Cemex SAB de CV (CX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX fourth quarter 2007 earnings conference call. My name is Shahida, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Hector Medina, Executive Vice President of Planning and Finance. Please proceed.

Thank you. Good morning, and thank you for joining us for our fourth quarter conference call. I will briefly review our year-end results and share our outlook for 2008. Then, our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

In 2007, a good year for CEMEX, we achieved two important milestones. First, we posted our strongest financial results ever. We achieved record sales in EBITDA generation, despite the worst performance in the United States, our largest market, in the last 50 years. This is a testimony to the resilience and strength of our business model which has delivered good results in bad times and will deliver better results as the macro environment improves.

For the year as a whole EBITDA grew 11% to $4.6 billion dollars. Net sales increased at a rate of 19%, reaching $21.7 billion dollars. Our free cash flow after maintenance capital expenditures was $2.6 billion dollars during the year. This achievement comes primarily from the consolidation of the Rinker operations, as well as from higher domestic volumes and favorable supply/demand dynamics in most of the markets in our portfolio.

We think it is important to note that in 2007 our geographical diversification mitigated the effect of the declining U.S. residential sector on our consolidated operations.

Our second major milestone of the year was the full integration of Rinker and the implementation of the necessary platforms to realize the resulting synergies.

We approach 2008 cautiously. As it was stated in mid December, for this year we expect, at the currently prevailing foreign exchange rates, EBITDA of about $5.6 billion dollars. This represents an increase of approximately $525 milion dollars over pro forma 2007 EBITDA, excluding inflationary acounting but including foreign exchange conversion effects. It is important to highlight, however, that this growth will be realized during the second half of this year, given the fact that the U.S. correction intensified throughout 2007.

First quarter comparisons are expected to be challenging, as we enjoyed favorable weather conditions in most of our markets during the first quarter of last year and we had better trading environment. In addition, there are fewer business days in the first quarter of this year compared with the first quarter of 2007 due to the Holy Week.

About two-thirds of the EBITDA growth for this year is expected to come from synergies resulting from the Rinker integration and from our expense reduction initiatives. Originally, we had estimated that we would achieve synergies of $130 million dollars after three years. We now expect to achieve this amount during 2008.

We expect to achieve the rest of the EBITDA growth organically, despite cero growth in Spain and no growth in the United States before synergies. Favorable supply/demand dynamics, realized synergies and productivity improvement initiatives are expected to offset lower volumes in these countries.

The strength of our asset portfolio, business model and earnings quality leads us to expect our free cash flow after maintenance capital expenditures to be in excess of $3 billion dollars for 2008. This is due, in part, to the fact that this will be the first year of full consolidation of Rinker, which will be free cash flow accretive despite the weakness in the U.S. market.

It is important to highlight the significant transformation in our business model in the past three years. Since the RMC and Rinker acquisitions we have increased our geographic diversification and have enhanced the vertical integration of the business throughout the cement value chains. We expect this transformation to improve the quality of earnings in terms of profitability, sustainability and stability.

The most profound changes have been the increased contribution to our operating performance from Aggregates, Ready-mix and other Concrete products. These businesses tend to have lower EBITDA margins and much lower asset intensity. In the case of Aggregates, we have a business that has profitability dynamics similar to those of Cement, but is less asset-intensive with important natural barriers to entry and positive supply/demand dynamics going forward.

An important consequence of this transformation is, however, a lower EBITDA margin for the Company on a consolidated basis. In addition, we have obtained global leadership in Ready-mix, which gives us the added advantage of being closer to our customers and, therefore, being able to strengthen our relationships through product innovation and service differentiation.

Now, I would like to discuss the fourth quarter performance of our principal markets and our outlook for this markets for 2008.

In Mexico, our Cement volumes increased 2% during the quarter versus the same period in 2006. The weak comparison is primarily due to an exceptionally strong fourth quarter in 2006, leading up to the completion of many large infrastructure projects. However, full-year volume growth was consistent with our expectation at close to 4%. Ready-mix volume grew by 4% during the quarter and by close to 8% for the full year 2007. Our results reflect the continued strength in the infrastructure and formal construction sectors.

We see two main factors driving Cement volumes during 2008. The first is government spending on streets and highways, public buildings and other infrastructure projects. During 2008 total spending on public works is expected to increase 34% to reach $7.5 billion dollars during 2008, of which about 50% is estimated to be spent in the modernization and construction of more than 3,000 km of roads and highways, compared with an estimated $5.6 billion dollars last year.

Growth in this sector is supported by government finances and the results of the realization of the fiscal reforms approved in 2007. The national infrastructure program, which was announced last year, will increase government and private spending on infrastructure. The private sector should also increase its contributions to the financing of public infrastructure projects. In cement-intensive sectors like highways, ports, airports, water treatment facilities, dams and others, private investment will be about 43% of the total.

The approval of the fiscal reform and other initiatives is also expected to provide the federal government with approximately $14 billion dollars in additional funds for the 2008 budget; a 10% increase versus last year. These additional resources will potentially raise the growth of -- the growth rate of Mexico's construction GDP to an annual average ceiling of 4% in the 2007 to 2012 period. This figure is higher than the average 2.7% growth rate achieved in the last presidential period.

The second factor is a strong residential sector which will also continue contributing to the increase in cement demand. The number of mortgages sponsored by Infonavit Commercial Bank, SOFOLES and other institutions continues to grow. President Calderon has committed to grant a record six million mortgages for home construction and remodeling during his six-year presidential term. Approximately 730,000 mortgages were granted last year and that number could reach 820,000 in 2008. During 2007, Infonavit granted approximately 460,000 mortgages and that number will likely reach about 500,000 this year.

