Cemex SAB de CV (CX) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CEMEX First Quarter 2010 Earnings Webcast. My name is Jasmine 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.

Our presenters for today are Fernando Gonzalez, Executive Vice President of Planning and Finance; and Rodrigo Trevino, Chief Financial Officer. At this time, I would now like to turn the conference over to your host for today, Mr. Rodrigo Trevino. Please proceed.

Thank you, Jasmine. Good morning to everyone and thank you for joining us for our First Quarter Conference Call and Video Webcast.

We will keep our initial remarks short to allow more time for questions. 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 for a variety of factors beyond our control.

I would like to introduce Fernando Gonzalez, our recently appointed Executive Vice President of Planning and Finance. Fernando has served CEMEX in a variety of executive functions since 1989. He has been a member of CEMEX's Executive Committee since 2003. He has managed business units in all of our operating regions and has also been responsible for strategic planning for human resources. Fernando is now responsible for all corporate strategic and developmental functions, including CEMEX's financial strategy.

And now, I will turn the call over to Fernando. Fernando-?

Thank you, Rodrigo. Good morning to everyone and thank you for joining us today. I would like to start with four messages.

First, while our financial challenges are not completely behind us, we have aggressively implemented strategies to reduce financing risk over the next three years, giving us sufficient headway to capitalize on the recovery in our markets. We will continue to aggressively address financing challenges in the medium term. We continue to believe that our growth in the medium term continues not to be compromised by our financial obligations under our financing agreements.

Second, economic erosion in most of our markets has stabilized and/or bottomed out. In fact, we are beginning to see moderate signs of growth in markets that have experienced the deepest corrections, like the U.S. and parts of Europe.

Having said this, we continue to be cautious about the traction that these trends will have. While these signs of growth are not evident in our results for the quarter, we are becoming more confident that we will see them in our full-year results.

The stability is still not where we would like it to be. But it has improved from last year. This is most evident in our U.S. markets.

Third, our business model has demonstrated its strength; not just by how we can deliver growth in the good times, but by how quickly we can adjust our business during the challenging times. While we will continue to rebalance our portfolio of businesses around the world, we are happy with our geographies and products and we feel that our core markets should deliver healthy organic growth in the short and the medium term.

And fourth, we are never satisfied with our profitability levels and we are continuously and aggressively focusing on our profitability metrics and right-sizing efforts.

And now I would like to discuss our first-quarter results. I would like to start by saying that our first-quarter results were in line with our expectations to deliver full-year EBITDA of $2.9 billion. Bad weather during the quarter was partially offset by better pricing conditions in some markets and cost-reduction initiatives and we continue to believe, as we have mentioned last quarter, that most of the expected EBITDA growth and recovery in our hardest-hit markets for 2010 will be reflected in the second half of the year.

During the first quarter, consolidated domestic cement volumes declined by 6%, ready-mix volumes declined by 16% and aggregates volumes declined by 13% versus same quarter last year.

Adjusting for foreign-exchange fluctuations, consolidated prices during the first quarter compared to the fourth quarter of last year increased by 1% for cement, were flat for ready mix and increased by 2% for aggregates.

Volumes in Mexico dropped during the quarter versus a very strong first quarter of 2009 in which infrastructure spending was high in anticipation of the midyear elections. Infrastructure spending is expected to drop by about 12% as in 2009 there were some extraordinary programs to promote growth and employment that will not be available this year.

The formal housing sector has been affected by bridge financing constraints. Low-income housing is expected to be flat for the year, while mid and high-income housing is expected to decline.

The self-construction sector is also expected to decrease slightly during this year, reflecting lower remittances in peso terms and the absence of extraordinary social programs that were available last year.

The industrial and commercial sector is expected to show moderate growth during the year after two years of decline. Bad weather in much of the United States, as well as the traditional slowdown in the industry in the first quarter, deferred construction until later in the year. Leading indicators, however, continue to strengthen and support our growth expectations for the U.S. in the infrastructure and residential sectors.

First quarter 2010, contract awards for streets and highways in the U.S. are up 38% in real terms, year on year, driven by ARRA fiscal stimulus monies and the extension in March of the federal highway spending program until year end.

To put the contract award numbers in some context, the growth in contract awards for streets and highways for the six-month period ending in March is the highest year-over-year percentage increase for this calendar period in the last 30 years.

The residential sector is showing modest recovery, fueled by improved affordability and the extension and expansion of the federal tax subsidies. It is worth mentioning that the increased volume resulting from public works projects that we have secured as of the end of first quarter, account for almost 50% of the high single-digit volume growth expectations for our cement operations in the U.S. for 2010.

This assumes that in the aggregate, total cement volumes from the residential and industrial and commercial sectors remain stable.

In Europe, severe weather conditions also affected volumes in our operations. In most countries in the region, infrastructure continues to be the main driver for volume in the quarter. While we expect stabilization and potential growth in some European markets this year, Spain, our biggest market in the region, is expect to continue declining.

