Cemex SAB de CV (CX) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 CEMEX Earnings Conference Call. My name is Alicia and I will be your operator 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 this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes.

I would now like to introduce Mr. Hector Medina, Executive Vice President of Planning and Finance and Mr. Rodrigo Trevino, Chief Financial Officer. Mr. Medina, you may proceed.

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

I would like to begin by mentioning that during the quarter we took a significant strategic step by completing the acquisition of Rinker. I would later discuss the status of the Rinker post-merger integration process.

With regard to our third quarter like-for-like results, weaker than expected performance in the United States and Spain has been partially offset by stronger than expected performance throughout the rest of the world.

Markets outside the United States and Spain account for about 60% of our consolidated EBITDA. The primary contributors to this growth have been the Rest of Europe region, primarily Eastern Europe, the South and Central America and Caribbean region, and to a lesser extent, Mexico.

Our consolidated EBITDA increased 23% versus the same quarter last year, reaching $1.36 billion, while net sales increased by 31%. The improvement in our EBITDA for the quarter resulted primarily from the consolidation of the Rinker operations, as well as favorable supply and demand dynamics in most of our markets.

Rinker's contribution to quarterly EBITDA was about $270 million. For the first nine months of the year, our consolidated EBITDA grew 10% versus the same period of last year, reaching $3.42 billion, and net sales increased by 16%.

On a pro-forma basis for the ongoing operations, that is, including the effect of the Rinker consolidation for 2006 and the first half of 2007, EBITDA declined 4% and sales increased at the rate of 2% for the first nine months of the year versus the same period last year.

Considering our year-to-date performance under prevailing foreign exchange rates, our target of close to $4.8 billion in EBITDA for the existing operations, before asset disposals, is a stretch target. But we remain committed to it.

Now, I would like to talk about Rinker. As you are aware, we begun consolidating the company on July 1st. We are now halfway through the post-merger integration due diligence, which we began in August 1st, and we are pleased with the preliminary results of the process. The high quality of Rinker management meant less demand on CEMEX management to achieve the integration's desired results. We are confident that we will exceed, in terms of synergies, the originally estimated amount of $130 million despite the asset sales. The final number will depend on the asset sale transaction as well as the completion and final findings of the due diligence of the integration process.

Now, I would like to discuss the third quarter performance of our principal markets and the outlook for the rest of the year. In Mexico, cement volume increased 5% during the third quarter and ready-mix volume increased 8%. Ready-mix consumption was affected by rain during August and September, mainly in the Gulf of California and the Southeastern region.

For the first nine months of the year, cement volume increased 5% and ready-mix volume increased 9% versus the comparable period in 2006. We achieved this growth despite a nearly 20% decline in federal spending. For 2007, we anticipate GDP growth in Mexico of about 3%. This marks the first time in recent history that a presidential term's first year begins 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. 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. The announcement of President Calderon's National Infrastructure Program earlier this year will boost government and private spending on infrastructure. Despite having a slow start in 2007, the outlook for the near future looks positive.

Additionally, the recent approval of the fiscal reform and other initiatives is expected to provide the federal government with approximately $14 billion in additional funds to the 2008 budget. These additional resources will potentially raise the growth rate of Mexico's construction GDP to an annual average rate exceeding 4% for the 2007 to 2012 period. This figure is significantly higher than the average 3.2% growth rate achieved in the 2001 to 2006 period.

The second factor is a strong residential sector, which will also contribute to the increase in cement demand. President Calderon has announced that a record 6 million mortgages will be granted for home constructions and remodeling over the course of his six-year presidential term. This represents more then double the number of mortgages granted under the previous six-year period.

During 2007, the number of new homes 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 should increase by about 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. These mortgages represent more then 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.

As of September, about 300,000 INFONAVIT mortgages had been granted out of the budgeted 500,000 for the year. This 60% advance is inline with expectations.

In general, the formal residential sector is increasingly meeting more of the housing demand that has been previously met by the self construction sector.

Remittances from the United States to Mexico continue to be strong despite the slower economic growth and the constraint on immigration in the United States. For the first eight months of the year, remittances have been $16.2 billion, slightly higher than the $15.9 billion registered in the same period last year. Total remittances will likely surpass $24 billion in 2007, and they are also contributing to economic growth. These remittances, together with official estimates of flows of foreign direct investment of $23 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 see cement volume in Mexico increasing by more than 4% in 2007. We now see ready-mix volume growing 10% during the year, reflecting the demand from the formal housing sector.

In the United States, our ready-mix sales volume increased by 54%, while aggregates volume increased by 173% in the third quarter versus the same quarter last year, as the acquisition of Rinker's operations significantly expanded these businesses. Third quarter cement sales volume fell 1% versus the prior year's period, with Rinker cement volume contribution almost offsetting the overall decline in the market. On a like-to-like basis for the ongoing operations, our cement volumes decreased by 18%, our ready-mix volume decreased by 20% and our aggregate volume decreased by 10% versus the same quarter a year ago.

The third quarter like-to-like decline in sales volumes was driven mainly by the continued decline in the residential sector and the integration of Rinker's operations into our results starting in July 2007, as Rinker's operations have a higher proportion of sales in markets which have attracted the highest speculative investments, especially in Florida, which is currently experiencing the deepest correction in the country. In addition, sales volumes in the quarter were adversely impacted by unfavorable weather conditions primarily in Texas, Nevada and Florida.

For the first nine months of the year on a like-to-like basis for the ongoing operations cement volume decreased by 18%, ready-mix volume decreased 21% and aggregates volume decreased by 12%.

Public sector construction nominal spending put in place increased 12% during the first eight months of 2007 and spending for streets and highways rose 5%. Adjusting for input cost inflation, highway spending through August was essentially flat versus last year. In effect, the nominal increase in federal funding from SAFETEA-LU has been essentially offset by higher construction costs for this year.

