Cemex SAB de CV (CX) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter CEMEX quarterly results. My name is Enrique and I will be your coordinator for today [OPERATOR INSTRUCTIONS].

I would now 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.

Good morning, and thank you for joining us for this second quarter conference call.

I will briefly review our second quarter results. Then I will share with you our best estimate for the year on a consolidated basis, giving our performance for the full 6 months. 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 very strong and successful first-half. As you may know we took a significant strategic step by completing the acquisition of the RMC Group in the first quarter of the year. We mentioned in our first merger integration update call, we have identified and documented recurring synergies of $360m that we will fully realize by the end of 2007. This includes $260m in Europe and $90m in the United States, as well as $10m in other operations.

To put this figure into context, identified synergies represent close to half the EBITDA generated by RMC during 2004. The integration process is moving smoothly and all operating teams, which include people from all of our operations, are demonstrating full commitment towards the deployment of the CEMEX business model throughout the organization.

With regard to our second quarter results, we are encouraged by our better-than-planned consolidated performance for the quarter. CEMEX's consolidated EBITDA grew 56% versus the same quarter last year, reaching $989m, while net sales increased by 125%. For the first 6 months EBITDA grew 36% while sales increased at the rate of 85%.

The marked improvement in our EBITDA for the quarter resulted primarily from the consolidation of the RMC operations, as well as moderately higher domestic volumes and prices in most of the markets in our portfolio. We are particularly pleased with the contribution to EBITDA from RMC during the second quarter, which was in excess of $300m.

In addition, our results benefited from supply/demand dynamics that continue to be attractive. Input cost of escalation has been substantially offset by ongoing efficiency gains throughout our operations and a better pricing environment.

Looking ahead, our year-to-date results give us confidence that we can achieve our EBITDA targets. In fact we are now expecting to achieve EBITDA of about $3.6b. This outlook is based on the consolidation of 10 months of RMC covering the March to December period, and represents an increase of nearly 42% versus last year, with net sales growing by about 92% to about $15.6b.

A continuation of the momentum has been since the first [indiscernible] throughout most of our portfolio, as well as incorporation of RMC, is driving EBITDA growth. We remain vigilant with regard to cost containment and we expect the restructure of efficiencies will continue to partially offset moderating installation of input costs during the rest of the year.

It is important to note that our EBITDA guidance incorporates a relatively small percentage of the eventual synergies that we expect to see from the integration of RMC into CEMEX. By the end of 2005 we expect to achieve synergies at an annual run rate of about $80m, 50% of which will be reflected this year.

Our healthy pre-cash flow generation will grow by about 22% and reach over $1.8b by year-end. This growth points to the strength of the legacy business, as well as the pre-cash flow accretive nature of the RMC acquisition from March 1 to December 31, 2005.

As you may have noticed from our second quarter report, and before I go into specifics about details on the quarter, we have reorganized [graphically] the way we report our results. Part of the change, we are now reporting in Mexico, United States, Spain the United Kingdom as separate entities. These 4 countries represent close to 80% of CEMEX's consolidated EBITDA, and we feel that the selected breakdown provides a good balance between relevant information and the simplicity that we want to maintain in our disclosures going forward.

Now I would like to discuss the second quarter performance of our principal markets, as well as the outlook for the rest of the year.

Mexico, demand volumes increased by about 5% year-on-year, due mainly to the fact that the quarter contained more business days that did the second quarter last year. Adjusted for the difference in business days, volumes remain flat quarter-over-quarter. For the first-half of the year demand volume declined about 2%. This was primarily due to an absence of spending of the [of the old structural funds] that were being debated in Congress during the first-half of the year. This is expected to be resolved and the spending on that program commence during the second-half of the year.

Ready Mix volumes on the other hand grew by 15%, underpinning healthy growth and infrastructure and formal construction segments. 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 the weak self-construction sector. For the full year we expect cement volume to increase by about 1%, which will be driven mainly by government spending on the streets and highways, other buildings and other infrastructure projects. By low- and middle income housing, resulting from an increase in mortgage awards during the second-half, and to a lesser extend by industrial and commercial projects.

