Cemex SAB de CV (CX) 2012 Q2 法說會逐字稿

Good morning. Welcome to the CEMEX second-quarter 2012 conference call and video webcast. My name is Jesenia, and I will be your operator for today. (Operator Instructions). Our hosts for today are Fernando Gonzalez, Executive Vice President of Finance and Administration, and Maher Al-Haffar, Vice President of Corporate Communications, Public Affairs and Investor Relations.

And now I will now turn the conference over to your host, Fernando Gonzalez. Please proceed.

Thank you, operator, and good day to everyone. Thank you for joining us for our second-quarter 2012 conference call and video webcast. After Maher and I discuss the results of the quarter, we will be happy to take your questions.

We are quite pleased with our 22% growth in operating EBITDA on a like-to-like basis on back of a 1% growth in consolidated net sales. This is the highest EBITDA generation since the third quarter of 2009 and the fourth consecutive quarter with a year-over-year EBITDA increase. Improvement in pricing and volume in several of our regions, as well as the continued success of our transformation effort, has led to the highest operating EBITDA margin in almost three years. Infrastructure and housing continue to be the main drivers of demand for our products.

Regarding our consolidated volumes, we had strong contribution from our US, South Central America and the Caribbean and Asia regions. In the case of Colombia, Panama and the Philippines, we sold records cement volumes during the first half of the year. The favorable volumes from these regions partially mitigated the declines we experienced in Mexico, Northern Europe and the Mediterranean regions. Prices for domestic gray cement and ready-mix were stable sequentially in local currency terms with aggregates prices down 2%.

Although we are substantially recovering short-term input cost inflation, we continue to be at levels below our targeted return on capital employed. On this front, as an important component of our transformation, we are introducing an initiative that will drive a change in our business mindset, executing a value before volume strategy. This means that we will be focusing on value enhancement, efficiency gains in our customer relationships, ensuring sustainability of our products and generating returns sufficient for reinvestments.

Under this strategy, we will establish our own internal procedures, guidelines, standards, principles and tools which will support our approach to cement pricing. We aim to recover our cost and obtain an adequate return on investment in our cement business.

Experiences from our cement pricing approach will be transferred to our ready-mix and aggregates business in due course. This initiative is global in scope, and in Europe we are in the implementation phase, while in all other regions, we are in the evaluation stage. In Europe a new price system following a gross minus logic will be introduced to determine prices and to ensure consistent price differentiation to customers. Furthermore, in order to deal with input cost volatility, we will introduce surcharges like transportation fuel and environmental costs depending on the country.

In addition to that and in order to address the value of our services, we will charge for special services according to pay per use principle. To adapt to market dynamics, pricing cycles will be revised. A close price follow-up will assure a consistent approach throughout the organization.

Our revision of the sales towards systems and training program is launched in order to support the implementation.

On the financing side, we have announced an exchange offer and consent request to participants under the financing agreement, which will expire on August 20. Some of the key elements of this offer are a three-year extension of the final maturity until February 2017. The offer includes an exchange of up to $500 million into new high-yield bonds maturing in June 2018, an upfront fee and revised margin, a $1 billion pay down in March 2013, an enhanced guarantor package and revised operational and financial covenants.

It is too early to provide feedback on this process, but as you know, we have long-standing relationships with the participants in the financing agreement, and this has been noticeable in the conversations that we have been having with them.

We continue to maintain sufficient liquidity to support our operations and expect to remain in compliance with our financial obligations. Our consolidated funded to debt to EBITDA ratio as of the end of June was 6.15 times, well inside the covenant level. We remain focused on our transformation program. We continue to anticipate an incremental improvement of $200 million in our steady-state EBITDA during 2012.

During the first half of the year, we achieved about $180 million of this improvement. We expect to reach the run rate of $400 million by the end of the year.

Another important driver of our transformation process is our efforts to increase the use of alternative fuels. The substitution rate reached 26% during the second quarter and 29% during the month of June. Earlier this month, we announced the successful global integration of our new business platform based on SAP. The deployment was achieved in record time and cost across all of our operations in over 50 countries.

With an increasingly complex operating environment in the building materials industry, we adopted the best technology available, which is scalable and quickly adaptable to ever-changing market conditions. This new platform provides real-time data from all critical processes and functions, helping us to integrate our core cement, ready-mix and aggregate businesses into a single solution that serves our customers with greater speed, precision and quality.

Now I would like to discuss the most important developments in our markets. In Mexico we are very pleased with the close to 4% point increase in the operating EBITDA margin, despite a decline in our volumes. This volume decline was a result of a high base of comparison as the second quarter of 2011 had the highest cement volumes in the past three years.

In addition, we saw a more cautious than expected stance from the government towards infrastructure spending during the electoral period, as well as a weaker formal residential sector. While we continue to expect a recovery in our cement and ready-mix volumes during the second half of the year and an easier year-over-year comparison, we now anticipate gray cement and ready-mix volumes to grow by about 2% and 4% respectively for the year.

Domestic gray cement prices during the quarter were 5% higher in peso terms than a year ago and were stable compared to the previous quarter. Earlier this week we announced a price increase of MXN120 per ton for bagged cement, equivalent to about 7%. Bagged cement represents about two-thirds of total cement sold in the country.

During the quarter, we saw a strong decline in volumes to housing developers as they continue to face working capital financing constraints. Bank credits to homebuilders have been gradually reduced over the last three years and declined by 12% year-to-date as of May, reaching a very low level.

