Cemex SAB de CV (CX) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX second quarter 2004 earnings conference call. My name is Alicia, and I will be your operator. [Operator instructions] Your hosts for today’s call will be Mr. Hector Medina, Executive Vice President of Planning and Finance, and Mr. Rodrigo Trevino, Chief Financial Officer.

Mr. Medina, you may begin, sir.

Thank you operator. Good morning, and thank you for joining us for this second quarter conference call. I will first comment on the Company’s performance during the quarter, and our outlook for 2004 in the different markets in which we operate. Then, our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

I would like to begin by sharing my thoughts on what was, for CEMEX, a really strong and successful first half. We are encouraged by our better than planned consolidated performance for the quarter. For CEMEX as a whole, EBIDTA grew 15% versus the same quarter last year, and at three times the rate of net sales, which grew 5%.

For the first 6 months, EBITDA grew 17%, while sales increased at a rate of 7%. The marked improvement in our EBITDA for the quarter was primarily the result of higher domestic volumes, efficiency gains, and a moderate to slight recovery in our portfolio. Looking ahead, our year to date results give us confidence that we can exceed our full-year guidance.

And specifically, we are now more comfortable with our ability to achieve EBITDA growth of about 11%, or $2.35b, and our consolidated EBITDA margin greater than 32% during the year.

We now expect free cash flow growth to be greater than 18% for the year, helping us to exceed our recent guidance of $1.35b. We will achieve this through continued discipline in capital budgeting and working capital management, as well as lower total funding costs. In the absence of acquisitions that meet our strict investment criteria, we will continue in our bias towards re-leveraging throughout the year.

Needless to say, we continue to monitor cement markets and the entire value chain for opportunities that would create even greater shareholder value, and not through our organic growth trajectory.

Now I want to give you the outlook for our major markets for the rest of the year. In Mexico, we have increased our GDP growth expectations to close to 4%, as a result to a healthy recovery – of a healthy recovery in the US manufacturing sector. On the back of this macro-economic performance, we expect volumes, which will continue to be driven mostly by infrastructure spending and low and middle-income housing, to increase by about 4%. The self construction sector continues to be stable, with a flat outlook for the year.

During the quarter, our volumes decreased 1%, due primarily to a stable self-construction sector, as well as a very strong second quarter in 2003, that was driven in part by pre-electoral spending.

Looking at the full year, demand is expected to be driven by Government spending on highways, public buildings and other infrastructure projects. This is expected to benefit particularly from the electoral cycle, as close to 30% of national cement consumption is coming from a state with elections later this year, as compared to 14% a year ago.

Government spending on infrastructure is expected to benefit from approximately $2b budget surplus, resulting from higher oil prices than assumed in the federal budget. Approximately $500m have been distributed to states – through the state infrastructure costs, for spending on infrastructure projects. We would also see growth in demand from the federal highways and work program, which has the potential to invest around $9b in the near future.

These factors lead us to continue to expect cement consumption from Government and other readymix-intensive projects to grow in the high single digits during 2004.

Low-income housing should keep its growth flat, and we continue to see the formal sector rolling at a rate of about 3%. This year, we expect about 575,000 mortgages to be originated, around 10% over last year’s levels. As of the end of the quarter, INFONAVIT has awarded around 45% of the target of 325,000 mortgages, putting them on track to achieve their objective for the year.

Cement demand in the self-construction sector is expected to grow slightly, at around 1%, due to a moderate increase in the aggregate disposable income in this sector, which has not increased in tandem with other building material prices, such as [indiscernible] products. In fact, the cost of an average dwelling in Mexico has risen by more than 20% since the beginning of the year.

Our multi-product strategy continues to exceed our plans. We expect full-year sales to increase by about 45%, to $250m, with a healthy EBITDA margin. In line with our pricing policy, we expect prices to remain flat in constant peso terms for the year.

Now I would like to discuss our second largest market, the United States. During the second quarter of 2004, our volumes increased about 9%, or close to 6% on a like-for-like comparison. This performance was slightly below our guidance of 10% for the quarter, due to rainy weather in the south-central region during the month of June.

For 2004, we believe that our fundamentals continue to be strong. Spending on construction put in place has continued to grow, as demonstrated by a growth rate of 9% from January to May. The main drivers of this growth were the residential sector, which grew in excess of 14%, and the street and highway sector, which grew 7%. The industrial and commercial sector has reversed its stated downward trend and also grew during the first five months, albeit at a slower pace of about 3%.

