Cemex SAB de CV (CX) 2011 Q1 法說會逐字稿

Good day to everyone. Thank you for joining us for our first-quarter 2011 conference call and video webcast. Today, I am joined on the call by Maher Al-Haffar, our new Head of Corporate Communications, Public Affairs, and Investor Relations. As many of you know, Maher has been part of CEMEX's finance team since 2000 and has extensive experience in the capital markets.

I will start with our recent organizational changes and then cover the highlights of the quarter and key regional developments. I will then ask Maher to go over the financials and I will end with our outlook for this year. Of course, then we will take your questions.

Two weeks ago, we announced significant changes in our senior management as part of an extensive reshaping of our organization. We are increasing accountability and responsibility at the operating level and shifting important functions from corporate headquarters to operations.

In the financial area, I have assumed the title and functions of Chief Financial Officer in addition to my role as Executive Vice President of Finance and Administration. Within my area, Jose Antonio Gonzalez, formerly Head of Corporate Communications and Public Affairs, has been appointed Corporate Finance Vice President and will be responsible for treasury, capital markets, corporate financing, and insurance.

As I mentioned earlier, Maher is now responsible for communication with external, as well as internal audiences. I have asked Jose Antonio as well as Maher to join me in meeting as many of you as possible over the next weeks to assure that we maintain the high level of cooperation with the entire financial community that CEMEX has long enjoyed.

The changes that have been announced are the initial elements of what we intend to be a far-reaching transformation of CEMEX. We also expect that the new members of our executive committee and newly assigned country managers will improve our ability to create value in our key markets in the short, as well as the medium term.

Overall, we expect this transformation process to result in a $400 million recurring improvement in our steady-state EBITDA generation, which we expect to realize before the end of 2012. I know that you will be interested in further details of our transformation effort. Of course, we will keep you informed of other changes as they occur and we will provide periodic updates on our EBITDA enhancement program.

In addition, we intend to host a CEMEX Day forum later in the year to introduce our new executive team, as well as the changes we are making in our business model.

Now, I want to turn to the first quarter. We were pleased with the trend we have seen in our quarterly sales. During the first quarter of this year, our sales increased by 9% on a like-to-like basis versus the same quarter last year. This is the seventh consecutive quarter of top-line recovery in our results. Operating income increased by 11% during the same period, also on a like-to-like basis.

Infrastructure and housing continued to be the main drivers of demand for our products. We saw positive consolidated pricing and volume dynamics during the quarter, which together with our cost-reduction initiatives partially compensated for higher costs on a year-over-year basis. However, for the full year, we remain confident that we will be able to at least recover input cost inflation.

On a consolidated basis, we saw our domestic gray cement and aggregate volumes grow for the first time since the first quarter of 2007. Ready-mix volumes show year-over-year growth for the second consecutive quarter.

Consumption of our products benefited from favorable weather conditions in Europe. We are cautiously optimistic with the pricing trends seen during the quarter. Most of our major markets, with the exception of Egypt and the Philippines, enjoyed price increases in local currency terms versus the previous quarter. Additionally, we benefited from the appreciation of most of our operating currencies versus the US dollar.

In addition to our operating achievements, we have continued to strengthen our balance sheet and have now practically eliminated our refinancing requirements through December of 2013. At the same time, we have kept our financing costs under control and increased the margin of compliance under our financial covenants. Year-to-date, we have refinanced almost $3.5 billion in several capital market transactions, each of which was significantly oversubscribed. This demonstrates CEMEX's continued access to the capital markets and the market support for our business model.

We also made good progress executing the $250 million EBITDA enhancing program that we announced last quarter. Since the beginning of the year, we have achieved about one-fourth of this amount in savings in line with our expectations.

We have also continued to make progress in increasing our utilization of alternative fuels to dampen energy costs and volatility. During 2010, substitution of alternative fuels reached 20% of our total energy use and we expect about 25% for this year.

We have recently increased our target to 35% substitution by 2015, which means we will continue to have the fastest growth rate in the industry. We are also on track to achieve a 25% reduction in specific CO2 emissions by 2015 from the 1990 baseline, up from the 20.5% achieved last year.

Now I would like to discuss the most important developments in our main countries and regions.

In Mexico, cement volumes within the first quarter of 2011 increased by 1% on a year-over-year basis reflecting positive performance from the infrastructure sector mitigating a slight decline in the formal residential sector.

Ready-mix volumes, which are more exposed to infrastructure, increased by 16% in the same period compared to a weak first quarter in 2010. For this year, we expect investment in the residential sector to grow by about 2.5%.

Despite the slight decline in the formal residential sector during the quarter, we expect investment in this sector to grow by about 3% in real terms during this year driven mainly by more robust commercial lending.

