Cemex SAB de CV (CX) 2011 Q2 法說會逐字稿

Welcome to CEMEX's second-quarter 2011 conference call and video webcast. My name is Jasmine and I'll 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)

Our hosts for today are Fernando Gonzalez, Executive Vice President of Finance and Administration, and Maher Al-Haffer, Vice President of Corporate Communications and Investor Relations. And now I would like to turn the conference over to your hosts, to Fernando Gonzalez. Please proceed.

Thank you. Good day to everyone. Thank you for joining us for our second-quarter 2011 conference call and video webcast. I will start with 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. After that we will be happy to take your questions.

We are pleased with the trend we have seen in our consolidated quarterly sales. During the second quarter of this year, our sales increased by 9% in US dollar terms versus the same quarter last year. This is the third consecutive quarter of year-over-year growth in sales.

Infrastructure and housing continued to be demand drivers of demand for our products. During the quarter, we saw positive pricing conditions in most markets and favorable volume dynamics in Northern Europe, the South/Central America and Caribbean region, and Mexico.

On a consolidated basis, the 1% drop in domestic gray cement volume is mainly the result of declines in the United States, Spain, and the Philippines. Our ready-mix volumes showed year-over-year growth for the third consecutive quarter, while aggregates volumes remained stable for the period.

Consolidated prices on a quarter-over-quarter basis were flat in local currency terms for ready-mix and aggregates. The 1% quarter-over-quarter decline in pricing for cement in large part reflects a sequential drop in local currency prices in Mexico, Spain, Egypt, and the Philippines.

We are encouraged with cement price levels during the quarter being 6% higher in US dollar terms than in the fourth quarter of 2010. Unfortunately, this increase is being more than offset by higher fuel and transportation costs in our cement operations.

This is not the case in our ready-mix and aggregates businesses, where price increase has more than offset input cost inflation. For the full year, we remain confident that we will be able to at least recover input cost inflation in our three businesses.

In addition to our operating achievements we have now practically eliminated our refinancing requirements through December of 2013, while keeping our financial costs relatively stable. We continue to make progress executing the $250 million EBITDA enhancing program that we announced at the beginning of the year. So far we have achieved about half of this amount in savings, in line with our expectations.

Additionally, we remain focused on our transformation process, which we expect will result in a recovering improvement in our steady-state EBITDA of $70 million for this year, an incremental $180 million in 2012, and reaching a run rate of $400 million before the end of 2012. Cash costs for realizing these savings are expected to be about $70 million this year.

The majority of the actions necessary to realize these savings have already been implemented. As part of these actions we have reduced our total headcount worldwide by more than 6%, or about 3,000 employees. This is a very difficult and regrettable decision; but it was nevertheless essential for the success of our transformation process.

Our efforts to increase our utilization of alternative fuels continue to dampen rising energy costs. During 2010, substitution of alternative fuels reached 20% of our total energy usage. During the second quarter, the substitution rate increased to a record 24.4%.

Before I begin the discussion of our operations, I would like to mention that we are now reporting financial information for the six new countries and regions that resulted from the new organizational structure announced last quarter. These countries and regions are Mexico; the United States; Northern Europe; Mediterranean; South/Central America and the Caribbean; and Asia.

Now I would like to address the most important developments in each of these countries and regions. In Mexico, cement volumes during the quarter increased by 3% on a year-over-year basis. Ready-mix volumes, which are more exposed to infrastructure, increased by 13% in the same period.

For this year, we continue to expect investments in the residential sector to grow by about 2.5%. Driven mainly by more robust commercial lending, investment in the formal residential sector is anticipated to grow by about 3.5% during the year.

This growth is expected to come from expansion of credit from banks and an expected recovery from Infonavit and Fovissste during the second half of the year. Investment in the self-construction sector should grow by about 2% this year, fueled by growth in employment and an expected increase in remittances of about 2%.

For 2011 we anticipate that total investment in infrastructure will increase by about 4.5%, in part because of the expected surplus in oil revenues this year which could translate into an additional MXN12 billion for investment. The industrial-and-commercial sector is expected to grow by about 4% this year, in line with the recovery in the economy.

In the US, year-over-year volume declines in all three products are due to a difficult comparison versus the second quarter of 2010, in which we experienced an 8% increase in cement volumes resulting from the expiration of the residential tax subsidy. In addition, volumes were affected by the slowdown in the economic recovery during the quarter; increased concern regarding the deficit discussions in Washington; bad weather in the Midwest and California; and the restructuring of our Arizona business.

We are encouraged that for the first time in 11 quarters prices for our three key products at the national level are up on a quarter-over-quarter basis. While input costs have outpaced the pricing increase year to date, we are optimistic that we have seen the worst of energy cost inflation for the year.

On the residential side, lackluster employment numbers, tight credit, foreclosure inventory, and more erosion in home prices led to a week spring selling season. On a year-over-year basis, housing starts for the second quarter dropped 4%, reflecting the impact of the 2010 expiring housing subsidy. Consistent with our expectations for the year, we believe the key determinant with regard to 2011 residential activity will be the second-half performance, as we move beyond the 2010 distortion in demand.

