Cemex SAB de CV (CX) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2006 CEMEX earnings conference call. My name is Alicia and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to introduce your host for today’s call, Mr. Hector Medina, Executive Vice President of Planning and Finance. Please proceed sir.

Thank you. Good morning and thank you for joining us for the first quarter conference call. I will briefly review our first quarter results and will share with you our estimates for 2006. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

With regard to our first quarter results, we are encouraged by our better-than-planned consolidated performance. Consolidated EBITDA grew 29% versus the same quarter last year, reaching $818m, while net sales increased by 52%.

On a pro forma basis, including the effect of the RMC consolidation for January and February 2005, EBITDA grew 26%, while sales increased at a rate of 10%.

The marked improvement in our EBITDA for the quarter resulted primarily from the consolidation of the RMC operations, higher domestic volumes in all of our core markets, as well as the realization of the RMC synergies that enhanced this growth further.

We continue to be very pleased with the RMC integration process. We remain on track with all the initiatives being in place to achieve our stated target for 2006 and 2007. This is ahead of what we originally expected.

In addition, our results for the quarter benefited from supply/demand dynamic that continues to be attractive. We remain vigilant with regards to cost containment, and we expect the [protraction] of efficiencies will continue to more than offset the increasing input costs during the rest of the year.

Looking ahead, the strength of our core market gives us confidence that we can achieve our EBITDA target of $4b, and our net sales target of $17b.

Our EBITDA growth for the year will come from the continuing momentum that we are experiencing throughout most of our portfolio, as well as the realization of the bulk of the synergies that we have identified. Our current EBITDA estimate for the year assumes that we will achieve synergies at an annual run rate of about $360m by year end, or an incremental $240m versus 2005.

Our free cash flow after maintenance capital expenditures should grow at a healthy rate of more than 14%, and exceed $2.5b by year end. This represents a 60% conversion rate of EBITDA into free cash flow after maintenance capital expenditures - this in line with our historical performance.

Growth in our free cash flow and the conversion of ratio of EBITDA into free cash flow demonstrates the strength of our asset portfolio and our business model, as well as our earnings quality.

The results I have just mentioned, as well as our confidence in the benefits of the RMC acquisition, leads us to approach 2006 with renewed optimism and enthusiasm.

Now I would like to discuss the first quarter performance of our principal markets, and our outlook for these markets for 2006.

In the United States, our cement volumes increased during the quarter by 17%. Ready-mix volumes increased by 48%, and aggregate volumes grew by 36% over the same quarter a year ago. On a like-for-like basis for the ongoing operations, cement volumes increased by 18%, the ready-mix volumes increased by 2%, while aggregates were up by 3%.

Our better-than-expected performance in the first quarter was underpinned by healthy organic growth as well as favorable weather conditions that led to strong growth in cement volumes during the quarter.

Public sector construction spending put in place was up 8% for the first two months of 2006, with a spending for streets and highways up 8% as well. We expect continued growth in these sectors, as we see cement volumes increasing by about 8% during the year.

Two primary factors driving growth in the public sectors in the 2006. The first is the recently approved $187b six year [inaudible] transportation program known as [Safety Loop]. And the second is a general improvement in the economic environment and fiscal condition of the States.

The industrial and commercial sector continued its growth trend, as demonstrated by a 12% increase in construction spending during the first two months of the year. On the back of continual economic expansion, we expect cement volume growth to reach about 9% in this sector.

In the residential sector, construction spending was up 8% for the first two months of the year, while housing starts were up 2.6% for the first quarter of 2006. Growth has been driven by attractive financing terms, better employment, positive household formation, and the continuing southern migration of northern [baby boomer]. However, given rising interest rates, the slow down on sales and inventory build up, we expect a moderate decline in this segment of about 3% for 2006.

Because we expect the continuing strength of the public and industrial and commercial sectors to offset weakness in the residential sector, we see cement volumes growing at sales of 4% for the full year 2006.

We announced during the quarter that we intend to begin the construction of our second kiln at our Balcones cement plant in New Braunfels, Texas, which will effectively double our production capacity to about 2.1m metric tons per year. We expect to complete construction of the kiln in 2008. This expansion is aimed to satisfy an increased regional construction and infrastructure demand and will require a total investment of approximately $220m, extended over a three year period.

Regarding the RMC integration process, it continues to be on track, with $100m of synergies expected to be realized by the end of 2006.

In Mexico, market conditions continue to improve, as demonstrated by the 10% and 25% increases in cement and ready-mix volumes respectively during the first quarter. Both exceeded our expectations. Adjusting for the additional business days in the quarter, cement volumes increased by 5%, while ready-mix volumes increased by 20%. Growth in ready-mix volume, in particular, reflects continued strength in the infrastructure and formal construction sector.