In addition, there has been a gradual migration from horizontal to vertical multifamily construction that requires a higher initial investment from homebuilders.

The informal residential sector is expected to be supported by robust employment levels and remittances from the US. For 2012 we anticipate total investment in infrastructure will increase by about 4.5% in real terms.

We should also see the start of different projects at the state level during the second half of the year. The industrial and commercial sector is forecasted to grow in line with the economy, driven by manufacturing activity and favorable momentum in private consumption.

Regarding our energy consumption, we have continued to increase the use of alternative fuels in Mexico, reaching an 18% substitution rate during the first half of the year from 12% a year ago. We expect to increase this utilization rate to about 22% for the full-year 2012.

In the United States, we are encouraged with the evidence of operating leverage seen in our quarterly results with year-over-year sales increasing by $102 million and operating EBITDA showing a favorable swing of $44 million.

In addition, we achieved an important milestone in the quarter by generating positive EBITDA for the first time in eight quarters.

Cement volumes were up 19% on a year-over-year basis, largely attributable to higher demand in the residential and industrial and commercial sectors. Second-quarter ready-mix and aggregates volumes increased by 15% and 5% respectively on a year-over-year basis. The cement price increase we implemented in January and April have generally been successful, except in Florida, Arizona and Southern California.

On a sequential basis, prices are up 2% for cement and ready-mix and 1% for aggregates. Successful increases in the range of 4% to 6% in December 2011 were experienced in the Midwest, Southeast, Texas and Northern California.

As we look into the remaining quarters of 2012 and the first quarter of 2013, we remain firmly committed to margin recovery. In cement, for Southern California, although the April increase was not successful, we decided to reintroduce a $5 increase in July, coupled with another $5 in October. These increases are warranted as Southern California cement prices are lower than in any other market we service.

In ready-mix, in addition to implementing price increases in various markets, we are committed to enforcing fuel surcharges, missing load fees, environmental fees, waiting time and finance charges.

Housing activity in the US continues to accelerate year-to-date starts as of June were up 26% versus the prior year. We are more confident in the sustainability of the housing recovery and are increasing our housing starts estimate for 2012 to 750,000 from 725,000.

The industrial and commercial sector outperformed during the quarter, largely due to continued strength in manufacturing, agriculture and oil and gas exploration.

On a year-over-year basis, spending rose 20% year-to-date May. Contract awards were up 6% for this period. Public construction spending increased 7% through May 2012 with streets and highways up 2%. We improved revenue generation for the states, coupled with the initiation of more cement-intensive projects, the infrastructure sector is outperforming our expectations for the sector for the year.

In June Congress authorized a new two-year Federal surface transportation bill, MAP-21. The program will expire in September 2014 and provides $105 billion of funding, which equates to a slight increase in Federal funding levels from today's expenditures.

Additionally the bill does expand the federal highway loan program significantly. This expansion, as well as the passage of a two-year program, will give states more confidence in approving long-term cement-intensive projects and will facilitate additional spending.

We continue to make strides in optimizing our energy mix in the US. Our alternative energy usage was 22% for the first half of 2012, 5% higher than in the same period last year.

In addition, we continue our transition to natural gas as kiln fuel, which now constitutes 27% of our fuel usage in the second quarter.

Another important development in the quarter was the issuance by the EPA of a revised proposal for NESHAP. The new proposal, subject to public comment, postpones the compliance deadline by two years until September 2015.

Based on our first-half results, we are increasing our 2012 volume guidance for the US from mid-single-digit to high single digit growth for cement and ready-mix. This change reflects the dynamism of the residential and industrial and commercial sectors, as well as a slight improvement in the infrastructure sector due to the new highway bill.

In our Northern Europe region, our quarterly EBITDA margin remained flat, despite lower volumes and lower year-over-year prices in US dollar terms because of our weaker currencies in the region.

Our volumes were affected by reduction in public spending in the UK, Poland and Germany, the transition process of the new government in France, as well as unfavorable weather conditions in the UK, Germany and France.

In addition, we have had slight temporary losses of market share in cement since the beginning of the year in the UK, Germany and Poland.

We expect to recover this marketshare in a targeted way. To support our value before volume strategy, we have gone through cement capacity shutdowns in the region. In Germany, old kilns in Rudersdorf have been demolished, and capacity has been abandoned permanently. In the UK, we made the decision to permanently close our capacity at Barrington, and we are maintaining cement output at our South Ferriby plant at 50% of capacity, operating only one of the two kilns.

In Poland we do not expect to restart the third kiln in our Ru dniki cement plant. In this country we will eventually consider additional temporary kiln shutdowns in both of our plants, while we remain committed to meeting cement demand.

In Germany we saw a decline in housing permits during the first months of the year from a very strong fourth quarter 2011. We believe, however, that favorable conditions for this sector persist, and we should see growth in the sector during this year.

The industrial and commercial sector is also expected to perform favorably, especially in manufacturing, offices and commercial buildings. In Poland we have seen a reduction in infrastructure spending from a very high consumption base in 2011 as some road and sport infrastructure projects built in anticipation to the euro 2012 championship came to an end. We expect growth from the industrial and commercial sector driven in part by office construction as the country becomes an important world player in business process outsourcing services.

In France, during the 12 months ended in February, housing starts increased by 2% and permits were up 11%. There was a slowdown in housing starts during the first half of this year, reflecting the decrease in the tax benefit on buy to let investments, unfavorable weather conditions and pressure on credits.