In the industrial and commercial sector, nominal construction spending in the United States grew 18% during the first eight months of the year. Nominal spending growth in this sector has begun to slowdown as contractors have become more cautious in the recent economic environment. Growing concerns among contractors over the economic outlook has led to a decline in new projects this year. For the entire United States, contract awards in real terms have declined 6% through August versus the same period of last year. We now expect full year cement volume for this segment to be relatively flat versus 2006 for our markets, compared with an expected increase of about 5% for the entire United States. This is due largely to weakness in California and Florida, especially given the high proportion of our sales in these two major markets to total sales in the region.

The residential sector continues its decline. Nominal construction spending in this sector has decreased 18% on a nationwide basis for the first eights months of the year. Housing starts, the fundamental driver of cement demand in this sector, decreased 25% during the first nine months of the year. For our market, this decline is even steeper, with the high growth residential markets decreasing faster. Housing permits in Florida, for instance, have decreased almost 50% in the first eight months of the year. In our other major markets, housing permits through August declined 28% in California, 26% in Arizona and 44% in Nevada. Even in Texas, where affordability is high and inventories are normal, residential permits have declined 18% through August. These five states, Florida, California, Arizona, Nevada and Texas, represent 72% of our cement operations based on 2006 pro forma sales volume.

Inventories of new and existing homes for sale have increased to about twice the normal level, in terms of months of supply. New home inventories have declined about 7% over the last year, but represent eight months of supply at the September sales level versus about 6.5 months for 2006. Existing home inventories have increased 16% during the last year. Based on current sales levels, inventories represent 10.5 months of supply in September, compared with about 6.5 months of 2006. Moreover, rising delinquency rates for high-risk mortgages segments, such as subprime, are expected to result in record foreclosures, which will add to inventory.

Excess new home inventories can be we worked off only by increasing sales and reducing construction starts. We are encouraged by the fact that builders are beginning to reduce home prices more aggressively then we have seen since the downturn began in early 2006. In August and September, median home prices have declined to a level that is about 8% lower than price levels earlier this year. In some of our markets like Florida, price reductions have been even greater. These price reductions are necessary to bring affordability back into balance and set the foundation for higher sales, which are necessary to absorb the excess inventories and ultimately drive a recovery in residential construction.

In addition to price reductions, how quickly the excess inventory will be absorbed will also depend on interest rates, credit availability, job creation and the magnitude of home foreclosures. Considerable uncertainty continues to exist around the depth and duration of the housing correction, which makes it difficult for us to provide near-term sales volume guidance.

Based on our assessment of all these factors as well as inclusion of Rinker operations starting in July, which increases the proportion of our sales in Florida, we now expect cement demand for this segment to decline by about 36% for the year for our markets compared with an expected 26% decline for the United States as a whole.

EBITDA generation in the United States has been affected mainly by our ready-mix and other products operations, such as concrete blocks and other building materials, since these operations are driven more by the residential sector than our cement and aggregates operation, which have benefited from high levels of capacity utilization and more favorable supply-demand dynamics. The ready-mix and concrete block operations have been adversely affected not only by lower sales volumes, but also by higher material costs. We have taken actions to reduce costs in the ready-mix, aggregates, and concrete block operations, which include plant closures and substantial reduction in our truck fleet and headcount. In addition, we have identified substantial cost synergies from the post merger integration process, which will further reduce our costs going forward. We look positively towards the future in the United States. We recognize that the current downturn is temporary, that the integration of Rinker into our operations together with the divestiture plan we have announced, will position us in good long-term growth markets with a more balanced position throughout the cement value chain.

In light of the above, the public works and the industrial and commercial sectors are not expected to mitigate the drop in the residential sector for this year. For the full year, on the like-to-like basis for the ongoing operations, excluding the effect of the assets sales under negotiations, we now expect that our cement volume will decline by about 17% for the full year 2007.

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

In Spain, domestic cement volume decreased by 6% during the third quarter and ready-mix volume decreased 5%. For the first nine months of the year, cement volume decreased by 4% while ready-mix volume declined by 3%. Cement and ready-mix consumption was affected by the termination of major projects earlier this year in anticipation of local and regional autonomic elections held in May.

Last year, the residential sector had a record year with housing starts exceeding 860,000. Part of this growth was fueled by an extraordinary increase in as many as 75,000 housing starts during last year in anticipation of changes in the residential building code. Housing starts have moderated in the months following the building code changes and now there is a decline in the sector.

In the public works sector, the termination of local projects during the first months of the year, which coincided with the last May's local and regional autonomic elections, is depressing infrastructure more than originally expected, affecting volumes during the quarter. This negative effect is partially mitigated by central government promoted projects.

Accordingly and given the very high cement consumption level last year, we expect cement volume in Spain to decline by about 3%.

In the United Kingdom, cement volumes increased 17%. Volume of cementitious materials, including cement and slag, increased 20%, while ready-mix volume increased by 3% and aggregates volume remained flat during the quarter. The flat performance of aggregates volume during the quarter versus our guidance of a 2% increase was a result of lower sales during the month of September in the Northwest and Eastern markets

The industrial, commercial and public housing sectors continue to be the main drivers of cement demand. Cement volume in the third quarter compares favorably to volume in the third quarter of 2006, because, during July and August, we were still implementing some enhancements in our Rugby plant that led to lower production levels last year.

For the first nine months of the year, cement volume increased by 14%, cementitious materials volume increased by 15%, ready-mix volume decreased by 2% and aggregates volume remained flat versus the first nine months of 2006.

Input cost inflation in our ready-mix operations, which represent about a third of our sales in the country continues to affect overall EBITDA margins.