The residential sector is expected to moderate its growth as a result of a likely increase in interest rates. This may lead to a decrease in cement consumption for the segment – for this segment of the market. Due to a strong first-half performance, we expect full-year growth of this segment to be up 1.5%.

The industrial and commercial sector is expected to recover during the year and grow about 4%, due to lower vacancy rates and higher capital expenditures resulting from increased economic activity.

We expect volumes in the public works and the streets and highways sectors to increase by about 4%. The general improving economic environment understates better than expected fiscal conditions, which improved from a $40b deficit a year ago to a surplus of more than $20m, are driving these increases.

Also encouraging is the fact that both the Senate and the House have approved the important increases in the budget of SAFETEA, the successor of TEA-21. While the Senate and the House are still in the process of reconciling differences in their proposals, we are confident that an agreement can be reached that will exceed the current administration’s $256b proposal. These budget increases are likely to lead to cement volume growth for the street and highway sector in excess of 3% per annum over the next 6 years.

Also, at the end of last month Congress approved another expansion of the current TEA-21 program for July 31, 2004, at an annual run-rate of $33.6b, $2b more than the 2003 levels. As a result, we continue to expect our cement volumes to increase in 2004 by about 6% over those of 2003.

Prices in the U.S. have increased by $4 between December 2003 and June 2004. A further price increase is expected to be implemented in July and August, as we have sent letters to our customers with average price increases of about $5 per metric ton. These price increases are predicated on favorable demand conditions and supply pressures on inventory, which at the extreme, are being manifested through shortages or low inventories in many of our markets.

The shortages are being driven, basically, by very tight and significantly more expensive shipping market, both maritime and inland, as well as the difficulty of sourcing imported cement, given the domestic recovery in many of the exporting markets.

Our EBITDA margin improved in the second quarter, as a result of higher prices and volumes, both of which mitigated higher transportation, energy and import costs. We expect EBITDA margins for the remainder of the year to exceed 2003 levels, as volumes continue to grow and achieve better leverage prices.

In Spain, our cement sales remained flat during the second quarter and decreased 1% for the first half of the year. This performance is in line with our expectations for the year of flat to -1% for cement consumption in Spain.

Public works and spending and housing continued to be the primary drivers of domestic cement. The public works sector, mainly [indiscernible], continues to be the current government’s infrastructure plan, which has mitigated the slow-down in pre-electoral spending. About 40% of this plan has been completed already. The successor to the current infrastructure plan, which is currently under inauguration, is expected to start next year, and to run until the year 2015, and could have an estimated total size of about $130b.

The housing sector remains very strong, and is supported by a favorable interest rate environment, and immigration for northern European. Although we do not expect housing starts to exceed 2003 levels, we see them at the relatively higher level of approximately 575,000 starts for the year.

For the first half of the year, our prices increased by about 3% in euro terms, ahead of plan, and are expected to remain at this level for the rest of the year.

In Venezuela, we expect cement demand to increase by more than 20%, due primarily to a very weak 2003. The primary thrust behind demand growth is the self-construction sector. Also, infrastructural investment from the public and the private sectors are driving consumption. But we expect demand from both of these sectors to slow throughout the year, as ongoing projects are completed.

In Colombia, we see volume growth of about 6%, which will be driven primarily by the formal sectors, mostly on the commercial side, and, to a lesser extent, the residential sector. The self construction sector will continue to grow, but at a slower pace, while the public works sector will remain at the same levels as last year, due to ongoing projects.

We are pleased with our Egyptian operations, as they are operating at full capacity utilization. We expect our domestic volumes to decrease by about 4% in 2004, due mainly to a slowdown in Government infrastructure spending. And, is being partially offset by 150% in exports versus last year, which now represents close to one-third of our production capacity. Pricing continues to undergo a healthy recovery.

Before I turn the call over to Rodrigo, I want to briefly share with you how we see our growth opportunities going forward. If you look at the past performance of the countries in which we now operate, you will see that our portfolio has the potential to grow EBITDA at about 5%-6% per year.

Because we generate free cash flow in excess of $1b per year, we should be able to acquire operations that would add at least another 5%-6% in EBITDA growth per year. Where can we find these acquisition opportunities to complement our robust organic growth? We see ample opportunities in cement and the rest of the value chain. These exclude assets that are currently owned and operated by the top 11 companies in the sector.

