Cemex SAB de CV (CX) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2008 CEMEX conference call. My name is Sylvania. I will be your Coordinator. At this time all participants are in a listen only mode. We will be facilitating 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 turn the presentation over to your host for today's call, Mr. Hector Medina, Executive Vice President of Planning and Finance. You may proceed.

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

As we mentioned in our last conference call, we expected first quarter comparisons to be challenging as we enjoyed substantially better trading environments in our U.S. and Spanish markets. Additionally, favorable weather conditions in most of our markets during the first quarter of last year and fewer business days in the first quarter of this year due to Holy Week made quarterly comparisons more challenging.

During the quarter, and on a pro forma basis, consolidated domestic Cement volume was down 9%, Ready-mix volume was down 12% and Aggregate volume was down 15%. However, compensating for lower volumes and higher energy transportation costs, consolidated prices in U.S. dollar terms during the same period increased by 12% for domestic Cement, 11% for Ready-mix and 15% for Aggregates.

For the full year 2008 we expect EBITDA of about $5.6b at the prevailing foreign exchange rate. This represents an increase of approximately $525m over pro forma 2007 EBITDA, excluding inflationary accounting but including foreign exchange conversion effects. It is important to highlight however that most of the growth will come during the second half of this year given that the U.S. correction intensified throughout 2007.

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 $130m after three years. We now expect synergies to reach $400m, about half of which will be realized during 2008. We expect to achieve the rest of the EBITDA growth organically from our global markets including Mexico, the Central South America and Caribbean region, Eastern Europe and Australia. This is despite the lack of growth from Spain and the United States.

In these two countries we continue to expect favorable supply demand dynamics. These, along with realized synergies and productivity improvement initiatives, is expected to partially mitigate lower volumes.

The strength of our asset portfolio, business model and earnings quality leads us to expect our free cash flow after maintenance capital expenditures to exceed $3b in 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 completing the RMC and Rinker acquisitions, we have increased our geographic diversification and enhanced the vertical integration of the business throughout the cement value chain. 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 of Aggregates, Ready-mix and other Concrete products to our operating performance. These businesses tend to have lower EBITDA margins but they also have lower asset intensity.

In the case of Aggregates, our business has profitability dynamics similar to those of Cement, but is less asset intensive and has important natural barriers to entry and positive supply/demand dynamics going forward.

An important consequence of this transformation however, is 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 able to strengthen our relationships through product innovation and service differentiation.

Now, I would like to discuss the first quarter performance of our principal markets and our outlook for this markets for 2008. In Mexico, our Cement volume decreased 7% while Ready-mix decreased 15% during the quarter. Adjusting for the fewer days in the quarter related to the Holy Week holiday demand volume decreased 4% and Ready-mix volume decreased 12%. While volumes during the quarter were negatively affected by a delay in project starts from the infrastructure sector they are expected to recover during the second half of the year given the current status of many of these projects, as we have experienced in prior years.

We see two main factors driving Cement volumes during 2008. The first is federal government spending on streets and highways, public buildings and other infrastructure projects. The National Infrastructure Program announced by President Calderon represents an investment of about $230b, $86b of which will be spent on infrastructure, railroads and telecommunications. This program will increase government and private spending on infrastructure. For cement intensive projects such as highways, ports, airports, water treatment facilities and dams the investment is expected to be about $56b.

During 2008 total federal spending on public works, including the National Infrastructure Program and other local investments, is expected to increase 34% to reach $7.5b of which about 50% is estimated to be spent on the modernization and construction of more than 3,000 kilometers of roads and highways, compared with an expenditure of an estimated $5.6b last year. Growth in this sector will be supported by higher oil revenues and the results of fiscal reform approved in 2007.

Regarding our revenues, the 2008 federal budget was approved with a surplus based on the budget with Mexican oil mix price of $49 per barrel. In contrast, the year to date average is about $84 and is expected to remain at higher than budgeted levels for the rest of the year.

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

The second factor is a strong residential sector, which would also continue contributing to the increase in cement demand. The number of mortgages sponsored by Infonavit, Commercial Banks, SOFOLES and other institutions continues to grow. President Calderon has committed to grant a record 6m mortgages for new home acquisitions 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 exceeded 220,000. Although CONAVI has set this expectation for 2008 at 155,000 mortgages, the level of investment is expected to remain steady at around $11b.

The formal residential sector is continuing to meet more of the housing demand previously met by the self construction sector. Continuous improvement and innovation projects in CEMEX Mexico have already resulted in some cost efficiencies, mainly in terms of power and fuel, operating and expense reductions, and EBITDA margin improvement. In addition, a more diversified product and service portfolio allows us to offer better and more specialized business solutions to our markets creating sustainable value.

Mexico is very prepared to withstand a U.S. economic slowdown today than it was at the beginning of the former presidential term. This is due to the level of the government's international reserves, external debt, trade deficits, remittances, foreign direct investments and exchange rate stability.