Investment in the informal residential or self-construction sector should grow by about 2% in real terms this year driven by an increase in employment and an expected increase in remmittances of about 2%. For 2011, we anticipate total investment in infrastructure will increase by about 4% in real terms, in part because of expected surplus, oil revenue this year, which could translate into an additional MXN12 billion for investments.

The industrial-and-commercial sector is expected to grow by about 4% this year from a low level last year and responding to the expanding economy. In our US operations, the year-over-year volume decline reflects the continued delay in the residential market recovery. Bad weather conditions in many of our markets, as well as the restructuring of our Arizona business.

In addition, during the first and second quarters of 2010, we saw increased housing activity in anticipation of the expiring home purchase subsidy making a difficult year-over-year comparison. While we saw a pickup in infrastructure spending during the quarter, it did not outweigh these factors.

On the other hand, we are encouraged by this year's upward movement in cement and aggregate prices, as well as the continued stabilization in ready-mix prices. Additionally, pricing increases for cement in much of the US were implemented during March and April. There are signs of renewed optimism in the pace of job recovery in the country. Job creation has accelerated during the quarter.

In addition, absolute new home inventory levels are trending to historic lows, suggesting that any pickup in new home sales will lead to increases in housing starts. Headwinds remain for the residential sector in the form of tight credit, especially for the first-time homebuyers. Further deterioration in housing prices, which erodes buyer confidence and continued uncertainty regarding the timing of foreclosure or shadow inventory deployment.

The poor weather and low volumes of the residential off-season limits our ability to project annual volumes from first-quarter activity. We expect more visibility after the spring buying season, but the recovery of the housing sector remains a work in progress.

While public construction spending in the first two months of the year was down 3% on a year-over-year basis, streets-and-highway spending, the most important sector for cement in terms of infrastructure, was up 9%. In the case of streets-and-highways, funding certainty has improved with Congress extending federal aid funding at current levels through September, the end of the federal fiscal year 2011 with strong bipartisan support.

The decline in industrial-and-commercial construction spending has moderated over the past six months. In addition, contract awards for this sector in real terms were down 5% year-to-date as of February compared to an 18% decline for the same period in 2010.

In Europe, the growth in volumes in our three core products during the quarter was driven by favorable weather in the region, as well as pent-up demand from the end of last year. While we are happy with the positive seasonality effect during the quarter, volume growth for the rest of the year will trend towards the guidance we provide for the countries in this region.

The residential sector continued to be the main driver for volumes during the quarter in Germany, France and the UK. In Germany, housing permits, a leading indicator, increased by 8% during the second half of 2010 reflecting continued low mortgage interest rates, relatively stable prices for construction and improved employment.

Infrastructure was also an important driver for demand for our products, especially in Poland and to a lesser extent in the UK. In Poland, the government has initiated a program to build streets and highways with the bulk of the spending expected to occur during 2011 and '12.

Going forward, in some countries in Western Europe like Germany, France and to a lesser extent the UK, the absence of significant precrisis real estate problems and milder fiscal tightening are expected to lead to a sustained economic recovery.

We anticipate our volumes in the region to show growth during 2011 with the exception of Spain where the construction sector is still weak and sizable fiscal tightening is anticipated.

Growth in the region will be driven by ongoing projects in Western Europe and increase in permits from the residential and industrial-and-commercial sectors.

In Spain, low domestic cement volumes continue to be mitigated by exports to other countries, which, during the first quarter, increased by more than 30% on a year-over-year basis. This is reflected in the 6% year-over-year growth in our consolidated total cement volumes.

In our South Central America and Caribbean region, domestic gray cement volume was driven by increased consumption in Panama, Guatemala, Nicaragua and the Caribbean. In Panama, for example, we began seeing the positive effect of the Canal expansion. Columbia, our largest market in the region, was adversely affected by poor weather and an 18-day transportation strike during the month of February.

However, while our domestic gray cement volumes dropped by 2%, our ready-mix volume increased by 15% during the quarter due to the housing recovery. In fact, housing permits went up 32% during 2010 and a further 59% in the first two months of 2011 on a year-over-year basis.

In addition, significant infrastructure investment is expected after the devastation by the torrential rainfall and abnormal climate conditions in late 2010 related to the La Nina phenomenon in Colombia, Costa Rica and Guatemala.

In our Africa and Middle East region, we saw a decline in our quarterly domestic gray cement volumes in Egypt and the United Arab Emirates. Our ready-mix volumes, however, increased during the quarter mainly driven by our operations in Israel.

In the case of Egypt, the political turmoil in the country has adversely affected economic activity. The magnitude of our volume decline this year will depend on the success of the political transition and the configuration of the new political structure.

In Asia, the decline in cement volumes during the quarter was driven mainly by our Philippines operations. Our operations there were affected by the delay in the release of government budget funds, the postponement of public/private partnership projects and adverse weather conditions. And now I will turn the call over to Maher to discuss our financials.

