of you may already know - we are living through very challenging and volatile times. The global economy is weak, and the capital markets remain fiscular. Recent events have taken their toll on globalization, but they haven't halted its progress. For us, globalization is a reality and a force we must harness by embracing change. In anticipation of economic slowdown, we are identifying new uses for our products that provide a broader array of building solutions. In anticipation of discretionary pressures, Cemex continues to implement different cost-cutting strategies to become even more efficient. In anticipation of increasing competition, we are intensifying our customer focus, strengthening our system distribution channels and building brand loyalty. In anticipation of continued volatility in the financial markets, we are aligning our financial strategy with our business cycle with emphasis on achieving greater financial flexibility.

We have delivered consistently high growth on the strength of our portfolio and capital structure, despite an often challenging economic environment. We strongly believe that diversification we have achieved will continue to deliver positive growth free cash flow in the coming years. Indeed, we are encouraged by our prospects in the majority of our markets and we still expect more volatility in growth for 2002 and 2003. We also believe that we are reaching the bottom of the economic cycle in most of our under-performing markets like Colombia, Venezuela, and Southeast Asia. In light of the current environment and our market dynamics, which I will discuss momentarily, we now expect to generate EBITDA of close to $2 billion for the year. Free cash flow of 950 million in cash earnings, we expect to reach about $1.4 billion.

For the remainder of 2002, we anticipate the following performance in our major markets - in Mexico, we remain optimistic about cement consumption. The upward trend in [inaudible] construction, manufacturing, and industrial in the second quarter of 2002 demonstrates the market's second-half recovery is well underway. In particular, the construction sector's superior performance is underscored by 2-percent year-to-date growth versus the overall industrial sector, which has declined by 1 percent. Our status volumes increased 6 percent for the quarter, slightly below our mid-quarter guidance as Hurricane Isidore and extreme wet weather conditions affected daily shipments in Mexico's central and southeastern regions during the last week of September. For full-year 2002, we expect cement amounts to grow about 4 percent, roughly in line with our performance to the last nine months and in line with the market.

The main drivers of cement demands remain in construction spending and low-income housing. On the construction side, we expect continued growth. Government spending on transportation with the related work and public buildings remain the sector's main drivers of cement demand. Highway construction spending remains at record levels with the highest spending in real terms in the last six years. We're particularly pleased with cement levels of penetration in highway awards, with 100 percent of projects awarded at the federal level using ready-mix for construction. Low-income housing continues to benefit from both government spending and their recovering employment. After the third quarter, the [inaudible] already granted financing to around 80 percent of its 2002 mortgage goal of 275,000 houses. The sales construction sector continues to be able to be a stable source of demand with recovering employment and moderate growth resulting in about 1.5 percent higher consumption in 2002. We are especially pleased to report that performance from our different consumption sectors has generated cement demand in excess of 2 times GDP growth despite rate volatility and an absence of bank credit.

Nominal pricing was flat versus the end of the second quarter and we expect it to remain at that level until year-end. Volatility is still the order of the day, thanks to the economic and political news from the U.S. and around the world and the uncertainty generated by South America, We cautiously anticipate and end-of-the-year exchange rate of 10 pesos to the dollar. On a macro level, we now expect GDP growth of around 1.5 percent for 2002.

Our [inaudible] multi-products and strategies to strengthen our Mexican distribution network remain on track. Sales from multi-products are well on their way to reach approximately $120 million in 2002 and $200 million in 2003. During the year we will continue to bolster and secure a distribution network, intensify our customer focus, and build brand loyalty.

With respect to our cost and structure, our energy efficiency program is paying off. During the quarter we reduced our viable costs by about 5 percent in constant pesos versus the same period a year ago. For example, our year-to-date energy cost has gone down by 24 percent in dollar terms, while our electricity costs have decreased by 8 percent in dollar terms, despite an increase in rates.

Looking forward to 2003, we are cautiously optimistic about cement demand and prices in light of the government's recently announced infrastructure investment from which it has tentatively earmarked approximately 25 percent for low-income housing. Although we are confident in Mexico's long-term economic convergence with the U.S., we are currently in the midst of a short-term counter-cyclical period due to mid-term elections, which should provide growth in cement volumes next year. In the United States, we anticipate GDP growth of about 2.2 percent for 2002. The public sectors continue to drive demand with construction spending put in place growing 6 percent for the first eight months of the year. Thanks to the low interest rate environment, the residential sectors remain strong with construction put in place for the first eight months at 6 percent as well.