We think the government finances will remain sound in 2005 as a result of continued fiscal prudence and robust oil prices, both of which should lead to stronger demand in the second-half. As a result we see cement consumption from governments and the formal sector growing during the later part of 2005 and leading to an increase in our Ready Mix volumes of about 15% for the year.

With regard to the residential sector, we expect about 575,000 mortgages to be originated in 2005, about 8% more than in 2004. Commercial banking sector, which continues to improve its mortgage origination levels is supporting demand in this sector. The self-construction sector has not grown despite growth in aggregate disposable income during the first half of the year. Cement demand from this sector is expected to remain flat or to slightly decline by about 1% for the year. This is primarily due to continued volatility in the price of building materials, although the trend is down.

In addition, some of the housing demand is being satisfied by the former construction segment due to a wider availability of finance. We continue to realize a high degree of success in our [multi-public] strategy and we expect sales to increase by about 18% and to exceed $300m in 2005.

In the United States our volumes increased during the quarter by about 9% over the same quarter a year ago. On a like-for-like basis for the ongoing operations, volumes increased by 12% while in the first 6 months of the year they increased by about 7%. Both segments of demand experienced robust growth in the quarter and for the first half. In the residential sector construction spending was up 13% for the first 5 months of the year and housing starts were up by 5%. Spend in this segment is being driven by a attractive financing terms, better employment and site inventory.

Having said this we remain cautious as indicated by our expectation of 1% decline for the full year.

Industrial and commercial sector has been recovering, with the construction spending up 9% during the first 5 months of the year. Growth in this segment is expected to continue to benefit from the expansion in the economy leading us to expect a full-year growth of about 8%.

Public sector construction spending put in place was up 6% for the first 5 months of the year, with the spending for streets and highways up 7%. Federal funding under the current extension of the TA21 program is approximately $37b for fiscal year 2005, plus $2b that was left unused from fiscal year 2004. So total Federal funding for 2005 is expected to be about $39b, or 18% over 2004 levels.

Regarding [indiscernible] program we expect the consensus for the next 6 years budget will be close to $287b, and that the House and the Senate will reach an agreement and submit a bill to President Bush in September.

Given healthy infrastructure funding, coupled with the general improving economic environment and fiscal conditions of the States, we see volumes in the public works and street and highway sectors increasing by about 5% in 2005. Because of this on a like-to-like basis for the ongoing operations, adjusted for the acquisition of RMC and the sale of markets in the Great Lakes area, we see cement volumes growing moderately in excess of GDP growth at about 5% in 2005.

In light of continued strength and demand in [license] and supply, we expect the pricing environment to continue to be favorable. During the second quarter we established a joint venture with Ready Mix USA, a private Ready Mix concrete company with operations in the South Eastern United States. As part of this deal CEMEX contributed 2 cement plants, 11 cement terminals and several Ready Mix outlets while Ready Mix USA contributed all of its Ready Mix and aggregate operations.

The cement assets of the joint venture will be managed by CEMEX, while the other assets will be managed by Ready Mix USA. Because the businesses of the joint venture are very complimentary, it will create many synergies and the management structure will allow CEMEX to benefit from Ready Mix USA, management expertise with respect to the Ready Mix deal.

With this transaction we will consolidate our position in the South Eastern Regions of the United States and achieve further vertical division. We will have strengthened our distribution in the region by entering into this deal with the largest producer of Ready Mix in the region, and we will gain access to establish customer relationships in [indiscernible].

Finally we continue to make progress in our integration process with respect to the US portion of the RMC assets. As we discussed before, in the United States we have identified around $90m in recurring cost savings, which will be fully implemented by 2007. This will come from every part of what was a highly decentralized organization. In fact, a significant portion of the synergy opportunities will come from centralizing management from many of the functional areas of these operations.

