Cemex SAB de CV (CX) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CEMEX 2007 second-quarter earnings conference call. My name is Camilla and it will be my pleasure to be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

For today's discussion, we have with us Mr. Rodrigo Trevino, Chief Financial Officer and Mr. Hector Medina, Executive Vice President of Planning and Finance. I would now like to turn the call over to Mr. Hector Medina. Please proceed, sir.

Thank you. Good morning and thank you for joining us for our second-quarter conference call. I will briefly review our second-quarter results and will share with you our estimate for 2007 in light of our performance for the first half of the year. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

For the first half of the year, our consolidated EBITDA grew 3% versus the same period last year, reaching $2.03 billion despite higher energy and transportation costs. With regard to our second-quarter results, we continue to see underlying strength and favorable supply/demand dynamics in most of our markets. But at the same time, we recognize that the correction and the eventual recovery of the residential sector in the United States continues to be uncertain and we maintain low visibility going forward.

Our consolidated EBITDA declined 1% versus the same quarter last year, reaching $1.13 billion. EBITDA during the quarter was affected by higher energy and transportation costs, as well as higher costs related to purchased clinker, especially in our operations in the UK and Spain.

The underperformance in the United States has been mitigated by a better-than-expected performance in other regions, including South and Central America, the Caribbean, Africa and Middle East and the rest of Europe. Even our geographic diversification and the fact that the first semester of the year is seasonally weaker than the second half, we are confident we will reach our stated EBITDA target of $4.3 billion for CEMEX's legacy operations in 2007.

Now I would like to address the status of our offer to acquire Rinker Group. On July 10, we announced that we had a relevant interest in more than 90% of the Rinker shares and we proceeded to compulsorily acquire the remaining untendered shares. Last Monday, the offer closed and we now own 95.62% of the Rinker shares. We have started the post-merger integration of the company and will begin consolidating Rinker's results starting this month.

As soon as we can determine the effect of potential asset disposals, we intend to provide EBITDA and capital structure guidance for the full year 2007. We expect this to happen in the upcoming weeks. Rinker will enhance our position as one of the world's largest building materials company, reduce our cash flow volatility and lower our cost of capital and we remain committed to regaining our financial flexibility and capital structure target within two years.

Additionally, following the placement of the perpetual securities which qualify as equity in our capital structure, we have lowered our steady-state net debt to EBITDA capital structure target from 2.7 times to 2.4 times. This stronger capital structure will help prepare us for the continued consolidation within our industry. We reaffirm our confidence and optimism in the future of CEMEX and continue to execute our strategy of creating value for our shareholders.

Now I would like to discuss the second-quarter performance of our principal markets and our outlook for these markets for 2007. In Mexico, cement volume increased 3% during the second quarter, continuing the positive trend we saw last year. Ready Mix volume grew by 8% during the quarter. The increase in Ready Mix volume is two percentage points lower than the guidance of 10% that we had given for the quarter and is due to the fact that some infrastructure projects in central Mexico have been temporarily delayed. In addition, unfavorable weather in the Northeastern region affected consumption.

For the first six months of the year, demand volume increased 5% and Ready Mix volume increased 10% versus the first half of 2006. For 2007, we anticipate GDP growth in Mexico of about 3.1%. This marks the first time in recent history that a presidential term's first year began with favorable economic activity.

Two factors will continue to influence cement sales for the rest of the year. The first is government spending on roads, public buildings and other infrastructure projects. Although we have seen some delays in some projects, this sector continues to be an important driver of cement demand.

Total federal spending on public works is expected to exceed $5 billion during 2007. Growth in this sector will be supported by strong government finances and continued fiscal discipline and the private sector will likely increase its contribution to the financing of public infrastructure projects.

The second factor is the strong homebuilding sector growth, which will also contribute to the increase in cement demand. Supporting growth in this sector is President Calderon's commitment to grant a record six million mortgages for home construction and remodeling over the course of his six-year presidential term.

During 2007, the number of new home mortgages issued by INFONAVIT commercial banks, SOFOLES, and other institutions is expected to reach 790,000, an increase of about 9% over last year's number on a comparable basis.

According to the CONAVI, the National Housing Council, the total investment in the formal housing sector in 2007 will increase by 4% in real peso terms over that of 2006 to nearly $22 billion. The number of mortgages issued by commercial banks and SOFOLES is expected to reach 260,000, an increase of about 55% versus 2006.

Even though this number may still seem small relative to the number of mortgages sponsored by INFONAVIT and other institutions, it represents more than 40% of the total value of all mortgages to be granted this year in Mexico. The average size of these mortgages is approximately two to three times the size of the average INFONAVIT mortgage and they have a lower loan to value ratio. And because the homes built using these mortgages are larger, they tend to have higher cement intensity per dollar of construction put into place.

