Cemex SAB de CV (CX) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CEMEX fourth quarter 2002 conference call. At this time all participants are in the listen-only mode. Later we will conduct a question and answer session; instructions will be given at that time. If you should require assistance during the call, please press zero then star. As a reminder, this conference is being recorded. Your hosts for this conference will be Mr. Hector Medina, Executive Vice President of Planning and Finances, and Mr. Rodrigo Trevino, Chief Financial Officer. I would now like to turn the conference over to Mr. Hector Medina. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for the fourth quarter conference call. I will first briefly comment on the company's performance during the fourth quarter of 2002, and our outlook for 2003 on the different markets in which we operate. Our CFO, Rodrigo Trevino will follow with a discussion of our financial results.

Let me start the call by briefly sharing my thoughts on what proved to be a challenging year for CEMEX. Immersed in significant uncertainty and volatility, the global economy has remained weak, with limited opportunity for growth affecting our performance, as well as the performance of other companies within our sector.

For the first time since the Mexican crisis of 1995, we produced lower year-over-year EBITDA. A difficult macroeconomic environment, coupled with deflationary pressures, limited our top line growth and made it harder for us to sustain pricing in constant terms in some of our markets. Nonetheless, we are pleased that in the face of this adverse climate, our business model delivered modest system-wide volume growth versus 2001. We ended the year with close to $1.0b of free cash flow.

In many ways 2002 was a year of transition. We continued our unrelenting drive to improve our business model and to enhance our operating efficiency and agility, so we can better confront and capitalize on an ever changing industry and macroeconomic environment. I would like to highlight some of the key points on which we focus, and will continue to focus, to meet the challenges ahead.

To prepare for and address our markets' deflationary pressures and economic cycles more effectively, we will further enhance our relationship and value proposition with our customers, to engender a greater brand loyalty and to increase demand for market penetration. We will redouble our efforts to improve our operating efficiency, with an emphasis on cost reduction and expenses. In the coming months we will also work to improve our profitability by maximizing the return on our investment in efficiency programs. In light of financial market volatility we will continue to fortify and further align our financial structure with our business cycle, while emphasizing simplicity, a point that Rodrigo will discuss in more detail.

Last year, we demonstrated a proven ability to sustain profitability and free cash flow generation, even in [indiscernible] uncertain economic conditions. Our track record reflects a strong company with a sound business and financial strategy, assigned to surmount our market strategy. Though as I noted last quarter, we believe that we are in the down part of many of our markets' business cycles, we expect the investments we have made, as well as our continued efforts, will make us a healthier and stronger company. With that in mind, we approach 2003 with a degree of caution.

The continued lack of visibility makes it difficult to predict the performance during the year. Although we believe the world economy is taking a turn for the better, it remains fragile and subject to several downside risks.

Fortunately, several of our markets, particularly Mexico, Spain and Columbia, all of which have independent economic cycles, have each performed a corresponding economic block in 2002. This is expected to continue this year due to a variety of factors that I will discuss momentarily. Before that, I will offer a specific guidance for 2003. We expect EBITDA of about $2.0b, free cash flow of close to $900m, and cash earnings to reach about $1.3b.

For 2003 we anticipate the following performance in our major markets. With respect to a macroeconomic outlook in 2003, we expect Mexico's GDP will grow about 3%, driven by expected growth in the US, which should results in a recovery of the manufacturing sector in Mexico, better employment and thus consumption. This is further complimented by current account deficit of 2.7% of GDP, which is more than adequately funded by foreign direct investment and remittances from Mexicans working abroad. In fact, Mexico's foreign currency reserves increased from close to $42b to about $48b during 2002, and they are likely to continue to increase in 2003.

Mexico's growth dynamics should remain stable for the first half of the year, and should accelerate by the second half of the year, as an improving US economy recovery, and a less uncertain environment, lead to greater demand and improved economic activity.

Thanks to the strength of the low income housing sector, and infrastructure spending, our fourth quarter sales volume increased by 6%, versus the year earlier period. Despite the absence of bank credit, cement volumes grew 4% for the year, more than twice the pace of GDP, a ratio not reached by the industry in recent years. We are optimistic about the positive trend in cement consumption, and we believe it will extend well into 2003. For the year, we expect cement volumes will increase by about 4%, driven mainly by continued [infrastructure] spending, low-income housing, and the assumption of healthy growth in the self-construction sector.