Although we are optimistic about the trend in cement consumption, given a potential slow down of demand after the elections, we cautiously estimate cement volume growth of approximately 3% for the year. On the other hand, given the strength in the formal construction sector, we expect ready-mix volumes to increase by about 14% in 2006.

Two factors will continue to drive cement demand during the rest of the year. First, the government spending on streets and highways, public buildings, hurricane construction -- re-construction efforts and other infrastructure projects. Total sales outstanding on public work is expected to reach $5b during 2006. Growth in this sector is underpinned by strong government finances, continued fiscal discipline, and higher realized oil prices.

Government finances will be further bolstered by higher economic activity brought by remittances from the United States which, in 2005, reached a record $20b, and by foreign direct investment. Those expected to remain at the same high levels in 2006.

The second factor is growth in the formal home building sector, resulting from an accelerated increase in mortgages. The number of mortgages sponsored by Infonavit and other institutions continues to grow, and will likely reach about 750,000 in 2006 - 11% higher than last year. An increasingly important contributor to this growth is the higher number of mortgages granted by commercial banks. That number is expected to double in 2006 to about 95,000.

Self-construction sector is showing signs of recovery due to the increased disposable income which they [inaudible]. This sector has experienced lower than expected growth, and some of the demand is being satisfied by the formal construction sector. Until we have greater visibility about the future, we cannot assume that the strength of the first half of the year, ahead of the elections, will continue into the second half. And thus, we will remain cautious about our assumptions for the full year.

During the quarter, we announced that we intend to begin the construction of a new kiln at our Yaqui cement plant in [Hermovilla]. It will increase our capacity by 1.8m metric tons per year. We expect to complete construction of the kiln by 2007. This investment is aimed at satisfying growing demand for cement in the north western region of Mexico. The total value of the investment, which will extend over a two year timeframe, is approximately $210m.

We are pleased by the settlement concerning restrictions on exports of Mexican cement to the United States. Settlement announced and signed during the quarter went into effect three weeks ago. As part of the agreement, 3m metric tons of Mexican cement will be allowed into the United States, of which we believe we will be allowed to export 2m tons.

Under the terms of the agreement, those restrictions will be eased and, after a period of three years, eliminated. During the transition period, the tariff will be lowered to $3 per metric ton.

In addition, under the agreement, during the first quarter we cancelled $65m in liabilities due to the United States government. We will also receive approximately $100m in cash in the second and third quarters.

In Spain, performance exceeded expectations. Cement volumes increased by 13% during the first quarter, or by about 9% when adjusting for the additional business days in the quarter. Ready-mix volumes grew by 24% for the quarter, or by about 16% after adjustment for the additional business days in the quarter, and the integration of the Readymix Asland asset.

All segments of demand remain strong, driven by a robust construction sector. In light of our quarterly performance, we have increased our estimate of cement volume growth to about 3% for the full year 2006.

[In] 2005, the residential sector had its strongest year ever, with housing starts reaching 730,000. For 2006, we expect the residential sector to remain at a high level, and underpinning robust cement consumption.

We expect cement demand in the public work sector to remain at least -- at last year’s levels. Demand in this sector is expected to strengthen and will be driven by the central government after a transitional period, during which some projects were put on hold as the new government settled in. For example, several new projects under the government infrastructure plan will begin this year. The program is expected to run to 2020, and has an estimated total budget of $300b.

While we see local municipalities moderating their public work activities throughout the year, we expect demand to remain strong. This demand will come mainly as a result of several local elections that will take place in 2007, which should positively influence construction activity during the year.

The industrial and commercial sector should remain stable or growth slightly throughout 2006. During the quarter, we announced our investment of close to $60m in the construction of a new cement mill and dry mortar production plant at the Spain port of Cartagena. We expect the new facility to have a production capacity of almost 1m metric tons of cement, and 200,000 metric tons of dry mortar per year.

In the United Kingdom, cement volumes increased by 1% during the first quarter and some sectors demonstrated signs of recovery. Cement also benefited from favorable weather conditions during the quarter.

GDP in the United Kingdom is expected to grow at about 2% in 2006, with construction spending at about 1%, or slightly below GDP growth. We see our volumes remaining roughly flat compared with those of last year. We expect the trend that we saw in the last six months to continue, with activity levels slowly improving.

We anticipate a return to growth in the public and industrial and commercial sectors that will partially offset the subdued activity in the repair, maintenance and improvement sector and the residential sector. We expect the weak trends to turn around during the second half of 2006.