Public construction spending was down 3% year-over-year through May of this year. Highway spending reversed its positive first-quarter trajectory and is now down 4% year-over-year through May. Contract awards for streets and highways declined by 16% in the same period, primarily due to a strong comparable last year, which was boosted by ARRA projects.

Contract awards excluding these fiscal stimulus-related projects are up 14% year-over-year through May. This increase has not been sufficient to compensate for the loss of ARRA funding.

Highway spending continues to be hampered by the uncertainty surrounding the Federal Highway Program. We are encouraged by the developments earlier this month in the House of Representatives regarding a new Federal Highway Program. The proposal from the Republican side of the House is one of several proposals currently on the table in Washington.

While we do not think a six-year highway bill will be enacted this year, we are reasonably confident that we will get flat federal transportation spending when the current bill expires in September. In the near future, the federal debt ceiling limit will dominate discussions in Washington and will set the tone for a future transportation bill.

The decline in the industrial-and-commercial sector continues to moderate. Construction spending in this sector is down 16% year-to-date through May after a 32% decline in 2010. Meanwhile, contract awards are down 5% year-to-date versus a 14% decline last year.

However, this performance has been partially mitigated by growth in the oil and gas as well as the agricultural sectors. In light of the above, we now expect flat performance in volumes for our three products, in line with PCA's summer forecast.

In our Northern Europe region, we continued to see positive momentum in volumes for our three core products during the second quarter. In the case of Poland, we experienced double-digit volume growth on a year-over-year basis, driven by the continued strength of the infrastructure sector as well as a favorable comparison versus second-quarter 2010, in which the country experienced significant flooding.

Pricing conditions were also favorable in most countries in the region. In Germany and France, the residential sector continued to be the main driver for volumes during the quarter.

In Germany, housing permits increased by 31% during the first quarter and by 35% in April on a year-over-year basis, driven by low mortgage interest, relatively stable prices for construction, and improved employment. In light of the year-to-date performance we anticipate our cement volume in this region to show double-digit growth during 2011.

In our Mediterranean region, the decline in our quarterly domestic gray cement volumes was mainly due to a drop in volumes in our operations in Spain and the United Arab Emirates. Ready-mix volumes, however, increased during the quarter, driven by higher volumes mainly in Israel. In Spain, the decline in domestic cement volumes continues to be partially mitigated by exports to other countries.

In the case of Egypt, our distribution of cement has continued uninterrupted since the beginning of the year, despite the political turmoil during the first quarter; however, visibility remains low. 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 after the scheduled elections in September and November.

In our South/Central America and Caribbean region, positive volumes and pricing conditions continued during the second quarter. Domestic gray cement volumes were driven by increased consumption in Colombia, Panama, Guatemala, Nicaragua, and El Salvador.

All countries in the region, with the exception of Panama, experienced double-digit growth in ready-mix volumes during the quarter. The strong economic expansion in the region reflects government policies that favor expanding home ownership and infrastructure development in countries such as Colombia, as well as public spending in the lead-up to elections in Nicaragua, Guatemala, and Puerto Rico.

In addition, volume growth can be attributed to government efforts to rebuild communities hit by natural disasters in places like Colombia and Haiti. Regarding Colombia, our largest market in the region, reconstruction work began during the quarter to repair damage caused by the floods and rains experienced in the first quarter. However, this process was somewhat delayed by continued rains during May.

While domestic gray cement volumes increased by 2% during the quarter, we saw a double-digit increase in our ready-mix volume in the same period, reflecting the continued favorable performance of the residential sector. In fact, housing permits were up 32% during 2010 and a further 79% in the first quarter of 2011 on a year-over-year basis.

In Panama, the infrastructure sector was the main contributor to cement consumption during the quarter, driven by new projects such as the construction of about 40 hydroelectric plants in the Chiriqui province and the Panama City Metro project, as well as the continuation of the Canal expansion.

In Asia, the decline in cement volumes during the quarter is explained mainly by our operations in the Philippines, which were affected by adverse weather conditions during the second quarter, as well as he continued delay in the release of government budget funds and the postponement of public-private partnership projects.

Now I will turn the call over to Maher to discuss our financials. Maher?

Thank you, Fernando. Hello, everyone. Continuing with our results, operating EBITDA declined by 7% in US dollar terms during the quarter versus the same quarter last year.

Operating EBITDA margin fell to 15% during the quarter from 17.7% in the second quarter of last year. This decline in margin is explained by, first, a change in product mix resulting from the higher growth in our ready-mix business, which has a lower margin than cement. Second, a change in geographic mix, as the higher sales are coming from markets with a higher cost structure. And lastly, our inability to fully recover input cost inflation in our cement business. However, we have been able to more than offset input cost inflation in our ready-mix and aggregate businesses.