On the infrastructure side, we expect continued cement demand growth, driven by government spending on highways and public buildings, due in part to the electoral cycle. As a result we expect cement consumption from government and other ready-mix intensive projects, to grow by about 6% within 2003. We expect the government financials will remain sound as a result of higher [eligible] prices.

Low-income housing should continue to grow, as government spending continues and employment recovers in the second half of the year. Last year, [indiscernible] reached its stated target of financing 275,000 units. This year, we expect [indiscernible] will achieve their financing goal of 300,000 units. Offering further upside momentum to this, we expect the former construction sectors' cement consumption, including low-income housing, will grow by about 4% this year.

The self-construction sector, which remained relatively flat in 2002, will resume its growth with cement consumption increasing by about 3%. With the upward trend in GDP, we expect the industrial sector to experience a recovery during the second half of the year, spurring increased employment. These, coupled with an expected 1.5% increase in real wages, should contribute to the sector's growth this year. Consistent with our pricing policy, we will aim to maintain prices in constant peso terms for 2003.

As I highlighted at the outset, we will continue to move forward with our marketing strategy, which are assigned to enforce a commercial network, while intensifying our customer focus. In 2002, our multi-product strategy generated approximately $110m in sales, and we expect to reach about $190m in sales this year. While this program's low relative contributions may moderately lower EBITDA margins, we expect it will bolster our distributor's value proposition, and significantly contribute to brand loyalty.

Briefly, I would like to touch on an important issue regarding our energy strategy in Mexico. In April, we will begin sourcing electricity from a thermo electric generating facility, constructed and financed by [indiscernible], that will provide electricity for 80% of our consumption, under a fixed take-or-pay contract for a 20-year period. As you know, this will allow us to hedge against higher energy prices, by placing a ceiling on our future electricity costs.

Now let me discuss our second largest market, the United States. In 2002 the public sector mainly dropped cement demand, with construction put in place up 6% for the first 11 months of the year. Further the low interest rate environment fuelled residential construction, which also rose by about 6% last year. The industrial and commercial sector was most affected during this period, as the lack of investment and a slow macroeconomic recovery caused it to drop 15% for the first 11 months of the year. Construction put in place for streets highways, declined 1% for the first 11 months of the year, reversing part of the trend we saw in the first 8 months. In 2002, our cement volumes declined by about 5% versus 2001, reaching the 2000 levels, as we came back part of the 6% increase in cement volumes in the prior year.

We anticipate GDP growth of about 2.6% for 2003, and in line with total US consumption, cement demand is expected to decline about 1% this year. We expect economic recovery to remain slow, but to gain strength towards the end of the year. Residential construction activity will remain high, but not as high as last year's record levels, with cement consumption down from 3% to 5%, and some price appreciation, and weak a level market are expected to offset the favorable mortgage rate environment.

The industrial and commercial sector, which accounts for about 25% of total construction activity, is expected to remain weak, with cement consumption down from 2% to 3%. Given the weak economic environment, current vacancy rates are unlikely to improve in the near future. Public works are expected to remain relatively flat in 2003, with the street and highway construction marginally down, offset by growth in other public works. The States tight physical condition, combined with uncertain economic and geopolitical environment, necessitates a cautious outlook for the sector. Nonetheless, certain factors my counter the downside risks posed by the State's challenging physical environment.

The data show the States enter the current budget crisis in an extremely healthy financial condition, but deteriorating rapidly. Also, there is a political imperative to improve the States economic outlook, in advance of the 2004 elections. This political net could lead the Federal Government to increase funding for successive programs to [TTPA 21]. With 90% of budget balancing occurring at the State level, the States may be inclined to undertake several favorable actions in anticipation of the 2004 election cycle.

Furthermore, according to the latest data from the American Road and Transportation Builders Association, for the first 11 months of 2002 the value of highway contract awards was up 1%. Over the same period, tax revenues and gasoline consumption, which are earmarked for highway construction, increased by 3%. This means that even though the States are facing a difficult budgetary environment, they are still awarding roughly the same dollar amounts for public works projects as they did in 2001.

With respect to our national average pricing, we don't expect any major change during the course of 2003, versus last year. From an operating standpoint, we have heightened our promotional activity, including discussion with associations, such as the Portland Cement Association, to encourage alternative uses of cement in the US, which we believe will improve cement ministration in other product markets.

