Cemex SAB de CV (CX) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the CEMEX Q4 2003 Earnings Conference Call.

I would now like to introduce your host for today's call the Executive Vice President of Planning and Finance Mr. Hector Medina. Please go ahead sir.

Good morning and thank you for joining us for this Q4 conference call. I will first comment on the Company's performance during last year and our outlook for 2004 in the different markets in which we operate.

Then our CFO Rodrigo Trevino will follow with the discussion of our financial results.

I would like to begin by briefly sharing my thoughts on what was a very challenging, but ultimately successful year for CEMEX. Twelve-months ago we faced a global economy burdened by uncertainty and volatility. Offering few visible growth opportunities and subject to important downside risks. The reality was, however, better than expected. Demand in markets such as the United States, whose outlook was negative a year ago, grew significantly during the second half of 2003.

Led by the U.S. economic expansion, the global economic environment has also moderately improved and offers better prospects for the year ahead.

For example, Mexico and Spain, our other two major markets, grew at twice the rate of GDP growth or more. In fact, visibility has improved for most of the markets in our portfolio. These are growth markets on the upswing, and we feel that we are well prepared to capitalize on their accelerating development during 2004. For all of these reasons I have just mentioned, we approach 2004 with optimism.

This year we expect EBITDA growth to be in the high single-digits before additional growth from acquisitions. This is ahead of our medium-term expectations of 5% to 6% organic growth. We expect to achieve this improvement in EBITDA through higher volumes and a moderately healthy improvement in pricing dollar terms. I will get to country specifics shortly.

In contrast to last year, during which cement demand grew in only half of our 14 largest markets, we expect volume growth to be in the mid-single-digits throughout most of our portfolio. We expect this to be accompanied by a gradual price recovery.

In 2003 EBITDA grew 10% due principally to efficiency gains at the corporate overheads level. The result of several years of ongoing efforts such as the CEMEX Way to improve productivity and efficiency.

We expect to boost EBITDA growth by 2004 by realizing greater efficiencies and productivity gains, principally at the operating level. Both of these should continue to yield benefits in the years to come.

Free cash flow is expected to grow at a double-digit rate that is faster than EBITDA. After our current free cash flow deployment, we continue to believe that debt reduction is the best way to create value for our shareholders in the near-term. As such, we will continue in our bias towards the leveraging during the year. As always, however, we will monitor our markets for opportunities that may create even greater shareholder value.

Going forward, we are stronger, healthier and increasingly better prepared to capitalize on future growth opportunities as a result of the following.

Firstly, our focus on improving customer relationships, creating greater plant loyalty and expanding alternative cement uses.

Secondly, our planned several years investments in the CEMEX Way, most noticeably measures to improve efficiency and share best practices with our networks.

Thirdly, our continuing efforts to strengthen and simplify our already healthy capital structure.

I want to emphasize that our performance during the past two years demonstrates that we can sustain profitability, and strong free cash flow generation, in uncertain and difficult economic environments. In short, and I know our Chairman has said this before, but I believe it worth repeating, our business model generates good returns in bad times and great returns in good times.

For 2004 we anticipate the following performance in our major markets.

With respect to our macroeconomic outlook, we expect Mexico GDP growth to accelerate to close to 3% versus slightly more than 1% in 2003.

Let me put 2003 into context. Cement volumes grew 4% for the year, more than twice the pace of GDP growth two years running and at a multiple the industry has not been able to reach in recent years. This rate of growth is driven by the strong low-income housing sector and public infrastructure spending, which stood and anemic growth in bank lending and the industrial sectors.

We are optimistic about the positive trends in cement consumption and we believe that it will extend well into 2004. For the year we expect cement volumes to increase by close to 5% and to be driven mainly by continued infrastructure spending, low and middle-income housing and at the stable self-construction sector.

Despite the absence of fiscal reforms, we expect the Government's finances to remain sound, as a result of fiscal prudence and high average oil prices.

We should also see a significant increase in foreign direct investments and [welcome] remittances from the United States. Both of which we believe will lead to stability in the foreign exchange [indiscernible] market and contribute to higher economic activity. We expect this to positively impact cement demands.

On the infrastructure side, we expect continued cement demand growth driven by Government spending on highways and public building. As a result, we expect cement consumption from Government and other ready-mix intensive projects to grow in the high single-digits during 2004.

Low-income housing should keep growing as Government spending continues and employment recovers in the second half of the year. Last year the low income-housing sector reached about 500,000 mortgages and this year we expect that number to increase. In addition, about 10,000 mortgages were awarded by the commercial banking sector. We expect that number to double in 2004. We think that these two indicators will offer further upside potential for cement demand.