The residential sector, although strengthening, will remain subdued due to higher interest rates and housing prices. Improvement in the public work sector will depend upon whether the government returns to its previously announced investment in infrastructure, highways, and other public building projects.

We continue our efforts to increase and rationalize the productivity of our cement, ready-mix and aggregate plants as part of our ongoing integration of the RMC operation. The result and the tight market conditions, we expect to significantly improve our EBITDA in the U.K. by capturing the bulk of the expected synergies during 2006. But more, we will accomplish this without compromising any of our market position.

In France, our ready-mix volumes increased by about 13% for the first quarter of 2006. Growth was driven mainly by the residential sector and, to a lesser extent, by the non-residential sector. For 2006, our ready-mix volumes should grow roughly in line with GDP, at about 2%. This growth is being driven primarily by continuing strength in the housing sector. The non-residential sector is expected to grow slightly, while the public work sector will likely remain flat for the year.

Germany - our domestic cement volume increased by 10%, while ready-mix volume increased by 1% during the first quarter of 2006. In addition, we increased exports by about 20%. Those exports were aimed at satisfying some of the demands throughout Europe that we previously met from other operations in our portfolio.

We see domestic cement volumes in Germany increasing by up to 2% year-on-year for 2006. We expect an increase in cement volumes in the housing sector of about 5%, and think the residential sector will remain relatively flat throughout the year.

Finally, we see the public work sector increasing by about 5% due to the new government’s sponsored transportation infrastructure program which will start later this year.

Venezuela - volume growth during the quarter was higher than expected, reaching 41%, or 34% following the adjustment for the additional business days in the quarter. Increased public spending due to the electoral cycle fuelled the infrastructure segment. Self-construction and formal housing sectors were also important drivers of cement consumption.

In 2006 we expect cement consumption to continue its growth trend, albeit at a slower pace than last year. We expect cement volumes to grow at close to 20%.

In Columbia, we saw volume growth of 8% during the quarter, driven primarily by the self-construction sector, as employment remains stable and wages have increased above inflation. Infrastructure spending and investment in industrial and commercial buildings were also significant contributors to cement demand.

In 2006, we expect the self-construction sector, which represents about 60% of total cement demand, to decline from the high level it reached last year. Formal and public work sectors, which represent the balance of cement consumption, are expected to grow during the year. As a result of this, we expect our volumes to grow about 4% during 2006.

As usual, and before I turn the call over to Rodrigo, I would like to reiterate two important commitments to our shareholders. The first, which we made last year and we affirm throughout 2006, is to achieve the effective and timely integration of RMC [inaudible], to remain focused on realizing the synergies that we have identified, and to extract as much value from this acquisition as we can. Toward this end, we remain committed to maximizing the synergies inherent in this acquisition. We are on track to realize $260m by 2007.

Our second commitment is to ensure that, in the short, medium and long term, our capital allocation strategy remains on course to sustain our track record of disciplined profitable growth. Going forward, we intend to invest our free cash flow in three ways. First, we intend to invest part of our free cash flow to increase our production capacity of cement, ready-mix and aggregate in the markets that we currently have. We will do this in order to further integrate our position along the value chain and to ensure our ability for future growth in our market.

Second, we continue to monitor cement markets and entire value chains for investment opportunities outside of our current markets that would create even greater shareholder value and add to our organic growth projection.

Third, in the absence of acquisitions or investments that meet our strict criteria and our benchmark returns of at least 10% on capital employed, we will continue in our bias towards the leverage.

As we commemorate our 100 year anniversary, we are optimistic about the prospects that lie ahead of us. We have the people, the culture and the opportunity to continue on our path of disciplined profitable growth.

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

Good morning everyone. [Technical difficulty]. I’m sorry. I think I was on mute, so I will stop and rewind and start again. I apologize for that. Thank you Hector. Good morning everyone, and again, thank you for joining us today.

Our performance during the quarter was supported by higher volumes, even after adjusting for the additional business days in many countries in our portfolio. We also achieved these results, given the continued strong demand/supply dynamics in most of our markets, the realization of savings due to the successful integration of RMC, and the consolidation of RMC for the [full] quarters in 2006, which is only one month in 2005.

All of this resulted in an EBITDA growth of 26% on a pro forma basis, despite a weaker peso exchange rate versus the prevailing exchange rate when we provided guidance at the [bid] quarter. In fact, EBITDA was up in our four core markets - Mexico, the United States, Spain and the United Kingdom. These increases more than compensated for weakness in some of our other smaller markets.

For the trading 12 months our EBITDA was close to $3.8b, giving us greater confidence that we will exceed our target of $4b for 2006. Our consolidated EBITDA margin went from 25% to 21%.

