Cemex SAB de CV (CX) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX third quarter 2008 earnings conference call. My name is Becky 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).

Your hosts for today's call are Mr. Hector Medina, Executive Vice President of Planning and Finance and, Rodrigo Trevino, Chief Financial Officer. I would now like to turn the presentation over to Mr. Hector Medina. You may proceed.

Good morning, and thank you for joining us for our third quarter conference call. I will briefly review our third quarter results and will share with you our estimates for 2008 in light of our performance for the first nine months of the year. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

We have shortened our prepared remarks today because I know you have many questions about our performance as well as about our capital structure, maturities and derivatives strategy. But I hope we touch on all these issues that are important to your understanding of CEMEX's performance. A transcript of our remarks will be posted on our website for your convenience.

We are living through a period of extraordinary volatility in the financial markets and economic weakness is spreading throughout the global economy. Both have important consequences for CEMEX, which we will discuss today. More importantly, we will also discuss the measures that we're taking in response to the challenges that this environment has presented.

During the quarter we had a slightly better than expected EBITDA generation. Our diversified portfolio has partially compensated for the downturn in the United States, Spain and the United Kingdom and the negative impact from higher energy input costs. The economic environment continues to be difficult and construction demand has fallen more than we had originally anticipated.

During the first nine months of the year, and on a like-for-like basis for the ongoing operations, consolidated domestic Cement for Ready-Mix volumes was down 10%, and Aggregates volumes decreased 11%. However, consolidated prices in US dollar terms for the first nine months increased by 11% for Cement and Ready-Mix, and 12% for Aggregates.

Our EBITDA during the third quarter reached $1.3b, a decrease of 4% versus the same period last year. Adjusting for the exclusion of our Venezuelan operations starting August 1, 2008, to reflect the nationalization of assets in that country, EBITDA fell by 1%.

For the first nine months of the year, and on a like-to-like basis for ongoing operations, our consolidated EBITDA decreased 6% versus the same period last year, reaching $3.6b. For the rest of the year we expect favorable supply/demand dynamics in most of our portfolio allowing us to offset a significant portion of input cost inflation. In addition, we expect the synergies that we continue to realize from our cost-cutting process to partially offset lower volumes.

Given the extreme levels of volatility in the availability of credit and the potential impact on the real economy in several of our markets, as well as on the exchange rate in those markets, we are currently unable to provide a more updated full-year guidance for EBITDA and free cash flow for 2008.

We are, however, reviewing all the drivers of our free cash flow generation for 2009 and we are confident that we will be able to achieve a higher conversion rate of EBITDA dollars to free cash flow. This includes an assessment of our maintenance CapEx program, financing costs, working capital investment and our global tax liability management strategy.

As many of you are aware, in mid September we announced that we have initiated a global cost-cutting initiative, but this one is not business as usual. We are rethinking our existing businesses with the same tools and disciplines that we apply to any new acquisition. But this is a work in progress.

So far, we have identified close to $500m in cost reductions that are under our control. These include a further reduction of our global headcount, capacity closures across the value chain and an additional reduction in global operating expenses. Over the full year 2008 we expect our global headcount to be reduced by 10%. All of these initiatives will be executed before the end of this year, though the full impact is realized in 2009.

Associated implementation costs are approximately $80m this year and less than $40m next year. We expect to take further actions as part of this cost-reduction process. Our goal is to reduce the Company's cost structure to a level that is consistent with the decline in our market. However, it is important to remind you that we manage our business with a long-term view. We are determined not to undermine our strong global franchise that underlies our long-term capacity to create value.

As part of this process we are also revising our capital expenditures program for this year and the next. As you are aware, most of our Cement production and Cement grinding expansions are in their completion stages. As such, our maintenance plus expansion CapEx for next year is expected to be no more than $850m versus about $2b this year.

In addition, we expect to close the sale of our Austrian assets within the fourth quarter, the proceeds of which will be used for further debt reduction. The sale of our assets in Hungary, the smaller of the two entities, will be delayed until next year due to a lengthier anti-trust approval process than in Austria.

We are pursuing additional initiatives to divest non-core operations, including the previously-announced sale of our Australian Concrete Pipe business. In total, these assets have an estimated value of slightly in excess of $2b. Due to confidentiality requirements, we are unable to provide more information today, but we will announce additional details when we can.

Before I disclose the specifics of our country operations, I am pleased to announce that we will host an analysts' meeting early February 2009 to provide you with an update in our 2009 business plan, financial strategies and cost-cutting efforts.

Now I would like to discuss the third quarter performance of our principal markets and our outlook for these markets for 2008.

In Mexico, Cement volume declined by 5% and Ready-Mix volume declined by 3% during the quarter. The decline reflects lower economic activity which is affecting informal construction, as well as unfavorable weather conditions during the month of September which caused a delay in some infrastructure projects.

Investment in infrastructure in Mexico increased 7% during the first half of the year. We expect the same trend to continue for the rest of the year. There have been some delays in projects from the national infrastructure plan during the third quarter. However, we expect to see more activity in infrastructure during the fourth quarter. In October, some important paving projects related to this plan, including highways and city works, have already begun.

The government has also announced a program to promote growth and employment, with a total of MXN65.1b to be spent in the short and medium term. This program is expected to bring an additional MXN26.7b in resources for cement-intensive projects during 2009.

During the third quarter the formal residential sector slowed down, reversing the trend shown during the first half of the year. Financial institutions, which represent about 20% of the total number of mortgages granted in Mexico each year, or about 40% of formal housing investment, reduced the number of credits during the third quarter, reflecting current credit restrictions.

To reinforce housing investment with CONAVI, or National Housing Council, added MXN1b during September, a 24% increase to the MXN4.1b granted during the first eight months of 2008.

The informal residential sector has been affected by higher construction costs, higher interest rates, lower remittances and slower economic activity. In light of the above we now see Cement and Ready-Mix volumes declining by about 3% and 7% respectively for the full year 2008.