The cement opportunities space, which we currently find attractive, generates today approximately $5b of EBITDA. Looking down the value chain, including aggregates, readymix, distribution and others, the total EBITDA generation today is about $3.5b, totaling $8.5b.

Although we do not envisage something in the immediate future, we expect these opportunities to enable us to leverage our cement assets, and to further strengthen our business model, and improve our value proposition to our customers. In light of this, we do not need to compete, nor will we compete for the last dollar of unconsolidated EBITDA in our industry.

Essentially, our strategy is designed to enhance the value of our network by seeking and capitalizing on opportunities to more fully use our existing infrastructure, in distribution, logistics and back-office. It is a strategy that is also designed to take advantage of our global scale in procurement in energy, and our IT-enhanced capacity, to identify and share best practice.

How do we make sure that this growth translates into increased shareholder value? First, our investments will have as a common denominator, a healthy return on capital employed. As we explained in our recent analyst meeting, a typical new investment would have to provide a return on capital employed in excess of 10%. In other words, we manage our entire portfolio to produce a return on capital employed that exceeds our cost of capital.

Second, we are confident that we will find opportunities at prices and conditions that meet our investment criteria. These will enable us to sustain our long-term track record of double-digit profitable growth, which will translate into increased value for our shareholders.

I thank you, and now I will turn the call over to Rodrigo.

Thank you Hector. Good morning, everyone, and again, thank you for joining us today. EBITDA for the quarter increased 15% versus the same period in 2003, while the EBITDA margin rose by close to 3 percentage points. These increases were due mainly to higher domestic volumes throughout our portfolio, a pricing recovery in most of our markets, and lower cost of goods sold and SG&A expenses.

As a percentage of net sales, SG&A decreased by 78 basis points. This, despite the rise in transportation costs, due to increased domestic sale volumes. The reduction in SG&A results from greater efficiencies throughout our network. Our efforts to reduce expenses at the corporate and operating levels more than off-set the higher consolidated transportation costs incurred during the quarter.

We expect improvements in EBITDA margins in 2004 to be driven principally by lower energy costs per ton, higher utilization rates, lower redundancy costs, and a moderate price recovery.

Our free cash flow for the quarter was 14% higher than in the same period in 2003, due primarily to higher operating cash flow and lower investments in working capital and fixed assets. Free cash flow for the first 6 months reached $732m, a 47% increase versus the same period in 2003. In fact, our trailing 12-month free cash flow is close to $1.4b. This gives us confidence that we will achieve our free cash flow target of $1.35b for the year.

Of the $444m of free cash flow that we generated from operations during the second quarter, we used $343m to reduce debt. This is consistent with our stated intent to reduce debt in the absence of investment that meets our capital allocation criteria. Our debt decreased by an additional $40m during the quarter, due to foreign exchange rate movements, which resulted in a total net debt reduction of $383m during the second quarter.

During the first half of 2004, we used more than 85% of our free cash flow to reduce debt. Which resulted in a consolidated net debt reduction of $672m. In addition, in the past two weeks we early terminated our existing $300m US Commercial Paper program, and we have pre-paid $700m of an existing $1.15b multi-currency facility. We obtained the proceeds to early terminate and pre-pay these transactions from our free cash flow and a newly syndicated $800m bank facility, which will help us to further reduce our cost of borrowing. And this will also maintain our financial flexibility, given the facility’s revolving nature.

Looking at our capital structure, our interest coverage for the trailing 12 months improved to 6.2 times, achieving our objective to exceed a 6-times coverage during the course of this year. Our leverage ratio, as measured by net debt to EBITDA, improved significantly, from 3 times a year ago to 2.2 times for the trailing 12 months ending in June. These improvements were the result of our decision to use most of our free cash flow to pay down debt.

Our strong operating performance as we continue to emerge from the bottom of the cycle, was also a contributing factor. We continue to believe that, in the absence of investments that meet our strict capital allocation criteria, debt reduction is the best way to maximize shareholder value. Accordingly, we will continue to favor using our free cash flow to de-leverage in the near term, until we find attractive investment opportunities.

We feel comfortable in the short term achieving a net debt to EBITDA ratio of 2 times or lower, because our weighted average cost of capital has continued to decline, despite the lower debt level. We remain committed to obtaining a solid triple-B rating from the rating agencies. Given our strong balance sheet and capital structure, compared to the other major multi-nationals in our sector, as well as our strong performance track record with the cycle, we are confident that we are on the right track to get there.

