Cemex SAB de CV (CX) 2014 Q2 法說會逐字稿

Good morning. Welcome to the CEMEX second-quarter 2014 conference call and video webcast. My name is Lorraine and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. (Operator Instructions)

Our hosts for today are Fernando Gonzalez, Chief Executive Officer, and Maher Al-Haffar, Executive Vice President of Investor Relations, Communications, and Public Affairs. Now I will turn the conference over to your host, Fernando Gonzalez.

Thank you, operator. Good day to everyone and thank you for joining us for our second-quarter 2014 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 pleased with our operating EBITDA generation during the quarter with a growth of 3% on a like-to-like basis, adjusting for the fewer number of business days. Consolidated cement and aggregate volumes increased by 1% and 2%, respectively, while ready-mix volumes declined by 1% during the quarter.

On a like-to-like basis and adjusting for the higher number of business days, all of our regions enjoyed higher cement and ready-mix volumes during the quarter with the exception of northern Europe, where in some countries construction activity was brought forward as a result of the very good weather during the first quarter. However, when we take a look at the year-to-date performance, volumes in northern Europe still show healthy growth.

For the second half of the year, we expect consolidated volumes to continue performing well. Our volumes in Mexico should gradually increase as infrastructure activity picks up and year-over-year comparison becomes easier. On a sequential basis and in local currency terms, our consolidated prices for both cement and aggregates increased by 1% while ready-mix prices remained flat.

While the year-to-date prices in US dollar terms for cement are flat, reflecting weaker currencies in some countries, cement prices from December to June are up 4%. Similarly, ready-mix and aggregate prices are up 3% and 10% in the same period.

We are pleased with the recent performance in volumes and prices, which is largely in line with our midterm business plan presented earlier this year. As part of our financial results, we reported a controlling interest net income during the quarter of $76 million. This is our first positive quarterly net income since the third quarter of 2009.

On the financing side we continued to improve our debt maturity profile, reduce our interest expense, and strengthen our capital structure. We are pleased with the way our credit continues to re-rate. We remain vigilant and prepared for windows of opportunity to reduce interest expense at the margin.

Also during the quarter we announced that our subsidiary, CLH, has started the construction of a new 860,000 ton cement grinding plant in Nicaragua. The total investment will be approximately $55 million and the plant is expected to be completed by the end of 2017.

Now I would like to discuss the most important developments in our markets. In Mexico, adjusted volumes for cement increased by 1% while ready-mix volumes grew by 6% during the quarter. The higher increase in ready-mix volumes corresponds to higher activity in formal construction, especially in the formal residential and commercial segments.

On pricing, we have had positive traction from our different price increases. Cement prices as of June were 7% higher than December prices in local currency terms, recovering most of our 2013 price erosion. In ready-mix we announced a 9% price increase at the beginning of this month. We aim to recover our input cost inflation in cement and ready-mix production.

Now, talking about the different segments, we saw positive performance from the formal residential sector with housing starts, housing registries, and subsidies showing double-digit year-to-date growth as of June, recovering from low levels last year. While housing credits from INFONAVIT have shown some decline affected by the low income segment, other entities including Fovissste, Sociedad Hipotecaria Federal, and commercial banks continue supporting housing credit activity.

The prospects for the residential sector for this year are more encouraging, reflecting an expected acceleration in housing mortgages and subsidies as well as higher participation from medium and small homebuilders.

The self-construction sector was slightly down during the quarter. During the first months of the year we saw more cautious consumption as a result of tax increases due to the fiscal reform. Recent indicators are showing a gradual recovery in consumption. Moreover, positive trends in job creation and remittances should lead to slight growth in this sector for the full year.

The industrial and commercial sectors showed slow growth during the quarter, driven mainly by the commercial segment in line with our recovery in consumer confidence. Additionally, manufacturing activity indicators are showing signs of improvement. This sector should continue to show growth during the year in line with general economic activity.

Regarding the infrastructure sector, public investment has had a very positive year-to-date performance with a 43% growth as of May, mainly driven by the communications and transportation and water sectors. However, this spending has not yet translated into increased volumes in the sector. There is typically a lag between the granting of federal resources, which appear as already spent in the federal budget, and the actual infrastructure spending at the state and local levels.

In addition, our volumes in the sector were affected by determination of some high-volume projects during the quarter. We expect our volumes in the infrastructure sector to increase in the mid-single digits for 2014, driven by the anticipated increase in spending during the second half of the year.