EBITDA margin has improved by 180 basis points during the first nine months of the year, despite the increase in input costs. This increase is the result of continuous improvement initiatives, including fuel substitution, self-generated electricity and the optimization of our distribution channel.

In the United States, Cement volumes fell 19% during the third quarter. On a like-to-like basis for ongoing operations, Ready-Mix sales volume declined by 30% and Aggregate volume decreased by 31% during the third quarter versus the same quarter of last year.

The third quarter like-to-like drop in volume was driven mainly by the continued decline in the residential sector and tighter credit conditions which have negatively impacted other demand sectors. In addition, adverse weather conditions, primarily in Florida, Carolinas, Arizona and Texas, also negatively affected our volumes during the quarter.

Despite these historic declines across our core businesses, prices for most of our products have remained resilient. We announced a $25 per cubic yard price increase for Ready-Mix starting October 1. We are monitoring the situation very closely and, while the prospects appear very positive for many of our markets, it is too early to determine how much of this increase will be realized. The impact of this increase will not be evident until the first quarter of 2009, as the backlog of projects based on the prior price value will expire. In addition, we have announced a nationwide $15 per short ton increase in Cement starting January 1, 2009.

The public sector has been more stable, historically speaking, than the residential and the industrial and commercial sectors. We have continued to see increases in construction put in place in nominal terms for the public sector, including streets and highways and other public construction. These increases have been reduced, however, in some instances fully offset, by input cost inflation.

While there is little visibility at this point over the size of the next federal highway program, we are confident that the substantial need for infrastructure investment will drive many States to seek additional funds from their own bond programs, as was recently the case in California and Texas, and through public/private partnerships.

There have been ongoing discussions in Congress about a second Economic Stimulus Bill and many law-makers favor including additional infrastructure spending as the key element of such a program to create new jobs.

We now see volumes in the public sector declining by about 5% in 2008. In 2008, we expect volumes in the industrial and commercial sector to decline by approximately 16% because 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 third quarter. Housing starts, the fundamental driver of Cement demand in this sector, decreased by 31% year to date August. Our markets have seen an even steeper decline, as higher growth residential market have decreased at a more rapid pace. We are encouraged by improving affordability of houses, which should lead to higher sales as the economic environment stabilizes. This was anecdotally evidenced by the recent 7.4% increase in pending home sales from July to August.

For 2008, we expect the US residential sector to continue its downward trend, declining by about 33% for the country and by about 38% for our market. In light of the above, we expect that, on a like-to-like basis for ongoing operations, in 2008 our Cement volume in the United States will decline by about 19% and we see our Ready-Mix and Aggregates volume declining by about 29% and 28% respectively.

In Spain, Cement volumes during the third quarter decreased by 33% while Ready-Mix volumes decreased by 26%. Cement consumption in our market continued to fall at a faster rate than the overall market during the quarter. Many of the regions we are in which in previous years had shown above average growth, now have lower construction activity. The residential sector continues to decline. For this year we expect housing starts to decline by about 60% to about 250,000. This will translate into significant decline in Cement consumption for the sector.

Infrastructure projects continue to be on standby. Finished projects are not being replaced with new projects because of liquidity constraints and an increase in building cost. Non-residential construction is also expected to decline during 2008. Lower volumes and higher energy and transportation costs have partially been offset by more favorable supply/demand dynamics, as well as cost reduction and optimization initiatives.

In light of the above, we estimate that demand in Ready-Mix volumes will decrease by about 30% during 2008.

During the third quarter of 2008 in the United Kingdom, Cement volumes decreased by 19%, ready-Mix volumes declined by 26% and Aggregates volumes decreased by 11%. Adjusting for the divestments completed during 2007, Ready-Mix volumes decreased by 21%. Housing, industrial and commercial and infrastructure sectors continued to be very weak. For 2008 in the United Kingdom, we now expect Cement volumes to decline by about 19%, Ready-Mix volumes to drop by about 20% on a like-to-like basis and Aggregate volumes to decrease by approximately 14%.

In France, our Ready-Mix volumes decreased by 1%, while our Aggregate volumes decreased by 6% during the third quarter versus the comparable period last year. The main driver for volume growth in the country continues to be the public works sector. Residential and non-residential sectors are reflecting a decline in building permits. For 2008 we now see Ready-Mix volumes on a like-to-like basis for ongoing operations to be flat versus last year.

In Germany, our domestic Cement volumes increased by 10% during the third quarter versus the comparable period of last year. Supply/demand conditions continued to be favorable.

For 2008 the main driver of Cement demand will continue to be the non-residential sector and, to a lesser extent, the civil engineering sector. We expect domestic Cement volumes in Germany to increase by 4% for the year.

In Eastern Europe, namely Poland, Croatia, the Czech Republic and Latvia, domestic Cement volume declined by 11% during the quarter and increased by 6% during the first nine months of 2008. For the full year 2008 we expected the weighted average GDP growth rate from the aforementioned countries to come in at about 3.5%. This is lower than what it was -- than was initially expected at the beginning of the year and reflects the impact of credit restraints and inflation.

The prospects for the region remain attractive, as Cement consumption is expected to increase and supply/demand dynamics should continue to be favorable as the convergence of these countries into the European Union accelerates.

In the South and Central America and Caribbean regions, on a like-to-like basis for ongoing operations, that is, excluding our Venezuelan operations, Cement volume declined 2% during the quarter and increased 2% for the first nine months of the year.

In Colombia, our main country in this region, the main drivers of Cement demand are middle and high-income housing as well as non-residential construction.

In Egypt, domestic Cement volume increased by 3% during the third quarter with continued favorable supply/demand conditions. The private sector, especially upper and middle-income housing, continues to be the main driver of Cement demand. For 2008, we expect Cement volume to grow by about 3%.

