Cemex SAB de CV (CX) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cemex First Quarter 2003 Conference Call. At this time, all participants are in a 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 depress "0" followed by "*". As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Hector Medina, EVP for Planning and Finance. Please go ahead sir.

Thank you. Good morning and thank you for joining us for the first quarter conference call. Let me start the call by briefly sharing my thoughts on what we continue to believe will be a challenging year for Cemex. The volatile and the threats in global economy offer limited growth opportunities and a poor visibility. In light of this environment, I would like to reiterate three key points that I shared with you last quarter.

First, we will continue our strategies to enhance customer relationships and value propositions in order to engender great brand loyalty and increase Cemex's market penetration. Second, we will continue with our initiatives of improving our operating efficiency with an emphasis on cost containment and expense reduction. Already these efforts are partly reflected in our first quarter results. In the coming months, we expect to improve our profitability further by maximizing the return on our investment in efficiency programs. And we will continue to fortify and further align our capital structure with our business cycle.

We are pleased to see that our first quarter results are inline with full year EBITDA guidance that we provided at the start of the year. At that time, we anticipated a challenging business environment that would improve toward the end of 2003, but it was still fragile and subject to downside risk.

We remain optimistic about our major markets, medium and long term economic outlook. However, we continue to approach the coming months with a high degree of caution. We don't expect a meaningful recovery to develop before the second half of the year, as uncertainty and volatility continue to permeate the larger economic and business landscape. Despite the difficult operating environment coupled with weaker exchange rates in some of our markets, we delivered net sales growth of 2% on the back of a 5% system-wide volume growth. EBITDA declined by about 5% versus the first quarter of 2002. Though our first quarter performance was weak when compared with last year and our long term [inaudible], we firmly believe that we are in the bottom part of the many of our markets business cycle.

Moreover, we expect our portfolio diversification, the investments we have made in efficiency enhancement programs along with our continued cost cutting initiatives, will further bolster our business model and improve our free cash flow generation going forward. Looking ahead, our quarterly results reinforced our original full year guidance. Specifically, we are now more comfortable with our ability to generate consolidated EBITDA of approximately $2b. We now expect our free cash flow for the year to be over $900m for 2003.

Now let me go through the outlook of our major markets for the rest of the year. In Mexico, reflecting continued overall slowdown in G7 economies, and in particular in the US, we are adjusting our GDP growth focus from 3% to 2%. Economic performance in the first quarter grew weaker than expected, particularly in the concrete manufacturing sectors, which lead to lower consumer spending. Mexico's first quarter cement demand, however, grew other healthy base of 11%; driven by government infrastructure spending, low income housing development, and a stable self-construction sector. When adjusted for the Holy week religious holiday, demand grew at the rate of 8%; significantly above our expected growth rate of 4% for the year, which is two times expected GDP growth for the second year in the row. On the infrastructure side, we anticipate continued strong cement demand growth driven by government spending on highways and public buildings, due in part to the electoral cycle.

In particular, highway spending for 2003 is expected to be up 27% versus 2002. On top of this, we are pleased to note that the government is taking bids to build and operate toll roads that will upgrade and enhance the nation's current highway system. The low income-housing segment should experience continued growth this year. Overall mortgages in Mexico are expected to grow approximately 34% versus last year, reaching above 530,000. In front of it the largest government market originator is on track to achieve its target of 300,000 homes this year, 25,000 more than in 2002.

We are encouraged to see increased fund lending, the highest since 1994. After announcements of growth over the last six years, bank credit is growing in real strength in 2003. According to a leading Mexican bank, new commercial bank mortgages will triple in 2003; increasing the number of mortgages to 30,000 this year, which is at still low compared with the figure close to 130,000 mortgages in 1992.

Also encouraging is the proposal of a new bill currently in Congress that will make it easier for banks to foreclose on the collateral for defaulted loans. The absence of such legislation has been one of the main obstacles for bank lending in Mexico. The self-construction sector is expected to remain stable during the year with moderate growth of about 2%, to [attempt] employment recovers towards the end of the year driven by the improvement in the economy and the manufacturing sectors. Consistent with a [inaudible], we will aim to sustain constant prices in [inaudible].

During the quarter, we implemented an 8% price increase on black cement, which translated into an average increase of 6%. As part of our marketing strategies and to reinforce the commercial network, our multi-product strategy generated approximately $40m in sales, well on track to reach about $190m in sales this year. We are pleased that the EBITDA margin on the multi-product business is expected to reach 4%, which is about 2 years ahead of plan.

