Cemex SAB de CV (CX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 CEMEX Earnings Conference Call. My name is Alicia, and I will be your coordinator for today.

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

I would now like to introduce your host for today's call, Mr. Hector Medina, Executive Vice President of Planning and Finance. Mr. Medina, you may proceed.

Thank you. Good morning and thank you for joining us for our fourth quarter conference call. I will briefly review our year-end results, and will share with you our outlook for 2007. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

The announcement of our 2006 fourth quarter results marks a significant period for our Company, in which our performance was supported by international expansion and our global diversification strategy.

During 2007, an outstanding year for CEMEX, we achieved three very important milestones. First, we celebrated our 100th anniversary. Last year we honored a century of growth, and commemorated the accomplishments of many thousand employees, who have produced a track record that is unrivaled in our industry.

We celebrated with our shared commitment to excellence, and to continuous improvement. We remember our history, even as we prepared ourselves for an even more challenging future.

Second, we posted our strongest financial results ever. We achieved record EBITDA and free cash flow after maintenance capital expenditures. For the year as a whole EBITDA grew 16% to slightly more than $4.1b. Net sales increased at the rate of 19%, reaching $18.2b. Our free cash flow after maintenance capital expenditures grew at a rate of 22% reaching $2.7b.

This achievement comes primarily from the consolidation of the RMC operations and the related synergies, as well as from higher domestic volumes and favorable supply demand dynamics in most of the markets in our portfolio.

We think it is important to note that in 2006 our U.S. and Mexican operations demonstrated a counter-cyclical effect in cement consumption. Cement volumes in Mexico showed a positive trend in increased construction activity, while the residential sector in the United States experienced a downward trend. This is an example of how our geographical diversification has effectively stabilized our consolidated operations, and kept us on target to meet our EBITDA and free cash flow targets for the year.

Our third major milestone of the year was the full integration of the RMC Group, and the realization of the resulting synergies. During 2006 we reached our target return on capital employed, in the RMC acquisition, of greater than 10% a year earlier than originally expected.

Also during the year, we captured $240m in incremental synergies from the integration of RMC. By December we reached a run rate level of integration synergies of [$360m], also one year earlier than we had originally expected. As a result we expect to achieve net incremental synergies of $60m in 2007.

This has been not only the largest, but also our most complex acquisition to date, involving people from all of our operations in a multi-country, multi-disciplinary effort. Even though the RMC integration process is now complete, our effort to continuously improve our operations is an ongoing process.

We approach 2007 with cautious optimism. We expect to grow EBITDA to higher domestic volumes and positive supply demand dynamics in most of our markets. In addition, we expect to capture the incremental $60m of synergies realized from the RMC acquisition throughout 2007.

While we see underlying strength in most of our markets, we also recognize the continued uncertainty in the United States. Accordingly, we expect to deliver EBITDA of about $4.3b for 2007. The strength of our asset portfolio, business model and earnings quality lead us to expect our free cash flow after maintenance capital expenditures to remain stable versus last year, and to continue exceeding 60% of EBITDA in 2007.

Before I discuss our operational results, I would like to address the status of the Offer we made last October to acquire Rinker Group, which our shareholders approved on December 7.

We have extended the deadline for the Offer to March 30, as we await the necessary approvals from the Australia and the U.S. Governments. On the Australian side, we have received approval from the Anti-trust authorities, and are awaiting the response from the Foreign Investment Review Board, which we expect to receive by March 6, at the latest.

On the U.S. side, we received a request from the Department of Justice for additional information, a second request, which is currently in progress. As of today, we have no indication as to when this process will be completed.

We will continue to be one of the consolidators of the cement industry worldwide. We will also maintain our financial discipline, while seeking acquisition opportunities that meet our strict criteria, including Rinker and/or others across the cement value chain. We will continue to grow profitably.

Now, I would like to discuss the fourth quarter performance of our principal markets and our outlook for these markets for 2007.

In Mexico, Cement volumes increased 6% during the fourth quarter, as the favorable market conditions that we saw in the first nine months of the year, continued into the fourth quarter. We ended the year with 8% volume growth.

Ready-mix volumes grew by 19% during the quarter and 21% for the full year 2006. Our results reflect the continued strength in this restructure and formal construction sectors.

We see two factors driving Cement volume during 2007. The first is government spending on the streets and highways, public buildings and other infrastructure projects. Total federal spending on public works is expected to reach $5b during 2007. Growth in this sector is supported by strong government finances and continued fiscal discipline. The private sector is also expected to increase its contribution to the financing of public infrastructure projects.

As a result, cement consumption from the government and other Ready-mix intensive projects, will likely bring an increase in our Ready-mix volumes of about 16% for the year.

The second factor is growth in the home building sector due to an accelerated increase in mortgages. The number of mortgages sponsored by Infonavit, Commercial Bank, Sofoles and other institutions continues to grow.

