Cemex SAB de CV (CX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CEMEX third-quarter 2011 earnings conference call and webcast. My name is Chris, and I will be your conference moderator for today. (Operator Instructions).

Your host for today, Mr. Fernando Gonzalez, Executive Vice President of Finance and Administration, and Mr. Maher Al-Haffar, Vice President of Corporate Communications, Public Affairs and Investor Relations. And I would now like to turn the call back over to Mr. Fernando Gonzalez. Sir, you may proceed.

Thank you, Chris. Good day to everyone, and thank you for joining us for our third-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 trends we are seeing in our consolidated quarterly sales. During the quarter, sales increased by 5% in US dollar terms versus the same quarter last year. This is the fourth consecutive quarter of year-over-year growth in our topline. We also saw growth in EBITDA and free cash flow generation in US dollar terms during the quarter. Infrastructure and housing continue to be the main drivers of demand for our products.

During the quarter, we saw favorable volume dynamics in the US, Northern Europe, the South, Central America and Caribbean region and Asia. On a consolidated basis, our ready-mix volumes showed year-over-year growth for the fourth consecutive quarter with an increase of 4% on like to like basis. The 1% drop in domestic gray cement volume is mainly the result of declines in Mexico, Spain and Egypt. Aggregate volumes declined by 2% in the quarter, mainly as a result of declines in the US, the UK, Poland and Spain.

Consolidated prices on a quarter-over-quarter basis were flat in local currency terms for cement, ready-mix and aggregates. We saw sequential price increases for cement in Mexico and for ready-mix in the US and the Mediterranean region. In addition, the South, Central America and the Caribbean region experienced sequential price increases in both of these products. We continue to be encouraged with cement pricing levels during the quarter being higher than at the beginning of the year in all of our main markets, except Egypt and the Philippines.

Price increases have more than offset fuel and transportation cost increases in our ready-mix and aggregate businesses. In our cement operations, we closed the gap by 50% between input cost inflation and price increases.

On the financing side, we have now practically eliminated our refinancing requirements through December of 2013, while keeping our interest expense relatively stable. We have maintained sufficient liquidity to support our operations and continue to comply with our financial obligations.

With the debt payment made last week, we have met the final prepayment milestone under our financing agreement. We remain focused on our transformation process.

First, as we commented during CEMEX day, we now expect the transformation process will result in a recurring improvement in our steady-state EBITDA of $150 million during the second half of this year, having achieved about one third of this amount during the third quarter.

We expect an incremental improvement of $200 million in 2012 and to reach a run rate of $400 million by the end of next year, which we expect will be fully reflected in our 2013 results.

We also expect to raise around $1 billion in assets sales by the end of next year. We will be focused on selling assets that will improve our return on capital employ and which will help us to deliver. As part of this effort, we have raised $80 million in assets sales during the first nine months of this year and expect to raise an additional $100 million to $200 million during the fourth quarter.

Another important competence of our transformation progress is our efforts to increase the use of alternative fuels. During the third quarter, the substitution rate increased to a record 25.8%, up from 24.4% in the previous quarter. This reduces the cost of production and dampens rising energy prices. Alternative fuels are now tied with coal as the second most important fuel for us just behind pet coke.

It is likely that alternative fuels will surpass coal utilization in our operations next year.

Now I would like to discuss the most important developments in our markets. In Mexico ready-mix volumes increased by 10%, and aggregates were flat during the quarter. Cement volumes, which are less exposed to infrastructure, decreased by 1% in the same period on a year-over-year basis. The quarterly decline in cement volumes reflects a decline in consumption from the residential sector. Despite an expected increase in investment for the year in the form of residential sector of about 3.2%, cement consumption from this sector has been affected for two reasons.

First, there is a higher percentage of mortgages which are being applied to existing as opposed to new homes. This percentage is currently estimated at about 30% versus about 28% last year. And second, according to the National Housing Registry, housing starts have decreased by about 19% year to date as of August versus the same period last year, in line with a decrease in working capital financings available to housing developers.

Investment in the self construction sector should grow by about 2% this year fueled by growth in employment. In addition, remittances in US dollar terms have increased by 5% year-to-date as of August. The recent depreciation of the Mexican peso should further contribute to the growth in spending power of remittances in local currency terms. For 2011 we continue to expect total investment in infrastructure will increase by about 4.5%. This figure includes several public investments, as well as extra budgetary resources. The latter includes an estimate of about MXN3 billion for investment stemming from surplus oil revenues, equivalent to about 0.7% of cement-intensive infrastructure investments for this year.

The industrial and commercial sector is expected to grow by about 4% this year, in line with the recovery in the economy. In the United States, quarterly cement volumes were up 2% on a year-over-year basis. With the consolidation of the ready-mix USA joint venture in September, our quarterly ready-mix volumes increased by 9% on a year-over-year basis, while aggregate volumes declined by 10%. On a like to like for the ongoing operations adjusting for Ready Mix USA, as well as the aggregates quarries sold in the third quarter of last year, ready-mix and aggregates volumes declined by 3% and 8% respectively.