Cost of sales as a percentage of net sales increased by 1.8 percentage points, reflecting higher fuel and maintenance costs in our cement operations during the quarter. In addition to the change in product and geographic mix already mentioned, SG&A as a percent of net sales declined by 0.3 percentage points during the second quarter versus the same quarter last year. Excluding distribution costs, this decline was 0.8 percentage points, reflecting the successful kick-off of our transformation program.

Our kiln fuel and electricity costs, on a per ton of cement produced basis, increased by 19% during the first half of the year versus the same period 2010. About 20% of this increase is due to foreign exchange fluctuations.

During the quarter, our free cash flow after maintenance CapEx was $18 million versus $161 million last year. The year-over-year variation in free cash flow is due mainly to higher financial expenses, working capital, and other cash expenses.

About 40% of the increase in financial expenses during the quarter is due to the exchange of a material amount of our perpetual debentures for new senior secured notes completed in May 2010 and March this year. In addition, contributing to this increase was the refunding of bank debt with long-term fixed-rate bonds.

The higher working capital investment during the quarter is mainly a result of higher sales. However, the number of working capital days during the quarter, excluding the effect of our securitizations program, remained at the same level as the same quarter last year.

For the first half of the year, working capital days excluding securitizations have declined to 30 days, from 33 days in the same period last year. As usual, due to the seasonality of our business, we expect an important part of the investment in working capital that occurred in the first half of the year will be reversed later in the year.

The higher Other cash items during the quarter include severance payments related to our transformation process. In the income statement, Other expenses during the quarter were $202 million, including severance payments related to our transformation process; impairment of fixed assets; amortization of fees related to early redemption of debt; and a one-time tax provision in Colombia.

We also recognized a loss on financial instruments of $22 million related mainly to CEMEX shares. During the quarter, we had a controlling interest net loss of $294 million, slightly better than in the same period last year.

Our financial strategy for this year continues to be underpinned by three main pillars. First, to continue to reduce our refinancing risk; second, to avoid incremental costs in our financial expense line; and lastly, to increase the margin of compliance under our financial covenants.

Since the second quarter of 2009, just before the closing of the Financing Agreement, we have reduced total debt including our perpetual debentures by $3.85 billion. In addition, we have repaid approximately $7.5 billion or about 50% of the original balance outstanding under the Financing Agreement and have substantially addressed all maturities until December 2013.

As you are aware, earlier this month we raised $650 million through a reopening of our 9% senior secured notes due in 2018. This transaction will allow us to meet the final prepayment milestone under our Financing Agreement necessary to avoid the remaining 50 basis point step-up in our interest expense, as well as to address most of our 2012 debt maturities ahead of schedule.

The remaining maturities we have during 2011 and 2012 are Certificados Bursatiles, working capital lines, and other bank debt which we expect to pay with proceeds from our recent note issuance and/or asset sales, our free cash flow generation, or rollovers. Now, Fernando will discuss our outlook for the year. Fernando?

Thank you, Maher. We believe most markets in our portfolio will exhibit volume growth and increased profitability in 2011. For the full year, we expect consolidated volumes for our three core products to grow by low to mid single digits. However, as I mentioned earlier, we now expect a flat performance from our US volumes, reflecting the slower than expected recovery in the construction sector.

On a per ton of cement produced basis, our cost of energy is now expected to increase by about 17% during the year. For the full year, we continue to expect our pricing strategies to recover input cost inflation on a consolidated basis.

We will keep capital expenditures and other investments at a minimum. Total CapEx is expected to be 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 investment in working capital from 2010 levels. Similarly, we do not foresee a significant change this year in the cost of debt, including our perpetual and convertible securities.

In closing, I want to emphasize three points. First, as I said at the beginning of the call, we have seen three consecutive quarters of top-line growth. The recovery in many of our markets should produce volume as well as price increases across our portfolio.

Second, we will continue with the implementation of our transformation process, which is expected to bolster our deleveraging effort and shareholder value creation. Finally, we have practically eliminated our refinancing risk until December of 2013. Thank you for your attention.

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control.

And now we will be happy to take your questions. Operator?

Esteban Polidura, Deutsche Bank.

Thank you very much. Good morning, Fernando and Maher. Two questions if I may.

The first one, could you please give us a sense of the cash flow impact that the IFRS accounting changes will have and when they will be reflected in your results?

And the second question. Could you please also let us know when you expect to make the payment for Ready Mix USA, and if you will use cash or other sources of funding there? Thank you very much.

I will take the second one first. As you may know, they put is due at the end of September. So we need to make a transaction before the end of September.

We have been following a divestment process that is in place. We still have time -- July, August, and September -- to see our chances. And in case it is necessary, we are prepared to finance the put and take the time to make the divestment of the assets.

Now, on the IFRS, Maher, I don't know if we should comment that here. That is a long and sort of complicated issue that is already --

Well, if you take a look at the report that we just published, there is a full page explaining the migration plans to IFRS and the expected impact by account in the balance sheet.

In addition to that, Esteban, last month we filed with both the SEC and the Bolsa a more comprehensive analysis of this. So we encourage you to take a look at that document; and certainly we can address the specifics offline, if you don't mind.

Sure thing. Thank you very much.

