Cemex SAB de CV (CX) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2005 CEMEX SA earnings conference call. My name is [Enrique] and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn this presentation over to your host for today's call, Mr. Hector Medina, Executive Vice President of Planning and Finance. Please proceed, sir.

Thank you, [Enrique]. Good morning and thank you for joining us for this first quarter conference call. I [indiscernible] where we stand in RMC's integration process and then I will go over our first quarter results. And finally, I will share with you our best estimate for the year on a consolidated basis. Then, our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

This was a very important quarter for CEMEX. On March 1, we took a significant strategic step by completing the acquisition of the RMC Group. The acquisition of RMC and its integration into CEMEX will give us greater global reach and a stronger position across the value streams, both of which will enable us to compete more effectively and will also enhance our financial strength to continue to grow profitably throughout the business [cycle].

Although we have been only in the Company for 8, 12 weeks, we have a solid [EMI] team deployed and working [diligently] to ensure a successful integration. The integration process is moving smoothly and all operating teams are demonstrating full commitment towards the deployment of the CEMEX business model throughout the organization. In terms of the findings, the positive surprises have outweighted the negative ones. And, as such, we are now more comfortable in improving our estimates for the synergies that we expect to achieve from the integration. All head office functions have already transitioned into [existing] CEMEX infrastructures. We will be able to share more of the integration results with you in the near future, when we will give you a more thorough update on the process.

With regard to our first quarter results, we're encouraged by [indiscernible] consolidated performance for the quarter. Including the effect of RMC for the month of March, CEMEX's consolidated EBITDA grew 14% versus the same quarter last year, while net sales increased by more than 40%. The improvement in our EBITDA for the quarter resulted primarily from moderately higher [cement] volumes in most of the markets in our portfolio [despite] fewer business days in the quarter. Additionally, our results benefited from continuing [to practice] supply demand dynamics. [indiscernible] has been partially offset by a continued efficiency gain throughout our operations.

Given our recent guidance on our [legacy] business and our comfort with the progress of the integration process, we feel confident in providing full year consolidated EBITDA guidance of about $3.5b. This outlook is based on the consolidation of 10 months of RMC covering the March to December period. This represents an increase of close to 40% versus last year, with net sales growing by more than 90%, reaching about $15.8b.

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We remain vigilant on cost containment and we expect that the [traction] of efficiencies will continue to partially offset the moderate escalations of interest costs during the rest of the year.

It is important to note our EBITDA guidance incorporates a relatively small percentage of the eventual synergies that we expect to achieve. Having said this, we are now comfortable with eventual recurrent synergies at the EBITDA level in an amount well in excess of the original guidance of $200m to be achieved by 2007.

The strength of the CEMEX model continues to be demonstrated by a healthy free cash flow generation, which is expected to grow by about 15%, reaching over $1.7b. This growth demonstrates the strength of the legacy business, as well as the free cash flow [indiscernible] nature of the RMC acquisition from March 1 to December 31 2005.

Now, I would like to discuss the first quarter performance of our principal markets, as well as the outlook for 2005. In Mexico, cement volumes declined by about 7% year on year, due to fewer business days in the quarter and less robust demand. On a like for like basis, cement volume declined about 2%. Ready mix volumes, on the other hand, grew by 12%, underpinning healthy infrastructure and [formal] construction sectors. Cement demand was sustained mainly by government infrastructure spending and, to a lesser extent, by low and middle income housing, both of which partially offset a relatively weak self construction sector. The lack of growth in self construction is due primarily to a sluggish increase in aggregate disposal income which has affected demand from the sector.

We remain optimistic about a positive trend in cement consumption. For the year as a whole, we expect demand volumes to increase by about 3% and to be driven mainly by government spending on streets and highways, corporate buildings and other infrastructure projects and by low and middle income houses. Demand will also benefit from increased government spending during the year, as the electoral cycle shifts into higher gear with the approaching 2006 presidential election. We think the government finances will remain sound in 2005 as a result of continued fiscal prudence and robust oil prices.

[indiscernible] we see consumption from government and other ready mix [intensive] projects growing during the latter part of 2005 and leading to an increase in our ready mix volumes of about 15% for the year. Regarding the residential sector, we expect about 575,000 mortgages to be originated in 2005, about 8% more than last year. The commercial banking sector has continued to improve its mortgage origination level, albeit from a very low starting point. We see cement demand in the self construction sector remaining flat in 2005, as aggregate disposal income is likely to continue to be [steady]. We continue to realize a high degree of success in our [indiscernible] strategy and we expect sales to exceed $315m in 2005, or an increase of about 18%.

In the United States, during the quarter our volumes remained flat but in line with our expectations, due to [quite] unfavorable weather conditions in the western regions and 1 fewer business day in the quarter. On a like to like basis, volumes increased by about 1%. The main drivers of demand were the residential sector, with construction spending up 13% for the first 3 months of the year and the public work sector.