In our operations in Australia, Ready-Mix volume increased by 5% and Aggregate volume increased by 8% during the third quarter. Supply/demand conditions continue to be favorable. The main drivers of growth in Ready-Mix and Aggregates volumes for 2008 will continue to be the public works and commercial sector. For Australia, we expect Ready-Mix volumes to increase by 7% and Aggregates volumes to increase by 3%.

Before I turn the call over to Rodrigo, I would like to stress an important commitment to our shareholders. We continue to strive to sustain a record of disciplined, profitable growth in the short, medium and long term. However, given the environment in which we're living, our over-arching commitment in the immediate future is to maximize free cash flow from operations and asset disposal and to deploy those resources towards de-leveraging.

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

Thank you, Hector. Good morning, everyone, and thank you for joining us today. Most of our countries and regions registered EBITDA growth during the quarter, the exceptions being the United States, Spain and the United Kingdom. In the case of the United States and Spain, EBITDA fell mainly as a result of the ongoing correction in the residential sector. In the United Kingdom EBITDA declined due to lower volumes that reflect a general slow-down across all sectors.

Our consolidated EBITDA margin remained flat during the third quarter. Lower margins from our US operations were mitigated by better margins in Mexico and other regions, as well as by the contribution from the temporary excess emission allowances sold during the quarter.

SG&A expenses as a percentage of sales increased from 17.7% in the third quarter of last year to 19.2% this third quarter, due to lower economies of scale resulting from lower volumes, and an increase in transportation costs which were partially mitigated by the cost reduction initiatives we have currently in place.

During the quarter our free cash flow after maintenance capital expenditures reached $957m, 1% lower than in the same period of 2007. For the first nine months of the year free cash flow after maintenance capital expenditures was $2.2b, 17% higher than in the same period last year.

In the first nine months of the year our kiln-fuel and electricity costs on a per ton of Cement produced basis increased 20% over the same period last year.

Given year-to-date performance as well as a continued price volatility in the international energy markets, we now expect an increase in these energy input costs of about 20% for the year, which is lower than our latest expectations.

We continue to develop new ways to increase predictability and reduce volatility in our energy costs. We remain committed to increasing the use of alternative fuels in our operations and continue pursuing clean development mechanism projects, such as the wind driven 250MW power plant in Mexico. This wind-farm, together with the thermo-electrica del Golfo power plant, will allow us to self-generate the majority of our current power needs in CEMEX Mexico.

During the quarter we sustained a loss on financial instruments of $271m, due mainly to our peso/dollar cross-currency swaps and also to equity derivatives related to CEMEX and Axtel shares. We will provide additional details on our exposure management strategy in a minute.

Our majority net income decreased by 74% during the quarter to $200m. This was due to lower operating income, mainly from our US operations, a drop in the monetary position gain, as inflationary gains are no longer being recognized under Mexican accounting standards during low inflation periods, as well as foreign exchange loss and a loss on financial instruments, as mentioned earlier.

Prior to discussing the details of our derivative decisions, I would like to share with you the drivers behind our exposure management strategy. First, we tap the cheapest markets for financing available to us while diversifying our sources of funding. Second, we minimize the volatility in our free cash flow and capital structure. And, third, we achieve the desired level of flexibility while aligning our liability management with our assets and operating cycle.

It is very important to note that the notional amount of our derivatives reflect each step of a conversion of a liability to the designed currency and fixed versus floating mix. For example, if we are converting peso debt equivalent to $1,000 from peso floating to US dollar fixed, the notional amount of derivatives underlying this transaction may reflect $2,000; $1,000 corresponding to the change from peso floating to US floating, and later $1,000 to change from US floating to US fixed.

Of course, if we collapse some of these transactions into net final exposure, our notional amount of outstanding derivatives would be substantially lower.

Now I would like to go into each of the specific strategies. First, I will talk about our interest rate derivatives. As of September 30, we had a total of $17.9b, of which $14.1b is funded in US dollars, either directly or in Mexican pesos or Japanese yen swapped into US dollars, and $3.8b dollar equivalent in euros.

About three-quarters of our total debt is on a floating rate basis, but most of it with protection against rising interest rates. The balance is at a fixed rate. In order to achieve the current mix of fixed versus floating, we have entered into a series of plain vanilla interest rate swaps.

Due to our exposure to LIBOR and Euribor and our concern with the inter-bank market conditions, we decided before the middle of September to put in place strategies to minimize the exposure to increasing base rates while maintaining the flexibility to benefit from lower rates.

As regards LIBOR, we have put into place $8.5b of caps, floors and collars at a weighted average LIBOR rate cap of 3.5%. The majority of our interest rate caps are from June 2009 to June 2011. Second, $3b of interest rate loss at an average LIBOR rate of 3% from December 2008 to June 2009.

With respect to Euribor, we have $2.4b of caps at an average Euribor rate of 4.2%. We also have some yen interest rate locks for about $81m US dollar equivalent, mainly relating to coupons falling during 2010 and 2011. As of October 14, the mark to market of our total interest rate derivative position is a positive $194m. Second, under our foreign exchange derivatives we include our capital hedge program and cross-currency swaps to achieve our desired liability management strategy.

Our capital hedge program is designed to hedge the net asset exposure in our foreign subsidiaries. Since we have a net long dollar and euro-denominated asset positions, this program is achieved by buying pesos forward against US dollars and euros. It is important to note that this hedging program covers only a fraction of our actual net asset exposure in our foreign-owned subsidiaries. As of September 30, the notional amount under our capital hedge program was $3.5b, down from $3.7b as of June and $5.8b as of March 31.

Since September 30 we have completely closed these hedges, lowering the risk of future margin calls. In light of the tightness in the global credit markets, we're not likely to enter into any capital hedging going forward.