Investment in the infrastructure sector should show slight growth during this year. In our Mediterranean region, during the second quarter of 2012, positive ready-mix volumes from our operations in Israel and Croatia, partially mitigated the decline in volumes from our operations in Spain, Egypt and the United Arab Emirates.

In cement we saw generalized declines in the region. Prices in local currency terms were higher for our three core products on a quarter-on-quarter basis. In Spain the government continues to focus on fiscal consolidation, resulting in very low levels of infrastructure spending. This, together with the continued lackluster performance of the residential sector, placed downward pressure on our quarterly volumes.

Housing starts could decline by an additional 30% this year to about 20% of the household formation level. Despite the decline in domestic cement volumes, prices in the quarter were 2% higher than at the end of last year.

We continue to export from Spain to other countries to mitigate the declines in domestic cement volume. Exports account for about a third of volumes during the quarter.

In addition and as part of our value before volume strategy, we have gone through cement capacity adjustments, focusing on far from coast cement operations, first, where exporting of cement production is not an option.

Our production will continue to be adapted adequately while continuing to meet the needs and requirements of our customers.

In the case of Egypt, our cement volumes declined by 18% during the quarter, reflecting the low activity in the infrastructure sector in anticipation of the presidential elections. In addition, truckers strikes and shortage of diesel impacted the delivery of cement.

During the second quarter of 2011, we purchased clinker equivalent to about 160,000 tons of cement as we were producing at full capacity versus none this quarter. So part of the year-over-year drop in volumes covers corresponds to this less profitable purchased clinker.

We continued seeing energy shortages during the quarter that dampened the effective new cement capacity in the country. Prices for cement in both local currency and US dollar terms increased by 5% sequentially.

Now in our South, Central America and the Caribbean region, we are pleased with the operating EBITDA expansion seen during the quarter. On the back of a 20% increase in net sales, our operating EBITDA increased by close to 60%. The infrastructure and residential sectors were the main drivers of growth. We also continue with our capacity debottlenecking efforts, as well as value-added proposals to our customers.

Colombia and Panama, our two largest markets in the region, enjoyed double-digit growth in domestic gray cement and ready-mix volumes during the quarter. In these two countries, we reached record cement volumes during the first half of the year. In Colombia we expect the residential sector, especially low income housing, to have a favorable performance during the rest of the year. The government has approved $1.4 billion to extend the benefit in mortgage interest rates for low income housing.

In addition, President Santos announced the construction of 200,000 free houses for the poor by 2013, divided equally between urban and rural areas.

After a slow start in the infrastructure sector during the first half of the year, we have now started to see requests for bids for different projects, which should reactivate this sector starting in the second half of this year.

In Panama the infrastructure sector continued to be the main contributor to cement consumption during the quarter, driven by projects such as hydroelectric plants in the Western part of the country, the Panama City Metro, as well as the ongoing Canal expansion.

In Asia net sales increased by 10% in the quarter, while operating EBITDA increased by 35%, driven by strong cement volumes and prices and expanding EBITDA margin by close to 4 percentage points.

The regional 21% increase in domestic cement volumes during the quarter reflects the continued positive performance of our operations in the Philippines and Bangladesh. Prices in local currency terms also increased by 6% sequentially. Domestic cement volumes in the Philippines increased by 27% during the quarter, in fact, we registered record volumes in the country in the first half of the year.

Prices in local currency terms increased by 4% sequentially. The increasing volumes in the country was driven by the continued recovery trend in infrastructure, as well as a favorable performance from the residential sector.

Infrastructure spending is expected to continue to be strong during the rest of the year as the government introduces new public-private partnership and other projects.

In summary, we were able to mitigate the weakness that we were experiencing in our Northern European and Mediterranean regions with the favorable market dynamics and strong operating leverage evidenced in the rest of our portfolio.

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

Thank you, Fernando. Hello, everyone. Our operating EBITDA increased by 11%. On a like-to-like basis for the ongoing operations and adjusting for FX, this increase was 22%. Operating EBITDA margin increased by 3 percentage points on a year-over-year basis to 18.2% from 15.2% in the second quarter of 2011.

This margin expansion is driven by higher volumes and prices in some regions as already discussed by Fernando, the continued results of our transformation process, as well as favorable operating leverage effect in several of our markets. Cost of sales as a percentage of net sales decreased by 2.3 percentage points during the quarter versus the second quarter of 2011.

SG&A, also as a percentage of net sales, declined by 1.2 percentage points in the same period. The reduction in these costs and expenses reflects the savings of our cost reduction initiatives, as well as lower fuel costs. Our kiln fuel and electricity bill on a per ton of cement produced basis, as Fernando mentioned, decreased by 5% during the second quarter. This decline is due to a significant drop in the price of pet coke and coal from last year's levels and increase in the use of alternative fuels and the introduction of natural gas to our fuel mix in the US, as well as lower prices for alternative fuels in dollar terms.

It is important to stress that substituting primary fossil fuels with alternative fuels have several advantages. First, they are significantly cheaper. Last year we saved about $140 million by using alternative fuels instead of fossil fuels, and so far this year we have saved about $60 million.

Second, when using alternative fuels with biomass content, some of the CO2 emissions are considered carbon neutral, which is good for the environment and good for our bottom line as it reduces the number of emission allowances used in some of our operations.