Thank you, Fernando. Hello, everyone. I am pleased to be here with you today. Continuing with our results, favorable consolidated pricing and volume dynamics had a positive effect on operating EBITDA generation during the quarter. However, operating EBITDA margins fell to 15.3% during the quarter from 16.9% in the first quarter of last year. The lower margin is primarily the result of a product mix effect, as well as higher distribution expenses.

Cost of sales as a percentage of net sales improved by 1.5% reflecting better economies of scale resulting from higher volumes. Our kiln fuels and electricity on a per ton of cement produced basis increased by 17% versus the same period in 2010. During the quarter, our free cash flow after maintenance CapEx was negative $317 million versus negative $171 million last year.

The year-over-year variation in free cash flow is due mainly to higher financial expenses, working capital and taxes. The higher working capital investment during the quarter is a result of the increase in receivables due to higher sales.

In addition, typically during the first quarter, there is an accumulation of inventories, which are sold later in the year. Accordingly, an important part of the investment in working capital in the first quarter is reversed later in the year. The increase in financial expenses during the quarter reflects the substitution of bank debt with bonds issued in the capital markets with higher fixed-rate coupon, as well as the exchange of our perpetual debentures into new senior secured notes done in May 2010 and earlier this year.

Other expenses during the quarter were $76 million, including the amortization of fees related to the early redemption of debt, severance payments and other items. During the quarter, we recognized an exchange gain of $109 million mainly because of the appreciation of the euro and of the Mexican peso versus the US dollar. We also recognized a loss on financial instruments of $44 million related mainly to CEMEX shares.

During the quarter, we had a controlling interest net loss of $276 million versus a loss of $342 million in the same period last year. This reflects higher operating income, higher exchange gain and lower other expenses, which more than offset the higher financial expenses during the quarter.

As we discussed last quarter, our financial strategy continues to be underpinned by three main pillars. First, to continue to reduce our refinancing risk. Year-to-date, we have refinanced close to $3.5 billion by issuing fixed and floating rate notes, as well as convertibles. We have now repaid approximately $7.5 billion, or approximately 50% of the original balance outstanding under our Financing Agreement and have addressed all material maturities until December of 2013.

Second, to avoid incremental costs in our financial expense line. With our year-to-date prepayments and the issuance of the convertibles, we avoided an increase of 150 basis points in the Financing Agreement's annual interest rate. With an additional prepayment under the agreement of about $200 million, we would avoid the remaining step-up of 50 basis points.

And finally, to increase the margin of compliance under our financial covenants. The issuance during the quarter of the convertible securities, which are subordinated and are not considered for the calculation of our leverage covenant, is a significant milestone towards this goal.

The positive impact on EBITDA of our cost-reduction efforts will further improve the margin of compliance. During the first quarter, we continued to improve CEMEX's debt maturity profile, increasing the average life to 4.3 years from 2 years in June of 2009. The remaining maturities we have during 2011 and 2012 are primarily Certificados Bursatiles, working capital lines and other bank debt, which we will either pay with our free cash flow generation or roll over. And now Fernando will discuss our outlook for this year.

Regarding our outlook, we expect about 80% of our operating EBITDA generation in 2011 to come from high growth emerging markets. In the United States, we expect higher volumes on prices, as well as return to profitability this year. In this, we believe most markets in our portfolio will show volume growth and increased profitability in 2011.

For the full year, we expect consolidated volumes of our three core products to show a low to mid single-digit percentage growth. We now forecast our cost of energy on a per ton of cement produced basis to increase by about 13% during the year. Despite this, we expect to be able to adjust prices to recover input cost inflation on a consolidated basis.

We will keep capital expenditures and other investments at a minimum to maximize debt reduction. We expect total CapEx to reach about $470 million, including $350 million in maintenance CapEx and $120 million in strategic CapEx. We anticipate no major change in cash taxes or in investments in working capital from 2010 levels. Similarly, we do not expect a significant change this year in the cost of debt, including our perpetual and convertible instruments.

In closing, I want to emphasize two points. First, as I said at the beginning of the call, we have seen seven consecutive quarters of top-line recovery. I believe that we have turned the corner in most of our markets, which are now growing. This should produce volume, as well as price increases across our portfolio.

Second, we will continue with implementation of our transformation process and our EBITDA enhancing program, which will bolster our deleveraging effort and shareholder value creation.

Finally, we have effectively eliminated our refinancing risk until December of 2013. Thank you for your attention.

Before we go into our Q&A session, I just would like to remind everyone that any forward-looking statements we make today are, of course, based on our current knowledge of the market in which we operate and of course could change in the future due to a variety of factors beyond our control. And now, we will be happy to take your questions. Operator?

(Operator Instructions). Vanessa Quiroga, Credit Suisse.