Vanessa Quiroga, Credit Suisse.

Thank you, Fernando, Maher. Good morning. My question is regarding Mexico. Could you provide more color on the performance of this country within CEMEX?

We saw lower margins year-over-year, also a reversal in the increases in cement prices that we had seen in the first quarter. I was wondering if this is a trend that you expect to continue during the rest of the year, or there was something extraordinary in the quarter.

My second question would be regarding cash flow. Do you have any range that you would guide for, for cash flow generation, for the year? Thanks.

I will take the first one. Thanks for your questions, Vanessa. What I can comment in Mexico is that volumes are stable and growing, as we have commented, low to mid single digit growth. And we continue having the same expectations.

Now on margins, there is a reduction in margins that are similar to what is happening in other countries. We already mentioned in our introduction we do have -- we have been able to recuperate inflation in our ready-mix and aggregates sectors; but in cement that has not been the case so far. And Mexico is not an exception.

The increase of prices of pet coke is affecting production costs, and fuels are affecting also transportation costs. So there is some deterioration in the margins because of energy costs and, again, something similar to what that is happening in other countries.

Now on prices, Vanessa, there seems to be a slight reduction in prices. Now if we take each and every sector, each and every product, and each and every way to present the product -- I am referring to, in the case of cement, to bulk and bag -- all prices are stable. The difference is just because of mix in products. As you have seen ready-mix growth is much higher than cement, and ready-mix margins are lower than cement margins.

As well as geographical mix. We are selling -- the composition of the different regions has been different. So again on a per-product basis, prices are very stable.

Vanessa, on the free cash flow, it's -- as you know we are not providing guidance on that. But I think it is important to take a look at what is happening in the first half of the year and what is likely to happen in the second half of the year. As you know, we have not changed any of the guidance of the elements between EBITDA and free cash flow, except for some of the impact that we have on energy.

In the first half of the year, roughly $130 million was essentially investment in working capital. Now, as you know, this is a seasonal thing; and we expect that investment to be pretty much recovered completely during the second half of the year.

The second component that has affected our free cash flow -- and this is of course, all of this, is year-to-date, right? This is first half.

The second element that has impacted our free cash flow generation is about $77 million more in interest expense. And roughly $17 million of that is essentially due to the perps exchange that we did, as we mentioned, last year and this year.

In addition to that, in the first half we had severance payments that were close to about $50 million. So that, those three things, were the major drivers.

I think what is really important here is that in terms working on working capital, if you exclude the effects of securitization for the first half of the year, we actually continued to improve our working capital. We went from 33 days working capital last year in the first half to about 30 days this year. It is primarily due to better inventory management and an improvement in supplier terms.

So clearly as you have seen from previous years, we expect to recover most of the working capital investment during the second half, which is very typical just because of the seasonality. I don't know if that answers your question, Vanessa.

Yes, Maher. Thank you. Just going back to the question on Mexico. Would you expect the same mix to continue to be the case, to be reflected in the second half of the year in the case of Mexico? And are you planning or have you announced more price increases in Mexico to cover better the higher fuel costs? Thanks.

I think mix might stay -- as you know, works on infrastructure continue. Now housing is recovering. It will depend on the speed, but it might stay around the same proportion.

On price increases in Mexico, I think there was one announcement last month. So let's see how much of the announcement sticks.

Great. Thank you both.

Eduardo Couto, Goldman Sachs.

Hi, good morning, Fernando. Good morning, Maher. My question is in relation to the US. I saw that despite higher volumes, actually despite the better -- basically the cement prices in the second quarter, they were pretty much flat if you compare versus the first quarter and also versus last year. So basically prices in the US are more or less flat.

So if you could comment a little bit more in relation to the environment in the US. Because you reported basically a negative EBITDA in the second quarter, which is generally a strong quarter. So what can we expect in terms of the second half assuming that prices, as I said, are more or less flat.

And basically if you believe you are going to be able to still raise prices in the US during the second half. So basically my question is just to have a view of what we can expect for CEMEX USA during the second half.

Let me start the answer by saying that, as you can imagine, the dynamics of the market are still complicated, in the sense of current volumes and the delay of the recovery that was expected this year. But despite of that, as you have seen, the prices are from flat to slightly higher than the previous period.

I think this is good news, and I think it will continue during the rest of the year. Don't forget that most or the majority of the impact of price increases in the US is starting in April, perhaps in March, but it is in April. So I think the news on prices for the rest of the year should improve gradually.

Now on the volume side, as we commented, we think that we will get flat volumes in the US.

If I can just add, it is very important -- I think, Fernando mentioned it in the comments section. The comparison in the US is a very difficult one for the first half. Right?

I mean, we had -- cement volumes were up 8%, just by way of backdrop, last year in the second quarter in cement. Right? And that was primarily due to the home purchase tax incentive which pulled demand forward.

The other thing that was affecting our volumes in the second quarter -- we had unprecedented, frankly, precipitation in the quarter. We had major flooding as you know in the Midwest, which affected our business and everybody else's. We had record precipitation rainfall in California in June.