In Spain, cement demand grew about 5%, exceeding 44m metric tons during 2002. This year, cement consumption should continue its positive growth trends, although at a slower pace, increasing by about 1%. Public works spending remains the main drive of cement consumption in Spain. The sector's main catalyst continues to be the government's infrastructure plan, which is expected to extend to 2007, and pre-electoral spending, which should foster demand in the first of half of 2003.

The housing sector remains very strong. Last year it exceeded 500,000 [starts], and we expect this trend to continue in 2003, with the favorable mortgage environment and the [indiscernible] of Northern Europeans. On a macro level, we expect GDP to grow by about 2.5%, and the exchange rate to reach parity with the US dollar by the end of 2003. For the rest of the year we expect prices to remain at the same level in euro terms.

As you know, Venezuela continues to experience a very difficult social and political situation. Due to the country's ongoing general strike, it has been extremely difficult to produce, distribute and sell cement. As a result, we've sold very small quantities of cement from our inventory. We are doubling our efforts to keep fixed costs to a minimum until this situation is resolved. Our current assumption is that they will resolve the strike some time during the first quarter, and thereby allow us to resume a more normal activity level. If our assumption is correct, we expect cement volumes to decline by approximately 15% in 2003.

We aim to maintain dollar prices as stable with fourth quarter levels, in line with our prevailing levels in South America and the Caribbean. Because our cost base is mostly [indiscernible], that targeted price point should enable us to remain at or above our current level of profitability.

In Columbia, despite the somewhat challenging environment, we expect cement volumes will rise about 2% this year, supported by the public works and housing sectors. We expect Columbia will remain a stable cash flow generator, with healthy pricing.

In the Caribbean, we expect healthy cash flow, supported in part by an integration of the Puerto Rican Cement operation, which should complement the original system, and provide further EBITDA growth.

In Egypt, we are expecting moderate volume growth of about 3%, and lower prices in dollar terms, due to a weaker exchange rate, resulting in stable EBITDA versus last year.

In South East Asia, we're cautiously optimistic about the region's outlook, because we have experienced across-the-board demand growth in Indonesia, Thailand and the Philippines. This positive plan leads us to believe that a possible recovery is on the horizon for 2004.

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

Thank you, Hector. Good morning everyone, and again, thank you for joining us today.

Our fourth quarter EBITDA came in below our guidance, primarily due to the weaker than expected Mexican peso, Venezuela's extremely difficult operating environment, which led to a worse than expected performance for December, as well as to the US operations which suffered from higher expenses. During the quarter, our consolidated EBITDA margin decreased to 25.8% as a result of three main factors: lower prices and volumes in some of our markets; a change in our product and country mix, and ongoing investment in our continuous improvement programs and commercial strategy.

As we've discussed on prior occasions, in order to reduce our costs, to streamline our processes, and to extract synergies from our global operations, we've been implementing efficiency programs across our business units. While we did not anticipate net savings from these programs in 2002, due to the up-front associated expenses, we do expect to realize annual net savings in 2003 and beyond as we complete the rollout. Nevertheless, the required up-front investments are behind us, and we expect minimal IT investment related to the CEMEX Way going forward.

In line with our continued efforts to improve our financial flexibility, and to strengthen our balance sheet, we used $255m of the $304m of free cash flow we generated during the fourth quarter, to reduce net debt. Our free cash flow was strengthened during the quarter as we sold, on a non-recourse basis, a portion of CEMEX Mexico's receivables. Nonetheless, our net debt decreased by only $189m for the quarter, due to foreign exchange rate movements of the year on the Yen, which translated into additional debt in the amount of $76m when expressed in US dollar terms. However, this increase in dollar debt is more than offset by a gain directly to our equity accounts, for about $185m equivalent, as we translate our net foreign assets at the prevailing exchange rate.

Our capital structure continues to benefit from the low interest rate environment. Last year our interest, expenses and preferred dividend payments were down approximately $150m versus 2001. As a result, our interest coverage reached 5.2 times for the trailing 12 months, significantly better than the 4.4 times we achieved in 2001, despite a higher net debt to EBITDA ratio.

In 2002, we also successfully refinanced $1.9b of our short-term maturities, while maintaining our credit ratings from both S&P and Moodys, and receiving an upgrade from Fitch to 'Triple B'. Our leverage ratio reached 3.2 times in 2002, compared to 2.7 times a year earlier. This ratio was negatively affected by the weaker than expected performance of our consolidated operations. We remain committed to our stated target of less than 2.7 times net debt to EBITDA. We expect to use slightly less than two-thirds of our free cash flow, or more than $500m, to reduce net debt during 2003. We intend to achieve our targeted capital structure by the first quarter of 2004.