During April, we have had some sustainability related to achievements in Europe. Our U.K. operation is the first cement company in the world to provide certified carbon levels for its cement, using the carbon trust carbon reduction level, demonstrating the Company's commitment to reducing environmental impact of its cement.

In Germany, we received notification certification from the Eco-management and audit scheme or EMAS in two of our plants- Beckum and Rudersdorf. The EMAS was developed by the European Union and is a system for environmental management and environmental auditing, according to which organizations voluntarily commit to having their environmental performance appraised and to constantly improve it.

For the next three years, the two cement plants have allowed to use the EMAS logos for the operational protection measures.

In the South/Central America and the Caribbean Region, volume growth during the quarter was mainly driven by our Colombian operations. In this country, even though low-income housing is expected to decline as a result of the abolishment of the Megaproyectos de Vivienda Social, growth in cement is expected to be fueled by the general elections and the stabilization of middle and high-income housing.

In Panama, initiation of infrastructure projects such as the expansion of Panama City's airport, and the Baitun hydroelectric project, will contribute to our ready-mix operations this year.

Growth in the region for this year is expected to be mainly driven by our operations in Colombia, Panama and the Dominican Republic.

In the Africa and Middle East region, healthy growth in cement volumes in Egypt was offset by a significant volume decline in the United Arab Emirates, where a slowdown in construction has resulted from the Dubai World restructuring.

Going forward, the informal housing and infrastructure sectors will continue to be the main drivers of cement demand in the region. In Egypt, expected recovery in tourism and Suez Canal receipts are expected to complement the already robust growth rates in construction.

In Asia, the increase in cement volumes during the quarter was driven mainly by growth in the Philippines and Thailand. In the Philippines, construction is expected to continue shifting towards more private investment amid increasing appetite for Asian assets.

For 2010, we expected consolidated volumes for cement and aggregates to increase by 3% and 1% respectively, while we expect ready-mix volumes to be slightly lower than last year.

In Mexico, we expect our cement and aggregates volumes to decline by about 4% and to decrease by about 8% for ready mix.

In the United States, we expect cement, ready mix and aggregates volumes to have high single-digit increases.

As regards to our pricing strategies, we will continue to target recovering input cost inflation for our business in most of our markets. We are encouraged by the increases in other construction input costs such as lumber, steel, gypsum in the United States and other markets.

Growth in volumes is expected to translate into a slight expansion in our consolidated EBITDA margin, reflecting the robust operating leverage in our U.S. portfolio.

We also expect Mexico to continue to deliver stable operating cash flow generation and our South/Central American Caribbean region to increase its EBITDA generation this year.

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 and the exclusion of our Australian operations.

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 comply with our total funded debt to EBITDA covenant for this year.

I would like to assure you that we will continue to be vigilant in 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, Fernando. Our performance during the first quarter reflects the continued general slowdown in the global economy as well as severe weather conditions in the United States and Europe. EBITDA declined as a result of lower volumes in most of our markets.

In the case of Mexico, the decline was the result of a very strong first quarter during 2009, resulting from increased infrastructure spending in anticipation of the midyear elections.

In the United States and Europe, weather affected volumes during the quarter. In contrast, the South/Central America and Caribbean region had a year-over-year increase in volumes driven mainly by Colombia.

Prices in local currency terms remain resilient in most of our markets versus the fourth quarter. On a like-to-like basis that is adjusting for currency effects and divestments, EBITDA was down 29% during the first quarter.

EBITDA margin declined to 16.9% during the quarter from 19.7% during the first quarter of last year. SG&A expenses as a percentage of sales increased by 2.3 percentage points during the quarter versus the comparable period in '09. This is the result of lesser economies of scale due to lower volumes. In addition, we have experienced higher transportation costs with the closing of some of our facilities, our products 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 was a negative $171 million, versus a positive $118 million last year. The negative free cash flow generation is due mainly to lower EBITDA generation and higher financial expense.

Working capital during the quarter was an investment of $328 million; very similar to the amount invested during the first quarter of last year. Typically, during the first quarter there is an accumulation of inventories which are sold later in the year. Accordingly, an important part of the investment in working capital during this first quarter is expected to be reversed later in the year.

We expect free cash flow for 2010 to reach close to $1 billion, virtually flat versus last year, adjusting for the sale of Australia. During this year, we expect to have higher interest expense and maintenance capital expenditures.

Regarding our input costs, during the first quarter our kiln fuel and electricity costs on a per-ton of cement produced basis, declined by 2% versus the same period last year. 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. In Egypt, for instance, we have increased alternative fuel utilization from 10% as of the end of last year to 23% as of the end of March. Alternative fuels in this country include agricultural waste- including rice husks, corn corpse, rice straw, maize and cotton stakes, as well as wood waste and tires.

We continue pursuing clean development mechanism projects such as a wind-driven 250-megawatt power plant in Oaxaca, Mexico. The increase in financial expenses during this first quarter reflects the new terms of the financing agreement, as well as the substitution of bank debt with bonds issued in the capital markets which of course carry a higher fixed-rate coupon.

During the quarter, we recognized an exchange gain of $57 million, primarily as a result of the appreciation of the Mexican peso against the U.S. dollar. We also recognized a loss on financial instruments of $41 million, resulting from the equity derivatives related to CEMEX and Axtel shares.