And third alternative fuels are mostly quoted and purchased in local currencies, reducing the volatility of our margins resulting from exchange rate fluctuations.

During the quarter, our free cash flow after maintenance CapEx was $21 million versus a negative $40 million last year. The year-over-year variation in free cash flow is due mainly to higher operating EBITDA, lower cash taxes and other cash items, which more than offset higher investment in working capital and to a lesser extent higher financial expenses. The year-to-date investment in working capital is close to $90 million lower than last year. Working capital days in the first half of the year decreased to 30 days from 32 days in the same period of 2011.

As in prior years, we expect to recover most of the investment in working capital in the second half of the year. In the income statement, we recognize an exchange loss of $118 million due primarily to the depreciation of the euro and Mexican peso versus the US dollar. We also recognize a loss on financial instruments of $16 million, related mainly to CEMEX shares.

During the quarter, we had a net loss of $187 million versus a loss of $209 million last year. This is primarily due to a higher operating income and lower other expenses net, which more than offset the exchange loss, the loss on financial instruments, as well as the higher interest expense in the quarter.

Regarding our debt, at the beginning of April, we paid our Certificados Bursatiles that were scheduled to mature in April and September, using the reserve that we had already created for this purpose. The quarterly decline in cash is mainly due to this payment. Total debt, plus perpetual securities, was reduced by $529 million during the quarter. This reduction includes a positive foreign-exchange conversion effect of $174 million. We continue to be comfortable with our liquidity position with cash and marketable securities in excess of $700 million as of the end of the quarter.

With the payment of our Certificados Bursatiles, we have addressed substantially all of our debt payments until December 2013. Most of the 2013 and 2014 maturities correspond to the financing agreement. As Fernando mentioned earlier, we have launched an exchange offer and consent request to participants under our financing agreement to extend the majority of the maturities of this agreement until 2017 subject to several terms and conditions. We will keep you updated on this process.

Our consolidated funded debt as calculated for covenant purposes was reduced by $191 million. Our consolidated funded debt to EBITDA level as of the end of June reached 6.15 times, as Fernando mentioned.

And now Fernando will discuss our outlook for this year. Fernando?

Thank you, Maher. For 2012 we expect consolidated volumes for cement to grow by 1%, while ready-mix and aggregate volumes remain stable. Estimated higher volumes and increased profitability from our operations in Mexico, the US, the South Central American and Caribbean region and Asia will more than offset an expected weaker Mediterranean region, as well as a tough base of comparison in our Northern Europe region.

Our cost of energy on a per ton of cement produced basis is expected to decline by approximately 3% during 2012. We also plan to continue to keep capital expenditures and other investments at a minimum. Total CapEx is expected to be about $600 million, including $465 million in maintenance CapEx and $135 million in strategic CapEx.

Regarding our cash taxes, we anticipate no major change from 2011 levels, excluding the payment made in Mexico in March. We also expect no significant difference in our working capital investment versus 2011, excluding the effect of foreign exchange fluctuations. Similarly we do not foresee a significant change this year in the cost of debt, including our perpetual and convertible securities, given our current financial obligations.

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 operating EBITDA growth, and this quarter we had the highest operating EBITDA margin in almost three years. The anticipated recovery in many of our markets should produce consolidated volume and price increases to improve our return on invested capital.

Second, we continue to work hard to ensure we achieve the expected $200 million in incremental savings from the initiatives under our transformation program during 2012.

And third, we continue to be confident in our ability to meet all of our financial obligations. We have substantially prepaid all of our principal debt payments until December 2013 and proactively bolstered our liquidity needs.

We are working towards extending our financing agreement maturities and at the same time advancing on different fronts to satisfy the required maturities under these proposals.

Thanks 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). Esteban Polidura, Deutsche Bank.

Thank you very much, and good morning, Fernando and Maher. I have two questions, if I may. The first one, which regions should contribute the most to your expected incremental improvement of $200 million in EBITDA this year, mainly if you could give us some rough percentages, that would be fine?

And the second one is, how is the asset sales process going, and how much should we expect to see this year?

Sure. Thanks for the question. On the first one, which regions, I think as we have commented, the effort is a global effort, the transformation effort is a global effort, and all regions are contributing. And not only regions. We have significant reduction in corporate expenses, for instance, for slightly more than 7%. We have things like -- I think we have commented before -- unfortunately we needed to let go of about 6% of our employees. For instance, just to give an example, in the case of Mexico, it was 10%.

So they are slightly differences on a per region or country basis, but difficult to point specifically if there is one in particular providing most of the incremental savings.

Regarding asset sales, for the first half of the year, we sold slightly higher than $50 million of assets. If you remember in previous conversations, we stated that we started lowering our asset sales target, and we were -- we guide on a range from $200 million to $300 million. So we have already executed slightly above $50 million, and we are confident that we will do the rest in the second half of the year.

Perfect. Very clear. Thank you, Fernando.

Vanessa Quiroga, Credit Suisse.

Fernando, Maher, good morning. Thanks for the call. My question is regarding the USA. If you could help us understand better the strong performance with a 19% increase year over year in cement volumes. We understand that the breakdown is about 60% of the consumption driven by infrastructure spending and at least 20% from housing. If we take that 26% year-over-year growth in housing starts and about a 4% increase in infrastructure spending, we can get to 19% year-over-year growth. So if you can explain, give us more color, please. Thanks.

