Cemex SAB de CV (CX) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX Third Quarter 2009 Earnings Conference Call. My name is Marisa, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to introduce the speakers for today's call, Mr. Hector Medina, Executive Vice President, Finance and Legal, and Mr. Rodrigo Trevino, Chief Financial Officer.

Mr. Medina, please proceed with your opening remarks.

Thank you. Good morning, and thank you for joining us for the third quarter conference call. During the quarter, we achieved several important milestones towards regaining our financial flexibility in the face of the worst crisis we have experienced in the last 75 years.

On August 14th, we announced the completion of the refinancing of $15 billion of CEMEX's outstanding debt. On September 28th, we successfully raised net proceeds of $1.8 billion in equity, which were used to reduce debt. On October 1st, we completed the sale of our Australian operations to Holcim Group for $1.7 billion. The proceeds from this sale reduced debt and strengthened CEMEX's liquidity position.

With the proceeds from the equity offering and the sale of our Australian operations, we have now covered amortizations under the financing agreement through mid-2011. In addition to these milestone achievements, we continued to implement our cost-saving and right-sizing initiatives throughout all operations.

As regards to our operations, during the third quarter, we continued to see a challenging business environment. While overall credit markets showed some improvement, growth in the residential and industrial-and-commercial sectors remained hindered by tight lending standards.

On the other hand, we saw an uptick in infrastructure spending in many of our countries. Leading indicators in several of our markets are showing signs of stabilization and in some modest increases in activity. It is important to note that, despite the signs, we still have not seen material spending from the fiscal stimulus programs launched in a number of our markets. A more pronounced contribution from these programs is expected for 2010.

The signs of bottoming are reflected in our results, given the seasonal comparability of the second and third quarters. On a quarter-on-quarter basis, we saw our third-quarter sales increasing by 1%, with a 1% decline in EBITDA. The sequential decline in EBITDA is due mainly to higher contributions from our Mexican operations during the second quarter as a consequence of the electoral cycle.

It is important to note, however, that in light of the continued uncertainty in the economic outlook and the timing of the recovery in our markets, we remain cautious about the future, especially in the US. On a year-over-year basis, the decline in our EBITDA and consolidated volumes is due primarily to the substantially better trading environment that prevailed in the same period last year.

Also contributing to the unfavorable year-over-year comparison is the deconsolidation of our Venezuelan assets. With regard to our consolidated volumes, on a sequential basis, our third quarter cement volume declined by 2%, whereas ready-mix volume remained flat, and aggregates volume increased by 2% in the same period.

The decline in cement volumes is a reflection of the higher contribution from our Mexican operations in the second quarter, as discussed earlier. Adjusting for foreign exchange fluctuations, quarter-on-quarter consolidated prices decreased by 2% for domestic cement and ready-mix, and increased by 1% for aggregates.

In US dollar terms, prices for cement, ready-mix and aggregate increased 1%, 2% and 5%, respectively. For the full year 2009, we now expect EBITDA to be close to $2.9 billion at the currently prevailing foreign exchange rates, including the results of our Australian operations for the first nine months of the year, or about $2.7 billion, excluding the Australian business.

We now expect free cash flow after maintenance capital expenditures to reach close to $1.2 billion during 2009, including the contribution of our Australian operations for the first nine months of the year.

Now I would like to discuss the third quarter performance of our principal markets and our outlook for these markets for 2009. In Mexico, on a sequential basis, our cement and ready-mix volume decreased by 10% and 6%, respectively. This quarter-on-quarter decline was in line with our expectation, as it is the result of higher activity during the second quarter, due to the electoral cycle.

Infrastructure continues to b the most active sector in our Mexican business. According to INEGI, infrastructure spending increased more than 30% in real terms during the first half of the year. For the full year 2009, infrastructure spending is on track to increase by about 20%, driven by the national infrastructure plan and other programs at state and municipal levels.

Looking forward into 2010, we are pleased with the government's stated commitment towards the acceleration in spending on the national infrastructure plan. According to CONAVI, Mexico's housing authority, investment in the overall formal residential sector will increase by about 6%. More of this investment is being directed towards the purchase of existing homes and renovations. As a result, investment in new housing is expected to drop by about 14% during the year.

Total investment in formal housing in Mexico in the first eight months of the year, adjusting for co-financings between public and private institutions decreased by 4%. This is mainly due to a decrease in investment from Infonavit by 7% and a decrease from sofoles and commercial banks of 26% due to lower liquidity, higher delinquency levels and an increase in funding costs.