Higher average volumes and pricing in most of our markets had a positive effect on the pro forma margins across our main business units in all of our major markets and more than compensated for higher energy costs. This effect, however, was more than offset by a change in product mix resulting from our consolidation of RMC during the three months in 2006, versus only one month last year and the corresponding increase in the weight of lower margins, less capital intensive businesses, such as ready-mix, and the more seasonal European markets.

The increase in our energy costs during the quarter is in line with our full year forecast. We expect that in 2006 our energy costs will increase by slightly more than $1 per metric ton of cement produced. This increase should be more than offset by a positive price momentum in most of our markets. In fact, during the quarter, the average cement price for all of our markets improved by more than $6 versus the same quarter a year ago - sufficient to fully offset the increase in energy costs.

Our efforts to minimize our energy costs per ton of cement are ongoing. We will continue to implement our energy strategy to change the fuel mix in most of our kilns in Europe. This strategy will allow us to further reduce our exposure to fuels with high price volatility. These efforts are paying off. We have achieved greater stability in a global environment characterized by higher volatility and rising costs of energy.

During the quarter, our majority net income increased by 14% to $505m. This was due to our strong operating performance and the positive effect of the resolution of the U.S. anti-dumping order regarding imports of Mexican cement into the United States, as we eliminated about $65m in liabilities and recognized a $100m receivable which CEMEX expects to collect in the second and third quarters of this year. These items are greater than the extraordinary gains of $122m that we realized a year ago and the pound sterling hedge during the RMC tender offer period.

Looking at our capital structure, our interest coverage for the [trailing] 12 months to March improved to 6.9 times, from 6.8 times a year ago. Our leverage ratio, as measured by net debt to trailing 12 months pro forma EBITDA, decreased from 3.2 times a year ago, to 2.3 times for the trailing 12 months ending this first quarter. These improvements are as a result of a net debt reduction of close to $2b during that period, as well as a stronger operating performance.

During the first quarter, free cash flow of $326m was used primarily to reduce debt by $293m, and to fund several smaller investments. Net debt, however, was reduced by $202m during the quarter as a result of several liability management initiatives, such as the recognition of the expected breakage costs incurred in relation to the pre-payment of the RMC private placement.

In addition, we are paying $54m in proceeds from the termination of the joint ventures in Spain and Portugal. This was used to early exercise the option to purchase the assets under lease at our Balcones plant in Texas, which is expected to contribute more than $10m per year in incremental EBITDA going forward.

The average maturity of our debt is now 3.3 years and our strong free cash flow and committed facilities in place mean that we have no re-financing needs. As of today, we have committed credit facilities of close to $1b, which are sufficient for us to maintain our financial flexibility.

On April 6, S&P assigned CEMEX a BBB rating, up from BBB-. The upgrade evidences S&P’s comfort with our ability to rapidly strengthen our capital structure, given our earnings quality, and the successful integration of the RMC operations. As a result, CEMEX now holds an investment grade rating from Moody’s, and solid BBB ratings from both Fitch and S&P.

We remain committed to obtaining solid investment grade ratings from all three rating agencies. We have a strong balance sheet and capital structure compared with those other major multi-nationals in our sector, especially when we consider the higher rate of conversion of operating cash flow into free cash flow. We also have a solid track record of performance through business cycles and at integrating acquisitions. Accordingly, we believe we remain on track to meet this objective.

As Hector mentioned, we remain comfortable using free cash flow to pay down debt, even if this again takes us down to a net debt level of less than 2 times operating cash flow in the near future.

Going forward, we will continue to invest resources in order to take advantage of higher return investment opportunities in the value chain in our existing markets. We will do so as part of a highly disciplined return driven process that ensures that our discretionary capital investments are aligned with our corporate objectives.

Toward this end, and as you are already aware, we have allocated approximately $500m during 2006 for expansion capital expenditures in different projects around the world to increase our production capacity. These projects include clinker capacity expansions in the United States, in Mexico and Latvia, as well as additional cement grading facilities in Spain and the United Arab Emirates. As we have mentioned before, we expect these expansion projects to provide, on average, returns of about 20%.

Our first priority continues to be extracting maximum value from the RMC acquisition. We remain committed to exceeding our 10% return threshold on capital employed for the RMC portion of the business, and we expect to achieve this objective during 2006.

Finally, and as always, I’ve been asked to remind 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?

[OPERATOR INSTRUCTIONS]. The first question comes from the line of Steve Trent with Citigroup. Please proceed.

Okay. Hello.

Hello Steve, how are you?

I’m sorry. Can you hear me okay?

Yes, we can hear you now.

Sorry. We had a bit of trouble for a second. Sorry about that. Just one or two quick questions gentlemen. First of all, congrats, it looks like you guys are off to a very nice start for ’06.