For 2007, we now expect cement volumes in our UK operations to increase by about 9%.

In France, our ready-mix volumes increased by about 8% during the third quarter and, for the first nine months of the year, increased by 5%. During the third quarter, we started consolidating five ready-mix plants acquired last June into our operations. On a like-to-like basis for the ongoing operations, our ready-mix volumes for the first nine months of the year would have increased 4%. The main drivers of this growth are the public works sector, which is showing the strong activity in anticipation of local elections next year and, to a lesser extent, the non-residential sector.

The residential sector is experiencing a stabilization in the number of starts this year from last year's record level.

We see ready-mix volume for the full year 2007, on a like-to-like basis for the ongoing operations, growing by about 3%, driven mainly by the infrastructure and non-residential sectors.

In Germany, our domestic cement volume decreased by 20% during the third quarter and by 3% during the first nine months of the year. The drop in third quarter cement volume was mainly a result of two factors. First, some construction began earlier in the year as a result of exceptionally good weather during the first quarter, which affected second and third quarter volumes. The second factor was the decline in residential sector permits, which had risen during the second half of 2005 and the first half of 2006, as a result of both the homeowner subsidy, which was canceled in 2005, and the increase in the value-added tax, which went into effect this past January.

The non-residential sector, including office building and energy projects, is partially mitigating the decline in the residential sector. Permits in this sector were up 16% during the first half of the year, triggered by GDP growth and a favorable business climate in the industry. The public works and infrastructure sector is stable.

In light of the expected performance for the different sectors, we now anticipate domestic cement volume in Germany to decrease by 6% during the year.

In Eastern Europe, namely Poland, Croatia, the Czech Republic and Latvia, domestic cement volume increased by 4% during the quarter and by 25% during the first nine months of 2007.

The prospects for the region continue 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 15% during the quarter and by 20% during the first nine months of the year, versus the comparable periods of last year. 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. As a result our cement exports decreased 48% during the first nine months of the year.

For the entire year, we expect domestic cement volume to grow by more than 15%, fueled by infrastructure, low income housing, and higher credit availability.

In Colombia, cement volume in our operations increased by 13% during the quarter and by 21% during the first nine months of the year, versus the comparable periods of last year. Domestic economic growth continues to fuel the country's economic activity.

The country's infrastructure spending continued to be strong during the quarter in anticipation of the local elections that will take place this coming Sunday. The government is promoting important projects such as the Plan 2500 in which 2500 kilometers of secondary roads will be paved and will interconnect small population centers across the country.

Middle and low income housing continues to show solid growth despite the rise in interest rates. The self construction sector is also supporting cement demand, driven by favorable employment levels and an increase in real wages.

These trends in the different sectors are expected to continue during the rest of the year. For 2007, we now expect cement volume to increase by more than 15%.

In Egypt, domestic cement volume increased by 10% during the third quarter and by 8% during the first nine months of the year. Cement consumption continues to be driven mainly by the residential sector, especially projects on the outskirts of Cairo.

For 2007, we expect domestic cement volume to grow by about 8%.

In the newest country in our portfolio, Australia, Ready-mix volume for the third quarter increased by 4% and aggregate volume increased by 6%. For the first nine months of the year, ready-mix volume increased by 3% and aggregates volume increased by 9%.

The main driver of ready-mix and aggregates consumption is the growth in the commercial and civil sectors. The value of commercial building approvals increased by 7% for the first seven months of the year, versus the comparable period last year. Offices, retail construction, and warehouse expenditures, supported by strong employment and growth in real wages, are driving growth in the commercial sector. The civil sector is benefiting from major road infrastructure projects and increased investment in the mining sector.

In light of this, for 2007 we expect ready-mix volume to increase by 3% and aggregates volume to increase by 6%.

As usual and before I turn the call to Rodrigo, I would like to reiterate two important commitments to our shareholders.

The first is to achieve the effective and timely integration of Rinker into CEMEX: to remain focused on realizing the synergies that we have identified, and to extract as much value from this association as we can. Our second commitment is to ensure that, in the short, medium and long term, our capital allocation strategy remains on course to sustain our record of disciplined, profitable growth.

Going forward, we intend to invest our free cash flow in three ways:

First and foremost, we will use our free cash flow to strengthen our capital structure. We remain committed to achieving our steady state net debt-to-EBITDA capital structure target of 2.4 times in less than two years after the completion of the Rinker acquisition last July.

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 this year. We are currently increasing cement production capacity by about 12 million metric tons in Mexico, the United States, Panama, Spain and Latvia.

Additionally, we are increasing cement grinding capacity by 4.5 million metric tons in Panama, Spain, the United Kingdom and the United Arab Emirates. We expect this expansion projects to provide, on average, returns well in excess of our acquisition investment criteria.

Third, 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.

We have the people, the culture and the opportunities to continue on our path of disciplined profitable growth. Thank you for your time. I would now like to turn the call over to Rodrigo.

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

Our performance during the first nine months of the year was supported by higher volumes, tight supply and strong demand dynamics in most of our markets, and also by the integration of Rinker operations starting July 1. EBITDA for the first nine months of the year increased by 10%, reaching $3.42 billion, despite the depth of the correction in the US residential segment.

During the quarter, EBITDA increased 23% versus the third quarter of last year, reaching $1.36 billion. On a like-to-like to basis for the ongoing operations, EBITDA would have decreased 8%. Most of our countries and regions registered EBITDA growth during the quarter. The exceptions were the United States on a like-to-like basis and the United Kingdom.

In the United States, EBITDA fell mainly as a result of the ongoing correction in the residential sector. EBITDA in the United Kingdom decreased due mainly to higher transportation costs, higher raw material costs in our ready-mix business, and higher logistic expenses in our aggregates business.