The growing number of mortgages granted by commercial banks and SOFOLES is increasingly contributing to the sector's growth. During 2007 the number of these mortgages is estimated around 200,000. We see that number rising by at least 30%, which implies at least 260,000 during this year.

In general, the former residential sector is meeting more of the housing demand previously met by the self-construction sector.

Mexico is very prepared to withstand the U.S. economic slowdown today than it was at the beginning of the former presidential term. Mexico currently has $85 billion dollars in federal reserves, compared with $36 billion dollars in 2001. Internal debt is lower than these reserves, at $70 billion dollars.

Mexico has a stable trade deficit below 1% of GDP. The 2008 federal budget was approved with a surplus and based on a budgeted Mexican oil mix price of $49 dollars per barrel, while the year-to-date average price is about $78 dollars and is expected to remain at higher than budget levels for the rest of the year.

Remittances from the United States to Mexico continue to be stable, in spite of the slowdown in the U.S. housing sector. In 2007 remittances are expected to reach about $24 billion dollars; a similar amount is expected for this year.

For 2007 and 2008 foreign direct investment is expected to be about $20 billion dollars annually. The country has low and stable inflation levels. A stable exchange rate is expected for 2008; in line with the last three years.

We continue with expansion projects in Yaqui and Tepeaca that we announced in 2006. These investments, which will extend into 2008 and 2009 respectively, reflect our confidence in the Mexican economy and the continued high growth of the country's housing and infrastructure markets. We are optimistic about the trend in cement demand in Mexico and we see Cement volumes in Mexico rising in excess of 4% in 2008. The main consumption from government and other ready-mix intensive projects will likely increase our Ready-mix volumes by about 14% for the year.

In the United States our Ready-mix sales volumes increased by 54% and Aggregates volumes increased by 175% in the fourth quarter versus the same quarter last year. These increases were mainly the result of the acquisition of the Rinker operations which expanded these businesses.

Fourth quarter Cement sales volume fell 1% versus the same period in 2006. cement main volume from the Rinker operations almost offset the overall declines in the market. On a like-to-like basis for the ongoing operations, our Cement volume decreased by 19%, our Ready-mix volume decreased by 21% and our Aggregates volume decreased by 13% versus the same period in the prior year.

The fourth 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. This is because Rinker's operations have a higher proportion of sales in markets that have attracted the highest speculative investments, especially Florida, which is currently experiencing the biggest correction in the country.

In addition, volumes were adversely affected by inclement weather conditions, primarily in California, Arizona and Florida. For the full year 2007, on a like-to-like basis for the ongoing operations, Cement volume decreased by 18%, Ready-mix volumes fell by 21% and Aggregates volumes declined by 13%. Despite this historic decline across all of our businesses, prices for most of our products remain resilient.

The U.S. has a cement capacity shortage and an import buffer which protect against demand downturns. During 2007, imports are expected to decline by about 13 million metric tons, slightly in excess of the drop in total U.S. demand, reaching about 22 million metric tons for the year. Imports represent about 19% of the total U.S. estimated consumption for the year.

Prices for imported cement have been escalating and are expected to increase in 2008, largely due to the higher freight costs, tight shipping conditions and higher fuel costs. Higher energy and other input costs are contributing further to pricing resilience.

Before sharing our expectations for 2008, I would like to point out that there is a continuing uncertainty about the economic outlook in the United States. As such, our guidance for the U.S. operations is particularly sensitive to changes in this outlook.

Public sector construction put in place, in nominal terms, increased 13% during the first 11 months of 2007 and spending for streets and highways rose 7%. Adjusting for input cost inflation, highway spending through November last year was up about 1% versus the previous year and contract awards for streets and highways in real terms were relatively flat last year. In effect, the nominal increase in federal funding from SAFETEA-LU was, essentially, offset by higher construction costs.

Contract awards for other public works increased approximately 3% during the past year. Historically, public sector construction spending has been more stable during economic downturns. Consequently, based on past history and recent trends in contract awards, we see volumes in the public sector remaining relatively flat in 2008.

Input cost inflation is also likely to be lower this year than it was in 2007. In the industrial and commercial sectors, nominal construction spending in the United States grew 18% during the first 11 months of the year. Nominal spending growth in this sector has begun to slow down as contractors have become more cautious in the current economic environment.

Growing concerns among businesses and developers over the economic outlook have led to a decline in new projects. For the entire United States, contract awards have declined 4% in real terms through November versus the same period of last year.

Full year 2007 cement volume growth for the segment was up about 1% versus 2006 for our markets. This 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 U.S.

In 2008, we expect volumes in the industrial and commercial sector to decline by approximately 6%, due to the decline in new project works, which is expected to continue due to the uncertain economic environment.

The residential sector continued to decline during the fourth quarter. Nominal construction spending in this sector decreased 18% nationwide for the first 11 months of 2007. Housing starts, the fundamental driver of cement demand in this sector, decreased 25% last year. For our markets, this decline is even steeper, with the high growth residential markets decreasing faster.

Housing permits in Florida, for instance, decreased almost 50% in the first 11 months of 2007. In our other major market housing permits to November declined 30% in California, 24% in Arizona and 24% in Nevada. Even in Texas, where affordability is high and inventories are normal, residential permits declined 18% through November. These five States, Florida, California, Arizona, Nevada and Texas, represent 67% of our Cement operations, based on 2007 pro forma sales volumes.

Inventories of new and existing unsold homes have increased in the relation to more than twice their normal levels. New home inventories have declined by about 7% as of December versus the previous year but represented 9.6 months of supply at the December sales level versus about 6.5 months for 2006.