We are optimistic about the trend in Cement demand mix. We now see Cement volumes rising by about 3% in 2008. Demand consumption from government and other ready-mix intensive projects will likely increase our ready-mix volume by approximately 8% for the year.

In the United States, first quarter Cement sales volume fell 3% versus the same period in 2007. Ready-mix sales volume increased by 31% and Aggregate volume increased by 116%. Ready-mix and Aggregate volume increases were mainly the result of the acquisition of Rinker operations which expanded this business. On a like for like basis for the ongoing operations our Cement volume decreased by 21%, our Ready-mix volume decreased by 28%, our Aggregate volume decreased by 25% compared with the same period in the prior year.

The first quarter like to like decline in sales volume 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 deepest correction in the country.

In addition, adverse weather conditions, primarily in California, Florida, Georgia, Nevada, Tennessee and Kentucky negatively affected volumes. Despite these historic declines across all of our businesses, prices for most of our products remain resilient.

During 2007 imports declined by about 13m metric tons, slightly in excess of the drop in total U.S. demand, reaching about 22m metric tons for the year. We expect the U.S. to continue to be a net importer of cement in 2008.

Prices for imported cement have been escalating and are expected to increase in 2008 due largely to 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 11% during the first two months of 2008 and spending for streets and highways rose 4%.

In terms of new project activity, contract awards for streets and highways were flat in real terms in 2007 versus 2006 and up 3% through February versus the prior year. In addition, contract awards for other public works decreased 1% in 2007 versus 2006 and decreased approximately 13% in the first two months of 2008 versus the previous 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 flat in 2008. Input cost inflation is also likely to be lower this year than it was in 2007.

We are encouraged by the healthy, general reserve positions of many of our states, leading us to believe that the reserves will be adequate to cover potential fiscal deficits for 2008. The infrastructure sector will also be bolstered by significant dedicated funding programs of $38b in California and $5b in Texas.

In the industrial and commercial sector nominal construction spending in the United States grew 15% during the first two months of the year. On the other hand, contract awards for new projects declined by 21% in the same period. Growth in this sector has begun to slow down as trade conditions have tightened and contractors have become more cautious in the current economic environment. In 2008 we expect volumes in the industrial and commercial sector to decline by approximately 7%, as a result of the decline in new projects, which is expected to continue due to tight credit conditions and the uncertain economic environment.

The residential sector continued its decline during the first quarter. Nominal construction spending in this sector decreased 20% nationwide for the first two months of 2008. Housing starts, the fundamental driver of cement demand in the sector, decreased 27% in the same period. For our markets this decline is even steeper with the high growth residential market decreasing at a more rapid pace.

Housing permits in Florida, for instance, decreased 35% for the first two months of 2008. In our other major markets housing permits through February declined 38% in California, 51% in Arizona and 35% in Nevada. Even in Texas, where affordability is high and inventories are normal, residential permits declined 19% through February. These five States, Florida, California, Arizona, Nevada and Texas, represent 67% of our Cement operations based on 2007 pro forma sales volumes.

New home inventories declined by about 13% as of February versus the previous year but represented close to 10 months of supply at the fair retail level versus about 6.5 months for 2006. Moreover, rising delinquency rates for high risk mortgage segments such as subprime loans will likely result in record foreclosures, which will increase inventories.

The reduction in home prices continues. Home prices have declined 9% nationwide, while key markets such as Florida and California have had double digit declines. Even so, steeper price reductions will be necessary to bring affordability back into balance and stimulate higher sales, which are necessary to absorb the excess inventories and ultimately drive a recovery in residential construction.

The time frame for excess inventory absorption will depend on product price reductions, interest rates, credit availability, job creation and the magnitude of home foreclosures. For 2008 we expect the U.S. residential sector to continue its downward trend, albeit at a slower pace. We now see cement demand for this sector, for our markets, declining by about 24%. In light of the above, and on a like for like basis for the ongoing operations, in 2008 we now expect our Cement volumes to decline by about 9%, our Ready-mix volume to decline by about 13% and our Aggregate volume to decline by about 10%.

EBITDA generation in the United States has been affected mainly by our Ready-mix and other product 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 steps to reduce costs in the Ready-mix, Aggregate and Concrete Block operations, including plant closures, reduced truck fleet and headcount.

In addition, we have identified substantial synergies during the post merger integration process that 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 and gives us a more balanced position throughout the cement value chain.

EBITDA margin in the U.S. decreased from 21.4% in the first quarter of 2007 to 13.8% in the same quarter of this year. The year over year margin drop was primarily the result of the change in product mix resulting from the integration of Rinker, as well as lower volume and higher energy and transportation costs.

In Spain, Cement volume decreased by 17% while Ready-mix volume decreased by 16% during the first quarter. Adjusting for the fewer days in the quarter, Cement volume decreased by 14% while Ready-mix volume decreased by 13%. Total volumes for the quarter ended below our most recent guidance due mainly to weaker than expected demand from the housing sector during the month of March.