The self-construction sector, which remained relatively flat in 2003 should begin to grow again. Increasing cement consumption by about 1.5%, with the upward trend in GDP we expect the industrial sector to experience a recovery, albeit a lagging recovery, during the second quarter of the year inferring increased employment and contributing to the sector's growth this year.

Consistent with our pricing policy, we will aim to maintain prices in constant peso terms for 2004.

As I highlighted at the outset we will continue to move forward with our marketing strategies, which are designed to reinforce our commercial network and will intensify our customer focus.

In 2003 our multi-product strategy generated approximately $170m in sales. We expect to reach about $220m in sales this year, with an EBITDA margin of about 4%.

I want to note here that for 2004 we expect the combination of higher ready-mix demands and increasing success of our multi-product strategy to continue to put pressure on EBITDA margins. On the other hand, the lower level of assets required to execute these strategies will, accordingly, translate into a higher return on assets.

Now let me discuss our second largest market, the United States. In 2003 the public sector was the primary driver of cement demand. With total construction put in place, with spending up 4% for the first 11-months of the year. The residential sector, which rose about 9% last year has been driven mainly by the very favorable interest rate environment, as well as positive demographics and house [indiscernible] formation, especially in our markets.

For 2004 the fundamentals continue to be strong, but we expect a slow down of about 3% in cement consumption, due to the strong buying trends in the last year and a half, as well as an expected moderate increase in interest rates.

The industrial and commercial sector was affected the most during this period with high vacancy rates for office space, low corporate capital expenditures and weak economic activity in general, cost construction spending in this sector to drop 6% in the first 11 months of the year. On the other hand, the downward trends level out during the second half of the year and we now expect the sector cement consumption growth to be about 4% in 2004.

Construction spending for streets and highways reversed its negative trend and increased by 2% for the first 11 months of the year. Due mainly to a better economic environment, that brought improved [fiscal] conditions and lower pressure from the states on the highway truck front, as well as $20b in federal aid to the state.

Going forward we expect cement demand from this sector to grow by about [2%] returning to 2001 levels. One of the main drivers of this segment, the TA21 program, was extended for an additional five months, based on the fiscal year 2004 funding of $34b, a 7% increase and in line with present [indiscernible] proposals, to allow the real [indiscernible] debate to continue.

In addition, the States' consolidated fiscal deficit has gone from an annual run rate of [$70m to $10m] for Q3. This we see as positive news for infrastructure spending at the state level.

The Government's proposed new highway construction program, safety will be a positive factor that will influence demands in 2005 and beyond. The Bush Administration’s proposed bill, represents a 7% rise in spending over that of TA21 and proposals from the Senate and the house, transportation and infrastructure committees represent spending increases of about 35% and 63% respectively.

We expect the new program to represent an increase in spending in the low to mid 20% range, over that of the prior five-year program. As a result, we expect our cement volumes to increase in 2004 by about 3% over those of 2003, on the back of a 2% increase over 2002 volumes.

With respect to national average pricing, we expect a slight increase in 2004 over last year's prices.

While EBITDA margin is growing moderately, it falls short of the desired level. This is largely due to a [spike] in lower shipping rates. We expect this cost to be substantially offset during the year by greater fuel efficiency.

Spain’s GDP continues to experience one of the strongest growth rates in Europe. This expansion underpins CEMEX's robust 2003 performance. Cement demands grew about 4.5% exceeding 46m metric tons for the year, about twice the rate of GDP in 2003.

At more than 600,000 starts last year, the housing sector remains very strong, although we don't expect housing starts to surpass this level in 2004, we think they will continue at a relatively high level. This growth has been driven by a favorable mortgage environment and the immigration of northern Europeans.

Public works spending also remains an important component of cement consumption. The sector's primary catalyst continues to be the Government's infrastructure program. Although we expect to see a slower activity in this sector through the transitional phase that will follow the first quarter of elections, spending should continue through 2007. On a macro level, we expect GDP to grow at about 3% and the euro exchange rate to weaken versus the US dollar by the end of 2004.

On the demand side, we think that cement consumption will flatten or slightly decrease. Our volumes will range from flat to minus 2%. We think cement prices will remain flat in euro terms for the rest of the year.

In Venezuela we faced a very challenging and difficult year. A tough operating environment and demands that remain depressed during most of 2003. In the fourth quarter, however, we finally saw demand bottom out, reverse and move towards the growth trend.

Thanks to this fourth quarter reversal, the drop in cement demand during 2003 was not as steep as we had previously anticipated. During 2004 we expect cement demand to resume its [indiscernible] and increase by 8%. The main demand drivers will be infrastructure investments on the public sector and to a lesser extent the self-construction sector, which also has a positive outlook.