Of course the other impact that will continue through the year is going to be the Arizona restructuring. Frankly if you just adjust for volumes, just for Arizona and the flooding, the numbers would be substantially less than that quarter over quarter. It would it be about roughly about 4%.

But we are very encouraged, frankly. To see prices, despite the fact that they are modest increases in the case of cement and ready-mix and not so modest in the case of aggregates, it is a good sign.

Again, I don't think people are high-fiving each other in the US operation; but seeing positive prices sequentially -- in cement 1%; in ready-mix 2%; in aggs 4%. And particularly in aggs, you have to consider we have increased -- this is the third sequential pricing increase in aggregates in our business on a like-for-like basis. I don't know if that addresses your question, Eduardo.

Yes, it partially does, Maher. But just to understand, do you think we can still see some momentum on prices in the US throughout the second half despite some weaker seasonality?

Also another question that I have is in relation to the other expenses that you had. If you could give us a little bit more color in relation of what percentages of these expenses are non-cash and what percentage are nonrecurring, so just to give an idea, because it was quite a high Other expenses in the results.

Right, well let me just address first -- to complete just the US conversation. We, in fact -- clearly the traction on pricing increases that we had is not as good as we would like it to have been. But also please bear in mind that the pricing increases were all pretty much taking effect in late spring this year.

In fact there has been some additional pricing increases that have been announced in the US in markets where they deserve that, especially in places where -- are impacted by some of the oil and gas and farm activity, which we have seem particularly higher volumes. Our volumes, for instance, in the oil and gas cement area are up more than 40%, which is pretty impressive.

So there is going to be localized favorable supply-demand conditions that will warrant additional pricing. And we expect to get a little bit more pricing traction during the course of the year. That is to complete the US conversation.

Now in terms of the Other expenses in the income statement of $202 million, most of those are non-cash. Essentially just to give you an idea by background -- I don't know, Fernando, you would like to go through that, or would you like me to?

No, no, go ahead. (multiple speakers)

Right. In terms of the breakdown, I mean roughly a quarter of that is severance payments; and that is a cash item.

Then another quarter, a little bit more than that, is a one-time tax in Colombia which I actually mentioned or alluded to in the remarks section. Now, that is not a cash item. It is payable over a number of years.

The other element is an impairment of fixed assets. And there are some fees that are related to financing that have been amortized. So really the chunk that is cash is probably a quarter or maybe a little bit more than that; and the rest are non-cash items.

Okay. Very clear. Thank you very much, Fernando and Maher.

We will be taking the next question from the webcast.

Okay, and the question from the webcast is from Felix Fischer from Lucror Analytics.

The question is -- are you confident to meet your 2011 financial covenants? How much headroom do you expect? Have there been any discussions with your banks lately?

Let me start with the last part. No, we have not been in discussions with our banks lately. As you know we have been permanently in contact and in conversations with our bank, for obvious reasons. And we are very glad that we have a good relation with all the banks related to our bank debt.

Now, we do -- yes, we are confident that we will comply with our covenants in 2011 with a reasonable margin. I mean, just making the arithmetics, I think it would be like around a 15% margin or so. It will depend; but we feel confident. We don't have a concern on that side for 2011.

Operator?

Gordon Lee, UBS.

Hi, good morning. Just a couple questions. First on the operating side I was wondering if there was anything specific to Asia and Central and South America in the quarter on the cost side. Because the margin compression there at the EBITDA level was particularly acute.

I realize there was volume issues in the Philippines. But I was wondering, are those one-offs on the cost side to think about?

Then the second question, on the covenants, I was wondering if you could tell us what interest expense is included in the interest coverage ratio? Specifically, I am wondering whether we should exclude the converts, the mandatory convert, and the perpetuals from that calculation in the denominator. Thank you.

On the operational side, in the case of Asia, the Philippines as I already mentioned, as other countries have been affected because of the increase in energy prices. In the case of the Philippines, it is combined with the competitive dynamics that are a little bit different because of new entrant in the market. But that is the main explanation in the case of Asia.

In the case of Central/South America and the Caribbean, I think we should refer to Colombia. Remember that Colombia, that there was a significant problem with rains a few months ago, which did affect our operational costs.

Just as a way to give some flavor to the size of the problem, the implications of the problems, for some time about 80% of all of the roads in Colombia were closed, were not operational. So as you can imagine all the distribution of the products was complicated, and there were some additional costs in order for us to continue serving the markets.

That is on the operational front. You want to take the other one, Maher?

Yes, yes. Gordon, on the interest coverage ratio, the answer is yes. All of the coupons on the converts, both the mandatory and the voluntary, are already included in the calculation.

They are included?

Yes.

So, okay -- and the perpetuals?

The perpetuals? Yes, I think they are. I will have to check, but I am pretty sure that they are as well. Yes.

Perfect, great. Thank you.

Mike Betts, Jefferies.