Last week, INFONAVIT issued a 2.7 billion peso tranche under its 8 billion peso securitization program for 2007. This second tranche was oversubscribed and done at a record low interest rate. Year to date, securitizations equal 64% of the full-year program. Potential securitizations in excess of the budgeted program could translate into additional INFONAVIT mortgages. In general, the formal residential sector is increasingly meeting more of the housing demand that has been previously met by the sales construction sector.

Remittances from the United States to Mexico continue to be strong despite the slower economic growth and the constraints on immigration in the US. Total remittances will likely surpass $24 billion in 2007 and are also contributing to economic growth. These remittances, together with estimated flows of foreign direct investment of $17 billion in 2007, will strengthen the country's external accounts.

Expansion construction at our Yaqui and Tepeaca plants remains on schedule. We expect these expansions to be operational by mid-2008 and mid-2009 respectively. These investments reflect our confidence in the strength of the Mexican economy and in the continued high growth of the country's housing and infrastructure market.

We've continued to be optimistic about the trend in cement demand in Mexico and we see cement volume in Mexico increasing by more than 4% in 2007. We now see Ready Mix volume growing 11% during the year, reflecting the demand from the formal housing sector, as well as the delay in infrastructure projects.

In the United States, demand volume decreased by 11% during the second quarter while Ready Mix and aggregate volumes fell by 21% and 16% respectively. The continued decline in activity in the residential sector, which accelerated throughout last year and continued into this year, resulted in low second-quarter demand relative to the demand level we saw in the second quarter of 2006.

Additionally, bad weather in Arizona, the South Central and Southeast regions, affected consumption in the quarter. For the first six months of the year, demand volume decreased 14%. Ready Mix volume decreased 23% and aggregate volume decreased 17%. There are two reasons why Ready Mix volume is decreasing more quickly than cement volume.

First, a higher proportion of Ready Mix sales comes from the residential market where the timing of the recovery is still uncertain. Second, the geographic footprint of our Ready Mix operations is different from that of our cement operations. A higher proportion of Ready Mix sales takes place in residential markets, such as Florida and Northern California-- areas that have previously experienced high growth, but have continued to experience a deeper correction.

There is continued uncertainty about the period required for the high housing inventory levels to be absorbed. As such, our guidance continues to be particularly sensitive to changes in the outlook for this sector. Public sector nominal construction spending was up 11% for the first five months of 2007 with the spending for streets and highways up 8%.

Two primary factors are driving growth in the public sector in 2007. The first is the $287 billion six-year surface transportation program known as SAFETEA-LU, and the second is the general improvement in the economic environment and fiscal conditions of the states.

The industrial and commercial sector continues its growth trend. Nominal construction spending grew 19% in this sector during the first five months of the year. In the residential sector, nominal construction spending was down 19% for the first five months of the year. Housing starts, the fundamental driver of cement demand in this sector, decreased 27% during the first five months of the year versus the comparable period of last year.

New home sales through May have declined by 21% versus last year. Current months of supply for new homes nationally are slightly lower than in the first quarter, but are still high at about seven at the current sales rate compared with historical norm of about four months under healthy conditions.

Inventories continue to be even higher in previously high growth markets such as Florida. However, some regions are showing improvement in inventory levels leading us to believe that normal growth levels will resume within the next few quarters. How quickly this excess inventory will be absorbed by the market depends on three main factors.

First is the magnitude of home foreclosures. Second, worsening affordability due to tighter lending standards coupled with mortgage rates and third is how aggressive builders are in working off excess inventories through price reductions. We expect infrastructure and industrial and commercial sectors to continue growing at a moderately healthy pace. This growth will partially offset the weakness in the residential sector.

Rinker's consolidation during the second half of the year will have a positive contribution to our volumes in the United States. As such, we expect the reported demand volume for the full year 2007 considering the consolidation of Rinker from July 1 onwards, excluding the assets to be sold as a result of the agreement with the Department of Justice, to grow in the mid-single digit range compared to operations last year. Similarly, we expect the full-year reported volumes to grow about 20% for Ready Mix and close to 100% for aggregate.

In Spain, cement volume during the second quarter decreased 6% while Ready Mix volume decreased 7%. Cement consumption was affected by adverse weather conditions in many regions of the country, the termination of major projects earlier this year in anticipation of local and municipal elections held in May and the fact that the quarter held one fewer working day than in the previous year.

For the first six months of the year, cement volume decreased by 2% and Ready Mix volume decreased by 3%. Last year, the residential sector had a record year with housing starts exceeding 850,000. Part of this growth was fueled by an increase in housing start during the summer in anticipation of changes in the residential building code that took effect last October.