Thank you.

I was curious, in terms of the margin on the rest of Europe, if there are any one or two particular elements that may have had a pejorative of impact.

Well, one of the things that certainly affects this, the rest of the Europe geography, as you know, is the weather and the seasonal effect that carries this to [streams]. And there are countries like Holland that had terrible weather. But I think that, overall, the issue that because of this slow down of activity in the season, most of the maintenance stoppages take place along this part of the year. And, as such, they affect the margin.

So we have carried this. And this isn’t the first time we operated [that] for the full quarter. So we see it carried out these maintenance projects fully. They affected, of course, the operations there in this region.

Let me just elaborate on that, if I may. When we take on maintenance CapEx and we stop the kiln, as it is programmed to be stopped during the slower part of the year during the winter months, we recognize that maintenance expense during the quarter it takes place. We do not amortize it over the 12 month period of the full year, as some might expect. And so that affects the margins during the first quarter. But we remain on track for our full year forecast nevertheless.

Great. And just one other quick question with respect to the one time gain on the income statement below the operating line related to the cancellation of the liability. The 65m that Hector mentioned, was that run through the income statement? I don’t know if you’re able to share with us if the income statement gain, specifically, was a different figure.

Yes, Steve. Not only the $65m reversal of the provision that we had created, but also the recognition of the $100m receivable that we expect to get from the agreement between Mexico and the U.S. Both of these items had affected our net income in prior periods and, as we now know, that provision is no longer necessary and the monies that we have deposited will be coming back. We have to recognize that through our income statement. And, as we mentioned, this more than offsets, for comparative purposes, the extraordinary gains realized during the first quarter of 2005, which were related to the hedge we took on during the tender offer period for the RMC acquisition.

Okay. Great. And once again, operating-wise looks like you guys are off to a very nice start in ’06.

Thank you.

Thank you Steve.

[OPERATOR INSTRUCTIONS]. The next question comes from the line of Daniel Altman with Bear Stearns. Please go ahead.

Hi. Good morning.

Morning.

A couple of questions. Firstly, there were some pretty detailed newswire articles a few weeks ago about Gresik and your ability to sell your stake to -- either to shareholders or to the government. This story’s been kicking around for years and years and years. But I just wonder if there’s anything to these more specific stories that came out recently.

The second question I had is on your tax rate. Is the rate that we saw in the first quarter still quite a bit below, I think, some of the guidance you’ve given in the past? Is this a reflective tax rate or could we expect it to be higher or lower the next few quarters? Thanks.

Let me take the first part and then I’ll ask Rodrigo to take up the tax rate question. On Gresik, I’m afraid the news is just the same. That is no news. We continue have conversations with the government and, as such, nothing new has appeared in this conversation. And the moment we feel there is anything new to report, we will do it immediately, of course.

Regarding the cash tax rate, we do not expect a significant change for the cash tax rate for the full year versus last year. The reason why the first quarter is different is because a withholding tax that fell in a separate quarter last year, fell in the first quarter this year. And so it’s only a timing difference that arises, this change, for comparative purposes between the first quarter of this year versus last.

Okay. So your full year guidance for the tax rate would be -- ?

Well, it’s more or less in line to the cash tax rate we have had in the recent past. And that is consistent with our guidance for free cash flow after maintenance CapEx that we have provided, where we maintain conversion rate of more than 60% of our operating cash flow after maintenance CapEx.

Okay. And let me just follow up on the Gresik question. So why is it that you have government representatives there making public statements. What do you think they’re trying to accomplish? And is this something that you -- after those comments, were there, I don’t know, closed door conversations to try and sort out what’s going on. Or what -- maybe give us a little bit more of color here on why this is going on and whether you believe the government, in the position that it’s in, is capable of buying back [Gresik] from you guys.

Well it’s not new that the officers from the Indonesian government make statements that are either miss-translated or miss-interpreted in the media and that has been happening always. Unfortunately, we don’t have anything to restrict these types of comments appearing in the media and having the form of public statements.

What also happens is that the particular subject depends -- well this is finally the process of privatization or a privatization process that has not ended, it’s still going on somehow. And in these types of processes, many different parts of the Indonesian government take part, take somehow -- perhaps take some sort of position. And being that the case, you have opinions from different parts of the government going around.

Our position is the same. We are holders of 25% of the Gresik shares. And we are in conversations with the government to see what is the destiny of CEMEX in this particular participation. That is the official position that I can tell you we have in that.

Okay. Thanks.

The next question we have comes from the line of Mike Betts with JP Morgan. Please proceed.

Yes, good morning.

Morning.

