Cemex SAB de CV (CX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 CEMEX Earnings Webcast. My name is Marcella and I will be your operator for today. At this time, all participants are in a 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 speakers for today are Fernando Gonzalez, Executive Vice President, Planning and Finance and Rodrigo Trevino, Chief Financial Officer. And I would now like to turn the conference over to your host for today, Mr. Fernando Gonzalez, Executive Vice President of Finance and -- Planning and Finance. Please proceed.

Good day to everyone. Thank you for joining us for our Second Quarter Conference Call and video webcast. I would like 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. Today, we will be joined by Gilberto Perez, President of our US operations for the question-and-answer session.

I would like to start with three key messages. First, deleveraging continues to be the focus of our financial strategy. During the quarter, we paid down close to $650 million in debt, including about $330 million on our Financing Agreement ahead of schedule and plan.

Second, despite the impact of the current debt crisis in Europe, we still believe that economic conditions in most of our markets have stabilized and / or bottomed out. This view is supported by the positive cement volume performance this quarter from some of our operations in European countries, including Germany and the United Kingdom. Having said this, the visibility is still not where we would like it to be. Third, we expect to be in compliance with our financial covenants.

Now, I would like to discuss our second quarter results. Infrastructure and housing were the main drivers of demand for our products during the quarter. Lower volumes and weaker pricing conditions in some of our markets partially mitigated by our cost reduction initiatives affected our quarterly results. We are encouraged, however, by the growth in volumes in the United States. This is the first year-over-year increase in volumes in the country since the first quarter of 2006. We believe that the second half of the year will continue to show operating EBITDA growth and recovery, though potentially at a slower pace than originally expected.

During the second quarter and on a like-to-like basis for the ongoing operations, consolidated domestic gray cement volumes declined by 1%, ready-mix volumes declined by 5% and aggregates volumes declined by 2% versus the same quarter last year. Adjusting for foreign exchange fluctuations consolidated gray cement prices declined by 1% during the second quarter compared with the first quarter and were flat for ready-mix and aggregates.

Volumes in Mexico dropped during the quarter versus the very strong second quarter in 2009 during which infrastructure was high due to expenditures on special government programs to promote growth and employment. Even though total investment in infrastructure is expected to drop only by about 1% in real terms for this year, this investment includes non-cement intensive projects such as energy and electricity. Investment in cement intensive projects, including communications, transportation and water projects is expected to decline by about 17%.

We see investment in the formal residential sector improving slightly during the year, despite the working capital financing constraints faced by homebuilders. Investment in the self-construction sector will see a minor decline affected by lower remittances in peso terms and the absence of extraordinary special programs that were available last year.

In the aggregate, investment in the residential sector will fall by about 1% this year. The industrial-and-commercial sector is expected to show mid-single digit growth during the year after two years of decline. This is driven mainly by the industrial sector which is supported by raising manufacturing exports to the United States.

In the United States, we are encouraged by the growth in volumes during the quarter for cement, ready-mix and on a like-to-like basis for the ongoing operations aggregates. While these results support our expectations for a second half rebound as discussed in CEMEX Day, we have since become more cautious about the second half of this year due to a deceleration in our average daily sales growth rate in June and the recent macroeconomic indicators.

Macro indicators for the month of May and June included weak figures for new home sales, housing starts, job creation, consumer confidence and retail sales. While most economists believe that the recent disruption in favorable macroeconomic trends is temporary, we will have to see how demand in our markets evolves in coming months. We continue to focus on job creation as a critical driver for a sustained recovery in the economy and the residential sector.

On the other hand, several leading indicators suggest a positive outlook. Contract awards for streets and highways are up 3% on a year-over-year basis through June. Growth in contract awards has dropped off in recent months due to the delay in extending the Federal Highway program and the deceleration in contracting out ARRA projects with almost 90% of ARRA funds under contract through May. States currently have a large reserve of unobligated federal highways monies, hiring relied heavily on ARRA financing to meet their immediate highway needs in 2010.

As we approach the end of the fiscal year for the federal government on September 30, states must move quickly to direct these monies. As of May, an obligated funds totaled approximately $24 billion, roughly 70% of the Federal Highway program appropriations. We believe that states will fully obligate these funds by September 30 and this activity will bolster contract awards in future months.

States also continue to take advantage of the Build America Bond program through which they have issued more than $120 billion to finance capital projects. A significant portion of the proceeds have been used for transportation projects. In addition, the House Transportation Appropriations Subcommittee recently passed a fiscal year 2011 spending bill budget with a projected 10% increase in spending. While this must be approved by the full committee and Congress, this is encouraging news of bipartisan support.

In the residential sector, housing starts are expected to increase during 2010, although the final figure could be lower than current market consensus. In light of all this, we have cautiously lowered our volume expectations for the year to reflect the limited visibility of the US recovery.

In Europe, infrastructure continues to be the main driver for volumes in the quarter. Cement volume growth from Germany and the UK and ready-mix volume growth in France were partially offset by declining volumes from Spain and Poland where heavy rains and floods had a negative impact in our operations during the quarter.

Leading indicators, including economic and consumer confidence data in some countries, have begun to weaken in response to recent debt crisis in Western Europe. Fiscal austerity measures in some countries are increasing concerns for the upcoming quarters. The increase in fiscal austerity and rise in risk premiums are expected to affect European countries differently based on their underlying conditions. We expect Germany, the UK, France and Poland to fare relatively well despite the crisis. Spain will continue to be affected by high unemployment levels and economic activity in the country is expected to improve at a slower pace.

