Cemex SAB de CV (CX) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 CEMEX Earnings Conference Call. My name is Shantele, and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your speakers for today's call, Mr. Hector Medina, Executive Vice President of Finance and Legal, and Chief Financial Officer Rodrigo Trevino. At this time, Mr. Hector Medina, you may proceed.

Thank you. Good morning, and thank you for joining us for our Fourth Quarter Conference Call and Media Webcast. Let me start by saying that we will host our CEMEX Day in the near term, with presentations on different topics from senior management.

During this call, we will be providing general guidance and EBITDA free cash flow and consolidated volumes for 2010. During the CEMEX Day, we will discuss our guidance on our financials and operations in more detail. The event will provide ample time for us to outline our expectations and their underlying assumptions.

The CEMEX Day proceedings will be webcast live to enable the broadest participation in the event, and allow listeners the opportunity to post questions via the webcast live. We encourage your participation through the webcast. For more information, please visit our website and follow the link to the event, where we will soon post the schedule dates, as well as a detailed agenda of the presentation.

In light of this, we would very much appreciate focusing the question-and-answer session today on fourth quarter results and related matters. And now, I will briefly review our year end 2009 results. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

During 2009, in the midst of the worst crisis we've experienced in the last 75 years, we have made significant progress in our plan for regaining our financial flexibility. We completed the refinancing of $15 billion of CEMEX's outstanding debt, and we issued close to $2.3 billion in bonds, including the $500 million raised this month. Additionally, we raised $2.2 billion in equity and equity-like capital and we completed the sale of our Australian operations to Holcim for $1.7 billion.

With the proceeds from the world capital market and asset sales transactions, we were successful in first reducing our debt under our financing agreement by $4.8 billion, and therefore satisfying the 2010 milestone. Second, lowering our Mexican fixed income securities outstanding by about $385 million. And third, reducing our reliance on short term debt, and replenishing our liquidity position.

In addition to these financial achievements, we also had other important accomplishments on the operational side of the business, including the implementation of our cost reduction program, which reduced our cost base by about $900 million, most of which is sustainable.

In addition, we increased the use of alternative fuels from 10% in 2008 to 16%, exceeding the 15% target we set four years ago for 2015. We will continue working to further increase alternative fuel utilization. Furthermore, we are on track to achieve a 25% reduction in specific CO2 emissions by 2015 from 1990 levels.

In 2009, the global economic crisis presented challenges for our businesses around the world. Towards the end of the year, we have seen some signs of stabilization in many of our key markets, as well as the first evidence of actual infrastructure spending under the fiscal stimulus programs in many of our countries.

And while overall credit markets saw some improvement, the residential and industrial and commercial sectors continued to be affected by tight lending standards. A number of leading indicators in several of our markets are showing signs of stabilization, and in some, modest increases. It is important to note that despite the signs, we still have not seen material spending from fiscal stimulus programs launched in a number of our markets. A more pronounced contribution from these programs is expected for 2010.

The decline in our 2009 EBITDA and consolidated volumes was due primarily to the better economic environment that prevailed in the prior year. Also contributing to the unfavorable year-over-year comparison is the deconsolidation of our Venezuelan assets. It is important to note that our fourth quarter report, the result of our Australian operations for 2008 and 2009 have been reclassified, and are now reflected in a discontinued operations line item in our financial statements.

With regard to our 2009 consolidated volumes on a like-for-like basis for our ongoing operations, cement volume declined by 14%, ready-mix volume by 23%, and aggregates volume by 20%. Adjusting for foreign exchange fluctuations, 2009 consolidated prices increased by 1% for domestic cement, and decreased by 2% for ready-mix and aggregates. In US dollar terms, prices for cement, ready-mix, and aggregates declined by 9%, 10%, and 9% respectively.

For 2010, we expect consolidated cement and aggregates volumes to increase by about 4%, and ready-mix volume to grow by about 2%. This estimates includes the following assumptions for our three main countries. We expect cement volumes in Mexico to be flatish during 2010, with ready-mix volumes growing in excess of 5%. Greater demand in ready-mix is due to our expectations of an expansion of industrial and commercial sectors.

In the US, we anticipate our volumes for cement, ready-mix, and aggregates to enjoy high single-digit increase. A significant portion of this growth is anticipated in the second quarter and beyond. In Spain, we expect cement volumes to be troughing out at 2009 levels. Ready-mix and aggregates volumes are expected to decline by 11% and 2% respectively during 2010.

As regards our pricing strategies, we will continue to target recovering input cost inflation for our business in most of our markets. Growth in volumes is expected to translate into slight expansion in our consolidated EBITDA margin, reflecting the robust operating leverage in our US portfolio. Accordingly, we expect our consolidated EBITDA on a like-to-like basis and based on currently prevailing exchange rates to be about $2.9 billion.