In addition, adjusting for our Arizona commercial strategy announced during the first quarter, third-quarter cement volumes increased 3%, while ready-mix and aggregate volumes declined by 1% and 4% respectively. On a year-over-year basis, third-quarter cement prices were flat, while ready-mix and aggregate prices went up largely resulting from product and geographic mix effects on price increases in some markets.

Pricing for our three main products has been relatively stable in the year. In an effort to compensate for input cost inflation, we announced price increases in most of our markets earlier this year. Unfortunately we were not successful and suffered some volume losses in the process of trying to achieve tractions of our price increase. We have recovered the majority of the volume loss and have announced price increases in a number of our markets for January of 2012. It is too early to tell the outcome of our price announcements at this moment. However, we are committed to covering at least input cost inflation while managing the impact to our volumes.

Housing starts for the third quarter were 8% higher than the previous quarter, mainly to the higher multifamily starts. On a year-to-date basis, starts are essentially flat versus last year. Year-to-date as of August, public construction spending was down 2% with streets and highways down 5%.

With regards to infrastructure, we are pleased with the recent extension of the existing Federal Highway Program for six months until March 2012 at spending levels flat to the prior year. We believe that the extension is further evidence that infrastructure spending has broad bipartisan support.

The industrial and commercial sector appears to be stabilizing as the year-over-year spending declined has moderated and turned slightly positive in the last two months. Contract awards are up 2% in real terms year-to-date.

In our Northern Europe region, growth continued during the third quarter although at a more moderate pace than in the first half of the year with relatively stable prices. Favorable demands and ready-mix volumes in Germany, France and Poland compensated for the decline in volumes in the United Kingdom, resulting from spending cuts in the public sector and the conclusion of some large infrastructure projects.

Despite these decline in third-quarter UK volumes, we expect cement volumes to increase by 6% and ready-mix volumes to increase by 9% for the full year. In Poland, despite extremely wet weather in July and August, cement and ready-mix volumes continued to be favorable, driven by the ongoing strength of the infrastructure sector, including roads and highways.

In Germany the residential sector was the main driver for volumes during the quarter. Housing permits increased by 26% during the second quarter on a year-over-year basis driven by low mortgage interest rates, relatively stable prices for construction and improved employment. Germany did not go through a residential bubble as some other countries did, so this increase in housing starts is coming from a very low level and is sustained by domestic housing needs.

Ready-mix and aggregates consumption in France was also driven by the housing sector. During the twelfth months ended in August 2011, new housing starts increased by 17%, and housing permits show a 10% improvement. Given this increase in permits, the estimate for 2011 has been revised up and is now expected to reach 365,000 units, a 10% increase versus last year.

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 client in our quarterly domestic gray cement volumes was due to a drop in volumes in our operations in Egypt, Spain, Croatia and the United Arab Emirates. In ready-mix, positive volumes in Israel and the Emirates were offset by declines in Spain and Egypt. Prices in the region for ready-mix and aggregates increased sequentially versus the previous quarter in local currency terms. The drop in sequential cement prices is due to declines in Egypt and the Emirates. In Spain domestic cement volumes continued to decline with Catalunya, Aragon and Baleares being the most affected regions. This drop in domestic cement volume is being partially mitigated by exports.

In the case of Egypt, visibility remains low, and most infrastructure projects are on hold. Parliamentary elections, which were to take place last month, were postponed and are now scheduled to take place in three phases, starting in late November and ending in mid-January 2012. Presidential elections are now expected to take place in the second half of next year.

In our South Central America and Caribbean regions, positive volume and pricing conditions continued during the third quarter. Domestic gray cement volume was driven by increased consumption in Colombia, Costa Rica, Panama, Guatemala and Nicaragua. All countries in the region with the exception of Panama and Guatemala experienced double-digit growth in ready-mix volumes during the quarter. The strong economic expansion in the region reflects government policies that favor expanding homeownership and infrastructure development in countries such as Colombia, as well as increased 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. In Colombia, our largest market in the region, domestic gray cement volumes increased by 8% during the quarter, while ready-mix volumes show double-digit increase, reflecting the continued favorable performance of the residential sector, which has benefited from favorable interest rates, controlled inflation and favorable economic conditions.

The government continues in its effort to build 1 million houses in the next four years. In addition, reconstruction work to repair damage caused by floods and rains experienced in the first quarter boosted volumes. In Panama the infrastructure sector continued to be the main contributor to cement consumption during the quarter, driven by new projects, including hydroelectric plants and the Panama City Metro project, as well as the continuation of the canal expansion.

In Asia the increasing domestic cement volumes during the quarter reflects positive performance in Thailand. In the Philippines, cement volumes were stable, showing an improvement in the year-over-year trend. Consumption in this country was affected by adverse weather conditions during the quarter, as well as a 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.

Thank you Fernando. Hello, everyone. Let me start by saying that we are pleased with the 1.6 percentage points sequential increase in our operating EBITDA margins. This margin expansion is driven by an improvement in our topline, a drop in energy prices, and the initial results from our transformation process.