Starting in this quarter, we changed our cement base for reporting purposes from total domestic cement plus clinker to domestic gray cement. The only major difference in our individually countries is in Spain where clinker sales have increased significantly this year. As a result, gray cement is declining at a faster rate than total domestic cement including clinker.

The guidance provided for Spain during CEMEX Day was a drop of 12% for total domestic cement. The equivalent guidance for gray cement, then, would have been a decline of 19%. We are now adjusting our guidance for gray cement downwards by 2 percentage points to a drop of 21%, reflecting the continued weak performance in the country.

In the South, Central America and Caribbean region, the increasing cement volumes in Colombia was offset by declining volumes in other countries in the region. In Colombia, the expectations following the recent presidential elections are positive. Growth in the residential sector is expected in the second half of the year as a result of housing starts for homes which were pre-sold this year in order to qualify for an expiring subsidy in interest rates.

In addition, President-elect Juan Manual Santos has been very vocal in his wish to address the country's current housing shortage of about 1.3 million houses. In particular, he has committed to the construction of 250,000 homes per year during the four years of his term for a total of 1 million homes. The yearly target is significantly higher than the 170,000 houses started during 2007 which was the record year.

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. Furthermore, we announced two weeks ago the signing of a supply contract with Consorcio Grupo Unidos por el Canal, the primary contractor for the construction of the third set of locks for the Panama Canal expansion project. The supply contract calls for approximately 500,000 tons of cement.

Domestic gray cement volume in the region is expected to remain flat during the year. This contrasts with the guidance of a 10% increase in total cement provided during our CEMEX Day. As we did in Spain, we have increased clinker sales in the region this year, which accounted for the increases in total cement volumes. On a like-to-like basis, we have adjusted the guidance provided during CEMEX Day downwards by 2 percentage points.

In the Africa and Middle East region, healthy growth in cement volumes in Egypt was offset by a continued volume decline in the United Emirates. During the second quarter, we saw a decline in public spending by the Egyptian government as it tried to achieve its budget targets for the fiscal year ending in June. Going forward, however, infrastructure will continue to be an important driver of cement consumption. The government is focusing on public/private partnerships to speed up infrastructure in areas such as roads, railways, ports, hospitals and wastewater treatment. Informal housing will continue to be an important contributor to cement demand in the country.

In Asia, the increase in cement volumes during the quarter was driven mainly by growth in the Philippines where infrastructure spending was very strong prior to the elections in May. The new wave of optimism following the elections is expected to continue this trend in the country. In addition, we expect increased remittances will continue supporting the residential sector, especially middle-income housing developments.

For 2010, we expect consolidated volumes for cement to be flattish and aggregates and ready-mix volumes to decline by low-to mid-single digits compared with last year. In Mexico, we expect our cement and aggregates volumes to decline by about 4% and we see ready-mix volumes decreasing by about 8%. In the United States, we expect cement, ready-mix and aggregates volumes to increase by about 5% each. As regards to our pricing strategies, we will continue to target recover and input cost inflation for our business in most of our markets. However, inflationary pressures have been muted.

For 2010, we anticipate that Mexico, Africa and Middle East and Asia will continue to generate stable operating cash flow and that our South, Central America and Caribbean region will increase its operating EBITDA generation. Given the likely increase in fiscal austerity in response to the European debt crisis, we now see lower contributions from this region as well as lower growth in the United States. Accordingly, we now expect our 2010 consolidated operating EBITDA on a like-to-like basis and based on currently prevailing exchange rates to be about $2.65 billion.

Free cash flow after maintenance capital expenditures this year is expected to be about $680 million, reflecting lower operating performance, 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 $400 million of our free cash flow towards debt reduction. This should enable us to comply with our consolidated funded debt to EBITDA covenant. We will continue to be vigilant over our cost cutting efforts, maximizing our bottom-line and strengthening our capital structure.

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

Thank you, Fernando. Let me start by saying that in the spirit of greater transparency, we're improving our disclosure. During this quarter, we have made the following changes in our reported information. First, as Fernando mentioned, we have changed our reporting base for our cement volumes from total domestic cement volumes, which included gray cement, white cement, mortar and clinker to only domestic gray cement, which is by far our main product. It will reduce distortions in our reported volumes due to product mix.

Second, we have integrated our results from Spain, the UK and the rest of Europe into a new Europe region. We will continue, however, to discuss the main European countries in our portfolio and in our quarterly reports and presentations. Third, we have added Poland and the Philippines to the list of individual countries for which we will provide historical and guidance information as a result of their increase importance in our portfolio. The countries we now report individually represent about 85% of our 2009 operating EBITDA.

Regarding our results, operating EBITDA during the second quarter decreased as a result of lower volumes in some of our markets. In the case of Mexico, the decline results from a difficult second quarter 2009 comparison when our operations benefited from special government counter-cyclical programs that are no longer available.

The Europe region was affected mainly by our Spanish operations. In the South, Central America and Caribbean region, positive volumes in our Colombian operations were offset by lower volumes in other countries in the region. In contrast, the United States went through an inflection point and delivered year-over-year increase in volume across the value chain on a like-to-like basis in the case for aggregates.

Operating EBITDA generation during the quarter was affected by lower year-over-year prices, especially in the United States and Spain. On a like-to-like basis adjusting for foreign exchange effects and divestments, operating EBITDA was down 14% during the quarter. Operating EBITDA margin fell to 17.7% during the quarter from 19.6% in the second quarter of last year.