Thank you very much. A couple of questions from me, please. I am looking at slide 8, Northern Europe. Clearly very good picture on volumes. But I notice that pricing was down for all three products sequentially. Minus 1% for cement; minus 5% ready-mix; minus 7% aggregates. Could you explain what is going on in pricing in that region, given obviously the very good volume numbers?

Then also if you could talk about the situation in Egypt, please, where also seems to be some renewed pricing pressure. Is that the new capacity that is behind that? What is going on there? Thank you.

Well, let me start with Egypt and then we will move to North Europe. In the case of Egypt, I think the market has been behaving even better than we originally expected, after we learned about the political issues in the country. Prices have been affected, but almost none -- for a very slight amount.

So we think Egypt is both still volumes and price stable, and it will continue as that as long as the transition to a new form of government takes place. So that is on the Egyptian part. Do you want to take the one in Europe?

Yes, I think that there are some effects that are taking place in Europe that are primarily -- there are some of the smaller countries, particularly in the case of cement, places like frankly Norway, Czech Republic, that are affecting prices. There has been a bit of a delay in some of the price increases that were supposed to occur in some of the other countries like in Germany to a later part of the season.

In the case of ready-mix, again, prices were down in most countries about 3 to 5 percentage points. But given the supply-demand dynamics there, obviously that situation is not sustainable. And there has been a number of pricing increases, as you know, in the market, in most of those markets.

Okay. Then if I could, two very brief final questions. Were there any CO2 gains in these numbers?

Then secondly, I presume there is nothing to say on Venezuela, as there is nothing in the press release.

No, in the case of Venezuela, we don't have any additional significant news. We continue negotiating. As you know there are some news in Venezuela about Mr. Chavez's health. But conversations continue, so we still are on that track. But nothing new in particular.

And, Mike, in the case of the CO2, no; all of that had been -- have occurred in the first quarter. So no CO2 contributions in this quarter.

That's great. Thank you very much.

Gonzalo Fernandez, Santander.

Hi, good morning, Maher and Fernando. Two questions.

First, if you are expecting to follow the same policy on a securitization of receivables that normally turns around a working capital into positive in the fourth quarter.

And the second question, if this is not enough to turn around free cash flow into positive, is the potential payment for Ready Mix US already -- do you already have the resources with the recent debt issuance? Or is this subject to a possible sale of assets or other debt issuance before September?

Let me take the answers. On securitization as you know, Gonzalo, this is a program that we have had in the past; and yes, we plan to continue having this program. We are renovating them and we will continue having this figure.

Now, on the -- I think the second question is related to funds and our obligations for the next few months. I think that we have commented that with the latest bonds -- and as you know, after a very active first half in the market, we have already succeeded on eliminating all refinancing risk in the very short term.

And that is including everything, meaning including the eventuality of needing to finance the put if don't manage to divest that asset or other assets by September 30. So on that front we are very comfortable and confident in the sense of we have the funds to run, including all our obligations.

Perfect. Thank you, Fernando.

We will be taking the next question from the webcast.

The next question from the webcast is from Paul Roger from Exane BNP Paribas. And it is a twofold question. The first question has to do with energy and the second question is on the US.

So the first question, Fernando, is -- you have increased your guidance for energy cost inflation from 13% -- this is for the full year -- from 13% to 17%. To what extent does this reflect FX changes? And what does it imply for underlying inflation?

Well, let me explain. The 17% is impacted by an FX effect of 4 percentage points. In real terms it is 13%.

The figure I don't have now is how much the previous 13% was impacted by FX. But this one, the 17% is impacted by 4 percentage points.

As Maher already mentioned, we are expecting a better comparison in the second half compared to the second half of last year. Year-to-date inflation in our energy cost is 19%; so that will go down 2 percentage points to 17%. And again, this 17% includes an FX impact of 4 percentage points.

The reason why we are expecting a better comparison in the second half for energy cost is two reasons. The first one is prices in fuels like pet coke and coal are -- seems like they have been stable for the last few weeks, on the one hand.

And on the other hand, last year we still had some inventories of either pet coke or coal that made the base cheaper in the first half. And then we started paying for the higher prices in the second half, so that is one reason. There is also a base affect because of that.

Also don't forget we insist in the fact that we have been aggressively developing our alternative fuel initiative. Our alternative fuel initiative that was started a few years ago -- this is not this year or last year; it started in 2005 or '06 -- is an initiative for us in order to take advantage of the characteristics of the cement process, in order to try to detach an important part of our energy costs by using other alternative fuels that are not directly related to the prices of either oil or coke or pet coke.

I think in that front, we have increased very rapidly. We started with a very low base. I think it was 5% or 6% five years ago; and I think Maher mentioned in this quarter we have achieved already 24%. As you may have heard, we have a target for 2015 for 35%.

These are fuels that even though they might be related, but they do not follow directly the price dynamics of primary fuels. So those are the reasons why we think in the second half the increase in our fuel bill will be lower than first half of the year.

The second question from Paul is a general question on the US. It's about our guidance for flat volumes for the full year.

Does it imply good growth in the second half? Is this just due to base effect? And where will the growth come from?

I don't know, Fernando, you want me to address that?

Yes, right.