Thank you, Fernando and Maher for the call. My question is regarding your management of rising energy costs. You mentioned that you expect to adjust prices enough to compensate for that higher input costs, but does that include the increases in distribution that we saw as an example in the first quarter and that should continue? Or should -- or are you expecting to compensate for that with your cost savings program? And just I guess to wrap up my question, my second question would be if after the first-quarter results if your outlook on free cash flow generation for the year has changed. At least if you could provide the direction of that would be helpful. Thanks.

Hi, Vanessa. For your first question, I think we have mentioned that our expectation is to cover inflation on all our costs and expenses and let me elaborate a little bit on this because I think the first quarter what we saw is that, in the case of ready-mix and aggregates, we have covered already the inflation in our costs and expenses, which is not the case for cement.

In the case of cement, cost of expenses were a little bit higher than the price increases, but sometimes remember that our price increases come through mainly in the month of March and April. So that makes us think that, during the year and through the year, we will be able to cover -- at least to cover the inflation in our inputs.

Now if you look at the evolution of the SG&A expenses without distribution, you can see that there is a material, a real reduction of expenses even those are increasing during the quarter. That is really a reflection of our EBITDA enhancing program, the one we announced before, the one that amounts for $250 million. So again, we feel confident that we will be able to cover -- at least to cover inflation, including distribution.

Now one reason why we do emphasize our progress in the use of alternative fuels I already mentioned. During the first quarter, we didn't cover the cement sector. We think we will because price increases are still expected to come. But in the case of cement, we insist on the use of alternative fuels because if we succeed on substituting large amounts of primary fuels with alternative fuels, it changes completely the cost structure of cement production. That is why quarter after quarter we do inform on our progress on the substitution on alternative fuels. You know we are coming from a very low figure of 5%. Last year, it was 20% and the initiative we have all over the Company for sure will take us to the new target that we just communicated lately in our sustainability report of 35%. That is related to your first question.

I'm not sure I understood your second question. Was it that is there any change on the free cash flow? No, we don't have any material change so far.

Okay. Just a clarification, Fernando, if I may. Regarding your comment about SG&A, you mentioned that, if we exclude the increases in distribution costs, you can see much more efficiency in the SG&A. How much was that down year-over-year?

1% and compared to last quarter, to fourth quarter 2010, it is 4%. Again, excluding distribution expenses.

Of course. Okay, great, thanks.

And Vanessa, I mean just to emphasize, this is despite an 11% increase in sales year-on-year, of course, right.

Thank you. That is useful. Thanks.

Gonzalo Fernandez, Santander.

Good morning, Fernando and Maher. Congratulations on your new positions. My questions are regarding the US. In the fourth-quarter conference call, you disclosed that you are expecting segment volumes to grow 5% in ready-mix, 6% and probably a 10% increase in prices. After the first quarter, do you maintain that guidance for volumes? And if you can share how your targets are evolving. And the second question is if you can elaborate on the restructuring on Arizona that you mentioned in the press release.

Hi, Gonzalo. Let me take the first one. We do have the guidance of 5% for the US and during the information we are sharing with you today, we are changing that to low to mid single digit growth. And it is basically -- you know why. The residential sector has not been performing as we were expecting. So it will -- I think our expectation was like 14% growth for the residential sector and it will be -- now we know we do expect a much lower growth. And because of that, the 5% will go down to a low to mid low single digit. So that is a change and it is already included in the material that is distributed.

On the Arizona, Maher, do you want to take that?

Unidentified Company Representative: Yes, in the case of Arizona, Gonzalo, the most important thing is that we are not vertically integrated in Arizona and so -- and what has been happening is that input costs into our ready-mix business has been increasing and prices of ready-mix have been softening. And so we took a strategic decision essentially of rightsizing our operations and improving the profitability. And so that essentially had a negative impact on our consolidated volume numbers. But at the end of the day, we think it is going to translate to better EBITDA generation in that market.

Now albeit, of course, that market is a -- it is one of the largest four markets in the US for us, but it does represent around -- well, last year at least, it represented close to about 10% of the business. I don't know if you have anything else to add.

What I was going to say we can give an idea on how relevant are these volumes for the total volumes in the US as part of the drop that we had in the --.

Essentially if you exclude Arizona, cement would be almost -- the cement volume drop would be almost cut in half. So we would go from a total consolidated number in the US of minus 4% to about minus 2%. So it has a big impact, okay, the action that we have taken.

In the case of ready-mix, it has even a bigger impact. I mean if you exclude Arizona, you would go from around a minus 10% to about -- close to about a minus 4%.

In the case of aggregates, it is even more significant. We go from -- on a like-to-like basis, same-store sales basis, we would go from about minus 6% to a little bit over 1% growth in the aggregates business. So clearly that business restructuring had an impact, but at the end of the day, it should actually have a positive impact on our EBITDA. I don't know if that answers your question.

Yes, the other question was on prices, how the price increases are balancing and the stock changes because of expectations of lower volumes.

You mean in the US or --?

Yes, yes, in the US.