The increase in the notional amount of equity derivatives during this first quarter reflects the capped-call transaction made in connection with the convertible subordinated notes issued this March.

Other expenses during the quarter were $88 million, including the impairment of the Davenport plant in the United States which was closed permanently, severance payments and others.

The income tax line during the first quarter was an expense of $86 million versus a gain of $173 million in the same quarter last year which included a positive effect on deferred taxes.

During the first quarter, we had a majority net loss from continuing operations of $341 million versus a loss of $61 million in the same period last year. This reflects the lower operating income, higher financial expenses and income tax expense versus the positive contribution from deferred taxes last year.

These declines were partially mitigated by an exchange gain and a smaller loss on financial instruments.

In addition to the reopening of the 2016 U.S. dollar notes in January, we continued to make progress in our plan for regaining our financial flexibility. We issued $715 million in five-year convertible subordinated notes with an annual pool fund of 4.875%. Our 49.9% owned Ready-mix U.S.A. joint venture completed the sale of 12 active quarries and certain other assets for $420 million with a cash distribution of approximately $100 million to CEMEX.

During the quarter, we also issued short-term notes under our Certificados Bursatiles program. The outstanding amount of these notes was MXN 800 million as of March 31.

The current all-in cost of these peso instruments is about 5.1% in peso terms; a drop of more than 700 basis points compared with a year ago. Year to date, we have prepaid $762 million under the financing agreement, $180 million of which were done in April. This has taken care of all of our scheduled amortizations under this agreement for the entire 2010 and 2011.

With these prepayments, our refinancing risk for the upcoming two years has been greatly reduced. As Fernando 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 of 7.75 times as of June and 6.75 times as of the end of the year.

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

(Operator Instructions). Your first question comes from the line of Carlos Peyrelongue with Merrill Lynch. Please proceed.

Thank you for the call, gentlemen. Two questions if I may; first one related to your full-year guidance for EBITDA; you are reducing your guidance for cement and ready mix volumes in Mexico and you're still staying with your guidance for full year in EBITDA. Could you please provide some light as to what other markets will be able to take the cushion for the Mexican operations?

And the second question is related to free cash flow. The first quarter you had a minus $200 million and you also mentioned that you're keeping your guidance of $1 billion for a full year. I think Rodrigo you mentioned something related to working capital; if you could provide also some light on this it would be very helpful. Thank you.

Yes, thank you Carlos. I will take the first one. Yes, we are lowering our guidance in volumes in Mexico, but some other countries; basically all countries in emerging countries are taking over that volume. But volume is not the only reason why we are keeping our guidance. There are two other reasons. We- in some countries we are slightly increasing our margins which will help for us to achieve our guidance and we will, as we mentioned, we continue with efforts in order to increase efficiencies as well as continue adjusting whatever businesses need to be right-sized. And the second question- Rodrigo-?

On the second question, of course what helps to mitigate the effect of volumes is the fact that some of the currencies in the markets in which we operate are stronger, particularly the Mexican peso. This, together with our continued efforts on working capital management and other right-sizing initiatives, will allow us to stay with our target of close to $1 billion in free cash for the full year.

And in addition, the sale of the assets in our joint venture in the U.S. and other asset sales proceeds, should allow us to reduce debt or use $600 million of that free cash flow to pay down debt. Of course during this first quarter, we have seen a reduction in net debt in addition to that of our operations as a result of the foreign exchange rate movements and the issuance of the convertible securities and we will see an additional reduction in debt total obligations, including our perpetual obligations, as a result of the exchange offer currently underway for our perpetual securities.

Okay. Thank you.

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

Thank you. Thank you for the call. My question is regarding pricing in the U.S. I recall that you had announced price increases to be effective in some markets in April. So I was wondering if you already have some color on what has been the response for your clients.

The other question would be-- if you could be any more specific regarding the most recent trends in the disbursement of the monies from the stimulus package and by how much it seems to be compensating for the lower discretionary consumption at the states level in terms of highways and streets.

And the other question would be regarding the intercompany alliance; we thought that it was positive. There have been very few quarters, if any, that in the first quarter this intercompany EBITDA line is positive. Last year, in the first quarter it was positive but you had mentioned that you had a one-time benefit on bringing back some provisions that you had made a year before in 2008 regarding some compensation to employees that were not given at the end. So that was clearly non-recurring. So this time, I'm wondering if there was anything non-recurring in the first quarter in the intercompany EBITDA line. Thanks.

I will take the third one, Rodrigo, and we will elaborate on the other two. This year, there are several reasons for a positive variation; the main one being CO2 credits sold during the first quarter and the second one again reverse of a variable compensation provision given that this year, as well as last year, we didn't provide or we didn't pay variable compensation to the executive team.