In fact, President Calderon has committed to grant a record 6m mortgages for home construction and remodeling during his six-year presidential term. Approximately 760,000 mortgages were granted in 2006, and we expect that number could reach 840,000 in 2007. During 2006, Infonavit granted approximately 422,000 mortgages, and that number will likely reach about 500,000 in 2007.

The growing number of mortgages granted by commercial banks and Sofoles is increasingly contributing to the sector's growth. During 2006 the number of those mortgages grew at a faster than expected pace, and reached 122,000. We see that number rising by about 15% to 140,000 during 2007.

While this number may seem small, relative to the number of mortgages as sponsored by Infonavit and other institutions, please consider that commercial banks and Sofoles together fund more than 40% of the total value of all mortgages in Mexico. These mortgages have lower loan-to-value ratios than those issued by Infonavit and other institutions, and average approximately four times the size of the average Infonavit mortgage.

In addition, the houses are larger than average and have a higher cement intensity than Infonavit sponsored units. The total value of expected new mortgages for Sofoles and commercial banks in 2007 is still very small in comparison with total bank assets.

Home equity in Mexico represents about $750b, roughly the same as 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, and this demand will translate into higher cement consumption.

Growth in cement consumption from the self-construction sector was below the overall growth rate, despite a stable employment and an increase in disposable income. The main reason for this lag is that, notwithstanding the rate of availability of housing credit, the formal sector now satisfies a portion of the housing demand previously satisfied by the self-construction sector.

Remittances from the United States to Mexico which, in 2006 increased 20%, and reached a record $24b, are expected to increase by about 4% to reach $25b in 2007. These remittances, together with estimated flows of foreign direct investment of [$60m] for 2007, are strengthening the country's external accounts.

Increased economic activity is also contributing to the improvement in government finances, and allowing Mexico to maintain its balanced budget. In addition, the quick approval of the Government's 2007 budget is a good indicator of better relations between the President and Congress.

In fact, this is the first time in recent history that a presidential term begins with favorable expectations for its first year. We anticipate GDP growth in Mexico of about 3.2% in 2007.

We continue with our expansion projects in Yaqui and [Topeka], which we announced last year. These investments, which will extend into 2008 and 2009 respectively, reflect our confidence in the strength of the Mexican economy, and in the continued high growth of the county's housing and infrastructure markets. We are optimistic about the strength of cement demand in Mexico and we see Cement volumes in Mexico rising in excess of 4% in 2007.

In the United States, our Cement volumes decreased by 11% during the fourth quarter, while on a like-to-like basis, Ready-mix volumes decreased by 25% and Aggregates fell by 21%. This decline in sales volumes was driven by the downturn in the residential sector which accelerated throughout the year, and resulted in a very weak demand in the fourth quarter compared to the big demand levels of the prior year.

For the full year 2006, on a like-to-like basis for the ongoing operations, Cement volumes decreased by 1%, Ready-mix volumes fell by 17% and Aggregates volumes declined by 15%.

Ready-mix volume is decreasing at a faster pace than Cement volumes for two primary reasons. First, our Ready-mix operations have a different market segment mix. A higher proportion of Ready-mix sales come from the weakening residential market.

Second, our Ready-mix operations have different geographical footprint than our Cement operations. A higher proportion of Ready-mix sales come from previously high growth residential markets and those markets, primarily in Florida and Northern California, are currently experiencing a deeper correction.

Demand in the residential sector declined at a faster pace during the second half of 2006 than generally expected. For 2007, the infrastructure and industrial and commercial sectors will continue to be the main drivers of cement consumption. And demand in these sectors will continue to partially compensate for weakened demand in the residential sector.

Before proceeding with the expectations for 2007 in our United States operations, I would like to point out that there is continued uncertainty around the depth and duration of the ongoing correction in the residential sector. As such, our guidance is particularly sensitive to changes in the outlook for this sector.

Public sector construction spending put in place, was up 10% for the first 11 months of 2006, with the spending for streets and highways up 16%. Driving this sector in 2007 is the $287m six-year surface transportation program, known as [Safety Loop], together with the improving economic environment and fiscal conditions of The States. Consequently, we see volumes in the public works and streets and highway sectors, increasing by about 4 to 5% during the year.

The industrial and commercial sector continues its growth trend. Construction spending grew 17% in this sector during the first 11 month of the year. We expect Cement volume in this segment to grow by 5 to 6% for 2007.

In the residential sector construction spending was down 1% for the first 11 months of 2006.

Housing starts, the fundamental driver of cement demand in this sector, decreased [30%] in 2006, going from a year-over-year increase of 4% in the first quarter to declines of 9% in second quarter, 19% in the third quarter and 25% in the fourth quarter.

According to recent reports, current months of supply of new homes are about six and half months compared to a historical norm of about four months under healthy conditions.

