Cemex SAB de CV (CX) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX fourth-quarter 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)

I would now like to turn the conference over to your host for today, Mr. Fernando Gonzalez, Executive Vice President of Planning and Finance. Please proceed, sir.

Good day to everyone. Thank you for joining us for our fourth-quarter conference call and video webcast. I have been asked to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control.

Let me start by saying that our sales during the fourth quarter increased by 2% on a like-for-like basis versus the same quarter in 2009. This is the sixth consecutive quarter of consistent recovery in our performance culminating in the first quarterly year-over-year growth in our operating EBITDA generation since the first quarter of 2007, signaling an important inflection point in our trailing 12-month operating EBITDA.

On a consolidated basis our fourth-quarter results came in below our expectations despite the on-target performance in October and November along with better-than-expected volumes in our US business. But weather conditions during December in Europe and Colombia more than offset this performance. We are pleased to see that volumes in Mexico for 2010 were in line with our forecast provided at the beginning of the year.

During the quarter we also saw a stable sequential pricing environment for cement on a consolidated basis. We continue to right-size our business as necessary and achieved $150 million in savings for 2010. These efforts will be further augmented this year.

In order to dampen energy cost volatility, we increased the use of alternative fuels from 16% in 2009 to 20% in 2010 with substitution reaching 21% in the fourth quarter. We will continue working to further increase alternative fuels utilization. We are also on track to achieve a 25% reduction in specific CO2 emissions by 2015 from 1990 levels.

In regard to our financial plan, we continue to strengthen our balance sheet and our liquidity position. We have reduced our total senior debt, including our perpetual securities by more than $1.4 billion during the year through different initiatives which Rodrigo will discuss later in this call. As a result, we have substantially addressed our maturities until September 2012.

Now I would like to discuss our fourth-quarter results. Infrastructure and housing continue to be 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.

Our consolidated ready-mix volumes showed growth for the first time since the first quarter of 2007, while the rate of decline in aggregates volumes on a like-to-like basis moderated for the sixth consecutive quarter. Consolidated cement volumes declined by 2% on a year-over-year basis compared with a drop of 1% in the previous quarter affected by weather conditions in December.

Adjusting for foreign exchange fluctuations, consolidated gray cement prices declined by 1% during the fourth quarter compared with the fourth quarter of 2009. During the same period ready-mix prices decreased by 2% while aggregates prices declined by 3%.

In Mexico, cement volumes for the full year 2010 ended in line with our expectations with an erosion of 4%. Infrastructure spending was high in 2009, especially in the first half of the year, due to expenditures on special government programs to promote growth and employment which total about MXN46 billion affecting 2010 year-over-year comparisons.

The formal residential sector declined by about 1.5% in 2010 reflecting the working capital financing constraints faced by homebuilders, especially at the beginning of the year. Despite this, INFONAVIT reached its 2010 target of 475,000 mortgages. For this year we anticipate investment in the formal residential sector to grow by about 2% in real terms, driven mainly by credit recovering commercial banks.

Investment in the self-construction sector also declined by about 1.5% in 2010 reflecting the absence of the extraordinary social programs that were available for the prior year. Investment in this sector is expected to increase by about 1% for this year resulting from an increase in informal employment and remittances.

Total investment in infrastructure in 2010, including non-cement-intensive projects such as energy and electricity, is expected to increase 6% in real terms from the previous year. Investment in cement-intensive projects, however, is anticipated to end 5% lower in the same period. For 2011 we believe total investment in infrastructure and investment in cement-intensive projects will increase by about 4% in real terms.

The industrial-and-commercial sector is expected to end 2010 with a decline of 4%. While this sector enjoyed a rebound in the first quarter of 2010, growth diminished through the rest of the year. We expect this drop to reverse in 2011 as this sector continues to respond to an expanding economy.

In Mexico, as part of our initiatives for this year, we will focus on differentiated products and services to our customers in the country, and we will continue with our initiatives to control costs and expenses and to optimize working capital.

In the United States, volume growth on a year-over-year basis outpaced our most recent forecast for the fourth quarter. This outperformance is due to increased infrastructure spending and renewed optimism in the pace of economic recovery in the country. For this year, the principal drivers for growth are expected to be infrastructure spending as well as a pickup in residential housing construction.

Pricing showed signs of stabilization in our three core businesses and for the second consecutive quarter some upward movement in ready-mix prices in some of our markets. However, due to a backlog of work booked at lower prices, it will take time for this change to translate into higher average pricing on a year-over-year basis. Additionally, as we look forward we are encouraged by our supply-and-demand dynamics as more industry players have publicly announced pricing increases for 2011 than has been the case in the past few years.

While public construction spending through November was down 6% on a year-over-year basis, the pace of public construction spending has accelerated in recent months. Streets-and-highway spending was up 1% year to date as of November and has shown significant strength since August propelled by both ARRA and non-ARRA spending as well as stabilization in local and state highway spending.

ARRA-related highway spending accelerated to $1.3 billion per month in the July/November period versus an average of about $700 million in the first half of the year. As of November, only 44% of the ARRA-related infrastructure funds has been spent with two of our key states, Florida and California, significantly lagging the national average.

Contract awards for streets-and-highways in our four key states were up 10% year-over-year on a rolling six-month basis as of December, while national contract awards were down 6% in the same period. With some turnaround in state tax revenue generation coupled with delayed expenditures of ARRA and last year's regular federal highway obligations, we expect public cement consumption to grow in the low to mid-single digits during 2011.