I think the most relevant one is CO2 variation and I would like extend the comment a little bit because CEMEX has a proactive approach to CO2 and we have been developing since after the RMC acquisition in 2005, developing a very comprehensive program in order to generate the CO2 credits-- being proactive in generating them. What I can tell you, and there is much more information related to this; but what I can tell you is that we-- as of today with initiatives and projects we have already developed and they are already in place, we generate about a little bit more than 1.5 million tons of CO2 credits per year. That includes projects like Eurus in Mexico. It concludes, as Rodrigo mentioned, a higher usage of alternative fuels-- and I'm referring mainly to alternative fuels with a very high content of biomass from which we get CO2 credits.

Just to give you an idea, in most of our plants in Europe we are already using household waste and commercial waste to produce cement. And that fuel has about a content of between 50% and 60% of biomass.

Now the reason why-- how we define how much CO2 we can sell is a simple balance on what we need and what we have. So constantly we are reviewing things the information and whenever we think we can sell additional CO2 credits, we do it; the same way whenever we need investments in order to produce more CO2, we also proceed. With the information available as of today, what we sold in the first quarter seems to be all we are going to sell for the year unless there are materially changes we don't foresee for the time being.

Yes, let me take the second question on the American Recovery and Reinvestment Act enacted by President Obama as a fiscal stimulus to reactive the economy. Let me give you an update on that.

The good news is that 96% of the close to $27 billion allocated to highways has been obligated. In fact, in some of our most important states-- California and Florida-- it's higher than 99% has been obligated. Of the total funds that have been obligated that is projects have been approved and assigned; only 26% has been spent in the entire U.S.

In the states that are most relevant to us, however, it's closer to 11% to 13%. Florida again and California only 11% to 13% has been actually spent. That is because some of the projects that are scheduled to be undertaken with these funds are expansions which of course are more cement-intensive and so the good news is that we're likely to see these volumes during the second half of this year and of course during 2011 as well.

And this is what has been factored into our full-year guidance that we have provided. It is true that during this first quarter some of the markets in which we operate in the U.S. have been weaker than expected, primarily as a result of weather conditions. But this of course has an impact on supply-demand dynamics and prices are softer during the first quarter; both on a sequential basis when compared to the fourth quarter of last year, as well as on a year-over-year basis. But we remain with our target for the full year however.

I don't know if you want to complement on that, Fernando-?

Not really any additional information.

Okay, very well. And regarding pricing; do you have any update on the increases that you have announced?

Regarding prices in the U.S., the announcement didn't stick completely. So we are announcing an additional price for about midyear. It's different on a per-product and regional basis. And we think behavior in prices will improve in the next few months; the reason being is that we are looking at positive signs of volumes increasing which-- this does not show in the quarter figures but what I can share to you is that during the month of March volumes of cement in the U.S. were higher than March 2009, which sounds like sort of an insignificant piece of information. But we have to take into account that this is the first time that a volume in the U.S. in the month is higher than the month from the previous year since 2006; still to be seen how much traction this tendency will have.

I also can share that volumes in April are almost-- it has a growth compared to April last year for almost a double-digit percentage which is sort of confirming what we saw in March and it also is encouraging our view that during the year, again even though visibility is not the one we would like, but we believe that our high single-digit growth will happen.

I think, if I may also complement Fernando, it's true that prices were softer during the first quarter of this year; about 3% versus the fourth quarter of last year; but so have unitary costs of production. Our cost of production is down on a per-ton of cement basis by more than 5% during this first quarter versus the fourth quarter of last year. And we have announced price increases for July and we will have to wait until then to see how much of that is absorbed in the market.

Of course it will make a big difference, as Fernando pointed out, if the market is growing and volumes are growing at a faster rate than others have assumed in the industry on our sales.

That's great color. Regarding the increases that you saw in volumes already March-April; could you confirm that housing- residential, was the main sector driving this growth?

Well, I think it's a combination. You know that the infrastructure accounts for between 65% and 70% of our volumes and infrastructure is evolving in a positive way. Monies are much-- spend on the monies of the fiscal stimulus has been spent up to-- this varies from state to state-- but it's about 30%. I think the last figure we gave it was around 11% or 12% in average. So that is happening.

And you know there have been some positive indications lately on the residential sector. We know our estimates on the residential sector are higher than PCA and other institutions. But for the time being and because of the information, we do see we are keeping our guidance on high single-digit growth in the U.S.

Great, gentlemen. Thanks.

Your next question comes from the line of Gordon Lee with UBS. Please proceed.

Hi, good morning. Just a couple of questions; first, if you wouldn't mind quantifying what the amounts of CO2 emission rights sales were during the quarter. And the second question, on the balance sheet; I was wondering if you could tell us as of the end of the first quarter what your leverage ratio is calculated as per the terms of the covenant. And on that, if you could clarify what the treatment of the most-recently issued convertible-- not the mandatory ones but the other ones-- how that is treated in the calculation of the covenant and how that is shows up in the total debt number that you post in your release. Thank you.

I will take the CO2 question. During the first quarter, we sold about-- compared to first quarter last year, we sold like 2 million credits more which accounts for more or less around $30 million-- that was the question I think?

Yes, the variance between first quarter of this year and last year-- on same quarter last year was approximately $30 million.