Industrial and commercial construction put in place remains the most effective sector. High inventories in an absence of investment led to a 13-percent decline in construction put in place for the first eight months of the year. In street and highway construction, which is down 4 percent for the first eight months, is most affected by the more difficult weather conditions in 2002 and a lag between contract awards and actual construction starts. Weather conditions were dramatically worse toward the last month of the quarter when the states served by Cemex saw 9 percent more rain on a weighted basis than the same period a year ago, thus affecting our sales.

According to data from the American Automobile Transportation Business Association, contract awards in the market in which we participate are up 5 percent for the first nine months of 2002 and up 2 percent year-over-year weighted by the contribution to our sales. Additionally, in the states served by Cemex, gasoline consumption has risen 1.5 percent in the last 12 months, improving the states' revenues and overall business conditions. Moreover, the fact that more than 80 percent of Cemex's sales are in states with a constitutional provision earmarking gasoline use of ease for highway construction ensures the state will use the money collected for highway spending.

Our full-year volumes are expected to decline about 4 percent, slightly below the most recent PCA forecast of negative 3.4 percent due to lower industry sales in some of our months. Pricing remained stable through the first nine months of the year, and we expect that trend to continue for the rest of 2002. To put this in the right context, we need to consider that last year results were quite robust on the back of important industry sales as demonstrated by the 7-percent growth year-on-year, while the market grew only 2.8 percent, thus making the comparison with this year more difficult. With just core industry sales, which represented 2 percentage points of our 6-percentage-point drop during the quarter, we would be in line with the PCA. Looking to 2003, assuming we do not experience the further slowdown or deterioration in market conditions, we expect cement demand to remain stable, an outlook that is in line with the PCA Association expectation of plus or minus 1-percent demand.

In Spain, overall cement consumption continues to grow at a healthy pace of 5 percent for the first nine months of the year, more than twice the rates of expected GDP growth for 2002. Although we expect the pace would slow down by year-end, we are confident cement demand will reach about 44 million tons, an increase of 4 percent versus 2001. Public works spending continues to fuel domestic cement demand. The sector's main growth drivers are the government infrastructure plans and is expected to continue until 2007 and pre-electoral spending. The housing sector also remains strong. However, we now expect it to stay in line with or slightly below last year's level of 500,000 starts. This sector's performance is helped by the migration of Northern European retirees who are finding a lower cost of living in Spain, and Cemex's same volumes are expected to grow 1 percent in 2002. This growth is in line with other domestic producers but lower than the national average due to the increased market participation of imported cement. In 2003, we expect cement demand will benefit from expansive public works projects driven by the election cycle and the infrastructure program that will more than offset the expected deceleration in housing. As a result of these factors, we expect national cement consumption will grow in line with GDP growth and Cemex's staying volumes will grow in line with the market.

Venezuela continues to experience a very difficult political situation. The volumes have significantly decreased this year. It isn't clear whether they will stabilize in 2003. Nonetheless, we managed to maintain pricing of $100 per ton despite the 100 percentage gain for rates move this year. We are also doubling our efforts with production for exports to the Caribbean and the United States, which will help us to leverage our capacity and stabilize EBITDA in 2003. We will further continue our ongoing effort to reduce costs. Since most of our cost base [inaudible] the devaluations have led us into a 50-percent cost reduction for tons in dollar terms. These, coupled with our ability to sustain healthy prices in line with our prevailing South American and Caribbean levels, has significantly improved our profitability.

In Colombia, in spite of a somewhat challenging environment, we expect that it will continue to be a stable cash flow generator for the remainder of this year and 2003 with healthy prices and continuously improving margins to ongoing construction.

In Egypt, we are pleased with the results of our commercial strategy, which has yielded 18-percent sales volume growth throughout 2002. However, pricing in dollar terms has declined primarily this year, due to the depreciation of Egyptian pound and greater participation in Lower Egypt.