We will remain focused on reducing costs and expenses. We are also continuing our efforts to increase exports during 2004 in order to sell more cement elsewhere in the CEMEX system. As a result of these efforts, we expect EBITDA to remain roughly flat fiscal 2003. I would like you to note that this expectation assumes for planning purposes, an average 25% devaluation in the Bolivar during the course of the year. An assumption that seems conservative in light of the countries current foreign exchange reserves level of $21b, given the size of its economy.

In Colombia the economy is gaining speed and we expect GDP growth of about 3% in 2004 versus 1% in 2003. Driven by higher business confidence in the Government's [indiscernible].

We expect a rise in volumes of about 3.5% driven by low-income housing and industrial, commercial and transportation infrastructure. We believe Colombia will remain a stable cash flow generator and will continue to see healthy prices.

In Egypt we expect moderate volume growth of about 1% and some further recovery in prices in dollar terms, resulting in a moderate increase in EBITDA for 2004.

In the Caribbean we expect EBITDA will be flat to slightly weaker than in 2003. Nonetheless, we are very pleased with the results of the post merger integration process of the Puerto Rican Cement Company.

In 2004 we expect Puerto Rico's EBITDA to increase in the high teens, reflecting the continuing success of this post merger integration process.

In South East Asia the Philippine operations are expected to post higher EBITDA growth than last year, due to relatively stronger prices. Yet, while the contribution from these operations remain small relative to our global network, we are encouraged by favorable trends throughout the region, such as Indonesia and Thailand. These trends demonstrated by volume growth, stable and in some cases rising prices and improving capacity utilization give us ample reasons for optimism.

Thank you for your time, I will now turn the call over to Rodrigo.

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

Notwithstanding the challenging macroeconomic environment, we delivered a strong financial performance last year. In this regard, I want to briefly summarize our Q4 and year-end results.

EBITDA for the quarter increased by 22% versus the same period a year ago, while the EBITDA margin increased by almost 3 percentage points. EBITDA for the full-year 2003 increased by 10%. These increases were mainly due to higher volumes, moderately higher prices and lower SG&A throughout the year, which declined by 210 basis points as a percentage of net sales.

This reduction in SG&A results from ongoing efficiencies, mainly at the head office level, but also as a result of our ongoing efficiency program.

As Hector mentioned, we believe that there is also room for further reductions leading to greater efficiencies at the operating level. Improvements in EBITDA margins in 2004 are expected to be principally driven by lower energy costs per ton, higher utilization rates and lower redundancy costs.

Our net income was negatively impacted by a one-time impairment of obsolete assets in Asia. Some of which were shut down and are expected to remain inoperative. This impairment didn't have a cash impact during the quarter.

Our free cash flow for the quarter decreased by about 19% due mainly to the 2002 accounts receivable [securitization] transactions, which we executed during Q4 of that year. If we adjust for this transaction, free cash flow grew by 42% versus the Q4 of 2002. Moreover, free cash flow for the full-year 2003 increased by about 21% and on a like-for-like basis that is adjusted by the securitization transaction it grew by 40% year-over-year for the full-year. In any event a remarkable double-digit growth performance.

In line with our continued efforts to improve our financial flexibility, and strengthen our balance sheet, we used $150m of the $247m of free cash flow that we generated from operations during Q4, to reduce debt. Our net debt decreased by only $35m for the quarter, however, due to foreign exchange rate movements of both the euro and the yen. Which translated into additional debt in the amount of $115m when expressed in dollar terms.

During 2003 we used $725m of our $1.14b in free cash flow to reduce debt. Our consolidated net debt was reduced by $481m, however, due to the foreign exchange rate movements I just mentioned. This free cash flow deployment is in line with our full-year guidance to use about two thirds of our free cash flow to pay down debt.

We used the remaining free cash flow to fund our [indiscernible] acquisition in the United States. To exercise an option to terminate an asset based financing transaction and to make other investments.

During Q4 we successfully executed a non-dilutive equity offering in which slightly more than 29m ADRs were sold with net proceeds of approximately $122m after canceling the [indiscernible] with the banks. These proceeds were primarily used to terminate $1b in notional amount of interest rate and cross currency derivatives. In fact the total notional amount of our derivative positions was reduced by close to $1.7b during the quarter.

We intend to continue to reduce the notional amount of our derivative position, mainly as a result of our intended use of free cash flow to pay down debt during 2004. We do not anticipate, however, that this will have a net cash outflow and we expect a positive contribution from the exposure management strategies that we have put in place.