I had a number of questions, if I could, firstly, just starting on the U.S. The cement volumes, like for like, were up 18%. The aggregates and ready-mix just 2 and 3%. The first question really, was that due to regional differences, or is there anything else that I’m missing there?

Secondly Hector, and it was probably me miss-hearing here, but when you were talking about the outlook for the U.S. for 2006, I noted down two numbers. One was 4% and the other one, which I presume I miss-heard, was 8% but maybe you could just clarify that please.

Thirdly just on Mexico. The 1% decline in constant peso pricing. I wonder if you could just talk a little bit about what’s been happening to pricing for cement in Mexico in Q1 because, obviously, there was that 6% price increase that was announced at the beginning of January.

And then just finally, going back to Daniel’s question on the tax, and I think the question he asked was mainly about the cash implications. But also if I look at the P&L, the charge was up, the rate was up about 300 basis points in Q1. And I suppose my question there really, because you probably don’t want to give me guidance for the year but, obviously, we’ve got this $165m from the U.S. with the write back of that anti-dumping duty. I presume that the tax rate on that would be probably a lot higher than on the Group as a whole. Was that a factor in the P&L tax rate charge in Q1? Thanks.

Thank you Mike. Let me take the U.S. questions first. The first one is, as you mentioned, some regional differences but also capacity constraint. In the case of aggregate facilities we’re operating at full capacity. So that is one of the reasons why we are growing less than the cement growth you see.

And then the addition in that respect with ready-mix is the joint venture that we have with Ready Mix U.S and in one region, in particular in the U.S. So that’s -- that accounts for the ready-mix and aggregate differences in terms of growth with cement.

And for the full U.S. my -- I mentioned, I don’t know if I maybe miss-read but it was 4%.

Okay. Thank you.

The full U.S. In terms of the Mexican pricing situation, as you correctly said, we announced a 6% average increase in prices. And from December to March what I can tell you is that average prices, comparable prices, have increased in nominal pesos 5.3%. So most of the price increase that was announced has been realized as of March. Continues to be positive as we see the supply and demand situation favorable in that respect.

And are you happy with the tax rate question Rodrigo?

Yes. On the tax rate, the explanation is the same, Mike, as for cash taxes. There’s a timing difference in this first quarter of ’06 versus when a specific tax fell due last year. But we don’t expect a major change in either the tax rate or the cash tax rate for the Company for this year versus last.

Let me also just elaborate on the question of the growth rate of cement and ready-mix volumes in the U.S. We also entered into a joint venture, as you know, in the Georgia/Alabama region of the United States. And, as you know, we consolidate the cement portion of the joint venture, but we do not consolidate the ready-mix portion of the joint venture. So we recognized the impact of that below the EBITDA line in the minority interest line as Ready ix U.S.A. is managing the ready-mix assets and we're managing the cement assets. And so that also explains part of the difference between the growth rate in cement volumes versus ready mix volumes in the U.S.

Okay, that's great. One final follow up if I could. The 31% increase in aggregate prices did kind of jump out off the sheets. Was that caused again by the distortion in change in business mix or product mix, because the increases we're hearing from [Falcon & Martin Aretza] are more in the range of 10%, 11%. So I presume, again, that was just caused by specific one-off factors was it?

Yes, we're going to have to follow up on that, but I -- what line are you looking at?

There's an increase of 31% stated for aggregate prices, I think.

Worldwide did you mean or --

No, in the U.S., sorry, in the U.S.

Yes, let me follow up with that because we don't have the detailed answer for you right now.

Okay, that would be great. Thanks.

The next question we have comes from the line of Dan McGoey with Deutsche Bank. Please proceed sir.

Good morning gentlemen, two questions. First one is also on the U.S. Just looking at the EBITDA margin generated in the first quarter, in the U.S. of 26% which was up about 600 basis points year-on-year. Given what you're seeing on the volume front, as well as on the pricing front, I'm wondering if you can give a little bit of guidance on where that margin might be for the full year in the U.S., given that the first quarter should be the weakest?

I guess I could infer, Rodrigo, from some of your comments about energy, but if you could talk about that. Also, it strikes me that maintaining a 4% volume forecast for this year is a bit conservative, given the start you've had in the first quarter, so a little extra color on the U.S.

Second question, on the cash flow and liability management initiatives. I think the differential between free cash flow of $326m and net debt reduction of [$202m] was attributed to some of these initiatives. If you can elaborate again, a little bit on what they were and whether they should be expected in upcoming quarters?

Okay, let me take the U.S. margin color. We think that our margins are measured in a way we're now measuring, with the RMC assets included, comparing to the year 2005 where we had the RMC assets only for ten months, is around probably in the region of 30% or close to. So yes, the first quarter was very good compared to the quarter last year, but it’s improving because of the fact that we are looking at better volumes and a better season coming in.