And the absolute amount dollar amount for the sales in the first quarter of 2010 alone?

The amount in the first quarter of 2009?

No. Just what was the actual amount of CO2 from a revenue standpoint in the first quarter of 2010 or from a cost-reduction standpoint; not the variance but just the absolute amount?

It's $30 million more than last year which was about $60 million.

Okay; perfect. Thank you.

The next question comes from the line of the webcast.

I'm sorry. Let me take the second question that Gordon Lee had on the treatment of the convertible for leverage calculations. Before the issuance of the convertible subordinated notes, we went to our financing agreement lenders and asked for an amendment so that the proceeds from this transaction and the obligation under this security would not be counted towards the leverage calculation. And the reason that is, is because the claims are subordinated and the majority comes behind the financing agreement. So clearly, yes it did help substantially to reduce the total debt for purposes of calculating that debt covenant which currently stands at about 7.3 times and we do expect to be in compliance for June and December.

We will continue to do things that will generate additional margin for compliance. Clearly the offer to exchange the perps for the new securities is another initiative that will help us to widen that margin for compliance and as the operating cash flow begins to grow we should continue to increase that margin for compliance. I don't know if I've answered your question, Gordon.

I guess we can move on to the next question. And the next question comes from the webcast-- is that right, Jasmine?

Yes sir.

Yes, the question is from Robert Easton from Gubody, Ireland. Can you explain the regional variation you are seeing in aggregate pricing in the U.S. that made up the 5% decline in the first quarter?

I don't know if we have the details here but we can follow up with you Robert and answer in writing and we will follow up soon with that.

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

Yes, thank you very much. I had a few questions, if I could. Maybe the first one-- in your slide it talks about both improvement in the U.S. but also in parts in Europe. Maybe you could explain which countries specifically you're referring to. And also the same point; maybe you could also talk-- I think there was an increase and I was just trying to find the figure in the EBITDA margin in Spain compared with a year ago which somewhat surprised me, given the big volumes. If that's correct, maybe you could explain what's caused that please.

Then my other question was in terms of U.S. price increase in July; what was the magnitude of that price increase please? And then also if you could talk about the leverage impact that you get as you get additional volumes in the U.S. I mean the two U.S. aggregates companies have indicated that they may get 50% to 60% of the additional sales as profits. I think we briefly had a discussion on this on one of the previous calls, but maybe you have a more up-to-date estimate, given your mix of business. As you see volume recovery in the U.S., what the sort of leverage benefit is in terms of additional EBITDA growth for every 1% change in volumes-- if it's possible to calculate that? Thanks.

Let me take the last one before I forget it. I can't comment that specifically the figure of cement-- we calculate that every additional ton of cement will provide for about-- between 65% to 70% of marginal EBITDA; that's what we are expecting.

Regarding the EBITDA margin improvement in Spain, Mike; last year we did implement significant cost-saving initiatives right-sizing initiatives in our operations in Spain to adapt to the new operating environment. We also implemented several energy initiatives including the increase of alternative fuels and others that have yielded savings and of course we've generated through the investments we made in clean development mechanisms, CO2 credits that also have helped. So all of this combined is what has contributed to our ability to maintain the margin in that market.

If I may, I would like to add some color to this concept or idea of alternative fuels because we're insisting and insisting in alternative fuels and why is it important- especially in Europe? In 2006, after learning on how some German plants in RMC were using very high quantities of alternative fuels, we proceed to-- after learning from them, to replicate the idea all over our cement plants in Europe-- which were not absent of investments but the business proposition is very attractive, especially when you focus on household waste and commercial waste. Because in some countries in Europe, fuel can be an income instead of a cost; you are paid to burn it.

And besides that, and again especially household waste and commercial waste, with a high content of biomass, you get CO2 credits. That's the simple proposition.

Now in the case of Spain, our alternative fuel substitution was very low. And nowadays we have cement plants using, co-processing alternative fuels in cement plants as much as 40% or 50% of the total fuel needs. We have other examples in Europe, for instance in the case of Poland there is a plant called [Helm] in which we've moved from zero alternative fuel substitution to last year I think it was 73% or 74% of alternative fuels, meaning 73% or 74% of the fuel used to produce cement at that plant is household waste or commercial waste with the economics that come with it.

There is one other factor that did have a positive contribution during this first quarter of 2010 when compared to '09 in Spain and that is SG&A was significantly lower in 2010 versus '09 as a result of the lower charges for bad accounts receivable. And so that also helped contribute to the positive margin evolution.

We forget-- what was the first question you had, Mike?

Just-- and I've got one more at the end if I may; but just to quantify the July price increase in the U.S.?

11% is what has been announced on average.

Okay, thank you for that. And then the final question; is it possible just to give us an overall total in terms of any additional cost savings that you've implemented in 2010; not so much the carryover from what you did in '09, but I mean there's obviously an additional charge for cost-cutting. I mean is there a cost-savings number that goes with that?

At this point in time, we are not disclosing any specific number, but actually we do that in our CEMEX Day in June.

Okay, that's fine. Thank you very much for that, guys.

Your next question comes from the webcast.