On a year-over-year basis, operating EBITDA increased by 1% in US dollar terms during the quarter. Operating EBITDA margins fail to 16.6% during the quarter from 17.2% in the third quarter of last year. This decline in margins is explained by a few things. First, a change in product mix resulting from the higher growth in our ready-mix business, which has a lower margin, but also and more importantly has much lower asset intensity than our cement businesses.

Second, a change in geographic mix as higher sales are coming from markets with higher cost structure. And lastly, input cost inflation in our cement business where we have continued to close the gap between input cost inflation and prices.

In our ready-mix and aggregates businesses, we have been able to more than offset the input cost inflation. Cost of sales as a percentage of net sales declined by 0.8 percentage points versus the same quarter last year, reflecting mainly the increase in year-over-year prices in Mexico, Northern Europe and South/Central America and the Caribbean, which have offset the increase in fuel and raw material costs.

SG&A as a percentage of net sales increased by 0.6 percentage points during the third quarter versus the same quarter last year, reflecting higher distribution expenses which were partially mitigated by our cost reduction initiatives.

Excluding energy and distribution costs, cost of sales plus SG&A as a percentage of sales actually decreased by 2.1 percentage points during the quarter on a year-over-year basis. Additionally, if we exclude the price effect, the decrease is about half of that, reflecting the success of our transformation program. Our kiln fuel and electricity bill on a per ton of cement produced basis and excluding foreign exchange fluctuations increased by 13% during the first nine months of the year versus the same period in 2010. If we include the FX effects, the increase was 17%.

During the quarter, increases in energy prices moderated significantly. For instance, pet coke prices dropped by about 30% from their peak in April of this year. In addition, as Fernando commented earlier, we continue increasing the utilization of alternative fuels.

During the quarter, our free cash flow after maintenance CapEx was $263 million versus $250 million last year. Lower maintenance CapEx, a partial recovery in our working capital versus an investment last year, and lowered cash taxes offset the higher financials and other expenses during the quarter.

The year-over-year increase in our net financial expenses is primarily due to the substitution of financing agreement debt with long-term fixed-rate bonds. The partial reversal of the working capital investment during the quarter is mainly a result of a securitization program in the United Kingdom and the enlargement of the Mexican securitization program.

For the first nine months of the year, working capital days, excluding securitizations, declined to 31 days from 32 days in the same period last year. Due to the seasonality of our business, we expect an important part of the year-to-date investment in working capital to be reversed during the fourth quarter. However, we do expect working capital investment for the full year to be higher than last year's, reflecting higher sales. Despite the expected higher working capital investment, we expect to reduce working capital days to 30 by the end of the year.

The other cash items line during the quarter includes severance payments for $63 million, as well as sales of assets for $52 million. Severance payments during the second and third quarters were higher than our initial estimate of transformation-related costs for this year. However, the expected improvements in our steady-state EBITDA for this year is now also more than double our original estimate at about $150 million.

During the quarter, our controlling interest net loss was primarily driven by material adverse change in the currency and equity markets. Of the $732 million year-over-year difference in controlling interest net loss, about 70% is noncash, and about 85% is primarily explained by a few things.

One, $217 million in foreign exchange loss, due mainly to the depreciation of the euro and to a much lesser extent Mexican peso versus the US dollar. Most of these losses are noncash and are related primarily to intercompany operations. And second, a loss on financial instruments of $339 million related mainly to equity derivatives on CEMEX shares, and half of which is also non-cash. These foreign exchange and financial instrument losses were close to $100 million less than that at the end of the quarter as of yesterday. Despite the controlling interests and net loss, we expect to continue to comply with all of our financial covenants and other obligations as Fernando highlighted earlier.

As part of our financial strategy for this year, we have continued to reduce our refinancing needs. In the process, we have addressed substantially all our maturities through December 2013. We have now paid close to $7.7 billion or more than half of the original balance outstanding under the financing agreement and have met the final prepayment milestone.

In complying with the three milestones under the financing agreement, we have avoided an aggregate of 200 basis points step-ups in our interest expense, which translates into the avoidance of about $150 million per annum increase in our interest expense.

Of course, another important priority is to ensure that we have adequate liquidity. We have maintained cash levels above $600 million during the year. At the end of the third quarter, we had $736 million in cash and cash equivalents. We also maintained working capital facilities to support funding requirements of our business cycle through our committed securitization programs and other facilities.

The remaining maturities we have during 2011 and 2012 are Certificado Bursatiles, working capital lines, and other bank debt, which we expect to pay with proceeds from asset sales, our free cash flow generation and/or refinancing.

Now Fernando will discuss our outlook for this year. Fernando?

Thanks Maher. As we stated last month, during our CEMEX day, 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 cement to grow by 1%, and on a like to like basis from the ongoing operations, we expect consolidated ready-mix and aggregate volumes to grow by 4% and 1% respectively.