Moreover, rising delinquency rates for high-risk mortgage segments, such as sub-prime, will likely result in record foreclosures which will increase inventories. Excess home inventories can be worked off only by increasing sales and reducing construction starts. We are encouraged by the fact that builders are becoming more aggressive in reducing home prices which have declined 6% nationwide, while key markets, like Florida and California, have had double-digit declines. Even so, steeper price reductions will be necessary to bring affordability back into balance and set the foundations for higher sales, which are necessary to absorb the excess inventories and, ultimately, drive a recovery in residential construction.

The timeframe for excess inventory absorption will depend on further price reductions, interest rates, credit availability, job creation and the magnitude of home foreclosures. Based on our assessment of all these factors, we estimate that in 2007 our Cement demand for this segment declined by about 37% compared with a 28% decline for the entire United States.

For 2008, we expect the U.S. residential sector to continue its downward trend, albeit at a slower place. Cement demand for this sector for our market is expected to be slightly worse than consensus, at a decline of about 18%. EBITDA generation in the United States has been affected mainly by our Ready-mix and Other products operations. These operations, which include Concrete Blocks and Other building materials, are driven more by the residential sector than our Cement and Aggregate operations. The Ready-mix and Concrete Block operations suffered due to lower sales volumes and higher material costs.

We have taken actions to reduce costs in the Ready-mix, Aggregates and Concrete Block operations. These actions have included plant closures, reduced truck fleet and headcount. In addition, we have identified substantial synergies during the post-merger integration process which will further reduce our costs going forward. We look positively toward the future in the United States. We recognize that the current downturn is temporary, and know that the integration of Rinker prepares us for long-term growth with a more balanced position throughout the Cement value chain.

In light of the above, on a like-to-like basis for the ongoing operations, we expect that our 2008 -- that in 2008 our Cement volume will decline by about 7%, our Ready-mix volumes will decline by about 9% and our Aggregates volumes will decline by about 6%.

However, we expect operating cash flow from the United States to be flat this year versus last year. The decline in volumes will be offset by higher than originally expected synergies from the Rinker acquisition, plus containment initiatives and continued favorable supply/demand dynamics.

In Spain, Cement volumes decreased by 8% and Ready-mix volumes decreased by 5% during the fourth quarter. For the full year 2007, Cement volumes decreased by 5% in Ready-mix volumes -- and Ready-mix volumes decreased 4% versus the previous year. Total volumes for the year ended below our most recent guidance, due mainly to weaker than expected demand from the housing and infrastructure sectors during the fourth quarter.

During 2007, the growth rate in national cement consumption was lower than in previous years. Coming from a strong 2006 with growth rates of over 8%, the market this year posted a modest increase of only 0.3% with varying performance levels in the different markets.

While the overall market remained almost flat during 2007, Cement consumption in our markets declined by 4.7%, due mainly to lower construction activity, especially in Madrid and Levante, which have shown above-average growth in previous years.

For 2008, we expect GDP to moderate to a growth rate of about 2.8% versus 3.8% during 2007. In 2006, the residential sector posted a record year, with housing permits exceeding 860,000. Part of this growth was fuelled by an extraordinary increase in housing permits, as many as 75,000, in anticipation of changes in the Residential Building Code. Accordingly, a decline in housing permits of approximately 25% is expected for 2007 and a further decline of a lesser magnitude of about 10% is expected for 2008.

The evolution of housing prices and the intensity of the current financial liquidity crisis will condition the adjustment of supply side of residential construction. A potential decline in real prices would translate into a higher adjustment in new housing units, and a sharper and faster correction to our equilibrium levels.

In 2007, infrastructure spending was negatively affected by the completion of major projects early in the year, in anticipation of local and regional elections held in May. For 2008, civil works will show a performance similar to that of 2007. We expect an improvement in local and regional activity as the effect of the last election should start losing momentum, offsetting any possible slowdown in the central government activity, caused by the upcoming Presidential elections to be held this coming March.

The industrial and commercial sectors should grow at a moderate rate during 2008.

In light of the above, we estimate both Cement and Ready-mix volumes to decline by about 3% to 4% during 2008. There is a risk that Spain will experience a deeper correction in the residential sector during 2008.

In the United Kingdom, Cement volume increased by 4%. The volume of cementitious materials, including cement and slag, increased by 7%, Ready-mix volume remained flat and Aggregates volumes increased by 5% during the fourth quarter. For the full year 2007, Cement volume increased by 12%, cementitious materials volume increased by 13% and Aggregates volumes increased by 2%, all versus the 2006 figures.

Ready-mix volumes during 2007 decreased 2%. During the fourth quarter, we have some divestments in our Ready-mix business. On a like-to-like basis on the ongoing operations, Ready-mix volumes decreased 1%.

During 2007, Cement demand was driven mainly by a healthy performance from the industrial, commercial and public housing sectors. These sectors, together with the improved performance in infrastructure sector, will continue to drive Cement consumption during 2008, while the private new housing work and the repair, maintenance and improvement sector will remain subdued.

For 2008, we expect the volumes of Cement, Ready-mix and Aggregates in the United Kingdom to perform in line with national consumption, which we expect to grow around 1% during the year.

We are expecting the profitability of our business in the U.K. to be positively impacted by SG&A and corporate expense reductions, increasing the usage of alternative fuels in Cement, lower electricity costs across all businesses due to more beneficial contracts, a reduction in operating costs in Ready-mix Concrete.

In France, our Ready-mix operations increased 3% during the fourth quarter and 5% during the full year 2007. During the third quarter of 2007, 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 volume for the year would have increased 3%. Aggregates volumes increased 2% during the fourth quarter and increased 2% during 2007 versus the comparable periods in the previous year.