In Spain we achieved encouraging volume growth of 13% during the quarter and about 9% for the first half of the year. Though the overall trend remains very positive. We are cautiously maintaining a 3% volume growth for the full year 2005. At close to 700,000 housing starts last year, the residential sector continues to be one of the main drivers of cement demand. The growth in this sector has been driven by a favorable market environment, positive economic performance and [migration] dynamic.

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

In 2005 we think demand in the residential sector will increase versus last year. In fact housing starts as of May have increased by about 7% compared with the same period a year ago. Based on this performance we expect the number of housing starts for the year to peak the 700,000 mark in 2005.

On the Public-works side, we see this sector emerging from a transitional period as ongoing projects continue and new ones are realised. And the government has been updating its own infrastructure plans for the coming year.

In the United Kingdom demand, volumes increased by 5% for the second quarter and remain flat for the first 6 months of the year. Growth during the quarter was driven basically by large infrastructure projects related to transportation. And also by a recovery from adverse weather conditions that affected construction activity during the first quarter.

GDP in the United Kingdom is likely to grow at about 2.7% in 2005, with construction spending slightly below GDP growth, about 1%. We expect our volumes to be relatively flat to slightly negative compared with those of last year, although slowing down the public, residential and industrial and commercial sectors remain the primary drivers of growth, offsetting the repair, maintenance and improvement sector, which is expected to decline throughout the rest of the year.

The housing sector should gently decelerate and stabilize due to a combination of higher inflation and interest rates, with good growth in disposal income and higher debt level. The public sector should remain relatively healthy throughout the rest of the year as large ongoing infrastructure projects, such as Heathrow Terminal 5, near completion. The non-residential sector will benefit by low inflation and unemployment rate.

We are pleased by the successful outcome of the London Olympic bid, although we do not expect the demand Ready Mix, aggregates or other building materials volumes to be affected in the short term. We think that in the long run demand as a result of this event will increase in 2007 and onwards.

As part of our ongoing integration of the RMC operations have begun an effort to increase the productivity of our Ready Mix and aggregates plant. The result, we are realizing the net work of Ready Mix plant and aggregate, aggregate quarries, with a view of increasing our production efficiency and the quality of service that we offer to our customers. This is being accomplished without compromising any of our market positions.

Regarding the Rugby plant, you already know, having to do some new operating philosophy that emphasizes quality control, better quarry management to reduce raw material volatility and improved [indiscernible]. Since the beginning of April we have had almost no plant stoppage and have maintained the utilization rate at over 90%. Production has increased by one-third, allowing us to reduce cement inputs and realize significant and continuing sales.

Turning to our operations in France, we expect the countries GDP growth in 2005 to continue at about 1.5% to 2%. We see our Ready Mix volume growing by about 5% for the full year 2005. However, as we are present in the higher growth areas of France. Demand should be driven by the housing sector, which will reach its highest levels in the past 20 years. The sector has been aided by lower interest rates, tax incentives and a new social housing programs implemented this year.

Public works sector has also been growing, at a rate similar to GDP growth despite large infrastructure projects that are ending. The non-residential sector is expected to decrease slightly throughout the year due to lower investment.

Our outlook for Germany is not as optimistic as for other European countries. The main demand in the housing sector has been affected by a high unemployment rate, deflating income and low consumer confidence. Public works sector remains depressed due to high public debt that has [indiscernible] investment.

As a result of this we expect our cement volumes to decrease by about 10% year-on-year. As we have said before, in part of tremendous downward market pressures, as well as relatively high cost in cement operations and procurement, the country's EBITDA contribution has been minimal. That presents for us a challenging operating environment but also a significant opportunity to reduce costs. To restructure the Ready Mix network, which is less productive than the Germany industry average and to optimize logistics as well as fuel utilization.

In Easter Europe, namely Croatia, Poland, the Czech Republic and Hungary, we expect activity to grow between 3% and 5%. Construction activity growth to remain between 3% and 6% on average 2005. And as consumption would likely improve especially as the convergence of these countries with the European Union accelerate, the prospect for this region remains very attractive.