The industrial and commercial sector has been recovering, with construction spending up 8% during the first [3] months of the year. As regards the residential sector, although we have seen continued strength in the first quarter, we remain cautious and expect this sector to decline by about 6% for the full year, due to [preemptive] buying last year and moderate increases in mortgage rates throughout 2005.

Public sector construction spending [put in place] was up 6% for the first 3 months of the year, with spending for streets and highways up 17%. Federal funding, under the current extension of the [CA21] program, is approximately $34.4b for fiscal year 2005, plus $2b that was left [from use] from fiscal year 2004. Thus, [indiscernible] federal funding for 2005 is expected to be $36.4b, or 15% over 2004 level.

Given the healthy funding for infrastructure, coupled with the generally improving economic environment and fiscal condition of the States, we expect volumes in the public works and streets and highways sectors to increase by about 5% in 2005. Regarding the [indiscernible] program, we are encouraged that the House of Representatives and the Bush administration have agreed on a $284b program. Although the Senators are still debating this proposal, we remain confident that an agreement can be reached that could exceed this amount.

We think the industrial and commercial sector will grow about 10% in 2005 and will offset the expected declines in the residential sector. On a like to like basis, and adjusted for the sale of the assets in the Great Lakes area, we see cement volumes growing in 2005 in line with [indiscernible] growth, or slightly in excess of 3%. Supply and demand conditions are expected to remain favorable for the rest of the year.

In Spain, we achieved encouraging volume growth of 4% during the quarter, despite the fact that the quarter had fewer business days due to religious holidays. The overall trend remained positive. However, we are cautiously maintaining a flat volume growth for the year. At close to 700,000 housing starts last year, the residential sector was a stellar performer and was 1 of the main drivers of cement demand. The growth in this sector has been driven by a favorable mortgage environment, positive economic performance and migration dynamics.

Public works spending remains an important component of cement consumption. The successor to the government's 2000 infrastructure plan is being finalized and is expected to start this year and run until 2020, with an estimated total price of $300b. The new program represents an annual increase of $4b over the previous 1, or an increase of more than 25% per annum.

For 2005, we think the residential sector will decline slightly, although housing starts will remain at high levels. On the public works side, we see the sector emerging from a transitional period, as the government has been revising it's [own] infrastructure plan for the coming years.

Regarding our other European markets, for the first 3 months of the year, RMC's total cement volume declined by about 7%, while ready mix volume declined by about 3%. Both decreases were due to harsh [snow] weather conditions in most of our European markets. On the other hand, we continue to experience a price recovery in most of our markets, resulting in a weighted average cement price that is in line with CEMEX's average.

EBITD in the United Kingdom is likely to grow about 4.5% in 2005, with construction spending in line with [indiscernible] growth. We expect our volumes to be relatively flat. In France, both [indiscernible] and construction spending should increase by about 2%, resulting in better ready mix volumes of a similar [amount]. Germany's EBITD, which [will grow] to 2% in 2004, is likely to grow by about 1% in 2005, while the construction industry is expected to decline by about 1%.

As we have said in the past, 1 of the particularly attractive aspects of the RMC portfolio is the company's presence in countries that are new and prospective members of the European Union. In these countries, including Poland, the Czech Republic and Hungary, [EBITD] is expected to grow between 3 and 5% in 2005, and will likely improve the consumption of cement and cement related products in the coming years, especially as their convergence with the European Union accelerates.

During 2005, volumes in Venezuela should continue with a strong growth, increasing by about 15%. The main demand driver will remain the self construction sector, which is likely to grow by about 10%. Government financed housing will also drive demand, albeit to a lesser extent. And the public sector should grow, as current projects come to an end.

In Colombia, we expect volume growth in the double digit range, as we see a strength in the self construction sector. The public work sector should also grow versus 2004, as the 2006 presidential elections draw near. We see demand from the middle to high income housing sector declining and being offset by growth in low income housing. We are currently experiencing an increase in competitive pressure in our operators in Colombia and in [the Caribbean], which is likely to continue and lead to weaker price environments in some of these markets.

We are pleased with our Egyptian operations, as they are operating at full capacity utilization, due to increasing demand. As a result, we are [redirecting extra productions toward] local consumption. We expect volume growth of about 8%, due to strength in the construction sector driven by private investment. To a lesser extent, growth will also come from the residential and self construction sector.

I am not able to provide a more detailed outlook for the RMC operations today, as we are still in the process of fine tuning our estimates for both organic growth and potential synergies for 2005 and beyond. Instead, we will try to give you an update on our integration progress during the summer.

Before I turn the call over to Rodrigo, I would like to reiterate 2 important commitments to our shareholders. The first is to achieve the effective and timely integration of RMC into CEMEX and to realize the synergies that we have identified. The second is our determination to take all the necessary actions to deliver on our [deleveraging] commitment. As such, we intend to apply as much of our free cash flow from operations and asset disposal as needed towards debt reduction in order to achieve our target of 2.7 times net debt to EBITDA by the end of the year or sooner.