During the past several months, we’ve taken steps to improve the average life of our debt to 4 years, which is well above the 2-year average life that would be required, given our debt levels relative to our free cash flow. We’ve also increased the long-term debt component of our debt to 87%, compared to 66% a year ago. And we have significantly improved our financial flexibility by diversifying our funding sources.

With respect to our liability structure, we do not expect any major shift in our currency or interest rate mix in the near term. In closing, I would like to say that we were pleased with CEMEX’s performance during the first half of the year. Especially because we have been operating under a challenging macro-economic environment during the past couple of years.

The investments we’ve made in the past and our efforts to improve our productivity have strengthened our business model, increased our efficiency, and have better prepared us to reap the benefits of the upturn in the business cycle. In fact, they’ve already begun to pay off, and will continue to have important lasting benefits.

As Hector mentioned before, we believe that going forward, CEMEX has the potential to deliver profitable growth to our shareholders. This requires us to invest our free cash flow in projects that not only meet our investment criteria but also contribute to widening the spread between our return on capital and the cost of capital.

Since 1998, our return on capital employed has been consistently above 10%, and the typical investment that we would consider is likely to offer returns of at least this level after achievement of post-merger integration benefits. We also have one of the highest returns on capital employed in our sector, despite the fact that our maintenance capital expenditures are significantly lower than the depreciation charge in our income statement, because of the inflationary effect in accordance with Mexican accounting principles.

We’ve also benefited from a significant reduction in our weighted average cost of capital, which we currently estimate at about 8%. As the cycle improves and we continue to capture the benefits of our initiatives in current and future investments, the spread between our return on capital employed and our weighted average cost of capital should continue to improve, and thus enhance the value proposition we offer to our shareholders.

As always, I’ve been asked to tell you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate, and could change in the future due to a variety of factors beyond our control, as we have explained in great detail in our filings with the Securities and Exchange Commission.

Thank you for your attention, and now we will be happy to take your questions. Operator?

[Operator instructions] The first question is from Dan McGoey with Deutsche ISC. Please go ahead.

Good morning. Thank you. I have actually two – two quick questions. First, if you couldn’t remind us of the revisions that you’re making to the current 2004 guidance relative to what you had given out at the analyst meeting just recently.

And then the second question is regarding the operating expenses, which declined, at least at the other operating expense line, pretty sharply year on year. And we’re now back to a level I think we haven’t seen from CEMEX since 2001. I’m interested to hear about the sustainability of that other expense – or other operating expense line, or whether there was anything extraordinary that pushed that figure down this quarter. Thanks.

Okay, well, for the first question, there’s from the guidance we gave on the conference for analysts two weeks ago. And, on the other expense issue, or this a significant reduction in corporate expense line. And the fact that this has happened is due to substantial efficiencies that we have achieved, after investments in our back-office platform that runs throughout the company. Now, the sustainability of this, expense line is certain because, again, we are, in fact, achieving additional benefits of this single platform.

We invested in this single platform – we call it the CEMEX Way – in the year 2002, mainly. And we finalized this investment in the year 2003, and that’s why you see this decline in other expenses. But again, we should be able to realize additional benefits in this line.

This has included headcount reductions, significant ones, throughout the Company. In fact, from 2003, the headcount, this moment, has been reduced by about 4%.

Okay, so, I think the figure, for instance, in this quarter, was about $55m. That’s a fair level to assume going forward?

I’m sorry, could you repeat the question?

The level of the other expense and inter-company eliminations line in the EBITDA breakdown you provided was about $55m in the quarter, versus, I think, $70m, $80m, or sometimes even higher we’ve seen recently. I guess more precisely, is $50m, more or less, a level that we can expect going forward?

Yeah, I think so, but Rodrigo, do you want to comment on that?

Yeah, no, the primary reason for the reduction is the efforts to reduce corporate overheads. And those are sustainable, and we expect those to continue to benefit our bottom line going forward.

Okay. Thanks very much.

Thank you.

The next question is from Marcelo Telles, with CSFB. Please go ahead.

Good morning, and first of all congratulations for the very good results. I have two questions, actually. The first one is on the consolidation front. You mentioned that your acquisition strategy on the cement side would be concentrated below the top 11 players. Is it fair to say that CEMEX’s acquisition strategy is going to be mainly concentrated on these small acquisitions, I mean, such as the Dixon-Marquette acquisition that we saw last year?