We are cautiously optimistic regarding the prospects of passage of a new six-year federal highway bill in 2011. With President Obama and key members of Congress prioritizing this legislation we believe a window for passage exists prior to September. Increased spending under the bill must weigh the strong political sentiment regarding the importance of infrastructure investments and job creation against the tide of fiscal austerity in Congress.

For 2011 we forecast double-digit growth in volumes for residential construction. This growth is premised on an estimated 2011 housing start level of about 675,000, continued decline in foreclosure inventory, and rising consumer spending.

Job creation and confidence will remain the critical drivers for this demand segment. We anticipate that the level of decline in cement consumption from the industrial-and-commercial sector would taper off to a low single-digit percentage decline from a drop of 22% in 2010.

Contract awards for the industrial-and-commercial sector in real terms were down 19% year to date as of November. Notably we have seen positive growth in contract awards for manufacturing as well as marked upturn in the Architectural Billings index over the last few months.

While volumes year-over-year did outperform our estimates for the fourth quarter, we have continued to take further actions to streamline our operations and improve productivity, including our reduction in headcount, shutdowns of ready-mix plants and aggregate quarries, as well as a reduction in our ready-mix fleet.

In Europe fourth-quarter and full-year volumes were affected by adverse weather conditions during the month of December. Most countries in the region reported a decline in year-over-year cement volumes in the quarter with the exception of Poland, Latvia, and Norway. In some countries in the region, like Germany, France, and the UK, the residential sector was the main driver for volumes in 2010 coming from very low levels in the previous year.

In Germany, for instance, housing permits during 2010 were driven by historically low mortgage interest rates, relatively stable prices for construction work, shrinking unemployment, and the expectation of higher wages and salaries this year. In Poland, on the other hand, infrastructure was the main driver of demand for our products fueled by the building of streets-and-highways. Increased activity from these sectors during October and November more than compensated for the lost volumes caused by December's adverse weather conditions.

During the second half of 2010 we started seeing the first signs of fiscal tightening in some countries in the region. We believe these measures will become more evident this year. Despite this, we anticipate our volumes in that region to show growth during 2011, with the exception of Spain where activity across the different sectors will remain subdued.

Growth in the region will be driven by ongoing projects in Western Europe and the increase in permits from the residential and industrial-and-commercial sectors. In Spain, mitigating domestic cement volumes decline we have increased our exports to other countries especially in the Mediterranean. 2010 exports from the country rose by about 80% versus the previous year.

For the full year 2010 we achieved record alternative fuel substitution in several of our markets in Europe. Our alternative fuel utilization rate in the region increased to 35% in 2010 from 17% in the previous year.

In the South/Central American and Caribbean region we saw a decline in all our major markets with the exception of Colombia, where our volumes were flat during the fourth quarter on a year-over-year basis, reflecting adverse weather conditions as well as delay in infrastructure projects.

Volumes in Colombia during the quarter were lower than projected due to the rain and floods that affected road infrastructure and distribution capacity. Major reconstruction efforts will be required to repair the damages caused by these adverse weather conditions. The initial estimate of the investment required to attend the needs of the 2 million people that were affected by the flood is US$5.3 billion. The expectations for Colombian cement consumption going forward continued to be positive.

High confidence levels, low interest rates, and inflation will continue to drive the residential sector, especially low-income housing. Housing permits, a leading indicator for construction, were up 28% from January to October 2010 versus the same period in the previous year. In addition, high infrastructure spending is anticipated this year reflecting countercyclical public measures and the reconstruction of areas affected by the flood.

In Panama, some projects like the Panama City Airport and Baitun hydroelectric plant are expected to regain momentum after the rainy season. In addition, the Panama Canal expansion project will start during the first quarter and other projects will start later in the year.

In the Africa and Middle East region, growth in cement volumes in Egypt was upset by a continued volume decline in the United Arab Emirates. The informal residential sector was the main driver of cement demand in Egypt during 2010. Going forward we are expecting infrastructure to be an important driver of cement consumption in anticipation of the presidential elections taking place in November this year. In light of the recent events we are watching the situation very closely.

Our plant in Assiut, which is located about 350 km south of Cairo, remains on under normal production schedule. It is still too soon to have a clear assessment on impact but we will keep you informed of new developments.

In Asia, the decline in cement volumes during the quarter was driven mainly by our Philippines operations. Infrastructure spending in the country moderated after midyear elections with projects in this sector expected to resume this year. Last year the main driver of cement consumption in the country was the residential sector driven by strong remittances from workers overseas. Year-to-date remittances, as of October 2010, increased by 8% in dollar terms versus the same period in the previous year.

Given the continued amount of uncertainties around the US market, the more recent developments in Egypt, as well as higher volatility in foreign exchange markets, we will not be providing specific EBITDA and free cash flow guidance. However, and more in line with common practice in our sector, we will be providing guidance on drivers of our business in our principal markets as well as in free cash flow.

80% of our operating EBITDA generation during 2011 is anticipated to come from high-growth emerging markets. The United States is expected to be in recovery mode with higher volumes and prices as well as return to profitability this year. We believe most markets in our portfolio will show volume growth and increased profitability in 2011.