For the year, we generated free cash flow of $950m, of which we used almost $400m to reduce debt. However, our consolidated net debt remained flat, due to three main factors. One, foreign exchange rate movement. Two, the consolidation of debt from our acquisition of Puerto Rican Cement. Three, the premium paid to buy back our notes due in '06 under Preferred Capital Securities, which allows us to reduce our interest expense going forward. We used our remaining free cash flow to fund our acquisitions in Puerto Rica and the Philippines, and to make investments in fixed assets and information technology, that will improve our global operations.

During the year, our majority net income was negatively impacted by the change in the mark to market of the derivative transactions that were put in place, to lower the aggregate business and financial risk, as we align our business and financial strategies. We have been focusing on reducing the notional amount of our derivative instruments, while maintaining our funding and exposure management strategies. These efforts should lead to a simpler capital structure, as well as lower volatility of our income statement.

During the fourth quarter, we reduced the notional amount of our interest rate derivatives by $650m. Moreover, due to our broader access to sources of capital, during January of 2003 we have reduced out Yen derivative position by funding directly in Yen. Specifically, we successfully raised $360m equivalent in Yen. Lowering notional amounts of interest rate and Yen derivatives, will reduce the volatility to our income statement going forward.

As Hector noted, we expect to generate EBITDA of $2.0b in free cash flow, or close to $900m this year. The continued macroeconomic and geopolitical uncertainty heightens market volatility. Nonetheless, we firmly believe that our geographically diverse operations, our continuous improvement programs, and our sound financial management will enable us to withstand the challenges ahead.

In sum, I would like to leave you with three very important thoughts. During 2003 we will concentrate on, one, improving our EBITDA through important cost and expense reductions. Two, our free cash flow will be primarily used to pay down debt, and we intend to reduce debt by more than $500m, moving up closer to our net debt to EBITDA target of 2.7 times. Three, we will continue to relentlessly improve the value proposition for our customers.

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 significantly in the future due to a variety of factors beyond our control. Thank you for your attention, and now we will be happy to take your questions. Operator?

Thank you very much. Ladies and gentlemen, if you wish to ask a question, please press the one on your touchtone phone. You will hear a tone indicating you've been placed in queue. If you pressed the one prior to this announcement, we ask you to please do so again at this time. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the number. Once again, if you have a question, please press the one at this time. One moment please for the first question.

Our first question comes from the line of Gordon Lee from Goldman Sachs. Please go ahead, sir.

Hi, good morning, gentlemen. Just a couple of quick questions. First on the SG&A front, you did mention during your comments that the bulk of the up-front investments have already been made, but [indiscernible] rise again during the quarter to a ratio of almost 26% of sales. Could you give us a sense of what you'd expect that ratio to be in 2003? The other question was related to Egypt, where we actually saw EBITDA margins decline by half from the third quarter to the fourth quarter. Could you explain what that was, why that happened, and what we should expect in terms of margins going forward in Egypt?

Sure. Let me take the SG&A part first. In addition to some of the up-front investments that we made in expenses associated with the CEMEX Way, we have other items on the SG&A that are growing in this particular quarter. That's some issuance expenses after 2000 -- I mean after September 11th 2001. Insurance premiums have risen considerably - I guess that's something that we all suffer - that has affected also SG&A quite significantly. That's essentially the additional item on our SG&A, but as Rodrigo mentioned, going forward we don't expect the CEMEX Way expenses and investment in IT to be of any significant nature. The reduction of SG&A should be significant going forward. Do you want to specify more on that, Rodrigo?

No. Just to emphasize the fact that it is one of the imperatives that we are, as a company focusing on for this year, to make sure that we monitor and control our costs and expenses. So that contributes to growth in EBITDA that we are forecasting or targeting to achieve during 2003.

But at this point you're not willing to commit to an absolute level of decline, or to a [indiscernible] sales ratio or anything of that nature?

Well not specifically, but I would say that it's going to be significant. We will probably be able to provide more guidance on that going forward.

And as for Egypt, the decline in margins have two major components. One of course is the price that is lower in dollar terms by about 18%. But volumes have been significantly up about 20%. This is part of our marketing strategy, which has taken us to lower Egypt, lower Nile, Egypt, which implies higher transportation costs, which of course reduces margin, but increases our EBITDA. There is also the fact that we had an extraordinary maintenance costs in our plant in line one, to finish up with the bottle neck on this plant, on this line. That is an extraordinary item. So we would expect that next year we have some volume increases, because of demand increases.