Cement consumption in our markets continued to fall at a faster rate than the overall market during the quarter as a result of lower construction activity, especially in the central region, Levante, Baleares and Canarias, which have shown above average growth in previous years. For 2008 we now expect the GDP growth rate to be about 2% or lower compared with the 3.8% that we had expected at the beginning of the year. This is a reflection of lower expected economic activity.

The residential sector continues to decline. Housing starts in 2007 declined 19% versus the previous year, reaching 616,000. For this year we expect housing starts to decline an additional 30% to about 430,000. This will translate into significant declines in cement consumption for the sector.

For 2008 civil works will show performance similar to that of 2007. The central government is fueling civil work bids in order to compensate, at least in part, for the residential construction slowdown. There is uncertainty, however, in both the timing of such bids and their impact during 2008.

The industrial and commercial sector should show a single digit decline during 2008. Favorable supply/demand dynamics and cost reduction initiatives in the country have offset the reduction in volume and higher energy and transportation costs. This import buffer is expected to continue to be sizeable as a percentage of total consumption.

In light of the above, we estimate that during 2008 cement volume will decrease by about 8% to 10% and Ready-mix volume will decline by about 10% to 12%. There is a risk however, that Spain could experience a deeper correction in the residential sector.

In the United Kingdom cement volume decreased by 11%, Ready-mix volume declined by 17% and Aggregate volume decreased by 5% during the first quarter. The lower than guided volume performance is mainly due to adverse weather conditions affecting consumption during the last weeks in the quarter. Adjusting for the fewer business days during the quarter, and in the case of Ready-mix the divestments completed during 2007, cement volume declined by about 6%, Ready-mix volume decreased by about 7% and Aggregate volume remained stable during the quarter versus the comparable period last year.

The Central Bank now expects GDP to grow 2% during 2008, a deceleration from the 3.1% growth experienced last year.

For 2008 cement demand is being negatively affected by a slowdown in private and new housing work, repair and maintenance and industrial sectors, due in part to credit restrictions. Lower demand from these sectors is being partially offset by the performance of the infrastructure in commercial and public housing sectors. For 2008 in the United Kingdom we now expect the volume of cement to decline by about 5%, the volume of Ready-mix to drop by about 7% and the volumes of Aggregate to decrease by about 2%.

In France our Ready-mix operations grew 7% during the first quarter. During the second and third quarters of 2007 we began consolidating into our operations five Ready-mix plants that we had acquired. On a like to like basis for the ongoing operations, our Ready-mix volume for the year would have increased 4%.

Aggregate volume increased by 3% during the first quarter versus the comparable period last year. Favorable weather conditions during January and February drove Ready-mix and Aggregate consumption. The main driver for volume growth in the country continues to be the public work sector, which is showing strong activity, and to a lesser extent the non-residential sector.

We see Ready-mix volume for the full year 2008 and on a like to like basis for the ongoing operations growing by about 1%. This growth will be driven mainly by the infrastructure and non-residential sectors.

In Germany our domestic Cement volumes decreased by 10% during the first quarter versus the comparable period in 2007. This decrease is in part due to the redirection of some domestic sales to exports to The Netherlands and Poland, which have helped to improve our profitability.

The number of permits in the residential sector declined in 2007 and have stabilized during the first months of 2008, albeit at a low level. This decline began during the second half of 2006 as some of these permits were requested earlier in anticipation of the increase in the value added tax, which went into effect in January, 2007. Residential permits from July 2007 to January 2008 declined 11%. The number of residential permits is expected to increase again in the following months driven by attractive rates and low unemployment.

The non-residential sector, including office buildings and energy projects, partially offset the decline in the residential sector. Non-residential permits increased 12% from July 2007 to January 2008. The civil engineering sector has grown 9% from July 2007 to January 2008, driven in part by higher tax revenues which have fueled traffic infrastructure spending.

For 2008 the main driver of cement demand will be the non-residential sector and, to a lesser extent, the civil engineering sector. We expect, as a result, a mid single digit increase in our domestic cement volume in Germany.

In Eastern Europe, namely Poland, Croatia, the Czech Republic and Latvia, domestic Cement consumption increased by 6% during the first quarter. In Poland, our largest market in Eastern Europe, volumes and prices had double digit increases during the quarter. Construction confidence in the country remains very high.

For the full year 2008 we expect the weighted average GDP growth rate from the aforementioned countries to come in at about 5.5%. The prospects for the region remain attractive as cement consumption is expected to increase and supply/demand dynamics are expected to continue to be favorable as the convergence of these countries into the European Union accelerate.

In Venezuela domestic Cement volume declined by 1% during the first quarter. The infrastructure and public housing sectors continue 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. Demand volume should grow by about 7%, fueled primarily by infrastructure and low income housing.