In fact, close to $90m of the negative mark-to-market valuation of our derivative position as of December 2003 has been reversed as of January 19 of this year. Close to $80m of that improvement would positively impact our income statement during 2004.

Looking at our capital structure our interest coverage for the trailing 12-months was 5.3 times, well above our target of 4.5 times for 2003. Also higher than our interest coverage for 2002 despite the shift from floating to a fixed rate funding strategy.

We also successfully refinanced $2.4b of our maturities during the year and maintained our credit rating with Moodys, S&P and Fitch. As a result of this, the average maturity of our debt is now 3.3 years. Given our strong free cash flow and committed facilities in place, few of our debt maturities of 2004 will need to be refinanced.

We have committed credit lines in the amount of $800m as of the end of the year.

Our leverage ratio improved from 3.2 times a year ago to 2.7 times as measured by net debt to EBITDA. The improvement was due mainly to lower net debt, but also as a result of higher trailing 12-months EBITDA. We are pleased that we achieved our leverage target one quarter ahead of schedule.

As Hector mentioned, because we continue to believe that net debt reduction is the best way to create shareholder value in the near-term, we will continue to favor de-leveraging with our free cash flow during 2004.

While we are not lowering our steady state net debt to EBITDA target of 2.7 times, we feel comfortable in the short-term approaching a ratio of 2 times. In so doing, we expect to significantly strengthen our capital structure and should see interest coverage exceed 6 times during the year.

With respect to our liability structure, we do not expect any major shift in our currency and interest rate mix. Having said that, we will, of course, continue to secure the lowest cost funding available within our desired overall maturity profile. We will also continue our efforts to simplify our capital structure, which in the expected economic environment should have a positive contribution to our income statement in 2004.

Although we are taking steps in this direction, we want to emphasize that the use of financial derivatives is, and will continue to be an integral part of our corporate funding and exposure management strategy.

In closing, I would like to say that we are pleased with CEMEX's performance during the trough of the cycle, especially since we have been operating under a challenging macroeconomic environment during the last couple of years in most of our markets.

This has also coincided with strategic initiatives that have important long-term benefits. These investments are strengthening our business model and increasing our efficiencies, helping us to better reap the benefits of the upturn in the business cycle.

Throughout this period we have generated strong free cash flows, and have achieved returns in excess of our cost to capital. As the cycle improves and as we continue to capture the benefits of our investments and initiatives, the spread between our return on capital and our weighted average cost to capital should improve and thus enhance value creation for our shareholders.

As always, I have been asked to tell you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control.

Thank you for your attention. Now we will be happy to take your questions. Alicia.

Ladies and gentlemen, if you wish to ask a question please press '*' followed by '1' on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press '*' followed by '2'. Again, please press '*' followed by '1' to begin.

Our first question comes from Sebastian Luparia with JP Morgan. Please go ahead.

Good morning Rodrigo, good morning Hector. I have a couple questions regarding the US market. With higher transportation costs [indiscernible] basis, you have in the US been a net [indiscernible] demand? You have to imagine that the cost of imports are much higher. How much support do you think that is going to give for pricing during 2004? When do you think we are going to see some benefit throughout the year on that?

Sorry I missed some part of the question. The line is not very good.

Okay, let me repeat that Hector. I was saying that with higher transportation costs on a lower basis. I have to imagine the cost of importing cement in the US has to be higher. How much support do you think we're going to see on pricing in the US on the back of that? When do you think you're going to see some impact on that, if any, during the year?

We expect those higher transportation costs to impact import prices as you said, but this will have an effect on the wider import market, not necessarily in the very short-term. Because, as you know the [spot] imports are relatively small fraction of the total imports, so, most of the prices for imports are already somehow set. But towards the end of the year that should have an effect on import prices and that we expect will have an effect on the market prices of cement, at least in the coastal regions.

Hector to follow on the US we saw a strong reverse in trends during the last couple of quarters. Can you give us some color in terms of which states or regions showed the biggest trends in volume and prices and also, which were the weakest ones, basically in the areas where you are operating.

Let me try to get one of our tables here. Essentially most of the large markets we operate in are Texas and California and Arizona. We have seen better prices and volumes towards the end of the year that is as weather improves in most of these regions.

Maybe the only one that we expect to be lagging in 2004 would be California, due to the budget problems they have. The rest of the regions we expect to be more or less in line with the overall growth, which we expect for the market.

Okay. Regarding the impairment of the assets in Asia, can you give us some color in terms of which assets were different and the exact amount that impacted the quarter?

This is related to one of our plants in the Philippines that has remained closed. Because of the market conditions we expect that to remain closed. This is not a plant that is not as efficient as the rest of our assets. So we say that will remain closed.