Price we will still keep somehow low because of, as we said, the effect of currency exchange rate. And of course we expect some of the transportation costs to remain. So the margins will remain low, and we would expect EBITDA to grow by about - let me just check here - oh, to stay more or less flat. But still our marketing strategy is to keep on providing us with a better market share and positioning the company for the consolidation of this market.

Thanks very much.

Thank you.

Our next question comes from the line of Gonzalo Fernandez from Santander. Please go ahead.

Hi, good morning. I have two questions. The first is, if you can elaborate on the 5% increase in cash costs in the US? I imagine that that's related to fuel costs. Going forward, what kind of EBITDA margins can we expect in the US? And the second would be, if the reduction in the notional amount of derivatives has any extraordinary costs?

Okay, let me take the US question first. Give me a second. For the US we expect margins to remain flat in 2003. As you mentioned, the increase in cash costs have to do with energy, but also with transportation, given the fact that our marketing mix changed over the year, compared to 2001, mainly because of the industry sales decline, significant. So that's essentially the effect on our cash costs.

As to your question on the reduction of the notional amount of our derivative positions which happened in the fourth quarter of last year, and during this month of January of this year. There has been no significant impact to debt levels or cash flows, usage of cash flow, as we had guided in the third quarter. We also intend to continue to reduce the notional amount of our derivative position, both relating to our interest rates as well as to the Yen position. We would expect to do so during the first half of this year, again also without an impact to our debt or usage of free cash flow.

Okay, thank you.

The next question comes from the line of Carmen Slade from Salomon Smith Barney. Please go ahead.

Thank you. Good morning, Hector and Rodrigo, how are you.

Good morning.

I have a couple of questions. First just in general, I noticed that your -- can you hear me okay, by the way?

Yes, just fine.

Let me just pick up my handset here. I'm noticing that you're projecting EBITDA to stay more or less unchanged next year, but if I understood you correctly you're also talking about small reduction in free cash flow - is that correct?

That's correct.

Could you explain why that would be?

That is essentially due to higher interest rates, higher interest expense.

Okay, that makes sense. And the second question is, I know I'm generally on the negative side of things, but if you're talking about some volume growth in Mexico, and I realize you're talking about a small decline in the US, just a little bit of growth in Spain, but you do have volume growth in Mexico. You were talking about your industrial initiative more or less having ended in terms of most of the up-front costs for CEMEX Way, etc. Would you as a result expect some growth to EBITDA for '03?

Yes, but the issue is that Venezuela is practically not performing on the first quarter. That of course takes whatever growth we might think. And if you think that EBITDA in 2002 is [indiscernible], but its growth up to $2.0b.

Carmen Slade. Okay, thanks. And then my final question has to do with prices in Mexico. The information that I have found is that there was a price increase that you attempted to implement in early December. It appears with some very limited success, by my calculations. You did increase prices a little bit, a little bit more than 1% from the third to the fourth quarter in Mexico. Can you comment on that, and on what might by your pricing strategy for Mexico going forward in the short term?

Well the increase we show in the September to December period is about 3.3% in nominal pesos. So there was part of the price increase of course, the sales mix changes and all that you have to take into consideration, and the exchange rate. But that in nominal pesos is 3.3% increase. Now going forward, we essentially - as I mentioned in the initial remarks - we intend to keep our prices flat in constant pesos, which was more or less the case in 2002. There were changes along the year, up and down, but essentially remained more or less flat in constant peso terms, which is what we intend to continue to do going forward.

Of course in our terms, as you know prices have come down during the year, as the peso/dollar exchange rate has weakened considerably during 2002. Frankly we don't understand the fundamentals of that. As Hector noted in the opening remarks, we've seen that the reserves of Mexico during 2002 have increased from about $42b to close to $48b. It is likely that given the current prices of oil in the market, as well as the increase flow of remittances from Mexicans working abroad, that we're likely to see an accumulation of reserves again during 2003. So it is unclear to us what the prices will be in dollar terms, because we're very uncertain as to what the exchange rate will be. The fundamentals are there, and that is encouraging. We anticipate that once the uncertainty that is currently in the market is dissipated, that the fundamentals are there, given the flows of dollars in and out of Mexico for the peso to strengthen. But we will have to wait and see.