The main driver for volume growth in the country is the public works sector which is showing a strong activity in anticipation of local elections to be held this year and, to a lesser extent, the non-residential sector. The residential sector started to stabilize in 2007 compared with record levels reached in 2006. We see Ready-mix volume for the full year 2008 and on a like-for-like basis for the ongoing operations growing by about 1%, driven mainly by the infrastructure and non-residential sectors.

In Germany, our domestic Cement volumes increased -- decreased by 15% during the fourth quarter and by 6% during the full year 2007 versus the comparable periods in 2006. The number of permits in the residential sector declined in 2007.

This decline began during the second half of 2006 and some of these permits were requested earlier, in anticipation of the increase in the value added tax, which went into effect in January 2007. The non-residential sector, including office buildings and energy projects, partially offset the decline in the residential sector during 2007. Permits in the sector were up 9% during the first nine months of the year. The public works sector remained stable in 2007.

For 2008, the main driver of Cement demand will be the public work sector and, to a lesser extent, the residential sector, which is expected to grow during the second half of the year. We expect our domestic Cement volumes in Germany to have a high single-digit increase.

In Eastern Europe, namely, Poland, Croatia, the Czech Republic and Latvia domestic Cement consumption increased by 16% for the full year 2007 versus the same period in 2006. For 2008, we expect the weighted average GDP growth rate to be about 5.5%. The prospects for the region remain attractive, as Cement consumption is expected to increase as the convergence of these countries into the European Union accelerates.

In Venezuela, domestic Cement volume grew by 9% during the fourth quarter and by 17% for the full year versus the comparable periods of 2006. Infrastructure and housing sectors continued to be the main drivers of Cement demand. For 2008, we expect Cement consumption to continue its growth trend, albeit at a slower pace than last year.

Cement volumes should grow by about 7%, fuelled primarily by infrastructure and low income housing.

In Colombia we saw 14% Cement volume growth in our operations during the quarter and 19% during the full year 2007. The three main drivers of Cement demand during the year were infrastructure spending, middle income housing and non-residential construction, such as warehouses and shopping centers.

For 2008, we expect infrastructure spending to continue on projects, such as the plan 2500, in which 2,500 kilometers of secondary roads will be paved and will connect more population centers across the country. We see a slowdown in the residential sector, however, resulting from an increase in interest rates and higher home supply. The non-residential sector should continue with a strong performance and the self-construction sector will show a moderate growth during the year, driven by favorable employment levels and increase in real wages. Overall, we expect an increase of 5% in domestic Cement volumes for 2008.

In Egypt, domestic Cement volumes increased by 7% during the fourth quarter and by 8% for the full year 2007 versus the same period in 2006. During 2008, the residential sector will continue to drive Cement consumption. Public spending on construction is low, and there are no new projects. Accordingly, we expect Cement volumes to grow by 2%.

In our operations in Australia, Ready-mix volumes for the fourth quarter increased by 10% and Aggregates volume increased by 2%. For the full year 2007, Ready-mix volume increased by 5% and Aggregates volume increased by 7%. The value of commercial building approvals increased by 18% for the first 11 months of 2007 versus the same period in 2006.

Office retail and warehouse construction, supported by strong employment and growth in real wages, are driving growth in the commercial sectors. The civil sector is benefiting from major road infrastructure projects and increased investment in the mining sector. The value of work done in the civil sector increased by 11% for the first nine months of 2007 versus the same period in 2006.

The main drivers of growth in Ready-mix and Aggregates volumes for 2008 will continue to be the commercial and civil sectors. We expect Ready-mix volumes to increase by 2% during 2008. We see Aggregates volumes declining by about 4%, as a result of the conclusion of large road projects which contributed to 2007 volumes.

As usual, and before I turn the call over to Rodrigo, I would like to reiterate an important commitment to our shareholders, which is to ensure that in the short, medium and long term, our capital allocation strategy remains on course to sustain a record of disciplined, profitable growth.

Going forward, we intend to invest our free cash flow in two 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 structural target of 2.7 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 market that we currently serve. We will do this in order to further integrate our position along the value chain and to ensure our ability to participate in the future growth of our markets.

In light of this, we are forging ahead with our expansion capital expenditure projects announced during 2006 and 2007. We're currently increasing Cement production capacity by about 12 million metric tons in Mexico, the United States, Panama, Spain and Latvia. In addition, 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 these expansion projects to provide, on average, returns well in excess of our acquisition investment 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 on this teleconference.

Our performance here in 2007 was supported by higher volumes and strong supply/demand dynamics in most of our markets, and also by the integration of Rinker's operations starting July 1.

EBITDA for the year increased by 11%, reaching $4.6 billion dollars, despite the depth of the correction in the U.S. residential segment. During 2007, our free cash flow after maintenance capital expenditures reached $2.6 billion dollars, 4% below the previous year, as a result of the weaker than expected contribution of our U.S. businesses.

During the quarter, EBITDA increased 18% versus the fourth quarter of 2006, reaching $1.1 billion dollars. On a like-to-like basis for the ongoing operations, EBITDA would have decreased 11%. Most of our countries and regions registered EBITDA growth during the quarter, with the exception of the United States, in which EBITDA fell on a like-to-like basis, again, mainly as a result of the ongoing correction in the residential sector.

Our consolidated EBITDA margin decreased from 20.9% in the fourth quarter of 2006, to 19% in last year's fourth quarter. This drop in EBITDA margin is due to the change in the product mix as a result of the consolidation of Rinker, and also due to higher kiln fuel, electricity and transportation costs.

For 2008, we expect our consolidated EBITDA margin to increase as a result of better pricing across geographies and product lines, the realization of synergies from the integration of Rinker and other productivity improving initiatives that have already been implemented during the fourth quarter of last year.