Yes and the question is from Jeff Davis from HSBC. You have guided to 7% to 9% volume growth in the U.S. for 2010; ahead of PCA and your competitors' guidance. Could you provide some color on what is driving your relatively optimistic volume guidance? Also, could you give some color on U.S. pricing for 2010?

Let me comment on it, Rodrigo and then you can complement. I think on pricing we already commented. Maybe the question was posted before the last comment. So the price increase we tried in the first quarter didn't stick that much and we have another one announced for around 11% as Rodrigo--

I'm sorry. It was $11.

$11-- Rodrigo mentioned. And in volumes, what I have commented is that we see all the stimulus packages really evolving and moving. Perhaps it was not-- late last year we were commenting it was not happening as fast as we would like for them to happen but it is happening. More than 90% of the monies of this program are already committed and the figure I have in mind that has been already spent is about 30%.

It's actually much lower in our markets-- in our markets it's about 11-.

But that is also one of the reasons why our markets are likely to benefit more is 100% of the projects have been obligated; only 13% of the monies have been spent. At some point, they have to get spent. And it's also true that some of the markets that we're in the U.S.-- in California and Florida-- also dropped more than the rest of the U.S. so we're coming off of a lower base. And the combination of the two explains the difference in our estimates.

So just summarizing; it's 30% as of March for the U.S.; and in our own markets it's close to 20%. And on volumes-- I think infrastructure being about 65% to 66% of our volumes; that explains a lot. But I also mentioned a while ago that we do have a slightly higher estimate on the residential-- in the residential sector in our markets compared to consensus. So both issues cover the one that explain and that make us think that the U.S. market will grow at about a high single-digit.

I wish we could have even much more visibility but that's our current estimate.

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

Good morning Fernando and Rodrigo. Could you talk a little bit about the major drivers behind the electricity costs-- the increase of 5% and what is the percentage of COGS that is electricity? Is that increase in 5% inflation or is it something else?

And then we mentioned in the news that CEMEX might be looking to sell some minority stakes in some of its operations, but keeping control of those operations around the world. I was wondering if you had any comment on that.

And then last, for the $7.6 billion I believe that's the target-- milestone of refinancing in 2011; that I understand has already been met because you've already met all of the refinancing requirements for 2011- is that correct?

Let me start with the minority stakes which it was commented by Mr. Zambrano in an interview today or yesterday. It is a possibility; it's something we can-- we might do. It will depend on several factors including dealing with that specific scheme with the banks involved in our financial agreement.

But it is a possibility; at the right price and at the right conditions, that's something we might do to continue improving our balance sheet.

Okay.

Regarding the milestones; we have met the milestone for December of 2010 and that is the $4.8 billion of prepayments under the financing agreement; $15 billion refinanced debt. In fact, we have now prepaid close to $5 billion.

The next milestone will come in December of 2011 and that's a good more than a year and a half away. We do have an aggressive target to de-lever. That is clear from the statement from our Chairman and CEO, Lorenzo Zambrano. We aspire to recover our financial flexibility as quickly as we can. And we are exploring all of the different alternatives available to us, including the sale of non-productive assets that don't contribute to EBITDA today and including other initiatives that might be value-accretive to our shareholders.

And so clearly we cannot discard any of them and we have to proactively pursue all of them if we want to reach our target sooner than everybody expects. And we will work diligently towards that objective.

Now referring to your first and second question related to electricity costs; well, electricity has increased in price mainly because of fuels but in some cases because of CO2 in Europe. And there are some cases in which our markets are changing its structure, so different reasons.

And the electricity cost in average for us is about 5% of our total cost.

Total cost of goods sold?

Yes.

Okay. Thank you.

The next question comes from the Internet from David Hisman from RJM Investments. Does the Company have any direct or indirect exposure to Brazil? If not, what prevent the Company from entering Brazil?

Well, since 1996 I think, we have an import business in the north part of Brazil; a place called Manaus and besides that, we have not made any other additional investments. It's a small import business in the country.

Now what is preventing us to go into Brazil? Nothing specific; it is just that we continuously and before the crisis, analyzed different opportunities and it just happens that whenever we decide, we have found other propositions more attractive than the one we find in Brazil.

And right now of course what would prevent us from entering a market such as Brazil that requires heavy capital commitment is our leverage ratio and our intent on reducing that leverage ratio.

That's valid for Brazil and that's valid for other countries as well.

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

Hi, good morning Fernando and Rodrigo. If understand correctly, you mentioned that you are expecting moderate improvement in EBITDA margin for this year. I previously understood that you would have a very strong operating leverage because of the cost-cutting efforts on the turnarounds. Why a moderate improvement in margins? And specifically-- I don't know if you can provide us with your estimated EBITDA margin for 2010 and particularly in the U.S. where the EBITDA margin is currently negative.