Inventories are even higher in previously high-growth markets such as Florida. These numbers could be understated as a result of increased contract cancellations.

Given these factors, we estimate [excess] new home inventories to be around 300,000 to 350,000. We expect Cement volume in this sector to decline by about 10 to 13% during 2007, depending on builders' aggressiveness in working off excess inventories, and changes to other factors that drive new homes sales, such as affordability, which depends on home prices and interest rates, job creation and demographic trends.

We expect infrastructure and industrial and commercial sectors to continue growing at a healthy pace. This growth will partially offset the weak residential sector. Considering all these factors we see our Cement volumes in the United States for 2007 ranging from stable to a decline of about 2%.

We expect our Ready-mix volumes to decline by about 4 to 6%, because of our Ready-mix operations' higher exposure to the residential markets.

In Spain, Cement volumes increased by 9% during the fourth quarter. For the full year 2006, Cement volumes increased by 10%. Performance for the year exceeded our initial expectations. All segments of demand remain strong throughout the year, driven by a robust construction sector. For 2007 we expect GDP will moderate this growth and come in at about 3%.

Last year, the residential sector had the strongest year ever, with the number of housing starts in excess of 850,000. Housing starts reached very high levels during the summer in anticipation of the changes in the residential building vote that took effect in October.

Accordingly, we expect housing starts to moderate in 2007, and to cause a deceleration in this sector, especially in the second half of the year. Housing starts are expected to remain at high levels, however, underpinning robust cement consumption.

Performance in the public works sector is expected to be positive in 2007. Most of the growth in this sector last year came from local municipalities in anticipation of the local elections to be held in May.

This year new projects currently being initiated, under the Government's new infrastructure plan will more than compensate for the expected decline in activity in local municipal. The infrastructure plan is expected to run through to 2020, and has an estimated total budget of $300b.

The industrial and commercial sector should grow at a moderate rate during 2007. In light of the above, and given the very high cement consumption level last year, we estimate Cement volume growth of about 3% for the year.

In the United Kingdom Cement volumes increased 5% during the fourth quarter and, on a like-to-like basis for the full year 2006, fell 4%. During 2006 we increased the sale of slag to our Ready-mix operations. Volumes of cementitious materials, including cement and slag rose 6% during the fourth quarter, and decreased 1% during the full year 2006.

Ready-mix volumes decreased 3% and aggregate volumes increased 4% during the quarter. For the full year 2006, on a like-to-like basis, Ready-mix volumes were down 1% and aggregate volumes increased 3%.

During 2006, cement demand was driven mainly by healthy performance from the industrial, commercial and public housing sectors. These sectors, together with the improved performance in the infrastructure sector, will drive cement consumption during 2006, while private new housing work and the repair maintenance and improvement sector will remain subdued during the year.

For 2007 we expect Cement volumes in the United Kingdom to perform in line with national consumption, which we expect will increase in excess of 1%.

In France, our Ready-mix operations increased 9% during the four quarter, and 5% during the full year 2006. Good weather conditions during the quarter boosted our Ready-mix sales during November and December. The residential sector was the main driver of demand during 2006.

Social programs in place for new home acquisitions, and easier access to mortgages and lower rates, led the number of housing starts to reach 430,000 during the year.

For 2007, a continued residential deficit of more than 400,000 new homes, together with expected growth in the infrastructure and non-residential sectors, will continue to drive Ready-mix consumption. We see our Ready-mix volumes rising by about 3% during the year.

In Germany, our domestic Cement volumes increased by 15% during the fourth quarter. The main driver of demand during 2006 was the residential sector. The number of residential permits grew by [50%] in 2006 and began to slow down after May. This is mainly because the home owner subsidiary, of which many people have taken advantage, was cancelled in 2005 and people sought to avoid the 3% value added tax increase, which took effect this year.

The non-residential sector grew by about 6% during the year. The favorable business climate prevailing in the country has caused an upswing in building permits for non-residential construction.

The civil engineering sector also experienced growth during the year, benefiting from higher corporate tax and toll road revenues, as well ERU4.3b Europe Traffic Infrastructure Program, which will run from 2006 to 2009.

For 2007, we expect a decline in the residential sector from its robust growth last year. Despite this, we expect our domestic Cement volumes in Germany to remain stable during the year.

In Eastern Europe, namely Poland, Croatia, The Czech Republic, Hungary and Latvia, we expect the weighted average GDP growth rate to range from 4.5 to 5%. Cement consumption is expected to continue improving in the region as the convergence of these countries with the European Union accelerates. In general, the prospects for this region remain very attractive.

In Venezuela our Cement volume growth of 30% during 2006 was higher than expected at the beginning of the year. The infrastructure and housing sectors continue to be the main drivers of cement demand. For 2007 we expect cement consumption to continue its growth trend, albeit at a slower pace than last year. Cement volume should grow by about 10%, fueled by infrastructure, low income housing and higher credit availability.