Well, we are very optimistic on pricing increases. We have announced, as you know, pricing increases throughout all of our markets varying from as low as 6% to as high in some markets to double-digit levels. We have already seen some pricing increases as you have seen the effect in our consolidated US pricing. But again, most of the pricing increases are expected or have rolled out beginning of the spring. And most of the announcements in cement and ready-mix were effective March and April.

Prices in cement have already moved up 1% driven primarily by the strength that we are seeing in Texas and in Texas, it is being driven primarily by the oil sector. In fact, in some of the cement types in Texas, we are completely sold out and we are having to transfer some cement from other areas into those markets.

Also, California has been driving the pricing strength. On the aggregate side, most of the increases were done earlier. The supply/demand dynamics in that segment are better and so prices went effective in January and as we saw prices were up 2% from the previous quarter. I don't know if that is enough color.

Yes, very clear. Thank you very much.

Esteban Polidura, Deutsche Bank.

Thank you very much. Good morning Fernando and Maher. Two questions regarding the receivables if I may. The first one, is increasing receivables a consequence of increasing prices in some regions? In other words, did you have to improve the terms for some of your clients to be able to increase prices? And the second question, you mentioned, Maher, that working capital pressures should revert during the remainder of the year. Should we expect this for the second quarter or more towards the end of the year? Thank you.

Can I take that one? I think receivables, if we see it in days terms, which measures efficiency of the management of receivables, did increase three days, which is not a material figure, meaning from 48 days to 51 days. It is not because of -- I don't see any relation on this increase because of price increases. We are not sacrificing payment terms in order to -- for our price increases to stick. In some cases, that is done on a temporary basis, but that is reversible during the year. But again, it is a three-day increase, which I don't find it that material.

Now if we see receivables as part of working capital, even though in absolute terms working capital increased compared to last year, again, in terms of days, we did improve working capital from 34 days to 30 days. Now you know that because of seasonality in our business and I think Maher has already mentioned, at the beginning of the year this quarter, first four months perhaps, we do have an increase in working capital because of inventories. We do most of the major repairs in our cement plant kilns. And through the year, that investment, it is converted to cash. So I don't -- I am not concerned because of that variation. Was there a second question?

In terms of the timing of the recovery of the working capital, our expectation frankly is that we would have similar seasonal modalities as we did last year. As you saw last year, we recovered a significant portion of our working capital in the fourth quarter and barring any changes in the markets, which frankly we don't expect at this point in time, we expect similar modalities in terms of recovering working capital investment during the year. So it would be mostly in the fourth quarter essentially.

Excellent. Very clear. Thank you.

Your next question will come from the line of webcast.

Our question is from Olivier Tabouret from Alcentra and we have two questions. Actually the first question is how confident are you about a potential recovery in the housing sector this year. What are the implications in terms of prices in various US local markets?

The second question is would you please expand on how you intend to manage your energy costs. I don't know, Fernando, if you want to take the energy costs and I can maybe address the --.

Sure. I think our main strategy on management on fuels, I am going to refer to the bulk of it, which is the fuels we use in cement is to have the lowest price possible for primary fuels, but since 2005 and after the RMC acquisition with most of the assets in Europe, we found in Central Europe best practice, which is the use of alternative fuels, which have lots of advantages compared to primary fuels in order to be used in cement kilns. Some of them are that the prices are lower. Another one is that emissions are more beneficial. Another one is that we are concentrated in alternative fuels with very high contents of biomass, which also do help us to reduce CO2 production in terms of cement.

Just to give you an idea, the fuel we are using the most has at least 50% of biomass content that provide us with CO2 credits. So we have been growing that best practice in the Company. As I think I already mentioned, we started in 2006 with 5% substitution and now we have -- last year the real figure was 20.3%, 20.4% and we have lots of projects through an initiative that we push globally in order to increase that amount to 35%.

We know now -- it is clear to us that the potential it has for the Company. We are developing that potential, the highest potential in the profitable use of alternative fuels and that is one of the main pieces in our strategy. The conditions in which these fuels can be used in different geographies and its economics are different in different places.

In the case of Europe, we do have plans using up to 80% of these alternative fuels that completely changes the cost structure of our total production costs in cement. So I think that is the main element nowadays of our fuel strategy.

On the other hand, we have been also developing clean energy. I mean we have our Eurus Park, and we do have a list of initiatives and projects that we will be developing in the months and years to come.

On the first question about how confident we are in terms of the potential recovery of the US residential market, in all frankness, I think if we take a look at the volatility of housing stocks, it is probably a good indicator of the visibility frankly of what is happening there and that is driven by many factors.

Obviously, credit conditions, the amount of foreclosures as a percentage of total home sales, what we have -- we were a little bit discouraged frankly during the first quarter by the less than expected activity and on the back of that, we -- now our expectations in terms of growth in the residential market -- we were around mid-teens growth for the full year. We are now down close to around 2%, maybe a little bit higher, a little bit lower, and the main drivers are tighter credit conditions. There is credit available, but the acceptance criteria for mortgage origination is much tougher, as I am sure you are aware.