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

Thank you, Hector. Good morning, everyone. We appreciate that you have to taken the time to join us today. Our performance for the quarter was supported by moderately higher volumes, despite fewer business days for many of the countries in our portfolio. It was also achieved as a result of significant improvement in the supply demand dynamics in many of our markets. And also as we consolidated RMC for the month of March.

During the quarter, we continued to improve operating efficiency by lowering redundancy costs and improving the utilization rate, achieving stability in costs of goods sold and SG&A as a percentage of net sales for our [legacy] business. We accomplished this despite higher transportation costs and energy prices. We also benefited from the strong Mexican peso and euro exchange rates.

As you are aware, we have been proactive in our efforts to minimize our energy costs on a per ton of cement basis. These efforts - including shifting to fuels whose prices are less correlated to stock markets, [as well as] developing a self supply power generation process - have paid off, as we have greater stability in our energy [input] costs, in a global environment characterized by high energy price volatility. Our energy cost increase during the quarter was in line with our full year forecast. We expect that, in 2005, our energy costs will increase by about 12% on a per metric ton of cement basis, or about $1 per metric ton of cement produced. This increase should be offset by our ongoing efficiency programs and the positive trend in the supply demand dynamics in most of our markets.

Our majority net income for the year increased by 43%, reaching $444m, due to our strong operating performance, the inclusion of RMC for the month of March and gains resulting from our derivative positions. Our consolidated EBITDA margin went from [21%] a year ago to 25%, due primarily to a change in product mix as we consolidate RMC and we increase the [rate] of lower margin, less capital intensive ready mix and aggregate businesses. For the year as a whole, we are targeting an EBITDA of about $3.5b, with a margin of about 22% on sales. This margin is expected to improve going forward, as we realize the synergies and cost savings that we have identified so far and have yet to complete [implementation] for.

If we consider the process of [vertical] integration in our markets, we believe that, in terms of value creation for our shareholders, return on capital employed becomes more relevant than EBITDA margin on sales. The ready mix and aggregate businesses are less capital intensive than cement and therefore can produce similar or higher returns on capital employed with lower profit margin on sales. We remain committed to achieving a return on capital employed of at least 10%, for the RMC portion of our business, by 2007.

Our free cash flow for the quarter was 2% higher than during the same period in 2004. Higher operating [capital] during the quarter was used to pay the higher financial expenses and investments in working capital and capital expenditures resulting from the consolidation of RMC for the month of March. For the full year, we now anticipate that free cash flow will exceed $1.7b, an increase of about 15% over last year. We expect to achieve this due to higher operating cash flow as well as [the accretive nature] of the RMC acquisition from March to December.

Looking at our capital structure, our interest coverage for the [trading 12 months] through March improved to 6.8 times from 5.7 times a year ago. Our leverage ratio, as measured by net debt to trading 12 months proforma EBITDA increased from 2.4 times a year ago to 3.2 times for the trading 12 months ending in March, again as a result of incorporating RMC.

We used [$296m] of free cash flow that we generated from operations during the first quarter, as well as [$389m] obtained from the completion of the sale of assets in the United States, to reduce the increased net indebtedness required to acquire and consolidate RMC. As a result of this, net debt as of March increased to $10.4b. The average maturity of our debt is now [3.1] years and our strong free cash flow [uncommitted] [indiscernible] means that we will not need to refinance debt maturing in 2005. As of today, we have committed credit facilities in excess of $1b. [Indiscernible] we will take advantage of the favorable market conditions to lengthen the debt maturity profile of our debt, while continuing to reduce the weighted average spread that we pay on our debt obligations.

Regarding the acquisition of RMC, during the quarter we successfully completed the [general syndication effort]. [51] banks participated and provided the required underwriting commitment with an [over] subscription rate of 2 times the funds needed to complete the acquisition. The committed term financing package at a cost of [indiscernible] allows us to maintain our interest coverage well over 5 times throughout 2005. This package will allow us to meet our financial objectives and retain our financial flexibility. We are, however, proactively refinancing 2006 and 2007 maturity at lower spreads and for longer [tenure] during the second quarter of 2005.

We're also pleased that the rating agencies have completed reviewing the RMC transaction and have decided to maintain the same credit ratings that we had prior to the acquisition announcement. All of our credit ratings have a stable outlook attached to them. Our cost of borrowing to fund this transaction will be about 4% on average. We intend to borrow in dollars, euros and British pounds. And we have locked in this rate for about half of the incremental debt - that is, we've locked in fixed rates for all of the long term U.S. dollar denominated acquisition debt. Furthermore, CEMEX's weighted average cost of debt is expected to be about 100 basis points lower than in 2004. And this is the lowest average cost of borrowing we've had in the last 20 years.

[indiscernible] amounts of our foreign exchange derivatives [equaling] [indiscernible] more than $2b during the first quarter, as we unwound the positions that we took to protect ourselves against the exposure to the British pound arising from our offer to purchase the equity capital of the RMC Group. As of the closing of that transaction, this strategy translated into a positive cash inflow of $122m during the first quarter.

A notional amount of our interest rate derivatives increased by about $2.3b during the quarter, due to the additional [contracts] that we acquired to adjust the fixed and floating mix in our debt in connection with the RMC acquisition bank financing. We're now aiming to achieve close to 60% fixed, 40% floating interest rate mix.