But again, weather permitting it's always we have that variable for some parts in the U.S., that could change.

Sorry Hector, if I can interrupt. I guess the bottom question is, does that also -- when you look at that margin acceleration does that have any push back from clients or customers in terms of the expected upcoming price increases in the second or third quarters of the year?

We're not looking at anything like that today. Most of the price realization has been -- there are some delays in some places and there are some contracts, of course, that still being applied at prices that were agreed before. But no, we are looking at, essentially, the same increases that we have announced in the past.

Great, thank you.

Let me go back -- let me go to the second question on -- free cash flow generated after both maintenance and expansion CapEx during the quarter were 326. We did use most of that, 293 or 292m to reduce debt, to pay down debt. However, as you pointed out, there were several liability management initiatives that we carried out during the quarter. The most important of which was we sent out a notice that we intend to pre-pay the private placement of RMC plc. Because we did send out a notice that we would pre-pay those notes, and there is a known amount that we will have to pay upon pre-payment based on market rates and the contractual obligations we had under those private placement notes, we have to now carry the debt at fair value.

Instead of carrying the debt at nominal value, when it was issued, we have to carry it at market value. So there was an increase in the net debt as a result of our intent to pre-pay those notes during the second quarter and we recognized that during the first quarter. This raised the level of debt and it's a non-cash item. It was as a result of, again, going from nominal sort of reporting to fair market reporting on those notes and that is the most important piece of it.

We also recognized some of the leases as financial leases and, therefore, carried them as part of our debt. They will contribute incremental EBITDA, but the net result of all of these liability management initiatives is that instead of seeing a net debt reduction in the order of the [$290m] or so that we used to pay down debt, we see it at the [$202m] level, as reported.

Now I want to go back to the previous question on the prices as reported on page 12 of our release where we point out that there was an increase in prices in aggregate in the U.S. of 31%. The reason for this is because this is not a pro forma number and as we consolidated the RMC Group assets in the U.S., we incorporated regions where the price of aggregates is higher such as, for example, Northern California. And so it's more of as a result of a change in the product mix, if you will, of where the aggregates are being sold in the U.S. and the differences in the geography prices than a real increase on a like-for-like basis.

And just going back to the prices in the U.S., Dan, the fact is that there were prices announced in -- for January, price increases for January, that have not been fully realized. So I am not going to give you the impression that everything is put in place because, again, some of the regions have delayed the implementation of these price increases and some of the contracts that were being supplied, as I mentioned, at previous prices. So that, there is a -- that accounts for the price realization that we have until now. What we can, we mentioned -- we see is that the price increases that were announced for the middle of the year are still in place.

Great, thanks for the additional color.

Okay.

The next question comes from the line of Nicolas Godet with Exane BNP. Please proceed.

Yes, good morning gentlemen. My first question is on the Co2 allowances in Europe. I just wanted to know if you have [excess] Co2 allowances and what was your strategy about that?

Second question regards Columbian prices and Dominican Republic prices, could we have some color on what is the direction in Q1 compared to Q4, '05? And what is the impact of price evolutions in Columbia and Dominican Republic? Thank you very much.

I understood the first question as being if we have Co2 allowances in Europe?

Excess Co2 allowances.

Excess Co2 allowance. I would have to follow up on that as we don't have that information in particular now, but we will follow up with you on that Nicolas.

So the situation in Columbia and Dominican Republic, yes, there is some significant increases in the first quarter and prices in Columbia, in terms of cement, the price increase is around 6% over first quarter last year. Ready-mix is more or less the same, that would be a -- the price increase in dollar terms as in Columbia today.

For the Dominican Republic we are still experiencing price weakness due to competition factors there. And we are not really -- we don't have much visibility on where this is going but we would expect that it is reaching levels of stability and maybe there is some improvement, but we're not really able to see when this is going to happen, I mean, when this turnaround is going to happen.

Could we have an idea of what the margin is in the Dominican Republic in Q1?

I don't think we have that information available now.

Thank you very much.

Thank you.

Your next question comes from the line of Jack Kasprzak of BB&T Capital Markets. Please proceed.

Thanks. Good morning everyone. I just wanted a question on the 2006 full year EBITDA guidance, based on your statement that free cash flow would be at least $2.5b and a 60% conversion of EBITDA to free cash flow. We're talking an EBITDA number for '06 of more like $4.2b or maybe $4.3b. Obviously, you're saying here on the call that you now expect to exceed your EBITDA target, but is that the sort of range our -- we were focusing in on a little more that we would be talking about for '06?