Operating EBITDA margin was affected primarily by higher SG&A expenses as a percentage of sales resulting from lesser economies of scale due to lower volumes. SG&A expenses were further affected by higher transportation costs. With the closing of some of our facilities, our products in some cases have to travel farther to serve our customers. The increase in cost of sales and SG&A was partially offset by savings from our cost reduction initiatives.

During the quarter, our free cash flow after maintenance capital expenditures was $187 million versus $456 million last year. A lower investment in working capital during the quarter partially mitigated the lower operating EBITDA generation, higher financial expenses and higher cash taxes. The number of working capital days for our consolidated operations, excluding the effect of securitizations declined to 32 days during the first half of this year from 37 days during the same period last year.

We expect free cash flow for 2010 to reach about $680 million. We expect to have higher interest expense and maintenance capital expenditures, but lower investment in working capital. We expect to recover more than half of our year-to-date working capital investment during the rest of the year.

Approximately $73 million in higher interest expense is due to the exchange of our perpetual debentures into about $1.2 billion in principal amount of new senior secured notes. Due to our energy strategy, our kiln fuel and electricity costs on a per-ton of cement produced basis increased by only 1% this year versus last year. For 2010, we now expect this cost to increase by approximately 2%.

We continue to develop new ways to lower our energy input costs and to make them more predictable. As part of this effort, we are increasing the use of alternative fuels such as tires, biomass and household waste in our manufacturing process and reducing our use of conventional fossil fuels. This will help us recover energy from society's waste and is a positive contribution to the environment. During the second quarter, we reached close to 21% in alternative fuel utilization, up from 15% a year ago.

The increase in financial expenses during the quarter reflects the terms of the Financing Agreement and a replacement of bad debt with higher coupon fixed rate bonds issued in the capital markets. During the quarter, we recognized a foreign exchange loss of $101 million, mainly due to the depreciation of the euro against the US dollar. Most of these losses are non-cash and related mainly to our European operations. We also recognized a loss of financial instruments of $43 million related to CEMEX and Axtel shares.

Other expenses during the quarter were $96 million including severance payments, a loss on the sale of assets and the amortization of fees related to the early redemption of our debt. During the second quarter, we had a majority net loss from continuing operations of $301 million versus a gain of $173 million in the same period last year. This reflects the lower operating income, higher financial expense, a foreign exchange loss versus a gain last year and a higher loss on financial instruments.

During the quarter, we continued to make progress on our plans for regaining our financial flexibility. In May, we completed the exchange of our perpetual debentures for new senior secured notes. This resulted in a reduction in net debt, including our perpetual debentures of $437 million. Year to date, we have prepaid $914 million of principal under the Financing Agreement, $330 million of which were paid during the second quarter. This has taken care of all of our scheduled maturities under this agreement for 2010 and 2011.

Also during the quarter, we announced the early payment of about $317 million of Certificados Bursatiles. After the quarter ended, we announced an agreement to sell non-core assets in the US to Bluegrass Materials Company for $90 million. This included seven aggregates quarries, three resale aggregates distribution centers and one concrete block manufacturing facility, all of them in Kentucky.

With the prepayments, we have greatly mitigated our refinancing risk for the upcoming two years. Our short-term debt, excluding perpetuals, is now only 3% of the total. The average life of our debt also increased from four years to 4.3 years during the quarter. Close to a quarter of our current debt, excluding perpetuals, is in euros. During the second quarter, we had a positive conversion effect in our debt of about $455 million, mainly as a result of the depreciation of the euro against the US dollar.

As Fernando mentioned, we expect to use about $400 million of our free cash flow to reduce debt this year. With our planned debt reduction and operating EBITDA generation for the rest of the year, we expect to comply with our consolidated-funded-debt-to-EBITDA covenant of 6.75 times as of the end of this year. Our priority in the short-term continues to be to pay down debt. To do this, we will work 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. Operator?

(Operator Instructions).

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

Thank you. Good morning, gentlemen. Two questions if I may, first one related to Mexico. You mentioned that you expect stable operating cash flow for the year, and year-to-date Mexico's EBITDA is down 5% and margin's down about 300 basis points. Could you give us some color as to what you expect in the second half for this to revert? And the second question is related to free cash flow. You gave guidance, new guidance of $680 million. Is that before interest payments for perpetuals? Thank you.

If I may take the first part of Mexico, the second half in Mexico will compare favorable to the second half last year and so even though in the total year we are expecting, as mentioned, a slight decline in volumes, we do expect to generate the -- about the same EBITDA than last year. And that part of the increase will happen during the second half of the year.

Regarding your second question, Carlos, on free cash flow, we report free cash flow after maintenance capital expenditures, but it is before the servicing of our perpetual debentures. As you know, we have exchanged more than half of those perpetual debentures into senior secure notes and so, the amount of perpetuals to be serviced has also decreased accordingly.

Good. Thank you, Fernando and Rodrigo.

Thanks, Carlos.

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

Hi gentlemen, two questions as well. If you could talk about the pricing environment a little bit, in a little bit more detail in the US. One would think that if the volumes are expected to rise, particularly as we go into the second half that maybe pricing would be healthier, but you said in your comments that you see lower inflationary pressure. So, does that mean flattish pricing, or is there maybe some sort of competitive dynamic that might mean even lower pricing? That's the first question.

And then the second, if you could talk a little bit more about the working capital changes, where might you reduce working capital in the second half? Is it more on the asset side, or the liability side or if you could add anything to that it would be helpful.

Okay, could -- Gilberto, could you help us with the first question on prices in the US, please?

Sure, Fernando. Good morning, everybody. Well, we have tried to implement price increases in every line of products since April this year. It failed. Then, July 1st we're still waiting and trying to see if the price increases are going to start in some of the places.