During the past 12 months the positive cash contribution from our capital hedge program has been $349m. Over the past 10 years the accumulative positive cash contributions have been significantly higher than the existing negative mark to market, which will not increase going forward as we have closed our entire position.

Our cross-currency swaps are the other components of our foreign exchange derivatives. Here, we're primarily borrowing from markets with the most competitive cost of funding on an all-in basis in the desired currency. For example, we borrow Mexican pesos, then convert them to US dollar funding. Under these derivatives the fluctuation of the mark to market has no bearings on US dollar net debt outstanding. As the mark to market becomes negative, the dollar amount required to pay the underlying peso obligation will be reduced by an equal amount of the negative mark to market, thus, maintaining net debt in US dollar terms unchanged.

For more than 10 years we have adopted a strategy of funding ourselves in US dollars and euros in line with our investments. Since 2000 our investments into the United States of America exceeded our US dollar debt. We also hold significant investments in the euro region, with a total value well in excess of our euro debt.

In light of the under-performance of our US operations, and given the deterioration of the ratio of operating cash flow to debt in US dollars, we have decided to decrease our funding in US dollars. We will look for all the opportunities to reduce US dollar debt from all sources available for us going forward, and until our US businesses have recovered.

The remainder of our notional amounts under foreign exchange derivatives as of September 30 correspond to cross-currency transactions related to a US dollar liability swap to euros which has, since September 30, been closed out with a positive mark to market of about $25m. And cross-currency swaps entered into to eliminate the exposure to yen interest, and yen/US dollar foreign exchange rates for the coupons related to our bank's perpetual facility and our perpetual debentures, for most coupons from now until the middle of 2010, and one coupon beyond that year.

As of October 14, the mark to market of our total foreign exchange derivatives was a negative $501m.

Third, we have equity derivatives with a notional amount of $963m as of September 30 related to shares of CEMEX and Axtel. Most of the exposure under these derivatives has been covered through margins already posted, and we have taken actions to mitigate the risk of future margin calls.

We have three major types of equity derivatives, the largest of which relates to a $500m equity linked three-year financing. Under this loan the cost of financing varies between zero and 11.2% depending on the price of the CEMEX stock at maturity in 2011. At a stock price below $22.18 per ADR, our cost is capped. Because we're currently trading significantly below that level, there is very limited risk of additional margin calls.

$257m of our equity derivatives is related to the sale of our Axtel shares earlier this year to our banks. Given the fact that the final sale to the market has not yet occurred, we retain both the upside and the downside on these shares. Considering that Axtel shares have dropped from $2.17 to $0.71 of a dollar per CPO we have limited further risk of margin calls.

The remainder relates to hedges put in place against the balance of our executive stock option program. We have secured financing and hold cash on hand sufficient to meet all future margin calls on these transactions. The complete details of all these transactions have been fully disclosed and can be found in our most recent 20-F filing statement.

As of October 14, the mark to market of our total equity derivatives was a negative $404m.

Looking at our capital structure, our interest coverage for the trailing 12 months through September increased to 4.8 times from 4.4 times last quarter, that is, June 30 of this year. The improvement in the interest coverage is the result of lower interest expense given the floating rate nature of our debt.

Our leverage ratio as measured by net debt to trailing 12 months EBITDA, using inflationary accounting end of the period convenient translation and the addition of financial income to the denominator in accordance with our contractual obligations, decreased to 3.4 times from 3.5 times at the end of the second quarter.

We reduced net debt by $1.2b during the third quarter, in part by applying realized gains of $262m from our capital hedge program and also from positive foreign exchange conversion effects for $548m resulting, primarily, from a weaker euro. Going forward, we expect to use more of our free cash flow and assets divestiture of proceeds to pay down debt.

During the quarter we rolled over under our Certificados Bursatiles program issuances of short-term notes for a total amount of MXN1.7b. The notes issued were swapped to US dollars at a weighted average rate of close to LIBOR.

As of October 14, we had cash on hand of about $945m, out of which $385m has been posted as margin with banks to support our derivatives. There is an additional $70m cash collateral which is not part of our cash on hand and which has been posted as margin with our banks.

For next year, our most important debt maturity is the $3b syndicated loan facility at CEMEX Espana related to the Rinker acquisition. It will not come due until December of 2009. The remainder of our maturities are spread out throughout the year.

We have already initiated contact with the mandated lead arrangers in that facility, and have received close to $1b of commitments and $300m of positive indications to extend the facility out to December 2010.

We have indicated to the banks that we're willing to improve the profitability on this facility through better pricing. We expect to extend this offer shortly to all banks in the syndicate. The extension of the maturity to 2010 is justified by the low level of maturities in that year. We expect to convene a syndicate bank meeting soon and we look forward to maintaining the support of our banks.

Our priorities in the short term will continue to be to regain our financial flexibility. To do this, we will significantly reduce our capital expenditure programs, both for expansion and for maintenance capital expenditures. We will continue to implement our global cost-cutting initiatives and we will use as much of our free cash flow as possible to reduce debt.

In addition to all of this, we have expanded the list of assets that have been identified for disposal, as we intend to regain our financial flexibility as soon as possible.

Finally, and as always, I have been asked to remind you that any forward-looking statements we make here today are based on our current knowledge of the markets in which we operate and could change in the future, due to a variety of factors beyond our control.

Thank you for your attention. And now we will be happy to take your questions.

(Operator Instructions). And your first question comes from the line of Marcelo Telles of Credit Suisse. You may proceed.

Hi. Good morning, gentlemen. I have a couple questions, the first one regarding your derivatives strategy. You mentioned in the press release that you have about $455m in cash that is being held as collateral by banks. And this would be related to the loss in derivates that you had. I was wondering if that money, since you might not have full access to it, if that's going to jeopardize your ability to meet some of your short-term financing needs. So if you could elaborate on that, that would be great.