During 2005 volumes in Venezuela continued a strong growth, increasing by about 17% with all segments growing across the board. In fact second quarter 2005 has been the strongest quarter in terms of volumes since 1998. The primary demand driver will remain the self-construction sector, which is likely to grow more than 20%, as well as the public sector, which continues to be strong given the high energy price environment.

In Columbia, we expect strong volume growth in double-digit range through primarily to a strong self-construction sector. The public works sector also grow versus 2004 as the 2006 presidential elections draw near. For the second half of the year we see demand from the high to middle income housing sector declining and being offset by growth in low-income housing.

Before I turn the call over to Rodrigo I would like to reiterate two important commitments to our shareholders. The first is our commitment to achieve the effective and timely integration of RMC into CEMEX. This will remain focused in extracting as much value as possible from this acquisition and realizing the synergies that we have identified.

The second is to apply as much of our free cash flow as necessary to obtain our target of 2.7 times net debt EBITDA by the end of this year. We have made significant progress towards this goal during the quarter, having reached a ratio of net debt to EBITDA of 2.9 times [indiscernible]. This gives us confidence that we will achieve our targets of 2.7 times net debt EBITDA ahead of schedule.

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

Thank you, Hector. Good morning everyone. I appreciate you taking the time to join us today.

Our performance during the quarter was supported by higher volumes throughout our portfolio, as well as a significant improvement in supply/demand dynamics in many of our markets, which offset higher transportation and energy costs. We strongly benefited from the infusion of RMC operations for the full second quarter. And to a lesser extent we have also had a positive contribution from a strong Mexican peso.

Our consolidated EBITDA margin went from 33% a year ago to 23% due primarily to a change in product mix, as we consolidate RMC and increase the way of lower margin, less capital-intensive businesses, such as Ready Mix and aggregate.

You are aware we have been proactive in our efforts to minimize our energy costs per ton of cement produced. These efforts, including shifting to fuels whose prices are less correlated to spot markets, as well as developing self-supply powered generation projects, have paid off. Our energy input costs are more stable in a global environment that is characterized by rising and highly volatile energy prices.

The increase in our energy costs during the quarter was in line with out full-year forecast. We expect that in 2005 our energy cost will increase by about 12% per metric ton of cement produced, or about $1 per ton. This increase should be offset by our ongoing efficiency program, as well as the positive trends in supply/demand dynamics in most of our markets.

Our majority net income for the year increased by almost 200% during the second quarter, reaching $733m due to our strong operating performance, the inclusion of RMC and gains resulting from our derivatives position.

For the year as a whole we are targeting an EBITDA of about $3.6b, with an operating cash flow margin of about 23% on sales. This margin captures the $40m in synergies and cost savings that we plan to realize during 2005 and compares favorably with our consolidated EBITDA margin expectation of about 22% that we shared with you earlier this year. Our free cash flow for the quarter was 56% higher that during the same period in 2004, due primarily to higher operating cash flow, efficiency in working capital management and disciplined capital expenditure.

Free cash flow for the first 6 months of the year was close to $1b; that's 35% more than during the same period last year and twice the free cash flow generated during the first half of 2003. We used the $693m of free cash flow that we generated from operations during the second quarter to reduce net debt and to pay dividends.

In addition, favorable foreign exchange rate movements led to a further reduction in our net debt, which resulted in a total net debt reduction of $811m during the quarter. For the full year we now anticipate that free cash flow will exceed $1.8b, an increase of about 22% versus last year. We expect to achieve this as a result of higher operating cash flow, as well as the accretive nature of the RMC acquisition from March 1 to December 31.

Looking at our capital structure, our interest coverage for the trading 12 months through June improved to 6.5 times from 6.2 times a year ago. Our leverage ratio, as measured by net debt to trading 12 months pro forma EBITDA, decreased from 3.2 times to March to 2.9 times for the trading 12 months ending in June. This reflects the underlying strength of our operations as well as our commitment to use most of our free cash flow to pay down debt.