As you are already aware, the government of Venezuela announced its decision to nationalize the cement industry. The government has stated that it intends to have a participation of at least 60% with full operational and administration control. It also expressed that, if required, it will be able to acquire 100% participation.

CEMEX has been requested to appoint a team to represent the Company during this process. The government has already appointed its representatives. Initially, the government will undertake a due diligence process.

In Colombia we saw Cement volume grow by 4% in our operations during the quarter. The main drivers of cement demand continue to be infrastructure spending, middle income housing and non-residential construction. Infrastructure spending projects continues. These include roads and highways, airports and ports among others.

We see a slowdown in the residential sector, however, resulting from an increase in interest rates and higher home supply. The non-residential sector should continue its strong performance and the self construction sector will show moderate growth during the year, driven by favorable employment levels and an increase in real wages. Overall, we now expect an increase of 4% in domestic Cement volume for 2008 with attractive supply/demand conditions.

In Egypt, domestic Cement volume increased by 4% during the first quarter versus the same period in 2007. The residential sector continues to be the main driver of cement demand. We now expect Cement volume to grow by 3% in 2008.

In our operations in Australia, Ready-mix volume for the first quarter of 2007 increased by 7% and Aggregate volume increased by 2%. The public work sector is benefiting from major road infrastructure projects and increased investment in the resource sector. Office, retail and warehouse construction, supported by a strong employment and growth in real wages, is driving growth in the commercial sector.

The main drivers of growth in Ready-mix and Aggregate volumes for 2008 will continue to be the commercial and public work sectors. We now expect Ready-mix volumes to increase by 4% and Aggregate volumes to be flat during 2008.

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 term, 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 net debt to EBITDA, capital structure target of 2.7 times by mid 2009. That is two years after the completion of the Rinker acquisition.

Second, we intend to invest part of our free cash flow to increase our production capacity, primarily in Cement and Aggregate, in the markets 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 moving forward with our expansion capital expenditure projects announced during 2008 and 2007. We are currently increasing Cement production capacity by about 13.5m metric tons in Mexico the United States, Panama, Spain and Latvia. In addition, we are increasing cement grinding capacity by 3.2m metric tons in 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 and profitable growth. Thank you for your time. Now I will turn the call over to Rodrigo now.

Thank you Hector. Good morning everyone, and again, thank you for joining us today. Our performance during the first quarter was supported by the integration of Rinker operations as of July 1st of last year. EBITDA for the quarter increased by 10% reaching $951m. On a like to like basis, for the ongoing operations, EBITDA would have decreased by 21%. With the exception of the United States and the United Kingdom, most of our countries and regions registered EBITDA growth during the quarter.

In the United States EBITDA fell on a like to like basis, mainly as a result of the ongoing correction in the residential sector. In the United Kingdom, EBITDA declined due to lower volumes resulting from adverse weather conditions affecting consumption, especially during the last weeks of the quarter.

Our consolidated EBITDA margin decreased from 20.2% in the first quarter of last year to 17.6% this first quarter. This drop in EBITDA margin is mainly due to the change in product mix as the result of the consolidation of Rinker, and additionally due to higher kiln fuel, electricity, transportation costs and also due to higher fixed costs due to lower economies of scale resulting from our lower volumes.

SG&A expenses as a percentage of sales decreased from 21.8% in the first quarter of last year to 21.0% this first quarter reflecting our cost reduction initiatives. As Lorenzo Zambrano stated during our CEMEX Day, last March, we expect to reduce the ratio of SG&A to sales by around 150 basis points for the full year.

During the quarter our free cash flow after maintenance capital expenditures reached $487m, 78% more than last year as a result of higher EBITDA, lower change in working capital and also extraordinary proceeds from the sale of assets which more than offset higher financial expenses related to the higher debt levels after the Rinker acquisition.

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 also other productivity improvement initiatives that have been implemented.

Regarding our input costs, during the quarter our kiln fuel and electricity costs increased by 16% on a per ton of cement basis over the same period last year. This reflects price volatility and increases in the international energy markets.

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 costs. Given first quarter performance during 2008 we now expect a net increase in these energy costs per ton of cement produced in the high single digit levels. In the first quarter freight rates as measured by the one year Handymax time charter rate remain at historically high levels. About 70% higher than the levels seen during the first quarter of 2007. The increase in global demand continues to absorb new ships entering the market maintaining the tightness in the international Handymax shipping business.

Most of our markets continue to see an increase in transportation costs, in particular we have seen our U.S. truck and rail costs rise. The increases in these costs, which are 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.

The monetary position gained during the first quarter is significantly lower than the one reported in the same quarter last year and will remain at lower levels going forward. These levels reflect the changes in Mexican financial reporting standards which went into effect this year and eliminated inflationary accounting in most of our operations.

During the first quarter our majority net income increased by 18% versus last year, reaching $470m. This was due mainly to higher EBITDA, an extraordinary gain of $180m related to the sale of 90% of our position in Axtel, which more than offset higher interest expenses and a $68m lower net non-cash gain from the elimination of inflationary accounting.