Paul, there's a number of things. Obviously the base effect is something that we really can't ignore, right? I mean, it's very, very material, especially as it affects the residential market.

As you know and as I mentioned in the remarks section, the residential demand in the first half of last year was substantially stronger. So we are definitely expecting a little bit of better performance in the second half of the year.

Also, it is very, very usual for department of transportations in the first half of the year -- especially given the level of I guess issues with state budgets and of getting state budgets approved -- that tends to generally slow down the decision-making process and conviction by department of transportations on awarding contracts. So we do expect higher spending on highways from states now that budgets are approved substantially.

Also from a fiscal perspective we are very encouraged by the tax revenue situation. I think we are on the fourth consecutive quarter now or fifth consecutive quarter where we have seen positive growth in tax revenues for most of the states.

Then you have states like California, for instance, which finally, finally are getting proposition -- I don't want to get too technical here for the audience. But proposition -- I think it's P1 or Proposition 1, which was from the days of the older, not in age, but older governor, Mr. Schwarzenegger. There, that amounts to about $2 billion worth of funds that are now beginning to actually get into the market. That is a significant number for California, and that is a market where we are very strong in.

The third area, Paul, that is positively impacting us and we really don't see things slowing down is places like Texas, for instance, where we have a very strong oil and gas sector. Like I said, again, earlier in the Q&A, our volumes for that sector are up more than 40% year to date.

Big question, of course, continues to be employment. So we will have to wait and see. But yes, there is a base effect and we do expect things to get a little better in the second half of the year. I don't know if that addresses that question, Paul.

Jacob Steinfeld, JPMorgan.

Hi, good morning. Thank you very much for the call. I was wondering if you could provide an update on the covenants ratios and the maturity schedule pro forma for the retap.

Can you repeat the question, please?

Sure, I was wondering what the covenant ratios, the funded debt ratio and the interest coverage ratio, are now pro forma for the retap of the bonds for this month.

At the end of the year leverage ratio is 7 times.

I know it was 7.16 at the end of 2Q; but do you have what it would be after the additional $650 million that was issued this month?

We have not, Jacob, produced yet a pro forma for the $650 million. In terms of the application, right? I mean we have not yet announced to the market what would be the application of that $650 million, so it would be difficult, frankly, to provide a pro forma without doing that.

As you can imagine, right? It depends on how much free cash flow was being generated; if there are any asset disposals; or how we will deal with some of the maturities that we are intending to reserve for. But I don't know if that addresses the question.

I guess my question had two parts. The second part was -- I know it was mentioned earlier in the call that you expected a 15% cushion in the ratios for the end of the year, which -- and on the funded debt ratio it has to be 7 times, which I think would imply a number a little above 6 times by year-end.

So given I would think the ratio would have increased a bit with the retap, it is a little more than 1 turn that we need to go down in the second half. Am I thinking about that the right way, given the cushion that you mentioned earlier in the call?

Frankly, Jacob, again I would hate to give guidance on how we are going to be applying the $650 million. I know that is what you are trying to get to.

All I can tell you is that we are using $50 million so far this quarter, right? Clearly the intent is that we will use some of that to meet the $200 million requirement under the Financing Agreement to avoid that 50 basis point step-up.

But beyond that it is very -- we have not provided any guidance on the application of the rest of the funds. Clearly the effect on the ratio is very much a function of what those funds will be used for.

If they are used to repay other debt, then that has one impact. If they are paid -- if they are used to fund other sources that are not debt, that would have obviously an impact the other way on our leverage ratio. So it is difficult to give you that number.

I know that is what you're trying to get to, but it's tough. I don't know, Fernando, if you want to add anything to that.

No, I think what we have said is that our objective is to reduce or eliminate our short-term refinancing risk. So we have the Certificados Bursatiles next April, so the funds would be, as Maher already mentioned -- it will depend. We don't have a complete description and for sure we have not disclosed on the specific application of the funds.

Okay, thanks. That's helpful. I guess it's a question that was asked earlier; I just wanted to clarify. Mexico prices were up and volumes were up, but with revenue and EBITDA were down. I was just wondering. Is it really just cost inflation that drove the decline?

It is; and only in cement.

Okay, great. Thank you.

Jacob, one thing. I know people tend to think of CEMEX in a very monolithic way because of our primary product, cement. But we do sell other things, right? Our other core businesses are ready-mix and aggregates.

And in the case of Mexico we have other activities. I mean in some cases we perform the role of a contractor. We have some retail business. We have many other businesses.

In the second quarter almost 10% of the sales were actually outside of the three most important core products -- cement, ready-mix, and aggregates. So a combination of --.

Also, the other thing that is very important is that ready-mix volumes increased substantially more than -- close to, almost a little bit more than, almost 40% of the 2.9 percentage point decline in margin was due to product mix. A big driver there is the fact that you had ready-mix growing substantially higher because of infrastructure work, 13%; versus cement growing by 3%. So the product mix element is not something to be minimized, frankly.