The sales construction sector is expected to see slight growth during the year, as a result of an increase in real peso terms in the amount of remittances from abroad. In addition, there is a modest shift from the formal to the informal residential sector, as credit restrictions continue. We now see cement volumes declining by approximately 4% and ready-mix volumes decreasing by about 12% during 2009.

In the United States, cement volume increased by 5% during the third quarter, versus the previous quarter. Ready-mix volume increased by 7%, and aggregates volume increased by 1%. I would like to reiterate that there is continued uncertainty about the economic outlook and timing of the recovery in the US. As such, our results for the US operations are particularly sensitive to changes in this outlook.

Quarter-on-quarter, prices declined moderately by 2% for cement, by 4% for ready-mix and remain flat for aggregates. Pricing softness is principally driven by weakness in our western region.

Public construction spending continues to be the principal driver for demand and is expected to represent about two-thirds of cement consumption this year and in 2010. From January to August 2009, public construction spending was 3% higher, and is expected to improve in the coming quarters as a result of the $85 billion in public infrastructure stimulus funding, very little of which has been spent up until now.

A good leading indicator for infrastructure spending, contract awards for streets and highways, was up 20% during the three months ended in August, versus the same period last year. In addition, the six-year SAFETEA-LU highway program expired last September. We expect the program to be extended by 12 to 18 months at current funding levels, while the House Transportation and Infrastructure Committee is proposing a $500 billion six-year transportation program. This represents an increase of 74% over SAFETEA-LU.

During the first eight months of the year, industrial and commercial construction was 10% below that of the same period as 2008. Contract awards in this sector declined 60% during the first two months of the year and have been stable since then.

The health of the housing sector, as demonstrated by new home starts, hit a low in April and has been in a moderate recovery since then, reaching close to 600,000 new homes in September. We are encouraged by the recent uptick in the Case-Schiller home price index of 20 major cities, which has shown sequential month-over-month increases in May, June, July and August; these are the first increases in three years.

Overall, housing inventories have strong signs of stabilization, despite historic levels of foreclosures. With the September existing home supply dropping to 7.8 months from 10.1 month as year ago. New home supply dropped to 7.3 months in August, from 11.1 months a year ago.

We saw quarter-on-quarter stability in our top-line results, as demonstrated by the 1% drop in sales. Despite this, we experienced a $25 million decline in EBITDA, largely due to inventory reduction effects and product mix. Excluding these effects, EBITDA for the quarter increased by about 8% on a sequential basis, in light of high volumes and lower cash costs.

For the full year, we now expect cement volume to decline by about 30%, ready-mix volume to decrease by about 38% and aggregates volume to decline by about 35%.

In Spain, cement volumes were flat on a quarter-on-quarter basis during the third quarter. Ready-mix volume increased by 2%, and aggregates volume increased by 7% in the same period.

Prices on a sequential basis declined by 4% for cement, by 5% for ready-mix and by 2% for aggregates. EBITDA margin in Spain increased to 32.3% in the third quarter, from 24.9% in the previous quarter, mainly due to a reduction in production costs on a per-unit basis, lower SG&A and less maintenance work during the third quarter.

Cement consumption in our markets continued to fall at a rate faster than that of the overall markets during the quarter, as a result of lower construction activity, especially in the central region, Levante and Baleares, which represent about 56% of our activity in the country and have shown above-average growth in previous years. The residential sector continues to contact. Housing starts declined by 52% during the first half of 2009.

For the full year, housing starts are expected to decrease to about 150,000 from 360,000 in 2008. Investment in the residential sector is expected to fall by about 27% during 2009. Although housing prices have decreased by about 8% year-over-year, the decline is still not enough to reactivate the sector and further declines in housing prices are expected.

We expect the industrial-and-commercial sector to remain flat in terms of construction activity versus last year. Year-to-date performance has been affected by lack of confidence and tight credit conditions. Recent improvement in confidence, however, is expected to have a positive effect on this sector.

The infrastructure sector has been relatively stable. Spain announced an EUR8 billion stimulus program. Since these resources have to be spent before the end of the year, however, they were allocated largely to small, non-cement-intensive projects.

For the full year 2009 and on a like-to-like basis, adjusting for the sale of our Canary Island operations, cement and ready-mix volumes are expected to decline by about 30% and 35%, respectively.

In the United Kingdom, cement, ready-mix and aggregates volumes increased by 15%, 21% and 14%, respectively, during the third quarter.

For 2009, we continue to expect business across all of our business segments, with some mild deceleration in the rate of decline. We see cement, ready-mix and aggregates volume decreasing by about 18%, 24% and 18%, respectively.