In addition, we expect free cash flow after maintenance capital expenditures to reach close to $1 billion, reflecting the impact of higher interest expense, maintenance capital expenditures, cash taxes, and the exclusion of our Australian operation. These effects are partially mitigated through lower investment in our working capital position as a consequence of more normalized supplier terms, and receivables collection.

We will keep capital expenditures and other investments at a minimum, and anticipate using about $600 million from our free cash flow towards debt reduction. This should enable us to be in compliance with our total-funded-debt to EBITDA covenant for this year.

Now, I would like to discuss the fourth quarter performance of our principal markets, and our outlook for these markets for 2010. In Mexico, our cement volumes decreased by 10% during the fourth quarter versus the same period in 2008. Full year cement volume declined by 4% in line with our initial estimates, despite the worst economic environment than anticipated at the beginning of the year. The country's GDP contracted by about 7% last year.

Ready-mix volumes declined 28% during the quarter, and by 14% for the full year 2009. This contraction was mainly due to a decrease in the residential and non-residential sectors, which was only partially offset by the expansion in infrastructure spending. For 2010, we expect Mexico's GDP to increase by about 3% to 4%.

Investment in infrastructures increased by an estimated 20% during last year. For 2010, even though the infrastructure spending included in the national budget is essentially flat compared to last year, total infrastructure investment is expected to decline by about 10% versus last year, due to the absence of extra budgetary expenditures.

During 2009, the formal residential sector was affected by a more cautious approach among commercial banks at a time of great economic uncertainty, and also by a reduction in the number of mortgages granted by sofoles, resulting from the lower liquidity, higher delinquency levels, and an increase in funding costs. Sofoles were a very important player in the granting of bridge loans for home construction, a role that banking institutions have been very slow to adapt.

For 2010, the CONAVI, or National Housing Council, expects formal housing investments to increase by about 6% in real terms in 2010. INFONAVIT has set a target to grant 475,000 mortgages also for the year, compared with approximately 450,000 granted in 2009, reflecting a 6% growth.

Investment in the informal or self-construction sector is expected to decline by about 1% this year. Federal government subsidies for housing improvement programs that brought most of the growth in the segment in 2009 are expected to contract this year. Additionally, the positive effects stemming from remittances, which in peso terms were higher last year, would also be absent. Expected modest recovery in employment and aggregate wages will potentially mitigate the decline.

Investment in the industrial and commercial sector is expected to grow by about 15% during 2010, after two consecutive years of acute contraction. This sector was down 17% in 2008, and down 30% in 2009. This moderate recovery will be attributable mainly to the initiation of previously suspended projects, as well as by a modest recovery in new investment projects, as economic growth is expected to resume.

In the United States, cement volume fell by 25%, ready-mix sales volumes declined by 30%, and aggregates volume decreased by 29% during the fourth quarter versus the same quarter in 2008. For the full year 2009, cement volume declined by 32%, ready-mix volume decreased by 38%, and aggregates volume declined by 36%. The fourth quarter decline in sales volumes was driven mainly by the continued weakness in the residential and industrial and commercial sectors, as well as poor weather during December.

Public construction spending was the main driver for demand in 2009, and represented about two-thirds of cement construction last year. Although we saw price softness in our products during 2009, it was moderate in view of the unprecedented volume declines we have experienced since 2006. As of November, year-to-date nominal public construction spending was up 2%, with the spending for streets and highways up 4%. Contract awards, which is the leading indicator, were up 6% for streets and highways, and down 9% for other infrastructure -- public infrastructure in the same period.

During this year, we expect cement demand from the public sector to increase by about 9%, driven by disbursements under the ARRA stimulus. In addition, the federal transportation program for fiscal year 2010 was recently funded at a slightly higher level.

Spending of the $29 billion in ARRA highway infrastructure funds is becoming evident. As of January 8, about 84% of the ARRA highway funds have been obligated, with only about 20% spent. For our markets, the percentage of obligated funds is also 84%, but spending has lagged the national averages with only 11% spent as of the same date.

We are cautiously optimistic about the prospects of a new round of fiscal stimulus. In December, the House of Representatives passed a $174 billion Jobs for Main Street Act, which includes $48 billion in additional infrastructure spending. The legislative process now moves to the Senate. The situation is too fluid to predict whether this effort will be successful in securing additional fiscal stimulus.

The six-year federal transportation program expired last September, and has been extended in a series of short dated rollovers, the latest of which expires on February 28. It is likely that the next extension will be for a longer period, thereby providing more funding certainty to States.

The House Transportation Infrastructure Committee has developed a new six-year, $500 billion program, a significant increase from the $287 billion SAFETEA-LU, the previous six-year federal transportation program. The timing of passage of a new transportation program, however, is still difficult to predict, and will be influenced by the legislative priorities of the present administration, as well as the November midterm elections.

During the first 11 months of 2009, contract awards in the industrial and commercial sectors declined by 58%. Much of this decline occurred in the beginning of the year and we have seen stability in the award levels since March. For 2010, we expect cement demand from the sector to decline by about 19%.