Our consolidated EBITDA margin decreased from 23.8% in the third quarter of last year to 22.3% in this years' third quarter. This drop in EBITDA margin is the result of higher kiln fuel, electricity and transportation costs, which were only partially offset by higher volumes and better pricing in most of our markets, resulting in part from stronger currency exchange rates. It is important to highlight however, that our product and geographic mix changed during the third quarter due to the consolidation of Rinker.

For the trailing 12 months, our EBITDA reached $4.41 billion. This figure consolidated only three months of Rinker. Our EBITDA in December will consolidate six months of Rinker's operations. As Hector mentioned, given the year-to-date performance and the prevailing foreign exchange rates, our target of close to $4.8 billion in consolidated EBITDA for the existing operations for 2007, that is before asset disposals, is a stretch target. But we remain committed to it.

Moving on to our input cost. Despite the significant cost increases we have seen this year in the international energy and transportation markets, we saw an increase in kiln fuels and electricity on a per ton of cement produced basis of only 13% for the first nine months of the year, in line with our expected increase for the full year 2007. We have continued to achieve greater predictability in our cost structure, and we will continue to seek ways in which to mitigate the impact of higher energy input costs going forward.

Shipping freight rates continued to trend upward during the third quarter of 2007 and remain at record high levels. The increase in aggregate demand continues to absorb new ships entering the market. Freight rates as measured by the one-year Handymax time charter rate have increased more than a 100% from December 2006 to September of this year.

Most of our markets continue to see an increase in transportation costs. In particular, we have seen 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 many markets. Higher energy shipping and transportation costs and tight export supply globally translate into higher average equilibrium market prices. This may sound counterintuitive, but higher sustained shipping and transportation costs could have a net positive effect in our operating results over the medium term.

During the quarter, there was a gain in financial instruments of $152 million, mainly due to the positive non-cash impact attributable to the drop in the yen long-term interest rates embedded in our perpetual securities versus the negative non-cash impacts suffered during the second quarter of this year which was almost fully reverted during the third quarter and has been fully reverted as of today.

Our majority net income decreased by 7% to $780 million during the quarter versus a year ago. This was due to the extraordinary gain of about a $100 million which we realized last year related to the sale of our minority position in Semen Gresik.

Looking at our capital structure, our interest coverage for the trailing 12 months through September declined to 6.9 times from 8.3 times a year ago. Our leverage ratio as measured by net debt to trailing 12 months pro forma EBITDA increased to 3.6 times for the trailing 12 months ending the third quarter. The decline in interest coverage and increase in net-debt-to-EBITDA are the result of the addition of more than $15 billion in debt related to the Rinker acquisition.

We expect to reduce the level of net-debt-to-EBITDA below the 3.2 times level reached when we acquired the RMC Group once we complete the asset disposals being considered. As Hector mentioned, we remain committed to achieving our steady-state net-debt-to-EBITDA capital structure target of 2.4 times within two years.

The average maturity of our debt is currently at about 3.1 years, and our strong free cash flow and committed facilities in place mean that we will have no refinancing needs during 2007 or 2008, as we expect to use the bulk of the assets sales proceeds to pay and prepay the shorter-term maturities in our debt profile.

During the quarter, we issued notes under our Certificados Bursatiles program for 3 billion pesos, with a maturity of 5 years at an interest rate equal to the 91-day Mexican TIIE rate, that is, the Inter-bank Equilibrium Interest Rate plus 10 basis points. We also issued various short-term notes under the same program. The notes issued were used to prepay short-term debt. These peso notes were swapped to US dollars at a weighted average funding cost for CEMEX of LIBOR plus 6 basis points.

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 close to $750 million in expansion capital expenditures in different projects around the world to increase our production capacity. This year, we will invest close to $1.4 billion, that is, including Rinker's expansion capital expenditures. We expect these expansion projects to provide, on average, returns well in excess of our stated acquisition investment criteria.

Our priorities will be to regain our financial flexibility and extract maximum value from the Rinker acquisition.

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.

Well, thank you for your attention. For the remainder of this call, we have invited Gilberto Perez, President of our US operations, as we anticipate that you are likely to have questions on our US business.

Now, we would be happy to take your questions. Operator?

[OPERATOR INSTRUCTIONS] The first question comes from the line of Esteban Polidura with Merrill Lynch. Please proceed.

Thank you. Good morning gentlemen. Three questions if I may. The first one, could you let us know in which countries you are experiencing these high energy and transportation costs. Second, when do you expect your operating margins to start stabilizing? And third, if possible, is there any guidance you could give us for '08, maybe in terms of volume prices or whatever you could give us? Thank you.

Well, thank you, Esteban. The issue of high energy cost, I think it is a worldwide issue. I don't see that there is any country that is being not affected by this, except that there might be different levels from which we are coming, depending on the availability of the different ended resources, but transportation costs affected by energy cost is definitely something that is a global in nature.

And then fuel costs increasing in different places are again depending on the different sources of energy or different fuels. And then, power is also being affected all over the place. There might be differences in the yield, but this is again a global issue.

On the operating margin, I think our consolidated margin is essentially affected today as mentioned by Rodrigo by the Rinker acquisition, but we think that in essence this is changing as some of our businesses, business mix changes in different places. To give you example, the case of Mexico where the increase in ready-mix volumes has been very significant as compared to increase in cement volumes and by that affecting the overall margin of the Mexican operations.

But if I may add Hector on the operating cash flow margins, despite the product mix that we have seen in Mexico and elsewhere where we have seen an increase of the rate of ready-mix which is a lower capital intensive business and though there is a lower margin.

Nevertheless, our operating cash flow margins are actually flat during 2007 versus 2006, and so the change in margin that we see in 2007 is primarily as a result of the United States and to a very large extent as a result of the consolidation of Rinker as well, which of course is a different geographic and product mix.