Effective January 2005, [with] the accounting rule changes outlined in Bulletin C-10 under Mexican GAAP, we may no longer present the [debt] instrument associated with the derivatives as 1 single financial instrument. Nevertheless, for presentation purposes, the [indiscernible] calculation of net debt in our quarterly report will continue to include the fair value of the cross currency swaps associated with such debt.

The [major risks] that we face in 2005 relate primarily to the [indiscernible] movements in the exchange rates of the peso, the euro, the yen, the British pound versus the dollar, a slowdown in the U.S. economy and continuing increases in energy and transportation costs. We believe, however, that our strong capacity to generate free cash flow, the portfolio diversification, the financial strategies put in place and our proactive approach to minimizing our energy costs will continue to help us to mitigate this risk.

As we said earlier, a priority going forward will be to use our free cash flow to pay down debt until we have reached our desired capital structure. As there are no other permitted extraordinary uses of free cash flow for 2005, we are increasingly confident that we will achieve a net debt to EBITDA ratio of 2.7 times by the end of the year, or sooner if we apply the proceeds from asset disposal to pay down debt faster than we intend to. We are determined to continue to deliver on our self imposed commitment to strengthen our capital structure as quickly as possible.

In closing, I would like to say that we are pleased with CEMEX's performance during the quarter. We continued to deliver in the aggregate and our geographic diversification, once again, has proven to be quite effective. Our performance shows that CEMEX continues to produce great results in [good time].

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

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

Thank you, sir. [OPERATOR INSTRUCTIONS]. The first question comes from the line of Marcelo Telles from Credit Suisse First Boston. Please proceed.

Hi. Good morning, gentlemen. My question is regarding the price environment for the month of March in the case of RMC. How much of RMC's results include the price increase? Are you expecting more price increases in those markets? And my second question is regarding the price environment in the U.S., if you expect more price increases going forward. Thank you.

Marcelo, unfortunately we could not hear you very well. So I'm going to try to rephrase your question for Hector. If I didn't understand it correctly, please let me know.

Sure.

His question is related to the price environment and especially related to RMC markets. How much of the performance of RMC was as a result of the price improvement in the U.S. and elsewhere? Is that more or less the tone of your question, Marcelo?

Yes, that's correct.

Well, certainly most of RMC's markets in Europe, as we mentioned in the initial remarks, were subject to very harsh winter weather conditions. So the first months of the year were really bad in terms of volumes, whereas March was relatively better and the volumes are improving. So volume is quite a good part of the results in the RMC European market. And, as such, the price increases are a relatively small part of the results. But also, I would say that the U.S. contribution to RMC results was also a good part of it.

Maybe just to complement that, Marcelo, as you probably know, the businesses of RMC are much more seasonal in the aggregate of the portfolio than those of CEMEX. As they do participate in the Northern hemisphere, the months of January, February and March tend to be the slowest months of the year, which is when you have the harshest weather. This particular winter and the month of March, I believe in Europe was the coldest, the snowiest in the last 30 years. So you cannot reach many conclusions from the month of March for the potential for the full year. That's why we wanted to give you full year guidance, as we see it today, for all of our markets. I think it's important to highlight, thought, that the average price for cement in the RMC portfolio is more or less in line with the average price for CEMEX's cement portfolio, in dollar terms.

Okay. Thank you. Just 1 follow up question, if I may, regarding your EBITDA guidance for the full year. Is there any restructuring charges related to RMC included in that number?

Rodrigo?

Well, we do have some costs associated with some of the synergies that we will achieve, but most of these are investments, rather than [hit] through the EBITDA. We do have some costs associated in the current year and that's why some of the synergies that we do achieve during the current year will be somewhat offset by these incremental costs. But I think, as Hector pointed out in the opening remarks, we are looking at $3.5b for the full year EBITDA number. [That is in] 10 months of RMC. It does not include a significant amount of the potential synergies that we see eventually being well in excess of $200m.

Okay, that's great. Congratulations. Thank you.

Thank you, Marcelo.

Thank you, Marcelo.

Your next question comes from the line of Gonzalo Fernandez from Santander.

Hi. Good morning and congratulations on your results. I have 3 questions. 1 is very easy - if you can repeat your guidance for EBITDA because I kind of missed it. And second, your outlook on prices in the U.S. Obviously, you have been very successful in increasing prices. What you think the prices could be reaching? I think that housing may be slowing down, or are you planning further increases? And the final question is regarding the gains on marketable securities. It was about $182m this quarter. And I don't know if you can [release] how much of that, if any, was 1 time effects related to the acquisition of RMC and the hedges that you have there or if [everything] all of that was kind of recurrent?

Thank you, Gonzalo. On the first part of the question, our EBITDA guidance for the full year is $3.5b -- around $3.5b. And that includes 10 months of RMC, consolidated in our EBITDA.