As I mentioned over the comments, with the initial comments, we're very positive that we can now exceed our guidance of $4b and -- well I can tell you that we hope you're right in terms of what the compression is and then the actual result amount. I can tell you now it's -- and our guidance is that we are positive to exceed the $4b guidance.

Let me just add that although the results of the first quarter are encouraging, and give us optimism and make us enthusiastic about the prospects for this year, we have decided to wait until we see what happens during the second quarter in order to determine if we need to or not, change our guidance for the full year.

For the time being we have kept it as it is, although we have made a slight change in the wording to reflect our increased confidence as a result of both the first quarter results and the momentum we see into the second quarter.

So I guess it's fair to characterize it as you think you'll exceed it, but you're not -- perhaps, not exactly sure by how much and so you're leaving another quarter to go to pinpoint it?

That's fair to say that.

That's fair to say Jack.

Okay, fair enough. Thank you very much.

Thank you Jack.

Your final question comes from the line of David MacGregor with Longbow Research. Please proceed.

Yes, good morning. I was wondering if you could talk a little bit about Mexico and you talked about the growth and the government infrastructure spend down there. What percentage of your Mexican volume now is government infrastructure as opposed to the self-construction?

Let's say mid term estimate, we would say that self-construction is about half of the total cement. Then we have another 50% in terms of what is not self-construction and out of that I would say that formal construction is probably about 15%, which is formal construction that is not government related that is.

So roughly 35% would be government infrastructure spend?

Well no, because then we have -- this is both -- we're talking about cement demand here?

Yes.

So the integration would be self-construction 50%, the formal construction and cement demand, not to any other segment, formal construction is 15%. Then you would have concrete products. Demand goes to -- or cement that goes to concrete producers, that is between 7% and 8%. Then ready-mix companies that could sell to the government was -- the cement that goes to ready-mix companies is around 18% to 19%. And then government cement demand, that is cement goes to the government directly, is around 10%.

So directly and indirectly I'm still coming up with about a 35% number is that fair?

Well what happens is that --.

Better than 10% is what you're saying then?

But we cannot say, specifically, because we don't have that statistic and unfortunately ready-mix companies do not report specifically their sales.

I see, okay.

Is that what is the breakdown between government? But yes, if you sort of half-and-half you would reach that more or less 30% to 35% government derived infrastructure and public works cement demand.

So I guess where I'm going with this is the weak local currency pricing in Mexico, as infrastructure becomes a more predominant element in the overall demand, do we start to see a little more pricing power?

Well, I mean, if demand keeps strengthening that's the natural consequence, I would say.

[Today's] prices have been relatively stable over the last seven years.

Yes, I realize that.

And they have been stable for the last seven years despite years in which cement demand went down by 7%. They have been stable despite the fact that there have been years when there has been increased capacity coming on and competitors. So regarding your question of pricing power and stability in prices, I think the evidence is there for the fact that prices have been relatively stable.

Now, again, important to highlight as we have in past occasions, prices in Mexico are significantly lower than prices in the U.S., for example, which is one of the [closest] markets we have. Prices of ready-mix in the U.S. are in excess of $100, prices of ready-mix in Mexico are closer to $75 per cubic meter and those [who are comparable] and prices of cement in bags [at the door] are also lower in Mexico than they are in the U.S. And yet, because we have been very efficient and we've reached high productivity levels, margins are acceptable and return on capital employed is acceptable so we see no need for increased prices in Mexico as it is.

We've been able to offset what would have been a significant increase in our import products by switching to alternative fuels, to cheaper fuel sources, to securing long term contracts and putting the right natural hedges in place so that we wouldn't be exposed against a higher input cost environment. And because of that we have been successful at maintaining the profitability on our return on assets bases with steady prices.

Sorry, but I realize we're short on time here. Just shifting gears to the rest of Europe, you mentioned that Poland had been particularly bad weather. It was my impression that Poland was being developed as an export base and I was just wondering if you could talk about the progress in terms of developing export markets for Polish production.

Of course we manage our facilities, our Company and the systems. And when we see opportunities I know that Poland is particularly [not a good one], but it could be an opportunity because of the construction industry. And one particular quarter is almost non-existent and then we have volumes to export and we use those volumes in the rest of our systems. But again, it's just a matter of the way we manage the full system of --.

I just recall you were trying to develop markets in the Canary Islands, in the Czech Republic and so on. And I was just wondering what kind of progress we had been making there?

Well I think we will be able to report that with the full year. Again, we are almost -- well our first year of operations with the RMC asset and some of the projects that we have are still in the implementation phase. So we should be able to report more in the following quarters.

Okay, thank you very much.

Thank you. Well thank you very much and, in closing, I would like to thank you all for your time and attention. We 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 all.

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