Nevertheless, of course we do everything that we can to mitigate the cost of higher input cost, and as an example, we have recently refinanced and restructured the thermoelectric project in Mexico that supplies the biggest junk of our electricity needs. So that our cost during 2009 for electricity, as a result of that project -- I'm sorry, during 2008 will be lower than 2007, that's helping us to mitigate again potentially higher price increases elsewhere across the cost structure.

But as for the guidance for 2008, we will wait until we have better visibility mostly in zone for major markets.

Okay, great. Thank you very much.

Thank you.

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

Yes, good morning. I just had a number of short questions, maybe I could fire them at one at a time. Firstly Hector you gave an EBITDA number for Rinker, could you give us sales and the operating profit number please?

Let me see if we can get it for you, just a second please.

Okay.

Maybe while we get that, Mike, you could ask your second question and we'll get back to the answer on the first question.

Okay. The second question, another short one, page 15 of the press release you referred to the disposals having a carrying value of $114 million Is that a revalued value or historical book value as they were in Rinker's balance sheet? Hello.

Yeah. Just a second.

Maybe I'll ask the third one, it's an easier one that doesn't need looking up maybe Mr. Perez can talk about the US price increase announcements both for aggregate. I think the Florida announcement back in October for maybe $5 a ton, if you follow that and also the cement prices next year I think its being a $10 announcement but it seems to be unclear where that's going from January or April and whether its saving at this stage.

Well. I am glad that's the easier one.

Sorry.

For October, the $5 increase announced in Florida is being accepted by the market, we led it and the whole market supported it.

Is it whole of Florida or Southern Florida.

Excuse me.

Is it the whole of Florida or just Southern Florida

It's the whole of Florida.

Okay. Thank you.

And just for rock.

Alright.

Okay. And we are expecting another one for January. It is still into works but I am cautiously optimistic about it. With regards to cement, I think it's a little bit early to tell everybody by region, but my bet will be that cement price increases will be more in March to April than in January.

Alright.

But again, it will vary by region, probably we will be able to get something in Florida in January, but in other regions I think it will be most likely March or April.

Okay. And just going back that January increase in aggregates in Florida, it's another $5, or it's the smaller number?

We are planning another $5.

Okay. Thank you.

Sure.

Let me go back to the second question, Mike, and then I guess Hector will go the first. When you see on page 15 of our press release relates to the accounting book entry of the assets that had been identified for sale, as a result of the requirement by the U.S. Department of Justice. And because they are for sale and will no longer be consolidated, they have already been taken out of the operating results of the company or and their contribution to net income is immaterial. It's less than $1 million for the quarter.

Another 114, was what they've been in Rinker's account, you've not done any kind of revaluation it's just historic book value?

That's correct. So, whatever you carry there, not the accounting, you take it out and you put it in for sale line instead of as part of your operating assets as we don't intend to keep those at.

Okay.

Let me take one of the -- approximately and we are of course, in the integration process as you can understand. We have already somehow organized their operations as we are in CEMEX and so Rinker it is or has disappeared, there's a concept, but approximately sales of Rinker in the third quarter were about $1,200 million.

Okay.

And operating profit about $200.

Okay.

That's approximate figures.

That's great, thank you for that. And the last question from me just on the tax situation and its more to do with the changes, you know you talked about the additional money that Mexican government is going to have to invest in infrastructure of the areas, but I think its doing not by raising taxes. Do you have an estimates of what the impact will be on you if, having to pay more tax in Mexico or haven't you actually paid tax in Mexico, is it still so early to calculate that?

No, we always keep the guidance and tax rate on a very general basis as the changes in tax laws normally carry a lag period where its very difficult for us to understand all the details of the application of the law. And so up to now we don't know exactly how this is going to impact our business, but we don't foresee any major impacts on our tax account.

Okay.

There are two major positive changes going forward of course. You know as you know before the tax reform we used to have an asset tax in Mexico which will no longer apply and of course an asset tax is unfair to company's and have a high asset base or rather a capital intensive business that has a low turnover such as cement and so doing away with those asset taxes is a positive step in the right direction we think. The other positive step is right direction is to allow for capital expenditure to be fully deductible upfront to promote investment and employment and as, you know, we have a heavy capital expenditure program in Mexico over 2008 which we're likely to benefit from.

That's great. Thanks very much about your talks, great of you. Thank you.

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

Hi, good morning, Hector and Rodrigo. Two quick questions, which are your expectations in terms of cement prices in the US, and they have some price cuts held up very well despite the decreasing volumes, what are your expectations going forward. And if you can elaborate a little on a slight drop on prices in Mexico in the third quarter, and finally if you can repeat your guidance for EBITDA and free cash flow for full year?

For the first question I think Gilberto can help us.

Sure Hector. Well I think that even we have widely discuss our excellent revenue, widely discuss the economic environment in the United States, what's going on in the residential sector. But I think that there are other factors as well that are going to help prices in the United States in general to be or to continue being resilient.

And we have disclosed those two energy prices especially where they are affecting freight and imports into the United States, our consolidation, the fact there are a lot of our competitors in the United States are European and they have exchange rate issues. I think all those factors are going to help cement prices to be resilient. There's a price increase pretty much nationwide announced on January 1 in cement of about $10.

My feeling right now that's probably going to happen until March or April. With regards to aggregates other conditions like permitting and scarcity I think are in our favor and in spite of our economic conditions, we're going to be able to at least in Florida increase in other $5 beginning January 1. I don't think the $5 will hit our books on January 1, but we will take it will probably March to get the full $5, but I am very optimistic about those.

Let me take the issue of Mexican prices, that we had a quarter-on-quarter sequential drop in average prices. It's an issue we don't see as a trend is mostly due to the fact that there is a geographic mix change.