Now for the U.S. price situation, what we see now is the effect of the prices that were announced [for the beginning] of the year. And that is, we estimate, around $7 -- $6 to $7, that have been realized, of a $9 average increase. And then there are other price increases already announced for the month of July, if I'm not mistaken, of which we estimate another $1.5 to $2 will be achieved. But we don't see any other effects and we don't -- I mean, we see prices maintaining [indiscernible] dynamics for the rest of the year.

I'll ask Rodrigo to take the last part of your question.

Yes. Regarding the gains during the quarter, the biggest factor was of course the British pound appreciation versus the dollar. As you know, when we decided to make an offer to purchase the RMC Group, back in the September of last year, we made an offer to purchase the equity capital of the RMC Group at a pound sterling price. We did not want to be exposed to the exchange rate movements. We were prepared to and wanted to lock in a price for the capital of $4.1b for the equity. We purchased 19% on the day of the offer. The remaining shares we hedged, were equity derivatives. As a result of that, despite the fact that the pound sterling appreciated versus the dollar, we ended up paying approximately $4.1b for the equity capital of the RMC Group.

$122m of that gain on those derivatives were realized and the cash inflow was received during this first quarter. And of course, that's a 1 time transaction that is not expected to be repeated, because it was only temporarily there during the offer period for the purchase of the RMC Group. Many of the other gains have to do with other derivative positions that we have put in place, such as, for example, interest rate derivatives, where we have locked in fixed rates. And as you know, rates [have moved] upwards and some of these derivatives that we put in place do not qualify for hedge accounting. And so their effect in the [market may not] be recognized to the income statement.

Okay. And just another 1. What percentage of your debt is now at fixed rates, or --

I'm sorry, we -- your voice was getting cut off. Can you repeat your question, a little louder? Gonzalo, we couldn't hear you.

Hello?

Hello?

Yes, thank you for the answers. That was very clear.

Yes, we missed the last question you were going to ask, Gonzalo?

What percentage now, of your total debt, is at fixed rates?

Currently, approximately half of our debt is fixed rate, half of it is floating rate. But we are in the process of issuing longer [tenure] debt at a fixed rate. For example, during the second quarter in Mexico, we have issued $330m equivalent of pesos [indiscernible] which we then swapped into a dollar fixed rate of between 5.1 and 5.3% fixed rate, in dollar terms. But we are gradually increasing the percentage of fixed rate and we want to get to approximately 60% fixed rate, 40% floating. Essentially, most of our -- or practically 100% of our long term dollar debt we want to be fixed rate, at this point in time.

Okay, thank you, Rodrigo. [Indiscernible].

Your next question comes from the line of Gordon Lee from UBS.

Hi, good morning, gentlemen.

Good morning.

Good morning.

A couple of questions. Just 1 on U.S. pricing. Could you just tell us what the average price was in dollars per ton in the U.S. during the fourth quarter and where you think that is today? That's the first question.

Just the second question, Rodrigo, in your remarks you mentioned that you -- if asset disposals were to materialize you'd use resources from those sales to pay down debt. Does that mean, then, that you have identified potential asset sales at RMC? And if so, would you characterize any of those potential sales as material?

Okay. Let me take the first 1, in terms of the first quarter pricing situation. I think [they're at] around 90 something, if I can find my [results]. The first quarter, it's around 90.3. [Indiscernible]. I'm sorry, 82 fourth quarter last year, 75 a year ago. That's the U.S. pricing situation today.

And 90 -- you said 90 in the first quarter?

90 for the first quarter, yes, was the average for our operation.

And do you have a sense of -- in so far as -- as much as you can comment, whether the remaining portion of that price increase that wasn't fully [absorbed] in the first quarter, is that being absorbed in the second quarter?

I'm sorry, I -- I mean, unfortunately we have a very bad reception, here.

The question was just that the remaining $2 or $3 of the first -- of the price increase that was announced, that isn't reflected yet in first quarter numbers. Does it seem to be -- is it being absorbed in the second quarter? Could we expect second quarter prices to be around $9 higher than they were in the fourth quarter of last year?

Yes, let me just correct my -- the figures I gave you, in fact [does mean] that March has a $90 average price. And so for the quarter, the average price is $88.7. So that will tell you that we are in the way of getting all of the price increase. Then for the other price increases that were announced for the month of July, of which we estimate we'll get another $1.5 to $2 on the average.

Perfect. That's great. Thank you.

Thank you.

[Indiscernible] the second question you had, Gordon, on the asset disposals. During the second quarter, we have sold, for example, a terminal in Detroit at about $23m. We intend to sell the ready mix plant near Tucson, Arizona. There are other assets which we intend to sell that are maybe, for example, minority stakes that we hold that do not produce EBITDA or is not part of our core business. And we could use the money in better ways, by paying down debt faster and getting to our 2.7 times net debt to EBITDA target sooner. And so, we're [indiscernible] opportunities and as they arise we will take advantage of them.

Perfect, that's great. Thank you very much.

Thank you, Gordon.

Your next question comes from the line of Mike Betts from JP Morgan.