Well, maybe as part of the answer, it's important to emphasize that for each marginal ton of cement that we sell in the U.S., the contribution is significantly higher than what we realize today. And that is because we are a very capital-intensive business with a significant component of fixed cost in our cost structure. And on the margin, given the variable costs, a ton of cement sold that utilizes more of our unutilized capacity in the U.S. will have a margin in the order of 65% to 70% which of course will change-- the margin for the business as a whole, especially when volumes begin to recover as we expect they will during the latter part of this year. I don't know Fernando is you want--

Well, I think part of the question was margins at a consolidated level. That information is in the information we disclosed and for 2010 it's suspected to be around 16-- no that's the first quarter-- 16.9.

Specifically in the U.S., the expected margin is around 10%. The reason being the one that Rodrigo has been mentioning and we have explained before; we do expect there will be additional ton-- every additional cubic meter of concrete to provide a much higher margin and EBITDA than the one we are getting ourselves today.

So let me see if I understand correctly. You are expecting the same EBITDA margin of the first quarter for the full year or-- which would be the margin for the full year?

No. We significantly expect to increase the margin in the U.S. during the remaining three quarters as volumes begin to recover and we capture some of the operating leverage that we have in our U.S. business.

Okay. Thank you.

Your next question comes from the line of Jacob Steinfield with JPMorgan. Please proceed.

Hi good morning. Thanks very much for the call and presentation. I have a couple of questions. First, I'm calculating growth in net leverage of 7.5 and 6.9 times net of the subordinated convertible notes at the end of the first quarter. I just wanted to confirm these figures.

I'm sorry. What was the figure you mentioned?

7.5 times on a total funded basis and 6.9 times net; that's excluding the converts.

Total debt to last 12 months EBITDA as of March is actually closer to 7.3 times.

Are you just--

And the reason that is and probably you have not made that adjustment is that one of the other amendments we obtained from the banks when we amended the financing agreement was that the cash that we maintain in a reserve to meet future obligations under either the financing agreement or our Certificados Bursatiles program, would also be netted out of the calculation. So in the total debt calculation, not only do we not include the obligation under the subordinated convertible transaction, we also don't include the cash that is held in a special reserve to meet obligations under either the financing agreement or the Certificados Bursatiles program.

Okay. And how much cash is currently in that reserve account?

I think it's slightly less than $500 million. I don't have the exact number but we can get it to you.

Okay. So--

So we're at about 7.3 times and yes, we do expect to be in compliance with the ratio in June and December.

Okay. So in terms of the $600 million that you expect of debt to reduce from free cash flow; is it fair to assume that all of that is going to come in the next three quarter?

Well, yes because the free cash flow actually during the first quarter was negative and so clearly we did not use any proceeds from free cash flow to pay down debt during the first quarter. In fact, it increased. So maybe for the full year, the actual reduction with proceeds from free cash and other sources during the last nine months will be greater than $600 million, yes.

Okay. And then I understand the cash balance was high at the end of the quarter from the payments of the $715 million of converts; but I was wondering why it was so high at the end of the quarter. It was almost $1.5 billion; I was wondering how much of that do you expect to use in the second quarter to repay debt?

Well, again close to $500 million of that is the reserve that I just explained that would be used only to pay down debt either under the financing agreement or under our capital market transactions in Mexico.

So that is what explains the temporary excess in cash at the end of March.

Okay. Great; thank you very much.

Your next question comes from the line of the webcast.

Yes and the question is from Olivie Fortesa from Amber Capital.

Could you give us an indication of valuation multiple at which you sold your quarries in the U.S.? This is the joint venture with Ready-mix U.S.A.

Actually, I think we cannot disclose that because of confidentiality issues related to the transaction. But what I can comment is that cash flow coming from those assets was not significantly eroded we divested. For us it was an attractive divestment.

Well we own 49.9% of that joint venture and the proceeds for the quarries sold was $420 million; a little more than half of that was used to pay down debt at the joint venture and then $200 million was distributed to the partners; $100 million to CEMEX and $100 million to the majority partner in that joint venture.

Your next question comes from the line of Yusain Tujari with Exane BNP Paribas. Please proceed.

Good morning gentlemen. I would have a question on the pricing in Europe. Have you announced a price increase in Germany or the United Kingdom? And then I would have a question on your German outlook; you're forecasting volume up 3% in Germany in 2010. That's much more optimistic than the German Association. If I remember well, the German Cement Association is expecting a 5% decline in cement volume.

Then I would have a question on your backlog in the United States. Do you have any backlog in the U.S. and could you give us a bit more color on that?

Let me start commenting in Germany. Again, as I have commented before, I wish visibility was much, much better. The figure we are disclosing is the figure we believe the market will deliver and it's still to be seen, mainly because of the harsh winter we had in Germany as well as other markets in North Europe. But we are sticking to our estimate.

On pricing, what I remember is in Germany, we announced prices last year I think valid April 1st. U.K. was a little bit earlier than that. U.K. volumes are also behaving. As you know, the U.K. doesn't have a surplus in residential sector so that helps.

And what was the question on the U.S.?

Do you have any backlog on the U.S.? But perhaps to come back on Europe; do you have any color or any feel in mind about the trends in March or April?