We haven't started the benefit from a thermoelectric generating facility constructed and financed with [inaudible]. The new facility is expected to meet more than 80% of Mexican electricity consumption requirement. This will provide us with a natural edge against higher energy price.

Turning to the United States. We continue to be cautious due to constrained microeconomic visibility. Given the ongoing war in Iraq, the States continued fiscal weakness, low consumer confidence, and the uncertain manufacturing sector; the country's economic growth plan, if any, is unclear. We have reduced GDP expectations slightly above 2% for 2003.

I would like to take this opportunity to highlight that the US market is the most seasonal of our portfolio, and the first quarter is typically our weakest. The industrial and commercial sector is a still weak with construction put in place down 13% for the first two months of the year. High vacancies with slow industrial recovery and low consumer confidence, have combined to make this the laggard of the three main construction sector. Residential construction remains strong with the construction put in place up 12%, fueled by the low interest rate environment and continued pent-up demand in most of the Southeast and Southwest market.

However, we expect the sector to moderate towards year-end its home price implication and higher interest rate make up demand. Triton highway construction put in place declined by 6% for the first two months of the year, due to tighter fiscal conditions at the state level and a weaker economic outlook, and not to mention the impact of the severe weather conditions during the quarter. On a positive note, we are encouraged by the Senate's recommendation of $311b budget for federal highways and transportation over the next six years. Although this budget is not yet final, it is a positive step toward the reauthorization of the TA21 successors later this year. We think this initiative stands a good chance of approval. As every billion dollar in construction put in place in this segment, translates into 50,000 jobs. Additionally it is estimated that $50b per year is needed to just maintain the country's current highway system.

In light of current performance indicators and reflecting our cautious stance, we feel that our minus 1% guidance has further down sized risk, which we believe will be more than offset by our better than expected performance in Mexico and Spain.

In Spain, we achieved encouraging quarterly volume growth of 6%. While this increase includes the Hollywood religious holiday, the overall trend remains positive and we feel conservative. We expect our cement volumes will grow by approximately 1% in 2003. We remain optimistic about the Spanish cement demand with the country's construction sector expected to grow by about 4% this year. The main drivers continue to be government's infrastructure plan and pre-electoral spending with municipal elections to be held in May of this year.

The housing sector also remains very strong. We expect housing to start at about 500,000, driven by the low interest rate environment and the continued emigration of Northern Europeans. On a macro level, we expect GDP to grow at about 2.5% and joining one of the healthiest growth rates in Europe. For the rest of 2003, we expect prices to continue to be higher in dollar terms versus 2002.

As you are aware, Venezuela continues to experience a very difficult social and political situation. Although the country's general strike is now over, the overall situation remains difficult as the demand remains depressed. Current total production in our Venezuelan operations is expected to be flat versus last year. We expect to ramp up exports to compensate lower domestic demand by selling Venezuelan cement elsewhere in the Cemex system, particularly in the Caribbean and the United States. We see further downside risk to earlier guidance of minus 15% in cement demand as uncertainty continues to permeate the country's politic and economic environment. We will remain focused on reducing cost and expenses to better face declining demand in the coming months. On positive note though, the pricing environment remains stable.

We expect Columbia will remain a stable cash flow generator throughout 2003. Despite the somewhat challenging environment, we continue to expect cement volume growth of about 2% this year. The housing sector should benefit from the favorable government-sponsored mortgage environment and the public work sector should support demand in the second half of the year.

Before I turn the call over to Rodrigo, I would like to quickly review some of the management changes that have been announced and that will become effective on May 1, 2003. Victor Romo, current President of the South American and Caribbean region will become EVP of Administration reporting to our CEO. This position is currently occupied by Mr. Mario De la Garza, who will be retiring from Cemex after a 37-year career that was instrumental in the company's development. Fernando Gonzalez, current President of Cemex Asia, will replace Victor Romo as President of the South American and Caribbean Region and will also report to our CEO. Francisco Garza, President of the North American Region; Jose Luis Saenz de Miera, President of the Europe, Middle East & Asia Region; Armando Garcia Executive Vice President of Development and I will continue to report to our CEO. And now, I will turn the call over to Rodrigo.

Thank you Hector. Good morning everyone and again thank you for joining us on this call. Our first quarter EBITDA came in above mid-quarter guidance primarily as a result of better than expected performance in Mexico and Spain, as well as important benefits from our cost cutting efforts which have started to yield positive results, especially towards the end of this quarter.

