Cemex SAB de CV (CX) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2005 Cemex earnings conference call. [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 at Cemex, please proceed.

Thank you operator. Good morning and thank you for joining us for this third quarter conference call. I will briefly review our third quarter results, and then I will share with you our best estimate for the year on a consolidated basis given our performance for the first nine months. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

Our consolidated performance for the third quarter was better than planned. As a result, we remain optimistic of our future prospects. Cemex's consolidated EBITDA grew 54% versus the same quarter last year, exceeding $1b for the first time in the Cemex history, while net sales increased by 110%. For the first nine months, EBITDA grew 41% to more than $2.6b while sales increased at the rate of 92%.

The marked improvement in our EBITDA resulted primarily from the consolidation of the RMC operations, as well as 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 third quarter, which exceeded $300m.

Our results also continue to benefit from the attractive supply demand dynamics in our portfolio. Input cost escalation has been substantially offset by ongoing efficiency gains throughout our operations as well as a better pricing environment. Our year to date results keeps us on track to meet our EBITDA target of about $3.6m. This outlook is based on the consolidation of 10 months of RMC, covering the March to December period, and represents an increase of about 40% versus last year, with net sales growing by about 90% to about $15.5m.

The momentum that we experienced in the first nine months throughout most of our portfolio continues. That momentum, together with the incorporation of RMC, is driving EBITDA growth.

I would like to remind you that our EBITDA guidance incorporates a relatively small percentage of the total synergies that we expect to achieve from the integration of RMC into Cemex. By the end of 2005 we should achieve synergies at an annual run rate of about $80m, 50% of which will be reflected this year.

Our free cash flow generation, which continues to be strong, should grow by about 30% and reach our -- $1.9b by year end. This growth points to the strength of the legacy business, as well as the free cash flow accretive nature of the RMC acquisition from March 1 to December 31, 2005.

Now I would like to discuss the second quarter performance of our principle markets and the outlook for these markets for the rest of the year. In Mexico, cement volumes increased by about 1% year on year, while for the first nine months of the year cement volumes declined by about 1%. Ready mix volumes, on the other hand, grew by 14% reflecting healthy growth in the infrastructure and formal construction sectors. Cement demand during the quarter was sustained mainly by Government infrastructure spending and, to a lesser extent, by low and middle income housing, both of which partially offset a weak self construction sector.

We expect the negative trend that we experienced in the first nine months to turn around in the fourth quarter and to lead to flat volumes year over year. We see three factors driving cement volume for the remainder of the year. The first is Government spending on streets and highways, public buildings, and other infrastructure projects. The second is low and middle income housing resulting from mortgage awards that have been increasing and accelerated pace. The third factor, albeit to a lesser extent than the others, is industrial and commercial projects.

With respect to the public sector we expect it to continue its upward trend as demonstrated by our expectation of over 15% increase in our ready mix volumes for the year. This is being driven by robust Government finances in 2005 as a consequence of continued fiscal prudence and higher oil prices. We expect the outlook in the sector to improve due to the spending of about $1.5b from the oil surplus fund. This is anticipated to occur within the next several months.

With regard to the residential sector, we anticipate that about 575,000 mortgages, sponsored by Infonavit and other institutions, will originate in 2005. That's about 8% more than 2004. The commercial banking sector, which continues to improve its mortgage origination level, is supporting demand in this sector as well. Both segments could bring origination levels to well in excess of 600,000 mortgages in Mexico during 2005.

The sales construction sector continues to be moderately weak. This is a result of weaker than expected employment numbers in the manufacturing sector, which has dropped by about 1% during the first seven months of this year. This leads us to expect volumes in this segment of our business to decline by about 1% for the year, and it's being further amplified by the continued volatility in the price of building materials, although prices are trending downwards. In addition, the formal construction segment is satisfying some of the housing demand due to a higher availability of mortgage financing.

In the United States our volumes increased during the quarter by about 2% over the same quarter a year ago. On a like to like basis for the ongoing operations, volumes increased by 7% for both the quarter and on a year to date basis. All segments of demand continue to experience robust growth throughout the first nine months of the year.

Public sector construction spending put in place was up 7% for the first eight months of the year, with the spending for streets and highways up 9%. The new six year surface transportation program, known as SAFETEA-LU was approved in August. SAFETEA-LU replaces the previous bill, which had expired two years ago, but was extended while the debate on the new bill continued for almost two years. With a budget of $280b -- $287b the new program will be an important growth driver for cement demand in the public sector going forward. Federal funding on the recurring expansion of TEA21 for the fiscal year 2005 remains at $39b, 18% more than in 2004.