Finally, in the Caribbean, the recently acquired Puerto Rican operations and the associated post-measure integration benefits has led into more stability in the region and higher EBITDA.

So thank you for joining us today, and before we take your questions, I would like to turn the call over to Rodrigo.

Thank you, Hector. Good morning, everyone, and thank you for joining us today. Our below-guidance performance for operating cash flow by 3 percentage points is principally attributable to the weaker-than-expected Mexican peso toward the end of the quarter and to adverse weather conditions that affected our volumes in United States and Mexico. The consolidated EBITDA margin decreased to 29.4 percent. This 2.6 percent-point drop is explained by three main factors: one, our higher SG&A due to up-front expenses in conjunction with Cemex rollout; two, our increased efforts to strengthen our commercial and distribution network; and, three, lower average prices in some of our markets.

During the third quarter, we used our free cash flow and incremental debt to complete the acquisition of Puerto Rican Cement. Additionally, in order to obtain greater flexibility and to better integrate Cemex Asia holdings and its subsidiaries into the Cemex global network, we completed the following two transactions: One, we acquired the remaining minorities in Rizal Cement at a price equivalent to the original purchase price; and, two, we successfully swapped 65 percent of Cemex's Asia holding minority shareholders into Cemex shares.

Looking at our capital structure, our interest coverage for the trailing 12-month period increased to 5.5 times versus 5.3 times for the second quarter of this year, thanks to the lower interest rate environment. Our leverage ratio is 3.1 times net-debt-to-EBITDA versus 2.9 times a year ago. Two factors negatively affected this ratio: The restatement of Mexico's trailing 12-month EBITDA at a weaker 10.22 pesos-per-dollar exchange rate, and the successful acquisition of Puerto Rican Cement as well as our increased participation in Rizal Cement Company in the Philippines. We remain committed to our stated capital structure target of net-debt-to-EBITDA of lower than 2.7 times. As a result, we intend to use most of our future free cash flow to repay debt plus to regain financial flexibility in our stated targeted ratio as soon as possible.

We are currently in discussions with financial institutions that have ordered us hedging or warrant transactions, and we intend to roll over the forward purchase agreement for an additional 12 months. We expect to reach a final agreement on terms and conditions during November and are scheduling to close this transaction during December. Our majority net income was further negatively impacted during the third quarter by the rate of transactions we put in place to lower our aggregate business and financial risks.

I would like to briefly discuss the philosophies behind our funding strategy, as this is the main driver leading to derivative positions that we have in place. We fund ourselves mainly in dollars, due to the dollarized nature of our businesses in the Americas. Also, the direct correlation between economic activity and interest rates in North America led us to an overweight loading rate funding strategy prior to 2002, so that our weaker operating performance would be offset by lower funding costs. This funding strategy paid off, as lower interest expense helped to partially offset weaker operating performance as we entered a period of economic slowdown.

During this year, however, we began to gradually shift back to a more normal fixed-rate versus loading rate mix funding strategy to interest-rate derivatives. As many of you are aware, interest rates have fallen further during the third quarter, reaching levels below those at which we had agreed to swap into fixed rates. This has led to a mark-to-market impact on our income statement and balance sheet. This negative mark-to-market will reverse itself during the life of our interest rate swap and underlying liabilities or sooner if rates go up.

On the currency side, we chose a strategic direction that has not changed over the last two years. We partially fund in yen to cover our investments and the cash flows generated from our Saudi station operation. By the same token, we follow a similar strategy in Spain, where we partially fund our operation in euros. At the end of the quarter, the total aggregate fair market value of our derivative position was a negative $461 million. Nonetheless, close to $200 million of this position had reversed itself as of close of business last Friday, when the fair market value was a negative $271 million. More than 90 percent of the negative mark-to-market position as of December 30th is explained by interest-rate derivatives, and we expect that it will be reversed as interest rates rebound or simply, with the passage of time, as interest on the underlying liabilities is based.

In closing, as Hector mentioned, we are revising our expectations for EBITDA and free cash flow for 2002. We now expect to achieve around $950 million of free cash flow. By concentrating our efforts on having a more efficient use of working capital and a rationalization of capital expenditures during the remainder of the year. We also expect to generate EBITDA of close to $2 billion and cash earnings of about $1.4 billion for the full year.