Yes, hi. I had a few questions - they're all very short, though - on RMC. The first 1 is just in terms of reporting. You've grouped it all together in the first quarter's results. Should we expect that for the remainder of this year, or will you break it down by individual regions as you've talked about? That would be my first question.

My second question, in terms of the $50m of EBITDA. We've never seen a figure for March [gap in audio].

Thirdly - and apologies for this - I think, Rodrigo, when you were talking about the cost cutting and what was in the numbers, you mentioned that some of it was actually -- we're going to see restructuring costs and [others were] investments. Of the $250m that was talked about on day 1, how much of that will we see go through the P&L account?

And then finally, just on Germany. Is it still too early to talk about maybe anything that you might do in terms of the German capacity? Whether you might reduce capacity at all? Thank you.

Thank you, Mike. Well, for the first question, we intend to give you, as I mentioned in my initial remarks, a full account of what is happening with the RMC integration in the summer. That will include, of course, the way we intend to report, intend to [accommodate] the different regions, the different countries. We of course are looking for the best possible way to do it to be as transparent as we can be, but at the same time being practical and being as direct as we can be in letting you know what is the status of our operations. So you'll have a better view of what is our intentions in terms of reporting in the summer.

Okay.

Now, for RMC's results in March, of course that is what came to us as we took over the company in March 1. I can tell you that January and February were very bad, but March was good and good in terms of prices and good in terms of volumes, essentially. But difficult to compare, because we have no way of knowing what was RMC doing in March last year [indiscernible] as RMC didn't report first quarter or the second quarter specifically. So, well, is it a good month of March, [indiscernible] but 1 we intend to improve.

But for the $250m that we initially put in our information what we'd be spending on RMC's integration, we will have a better view, again, in the summer, as to what it is that we view as being in the P&L for this year and for the next year.

Most of that is an investment.

Okay.

And for Germany, yes indeed, it's too early for us to tell. We are in the process of understanding what the business is like in Germany and getting all the [Board] to understand what the direction the most strategically [convenient] Germany. So we'll tell you more about that in the summer, if it's possible.

Okay. 1 follow up, if I could. And maybe you won't be able to answer it, but let me ask the question. Just in terms of German pricing. I mean, obviously we've had a whole sequence of price increases. I mean, is it possible -- do you have the data where pricing was at the end of March versus a year ago?

What I gather is that it was about [$62]. There is a price recovery in progress. The view that I have from the teams there is that the recovery is not happening as [indiscernible] expected. I don't know who was expecting that, but anyway there is some price recovery in Germany. Price today is at around [$62].

Okay, that's great. Thank you very much.

Thank you, Mike.

Your next question comes from the line of Steve Trent from Smith Barney.

Good morning, gentlemen, and congrats on the solid operating result.

Thank you, Steve.

2 questions for you. 1, I was wondering if there's any sort of update as to what might be going on with import tariffs of Mexican cement to the United States. I noticed not long ago that Mexico won a round in the World Trade Organization against these tariffs.

And 2, there's also been some speculation that the Croatians are planning some infrastructure type projects as well as other players in Eastern Europe. I was wondering if you have a sense as to where those countries might be in terms of planning and potential execution. Thank you.

Thank you, Steve. Well, the first question -- I mean, it's always been our [position] that the Mexican economy or any economy will do better if it's open to external trade.

So, that is a blanket statement for all of the countries where we operated and this is, of course, the case of Mexico. As we have always been supporters of the free trade agreement. Now you have to probably remember that Mexican cement is subject to [pumping] duties, as Mexican cement goes into the U.S. So we’ve been [facing] this particular situation over the last 14 years already, and we believe that it’s an unfair ruling, but still we will play by the rules of the land. Now we believe that the rules should be as free as possible.

On the Croatian and all the Eastern European or Central European countries that are joining the European Union. We believe that this is a very positive situation, and it’s very likely that all these countries will have resources to increase their infrastructure to make [indiscernible] to the European Union standards. So, I think it’s -- I cannot tell you specifically for Croatia, but I’m sure that there is going to be infrastructure [financing] increases, and they are significant in Croatia and all these countries.

Okay great there, thanks very much.

Thank you Steve.

The next question comes from the line of Daniel Altman from Bear Stearns.

Hi, good morning. A couple of questions. First of all, can you give us -- are you able to provide a free cash flow number for CEMEX on a stand- alone basis, excluding RMC for 2005?

And the second question is, on RMC, how have -- have there been any surprises in terms of the quality of the assets or the quality of the management? Are you keeping a lot of the management from RMC, or is this a -- are you thinking about a wholesale change? Thanks.

Let me take the first question. On the free cash flow breakdown, how much is CEMEX, how much is the [acquisition] from the RMC acquisition? It’s difficult to break it out, you know, just because the tax component, for example, it’s difficult to say how much it would have been with [or] without RMC. But what we have guided to the market is that we don’t see any major changes in our [CapEx] working capital. Interest expense with RMC would have continued to go down, you know, as we have [paid down that] and lowered the debt burden.