In the housing sector, new home starts hit the low in the first quarter of 2009, and have increased moderately over the rest of the year. The Case-Shiller Home Price Index of 20 major cities has increased about 5% since reaching a trough in April 2009. These price improvements follows a 33% decline in the index from the peak levels reached in 2006, and indicate that the housing market supply dynamics are beginning to improve.

The significant home price correction, combined with historically low interest rates, has vastly improved affordability, which sets a strong foundation for a recovery in home sales. During 2009, existing home sales rose 4.9% to 5.16 million homes from 4.91 million homes in 2008. This increase constitutes the first gain in existing home sales in four years.

The existing home supply as of December was 7.2 months versus 9.4 months a year before. We expect cement demand from the residential sector to experience a double digit increase in 2010, albeit of a very low rate. Home sales will be fueled by improvements in affordability, as well as the extension and expansion of the federal tax subsidies until April of 2010.

In Spain, and on a like-to-like basis, cement volumes decreased by 6%, and ready-mix volumes decreased by 24% during the fourth quarter. For the full year 2009, cement volumes decreased by 30%, and ready-mix volumes decreased by 37% versus the previous year. Construction activity has been affected by the economic slowdown and limited credit availability. Cement consumption in our markets continued to fall at a faster rate than the overall Spanish market during the quarter. The residential sector continues to contract.

For 2009, housing starts, a leading indicator of the sector, are expected to decrease to about 140,000 to 150,000 from 360,000 in 2008. A further decline to 100,000 is expected for 2010. Although housing prices have decreased by about 8% year-over-year as of September, the decline is still not enough to reactivate the sector, and further declines in housing prices are expected.

Investment in the residential sector is expected to fall by about an additional 18% to 20% during 2010, with this sector representing about 10% of total cement demand. The non-residential sector is also expected to decline during 2010. Lack of activity and financing difficulties have affected this sector.

The infrastructure sector has been relatively stable, but it is still insufficient to compensate for the falling demand in other segments. Last year, the government announced and completed an EUR8 billion infrastructure program, but it was allocated mostly to small, non-cement intensive projects. A new short term EUR5 billion program has been put in place, but we are uncertain about its actual impact on cement demand, given the results of the previous program.

In addition, Spain has announced an extraordinary EUR15 billion infrastructure program which will be spent during the next three years. However, the impact of this effort on cement demand is still unknown as the plan has yet to be completely defined.

In the United Kingdom, cement volume decreased by 14%, ready-mix volume declined 23%, and aggregates volume declined 12% during the fourth quarter of 2009. For the full year 2009, cement volume declined by 19%, ready-mix fell by 25%, and aggregates volume decreased by 19% versus the previous year, reflecting weakness across all business segments, with a deceleration in the rate of decline throughout the year.

In our rest of Europe region, excluding Spain and the UK, cement volumes declined by 18% for the fourth quarter, and by 17% in 2009. Ready-mix volumes fell by 14% during the quarter, and by 17% for the full year.

In France, our ready-mix and aggregates volumes decreased by 17% and 13% respectively during the fourth quarter. For the full year 2009, volumes for ready-mix and aggregates decreased by 18% and 16% respectively. The infrastructure sector continues to be the main driver of volume growth. However, only about a third of the regional incentive infrastructure package announced by the government last year was actually spent last year versus the two-thirds originally planned. The remainder of the package is expected to be spent during 2010. In addition, the government approved a new EUR35 billion last December. No significant impact from this program is expected for this year, and in any event, only a very small portion will be dedicated to infrastructure. In the residential sector, housing starts for the first 11 months of 2009 declined by 19%, with permits declining by about 18%. However, the rate of decline in permits and starts gradually eased during the year. We think housing permits and starts in 2010 will be at levels similar to those in 2009.

In Germany, our domestic cement volumes decreased by 16% during the fourth quarter, and by 18% for the full year 2009 versus the comparable period in 2008. During 2009, we saw the initiation of some projects under the announced EUR50 billion stimulus program. The infrastructure portion of the fiscal stimulus package accounts for about EUR13 million to EUR18 million to be spent during 2009 and 2010. Many of these will be maintenance projects, however, which are less cement intensive than new projects. About a third of the stimulus funds were disbursed during 2009, with the remainder to be spent this year. Although residential spending declined during the first 10 months of the year, residential permits, a leading indicator, showed month-over-month increases from June to October, and construction under these permits is expected to be done this year. Permits in the non-residential sector continued to decline, and are not expected to stabilize until the second half of this year.

In Eastern Europe, which includes Poland, Croatia, the Czech Republic, and Latvia, domestic cement consumption declined by 25% during the quarter, and by 19% during 2009. During 2009, we saw a decline in confidence and tight credit conditions in these regions. However, the sizeable backlog in infrastructure projects, and the improvement in core finance management in EU-related projects are expected to lead to stabilization and potential growth in some of our markets in this region during 2010.