And the other point is, given that the duration in the operating environment, in general for the market, if you would consider a capital increase at this stage in order to improve your liquidity position and your net debt to EBITDA ratios.

And, lastly, you mentioned in the press release you are willing to do impairment testing on your assets. So I was wondering if you would have a preliminary figure of what potential write-offs we could expect from that analysis. Thank you.

Let me take the first question, Hector, if I may.

Sure.

We have close to $600m cash on hand in addition to all the cash that we have posted with our banks on margin. So we have sufficient liquidity for the short term and we continue to generate cash from our operations. And so, yes, we have what we need to meet all of our obligations, Marcelo.

Perfect. Thank you.

Now on the second question, yes, as we pointed out in our remarks initially, the operating environment is really challenging for some of our main markets. And we are, as we also announced, doing a total review of all of our operations. As we mentioned, this is as if we were acquiring all of these assets with all the same discipline and the same techniques that we use when we do that and we integrate a new acquisition. And we expect to obtain these cost-cutting efforts, as I mentioned, about $500m up to now, of cost-cutting savings.

And together with that, of course, which is improving our operation environment in terms of our efficiencies, we are also, as we mentioned and also Rodrigo mentioned, increasing the list of assets -- asset disposals so that we can face this challenging environment. That is what we're doing. We think that is what we have to do to regain our financial flexibility as soon as we can.

As for the impairment testing, we are normally doing this up to the month of November. And we should be able to report to you as soon as possible when we finish this process.

Perfect. And just a follow up on this impairment question. In case you arrive at a number, it would be -- whether that number is negative or whatever the result is, would you be booking that into your income statement or your equity? Or this would just be an exercise, or does it actually go through your financials?

We will see, whenever we get to that point, what is the appropriate action to take. As of now, we have to finish first the test to see what happens. But whatever it is, it will not be a cash impact, of course.

Sure, thank you very much.

Thank you, Marcelo.

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

Thank you. Good morning, Hector and Rodrigo. Most of my questions have been answered, but I would like to ask you how likely you see a scenario in which volumes in Mexico decrease next year.

Well, we have not given any guidance for next year. And we're, of course, in a very volatile environment. We are assessing the impact of the new measures taken by the Mexican government to promote growth and employment, to see whether that is going to do it for the Mexican market to grow. We will be much more able to give you guidance on these issues and all the issues -- relevant issues of our operating environment early February when we -- or maybe earlier, if we can. And, Rodrigo, you want to add.

Yes, if I may add, Hector, we're encouraged by some of the actions we have seen taken by the governments around the world. We think it as likely that, as we enter into a recession, if that's where we are now, it is reasonable to expect that governments will take action to increase spending in infrastructure and public works. Because, of course, these kinds of actions taken by governments around the world are the actions that create jobs and that have a multiplier effect in the economy.

We have already seen announcements in the United States and in Mexico. And we would expect, if the situation worsens macro-economically, that the public works and infrastructure sector that consumes our products which, by the way, is the largest of the three sectors that consume our products, should show signs of growth.

Great, thank you.

Thank you.

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

Good morning, gentlemen. Just another question on the derivatives. Rodrigo, I think you mentioned some of the areas of potential risks from margin calls. One of the areas I think probably still sees some of the highest volatility is foreign exchange.

While the gains on the depreciation of the debt may be offset by the derivatives, I'm wondering if you could talk a little bit about the risk of not having a cash flow match, meaning that you would have to put up additional collateral in for the FX derivative losses, and whether or not -- where those instruments are held and if they're related to the debt, may provide you some greater assurance of not having to put extra cash up because of those losses.

And then, I guess, just to expand on that also a little bit, if you could maybe mention how much credit line availability you have with institutions that hold those derivatives, and whether or not some of the rethinking of strategies that Hector mentioned include rethinking the financial strategy and, specifically, into derivatives.

Yes, that's a very good question. And let me take the first part of the question. Of the remainder of the exposure we had as of October 14, and, of course, September 30, an important portion was related to the cross-currency derivatives related to our peso debt. Since then, we have actually closed more than 70% of that position. In essence, we have reduced our debt, and I'm talking over the last three days. So, as we speak, this was happening because, of course, there was an auction this morning and we participated.

And so we have, in essence, reduced dollar debt and increased the proportion of peso debt on our balance sheet. Now, why have we done that? Well, on the one part you point out, and it's true, that had we maintained it the way it was, there was a significant risk of margin calls. And so we have eliminated that risk on more than 70% of that exposure.

And the reason why we have decided to reduce dollar debt is because our US dollar businesses which, as we mentioned, we have invested over $17b into the US over the last seven years and on a pro forma basis, at the peak, perhaps these businesses generated significantly more than $2b, probably more than $2.4b, are generating significantly less than that now.

And so, yes, you're right. Now, whereas before there wasn't a mismatch, today we do have a mismatch in the currencies in which we borrow. And we have decided to reduce the percentage of dollar debt and increase the percentage of peso debt. And, of course, we do have a large business in Mexico that supports that debt.

And so, yes, there is a change going forward. Everybody realizes that we're living in turbulent times. The volatility we have seen in the last few weeks was unheard of, was totally unexpected, caught everybody by surprise and forces everybody to adapt to the new environment.

One of the consequences of it is likely we're not going to be hedging our net asset exposures overseas? Why? Well, again, even though it has generated a net positive contribution over the long term, it does have a high volatility and does require significant lines against that volatility from institutions. And, let's face it, in today's market conditions it is difficult to obtain incremental facilities from banks.

In our case we do generate strong free cash flows. I think it's important to highlight that for next year a significant greater proportion of those free cash flows will be available for us to pay down debt. As Hector Medina mentioned, our maintenance CapEx plus expansion CapEx, which this year has been about $2b, for next year we expect it to go down to below $850m. Clearly, that releases a lot more of our free cash flow to pay down debt. And we do have a longer list of assets that we have put up for sale. And so, yes, we do expect that we will sell some of these assets and we will use some of that free cash flow to reduce debt.