Given the 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.

In the residential sector construction spending was up 11% for the first eight months of the year and housing starts were up 5%. Attractive financing terms, better employment and tight inventories are all driving the strong growth in this segment. We remain cautious with regard to the sector, however, seeing growth in cement volumes at 2 to 3% for the full year.

Industrial and commercial sector has been recovering. Construction spending was up 7% during the first eight months of the year. Because we see growth in this segment continuing to benefit from the expansion in the economy, we expect full year growth in cement volumes for this segment to come in at about 8%. Accordingly, on a like to like basis we continue to see cement volumes growing moderately in excess of GDP growth at about 5% in 2005. And in light of continuing strong demand and tight supply, we expect the pricing environment to continue to be favorable.

During the third quarter we signed an agreement to expand the scope of our recently formed joint venture with Ready Mix U.S.A. As part of the expansion of the joint venture Cemex contributed 27 additional ready mix plants and four additional block facilities, all of which are located in the Atlanta metropolitan area. Ready Mix U.S.A. will manage this newly contributed asset. In return from the contribution of this additional asset, Cemex received a net amount of about $92m. With this transaction we will consolidate our position in the south eastern region of the United States and achieve further vertical integration.

Finally, we continued to make progress in our integration process with respect to the U.S. portion of the RMC asset. As we discussed before, in the United States we have identified around $90m in the current cost savings, which should be fully implemented by 2007. A significant portion of the synergy opportunities will come from centralizing management of many of the functional areas of these operations.

In Spain cement volumes decreased by 2% during the third quarter, and increased by about 5% during the first nine months of the year. So, the overall year to date trend remains positive. We're cautiously maintaining an expectation of 3% volume growth for the full year 2005.

We expect that the residential sector, although slowing, will continue to drive cement consumption. In fact, housing starts [for] July are increased by about 4% compared with the same period a year ago. Based on this performance, we expect the number of housing starts for the year to exceed the 700 mark -- 700,000 mark by -- in 2005. The growth in the sector throughout the year has been driven by a favorable mortgage environment, positive economic performance and migration dynamics.

On the public work side we see this sector emerging from a transitional period. Ongoing projects continue and new ones are being revised. And the Government has been updating its own infrastructure plan for the coming years and the local municipalities have increased their activity in public works.

The successor to the Government's 2000 infrastructure plan is expected to begin in 2006 and run until 2020 with an estimated total budget of $300m. The new program represents an annual increase of $4b, or more than 25% per annum over the previous one.

In the United Kingdom cement volumes fell by 4% for the third quarter, and by about 2% for the first nine months of the year. The decrease in cement consumption was due mainly to a deceleration of the economy, which will likely continue throughout the remainder of the year. GDP in the United Kingdom is likely to grow at about 2% in 2005, with construction spending at less 1%, slightly below GDP growth. We expect our volumes to decrease by about 2% compared with those of last year.

A moderate growth in the public, residential and industrial and commercial sectors is not sufficient to offset the drop in the infrastructure and the repair, maintenance and improvement sectors. The residential sector should decelerate due to anticipated higher interest rates, subdued growth in disposable income and increasing debt levels.

We see the public sector remaining relatively healthy throughout the rest of the year as large ongoing infrastructure projects, such as Heathrow Terminal 5 near completion.

We continue our efforts to increase the productivity our ready mix and aggregate plants as part of our ongoing integration of the RMC operations. As a result, we are rationalizing our network of ready mix plants and aggregate quarries in order to increase production efficiency and the quality of service that we offer to our customers. What's more, we are accomplishing this without compromising any of our market positions.

Turning to our operations in France, we expect the country's GDP growth in 2005 to come in at about 1.6%. As we are present in the higher growth areas of the country we expect to see our ready mix volumes growing by about 5% for the full year 2005. Demand should be driven by the housing sector, which will reach its highest level in the past 20 years. The sector has been aided by lower interest rates, tax incentives and a new social housing program implemented this year.

The public work sector has also been growing at a rate similar to that of GDP growth despite large infrastructure projects that are nearing completion. The non residential and public sectors are also expected to grow, but at a slightly lower rate.

