Cemex SAB de CV (CX) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 CEMEX Earnings Conference Call. My name is Enrique, and I will be the audio operator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of the conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to introduce your hosts for today's call, Mr. Hector Medina, Executive Vice President of Planning & Finance, and Rodrigo Trevino, Chief Financial Officer. Mr. Medina, you may proceed.

Thank you. Good morning, and thank you for joining us for the Third Quarter Conference Call. I will briefly review our third quarter results and will share with you our estimates for the full year of 2006 in light of our performance for the first nine months. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

CEMEX's fundamentals and outlook remain strong. For the first nine months of the year, our consolidated EBITDA grew 18% versus the same period last year, reaching more than $3.1 billion, while net sales increased by 19%. On a pro forma basis, including the effect of the RMC consolidation for January and February 2005, EBITDA grew 17% and sales increased at the rate of 9%. Our year-to-date results keeps us on track to reach our expected full-year EBITDA of approximately $4.1 billion.

Our free cash flow after maintenance capital expenditures should grow at a rate of more than 18% and should be close to $2.6 billion by year-end. That would represent a rate of conversion of EBITDA into free cash flow after maintenance capital expenditures of more than 60%, which is in line with our historical performance.

Our solid performance during the first nine months of the year resulted primarily from the strength of our operations in all of our core markets, with the U.S. residential sector weakening in the third quarter. We also continued to implement initiatives to realize productivity gains throughout CEMEX that have further enhanced our growth. As an example, we have implemented a new power consumption monitoring system in Mexico, the United States and Puerto Rico. This system provides daily accurate power consumption and other electrical metrics at our plants. With this information, we can optimize the cost of our power needs, and we are also able to make better capital allocation decisions.

We remain on track with the RMC integration process. All of the initiatives needed to achieve our stated targets for 2006 and 2007 are already in place. Our current EBITDA estimate for the year assumes that we will achieve synergies at an annual run rate of about $360 million by year end, or an incremental $240 million over that of 2005.

Now I would like to discuss the third-quarter performance of our principal markets and our outlook for the rest of the year. In Mexico, we continue to experience favorable market conditions. Cement and ready-mix volumes increased by 8 and 21% respectively during the third quarter. For the first nine months of the year, cement volume grew by 8% and ready-mix volume rose by 22%. These increases reflect continued strength in the infrastructure and formal construction sectors.

There have been no signs of a slowdown during the post-election period, and we are optimistic about the trend for cement consumption for the rest of 2006. Accordingly, we estimate that cement and ready-mix volumes will grow by approximately 7% to 20% respectively in 2006.

Two factors will continue to drive cement demand during the rest of the year. The first is government spending on streets and highways, public buildings, hurricane reconstruction efforts and other infrastructure projects. Total federal spending on public works is expected to reach $7 billion during 2006. Growth in this sector is supported by strong government finances, continued fiscal discipline and higher realized oil prices.

The second factor is growth in the formal home-building sector, due to an accelerated increase in mortgages. The number of mortgages sponsored by Infonavit and other institutions continues to grow, and we expect the number of mortgages granted in 2006 to reach approximately 750,000, 11% higher than during the previous year.

Mortgages granted by commercial banks and Sofoles are increasingly contributing to the growth in the sector. As of August 2006, commercial banks have granted 43,000 credits and Sofoles have granted 30,000. The average size of commercial bank mortgages is approximately four times the size of the average Infonavit mortgage, and cement intensity is higher than for Infonavit-sponsored units.

The total value of expected new mortgages for Sofoles and commercial banks in 2006 should be approximately $7 billion. This amount is small, however, in comparison with total bank assets. Home equity in Mexico represents about $750 billion, or about the country's GDP. Banks have already begun to offer products to tap this market. Home equity lending will gradually have an impact on total aggregate demand in the country, including home expansions, which will translate into higher cement consumption.

The self construction sector is showing signs of a recovery thanks to an increase in disposable income and stable employment. This sector has experienced slower-than-expected growth, however, because the formal construction sector is satisfying some of the demand.