On a per ton of cement produced basis, our cost of energy is expected to increase by about 15% during the year or 13%, excluding foreign exchange fluctuations. For the full year, we continue to expect our pricing strategies to recover input cost inflation for ready-mix and aggregates on a consolidated basis and continue to close the gap on cement. 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 for 2010 levels.

As Maher commented earlier, we expect an important part of our year-to-date investment in working capital will be reversed during the fourth quarter. Similarly we do not foresee a significant change this year in the cost of that, including our perpetual and convertible securities.

With respect to our financial obligations, I would like to reiterate our confidence in meeting our year-end covenant. For this purpose, I would like to walk you through a simple calculation explaining why and how we expect to achieve this.

As of the end of the quarter, consolidated funded debt was close to $16.3 billion. At a minimum, we expect this number will be adjusted downwards by the $131 million prepayment we made last week, as well as by expected incremental reserves of $150 million primarily for Certificado Bursatiles. This will translate into an expected consolidated funded debt of about $16 billion for the end of the year.

Given year-to-date EBITDA performance, operating EBITDA would need to grow by about 5% during the fourth quarter versus the same quarter last year to be in compliance with our 7 times leverage covenant level. Our confidence in being able to achieve at least this year-over-year operating EBITDA growth during the fourth quarter stems from additional expected transformation savings of about $100 million, CO2 sales of about $35 million on a higher alternative substitution rate, and potentially an easier year-over-year comparison given extremely unfavorable weather conditions in some European countries and Colombia during the fourth quarter last year.

In addition, consolidated funded debt could be further reduced by the expected asset sales during the fourth quarter of about $100 million to $200 million, as well as free cash flow generation.

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

Second, we will continue with implementation of different initiatives under our transformation process, including optimization of our operations, asset sales, increased alternative fuel utilization, among others.

Third, for reasons we explained earlier, we continue to be confident in our ability to meet all of our financial obligations.

We have also substantially prepared all of our maturities until December 2013 and proactively bolstered our liquidity needs.

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?

(Operator Instructions). Carlos Peyrelongue.

Bank of America/Merrill Lynch. My question is related to Europe, Northern Europe. You had very strong growth in the first half of the year, some deceleration as we go into the third quarter with volumes growing about 2% versus the high double-digit growth in the first half. Can you comment regarding infrastructure spending and cuts by governments? You mentioned the UK has had some cuts. Can you comment on the other countries besides some reduction in housing and other places, what explains the deceleration in Northern Europe, please?

If I understood the question correctly, we were having some issues here. Maybe we can check that and improve it. But, as commented during the third quarter, we saw a reduction in the pace in the UK. You already mentioned the reasons why. And what I can add to what we have said is that in the case of Germany, even during the third quarter, we grew 4%, which is high-growth. And it seems that it will continue happening as commented. It is mainly based in the residential sector. Again, there is -- there are no significant inventories in housing in Germany, and we think that will continue to happen. So Germany is one of the explanations of why it continues growing at the pace it is growing.

The other countries that I can mention is Poland. Poland, during the third quarter, grew 33%, and it continues growing. They continue with their infrastructure projects. As mentioned, there was a couple of months of difficult weather conditions in Poland. But even though that happened, the market is reacting properly.

What I can't comment also in the case of France, in France the pace of growth was reduced during the quarter. It is a growth of 1%, but we, again, continue thinking that it will continue during the year.

We have not seen -- aside from the UK, we have not seen any significant impact on any cutting of public investments, and we do see a strong, again, Germany and France mainly housing sector.

I will follow-up, if I may. You mentioned that you expect EBITDA in the fourth quarter to grow about 5% in order to meet your covenants when the growth this quarter, third quarter was 1%. So besides the bad weather that you had in Europe fourth quarter of last year, what else explains the -- if you could go over again what else explains the expectation for a 5% growth on a year-over-year basis on the fourth-quarter EBITDA?

Thank you for the question because it will allow me to explain the meaning of that 5%.

We are not saying that we will grow our EBITDA during the fourth quarter by 5%. What we are saying is that, according to our debt estimate, by year-end what is nearer is an EBITDA that is 5% higher than fourth-quarter 2010. So this is not a guidance. This 5% is not a guidance on our EBITDA for the fourth quarter. It is an indication. It is an illustration on what is needed in order to comply with December's leverage covenant.

And the reason why we think that we will have at least 5% is because we have at the bulk of our transformation savings during the year that will happen in the last quarter, even though we have like about a third during the third quarter, we will have most of the impact already in the fourth quarter as a way to describe the progress on all the initiatives and actions we are executing to our transformation project, the investment we have in the program so far at the end of September is an execution of 88%. So that means that most of the initiatives have been already executed and that we will get most of the impact during the -- we plan on having most of the impact during the fourth quarter, and we calculate that in about $100 million.