Our outlook for Germany remains unchanged and continues to be negative compared with that of other European countries. The main demand in the housing sector has been affected by a high unemployment rate, [stagnating] income and low consumer confidence. The public work sector, which remains depressed due to high public debt and limited investments, has offset the non residential sector which has grown slightly due to a rise in commercial building construction. The recent events surrounding the election and its resulting coalition only add to the uncertainty regarding cement demand in the near term.

As a result, we see our domestic cement volumes decreasing by about 15% year on year. We are partially offsetting this effect by increasing our exports by about 22%. These exports are aimed at improving our logistics by satisfying some of our customers' demand in Scandinavia, the Netherlands and Eastern Europe, which were previously served from elsewhere in our portfolio.

Despite tremendous downward market pressures and the relatively high cost of energy and oil related fuels, we expect our German operations to make a significant contribution to EBITDA, which was minimal last year. So, Germany presents for us a challenging operating environment. It also offers a significant opportunity for us to reduce cost and optimize our logistics and alternative fuel use.

During 2005 volumes in Venezuela should continue their strong growth plan. We see them increasing by more than 20% with all segments growing across the board. The primary demand driver will remain the self construction sector, which is likely to grow by more than 20%, as well as the public sector, which continues to be strong given high energy prices.

In Columbia we expect a strong volume growth of about 30% across all sectors driven primarily by [cement] demand and to a lesser extent demand to [indiscernible]. The main driver, which accounts for almost 60% of total demand, is the self construction sector. The public work sector, which should grow versus 2004 as the 2006 presidential elections draw near, also remains an important driver.

Our operations in Egypt continue at full capacity utilization due to increasing demand. As a result, we are redirecting export production toward local consumption. A strong infrastructure sector driven by private investment, as well as the residential and self construction sectors should drive volume growth of about 20%.

Before I turn the call over to Rodrigo, I would like to review two important commitments that we've made to our shareholders this year. The first is our commitment to achieve the effective and timely integration of RMC into Cemex and to remain focused on realizing the synergies that we have identified, extracting as much value from this acquisition as we can. Toward this end we remain committed to maximizing the synergies in here in this acquisition. We expect to realize $360m by year end 2007. That amount represents about half of the EBITDA generated by RMC during 2004. The integration process continues as planned. All operating teams throughout our organization are demonstrating full commitment to the Cemex business model.

The second commitment is to apply as much of our free cash flow as necessary to obtain our target of 2.7 times net debt to EBITDA by the end of this year. We are happy to report that as of the third quarter we have delivered on this promise by achieving a 2.6 times net debt to EBITDA ratio. We surpassed this milestone only seven months after we completed the acquisition of RMC, one quarter ahead of schedule. This is a testament to both our capacity to generate free cash flow and the strength of our business model.

In the absence of acquisitions that meet our strict investment criteria and our benchmark of 10% on return on capital employed, we will continue in our bias towards deleverage. Needless to say, we continue to monitor cement markets and entire value chain for opportunities that will create even greater shareholder value and add to our organic growth trajectory.

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 year has been, and continues to be, supported by higher volumes throughout our portfolio as well as the significant improvement in supply demand dynamics in many of our markets, both of which have offset higher transportation and energy costs. We're also enjoying strong benefits from the inclusion of RMC operations since March of this year. And to a lesser extent we have also benefited from the continued strength of the Mexican peso.

Our consolidated EBITDA margin went from 32% a year ago to 24%, due primarily to a change in product mix as we consolidate RMC and increase the weight of lower margins, less capital intensive businesses, such as ready mix and aggregates. Our EBITDA margin in Mexico was negatively affected by a change in the product mix as the sales of ready mix outweighed the sales of cement. But in Spain it slightly decreased due to a product mix change and higher distribution costs. In the United States margins remain stable, despite a change in product mix, as we integrate RMC mainly due to a better pricing environment.

However, on a consolidated basis we expect to achieve a return on capital employed of about 12% by year end. This is in line with last year's return prior to the RMC acquisition. What's more, we will accomplish this without realizing the bulk of the synergies, which we expect to attain during the course of next year.

And with a depreciation charge that exceeds our maintenance capital expenditure, which has consistently been much lower than our consolidated accounting depreciation. This is primarily as a result of inflation area accounting under Mexican generally accepted accounting principles.

The increase in our energy cost during the quarter was in line with our full year forecast, around 1.5 hours per metric ton of cement produced. The favorable pricing environment and higher volumes in most of our markets should more than offset the increase in our input cost.