EBITDA dropped 5% from a year ago to $450m and our consolidated EBITDA margin decreased from 30% in the year -- earlier period to 28% in the first quarter of this year. The 2-percentage point drop is attributable to the increased weight of our multi-product and ready mix sales, both of which have lower margins than cement sales. Our first quarter EBITDA benefited from both our cost cutting efforts and the completion of the rollout of the Cemex Way program. This is clear evident as our selling, general, and administrative expenses dropped by 7% versus a year ago. These savings will be greater as we enjoy their full impact during the rest of the year.

Let me quickly share with you some of the major initiatives that we have undertaken. During the course of this year, we have reduced our headcount by about 1,500 people worldwide to address our needs in the current environment. We have offered a voluntary early retirement program in Mexico in our corporate offices, which has been accepted by 189 employees that began their retirement on April 1st, and we've implemented a mandatory company-wide targeted reduction in travel expenses of 40%.

Looking at our capital structure, our interest coverage for the trailing 12 months increased to five times from 4.9 times a year ago, but decreased slightly from 5.2 times from the fourth quarter of 2002. Our leverage ratio remains stable and net debt to EBITDA 3.2 times for the trailing 12 months compared to the fourth quarter of 2002. Free cash flow generated during the first quarter was $97m, 15% higher year-on-year.The first quarter is seasonally our weakest quarter in every calendar year. Investment and working capital tends to be highest during the first quarter of every year.

However, we expect the total working capital investments for the full year 2003 will be only about one-third of the increase in working capital during this first quarter. This would allow us to recover about two-thirds of the temporary investment and working capital through March 31. During the quarter, we used our free cash flow as follows - $20m for investments, $20m for lease payments, and $52m in interest payments in excess of accrued interest. Net debt increased by $57m; primarily as a result of foreign exchange movements as we translate our euro denominated debt into U.S. dollars.

Regarding our interest rate funding strategy, while we think that our steady state interest rate mix should be closer to 50% funding and fixed rates and 50% funding and floating rates. We've decided to fund a greater percentage in fixed rates and as of March 31 of 2003, 70% of our debt is founded at fixed rates, and 30% is founded in floating rates to take advantage of the current historical-low fixed rate environment. We remain committed to our stated target of less than 2.7 times net debt to EBITDA.

As we've mentioned in our last teleconference, we expect to use two-thirds of our free cash flow to reduce net debt during 2003. In the short-term, our stated priority for usage of free cash flow is to pay-down debt. Over $150m of the negative mark-to-market evaluation of our derivative position as of March 31 has been reversed as of this morning, reaching the same levels that we had as of December 31, 2002. And close to $30m of that -- of the non-cash charges during the first quarter effecting our income statements have also been reverting during the 10 days following March 31 to the close of business yesterday. That may have improved slightly during the course of this morning as most of the financial indicators have also improved in our favor.

We continue to reduce the notional amount of our derivative instruments, while maintaining our funding and exposure management strategy. We reduced the notional amounts by more than $400m during the first quarter of 2003 and over a billion dollars in notional amounts during the past 6 months. The lower notional amounts of interest rate and derivatives will reduce earnings volatility going forward. As Hector mentioned, given our performance so far, we have increased confidence in our guidance for EBITDA and free cash flow for the full year. We continue to expect to achieve about $2b in EBITDA despite weakness in the U.S. and Venezuelan markets, because of the stronger than expected performance in Mexico and Spain.

Before taking your questions, I would like to emphasize that we remain focused on the following three major initiatives. One, we intend to improve our EBITDA and free cash flow through cost reductions and disciplined investment strategies. Two, we intend to use two-thirds of our free cash flow towards net debt reduction moving us closer to our net debt EBITDA target of 2.7 times, and three, we remain customer focus, and we will continue to improve the value proposition we offer to them.

As always, I have been asked to you tell you that any forward-looking statements we make today are based on our current knowledge of the market 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 take your questions. Operator.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the "1" on your touch-tone phone. You will hear a tone indicating you have been placed in queue. If you pressed "1" prior to this announcement, please do so again at this time. You may remove yourself from the queue at any time by depressing the "#" key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again if you have a question, please press the "1" at this time. One moment please for the first question. Your first question is from the line of Sebastian Luparia of JP Morgan. Please go ahead.

Yes, good morning everyone. I think it's a question for Rodrigo. Rodrigo, thank you for your explanation on your changes from [inaudible]. I noticed that as of this first quarter your fixed deferred proportion goes down to zero. Was there any [inaudible] implied to move that to zero or basically the amount zero was [inaudible] to put a [growth] that basically is subject to -- a [inaudible] right now in the first quarter?