Housing starts have moderated in the months following the building code changes and now a deceleration in this sector is expected. Housing starts are expected to remain at high levels however and to drive robust cement consumption.

in the public works sector, the termination of local projects during the first months of the year, which coincided with the local and municipal elections last May, is depressing infrastructure more than originally expected. This negative effect is being partially mitigated by federal projects initiated under the government's $310 billion long-term infrastructure plan. In light of the expected performance of the different sectors and given the very high cement consumption level last year, our estimate now is that our 2007 domestic cement volume will decline by about 2%.

In the United Kingdom, demand volumes increased by 21% during the second quarter. Volumes of cementitious materials, including cement and slag, increased by 22%. Ready Mix volumes decreased by 6% while aggregate volumes increased 3%.

Cement demand during the quarter was driven mainly by healthy performance in the industrial, commercial and public housing sectors. As we have been operating at full capacity levels in our Rugby plant, demand volumes in the second quarter compare favorably to volumes in the second quarter of 2006 when we were implementing some enhancements in that plant that led to lower production levels last year.

For the first half of the year, both cement and cementitious materials volumes increased 13%. Ready Mix volume decreased 5% and aggregate volume increased 1%. For the rest of the year, the industrial, commercial and public housing sectors will continue to drive cement consumption. Public infrastructure work is expected to remain weak. For 2007, we expect cement volumes in our UK operations to increase by about 7%.

In France, our Ready Mix volumes increased by 2% during the second quarter and 4% during the first half of the year. Higher activity in the Northwestern and Central regions improved our sales during the quarter. The number of permits and starts in the residential sector have slowed down since the fourth quarter of 2006. Housing starts are expected to decline slightly from last year's record 421,000 new homes. A slight deceleration in the non-residential sector is also expected for the year.

Public works and infrastructure projects continue to be an important driver of Ready Mix consumption in the country. Strong activity in this sector is expected in anticipation of local elections next year. For 2007, we expect the Ready Mix volumes to rise by about 3%.

In Germany, our domestic cement volume decreased by 8% during the second quarter and increase by 11% during the first half of the year versus the comparable period of last year. The drop in second-quarter cement volume was a result of two factors. First, because of exceptionally good weather during the first quarter, some construction began earlier in the year.

Second, construction in the residential sector has slowed following the drop in residential permits after June 2006. Residential permits had risen during the second half of 2005 and the first half of 2006, as people took advantage of the homeowner subsidy, which was canceled in 2005, and sought to avoid the 3% increase in the value-added tax, which took effect beginning this year.

Growth in the non-residential sector, including energy projects, office and agricultural buildings, is offsetting the slowdown in the residential sector. Non-residential permits are up 7% for the first four months of the year triggered by GDP growth and the favorable business climate in the industry.

The public works and infrastructure sector is experiencing moderate growth. Even so, demand in this sector is being fueled by higher corporate tax and total revenue, as well as by the EUR4.3 billion traffic infrastructure program, which will run from 2006 to 2009.

In the next months, increasing orders are expected from local authorities to improve traffic infrastructure and sewage systems. We expect our domestic cement volume in Germany to remain stable during the year.

In Eastern Europe, namely Poland, Croatia, the Czech Republic, Hungary and Latvia, domestic cement volume increased by 17% during the quarter and 41% during the first half of 2007. The prospect for the region continued to remain attractive as cement consumption is expected to increase as the convergence of these countries with the European Union accelerates.

In Venezuela, domestic cement volume grew by 22% both during the quarter and during the first half of 2007, versus the comparable periods of last year. The economic outlook for the country continues to be very positive. Higher oil prices have translated into higher construction spending and higher cement demand. The infrastructure and housing sectors continue to be the main drivers of cement demand. We continue redirecting our cement exports to satisfy growing domestic demand.

For the entire year and in light of a better economic outlook for the country, we now expect domestic cement volume to grow in excess of 15%, fueled by infrastructure, low income housing, and higher credit availability. In Colombia, demand volumes in our operations increased by 31% during the quarter and by 25% during the first half of the year versus the comparable periods of last year.

Domestic economic growth has fueled the country's construction activity. In fact, construction GDP in the country is growing about three times as fast as overall GDP. Infrastructure spending continues strongly, in anticipation of the elections to be held in October. The residential sector, low income housing in particular, continues to show solid growth despite the rise in interest rates. Investment in the industrial and commercial sector continues in anticipation of a free trade agreement with the United States. These strengths in the different sectors are expected to continue throughout the year. For 2007, we expect an increasing domestic cement volume of about 10%.

In Egypt, domestic cement volume increased by 10% during the second quarter and by 7% during the first six months of the year. The private sector, especially upper and middle class housing, continues to be the main driver of cement demand. For 2007, we now expect cement volume to grow by about 8% in Egypt.

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 our capital allocation strategy remains on course, and to sustain our record of disciplined profitable growth in the short, medium and long term.