And my second question is regarding the price environment in Mexico. I was actually expecting a higher price increase in Mexico, of around 4%, which would be more in line with what we have seen over the past two years. But you – it went up by only 2%. I was wondering if you could elaborate a little bit more on the pricing value in Mexico, where this is coming from maybe more pressure in the ready-mix market? So these would be my two questions.

Okay, let me take the consolidation one first. Well, the meaning really of our strategy and the way we have explained it, is we did this at the analyst meeting and I guess that was my intent in my initial remarks, is that beyond the two different alternatives for growth that you would – the conventional wisdom would have in the industry.

That is, on the one side, further consolidation at the top of the sector, that is, among the top players. That is one alternative. The other alternative is additional growth by acquisition of smaller independent companies. And the third one, this is the one that we are expressing, that exists, but it’s not that it didn’t exist in the past, that is the growth in the - down the value chain.

We are not saying that we will concentrate on any one particular mode of growth. What we say is that our growth has these three opportunities. But in any case it will be a growth that is profitable. And it has, that we have said, concentrating, focusing on return on capital employed. But also concentrating on the guidelines that we have, the strict discipline that we have for our acquisitions and in the sense that they have to use our existing and improve the value for existing networks, existing platforms, our existing systems, and that is the way we see our strategy going forward.

Now, in terms of the prices in Mexico, we essentially keep as a general policy –- this has been a fact for the past many years, is that we seek to keep prices in constant peso terms flat in Mexico. We believe that that is going to be the case this year, all-in-all throughout the year.

I don’t know if you want to add anything to that Roddy?

Well, I mean, on the prices, just to note that when you look at average prices for a quarter, -- you have to consider that the price increase didn’t happen at the end of the quarter, it didn’t happen on the first day of the quarter. And, also when you look at prices and you compare them year-over-year, you also have to consider that prices were not static, say from the second quarter of 2003 to the end of 2003. And, so that may explain some of the differences that you may note on the prices, when we talk about the price increase from a given month to the next month, versus when you compare a given quarter to the same quarter a year ago.

But essentially the price increase that we put through in the first quarter in Mexico in bagged cement went through successfully, and we remain on track to maintain our pricing policy of constant prices in real peso terms, over the medium-term, which we have achieved for the past 5 years.

Okay. Thank you. One additional question if I may, still regarding the price environment, but in the US market. Is this second price increase that you’re [in procedure] for July/August included in your EBITDA guidance for this year?

Well, part of it. And, as I mentioned the price increase is predicated on the –- whatever demand and supply situation develops. As we mentioned also, there is shortages and low inventories around the US. So, it really depends on how this will develop.

There is also, throughout the US and as an average as you know, a seasonal effect which will of course, alter the situation of the inventories and the supply and demand effect.

I would only add that –- you know the prices we assume for planning purposes to reach our guidance number for the full-year in the US, leaves us with more upside than downside. In other words, if further price increases are absorbed by the market in the US in the second half, then we’re likely to “eat”, to exceed our own assumption for prices for the US for the second half. That’s providing us with upside versus our guidance number.

Okay, great. Thank you.

The next question is from Gonzalo Fernandez for Santander. Please go ahead.

Yes, hi, good morning everyone. Congratulations also on the results. I have some questions on Mexico -- Readymix grew 10% in volumes in the first half. I don’t know if you can provide some guidance for the full-year.

And, second if you can share with us the amount of sales in the month profit segments and the margins enjoyed in there.

And, finally if you –- if we can expect further margin expansion in Mexico after the opening of the electricity plant.

The first question. We think that ready-mix is growing very healthily in Mexico. We’ll probably find that it will be in the higher teens throughout the year. To even higher, 10 –- that is around 10%, which is for like what is growing now.

As a result of –- as we mentioned, more form of construction in both housing and infrastructure.

Regarding the multi-products margins. They’re very healthy, but of course this is a business that depends highly on the pricing situation of all the products that we buy and sell to our distributors and customers. And, as such, we –- lately have been enjoying a relatively high margin as a product of timely purchases of some of the products mainly in this field, that have been increasing in price throughout the last 2 quarters. So, that’s something that we’re enjoying today.

But, we potentially see margins for this segment of our sales to remain at relatively healthy levels as compared to the rest of the industry, given the volumes of purchases that we can consolidate and sell in this segment.

But this strategy is definitely is a sign to provide better service to our customers. So, I would say that as long as this is profitable, we’re very happy with increase of sales of multi-product strategy. That’s for the margins in Mexico.