So do we need incremental lines of credit going forward? Not really. We intend to pay them down in an orderly fashion. And we need to because we need to recover our financial flexibility. And, let's face it, today our net debt to EBITDA is significantly above our steady-state targets. And so we are taking action to do that. And we will continue to take aggressive action to do that.

Of course, we have been meeting with our major financial institutions. We will continue to meet with them regularly. We will call for a general bank meeting soon. And we expect to continue to maintain the support from our banks because we do generate strong free cash flows and we do have a plan to reduce debt. In fact, our net debt today is lower than what we expected it to be at this time when we bought Rinker more than a year ago.

And so we have made progress in recovering our financial flexibility but, of course, our ratios don't reflect it because our trailing 12-month EBITDA has not grown. In fact, it, in line with what's happening in the world, has gone down.

Okay, thanks. Sorry, and just to be clear, including the actions in the last couple days, Rodrigo, can you provide an updated notional amount on the FX derivatives -- on the foreign exchange derivatives?

I believe the exposure to peso/dollar, where we swap peso debt into dollar debt today, after what we have done, is probably something in the range of $800m. It's definitely less than $1b. So it's in that ballpark. And so, of course the exposure to that is significantly less than what we had even a couple of weeks ago.

Thank you.

Thank you.

Thank you.

And your next question comes from the line of Gordon Lee of UBS. You may proceed.

Hi. Good morning. Just following up on the derivatives, a couple of questions. The first question is, under the terms of the derivatives that you still have outstanding, does the debt rating downgrade, either the one that happened earlier in the week or if one were to happen to below investment grade, does that have any implications for the terms of the derivatives, for any margin calls, etc?

And the second question, just on the cash balance. You mentioned, Rodrigo, that your existing cash available is $985m. At the end of the third quarter I see that it was $1.4b. So I was wondering if you could just explain what happened to that cash during this timeframe, and whether you still have any untapped committed credit facilities available, should you need them. Thank you.

There has been no impact on either the cost of our debt or the lines available to us as a result of the rating actions that have taken place.

Of the cash available to us at the end of September, part of it was used to make margin calls, part of it was used to pay suppliers, part of it was used to pay a Certificado Bursatiles in Mexico that came due. Part of that cash is cash in transit. Every time you have your cash balance, you don't necessarily have access to all of that cash. And, of course, you have cash which is tied up in the operations and is not freely available. So that is what explains the difference between September and October 14.

Perfect. If I could just --

Yes, we still have working capital facilities in addition to the excess cash we have on hand. And we believe we have sufficient flexibility to meet all of our obligations.

Perfect. If I could just follow up on those questions. On the ratings issue, I was wondering if you have any exposure or, again, if the terms of the derivatives are affected by any future ratings cuts, not the one that happened last week necessarily. But if you were to have a rating cut that would take your debt below investment grade, does that have any implications for the terms of the derivatives?

And just a follow-up question to the effective swapping out of dollar debt back into peso debt that you've done. I was wondering if you could give us a sense of how that affects your cost of debt, just by having done that. What was it, say, in the third quarter? So even was around 5%. And what would it be now, given the changes to the hedge book that you've done in the past few days?

Well, I don't have the exact figure, but peso debt clearly has a higher interest rate than dollar debt. So, yes, for that proportion of the debt, the cost of borrowing will go up. But, of course, if the Peso depreciates, then the principal may be less. If the peso appreciates, well, the peso change -- the peso debt doesn't change and we do have the operations in Mexico to support it.

Relating to the future rating actions by the rating agencies, I'm not going to sit here and speculate about that. I think in some of our derivatives ISDAs there is a significant reduction in thresholds once we get to the level of BB minus but, of course, we're three levels beyond that. We're BBB minus. And, in any event, we're not going to have many derivatives with exposure going forward anyway, so it's really a non-issue.

Great. Thank you very much.

Thank you, Gordon.

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

Hi. Good morning, Hector and Rodrigo. Basically, two quick questions. One is what the bands -- what is the bands in the expansions of capacity in Mexico? And where are you -- when are you planning to open that additional capacity? Which is the amount that you need to finish your expansion program?

And the second would be, considering a lower expansion CapEx in next year, if you expect that to have an impact on your cash tax rate.

Yes, on the first one, Gonzalo, the Tepeaca plant is expected to come in line around March next year. And the Yaqui expansion is already in line and that's already finished, so it's already there.

In terms of the expansion CapEx for next year, as we mentioned, together with the maintenance CapEx, it's -- there is a significant reduction. And that is because only those projects that have already started and are finishing by early next year, or already finishing this year, are being continued. But we don't expect that to affect our tax situation for next year in the case of Mexico, at least from the perspective today. We'll, of course, give you more guidance at the beginning of the year.

Great. And if I may follow on, do you think that with the current weaker volumes and the situation of the construction industry, these expansions, plus potential additional capacity from your competitors, could affect prices in Mexico?

Well, the rationality of the industry has been tested again and again, not only in Mexico. And so our expectation is that in these situations, which are of course challenging, in our case we will review our capacity, not only in Mexico, but in all the markets where we are, to rationalize it and do it as more -- be as more efficient as possible. That means that some of the less efficient capacity might be out of line for a while, while the market recovers.

And so that capacity rationalization, I think, is a matter of the normal practice of the industry. I think that that will take care of the pressures of -- the capacity pressures.

Okay. That's very clear. Thank you, Hector.

Thank you, Gonzalo.

And your next question comes from the line of Mike Betts of JP Morgan. You may proceed.

Yes, good morning. I had a number of questions, but they should all be relatively short. The first one is could you give us some idea of how that $500m of cost savings splits by geography?

We will be able to do that in a lot of detail as soon as possible, but at the latest in our early February meeting. This is, as I mentioned, work in progress. And, of course, we won't limit it to $500m. If we find more, it will be more.