We have also client mix change and where the more infrastructure projects, which would normally carry lower average price, but that is potentially a temporary issue. As we see the full year prices in Mexico in dollar terms, US dollar terms are up on the average year-on-year, but we don't see that as an issue.

And then for the EBITDA guidance for the full year, as we have both Rodrigo and myself stated in our initial comments, we find the $4.8 billion of EBITDA for the full '07 year target a stretch target, but we remain committed to it.

No, we have not provided guidance on free cash flow for this year because we believe what is most relevant is what will happen to our capital structure as a result of the asset disposals. Whereby we expect that once these asset disposals are concluded we should be back under 3.2 times net debt to EBITDA. Until, we know exactly which are the assets that will be disposed and which are the assets that will remain, it is difficult to talk about free cash flow for the existing business, because we don't know exactly which is the business that we will consolidate going forward. Once those asset disposals are completed then we should be in a position to begin providing guidance on free cash flow as well.

Now, if we look at the legacy CEMEX prior to the Rinker asset being acquired, the latest guidance we have provided to you is that we expect the conversion rate into free cash flow to be approximately 60%. Our EBITDA is converted to free cash flow after maintenance CapEx, whether that remains the case. For the Rinker assets that have been acquired, of course, in the early months, you need to carry the full impact of the incremental debt in highly leveraged acquisition transaction. And you yet don't have the benefits of the cost savings and the synergies that you are right. Once we have completed our due diligence on the post-merger integration process and we are in a position to give you the actual estimate for 2008, we will be able to talk about free cash flow for 2008 and going forward.

Okay. And thanks everyone.

Thank you, Gonzalo.

Your next question comes from line of Steve Trent with Citigroup. Please proceed.

Yes. Good morning gentlemen, just one or two questions from me. Looking at the expansion CapEx that you are moving forward within Mexico, the Yaqui cement facility etcetera, etcetera, to what degree will some of the new capacity replace older capacity? If I recall correctly you may still have a little bit of...

Hello.

It appears that his line has disconnected. [OPERATOR INSTRUCTIONS]. You may proceed, sir.

Yes. Hello, can you hear me?

Yeah, that's perfect now.

Sorry, not sure what happened. Yeah, just one or two things for me. Looking at your expansion CapEx in Mexico, the Yaqui cement facility etcetera, to what degree will some of the new capacity replace some of the older capacity that you might have there. I can't recall exactly whether you have any -- I am sorry wet process -- production left in Mexico, but will any of that new capacity be replacement. And then my second question with respect to some of the efforts you've taken in the US reducing fleet and some headcount were done in season and that sort of thing. Should we expect any one-time charges or so in fourth quarter or maybe into the first, if you could maybe give a little color on those items that will be great.

Well, on the first one...

Part of the answer is that, we don't have any wet process capacity in Mexico today and on the other hand what we do is that, because of the Mexican system is a very large one that we optimize the use of our capacity through a big model that we run. And our operations in Mexico normally looking at this to constantly change the mix of production in the different plants that we have in Mexico. So, it's very unlikely that any capacity will be actually or probably replaced by the new capacity. Instead, throughout the year after this new capacity is online, we'll probably be changing our mix of production depending on the different consumption patterns in the country.

Okay. Great.

For your US question I would like to turn the call over to Gilberto.

Thank you, Hector. Steve, we are not expecting any significant one-time charges because of the reduction in headcount or fleet or bank closures that is undergoing right now or is being undergoing for the last 16 months, but we do expect obviously the savings associated with those.

Okay. That's great. Thanks very much guys.

Thank you, Steve.

Your next question comes from the line of Dan McGoey with Deutsche Bank. Please proceed.

Good morning. My question is regarding the US margin performance. Looking year-on-year EBITDA margins were down about 600 basis points. I am wondering if you could talk little bit about how much of that decline is based on the energy and transportation cost, how much on the lower volume performance? There is obviously also the difference there with the inclusion of Rinker, so maybe comparing it on a pro forma basis. And then also if you can remind me how much of the cement -- how much cement imports you are brining into the US and how much of that additional cost transportation related is coming from the imports?

Gilberto?

Yes. Give me a ... just, hold on. For the majority of the change is as you said coming from volumes, I will say that probably close to -- out of this 600, close to 250 is because of volumes. And the rest is pretty much spread, a little bit on prices which are better in cement and aggregates, but are little bit down in ready-mix. The freight charges that you mentioned reflected in variable cost is not -- is about 60 points only. Distribution expenses in particular, but those are internal distribution expenses, those are about 70 points and corporate expenses another 70 points. The rest is very small.

Okay. And that's free. Costs, you mean, is the actual cost on the imported [product, that's some expense] in?

Which one? Excuse me.

You mentioned, I think 60 basis points for freight. I guess, I am wondering to what extent -- I guess how much in 2007, how much cement is CEMEX importing? And whether or not those higher shipping costs you were referring to are having a material negative affect on the cost structure for the US business?

I will say that the 60 basis points in variable cost, probably half of that is due to import cost and the other half is just energy cost in cement production. We have drastically reduced our imports compared to 2006 and they are down 55%. So the impact is being diluted. For next year, what we expect is whenever it's possible to buy from domestic producers or to utilize our domestic capacity 100% and with -- then continue reducing imports.

I think, Gilberto, if I could add and to put it into perspective, we believe the US business model is today significantly stronger than it was in the past. And that is the evidenced by the fact that despite the very large drop in volumes that we have suffered in the United States, which are really unprecedented, I don't recall a year in which volumes have dropped as much as during 2007. Margins today, operating cash flow margins today despite the change in the product mix are higher than they were in the previous down cycles, that we have suffered through in the United States. In fact margins today are higher than some years, they were middle of the cycle in the past, I don't know if you, Gilberto, if you like to give more color to that.