But as you know, our energy strategy is designed to give us a stable cost of energy. And, as such, I think we are today achieving significant savings already. Because, as you can gather, our costs in energy in Mexico are already very stable.

But, going forward, given the operation of the terminal electric [indiscernible] which supplies a good part of our electricity for our plants in Mexico. The cost of our kilowatt hour in Mexico should decrease by approximately 12% in comparison to the cost of CFE, the national utility, towards the end of this year.

Okay. Thank you Hector.

Welcome Gonzalo. Thank you.

The next question is from Daniel Altman with Bear Stearns. Please go ahead.

Hi, good morning. Two questions. First of all the Central American Caribbean grew very nicely on the EBITDA line. I wonder if you could talk a little bit about that.

Second question is, I probably should have asked this at the analyst day. But the –- you know hypothetically if you were shown two assets, 1 cement and 1 ready-mix or as you call value added, with identical ROICs are you indifferent between the two or can we still say that your preference is for cement?

Also kind of wondering –- again you’re hitting on the value added theme again today. I’m wondering if -- what’s changed in terms of the way you view that segment versus a couple of years ago.

Well, you know, first question, the Central American Caribbean situation. We had a very weak first half last year in the Dominican Republic, which has today -- I mean returned to normality. So, that is the main driver for the results comparison to last year in the Central American Caribbean region.

Now, your philosophical question about the two assets, brings me to the exact value added second part of the question. I would say that as long as both assets add value to our network we will go for both. Because that would mean that we can make it.

Now, on the other hand, -- actual preferences, it’s a matter of which is the one that adds more value. But again, if –- if the question is that two of them add the same amount of value, at least in terms of perception from our part, and we can make them both, we will go for both.

What we always do is, when considering alternative investment proposals, we first look at the assets themselves, and then we look at the contribution to the rest of the portfolio. And, we give a lot of importance to that contribution. And, if it has an impact then we do the negative volatility, or if it has an impact in improving our business model for the existing portfolio, if it makes it stronger, more sustainable into the future, then of course we give that weight.

And so that will –- you know if everything else is equal, it will tend to drive the decision, you know, moving it up or down in the priority list.

But if you look at our acquisitions and I guess it applies to all of them if not most of them, they are never isolated, they are always part – they always go to complement our levels somehow. So, that would be, I guess, the main driver.

And it could be that throughout this – [indiscernible] different characteristics, one is isolated and the other one is not. So, of course, that’s the thing for a very straightforward decision.

But, as Rodrigo said, we will have to look at them very carefully. And, of course, the other part of our guidelines is that our financial facility must not be compromised. So, yes, I mean if it’s the two –- and the two add value and the two are part of a network, or can be part of a network, then the two assets by acquiring them do not compromise the financial facility, you have them both.

Okay. Thanks very much.

The next question is from Mike Betts with JP Morgan. Please go ahead.

Yes, good morning. I had really two questions. One that’s probably very quick and easy to answer, and that was what year-end peso/dollar exchange rate your guidance was based on. That was the first question.

And the second question, just on Venezuela and the prices. I think at the analyst meeting it was explained that there were price controls that were on – that were being in place in Venezuela. I noticed the price in Bolivar terms has dropped by – I think looking at my notes here about 14% in both quarters. Could you just explain kind of how those price controls work? I mean, should we basically be modeling on the basis of that sort of decline each quarter for the rest of this year?

The first assumption for the end of the year is 1180.

Okay.

Peso to the dollar. Now for the Venezuelan price controls, they –- they are set in Bolivar terms, if I understand correctly. And they affect about 67% of our domestic – on the domestic volumes. And you have to remember that we export also from Venezuela.

Now, looking to my notes here. –- and, well indirectly the -– both cement sales, which is only 11% of revenue is also affected because the price cannot be increased above the price level of bagged cement. So, that’s what affects the price in Bolivar terms.

What is – is it going to be? Really I mean the situation in Venezuela as you know is relatively volatile as the political developments are to come with the referendum coming very shortly. So, basically to say that this is not going to change.

But in your guidance you would have assumed a kind of similar rate of price fall for the remainder of the year, would that be fair to say or not?

Yeah, that’s what we’re assuming in – lacking any other possible assumption, given the fact that it’s a toss of a coin really today.