Before I turn the call over to questions, I would like to conclude with a quote from our chairman - "Cemex performs well in bad times and outstandingly well in good times. We are optimistic about the future. We have the vision, the resources, and the discipline to continue to grow and to continue to generate value for our stakeholders."

As always, I've been asked to tell you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. Thank you for your attention and now we will be happy to answer your questions. Operator?

Thank you. Ladies and gentlemen, if you do have any questions, please press the 1 on your touchtone phone at this time. You will hear a tone indicating you've been placed in queue and may remove yourself from queue by pressing the pound key. If you are using a speakerphone, we ask that you please pick up your handset before pressing any numbers. Again, if there are questions, press the 1 on your touchtone phone at this time. We'll first go to the line of Sebastian Luparia of JP Morgan. Go ahead, please.

Yes, good morning, everyone, and thank you, Rodrigo and Hector, for your comments. Any guidance for 2003 in these difficult times, and if not, can you help us understand what we might see next year?

Well, we are in the midst of our budgeting cycle, Sebastian, so my estimation is that we will be prepared to give guidance with more certainty in a few weeks. So we will do that as soon as we are ready.

Okay, and I have a specific question for the transaction on Cemex Asia holdings. I was doing some calculations, and according to my numbers, after the end of the transaction, after the end of next year, we will see a dilution of 1.8 percent. Are you planning to hedge that? And how is that transaction going to be structured through the share exchange?

Yes, thank you for your question. Yes, we intend to hedge. In fact, we are hedging that transaction. What we achieved was a swap with Cemex Asia Holding a minority investment, two-thirds of them, to swap from Cemex Asia Holding into Cemex shares gradually, starting in March of next year, and we have the hedges in place so that we will not be negatively impacted, should the share price go up.

Okay, and, Rodrigo, the valuation that you are giving to CHE is the accounting for the increasing participation in [prisalo] or that's after this transaction?

Well, the transaction was done at a discount of 5 percent versus the original invested amount by Cemex Asia Holding investments. So, in essence, if you want to see it that way, we'll stay in the equivalent of negative interest rate financing for a period that the minority shareholders invested in Cemex Asia Holdings. Of course, this was a result of the under-performance of the region and our investments in that region.

Okay, and, Rodrigo, if I can ask you the last question - with especially the numbers that we just saw on consumer report and confidence, it's very likely that we'll probably see interest rates coming down further below going up. Do you see any changes in your strategy on your interest rate derivatives?

Well, that's a good question, and, no, we are not traders on interest rate derivatives. What we have done is a strategy to hedge our position. As you know, we went significantly overweight into floating rates in funding our debt prior to 2002. We felt that it was prudent to begin to gradually shift back into a more normal floating rate funding strategy. Together with the derivatives that we now have in place, we will eventually have a 60/40 - that is, 60 percent of our funding strategy will be fixed rate. We have locked in rates at rates which we believe are attractive for us in the medium to long term. Of course, rates have moved lower, and I don't know of any company that managed to lock in their fixed rates at the lowest possible rate available from the market. We don't intend to get what is the lowest possible rate, but we did want to shift back into a more normal fixed versus floating mix in our funding strategy, and we intend to keep that, going forward.

Okay, thank you very much.

We'll move now to the line of Gonzalo Fernandez with Santander. Go ahead, please.

Yes, hi, good morning, everyone. Two question - the first one is regarding cement demand in Mexico, and we saw that it was affected in September by heavy rains, but I don't know if you can share with us how demand is behaving in October, if it was just a temporary slowdown because of weather or if you're seeing a structure of the slowdown in demand. And the second one is if you can repeat your targets in terms of free cash flow and net-debt reduction for the remaining of the year. Thank you.

The Mexican cement demand, of course, was the effect of the Isidore hurricane in southeast Mexico, in the Yucatan Peninsula, was so strong that, of course, for some time, as the construction efforts starts, we won't be seeing a lot of demand coming from this part of the country. So that is going to affect probably some of the demand in that region. But the rest of the country, and then, of course, we had the Hurricane Kenneth coming into the Pacific Coast just week ago. So we would have that affect also built into the fourth quarter, but what we are seeing in October is better than September, slightly so. So we feel the dynamics of demand keep on going, of course, affected by this weather situation without anyone's control.