Going forward, we intend to reinvest our free flow in three ways. First and foremost, we will use our free cash flow to strengthen our capital structure. Second, we intend to invest part of our free cash flow to increase our production capacity, primarily in cement 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 serve future growth in our markets.

In light of this, we are forging ahead with our expansion capital expenditure projects announced during last year and the first half of this year. We are currently increasing cement production capacity by 10.3 million tons in Mexico, the US, Panama, Spain, and Latvia. Additionally, we are increasing cement grinding capacity by about 4.5 million tons in Panama, Spain, the UK, and the United Arab Emirates. We expect these expansion projects to provide on average returns well in excess of our stated acquisition investment criteria.

Third, we continue to monitor our 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. We will maintain our financial discipline while seeking acquisition opportunities across the cement value chain, such as Rinker, that we expect will meet our strict acquisition criteria. 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. Higher volumes and tight supply in most of our markets helped to strengthen our performance during the first half of the year, resulting in a consolidated EBITDA growth of 3% versus the same period last year, reaching $2.03 billion despite the depth of the correction in the US residential segment.

During the quarter, EBITDA declined 1% versus the second quarter of last year, reaching $1.13 billion. Most of our countries and regions registered EBITDA growth during the quarter. The exceptions were the United States and the United Kingdom. In the United States, EBITDA fell mainly as a result of the ongoing correction in the residential sector, but also as a result of unfavorable weather when compared to 2006.

EBITDA in the United Kingdom decreased, due mainly to higher energy costs, lower volumes and higher raw material costs in our ready-mix business, and higher logistic expenses in our aggregate business. Our consolidated EBITDA margin decreased from 24.8% in the second quarter of last year to 23.1% in this year's second quarter.

This drop in EBITDA margin is a result of higher kiln fuel, electricity and transportation costs, and also more purchased cement and clinker. These were partially offset by higher volumes and better pricing in most of our markets, partially resulting from stronger currency exchange rates.

Our EBITDA for the trailing 12 months was $4.17 billion. This gives us confidence that we should reach our target of $4.3 billion for 2007 for the legacy CEMEX business. The increase in our working capital investments during the second quarter compared with the same quarter last year was primarily a result of a negative impact from accounts receivable, especially in the second quarter of last year when we had a one-time positive effect of the securitization of receivables in France. We also had a negative impact due to higher payments of value-added taxes and payments to suppliers related to our capital expenditures program.

With regard to energy costs, despite the significant second quarter input cost increases in the international energy and transportation markets, we saw an increase in kiln fuels and electricity of only 13%. We now see our energy costs for the full year 2007 increasing by about 12% versus last year.

We have continued to achieve greater predictability in our cost structure, and we remain committed to mitigating the impact of higher energy costs per ton of cement produced.

Shipping freight rates continued to trend upward during the second quarter of 2007 and remain at record high levels. The increase in demand continues to absorb new ships entering the market. Freight rates as measured by the one-year average Handymax time charter rate rose 25% versus the first quarter of 2007, and 91% over the second quarter of '06.

Most of our markets continue to see an increase in transportation costs. In particular, we see our US truck and rail costs rise. The increases in these costs which are more highly correlated to oil prices reflect a continuing rise in fuel costs and tight supply in some markets. Higher energy shipping and transportation costs and tight supply of cement globally translate into higher equilibrium market prices for cement worldwide.

During the quarter, there was a loss in financial instruments of $44 million, mainly due to a negative non-cash impact arising from the rise in the yen interest rate embedded in our perpetual securities. The non-cash negative mark-to-market of these securities will revert to zero by the call option date. And it is important to note that these notes cannot be accelerated or early terminated.

Our majority net income increased by 6% during the quarter to $611 million. This was due in part to a foreign exchange gain resulting mainly from the appreciation of the Mexican peso during the quarter versus a foreign exchange loss last year, as well as lower losses on financial instruments during the quarter when compared with last year.

As regards our capital structure, our interest coverage for the trailing 12 months through June improved to 8.9 times from 7.7 times a year ago. Our leverage ratio as measured by net debt to trailing 12 months EBITDA decreased to 1 time, from 1.2 times at the end of the first quarter of this year. The improvement in our capital structure resulted mainly from the issuance during the quarter of EUR730 million of perpetual securities. The expected cost in US dollar terms for the first year has been fixed at about 2.9%.

In addition, we completed the issuance of several short-term notes under our Certificados Bursatiles program in Mexico, having an outstanding amount of close to 1.5 billion pesos. The peso notes were swapped to US dollars at an average cost of less than LIBOR.

During the quarter, derivatives were put in place for the Australian dollar payments related to the acquisition of Rinker. This substantially increased the notional amount of our foreign exchange derivatives during the quarter. Once the payment for Rinker is completed, these derivatives will be fully unwound.