During the quarter we took advantage of the favorable market conditions to lengthen our debt maturity profile, while continuing to reduce the weighted average spread that we pay on our debt obligations. As part of this effort we closed or amended various credit facilities totaling $4.9b. A total of 48 financial institutions participated in at least one of the credit facilities. In addition CEMEX Espania, a wholly-owned subsidiary, issued new 5- and 10-year notes for $325m through a private [placement]. The proceeds of these transactions were used to complete the refinancing of the acquisition debt for the RMC Group [indiscernible] and to [repay] the debt.

The average spread over LIBOR of the refinanced debt was reduced to about half the original spread of the acquisition debt. This refinancing will help us reduce our financing costs and expand our debt maturity profile. The average maturity of our debt is now 3.7 years and our strong free cash flow and committed facilities in place mean that we will not need to refinance debt maturing in 2005, 2006 or 2007. As of today we have committed credit facilities in excess of $1b, sufficient to maintain financial flexibility even under severe adverse macroeconomic conditions.

With respect to our liability structure, we do not expect any major shift in either our currency or interest rate mix going forward. Furthermore, CEMEX's weighted average cost of debt during the second quarter was about 85 basis points lower than in the second quarter of 2004, reaching the lowest average cost of borrowing we have had in the last 20 years.

A [indiscernible] amount of our interest rate derivatives decreased by about $1b during the second quarter as we unwound RMC's derivative position and we continued with our efforts to optimize our interest rate mix. The mark to market of our total derivatives position improved by $261m during the second quarter, reversing the negative $112m position at the beginning of the quarter to end the quarter with a positive $149m mark to market. This mark to market has improved even further to about $300m as of the close of business yesterday.

As you are aware, during 2004 we implemented 2 initiatives designed to bring management and shareholders into this more in line with each other. First we offered our executives the opportunity to exchange their options for new options, whereby the gain will be invested in restricted stock. During the fourth quarter we offered executives an early exercise program to accelerate the transition into restricted stock. On June 17, 2005 the closing price on the CEMEX [CPO] exceeded $8.5, triggering the automatic exercise of 132m options. The gain realized by executives was invested in the equivalent of about 3.6m restricted ADSs.

With the equity forwards put in place to hedge this program, CEMEX also realized an equivalent gain to offset the cost of this program. As a consequence, we will no longer need the equity forwards put in place to hedge the exposure arising from this executive stock option program. We are currently analyzing different alternatives to unwind these equity forwards. One option would be to repurchase and cancel the shares in the equity forwards, this would reduce our share count. Another option would be to maintain the current share outstanding unchanged by placing these shares into the market to an undiluted secondary equity offering. Until we reach a decision we will maintain these forwards.

It is important to note that we are not required to take any particular action. And we will proceed with the option that is most beneficial to our shareholders. Given the spot price of our ADSs as of yesterday, the estimated value of our equity derivatives is $50m in our favor, net of the intrinsic value of the executive stock option program being hedged with the equity forwards. This provides us with sufficient flexibility to analyse our options and ensure best execution. The automatic exercise of these options is another important step in our efforts to simplify our capital structure and improve the alignment of our executives with our shareholders.

As Hector mentioned earlier our 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 committed extraordinary uses of free cash flow for 2005 or 2006, we are increasingly confident that we will achieve our net debt to EBITDA ratio of 2.7 times ahead of schedule, especially if we apply the proceeds from assets disposals to further pay down debt, as is out intent. As we reach our target of 2.7 times net debt to EBITDA, we remain comfortable using free cash flow to pay down debt, even if this again takes us down to a net debt level of under 2 times EBITDA.

Our first priority remains to extract as much value as possible from the RMC acquisition. We remain committed to exceeding our 10% return on capital employed for the RMC portion of our business by 2006. That is earlier than forecasted when we announced the acquisition last September.

We are encourages by the outlook for the remainder of this year. Furthermore, by capturing the bulk of the synergies expected from the RMC acquisition during 2006, as well as benefiting from the full-year consolidation of the RMC operations, instead of 10 months of this year, we are confident that we can deliver high single-digit growth in EBITDA during 2006 before taking into consideration the contribution from organic growth.

So this means we can continue to deliver high growth even if we use all our free cash flow to strengthen our capital structure and none of it to complement our organic growth through acquisitions.