Year to date our majority net income increased by almost 100% to $1.9b, due to our strong operating performance, the inclusion of RMC and gains resulting from our derivative positions.

For the year as a whole, we continued to target an EBITDA of close $3.6b with an operating cash flow margin of about 23% on sales. Our free cash flow for the quarter was 51% higher than in the same period in 2004. And after the first nine months of the year it was close $1.7b. That's 39% more than during the same period in '04. Free cash flow represents more than half of our EBITDA for the quarter and year to date, further evidence of the consistent, superior quality of our earnings.

We have now achieved better than 50% free cash flow when compared to EBITDA since 2001. What's more, we will have grown our free cash flow by about 15% compounded annually through 2005. We used all of the free cash flow that we generated from operations during the third quarter to reduce debt. A weaker British pound, euro and yen further translated into lower net debt in dollar terms. The result, our net debt was reduced by $724m during the quarter. In fact, during the last six months we used all of our free cash flow to reduce our net debt by more than $1.5b.

For the full year we are now more comfortable that our free cash flow will exceed $1.9b, especially given the fact that we generated $1.9b of free cash flow during the trading 12 months ending in September of 2005. We will achieve this through higher operating cash flow as well as the accretive nature of the RMC acquisition through March to December.

Regarding our capital structure, our interest coverage for the trading 12 months to September remains stable at 6.5 times versus the second quarter of 2005. We now expect our interest coverage to improve going forward as we use free cash flow to pay down debt. Our leverage ratio is measured by net debt to trading 12 months pro forma EBITDA, and the increase from 3.2 times in March to 2.6 times for the trading 12 months ending in September. 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. This does not yet reflect the net inflow of approximately $200m from the non diluted equity offering which we received on October 3.

The average maturity of our debt is now about 3.5 years, and our strong free cash flow and committed securities in place, mean that we have no refinancing needs for debt maturing in 2006 or 2007. As of today, we have committed credit securities that total more than $1.5b and are sufficient to maintain financial flexibility for unexpected needs. We remain comfortable using free cash flow to pay down debt, even if this again takes us down to a net level of under 2 times EBITDA in the near future. We expect to achieve a leverage ratio of better than 2.5 times by the end of this year.

During the quarter, Moody's assigned Cemex an investment grade rating evidencing their comfort with our ability to rapidly strengthen our GAAP restructure given our earnings quality. As a result, Cemex now holds an investment grade rating from Moody's, Fitch and S&P. We remain committed to obtaining solid triple B ratings from these three rating agencies.

We have a strong balance sheet and capital structure compared to those of other major, more financials in our sector, especially when we consider the higher rate of conversion of EBITDA into free cash flow. We also have a solid track record of performance through the business cycles and in integrating acquisitions. Accordingly, we believe we are on track to achieving such ratings.

During the quarter we successfully completed a non dilutive equity offering in which 31m ADSs were sold for a total amount of $1.5b. We used $1.3b of the proceeds to unwind those equity forward contracts entered into with [bags], or hedge, or executive stock option plans. This leaves us with options on about 6m ADSs that remain unhedged. We're currently evaluating the best way in which to address this exposure.

By terminating all of our equity forward contracts we have significantly simplified our capital structure. This will make it easier for investors to value our shares and their potential returns by allowing them to focus on the fundamental strengths of our operating business model. This transaction has enabled us to reduce our related obligations with the bank market by about $1.3b giving us greater financial strength and improved credit quality. It was also our intent to reduce earning volatility in our income statement.

I would like to reiterate that given the non dilutive nature of this transaction the successful placement of the offering has translated into greater liquidity for Cemex shares, through a broader shareholder base, while the total number of shares outstanding has remained unchanged.

As you're aware, since June 2004 we have been migrating our long term variable compensation programs from stock options to programs based on restricted stock in the belief that these programs enable us to more effectively align executive compensation with shareholders' interest.

Going forward our first priority remains to maximize value for our shareholders 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's earlier than we had forecasted when we announced the acquisition last year. We are encouraged by the outlook of the remainder of this year.

What's more, in 2006 we will capture the bulk of the synergies expected from the RMC integration, an incremental $240m over 2005. We also expect the benefit from the full year consolidation of the RMC operations. Accordingly, we are confident that we can deliver above average organic growth in EBITDA during 2006. We also expect that our free cash flow will benefit from better capital expenditures and working capital management practices.