Yes, thank you. That is a very good observation, and the reason that we are outperforming or getting that positive performance is depending on where we are getting that growth. Most of the states that we are operating in are outperforming the overall US market. And, in particular, the two most important states that are driving that growth is California and Texas. And so you may see a little bit of the skewness compared to the general national statistics.

Just to give you an example, for instance, the housing starts, as you said, are up by 27%. If you take a look at our markets, for instances, in April and May, we were close to 46% in permit gross, of course, right? So that gives you an idea of the differential between ourselves and the national market. It has to do a lot with footprint. It has to do specifically with the accelerated growth in California and Texas.

Now in terms of the weights, residential is close to a quarter. That is our expectations in terms of the growth, and of course, it could be a little bit higher in the first half of the year. Industrial and commercial, which is also doing well, is about 16% of the pie, and we are increasing our expectations. As you recall, originally we were expecting between 6% to 7% growth, and now we're expecting close to a 11% growth.

Now on the public infrastructure side, which represents close to about 60% of our volumes, we also are encouraged by the growth that we have seen so far. I mean we were a little bit cautious in the beginning of the year, and as you remember, we were kind of flattish to minus 2% for the full year, and now our expectation is probably a growth of about 2%.

We think the passage of MAP-21 is going to be very important, not because the bill itself is going to represent a huge increase in expenditure, but because it encourages states to feel comfortable with funding and is also likely to translate to an increase in the Federal highway lending program that was announced along that. I don't know if that answers your question.

So would you be able to give an outlook for housing starts in your markets for 2012?

An outlook of what? Housing starts. We really have not. What we have done, as Fernando mentioned, what we have done is we given an expectation for the national market, which is about a 23% increase. I think Fernando mentioned --

750 --

But beyond that, I think that if you -- there are sources where you can actually go to, and we could certainly work off-line with you to get to public numbers obviously, not our own expectations by state.

Great. Thanks. If I could continue with a question about Mexico, so you mentioned that tough comparison base, but also there is a slower than expected performance from formal housing. And if you were to see that this is sustained that homebuilders continue to have difficulty in funding their working capital and this slower performance continues, would you implement strategies to move your mix towards infrastructure?

Well, as you know, particularly in the case of Mexico, it is since several years now we have a very formal and specific effort on developing infrastructure projects. So we will continue doing it, and we will do even more than that.

Again, I think as commented before the second-quarter 2011 is or was a very tough base of comparison. So moving forward, we will have an easier base given that the second half last year in Mexico is a softer-based comparison.

We have seen also some infrastructure projects we are debating, and formal construction is also strong. So the only part timing is to see how formal housing will evolve in the rest of the year.

Great. Thank you.

Nikolaj Lippmann, Morgan Stanley.

Thank you very much. Thanks for the color, and thanks for taking my question. I have a question about energy.

I believe in the first quarter, your cost of energy on a per ton of cement basis was up a little bit sort of 5%, 6%. Now it is down 5%. That is a pretty big swing factor. And that is happening very close to where we are seeing the cost of pet coke and coal come down. So I think your guidance for the full year is minus 2%. Can you confirm that, and can you see if you are -- it sounds like with the kind of swing factor we are seeing now, that maybe a small decline in energy is too conservative.

Well, let me comment on what has happened so far. On primary fuels first, coal and pet coke prices started declining, I think it was May last year, April and May last year.

So on the -- comparing second quarter to second quarter opposed to the first quarter, we see a significant reduction in energy costs on a per ton of cement, that is one viable.

The other one, as we mentioned, we have been commenting this for several quarters already. We have a very ambitious program on increasing the use of alternative fuels all over the Company, and it is an effort that we have been managing since 2006, I think. We started with 5% substitution, and last month it was 29%, which is by far the highest in the industry.

So we are also seeing the benefit through time, and more and more we see the benefit of the special economics of alternative fuels, which include significant contributions because the type of alternative fuels we are targeting all over the place are fuels with very high content of biomass. On average it has 50% of biomass, meaning we get additional CO2 credits by doing that.

So, in this quarter, I think we have both effects. The reduction of pet coke and coal that started second quarter last year already reflected in this quarter Plus the advance of the material progress we have done in our alternative fuels strategy.

If I can add to that, Fernando, I mean there is a couple of other important points. One, in the US, the swing to natural gas usage has been very important. As you recall, we mentioned that in the first quarter we had only one plant, and we were considering others. We have now switched to a large extent six of our 11 plants that are operating in the US to nat gas, which is also contributing.

And the other thing, as I said in my comments, all of this alternative fuel is local currency denominated. So to the extent there has been a weakness against the local currencies where we are operating, that also translates to an additional savings. So we are getting a lot of tailwinds on all of these efforts.

Okay. Thank you. I think the last time I checked gas in the US represented approximately 4% of your energy consumption. Can you give us a sense of what those are?

Just one second. In terms of the total percent, I don't know if I have that here.

About 27%, I think.

Does that answer the question?

Yes, thanks.

Sorry, the question was the US compared to total?

The importance of gas in the total energy consumption in the US.

Now what I was heading to US consumption (multiple speakers) consumption in the second quarter of natural gas in the US, I don't have the figure on US compared to total, but we will come back to you.

Okay. Thanks.

Gordon Lee, BTG.

Good morning. Just a couple of questions on the US also following up on Nikolaj's question on energy. What proportion of your energy contracts come due every year? Just to get a sense of how quickly those can be rolled over into lower price contracts.