The average maturity of our debt is now 3.8 years, and our free cash flow generation and committed facilities in place mean that we have no short-term refinancing needs. The general syndication for the facility related to the Rinker acquisition was successfully completed in June with the participation of about 40 banks. As of today, we have committed credit facilities and excess cash on hand in an amount sufficient to complete the acquisition.

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, last year we invested $746 million in expansion capital expenditures in different projects around the world to increase our production capacity. We expect these expansion projects to provide on average returns well in excess of our stated acquisition investment criteria.

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. Operator?

Thank you very much. (OPERATOR INSTRUCTIONS). Jorge Kuri, Morgan Stanley.

Hi. Good morning, everyone, and congratulations on the completing of the Rinker transaction. I have two questions if I may. The first one is can you provide us with the volume growth guidance for the US on a CEMEX only basis? The last numbers you provided during the preview one month ago were that volumes were expected to be down on cement 4% negative year-on-year, and ready-mix down 6%. Can you tell us what are those numbers in your current guidance now excluding the Rinker numbers?

And then the second question is can you give us some color on what are the dynamics behind the pressure on EBITDA margins in Mexico, despite the nice 10% growth in revenues that we saw your EBITDA was flat due to lower margins? When do you think that we will see some of those nice top-line revenue trends of trickle down to the operating level line? Thank you.

Thank you, Jorge. On the first question, what we have concluded is that it is a bit difficult for us to give guidance on something that is going to happen on a consolidated basis, difficult to separate going forward. And then there is also the fact that there will be some asset disposals as you know.

So we have reserved our guidance as we mentioned for the upcoming weeks when we know how things are going to be in the UK -- in the US regarding all of our assets. But if we have to give you some color on that, I would have to tell you that the situation is weaker as we have indicated in our script. You can expect guidance from us in the upcoming weeks as we mentioned.

As the issue in the Mexican operations regarding our margin, well, there is the fact on an ongoing change for product mix from cement to ready-mix. We have rising energy costs. There is this energy cost is impacting also our transportation cost. There are also the fact that we are reactivating less efficient kilns to meet growing demand. There is in this particular case, in this particular quarter, more outages, kiln outages that there were in 2006, and they lasted longer.

And well, there is an increasing sales force and warehouses to support demand. So all of these factors affect our EBITDA margin. But I have to say that our return on capital employed in the Mexican operations keeps a very good level and increasing. which I think is the more relevant than our EBITDA margin. I don't know if you want to add anything.

No, no I was going to make that last point that you just made, Hector. I think is our EBITDA and return on capital employed continues to improve in Mexico and our asset base has not changed significantly, our return on capital employed for the Mexican business continues to improve despite the lower EBITDA margin on sales because of this change in product mix.

And as we mentioned, I mean we are going ahead with our investments in cement production capacity in Tepeaca and Yaqui. Those investments are also very attractive in terms of return on capital employed. So we've obtained these increasing returns on capital employed in our Mexican operations.

Okay. Thank you very much.

Gonzalo Fernandez, Santander.

Good morning, everyone. Also congratulations on the Rinker acquisition and two quick questions. I don't know if you can repeat your guidance for volume seen in Spain and what is your feeling in Spain? Do you think that we could expect some something similar than the weakness that we are seeing in the US, or you feel that the reduction in Spain could be more moderate?

And the second is looking at your free cash flow figures for the first half of the year, do you think that your guidance for $2.7 billion for full-year is -- on the legacy operations, of course, is still achievable? Thank you.

Yes, on the Spanish operations, Gonzalo, we think it is as we mentioned in the script 2% decline. This is more or less in line with that of the total market of the national consumption. And as we mentioned, some of it is affected by the fact that we are comparing with a record last year -- I mean, last year was 850,000 building permits so we expect that this deceleration in housing construction will affect this year's volumes. That is why we are estimating this 2%. That is -- I mean, a comparison effect essentially.

As for our free cash flow -- this was Hector Medina -- Rodrigo, would you take up that?

We remain comfortable with our conversion rate of operating cash flow EBITDA into free cash flow after maintenance CapEx of about 60%. It is difficult to give guidance going forward because, of course, we will consolidate the balance sheet and the operations of Rinker for the second half of the year. And we do intend to make asset disposals during the course of the second half of the year. And, of course, also temporarily until those asset disposals occur, we will have a higher interest expense as a result of the higher leverage that we have on our balance sheet today.

But for the legacy business, we do see the conversion rate remaining at about 60% of our EBITDA and, of course, we intend to provide guidance for full-year 2008 once we have fully consolidated Rinker and completed the asset disposals we intend to execute during the course of the second half of this year.

Okay. Thank you very much.

Mike Betts, JPMorgan.

Yes, good morning, gentlemen. I had a number of quick questions if I could. First one on the US; obviously, we all know that volumes are very weak. Could you just explain or give us some inkling of what you're doing in terms of trying to take costs out of that business when you see volumes decline at this kind of magnitude?