Now, as with the targets in terms of free cash flow, we expect that to be around $950 million, and that reduction target, as Rodrigo mentioned, we are committed to our 2.7 times EBITDA - net-debt-to-EBITDA, and we expect to reach that one - or we are working to reach the one if possible. That means that we will be using our free cash flow to reduce that and we can eventually - that would be the priority.

Okay, thank you.

You're welcome.

We have a question queue from the line of Carmen Slade with Salomon Smith Barney. Please go ahead.

Yes, hi, good morning, gentlemen.

Good morning, Carmen.

I've got a couple of questions. I wanted to start with the interest rate derivatives and just go through that a little bit. As I understand it, the charge, the non-cash charge that was in the income statement related to the fact that you had moved part of your debt from variable to fixed, and there is an opportunity cause here because the rate went down, is that correct?

That's correct.

Okay, and then the other issue was in your balance sheet, your net liabilities related to derivatives also went up during the quarter because of various movements in currencies and interest rates and stock prices. Is that correct as well?

That's correct, and the primary explanation is, as you point out, the interest rate mark-to-market position.

That's the bulk of it, okay. What I wanted to ask you about that I'm not quite understanding is that there is $51 million that was as a result, as you explained in your press release, was the result of the position in derivatives that hit your free cash flow. Where did that come from?

Well, when you have a derivative transaction, the mark-to-market does not affect you in a cash way, but it does affect you in a cash way when you either settle the interest rate or when you terminate, when you reach the termination date on a derivative, and what happened during the third quarter is that we reached a termination date on some of our derivatives at a negative mark-to-market on the termination date, so we had to settle that obligation.

Okay -

- we roll over that same decision, then what happens is essentially you lower the price pressure, you lower your average rate at which you have co-opted the fixed rate.

Okay, so some of these positions actually did terminate during the quarter, so there was a cash impact?

That's correct.

Are you disclosing at this time what they were or is it too much detail to go into?

Well, we were disclosing the aggregate impact, which is outlined in our press release, and we intend to maintain the funding strategy, as I pointed out, towards a more normal fixed-to-floating mix. We don't intend to know exactly which is the bottom, that's not our job. But we did want to fix into a reasonable fixed rate now that rates have come down so dramatically during 2002.

Sure. I did the same thing with my mortgage, so I completely understand.

I have yet to do that on mine. I will do that in the short term.

Okay, I just also wanted to ask about the most important derivative you have in my opinion right now, anyway, which is the hedge on the warrants of the forward sale shares, which is coming due the end of this year, and you mentioned, I believe, that you are extending that for 12 months. I just wondered, you know, the degree of certainty you have in terms of actually concluding that transaction this year, and maybe you could go through a little bit the risk if, for some reason, that didn't happen. I mean, I guess you'd be buying back some shares at a certain price and potentially putting them into the market at a lower price. I'm sure people want to understand that a little bit better.

Yes, we do intend to roll over the transaction, we do intend to maintain the hedge on the warrant transaction. We believe that we will be able to do so on terms that are attractive to the company. When we initially put this transaction in place, you know, close to three years ago, the interest rates and spreads at which we were borrowing in the market were significantly higher. Of course, as we rolled it over, the base rate, LIBOR rate, were at a historical low level. The spreads for Cemex, we've been able to refinance sizable amounts of money in the market at close to LIBOR plus 1. We think the downside to us is on the price side, but even then, considering the lower base rate, we believe that the cost of hedging this transaction will be significantly lower than the cost we had over the last three years, and so we don't anticipate any problem in rolling over this transaction for the next 12 months.

Okay. Okay, great. My last question is just curious - why did you make the decision to invest further in the Philippines now? What was the catalyst to that?

Let me answer that, Carmen. The fact is that, as you know, we had already 70 percent that we sell cement, and the original families who are still owners of the other 30 percent. Now, for several reasons, this was something that we - so convenient to do, we had to do, it was an opportunity that we needed to take, because of trading advantages, that is, gaining trading flexibility in a region which, as you know, has been very active in terms of trading, and we, of course, have invested in improving our trading network, having flexibility of trading was important for us. Secondly, there were some fiscal benefits of doing it; and, thirdly, I think most importantly, because of seller was that - the seller. We could not risk the possibility of this minority participation being out of hand.