For the full year we expect consolidated volumes for our three core products to show a low to mid-single digit percentage growth. In Mexico, we anticipate volumes for our three core products to increase by about 3% this year. In the United States, we expect cement volume to increase by about 5%, ready-mix volume to grow by about 6%, and on a like-to-like basis aggregates volumes to grow by about 2%.

In these two key markets we believe that we will be able to adjust prices to recover input cost inflation for our sector. We forecast our cost of energy on a per-ton of cement produced basis to increase by about 8% during the year.

We will keep capital expenditures and other investments at a minimum to maximize debt reduction. We expect total CapEx to reach about $475 million, including $350 million in maintenance CapEx and $125 million in strategic CapEx which includes project aimed at increasing the Company's profitability either by increasing capacity or by reducing costs.

We anticipate no major change in cash taxes or investment in working capital from 2010 levels. Similarly, we do not expect significant change this year in the cost of debt including our perpetual and convertible instruments.

In addition to the above, and as I mentioned earlier, we are rolling out an EBITDA-enhancing program that we expect will translate into about $250 million of cost savings this year.

Some of the initiatives under this program include, first, efforts to reduce our variable costs through more efficient fuel utilization and increased alternative fuels as well as enhanced clinker factors in our cement operations. Second, improvements in fixed costs by further rationalizing our ready-mix business and optimizing maintenance of our cement plants.

And, third, reducing our SG&A expenses at the country and corporate levels through the adoption of new best practices. With these efforts we will continue to focus on building a leaner, more efficient organization.

Thank you. Now I will turn the call over to Rodrigo.

Thank you, Fernando. Operating EBITDA generation during the quarter was affected by lower volumes in some of our markets reflecting adverse weather conditions as well as 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 up 1% during the quarter. Operating EBITDA margin remained flat during the fourth quarter on a year-over-year basis at 13.8%.

The margin in the quarter was affected by lesser economies of scale resulting from lower volumes, software prices, and higher transportation costs which were offset by our cost reduction initiatives. During the quarter our free cash flow after maintenance capital expenditures was $248 million versus $401 million in the previous year.

More than half of our maintenance capital expenditures in 2010 was done during the fourth quarter. Total CapEx for the full year ended well below the limitation we have under our Financing Agreement. As Fernando mentioned, for 2011 our CapEx will reach about $475 million.

During the fourth quarter we recovered most of the year-to-date investments in working capital we had as of September. The number of working capital days for our consolidated operations, excluding the effect of our securitization programs, declined to 31 days during the full year from 36 days in 2009.

As we have mentioned in previous quarters, 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. With this exchange, however, coupon payments on our perpetual instruments are reduced by close to $70 million, but, more importantly, our net debt including perpetual debentures was reduced by $437 million.

Our kiln fuel and electricity costs on a per-ton of cement produced basis increased by 4% for the full year 2010 and by 10% for the fourth quarter on a year-over-year basis. For this year we expect the cost to increase by approximately 8%.

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. During the fourth quarter we achieved an alternative fuel utilization rate of close to 21%, up from 19% a year ago.

We also continued pursuing clean development mechanism projects. During the quarter a new CDM project related to the use of alternative fuels in our Zapotiltic plant in Mexico was approved by the United Nations. This is the fourth CDM project that has passed the challenging process of validation and registration and it's expected to be implemented by the end of this year.

Our first three CDM projects have already begun to generate carbon reduction -- carbon emission reductions.

Regarding our fourth-quarter income statement, we had other expenses of $220 million which included an impairment on fixed assets and goodwill, a loss on sale of assets, and severance payments. We also recognized a gain on financial instruments of $44 million related mainly to CEMEX shares. During the fourth quarter we had a net loss from continuing operations of $581 million versus a gain of $265 million for the same period last year.

The main difference in the year-over-year net income is the income tax expense of $231 million this fourth quarter versus a positive contribution in the income tax line of $613 million in the fourth quarter of 2009, which reflected the effect of tax losses in many of our operating jurisdictions due to reduced operating volumes combined with local currency exchange losses.

During 2010 we continued to make progress in our plan for improving our financial flexibility. We reopened our 9.5% notes in January and issued an additional $500 million. In March, we closed $715 million in convertible subordinated notes. In connection with this offering we entered into a capped call transaction which is expected to reduce the dilution effect upon conversion of these securities into ADSs.

In May, we exchanged a portion of our perpetual debentures for new senior secured notes resulting in a net debt reduction of $437 million. We also amended some of the covenants under our Financing Agreement last October to reflect the delay in the recovery in our US operations, which is now believed will be more gradual. This covenant reset has allowed us to remain in compliance with our financial covenants.

Also, during the fourth quarter we issued various short-term notes under our short-term Certificados Bursatiles program with an outstanding amount of MXN276 million pesos at the end of the year. Notes were issued during the quarter at Mexican peso rates of about 5%. Our financing activities during 2010 resulted in a reduction of our total senior debt, less perpetual securities, of more than $1.4 billion.

Last month we issued an additional $1 billion in senior secured notes. This transaction was close to six times oversubscribed with an order book including more than 380 accounts. This demonstrates CEMEX's continued access to the capital markets and is further evidence of the market's support for our financial strategy.

The proceeds of this issuance were used to prepay or create a reserve to pay Certificados Bursatiles maturing in the next 12 months. It was also used to prepay debt under the Financing Agreement, pay other debt, and replenish our cash reserves during the seasonal period in which our business requires investment in working capital. With the issuance of the notes last month, we have substantially addressed our maturities until September 2012.