Although we're not yet ready to provide specific guidance for 2006, we remain comfortable with the positive trends in our major three markets, Mexico, the United States and Spain. We think that the underlying demand dynamics, which are driven mostly by both public or its infrastructure spending, and to a lesser extent by the residential sector, it will remain attractive in the short term and medium term. All of this means that we can continue to deliver high growth into '06.

As always, I've been asked to tell you that any forward looking statement 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. [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Marcelo Telles from Credit Suisse First Boston.

Hello, good morning gentlemen. Congratulations on the results.

Thank you Marcelo.

Thank you.

Two questions, the first one could you please comment on the upcoming price increases in the U.S., if you have announced new ones, the current price increase that was back in July, for how long this will be in place.

And the other question is regarding the Mexican market. We've had these heavy rains in Mexican in the fourth quarter. Do you this will eventually the cement volumes?

Yes, thank you Marcelo. Well, prices in the U.S. was the first question and so I can tell you that on our part we have announced price increases in -- for January 2006, other than the ones already announced in 2005. So, it's January 2006 for about $10 per ton and then another increase in July for $5 per ton. That is what has been announced.

And the Mexican situation, it was probably too soon to have already the impact of the hurricanes that have hit the Mexican south and are hitting as we speak, unfortunately. So, we expect that soon the authorities in charge will initiate the reconstruction effort. And, although on an unfortunate note, volumes will have to increase because of that. Other than that, it's very difficult to make any estimation today.

Okay, great, thank you.

Thank you Marcelo.

Your next question comes from the line of Steve Trent from Citigroup.

Good morning gentlemen and congrats again on the results.

Thank you Steve.

To some degree this is a follow up on Marcelo's question. I'm wondering on the Mexico side for one, if any of the potentially higher infrastructure spending you might see is coming as a result of the election cycle, perhaps exacerbated as well from higher reconstruction requirements related to hurricane activity. Have you seen any of these -- seen any of this coming through in terms of what you might expect from Mexico through the medium term?

Well, certainly, there is the electoral cycle effect on infrastructure. But I would say that underlining this is -- underlying this is the $1.5b additional funds that we will spend from the oil -- from the extraordinary oil fund. So, that is somehow, as we have mentioned, something that we see coming in the next several months.

The -- as you mentioned, the electoral effect should also be there. And, of course, some of the highways and other infrastructure spending, it is coming up, and so we are, as we mentioned, positive on this sector of the cement demand for the next several months. In the case of Mexico, again very difficult to estimate today or to see any specific reconstruction effect yet, but I'm sure it's coming also.

Great. And just one quick last question, not to be morbid here, but also thinking in terms of reconstruction. We're now several months past the awful events in the Asian basin with December's Tsunami. Probably there's a lot of reconstruction requirement in that market. Have you gotten a signal from any of the governments in that region that they might be ready to undertake some major reconstruction project?

Well, from my understand, volumes in Indonesia, for example, have increased but that, I think, is an effect of the growth of the economy on the one hand, and also some of the reconstruction. But given the size of the market, I would say that the reconstruction driven demand today is but a trickle. I don't think that it is a major component today. But, yes, there's bound to be an increase demand, due to the reconstruction in the region nothing that we have seen specifically up to now.

Great, thank you very much.

Thank you.

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

Thank you. Good morning gentlemen. My question is in Mexico. Can you elaborate further on the expectation for Mexican cement volumes next year? In particular, can you disclose the impact of how the fiscal revenues related to oil prices? I remember last year when we were discussing the outlook for '05. But you also mentioned the positive impact that higher fiscal revenues from higher unexpected oil prices would have on volumes. But we haven't seen that so far this year. What will be different next year?

And are there any specific dates in which the $1.5b oil surplus fund will be distributed to the State?

Well, we are not yet ready to provide guidance on 2006, as Rodrigo mentioned. But we are -- we said, and I repeat in my remarks, that we are positive about our next year volume trends in Mexico given essentially the infrastructure spending that we expect from the electoral effect, but also from this fund that is now ready. As are aware, Congress was discussing some of the 2005 budget items and it is only up to now that it's been -- that this has been resolved. So, that was an effect -- had an effect, of course, on the speed of spending on the Federal budget.

But I would also say that the improved financial conditions that are making the mortgage origination levels to increase are also a driver for demand next year. So, we are positive in that sense for 2006 in Mexico in terms of cement volumes.

Thank you.

Thank you Carlos.

Your next question comes from the line of Dan McGoey from Deutsche IXE.