I see, okay. Very good. Well, thank you for your answers. I'll leave it at that, thank you.

Thank you, Carmen.

Thank you.

We have a question in queue from the line of Daniel Altman with Bear Stearns. Please go ahead.

Hi, good morning, it's Daniel from Bear Stearns.

Good morning.

Going back to the derivative issue, the 51 million cash outflow, your earlier comments, Rodrigo, which I understood was interest rate swaps at maturity have no value. The 51 million cash outflow - is that a contract other than an interest rate swap? Or is that an interest rate swap that you terminated before its maturity?

Well, we don't only use interest rate swaps. Sometimes we do it through rate locks and, of course, rate locks have a maturity that is shorter than the swaps - that the entire swap flow of exchange of interest rates, and so that is the nature of the termination of that derivative contract.

Okay, and should we be expecting more of these hits in upcoming quarters?

Well, we intend to swap and to take the same fix, and so we intend to spread out the cost of these rate locks over the life of the transaction, but we will follow the accounting rules as we must.

Okay, and just relating to a couple of the free cash flow items - if you can explain Puerto Rico - you refer to it as 281 million of free cash flow outflow. The transaction I thought was 250. Also, you have an item called "other core assets," which you record as 51 million. Why is that not considered capex? Maybe give us a little bit of color on that?

Let me answer the first question on Puerto Rico. Yes, the total enterprise value of the acquisition of Puerto Rican Cement was $250 million. The incremental cash outflow relates to the post-purchase of a bond that was outstanding that had changed control [inaudible] and also to other acquisition-related expense. So we had to pay a premium on standards for the bond based on the terms that had been negotiated by Puerto Rican cement to this investment.

Okay, for the second part of the question - these "other core assets," are principally related to small ready-mix investments in several markets that we won in Costa Rica, several land reserves for our ready-mix and aggregate operations in different countries, in addition to trading infrastructure that were sold to investors in small terminals and other trade infrastructure components, and those are some of the required investments that we have in terms of a trading infrastructure. So this is composed of many small investments. All of them are related to our core business.

Okay, and just one last comment - vis-à-vis your targets from the beginning of the year - there just doesn't seem to be any discipline in terms of reducing debt. Can you tell us what your debt reduction is going to be for 2002? And whether your plan for 2003 is to be more, I guess, aggressive in the debt-cutting side after all of these additional investments that you made in 2002?

Well, as I just said, our commitment to our debt-to-EBITDA target remains at 2.7, and we are doing everything that we can to reach that level again as soon as possible. So that marks the priority for the usage of free cash flow in this coming quarter. That would be reached in the rest of the year. It probably will happen, or at least we will go in that direction. I don't know if you want to add anything Rodrigo.

Yes, the only thing I would add is that we did use great discipline the first six months of the year at using most of our free cash flow to reduce debt. We did make important acquisition investments during the third quarter. We are very conscious that we've gone beyond the 2.7 times net-debt-to-EBITDA ratio that we feel comfortable with, and we intend to get back down below that level as soon as we can, and that means that the important free cash flow, which we do expect to generate in the fourth quarter will be primarily earmarked to net-debt reduction and for the quarters ahead in 2003 as well until we get down below 2.7 times.

Okay, thanks.

As a reminder, ladies and gentlemen, if you do have any other questions, please take this opportunity to press the 1 on your touchtone phone. We'll next go to the line of Ken Rumph with Merrill Lynch. Please go ahead.

Hello, gentlemen. On that point of debt reduction, your free cash flow target for the year implies around 300-odd million of free cash flow in the fourth quarter. You mentioned - and there was certainly not a positive in the third quarter - working capital and capex sort of constraint. Could you give us an idea of where you think those numbers can go to and where, perhaps, an expectation of capex and, indeed, of Cemex Way, which you categorize in a different way in terms of capex, how those expenses might be expected to develop next year, for instance? And, finally, also on the cash flow front, cash tax has been running well ahead of charge tax. Is there any reason why that's going to change in the fourth quarter? Or should we assume that we're going to see a reasonable cash tax outflow for the full year?