Also, the other variable is the level of foreclosures. And if we take a look at the percentage of homes sold and take a look at the percentage of foreclosed homes as a percentage of that, it has gone up considerably. Last year, we were at about 30%. This year, we are running at around 40%. Now that is good and it is bad. It's, obviously, bad because it means that it affects new home demand and construction activity and demand from that sector. It is good because it means that we are recycling the shadow inventory faster.

We are also encouraged frankly by what is happening in the rental market. We are seeing rental vacancies improving. We are seeing rentals going up in most of the metropolitan areas that we are working in. And so at the end of the day -- the third factor also is pricing, home prices, right. There has been some continued price erosion. Albeit most of the price erosion is really due to a change of product mix, right. When you are selling more foreclosed homes, the weighted average pricing of the whole sector is likely to go down. We are seeing some stability in the non-foreclosed sector.

So visibility is a little bit low. We are, obviously, much more cautious given what happened in the first quarter. We are expecting now about 600,000 starts for the year. In the first quarter, we were running around 550,000. And so -- I don't know if that -- and really that was the biggest driver I would say behind the adjustment of our demand for the year. I don't know if that addresses all of that. If there are any other details, please follow up with a question.

Gordon Lee, UBS.

Hi, good morning. Just two quick questions. First, I was wondering if you could tell us what the amount of CO2 emission rate of sales took place during the quarter? And then just a second one on CapEx. I was wondering if you could remind us what the $120 million of strategic CapEx is focused on and then whether the $350 million that you have allocated as maintenance CapEx, is that a sustainable number going forward or are you expecting this CapEx to pick up in years to come? Thanks.

Thanks, Gordon. On CO2, during the first quarter, we sold about $90 million of CO2 and that compares to $83 million we sold during the first quarter in 2010. And that's -- I would think the total amount of CO2 credits we can sell during the whole year. We are in balance with our needs and with our assignments. So we do not expect any additional CO2 sales during the year.

Now on CapEx, if I understood correctly, you wanted us to comment on the figures?

Yes, I guess specifically if you look at the $120 million (technical difficulty) strategic CapEx (technical difficulty) was focused on or was about. And then if the $350 million level you think is an appropriate maintenance level to be projecting going forward.

I cannot hear very well, but let me see if I understood what you said. This year, we are expecting $470 million we mentioned $350 of maintenance and the rest for strategic. This is let's say compared to our regular amount of CapEx per year is on the low side. This CapEx will be increasing because we do expect economic activity to increase. We do expect our sales to continue increasing. So they will tend to increase. We have been and we will continue being very careful on how we manage this CapEx knowing that we do have to continue performing on our financial strategy. But what I can say is in the low side and it will tend to change according to the improvement in the economic activity.

Another thing I can mention is that we do have strategic CapEx that are very profitable to invest in. So we will, of course, continue considering all the factors and make decisions in the future, not necessarily this year, but in the future about the potential increase in our CapEx. Is that the answer to your question, Gordon.

Yes, that was perfect. Thank you.

Now we can hear you very well.

I don't know -- did you have a question about the $120 million?

That's okay. Thank you.

Mike Betts, Jefferies.

Yes, thank you very much. I had three questions I guess. First one on energy, the increase in the guidance up from 8% increase this year to 13%. Is that now mainly fixed? It doesn't seem that you had that much of it hedged or forward buying or in inventories going into the year if it is gone up that much just in the three months. I guess visibility on that 13%, have you now got most of the fuel purchases lined up for the year or are you still at the vagaries of the market is my first question.

Second question, European pricing looked very good particularly when we were comparing Q1 versus Q4. Is that real price increases? I mean I am looking at 3% for cement, 5% for ready-mix, 9% for aggregates or is it a regional mix change or is there anything else going on there because I presume, like the US, that you would have normally put prices up more sort of March and April?

And then my final question just going back to the US. When [Michael] referred to all the changes made in Arizona, were there significant costs related to that in Q1 or did those costs occur in the end of last year?

And secondly, just on the cost-cutting, of the 25% of the $250 million, is most of that in the US in the first quarter or was it pretty well spread around the regions? Thank you.

Let me take the first two questions. On energy, most of our needs are already covered. Most of our prices are fixed, but not all of them. That is why we are changing our estimate that we started the year thinking that the increase was going to be 8%, 9% and now we think it is going to be around 13%.