Regarding cost and expenses, we continue with our productivity initiatives including upgrades in our truck fleet, self-generation of electric power, better fuel supply management, and working capital improvement.

In summary, in Mexico we see volumes picking up during the second half of the year and expect to achieve annual cement volume growth in the low single digits. This growth will be mainly driven by higher infrastructure spending, a positive industrial and commercial sector, and a growing residential sector. The different reforms again implemented -- being implemented in the country and the acceleration in the US growth should result in stronger volumes going forward.

During the quarter, recovery of our US business continued with good advances in pricing and volumes. On a year-over-year basis, cement volumes were up 7%. Ready mix volumes on a pro forma basis, adjusting for the transfer of our ready-mix assets into the joint venture in the Carolinas, were up 5% year over year. Aggregate volumes declined 1%, primarily due to the completion of the Fort Lauderdale airport project in Florida in 2013.

After our muted performance in the first quarter due to weather conditions, residential demand picked up in our markets in the second quarter. The industrial and commercial sectors continued to drive volume performance in the quarter with a marginal contribution from infrastructure.

Housing permits in our four key states -- Texas, Florida, California, and Arizona -- are up 5% year-to-date May compared with a 1% increase at a national level. Texas and Arizona have led the way with growth rates in excess of 10%.

Construction spending for industrial and commercial rose 11% year to date May. Activity in our key states continues to outperform national levels. In particular, office construction has contributed to year-to-date volume growth in this segment. Contract awards for our key states are up 10% year to date May compared to a flat performance nationally.

The public sector also contributed to volume growth during the quarter. Public infrastructure spending is up 5% year-to-date May versus the same period last year. Highway and bridge investment increased 4% during the same period, primarily driven by state activity and the initiation of TIFIA projects.

We attribute this increase to improving state fiscal conditions. However, uncertainties surrounding the federal highway program is putting pressure on contract awards for highways, which are down 14% year-to-date May.

The value-before-volume initiative continued to deliver with prices for cement, ready-mix, and aggregates, up 8%, 6%, and 7%, respectively, from December 2013 to June 2014. The increase in pricing is a result of our April pricing increase, which was successfully -- successful in virtually all markets.

We have begun to roll out our summer/fall pricing increases with July cement increases in Colorado and Florida and ready mix increases in East Texas and Florida. Summer/fall cement price increases are in the range of $5.50 to $11.10 per ton. We are pleased with the inroads we are making with our value-before-volume initiative in the US, but we have a long way to go to eliminate the chronic underpricing of our products and to capture a fair return on the capital employed in this business.

In our northern Europe region, the decrease in quarterly cement and ready-mix volumes mainly reflects declines in Germany and Poland. In these two countries, there was very good weather at the beginning of the year, which brought forward activity to the first quarter. However, year-to-date volumes for our three core products in all countries in the region are higher versus last year.

In Germany, the residential sector continued to be the main driver of demand for our products during the second quarter. We expect this sector to grow in the mid-single digits, benefiting from low unemployment, low mortgage rates, a growth in wages, and net immigration into the country.

The infrastructure sector should be positively impacted this year by transportation infrastructure projects, financed in part by the increased toll tax. In Poland, better macroeconomic conditions have translated into an improvement in all sectors. As explained earlier, the decline in volumes was mainly due to the different quarterly consumption patterns versus last year.

Year-to-date cement volumes are up 2%. Infrastructure is expected to be the main contributor to cement demand in 2014 from a very low base last year. The residential and industrial and commercial sectors should also show also some growth this year.

In France there was some moderation in new infrastructure projects after the March 2014 elections. In addition, financing constraints and the government's efforts to reduce its deficit have also affected the sector. However, infrastructure activity will continue to be supported by the multiyear highway and high-speed railway projects started two years ago.

In the residential sector declines in housing starts and permits reflect tight credit availability.

In the United Kingdom, general confidence and market conditions continue to improve. The residential sector continues to be the main driver for growth in our cement and ready-mix volumes, positively impacted by the help-to-buy policy and a catch-up effect from the flooding last quarter. Improved sentiment is also translating into increased activity in the industrial and commercial sector. In contrast, there are limited new projects in the infrastructure sector.

In the Mediterranean region, during the quarter we saw growth in cement volumes in Spain, Croatia, and the Emirates. Ready-mix volumes grew double digits in Croatia and the Emirates. We continue to modulate capacity in the region based on customer demand and in support of our value-before-volume strategy.