Remittances from the United States to Mexico, which in 2005 reached a record $20 billion, are expected to grow more than 20% in 2006. These remittances, together with estimated flows of foreign direct investment of $7.6 billion for 2006, are strengthening the country's external accounts. Increased economic activity is also contributing to the improvement in government finances, allowing Mexico to maintain its balanced budget.

During the quarter, we announced that we intend to begin construction of a new kiln in the Tepeaca Cement Plant in the state of Puebla. The total value of the investment, which will extend over a three-year period, is approximately $460 million. The plant will increase Tepeaca's production from 3.2 to 7.6 million metric tons of cement per year. This investment, together with the investment in the Yaqui Plant expansion announced in the first quarter, reflects our confidence in the strength of the Mexican economy and in the continued high growth of the country's housing and infrastructure markets.

In the United States, our cement volumes decreased by 6% on a like-to-like basis during the quarter, and ready-mix volumes decreased by 25% versus the same quarter a year ago. The third quarter saw a decline in consumption driven mainly by a weaker residential sector, one fewer shipping date and weather. Unfavorable weather conditions in the West, Midwest and South Central regions, especially during the end of the quarter, had a negative effect on consumption.

For the first nine months of the year on a like-to-like basis for the ongoing operations, cement volumes increased by 2%, and ready-mix and aggregate volumes each decreased 14%. Ready-mix is decreasing at a faster pace than cement because our ready-mix operations have a different market segment mix, with a higher proportion of sales coming from the weakening residential market and a lower proportion of sales coming from the growing public construction market.

In addition, our ready-mix operations have a different geographical footprint from our cement operations, with a higher proportion of sales in high-growth residential markets, which are currently experiencing a correction, primarily in Florida and Northern California. Public sector construction spending put in place increased 10% during the first eight months of 2006, and spending for streets and highways rose 17%. We expect continuing growth in these sectors and see cement volumes increasing by about 7% for total public sector construction spending and 9% for streets and highways during the year.

Two primary factors are driving growth in the public sector in 2006. The first is the $287 billion six-year surface transportation program known as [Safety Loux]. And the second is the continued health of the economic environment and fiscal condition of the States. The industrial and commercial sector continues its growth trend. Construction spending grew 17% in this sector during the first eight months of the year. We expect full-year growth in cement volumes for this segment to come in at about 9%.

The residential sector is declining more rapidly than was generally expected earlier this year. Housing starts, the fundamental driver of cement demand in this sector, went from a year-over-year increase of 4% in the first quarter to declines of 10% in the second quarter and 19% in the third quarter. As a result of the inventory buildup, we now expect this segment to decline by about 11% for the full year.

The growing infrastructure and industrial and commercial sectors are projected to offset the weak residential sector, which continues its downward trend. We expect that our cement volumes will grow at about 1% for the full-year 2006.

In general, our U.S. and Mexican operations are showing a counter-cyclical effect in cement consumption. Demand volumes in Mexico are showing a positive trend, and construction activity in infrastructure is increasing, while the residential sector in the United States is experiencing a downward trend. This represents an additional data point which demonstrates that the geographic diversification that we have put in place has effectively stabilized our consolidated operations.

In Spain, cement volumes increased by 11% during the third quarter. This is 2 percentage points lower than the 13% guidance we have given for the quarter, and is due to the delay of some projects in the Catalonia region and the termination of others in the Central region. Ready-mix volumes grew by about 5% on a like-to-like basis after adjustments for the integration of the Readymix Aslan assets.

Our year-to-date results are, however, in line with our recent guidance. During the first nine months of the year, cement volumes increased by 10%, and on a like-to-like basis ready-mix volumes grew by 10%. All segments of demand remained strong, surpassing the expectations that we had at the beginning of the year. Accordingly, we expect 2006 to be another record year for the residential sector. Housing starts will likely surpass the record 730,000 reached in 2005, and should reach nearly 800,000 this year.

Demand in the public works sector also continues to be very strong. Projects at the local government level continue to show strong growth in anticipation of several local elections that will take place during the year. Last year, Spain presented its new 2005 to 2020 infrastructure plan, which represents a total investment of more than $300 billion, or about $19 billion per year. Projects under this program are also fueling the public works sector. Accordingly, we expect cement volume growth in Spain of about 7% for the full year 2006.