Well during the past six months we have focused on achieving both the lower notional amount, as well as, restructuring our interest rate derivative. So that the impact of these would be realized over time, as we swap into fixed rate and make the payments over the course of the next five years. What we have done during the first quarter is complete this restructuring effort, and now we expect that -- funding that we have in place, which about 70% fixed rate funding, 30%, floating funding is one that we will keep at least for the foreseeable short-term. Of course, the impact of that is that our interest rate is likely to be slight because we are paying fixed rate, instead of floating rates, you know, there is a -- yield curve that is -- positive. But then again it also makes our interest -- more predictable in the short-term, and we do believe that we are at a historical low fixed rate environment, and we feel comfortable with the funding strategy, which is 70% fixed, 30% floating for the short-term.

But basically it dropped some of the [inaudible] working notes, [fixed loss] in any of your trade, [basically] the [months you] of, you know, [place after place] a year ago?

I am sorry we can barely hear you, Sebastian, can you repeat the question.

It's not that you've changed or closed trades to move from fixed deferred to fixed. Was basically that a trade that you setup a year ago, basically it's not doing good, right now in the first quarter, is that correct thing?

That's correct. I mean initially last year what we put in place was a strategy that we would lock into a fixed rate forward. But we would continue to enjoy the benefit of the floating rate environment, which was, you know, very attractive to us during last year and the first quarter of this year. And as originally, you know, was the intent, we have now moved away from that and into a fixed rate funding strategy with 70% of our funding in fixed rate, 30% floating.

So there is no cash impact on that?

No, there was no cash impact, and of course, the cash impact of an interest rates swap. You know, as you swap from floating into fixed, you would realize that you pay the fixed rate over time during the next five years.

Okay, great. And Rodrigo, if changing to the markets, I have a specific questions on the U.S. We saw the rate is coming down at 9% in the U.S. at the same time if you look to operating income the decline was much bigger than that. Can you go little bit in terms of what were the main factors affecting that? I know you mentioned the efforts you are doing though difficult, but how do foresee -- how do you see going forward the coastline? How do you foresee margins in the U.S.?

Well, let me answer that Sebastian that's was essentially margins in the U.S. went down due to two major factors, lower cement volumes and lower cement prices. It's essentially the impact we see. There are some additional expenses in maintenance that was taken during this quarter but the one-time that is not the major part. It's essentially lower cement prices and lower cement volume. As mentioned in our initial remarks, we still see the U.S. would come downside risk due to volumes essentially. Now, we also had some additional higher operating cost in aggregate -- I am sorry in concrete ready-mix. And a lower aggregate volumes, it's also impacting this issue. In the case of the expenses, we also have some corporate pension fund -- I am sorry insurance expense, but that is maybe one-time.

Thank you, can you quantify those additional expenses that you conceded a number of times?

Well, let me also participate in the answer of that question. As you recall in the fourth quarter of last year, we had to recalculate. You know, the internal calculations for our pension obligations and the expected returns from our pension fund, as well as, realize the increased cost of the insurance for the full year. And that effected the fourth quarter in the U.S. -- the fourth quarter of last year.

So, when we look at the full year, 2003 versus the 2002, we expect that the impact of those two items will not be worse than it was in 2002. However, as we confer the first quarter of this year versus the first quarter of last year, we are not seeing the full impact of that. So you do need to look at the full year to get a better picture of the U.S. The U.S. is also, you know, our most seasonal market and so is the most sensitive market during the first quarter of the calendar year to changes in weather conditions, and these past three months happen to be, you know, wetter than usual quarter, colder than usual, and did have an impact in some of our markets.

Okay thank you Rodrigo, thank you Hector.

Thank you for listening.

Your next question is from the line of Gonzalo Fernandez of Santander. Please go ahead.

Hi, good morning everyone. I have two questions. Could you quantify the cost of these early retirement program, and the severance payment that you would have to make because of the personnel reduction? And then, the second question is that, you are mentioning that you use $52m in interest payments in excess of accrued interest. I don't know if you can explain that more deeply with that effect?