During the fourth quarter we used our free cash flow mainly for debt reduction. Total debt plus perpetual securities, was reduced by $374 million during the quarter. This reduction includes a favorable conversion effect of $34 million.

As you are aware, we have agreed with our financial institutions to additional compensation that is contingent upon certain events not happening. First, under the original Financing Agreement we have a second repayment milestone under which we do not pay at least 51% of the September 2009 exposure under the Financing Agreement by December 2011 we will incur a margin increase of either 50 or 100 basis points. The increased costs will depend on how far we are from this milestone.

Second, as we agreed in the covenant reset to the Financing Agreement last October, if additional prepayments between October 1, 2010, and December 31, 2011, under the Financing Agreement are less than approximately $1.5 billion we will incur an additional one-time fee which can be either 12.5 or 25 basis points.

And third, we have -- if we have not raised at least $1 billion from equity or equity-linked subordinated securities by September 30, 2011, the prevailing margin will increase by 100 basis points beginning on October 1, 2011, and remain in place until the $1 billion of equity or equity-linked subordinated securities has been raised.

With these contingent fees and margin increases in mind, during 2011 we will continue to focus on strengthening the balance sheet and eliminating refinancing risk for the longest period possible. It also means that we have a strong economic incentive to continue to pay down and refinance our senior debt and to reduce exposure under the Financing Agreement.

Of course, an equity-linked subordinated security including convertibles have a lower dilution effect than straight equity and could complement -- and we could complement these type of transactions with a capped call, as we did last year to reduce dilution even further. We will continue to monitor market conditions to properly assess all of the alternatives that are available to us.

You can be certain that when we make a decision under our financing strategy we will consider all the costs and benefits of the transaction, as well as the implication for all of our stakeholders so as to maximize shareholder value and mitigate future dilution.

In connection with this, and as you are aware, we are holding our annual shareholders meeting on February 24. One of the proposed items up for a voting at the meeting relates to the issuance of up to 200 million ADSs or about 20% of our current outstanding shares. If approved, it will give us the flexibility to access the capital markets by issuing equity and/or subordinated convertible securities and to continue with our financing strategy while we weather this down part of the cycle in some of our largest businesses, such as the US and Spain.

Let me conclude by saying that our financial strategy for 2011 is underpinned by three main pillars. First, continue to reduce our refinancing risk, if possible, until December 2013. Second, avoid incremental costs in our financial expense line. Repayments of $2.3 billion under our Financing Agreement this year translate into an avoidance of close to $200 million of incremental financial expense on an annualized basis. And, third, increase the margin of compliance under our financial covenants.

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

(Operator Instructions) Carlos Peyrelongue, Merrill Lynch.

Thank you. Good morning, gentlemen. Two questions if I may. First one related to volume guidance for 2011. You provided some guidance for Mexico and the US. Could you do so for the other regions?

And the second question is related to the potential offer of either equity or convert. Could you provide some guidance as to the potential timing for this and whether you have decided to do a convert or it could be a mix of both? Thank you.

Let me take a second question first, Carlos. Your question relates to whether we will issue equity, straight equity, or do a convert as we did last year. We have not made a decision on that, of course; first, we need to obtain approval from our shareholders at the annual shareholders meeting.

We will clearly monitor market conditions and remain vigilant of windows of opportunity to tap the capital markets, if and when the share capital increase is approved. Last year, as you know, we issued $715 million in subordinated convertible securities, which together with the capped call that we bought at the time, is expected to mitigate dilution and reduce the eventual number of shares that are required upon conversion to satisfy the obligations under those securities.

And so we will continue to monitor market conditions. Clearly that convertible has performed well in the market and as market conditions allow, once the share capital increase we will begin to monitor the markets to decide when is the best time and what is the optimal mix to maximize value for our shareholders.

Okay. Thank you, Rodrigo.

Related to guidance of volume in other countries, Carlos, there is a table in the presentation that we are sharing which includes the guidance for cement ready-mix and aggregates. I have it with me, but it's a large table so it's available for you in the presentation.

Okay, great. I will have a look at that. Thank you, appreciate it.

Vanessa Quiroga, Credit Suisse.

Good morning and thank you for taking my question. The first part is what are the most recent developments regarding payments from Venezuela? And if you will be using any of these proceeds or the proceeds from the potential equity or convertibles issuance to pay for the purchase of the ready-mix USA assets for $350 million?

And the second part of my question is regarding the transportation costs. Do you have any -- can you give any color on how much they went up per unit in the fourth quarter or during the year 2010?

Again, can you repeat that? Do we have what? On the (multiple speakers).

Yes, any more detail that you may have on how much transportation costs went up per unit so that we can have a better idea how much this impacted on margins? Thanks.

Yes, let me start with the first one. As you may know, it's being publicly announced by the government of Venezuela and ourselves is that we are having an amicable conversation, and we both expect to make an agreement in the very short term. That is what I can comment on Venezuela.

Now you were asking also I think that we are going to use some of those proceeds in order to, let's say, pay for the joint venture in the US. Did I understand correctly your question?

Yes, Fernando.

Okay. Now the idea is not to use those proceeds. The idea -- as you know, our first priority is to continue paying back debt. Now on the joint venture in the US we have decided to divest either that specific asset or any other asset to comply with our commitment.

Okay.