In our rest of Europe region, excluding Spain and the UK, we saw sequential improvement in volumes. On a quarter-on-quarter basis for the region, cement, ready-mix and aggregates volumes increased by 6%, 1% and 7%, respectively. These increases were driven mainly by our operations in Poland and the Czech Republic.

In France during the quarter, ready-mix volume fell by 18%, while aggregates volume declined by 15%. The infrastructure sector continues to be the main driver for volume growth. However, we now expect only a third of the incentive infrastructure package announced by the government to be spent this year, versus two-thirds originally. The remainder of the package is expected to be spent during 2010.

In addition, a new plan for EUR100 billion, or about 4% to 5% of France's GDP, is now being discussed in Parliament. If approved, this plan would further contribute to infrastructure spending projects, including schools, hospitals, high-speed trains and others in 2011 and beyond.

In light of the above, we now expect ready-mix volume for the full year 2009 to decline by about 17% in France.

In Germany, our domestic cement volumes decreased by 15% during the third quarter and by 18% during the first nine months of 2009, versus the comparable periods of last year.

Spending in the infrastructure sector showed a slight increase during July and August, reflecting the initiation of projects under the stimulus program. About EUR14 billion out of the total EUR50 billion announced for the program are planned to be spent on infrastructure-related projects during 2009 and 2010. About 25% of the stimulus funds are expected to be disbursed during 2009.

Residential spending showed a slight decline during August. We are encouraged, however, by the reversal of the negative trend in residential permits, which increased by 9%. Permits in the non-residential sector declined by 30% during the month of August on a year-over-year basis. This drop reflects the cancellation and delay of some projects, as companies have reduced capital expenditures. For 2009, we now see our domestic cement volume declining by about 16%.

In Eastern Europe, which includes Poland, Croatia, the Czech Republic and Latvia, domestic cement consumption remained flat during the third quarter. This was mainly due to a decline in confidence and tight credit conditions. However, the important backlog infrastructure projects and the improvement in co-finance management in the EU-related projects are expected to lead to stabilization and potential growth in some of our markets during 2010.

In the South Central American and Caribbean region, volumes during the third quarter on a sequential basis increased by 3% for cement and were flat for ready-mix.

In Colombia, quarter-on-quarter volumes increased during the third quarter by 8% for cement and by 4% for ready-mix.

On a year-over-year basis, cement volume in our operations declined by 4% during the quarter and by 8% during the first nine months of the year. The infrastructure sector is expected to be the main driver of cement consumption during the coming years. The formal residential sector has benefited from a subsidy in interest rates for new home purchases, which has started in April. This program has shown its positive effect in the number of homes sold as presales, which will affect housing starts, mainly during 2010. In addition, the government has initiated several low-income housing projects as part of its stimulus plan to reactivate the construction sector. The industrial-and-commercial and self construction sector will likely remain weak, reflecting the decline in economic activity and higher unemployment rates. Overall, in Colombia, we expect a decline of about 8% in domestic cement volume for 2009.

In Egypt, domestic cement volume increased by 8% during the third quarter and by 16% during the first nine months of the year, versus the comparable periods in 2008. The formal housing and infrastructure sectors are the main drivers of cement demand. The decrease in prices of other building materials, steel in particular, has been fueling growth in the construction sector. We now expect cement volume to grow by about 12% in 2009.

While anecdotally, we are seeing a bottoming out in some of our markets, we continue to be very cautious about the outlook, given the limited visibility. On the other hand, we are very pleased with our achievements, in particular, having refinanced $15 billion of our debt, bolstered capital structure through the issuance of $1.8 billion of net proceeds in common equity and, lastly, substantially improving our liquidity position through the sale of our Australian assets for $1.7 billion. I would like to assure you that we will continue our vigilance in focusing on our cost-cutting efforts and maximizing our bottom line.

Thank you, and I will now turn the call over to Rodrigo.

Thank you, Hector. Good morning, everyone, and thank you for joining us on this call. Our performance during the third quarter was affected by the continued general slowdown in the global economy.

EBITDA declined as a result of lower volumes, which were partially mitigated by a resilient pricing environment in local currency terms in all of our major markets, except the US and Spain. In the US and Spain, pricing softness was substantially in line with input cost deflation. Expressed in US dollar terms, our results had an unfavorable effect due to the depreciation of many of the currencies of the countries in which we operate.

On a like-to-like basis, that is, adjusting for currency effects, the expropriation of our Venezuelan operations and the divestment of our Canary Island assets, EBITDA was down 30% during the quarter and down 22% for the first nine months of the year. EBITDA margin declined to 19.3% during the first nine months of the year, from 20.7% during the same period of 2008.