I'm sorry, I missed the second part of the question.

Yes, sorry, Hector. I was just trying to get some idea of the measures that you were taking, either redundancies or what you were doing to take costs out of the business with those big volume reductions in the US.

Sure. Certainly. we are adjusting and we have already taken several measures on that respect. We expect that we will give you more color on that in terms of particular numbers in the US when we guide to the total free cash flow for -- I'm sorry, the total EBITDA guidance for 2007 and our capital structure in a few weeks, within the next few weeks.

But certainly, we are doing that and -- well, it includes many different measures in all respects in our cost structure in the US. And I also have to say that as the cost measure integration project begins in the US or is beginning in the US to integrate the Rinker operations, that will also take into consideration all the measures that we can take to lower our cost base in the US.

Okay. Thank you for that. My second question again on the US, in terms of what pricing -- have you put significant price increases through from the 1st of July? And TXI commented last week that it was seeing higher prices in California and Texas. Are you seeing the same?

Yes. Well, some of the regions have -- different regions have different behavior in terms of pricing. But I would say that in June, we have increased prices in Southern California and North Texas. We're realizing about $5 California, about $10 in Texas, in Northern Texas, for most customers. So we are seeing that in those regions.

Of course, nothing in Florida as you would expect. It can average $2.50 per metric ton by the end of the second quarter in the Midwest, an average of $2.50 also for Colorado, West Texas, and the Carolinas. So it is a different mix of things, but yes, we have seen some increases holding in some of the regions.

Okay. Third question probably for Rodrigo. Asset disposals, are we just talking about what was required by the Department of Justice, or do you have something more substantial planned?

This is Hector, Mike. I will take that. And certainly, we are proceeding with what we have to do, but we also as always are reviewing all of our asset base and our portfolio to clearly prioritize whatever we can (technical difficulty) value, and see what is strategically better or fits better our portfolio and our strategy.

So we are always doing that. And in terms of whatever asset disposal we make as we pointed out in the initial remarks, we will give you more information in the upcoming weeks.

If I may add, Mike, as you know what we have also stated when we announced our intent to acquire Rinker is that we would recover our capital structure target within two years. We have also stated in the opening remarks on this teleconference that our stated capital structure target now going forward for the steady state capital structure is 2.4 times net debt to EBITDA. And, of course, the sooner we can recover our financial flexibility, the better. So we will proactively look for the opportunities to do that.

Okay, that's great. And the final question if I may, energy costs, significant increase. Is it mainly petcoke, and have you been able to do anything to fix those costs in the second half or are they subject to the market vagaries?

Well, we do expect on average our energy costs to increase by 12% versus last, which is significantly less than what you would expect to see if you only calculated the fuel mix that we have and incorporate the increase in the input cost in the spot markets as well as the increased transportation costs. So clearly, we are doing a lot of things to mitigate what would have been the negative impact had we not put our strategy in place.

We are switching to alternative fuels where we can. You know, we continue to proactively look for ways in which to take volatility out of our input cost structure. And the bottom line is that we have, you know, increased the predictability of our input cost and lowered the volatility of our input cost versus what it would have otherwise been in the market now.

We also have a natural hedge embedded in our business model, because as a result of the higher input costs and higher transportation costs, you also would expect to see a higher equilibrium price for our products. And, of course, that has been validated by the market behavior.

Okay, that's great. Thank you very much.

Stephen Trent, Citigroup.

Good morning, gentlemen. Just a quick question from me. Most of my questions have been answered, but I just wanted to just confirm about cement importations into the US. My sense is that the majority of the imported tonnage is contractual and, therefore, it is not like you can immediately turn off the spigot if you wanted to. Can you give us a sense kind of going forward to what degree, if any, you might still have some contractual obligation to import tonnage into the US market? Thank you.

Yes, Steve. The information we have up to April, early April in fact, is that all imports in the US fell by 4.5 million tons. That will be about 40% decline year-to-date April as compared to the same period in 2006. So that is a significant drop. Now, as you mentioned, some of the imports are covered by contracts, but certainly we can see that the weakness in the market (inaudible) will be even a more significant drop in the months to come.

We will have more information, of course, in the following months, but we are already two months after this data that I am giving you. And I can tell you in the case of CEMEX is that we are more or less in line with the market in terms of reduction of imports from our own operations.

Sounds good to me. Thanks very much, guys.

Dan McGoey, Deutsche Bank.

Good morning, gentlemen. Just a quick question on the transportation costs. Rodrigo, you highlighted a number of elements on the transportation cost front. I am wondering when we look at the margin decline in the US of almost 600 basis points, half of it looks like it came through in the gross margin, half in the operating or the SG&A.