[technical difficulty]

Ladies and gentlemen, please stand by.

Is it better now?

Yes, sir, you may proceed.

Okay. So, during the quarter, this is in the UK, we announced plans to construct a new grinding and blending facility for the manufacturing of blended cement in the United Kingdom at the Port of Tilbury near London. This facility, which represents an investment of $49 million, will have an annual capacity of 1.2 million metric tons of cement.

In France, our ready-mix operations decreased by about 1% during the third quarter and for the first nine months of the year increased by 3%. The main drivers of this growth were the residential sector and, to a lesser extent, the non-residential sector. For the full year 2006, we expect the ready-mix volumes to grow by about 4%. The housing and non-residential sectors will continue to drive this growth, while the public works sector will likely remain relatively flat for the year.

In Germany, our domestic cement volume increased by 25% during the third quarter and increased by 16% during the first nine months of the year. The main driver of demand continues to be the residential sector, which experienced double-digit growth in building permits in the first half of 2006. Residential permits began to slow down after May because people took advantage of the homeowner subsidy that was cancelled in December 2005 and sought to avoid the 3% value-added tax increase which takes effect in 2007.

On the other hand, the excellent business climate prevailing in the country has brought a recent upswing in building permits for non-residential construction. The civil engineering sector is benefiting from higher corporate tax and toll road revenues as well as a EUR4.3 billion traffic infrastructure program which will run from 2006 through 2009 and has expected investment for the year of EUR1 billion. Going forward, we see our domestic cement volumes in Germany increasing by about 13% for the full year 2006.

In Venezuela, cement volume grew 28% during the quarter and by 31% during the first nine months. The infrastructure sector, which continues to be bolstered by the electoral cycle, and the housing sector are again the main drivers of cement consumption. For the full year 2006, we expect cement volumes to grow by more than 25%.

In Colombia, we saw volume growth of 16% during the quarter and 5% during the first nine months of the year. The three main drivers of cement consumption in the country are continuing strong infrastructure spending, non-residential construction such as warehouses and shopping centers, which is increasing in anticipation of a potential free trade agreement with the United States, and middle income housing. Accordingly, we now expect our volumes to grow about 5% 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 reaffirmed through 2006, is to achieve the effective and timely integration of RMC into CEMEX. We 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. I am pleased to report that we are on track to realize $360 million by 2007.

Our second commitment is to ensure that in the short, medium and long term, our capital allocation strategy remains in force to sustain our 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 serve. We will do this in order to integrate further our position along the value chain and to ensure our ability to serve future growth in our markets.

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

And, third, until we make acquisitions or investments that meet our strict criteria, we will continue to use our free cash flow to bolster our capital structure.

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

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

Thank you, Hector. Good morning, everyone, and thank you for joining us on this call.

Our performance during the first nine months of the year was supported by higher volumes and strong supply-demand dynamics in most of our markets. During the quarter, savings from the successful integration of RMC enabled us to achieve EBITDA growth of 10% on the back of 8% growth in net sales, this despite a weaker peso to dollar exchange rate on September 30, 2006 versus a year ago.

Our consolidated EBITDA grew 18% during the first nine months of the year and reached $3.1 billion. For the trailing 12 months, our EBITDA reached $4.06 billion, and our free cash flow after maintenance capital expenditures reached $2.45 billion. This puts us on track to achieve our stated EBITDA target of about $4.1 billion in free cash flow after maintenance CapEx of nearly $2.6 billion for 2006. Excluding the incremental synergies we expect to realize this year from the consolidation of RMC, this translates into pro forma organic EBITDA growth of 8 percent for the full year.

Our consolidated EBITDA margin for the quarter was 23.8%, up from 23.5% a year ago. This increase is as a result of not only the continued integration of RMC, but also higher volumes and pricing in most of our markets, which have compensated for higher energy and transportation costs and have more than offset the impact of the change in our product mix to a less capital-intensive business. EBITDA was up in our major markets, including Mexico, the United States, Spain, and, on a like-to-like basis, as I will explain shortly, the United Kingdom.