However, we are pleased with improving margins throughout our market, except for the US and Spain. Our cost-reduction initiatives contributed to mitigate the effects of the significant volume declines seen during the period -- during this period. Given the seasonally comparable nature of the second and third quarters, we are cautiously encouraged by the sequential stability seen in our sales EBITDA and EBITDA margin.

Cost of sales as a percentage of net sales increased two percentage points from 68.7% -- to 68.7% from 66.7% during the third quarter of 2008, during which we completed the sale of emission allowances for $116 million. Adjusting for this effect, cost of sales as a percentage of net sales remained flat. On a quarter-on-quarter basis, cost of sales as a percentage of net sales decreased 0.7 percentage points.

SG&A expenses as a percentage of sales during the quarter increased 2.4 percentage points, compared with the same period last year, mainly as a result of lesser economies of scale, due to lower volumes, partially offset by savings from our cost-reduction initiatives. On a quarter-on-quarter basis, SG&A expenses as a percentage of sales increased 0.8 percentage points, due mainly to higher distribution expenses during the quarter.

During the quarter, our free cash flow after maintenance capital expenditures reached $260 million, 73% less than last year, mainly as a result of lower EBITDA, higher financial expense and higher investment in working capital. These factors were partially offset by lower maintenance CapEx.

Most of the increase in working capital during the quarter was extraordinary and of a non-recurring nature. It is explained by advanced payments to suppliers as part of our liquidity management, resulting of our contractual obligations under our financing agreement. It is also due to the upfront impact of the worsening of the trade terms in our working capital cycle, due to tighter liquidity conditions.

These effects were partially mitigated by a decline in inventories, mainly in the US. For the first nine months of the year, free cash flow after maintenance CapEx was $819 million. We expect free cash flow for the full year to reach close to $1.2 billion, including the contribution of the Australian operations for the first nine months of the year. Regarding our input costs, during the first nine months of the year, our kiln fuel and electricity cost on a per ton of cement produced basis declined by 17%, versus the same period last year.

We continue to develop new ways to lower our energy input costs and to make them more predictable. We remain committed to increasing the use of alternative fuels in our operations and we continue pursuing clean development mechanism projects, such as the wind-driven 250-megawatt power plant in Oaxaca, Mexico.

The increase in financial expenses during the quarter reflects the new terms of the financing agreement. During the quarter, we recognized an exchange gain of $16 million, mainly as a result of the appreciation of the euro against the US dollar. We also recognized a loss on financial instruments of $23 million. This reflects the closing out of the cross-currency derivatives embedded in or perpetual securities, which were partially mitigated by a positive mark-to-market contribution of our equity derivatives.

The income tax line shows a positive contribution, reflecting the effect of expected tax losses in many of our operating jurisdictions, due to the reduced operating volumes, combined with local currency exchange losses. During the third quarter, our majority net income decreased by 40% to $121 million. The decline was due mainly to lower operating income and higher financial expense, which were partially offset by lower losses on financial instruments and an exchange gain versus last year -- versus a lost last year.

We completed the refinancing of approximately $15 billion of syndicated and bilateral obligations. The financing agreement includes a maturity schedule running through February 2014, with interest payments of LIBOR plus 450 basis points to our bank creditors, and a fixed rate of 8.91% to our private placement creditors. It is important to note that proceeds from the equity offering we completed in September and the sale of our Australian operations, plus our cash position as of September 30th are sufficient for us to meet our capital obligations through mid-2011.

Additional capital sources, including our free cash flow generation, additional asset sales and additional capital market transactions, as well as regularly rolled-over working capital facilities, will allow us to pay and prepay future capital obligations.

During the quarter, we also issued short-term notes under our Certificados Bursatiles program. The outstanding amount of these notes was MXN1.2 billion as of September 30th. Our priorities in the short term will continue to be to pay down debt. To do this, we will significantly reduce our capital expenditures, continue to implement our global cost reduction and right-sizing initiatives and, as we just discussed, use as much of our free cash flow as possible and the proceeds from other initiatives to reduce debt.

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

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

(Operator Instructions)

And you have your first question from the line of Gordon Lee from UBS. Please proceed.

Hi, good morning. Just a couple of quick questions, actually. The first is on the balance sheet, if I look at the cash inflows, plus the equity inflow, and then I look at the net debt reduction, even if you adjust for the currency conversions and the coupon on the perpetuals payment, I still come short about $500 million -- $450 million, which is a relatively material amount.