Okay, thank you. Just one final thing. On the US you mentioned you had additional costs because of change in marketing mix, and energy related costs. Is it possible to try to quantify how much of the decline margin - which I believe was the greatest in the US - was just due to price volume impact versus the other more one-time type occurrences?

Well in the US, quarter-to-quarter we estimate that roughly 1.4, 1.5 was due to lower cement volumes and a change of mix in volumes of course. Lower cement prices would account for about 1.2 in the margin reduction. Though higher distribution costs, as I mentioned, because of the change in mix, accounted for 1%. There were other -- together with ready-mix aggregate was offset by the PMI savings, that would be about 1.5% - in that region. So it's probably four components as I said. Lower cement volumes, lower cement prices, higher distribution costs and a mix of things, which is about 1.2, 1.4 each on average.

Okay. Great, thank you very much.

You're welcome.

next question comes from the line of Jennifer Bolton from JP Morgan. Please go ahead.

Good morning, gentlemen. I was wondering if you could give me some regional color on how volume and demand is looking in the US? In particular I'm interested in California, where we've heard some rumblings about what's going to be happening with State budget allocations?

Well during the quarter regionally, I would say that the West was the one that behaved best - meaning flat - in our volume at least, and the volume has been safe volume. We were affected in the South East by the weather, and of course the industry sales were lower than the same quarter last year, as I mentioned. The South Central States were down by 10%, because of adverse weather also. The Mid West also was affected by the weather and industry sales.

Now going forward, I would say that we expect more or less flat -- I mean not taking into account unusual weather conditions, which are always present, unfortunately, we expect more or less flat behavior in the volume, region by region. There is no special effect that we are expecting going forward.

and you're not concerned about California or allocations of budgets in that State?

Well that's a very good question. I mean California is probably one of the States that has one of the worst problems in terms of budget, and yet it was the region that behaved the best for us during 2002. The reason why this is the case is because the investments in infrastructure are funded to a large extent by the gasoline taxes. Those in fact have been increasing during 2002 as the price of gasoline has gone up on average. So we are encouraged by the fact that the awards granted during the year to November, nationwide, was up 1%, versus 2001. Of course that is a leading indicator, indicating that activity will continue in 2003 and beyond.

Okay, thank you very much.

The next question comes from the line of Mr. Ken Rumph from Merrill Lynch. Please go ahead, sir.

Hello, Gentlemen. If I could carry on, on the US theme, there did seem to be slightly lower prices in the fourth quarter versus the end of the third quarter. Is that a mix effect? If anything I would have thought if you were doing more business in the West relatively, versus Texas and the South East, that would have helped your prices. Maybe you could explain that, and where would you expect better pricing? Where have you announced price increases for the coming year? Regionally how do you expect that to vary across the States?

Well, I don't think there was any major effect in terms of prices changing in any of the regions. Maybe except in Texas [indiscernible] they were remaining essentially flat. I mean a 2% change, because of the change in mix. I will not characterize it as a major change. And we don't expect any other changes going forward. Slightly lower in some regions, slightly higher in other regions. There are some price increases in some of the States, but there are no major changes. As we mentioned, we expect a flat price situation in the US for 2003, overall.

If I could ask a follow-up on Venezuela. Your comment about, we expect a level of profitability because we expect to maintain dollar prices, and on your assumption of the strike ending in the first quarter. Your expectation of maintaining profitability, that refers to the region including Panama and Dominican Republic, or it refers to the Venezuelan part of it - which we don't know on its own. Or even does it refer to the fourth quarter level, the profitability of the whole year? I'm just trying to get an idea of just what you're saying about Venezuela?

Well it refers to Venezuela, first. The idea is as the situation is resolved, and Venezuela resumes its economic activity, our margins will remain more or less the same. That is essentially it.

Maybe I -- I thought actually that you were suggesting that because you were going to have stable dollar prices and falling volatile costs, you're actually suggesting, even though the volumes are lower our profits will be similar. Was that a mistake?

No, that is what I suggested.

Okay, so the margin's higher, but the profit is similar?

Yes. It was margins that I suggest that would remain flat.

Also, just to clarify. What we expect is that the prices of the fourth quarter will be maintained for 2003. Of course the prices of the fourth quarter, on average, were lower than the prices for the full year in Venezuela, expressed in dollar terms.

Could you just give us an idea of how those numbers compare?