What was the exact amount of that Hector?

Just one second please. It is about $78m. There is also some terminals included that we have changed - ceased to operate in the region. But that is because of the change of cement flows, we have ceased to operate these terminals.

What is the capacity of that plant in the Philippines?

That is about 600,000 tons.

Okay, thank you very much.

Thank you.

The next question we have comes from Gonzalo Fernandez from Santander. Please go ahead.

Good morning, Hector and Rodrigo. One question, in Mexico I know that the EBITDA margin was below last year and also well below the third quarter, while your cash costs in Mexico increased. So I don't know if there is some special reason for that, and the outlook for margins there going forward?

If you could update us on the start-ups of the [indiscernible] generation electricity plant in Mexico.

Let me turn this one to Rodrigo.

Part of the explanation for the margin reduction in the fourth quarter in Mexico is as a result of provisions that had not been taken in earlier quarters and had to be adjusted in the fourth quarter and which of course are of a non-recurring nature. So, we expect part of this margin erosion to be reversed in 2004.

We also expect that the cost of fuel and electricity combined in 2004 will come down on our [indiscernible] basis as a result of the investments we've made to shift away from fuel oil to [indiscernible]. Also as a result of the thermo electric facility that we expect will begin to supply our needs during this first quarter of the year. So, we expect to reap the benefits of that fully for the last three quarters of this year, with savings in excess of $11m for 2004.

We expect this to have a positive impact in our margins for 2004. Of course, as Hector mentioned in the opening remarks, we do expect to sell more other products that we don't manufacture in 2004, when compared to 2003 and we also expect the growth in ready-mix to be at a faster rate than the growth in cement. Of course the multi-product strategy and ready-mix do have lower margins, so that will impact the weighted average margin.

For Mexico for the full-year we do expect both initiatives to have positive contributions to higher return on assets, higher return on capital employed and have a greater shareholder value creation out of Mexico for 2004.

Please could you repeat the number of savings that you're expecting in energy as a result of the plant?

For electricity alone it is in excess of $11m within 2004 considering the fact that we expect the thermo electric facility to start supplying our needs during this first quarter of 2004. So, we will not reap the full benefits of the full-year, but significant savings in the course of the year.

Okay, thank you Rodrigo.

The next question we have comes from Gordon Lee with UBS. Please go ahead.

Good morning gentlemen. I have a couple of questions starting off with Asia. Just very quickly, could you explain what is behind the very sharp price increase we have seen over the past couple of quarters? Is it a change in mix or does it have to do with a strategy implemented on the marketing side? Maybe similar to what you are doing or what you have been doing in Egypt.

My second question, regarding Central America and the Caribbean. It seems from your remarks that the PMI for Puerto Rico is going very well, yet your outlook for the Caribbean and Central America region isn't very positive. I guess you're looking for stable to maybe slightly negative EBITDA. Could you explain what is happening there, if there is any particular market that is weaker at present?

For the case of the Philippines, Gordon, the price increase or expectations in fact going forward is that some additional improvement would occur. We think that this is essentially due to the fact that we have been looking at a relatively more stable market. Imports have somewhat decreased, so we are expecting the safeguard measures that the Government has put in place for imports for the cement industry to lapse in a few weeks. We don't know if they are going to continue to be in place. If they do, prices should stay and improve somehow. But essentially that is the case of the Philippines.

In the case of the Caribbean the improvement in our EBITDA in Puerto Rico is offset a little bit in the case of our Dominican Republic operations, where because of our fiscal situation there is some decrease in activity. Then the exchange rate is also affecting our expectations for EBITDA generation there. That is offsetting the improvement in Puerto Rico essentially.

Perfect, thanks. But, in the Dominican Republic the expansion plans remain in place?

Yes, we essentially plan to go on. This is, of course, a long-term strategy and we feel that it is improving our perspective in the full region as we are deficient in clinker production in the Dominican Republic anyway.

Perfect. Thank you very much.

The next question we have comes from Daniel Altman with Bear Stearns. Please go ahead.

Hi, it's Daniel, Bear Stearns. Two questions, first of all the $122m that you received from the [Ford] contracts. I wonder if you could talk to us specifically about where the proceeds went. I know you mentioned both derivatives and debt reduction. I wonder if you could break that out?

My second question is regarding your EBITDA guidance for 2004 of high single-digits. Just looking at the country-by-country breakdown, it doesn't appear that you're looking for such a growth rate in the US, Spain, Colombia, Egypt etcetera. So I am wondering is it Mexico and Venezuela that you're getting to high single-digits?