What I can tell you is pricing in our three lines of products have stabilized compared to what happened in the first quarter in which everybody was accumulating inventories because of the bad weather during the first two months. So, as I said, we have noticed that pricing has been stabilizing. In fact, our cement pricing has been growing for two consecutive months and I think it is important to notice that every time we announce price increases, also what we're trying to do is to stop potential downward spiral, which I think we have succeeded in.

We have another price increase for October 1st in cement, in ready-mix and in aggregates. It's early to say what's going to happen, but we believe that if the second half of this year is going to be considerably better than the second half of last year in terms of percentage growth, that might create an environment more suitable for price increases. I think the important issue is pricing is stable right now.

Thank you.

Yes, on your second question on working capital, we have improved during the first half of this year from 37 days to 32 days at the business unit level. A net of securitization programs were more or less flat or about 20 days and we do have a seasonal business and so every year, we tend to invest in working capital during the first and second quarter and we tend to recover a good portion of that during the second half of the year. A lot of it has to do with working capital management of inventories and accounts receivables. We have marginally improved also the terms from our suppliers on the consolidated whole.

Okay. So, the change in the second half is you would say seasonally normal, or is it more than just seasonality? In other words, you are also improving -- I guess you said --

We will have to further improve the investment in accounts receivables, for example, for the rest of the year. But to the large -- to a very large extent, it's seasonal. I would say most of it is seasonal.

Great, thank you.

And your next question comes from the webcast.

Yes. The question is from Robert Eason. Can you give us an indication of the regional variation in the US around the 8% cement volume growth reported in the second quarter, and similarly for pricing?

Would you please answer, Gilberto?

Yes.

Thank you.

Well, in -- most of our regions have experienced growth in cement consumption during the first six months. Obviously the first quarter, as I said, we experienced heavy rain during the first two months, so the second quarter experienced high growth compared to the first one and we're talking about more than 20% in places like California and Texas, low teens in Arizona and around 5% to 6% in the case of Florida, second quarter compared to first quarter.

When we talk about second quarter compared to the second quarter of last year, mainly the growth came in Texas, in Florida, while California was pretty much flat and we experienced a decrease in volume in Arizona. I'm talking about those four states because those four states account for around 70% of our sales. The Mid-Atlantic and the Southeast also experienced growth compared to last year and obviously compared to because of seasonality and weather compared to the first quarter. I don't know if that answers your question.

The second part of the question was about prices, right?

Yes. If you could give us some color on the regional variations on prices in the US.

Well, there is no -- not much difference among regions. Probably the region that has suffered the most in the case of cement, it's Arizona because of a supply and demand situation. And -- but the rest of the regions are pretty much at the same level in the case of cement.

In the case of ready-mix, the April increase that we announced for ready-mix was favorably received by -- in Arizona, but prices of ready-mix in Arizona are 8% higher in the second quarter compared to the second quarter of last year. The other regions are pretty much the same. And in the case of aggregates, prices are flat except for the case, again, in Arizona which we had an increase of 3% in the second quarter compared to that of last year.

Thank you, Gilberto.

And your next question comes from the line of Gonzalo Fernandez with Santander.

Hi. Good morning, everyone. I have two questions. Can you explain the reduction of debt? Does this includes $550 million reduction because of changes in exchange rates that you commented during the CEMEX Day, or this is just explained by the use of free cash flow and the purchase of perpetuals at a discount? And the second question is you reported an EBITDA margin in the US of minus 0.6% in the first half of the year. With this new guidance in volumes, which margins do you expect in the US for the full year? Thank you.

Let me take the first question on the debt. Gonzalo, I presume you are asking about total funded debt for purposes of the calculation for the leverage covenant under the Financing Agreement. And there, we include the perpetual securities. And so, of course what explains the total consolidated funded debt, it's in part the exchange of the perpetual securities, as well as the conversion effects as a result of the weaker euro. Those are the two primary explanations.

Can you quantify how much is for each?

I'm sorry?

Could you quantify how much is the effect of each one and on how much is from the exchange of perpetuals and how much because of exchange rates?

Yes. The perpetual exchange reduction was -- the effect was $437 million. The positive conversion effects were approximately $450 million during the quarter and so, those are the two most important.

Thank you, Rodrigo.

Of course, we also used cash balances at the end of the first quarter during the second quarter to reduce that and prepaid Certificados Bursatiles.

Okay, Gilberto, can you take the second question related to EBITDA margins for the full year?

Yes. Well, I think that we need to say that the margins in cement, in aggregates haven't suffered as much as those in ready-mix. I think our margin in cement and ready-mix -- in cement and aggregates continue to be very healthy and you could say they are around, in the case of cement, from mid-20s to high-20s, in the case of aggregates for the whole country and in the low-20s. And -- but we're suffering in ready-mix.

So, what we have been doing is to reduce the number of plants, to reduce the fleet in the case of ready-mix to those places in which with the pull through effect of cement and aggregates, we're making money. We're practically getting out of markets in which we're not making money, taking obviously care of our market share, which is very, very important to us.

So, really the margin in the United States is being hurt by the weight that our ready-mix business has, so as long as that business recovers, or as volume recovers in that part of our business, our margins are going to experience growth. The margin was negative for the first half of the year. We are operating pretty much at in this kind of environment at breakeven.

We think that for the second half, this is going to change with the volume increases and some of the price increases that we, small price increases that we have had. And probably cement and aggregates are going to grow by about 3 or 4 percentages points. We don't see ready-mix growing much, so our margins are going to remain probably in the 5%, 6%, 7% range for the whole Company, the US.