In Egypt, energy and electricity disruptions continued during the quarter. However, we continue to operate normally, supported by our alternative fuel strategy. In electricity, we continue to manage our operations to reduce optimization during peak hours. At the beginning of this month the Egyptian government announced a new law increasing fuel and electricity prices. Our cement prices should continue to reflect the reduction in subsidies and the future increase in energy prices.

During the second quarter our cement prices increased by 14% sequentially and by 19% on a year-over-year basis. The informal sector remains the main driver of cement consumption in the country. Going forward, we expect some downward pressure on our volumes, reflecting the increased cement production capacity.

In Israel, ready-mix volumes declined by 3% during the quarter, reflecting the current political situation. Year-to-date volumes are up 6%. In Spain, macroeconomic conditions continue to improve during the quarter. Our domestic gray cement volumes showed year-over-year growth for the first time since the first quarter of 2011. Considering our export activity, total cement volumes increased by 56%.

In infrastructure, public biddings as of April have shown growth for the ninth consecutive month from very low levels. This largely reflects lower pressure from fiscal austerity measures and anticipation of municipal elections next year. Recent indicators, including housing sales and permits, indicate that the residential sector might have reached bottom. This stabilization of home prices and increased housing demand from foreigners should contribute to the clearing out of inventory in some regions.

In our South, Central America, and the Caribbean region during the quarter cement and ready-mix volumes increased by 1% and 7%, respectively. In Colombia and Nicaragua, we reached new quarterly cement and aggregate volume records. Year-to-date regional cement and ready-mix volumes are up 8% and 11%, respectively.

As explained yesterday in CLH's results call, the decline in quarterly margins was driven mainly by declines in Colombia and Panama. More than half of the decline was due to scheduled maintenance during the quarter. We anticipate a margin recovery during the second half of the year.

In our operations in Colombia we are encouraged by the double-digit year-to-date growth in volumes for our three core products, driven by positive dynamics in all demand segments. The residential sector continues to benefit from different programs to promote home ownership. During the second quarter the government awarded the construction of the 86,000 homes that will benefit from a 5% mortgage rate subsidy.

Construction of these houses should start soon. The government is working on new housing initiatives which should continue to support the favorable performance of the residential sector.

In the infrastructure sector, increased activity in the first half of the year was driven by the infrastructure law approved last year, which has accelerated the execution of several highway projects. Cement volumes in this sector should increase in double digits during 2014.

In Panama, cement volumes during the quarter declined by 20%, reflecting the impact of a construction worker strike in April as well as reduced consumption from the canal expansion project on a year-over-year basis. The sequential decline in cement prices is due to a mix effect with higher volumes going to the canal project compared with the first quarter.

The residential sector continues to be the main driver for cement demand in Panama, supported by middle income housing activity. In the industrial and commercial sector, we are encouraged by recently initiated projects. We expect these sectors to continue driving volumes during the rest of 2014.

In the future, infrastructure spending should continue to be supported by different projects like the Corredor Norte, already in construction; the Inter-American highway; the second and third lines of the Panama City subway; and several hydroelectric projects, among others.

In Asia, cement volumes increased by 1% during the quarter and by 5% during the first half of the year. The decline in regional EBITDA margin is mainly due to higher scheduled maintenance during the quarter and the restarting of one kiln in the Philippines. Cement volumes in Philippines during the second quarter, adjusted by business days, grew 5% during the quarter driven by continued strong demand from all sectors.

The infrastructure sector remains healthy with reconstruction and rehabilitation projects with a focus on more disaster-resistant construction. In the residential sector, there is continued growth in the low-cost and high-end segments. Stable inflation, low mortgage rates, and strong remittances continue to benefit this sector.

Our new grinding capacity of 1.5 million tons in the Philippines is now in operations.

In summary, we are pleased with the year-to-date trends in our consolidated volumes and prices. Our value-before-volume strategy continues to pay off. We aim to capture the intrinsic value of our products, recovering input cost inflation and getting an appropriate return on capital employed.

In addition, we are now increasingly getting paid for services delivered together with our products, which we used to provide for free. Lastly, we are more systematically recovering transportation cost increases by surcharges.

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

Thank you, Fernando. Hello to everyone. Net sales on a like-to-like basis and adjusting for the fewer number of business days increased by 5% for the quarter and by 7% for the first half of the year.