There are three factors affecting year-over-year comparisons in our reported operating results on a per-country basis. First, due to the standardization effort currently underway in the operations that were formerly part of RMC, some expenses have been reclassified from SG&A to cost of sales during the quarter and for the first nine months of the year. This reclassification has an effect on gross profit only, but has no effect on operating income or EBITDA.

Second, as we announced in January of this year, we had an extraordinary depreciation and amortization expense during the fourth quarter of 2005, due mainly to the one-time adjustment resulting from the incremental value of property, plants and equipment and intangible assets, other than goodwill, resulting from the fair value allocation of the purchase price paid for RMC.

Because of this adjustment, the normalized depreciation and amortization expense this year in the countries that were part of RMC's portfolio has been higher for the first three quarters of 2006 when compared to the first three quarters of last year. This effect will reverse itself during the fourth quarter, as this is just a result of the timing of the depreciation and amortization expense. In other words, the full-year comparisons will not reflect this effect. Again, this expense has had an effect on gross operating profit only, but not on EBITDA.

Third, unlike in 2005, our 2006 operating results for the United Kingdom include some charges related to the implementation of CEMEX's business model and adoption of our centralized management style throughout the European region. On a like-to-like basis, adjusting for these expenses, EBITDA for the United Kingdom increased 15% during the third quarter and 26% during the first nine months of this year versus the comparable periods last year.

Moving on to our input costs, the increase in our energy expenses during the quarter is in line with our full-year forecast. We expect that in 2006 our energy cost will increase by slightly more than 10% versus last year. This increase should be more than offset by higher average prices in most of our markets.

Our majority net income increased by 24%, to $836 million, during the quarter. This was due to our strong operating performance, the extraordinary gain of nearly $100 million, which was reflected in our income statement and related to the sale of our minority position in Semen Gresik, as well as foreign exchange and financial instrument gains, which resulted mainly from the appreciation of the Mexican peso.

Since September 30, we have seen continued favorable performance in key variables, such as the Mexican peso exchange rate, that affect our derivative instrument positions. As a result, the aggregate fair market value of our derivative positions has improved by $135 million since the end of the third quarter, going from a positive $336 million to $471 million as of October 24.

Looking at our capital structure, our interest coverage for the trailing 12 months through September improved to 8.3 times from 6.5 times a year ago. Our leverage ratio as measured by net debt to trailing 12 months pro forma EBITDA decreased from 2.6 times a year ago to below 1.8 times for the trailing 12 months ending the third quarter. These improvements resulted from our stronger operating performance and our preferred use of free cash flow to reduce debt.

At the beginning of 2005, we committed to use most of our free cash flow to reduce debt, and we did. Since completing the acquisition of RMC on March 1 of last year, we have reduced our net debt by close to $3.3 billion. That is more than half of the total enterprise value of the acquisition. We achieved this reduction by applying the majority of our free cash flow generated during this period to prepay or pay the most onerous debt on our balance sheet. The average maturity of our debt remains at about 3.1 years, and our strong free cash flow and committed facilities in place mean that we have no refinancing needs going forward.

During the third quarter, we issued notes under our Certificados Bursatiles program for 2.5 billion pesos, with a maturity of five years at an interest rate equal to 91-day Mexican Treasury rates plus 46 basis points. We also issued short-term notes under the same program. These notes, issued to refinance debt, were swapped to U.S. dollars at an average funding cost of LIBOR plus seven basis points.

During the quarter, we used most of our free cash flow of $683 million, as well as $335 million from the sale of our minority stake in Semen Gresik to reduce debt by $927 million. As a result of foreign exchange conversion effects in the amount of $49 million, however, net debt was reduced by $976 million. We used the rest of our free cash flow generated during the quarter for the integration efforts of our RMC operations and for other uses.

Going forward, we will continue to invest resources in order to take advantage of high return investment opportunities across 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 plan to invest more than $500 million during 2006 in expansion capital expenditures in different projects around the world to increase our production capacity. Our first priority continues to be extracting maximum value from the RMC acquisition. We are happy to announce that we are already exceeding our return on capital employed target of 10% for the RMC portion of the business.

Finally and as always, I have 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. Enrique?

[OPERATOR INSTRUCTIONS]

Sir, your first question comes from the line of Marcelo Telles, from Credit Suisse.