In the region, we expect different speeds of recovery. In Central Europe, especially in Poland, we expect positive growth rates supported by infrastructure spending and some stabilization in the residential and non-residential sectors. On the other hand, the Baltics and the Balkans are expected to continue their ongoing correction, although with less negative growth rates. Financing conditions will remain tight, and EU-related infrastructure projects will be limited by core financing problems, given the poor state of public finances.

In our South, Central America and Caribbean region, cement volumes declined by 1% during the quarter, while ready-mix volumes declined by 21%. For the full year, cement and ready-mix volumes declined by 30% and 34% respectively.

In Colombia, cement volume during the fourth quarter remained flat, and ready-mix volume decreased by 15%. For the full year, cement and ready-mix volumes declined by 6% and 17% respectively. The infrastructure sector was the main driver of cement consumption during 2009, and is expected to continue to be an important contributor to volumes in 2010. The formal residential sector has benefited from a subsidy in interest rates for new home purchases, which was started in April 2009. This program has demonstrated positive effects in the number of homes sold at presale, which will affect housing starts mainly during this year. 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 sector and self-construction sectors will remain weak, reflecting the decline in economic activity and higher unemployment rates.

In Egypt, domestic cement volume increased by 7% during the fourth quarter, and by 13% for the full year 2009 versus the comparable periods in 2008. The informal housing and infrastructure sectors will continue to be the main drivers of cement demand during 2010.

While we're seeing a bottoming out in some of our markets, as evidenced by some leading indicators, we expect first quarter 2010 to continue to be weak, and that most of the expected growth in EBITDA will occur in the second half of the year.

Despite the challenges we faced in 2009, we can see that we had positive achievements during the year, including the refinancing of $15 billion of debt, the boosting of our capital structure, and the improvement in our liquidity position through the agents of equity and long-term debt, together with the sale of our Australian assets.

I would like to assure you that we will continue to be vigilantly focusing on our cost cutting efforts, maximizing our bottom line, and the strengthening of our capital structure. Thank you and now, I will turn the call over to Rodrigo.

Thank you, Hector. Good morning, everyone, and thank you for joining us on this call and webcast. Our performance during 2009 reflects 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.

On a like-to-like basis, that is adjusting for currency effects, the expropiation of our Venezuelan operations, and the divestment of our Australian and Canary Islands and other assets, EBITDA was down 39% during the quarter, and 25% for the full year. EBITDA margin declined to 18.3% during 2009, from 20.3% the previous year. Adjusting for Venezuela, Australia, the Canary Islands, and the sale of emission allowances, EBITDA margin had a slight decline of 0.4 percentage points despite a 19% decline in sales on a like to like basis.

Our cost reduction initiatives partially mitigated the effects of the volume declines seen during the fourth quarter and the full year 2009. SG&A expenses as a percentage of sales increased by 1.5 percentage points during the quarter, and by 1.2 points during the full year 2009 versus the comparable period in 2008. This is the result of lesser economies of scale due to lower volumes.

In addition, we have had higher transportation costs since with the closing of some of our facilities our product, in some instances, have to travel longer distances to serve our customers. These negative effects of our SG&A were partially offset by savings from our cost reduction initiatives.

During the quarter, our free cash flow, after maintenance capital expenditures, reached $401 million, 15% lower than the same period of 2008. For the full year 2009, free cash flow after maintenance capital expenditures, was $1.2 billion, down from $2.6 billion the year before. The lower free cash flow generation is due mainly to lower EBITDA generation, higher financial expenses, and higher investment in working capital. These results were partially offset by lower maintenance capital expenditures.

Of the $662 million invested in working capital during the first nine months of 2009, we recovered close to $500 million during the fourth quarter. We expect free cash flow for 2010 to reach about $1 billion, practically flat versus last year, adjusting for the sale of Australia. During this year, we expect to have higher interest expense and maintenance capital expenditures, which will be partially mitigated by lower investments in working capital.

Regarding our input costs during 2009, our kiln fuel and electricity costs on a per ton of cement produced basis declined by 16% versus 2008. For 2010, we expect this cost to increase by approximately 5%. 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 $48 million, mainly as a result of the appreciation of the Mexican peso. We also recognized a gain on financial instruments of $21 million, resulting from an improvement in the mark-to-market of our equity derivatives.

Other expenses during the quarter were significantly lower in the fourth quarter of 2008. These include the goodwill impairment, which was $40 million for this past quarter, and other charges related to the refinanced debt. The income tax line for 2009 shows a positive contribution, reflecting the effect of tax losses in many of our operating jurisdictions due to reduced operating volumes, combined with local currency exchange losses.

In relation to Mexico's recent fiscal reform, we estimate the impacts of the changes in the rules in Mexico for group tax consolidation to be about $799 million, which will be payable over a 10- year period. Accordingly, during the fourth quarter, we have recognized a liability for this amount in our balance sheet.