The positive variation in our working capital during the fourth quarter came mainly from better account receivable collections, especially in Mexico, the United Kingdom and Spain.

Moving on to our input costs, despite the significant cost increases we saw last year in the international, energy and transportation markets, our kiln fuel and electricity costs increased by 13.5% on a per ton of Cement produced basis, over 2006, which is in line with our expectation at the beginning of last year.

We have continued to achieve greater predictability in our cost structure and will continue to seek ways in which to mitigate the impact of higher energy costs going forward. In 2008, we expect a mid single-digit increase in these energy costs per ton of Cement produced.

During the fourth quarter, freight rates as measured by the one-year Handymax Time charter rates, remain at high historical levels; almost double the level seen during the fourth quarter of 2006. The increase in global demand continues to absorb new ships entering the market, maintaining the tightness in the international Handymax bulk shipping business.

Most of our markets continue to see an increase in transportation costs. In particular, we see -- we have seen our U.S. truck and rail costs rise. The increases in these costs, which are more highly correlated with oil prices, reflect a continuing rise in fuel costs and tight supply in most markets. Higher energy, shipping and transportation costs, and tight supply globally, translate into higher average equilibrium market prices for our products.

During the quarter, there was a gain in financial instruments of $143 million dollars, resulting mainly from the positive non-cash impact attributable to the drop in the yen, long-term interest rates embedded in our perpetual instruments. In addition, there was a gain in monetary position of $313 million dollars, due mainly to higher debt resulting from the Rinker acquisition.

These gains, which arise as a result of inflationary accounting, will no longer be realized going forward because the Mexican financial reporting standards have changed, starting with the first quarter of 2008.

During the fourth quarter, our majority net income increased by 43% versus last year, reaching $538 million. This was due to higher gains from our monetary position and higher gains on financial instruments, which more than offset the higher depreciation and amortization charge during the fourth quarter. Depreciation and amortization for the quarter was higher, as it reflects a one-time negative adjustment of approximately $115 million dollars related to the revaluation of Rinker's assets in accordance with the purchase price allocation accounting principles.

As I mentioned, Mexican financial reporting standards have changed beginning in 2008. As a result, inflationary accounting, going forward, will apply only during periods of high inflation, or periods in which the cumulative inflation rate over the previous three years equals, or exceeds, 26%.

Until December 31, 2007, the inflationary accounting was applied to CEMEX and all of its consolidated subsidiaries, regardless of their inflation levels. Starting this year, inflationary accounting will apply only on a country-by-country basis to those countries that exceed the inflation threshold.

The main effects from ceasing inflationary accounting include balances of inventory and fixed assets as of December 31, 2007 will not be further restated by inflation, significant reduction of the gains in monetary position in the income statement, as it will include only the results of those countries over the inflation threshold and reduced affect in equity from non-monetary assets.

The expected impact of these changes in our income statement is as follows. Operating income should be positively affected as depreciation and amortization charge will be reduced over time. Net income is positively affected by the reduction in depreciation and amortization, but has the negative effect of the significant reduction of the gains in monetary position.

Looking at our capital structure, our interest coverage for the trailing 12 months through December decreased to 5.7 times from 8.4 times a year ago. Our leverage ratio, as measured by net debt to trailing 12 months pro forma EBITDA, was 3.6 times for the trailing 12 months ending this past fourth quarter. The decline in interest coverage and the increase in net debt to EBITDA are the result of the addition of more than $15 billion dollars in debt related to the Rinker acquisition.

As Hector mentioned, we remain committed to achieving our steady-state, net debt to EBITDA capital structure target. We expect to reach 2.7 times by mid 2009. We intend to make significant progress towards this objective during 2008. We have targeted to achieve a level of close to 3.0 times net debt to EBITDA by December of 2008. This may require a certain amount of asset sales.

It is important to note, however, that this leverage ratio will be higher for the trailing 12 months ending in March 2008, due, in part, to the recent change in Mexican reporting standards. In addition, Holy Week will be in March this year, leading to a lower number of business days for our portfolio of assets during this first quarter.

During the fourth quarter we issued two tranches of Notes under our Certificados Bursatiles Program. Those tranches were placed in UDIs - Unidades de Inversion . The first tranche consists of MXN2 billion with a maturity of three years at a fixed real interest rate equal to 3.9%. The second is a 10-year tranche for MXN456 million at a fixed rate interest rate of 4.4%. We also issued various short-term Notes under the same program. All these peso issuances have been swapped to U.S. dollar obligations.

We invested close to $750 million dollars in 2006, and $1.4 billion dollars in 2007, in different capacity expansion projects around the world. We will continue with these investments during 2008, allocating more than half of our free cash flow to these initiatives. And we expect to enjoy the incremental EBITDA from these projects starting in the second half of this year but, predominantly, during 2009 and beyond.

Our priorities in the short term will be to regain our financial flexibility and to extract the maximum value from the Rinker acquisition. Whereas, our original expectation was that the average cost of funding in the Rinker acquisition would be 6%, we are now estimating an average cost for 2008 of close to 4%, that is, before taxes, as a result of where we are in the U.S. dollar interest rate cycle.

These savings, together with the greater than originally expected synergies, will more than offset the lower than originally expected EBITDA from Rinker, resulting from the deeper U.S. correction. Consequently, the free cash flow and cash earnings accretion from Rinker for 2008 will be better than originally assumed, despite the ongoing U.S. recession in our industry. This will allow us to maintain our historically long-term growth rate in both free cash flow and cash earnings.

Finally, and as always, I've been asked to remind you that any forward-looking statements we make today are based on our current knowledge of the markets and are provided at the prevailing exchange rates. Of course, these could change in the future due to a variety of factors beyond our control.