There are some other reasons why we are seeing the EBITDA of the fourth quarter will be at least that 5% growth, which is some additional CO2 savings during the fourth quarter. And, also, I think we commented that our two issues, reducing the inflation of our energy costs, the one reason being that the prices of pet coke and, as you know, pet coke is our largest and our fuel mix is the most important fuel we use. Prices of pet coke in at least the Western world have been decreasing since April. Last April was the peak of the price of pet coke. They have decreased by 30% compared to the end of September, and according to the information we have because of demand issues and because of new supplies coming on stream in 2011 and 2012 in the Western world, it seems like that trend will continue. Plus, the advancement in our alternative fuels program because alternative fuels do have a completely different economic dynamic, and it is completely detached to primary fuels. So we will get a benefit also during the fourth quarter because of those two issues.

So, in summary, transformation, some CO2, a slight reduction during the fourth quarter in fuels, plus potentially, as I think Maher commented, an easy base comparison to 2010.

Great. Thank you.

If I can add, Carlos, just one extra thing. I mean just to put it into perspective, the 5% that we talked about is roughly $24 million growth over last year's fourth quarter. Right? And we said CO2 sales of close to about $35 million. So just that by itself would translate to the increase.

Vanessa Quiroga.

Thank you, good morning. My question is regarding the quarter-on-quarter EBITDA margin expansion that you saw. You mentioned that the impact was due to a drop in energy prices and partly due to the transformation. Are you able to break down how much was due to lower energy prices and how much due to transformation?

And my second question is regarding the asset sales in the range of $100 million and $200 million that you mentioned. So that would be in addition to the expected EBITDA growth of the fourth quarter?

On the first question, what the impact of not just the energy cost trend but also the dynamic between price increases and energy, but you know price increases have been lower than fuel inflation. But so far year-to-date right now we have -- it is not year-to-date, sorry. During the quarter, we reduced the difference in margin in cement, which is the sector that we have not been able to get to cope with inflation. We reduced the level of reduction of the margin that used to be $1.00 per ton of cement to $0.50. That is a reduction then of $0.50 per ton produced. And the information I already have, I don't have it. Perhaps the way you requested, Vanessa, but the information I have on transformation is that an approximate figure on the impact of transformation during the third quarter was for about $50 million. So those two are the impacts between energy and transformation for the quarter.

On the second question on asset sales, I'm not sure I got your question, but if you can repeat it please?

Yes, what I meant to say is just to clarify that you expect to be compliant with the covenant in spite of asset sales, I mean not depending on asset sales? And if you could provide any guidance on what is your progress on the asset sales that you expect.

Okay. We have already during the year sold about $80 million of assets. I think all of them are assets that are not producing EBITDA. I'm referring to real estate, some equipment that is not in use. And out of those $80 million we have already sold, $50 million were sold during the third quarter. Our expectation for the rest of the year is that we will be selling another $100 million to $200 million additional to what we have done. And I'm mentioning a figure on assets again, more assets of the same type that I have mentioned. I'm referring to assets in which we are very confident that they will be sold because we are already dealing with those transactions. It might be higher, but I think for the time being we can say that we will add $100 million to $200 million asset sales for the rest of the year.

Gonzalo Fernandez.

I have two questions regarding free cash flow and debt reduction. You mentioned on your presentation that you have lost financial instruments of $339 million this quarter, and that half of that was a cash expense. I do not see that registered neither in your free cash flow calculation and in your variation in the net debt.

And the second question is the reduction of debt about $300 million is explained by a conversion effect due to the precision of the euro. My question is, if you have locked in that reduction or given that the euro has appreciated since September that the effect is going to reverse and if you have considered that in the calculation of the covenant you mentioned before?

In terms of where that number shows up, it is a use of free cash flow. It is below the free cash flow line. It is not part of the free cash flow calculation. I don't know if that makes sense or not.

Yes, but I don't see it either in the variation of net debt, so that is why I see the FX impact, the purchase of ready-mix, but I don't find that variation anywhere. So just to be sure if that was cash or non-cash?

It is as I said. Half of that number is non-cash, and the usage is really below the free cash flow line. (multiple speakers) If you wish, give us a call after this call and we will walk you through the calculation.

Sure.

I don't know, Fernando, if you want to take the --

On your second question Gonzalo, from the FX from the end of September to now have already reversed $100 million of impacts in FX and also in mark-to-market. Now it is not much of a strategy to expect a certain exchange rate in order for us to commit with our financial obligations by year-end. So unless we think on sort of a disaster in exchange rates or in the value of our shares, I think we are more than covered with resources we have even assuming by December we might have a negative variation in foreign exchange in the euro and the peso against the dollar.

What I can tell you is that we do have resources for 2 or 3 times the amount you can imagine on negative FX on (inaudible) variations. I can quantify, more or less what I can say is that we have up to $500 million of flexibility on ways in which we can offset the effect of certain operational risks we might have -- there always are some -- plus FX risks. This $500 million, this up to $500 million of resourses I am referring, some of them we have already used them, like the last payment we did in the FA. There are some others that we have not used. We might use it by the end of the year. We might use them next year. I'm referring to free cash flow. I'm referring to, for instance, the bucket we have that we have not used on financial leases in the FA for up to $300 million. We have other options. Of course, I already mentioned asset sales. So we are not betting to an exchange rate by December 31.