What I can add to the comment on energy is that I think the increases in the quarter was about 17% and that compares to last year LAST YEAR, THE FIRST HALF OF LAST YEAR, BECAUSE OF INVENTORIES ACQUIRED DURING 2009 WE STILL HAD INVENTORIES OF PETCOKE AND OTHERS LET'S SAY AT A LOWER PRICE THAN WE GOT FROM THE SECOND HALF OF 2010, SO THIS AROUND 17% INCREASE IN THE FIRST QUARTER WILL START DIMINISHING DURING THE YEAR AS THE BASE COMPARISON FOR 2010 WILL START INCREASING, AND PARTICULARLY IN THE SECOND HALF. NOW ON PRICING I THINK WE MENTIONED THAT IN LOCAL CURRENCIES IT WAS ONLY EGYPT AND THE PHILIPPINES THE ONES THAT DIDN'T ACHIEVE PRICE INCREASES IN REAL TERMS IN LOCAL CURRENCIE the rest of the portfolio did achieve price increases at these new levels in their own local currencies. And we also mentioned that perhaps it is still too early to make a strong statement on prices. We think that the evolution is very positive and we do believe it will continue being positive. As we already mentioned, most of our price increase is at around March and April. I mean there are others in January and some were in May, but most of them are March and April.

So I think we need more additional time to realize how much of these price increases would stick during the year. So I think during the second-quarter call, we will be much, much better prepared to give you some additional color on the price side.

On the Arizona, I didn't understand the question.

Yes, in terms of the Arizona, there were some costs associated with it. They are fairly limited and as far as the cost-cutting program, the $250 million cost program and the geographic contribution of that, it is really very spread out, but clearly the US is an important portion of that. We did say that we've realized close to a quarter of that in the first quarter, about $70 million and the savings are roughly broken down -- I mean SG&A is a big component of that. There is some reduction -- I mean almost half of the cost -- a little bit less than half are SG&A-based. About 20% are fixed costs.

We had some actions that were taken in Egypt, for instance. There was some optimization of maintenance and some headcount reduction in Mexico. In Eastern Europe, we also had some tightening of our SG&A and fixed costs. And we, obviously, don't like doing this, but in some of our markets, clearly we have to rightsize the business and that translates to some headcount reductions and that is what has driven some of those savings. But it has been spread out pretty much all over. I don't know if that addresses your question. If you have any follow-up --.

Yes, it does address it. Can I just have one follow-up? And it actually relates to the $400 million, the new cost-cutting program. It talks about steady-state EBITDA generation. Is this actual cost-cutting or is this (multiple speakers) or is this the level that would be there if you were at midcycle? So I guess I am guessing the additional $400 million. Does that require a greater volume pickup to achieve that by the end of 2012?

We cannot hear. There is a lot of interference.

I think, Mike, you are on a cell phone or something. We can't hear you at all.

Can you hear me any better now?

Can you repeat?

Yes, the question was --.

Now we can hear you.

On the $400 million, it refers to being additional EBITDA when you are at steady-state. Does that, therefore, mean you require volume growth or is that cost cutting?

It is cost-cutting. As we have mentioned, the transformation project is a very recent project we started I think it was last January. So we have already going through it for three months. The first steps of this project has already shown up, which is all the changes we commented on the composition of the Executive Committee, through which you can translate additional changes that will happen all along the structure, the organizational structure in the Company.

And out of the $400 million, I think just to give you some idea, I said for about $100 million that related directly to business restructuring that might be related to either fixed or variable costs, some rightsizing, whatever. The other $300 million are related mainly to SG&A without distribution. And we do think this $400 million will be on the top of the effort we started, the $250 million EBITDA enhancement program we started September last year.

Now this transformation project we do not expect to be ready during the year. We will be -- we think it will take us to the end of 2012 to have let's say the full amount already executed.

Another thing we are expecting that we still don't have figures to it, but they will come as the transformation initiative evolves and progress is an additional amount of organizational effort on noncash generation assets that we might still have that will also be on top of the amount of nonproductive assets we have already announced that are for sale. When I say nonproductive, I am referring mainly to real estate businesses. But again, we are not prepared right now, but I am sure that during the second-quarter call, we will be much more specific on the figures for the transformation initiative.

Understood. Thank you very much.

Your next question comes from the line of the webcast.

Our next question is from Arnaud Lehmann from Credit Suisse and the question is could you please explain the margin improvement in Africa despite the pressure on volumes in Egypt?

Well, I think a couple of comments related to it. Even though we lost some volume in Egypt, most of it was, as you'll remember, we used to import part of the cement we used in Egypt and so by stopping those imports, we didn't have a major -- it does have a positive impact in EBITDA in percentage terms because that is a higher cost cement than the one we produce locally though. So that is one factor.

The other factor is that the business, the ready-mix and lately the aggregate business we acquired, I think it was a couple of years ago in Israel, is performing very well, both volumes and prices. So this business has been very positive and is impacting in a positive way our Africa and Middle East area.

Operator, next question.

Nicholas Lipman, Morgan Stanley.