It is important to note, however, that we have also recognized a deferred tax asset for $628 million, resulting from the losses from prior periods that are being deconsolidated due to the changes in the rules. The difference between the tax asset and liability of $171 million is being recognized as a reduction in retained earnings, and as a result, no impact in our income statement. During 2010, the expected impact on cash taxes from this tax rule change is about $30 million.

During 2009, our majority net income from continuing operations reached $418 million versus $47 million in 2008. Lower foreign exchange losses, lower losses on financial instruments, and lower impairment charges more than offset lower operating income and higher financial expenses during the year.

In December, we issued MXN4.1 billion, or approximately $320 million in a convertible securities transaction. CEMEX offered to exchange outstanding Certificados Bursatiles into new mandatorily convertible securities. Upon conversion, these securities will be settled with approximately 17.25 million ADSs.

Also in December, we returned to the international fixed income market and issued notes in excess of $1.75 billion, including a seven-year US dollar tranche for $1.25 billion with a yield of 9.5%, and an eight-year euro tranche for EUR350 million with a yield of 9.625%. In January, we reopened the 2016 US dollar tranche, and issued an additional $500 million with a yield to maturity of 8.477%.

During the quarter, we also issued short term notes under our Certificados Bursatiles program. The outstanding amount of these notes was MXN800 million as of December 31st. The current all-in cost of these peso instruments is below 5%, a drop of more than 600 basis points compared with the cost six months ago.

It is important to note that with the proceeds from the equity offering we completed in September, the sale of our Australian operations, and the issuance of notes, we have accumulated prepayments in excess of the first financial milestone under the financing agreement of $4.8 billion.

As Hector mentioned, we expect to use about $600 million from our free cash flow to reduce debt this year. With our planned debt reduction and EBITDA generation for the year, we expect to be in compliance with our total funded debt to EBITDA covenant ratio of 6.75 times as of the end of the year.

In order to improve the margin for compliance, we will be implementing a number of initiatives aimed at further strengthening our capital structure. Our priority in the short term continues to be to pay down debt. To do this, we will aim to improve our working capital management, and continue to implement our global cost reduction and right sizing initiatives.

Finally, and as always, I've been asked to remind you that any forward-looking statements we make today are based on our current knowledge of the markets 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. Shantele?

Yes, sir. (Operator Instructions).

And your first question comes from the line of Carlos Peyrelongue of Merrill Lynch. Please proceed.

Thank you. Good morning, gentlemen. Two questions, if I may. First one, I apologize, I was not able to hear the guidance you probably provided for sales and EBITDA for 2010.

Yes, we provided only guidance for EBITDA in terms of approximately around $2.9 billion.

Perfect, thank you. And the second, related to the US -- the federal support programs for infrastructure have been met with difficult fiscal situations at the state level. And as you mentioned, housing remains in a difficult situation and commercial construction is still falling. When would you expect cement volumes for your operations to start showing positive growth on a year-over-year basis?

Well, as we mentioned in the -- in our guidance, we would expect this year to show positive gains in terms of volumes. But that would certainly be back loaded in the year. I don't know if you want to add?

Well, maybe just to complement Hector, of the approximately $15 billion allocated to the States we're in, about $13 billion has been obligated, and only 11% has been spent. And so clearly, we do expect significant additional money to be spent during 2010 when compared to 2009.

Understood. So, it's the implementation of these monies in the second -- probably in the second half of the year that will then turn volumes positive on a year-over-year basis, no?

Yes, that's what we expect at least for our markets.

Understood. Thank you.

And also in the case of the US, important to note that we do expect significant growth in the residential sector for the full year as well.

Okay. Thank you.

Thank you, Carlos.

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

Hi, good morning, everyone. I also have two questions and I know [this time] you showed a significant difference between the operating margin and the EBITDA margin, and a significant hike in inter-company eliminations and other on the operating profit. I don't know if you can explain why was that, and if you can repeat your target leverage ratios for the end of 2010? Thank you.

You take the first part of the question?

Yes, for the first question, the major difference that explains the wide fluctuations between the fourth quarter of 2008 and the fourth quarter of 2009 has to do with the sale of emission allowances that took place during that fourth quarter of 2008. And we can help you reconcile that, Gonzalo.

Yes, as for the leverage ratios, we mentioned that we expect to be in compliance with our leverage target ratio of 6.75 for the end of the year.

Is that net debt to EBITDA or --?

I think with the expected usage of approximately $600 million of free cash flow to pay down debt, and with the EBITDA guidance of $2.9 billion for the full year, you can easily calculate the leverage ratio year end. And this would allow us to be in compliance with our stated covenant by the end of the year and throughout the year.

Yes, that would be, in fact, total debt to EBITDA.

Total debt to --

Not net debt. It's total funded debt to EBITDA.