Hi, good morning, gentlemen. I have a question regarding input costs for CEMEX. I was wondering if you could comment on what happened to -- what was the evolution of pet coke and coal prices in this quarter, specifically for CEMEX, versus the previous quarter, and where do you see that going forward? Thank you.

Well, we have no specific information on that, but what I could say is that what we had already guided to regarding our total energy bill is in line with what we expected, and so that that is an increase of about 10% or slightly more for the total energy bill year-over-year. And that's, I guess, what I could point out in this case. I don't know if you have something else.

Yes, actually, I'm making this question because the -- regarding -- I've been hearing that, I don't know if that's -- whether that's true or not, that pet coke prices have been going up recently. I know you have a long-term contract with Pemex for the supply of pet coke in Mexico, and I know it's a long-term contract, but I was trying to find out when that contract -- what is the time frame that this contract is usually renewed, and if your costs today of pet coke already reflects the oil price environment that we are today.

Marcelo, let me, if I may, add to what Hector has already pointed out. Yes, you are right. The increase in our average pet coke and other energy input costs on a per-unit basis has increased by more, and in some cases significantly more, than the expected slightly more than 10% increase in the average cost of energy, both fuel and electricity, for our mix worldwide.

Now, this is as a result of our continued efforts to switch to alternative fuels, to cheaper sources, and to continue to achieve productivity gains across our operations worldwide. And so we intend to implement projects as we implemented projects five years ago from which we are benefiting today going forward, so that we will continue to offset to our -- to the best of our abilities, future increases in the price of energy, as well as reduce the volatility in our input costs. That we will continue to do.

Okay. Thank you, Rodrigo. Thank you, Hector.

Thank you, Marcelo.

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

Good morning, Rodrigo and Hector.

Good morning.

Good morning.

Two questions, if I may. Can you comment on what was your average cement price in the U.S. at the close of Q3, and whether you have seen any pricing pressures, for example, in Florida and California, where I believe we've seen residential construction declining more than in other states? And the second, you mentioned that you expect cement demand in your U.S. operations to grow 9% for non-residential this year and -11% for residential. I did not hear for public works. Can you repeat what you expect for the full year in public works in the U.S.?

Sure, Carlos. Well, the average price that we see for the U.S. [inaudible] operations is around $107. That's cement per ton, per metric ton. And, yes, as a result of the situation in the housing markets, some of the price increases have taken longer to implement than had originally been expected. But that is what we feel now, and, of course, it's too soon to tell how this effect is going to be absorbed and how long it's going to last. And regarding the public works sector, we expect a 7% increase for the full year, whereas the residential sector we expect, as I mentioned, an 11% decline year-over-year.

And if I may add on the pricing side, we are on track to our assumptions at the beginning of the year for the expectation for prices in the U.S. A greater proportion of the price increase at the beginning of the year was absorbed in the market. A slightly lower percentage of the price increase that we had assumed was absorbed during the middle of the year. However, for the year as a whole we're on track.

Then you have the differential geographic effect. Of course, the residential sector is difficult in Florida, but it's not as bad in other parts of the geography of the United States.

Understood. One more question, if I may. On Mexico, the results have been particularly strong this year, and with infrastructure and housing likely to remain quite strong for next year. When do you expect to provide some guidance on your expectations for 2007?

Well, we will be happy to do that as soon as we feel we have more visibility, hopefully towards the end of the year or the beginning of the following year.

Good. Thank you.

Thank you, Carlos.

Sir, your next question comes from the line of Jorge Kuri, from Morgan Stanley.

Hi, good morning, gentlemen.

Hi.

Good morning.

Your guidance for U.S. cement volume growth in 2006 is now 1%. That is down from 3% previously. Now, the 3% guidance, if I understand correctly, was based on the assumption that volumes in the third quarter were going to decline 3% year-on-year, as you mentioned in your preliminary guidance a month ago.

Now, U.S. volumes actually fell 6% this quarter, and by just doing the mark to market of the lower-than-expected third quarter results, you get to full year 2006 volumes that grow only 1%. So, in other words, your new guidance only seems to mark to market what happened in third quarter and does not assume a slower fourth quarter. Does this mean that you think the worst of the housing downturn is now behind? Can you share some color on what you're seeing today?