In Columbia we saw Cement volume growth in our operations of 40% during the quarter, and 8% during the full year 2006. The three main drivers of cement demand during the year were infrastructure spending, middle income housing and non-residential constructions, such as warehouses and shopping centers, which has increased in anticipation of a potential free trade agreement with the United States.

For 2007, we expect infrastructure spending to continue on projects such as secondary roads and airports, among others. We see a slowdown in the residential sector, however, resulting from an increase in interest rates and higher home supply.

The non-residential sector is expected to continue its strong performance, and the self-construction sector will show moderate growth during the year. Overall, we expect a mid-single digit increase in domestic Cement volumes for 2007.

In Egypt domestic Cement volumes increased by 3% during 2006. Public spending on construction is very low, and there are no new projects. The private sector, which is the main driver of cement demand, will continue to drive cement consumption into this year. Accordingly, we expect Cement volumes to go up by 4%.

As usual, and before I turn the call over to Rodrigo, I would like to reiterate an important commitment to our shareholders, which is to ensure that in the short, medium and long term, our capital allocation strategy remains on course to sustain a 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 Aggregates, 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 [search] 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 the [positions] for investments that meet our strict criteria, we will continue to use our free cash flow to strengthen our capital structure. We have the people, the culture and the opportunities to continue on our path of disciplined, profitable growth.

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

Thank you Hector. Good morning everyone, and thank you for joining us today.

We are pleased with our full year performance, which exceeded the expectations we had a year ago to demonstrate that we can continue on our path of sustainable, profitable growth, while maintaining a strong and stable capital structure.

Our performance during 2006 was supported by higher volumes, and [inaudible] healthy supply demand dynamics in most of our markets. These factors were sufficient to offset higher transportation and energy costs.

As Hector mentioned, the better than expected performance from Mexico and Spain, more than compensated for the weaker than expected contribution from the United States.

On the full year 2006, reported sales increased 19% versus a 16% increase in operating cash flow. Sales grew at a faster pace than EBITDA, because we did not consolidate the first two months of the RMC Group during 2005. These two months, which are seasonally low, have significantly lower than average EBITDA margins. On a like-to-like basis for our current operations, however, sales increased 13% while EBITDA increased 16%.

Our free cash flow after maintenance capital expenditures reached $2.7b. Both EBITDA and free cash flow results were in line or above our stated targets for the year.

Our consolidated EBITDA margin for the fourth quarter was 20.9%, down from 22.7% a year ago. This decrease resulted from higher energy and transportation costs, which were partially offset by productivity gains throughout CEMEX. The margin was also affected by the continued change in our product mix into the less capital intensive businesses and as the result of one-time adjustments made in the fourth quarter of 2005, but not during 2006.

Three factors affected the year-over-year comparisons in our report operating results, on a per country basis. First, as a result of our standardization effort in the operations that were formerly part of RMC, we reclassified some expenses from SG&A to cost of sales during the quarter and for the full year. This reclassification has an effect on gross profit only. It has no effect on operating income or EBITDA.

Second, as we announced in January 2006, we had an extraordinary depreciation and amortization expense during the fourth quarter 2005, due mainly to the one-time adjustment resulting from the incremental value of property, plant and equipment resulting from the fair-value allocation of the purchase price paid for RMC.

Because of this adjustment during the fourth quarter of 2005, the normalized depreciation and amortization expense this year was higher for the first three quarters but lower for the fourth quarter of 2006, when compared with the same periods in 2005. The full year comparisons, however, are unaffected. Again, this has an effect on gross and 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 the adoption of our centralized management style throughout the European region.

On a like-to-like basis, and adjusting for these expenses, EBITDA for the United Kingdom increased 65% in the fourth quarter and 41% during the full year 2006 versus the comparable periods in 2005.

The positive variation in our working capital during the quarter was a result from, first, higher collections in our accounts receivables due to seasonality and lower Ready-mix sales during December in our U.S. operations.

Second, higher suppliers' accounts payable, which arise from our increased maintenance and expansion capital expenditures during the month of December.

And finally, lower inventories resulting from milder weather conditions in most of our European operations.

Moving onto our input costs, the net increase in our energy expenses, including kiln, fuel and electricity during 2006, was 11.5% and was in line with our expectation at the beginning of the year.

For 2007 we expect the net increase of these energy costs to be about 10% per metric ton of cement produced.

Transportation fuels in our operations are more highly correlated with oil prices than our kiln, fuel and electricity. Under the current macroeconomic outlook we expect transportation unit costs to be flat versus 2006.

During 2006, our majority net income increased by 13% to $2.4b, due to our strong operating performance and despite the fact that we had higher extraordinary gains during 2005 than during 2006.