Yes, our margins are much higher than in previous cycles, just to give you an idea, during the last -- during the last three years our effort in increasing prices and our ongoing program of reducing costs have increased margins from around US about 20% in the period where Rodrigo was talking about to around 25%. And it could be higher but we had a different mix.

But do you think...

...construction downturn...

Just a follow-up. Rodrigo, your point about the unprecedented declines were taken, probably also unprecedented is the short drop in imports that the US is experiencing. Maybe, Gilberto you could comment, just a little bit generally on how sustainable looking out to 2008 such a low annualized import rate of cement is? Is that realistic to be sustained at such reduced levels?

Well we need to be. I think it's realistic. We need to acknowledge that probably 95% of the imports in to United States are done by cement producers -- domestic cement producers. And obviously, there everybody is going to give a stop on imports favoring domestic capacity. To give you an example, Florida who is bringing considerable capacity -- local capacity next year, used to import close to 50% of its needs, half of that was Rinker. That means that we will reduce imports next year almost to zero and we're going to utilize our domestic capacity.

Another example and I think all the major players are doing the same thing. Instead of importing cement from Korea into Houston for importing the same quantity I was importing this year or last year. What we're going to do is to bring, for instance, cement by barge from Demopolis into Houston to supply the Texas market and thus utilizing our domestic capacity at 100%. This is just a couple of examples that illustrates what I think is going to happen next year.

Okay. Thank you very much.

The next question comes from the line of Vanessa Quiroga with Credit Suisse. Please proceed.

Thank you. My question is regarding synergies. Could you give us some color on how much synergies you achieved from the Rinker acquisition in the third quarter, and I don't know if you would have guidance on how much synergies you will achieve every year in the next two, three years, and also to clarify what happened with margins in the Asia, Australia markets? Because from the last report of Rinker, they were having about 20% EBITDA margin in their operation in Australia.

And CEMEX was not that different, in this quarter margin was less than 18%, so just to clarify on that. And the third question would be just a follow-up on pricing in the US. Are those increases of $10 per ton applicable to other markets outside Florida or is it only Florida? Thanks.

Thank you, Vanessa. Well, first in terms of the synergies. As we stated, we still believe that the 130 million of synergies that we have originally targeted, we will achieve. We are very confident that we will achieve.

We are in the middle of the due diligence of our post-merger integration -- integration process. So we won't be able to give you any specifics about synergies, any further specifics until we finish this. We hope this will be as soon as possible.

In terms of the margins in Asia, the margin in Asia of course was affected by the mix due to the inclusion of the Australian operations.

So that's the reason why you see our margin changed there.

Well and also the margin drop is more as a result of some of our other operations for example Malaysia.

Is increasing in weight. Yes. And -- for the pricing in the U.S., Gilberto will give --.

Yes. [inaudible]. There is an average of $12 announcement in cement for the State of Florida starting January 1st. I would not think that we are going to get the $12, nevertheless all competitors are out with letters that vary from between $10 and $15. So, it's anybody's' guess how much are we going to be able to get, but I think we are going to get something in Florida.

In the rest of the country, I think we're going to get between $3 and $6 maybe, somewhere between March and April except for the West. It is still very uncertain what's going to happen in the West, which is basically California, Nevada, Arizona. We are still monitoring import prices, especially the behavior of freights. A lot of the cement is imported into that market and at very high prices.

Just to give you an idea, just freights from Asia to the West Coast in the United States are around $80, $84. So, we are still monitoring that situation very closely. And then we have, on top of that we have the TXI expansion. They brought in about 1.2 million tons into the market. We're monitoring that situation as well, and know that some of the players in the market are trying to buy cement from the TXI at import quality prices, which will help to stabilize the situation.

So you would expect that prices for the US could look flattish to slightly higher for next year, in the overall.

In the overall I think pricing will be resilient. It's still uncertain, the amount that we are going to get and the timing, but I will expect that somewhere within January and April we're going to get something in the regions that I just mentioned.

Thank you very much Gilberto. Thank you.

Thank you, Vanessa.

The next question comes from the line of Tobias Woerner with MS Global. Please proceed.

Yes, good morning gentlemen.

Morning.

Just a couple of questions. You split out the Rinker contribution in terms of EBITDA maybe to make life a little bit easier for us. Could you split that by the geographic basis i.e. US, Asia and -- well US and Asia basically. That's first question. Second, clearly with regard to your margins coming from aggregates and RMC, it is going to be to come more and more difficult for outsiders like myself, to differentiate between your performance, your actual performance and the dilution from increasing RMC businesses in your various regions. Might it not be better if you actually split that out in future in terms of cement and other building material margins?

And then just thirdly on the UK, would it be possible to give a little bit more flavor on why the drop in margin was so strong? You gave us some indications, do you think these are more industrial-related or are they more related to your company, because of certain issues what you are facing at the moment. And just lastly, the Egyptian prices, what is happening in Egypt? Thank you.

Okay. Let me see I mean from the point of view of breakdown, the EBITDA from Rinker in the quarter, there is, I mean, barely any contribution from the rest of Rinker that is not Australia and the US. So, out of the $270 million, $70 million comes from Australia and $200 from the US. China is a very minor contribution.

As to your question breaking down in a different way, our margins to help you better, that is of constant concern, we will of course consider any suggestions and will try to accommodate as much as we can to make our reporting much more effective and to make it more helpful for you.

To the UK, this is a special situation in the margins that we have, highly influenced by the fact that we have to import, in fact, because if you compare year-to-year as we mentioned, last year we were making major changes and repairs in our Rugby plant, and this year there were some issues in some of our colleagues in the industry and some of the suppliers. And so we have to, in order to be effective in supplying our customers, we have to be importing more than we had in the past. So that affected our margins more than anything else.