Regarding your question on transportation costs, on the SG&A line for the fourth quarter costs are up 4% as a result of transportation expenses increasing and 3% for the full year 2010. It is important to highlight, though, that this is perhaps the input cost that is more easily passed through to the end user in our sector, as it is expected that the end consumer will pay for the transportation costs if they are higher. Well, the prices need to move in line with that.

Okay. So the main reason for margins not to go up that much year over year, you think, is lower volumes, lower scale?

Well, during last year we were affected by both lower volumes as well as softer prices, especially in the US and Spain as we mentioned, but to a lesser extent the higher transportation costs. All of these have been offset by our cost reduction initiatives. Going forward, we would expect to maintain our margins and improve them as we obtain the benefits of economies of scale and as we recover input cost inflation through prices as well.

Okay, thank you very much, Fernando and Rodrigo.

More than welcome, Vanessa.

Adrian Huerta, JPMorgan.

Good morning, everyone. I have two questions. One is just the possible divestitures that you could have this year. You just mentioned that you could be possibly selling the ready-mix asset that you will have to acquire later in the year. What other divestitures you could actually execute this year and how much money are you planning to raise from this front?

And then the second question is with regards to the potential cost savings of $250 million for this year. How will we see that progressing throughout the year? Should that happen already in the first quarter of this year or are we going to see a gradual progression of that? Thank you.

Let me start with the first one. Just clarifying, we are not, let's say, thinking that large asset divestment will, let's say, be a part of or a pillar of our financial strategy, because as you know it doesn't really deleverage that much. But we are focusing on divesting non-productive assets, meaning assets that do not generate cash.

The amount we think we can get from that type of assets during this year could be around $150 million and $200 million. That is related to your first question.

On the second one, the savings we are commenting today it's a program that we executed in September and December last year and we put in place already. So all the effect will start and it's gradual from January 1 until December 31. It will start already happening as we speak.

The other thing I would like to comment which is complementary to this one is that we have also first week of this year we have started a new initiative, we are calling it transformation, in order to identify additional opportunities for the Company to reduce costs and expenses. But more important, is to make the Company even much more efficient and agile. That is what I comment on your question.

Maybe, Fernando, also it would help if I complement that by saying that related to the efforts to reduce costs and expenses of $250 million for next year during the fourth quarter in the other expense line we include about $40 million of severance payments related precisely to our efforts to reduce costs and expenses going forward.

Perfect, very good. Thank you very much.

Your next question comes from the webcast.

Yes, the question comes from Raja Mukherji from PIMCO. When is your shareholder vote for the equity capital raise and how much equity are you contemplating now?

We have published our convocatoria and the shareholder meeting will take place on February 24. We have both an ordinary and extraordinary shareholder meeting on that date. And we have requested approval for up to the equivalent of 200 million ADSs, which equates to about 20% of what is currently outstanding in the market.

As I mentioned during my opening remarks, we have a strong economic incentive to make additional prepayments under the Financing Agreement of close to $2.3 billion as this will help us avoid increased cost of close to $200 million in addition to the cost of debt that is being prepaid, which is LIBOR plus 450. And so by doing a combination of things, both usage of free cash flow, potential issuance of notes, as well as equity or equity-linked securities, if we can comply with these milestones and achieve these prepayments we will be maximizing future free cash flow and improving, in fact, free cash flow per share going forward.

The eventual decision on what we will do will depend first on the share capital increase being approved on February 24, and then on market conditions beyond that.

Nick Sebrell, Morgan Stanley.

Hi, Fernando and Rodrigo. Regarding US operations and EBITDA margin there, my question is how much volume growth do you think you need or, alternatively, a maximum volume number or revenue number to reach pre-2007 or pre-crisis EBITDA margins?

The reason I have asked is you have got two things going on there and we are trying to figure it out. One, of course, is operating leverage which is obvious and the other is the cost and efficiency programs that you have started on the costs that you expect to improve.

So how have things -- how have economies of scale or how do you expect them to change? Because it seems to me that you should be able to get to pre-2007 margins without having, say, the same amount of volume or revenue that you had at that time. That is the first question.

Then, second, just quickly if you could talk about energy costs. Have you seen any upward pressure there and what kind of sensitivity do your energy costs have to oil prices? I know oil is a very small input, but you do have petcoke and related.

Related to margins, we might not have here handy a specific number but we can elaborate that. But let me comment the following.

We have lost in the US since the crisis started around -- more than 50%, 55% of our volumes on average but we are sure we don't need those volumes to get back to pre-crisis margins, mainly because of two reasons. Because we have been through time adjusting the business to its new economic activity or reality, meaning the business in the US nowadays is much more efficient than what it used to be about three years ago.

And as we have commented before there are savings that will come back when volumes come back, but there are some that will remain as savings because the Company itself is much more efficient. But we don't need, let's say, same levels pre-crisis to get to those margins.

The second reason being, if you remember, the US has been -- was an importer and we were not the exception. So part of those volumes were done with imported cement, and as you know imported cement do give us a much lower margin. So combining the two of them, again, we think that we don't need pre-crisis volumes to get back to same margins.

Now your question on energy, I am not sure I got your specific question. Could you please repeat it?

Yes, but if you don't mind, so in terms of -- revisiting the first part. In terms of cement volume, if you were to increase 25%/30% here and hold other things constant, in other words cement prices, etc., would that be sufficient to get you within striking range of EBITDA margins that were above 20% do you think?