For the quarter, majority net income increased 55% due to our stronger operating performance, lower depreciation and amortization expense, higher foreign exchange and financial instrument gains, resulting mainly from the appreciation of the Mexican peso and the weaker Japanese yen, and also as a result of lower non-operating expenses.

Looking at our capital structure, our interest coverage for 2006 improved to 8.4 times and our leverage ratio, as measured by net debt to trailing 12 months pro forma EBITDA, decreased from 2.4 times in 2005 to 1.4 times in 2006.

These improvements in our capital structure resulted from our stronger operating performance, our preferred use of free cash flow to reduce debt and the issuance of $1.25b of Perpetual Notes which, under Mexican generally accepted accounting principals, are accounted for as equity.

At the beginning of 2006 we committed to use most of our free cash flow to reduce debt, and we did. During the quarter we issued two tranches of Callable Perpetual [dual] currency Notes. We have hedged the exposure on these notes for the first two years. The expected cost in U.S. dollar terms will be less than 3% for the first year, and close to 4% for the second.

Also during the quarter we completed two five-year issuance of Notes under our Certificados Bursatiles Program; the first for MXN1.5b and the second for MXN2.95b. The peso Notes issued were swapped to U.S. dollars at a weighted average cost of close to LIBOR.

In completing the acquisition of RMC on March 1, 2005 we have reduced our net debt by $4.6b. That is more than three quarters of the enterprise value of that acquisition.

During the quarter we used our free cash flow of $161m, together with the proceeds from the Perpetual Notes, and $165m from the sale of CEMEX shares previously held in subsidiaries, to reduce debt by $1.45b. The actual net debt reduction was lower as a result of the conversion effects, given the euro appreciation.

The balance of the free cash flow we used primarily for other investments.

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. Towards this end, we invested $746m during 2006 in expansion capital expenditures. These projects will continue into 2007.

For this year, we expect to invest over $1b through increased capacity. We continue to extract maximum value from the RMC acquisition. In fact, we have exceeded our targeted return on capital employed of 10%.

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'll be happy to take your questions. Alicia.

Operator, if there are some questions from participants, we're ready to take their questions now.

[OPERATOR INSTRUCTIONS]. At this time, the first question comes from the line of Dan McGoey with Deutsche Bank. Please proceed.

Morning, gentlemen. My question is regarding pricing environments, both in the U.S. and Mexico. If you could talk a little bit about, I guess, starting off with the U.S., as we've seen volumes continue to slump. According to your results in your press release there was no change on a quarter-on-quarter basis in Cement pricing. Can you talk a little bit about if the volume declines or just being displaced by reduced imports?

And then secondly, in Mexico, if you can give an outlook for any price increases this year.

Okay. Regarding the U.S. pricing situation, as I mentioned, both volumes and the build up of inventory meant that we got a very, very low traction with the price increase that was announced for July. And, yes, it helped [output] partially in the South Eastern market. So that's where it is today in the U.S.

Okay. And then for the, what had been, I guess, the previously announced January increases, is that -- do you say that those are unlikely to be put through?

Well, today it's very difficult to say anything about that given the situation of the July increase, as you can imagine.

Okay.

Now, for the Mexican case, we announced an increase of 5% just recently, so it's very difficult to say today what part of that is going to hold. But the environment is very positive, as you have seen, in terms of our statements of last year, volume increases and what we expect for this year. But that is as much as I could say about Mexico in terms of pricing today.

Okay. Thanks. And one additional question, if you can. I think, Rodrigo, you mentioned $1b in expansion CapEx. Can you give a breakdown of where that's destined?

We can send you a list of the previously announced major expansion capital expenditure projects, but we are increasing capacity in Texas in the U.S., in Mexico in several places. We are increasing grinding capacity in Spain and the Middle East. There are a number of projects across our operations. And, of course, Ready-mix has been growing in many parts of the world at a very high pace and so we need to increase capacity to maintain our position in the market. And we can give you a breakdown of the major projects.

Okay. Thanks.

Thank you, Dan.

The next question comes from the line of Mike Betts with JPMorgan. Please proceed.

Yes, good morning. I had three questions, if I could. Firstly, maybe you could explain a little bit more about the margin trend in Spain in the fourth quarter where, I think, the EBITDA margin declined fairly considerably from a year ago.

Secondly, could you just say, Hector, on the guidance, what peso/dollar year-end exchange rate you've assumed with that guidance?

And then, thirdly, I guess for Rodrigo, the tax rate went up quite significantly in the fourth quarter. Is there anything I should read into that and, at this stage, could you give us any indication of what you might expect for a tax rate in '07? Thank you.

Okay. Let me take up the question about Spain first. Definitely, energy prices both coke and fuel and electricity increased significantly above inflation rates. Volume increases and price increases were also offsetting this, but there was an increase in imports, which have a very low margin and that affected the margin for the quarter in Spain.