Morning. My question was regarding a comment you had about expectations, I think you said, for above average organic growth in 2006. I'm just wondering if you can clarify, doesn't that mean something above this 5 to 6% range. And I was wondering if you could identify, not so much on a volume basis but a financial performance, which regions you were most optimistic about in driving that above average growth?

The second question was regarding costs. We've seen in a number of results rising electricity costs hurting margins in areas, particularly in the U.S. I know Cemex uses long term contracts to soften the fuel expenditure. So, I was wondering if you can explain a little bit about what you're seeing on the electricity cost front.

Yes, Rodrigo could take care of the first part of the question, please.

Yes, what we are making reference to is the fact that we expect to generate the bulk of the synergies of the RMC integration during '06. And that is approximately $280m for the full year versus approximately $40m this year. So the incremental savings that we expect to achieve, as a result of merging the two entities, is in the range of $240m more for '06 versus '05. And so that is a source of growth in operating cash flow for next year.

We also expect to end the year with a significantly stronger prices in the US versus the beginning of the year. And, of course, as we mention, we expect prices to increase during the course of next year. All of this leads us to believe that, given the dynamics of our major markets and the fact that we have been in the past been able to offset, more than offset, the impact of higher import costs. That we would expect higher than average growth during '06, versus what we consider our long-term, organic growth rate of between 5% and 6%.

Thank you Rodrigo. And for the second part of the question in terms of the energy component of our costs. We mentioned that the expectation for this year's total energy bill for Cemex, would increase around $1.25 per ton of cement. Which of course, if you compare that with an average price increase on the ton of cement for the whole of consolidated Cemex volumes, which is definitely higher than that. That is compensated at that level.

Now for next year, of course, we see some energy price increases and we hope to mitigate these increased costs by several ways. Continuing, of course, always in our energy strategy. We are increasing the use of petcoke in our operations in the US. We are increasing the use of alternative fuels in the US, also in Mexico and also in Spain. We are managing our strategic fuel inventories to supply our plants at lowest cost.

Optimizing the dispatch of electricity from our -- well, from the Termoelectrica, a local plant in Mexico. And we are of course, in the case of the RMC operations, implementing our energy strategy, so that we expect also to mitigate some of the cost increases for the RMC legacy and RMC operations, in terms of that. So that's how we are mitigating the energy cost increases that we see forward in 2006.

Okay, thanks Hector. Thanks Rodrigo.

Thank you Dan.

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

Yes, good morning. I had three questions if I could. The first one is, would I be right in assuming that year's synergies, the $40m. will mainly occur in the fourth quarter, or have -- or have we had much of that so far? My second was, we've obviously never seen RMC's results published by quarter, but would it be a fair assumption to assume that the seasonality would be something like Cemex's, or would it be slightly more seasonal? Given that they're more biased to Europe and the US.

And then finally, I wonder if you could comment a little bit on -- Lafarge yesterday was commenting about the slowdown that they'd seen in cement volumes, in the last couple of months in the north east. I know you're not in that area, but from what you've said your markets are still pretty strong. Do you think there's any reason or any concern, that that slowdown there might spread to other parts of the US, or do you think it's regionally specific? Thank you.

Thank you Mike. Well, I would say a strong yes to the first question. Yes, we do believe that the synergies for the RMC integration are, of course, back-ended. As we are only seven months into the integration process, most of the synergies should be accruing towards the end of this year, or the ones that we believe are going to be realized this year. So that is the case and, of course, that ties into the second question which, as you said, RMC was not publishing quarterly results.

And of course, we have not lived through the fourth quarter with RMC integrated to Cemex, so that's a -- it's a first time for us. But what we're seeing, of course, is that the positive momentum in many of the RMC markets, mainly of course talking about the US in terms of pricing. As you know the situation in our case in Germany, because of the synergies and the cost savings that we are achieving, and then our legacy Cemex markets like Egypt or, of course, the US also.

We're confident that the fourth quarter should be also very positive, and we feel that we're in line to achieve our guidance of around -- about $3.6b in EBITDA. So that I think is the question. I don't know if you want to add something to that, Rodrigo?

No, I think that sums it up very well, Hector.

And then for the third question. In the north east of the US, as you mentioned, we have no longer operations there. So we're not really very familiar with the situation there, and this is something that we should be looking at. But let me tell you that, as we all know, the current situation in the US is that imports are running at around 30% of the total demand of the US.