Can you talk a little bit on the gross margin side, is that primarily the energy costs? And I think you also referenced increased clinker purchases. Is that a factor there?

And then on the SG&A side, I imagine that is where most of the transportation is coming through. If you can give a little color on that, I would appreciate it.

Well, and of course as you would expect, most of the margin compression and the impact in the consolidated margins in the US comes from the ready-mix, block and other businesses, which are more closely aligned with the correction in the US residential sector. The margins on both cement, aggregates and other products aimed at different markets have not seen such a contraction.

Of course, this makes sense, because you do have significant excess supply in the case of the ready-mix business with different markets, whereas that is not necessarily the case in both the case of aggregates and cement, nationwide and in the aggregate.

And on the transportation, is all the increased transportation cost going to have to be recouped through price increases? Or I guess depending on the ways in which you sell it, is any of the transportation cost being passed through directly to the end consumer?

Well, you have two transportation costs. One is the one affecting, of course, the ready-mix logistics. I mean, one that you have transportation of the cement and aggregates to our ready-mix plans, and then the delivery of the ready-mix that can hardly be passed on to the end user because of the fact that you have a significant drop in volume in ready-mix.

Then you have the effect on the other transportation costs from the sales of cement to other customers, and aggregates to other customers, is a different situation. And that depends on the demand and supply dynamics in each market that we pointed out in the pricing equation that we described (inaudible). In terms of cement, we have different situation different pricing behavior in different regions.

Of course, something that affects the equation is the fact that there are also very tight supplies for exportable cement around the world. So as we have seen less available exportable cement out of markets such as China, for example, that coupled together with the high transportation cost, yes, of course it leads to a higher equilibrium price in order to stabilize the supply demand equation; something which is not the case for ready-mix.

You do have the capacity in ready-mix, and as you would expect even though cement and aggregates to a certain extent can pass on the higher input cost through price, that is not necessarily the case in ready-mix where we have seen significant margin contraction.

Great, thanks. One additional question if I may on the Lake Belt region in Florida. We saw some additional action to close certain operations, I guess unrelated to CEMEX this week. But I'm wondering if you'd talk a little bit about your contingency planning for different outcomes on the Lake Belt region, how you might service that market and whether you have any indemnification through Rinker if some of those assets are closed?

Well, since this is a litigation process, Dan, we would have to stick to the facts. And the fact is that our operation in the Lake Belt remains open. That is as much as we would like to say at this point in time.

Okay, understood. Thank you.

Gordon Lee, UBS.

Yes, hi, good morning. Most of my questions have been answered, but I just have one pending, which is I was wondering if you have been able to run any numbers on the potential impact on your tax bill on a cash basis and maybe a reported earnings basis as well; if of the Mexican tax -- or the federal government's tax proposal reform in Mexico, if that were to be implemented as proposed, do you have a sense of how that might affect your cash tax payments? Thanks.

Well, we don't have an estimate of them now, because of course we don't know what the final form of this reform will be. We do see some positive implications from it. Of course, the most important of which would be the effect it would have on federal government expenditure programs. As recently announced, there is a large increase in the infrastructure spending plan that the federal government announced this week. Of course, this will have a significant impact not only at the GDP level but also at the consumption of cement level for the country as a whole. Of course, that is a positive effect and it is tied together to the fiscal reform project.

I think it is important to note, however, that Mexico now as we consolidate Rinker represents less than 20% of our global revenues. And yes, it is our second largest market worldwide, but it is not the biggest weight of our asset base, our portfolio, either in terms of revenues, cash flow or free cash flow.

Okay, thanks.

We don't expect net-net a material impact on CEMEX consolidated as a whole, I guess would be the bottom line of my answer at this point.

Perfect. Thank you.

Nicolas Godet, Exane.

Hello, good morning. Nicolas Godet, Exane BNP Paribas. I have one question on the aggregates in the US. I would like to understand why -- I mean what happened in Q2. It seems like spot prices in Q2 were lower than in Q1. Do you think -- I mean are you fighting for market share by lowering prices, or is that just a mix effect?

Bear with us a minute. Well, it might be a matter of mix, geographic mix of volumes behaved differently in the quarter. But also I think it is a tough comparison with last year's same period. Prices went up significantly last year (technical difficulty) of 6.5% I think. So that might be the reason, but there is no specific reason for that. I mean, there is no strategic issue there.

So we should consider, for example, when Vulcan says prices are up like 14% in the same region as your competitors, you would push prices in a similar way?

We don't know that. We'll have to see our -- and we have different customers. We have different -- in even the same region, we have different cities, different quarries, different costs. So it is difficult to say that.

Okay.

But to address your question on volumes versus prices, our volumes for aggregates in the US during the quarter, you know, have increased in the second quarter versus the first quarter. So even though prices quarter to quarter sequentially may have decreased, volumes have increased. So it may be a change in product mix and regions. We would have to follow up on that with you.