I was wondering -- and in the press release you said that there were fees associated with the refinancing and that there were other uses of cash. I was wondering if you could elaborate on that, and if that accounts for the gap. And the second question is, with the closing of the -- of the sale of the Australian assets already completed, could you give us a sense of what you think the impairment charge, in terms of the loss of book value, will be for the fourth quarter? Thank you.

Let me take the first question, if I may, Hector. You're correct, Gordon. The gap from the numbers you mentioned on the free cash flow proceeds -- net proceeds from the equity transaction, is accounted for the refinancing fees and expenses associated with the recently $15 billion close to five-year financing we put in place.

And, as you pointed out, we had to pay the coupon, so we paid the coupons on the perpetuals, plus the fees paid to the private placement investors up front for them to purchase the 8.91 notes during February 2014.

What's the --?

The second question on the impairment charges, well, we will have to wait until November when we usually do the impairment calculation, but as we point out in the press release, we will book a loss -- net loss, on the sale of the Australian assets versus the book carrying cost on those assets.

Perfect. Thanks very much.

Thank you.

Thank you, Gordon.

And your net question comes from the line of Vanessa Quiroga from Credit Suisse. Please proceed.

Yes. Thank you for the call. My first question would be regarding the proposal to demand -- to require from companies to pay deferred taxes related to that consolidation regime, and if you would have any guidance of what could be the potential impact for CEMEX, or what portion of your reported deferred taxes come from Mexico, and if they are explained by the consolidation regime.

And my second question would be a clarification regarding the carbon credits. Were those reflected in Spain, exclusively, or in the inter-company adjustments? Thanks.

Thank you, Vanessa. On the first one, there's no final determination of what is going to be the reforms or the changes in the tax regime -- the tax consolidation regime. It is not appropriate for us to estimate now what the impact would be, because we don't have any final determination, as I said. It's clearly something that would affect the Company. We believe that there is no other country that has made this kind of change, being retroactive, but nevertheless we'll wait -- we will have to wait until that determination is made by Congress.

On the carbon credits, the $160 million in the total carbon credits that were sold somewhere in Spain, previous quarter and last year, and I would say that a third perhaps was in Spain, and then the other -- in other parts of the Company, two thirds.

In the third quarter -- sorry, how much were the carbon credits for?

$160 million --.

That was last year.

Last year, of course. Last year, third quarter was $160 million.

In this quarter, we saw an important improvement in the EBITDA margin for Spain on a sequential basis. Is that sustainable?

Well, it is primarily explained by the lower maintenance expense during the third quarter, which is not recurrent in nature, and it was also on a sequential basis from second quarter to third quarter, to a lesser extent explained by the carbon allowances that were sold and recognized in Spain. Now, some of it is a result of the lower cost base, based on the initiatives we've implemented, and those will be recurrent in nature. But I would say that close to two-thirds is of a non-recurring nature.

Great, thanks.

Thank you, Vanessa.

And your next question comes from the line of Mike Betts from JPMorgan. Please proceed.

Yes, good morning. I had three questions, two of a financial nature and one more relating to pricing. Maybe, Rodrigo, I could first ask in terms of this working capital increase, which you explained, but now you have a new refinancing facility in place. You've got the equity capital raising, or the equity capital raised, and you've sold Australia. What's the potential to reverse those changes in the working capital requirement?

Well, I would say that there is a potential, it's not going to be immediate, but to the extent that we have addressed the short-term liquidity risk to the Company, we should be in a position to regain the credit terms we had with our suppliers and to normalize, as well, the credit terms with our customers. And to the extent that happens, and to the extent that we go back to the working capital cycle that we used to have, we should be in a position to recover some of that upfront cost -- or upfront investment in working capital. Nevertheless, we do want to highlight that the impact we see in the third quarter is primarily of a one-time nature, because it's the one-time impact of the lengthening of the working capital cycle in our business worldwide.

Okay. Normally, in the fourth quarter, I think you get a seasonal inflow or seasonal reduction in working capital. Is that correct, and would you expect that again this year?

That is embedded in our guidance for the full-year forecast of free cash flow of close to $1.2 billion, including nine months of Australia. And of course, the reason we include the free cash flow for the nine months of Australia is because we kept that free cash flow for the first nine months of Australia.

Okay. Second --

As we sold the operations, of course, we sold the future operating potential and contribution of Australia to the buyer.

Yes -- no, no, sure. Second question, cost savings, are you able to give an indication of either how much of the $900 million you've had in the first nine months of the year, or more specifically how much you had in the third quarter?