Well, maybe I ought to add that for our guidance number we also assumed that towards the second half of the year – during the second half of the year the Bolivar/dollar exchange rate would weaken further by another – more than 10%. But frankly with the price of oil and the reserve levels, you know, it’s questionable whether the Bolivar will weaken again.

And so, if the Bolivar/dollar exchange rate were to remain at its current level, then of course, then prices in our assumption for the guidance in the market would be better than what we have assumed.

Okay. Understood. Thank you very much.

Thank you Mike.

The next question is from Gordon Lee with UBS. Please go ahead.

Hi, good morning. Two questions, first on the US. One of your competitors in the US market in the last few days has suggested that, you know, they think the industry might be prepared, or be ready to implement a third price increase sometime in the fall and then potentially a fourth price increase. I was wondering if you share that view, and, if so, if it’s something that you’re preparing for.

And just second on Venezuela. Are you at all concerned that the joint venture that the Government is considering to – through which to build a cement plant, is sort of a signal of their intention to try to – to keep prices low in the industry? Thank you.

Well, for the first part of the question. Our price announcements are good for 90 days. So, I mean, if we see the conditions are perfect for another price increase, we will go for it.

And, in the case of Venezuelan project, we understand that this project is today in the feasibility analysis part. And, of course, I mean, things – we believe the market is very well supplied. I mean the domestic market is very well supplied. The need for another cement plant, is – in our view, is not there. But, again, the stage at which the project is today is a pre-feasibility stage. So, we will have to wait and see what the Venezuelan Government does.

Okay, thanks. Just a quick follow-up if I may on the US side. Are you aware of any competitors of yours in regions that have already begun preparing the market for a third price increase, or not yet?

Let me just check here with the – there is not yet any – we’re not aware that is, of any other.

Perfect. Thank you very much.

The next question is from Dan Shidedi(ph) with Bestwood(ph) Partners. Please go ahead.

Hi, good morning. Just one question for – continuing on the theme of value creating acquisitions. You made a comment that you’re only going to focus on acquisitions that can achieve ROCE in excess of 10% after synergies. How long are you willing to wait to achieve those synergies? Is it 1 or 2 years or is it even up to 3 or 4 or even 5 years?

Well I – this is of course a case by case answer. But of a broad nature I will tell you that it is our job to achieve these synergies as soon as it is possible. Now we’ve – around the years – with each acquisition we have been able to reduce the time between we acquire and we achieve most of the synergies, or the benefits or the savings of including these new assets into our platform. Or integrating these new assets into our platform.

So, my answer would be, we would be very inpatient as to the achieving all the benefits. Sometimes time has to pass, sometimes you have to invest in additional assets to achieve some of the benefits. But I would say that more and more the issue will be how we can achieve most of the benefits in less time.

We think – to also give a recent example. In the case of Puerto Rico for example, which we acquired about two years ago, a little less than two years ago. The company was then selling something in the range of $150m a year. Operating cash flow was about $22m if I’m not mistaken for the trailing 12 months prior to our acquisition.

The first full-year after that acquisition we generated in excess of $30m with the same level of sales. This year, we’re estimating to generate to $37m in operating cash, so, with more or less the same levels of sales of $150m a year.

And so there we’ve clearly achieved the synergies of those merger integration benefits that we set out to achieve, 12 months – you know, 12 to 15 months after the acquisition took place.

Is this possible in every instance? Well that’s very difficult to say. But we do try to achieve the post merger integration benefits within the first, I would say, 12 to 15 months. And so you see them fully usually in the second year after the acquisition.

So, if you look back, with a larger sample set, any sense of what percentage of the time you typically achieve your synergies within a 2 year time frame.

Yes, that has been the recent experience. I would say if you go back 10 years, to when we acquired Valenciana(ph) and Santon(ph) in Spain. There it was longer, it was 3 to 4 years to achieve the full benefits of the merger and the integration.

Today, with the IT platforms that we have in place, and the centralized management systems that we have in place, we have found that we can achieve, you know, we can significantly shorten that time frame to much less than what it took us 10 years ago. So, yes it is reasonable to assume that nowadays we should be able to achieve it within a year or 2.

One more quick follow-up question. Are you finding that you’re – or are you anticipating that you’re going to have to pay out more the synergies in the current environment than what’s historically been the case?

So, for example, if you’re going to focus more, or if you’re going to increase your focus on aggregates; I know that multiples have increased in the recent history in acquiring aggregates, or smaller aggregates players, based on their desire to capture some of the benefits of anticipated synergies. How are you factoring that in?