And as for the peso exchange rate, for the guidance, I think we were at, Rodrigo?

Well, we don't make any major assumptions on exchange rates when providing guidance so we're assuming that, more or less, exchange rates remain stable.

What the moment of the guidance in fact.

Right.

[I don't remember what it was.]

Okay. No. That's fine. And the tax rate?

Yes. The tax rate is -- I think if you look at the cash tax -- taxes paid during the year there has not been a significant increase. The accounting taxes, that are both there as a result from the accounting formula that we need to use, so there may be an increase in the deferred tax account. But that does not necessarily coincide with tax cashes paid. And yet there are some changes in when taxes get paid from one year to another. So, whereas, you may see it in the first quarter in one year, you may see it in the fourth quarter in another year.

Okay. And then just to follow up on Spain, Hector, if you're forecasting, I think you said a 3% volume growth in '07 in Spain, will most of that have to be supplied by import?

We will, of course, try to de-bottleneck as much as we can our current operations, make them more efficient if we can, to obtain as much as we can from our local operations, otherwise, we will have to import either clinker or cement.

Okay. Thank you very much.

You're welcome.

The next question comes from the line of Daniel Altman with Bear, Stearns. Please proceed.

Hi. Thanks very much.

Hi, Dan.

The first question is on Rinker. In the past the CEMEX acquisitions have always been friendly. I'm wondering if you're willing to go hostile with Rinker if that's -- if you find that you can't get support from management. If that's an option the Company's considering or would you prefer, and are you willing, to take steps in order to make it into a friendly?

The second question is regarding your guidance for '07. I just wanted to make sure I understood. It sounds like you have EBITDA up and then you have, I thought I understood, free cash flow stable. And, if that's the case, is that higher maintenance CapEx? Is that the difference between the two pieces of guidance? Thanks.

Well, in the case of Rinker, let me just state the facts. We launched an unsolicited bid for Rinker shares, [90%] of Rinker shares. And the way that stands now, we believe our Offer is full and fair. And, as I mentioned in the remarks, we are expecting authorization from the relevant authorities in Australia and the U.S. Before we get that, there's nothing else we can really say about our -- nothing else we can say about our bid.

Now, for the '07 guidance, yes, we stated that we have a slight organic growth in terms of EBITDA and then free cash flow stable. Would you care to add anything, Rodrigo?

Yes. Well, we are making an allowance for higher cash taxes. It is always difficult to forecast cash taxes to be paid and, at this point, there is uncertainty so we are making an allowance for that. This year was also -- 2006 was also a year in which working capital investments were also relatively low, especially during the fourth quarter, as you can see. And, of course, it's difficult to forecast what the fourth quarter of 2007 will look like and we're making a more cautious assumption in working capital investments, or cash flow generation from working capital for the fourth quarter of 2007.

And so we feel confident that we can continue to generate in excess of 60% of free cash flow after maintenance CapEx for every dollar of EBITDA, which is what we have achieved consistently now for the past six years. And that will take us to somewhere in the range of $2.7b, which would be flat to 2006.

Okay. Just a follow up, and then one last question again on Rinker. So is that to say that, assuming you get regulatory approval, are you willing to go -- would you consider going forward without approval from Rinker management? In other words, continue it as a unsolicited or hostile Offer?

And then the second question is just related to the Callable Perpetual Notes. Do you think, to be conservative, we should include that as debt as opposed to equity? Putting aside the accounting treatment, how would you view that?

Let me take the Rinker question again. The decisions that we have to make regarding this bid will come when they have to come. As I mentioned, as of today, we are awaiting for these approvals. When they come then is when we have to make a decision and we will make it when the time comes. As for the Callable --

Yes, on the Callable Perpetual Notes that we have issued, if you recall, Dan, when a number of years ago we had capital securities as part of our capital structure, issued out of our subsidiary in The Netherlands, we used to include those as part of our net debt obligations and we also used to include the payment under those Notes as part of our interest coverage calculations.

And the reason we used to treat is as such was because we had a put obligation at the holding level to purchase these Notes at a forward date and we could not defer the payment of the coupons. On the Notes that we have just recently issued, however, we have no such obligation. We do have a true perpetuity option, and we also have an option to defer the coupons. And so, as such, we do not pre-empt as part of net debt, and we do not treat the [pre-payment] of the coupons as part of interest expense because there is no obligation to purchase these Notes and we do have an option to defer the coupons.

Let me just follow up a little bit on the Rinker question, Dan. And, in fact, just to repeat my remarks initially that, in any event, we will follow our strict investment criteria with Rinker and with any other investment [we make].

Okay. Thanks very much.

Thank you.

The next question comes from the line of Gonzalo Fernandez with Santander. Please proceed.