And I guess, Maher, you made a comment in your remarks, which is that it is more efficient from a cost basis to use alternative fuels with biomass as opposed to fossil fuels, but that was made on a global basis. Would that apply to the US as well considering where natural gas is being priced right now?

Let me take the second one. Our energy strategy combines the use of primary fuels and the combination of alternative fuels. But what we do is we have under the umbrella of a global primary and alternative fuels strategy we have an specific strategy on a per country basis, and of course, it varies depending on specific conditions in each type of fuel.

So, in the case of the US, for instance, and mainly because of the shale oil gas, gas as a primary fuel is competing very favorable with other fuels. So we have been moving, let's say, as much as possible our fuels in the US to natural gas.

So, in the second quarter of the year, we are increasing 27% the use of natural gas in our plants compared to same quarter last year. So that is the change, and it is specific to the economics of primary fuels in the US.

At the same time, we have found in the US specific or pockets of very attractive possibilities to increase the use of alternative fuels. For instance, we are producing cement with peanut shells with very favorable environmental and economic conditions compared to coal or coke or even natural gas.

So it is very specific per country. What is common all over the place is that we are encouraging and supporting all business units to develop the best strategy moving forward.

Maybe I can address the question on (multiple speakers). To address your question, obviously the length of contract varies, depending on the country and the fuel.

Just to give you an extreme example, for instance, in the US where today we find, for instance, nat gas prices in the spot market to be very attractive compared to the forward curve, for instance, which is significantly higher, as you know, especially as you go out to year two and three. So, in that case, for instance, we are satisfying our need predominately, I would say, on the spot market, and frankly, we are taking a slightly contrarian view. We think natural gas will continue to be stable at those levels.

Higher volatility leads generally speaking, as you can imagine, to shorter term contracts. So we are, by and large, on one- and two-year contracts. Obviously there are some exceptions in both alternative fuels and fossil fuels where we may have some very long contracts.

In the case of alternative fuels, we have been very successful in getting some quite long-term contracts in several of our markets. So I don't know if that answers the question on the contracts.

That does, Maher. Thanks very much. If I could just have one follow-up, just on the US as well. Obviously you mention your cement volume guidance is high single digits, which you revised upwards. Through June, you are up north of 20%, which implies obviously a significant drop-off in growth in the second half of the year for your guidance to be met. Is that just because you are being conservative, or is there something specific to the second half that worries you a little bit in terms of the growth outlook for volumes? Thank you.

No, there is nothing worrying us for the second half in the country. We are very positive on the evolution of the market in the US finally after so many years.

You know compared to the green charts we saw in the US -- I think it was second quarter of 2010 -- we had like two or three months of growth and then back to the previous conditions. We now have seen steady growth starting last July/August, July/August last year. So after all these months of growth and particularly from January to June on the 19% we have mentioned, what we will have in the second half is a tougher base comparison because of the growth that started happening second half of last year.

Now I think we have already mentioned that we might have an upside risk when the figures were given, but for the time being, the estimate we have is the one we have already shared.

That is very clear. Thank you very much.

The next question is from the webcast. It is from Carlos Hermosillo from Banorte. The question is, can you please elaborate on the specific tools you will be using in your pricing initiative, and which region is it already implemented in process? Thank you.

Regarding geographies, we have already started in our European businesses, and as commented, we are spreading the strategy everywhere, all CEMEX businesses.

Now the tools I think what we mentioned is that we are bringing in some cases there are some new ways, principles, philosophy on how to manage prices. And in some other instances, it is just reinforcing ideas or procedures or ways of tools that will help us to be more successful in increasing prices so we can comply or we can really pay for our cost of capital in all our cement operations or cement businesses.

There is a variety of tools. There is no one specific tool. We are -- at that time we are implementing the strategy, we are implementing and developing and implementing these tools.

Now I would like to combine this comment with one slight comment I made also on our strategy on updating on modernizing our ERP, our process platform in the Company. We had for the last I think it is 20, 21 years an ERP called J.D. Edwards that did not evolve as we expected a long time ago. And we just finished -- at the end of June, we just finished switching all our businesses to SAP. SAP has a very powerful CRM module, and we will be adopting or creating and developing specific tools to facilitate the sales force to really be effective on this regard.

If I can also add one of the things that we are doing in addition to -- I mean obviously with the use of the new tools is trying as much as possible to de-commoditize our product and services to our customers. We are also making sure that we are offering the right value to the right customer to make sure that that pricing dynamic or that pricing equation is a win-win for both sides. And, very importantly, frankly, is training the whole organization and our sales force to properly identify each customer's needs. And a very important component of this is aligning the reward system as well of our distribution system.

So when you add all of those things together, we feel quite confident at the end of the day that it is going to be a win-win. We will be able to optimize a return on capital, as well as making sure that we are maintaining the markets that we service today.

I don't know if that addresses all of the question, Carlos. Operator?

Eduardo Couto, Goldman Sachs.

Good morning, Maher. Good morning, Fernando. Congratulations on the results. I have two additional questions, guys.

The first one also on the US where the results were quite strong. Can you guys give us additional color in terms of capacity utilization, inventory levels, and if there is any plants that will shut down that could be maybe restarted in the US, just to understand how things are there right now?

Well, currently on the cement, ready-mix and aggregates the plants that we have active, let's say, we are around 85% of usage.