Looking at our capital structure, our interest coverage for the trailing 12 months through March decreased to 4.8 times from 8.8 times a year ago. Our leverage ratio as measured by net debt to trailing 12 months pro forma EBITDA in accordance with our contractual obligations under our loan facilities were 3.7 times for the trailing 12 months, ending this first quarter.

The decline in interest coverage and the increase in net debt to EBITDA as the result of the addition of debt related to the Rinker acquisition.

After the closing of the first quarter we have received the cash proceeds from the sale of the Axtel shares. We have also received commitments from a group of banks for a new $1.050b senior unsecured loan, ranking pari-passu with other senior obligations of New Sunward, our Dutch holding company and the guarantors under certain events. This facility will have coupon deferral and perpetuity options, which under Mexican financial reporting standards qualifies as equity. Adjusting our net debt to EBITDA as of March 31 for these two transactions, we would be at a level below 3.5 times.

As Hector mentioned, we remain committed to achieving our steady state net debt to EBITDA capital structure target of 2.7 times by mid-2009. We intend to make significant progress towards this objective during 2008. We aim to achieve a level of close to 3.0 times net debt to EBITDA by the end of this year.

During the first quarter, we issued various short term notes under our short term Certificados Bursatiles Program. The outstanding amount at the end of the quarter was MXN2b with an average cost of close to LIBOR.

We invested close to $750m in 2006, $1.4b in 2007 in different capacity expansion projects around the world. We will continue with these investments during 2008, allocating about half of our free cash flow to these initiatives. By 2010 we expect to generate incremental EBITDA from these projects of at least $500m.

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 the Rinker acquisition would be 6%, we're now estimating an average cost for 2008 of close to 4%, as a result of the measures taken by the U.S. Federal Reserve to lower rates and increase liquidity.

These savings, together with the greater than originally expected synergies generated from the post merger integration, 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 expected, despite the ongoing U.S. contraction in our industry. This will allow us to maintain our historically long term high 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 market in which we operate and are provided at prevailing exchange rates. Of course, this 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) And our first question comes from the line of Mike Betts from JP Morgan. You may proceed.

Yes, good morning. I had two questions. The first one is kind of a big picture question. You've today lowered significantly your forecast for volume expectations. The cost pressures have also increased, yet the guidance is unchanged. I wonder if you could just give us a little bit more background on that. Is it because of the pricing, you've had better prices than you expected or is it foreign exchange or you've changed the exchange rate assumptions, or why were those much lower volumes compared to January? Are you still very confident for the $5.6b?

And then, once you've answered that, maybe I'll follow it with a second question on Spain, please.

Thank you, Mike. Well I think it's an issue of several situations. One is, of course, the increased synergies as we mentioned in the initial remarks. In addition to that we have, all around the Company, very strong cost savings initiatives and additional synergies that will also accrue this year. In addition to that, we have the exchange rate will have led us to believe that we can continue to commit to this $5.6b EBITDA margin result for this year -- target for the year. I don't know if you want to add anything to that?

Well yes, I think that summarizes it quite well. Also, the higher, as we mentioned, cost of transportation, energy across the board and the tightness in supply and demand globally has led to average -- leads to higher average equilibrium prices, not only in local currency terms, but also, as Hector mentioned, given the strength of currencies in U.S. dollar terms. And so both these factors, together with the greater cost savings, have offset the weaker contribution from some countries due to our new volume assumptions.

Okay. Just one follow up on that. Are you willing to quantify for me what exchange rate you'd assumed Dollar/Peso when you first gave the forecast? And I guess you're assuming the 10.65, I think it was, at the end of March, in your -- in the forecast now. Would that be correct? And what was the original (multiple speakers)?

Well we never -- it's a very good point that you raise because we never make an assumption when we provide guidance about the future exchange rate because we don't want to venture into that territory. What we do is we provide guidance based on prevailing exchange rates. And of course, you know what the prevailing exchange rate for the Euro and the Peso and the different currencies in which we operate in were back in December, back in February and what they are now. All of that is public information.

Okay. And my second question was just on Spain, because the situation -- I think that's the biggest reductions you've made in your volume forecasts. But you did have, actually -- the number was up in Spain in terms of EBITDA for Q1. So I guess two questions. Maybe you could explain a little bit, with the big volume reductions, how you were able to still increase the profitability in Spain in Q1? But probably more importantly, Hector, you cautioned on the risks that there were for Spain for the rest of the year. I guess the big picture question there is, is Spain turning into another U.S. and, particularly, Southern U.S.? Could we end up seeing the sort of declines of double digits for two or three years in Spain?

Well let me answer the back end of the question first. And of course, being this is a natural effect of some speculative issues in the housing sector in Spain. This has the effect of being difficult to forecast. But I would say that this is a different effect than the one we're seeing in the case of the U.S. But anyway, we feel obligated to warn you that we don't know everything about what the housing contraction in the -- in Spain is going to be.