Okay. And you're planning to use $600 million of free cash flow to pay down debt, correct?

That's correct.

Thank you very much.

Thank you.

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

Good morning. Thank you for the call. I have a question regarding your view on the demand to price balance that you see for the different markets where you operate. I was wondering if you could give us more color on any opening of plants, if any, that you are planning to do this year, and how your competitors are moving in this sense, and any indication of possible price increases in your markets.

And my other question would be regarding your capital structure strategy. You still have to comply with the milestones for December 2011. I was wondering if you could give us any details on what would be your preference between asset sales in capital markets for complying with this milestone. Thank you.

Sure, let me take the first part of the question in terms of supply and demand dynamics in some of our markets. I guess the most important one is the US, where we're seeing some capacity increases in 2010 as a result of construction that is being finished in some new plants or expansions. And this is in the region of around 5 million tons in 2010 that would come on line.

But they will probably be neted by plant closures and we would expect the net increase to be practically zero. And then of course, as demand shows some strengthening, as we have mentioned in the later part of the year, there might be some additional plant reopenings or kiln reopenings, but nothing that is significant as we expect that capacity will be fully utilized that is the one that remains open.

Now, there are other markets that are very important to us in which we don't see any major addition of capacity, like the case of Mexico or Spain or the UK. So, we believe that the industry keeps a very rational attitude to capacity utilization and that will continue as the challenging market conditions continue to be present.

You take the next --?

Regarding the second question with the milestone for 2011, of course we expect in addition, as we mentioned in our opening remarks, in addition to using most of our free cash flow to pay down debt and continue to prepay some of this refinanced debt, we also expect to implement other deleveraging initiatives, such as, for example, the sale of assets that may not be generating EBITDA that can help us to significant delever in terms of both the amortization of the debt, as well as the actual leverage ratio.

And we expect to implement those not only throughout 2010, but also during 2011. Clearly, we have not provided guidance for 2011, but should the recovery continue, we would expect to see growth in free cash flow for 2011 as well. And of course, we will be proactive in dealing with the milestone of 2011 well before we get to that point.

It is important to note, however, that it is a milestone, it is not an amortization of the debt. We have practically complied with 97% of the debt amortizations on the refinanced debt through December of 2011. In fact, the amount of refinanced debt that comes due in December of '11 today is less than $200 million and it is important to highlight that.

Let me just add a little bit of additional information for the first part of the question. And I think that it is important is that over the year 2009, we saw a net reduction of capacity in the US of 5 million tons, which of course it's a clear indication of the rationality of the industry for capacity utilization.

Thank you very much.

Thank you, Vanessa.

And our next question comes from the webcast.

Yes, I believe the question comes from Mike Betts from JPMorgan. And the question is how much scope is there to further reduce working capital? It was reduced by $500 million in the fourth quarter, but it was still up for the year despite the 19% reduction in sales. How much of a reduction in working capital have you assumed in your 2010 free cash flow estimate?

Well, we actually haven't assumed a reduction in the working capital for 2010. But we do expect that we will have a significantly lower investment in working capital during 2010. And this of course is before additional initiatives that we would expect to implement to help us to better manage our working capital and hopefully reduce the investment in working capital.

But we do believe there is a significant room for improvement as conditions normalize, and as access to the credit market improves for all of our counterparties, both suppliers, customers, and everybody else that contributes to the working capital.

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

Hi, gentlemen. Two questions. First, if you could discuss the tax credit. I was wondering if you could tell us on a normalized basis without discontinued operations if it would be the same. And if it would be the same, then maybe describe what's in there and what we can expect to see in terms of tax rate going forward.

And the second question is just with respect to the US margin, we saw negative EBITDA margin this quarter in the US and obviously, there's some operating leverage there. But how quickly do you think this will reverse? Do you think we might expect, given that first quarter 2010 could also be difficult, a negative margin there again? Thank you.

You get the first one.

Well, maybe -- I can answer the second question, Nick. In the case of the US, more than 100% of the drop in margin leading to the drop in -- slight drop in EBITDA for the quarter had to do with volume decline. And so, clearly to the extent that volumes begin to come back into the US market, we would expect our margins to begin to improve.

Now as we mentioned, we will continue to implement cost reduction initiatives, right sizing initiatives to make sure we're adapting to the operating environment we're in, and all of that will also contribute to margin recovery. But clearly, the biggest component to margin recovery in the US will be volume driven, as the sharpest reason for the contraction has also been volume driven.

Okay, very clear.

Let me go now -- sure. Let me go to the first part of the question in terms of taxes. We see no major change in our tax situation except for the tax consolidation rule that change in the case of Mexico, as we already discussed in the initial remarks. And that would have an impact on cash taxes for 2010 of about $30 million; we don't see any other major impact in 2010.