I'm sorry?

Could you give us an idea of how those two numbers look, the average for the full year, and the average for the fourth quarter?

The average for the fourth quarter is about 10% below the average price for the full year. They're in line with the prices in the Caribbean, Central America regions, including Columbia, which we expect will behave in a stable form for 2003, compared to 2002.

Okay, thanks very much.

The next question comes from Marcus Peixoto from Credit Suisse First Boston. Please go ahead, sir.

Good morning everyone. Just a question on the funding strategy. Now that we saw that the prices were actually weaker in dollar terms in Mexico because of the devaluation of the peso this year. Do you have any plans of having some peso denominated liabilities in your mix of [indiscernible], or will you remain with the 100% hard currency?

We do have in fact, at the end of the year, close to 3% of our funding in pesos. That is in part due to the intent that we have to lower the volatility to our income statement as we look at the net income. Of course we are carefully looking at our financial strategy, not only from an alignment between the business and the financial strategy, but also carefully looking at the accounting. If it does make sense to shift part of the funding into pesos, we will. We have done that at the end of last year, for about $200m.

Okay. Still on the third point, you still have separate [tranches] of debt that was raised here. Separate [tranches] that were raised here in Mexico, in pesos originally, that were swapped into dollars, isn't it?

Yes, some of them have been swapped into dollars. Some of the transactions that we did towards the end of the year, remain in pesos. For example we raised I believe close to $150m equivalent from the Mexican bank market. That transaction remains in pesos through December 31.

If the total amount of debt that was originally denominated in pesos, if the swaps are undone, back to pesos, eliminated the swap to dollars. How much would be the total percentage of that that could be say immediately swapped into pesos from the present 3%? How much could it be, 10%, 20%?

Well the market is very deep. You could do a very large amount if you wanted to switch into pesos. I mean we have raised, I think, close to $1.0b equivalent in Mexican pesos.

Okay. So some 15% of the total debt could be easily swapped back to pesos?

Well, we don't intend to do that. I don't know exactly what you're getting at. The market is very deep.

I'm just thinking that as you have 50% of your EBIT in pesos, it could have helped a lot all your financials if you had more debt in pesos. So I'm just thinking of how much you could increase your exposure back to pesos in order to have a less volatile financial position?

Well we also have more assets outside of Mexico than we have debt in Mexico in total. So in fact when you look at the fourth quarter, you see that we had a very important foreign exchange translation gain as we consolidate the net foreign asset position into Mexico. We had a gain of $185m during the fourth quarter. So clearly we have the assets outside of Mexico to support the funding strategy that we have maintained.

Okay. Thank you.

Thank you Marcus.

The next question comes from Daniel Altman from Bear Stearns & Co. Please go ahead, sir.

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

Good morning, Daniel.

Three quick questions. First of all, I know the company's been a strong advocate of the peso over the last few years. In your assumptions for 2003, I'm just wondering what peso assumption you're using? Secondly, if you can give us an update on the forward contracts? I know you had a big amortization in December. I didn't hear much about what happened to that, related to your warrant contracts on your stock. And the third question is, if you could give us a year-over-year number for EBITDA in Puerto Rico for the fourth quarter? Thanks.

Okay. We are -- Rodrigo talked about the fundamentals for the peso/dollar exchange rate. Of course the visibility we have is clouded by the situation which is difficult to understand. Nevertheless, we are forecasting an end of 2003 exchange rate of 10.85.

Well I would, if I may, I would just change the wording. Rather than 'forecasting', what I would say is that we're using a 10.85 end-of-the-year exchange rate for the assumption for our targets and the budget for this year. We're not attempting to forecast the exchange rate in any way, but we do have to use an exchange rate so that we can provide guidance to the market. That is based on a 10.85 end-of-the-year exchange rate, regardless of the fact whether we believe that will be the exchange rate or not at the end of the year.

Okay, that's the peso exchange rate comment. Now let me take the Puerto Rico question first, and then leave the forward question to Rodrigo. We consolidated $8.1m of EBITDA for Puerto Rico in 2002. For the full year the Puerto Rican Cement operation produced $21.7m of EBITDA.

Related to the hedge for the warrant transaction. As we indicated in October during our third quarter teleconference, we extended the hedge of that transaction for another year. Also due to the favorable interest rate environment, we were able to lower the cost of hedging that transaction to less than half of the cost that we had been carrying for the first three years of the transaction. We were able to do so with the same bank group that we had for the first three years.