As for Egypt, the question was about prices, let me just check. I think we are essentially on the same level, I mean there is nothing -- there is some increases if I am not mistaken, but I am trying to perhaps -- yes, there is about a 9% price increase over the last year's third quarter and year-on-year, it's more or less the same, it's about 9% for cement. However, the ready-mix operations are very small, but still there is about a 12% US dollar increase in prices year-on-year on the average for ready-mix in Egypt.

Okay. If I may just ask one last question, Rodrigo made a very intriguing comment which I fully share with him, but I would like to have a little bit more insight from you. He was talking about the fact that higher transport and logistic costs, especially the Baltic freight rates are helpful for your industry. The one question I have here is, the environment is a little bit different now with the US being under so much pressure than it was the case the previous year's before. So, are you a little bit worried that this might no longer work in the same way as it did before?

Rodrigo?

Well, now I think the basic fundamental issue is that cement and aggregates are very heavy bulky materials, expensive to move, and therefore, the higher the transportation costs, the higher the cost of logistics, the higher the cost of freight. The more likely that average prices in the equilibrium point will be higher, because the marginal producer, the marginal supplier will have to pay those higher costs, and of course, the existing producers, the existing reserves, the companies that are closest to the consumer will benefit as a result. And that has happened over the last five to six years and we think that we'll hold going forward as well.

Remember that we are in a very capital intensive industry as well, and therefore, even with a low cost of freight, it would be very difficult for anybody to justify the return on capital to build a plant entirely for exports. You'd never earn the return on capital to justify the cost of capital, of course if the cost of freight increases, and remember that over the last several years it has gone up three times in cost, then that equation becomes all that much more difficult and because you do have growth in the global consumption of cement, well this translate into higher average equilibrium prices worldwide.

If I may add Rodrigo, I agree that the US market is going to be under a lot of pressure, but the rest of world in general, cement demand is going to grow, and talking specifically about maritime freight, I think that's going to help a lot in what we have been talking about meaning resilience in domestic prices in the United States. We need to remember that in the last downturn that we had which was 2001 import prices in the United States were in the $30 to $35 range, and now are going to be between $95 and $105. So I think that definitely will help prices in the US to be resilient next year.

Thank you, so much for very helpful comment.

Thank you, Tobias. Operator, we have room for one more question.

Okay, sir. That question comes from the line of Arnold Pinatel with Exane. Please proceed.

Yes. Hello gentlemen, Arnold Pinatel from Exane BNP Paribas. I have two questions if I may, first one is just a follow-up on your outlook for US prices because I earned you on the freight rates as supporting prices.

I just wanted to understand when you talk about resilient is it based on a scenario where you have pressure on certain regions, where you can see capacity addition and high inventories. And the region increase helped by the freight rates this would be first question.

Okay. I think that basically pressure from freight rates is going to help prices to be resilient in the West, I mean, even though there is TXI capacity addition that is ready as we speak.

And the e East coast is different, the East coast basically is going to be a lot of replacing of imports. I see very little imports coming into the East coast especially with all the capacity coming on line by mid year in the State of Florida. And as I said earlier most of that capacity is being built by the importers into this part of the world. So I think it's just going to be a replacement.

Again, I don't deny that that the markets are going to be under pressure, but if you take into consideration that this year, we're expect a decline in cement demand unprecedented decline in cement demand and prices are still higher than last year. I think that prices are going to continue with this resilience.

Okay. Thank you. My second question is on Spain. If we were adopting a scenario of declining volume in 2008, I guess you will also first cut the import that you have on this market.

But my understanding of the Spanish market is that most of the import there are in the hand of independent trader, so just wanted to understand from you, what could be a scenario for prices in 2008, and do you see any conflicts between, independent importers and some local producers?

Yes. No, I think you're right. I mean, in Spain most of the imports are somehow handled by independent traders, and that of course has an impact on the situation when there is a decline in volumes.

But on the other hand there is the effect of freight rates that affect the importers and that's, I mean, whoever is handling those imports is going to be affected by those freight rates as they are higher as they keep being as high as today that is going to have an effect on prices. However, that's freight that is the same as we've seen in the US, but we don't know.

But will you not take the opportunity of this independent trader is of importance to be squeezed by the freight, and as there is a priority as in all imports markets between domestic and imports price. To we tended to reduce your price in Spain just to try to force out, as many smaller traders as you can in 2008?

I think, to answer your question. Definitely they must be feeling squeezed, especially going forward as they have to renegotiate their contracts for next year. Do you remember what we have mentioned in the opening remarks. The cost of shipping as measured by the one year charter handymax rate is actually double, as it was in December of '06. And so you may have locked in, you know, a reasonable cost freight for this year. But as you look forward to next year and you try to negotiate that if you are an independent, you are feeling the squeeze, definitely.

So, if I understood well, you don't need to decrease your price below the proprietary. But you will not increase you price in Spain, if you can squeeze independent importer.

This is addition we have to make when we get there and, of course, as for the oil industry that depends on whatever all the producers and importers do. But certainly that, the situation in Spain, presents an opportunity as we see in every market, in any event even in declining or increasing volumes that we see as a case.

Okay. But you still see cost inflation in Spain for 2008?

I am sorry, again.

You can still expect additional cost inflation in Spain for 2008?

Because of freight?

Because of energy or petcoke, or electricity price I don't know. Do you see locally from additional cost inflation in your budgets for 2008?

We have not given any guidance, yet and we will do so and we will see that as far as we can in our budgeting process.

Okay, thank you very much.

Thank you, Arnold. And thank you everyone. Thank you Gilberto for your help, and of course, I would like to thank you and 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. Thank you very much.

Ladies and gentlemen -- you're welcome. This concludes our presentation. And you may now disconnect. Good day.