Okay. The second thing is, you put a press release out on Austria and Hungary giving the total disposal proceeds. Two questions to that, if I could. Could you indicate roughly what proportion of that -- and I think it was something like EUR300m -- what proportion was Austria? And did you take anything out to cover the exchange rate, in terms of euro/dollars to cover that transaction?

We -- about $310m -- euros, I'm sorry, EUR310m as the price of this transaction. About EUR240m is Austria. About EUR70m is Hungary. And I don't know, Rodrigo, but I don't think we need to (multiple speakers).

Well, we don't have exposure, Mike, because what we would do with the euro proceeds is pay euro debt because, clearly, we had that euro debt to support the euro investments which are now being diminished.

Okay, thank you.

My next question, cutting CapEx back to about $850m, I thought in the past that was pretty close to your estimates of maintenance CapEx. So maybe two parts to this. Could you just explain what you think the real minimum level of maintenance CapEx is now for CEMEX?

And, secondly, have you actually cancelled any cement projects, or is this just a case of not starting any new plants?

Well, the first question, we will be able to give you more ideas on that level of maintenance CapEx when we see how this will affect our capacity utilization. The whole volume situation affects our capacity utilization worldwide.

And on the new plants, we have said that we will only finish those investments that we -- that have an early '09 finishing and that will contribute to our EBITDA. What I could say is we have not started any new projects and we will not start any new projects in '09, essentially.

Okay, thank you very much.

Thank you.

And your next question comes from the line of Steve Trent of Citi. You may proceed.

Good morning, gentlemen.

Good morning.

Most of my questions have been answered, but I got cut off for part of the call, so I apologize if I'm repeating anything. As a follow up to Mike's question, just to make sure the expansion CapEx that you guys have mentioned in various places, about , Yaqui, Panama, Latvia, the UAE, etc., can we assume that these projects will be complete next

Yes, Steve. All of them will be completed and they will be all contributing significantly to our operations, so we think that they make economic sense completely. In the case of Panama, of course, it's certainly very important for us as that volume is already sold.

Okay, great. And just to make sure I didn't miss anything, may I ask if you're, at this point, maintaining your full-year EBITDA guidance for 2008?

As I mentioned in the initial remarks, the volatility of both volumes and financial markets make it very difficult for us to guide for this quarter EBITDA. And that, of course, affects the full-year EBITDA.

Fair enough. That was the part of the call I wasn't able to get on.

I'm sorry to hear that.

That's all for me, but thanks very much.

Thank you.

Thank you, Stephen.

And your next question comes from the line of [Carlos Ambrosio] of Vector. You may proceed.

Yes, good morning Hector and Rodrigo. I just have three questions. Regarding your emission allowances, you state that you registered some 116m as a cost credit. I'd like that you can elaborate on how was that allocation between Spain and others, and if this is a one-time event. Thank you.

Well, these emission allowances come from -- proceeds, of course, come from what we estimate that we will not need for this year, as volumes have declined significantly all throughout the Cement industry in Europe. And so that's what they come from. But we cannot elaborate on the breakdown between our countries.

So it's 116m for this quarter that we have sold. It is something that we have to estimate as we go on, and so we will -- we would be estimating what we would do for volumes in the next quarter. And then is something that we have to keep looking at and making reference to the volumes that we see going forward.

Okay, thank you.

Thank you.

And your next question comes from the line of Jamie Nicholson of Credit Suisse. You may proceed.

Hi. Thanks for the call. I just have a question on your -- the tax ruling that you received September 9. When will you know what the amount of tax you'd have to pay? And are there any disagreements that you have with the government on what that tax obligation is? Thanks.

Well, we don't have an estimation. We are currently in the conversations with the authorities on that issue. So we will be able to give you an impression when we get to a final estimation.

Do you have any -- your initial press release said that you did not think it would be material, but additional analysis may lead to a different conclusion. Have you done additional analysis of what the potential obligation might be and would you still say that it's not material or is that still uncertain?

We still believe it will not be material, but we are currently doing those analyses. So if in the end it comes to being material we will, of course, inform that at the appropriate moment.

Thank you. And then just a clarification about your cash collateral and your cash position. The 366m loss resulting from the closeout of your FX derivatives, was that a cash loss? In other words, did that contribute to your cash reduction?

And then, additionally, if you have 455m of cash collateral based on a 711 mark-to-market loss, that seems like a high percentage of margin. What margin do you have to post? What percent? And can you give us a little guidance on how the margin estimation works? Thanks.

Well, it does vary a lot from institution to institution. And we do have different threshold amounts with each institution. And it depends whether it's a diversified portfolio of derivatives that we have with a certain institution, or just one derivative position. For example, there is one institution that we only have one derivative position, which is the Axtel shares. And so, of course, as the Axtel shares drop, we receive further margin calls.

The other part of the question, I'm sorry, was --? What was the first part of the question?

Yes, whether the -- you have in the footnote that 366m of your 711 mark-to-market loss was the closing out of the FX derivatives. I was wondering if that was cash.

Well, yes. No, it's important to mention that in the case of the capital hedge program, for example, over the last 12 months we have taken cash out of those derivative positions to reduce debt, I think, to the tune of close to $300m. So, yes, there are quarters, there are periods in time where we take cash out and periods of time where we will pay it back.

Now, currently, the mark to market is still there. And when we pay that mark to market over time then, yes, the cash will flow to pay it, instead of to pay down debt faster, for example.

Okay, great. And one final question. What are your fourth quarter debt service requirements, both principal and interest? Thank you.

Well, during the fourth quarter in Mexico we have approximately -- I believe the number is $300m equivalent of maturities in the domestic capital markets through commercial paper and Certificados Bursatiles. The balance is with banks, bilateral facilities, working capital facilities. And we have maintained support from our banks until now and we expect that we will continue to maintain support from our banks.