On the other hand, for the quarter, the increase of prices because of also exchange rate and the fact that we were able to decrease the number of imported clinker and cement in Spain made us have a positive result.

I think it's also important to highlight that Spain does import close to a quarter of the cement it consumes. And so it does have a very large buffer with which to absorb drops in domestic demand. Our operations in Spain are operating at full capacity. And so of course, that helps the profitability of the business.

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

Thank you.

And your next question comes from the line of Marcello Telles. You may proceed.

Good morning, gentlemen. I have a couple questions here. I think the first one, regarding the U.S. market, you did mention that for Spain you believe that there could be some downside through your forecast but you didn't mention that for the U.S. market. Do you think your -- is there any downside risk in your guidance for the U.S. market. And do you think this could put at risk your $5.6b guidance for the year, or you are very comfortable with the 9% decline in Cement volumes in the U.S. market?

And the other question is regarding prices. We saw in the quarter, prices going up in some of the markets, but in the U.S. there was just a 1% increase versus the fourth quarter. I don't know if you could give us an update on the upcoming price increase in the U.S. I think part of that would be implemented in April, if I'm not wrong. So how has this -- the prices been absorbed so far in the U.S. market? Thank you.

Thank you, Marcelo. For the first part of the question, well I mentioned in the initial remarks that definitely our guidance is very sensitive to the economic outlook of the U.S. And this is very uncertain, still. So with that, we think we are implicating that there might be changes to the outlook if the economic outlook for the U.S. worsens. It is already very bad. As we can tell from our guidance in terms of volumes for the year.

Now in terms of pricing, yes, it's as you mentioned, there were price increases in some states in cement like, for example, in Texas in April and also in Colorado, and they're holding. Now the price increase in cement that was announced in Florida in January definitely did not hold given the very soft demand.

In terms of Aggregates, we are realizing almost all of the increase that was announced in October. It was a $5 increase. There was another increase announced in April, but it's been delayed until July. And so the behavior was different in different States, of course. But of course where demand is softer, it's a bit more difficult to realize the increments.

But there was a January increase announced in Florida for Ready-mix. And of that, an increase of about $3 we have realized. And in terms of Ready-mix, I would say that there is no other price increases, at least for the time being, that we think is -- are going to be possible, given to the weak demand.

Hector, okay. And just a follow up question. I think to maybe follow up on what I know Mike Betts asked. But I'm also having a hard time reconciling the $5.6b EBITDA guidance with the new volume guidance on a per country basis. Do you think that -- how do you see that the quarter is evolving throughout the year. Do you -- because in the first quarter, you delivered probably around 15% of your full year guidance. So there's still a long way to go and you might see input costs going up.

It seems that you've got more -- the price increases are already taken place, so there are doubts that this -- that you might be able to do it and continue to do that in the same magnitude that you did in the first quarter. So are you seeing further price increases in other markets that will justify this $5.6b, because it's -- for me it's been very hard to get that number?

Well one of the things that I did comment in my remarks is that most of the synergies and cost reductions that we are seeing in the U.S., for example, are happening in the second half of the year. And the comparison towards the second half of the year is better as the situation in the U.S. worsened toward the end of 2007. That is one issue.

But again, there is the effect of pricing. We are giving this guidance of $5.6b U.S. of EBITDA based on the prevailing exchange rate. So if something changes along the way in terms of exchange rates, that guidance would now be changed, as it is in dollar terms and we have significant EBITDA coming in, in different currencies. You want to add something to that?

The first quarter is usually the weakest, seasonally adjusted. Sometimes the first quarter is weaker than other years. For example, this year we had Holy Week happening in the first quarter, whereas in previous couple of years it was in April. That makes a difference. In some cases you have government programs that have been delayed and will be stronger in the latter part of the year than in the first few months of the year. That is the case for Mexico.

We are cautiously optimistic about the projects coming on stream now and during the rest of the year. And of course, what we try to do, is we try to factor all of this into our forecast so that we can provide guidance based on everything we know in all of the markets. And we do so, as Hector mentioned, at prevailing exchange rates. And we do feel we're on track to $5.6b, everything considered.

Okay. Thank you very much, gentlemen. Thank you.

Thank you, Marcelo.

And your next question comes from the line of Esteban Polidura from Merrill Lynch. You may proceed.

Thank you. Good morning, Hector and Rodrigo. Two questions, if I may. First, with a weak housing sector and decreasing contract awards in the U.S., should we expect flat cement prices at year end or a slight price increase?

And second question, excluding the FX effect during the first quarter, you still had a material increase of prices in the rest of Europe. Can you please explain the reason behind this, and again, if you expect this to be sustainable going forward?