Perfect. Thank you very much. And just a very quick follow-on to Rodrigo, with euro strengthening in June, then should we see a reversal in this positive impact on debt, or did you lock in in that reduction in debt?

Yes. No, you would see a negative conversion effect during the month of July as a result of the euro strengthening. Nevertheless, you'd still see a positive effect for March to now. And it remains to be seen what the euro exchange rate is towards the end of the year, but of course we do have the operating cash flows in the euro and so, we have a natural hedge on our balance sheet and income statement.

Perfect. And thank you very much to both.

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

Yes, two questions from me as well, if I could. The first one, I wonder if you could talk about US volumes that trend in June specifically, and also what you can say about what's happened in July. I'm cognizant of the charts that you gave on the investor day, but they only went up to May, so some indication of what's happened subsequently, please.

And my second question is just on the European cement prices, which sequentially had fallen 4% Q2 versus Q1. It does seem to have been worsening there. Could you just explain maybe a bit more detail as to what had gone on there and what was behind it, please, and which countries were particularly to blame for that?

Okay. Gilberto, can you take the first one, please?

Sure. Well, volumes -- we're following very closely our daily average shipping rate. Up to June, the average shipping rate compared to June of last year is up 7%, when in April it was up by about 11% and in May was up by about 7% too. But that gives us an 8% growth compared to the second quarter of last year.

For July, the trend is heavily affected by the 4th of July weekend. The later, or the latter part of July we have experienced growth compared to last year. For the first part of July, we were below last year because of the 4th of July weekend and some weather, especially in the eastern part of the country. Access in Georgia, Alabama and Florida have been affected by weather during the second quarter.

But those are more or less the numbers in terms of average shipping rate by day, so also the number of days compared to last year. I mean, if -- last year, we had 20 days and this year we have 18 days and that will affect the monthly volume. So, that's what we're looking at daily average shipping rate.

Okay, and just to clarify whilst you're on, the forecast for the year now for the US is plus 5%, or is it plus 3% to 4%? I thought within the presentation, the number 5% was given and then maybe a number of 3% to 4% was mentioned. Could you just give us what the -- what now your expectation for US volumes is in 2010 please?

We think that the volume growth for the US is going to be 5%.

Okay, thank you.

Sure.

Mike, as regarding your second question, I think it was more detail on the decline of 4% in cement prices in Europe, the main -- the country, as you said, the countries to be blamed, half of the decline comes from Spain. That's -- we have admitted that before. Prices are eroding or they were eroding in Spain, so half of the drop is because of Spain. And then, the second country that it does affect decline of prices in Europe is Germany with a sequential drop of 2% compared to first quarter. And then, there are several others but these two countries, but again, mainly Spain are the ones affecting prices in Europe.

And your next question will come from the webcast.

Yes. The question is from Nidas Oblang from Credit Suisse. What future plans does CEMEX have for expansion, specifically in organic in coming six to 12 months? Already given an extremely high exposure to emerging markets, especially EBITDA, does CEMEX plan to increase it or maintain the emerging markets to develop geography mix?

Well, I think it's too soon to, if I might take the question, to talk about expansion plans and projects. Really, the -- as we have been mentioned -- as we have been mentioning, our priority now is to continue paying back debt. Now, of course there are always small investments that could be considered expansion in organic terms, but as you have seen our investments in CapEx are quite low, so the investments we can do that can qualify as expansion are really replenishing aggregates reserves and some small investments here and there. But really, we don't have a material, organic expansion program.

We, as we have already commented, or we have commented before, we are in the process of being part of a fund in which we will be investing $100 million. And the idea is to participate in that fund, Blue Rock, as a strategic investor. Through that fund, we might be doing some expansion investment in the near future. If -- I think we mentioned it during the CEMEX Day, our interest in Peru the same way we commented our interest in India and in some other markets. And I'm referring basically to even though it's the three sectors, but it's mainly in cement.

And your next question comes from the line of Dan McGoey with Citigroup. Please proceed.

Good morning, gentlemen. Just can we go back to a question on the costs in the US and the margins, if you can talk a little bit more about how much of the weakness in the US margin is from the price, the weaker pricing and how much from the additional, I think Rodrigo, you said in transportation costs principally? And then also, just looking at the price and having to shut down certain facilities, it is -- are the prices, particularly on the cement and ready-mix side, cost including freight meaning that there's some of that transportation effect also contributing to the weak pricing?

Gilberto, can you take that one, please?

Sure. Well, first I will -- I would disagree that even though obviously we're looking for better prices, I would disagree that pricing is weak. I mean, we haven't been able to improve pricing, but given the downturn and given the fall in demand for our products, I think prices have been fairly stable and the industry has been very rational. I don't think transportation cost is affecting pricing because we're going exactly to the same markets we were going to in the past. It's just it's sometimes we're going from other sources.

We have shut down capacity that was more expensive, and when we do that we obviously take care of -- I mean make sure that the savings derived from shutting down those facilities are higher than the additional transportation costs we're going to incur in. So, just to give you an example, our unit costs of production in cement have gone down more than $4.00 per ton compared to last year, while unit freight has gone up less than $2.00 compared to last year. So margins, just from those two concepts have improved.

One follow-up, if I may, on the US. On the volume side, the move back to positive growth was stronger in cement than aggregates. Is that more to do to the year-on-year comps, or are you seeing more of a recovery on the residential side in your markets than the non-residential and streets and highway side?