Well, the reality is that we have people on one side and people on the other side. That is, we have very wide points of view as to whether the residential issue has [lapsed] or not. Again, I would say the same. We don't know how long it's going to last, how long it's going to take for this correction to be absorbed, how long the inventories are going to take to be absorbed and the situation to change.

The views, as I stated, are mixed, so our visibility for this issue is very, very poor at this point in time. As soon as we get more visibility, we can say. That's why what you can see from our guidance is that we're looking at more or less the same situation that we were looking at previously, except that we had a very bad quarter in the residential sector in some geographies.

If I may add, the good news is that other markets are more than compensating for this effect. You know, as we stated, Mexico is significantly stronger than we had expected at the beginning of the year, and even some sectors of consumption of cement in the U.S. are also doing well, such as infrastructure and commercial industrial.

And, therefore, the diversification that we have put in place has worked. We have effectively stabilized and maintained a steady growth in the aggregate for the company as a whole. And so the good news, you know, the additional data point, as we highlighted in our opening remarks, is that despite this dismal or lack of visibility in one sector of our business, the business as a whole continues to deliver.

Okay. Thank you. And if I may add a second and last question, Mexico revenues were up 15% in dollar terms, but EBITDA was only up 5% due to a sharp increase in operating expenses. Can you share some color on what happened here and what is your outlook for operating leverage going forward? Thanks.

Certainly some input costs, as we've mentioned. And, in fact, also the increase of Multiproductos, which has a lower margin in terms of sales increase, and in fact on the increase of EBITDA, and also the fact that, because of the energy situation, the cost of freight, transportation, is having a significant increase. In addition to that, since we're selling more, we're selling farther away from our plants, and that increases also the cost of transportation. All those components somehow contributed to the increase.

But, in general, we are -- we feel we are in line with our expectations for the Mexican market. And, in fact, as you could see from our initial remarks, we are feeling very positive about the Mexican market, given the fact that the post-electoral season is not showing any signs of weakening.

Yes, and, of course, the return on capital employed in Mexico continues to improve as we use a greater proportion of the [usual] capacity to satisfy growth in the market.

Great. Thank you very much.

Thank you.

Sir, your next question comes from the line of Gordon Lee, from UBS.

Hi, good morning.

Good morning, Gordon.

Two questions which are, actually, I guess, are follow-ups from previous questions, the first on the U.S. Given the low visibility in terms of the residential segment, etc., should we still be assuming that the price increases announced in January are implemented on time, or are some of the delays that you're seeing in some of these regions pushing back the price increases that you have announced already for 2007?

And just, in Mexico, following up on Jorge's question, the results, the margin contraction from the second and third quarter was relatively significant. It was a bit over 300 basis points. Is that attributable to the issues you just highlighted, or was there a particular issue in the quarter as well? Thank you.

Let me just ask you to repeat the second question, Gordon, because we got some noise and couldn't hear you that well.

I was just a bit surprised by the degree of contraction in the margin, not so much year-on-year, but the quarter-on-quarter. The second quarter you had a margin, I think it was about 39.5% in Mexico, and you were below 36.5% this quarter. So I was wondering if there was any particular event this quarter that depressed margins that, you know, might be normalized in future quarters, or if this level, the 36-ish, is something that we should more or less assume for Mexico going forward, given the issues that you mentioned earlier in terms of transportation cost, etc.

Let me just take the second part of the second question first. The primary explanation for the change in the EBITDA margin on sales, again, is the change in product mix. As you know, ready-mix volumes in Mexico have been growing at greater than 20% rate. This is a less capital-intensive business. Therefore, it has a lower margin on sales. And Multiproductos has also grown, and therefore the margin on sales makes sense that it continues to decline. However, as we explained, the return on capital employed continues to improve, despite the lower margin on sales. So, yes, this is a result of the trend in the change in the product mix.

But, just if I could just follow up on that, but was the change in the product mix that intense from the second to the third quarter? Because it seems that the growth rates year-on-year were generally similar in terms of ready-mix versus cement, second versus third. So I would have assumed that the mix third versus second was pretty similar.