Adjusted operating EBITDA increased by 3% and adjusted operating EBITDA margin declined by 0.3 percentage points. Cost of sales as a percentage of net sales remained flat during the quarter.

Operating expenses, also as a percentage of net sales, increased by 0.4 percentage points. This increase is mainly due to higher distribution expenses during the quarter. Our kiln fuel and electricity bill on a per ton of cement produced basis declined by 1% during the second quarter.

During the quarter, our free cash flow after-maintenance CapEx was $63 million compared with negative $86 million in the same period in 2013. During the quarter, we had slightly higher EBITDA, lower financial expenses, and working capital as well as positive other expenses, which more than offset higher maintenance CapEx and higher taxes. The other expenses line includes proceeds from asset sales, mainly real estate assets in northern Europe.

The lower year-over-year working capital investment during the quarter is mainly due to an improvement in receivables. Year-to-date working capital days declined to 27 from 28 in the same period of 2013. As in prior years, we expect to recover most of the investment in working capital during the second half of the year.

Other expenses net during the quarter resulted in an income of $62 million, which includes a gain in sales of assets including real estate assets in northern Europe, mitigated by severance payments. We also had a foreign exchange gain of $65 million resulting primarily from the fluctuation of the Mexican peso versus the US dollar. We also recognized a gain on financial instruments of $77 million related mainly to CEMEX shares.

During the quarter, we had controlling interest net income of $76 million compared with a loss of $152 million in the same quarter of 2013. This is primarily due to an income in the other expenses line, a gain on financial instruments, lower income taxes, and higher operating earnings before other expenses mitigated by higher financial expenses and a lower foreign exchange gain.

We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. During the quarter we entered into additional private transactions with some institutional holders of our 2015 convertible notes under which these holders converted approximately $114.5 million of these notes for about 11.5 million ADSs. Following the closing of these transactions, approximately $320 million of these notes remain outstanding.

We also continue to be successful in accessing the global capital markets and are pleased with the strong support we have received. During April we issued $1 billion in senior secured notes due in 2024 with a coupon of 6%. In addition, we issued EUR400 million in senior secured notes due in 2021 with a coupon of 5.25%. We used the proceeds from these notes to pay higher coupon dollar and euro notes maturing between 2017 and 2020.

Total debt plus perpetual securities decreased by $125 million during the quarter. The decline in debt reflects mainly the conversion of a portion of our 2015 convertibles discussed earlier. In addition, there was a positive conversion affect during the quarter of $5 million.

The free cash flow during the quarter, plus the reduction in cash, was mainly used to pay the financial fees and refinancing premiums related to the issuance, tenders, and calls of different notes during the quarter. Pro forma average life of debt is currently at 4.6 years. Assuming our 2015 convertibles convert, CEMEX will not have any significant maturities until September 2015.

The liability management exercises during the quarter are expected to represent annual cash interest savings of approximately $40 million. We continue to be comfortable with our liquidity position, with cash and cash equivalents reaching $737 million as of the end of the quarter. We also maintained over $2 billion of working capital and receivables financing facilities, which further bolster our liquidity position. We continue with our liability management initiatives to lower our interest expense, lengthen the average life of our debt, and reduce refinancing risk.

Now Fernando will discuss our outlook for the year.

For 2014 we expect our consolidated cement, ready-mix, and aggregates volumes to grow in the mid single digits. As detailed in our per-country guidance, we anticipate most of our major countries to exceed the volume growth during the year.

Regarding our cost of energy, on a per ton of cement produced basis, we expected to be relatively flat from last year's levels. Guidance for total CapEx for 2014 is about $670 million. This includes $505 million in maintenance CapEx and $165 million in strategic CapEx. The increase in strategic CapEx guidance reflects the new grinding plant in Nicaragua announced in May.

Regarding working capital, we anticipate the working capital investment during this year to be similar to last year's. We expect cash taxes for 2014 to reach about $600 million. As a result of our liability management initiatives, we anticipate a marginal reduction in this year's cost of debt including our perpetual and convertible securities from 2013 levels.

In closing, I want to emphasize three points. First, pricing trends continue to be favorable. Consolidated prices for our three main products in local currency terms increased on a year-over-year basis. Sequential prices were up for cement and aggregates and flat for ready-mix.

Second, we expect improved performance from our Mexican operations during the second half of the year, which should lead to stronger overall EBITDA generation for the full year 2014. Third, we remain focused on value creation, proactively improving our operating performance by focusing on pricing, value-added products and services, maintaining our cost discipline, and outsourcing support activities while at the same time looking for ways to optimize our portfolio.