Let me take the first part of the question Hector on the user proceeds from the non-diluted equity transactions that we executed during the fourth quarter. As I mentioned, we reduced a notional amount of our derivative position by close to $1.7b during the fourth quarter. A portion of that obviously was the equity derivatives that were unwound as we placed the shares held by the bank under the forward transactions, back into the market.

The user proceeds went primarily to the reduction of a notional amount of about $1b in interest rate derivatives and the rest to the reduction in foreign exchange cross currency derivatives that we had put in place. It was close to $45m on interest rates and a little over $60m in the case of foreign exchange cross currency derivatives.

We expect that this will not only reduce our interest burden going forward, its in line with our stated funding strategy of maintaining close to 60% of our funding at a fixed rate, 40% at a floating rate and significantly reduces the contingent obligations going forward, as well as reducing the volatility of our derivatives position and exposure management strategy that we've put in place. So, we felt that it was the best usage of the proceeds during the fourth quarter.

Okay, let me take the EBITDA growth question. As indicated we expect positive volume increases in Mexico. The US is also expected to grow in terms of volume. We expect some price improvements in the US, although relatively small.

Yes, the Spanish operations, because as we mentioned, should slightly decrease in terms of volume, prices should hold flat. But Venezuela, Egypt, Central America, the Caribbean and essentially the Asia region should all present growth in terms of EBITDA. The only one that we are expecting to probably have a decrease in EBITDA is Colombia because of the finishing of some of the very large infrastructure projects that will decrease and make ready-mix volumes over the very large increase that we had in 2003.

So, all of these markets we expect, as I said, to present very important increases.

We have elections in, I would say, most of our main markets in 2004. This will either, of course, create some [indiscernible] at the election effect the construction industry, the gas works, everywhere in the world.

In the case of Mexico we have elections in 24% of the volume of the states where we are. It in 2003 there were the [indiscernible] elections in 16% of our volume. In 2004 there is 24%, so that is another motivation.

We expect all these volumes to affect our EBITDA growth. Now, in addition to that our energy strategy as Rodrigo mentioned will have several effects and that is what is allowing us to say that we are positive on a high single-digit EBITDA increase for 2004, over 2003.

Okay, just one follow-up. Do you have a FX rate assumption for Mexico for 2004?

We have an average FX of 11.3 and at the year-end of 11.5.

The exchange rate that we use for planning purposes, not necessarily reflecting our view of what may happen to the exchange rate during the year.

Okay, thanks very much.

The next question we have comes from Steve Trent with Smith Barney. Please go ahead sir.

Good morning gentlemen. Two quick questions. I couldn't hear you too well Hector, I apologize, when you mentioned high single-digit dollar EBITDA growth in '04 and I guess low double-digit free cash flow growth. Was part of the differential driven by a stronger working capital cycle?

My second question is, could you give us an update as to what is going on with [indiscernible] and how your strategy might have changed in the last couple of months. Thank you.

Sure. The difference in fact in growth for free cash flow over EBITDA growth, is that we are expecting flat factors free cash flow compliance for 2004. But as EBITDA increases year-over-year the mathematical effect is that free cash flow grows more than EBITDA. Because you are dividing over almost half of the year the denominator of EBITDA. EBITDA is $2.2b, free cash flow is $1.1b in 2003. So the difference is the same, but the percentage is higher.

Maybe just to complement that Hector. We are not contemplating additional CAPEX or investment in fixed assets during the year 2004 when compared to 2003. We are expecting lower interest expense when we include the preferred dividends in that concept, as a result of our intended use of free cash flow to pay down debt. We are conservatively assuming that we will have an increase in cash [access] and working capital investments in 2004 when compared to 2003. But, as Hector pointed out, as most of the growth in EBITDA is expected to translate into growth in free cash flow and you do divide that growth by a smaller amount, that is free cash flow being about 50% of EBITDA, it does lead to double-digit growth in free cash flow for the full-year when compared to 2003.

Now let me take your [indiscernible] question. As you have seen in the media we have started the arbitration procedure after the period of mediation ended without any result. This process will continue. Essentially there are several steps that have to be taken. First of all the arbitration proceedings should be accepted by the institution that is carrying these proceedings. Then a panel should be named and the process goes on.

We haven't received any formal decision from the Indonesian Government. Although you have probably seen in the media that they have been remorse or some expressions of different potential solutions to the arbitration or a negotiation outside the arbitration procedure.

As I said, we haven't received any formal proposal from the Government. When this happens we will of course will make this known to everyone and we will decide on what we would like to do. For the moment we keep an interest in the Indonesia market. As we have seen, this is a market that is growing and we believe that it is a very important part of the South East Asian cement market.

Great gentlemen, thank you very much.