Yeah, let me take the second question, first. The -- during the first quarter of every year, we tend to have a more coupon on our interests that need to be paid. Of course, as you accrue interest, you reflected on the balance sheet as interest payable. When the interest payment date occurs though, you have to make the payment. Also what happened during this first quarter is that we made pre-payments, and some of our debt, for example in Cemex in the U.S. Of course, as you make a pre-payment on a debt, you also have to pay not just the principle, but the accrued interest to the date of the pre-payment, and we make the pre-payments during the last days of March. And so that has an unusual impact in reducing at the balance sheet level, the interest payable line. As we pay more interest than we accrued during the quarter. Of course, this is something that happens late in one quarter and then tends to be reverse during the following quarter because you tend to have a normalized interest payable account on the balance sheet. But we do have, typically in the first quarter, also higher interest payment than we have accruals, and that happened last year and the previous year, as well.

Regarding the early retirement program, that of course doesn't have a severance payment or expense associated with it. And it does help us to reduce expenses going forward because many, many of these positions are left vacant by those people that accepted early retirements have been fulfilled with employees that were already in Cemex. And so, there is a significant reduction in the payroll going forward as a result of many of these people having accepted an early retirement, and of course, the retirement package is paid from the pension funds that we have put in place. And so, it does have a net positive effect on expenses--.

Which we expect to be around $7m annually.

Right. And this began on of course on April 1st, as the people have accepted the early retirement beginning at the start of this quarter

The cost of that in terms of the additional pension expense is around $2m. So, that is, of course, more than offset by the $7m that we expected in terms of savings. In terms of the severance for the headcount reductions that has something along around the first 2-3 months of the year. That is included in the other cash items in the report. And we estimated to be a total of $10m, but of course, the benefits of this headcount reduction, we will expect to see in the next few months.

The headcount reductions that did involve, as severance package didn't happen of course at the beginning of the quarter, it happened during the quarter. And so, we will begin to see the full benefit of that again starting in the second quarter and beyond. And the up-front expense is behind us during the first quarter.

Okay that's very clear. Thank you. If I follow-up one question about prices. And I am not getting the price increase, because the price has gone flat year-over-year. And what kind of increase in the average pricing in Mexico could we expect for the second quarter as a consequence of the increase that you made on February?

Well as I said we are looking at it in the best returns around a 6% increase of our prices in March '03 versus December. For the fourth quarter -- the second quarter that is we would expect that price increase to be around that level. I mean that's quarter-on-quarter. But in terms of the first quarter this year versus first quarter last year the petrol prices increased by 5.3%. And the first quarter of this year versus the last quarter of last year in best returns the increase was up 3.7% that is what we have experienced now. But as we have said, this price increase would apply to bag cement and so, the average, although it wasn't 8%, the average pricing in Mexico you will find is less than that. And the -- it is around 6%.

And may be just to complement that the increase from December to March was 6.1, the average increase quarter-over-quarter was 3.7 and so, you could expect to see another slightly higher than 2 percentage-point increase for the second quarter versus the first quarter sequentially as you get the full impact of the price increase on our co-operations in Mexico. We do expect some of the price increases that have taken place, for example, in both cement and ready-mix to be reflected in our consolidated results also overtime. As we do have some contract in that [inaudible] of course, and as they get replaced by new contracts, will be replaced at the new price level that we have today. Also, there will be slight improvement on number of prices still going forward during the second quarter and third quarter of this year.

Okay. That's very clear. Many thanks.

Thank you.

The next question is from the line of Steve Trent from Smith Barney. Please go ahead.

Good morning gentlemen, Steve Trent from Smith Barney. Hi Good morning. Just two or three quick questions for you. The first is, I was wondering you could give us little color? We saw that the Central America Caribbean basin, numbers are pretty good. I was wondering if you could give us a quick break down as to what portion of that was Puerto Rico cement and what portion of that was organic. And then with respect to the forward sale of shares you managed to postpone for a year. I was wondering if you could give us an update on that as to, you know, what might be the basic strike price on that repurchase, and when do you expect to repurchase that shares, November or December or...?

Yeah. Let me take up the first part of the question in terms of the Central American Caribbean region. Puerto Rico, of course, being the star in this region because of our first major integration project there being making a significant progress. The EBITDA margin in Puerto Rico; we have now at around 23-24% comparing favorably with the first quarter last year, which were around 13%. So, we are looking at the benefits of the -- over the benefit -- synergies and the changes we have been making to the operations in Puerto Rico. And that is, of course, the major source of improvement for the region. Say, for the rest of the countries in the region, all in all, they are essentially flat. So most of the growth in the region comes from the Puerto Rican turnaround.