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 of course could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to our prices for our products.

Now we will be happy to take your questions. Operator?

(Operator Instructions) Carlos Peyrelongue, Merrill Lynch.

Thank you. Good morning, thank you for the call. Two questions, if I may; first one related to Mexico.

Could you elaborate a bit more on the expected recovery for the second half? If you could breakup -- give us an idea of what sector would be infrastructure? Are we covering self-construction? Or where do you see the pickup coming to achieve mid-single-digit volume growth in Mexico? Would be great.

And the second is related to margins in the South and Central America, and the Caribbean region. Big drop year-over-year, 600 basis points. Can you comment on what type of recovery you will expect and what would drive that recovery? Thank you.

Sure, Carlos, thanks for your question. I can start with the question referred to volume recovery in Mexico.

What I can comment first is that if you remember in 2013, the second half of the year was the part of the year in which volumes eroded. So assuming same current volumes for the second half compared to a lower base in second half 2013, that will give us around 2% increase of volumes.

Second, besides this base effect, as we mentioned during the first half, it was the formal construction sector -- the housing, particularly -- the one providing for most of growth while informal is slightly below. Now we do see very direct indicators that make us believe that informal construction will be much stronger during the second half. Indicators like job creation increasing by 3%.

I think we have been commenting on a change in the trend of remittances, which the current information we have at this year-to-date May is that remittances has increased for about 13%. Besides that, you know consumer confidence is increasing, so we do believe that the informal sector would provide for additional growth during the second half.

Thank you, Fernando. And the one on South America?

Do you want to take that one?

Sure. Carlos, hi. The most important driver of the margin decline, probably two-thirds of the number is coming from maintenance in the quarter compared to last year. We had very little maintenance taking place in Colombia and so doing that distorted the numbers. In first half we maintain six kilns, while last year we only maintained one kiln.

The other thing, of course, is our currencies. That had an impact. The Colombian peso was quite weak. The Dominican peso was quite weak. The colon was weak. So looking into the second half of the year we certainly expect a pickup in margins and we see continued pickup in volumes.

Obviously, the maintenance is behind us now. And as you know, the Colombian peso already started appreciating as we speak. I don't know if that answers your question.

Yes, very clear. Thank you, Maher.

I would like to go back to your first question, Carlos, because I should have also mentioned how the public spending is evolving and we expect will continue evolving during the second half. As you know, expenditure has been increasing materially, and, as we mentioned, we have not seen it reflected already in volumes for the first half, but clearly there are early indicators that are showing us the number of large projects that the government is already putting in place like railroads, highways, and other projects. So that is also for sure will impact this sector during the second half.

The question is still to how much and how soon. But compared to a few months ago, not to say to the last part of last year, these indicators are much, much concrete, much clearer. So we feel much more confident that this sector will also improve -- will start improving during the second half.

Okay. Thank you, Fernando.

Nikolaj Lippmann, Morgan Stanley.

Thank you. Thanks for the call and for taking my questions. Two questions, if I may; first one on Mexico and then on the asset swap.

Mexico -- it looks like you are doing really well on ready-mix and, of course, we see cement volumes dropping. Could you help us to understand what's going on? I understand some of the European competitors have changed their strategies. Are you taking market share in ready-mix? Are you taking it from European competitors?

Also, can you say anything about whether you think you are losing share on the cement side in Mexico? Then my second question is related to Europe. How should we think about the idea of asset swaps after the rejection in Europe?

Let me start with asset swaps in Europe. I think the process continues. You know how these processes are.

There are -- I don't know if I should call them rumors or unofficial information regarding the rejection of the transaction, which is not necessarily the case. We will continue the process and we will follow the indications from authorities in order to finalize or to find out the conditions in which we can finalize this transaction in Europe.

You know that the partner or the business in Germany, Czech Republic is already approved, so we are still working on the Spanish part of the transaction. So whenever we have concrete information to share with you, we will gladly do so.

Okay, thanks. On cement and ready-mix in Mexico?

Yes, in Mexico in cement I think our position reflects, I would say, the market. There has been a lag in particular on the infrastructure side.