Well, and you have the other part of the answer that Hector gave. You know, we have seen an increase in some of our input costs, energy, transportation. As the market grows and we start up some of the less efficient kilns, the cost of operating these facilities is greater, and therefore the contribution is lower. Nevertheless, the contribution to return on capital employed is there. And so the net effect is a positive effect for us.

But, of course, this is also what has led to the recent announcements that we have made, increased capacity, because we are optimistic about Mexico and the growth rate going forward, and we want to have the install capacity ready when the market needs it. And if we're wrong by a year, we'd rather be wrong because we increased the capacity one year early rather than one year late.

Perfect. Thank you.

In the case of the U.S. price increases, Gordon, the answer of the price question goes through the answer of the demand question, and, well, there's an issue of visibility, as you mentioned, and we have mentioned. So I would say that the answer to the price increases for January next year goes to the same issue. There's very low visibility today, very little we can say about them.

Okay. Thank you very much.

Thank you, Gordon.

Sir, your next question comes from the line of Mike Betts, from JPMorgan.

Yes, hi, good morning. I've got a number of questions, if I could. Just maybe if I could start, Hector, on the UK, because you got cut off when you were talking about that. What's your forecast for volume this year? And then, secondly, on page 11 of the press release, in the domestic volumes, it shows a number of +16% for UK for the first nine months, and I'm struggling to reconcile that with the numbers in the text, which seems to be -7, and then on a cementitious basis, +3. If I could take those first, and I just had a couple on the U.S. afterwards. Thanks.

Okay. Let me just go back to my script. In the case of the UK, what I read is that on a like-to-like basis for the first nine months, we're down 7%. And that is demand volumes.

If I may just answer part of that question, when we look at the numbers on the tables, we're looking at the actual reported numbers. Of course, we're consolidating nine months in 2006, whereas we're consolidating only seven months in 2005.

Okay, point taken. Thank you for that, Rodrigo. And, therefore, what's the forecast for this year, for the full year on cement [inaudible] materials?

The volume for all cementitious materials, it's a 2% decrease for the full year 2006.

Okay.

That's what was lost, perhaps, in my -- due to the breakup we had.

That's, yes, I think it was. That's fine. And then just, if I could, returning to the U.S., how much of the U.S. sales is actually ready-mix concrete? I mean, is it sort of the 40% number, or would that be too high a percentage in broad terms? Of your total U.S. turnover, how much is ready-mix?

I'll tell you in a minute. It's less than 40%, and, if I'm not mistaken, it's -- it's about 40%. Yes.

Thank you.

It's probably a little bit less, and I can confirm that to you, but it's around 40%.

And is that where --

If I may just complement that, when you do it as a percentage of operating cash flow, it's a little bit less than 20%.

Okay.

EBITDA is about 20% from ready-mix in the U.S.

Okay. And then just two very brief final questions, the synergies, that $240 million, is that approximate -- I suppose the question I'm trying to find out is how much more you've got left in Q4. I mean, is it fair to assume just for my purposes that it's roughly 60 in each quarter? Do you still have that kind of magnitude left of additional synergies in Q4? And then, finally, the expansion CapEx, I mean, you're announcing an increasing number of cement plants, or it seems like that. Should we expect a much bigger number for '07 in expansion CapEx of over $500 million?

Well, first, in the case of synergies, Mike, it's becoming increasingly difficult to distinguish what is specifically synergies, although we have a very sophisticated tracking system. But all initiatives, as I mentioned, are already in place. So if -- what we feel is that the [360] running rate, it's already in place, it might be that it's what you say. But it's very difficult to confirm that that is such with any precision.

Okay.

The case of the expansion CapEx, yes, we mentioned some -- we announced some plant expansions, significant ones, as we mentioned, in the case of Mexico and the U.S. and also Latvia. And those, as you know, have a ramp-up [inaudible]. So some of that will be -- some of those investments will pick up in the next -- in the following year. But then this year we are doing some minor investments, quite a few of them that are very profitable, de-bottlenecking and some other expansion projects, that will not be present next year. So I cannot tell you that that is going to be repeated next year or not.

So a fair assumption, we could put 500 in for next year as well. Would that be the guidance?