Well in the U.S., in terms of Cement, the situation of course has to be considered in light of the very weak demand. And then there are regional differences. And we will be watching closely, of course. In addition to that, there is the input cost situation with prices of energy going up. That could command some additional price increases. And as you also know, the input prices are also going up because of freight costs.

All those variables come into play when we make our mind as to additional price increases. And we will have to be doing that. We'll let you know as this goes through. In terms of the prices in Europe, but it's the same all around the world, because of the input cost inflation that we have, mainly due to energy and transportation costs, these prices are just compensating for those increases in cost. And some of them, in some places, can fully compensate the cost increases.

In some other places, we have to do other things. And of course as you know we have an energy strategy that allows us to keep our energy costs as well as -- in control as we can. And we'll keep doing that. But again, there is a natural push of prices because of -- the cost of energy is going up.

Okay, perfect. Thank you.

Thank you.

And your next question comes from the line of Dan McGoey from Deutsche Bank. You may proceed.

Good morning, gentlemen. My question is first, on the U.S. The EBITDA margin in the U.S. in the first quarter of 13.8% is around 700 basis points lower than the year ago period. Now there's some differences, obviously, with the business mix. But I'm wondering if you can talk a little bit on the U.S. EBITDA margin, including the cost savings that you're expecting more towards the second half of the year, what we may see as a full year EBITDA margin in the U.S.?

Then the second question was on Mexico. Given the weakness of the demand performance, not necessarily the EBITDA, but certainly on the demand, formal housing remains pretty strong in Mexico, and public works, while it may be delayed, I guess one question is, did you actually see declines from that segment? And then maybe you can talk a little bit about the informal construction sector and whether it's the weakness there that really contributed to that result.

Okay. On the U.S. EBITDA margin, well one of the things that I mentioned is that the drop in EBITDA margin in the U.S. is primarily a result of the product mix change because of the Rinker integration. But also, there is the volume situation, which is impacting EBITDA significantly, in spite of the fact that we have reduced our fixed cost base significantly. And then there is higher energy and transportation costs, which are also impacting our margins in the U.S. They are being compensated by price increases, but of course not fully. So as we mentioned, we expect volumes in the U.S. to decline in Cement by about 9%, Ready-mix about 13% and the bulk and Aggregate about 10%. And that will, of course, have an impact on our margin for the U.S.

Now in the case of Mexico, we definitely view the results of the volumes in the first quarter as it was trended, the decline of volumes in the first quarter as result of the slow start of infrastructure projects. I would say that -- you mentioned residential construction, formal housing projects going up and very significantly through the different institutions, and housing industry enterprises. And I would say that the informal segment of the housing was essentially flat. There's not -- it's not a major effect on that. But it was the slow start of infrastructure projects that brought down the volumes in the Mexican operation.

I would say that in the case of the increase of formal housing, it's constituting for some of the informal housing, the other construction segment that we usually -- are seeing now less active than it was in the past. But I don't think that is the reason for the decline of the first quarter.

Okay. And just as a follow up, I think you indicate in your press release, third quarter as a turning point for the infrastructure spending in Mexico. Is that accurate? Is that to say that you're not expecting the turnaround to start to be evident with the second quarter?

Well I don't know if you are aware, but there have been some very recent announcements of very large infrastructure projects in Mexico City, in the central part of Mexico. And of course, those announcements mean that these projects are starting now. The companies that have won the bids need to put their -- all their teams to work. And most likely, consumption of cement will take some time to start coming from those projects. So we believe that that is going to happen around the third quarter.

Great, thank you.

Thank you.

And the next question comes from the line of Mr. Steve Trent from Citigroup. You may proceed.

Good morning, gentlemen. Most of my questions have been answered. Just one or two follow ups I believe I missed, or may have missed, anyway. You mentioned, and I recall seeing this before, California and Texas with their infrastructure programs, $38b and $5b, respectively. Any color on the timeframe with respect to projects getting launched in those areas?

And my second question, looking at the rest of Europe where you guys had a nice rebound in EBITDA, I was curious as to, roughly speaking, what portion of that is coming out of the former Eastern Bloc? And what's your color on the outlook there. And forgive me if I missed this color from earlier.

I would have to follow up on the specific situation in California and Texas, some infrastructure projects, but we know that there are those funds. We don't have any specifics now, but we will follow up with you on that gladly.

Now in the case of Rest of Europe, I would say the bulk of the Rest of Europe EBITDA comes from -- increase comes from Eastern Block.

All right. Terrific. And looking at the quarter itself where you exceeded your own EBITDA guidance, U.S. was only 17% of EBITDA. Do you think as well, as we look through the rest of the year, that the Eastern Bloc trajectory still looks very good in terms of helping you to meet that $5.6b?

Yes, we are very, very optimistic about the Eastern Bloc and our participation there. As I mentioned, in the case of Poland, it's the construction sector in Poland is just booming and we're very positive.

All right, great. Thanks for that.

Thank you.