On the ready-mix side, the reason that we have seen better performance -- I don't know if you are aware, but in terms of infrastructure projects, we are probably -- I don't want to say uniquely positioned, but certainly we probably have the biggest exposure to the formal sector and particularly the large infrastructure, large formal housing because of the product offerings that we have, because of the quality, and because of the credibility we have in the market.

Certainly the first-half growth and continuing into the second quarter was predominately driven by the formal construction sector, the bulk cement, ready-mix area. And then that's why our performance has been higher. Commercial also has been doing very well and we have a big participation about that.

Now in terms of commenting about market share loss or gain, frankly, we prefer not to address that point.

Thanks.

Ben Theurer, Barclays.

Good morning. Congratulations, first of all, and thanks for the call. I have two quick questions.

First of all, on the US, thinking a little bit, doing a little bit the math on what we have seen on expansion in total sales and how that translates through the operating leverage into EBITDA growth, it has been, let's say, surprisingly low in the second quarter with approximately 44%. I remember last year that figure was more like 80% and actually the expectation for this year was more like towards 60%.

So what where the reasons for why that operational leverage in the US did not materialize in such a good way, or will we see pricing actually very strong, up year-over-year approximately 6% and sequentially 5%? With that strategy in mind, there should be a much better operation leverage so that would be question one.

The second question would be following up on the Mexico price increases in local currency terms. Do you have any plans to further increase prices throughout the year?

Because if we take a look into the different price increases in local currency terms, it's still relatively minor on cement what we have seen compared to last year. I know you've increased compared to the fourth quarter, but it's still not a very strong increase, at least in local currency terms, i.e., compared to the US, what we are seeing. So what are pricing initiatives in Mexico going forward?

Okay. Starting with your first question, the operating leverage in the US, in the case of the US we had an effect similar to the one in South America, in Colombia, which is maintenance, because of equipments that needed to be maintained because of the additional volume, we are having in those markets. If we adjust the 44% you were mentioning of operating leverage due to this additional maintenance expense, that will go up to about 50%. And I am referring to the first half of the year, because this additional maintenance we think is around $17 million.

We do not expect any additional and we might turn around this amount of maintenance in the first half for the second half. So operating leverage in the second half should be higher compared to the one we had during the first half because of that reason.

Okay, just to clarify, those $17 million you just mentioned, does that -- that excludes that? It's only second quarter? This is not what was already in the first quarter where I think you mentioned a little bit over $20 million was affecting on maintenance. So basically you've done some additional maintenance into the second quarter as well, affecting here your EBITDA growth in the quarter and it would have been more likely to be towards $135 million instead of $129 million; is that correct?

Well, the total effect in the first half should be around $25 million and what we should be recovering in the second half it's around $17 million. So that's we can expect for the year.

There are also some effects that I didn't mention which is related to inventory, but that's a little bit more uncertain because in the first half we built some inventories and there is an impact, but we will use them during the year. We will reverse that impact also. But the main numbers are the ones that I already mentioned.

Okay, perfect. (multiple speakers) then on Mexico pricing?

Yes, the Mexico pricing, Ben, as you know, last year prices December to December declined by 9%. Of course, that is a point-to-point pricing drop.

If we take a look at kind of weighted average realized prices during the year, it was much less than that. So far this year we have recovered on a same-basis point-to-point, beginning of January or end of December to end of June, 7%. We are actually now at prices higher than last year.

And, of course, as Fernando mentioned earlier, we just announced the ready-mix pricing increase, 9% ready-mix pricing increase earlier this month. It's too early to talk about traction, but we will continue and certainly we are targeting to recover input cost inflation in all of the core products in Mexico.

Also, as Fernando indicated, we are expecting things to improve on the volume side in the second half of the year, and that should provide better support to some of the pricing announcements that we have made in Mexico. So we are optimistic about things holding up and improving in the second half of the year.

Thanks, Maher. Very clear.

Jacob Steinfeld, JPMorgan.

Good morning, Fernando and Maher. I have two questions. My first one is on the cash flow slide that you have in the deck on slide 15. Can you walk us through the $148 million positive gain that you have in the quarter?

Was there only one question or have we lost the connection?

No, no, that's it. Jacob, about $157 million was essentially the fixed asset sales, which was offset by other expenses like severance and some other items.

Okay, thank you very much. Then my second question was what was your -- in your opinion, I guess, what was your biggest disappointment in the quarter?

Sorry, could you repeat that? You broke a little bit, Jacob.

Sorry, my second question was what was your biggest disappointment in the quarter in the results?

I didn't think on disappointment in our results, but I will think about it.