Right. Well, as you correctly point out, you get to 950 in free cash flow for the full year from the level we have through September. We do have a challenge ahead of us for this quarter. We do intend to be aggressive and proactive in managing our working capital. We expect an important contribution there during the fourth quarter. We expect to rationalize our success in investment plans for the fourth quarter so that we can stay within or below our budget for the full year, for this year, in light of the more difficult macroeconomic environment that we're facing, and we will do everything we can on every single line that affects free cash flow to get there. Is it going to be easy? No, of course not, but we do have a stretch target, and we believe in stretch targets for ourselves, and we aim to achieve it and to dedicate most of that free cash flow to reduce debt.

And on the cash tax point - is that sort of a general change for the fourth quarter or for the years to go forward?

I think if you look at cash taxes in the medium term, you will find that we have been very effective at managing our tax obligations, and we will continue to do so, but it is more difficult to project than other items on the income statement and the balance sheet.

Okay, thanks for that.

We have a question in queue from the line of Bond Snodgrass with UBS Warburg. Please go ahead.

Good morning, gentlemen. Back to a couple of questions that were asked earlier - on the hedges on the American Depository Warrants and also on the transactions in Cemex Asia Holdings. The first question - basically a bit more specifics on both. If I recall, the strike price on the hedge contracts was something like 24.50. Does that mean that when you roll this over, you're going to have a charge next quarter for the difference between that strike price and the credit stock price? That's the first question. The second question is - will the Cemex Asia Holding transaction result in dilution to existing shareholders? You mentioned that you were hedged on it, but I just want to know - is this new equity? And will existing shareholders be diluted by 2 percent next year?

Yeah, as it relates to your first question, we show, on a quarterly basis, the impact of the derivative that we have in place to hedge the warrant transaction. So there is no incremental impact beyond what has already been recognized unless, of course, there is a change in the price of the stock, going forward. And to the Cemex Asia transaction, we don't expect that transaction will have a dilution impact on our shareholders because we have hedged that transaction through the market. And so we expect that we will use shares from the market to satisfy those obligations with our Cemex Asia Holdings minority investment.

Okay, on the first question, the holders of the contracts basically have an in-the-money call right now, because, again, the strike price is obviously above the stock price. Now, that could change over the next month or so.

Well, not extremely Bond, because if you go back in time, that transaction was started over two-and-a-half years ago, and, of course, we've had the equivalent of stock dividends from then until now, and there have been prepayments on those forward transactions as well. And so the actual strike price is lower than the one that you have assumed. If you go into our filings, you can exactly calculate what it will be.

Okay, can you just remind us, then, of what the stock dividends - what the new strike price on those contracts would be?

Well, stock dividends have been about 4 percent - a little over 4 percent per year. There have been three, I believe, since we put this transaction in place, but we can double-check with you. We can work the numbers and help you get to the actual strike price.

Okay, yeah, that would be helpful, because last time I sort of got 24.50 but, obviously, I'm wrong on that. That would be very useful to know. And then you're going to roll it over for one year, but they are two-year warrants. What's the rationale for that?

Well, we would expect that, given the volatility in the market, that a one-year extension should be sufficient, but we will have to manage that situation during next year.

Okay, fabulous. And so basically - and then on the other question of Cemex Asia Holding - basically you've been buying shares in the market, so you're fully covered there, so zero dilution?

Well, part of the equity derivatives that we have in place are designed to hedge that transaction specifically.

Okay, great. That's good news.

As you know, some of the equity derivatives that we have in place, hedge or executive stock option programs or warrant transactions, hedge the Cemex Asia Holding transaction that you are now aware of.

Okay, fabulous. And then the final two questions are as follows: Rodrigo, what is your current all-in cost of debt? And when the fixed deferred unwind, if you could tell us, first of all, when they're going to unwind and then what will be the cost of debt then? So current cost of debt, and then cost of debt, all-in, when does the fixed deferred unwind? And then, secondly, if you could give us a little bit of guidance in California. Maybe we'll touch on this during the plant visit that's coming up, but that seems to be a bit of a confusing state, and I'd be interested if you guys could give any color on how you see the outlook there?