Also the geographic mix, as we mentioned earlier, had an impact on prices. I mean, where the product was being sold. And there is a big variation, believe it or not.

Although again, just like the US, although we provide one single price for cement in Mexico, like everywhere else in the world, we have a range of prices and the geographic mix of markets does make a difference on the actual price realized.

Great. No, that's great color. Thank you.

Benjamin Theurer, Barclays Capital.

Hey, good morning, guys. Thank you very much for the call. Well, most of my questions actually have been answered. But there is one, just maybe to line up on what we just discussed with that shift in Mexico, the margin shift and the explanation.

So going forward, if we look into the rest of the year and also into future years, in the past Mexico has been always one of the higher margin regions. So this time is the first time that we are actually seeing a strong decline here.

So is this more like the new level because of this shift is going to be persistent? Or is this something you would expect to go back to a more normalized level?

A final question would be on South/Central America and Caribbean where also the margin has suffered significantly, over a 7 percentage points decrease. Which you explained already, also, partly due to a shift in product mix and other disruptions.

So do you expect that to recover? Or is this also something to be seen as a more realistic level going forward at least for the rest of the year?

Okay, let me start with your question related to Mexico on margins. As commented, there are several impacts in Mexico's margins. The first one is that it is a sector or product mix as Maher has already mentioned.

Growth in ready-mix and other businesses -- let's put it that way, which account for about 10% -- is much higher than cement and aggregates. In those sectors, ready-mix and other businesses, margins as you know are lower than the cement or either aggregate. So that is one reason.

Then there is another one which is, even in cement in Mexico, we have a large proportion of cement sold in bags. Because of the type of jobs that predominated in the quarter, there is also a reduction in the mix of more bulk cement because infrastructure works and less in bags.

So we have the product factor. And if you take each and every product in a separate way, prices didn't suffer. It is just you get more ready-mix, less cement, whatever; and the mix gives you a different composition. So that is one part.

The other part which I think also Maher already mentioned is related to geographies. Prices in the northwest of Mexico are not the same that in central or the southeast part of the country. So there is also a geographical mix that happened during the quarter that also affected the mix in prices.

Now, is that going to continue? Not necessarily. It depends.

We have a trend of strong infrastructure works; but I as I already mentioned the housing should start recovering. So let's see how it goes. But I think at the point here is that on a per-product basis, products are stable.

Now we have already mentioned also -- and that applies to South America to some extent -- that what has impacted margins is energy. Up to now in Mexico as well as in some other countries we have not been able to recuperate inflation in our cement production costs, and it is mainly due to energy.

As we have already commented that is not the case in ready-mix and aggregates. In ready-mix and aggregates we have been able to recuperate and even more the inflation of those sectors.

Now, in the case of South America and as commented, the main impact in South America or the most material one is Colombia. Of course, we do not expect another weather impact like the one that happened, which it was one of the main sources of margin deterioration.

There is another reason that it won't repeat itself, and I think that one we have not mentioned, which is the extra cost that we got in our Tunjuelo quarry in Bogota. As you remember there was a quarry; it is an important quarry in the city that was closed due to certain issues. Now we reopen it, and there are some additional expenses on how to put the quarry to work. Those also happened during the last few months, and those for sure will not continue happening in the rest of the year.

And maybe if I can add, Fernando, in Colombia again as you know it is our biggest market. And on the -- the weather patterns really delayed the infrastructure performance in the first quarter. I mean, in the second quarter. So we expect things to obviously pick up.

As you know, there is -- President Santos's national development plan contemplates a very significant investment in infrastructure, about $280 billion during 2011 and '14 period. Frankly we expect that to continue on plan. And demand in the residential sector continues to be very strong if we look you take a look at permits, as we mentioned in the comments section.

Then again, just a reminder -- Panama, we had a closed kiln for maintenance. That is not likely to continue.

So, yes, the expectation is that going forward thing should be looking better in the second half for SAC -- I mean for South America Caribbean region. Operator?

Adrian Huerta, JPMorgan.

Good morning, everyone. I basically wanted to ask, I mean, the situation in the US with the expectation of flat volumes for this year. What else can the Company do in order to get back into positive EBITDA margins if this is what we are going to see in the US for the next two or three years?

Sorry; could you repeat the question please?

Yes, sure. What can the Company basically do in the US in order to generate positive operating margins, if we assume that volumes will not be recovering over the next two or three years?

Well, price is one effort, as we have mentioned. We have already also commented the good news is that after three years this quarter we have positive prices, although modest, but positive prices. So that is one front.

The other front as we have commented also -- this is for the US as well as for the rest of the Company -- is all the effort that we are concentrating through our transformation process to continue making the Company much more agile with our lower cost base.

Perfect. Thank you, Fernando.

At this time I would like to turn the call back to Fernando Gonzalez for closing remarks.

Well, thank you very much. In closing I would like to mention that we will host a CEMEX Day forum on September 29 to update you on the changes we are making in our business model and to introduce our new executive team. This will be a full-day event and will be webcast live. We will be communicating the details of this event in the upcoming weeks.

I would also like to thank you for the 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.

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