Okay, and then the tax credit itself that you saw this quarter, what exactly is in there? I mean, I was trying to understand what the $613 million --

If you're referring to the deferred tax asset that was created, it has to do with the expectation that as a result of the losses that we have in several of our subsidiaries, that will no longer be consolidated, may result in lower cash taxes in the future. And this is the estimate that we have as of today.

I see. Okay, thanks.

Thank you, Nick.

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

Good morning. I'm wondering if you can walk us a little bit through some of the cash flow for the quarter, and in particular, whether or not you realized both the $1.7 billion in cash from the Australia sale and the bond as well -- the $1.75 billion there. And if I add those up, I'm in excess of $3.5 billion, but I just saw a net reduction in debt of -- again, net debt of about $2 billion. So, I'm just trying to understand the rest of those numbers.

Rodrigo?

Well, we did significantly improve our liquidity position during the quarter. We did use the proceeds from the sale of Australia also to pay some other short term obligations that were coming due. And we did have to pay some of the expenses related to the refinancing of the debt during the fourth quarter as well. And we can help you reconcile the specific amounts from the starting point to the end of the year.

Okay, but both the $1.7 billion from the sale of Australia and the $1.75 billion from the bond were both realized during the quarter?

The -- you said from the sale of Australia -- yes, but of course the issuance of the bond doesn't reduce debt. It just helps you pay other debt with the new debt that was issued. It also was used partially to replenish our liquidity during the quarter.

Okay. Fair enough. Thank you.

And our next question will come from the webcast.

Yes, the question comes from Raul Ghosh from [Oxyl]. You see volumes increasing in the US in 2010. What are your assumptions regarding pricing? Are you seeing price pressure?

So, as we discussed there is, at least in our markets, the expectation that we will see positive volumes in 2010 as we mentioned, most likely back loaded in the year. And that of course was based on the fact that we believe that some of the infrastructure spending stimulus are reaching the market as we speak, and also significant increase in housing construction.

Now, the price inflation in the US, of course, is to be expected with the very significant volume declines has been softening some of the prices. But some input cost inflation recovery is expected in the market. So, we would expect prices to more or less hold stable.

And your next question comes from the line of Diego Torres of ING. Please proceed.

In terms of the tax cashes for 2010, do you have any figure yet in terms of which will be the total amount that it will be disbursed?

Yes, we expect a slight increase in the consolidated cash taxes paid for the company as a whole from 2009 to 2010.

Perfect. I -- also, shall we expect -- which would be the amount of cash on hand for CEMEX at the end of 2010? That amount would be close to the $1 billion that you have right now, or are you expecting something less or more?

Well, it should be relatively similar since we have the agreement with the financing agreement for the cash sweep. Any funds in excess of $650 million must be used to prepay part of the refinanced debt. And so, we would expect the ending cash balance to be similar for 2010 versus 2009.

But if the financial agreement has that cash sweep of $650 million should be the cash balance moves towards the $650 million instead of the $1 billion?

Well, it's not the cash balance as defined by the accounting. The cash balance, it's another definition of cash. So, always the accounting definition of cash is slightly higher than that is freely available to be used to prepay the bank debt. And yes, we did have a slightly higher than that amount for December 31st and of course, the cash sweep we have during the month of January to settle. And so, we would expect to use some of that cash that we ended the year with to be used to prepay some of the refinanced debt during January.

In fact, it already has been and that is why we stated that we have met the first milestone of paying $4.8 billion as of now. That was not the case as of December 31st, but it is as of today. And that means we have paid more than 30% of the debt that was refinanced during the second half of last year within a relatively short period of time, that is six months.

Perfect. Thank you.

Your next question comes from the webcast. Please proceed.

Yes, the question comes from Matthew Reinhold from Travelers. Doesn't covenant compliance begin in June 30th, 2010? You mentioned that you would be in compliance for the year. But what about compliance for June 30th, 2010?

And yes, that is correct. The covenant ratio compliance level for June 2010 is 7.75. Currently, we ended the year at 7.3 times, as defined by the financing agreement terms. And we would expect to be in compliance with the June 30th covenant level as well.

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

Good morning, gentlemen. Most of my questions have been answered at this point. Just one quick follow-up if I may. We saw some news in some of the press over the past several weeks that certain regulatory authorities in the EU, I think particularly in Spain and Poland, have been looking into price fixing allegations against several cement players. And I'm wondering if you have any comment or additional color on this. Thank you.

Sure, Steve. Thank you for the question. We have certainly disclosed all of the legal proceedings. We are involved in our current documents. But I would just point out the fact that in the case of the European Commission, there is an investigation. And in this, we are cooperating with the authorities in this investigation.

There are no new developments, just the ones that have been already disclosed. And I mean, there is a complete legal disclosure in our bond offering memorandum, which is the last document that we published. But again, I mean we are cooperating with the European Commission in connection with this investigation. There are no major -- no further advance in this investigation.

Fair enough. Thanks very much.

Thank you.

And our next question comes from the webcast.