Yeah, regarding your other question on the extension of the agreement with the minority shareholders in Cemex Asia Holdings, we did extend the agreement we had with most of them from this year to next year. So, we extended by 12 months as the termination on all the transactions. As far as the strike prices on both the forward and the options, you know, we have provided you in this quarter to report with the waited average strike price for all of the options that we have with third parties, which is $24.95 for ADR equivalence.

We have the strike price on the forwards that we have put in place to hedge against these options. The waited average strike price is lower, is $22.76 for ADR equivalence. What this means is that assuming over the time -- over time, during the life of these options in forward, even when the price of the stock recovers and all of these options in forward get on around at market, if that market price is above $25 in ADR on the present value basis today, you would have about a 100 or over a $100m coming into the company as a difference between the strike on the forwards and the strike on the options is significant. Whereas the greater -- the gap between the forwards and the options, the greater the cash they would come in to down the road when all of these contracts get on one.

I appreciate that Rodrigo very clear at the -- I did notice that you put that detail in the report. My question more specifically, and I said I made it more clear, was -- an update as to the 105m CPOs that you sold forward in the fourth quarter of '99, if you could, you know, you're basically due to repurchase those holdings by the end of this year. And I'm not sure as to...

Okay. I understand your question. Let me just try to rephrase. You are referring to the increase in the derivatives -- the equity derivatives at the end of the quarter. What is that attributable to, is that your question?

No. I'm not referring basically to the CPOs you sold forward back the warranty issue, when you sold CPOs forward, simultaneously in the fourth quarter of '99...

Ha, okay, okay, yes. That transaction, which originally the forward, matured in December of last year. That was extended for further 12 months as the warrants also have a further 2-year life period. We extended those forwards to hedge the warrant transaction to December of this year. Now the cost of hedging those forwards was cut in half, as we were able to do it at today's market raise versus the original hedge that we've put in place to hedge those forwards was at market rates, you know, a little over three years ago. And so, you know, we have the hedge in place and we intend to keep it for the short term.

Are you able to give us any color on what the -- where the average strike might be on the forwards to be repurchased in December?

Well, we give the weighted average strike price on all the forwards. You know, rather than looking at each one of the individual pieces we think it's more useful for everybody to know what is the weighted average of all the forwards and what is the weighted average of all the options, and we will continue to provide that information on a quarterly basis.

Okay. Fair enough. Thanks very much guys.

Thank you.

Thank you.

The next question is from the line of Gordon Lee from UBS Warburg. Please go ahead.

Hi. Good morning gentlemen.

Good morning.

Hi Gordon.

Two quick questions on Mexico specifically. The first is -- if you look at, the volume growth in the first quarter was obviously very, very strong better than, I think, most of us were expecting -- that my questions for you would be, if you look at the drivers behind that growth, how much of that growth or what share of that growth you think is growth that may disappear after the elections; or parts of another way of answering that is what would you expect volume growth to be in the first half versus the second? And then the second question on Mexico is just, you know, ready-mix prices have been riding cement for a while; whether you would expect to be a bit of increase in ready-mix prices this year, particularly given the increased volume we are seeing in that segment?

Okay. We still look at the Mexican market for the second half of the year as we mentioned with some caution, although, of course we are also very pleasantly surprised that volumes are stronger than we also had expected for this first quarter. Now, as this was the Mexican market and this is very strong base of our demands in Mexican's self-construction sector is something that we expect we will keep on growing with a very reasonable pace is around 2-2.5%. Our formal-construction sector is with this, in fact driving the growth of this quarter and that we expect to still be pulling the demand, at least until the third quarter.

And as we mentioned, highway construction is a major driver and we estimate that the increase of cement demand for this segment, it should be around 4% -- 4.5% for the year but it's basically pulled from formal construction -- highway construction spending is about 27% year-over-year increase in real [inaudible] returns. There is also hydraulic infrastructure construction as there are two major projects, [El Carmen] and [inaudible] group, airport improvement projects also, and urban road paving that we feel will continue until the end of the year and then in fact go over into the following year. I mean all this projects of course are more than a 12-month project. So, although this projects will and already know we will increase demand by about 1m tones. They are, of course, something that is spread over more than a year and in fact probably more than 2-3 years.

So, if you take into consideration the growth of the self-construction sector and may be the rest of the sectors of concrete project's segment, that are essentially going with the economy that is it's around 2-3% rate and we consider the formal-construction sector will grow because of this project. Though, we still are looking at the 4-5% cement demand growth year-over-year. Now, we would be of course pleased if we see something better than that but that's what we see today.