It might but as I mentioned I don't have a specific figure. But we can come back to you and to share that specific figure.

Okay, thank you. So the second question was about energy costs. Are you seeing pressure upward in any of your energy sources? And then what kind of sensitivity do you have to oil prices, is there a feed through into petcoke from oil price changes?

Well, I think that of course there is relation of primary fuels to oil. Now in our case, as you know, we are heavy users of petcoke. Now if you look at price evolution of petcoke you will realize that by about the end of last year petcoke went up again to its record price, so we think that most of the increase has already happened.

Petcoke, as sort of a secondary fuel, that is not related to the price of oil, let's say, directly. There is a high component of supply and demand specific to this fuel. Now on the other hand, you might have already realized how much we insist on mentioning our target on increasing our alternative fuels, and it's not by chance. We have moved from, I think it was three or four years ago, our mix of fuels used to have about 5% of alternative fuels and, as we already mentioned, last year we got to 20%, which is one of the highest in the industry. And we are pretty sure that because of the projects we have already executed lately, in the last few months that this year we will increase that proportion to 25%.

Now the reason that we are making that emphasis is because, as you know, alternative fuels in some geographies do have very, very low costs and it has lots of advantages. It's not just about costs. Emissions are much more -- are less -- are much more amicable than emissions from primary fuels. And it also has the advantage, depending on the kind of alternative fuels you use, and the ones we are focusing on our alternative fuels with very high content of biomass. So besides detaching our energy inflation from oil and other primary fuels, we are proactively generating CO2 credits either directly in our businesses in Europe or through CDMs, as I think Rodrigo mentioned, in Mexico, Central/South America, and other countries. So that will help us. This year we will have -- only 75% of our fuels will be the primary and 25% will be alternative. So we think that this increase or impact of 9% we are commenting is, with the information we have available today, on the safe side.

Great. Thank you very much.

Mike Betts, Jefferies.

Two questions for me as well, please. First one, I think a lot of the weakness in three of the markets you attributed to the weather, in December particularly, could you give us some idea if you have seen a bounce back in January? I guess I am thinking particularly of Columbia, US, and Europe.

And then my second question, which I guess is for Rodrigo. Of the $1 billion bond issue in January, I think it was, how much of that did you use to pay off debt rather than the other uses that you mentioned? Thanks.

On weather -- lately it seems like we are sort of an agriculture company. But during December, as you know, we had very bad weather, a very humid December. It's either snow or rain, mainly in the US, rains in Colombia, south part of Mexico, and snow in Europe. It was not a good month in that regard.

We were heavily impacted in December. Our estimate is that we were hitted by about $30 million of EBITDA because of weather conditions during December. Now the good news is that January has been sort of a dry part of the winter, and in January we have better-than-expected volumes almost everywhere because of that reason.

On a consolidated basis, our volumes in January were higher than January last year by 4% in cement, 1% in ready-mix, and 2% in aggregates. Now if -- let's see how it goes, because we are in February and as you know the US is being hit by very strong snowstorms. So let's see how February does. But so far we had a, let's say, on that regard a good January.

Regarding your question on the use of proceeds for the $1 billion placement in January, the bulk of it was used to make repayments or to set aside cash reserves to make payments for our Certificados Bursatiles that was close to $566 million equivalent. These are Certificados Bursatiles that were coming due in the next 12 months and we were able to convert the dollars needed to make these payments or set aside these reserves at an exchange rate of close to MXN12.20 which is better than where the peso is trading at now.

We have used most of the reserves for those Certificados Bursatiles because we had options to call those Certificados Bursatiles and we have called most of them. We also intend to make prepayments under our Financing Agreement for the majority coming due in June of 2012, so our next maturity under the Financing Agreement will be in December 2010.

Usually in January, because we have negative free cash flow in most of our operations globally, is when we draw upon credit lines, working capital lines in our business units. This January, as a result of the $1 billion placed we didn't have to increase refinancing risk by drawing on these working capital facilities. So we used some of the proceeds from the $1 billion issuance to fund our negative working capital or our working capital investment during January, which is usually the case given the seasonality of our business.

And we were also able to increase cash held on hand. Because of the rules under the financing agreement, we are able to keep up to $650 million of cash for the month ending -- during the month of the placement. And so this puts us in a strong liquidity position, again to continue to make it through the down part of the cycle, the seasonal cycle within the year, which is January, February, March.

And I guess, Rodrigo, that working capital will reverse during -- later on during the year. On a pro forma basis could we assume that maybe $300 million or $400 million will be used to pay off debt under the finance agreement? Would that be a reasonable assumption (inaudible) through the year?

From the issuance itself, as I mentioned, it's expected to be $50 million which was the majority of June 2012. What we will use to make additional prepayments under the Financing Agreement will be the free cash flow generated during the year, the proceeds from asset sales, if any, as well as the proceeds from future capital market transactions during the course of the year, both fixed income or equity linked or equity securities if the share capital increase is approved by our shareholders.

Okay. Last question or follow-up; the $248 million of maintenance CapEx in Q4 seemed a very high number. Were there any specific reasons for that or was it just a catch up for what you hadn't spent earlier on in the year?

It was a combination. It was a catch up and it is not rare that at the end of the year we do increase maintenance CapEx a little bit.

Mike, I would like to make a clarification on the figures I gave you on January volumes. I think I said it was consolidated, but it is too soon to have consolidated figures. The figures I gave you is the US figures.