-- Well on the cost of debt side our debt is costing us slightly under 6 percent, we had assumed 6% for this year, of course, rates have been lower than we had expected for this year, and so they're slightly lower. We will still maintain a significant portion of our obligations in floating rates from this day forward. And so the actual borrowing cost will depend on market rates. We are setting our financial strategy to be aligned with our business strategy so that if rates do go up, we expect that to coincide with a stronger macroeconomic environment and higher growth rates for both Mexico and the U.S. and have the higher EBITDA numbers to offset that higher interest expense. We will, as we shift back from floating into fixed, have to pay a slightly higher price. I don't have the weighted average net impact, but the fixed deferred is approximately 30 percent over total debt obligations, and I believe the rates that we've locked in are 4 to 4.5 percent or in that range, and so you can do a quick-and-dirty estimate of what the interest will be from whatever the assumption is that floating rates might be next year.

Okay, and when does the fixed deferred begin to unwind?

I don't have the exact dates, but I think the bulk of it starts in March/April of next year.

March/April next year, great. And then the California question?

I'm sorry, I missed the California question.

Yeah, could you repeat that?

- yeah, well, it's just that, you know, we've got this mismatch. I understand the gas tax rationale, but road awards at the state level in California have been really a weak spot in your Big Three markets. Obviously, Florida is doing great, Texas is okay, but California road awards have been down, which is a little bit baffling, and I was hoping that you guys could help us to understand that and understand the California outlook a little bit better.

Well, what I can tell you, from my point of view, is that this is the best-behaving region during the quarter. I have to bone up on that and check what is specifically happening in California, but the Western region is the least of all the regions for our sales. So I will have to check and follow up on that one.

Okay, thanks a lot, Hector. I'll get back to that offline. Thanks a lot, gentlemen, I really appreciate the answers.

Thank you.

Thank you.

Our next question will come from the line of Gonzalo Fernandez from Santander with a follow-up question. Go ahead, please.

Yes, thank you. It's a follow up on the [inaudible]. According to your annual report, you have a swap on $850 million that expires on October this year. I don't know if this could have a cash impact like the one that you experienced during the quarter and you explained previously, and I don't know if you can quantify the effect in case your rate at this point?

I'll have to check on that for you, because I don't have it on the top of my head. Now, the fact that I don't have it on the top of my head, probably means we don't have a significant impact, but we'll follow up with you on that.

Okay, thank you, Rodrigo.

We also have a follow-up question from the line of Carmen Slade with Salomon Smith Barney. Go ahead, please.

Thank you. I just wanted to ask, as I did about the Philippine transaction - separately, the further investment in Cemex Asia Holdings itself - what was the rationale for that?

Rodrigo?

Well, primarily, as Hector pointed out, it's flexibility. We decided that, given the dynamic nature of the markets, we needed to have as much flexibility as we needed to be able to manage those operations, to be able to turn them around, to be able to manage our trading network, and having the minority vote in the Philippines and Cemex Asia Holdings, were significantly constraining us and, of course, we negotiated as best we could to achieve the best transaction we could for Cemex. We believe in the medium to long-term, this is the right way to go in order to make our operations in Southeast Asia profitable as soon as we can.

Okay, thank you.

I just wanted to just give a little bit additional flavor regarding the question of Bond Snodgrass regarding California. In our - at least in our case - we don't see any major under-performance in California. So we would have to understand better the question and see where the concern is coming from. We'll check up on that, but we don't see any measures [audio fade].

And due to time issues, we'll now be turning the conference call back over to our speakers.

Thank you all. I just want to thank you very much and for your time and attention. We do look forward to your continued participation in Cemex. As always, please feel free to contact us directly or visit the Website anytime. It is our intention, of course, to enable you to fully value our company and its long-term potential. Thank you and good day to everyone.

Ladies and gentlemen, your conference will be made available for replay beginning at 1:30 p.m. today, the 29th of October 2002, until the 5th day of November 2002 at 11:59 p.m. To access the AT&T Executive Playback Service during that time, please dial in the United States, area code 320-365-3844 and enter the access code, 657556. Those numbers again are area code 320-365-3844; the access code once again is 657556. That concludes your conference call for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.