The next question we have comes from Eric Ballam(ph) with ING. Please go ahead.

Good morning gentlemen. I believe it is right for Rodrigo. I understand the high single-digit growth rate in the EBITDA and the 2.0 times short-term coverage of net debt to EBITDA. By my calculation that comes up to about $1.1b reduction in debt from net debt from current levels. So, my question is do you have a number in mind when you talk about debt reduction for 2004? Could you just elaborate a little bit about what do you mean by 2.0 times in the short-term, yet your goal is 2.7. Is this something, 2004 or 2005 short-term - just could you elaborate a bit?

Yes, thank you for your question. When we have conversations with most of our important shareholders, we hear that one of the areas of interest for them is what is the intended deployment of free cash flow that we generate. Of course, as we have reached our target of 2.7 times net debt to EBITDA at the close of 2003, the natural question to ask is what do you intend to do with your free cash flow for 2004?

We are not changing our stated steady state target of 2.7 times, but we are saying that what we believe will maximize shareholder value in the very near-term is to use the free cash flow that we generate this year to pay down debt. To give further strength to that statement, we want to give our shareholders comfort that we seriously intend to do that and we don't mind if our capital structure strengthens to the point of 2.0 times net debt to EBITDA. This is a ratio that our Chairman Lorenzo Zambrano also mentioned at the analyst investor meeting that we held in July of last year.

So, do we want to get to 2.0 times? No, it is not a target that we're setting for ourselves, but we do have a bias to de-lever and to use free cash flow in that way. Because, we believe that we are going through uncertain times and we want to be prepared for any scenario that we may face. We believe that this is what our shareholders want us to do and we intend to do that. So, to give additional color, we add the fact that we feel comfortable with the capital structure, even if we get to 2.0 times net debt to EBITDA.

Now, when we get to that level, we can again discuss if the intended use forward from that point on, continues to be to de-lever or not. But, for the near-term, for the foreseeable future, I think it will take several quarters, as you have calculated doing the math. That is the intended preference that we have to use free cash flow to pay down debt.

Okay, so would it be fair to say that we'll continue to see most of free cash flow go to debt reduction for 2004, perhaps into 2005? But of course, what you guys have been very upfront in stating in the past, is if an opportunity presents itself, that's going to be accretive to shareholder value, perhaps an increase in borrowing to make such an acquisition a reality would be possible?

The intended use is to de-lever. When we change that intended use we will of course communicate it to the market.

Okay, thank you. One final question, the rating agencies, where does an upgrade by Moodys stand?

Well we do maintain a close dialogue with all rating agencies and we give them updates regularly on our performance versus original guidance and also on our plans for the full-year. As we are communicating our plans for the full-year 2004, we intend to have conversations with all rating agencies as to where we are, what progress we have made and what we intend to do during the year to maintain that dialogue.

We have had in the case of Moodys that you ask about, a positive outlook from Moodys now for more than a year. So we believe that the actual performance of the Company does corroborate that the positive outlook was warranted, as we have made significant progress in the right direction.

Okay, thank you.

The next question we have comes from Arnold Panatel with BNP. Please go ahead sir.

Good morning gentlemen, Arnold Panatel at BNP Paribas. I have a question about your development and your investment, because I have in mind that for you Europe is not a priority in terms of investment. There are strong rumors in Italy that you are investing into three grinding stations. According to my estimate this represents an investment of €75m to €100m, which is quite significant. So, I just wondered if you could confirm this rumor, if you could update us about your strategy in Europe. If you have changed your mind and if these rumors about entering into the Italian market are reliable, what is the strategy behind it? Thank you very much.

Let me say to start with that there hasn't been any change in our strategy in Europe. What is the reality is that we are a significant player in the Mediterranean and as such, trading is a very important part of this participation in this market, and, as such, some infrastructure and trading sometimes becomes useful for trading purposes.

Some of the trading operations require us sometimes to invest in some grinding or import terminals, in order for us to better use our flows of clinker or to comply with our trading strategies.

So, we are investing in some grinding positions. But these are relatively small operations, not really significant. As to the numbers you were using in terms of dollar investments, I feel that that is a bit over the real numbers.

Okay. Because we heard that it is 1.5m ton of grinding capacity. You say it is relatively small, but it represents 5% of the Italian market, which for me is not so small.

I understand about the trading behind the trading strategy. If I understood well, you are planning to supply this new position with your Egyptian clinker. Does it mean that you also see long-term other capacity in Egypt in your cement plant or...? Because it sounds like creating this grinding station in Italy is a long-term strategy for CEMEX.

Well you have to consider that half of the volume of clinker and cement that we trade comes from other sources than our own sources. So trading is a business in itself and it requires movements from different sources to different destinations.