Yes, the question comes from Oliver Tabret from Alcentra. What is your capacity utilization currently and target for 2010? And could you clarify the cost reduction amount? How much of this is permanent?

Sure. Globally, I would say that CEMEX aims to maintain its capacity utilization at a good rate, I mean full capacity utilization with -- in terms of kiln utilization, is about 88% in the US, for example. But that means what is the kind of hours that we use our kilns, based on the number of hours that our kilns have available to produce. So, this is the rate that we would seek to maintain all throughout our operations. And I guess that is -- that would be a global figure that you could use, around 80% to 85%.

And regarding the cost reduction initiatives that we achieved during the year?

Go ahead.

Well, we did implement the close to $900 million of cost reduction and expense reduction initiatives during the year, and we expect to maintain 60% of those on a recurrent basis. Clearly, some of those have to do with right sizing. And as volumes come back, we would expect some of these expenses to come back, but then it would be because EBITDA and free cash flow is growing as a result of that.

Your next question comes from the line of Nicolas Godet of BNP. Please proceed.

Yes, good morning.

Good morning.

I wasn't connected during the call, so maybe you answered that already. You provided a guidance of $2.9 billion. How much of that is due to incremental cost cutting?

I'm sorry, incremental what?

Cost cutting measures.

Well, there is no specific initiative in this case. But we have every one of our markets or our operations on the constant monitoring of the way the demand develops. And of course, we're adjusting our costs when we see that the demand is still weak. So, there has to be significant -- what I would call right sizing in our markets. And some of them, because we are seeing the possibility of volume increases for certain funds, cost increases would occur as the volume happens.

But then, some of the operating leverage that we have achieved during the past six months will then also kick in. So in a way, what we will see in some of our markets, at least those that will show some volume increases, is more than the effect of current cost cutting, rather the effect of the cost cutting that we already did.

And I would say that as we guided, we have guided for approximately 4% growth in volumes globally in cement and this is one of the biggest drivers of the recovery in the operating cash flow for the year as a whole. As you know, we have seen most of the drop in EBITDA in the last three years also as a result of the drop in volumes that we have seen from that period until now.

Okay, thank you. You also said that your energy costs should be applied to 2010 and you said that prices should be stable in the US. In other countries, do you assume you can (inaudible - technical difficulty) to price increase?

Yes, we guided to increase in the cost of production of cement as a result of energy, that is fuel and electricity of approximately 5% for 2010 versus 2009. And we intend, during the CEMEX Day, to get into greater detail in the supply/demand dynamics and how this may affect prices. But of course, prices is the most difficult part of the equation to forecast. And so, whenever we prepare our budget for the year, it is not reasonable to assume that a big component of the growth will come as a result of price increases and we have not, in this budget exercise.

Last question from me -- in Q3, you have quantified the impact of this [EUR13 million] on your margins. Could you quantify again the impact of [EUR13 million] margin in US in Q4?

Sorry, could you repeat the question? There's a little bit of noise in the --

No?

Yes, could you repeat the question?

I said --I mean, if you have this -- if you have regional investors from the US in Q4, this had an impact on your margin. Could you quantify this impact?

We will have to follow up with you. We cannot understand the question. The audio is not very good on our side.

Okay, I'll call you back then. Thanks.

Thank you.

Thank you.

Your next question comes from the webcast.

Yes, the question comes from John Collert from HSBC Securities and he says, good morning. As you leave your debt amortizations under the new bank agreement, does that free up capacity under the facility, or does the size of the facility decline as payments are made?

Yes, and as we amortize the debt, the size of the facility declines. This is not a revolving credit facility, this is a term facility that goes through February of 2014. And what we have done with -- by meeting the milestones -- is we have taken care of the maturities for 2009, 2010, June of 2011, and practically all of the December 2011. And so, as we generate free cash, and as we apply some of that to further prepay this refinance debt facility, we would expect to meet the amortization commitments well before the date that we have agreed with the banks.

And we have time for one final question and that question comes from the line of Carlos Hermosillo of Vector. Please proceed.

Yes, good morning. Just a quick question regarding your operations in Venezuela. I don't know if you could provide us with an update with the proceedings you're having there, the legal proceedings? And also, we saw a significant decrease in the net asset value you report in this operations. I would like to know if that has to do with the asset impairment process you affected in the fourth quarter. Thank you.

As to the legal proceedings, Carlos, the -- they are continuing. We have started the process, the panel has been named. There is some process to confirm the panel members, but that goes on. We continue to satisfy the requirements of the panel for information. And that is what is happening; there is no significant change in that process.

As to the asset value, I don't know if you -- I can give you some information now or follow up with you later because I don't have any --

Well, the reduction during the quarter has to do mainly with the sale of Australia, of course.

No, but -- I'm sorry, talking about the -- specifically the amount you recorded in the asset value on Venezuela.

We'll have to follow up with you on that, Carlos.

Okay. Okay, thank you.

Thank you.

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

Thank you.

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