But, you know, as we are looking mid single digit or so growth for our [indiscernible] business, you would expect to see some of that slow down to the free cash flow number. So, you know, of the 15% increase in the free cash flow number that we are forecasting for the full year guidance [which was] last year, I would venture to say that, you know, an important part of it is the existing CEMEX business, but also an important piece of it, you know, and I’m not prepared to say if it’s 50-50 or 60-40 o 40-60 or you know what is the breakdown.

But [it’s important to point out also] is the [appreciation] from the RMC acquisition. You know, as we said, we expected it to be [accredited] to free cash flow starting in the first year and this will be accredited for the [10 months], as we achieve some of the synergies. In [indiscernible] we expect it to be even more [indiscernible] going forward.

Now we couldn’t hear the second question very well.

[Inaudible] to the quality of the assets [inaudible] and the management. Is that the case?

Yes, kind of a 2 month update in terms of what you’ve had versus what you were expecting.

I think [that in the bulk] we’ve found what we expected. That I mentioned in my remarks, the positive surprises have outweighed the negative surprises. Even so, they might be fewer and fewer in any case. But I would say that, all in all, the [outlook] was affected, and this was nothing relatively surprising [for us]. But I think a very positive surprise is two-fold, and both have to do with people.

One is that we’ve found, and we keep finding, more talent in RMC’s operations than we had expected in fact. And also, we found a very positive attitude towards the integration, and a positive attitude towards the CEMEX business models, and we are really experiencing a very encouraging and motivating effect in this process. That’s why we feel very comfortable that we will achieve the synergies, and as we have mentioned in the [regulatory denotification], and we will certainly achieve them in the end.

Okay. And just a clarification, the CapEx that you are expecting for, I guess, consolidated for this year?

I’m sorry –

CapEx.

Is it a CapEx question?

Yes, CapEx for the Company.

For the full year we expect at around $800m.

Okay, thanks very much.

Thank you.

Your next question comes from the line of Christian Audi from Morgan Stanley.

Hi Hector and Rodrigo. I have 2 questions. The first one, Hector, with respect to Mexico, can you talk about the pricing environment that you saw in the first quarter, both in terms of your attempts to increase prices, and your [senses] there, and also in terms of competitive pressures from other players, and your outlook for --

Let me stop you there for a second because your voice is -- we cannot hear you very well. Your question is related to prices in Mexico is that right?

If you talk about the pricing environment in Mexico. And the second question was related to RMC and energy costs. Rodrigo, you mentioned energy costs being high during your comments. I was curious if you could talk about how you’ve found -- how energy efficient you’ve found so far, the RMC assets to be, relative to CEMEX’s assets.

Sorry, can you hear?

Yes.

Okay. Regarding the pricing environment in Mexico. [Certainly] because of the not so good volumes in the quarter, some of the price increases that was announced was not properly realized, but we don’t see any major [impacts] going forward, as we see the demands recovering over the next 3 quarters. Now, I would say that the environment is neutral to positive, if you could call it that way.

In terms of the RMC energy deflation, I think it would be for us more -- we would be able to give you a more complete picture of what the situation of the operations in RMC are, in the summer when we complete our [decisions] on all the RMC operations for our [PMI].

Let me just add that the guidance we have given of about 12% increase in our [indiscernible] of Cement for this year is for existing [CEMEX], which is a little over 12% increase [input] costs. We expect all of that to be offset by the positive supplies [in the end dynamics] of most of our markets.

I would also say that we believe, you know, in our industry, we have some of the best practices as it relates to our management of our energy input costs, and this stability we have been able to achieve in a high volatile price environment. We would expect an important component of the cost savings and the synergies that we will eventually achieve, as we integrate RMC. [Some about], you know, transferring some of those best practices on energy management and procurement to RMC.

Hopefully, when we give you the full picture of the RMC operations and the [upside] potential fuller in the summer of this year, we will be able to quantify that for you.

Okay thanks. This is a follow up Hector, what’s the guidance for pricing in Mexico than for the remainder of the year?

I’m sorry, could you repeat the question please?

Pricing guidance for Mexico?

Prices for Mexico.

Oh pricing. I mean, as our policy is longer term, we expect prices to be flat in [constant] [indiscernible] terms. That’s what we will be aiming at, and I think that this will be more or less the case.

Well one thing to be said on that front is that in our planning for this year, we had assumed that the peso would weaken versus the dollar from MXN11.20 to perhaps to MXN11.80, MXN11.90 for planning purposes. But, of course, it hasn’t, in fact it’s gone the other way. Today the peso is close to MXN11 per dollar and so in dollar terms, of course, this means that dollar prices are stronger than we had originally anticipated for this time of the year in our planning cycle.

Right, okay thank you.

Thank you.

The next question comes from the line of Dan [McCooley] from Deutsche Bank IXE.

Hi, good morning. I can imagine you guys are having trouble hearing me as well. I’ll try and [indiscernible]. Rodrigo I was wondering on the asset disposal comment that you made just before, whether those disposals are related to non-core businesses only, or whether there are other assets, or if you have an estimate of total assets that might be tagged for particular disposal.