So I would say that any effect today in that region should be absorbed in the -- because of the significant demand situation that we have in other parts of the US. We don't see any of that in our markets as you mention.

Thank you very much.

Thank you Mike.

Your next question comes from the line of John Kasprzak from BB&T Capital Market.

Thanks, good morning. My first question is just a point of clarification on the 5% to 6% long run, organic growth rate. Would that refer to sales growth?

No, I think it would be referred to EBITDA growth.

EBITDA?

Yes, that's correct. It's operating cash flow.

Okay, thank you. And then my second question is on -- a follow-up on the question about Lafarge's release yesterday. Lafarge also mentioned the Great Lakes region in particular - Ohio and Michigan - and you guys, of course, have a plant in Ohio. So putting on a finer point on it, are you seeing any of the same similar impact that they seem to be discussing yesterday in that market?

No, we're not seeing any specific issue in our Ohio plant. We're fully utilized, we don't see any of that but I can follow up specifically. If in the last days we've seen anything we will, of course, tell you but there's nothing in our view of the third quarter.

Well they're issues seem to be -- have started -- seem to have started in September. So I suppose if there'd been something there, you might have seen it already. So thank you very much.

Thank you.

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

Hi, good morning everyone, and also congratulations on the report. My question is regarding the gains in the [indiscernible] positions. When you published the guidance, you mentioned that that position had improved by $281m, and that 95% would that pass through the income statement. But in this report we are seeing that gain and loss on financial instruments was a gain of $94m. I don't know if we are talking about the same number, or if something -- some variables changed in between.

I know this is only mark-to-market but I was curious. And the second question would be, including your currency swaps, what percentage of your debt is now at fixed rate and what percentage is variable?

Rodrigo?

Yes. Of the -- Let me take the second question first. About 64% of our debt today is at a fixed rate of the total debt, and that's primarily the long-term, dollar-denominated debt. The percentage has increased as we used a significant portion of our free cash flow to pay down debt. And of course, we're paying down debt that is short-term, that is variable in nature, and so that is what is leading to the change in mix, [debt to floating].

Regarding your first question on gains on marketable securities. You're correct in saying that the gains, in fact, during the quarter were greater than what you're seeing. And this is explained in one of the footnotes in our press release, on page 3. As we have, starting in the third quarter of this year, accelerated what would have been a change in the way in which we report the valuation of the executive stock option programs that remain outstanding.

As you know, we have been expensing the intrinsic value of the stock options that are outstanding, beginning in the third quarter of this year. We're also expensing, not only the intrinsic value, but the fair value of the stock options. And so that means that we're recognizing an additional $92m -- $92.8m during the third quarter of '05, as we move from just valuing the intrinsic value to fair value on the stock options. And that is what explains the difference, Gonzalo.

Okay. Thank you Rodrigo.

Your next question comes from the line of Dan Kwiatkowski from Schroders.

Thank you, and again well done on the results. Two quick questions. Could you -- Firstly, could you outline the factors behind the decline in EBITDA in Mexico year-to-date, and whether you expect that to continue in 2006, the same trend? And then secondly, can you remind us of the progress that has been made on the imports -- import duties of Mexican cement into the US? If there has been any progress on that and your expectations?

Okay. Well, the efforts of the impact on EBITDA, I would talk about margins. I would talk about absolute in Mexico, of course, is the mix on the one hand of our business, because our increase in ready-mix sales, as we've mentioned, is going at around -- growing at around 15%. Whereas cement sales are essentially flat.

And then, of course, the energy bill that although very slightly but has had some increase, and that effect has been spilled out to our transportation cost. But that is in essence the factor behind that decline in EBITDA margin.

Yes, and in absolute terms it declined as well, in nominal peso, and also in dollars it declined as well. So do you expect that to continue in 2006, or do you think that you'll actually grow your Mexican EBITDA in 2006?

Well, I expect to -- that EBITDA to remain essentially flat. No, we're not guiding yet to specifically in any market.

Okay. Now for the second question on the import duties.

Yes. That was essentially stays the same. There's an examination by the International Trade Commission in September 22, that -- in which the NAFTA Panel had sent instruction to the International Trade Commission, to reconsider the decision on the dumping duties. The International Trade Commission decision was that they were -- they would uphold the duties but the vote was a 3 to 1 vote.

So it was close which is relatively good news for our case. But now the -- this situation will be back and forth between the ITC and the NAFTA panel. And, of course, this is the decision can be billed to an extraordinary challenge committee, and that is what is happening in the NAFTA situation. The [WIPO] Panel has also ruled on this but nothing has been -- nothing has happened yet.