They are US figures? Okay, thank you very much for that.

Your next question comes from the webcast.

Yes, and it's from Matthew Campbell from Goldman Sachs. What is the pro forma cash balance and net debt after the issuance of the 2018 notes?

The issuance of the $1 billion notes in January, the bulk of it was used to pay other the debt and so there is no change as a result of that in our net debt or debt calculations. The cash increase, as I explained in the previous question, is as a result of not using other working capital facilities, in essence financing the working capital investment with longer-term financing. Reducing refinancing risk, which is one of the three pillars of our financial strategy for this year.

I don't have the pro forma cash balance after the issuance of the notes, but the banks do allow us to keep sufficient cash on hand. And this is precisely the part of the year when we need to do it, because it's when we generate the negative free cash flows during the months of January, February, and March.

Gonzalo Fernandez, Santander.

Hi, good morning. Thank you for the call. I have two questions. The maintenance CapEx in the fourth quarter and full year was above my expectations and as a result then free cash flow to EBITDA conversion in 2010 was close to 22% compared with your traditional 50% to 60%.

Could you give us an estimate of the maintenance and expansion CapEx for 2011? And do you expect to recover your free cash flow during the conversion? The second question is how much of your EBITDA represented Egypt in 2011 and what is the situation of your operations there?

What was the second one?

The EBITDA in Egypt. But let me answer the first question, Gonzalo.

As we mentioned, the expected CapEx for the full year 2011 is $475 million and that includes both maintenance CapEx as well as other discretionary CapEx. The total CapEx for 2010 was significantly below the maximum limits under our Financing Agreement, and it does include the maintenance CapEx, of course, in addition to the switch to burn alternative fuels which have a very short payback. And so these are projects that we do not want to stop because they do help to delever in the very short term.

On the second question about Egypt, as you know, it's too soon to speculate how the situation will evolve. What I can share to you and we have commented some of it is that our plants, our markets compared to most of the players in Egypt is in Upper Egypt. That is south; it's 350 kilometers away from Cairo. So that is allowing us to keep the plant running.

Of course there are issues, some problems but given that the plant is far away from the main locations and even away from Assiut, which is the city that is closer to this plant, we are still in business, at least as of today. We do think that for sure the situation is affecting but again very early to evaluate. As you can imagine, it will depend on how long it will take for this situation to be in control, so the whole society and economy goes back to some sort of normal activity.

Maybe if I have mentioned an amount, we might be affected by something between $20 million to $40 million, $20 million to $50 million of EBITDA because of the disruptions. But again this is still very speculative.

Thank you to both.

Daniel McGoey, Citigroup.

Good morning, gentlemen. Just two questions from me. One, on Mexico the very strong volume growth in the fourth quarter on ready-mix and aggregates, if you could just provide a little bit of additional feedback on where that comes from. And I noticed also a higher price associated with them.

Then, secondly, on pricing, both in Mexico and you referred to a larger number of price increases in the US, can you give an indication of what you have either announced or are shooting for price increases in 2011, both Mexico and the US?

Okay. Let me start with the volumes in Mexico. As you know, the ready mix and aggregates sector is much more related to the formal economy and those sectors are the ones growing with it. Cement, which as you know is mostly, bagged cement is much for related to formal economy. Volumes will be positive. I think 2009 and 2010 were slightly negative and it's because of the residential sector with some growth in infrastructure.

On prices in the US, we have already announced price increases in most of the markets. So, depending on the sector and the region, we have announced recent -- in the case of cement we have announced an increase between 7% to 13% starting in March or April in the case of Texas, California, and Nevada. I think we have already commented it, but anyhow we have already announced $6 per ton of cement because of what we are calling the net up fee.

In ready-mix the range of prices is from 7% to 9% and in this case ready-mix compared to cement in some cases it starts in January -- from January to April, again depending on the region. In the case of aggregates, the range of price increases we have already announced goes from 7% to 17%, and in most of the cases or some of the cases, sorry, it's effective starting January.

Now what we see compared to -- we reported several price increases that we tried last year, then to report that unfortunately, they didn't hold, they didn't stick. In this case what we see different is that most of players in cement, ready-mix, and aggregates in our markets have already or have also announced price increases for their products. So we do see different dynamics in price increases this time. Perhaps it's early to say it, but we can see a difference between, again, January and April this year.

Thank you.

Yassine Touahri, Exane BNP Paribas.

Good morning. I have a few questions, actually three questions. For the question on the US, I see that bad prices in aggregate in the US are up 4% sequentially in the first quarter 2010 versus the third quarter of 2010. What has been driving that?

We are a bit surprised because some of your competitors have posted a sequential decline. Could you give us a bit more color?

Aggregate prices for the last quarter?

Yes, in the US they were up 4% sequentially versus the third quarter, whereas some of your competitors, your main competitor has posted a sequential decline in prices. So I wanted to understand what is driving that?

I think I will have to come back to you with the specific answer.

Okay.

But the 4% increase compared to third quarter, it's coming from California and Texas because they grow between 4% and 8%. But again I do prefer to come back to you with a much more specific answer.

Okay, thank you very much for that. I would have two other questions. You are talking about 8% of cost inflation next year. Is that on fuel or also include electricity? And without higher alternative energy, alternative energy, what will it be? Will it be something like 12%?