As you know, since we started seeing volumes declining materially several years ago, we started all of our efforts of right-sizing meaning we have certain capacity shutdowns. We have not seen very short-term, let's say, material changes on reactivating some of the plants, but I'm sure that the trend continues we will be soon putting other assets on play. But so far we keep seeing facilities 85% utilization, and that is more or less the current state.

And how is the inventory level? Is it like normal levels?

It is normal and even lower. I think with additional volumes, we can manage our inventories in a much more efficient way.

Okay. That is clear. Just another question, guys, regarding the asset divestments. Now with these better US numbers, have you guys seen more interest on your US assets? And not only I would say more interest, but also people really interest to pay better prices for these assets. Have you seen more interest on that?

Well, I think that there is a change in the sense of business context is improving. On the other hand, as you know, in previous quarters, we have been saying that because of there were no incentives on divesting businesses, meaning no liquidity needs, flexibility to comply with covenants, etc. So we were not, let's say, really proactively looking for large asset divestments.

Now with the proposal we are making in our refinancing and knowing that we are committing to a $1 billion payment in 2013, we are also changing our strategy, and we -- as you can imagine, we have an effort on exploring different possibilities in order to assure that we will comply with this commitment. So there is a change in, let's say, our divestment strategy, for good reasons.

Okay. And just a final question regarding this pricing, the new pricing tool, that you guys mentioned. How has been the response from clients and competitors for the implementation of this new pricing system?

Well, It is early stages, but allow me to take the opportunity to clarify. Tools are useful, but I think what we are doing is more related to a concept, a strategy. We need to assure that in all CEMEX businesses, we are able to cover our cost of capital, and in some markets we have not been able to achieve that. We have improved prices. Increases have been effective in different countries, but we have not got to the level we think we need in order to pay for our cost of capital.

So the whole strategy is about that specific objective. It is changing a little bit the philosophy and supporting, as Maher was saying, supporting our salesforce with training, with specific objectives on price levels and allowing them to as a force, as a group to be more disciplined, to have better information, more accurate online information so that they can improve the results of our efforts on increasing prices.

So tools are important, but I think what is more important is what is it that we are going afterwards.

But the main idea is really to remove the commodity volatility from your prices, right, Fernando?

It has different components. So, for instance, let's say, I will try to elaborate an example. A given country in which we make a simple calculation to find out that prices needed to pay our cost of capital because of current prices in the market, plus the cost structure in that specific market, let's assume it is 100 units. And it happens that the current price in the country is 90 units. It means the country or the business has a gap of 10 units in order to really pay for the cost of capital in that unit.

So that becomes an objective of the country, and then you will pursue that objective on different ways. For instance, the one that you are mentioning is one way. And in the cement ready-mix and aggregate industries, it is not, let's say, it is not used -- there has not been a practice the way it is in other industries for surcharges.

So if we -- let's say, if a customer buys ready-mix and a ready-mix truck goes to the side and if for whatever the reason and because of customers' requests, the trucks stays there for three hours instead of 30 minutes, it is a service that we should be charging to the customer because it is a customer need and because we are willing to serve the customer. But I think we have these opportunities to, of course, talking to customers and convincing them that a given service, a given specific service might require different price components on the service.

So this has not been a tool or a way or a method extensively used in the sector, and that is one of the issues we are trying to put in place. It is not the only one, but it might be one that will be relevant in the future.

This is, as we mentioned at the early stages, it is very difficult right now to say if it is successful or not. We are starting developing the initiative. It will take some time at the beginning, again training our people and then going to the market and start conversations with customers so we can agree on certain different practices according to their very specific needs.

Okay. And do you have any timing to implement that?

It is already happening in Europe, as I mentioned. I think for the rest of the year and, as you know, because of the price cycles in Europe, I see we might be in a position to share additional information in the first half of next year.

Okay. Thank you, guys, and congratulations.

Mike Betts, Jefferies.

Thank you very much. I had two areas of questions. Maybe I could do them individually, if you would not mind.

The first one is Northern Europe, and I want to talk the history here rather than the future we just talked about. It shows sequentially a 2% price decline in Q1, but when I look at the price changes in each of the major countries in the appendix, I don't see any of them that are down. So I am just wondering which countries are responsible for the 2% sequential price decline, please, in Northern Europe in Q2? And then I will comment my second question maybe immediately afterwards. Thank you.

What? What was the second?

No, I'm going to come to that afterwards. It is in a slightly different area. It is on Egypt.

Okay.

Mike, the most important on that pricing component is there is a geographic effect, and frankly, in terms of going through country by country, if you don't mind, we can get back to you with the details on that.

Okay. Thank you. And then just on Egypt, can I understand the impact of this 165,000 tons of clinker that you imported this year and you did not have this year, and I guess this is a two-part question.

One, how big was that in relation to the Egyptian sales in the quarter? By my calculations, it was probably a double-digit percentage. Is that correct?

And then secondly, is this just a Q2 2011 effect, or was this happening also later in the year? And the reason I ask that, is your Egyptian volumes in Q2 2011 versus Q2 2010 I think you reported as flat. So I am trying to understand whether this was a specific Q2 2011 effect or whether these imports were over several quarters as well?

Yes. Okay, so just going back to the relative size of 2Q 2011, you are right. I mean without giving you the complete breakdown on a quarter by quarter basis, it was a mid-teens of that quarter. As you know, as Fernando mentioned, we were sold out, and we were importing that clinker and selling it.

Now you are also right. I mean, the observation in terms of being flat year on year second-quarter 2011 versus second-quarter 2010.