One of the important drivers that we have not yet seen for increased cement volumes but could be important in the future and we are encouraged by all of the statements referred in the press from bank is mortgage lending to the private sector. We have seen in the past the benefit of being in [inaudible] project as social housing, but we have not yet seen the benefit of significant increases in mortgage lending to the average Mexican. When and if that happens, that is a potential driver of increased cement consumption, going forward. We are not seeing that yet and we are not counting on that for our full year guidance.

Yeah. I had mentioned in the opening remarks that we are at positive feel about this because of the signs we see, but of course we will get to see what is going to be the effect on the cement demand. So, I am not counting on this to have an effect for this year, we would like it to have it, however. Now, in terms of ready-mix prices, which were, I think, the second part of your question and of course referring to the Mexican situation, we are looking at ready-mix prices increasing about 5% in net growth and then rolling out through the rest of the year. Of course, in the case of ready-mix prices have a different effect than bag cement and which have a price increase in ready-mix because of the effect of contracts that have been awarded and already being supplied at the previous price when there is a price increase. It takes some time, there is a lag for the new price to set in. Well that's what we would be expecting in terms of prices in ready-mix.

Perfect. Thank you. And if I just may -- if I could -- I have just one follow up; on the SG&A we saw that the decline of 7% year-on-year this quarter, which was certainly positive. Is that something that -- is that a way of decline we could expect for the full year or are you ready to quantify that yet?

Well, may be let me just say that, as I mentioned in terms of the headcount reduction, that happened along the first two months of the year and so we would be looking at the benefits of this headcount reduction only in this quarter and the next. So, we expect that to happen this quarter but in addition to that the beginning of the year the whole company was under or is under the intention to reduce travel expenses by 40% company wide. So, we are looking at reductions already but they, of course, are affected by carry-forward from the last year's travel expenses that are being paid this quarter, I am sorry, in the first quarter. So, we would also be expecting to look at some benefits of these expense reductions in the following quarters. That -- since as much as I can say which is of course there is more early retirement programs that could be implemented in other parts, that is something that we are analyzing today.

Perfect. Thank you very much.

Thank you, Gordon.

Your next question is from the line of [Katie Blackbuck] of Sanders River Capital . Please go ahead.

Hi. I have a question on your total debt position. I think it increased by 51m from the end of last year and you were suggesting that that was because of the US dollar translation. It looks as though there was a different impact on the short-term and the long-term debt, though is short-term debt of about $361m and long-term debt actually down $310m; can you give me some kind of back on this to why it would be so different between the two if it's just a currency issue?

Well, I mean you do have majority that become short term, you know, every quarter that we go along that were not short term the previous quarter. What we have done is, we have maintained pretty much the same level of committed bank facilities implies that are available and most of which we are paying fees for and that we could drop on -- we maintain close to $600m of committed bank facilities implies that we could drop on. We are also going into our two strongest quarters in terms of free cash flow generation capacity; the second and third quarter of the calendar year is usually the period when we have the strongest free cash flow and thus when we can make the greatest pay down of debt and of course we'll pay down short-term debt, and so we do monitor our short-term and long-term mix. If we have more then we think we need in terms of short-term then we tend to be more cautious and maintain greater committed facilities in place during that period of time. And of course, we also have been and will continue to be proactive in addressing our upcoming maturity in our financial strategy and we will not wait until close to maturity. We will tend to address those maturities well ahead of time and extend the tenure of our debt and, we are in the process of doing that and that is part of our financial strategies for this year.

Okay. Just on the cash flow generation, you were saying the reason for lower cash flow generation in the first quarter is due to seasonality, particularly in the U.S., the other receivables line was where the big sort of difference happened, I think. Can you just give me some background as to what [inaudible] in to those receivables and why seasonality would be such a big issue?

Well, we do have seasonality in the U.S., in Spain and the first quarter tends to be not only our heaviest quarter in terms of usage of working capital, it also tends to be our weakest in terms of operating cash flow generation and so it tends to be our weakest in terms of free cash flow generation. The seasonality that you see under working capital, you know part of it is inventory, as you have to build them up in places like the U.S., for example, where consumption is much greater in the second and the third quarter versus the first quarter and so you tend to accumulate inventory. And then you do have the impact -- the seasonality impact of receivables during the first quarter that affects us in every quarter. First quarter is also a quarter when, for example, worldwide we paid variable compensation. And variable compensation tends to be recognized, of course this is an expense on a monthly basis and tends to be shown as a payable on the balance sheet, but of course it has to be paid at one point in time and it does get paid in February and so you see the impact of that and like this, you know, many things affect us in the first quarter, so we were not surprised by the investment in working capital that we had during the first quarter. But, you know, if we compare quarter-over-quarter, we have a significant improvement over the first quarter of last year, where our free cash flow increased by 15% year-over-year.