Okay, thanks. Just on Puerto Rico, if you have just fourth quarter year-over-year? I'm just interested in seeing the comparison there.

Let me just get the information. Can we follow up with you later on.

Absolutely. Thanks again.

Thank you Daniel.

The next question comes from the like of Carlos Perezalonso from BBVA Bancomer. Please go ahead, sir.

Good morning, gentlemen. I just have two small questions. First of all, Rodrigo, you mentioned that going forward we can expect annual savings due to the CEMEX Way, and basically due to the fact that all the [indiscernible] has already been done - or most of it. Can we quantify what kind of savings are we expecting here?

Well the net savings for 2003 are still marginal. But important savings will accrue for 2004 and beyond. Rather than quantifying those savings, we rather [indiscernible] produce, and on a quarterly basis we will report it.

I think it's also important to mention, Carlos, that the CEMEX Way has two sides of it. One is the savings that we are able to achieve on our current operations. But also the fact that this transformation process allows us to go forward in our growth process, taking this single company platform, so making it easy for us to integrate our growth projects.

Okay, perfect. Just a second question. Regarding to the electricity that you are going to start providing in April in Mexico. Can we expect any savings here?

Well what we estimate - and this is of course depending on several factors - we estimate around $5.0m to $6.0m in energy savings in the Mexican operations, due to this particular operation.

Annually?

Annually, that's correct.

Okay, thanks a lot.

The next question is from Arnel Penetel from BNP Paribas. Please go ahead, sir.

Good morning gentlemen. I just wanted to know if you could give us a pricing level in the Philippines and Egypt, I mean in dollar terms? And I have two other questions.

The average price in the Philippines for 2002 was about $41.

And the actual price is about $30?

The current price - let me just check the quarter - it's around $34.

$34, thank you. And for Egypt, if we could have the same figures?

Average price for the year 2002 was around $35, $34.5. And current prices are around $32.

So just to try to understand what is the pricing situation in both countries, I tried to look at the map and I can see that your plants -- I remember visiting [indiscernible], it doesn't seem that you have a natural market around your plant, or if it is it's very small. And in the Philippines, looking at your plant in this island, it seems also that you have to transport your cement to the main market, which is Manila. So does it mean that you have to be a little bit more aggressive than your competitors to be able to have a utilization rate in both countries, because your natural markets are small? Does it mean also that in the future you will keep this high transport cost, as you are transporting cement on a longer distance? At the end, does it mean that we can't expect any recovery of the prices in those countries in 2003?

That's long reasoning, but I would say that the short statement of that would be that in the market, if demand is growing, then regardless of the size of the market that would be growing, and of course would reduce our transportation costs. So going forward, if this market grows, which we expect, that will reduce our transportation costs. In addition to that, we expect our marketing strategies to produce a price premium for our brand, and that would of course take care of part of the transportation costs. In addition to that, we expect the markets, as they grow, to stabilize in terms of pricing, to improve in terms of pricing. So that altogether would tend to improve our margins and improve our profitability in this market.

Okay, but for 2003, you don't think that we will see any real change in both markets?

What we expect is prices in the Philippines to remain almost flat year-over-year. And as we mentioned, because of exchange rates, depreciation in Egypt, maybe a slight decline.

Sorry to ask you that again, but the trends you are expecting in volume for Venezuela in 2003, I understood -- If I understood well it was minus 15%.

That's correct. That is provided that our assumptions as to when the strike ends, and the country resumes economic activity is correct.

Okay, thank you. And you did not disclose any trends for the Philippines. Do you have one to give us for 2003?

In volume?

Yes.

Well we expect some growth in potential volume for our operations. Essentially as imports into the Philippines have almost disappeared.

My last question, you have announced recently that you are planning a new plant, a new capacity in Mexico, but you did not disclose any date or any size for this plant. Could we have more details or is it too early?

Not at the current moment.

Okay. Thank you very much.

Thank you. Well thank you very much. In closing I would like to thank everyone for your time and attention. We look forward to your continued participation in CEMEX. Please feel free to contact us directly, or visit our website at any time, so we can enable you to fully value our company and its long-term potential. Thank you, and a very good day to everyone.

Ladies and gentlemen, this conference will be available for replay after 1:30 pm today until January 28, 2003 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701. Enter in the access code of 670147. That does conclude our conference for today, thank you for your participation and for using AT&T Executive teleconference services. You may now disconnect.