So what was the other questions? I think we gave you the indication of the relevance of it, so it was an important percentage in 2011, the second-quarter 2011. (multiple speakers)

My second question was -- no, no, my other part was, did this only apply in the second-quarter 2011, or have we got the same effect really for the remainder of the year in 2012 versus 2011?

You know, Mike, why don't you let us check into that? I don't have that level -- we don't have that level of drill down. The second quarter was higher than other quarters, but let us get back to you on that as well, if you don't mind.

Okay. Thank you very much.

[Erin Malone], Bank of America/Merrill Lynch.

Thank you. Good morning, Maher. Good morning, Fernando. I hope you guys are doing well.

A couple of questions. One, I know that you mentioned during your comments that you have closed some of the capacity in Europe, Germany, UK and Poland, I believe. I was just wondering was this in the middle of the quarter or towards the end of the quarter? Do you expect more closures based on volume performance in the second half of the year, and should we see, all else being equal, some improvements in costs or margins as a result of this?

The second question has to do with after an election period in Mexico, like we are in right now, presidential election, how long before you see important public works spending begin? Will it be sometime in the middle of next year?

And then finally, I just wanted to know if on the financial exchange for the financing agreement if you will be announcing milestones before the date? I believe there was one deadline yesterday which was an early contender for the high yield bond or any other milestones before the final agreement is signed? Thank you.

Okay. On shutdowns, the information we gave is shutdowns for decisions that were already done. For instance, we mentioned we have the margins in the case of Germany. We have during the first half already decided not to run a kiln in Poland. We have already shut down the plant in Barrington in the UK. So those decisions are actions already taken, and we don't foresee those in most of the cases that capacity to come on stream.

There are certain decisions that we have already taken because our volume estimates in the sense of, for instance, not shutting down, but drowning one kiln in South Ferriby instead of two kilns are running that plant at half capacity. And, of course, if there are any changes in our volume forecast in Europe that we will be able to adapt some of those decisions, at least the ones that are not, let's say, definitely in the sense of kilns that have not been demolished, let me put it that way.

In the case of Mexico, we do think that the infrastructure works in the first-half pre-election timing were delayed, but by no means we believe that those projects were canceled. I mean there is a delay, and for sure we will see a re-activation of those during the second half having a positive impact.

And the third question, I'm not sure I understood you. Was disclosing information?

You were referring to the earlybird period that -- that is what you are referring to, right?

Yes, correct.

Well, the most important disclosure will be around August 20 when we will -- when the offer expires. Yes, I think it was yesterday or today when the earlybird for the bond, but that is a piece of information on how the bond -- well, we might be disclosing information afterward. At this point in time, I don't have the closing information.

But, again, I would like to stress what we have commented before. I think we are following the sales strategy we started some time ago regarding our financial agreement. We think that it pays to be proactive. We have been proposing this alternative initially with a group of 8 banks having more than 50% -- it is around 52% of the financial agreement. And then we continue after that an agreement in principle with them. We continue talking to other banks.

We have met also with all of them in general meetings in New York and Madrid, and according to the feedback we have received, I think we are moving forward. And, of course, we expect that by August 20 we will have a new financing agreement. Knowing that this agreement will give us much more time on paying our debt and will give us also more suitable covenants in the sense of having much higher margins in all covenants or commitments in order to for the Company to have much more flexibility tapping the markets whenever we need to do that.

As commented and perhaps I'm just repeating myself, but, as you know, the strategy we started to follow a couple of years ago is we have already paid any debt that is due, any debt that is due until December 2013 in which we have the first payment in the current effect to banks for about $500 million and then February 2014. So there is nothing that we have to pay from now to then, and I think it is a good context in order for banks to support us and move forward with a better landscape on our balance sheet moving forward.

Thank you.

Jacob Steinfeld, JPMorgan.

Congrats on the results. Most of my questions were already asked. I just have two quick questions. The first was you mentioned on the $50 million in assets sales, was that for the first half, or did you make $50 million of small assets sales in the quarter?

No, it is the first half. From January to June, out (multiple speakers) of our target, let's say, on asset sales of between $200 million to $300 million, the first half we sold like [50].

Now I am referring on these assets we have always referred to divestments of real estate. Our ready-mix and aggregates business -- cement also, but it's mainly ready-mix and aggregates -- is intensive in real estate. So this is the type of divestments we have been announcing. Including in this target of $200 million to $300 million, real estate, building (technical difficulty)-- buildings, small businesses that are not core, meaning they are not cement, ready-mix or aggregates business.

I'm not referring to other type of divestments, the ones that for sure we will be targeting in order to comply with -- if we -- when and if we have a new agreement to comply with a $1 billion we have to pay up to March next year.

Right. So we should still expect to see $150 million to $250 million of assets sales like these?

Yes, and we have very specific, let's say, properties, and we are progressing in negotiations. So I think it will happen during the second half of this year.

Okay. And my second question regards free cash flow. After expansion CapEx this year and fees associated with the exchange, do you still expect to be free cash flow positive this year?

Yes, it is positive, moderate but positive, after expansion (multiple speakers).

Higher than last year or relative to last year?

A little bit higher than last year, yes.

Okay. That is it for me. Thank you very much.

Okay. Well, thank you very much. And, in closing, I would like to thank you all for the time and attention, and we look forward to your continued participation in CEMEX. Please feel free to contact us directly or visit our website at any time.

Thank you and good day.

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