We did not guide specifically to what was the quarter -- current application of the savings, but we are on track to realize the savings. Remember that a good portion of it, almost 40% to 45% of those savings were right-sizing, and the rest we think are efficiencies that will stay with us on the way to recovery. But, again, we're essentially on track to realize this. We think we are at around 80% of the cost savings that we announced up to the third quarter.

Okay. Given that the volumes have deteriorated significantly since you've put those cost savings in place, are you looking at doing further cost savings for 2010?

Well, what happens is that esentially if the situation continues, of course, additional right-sizing would have to be -- measures would have to be taken. So we haven't changed the guidance to this $900 million in savings because of that.

Okay, and my third and final question relating to cement, or to pricing generally. It does seem to be continuing generally to drop down. And I guess I was intrigued by Rodrigo's comment that in the US and Spain it was just in line with the energy cost reductions or the cost savings. I mean, in reality, in most markets are those savings having to be passed on, or are you actually able to retain them in any of he markets, significantly?

Well, difficult to say, because of the volume drop in many of our markets. I would say that the -- I mean, volumes have affected prices only lately, and if you think of the high drops in volumes in some of our markets, price upheld reasonably well, with very minor exceptions. So, in a way, we have been able to keep all those savings in energy prices somehow considering the drop in volumes.

And we do estimate that more than 100% of the drop in operating cash flow margins is explained as a result of volume decline, not as a result of prices or prices versus input cost inflation.

And so, clearly we expect to recover that through operating leverage as the recovery ensues in the markets were volumes have dropped the most, primarily the US, which is the one that moves the consolidated numbers the most. Clearly, taking price action when volumes are going down is more difficult than when volumes are recovering, but of course prices are very difficult to forecast into the future.

To the extent that there is a recovery and to the extent that recovery is stronger than the market anticipates, we think that will be a positive catalyst for supply/demand and supply dynamics going forward.

Okay, and one final one, hopefully a short one. Egypt, the EBITDA was up 3% in Q3. It's been running up kind of 20% in previous quarters. I couldn't quite pick out from the statement -- I probably just missed it. Why the slowdown in the rate of growth? Was it just a base effect or was it something else?

No, it's essentially the Ramadan festivities that in this case fell fully within the quarter.

A volume effect.

Yes.

Okay, thank you very much indeed.

Thank you.

And your question comes from the line of Gonzalo Fernandez from Santander. Please proceed.

Hi. Good morning, Hector and Rodrigo. Just a couple of follow-ons from the previous questions. There have been some news related to a fiscal charge that CEMEX could have because of taxes generated in the past with its operations in fiscal paradises. I don't know if you can comment on that.

And the second is could you elaborate on the one-time impacts on margins in the US, if they are really one time, and which would be the margins eliminating those effects? And when are you expecting the cost savings to -- start having an impact on margins in the US?

So on the first question, we do try to be as cautious as possible in our statements, as regarding processes with the tax authorities. This is the case, and so we would beg not to make any comment on that until there is a final determination. On the US margins, as Rodrigo said just moments ago, margin loss in the US is mainly due to issues with volume, and so when volumes recover, that's when we will recover our margins.

Now, specifically, on the second quarter to third quarter comparison, there is specific issues there. High inventory reductions and some effect of the lower cement prices and ready-mix prices have an impact, but there are savings that are compensating those impacts.

Want to elaborate on that, Rodrigo?

Well, yes. I mean, we would expect, as Hector already pointed out, that as volumes come back, that we will see the recovery in margins in the US, where we have suffered the most contraction as a result of the volume decline, the inventory decline and everything that goes with it, including economies of scale.

And, yes, to a very large extent the cost-reduction initiatives that have been implemented have mitigated that margin erosion. But we would expect the operating leverage to work its way into higher margins as volumes come back.

I mentioned in my remarks, Gonzalo, that excluding the one-time effects of this quarter, that the EBITDA for the quarter increased about 8% on a sequential basis. So, that would be what you could expect to see if we didn't have these one-time effects.

Okay, that's clear. And just another quick question. Which would be the margin in Spain without the sale of additional allowances of this quarter?

Sorry, would you repeat the question?

It would be close to 30%, Gonzalo.

Oh, the margin. Okay.

Thank you.

Thank you.

And your next question comes from the line of Nick Sebrell from Morgan Stanley. Please proceed.

Hi, Hector and Rodrigo. Two questions. First, on the pricing in the US again, sorry to ask another question on that, but I was wondering if -- the trends that we've seen in the US, you mentioned that it was mostly due to the west coast, are we seeing markedly different pricing now at this point in different parts of the US, sort of comparable to the kind of price differences we see between the US and other countries?