In closing, I would like to say that we are pleased with CEMEX's performance during the firs-half of the year. We continued delivering in the aggregate, and our geographic diversification and strong business model have proven once again to be quite effective in the short, medium and long term.

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 now we will be happy to take your questions.

Operator.

Thank you sir. Ladies and gentlemen [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Marcelo Telles from Credit Suisse First Boston.

Hi good morning gentlemen, congratulations on the very good results. I have 2 questions the first 1 is regarding further price increases in the US. I was wondering if you could mentioned if you were able to implement any price increase in July? Or if you plan to implement additional price increases in the near term?

And my second question is regarding your working capital management. Since that CEMEX [indiscernible] generated a significant amount of free cash flow and a good part of that came from a better working capital management. And I was wondering if you could elaborate a little bit more on what the potential is for improvement or further reduction in working capital needs at RMC? And how much this could eventually represent in additional cash flow generation?

Thank you Marcelo. Let me address the first 1 in terms of the US, our price increases. As you know there are price increases announced for July, mostly for July there is this 1 case, 1 state with a [price increase] for August. We are, of course, [fervent] of the market and the realization of the announced price increased for July, which are for the most part $5.50, will be depending on market conditions. Whilst we are, as I mentioned, positive because of the inflation we are looking at this stage. So we are confident that these price increases will go through. But that has been something that will be [facing at] as the market progresses. There are no other announcements made for the year, no.

Rodrigo will you pick up the other 1?

Well the CEMEX legacy business as you know the second quarter tended to be a strong quarter in terms of working capital management. This is eve more so the case as we consolidate the RMC assets. As you know the first quarter of the year in many of the markets we know operate, activity is at the lowest point. And this usually means that it requires significant built up in working capital during the first quarter. As you begin to enter the months of higher activity during the second and third quarter we have the opportunity to manage our working capital and we intend to do so.

We think there is still room for working capital management going forward and this is embedded in our assumptions for both free cash flow for the full year. And we intend to build it into our free cash flow guidance when we provide that for next year.

That's great. Thank you.

Thank you Marcelo.

Sir your next question comes from the line of Carlos Peyrelongue from Merrill Lynch.

Hello congratulations gentlemen for the great results.

Thank you Carlos.

1 quick question, can you comment on what income tax rate do you expect for CEMEX consolidated operations this year, taking into account that year to date your income tax rate has been around 12.5%?

We would have to follow up on that Carlos as we have not made any specific forecast on our -- on income tax rate for the year. So, of course, it depends a lot on the integration of the RMC assets and probably opportunity we are finding there. So we will have to follow up with that.

Okay. Thanks.

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

Good morning gentlemen and once again my sentiments on the results. 2 quick questions from me, 1 I didn't totally catch what you were saying about like-for-like volume growth in the US for this year?

And my second question actually is a follow up on Carlos Peyrelongue's question with respect to the tax rate. We've been wrong, constantly too high in terms of what we've been forecasting. Over the long term, now that you have bought into ostensibly more onerous tax regimes of France and Germany and some of these other places, do you believe that we could at least see some modest gradual migration towards higher taxation over the longer term?

Okay taking the first question. If the -- what I said about like-for-like basis for our ongoing operations that is adjusting for the position of RMC and the sale of assets in the Great Lakes area, the growth we see is at 5%. That's the like-for-like growth that we are seeing in the US.

Now the -- as to that stipulation it was the same, we don't make any specific forecast [at] and in this case it is even less possible to do because of the integration of the RMC as it is going forward. We would have to see and tell you but probably towards the third quarter we might be able to tell you a little bit more about that. But unfortunately today it is very difficult for us to say anything about it.

I think what we can say though is to the extent that we make acquisitions that we make investments we are better able to manage our tax burden. And this has been the case in the last 10 years to the extent that we do not make any acquisitions going forward, I think it is reasonably to expect that gradually our cash tax rate would move up. But we have been able in the past to manage it and we feel comfortable in the short-term that we will be able to manage our position, so that if there is any change it will be a gradual change on it.