Thank you for your attention, and now we will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Your first question comes from the line of [Nick Sebral] with Morgan Stanley. Please proceed.

Mr. Sebral?

Sorry, I was on mute. Good day, guys. A couple of questions; first, I would like to ask regarding pricing. It sounds like, from what you said during the call, that you foresee healthy pricing dynamics in the U.S. You also recently, as I understand it, put increase in prices in Mexico; I wanted to know how that's going. And then if you just give a general rundown of where you see possibility of raising prices in the rest of your operations? That's the first question.

Then the second question, if you could just talk a little bit about import volumes, where are you seeing still significant imports as a percentage of the local market, specifically in the U.S. of course, and other regions as appropriate? Thanks.

Sure. Well, as we mentioned the perspective for pricing in the U.S., potentially driven by the very high freight costs which drives import prices -- are driving import prices up, is very positive. So, well, that's what we see in the case of Cement and that's --

Right, right. So one of the things -- if you don't mind, one of the things that we've been seeing is bulk rates coming down significantly. And I was wondering if you think that might have an impact on imports, or pricing of imports and, therefore, price dynamics?

You mean shipping rates coming down?

Yes, or is that not what you're observing?

That's not consistent with our -- with that from our trading group.

They may be coming down sequentially in the last few months, but still when you look at the year-over-year rates, as measured by the one-year Handymax charter rate, they're almost double what they were at the end of 2006.

And so, when you need to import cement into a market, you rarely want to expose yourself to the spot market. But still, the cost , you know, if on the port of the imported country today is significantly higher than it was a year ago. And so, of course, this, together with the lesser availability of the affordable cement around the world, leads to higher equilibrium

Okay.

That's essentially influencing the pricing situation in the U.S. and in other markets too, of course.

Okay.

From the sense of imports bought -- sorry, the second part of the question was import volume. Yes. Well they are, as we mentioned in the comments -- initial comments, the imports in the U.S. are declining as a result of this [demonstration] of demand.

So we expect imports in the U.S. will be declining in 2008 and probably be absorbed by the decline of demand. So, I don't think they would probably disappear, but certainly will fall to probably it would be like 9% of total demand. In 2007, imports were about 25% of total demand and will fall to be 9% in 2008.

And in Spain?

That's a different situation but, of course, also affected by the shipping rates. And in Spain imports were -- in 2007, were -- I'll just check here. Bear with me a second. It was about 26% of the total Cement consumption and we expect that to remain more or less the same during 2008.

Are those numbers significant anywhere else in where you operate? I mean, that 26, obviously, is a very large number?

Not really. I would say those are the two main import markets where we operate.

Excellent. Thank you, that was very helpful.

Thank you.

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

Hello, good morning, everyone. Two quick questions. At this point of time, right in the fiscal reform in Mexico, I don't know if you can share some your expectations on the tax rate and the effective tax rate that you expect going forward?

And second, we saw a reduction in your cash level. Are you feeling comfortable with this level and should we expect this to be sustainable going forward? And given the difficult environment in the markets, could we expect some more conservative dividend policy this year?

Rodrigo?

Yes, the effective cash tax rate for CEMEX tends to be lower over time after acquisitions. When we have entered into aggressive, either capital expenditure investment programs and/or acquisitions, is when we tend to see the lowest cash tax rate globally.

As you know, Mexico now accounts for less than 30% of our global operations and so we don't expect a significant negative impact from the fiscal reform in Mexico.

In fact, we're cautiously optimistic that if the tax revenues in the aggregate for the country as a whole improve considerably, then, as President Calderon has indicated, a significant portion of these increased collections will go towards infrastructure spending which is also intensive in Cement consumption. And so we would expect to benefit on the revenue side by higher volumes of Cement in the Mexican market.

Of course, we will do whatever we can to maintain our cash tax rate as low as possible and defer that payment of corporate income tax out into the future as much as we can.

And was there a second part to your question, Gonzalo?

Yes, Rodrigo, thank you. The cash level, should we expect cash levels to return to the levels of above 1b, and if this environment could imply some less aggressive dividend policy this year?

Well, yes, the cash tax levels will vary from quarter to quarter also, in part, as a result of upcoming maturity. For example, we have an upcoming maturity, say, in early October, and we make a placement in the capital markets in late September, you will see a higher cash level for that quarter. And vice versa; if there is no important maturity in the initial days of the following quarter, you will tend to see a lower cash level at the end of the quarter.

Now, in addition to that, we maintain over $1 billion dollars of committed facilities in place that we can draw upon to fund any obligations, or contingent obligations that we might have. And we intend to maintain those, while our leverage ratio is above our steady-state level that we want to reach.

With respect to our dividend policy, as you know, in previous years, last year and in 2006, close to 97% of our shareholders elected to reinvest their cash dividends back into the Company. And so the actual cash payout was something in the order of $30 million dollars per year which, compared to our free cash flow for this year of $3 billion dollars, is only 1% of our free cash flow.

So we're not allocating a significant portion of our free cash flow to pay back to the shareholders at this point in time. And this is primarily as a result of the voluntary dividend reinvestment program that we have, which 97% of our shareholders take advantage of.

That's very clear, Rodrigo, thank you.

Thank you.

Thank you.

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

Yes, good morning. I have a question of clarification first, and then two questions on the cost cutting, please.

The question of clarification; I thought when we had the last conference call three months ago you were talking about you had reduced the net debt to EBITDA of steady state to 2.4 times. Did I just mishear that, or has it changed back?

My second question is on the Rinker synergies. Obviously, good news; we're getting the $130 million dollars earlier. Are you able to give -- is it it's just moved forward, or do you have a new total for what the PMI is now for Rinker?