Hi, thanks for the call. A quick question. I thought the Arizona comments were quite interesting. I'm just trying to connect the dots. In relationship to the cost-cutting program, should we expect more similar (technical difficulty) particularly in Arizona. And then the second question in relation to Mexico, it looked like Mexican construction (technical difficulty) lagged for several years. Now with the good (inaudible) even the Mexican construction (technical difficulty) your guidance -- your expectations seem to be sort of at the low end of the (inaudible) expectations. Why would that be?

I didn't hear your second question.

Basically if GDP -- I would kind of expect construction GDP and your volume to follow more fairly closely. It seems that construction GDP is coming back quite significantly and your forecast for Mexico is sort of at the lower end of all GDP numbers in Mexico. So I was wondering if you had any color on that or marketshare losses, etc., those kind of things?

Well, cement consumption in Mexico doesn't follow exactly GDP year-after-year. What follows closely is construction GDP and it is quite similar and we do expect for 2011 for Mexico GDP in construction of 3.5% to 4%, which is close or similar to what we expect on national cement consumption, which is about 3 percentage points. But again, I think GDP is an indication, but it is not necessarily -- we do not expect cement consumption every year to be co-related to it. We do prefer to follow construction GDP.

And Nicholas, on the question regarding Arizona and potentially other markets, I mean we have already gone through the re-organization in Arizona and in fact, we are already starting to see positive dynamics both on the supply/demand dynamics and certainly profitability of the business.

Could we be doing this in other markets in the US? And the answer is obviously, yes. We are looking, we are very keen to improve the operations of every one of our markets. Arizona happened to be one of the earliest that have undergone such changes and we saw the impact of that both positive and seemingly negative in the first quarter.

Now, of course, the important thing again to remember that one of the big reasons that we did what we did in Arizona is because the business is not vertically integrated and had a very peculiar situation that we needed to address. So clearly, this is not something that is a broad-based event. I don't know if that answers your question. If you have any follow-up, we will be more than happy to address it.

Okay, thanks. That answers it.

Francisco Suarez, HSBC.

Thank you very much for the call. I know that we will be seeing a low interest rate for an extended period, but are you considering to do something in order to hedge yourself against possible rising interest rates?

Well, we continuously follow in our financial risk committee the risk of rates going up. I think as of today, we are not particularly concerned for -- let's say for the next 12 months. I think that about half -- ballpark about half of our debt we do have it at fixed rate and the other half, it is fixed spread to a variable base basically.

But we do our own scenarios and we do think that, in the very short term, we don't feel like we should proceed on any specific action different to the ones we have been already developing.

Maybe I can add also one of the important ways to -- given the interest rate structure in the markets right now, what is really important is to take a look at what percentage of our interest expense is actually variable, which really should be the most important concern because that would have the impact on our free cash flow. And if we were to take a look -- given the low level of LIBOR today, given what Fernando just said in terms of the breakout, we are -- at the end of the first quarter, about 93% of our interest expense was actually fixed and only 7% of that was really variable. So while we do have half of our debt roughly, as Fernando said, as fixed and the other half is variable, when we take a look at interest expense, actually a significant portion of the interest expense is fixed.

The other thing to consider, of course, is that looking out into the future, prepayments are happening in either the bank or some of the variable cost debt that we have and so that by definition will also change the mix towards a more fixed structure rather than a variable structure. But in the short term, it is hard to see an increase that would really impact in a material way the interest expense given what we have today.

Yes, that makes sense. Very clear. Thank you. And if I may, just a quick question and I apologize if that was answered, but the line was really, really bad. On the alternative fuel usage and I am very encouraged what you have done on Europe, but I am wondering what about the US operations. I mean what can you share with us and what is the status currently in US operations as for overall alternative fuel usage and what shall we actually expect going forward?

The US has advanced in the use of alternative fuels also. The last few years I remember is close to 12% of substitution. They are already on the total need of fuels for a cement kiln. They are already using 12% just to give you an example. In one of the plants, they are producing cement with peanut shells. So in every plant, we need to find what it is that is available that can be used in our kilns.

Now what we don't have by definition in the case of the US yet is a way to credit, for instance, the example I just mentioned, the use of peanut shells is biomass. We don't find a way to credit that in some way or some manner on CO2 credits, which we can do in type one countries according to the treaties. Meaning whatever alternative fuels with biomass content we use in Mexico, in Egypt, in the Philippines, in Colombia or in any others, we can get CO2 credits for the content of biomass through the mechanisms of -- the clean development mechanisms available that we have been applying for. And we have successfully obtained for several of our plants in Mexico, Colombia, Costa Rica and Egypt and others.

So all the businesses, all the countries are moving forward, are progressing in their initiative at a different pace and depending on their possibilities, but as I already mentioned, we thought that the use of alternative fuels was going to be and will continue being a key factor and it might be a competitive advantage in our cost structure.

(inaudible). Thank you very much.

At this time, there are no further questions. And I would like to turn the conference over to Mr. Fernando Gonzalez for closing. Please proceed.

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 good day.

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