No, I think that what's sustaining demand in the United States right now, it's public spending. We obviously had a spike on our markets which tend to be much more dynamic in residential because of the tax credits. Obviously, we're expecting a pullback in residential because of the expiration of the tax credit. And also, it has to do with our geographic portfolio. We're very big in Florida, so what happens in Florida affects our results in a greater way.

I don't know if that answers your question.

Sure, thank you.

Okay.

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

Hi, good morning. Just a quick question for Rodrigo on the covenant test for yearend. I know obviously you've made very clearly the statement that you're going to be focusing on doing everything possible to comply with that by yearend and that you're confident that you will. But as Fernando said, visibility is low and one question to that is if you were to end the year above that limit, have you disclosed what the penalties are for CEMEX, either as far as immediate charges or ramp up in interest expense, anything of that nature?

Well, of course you would have to sit down with the banks to discuss that. We do expect to have a certain margin for compliance towards the end of the year, but of course we're not comfortable with that margin for compliance. When we negotiated with the bank the Financing Agreement, we agreed with the bank a 20% margin for compliance.

And of course, with the new estimate for EBITDA for the full year, versus what we expected for EBITDA for this year a year ago, a significant portion of that margin, that 20% margin for compliance has diminished. And so, we will look to implement deleveraging initiatives, as we did during the first half of the year during the second half of the year so that we can again increase that margin for compliance to a more comfortable level. And we will do our best to remain in compliance for the life of the financial agreement.

Great, thank you.

And your next question comes from the webcast.

Yes. The question is from Garik Shmois. In the US, your new guidance implies approximately 10% volume growth for the second half of the year in cement, even more in aggregates and ready-mix with decided weaker trends in June from what you saw in April and May. What are your assumptions regarding acceleration in volume growth in the second half of the year vis-a-vis the recent trends?

Gilberto, I think this question is for you.

Well, basically what we think is going to happen is that most of the demand is going to come from the public sector, which in our case, in our markets is going to represent around 68% to 70% of our volumes this year. What happened during the first half of the year with -- specifically with public spending is that we noticed that public spending didn't grow in the first quarter of the year compared to that of 2009.

Some of it was related to weather we think, but a part of it was related also to cannibalization of funds that states would have spent otherwise, with or without the ARRA program. So, what we concluded is that the ARRA fund has cannibalized approximate, I mean not approximate, about 100% of works that would have been done by the states anyway. That trend has been coming down drastically and through -- right now, the last figure we have is of cannibalization is at around 25%.

And we are continuing seeing increases in public spending in the places in which we participate. So, most of the growth will come from the public sector, and also, I mean we're believing that the macroeconomic conditions in the United States are going to improve, that employment generation is going to be much more strong during the second half, giving way to a slight increase in the residential sector as well.

We're still expecting growth in housing starts compared to last year. We're expecting around 650,000 housing starts, which is the current consensus, and we think that is an achievable level despite the fact that we had a big pull down after the expiration of the tax credit.

Thank you, Gilberto.

Sure.

And your next question comes from the line of Yassine Touahri with Exane BNP Paribas. Please proceed.

Yes. I have three questions. My first question would be on the US. Could you give us another magnitude of the breakdown between fixed costs and variable costs, so just to understand the operating range there? Then, I would have a second question on your covenant. I understand that your covenant is becoming significantly tighter in 2011 and I would like to know if you have already in mind of the debt reduction strategy to be in compliance with your covenants in 2011 if economic recovery is a bit slower than expected. For example, as you already explored the possibility of selling some stakes that you have in Cementos Chihuahua or other assets.

And my third question would be on European pricing. You commented on cement pricing, but we also see that aggregates prices have deteriorated by 6% sequentially. Could you give us a bit more color on the aggregates pricing in Europe?

Gilberto, can you take the first one, please?

If I heard correctly, the first one was about giving you a breakdown between viable costs and fixed costs?

In the US, yes.

In the US? Well, I don't know how good a breakdown I can give you without giving too much information for other audiences. I could tell you that variable costs are right now with the level of pricing that we have, around 30% of our total costs in cement. The rest I think it will be easier for you with this information to --

And then, I guess it would be lower in aggregates and ready-mix concrete?

Well --

No, higher, ready-mix would be higher, yes.

Ready-mix, most of the cost is variable, fixed component is very small because it's just -- most of it's -- most of the fixed cost in ready-mix is really the driver is cost and the electricity cost component is just plant personnel, so it's not much compared to variable. In the case of aggregates, variable costs, I can tell you they represent less than 20% of the cost component.

Okay, that's very helpful.

Okay.

And your next question will come from the webcast.

Sorry. We still have two questions --

Two questions or something.

-- that we haven't answered, so we'll take those two first and then, we'll go to the webcast. But your second question had to do with the covenant compliance for this year and next. We believe that after more than three years of seeing drops in our trailing 12-month operating cash flow, our operating EBITDA as a result of the sharp contractions in some of major markets, we believe that we're seeing an inflection point this year and we expect significant growth in EBITDA for the second half of the year.

When we negotiated the covenant package with our banks, the assumption was that we would have a recovery in our volumes. That of course contributes significant operating leverage that allows our trailing 12-month EBITDA to recover. And a big portion of the deleveraging that will take place during the next several years is as a result of that operating leverage and that recovery in operating EBITDA. We don't have yet guidance for 2011, but an important component of the reduction in leverage from 2010 to '11 will come from that operating leverage. Of course, we are not complacent and we will continue to do things do delever as quickly as we can. We have certainly been proactive in implementing as many of the deleveraging initiatives that we could. We have, in fact, of the $15 billion of debt refinanced last year, we have now prepaid $5 billion -- more than $5 billion of that, and we will continue proactively looking for opportunities to prepay and reduce our debt and thus delever at the fastest rate possible so that we remain in compliance.