I think I understood the question, but this is related to the cost of energy. Maybe it helps to go back to the fourth quarter of last year. Our cost of fuel and electricity for the fourth quarter, the cost of energy was up 10% for the fourth quarter versus the year earlier fourth quarter. And that is in spite the fact that we saw significant increases, for example, in petcoke of up to 90% in the spot market, coal around 40% year over year. And so, of course, this is a result of our efforts again to switch to alternative fuels to take away volatility in our sourcing of our raw materials. When we say that we expect cost of energy to be up 8% for 2011 versus 2010 we are including all of this into the equation. And so we are including our continued efforts to switch to alternative fuels and to increase the utilization rate of alternative fuels up to 25% as Fernando mentioned. So of course if we didn't do that the increase in our energy input costs would be higher.

And it includes both electricity and fuel?

I am sorry I couldn't --

It includes both electricity and fuel?

Yes, it is the blend of costs of energy for both fuel and electricity. That is correct.

Okay. And then I would have a last question on the Philippines. Your prices in Asia were down sequentially by 5% again in the fourth quarter. Is that related to the new entrants? I assume there is a new player in Philippines, Eagle Cement, if I remember correctly.

Yes, there is a new player in the Philippines. And now, as you have seen, volumes in the Philippines have been increasing so it's sort of softened the dynamics of the market over there.

But has it impacted prices? Because I see prices down 5% sequentially in Asia in the fourth quarter versus the third quarter.

I don't remember that we have, let's say, eroded prices in the Philippines materially. So what I remember is that we have sort of stable.

Okay, thank you very much.

I will give a double check and go back to you.

Okay, thank you very much.

Your next question comes from the webcast. Please proceed.

The question is from John Coller from HSBC. Have you discussed with the rating agencies their treatment of the potential convertibles as debt versus equity for debt rating purposes?

Yes, this is a good question. And depends on the nature of the convertible that you do how much equity credit you will receive from the rating agencies. What drives our decision, however, is primarily our intent to continue to increase the margin for compliance with our Financing Agreement lenders. And from them we receive full equity credit, whether it is a mandatory convertible or a subordinated voluntary convertible.

And so when we decide what mix and when to do what we will consider everything, including of course the rating agencies, but very importantly our desire to increase the margin for compliance on our financial covenants under the Financing Agreement.

Anne Milne, Bank of America.

Yes, good morning. Two questions. On the US side I was just wondering if you have any more specific information that leads you to believe that there is a window of opportunity for the US highway bill to be passed.

And then also on the US side, I know you have some volume increase estimates for 2011. Was wondering if at current price levels will this bring your EBITDA back into positive territory?

And the second question really has to do with the financing side. You have done a great job of prepaying the financing agreement so far so you have a lot of breathing room and that is great. And I know that gives us a lot of comfort. I just wondering at what point do you start talking to the banks about the 2013 and then of course 2014 maturity. Thank you.

That is a very good question. Let me take the second question first relating to the Financing Agreement.

As I mentioned, our financial strategy for this year has three pillars. One of them is to avoid the increased costs that we would incur if we do nothing under the Financing Agreement. The increased costs as a result of the step-ups if we do not issue any equity or equity-linked securities that are subordinated is 100 basis points, which on the exposure under the Financing Agreement today of about $9.5 billion that would be $95 million per year. The increased cost if we make no additional prepayments under the Financing Agreement as of December of this will also be 100 basis points, so another $95 million. So clearly we have a very strong economic incentive to avoid these increased costs of close to $200 million per year and the cost of our financing.

In essence, prepaying the debt is prepaying the most expensive debt that we have on our balance sheet, because incurring these additional costs of close to $200 million plus the LIBOR plus 450 that we are paying today that would put you at a cost, all-in cost of more than 13%. Clearly, we can do much better than that in the capital markets.

And by doing so we also help achieve the second leg of our financial strategy, which is to eliminate as much as possible the refinancing risk. As we have discussed with you, Anne, in the past, when you are highly levered as we are, because of where we are in the down part of the cycle, the last thing you want is refinancing risk.

By achieving this prepayment milestone with the banks we believe that we can extend the period of time when we have no refinancing risk until December 2013. That gives us a very long run way for the recovery to get here and for our free cash flow conversion rate to increase again to historical levels.

Now the question is when do you refinance the remaining portion of the debt that is coming due in December of 2013 and February of 2014? Well, the answer is probably not now; most likely not during 2011. But as soon as we are well into our recovery and we can obtain better terms from our lenders than we have now under the Financing Agreement, we will try to sit down to renegotiate that on better terms.

Your first question was related to the US highway bill?

The highway bill and will the volume increase for 2011 bring EBITDA back into positive territory, all else being equal?

Yes, we think it will. As you have in your -- the information we have provided we think volumes in cement will grow 5%, ready-mix 6%, and aggregates 2%. And that together with the EBITDA enhancing program we have already commented it will bring costs back to positives.

The other question is -- as you know, the Congress has approved extension of existing highway program and we think there might be a window of opportunity in which they might pass a new highway program. Maybe between the second quarter and the fourth quarter this year.

Okay. I was just wondering is there anything concrete you have heard from some committee or otherwise that this will be a priority.

Not that we can comment today.

Thank you very much.

Thanks.

We have time for one final question and it comes from the line of Aaron Holsberg with Santander. Please proceed.

My question has been answered.

Thank you very much.

Well, thank you very much and in closing I would like to thank you all for your time and attention. 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, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.