And the next question comes from the line of Gonzalo Fernandez from Santander. You may proceed sir.

Hi. Good morning, everyone. I have two questions. First, the EBITDA margin in the United Kingdom, it stays at 1.6%. You mentioned during CEMEX Day that you were putting a big effort in improving margins in the U.K. When do you think we could see these efforts having an impact on margins?

And my second question is on the reduction of net debt during the quarter. You reduced -- you paid on debt for an amount of $481m. However, because of exchange rates, net debt was reduced by only $91m. So I don't know if you have any derivatives or any hedges to avoid this impact in the future if the Dollar continues weakening, or if you would have to adjust a little, your expectations for net debt reduction because of the impact of falling exchange rates.

Well let me take the first one on the U.K. and then have Rodrigo help me in the second one. The first quarter in the U.K., and as it is in most of the European countries, is the worst quarter of the year, seasonally. And this one was even worse because of the weather. But also, cost increases in energy and other factors came in very bad for the operation in the U.K. We are, of course, aiming at improving the margins in the U.K. We see that we will be looking at better quarters in the second and third quarter. But this quarter was very strongly affected by the weather in the last two weeks of the quarter.

Yes, for your question on the debt and usage of free cash flow, you're right, Gonzalo, and it's a good question. As you know, we have close to a quarter of our debt in Euros. And the Euro has strengthened significantly. In fact, the strengthening of the Euro is what explains most of the conversion effects of the debt, as we convert the Euro debt into Dollars, versus more Dollar debt at the end of the quarter, at the exchange rate that we closed at.

This does not affect our net debt to EBITDA ratio, as we calculate it in order to comply with our financial covenant in our loan facilities because you have to look at the EBITDA we generate in the Euro zone and then translate that at the end of the period exchange rate into what it would be like in order to comply with our financial covenants. And so, if we look at the contractual obligations that we have to satisfy, there is no major change if the Euro strengthens or weakens in our net debt to EBITDA ratio for covenant calculation purposes. And so that is the hedge we have in place, is that.

Okay. That's very clear, everyone. And Hector, if I may, just a quick follow on. You mentioned that you had some extraordinary sales of assets in your free cash flow calculation. Can you share with us the amount of the asset sales during the quarter? And how much was included in the free cash flow?

Yes, it's approximately $70m. These assets relate to either obsolete or non-operating assets that have been disposed of. And as they did not have any contribution to operating cash flow in the past, they are considered within the free cash flow calculation.

Okay. And the proceeds from Axtel will be included in the second quarter right?

We received the proceeds from the sale of the Axtel shares in early April. And we will use those to pay -- we have used those to pay down debt during April, and so they will help to -- to help us meet our targets of three times, 3.0 times net debt to EBITDA by the end of the year.

Okay. Thank you for the --

Thank you, Gonzalo.

We have time for one more question, and it comes from the line of Gordon Lee from UBS. You may proceed.

Hi. Good morning. Just a couple questions. First, on the perpetual review, you mentioned that under Mexican GAAP, those are considered equity, which is why you exclude them from the net debt calculation. I was wondering, is -- would they have the same treatment under U.S. GAAP. And when you release your 20-F, would they be similarly booked as they would under Mexican GAAP?

And then the second question, just on Venezuela. I was wondering if you could give us what the book value is of CEMEX Venezuela just for the Venezuelan operations? In other words, excluding the Panamanian and Dominican operations. Thanks.

The notes that we have issued that have a coupon deferral and a perpetuity option and qualify as equity, both under Mexican accounting standards as well as international accounting standards. But I believe under U.S. GAAP, they would not.

Now regarding Venezuela, we can follow up on that. Venezuela, our subsidiary in Venezuela is a public company and we provide information on it. We can follow up on the published -- the most recently published information on it.

Perfect. That would be great. And just one final follow up if I may, just on the guidance. I just want to make sure. You mentioned that you expect the second half of the year to be easier, or the comparables to be easier because both the States and Spain deteriorated in the second half. But wouldn't that, in large part, be offset by the fact that you started consolidating Rinker in the third quarter? I just want to correct -- I just want to make sure that I'm right. It wasn't the third quarter, right, that you started accounting for Rinker in the books?

Yes, but what is the question?

Well the question is would that not nullify the easier comps?

Well it's not easier or more difficult. When you look at our like for like comparison in the first quarter, it looks pretty dismal.

And we're really talking about pro forma.

So we look at both. We look at reported and we also look at like for like comparisons, which we think is useful. Now when we do realize the synergies and the cost savings during the second half of this year, and when we consider that the overall economic activity, both in the U.S. and Spain during the course of 2007 was weakening throughout the year, yes, the comps are easier as we get closer to the end of the year.

Perfect. Okay, thanks very much.

Thank you.

Thank you, Gordon.

I will now turn the call over to Hector Medina for closing remarks.

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

Thank you, ladies and gentlemen. This concludes the presentation for today's conference. You may now disconnect.