The third question I believe was related to euro pricing and aggregates I believe?

Yes. It was -- I think the question was giving some color on the decline of aggregates pricing in Europe. And again, it's Spain, the country that is affecting with a drop of 8% quarter-to-quarter, and also France and Germany for about the same variation. The UK, in which we had a high single-digit negative, high single-digit decline in the first quarter in 2010, compared to fourth quarter 2009, seems to be stabilizing. So this quarter the decline is almost flat, it's minus 1%, minus 2% drop compared with the first quarter, so those are the countries explaining the drop in prices in aggregates in Europe.

The question from the web is from Eric Ollom from Jefferies and his question is how much of the $400 million of debt reduction from free cash flow has already happened during the first half of 2010? Well, in fact, none of it. As you know, we generated negative free cash flow due to the seasonality of our business during the first quarter, and although we've started to generate free cash flow during the second quarter, we expect the contribution to debt reduction from free cash flow for 2010 to happen during the second half of the year.

And your next question comes from the line of Tim Cahill with Davy. Please proceed.

Hello and my first question is in relation to US pricing, if that's possible. Could you just state a little bit your rationale? As I understand, there's utilization rate in the US depending on region of something like 60%, 65%. I suppose I'm wondering what sort of pushback you're getting from your customers. And why you think that the next price increases should be successful, even though obviously it's been quite a tough pricing environment over the last few months. And if you were to see some sort of a stabilization in volumes in the second half of the year, as opposed to decent growth, would that make you a little bit more cautious about being successful with your next attempt at price increase?

And then secondly, my next question was just in relation to your balance sheet, again. If we do see that kind of slightly more stable or tougher environment than you're forecasting, I suppose what is the next plan of action in relation to reducing to debt? Would it be to sell more assets, or would it be more likely go down the equity route in terms of raising fresh equity? What would be kind of a plan B for reducing debt? Thank you.

Gilberto, can you take the first part, the first question, please?

Sure. Well, we are being very cautious about the pricing environment in the US, but the nature of competition here is very regional and we believe that there are regions in which the possibility of price increases obviously are higher than others. Right now, we have a price increase announcement for all of our products for October 1st in what we call the West, which is pretty much west of -- what we have west of the Mississippi; for October 1st of $11 in the case of cement, about $13 in the case of ready-mix and $1.00 in the case of aggregates.

In cement, we have had support from almost all of our competitors in places which are volume, are big volume for us like California, for instance, Nevada. And we have also announced cement price increases and ready-mix, I mean all products price increases in the East, which is again east of the Mississippi, Florida, Georgia, Alabama, Kentucky and up for September.

We haven't had the support we have had in the West and there are very specific reasons for it. I mean, we had an expansion in the Mississippi River system of one of our European competitors that brought 4 million tons into the equation, and they're trying to sell that plant out and that's putting a lot of pressure in the market. So, the possibilities in the East are not very good due to this, specifically due to this reason, plus we're a little bit more optimistic about it.

We think that the places in which we participate are pretty much going with what we have forecasted in terms of housing, which is going to -- which I really believe that housing is what's going to bring the demand up in the long-term. Except for Florida, in which we saw the pullback after the tax credit expiration was higher than that of other states in which we participate. So, going forward we think that with job creation, the residential sector is going to start to recuperate and things are going to stabilize further in terms of demand and obviously affecting pricing, the pricing environment.

Could I just ask just one more question to confirm there? Given that you're now talking about the October and September price increases, is it fair to say that the July price increases have succeeded in stopping prices falling, but you no longer are optimistic of actually increasing prices in July? Is that fair or is that wrong?

It depends, it depends. If we talk about Florida, we still have some hope that the price increase will stick in cement.

Yes.

In the case of aggregates, Florida, we have a competitor from -- a US competitor that is pretty much dumping rock in Florida, so that's making the pricing environment in aggregates a little bit difficult. So, we still have some hope in some individual regions. It's not widespread for the whole country, but I think it has helped stabilizing the prices as you well described it.

Thank you very much, and just the final question on the debt reduction?

Yes. And your question on the balance sheet, clearly our leverage today is very high because our trailing 12-month EBITDA is less than $2.5 billion. As we recently indicated in the CEMEX Day last month, we estimate our middle of the cycle operating EBITDA to be in the range of $5 billion.

So clearly, the biggest contributor to deleveraging, going forward, will be the recovery in our EBITDA as the operating leverage begins to have its effect once volumes begin to recover in some of the markets that have suffered the greatest drops. In the meantime, we will continue aggressively and proactively looking for ways to delever, reduce our debt, sell assets that are nonproductive and are not contributing to our consolidated EBITDA. We have done some of that during the second quarter of this year and we will continue to search for those opportunities. But I would say that the biggest contributor to deleveraging in the medium-term will be the recovery in our operating EBITDA.

And just to clarify -- sorry, just to clarify that because I mean I think one thing we've all learned from this cycle is that visibility is obviously quite low and there's very few uncertainties out there, so if we were to see kind of a more benign environment, I just wanted to know is it more dispose a little more on the equity side that would -- what you would then turn to?

Well, clearly, we need to adapt. I think if anything, we have demonstrated during the last year, year and a half that we have been very aggressive at adapting both at the operating level as well as the financial, at the financial level. And we have right sized the business and reduced costs and expenses and if we have to do some more of that, of course we will and we have done that this year and we will continue to look for ways on the financial side to complement our efforts on the operating side. I don't know, Fernando, if you would like to --?