Operator, our next question is actually from the webcast, and the question is from Robin Challis from RBS. If you performed your covenant test for September 30 of this year, what would the number have been? And then a follow-up to that is, how much of your US dollar debt is hedged?

Well, I mean, first, we do give we do give the calculation actually. It is 7.2 times as of the end of the quarter. I don't know if that answers the question. And, as regards to how much of our US dollar debt is hedged, I don't know if you mean by that hedged through some kind of derivatives transaction, the answer is no. As of the end of the third quarter, roughly about 77% of our total debt was denominated in dollars, and roughly 20% is denominated in euros, and the balance is in a variety of currencies.

And historically the way that we have managed our foreign exchange exposure is really primarily through an asset liability process and matching the revenues which we believe are substantially dollarized over the medium term in many of our markets. So that is how we manage that exposure. I don't know if that answers your question.

Operator?

Benjamin Theurer.

Good morning. I have actually two questions, one related on your US operations. Can you give us an update on how advanced you are in your Arizona operations and if everything is finished now, and what that might translate into future potential?

And the second question would be related to South/Central America is seen as a very, very strong region with strong margins, and actually volume growth for the region was extremely strong. Was there something -- remind me in the third quarter of 2010 for easy relative comp, or is there something you just foresee as being a more realistic scenario in terms of volumes and pricing for the region also going into the fourth quarter?

The implementation of our commercial strategy in Arizona is pretty much complete, and that is why you see some of the impact that we have seen on a pro forma basis, the drop in ready-mix and aggregates, particularly the aggregates number. That is primarily being driven by the commercial strategies in Arizona. And that is why we wanted to add, frankly, the impact of that, and that is why when we went through the discussion of the US, we did say, in fact, that if we adjust for the Arizona commercial strategy, we do see volumes growing in cement by 3%, ready-mix dampened a little bit from minus 3% to minus 1%, and aggregates in particular dampened from minus 8% to minus 4%.

Now in that case of the -- I don't know if I'm reading your question properly, but the cement demand is primarily being driven in the US during the quarter by some of the activity that we are seeing in Texas, in particular due to the demand, the very high demand, that we are seeing from the oil well specialized cement, which has been doing extremely well, and that has positively impacted both our volumes and our prices on an overall basis throughout the country.

I don't know if that answers your question. I don't know if you have any --

That was exactly what I was looking for. And then South/Central America?

There was another question on South America?

Yes, did you have another question?

Yes, that was on South/Central America. If there is, because of a strong volume, if there was an effect regarding last year comparison base, or is this something on such a strong level we can expect for the fourth quarter as well on outlook?

As we mentioned, there are different regions, but I think -- I mean different reasons, but what we can highlight is the residential sector in Colombia, which is very strong, and it will continue being very strong. There is a sort of promise or an initiative by the government, a very ambitious one and they are delivering. So that should continue in the case of Colombia, as well as infrastructure in Colombia and other countries that we mentioned in Panama and other countries in Central America. So it is mainly the market reacting favorably.

Now I think we also mentioned that during the fourth quarter there was also a base effect in Colombia because of weather issues. So it is a little bit of both. It is growth in the markets, plus in the case of Colombia, a sort of a base effect favorable to the comparison against fourth-quarter 2010.

Mike Betts.

I had two questions as well. Both are clarification. The first one just on fuel costs, I think you said -- and please correct me if these numbers are wrong -- but in dollar terms, it was a up 15% per ton in Q3. Can you give us what the nine months was? I calculate it was probably about 17% up. And where I'm leading to is, if the year is 15% increase and that is using dollars, that would suggest that the increase in Q4 will only be a high single-digit increase. Is that the right way to think about this, or am I confusing my currencies here?

And then secondly, on the carbon dioxide, the $35 million contribution you expected in Q4, is this because you have additional allowances that you did not expect to have this year because of lower volumes, or is this your selling 2012 free allowances are ahead?

Let me start with your second question. The reason why, and if you remember I mentioned I think it was an answer to a question, that I was asked if we were expecting to sell any CO2 during the rest of the year, and I said we might. It might not be material.

Now we are much more secure of the transaction we can do, and the reason is that finally starting in April and finalizing last September all the authorities and I'm referring to the ones in Europe finalized all the acts needed, all the decisions needed to understand the specific location for the third phase. So there was no way for us to compare and to determine if we were going to have deficit or a surplus until we had this firm conviction and decision from authorities, which just happened late last late September. So that is the reason why it is a surplus, and we are intending to sell it from any time from now to before the end of the year.

So just to clarify, it is a surplus from 2011 or early years? It is nothing to do with what might happen in the future?

Part of it has to do with what will happen with allocations already firmed, given for the third phase, yes.

Okay. Thank you. And my first question, please?

On the energy question.

Well, I think you asked for the first nine months. The first nine months was 17%.

Okay. So if it is going to be 15% for the year --

Pardon?

If it is going to be 15% for the year, that suggests that the figure is going to be high single-digit, low double-digit for Q4. Is that the way to look at it for question one?