Okay. That's more than fair. Thanks guys.

Thank you Stephen.

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

We are probably hearing some -- a lot of news about pressure from US builders to eliminate the anti dumping tax effect experts from Mexico. And I know that you can't share you view on these and in the case these dumping taxes is eliminated which would be CEMEX [indiscernible] because CEMEX is the largest producer in the US and, of course, you don't want to expose quantities of cement that could put pressure on prices in the US and those proposals [sporting] from Mexico's [indiscernible] which would be your strategy in that case?

Our position in this particular case [Valo] has been widely pressed and, you know we consider the anti dumping jury that Mexican cement base is important in the US as unfair and we will leave this other project. Now as you mentioned we are now 1 of the largest producers and market producers of cement in the US and as such there is very little logic in that we would injure ourselves in the produce of trading or [hurting] our trading network with the US.

And, of course, because we believe that this is unfair we have appealed to the and applied to all the instances that are possible, the public [PO] the [Nasa finals] and they are working as recently, in fact, it was as recently as June 24, the Nasa panel demanded the international [debt] commission was made a [transit] review in 2000, the year 2000. Demanded that decision to maintain the order back to review the order of maintaining the anti dumping jury. We believe that this is a very positive step towards -- a step towards the solution of this case.

Now there is, of course, a legal processes going on it has lasted for many years now so the expectation that this will be resolved very shortly we hope [formerly maintain] caution us to when this would happen. But on the other hand, as you mentioned, there are of course, market pressures because there are shortages. There are public audits in several states of the US, and so the fact is that the market would benefit from lifting this anti dumping jury.

What would CEMEX strategy would be, well the fact is that we have developed [indiscernible] network and is now a global based network and if this dumping jury would be lifted we would increase, of course, the exports from Mexico to the US as, of course, it would be more effective that other inputs can -- we would be more effective in serving our customers. I think that is the logical step that would certainly happen, which is of course, beneficial to the market but also beneficial to CEMEX that we would be spending savings on carrying this input from Mexico instead of from other parts of the world. But that's essentially what would happen.

[Indiscernible] dump here?

[Indiscernible] so.

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

Hi good morning and congratulations on the great results.

Thank you Dan.

Thanks.

Just a couple of questions, the other expense line used to be almost $75m expense kind of a lock every quarter and now it's turned into a game. I am wondering what's behind that and what should we think of in terms of that line on your income statement going forward?

My second question is on the US business, very surprisingly good numbers, difficult to predict because we didn't really have the proper apples to apples comparison with RMC. But I am wondering if you can flesh out how your stand-alone business did in the US? And what percentage of the EBITDA contribution approximately came from the new RMC assets? Thanks.

Well let me take up the second part of the question. It is going to be very difficult going forward for us to make any separation of the RMC results in the US or elsewhere. Because from the start and that is part -- a very important part in fact, of our [indiscernible] integration process. The assets and the operations of the companies become integrated almost immediately. So we don't keep account of specific as it is very difficult to split the result.

I can tell you, of course, the result of the Eastern CEMEX legacy US operations were very good. But also the results from the --from RMC were very good, but they are integrated already essentially from the start. So it is difficult to say specifically how much it was from this side. Let me ask Rodrigo to help me on the other part of your question.

On the other expenses the 2 major differences today versus what you remark as to seeing in the past, are on the 1 hand the fact that we no longer amortize goodwill, in accordance with accounting, currently accepted accounting principles today. Whereas we used to in the past, of course, this is a non cash item. But nevertheless it does -- it did affect the income statement and it is no longer affecting our income statement on a quarterly basis as it used to.

The second larger item is during the second quarter we divested of certain assets, for example our position in -- minority stake in Bio Bio which we sold for about $55m. And had an original cost when we bought that stake of about $35m so we generated an extraordinary gain during the quarter. We are, of course, also consolidating on the RMC Group and there are certain assets that also were divested during the second quarter to generate the gain that is reflected in this line that explains also a gain.

Okay. Thanks very much.