In Germany or the U.K.; I don't have that info with me right now but we can provide that to you. And what I can tell you in the case of the U.S. and I think I have already mentioned it is that March-- volumes in March were about 3% higher than March last year which I already mentioned is the first time that happened since 2006. So we are looking for some indicators that make us think that the U.S. has already bottomed and some reparation will come. That indicator is a useful one.

I also commented that April is confirming the trend in March, that it's confirming and it's increasing it because increasing volumes as of yesterday in April in the U.S. compared to April last year are about 2 digits higher. So it seems like-- but again, let's see how much traction that tendency has-- but since like after the winter in the U.S. March and April are behaving positively and according to our expectation of a high single-digit growth.

My question on the U.S. is do you have a backlog in the U.S. and could you give us some color on what's happening in your orders there?

I have to come back to you with that information. I don't have it here handy.

But we do use it as part of our estimate for the full year and the backlog is very important; particularly in the ready-mix area which is a good leading indicator for what volumes of cement might do. And yes, we do use that information in estimating the full year and that is why, despite the weather and the performance during the first quarter, we have this guidance for the full year.

Okay and I would have a last question on Mexico. We saw that prices were up 3% sequentially. Have you announced any other price increase in the kickoff of 2010?

The price increase we've seen in Mexico during the first quarter is a result of the price increase that happened I think in the middle of the quarter, more or less. So actually if you were to do it point to point, the increase is slightly better than that because what you see in the first quarter is the average price for the quarter. But I think more importantly in the case of Mexico as we convert our operations or we translate our operations into U.S. dollars; given the fact that the peso has appreciated versus the U.S. dollar; the contribution is U.S. dollar terms from Mexico is stronger than we originally anticipated.

Okay. And perhaps just to come back on pricing in Europe; what was the magnitude of your price increase in the U.K. and in Germany?

I don't have that info with me right now. I will get back to you on both.

Okay. Thank you very much.

But for the full year, we expect prices to remain relatively flat in Europe.

Okay. Thanks; thank you very much.

Your next question comes from the line of Alejandro Luciano with Credit Suisse. Please proceed.

Hi. Thanks a lot for the conference call and for taking my questions. First question- I was wondering if you could give some additional color regarding the comments made at the perpetual exchange press release regarding the option to defer interest on the perpetual securities. I was wondering first of all if you could confirm that you are eligible for the interest and secondly if you could give some color regarding what would you take into consideration in order to take up that option to defer? Thanks.

Well, we did mention in that transaction that today we're not eligible to defer, primarily as a result of the- precisely the offer to exchange. And so coupons in June cannot be deferred. What we did highlight was that we do intend to meet all of our contractual obligations and if in the future we comply with all the required conditions for deferral and it is required for us to meet our other contractual obligations, for example in terms of liquidity needs or in terms of covenant compliance or if it's important for us to achieve our financial objectives; this is something that we will have to consider and this is something that is a risk factor that of course those people participating in the exchange need to consider.

Thanks. And can you confirm whether or not right now you are eligible. I understand that you're not eligible for the June coupon in the exchange--

No, we're not.

Okay. And is that-- if I could have a follow-up question regarding your mandatory convertible securities; I believe they have an equity portion under MMRS accounting that is attributed at CEMEX holding company. Under the perpetual security indenture, do they qualify as a qualifying equity security?

Well, that's a very technical question that I would have to follow up with you on that.

Okay. Alright; thank you very much.

Your next question comes from the webcast.

Yes and the question is from Harry Goad from Credit Suisse. Please provide more details on what European markets are experiencing in improved demand or where you are more optimistic for the second half of 2010.

As I mentioned in my remarks, in general it's all markets except for Spain that are-- some markets I didn't mention like Latvia for instance. But in the case of the U.K., Germany, all the countries in the North Norway - even France, Poland, Czech Republic-- in general terms they are behaving better than we originally expected but it's slightly better. I mean it's not materially better. And again, remember that all those countries were affected by the harsh winter so we need some additional time to really change our current estimates on market growth in that geography.

And we have time for one last question. Your last question comes from the line of Harry Reminon with Eminence Capital. Please proceed.

Hi guys; just a quick question on your tax rate going forward. I did read some changes that have been taking place at the Mexico level. Could you just comment on over the next couple of years, what do you expect to see in terms of tax rate?

Well I think we mentioned that in the fourth quarter teleconference a few months back; we expect the impact from the changes in the Mexican tax laws to have a cash impact of about $30 million this year. So it's not going to move the needle for the consolidate Company as a whole during this year. And we will continue to proactively look for ways in which to optimize our cash burden.

But over the next two to three years, do you see the tax rate going up? I mean I think historically it's been between 15% to 20% of your pre-tax income is what's been taxed. Do you expect that to go up?

Well, tax laws change every year almost everywhere. So it is impossible to forecast two to three years forward. In fact, it's difficult to estimate the year we're operating under. So we will do our best to manage it, but it is difficult to say what the actual outcome will be going forward. We don't try to estimate it. We think most of the market players don't try to estimate it. Most would assume that the cash tax burden will gradually go up over time.

I don't know Fernando if you want--

I don't have any additional comment.

Okay. Thanks.

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

Thank you; so long.