Hi. Good morning, everyone. One question. You mentioned that, in 2006, higher energy prices put some pressure in margins. If the current downward trend in energy prices continues, would you expect a significant impact on the margins in 2007, and some improvement in margins in addition to the synergies are already considered in your estimate?

Well, the portion of our energy input costs that are more highly correlated to the price of oil is really the transportation cost, the fuel required for transportation. And for that we are assuming, actually, a flat transportation unit cost for 2007 versus 2006. So that would assume that there is a rebound on oil prices later in the year but, nevertheless, maintaining a flat year-over-year comparison on transportation costs at least at the unit cost level.

On fuel and electricity at the kilns, however, we do see a continued trend towards higher input costs and we're assuming a 10% in these input costs. As you know, we have provided guidance in the previous several years and we have been right on track in the actual performance.

And, of course, there are many things that affect us, in both kiln fuel and electricity, at the production level, and we do what we can to try and offset the higher input costs by switching to alternative fuels and by becoming more and more efficient at the plant level. All of that has been put in the mix and is what leads us to believe that we should see about a dollar, or slightly more than a dollar per ton of cement produced increase in the input costs.

[Hope that's --]

Okay. Thank you, Rodrigo.

Thank you, Gonzalo.

The next question comes from the line of Dan Kwiatkowski with Schroders. Please proceed.

Hi. I've got two questions. The first question is, can you tell us what percentage of your volumes in Spain are imported and at what stage, if any, it would make sense to build a new plant there?

And the second question is, can you comment on the margins in Africa and the Middle East, I suppose that's Egypt? And what happened in the quarter because, again, you had a fairly serious drop off in margins there? Thank you.

Okay. For the case of Spain, we are importing around 15% of our needs. Of course, we're as I mentioned already, doing our best to de-bottleneck our plants and increase our local production. We are also investing in a branding station and, of course, improving our efficiencies and improving our costs in Spain. So there will be a point that expected but, as we mentioned, we are looking at a slowdown in growth, in terms of growth in Spain, and we are waiting to see what happens.

In the case of Egypt, which is essentially Africa, our operations in Africa and the Middle East, there was a significant increase in the price of fuel. The Mazout, which is the fuel that we use in our plant in Assiut, increased in price by 67% so that affected the margins significantly. That is the main factor that reduced our margins.

Great, and just one follow-up question on the U.S. Can you comment on what you're seeing at import terminals in the U.S., if you're seeing any sort of build-up there? What you expect from the import market in the U.S.

Not really. I think we are -- we see a situation in the U.S., as we mentioned, where volumes are declining in terms of Cement so there is -- we see there is no major action in terms of additional [alternative] new input capacity in the U.S.

For the U.S., in 2007, should we be considering similar margins or even improving margins as you're -- as you use the mix of imports is less? Because your domestic capacity should remain the same at 100% and, if you're using less imports, then the margin should actually rise. Is that a fair assumption?

Well, you remember that our operations in the U.S. include now a significant Ready-mix volumes and also Aggregate volumes which have different margins, so our full consolidated U.S. margin will be affected also by whatever situations we experience in terms of volumes and prices in these other businesses.

But those businesses have a lower margin anyway so that should -- if Ready-mix falls faster than Cement then, therefore, you should have margin improvement there just from mix.

That is a possibility, certainly.

But on a mix-neutral basis, considering you're probably going to have a lower mix of imports in the U.S., should your margins rise on a neutral basis?

Inputs also depend on where the market is and whatever happens to the regional market has also an influence. So the fact that there is less volumes in the U.S. does not necessarily follow there is less [imports]. It depends on where the market is.

All in all the -- also, if I may add, Hector, in the U.S. we do have good visibility on the input costs, it's part of the equation but, frankly, we don't as good a visibility on the price side of the equation. And, of course, margins will be -- will vary significantly depending on what the actual prices turn out to be.

As Hector mentioned, given the inventory levels and the lower activity in the second half of last year, we did see a lot less traction in some parts of the U.S. with the price increases that had been announced. And so what will happen this year will greatly depend on that supply/demand balance and what the actual market conditions are, that allow us to either pass on or not the higher input costs.

Okay, thanks very much.

Thank you.

The next question comes from the line of [Vanessa Crioga] with Credit Suisse. Please proceed.

Yes, hello. Good morning. My question is regarding the exports from Mexico to the U.S. I'm wondering if you have been able to increase them given the situation of Cement demands in the U.S..

And, also, I would like to ask you on the breakdown of CapEx between maintenance and expansion for 2007 and ask you if you have revenue guidance for '07?

Okay. Our exports relating to the U.S. have been essentially flat and we don't expect them to change that much. Mexico has an assigned quota of 2m tons to export to the U.S. from April '07 to April '08. That was a quota set by the agreement between Mexico and the U.S. regarding cement exports. The Mexican exporter has to pay $3 tax each ton of import -- of export to the U.S. and that's the way it stands today.