The potential for Egypt to export clinker to Italy is there, but there is also clinker in other regions of the world that we might buy and sell in other places.

Rodrigo do you want to add something?

Let me just [indiscernible] put this in the context of the consolidated overall plan that we have. As Hector mentioned and as I mentioned, we don't expect to see an increase in the CAPEX or investment in fixed assets during 2004 when compared to 2003. This will include these types of investments or expansions in places such as in the Dominican Republic. In fact we might very well see that 2004 the total actual investment in CAPEX and fixed assets turns out to be less than what it was in 2003, including all of these investments.

So you don't see any increase of your CAPEX in 2004, including the investment into these Italian grinding stations?

Including the investments into the Dominican Republic and including all the investments we have to make to maintain our current operations.

In fact we might see, because we are focused in delivering double-digit growth in free cash flow, we might see a reduction versus 2003 in the aggregate for the Company as a whole.

Okay, thank you very much.

The next question we have comes from Ken Rumps(ph) with Merrill Lynch. Please go ahead.

Hello gentlemen. I have a couple of questions. Firstly, just on US prices, you mentioned earlier on that you thought that the sort of higher costs potentially of imports, might sort of ease the pricing situation later in the year. How are things set in terms of what you've proposed, if you have proposed any price increases for either at the beginning of January, if I have missed them, or for April perhaps, it's the more normal time in the States. What have you proposed in different regions or, can you give a range perhaps? Do you have any more optimism about whether that may stick, because obviously we had notified price increases last year, which in the end didn't hold?

My second question was just a small one on the Philippines. It is a market with a lot of over capacity and plants that were not running. I presume it is one of the ones on [indiscernible] nearer Manila, one of the solid [indiscernible] plants that you're closing or maybe a line in one of those plants. Is that right?

Finally I was going to ask how Philippine volumes developed last year domestically. You give a figure for the region, and I just wondered how the domestic market in the Philippines was last year. Thanks very much.

First, the question of the US prices. We are not expecting an overall average high - a very large increase in domestic prices in the US for our markets. Essentially, because as I said, the effect of higher transportation costs and imports will only be felt towards the end of the year.

Although we are proposing some price increases, this will, as I said have an effect towards the end. The average price increase is a relatively small one throughout the US.

In the case of the Philippines. Cement consumption was down to about 3.5% year-over-year for the total market. This, of course, reflects the state of the economy. In fact it also goes to the fact that we have made this impairment regarding one of our plants. You are correct to mention that this is one of the [Louson] plants that has been closed for some time now and we expect - as the market is where it is today and with the expectations we have for the future, this plant should remain closed.

Okay, thanks very much.

We have time for one more question. That question comes from Cecilia Del Castillo with Accival. Please go ahead ma'am.

Hello Hector, hello Rodrigo, how are you? I have a quick question on debt. With the leveraging that you're planning for 2004, do you expect any changes in currency denomination as well as short-term and long-term debt?

We do have a 3.3 years in the average life of our debt. Which, if you spread it over time translates into close to 6 years for the full life of the debt. We do generate very strong free cash flows and have a level of net debt of about 5 times our ability to generate free cash flow. So, we feel very comfortable with the debt maturity profile. We don't expect the debt will change during the year.

We do expect to use a significant portion of our free cash flow to pay down debt and that should go primarily to reduce dollar debt. We don't expect to see changes in our funding strategy on the yen or the euro during the year, as we want to maintain the alignment between our liability structure and our assets and upgrading cycles or asset side of the balance sheet.

We have about 60% of our debt that is being funded at a fixed rate and we intend to maintain that strategy of between 50% and 70% of our funding at a fixed rate. We don't expect that will change dramatically during the year. But, of course, as we use some of the free cash flow to pay down debt, we will need to decide what debt it is that we will reduce. It may very well be some of the debt that currently is at a fixed rate. So, it does reduce the need to use derivatives to achieve the funding strategy that we've had in the past and that is why we expect to see a further reduction in the notional amount of our derivatives during 2004 as we reduce debt in dollars. That has either been put in place by borrowing pesos and then swapping into dollars and then swapping some of that floating rate debt into fixed rate.

Okay, thank you.

At this time I'll hand the call back over to Mr. Hector Medina. Please go ahead sir.

Thank you very much. I'd like to thank you all for your time and attention and although a little bit late, also wish you a very happy New Year. We look forward to your continued participation in CEMEX. Please do feel free to contact us directly or visit our website at any time. Thank you and good day to you all.

Ladies and gentlemen, thank you for joining today's conference. This concludes the program, you may now disconnect. Good day.