I think that is the way, and again, the two reasons being our progress in our alternative fuels program just a way to give some orientation on how much progress we can do. Remember that our target for 2015 is 35%.

So we continue increasing our substitution of primary with alternative fuels. You might have realized most of all or most of our what we call strategic CapEx are completely apart from alternative fuels. And the other issue that it is affecting and is provoking deflation in our main fuel, which is pet coke as already -- as we already mentioned, is that pet coke prices are declining. The figure I can share with you is that the peak of the price of pet coke was March and April. I think it was about the same price in both months. And, as up to now, the decrease has been 30%.

It is difficult to forecast on the price of pet coke. But what I can say is that, on the one hand, there is no, let's say, additional that we can foresee, additional demand for pet coke for 2012 additional to what has been used in general terms for 2011. The loss, as far as I know, there are at least 6 million tons coming to the market starting at the end of this year, starting next year, that we compete with the market. So there are both demand and supply reasons that make us believe that pet coke prices will continue dropping during the quarter, and it will extend it for next year.

Okay. We tried to track the pet coke price, but what is the lag between movements in pet coke impacting your prices? Is there a contractual lag or an inventory lag?

No. I'm just giving this information as a reference. We don't have a direct line on the price, the market price of pet coke, and the direct impact in our cost structure. There are contracts, there are inventory issues, so it is not a direct relation.

Daniel McGoey.

A quick question, first on the working capital flow. Maher, I think you mentioned that you are still expecting a substantially positive working capital in the fourth quarter, but it would be less than in 2010. I'm wondering if you can be a little bit more specific on that, and whether it is contingent on collections or sale of receivables that working capital will come from?

And then secondly, on Egypt specifically, pretty strong volume declines both quarter on quarter and year on year and additional weakness in price. I'm wondering if you can give a little bit of an updated outlook of what to expect from volume and price on Egypt in the fourth quarter and if pricing has continued to weaken?

On the working capital, yes, we are as have been in the past looking for a significant recovery in working capital investment in the fourth quarter. Of course, we also had good recovery in this quarter as well.

Now last year, if you recall, the total investment for the year, if I remember it from the top of my head, was I think it was around $80 million. So the way to think about it really is versus that $80 million as opposed to what we are going to get into the quarter, and we are expecting the number to be higher than that. And it is going to be -- the management of that number is really principally due to inventories and receivables, and the reason the investment is likely to be higher is because of higher sales more than anything else.

I don't know if that answers your question. We have not -- it is a difficult number to give a very, very precise kind of amount of recovery in the fourth quarter. But that should give you an idea, a ballpark idea, of roughly the range of recovery in the fourth quarter.

Okay. So that is still implying something, a $300 million or so in-flow in the fourth quarter compared to last year's?

Roughly, yes roughly, and it is not because we are doing something additional on the securitization side. It is outright operating management of the working capital process, primarily, like I said, through management of inventories and receivables, which seasonally they swing in our favor.

Can you repeat your second question, please?

On Egypt specifically you had pretty sharp volume declines quarter on quarter and year on year, and it looks like some building pricing pressure. I'm wondering if you can give a more up-to-date outlook on Egypt fourth-quarter volume deterioration and pricing

Okay. It was about Egypt.That I did not listen the first time you made the question. On Egypt we are not -- as you know, we have not been giving guidance. It is very difficult to guide. We already mentioned that the political process, the elections have been moved, so it is difficult to give any specific guidance on Egypt right now.

Our next question comes from webcast.

Yes, the question is from John Espinoza from TIAA-CREF. Some media reports mentioned that CEMEX and the Venezuelan government could reach an agreement on compensation for the assets expropriated. Can you comment on this?

I think the reports, the media reports mentioned was a media report of a statement of the Venezuelan ambassador, I think, commenting on the goodwill of the Government of Venezuela to reach an agreement.

So I think that we do continue in touch and in contact with the Venezuelan government, and we might make an agreement. But there is no specific additional information we can share for the time being.

[Christopher Buck].

You guys gave some pretty helpful information about your total funded net debt -- sorry, total funded debt number earlier. I'm just wondering if you can repeat the number you expect for your year-end? Was that a $15 billion number?

$16 billion -- 1-6.

$16 billion, okay. That makes more sense given the other numbers you gave there. And then I'm just also wondering about that number, if you can help us actually get to the number you reported at the end of the third quarter, which was $16.279 billion. I think that the first three steps of that are pretty clear, when we take your total debt, reported debt number of $17.294 billion, we add the perps back, which is $1.161 billion and we subtract then the convertibles, a value of $1.962 billion. So when we do that, we get to a $16.493 billion. And then there is another $214 billion that I'm missing. So that is the part I am hoping you can help clarify for me.

Yes, I mean we obviously have to reduce the convertibles, right? We had about close to $2 billion in convertible securities. Then we did establish a small reserve for the CBs close to about $70 billion, and then you do have some mark-to-market element of about $90 million.

That is on the derivatives, I take it?