Well, not because of the fact of the large projects, but it's very difficult to guide for that today.

Okay. Understood. Thank you very much.

Thank you, Mike.

Sir, your next question comes from the line of Gonzalo Fernandez, from Santander.

Hi. Good morning. Just two quick questions. On the free cash flow calculations, you have another [inaudible] of 145 million. I don't know if you can expand on that. And regarding Mexico, given the strong demand for [inaudible], are you planning any price increase probably by the early 2007 that could offset the increase in costs that you have mentioned?

Yes, on the --

Okay.

Should I answer the free cash flow question?

Yes, please, Rodrigo.

On the free cash flow numbers, of course, the most important component is the countervailing antidumping duty [losses] that were returned to CEMEX, which before taxes was about $110 million, if I'm not mistaken. And the balance is, according to our definition of free cash flow as we reported, is the sale of obsolete or non-operating assets. Primarily, in this case, it was land that was not being utilized for any operating purpose that was sold during the quarter.

Okay, now, with the question of prices of ready-mix in Mexico, there is no development on that that we can comment on, so they are what they are today, and we will follow the supply-demand conditions to decide on that when the moment comes.

Okay. Thank you.

Enrique, I think we have time for one more question.

Sure thing, sir. Your next question comes from the line of Daniel Altman, from Bear Stearns.

Hi. It's Daniel, from Bear Stearns. Got in just under the wire. I guess two questions. First, on the U.S., I'm a little confused in terms of how important the residential segment is for the business, because I've always been under the impression it's a relatively small, you know, 25%-ish type of component for cement consumption. And it seems like it's more than offsetting the growth that you're seeing in the other area. So maybe, can you give us kind of a ballpark figure in terms of what residential means to your U.S. business right now? And then the second question is, when we compute our full-year numbers, what type of inflation adjustment or index adjustment should we make to the nine-month results to get to the full year? Thanks.

Well, on the first question, what we see as a full global CEMEX impact of the residential sector is about 10% for cement consumption on our global business. Now, the truth is that we are exposed in the U.S. to geographies that are growing, that have grown in the past and will grow long term, both residential and infrastructure sectors. So we are strategically positioned, in fact, regarding this particular sector in the U.S. But that's as much as I could tell you about that. I don't know if you want to add something on that, Rodrigo.

Well, maybe on the second question, on the inflation assumptions, your question is actually a lot more complicated than it seems, because if you're trying to calculate for Mexican accounting standards that impact, you not only have to consider the average inflation rates in each one of the countries in which we participate, but also the actual exchange rates.

And, of course, we never even attempt to forecast, you know, these adjustments, which are, of course, non-cash, forward, not even during the quarter, which is very difficult to do. We do try to align our financial strategy to the business model so that, in the aggregate, we can deliver the best performance in both free cash flow and cash earnings. But the non-cash items, you know, we have to report according to the Mexican inflationary accounting standards.

Okay, so, just to follow up on both questions, Hector, is the answer that you don't want to disclose how much of the U.S. business is residential? And then on the second question, Rodrigo, is that baked into your estimates, your annual estimates for the year, is there an implied assumption for that inflation adjustment?

Well, on the first question, I think what Hector said was the U.S. residential business has about a 10% contribution to our global EBITDA. And that means it contributes about a third of our EBITDA in the U.S. And this is, you know, this is across all the value chain. It's not just cement. It's cement, ready-mix, blocks and everything else that goes with it. That is more or less [the way]. I'm sorry, the second question on inflation that you wanted to follow up on was what again?

Yes, I don't mean to be too pedantic here. I'm just wondering when, in your guidance, you must have an implied assumption for how much you're grossing up the first nine months to get to your annual number. Is it a 3% number or something like that?

No, we never attempt to do that, and that is why, when we talk about guidance during the year, we always talk about under the current exchange rate environment. We never attempt to forecast exchange rates. We never attempt to forecast inflation rates. We always try to give guidance in accordance with what we know today rather than try to make assumptions going forward on non-cash items.

Okay. Thanks very much.

Thank you, Dan.

Ladies and gentlemen, this ends our Q&A session. I would like to turn the call back to Hector Medina for closing remarks.

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