I think you mentioned before that even though we have a margin, it's not large enough to make us feel comfortable, so we will continue exceeding the financial markets and doing whatever is needed to have a larger margin on compliance with our leverage ratio for December. This is -- right now, we cannot say specifically what it is that we will be doing. It will depend, but as you have seen in the last previous months we have done some, and again, we will be proactively doing whatever is needed in the financial markets to ensure we have the margins to comply with our covenant.

Thank you very much.

Thanks.

And your next question comes from the line of Tobias Woerner with MF Global. Please proceed.

Yes, good afternoon, Tobias Woerner from MF Global. Two questions, if I may, firstly with regard to the highway bill. I don't know whether you've discussed this on the call already, but it seems to me that any passing of the highway bill is highly optimistic. I wonder what your views on that is, whether we're just going to get an extension and what the implications will mean for you.

Secondly, with regard to prices, official statistics points to about a 0.5% increase in June over May. You mentioned July earlier a little bit, but maybe you can add a little bit more color in the US and maybe on a more general basis, where there are trend changes in terms of pricing around the world.

Okay. Gilberto, can you take the --

The first part of the first?

Yes.

Well, highway bill, we're not considering a highway bill reauthorization this year. We think that the political environment is such that nothing is going to happen until after the November elections, after everybody knows if the Republicans are going to recuperate the House or the Senate, or both or what. We're not giving a lot of hope to a reauthorization of the highway bill for this year.

Nevertheless, we have had -- we just -- it's not the best news, but it's good news. We had an extension with, I think the figure is $41 billion. And we just had -- the House Appropriations Committee has approved an additional $4 billion, which is a 10% increase funding for fiscal year 2011. This has to still pass both the House and the Senate, but what we think is that due to the political environment what they're doing is just an increasing of 10% for 2011, obviously because the spending in that -- in transportation is needed and everybody is putting pressure on it.

So, depending on what happens at the end of the -- at the November elections, we're going to have a little bit more color on what's going to happen with the highway bill. Right now, what we're considering for the long-term is that the highway bill doesn't increase in real terms from the current one, so whatever increase we experience in the highway bill will be a plus in our long-term projections.

Now in prices, I think that consecutive price increase announcements that we have made and we have tried to lead, as I said, have stopped further deterioration in the pricing levels in the United States. And all products have shown a stabilization during the last three four months. We think that that trend is going to continue. We don't see the pressures we saw in the first quarter of this year and that cost deterioration in price compared to last year. And hopefully, we're going to succeed in October, September/October with further price increases.

Can I just interrupt you here quickly before you move on to the changes in trend in the world? It seems to me that Holcim is one of the main drivers of more volume being put into the market and putting pressure on prices. Has that effectively stopped?

Well, no, no, I don't think so. I think that probably Holcim has stopped, but what Holcim -- I mean the dynamics of the market now is that people losing market share to Holcim are trying to fight back for market share, so that's the dynamic in the East right now. We haven't suffered in market share, but there are other competitors that I know have, so that's the dynamic right now. And I mean it's a lot of volume, 4 million tons when the market is going down, so obviously it has an effect on the competitive environment.

Thank you. With regard to trends?

Prices in other parts of the world, I think we have commented it seems in let's say on a country or region basis that there has been erosion basically or mainly in those countries in which volumes have suffered the most, but as you remember we were commenting, for instance, the case of Spain for both cement and aggregates. But in other geographies, price evolution is positive. Mexico is neutral to positive, South America is positive, 4% higher than last year. Asia and Middle East is also positive. It's in the range of 5% to 10% than last year and Asia also is positive in about 5%, so I think that in general terms, unless a business or a country has been materially affected in volumes, prices are holding and even increasing.

Thank you.

Thanks.

We have time for one more question and this question comes from the line of Alejandro Luciano with Credit Suisse. Please proceed.

Hi, good morning. Thanks for taking my question. I just have a quick clarification on your calculation for the total debt to EBITDA covenant. So, you have consolidated funded debt to EBITDA being 7.19 and your trailing EBITDA is about $2.4 billion, which gives me a total debt number of around $17.3 billion. However, your total debt plus the perpetuals is about $17.9 billion, and I was wondering, basically two questions.

What is the difference? I know that you have a cash reserve account in your balance sheet, so I wanted to know what was that amount. And secondly, are you excluding now the optional convertible subordinated notes out of your total debt figure presented in your press release? Thanks.

Yes, that is exactly right, Alejandro. The covenant calculations under the Financing Agreement excludes the convertible as we amended that Financing Agreement in order to receive credit from the bank because that convertible is subordinated and matures after the bank debt. And for that reason, it is not included in the total funded debt calculation under the Financing Agreement. That is the biggest explanation, to reconcile the two numbers that you have.

Thanks, but even if I take out the optional convertible, I mean that's $715 million and your -- the difference between your total debt and your total funded debt is about only $500 million. So, I was wondering, does that mean that your total funded debt actually increased?

Well, for purposes of the calculation, you also need to add other things such as for example, guarantees if you are providing any and you have to go into the Financing Agreement to get a detailed in which to calculate that total funded consolidated debt for purposes of that covenant. We can help you review that if you'd like.

All right, but overall then the consolidated debt of CEMEX is then more around I guess $18.5 billion then?

Well, I mean it's everything that is in the Financing Agreement plus everything that is disclosed, such as the convertible securities and other transactions that are on the balance sheet as well.

All right, thank you very much.

Thank you.

Our question-and-answer session has now ended. I would now like to turn the call over to Mr. Fernando Gonzalez for closing remarks.

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 have a good day.

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