And then that leads on to, do you expect the price declines that we've seen so far to reverse as volumes improve? I mean, do you think there might be a situation where we can see meaningful price increases far beyond inflation as volumes improve later in the year -- or not later this year, but in the future?

And that leads into the next question, which is volume declines -- price declines -- it seems that smaller players would get rather squeezed in an environment like this. Have you seen any consolidation in the market or financial distress that might take some of the capacity in the US out, which could improve obviously profitability going forward? That's it.

Well, on the first question, there is certainly in the average prices we have in the US an effect of the geographic mix, because as we've mentioned some of the effects have been in the western region, like in the case of Arizona has had the sharpest drop, but it has the highest price in the US. So, there is a mix effect there. You have quarter-on-quarter increases in Texas and in other markets, so we're seeing a mix of things here.

There is no major pricing issue. In fact, given what we've seen a potential drop in volumes. So I would not say there is a particular pattern in the US. We have seen adjustments in other places, like in the case of Spain, where the drop in volumes has been so dramatic, in such a very short timeframe, that the prices have been affected, certainly in local terms, local currency terms.

Now, the effect, the overall effect of prices, again, when volumes pick up, it's going to be an effect of the supply and demand conditions. What we have seen up to now is that the industry, as we've all seen, has closed down capacity to adjust for the new demand conditions, and I suppose that the same behavior will happen as we see volumes recover.

Now, in terms of consolidation in the industry, we haven't seen any significant one, but I think that is essentially because of the fact that the industry is highly vertically integrated. So there is closures of ready-mix plants and aggregate sites and cement plants, but this is of the same vertically integrated systems that players have in our industry in the US and in other markets.

But just going back to your question on prices, and let me try to add some color to the answer that Hector has already given on supply-demand dynamics. If we think about the medium and long term, if we look at what has happened in the US in the aggregate world, prices have risen as a result of the need to reflect through prices the cash replacement costs of reserves that are being consumed in the aggregate business.

And so that is the primary reason why we have seen significant price adjustments upwards in the last three or five years in the aggregate businesses in the US. I think philosophically, if you run that argument for cement, the cash replacement cost of cement capacity in the US has also continued to go up.

And if you account for the cost of capital on the significant capital commitment required to replace existing capacity in the US, you will quickly realize that prices today are insufficient to breakeven on the cost of capital versus cash replacement costs of the installed capacity in the US.

So, philosophically, is there room for prices to improve in the medium to long term? We believe there is room.

Very helpful. Thank you.

Thank you, Nick.

And your next question comes for the line of Steve Trent, from Citi. Please proceed.

Good morning, gentlemen.

Good morning.

Most of my questions have been answered, but one follow-up, if I may, and I think maybe Mike Betts was asking earlier. You very eloquently explained what's occurred with respect to the working capital cycle, and I appreciate that.

As I think back in time of the Company's free cash flow to EBITDA correlation, sort of a 50% to 55% pass through historically, much lower this quarter, as we think about this proportion of free cash flow to EBITDA over the next couple of quarters, any color as to what might be reasonable range here, 35% to 45%, let's say, of EBITDA?

Well, since the major driver of the free cash flow drop has been the EBITDA contraction, as volumes recover -- and we're not saying that they will recover next day or the following day, as we said we still have very low visibility, mainly in the US. But, nevertheless, when volumes recover, we will recover the EBITDA margins and that will recover the EBITDA to free cash flow conversion rate that we have had in the past.

Perhaps the biggest explanation for the decline in the conversion rate of operating cash flow -- EBITDA into free cash flow, is the increased interest expense as a percentage of EBITDA, as a result of the very high financial leverage we have on the balance sheet today.

Clearly, one of our objectives is to recover our capital structure targets, which means we have to significantly reduce the increased expense as a percentage of our EBITDA. That by its own account -- that financial leverage reduction will improve the conversion rate of operating cash flow into free cash flow.

Okay, very clear. Thanks very much.

Thank you.

Thank you, Steve.

And your next question comes from the line of Nicholas Godet from Exane Paribas. Please proceed.

Yes, good morning. This is actually Nicholas Godet from Exane BNP Paribas. Could you explain a bit more what happened in the US? What you're saying is that the EBITDA, without the destocking impact, would have been $76 million, is that correct?

I'm sorry, the EBITDA without what?

The EBITDA in the US without the destocking impact that you had mentioned would have been $76 million?

I'm sorry, I cannot understand the --

I think you just said that they were one-off in the US and that sequentially your EBITDA in the US would have improved by 8% compared to Q2.

Second quarter versus third quarter.

Yes. So second quarter was $70 million, so it would have been $76 million in Q3, is that correct?