And I guess the same question in terms of the cost reduction effort. Should we assume that all of that reduction effort is going to be benefiting '08, or is the stuff that you're still implementing, it will come on in '09? Thank you.

Thank you, Mike. Rodrigo, you want to go over to the first part of the question?

Yes, let me take care of the first question. What we communicated is that after the Rinker acquisition, and within two years, we expect it to be back under 2.7 times net debt to EBITDA. And so that remains our target for June 30, 2009.

However, you are right, Mike, our steady-state level for net debt to EBITDA is now 2.4 times and so we will not stop de-leveraging at that level of 2.7. We want to de-leverdown further beyond that internal target by the middle of 2009, of 2.7, to the level of 2.4. So our new steady-state target, eventually, is 2.4 times.

Of course, the sooner we get there the better, but the commitment that we have undertaken with the financial community is to de-lever down to 2.7 by mid 2009.

Okay, thank you.

As to the synergies and the cost reduction initiatives, Mike, we -- as you know there is an Investor Day on March 5, and probably you already receive the -- save the date.

We expect to give plenty of details at that point in time as for the total synergies, what we expect for this year in particular, where this will come from and also for the cost reduction initiatives and what they mean for our guidance this year.

At this point in time, what we have said in the initial comments is that they represent, we estimate, two-thirds of the pro forma EBITDA growth between 2008 and 2007.

Okay, understood, Hector. Just one final follow up on that. Are there any costs in the fourth quarter of '07 relating to the cost reduction initiatives that are of any magnitude?

Yes, we are -- there is about a $93 million dollars charge in our results in the fourth quarter resulting from these cost saving initiatives.

And would it mainly be in the U.S.?

I'm sorry?

Would that charge mainly --?

That's $93 million dollars globally.

Okay, but would the majority have been in the U.S. when we look at the profit numbers?

I would have to follow up on that, because I -- I don't think so. It's pretty mixed.

Okay. Okay, that's fine. Thank you very much, and I'll get more details on the fifth. Thank you.

Thank you, Mike.

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

Thank you gentlemen. Good morning. Most of my questions have actually already been answered. Just one quick follow up, however. Looking at what you plan to spend in terms of continuing the vertical integration strategy on your existing operations, are you guys putting any more effort into retooling certain global operations with respect to increasing alternative fuel usage?

Yes, Steve, in fact, we are targeting a significant increase in alternative fuel uses in our energy mix. We are currently going -- in 2007 we had about a 6.5%, 6.7% alternative fuel usage in our fuel mix. We are targeting to increase that to probably double that, around 12%, in 2008. So there is a significant increase and we believe that is a very important part of our energy strategy globally.

Great, thank you again. And, thanks, a very thorough overview.

Thank you.

Thank you.

Your next question comes from the line of Marcelo Telles with Credit Suisse. Please proceed.

Hello, gentlemen.

Hello, Marcelo.

Good morning.

Good morning. Well, I have a couple of questions, so most of my questions have been answered, but the first question regarding the U.S. market and the price environment. I was wondering if you could tell us if you had formally communicated to your clients of upcoming price increases.

And the second question is regarding the impact on inflation accounting. I know your commented a little bit about that, but I was wondering if the fact that you will not be recognizing more monetary gains, if that could have a positive impact on your free cash flow as a result of lower taxes that you might have to be paying before, because you had a positive gain? I don't know if you could comment on that?

Okay, let me take the price announcements. Yes, we have communicated some price announcements. I'll give some examples for April. We have price increases in California and Nevada, around $5 dollars, per short ton that is, a $10 dollars per short ton in Texas for April too, and $5 dollars in April in Colorado. And so there are some of the markets where we see that there is market conditions too that we have already announced price increases for April.

Thank you.

Yes, regarding your question on inflationary accounting, we expect that the EBITDA impact will be minimal as a result of the change on a global basis. Sometimes we will continue to account with inflationary accounting. Those countries such as Venezuela, Costa Rica and others that exceed the inflation threshold, we must continue to apply inflationary accounting.

Regarding your question to free cash flow, no, we don't expect any significant impact to free cash flow as a result of the change in inflationary accounting globally.

However, let me say that where we do expect a significant, positive impact on free cash flow is regarding the interest rate cycle. As I mentioned in the opening remarks, when we originally decided to pursue the Rinker acquisition, we expected an interest rate for 2008 of 6% for funding that acquisition. We are now looking at 4%, whereas, the difference of 2% on $15 billion dollarsof debt, well, that's $300 million dollarsof increased free cash flow as a result of the lower funding cost which is, as I mentioned in my remarks section, this is helping us to significantly offset the lower than expected contribution from the operations this year as a result of the correction that is taking place in the U.S.

So, again, as we did when we acquired Southdown, by aligning the financial strategy and the interest rate cycle with the business cycle, we were helping to stabilize and maintain the growth rate in both free cash flow and cash earnings. And that's where we do see a significant impact, not as a result of inflationary accounting or tax reform anywhere, but as a result of aligning the financial strategy with the business strategy.

Perfect. Well, thank you. And actually, just a follow up on this same point, do you see any -- in terms of the cost of that, is that included in your free cash flow guidance already for 2008, or this will be on top of the number that you have?

Well, it is included in our free cash flow guidance. As we have indicated, we now expect more than $3 billion dollars in free cash flow for this year. And, of course, this is the first time we provide guidance on free cash flow. And that does include the contribution from a lower funding charge to our income statement and our free cash flow statement.

Okay. No, that's very good. Thank you very much, gentlemen.

Thank you, Marcelo.

Thank you.

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

Morning, gentlemen. My question -- two questions. First, on Europe and, specifically, the U.K. A lot of the demand weakness we saw in the fourth quarter in 2007 was offset by a reasonably strong pricing environment, even in euro terms. Can you talk a little bit about the pricing outlook for Europe collectively for 2008?