We're meeting with them regularly and will continue to meet with them next week and the following week. And we will give you an update on a quarterly basis. But we expect to maintain these facilities in place.

So the $300m of maturities --?

The concern -- yes, the concern that we have in the very short term, in the immediate short term, is the domestic capital markets. We have seen actions taken by governments around the world that give comfort, for example, in the US, measures of commercial paper program. In Mexico we have been rolling our commercial paper program. In fact, last Wednesday, Wednesday of last week, we rolled our commercial paper program.

However, we are concerned that going forward there may be concerns in the market with the volatility at large. And that's why I mentioned those maturities, if they come due and the market has not stabilized, and there is no other mechanism of support to support the market, we may have to pay that. And, yes, we do generate free cash flow and we expect to sell assets. And we have cash on hand to meet those obligations.

Okay. Thank you very much.

Thank you.

Thank you.

And your next question comes from the line of Garrick Schmoies of Longbow Research. You may proceed.

Good morning. Thanks for taking my call. Just one quick question. Just wondering if you could go into a little bit of detail in the US, just regionally, where you're seeing some -- the price weakness, and maybe if there's pockets of strength where you're seeing actually some price increases here in the second half of the year in the US. Thank you.

There is, as we mentioned, price increases announced in the US on our part and on the part of other companies in the industry. But it's too early to tell whether those prices, both in Cement and Ready-Mix will hold. So that is what I can tell you about the pricing.

I don't think I got the second part of the question. I couldn't hear it.

The second part of the question was related to the price increases which you answered. Thank you. But the first half of the question was your prices in the US are down about 2%. Just wondering if you could break it out geographically where you're seeing the most weakness in pricing.

I don't have the original breakdown. But I would certainly think that those are -- geographic mixes and product mixes effects. 2% decrease, we don't see very significant.

Okay. Thank you very much.

Thank you.

And your next question comes from the line of Christopher Buck of Barclays Capital. You may proceed.

Good morning. You've answered many of my questions already. But following up on Jamie's question, you had about $3.8b in short-term debt as of the end of the third quarter. You've walked us through about $300m that are coming to you in the fourth quarter. And I'm just wondering if you can go through the rest of that 12-month period and let us know when those maturities are coming due.

Well, most of it is bank debt bilateral facilities that we have. We also have been paying some of the Certificados Bursatiles that have matured. We mentioned we have some further Certificados Bursatiles towards the end of the year. We don't have anything in the international capital markets that is coming due in the very short term. And so most of our refinancing needs, if you will, will be with the bank market. And we are in conversations with our bank.

Okay. So that's true for the $3b due in December, but also the --?

The $3b is December of '09.

Right. And so that's on top of the $3.8b short term that was listed as of the third quarter?

No. We can get into the details with you later on, but I don't have the details in front of me right now. But I know that with the capital markets we don't have any major maturities. The only ones are in the Mexican capital markets. I mentioned the amount and the rest is with banks. And we maintain good relationship with our banks and we maintain the support.

Okay, great. And you had also mentioned that there are some additional debt facilities to draw down. But I may have missed it. I don't know if you gave an amount of what is available.

No. These are working capital facilities that we have. And we have, of course, drawn many of our facilities and we have cash on hand. And, of course, to the extent that we can, we will negotiate additional facilities going forward. And we are in conversations with different institutions.

And there are bridges we could do to assets sales. There's funding we can do to potential sale and leaseback transactions. And, yes, we're looking at all the different options in order to have as much liquidity as we think we will need against any scenario that may develop.

Okay, great. And just to follow up on the asset sales issue, is there any more guidance you can give us? Clearly, asset values have come down pretty significantly. It seems like you've locked up this one European deal. So any more news in terms of Venezuela or other possible asset sales?

Other than that is expressed in the press release and what I said in the remarks, there is no additional information. But as soon as we can share it with you, we will.

Okay. Thanks very much.

Thank you.

We have time for one last question, and that question comes from the line of John Kollar of HSBC Securities. You may proceed.

Good morning, gentlemen. Thanks for the call. Just a quick follow on to a couple of the bank line questions that have been asked here. Specifically as it relates to the bank lines, are there any debt rating triggers in those bank facilities that you currently have outstanding that would, or might, require the acceleration of the principal amount, if the rating agencies were to further downgrade your debt rating?

No. We don't have any rating triggers. We do have pricing grids and so we do have the incentive to pay down and de-leverage, to lower the spread on our loans. But we don't have any rating triggers. We think that's really toxic. And I think we did at one point in time, more than five years ago, have some rating triggers in some of our derivatives, but we eliminated those a long time ago.

Great, thank you. And one other quick question. In your comment about "in constant negotiations with the banks on a regular basis here", have you gotten any feeling from the banks at all, any interest that they may be interested in trying to improve their position in the capital structure by securing the bank lines?

Well, one of the things we did mention in our opening remarks is that we have already gone through the mandated lead arrangers in our acquisition facility for Rinker. And we have actually already obtained commitments for $1b to extend the maturity of December next year into 2010. And, in exchange for that, the only thing we're looking at is pricing.

We're improving the profitability for them. We're improving the debt maturity profile for us. And, of course, we're reducing the overall risk for the benefit of all banks that participate across the capital structure of the Company. So we think this is something that made a lot of sense. This is something we started to do before Lehman got into problems and before all the other things that happened in the second half of September.

We think it pays that we have been proactive and we have been anticipatory and we have been informing our banks well ahead of when we need to do things, executing those transactions. We think this is -- they appreciate this and, of course, we update them with information as well. And we're constantly in that process.

Thank you so much.

Thank you, and thank you everybody. Hector, do you want to close the --?

Yes. I would like to thank all of you for your time and attention, more so in these turbulent times. We look forward to your continued participation in CEMEX. And please feel free to contact us directly. We're always here, 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.