Yes, that's correct. The inventory reduction had an accounting impact of -- in excess of $30 million during the quarter -- third quarter versus second quarter, sequentially.

So you were not destocking already in Q2?

I'm sorry.

Were you not reducing your inventories in Q2 already?

No, we reduced them during the third quarter, significantly, with a corresponding accounting surcharge.

Okay, and do you intend to further reduce your inventories in Q4, or should we expect an improvement of EBITDA sequentially in Q4 if you stop reducing your inventories?

That's an operating decision. I wouldn't really be able to say whether that would happen or not.

Okay, but in your guidance of 2.9, you have assumed an impact?

Well, normal inventory reductions, as it were, budgeted by our operations.

Okay, thank you. Second question, how much of -- you mentioned a non-operating working capital requirement reduction. What is the impact of this on your free cash flow in '09, please?

The working capital reduction, I'm sorry --

The increase in non-operating working capital that you have mentioned?

The increase in investment in working capital --

You said that you had to increase your working capital requirement --.

Yes. The increased investment in working capital in the quarter --

How much was that?

It was primarily explained as a result of the lengthening of the working capital cycle, and this includes terms from suppliers. It includes also terms with our customers. It includes the terms on the maintenance of the working capital facility, such as the securitization programs that we have in place. So the full impact of all of these working capital effects that you incurred one time, as you adjust to the new cycle.

Okay. But I guess my question is, the change in your working capital requirement has led to a change in your free cash flow guidance. Is that correct?

That is already included in the guidance for the full year.

And could you quantify the impact of this?

We can try to work that for you. We don't have it here in front of us, but it is significant. I mean, if you look at the investment in working capital during the third quarter of '09 versus the third quarter of '08, it is quite significant.

Okay, thank you very much. Another two questions. Could you comment a bit on the Portland Cement Association's forecast of plus 5% for next year? Do you think they would apply to your markets?

Sorry, I could not --

The PCA's forecast for next year at plus 5% for cement consumption. Do you think this is a good indication for your volumes in 2010?

The what? I'm sorry.

The PCA.

Oh, the PCA -- sorry. Of course, that is a part of what we were saying in the first part of our comments. We would have certainly an issue with the visibility of the volumes in the US, as the recovery has not -- I mean, there's very little signs of that yet, although there are some encouraging signs, but it is not there yet, so volumes are probably not what people expected them to be and that's why the PCA changed their forecast. And certainly we will have to be very -- we are cautious and we will keep our caution as to how do we forecast our volumes going forward.

Okay, and -- but 5% you think is a fair assumption for your markets?

Well, the fact is that our markets are in the -- concentrated in five states. They have been hit by drops in volumes that are very strong. I wonder if this PCA forecast is affecting mostly other markets, rather than the markets where we are, but that is something that we need to see.

And maybe my last question now, have you hedged your energy consumption for 2010? And, if yes, could you tell us if your unit costs will be lower in 2010 compared to '09?

Well, we have continued to implement initiatives to take away volatility on our energy input costs. And as you recall, when energy input costs were going up significantly in years past, our costs were going up only marginally. And, recently, as energy input costs have come down dramatically, ours have come down by slightly more than 15% for the production of cement, both as a result of fuel and electricity.

So our energy input costs are less volatile than the markets, in part because of self-supply agreements, in part because of medium-term and long-term contracts we've put in place, in part because of the switch to alternative fuels. And all of these initiatives will continue. Anything we can do to mitigate exposure to higher energy input costs and/or to take away volatility, we will continue to implement.

But you could not say if your unit costs next year should be lower than in '09?

No. We don't have guidance for next year yet.

Okay, thank you very much.

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

Good morning. My question has actually been answered. Thank you.

And ladies and gentlemen, we have time for only one more question, and that comes from the line of [Cathy Blackrock] from Nevsky Capital. Please proceed.

Hello. I just have a follow-up question on the destocking issue in the US. Could you just clarify, at the end of the third quarter, whether inventory levels were at normalized levels, or whether they're still above what you would class as being ideal levels?

No, I think we will have to follow up with you on that particular question. The specifics of that we don't have here.

Okay, thank you.

There was an effort during the third quarter particularly to reduce inventory levels as our inventory levels were higher than they should have been, given the fact that our initial guidance for the year for volumes was not as bad as it's turned out to be. But to the extent that the market in the US stabilizes, our inventory levels and planning will normalize, as well. But we will follow up with you.

Thank you.

And that concludes the question-and-answer session, so I turn it back to Mr. Medina for any closing remarks.

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

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.