Right. And then we add perpetuals, which just to be precise, that is around $1.161 billion. And that pretty much gets you roughly -- I mean there are some smaller adjustments -- but that should get you to roughly the $16.3 billion.

Okay. Perfect. That is helpful. And just one more from me, and this is one that is pretty relevant for credit investors? I'm just wondering there are some additional guarantors which are difficult to find much information on. I'm wondering if there is anything that you can provide in terms of either of value, a book value, or any kind of cash generation indication for the Mexican operating companies, Empresas Tolteca and CEMEX Concretos?

Yes, I mean we will follow-up with you on that. But, frankly, those businesses -- I mean Concretos holds the ready-mix assets. Tolteca is simply a holding company with several assets. But we will follow-up with you on that, but unfortunately whatever we provide on a 20-F is already disclosed there or in our most recent OMs. I don't think we are ready to start reporting on those guarantors.

Nikolaj Lippmann.

Two questions if I may. During CEMEX day, you commented on your [RNC] margins in the US, and I was just wondering if you could give an update on that, where you are standing in terms of EBITDA margins for that business?

And second, I was just wondering if the FX rate that you used in the income statement and balance sheet is the same, euro, dollar, peso, those kind of things?

I'm sorry, the second question?

It is related to FX. You mentioned FX rates in the release. Do you use the same FX rate for both the income statement and balance sheet purposes?

I still don't -- say it again. I --

For example, I think in the release you mentioned, for example, the Mexican peso at 12.6 I think it is rate in the third-quarter 2011. I was just wondering if also for the balance sheet you used the same FX rate, or if you have an average period potentially for the income statement and an end period for the balance sheet?

Yes, exactly. For the balance sheet, we use end of period FX rates, and on the income statement, we use as an average rate.

Now, as far as the US, I think you mentioned the margins on the ready-mix business, is that correct?

That is correct.

Yes, clearly we have had some improvement since the second quarter of this year. We were at close to negative 18%, and we have improved that business by close to 2.5 percentage points in the third quarter, primarily being driven by better volume, stable prices and easier energy trends in that business. And also, I mean part of this is the overall commercial strategy on, frankly, being more particular of which business we actually undertake and also focusing on more value-added businesses for our customers at the end of the day. So all of that is definitely beginning to pay off in terms of the value that that business is creating for our shareholders.

I don't know if that -- does that answer your question?

Yes, perfect. Thanks, guys.

Jacob Standfield.

A couple of questions. I guess the first one is, I'm wondering if you can provide how much cash you had to post as collateral for the equity derivatives at the end of 3Q, and given that the share price has increased since the end of the quarter, what that figure is today?

Yes, as of the end of the quarter, we had about $170 million. And since the end of the quarter, there has been about a $30 million reversal. This is using yesterday's prices. Now, of course, this is not a cash item, right?

Right. I know it is not a cash item, but the cash that you post as collateral is excluded from the cash balance you show on the balance sheet, correct?

Yes, that is $170 million, and the reversal is $30 million.

Okay. So I guess that will be another source of cash assuming the share price stays where it is today this quarter?

Right.

And then I want to just follow-up on the covenant ratio, which your information that you provided was very helpful. But I guess you start out with the funded debt amount at the end of 3Q, and then you take into consideration some planned reductions in 4Q. But then don't you need to then add back the appreciation of the euro to get to what increase in EBITDA you will need, the minimum EBITDA increase you will need in 4Q to meet that level?

Yes. We, as I already mentioned, there might be either positive or negative FX effect by the end of the year, and we cannot bet on that. That is why I mentioned that we do have resources that we can use that out-sights the potential negative impact of FX, which is in our case the euro and the peso are the most relevant ones. I mentioned that we have at hand up to $500 million that might help us to reduce debt by year-end.

Okay. Can you provide a little bit more detail on what these resources are? I mean are these credit lines that you have that would not count towards funded debt that you would be able to use to --?

As commented, we already used cash to pay for about [$130 million] to avoid the step-up. We have free cash flow also for about the same amount. We have a bucket in the FA related to capital leases we have not used in 2009. We -- I mean that is a flexibility we have. You have already -- with what I have mentioned, you have already more than $500 million. And I have not mentioned $100 million to $200 million of assets sales we are planning to do during the quarter.

So, on the much more secure resources, that is why I'm using the amount of up to $500 million, if needed. I'm not saying we will do it by December 31. What I'm saying is we have that flexibility at hand, and we might use it during the quarter, we might use it next year. So it is available to us on an as needed basis.

Okay. No, that is helpful. I guess my understanding is to the extent the euro appreciates, you will use some of this cash available and (multiple speakers) other means to make further payments under the FA?

Yes, and depending on your views about the potential by the end of the year, as you can imagine, these resources are much larger than any potential impact on FX we might have by the end of the year.

And I would now like to turn to call back over to Mr. Fernando Gonzalez for closing remarks.

Well, thank you very much. In closing, I would like to thank you all for your time and attention. We look forward to your continued participation in CEMEX. Please feel free to contact us directly or visit our website at any time. Thank you and have a good day.

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