And then on the U.K. specifically, the margins continue to be quite weak. I wonder if you could talk a little bit about what's weighing on margins in the U.K. in 2007 and an outlook for 2008.

Well, in terms of pricing for Europe, I would say that the outlook is essentially stable. We have some potential positive behavior with prices, given the continued strength of the shipping rates which drive import prices up, although that's an issue for some markets. And those will have some -- will influence the pricing situation in Europe also but, essentially, stable, I would say.

As for the case of the U.K. margins, we expect that the SG&A cost containment initiatives and the corporate expense reductions, the increase of alternative fuel usage in the U.K. will impact our margins positively. We're expecting an improvement -- a significant improvement in the U.K.

So, for instance, in 2007 we saw an EBITDA margin of just about 5%. Is that -- should we continue to think of the U.K. as a single-digit EBITDA margin business for you, or is there substantially more room for improvement?

Well, we're certainly aiming at a two-digit margin for this year, definitely.

Great. And, sorry, one follow-up, if I may. You mentioned, I think, Rodrigo, about the achievement of the leverage target for the end of 2008 and that it may include asset sales. Are you referencing specifically the divestitures, the DOJ divestitures already announced or are, potentially, a broader spectrum of asset sales still a possibility for this year?

Well, not necessarily. It could, it may include some of those assets, but we are looking at other assets that we have on our balance sheet that we could divest on. And so, certainly, where we are in the leverage ratio and with our objective to de-leverage, you have to look at everything on your balance sheet and decide what you must keep and what you can divest from. And so we are reviewing everything.

Of course, there are certain assets that we will never seriously consider to divest from because they're a core part of our business. But anything that would qualify as a non-core asset becomes a prime candidate for divestiture.

Okay. Thanks very much.

Thank you, Dan.

The next question comes from the line of Andres Cuellar with GBM. Please proceed.

Yes, good morning. Just a quick question. Can you give us any guidance in terms of gross CapEx?

Well, we have indicated that we're allocating more than half of our $3b there in free cash flow to expansion CapEx.

Okay.

And, of course, the bulk of it goes to the projects that have already been announced in prior communications, such as the expansion of capacity in Mexico, in the U.S. and elsewhere around the world.

Thanks.

And we can give you a full list of the announced major projects. [That will follow on].

Yes, sure.

The next question comes from the line of Jamie Nicholson with Credit Suisse. Please proceed.

Hello. Thanks for the call. My first question relates to clarification of your free cash flow usages and your leverage target of 3 times by the end of '08, which implies about $2 billion dollars of debt reduction. And then you just mentioned half of free cash flow, or about $1.5 billion dollars for expansion CapEx. Can you just clarify that inconsistency?

Certainly. What we mean is that, in terms of the usage of our free cash flow, half of it -- around half of it is going to expansion CapEx; the rest to debt reduction. But our target net debt to EBITDA will also be affected by potential asset sales.

Okay. But are you trying to reduce debt by about $2b in '08? Is that your target debt reduction?

Yes. If you do the math, where we are in the debt, with a target of $5.6 billion dollars, we would need to sell certain assets unless, of course, the EBITDA was greater. One way in which we could achieve the 3 times net debt to EBITDA by the end of the year without asset sales would be to generate incremental EBITDA. And, of course, this will depend on many factors, exchange rates included.

But, yes, we will be proactive during the course of the year. And we will try to de-leverage sooner rather than later.

Okay, great. And my next question is on your bank debt. Have you needed waivers from your banks? If so, do those waivers extend through 2008, or do you think you may need to go back and get additional waivers, either after the first quarter or second half results? Thank you.

Well, hopefully, we won't need additional waivers with the banks. But, yes, we have obtained flexibility from our banks unanimously to achieve our de-leveraging targets. And currently we have sufficient flexibility so that we believe we will not have to ask for an additional waiver from our banks.

Okay. Thank you very much.

Thank you. Operator, we have time for one more question, please.

Yes. And your last question comes from the line of Essaim Chavez with Arca Capital. Please proceed.

Hello. Thanks for taking the last question.

I just wanted to clarify, in your prepared remarks you talked about 2008 guidance and really no change. But I guess, if I remember correctly, you mentioned it as a second half recovery and that the first half would continue to be challenging. I was just curious if you can put some more numbers around that and just what we should expect in the first quarter and the second quarter, relative to the second half.

We're referring, essentially, to the fact that the first quarter of 2007 was a very good quarter, driven by many factors. One of them was the very good weather in Europe which created significant increases in EBITDA for our European -- Western European -- Eastern European operations, sorry. But also it was a good quarter for the U.S. It was a good quarter for Rinker. So, on a pro-forma basis, it's also a very good quarter.

And Holy Week was in April, so it's fewer days in the first quarter of 2008 versus 2007. And that is going to drive the EBITDA situation. So we're adding a not-so-good quarter and subtracting a very good quarter, first quarter of 2007, that's what I'm saying. But that's the issue.

So it's a comparison issue. You're just not -- because you also mentioned uncertainty around the U.S. housing and I'm just trying to see if you're thinking about a further deterioration, or do you think things have stabilized, or how you're seeing the momentum building?

We're already guiding to lower volumes so, essentially, the comparison for the first quarter it's going to be at lower volumes, of course.

Okay. Thank you.

Thank you. Thank you very much.

I would now like to turn the call over to Mr. Hector Medina for any closing remarks.

Yes. In closing, I would like to thank you all for your time and attention. We look forward to your continued participation in CEMEX. Please feel free to contact us directly, or visit our website at any time.

Thank you, and good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.