Okay. Thank you very much. My second question regards Spain. You made a lot of comments about equilibrium of prices in the US with import prices. Do you import a significant amount of cement or clinker into Spain, and do you think -- I mean the increase of freight rate would have a significant positive impact on Spanish prices?

Well, they have had in the recent past, as Spain has been increasing in terms of the volumes of cement (inaudible) increasing, and the fact that shipping costs have increased have had an effect on import cement in Spain, and that has made it a favorable environment for increased prices of cement in Spain.

Now, what happens going forward is difficult to ascertain, given the fact that we are experiencing, as we mentioned, corrections of some difficult comparisons regarding the situation last year. But also the fact is that our margins, as we mentioned that, are affected by the fact that we buy clinker in Spain, to supplement our operations in some of the regions. That is affected, of course, by transportation costs.

Could you tell us what could be the amount of cement that you import in Spain on an annual basis?

We will have to follow up on that. We don't have -- I don't have it with me today. We will gladly follow up.

Okay. Thank you very much for this.

Carlos Hermosillo, Vector.

Yes. Good morning, Hector and Rodrigo. Just a couple of quick questions. The first one would be regarding your financial strategy, how much more or how is your stance going forward regarding the issuance of perpetual notes? In other words, what's your targeted steady-state structure? And the second one would be, could you please repeat the target or the indicated estimated volumes in the US?

Yes. Regarding our financial strategy, we have issued what we think we need both in terms of perpetual securities, euro notes and bank financing. And we have the debt maturity profile that we think we will need net of the asset disposals we intend to execute during the second half of the year.

We do have in Mexico a Certificados Bursatiles program still outstanding and available to us and, of course, opportunistically we will use this market together with the cross currency swaps market to lower our cost of funding and perhaps lengthening our debt maturity profile, taking advantage of market conditions. But other than that, we don't have an intent in the short-term to issue more notes or perpetual securities.

Our targeted capital structure level now is 2.4 times net debt to EBITDA, and we will do our best to get there as soon as we can by using our free cash flow to pay down debt and, of course, complementing that with asset disposals.

Regarding our outlook for the full year, if we take out the assets we will dispose of as a result of the agreement with the Department of Justice in the US, we expect for the full year to report demand growth in the mid-single digit range, ready-mix volume growth of 20%, and aggregates volume growth of close to 100% as we consolidate six months of Rinker into our US operations.

Of course, once we complete the due diligence and we are better able to estimate what are the eliminations and what are the remaining assets that we will maintain, we will update that guidance to the market.

Okay. Thank you.

Tobias Woerner, MS Global.

Yes, good morning, gentlemen. Just one question from my side. I understand that petcoke prices have seen a significant step-up over the last few weeks on the back of higher freight rates which you mentioned earlier as well. If I am taking the average sort of cement company fuel costs amount to about 5%, so if we assume every 10% increase in the petcoke price results in margin dilution of about 50 basis points, and I think the price increase of petcoke was significantly more than that.

Have you -- firstly, is that right, that sort of assumption that petcoke prices have gone up quite significantly? And if so, do you feel that you're making your price increases on average are at this point in time adequate to offset those?

Well, I think it is important to note that our petcoke needs have been known for a long time. We have expected for a long while that we would use petcoke as part of our fuel mix and, of course, because we have the need for this fuel into the long-term, we don't leave ourselves exposed to the spot market. So we do and we have been able to, to the extent that we can, take away volatility of the spot market in our input costs by doing different things.

So because of that, we have been able to mitigate what would have been the exposure to the volatility in those spot markets. So we are not affected -- if you try to chart the spot market price for our input costs, we are not exposed to that. That is why last year our energy input costs went up by about 13%. This year we expect them to go up by 12% which is, of course, significantly less had we been exposed to the spot markets.

But eventually, that will catch up with you. You can only delay it, can you not?

But if we do it better than our competitors, and eventually our competitors also need to pass through the input cost increases into the final price. You know, the longer we can defer it, the better we will look or the better the performance will be vis-a-vis having done nothing.

What percentage of your petcoke exposure would you say is open to spot? How much is hedged?

I don't know if we have that information here with us right now, but give me a second.

Not to worry. I can speak to (inaudible) otherwise.

I think petcoke is close to a half of our fuel mix globally, consolidated. I would say the bulk of it is not exposed to spot, but we will get back to you on an estimate of what percentage of it is exposed to spot price volatility.

Thank you so much.

At this time, I would like to turn the call back over to Hector Medina for closing remarks.

Thank you. As we close, I would like to thank all of you for your time and attention. We look forward to your continued interest and participation in CEMEX. Please feel free to contact us directly or visit our website at any time. Thank you, and good day to all.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.