Regarding the second question --

Yes. Regards the capital expenditure program for 2007, I guess, in the total capital expenditure program that we have for the full year, a little under 40% of that would be maintenance CapEx and then the balance would be expansion CapEx. So, for this year, expansion CapEx will be greater than maintenance CapEx, whereas, in previous years it's always been the other way round.

And there was a question about revenue guidance for '07. There's no revenue guidance that we give for '07 today.

No.

Okay. Thank you.

You're welcome.

At this time, we currently have time for one more question. That question comes from the line of Arnaud Pinatel with BNP Paribas. Please proceed.

Yes. Good morning, gentlemen. It's Arnaud Pinatel from Exane BNP Paribas. Firstly, I would like to wish a Happy Anniversary to CEMEX because, as you said, it's 100 years that you are existing.

Thank you, Arnaud.

But I had several questions. A lot of my questions have been already answered but just a few details, if you don't mind. When you talk about the 5% price increase in Mexico you are talking about local currency or U.S. dollar? Local currency?

Local currency.

And it's also the increase for the weighted average that [more] of our products throughout the year versus last year.

Okay, very clear. Looking at the German pricing outlook for 2007, could you give us a little bit of flavor because we hear that some price increase have been announced quite significant. Have you followed this price increase?

No. We have no other comment on the situation in Germany, Arnaud.

You can't give -- not share with us any outlook for the pricing in Germany for 2007?

Not really. We're really waiting on the markets who are deciding what to do.

Okay. And can you -- and for Spain, I would ask the same question but you will tell me also that it's too early to answer for the Spanish pricing outlook for 2007?

Yes. And, though as we mentioned, we are looking at the Spanish market. It's been very positive. It has been beyond our expectations but we now expect the growth to slow down a little bit. It's still growing but not as fast as it has been in the last few years. So that will affect, in fact, the decisions in terms of pricing but we will have to wait and see.

Okay. And my last question will be on freight rates. We have seen very high freight rates all over for 2006. Do you have any outlook for them in 2007 in your -- as you are one of the main trader of cement in the world you probably have a -- your own scenario. Could you share it with us?

Well, if you refer to shipping rates?

Yes.

So I gather. It's still very high and the best we can say today is it's probably going to remain that high as long as demand from China keeps very high -- being very high.

So you are, for the time being, confident that we will keep this high freight rates for 2007?

Yes. That's our expectation anyway.

Okay. And, sorry, if I may, a last question. In the U.S. you are more exposed to Concrete than Cement and your position in Aggregates are relatively low in comparison to your Concrete exposure. You were highlighting on [inaudible] that geographical mix is different between your Concrete position and your Cement position.

We can see that aggregates producer are pushing prices and the concrete producer been struggling to pass price increase because of the higher exposure to the residential construction. Looking at your mix of products in the U.S., and without talking about the Rinker, because it's not finalized for the time being, could you just tell us what you plan to recover of the Aggregates price increase in your Concrete division, in 2007, obviously?

Do you care to answer that, Rodrigo?

Well, no. That's exactly what we have said. That's where we have the least visibility.

Okay.

And we announced, as you know, the second half of 2006, the contraction, the correction, was a lot deeper than had been anticipated but, particularly, on the residential sector. And that affects the products that are exposed to that such as ready-mix and block.

And, frankly, we don't have a very good feel for the depth and the length of the correction. We will see high inventory levels in many parts of the U.S., at the residential level, and until those inventory levels come down it is difficult to forecast that we will return to the normal growth rates.

For the time being, as the correction takes place and the inventory levels come down, we do expect to continue to see pressure on the volume side on our year-over-year comparison. And, of course, all this puts pressure on prices, as you would expect. Supply and demand comes into force and that's where we have the least visibility. That's where we have caution on our guidance for the full-year 2007. If we do need to change the guidance, most likely, it will be because the actual performance of the U.S. is different than what we see today.

Okay. And will you say that on your Aggregates position you have more visibility on the pricing outlook than, as you said, for the concretes and some of the other products?

Well, you know, Arnaud, that Aggregates is a very local business.

Sure.

And we have different Aggregate positions for different parts of the U.S., so it would be very difficult to generalize as to what we would expect. And really, regarding markets, where the housing sector is suffering this correction, well, we would expect -- and depending on what the position is of each player, to enjoy better or worse situation in terms of aggregate pricing.

Okay. Thank you very much.

You're welcome. Thank you.

Ladies and gentlemen, this concludes your question and answer session. I'd like to turn the call back over to Mr. Hector Medina. Please proceed, sir.

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. Please feel free to contact us directly or visit our website at any time. Thank you and good day to all.

Ladies and gentlemen, this does conclude your presentation. At this time, you may now disconnect. Good day.

Thank you.