Sure.

And we do expect to recover, you know, about two-thirds of the investments we made in working capital during this first quarter, during the course of the rest of the year.

Okay, thank you.

Thank you. And we have time for one or two more questions operator. You have somebody else in the line waiting?

Certainly. Your next question is from the line of Cecilia Castillo of Accival. Please go ahead.

Hello, good morning. I have a couple of questions. One is regarding again your equity, there is a [inaudible] forward, if the price of the ADR or CPO would remain at its current level, what would be the cash settlements that we can expect for the year? And then another quick question would be what was the average cost of debt during the first quarter, and what do we expect during the year going forward?

Rodrigo.

On the cost of debt, I think, for the fourth quarter of last year, we had an average cost of debt slightly under 6%. For the first quarter of this year we had slightly higher than 6%. The expectation that we have is as we switch away from floating rate debt into fixed rate that our average cost of debt will increase slightly. Our target is to have an interest average in excess of 4.5 times this year with our guidance for EBITDA and we feel comfortable that we should be able to achieve that for this year.

As you know, we have aligned our funding strategies, so that when our operations were weakest our interest burden would be lowest as well. Last year our interest and preferred dividend payments was down a $150m versus 2001 with pretty much the same level of debt starting at the beginning of the year versus the ending of the year. This year, we expect to have a stronger operating performance and correspondingly we also expect to have higher interest burden, but again they are aligned one with the other.

Regarding the derivative position, you know, we have given -- we have provided you with the weighted average strike buy both for the hedges and the options, and we will continue to do that on a quarterly basis. And what we've also done is we have extended the average life and that is why you see an increase in the notional amounts of the equity derivative. As you extend the life, you tend to have you know the longer the tenure, the higher the forward strike price. The present value strike price may be the same, but the notional of course is to be reported based on the forward strike prices. And we don't anticipate any problem involving these transactions over with the bank. Like I said, we have sufficient securities in place committed and available to be able to do so and we rather not speculate about the price of the stock forward.

Okay. And if I may, another quick question on operations. We've seen that in some notes that you were expecting to implement the [inaudible] strategy in some other countries. Would that, just to confirm it and if that's the case, will that have the effect on margins for the year?

Well, to start with -- I mean if there is something that we are looking at, and of course we have to find the right timing to do it, we think of markets like Venezuela. Of course, that is hardly appropriate to do at this point in time. So, we have to look at the right timing, but if that would happen then, that would effect the margins of that particular country and what we would be telling you is that, as we see it happening. As of today, I don't see either we can -- that we are doing that specifically in any particular country today.

Okay. Thank you very much.

Thank you.

Again, I think we have time for one more -- one last question.

Excellent. Your final question is from the line of [Roberto Elinas] of Bear Stearns. Please go ahead.

Thank you. Good morning gentlemen. I have a question on your Venezuela. What is your trend capacity utilization there and how are you seeing the demand and that markets evolve?

Well, let me take the second part first and as we mentioned, we are looking at the 15% decrease in demand year-over-year. But we feel looking at probably even larger declines, and when we say that, it is because the visibility's due very low as you can imagine the country is still on the -- under a significant political tension. There are decisions to be made -- that haven't been made that will effect the political environment and of course the business and economic activity in our country. So, it is hard for us to say that -- to speculate on what is going to happen, but we feel that demand is going to remain low locally. And as we mentioned in terms of capacity utilization, we will try to, because we have the facilities and the competitiveness in the international market to increase our exports to markets, like the rest of the Caribbean and the U.S. So as to increase the capacity of utilization at least in those plants that are able to export.

Okay. Thank you,

Thank you. Well thank you very much. And in closing, I would like to thank everyone for your time and attention and we look forward for your continued participation in Cemex. And 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 potentials. Thank you and a very good day to everyone.

Ladies and gentlemen, that does conclude your conference for this morning. This call will be available to replay at 1:30 p.m. Eastern Time this afternoon until midnight on April 18th. You may access this call by dialing 132-0365-3844 and putting in the access code of 680532. That number again is 1-320-365-3844, with the access code of 680532. That does conclude your conference for this morning. Thank you very much for using AT&T executive. You may now disconnect.