There is a [sunset] review of this case that should start this October, this month, and with a decision likely in 12 months. And then there are negotiations between the Mexican and the US government directly. No progress specific mentioned that we can speak about. So essentially those are the things that are happening. As you can see, there are many things happening. We have been doing all that we can but the situation remains the same. That is all I can say.

Okay. Well, thanks very much and congratulations.

Thank you so much.

Due to the time constraint, our last questions from the line of Dan Shedivy from Basswood-Partners.

Hi, good morning, thanks. Two quick questions. The first is on recognizing the expense associated with the long-term compensation plan. On an earlier question you mentioned that in the quarter the cost, that's been recognized, is roughly $92.8m. Is that a good run rate to use for, let's say, the next year on a quarterly basis?

No, that is a one-time charge as you move from expensing only the intrinsic value to expensing the full intrinsic value plus the time value, that is the fair value.

Okay. How should we look at the expense associated with the compensation, now that we've transitioned to this approach for long-term comp versus the options?

Going from using executive stock options to using restricted stock, means that we will expense the compensation as it happens. That is, as the restricted stock is earned by the executives and, in fact, this is a simpler way of compensating. It's a simpler way of accounting it. You account it as it happens and the full amount of it as it happens.

No, absolutely. It's absolutely the right thing to do. I'm just wondering, can you give me a sense on the absolute dollar amounts that will flow through? I assume it flows through SG&A?

Well, it flows both through SG&A as well as cost [to consult]. Because of course, many of our executives work directly in the operations, and some of our executives are at the corporate level. But our corporate expenses as a percentage of sales has been going down consistently over the last several years.

I'm just trying to compare it versus the past [inaudible - over talking]

Well, just to give you an idea. Our corporate expense has gone down from close to 5% to less than 3%, as a percentage of sales. And this is despite the change in compensation from [esubs] to restricted stock. And so you won't see an impact in the aggregate at that Companywide level, and especially less [all] when you look in terms of - as a percentage sales or in any way effecting the margin.

In fact, our margin has been improving as we gain scale, and we've been able to reduce corporate overhead as a percentage of total sales.

So is that specific amount that now is flowing through this way, as opposed to what used to be essentially compensating through options? Is that less than 50 bps of sales? Is it less than a percentage of sales?

Well, it's not significant and it's been expense that way throughout this year, so --

Okay. And then my second question is with respect to a longer-term outlook on China. There was an article in the International Cement Review this past month, that essentially claimed that China by 2007 they estimated would be in line to start exporting up to 20m tons. Obviously, that's not -- is not necessarily all going to be exported to North America.

But if freight rates were to decline and they overheat in their economy, and they have that excess capacity, how do you assess that potential threat in terms of is the quality of cement there? Are there other things that you can do to offset that pressure? How do you essentially assess that potential threat?

Well, on the one hand the potential overcapacity in China has to be taken into consideration, together with the fact that there is some capacity, or some proportion of the capacity in China that is of old technology and highly inefficient. So as energy prices go up, some of the capacity would be substituted by the new capacity coming on line in China. And so the excess capacity or the overcapacity should be [affirmed] that way.

On the other hand, I would say that any excess capacity in China that can be exported, which is an important thing to consider. That is that exports can happen but there are -- but they are close to the cost, and then there also have -- there is infrastructure for exports. That potential export is also an opportunity, because of the significant pressure in the US market in terms of imports that are been -- have been increasing in the US.

Now there is also the issue of shipping costs that have been increasing, but at least they have been volatile. So this is something that needs to be taken into consideration. This volatility in shipping costs have somehow made it difficult for independent traders to go into the business. So it is the consolidation of this segment of the business in the hands of the major producers increasing. And as this is happening, this excess capacity around the world should not be considered, or at least we don't consider it a significant threat.

One quick follow-up. In terms of the overall tonnage that is imported into the US, do you have any sense for what portion of that is controlled by independent traders versus a company such as yourself?

Well, it's probably a good half of it or even more than that. I could not really pinpoint the number.

Okay, fair enough. Thank you.

Thank you. Well, thank you very much to everyone, and in closing I would like to thank you for all your time and attention. I would look forward to your continued participation in Cemex. Please feel free to contact us directly or visit our website in any -- at any time. Thank you and good day.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a good day.