Well as I mentioned in the initial remarks, we see a very large space of opportunities. And we believe that there should be opportunities for us in this space, where we can invest and achieve the returns that we’re seeking.

So, I mean, yeah it’s a matter of price, but also it depends on what are the synergies that we are – can achieve from this particular investment. So, we are – certainly there has been strong consolidation in the industry all throughout, and the markets might have multiples that are higher today than they were in the past. But, again, we’re not focusing on the opportunities that you see, or in the margins of the multiples of companies that you see. Maybe are the ones that you don’t see, which are the ones that will be attractive.

Well, we’ve also learned that in the past that often being patient pays. And, we’re willing to be patient. And, we don’t see a cost in terms of our weighted average cost to capital. And, we think – you know – if we don’t have those attractive opportunities in the near term, we’ll continue to strengthen our balance sheet and wait for the right opportunity.

Great. Thank you.

Our next question is from Steve Trent with Smith Barney. Please go ahead.

Good morning gentleman. Congrats again on the solid quarter.

Thank you Steve.

Two quick questions, both with respect to Asia. The first on [Cemen-Greseec] I know it’s been a complicated process with the [with profits] from operating subs. We’re actually coming up to, or possibly at elections in Indonesia. Do you see any moderately higher probability that that gets resoled over the medium-term?

And my second question is, your strategy with respect to your ownership level of CEMEX Asia Holdings. Are you happy with it now? Or is this something where you see you might roll it out a bit to third parties in terms of having an Asian investment vehicle?

Thank you Steve. For the first question, in the case of Cemen-Greseec, as you know CEMEX decided by rather an option – a legal option that we have, to proceed with an arbitration procedure with the Government of Indonesia, given the fact that our agreement has not been fulfilled. Now, that is making progress. There is – towards the end of this month there is a meeting of the panel that has already been assembled for the [indiscernible] which is a lengthy procedure, as we all know. This meeting should be – should set the process for the months ahead, which the other – ensuing meetings will follow.

Now, on the other hand, we know that there are elections on September 20, the run of elections in Indonesia. We don’t know what the result of these elections might be. There might be a change of Government, there might not be a change of Government. That, of course, has an impact on our potential negotiations and the potential solution that might lead either to the arbitration process or to – private negotiation with the Indonesian Government.

As of now, the only thing that I can tell you is that the arbitration process is going on. And, we will see what happens with this procedure.

Let me turn to Rodrigo the other question about CAH.

Yeah regarding CEMEX Asia Holdings, our original intent when we put together this vehicle – you know going back now I believe more than 5 years. Our original intent was to have a Company that would be listed in an Asian stock exchange. We don’t see that as a viable alternative today.

We have bought, in the first half of the year, a portion of the minority shareholders of CEMEX Asia Holdings, and we would intend to continue acquiring minorities during the rest of the year.

And so, our intent is to increase our percentage ownership of CEMEX Asia Holdings, and it is not our intent to list that Company and make it a publicly held company.

Great, thanks very much gentlemen.

Thank you.

Thank you.

I think we have time for one more question operator.

And that question is from Carlos Perezalonso with BBVA Bancomer. Please go ahead.

Hey, good morning. Let me just also congratulate you on a very strong quarter. I actually have just one quick and then one clarification. My question would be regarding Egypt. We saw very impressive price increases, although at the same time a significant reduction in EBITDA margin. Can you explain this a little why it is happening? And what are your expectations for EBITDA margin in that market?

And secondly the clarification, although Hector you mentioned that you’re not changing your estimates for the Company, compared to what you mentioned at the analyst meeting for the full-year. However, you did mention that you feel confident you could exceed those estimates. Am I right?

Yep. Let me go to the EBITDA question first. Currently we have experienced very important increase in our EBITDA in Egypt. This is, as we mentioned in our initial remarks, due to our exports that have grown over 150%. So, we have been able to practically fully utilize our production capacity in Egypt. That’s what is creating the improvement in EBITDA.

To our guidelines – yes. The answer would be yes we are very confident that we will achieve our guidance of $135b in free cash flow and $2.35b in EBITDA. So, the feeling confident that we will achieve them implies that we might exceed them, but again it is achieving them that we want, and we can exceed them if we will.

Okay. Thank you.

Thank you. Well thank you everyone. We look forward to your continued participation in CEMEX. Please feel free to contact us directly or visit us at our website at any time. Thank you and good day to all.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program you may now disconnect.