Thank you.

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

Hi good morning gentlemen.

Hi.

Good morning.

Just a couple of questions on the operating side first Mexican and the US. In Mexico I just wanted to get a sense of how you see the price increase that was implemented earlier in the year. Is that sticking and do you still expect prices at the end of the year to be up roughly in line with inflation for the year?

And then on the US, and I guess it's also related to pricing, but I guess a little more to maybe thinking 2 or 3 years out, 1 of the factors there obviously was a catalyst behind the sharp [increasing] in the recent quarters was the increase in freight rates around the world. We are starting to see on some Transpacific routes at least, freights costs starting to decline. When you think of pricing long term do you think that decline might be an issue in terms of spending this momentum that you see on US prices? Thank you.

Thank you Gordon. On the first part of the question, of course, the Mexican price inflation is -- comes across as essentially our [political] gain plus [indiscernible] surprises all of the medium and long term and that's what we would strive to do. Of course, along here there is certain efforts we have to make sometimes successful sometimes not and reflecting the productivity of the infrastructure. As you know energy is 1 where it is important also affecting freight rate in our Mexican operations.

But I would say that the, in particular regarding your question the prices in nominal peso as of June we assume them better than they were in December. So there is parts of the price increase that was announced at the beginning at the year has already been realized. We believe that as we've mentioned if demand the second part of the year, because of the years of oil revenues will start [indiscernible] the second half of the year, we expect that these to be more effective, more in effect of course, the second part of the year.

So we have a relatively neutral attitude towards this, we believe that that is -- that we will be able to maintain our policy to keep our costs in place, [petrol] prices for cement. Of course, when you see average prices you have to realize that there are changes in the mix of bulk and bag prices that affects also what the average price is that you see. And sometimes because of -- the businesses are relatively small there is a volatility that is brought by this change in mix of our products.

Regarding the US issue and the bank that rates have been increasing over the past few months, what we see is that, they have decreased but, of course, they were a very high level for a while. The level they are today is almost double the normal level we had over the years. So this is still significant pressure and 1 that we believe is going to remain.

Now, of course, another component of the price situation, of the pricing environment in the US is the very strong component of demand that we have, that continues, we mention specifically in the [indiscernible] remark we believe that the favorable environment will continue.

That's very clear. Thank you very much.

Thank you Gordon.

Ladies and gentlemen due to [indiscernible] we have time for 1 more question. Your last question comes from the line of Mike Betts from JP Morgan.

Hi good morning. I have 2 questions the first was on Mexico where I think you have lowered your guidance for the year again to plus 1%. And yet I think actually the second quarter came out slightly higher for Mexico plus 5% rather than the plus 4% that you had been indicating in the guidance. So maybe if I could just a little bit more just on, the numbers see to keep coming back down. I hear what you just said about why you may be a bit more optimistic about the second-half, but is there a real risk in Mexico that we don't see any growth for the year or a decline?

And then secondly just quickly on Germany, minus 10% I am just wondering the market forecast we had been expected to be down about 4%. Is that a suggestion that you are going to give up market share or are you much less confident about the overall market than maybe the street is? Thanks.

Well thank you Mike. On the first part in the case of Mexico we prefer to be cautious. We know or at least we are told that this oil income is going to be [affecting] infrastructure projects and housing projects but will that be on time, we don't know so it's effectively [such] as that, that's why we are forecasting this relatively low growth from the Mexican operation.

In the case of Germany it's the same answer, we are new to the market and what we are serving is again a very difficult situation, although in term of prices it has always been a significant [street]. So no we don't expect to give up market share but then we don't measure market share on a very short-term. So it is more that the view we have is like that is a cautious view of the German market and that is what I could tell you.

Okay that's fine. Thank you.

Thank you Mike.

Thank you very much and in closing I would like to thank you all for your time and attention. I look forward to your continued participation in CEMEX and please feel free to contact us directly or visit our website at anytime. Thank you and good day to all.

Ladies and gentlemen thank you for participating in today's conference. This concludes the presentation you may now disconnect. Have a good day.