We don’t have any core businesses that generate operating cash flow for us that we intend to dispose. When we talk about potential asset disposals, you know, we are thinking of assets that are either not producing operating cash flow or non-core, or assets that may be part of the core, but we have to dispose, for example, [Santa Cruz] in Arizona, ready mix plant. But that would be the only asset that we have identified, that would be considered part of our core business that would be disposed. Other assets that we might, are either non-productive or non-core.

Okay, very clear.

I think we have time for 1 more question.

Sir, your last question comes from the line of Dan Shedivi from Bestwood Partners.

Hi, good morning.

Good morning.

Could you help me bridge the gap between your current EBITDA guidance and your previous guidance excluding RMC? If I do the math, the $2.65b you would have guided to earlier with 5% growth, versus the $3.5b you’re guiding to today, [could just] $835m incremental from the 10 months of RMC, and that would be roughly $83m of EBITDA a month versus the $50m that you have reported today. Am I missing something?

No that’s correct. Our guidance for the [indiscernible], was for mid single digit EBITDA. That was close to $2.6b Guidance we are providing for the full year now, with 10 months of RMC is $3.5b. The reason why you see a higher average for RMC for the remaining 9 months of the year versus the month of March, is for the reasons that I explained. This is a highly seasonal business, where sales volumes are traditionally much lower in the winter, because of the wet weather, because of the snow conditions. And this particular month of March was one of the harshest, coldest, snowiest March’s, you know, in the last 30 years in Europe. And so many of the markets in which we currently participate, you know, are affected by this seasonal effect.

And so, of course, that is taken into consideration. But this is not something that is new. I mean, you can see this, or you will be able to see this, you know, every winter for RMC, if they had disclosed this information to you on a quarterly basis. They only disclosed information on a semi-annual basis and so it was difficult for people to look at that on a month-by-month basis.

But this is the way, you know, the business works for us also in the Great Lakes region in the U.S. You know the 2 plants we sold, the Dixon-Marquette and the Charlevoix plants. We used to generate significantly lower volume revenues and operating cash flow and free cash flow, during the first 2, 3 months of the year than during the rest. That’s just the nature of the business.

And will the profitability be significantly different, or is it all going to be based on top line?

No this is not yet incorporating, you know, our full post-merger integration [average], and our planning from CEMEX’s perspective. We hope to give you that in the summer. So this is the way we see it. This is our best estimate of where we see the market for RMC today. And remember, we have been there only for a month.

Sure. One other quick question. In terms of profitability in Mexico, how much growth did you receive in the Specialty Products business, and what is the [rough] margin of that business? Did that help, or did that contribute significantly to the decline in profitability as well?

Hi, is your question about multi products? I’m sorry, I couldn’t hear you.

Yes, the Specialty Product sales. I understand that it’s growing very quickly and it’s a very low margin. Can you help me understand how fast it’s grown, and --

It’s growing at a very fast rate as we complete the line of products that we are selling, and [as] we fine tune what we find is important for our customers, and we refine the system. Now, for 2005, as I mentioned in [my] remarks, we expect sales of multi products in Mexico to reach $315m, although it’s very likely that the margins on these sales will be lower than it was in 2004. Even the price dynamic potentially of a few products have made some other products also, [other products] have some price action.

But essentially, this strategy, although it’s positive in terms of operating cash flow, it’s mainly designed to complement our products, so that we offer our customers a full product line. We make it more efficient for them to buy from us, and we [indiscernible] them more completely.

But of course, it does have a very high, very acceptable return on capital employed, because we don’t require large capital for this business. It’s also true that there is less capital employed, for example, for the Ready Mixed business, which also results in lower margins on sales. Ready Mix has grown at a faster pace than Cement volumes. And for the changing mix, that explains the drop in margins in Mexico to a certain extent. It’s also important to note that energy prices were going up during the course of last year, and so the first quarter comparison for this year also has higher than the average price increase we expect for the full year versus last year. And so that also affects margins. And so I would say the explanation for why margins dropped in Mexico during the first quarter, is partly energy costs, transportation costs, but also to a very large extent, a change in product mix.

So you would still guide longer term to flat margins versus 2004, which is what you guided to on your last call?

I’m sorry, your voice is breaking up in the communication, can you repeat your question again?

On your last call, you indicated [indiscernible] profitability in Mexico should be flat at 38% longer term. Barring the change in synergy and transportation costs, is that still a reasonable expectation, given the expected mix shift?

Yes, I would say over the medium term, we would expect profitability for the different product segments to remain more or less stable. But there are changes on a quarterly basis, and there are changes as a result of the different product mix in the Aggregates.

Yes, and as the Ready Mix part of our business is growing faster than Cement volumes, we’re [certainly] going to see some of that effect in the consolidated margins of the Mexican operations.

Thank you very much.

Thank you. Well then thank you very much. In closing I would like to thank you all [for your] attention. To look forward to your continued participation in CEMEX, and please 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 participating in today’s conference. This concludes the presentation. You may now disconnect. Good day.