Okay, thanks. That was it.

Vanessa Quiroga, Credit Suisse.

Fernando and Maher, thank you for the call. My question is regarding Mexico and if you can give us a little bit more color on the infrastructure, the better infrastructure indicators that you are seeing. Is it correct to say that the better performance that could be expected from this sector going forward will come from private sector investment, meaning the infrastructure plan actually ramping up rather than government spending with projects?

And then linked to that would be, at these current conditions, when would you expect to be able to reinitiate the new capacity that is pending in Tepeaca? Thanks.

As I had mentioned before, Vanessa, what we see is some indicators on showing much more activity in the public sector or in the segments related to public investment. And we have a larger number of tenders. We have already won some of these tenders; the actual consumption of our product is still not there, it will come during the second half.

In all the ministries, the ones much more related to construction expenditure is much higher than last year and those are the indicators that make us believe that the activity is increasing. During the first half we are -- the whole trend is that the activity in this sector started to be adjusted. We went into a sort of an inflection point for the whole half of the year.

The activity is flat so if you add to this flat trend these additional volumes coming from these projects, I think we have already mentioned which projects, a highway from Acapulco to Chilpancingo, a dam in Sonora. There are a couple of highways being tendered as we speak, large highways, more than 600 kilometers. So all of that is making us believe that the sector will start growing or it has already changed its trend and will start growing during the second half.

Vanessa, if I can add to that, although it's not infrastructure I think that we are quite pleased in what we are seeing from the government's behavior in the formal housing, affordable housing. If we take a look at housing starts in general, they were up 21% year-to-date. That is a very impressive acceleration in the housing numbers.

And also we have seen quite a material acceleration in subsidies, almost 16% year-to-date. So I think that we are seeing definitely the formal sector really stepping up and that is really what is going to continue to drive the growth in volumes in the second half of the year.

Excellent/ and so given those conditions, what is your outlook for the Tepeaca plant?

Well, we don't have yet any specific plans to make an announcement, but I think we are getting closer to that point. So whenever we think that we should continue with the project in Tepeaca we will do it.

As you may know, Vanessa, most of the investment in Tepeaca is already done. Yes, we still need to invest some additional amounts, but depending and according to demand we will consider investing in Tepeaca. But for the time being we don't have any specific plan.

Okay, okay, excellent. And apologies if I missed your specific comments about pricing in the US, but you did have a schedule of new price increases for July. Is that still your expectation that you will implement price increases this month in some markets?

Yes, Vanessa. We -- as you saw, the performance on pricing across all of our products, the April pricing increases and certainly the earlier price increases have been quite positive and very well received by the market.

I know that in the early part of the year we had a little bit of cautiousness on the summer and fall pricing increases, but we are seeing a lot more support in the market and we are optimistic about the summer and fall pricing increases getting traction.

Okay, excellent. Thank you very much.

Thank you. The next question will come from the webcast.

Okay, thank you. The question from the webcast is from Chris Choi from SKY Harbor Capital Management. The question is can you elaborate on the impact of the uncertainty surrounding Highway Trust Fund in the US and your outlook on the US business going forward. Would you like me to address that?

Yes.

I don't know if you are -- Chris, I'm sure you are following this in the US. We are quite -- on one hand, we are pleased; on the other, we are cautious. We are pleased to see quite a bit of alignment between both the president and certainly both parties and both houses, frankly.

As you know, there has been a House bill that provides for about an $11 billion infusion. Passed the House Tuesday and we are waiting for the Senate. We are optimistic that is likely to go through. Now, frankly, nobody is high-fiving each other because of that. We wish and we look forward to the administration providing us with a longer-term solution to this situation.

So we are happy about that. We think that that is going to lower the volatility and infrastructure project awards.

The problem that we have seen from prior years is that when we see these extensions, the quality of contract awards tend to be biased towards maintenance projects instead of new miles put into place. And that, unfortunately, tends not to translate in as much cement demand as we would like it to be.

But having said that, in our markets the performance of infrastructure and particularly streets and highways have been particularly good. So we are optimistic, but we wish the administration and both parties would come up with a longer-term solution and not have to suffer what we suffered the last time around, which is an extended period of extensions.

Dan McGoey, Citigroup.

Good morning, gentlemen. Thanks for the call. I was wondering if you could talk a little bit about priorities on balance sheet management, including scope for further early conversion of the convertible debentures. And also I guess the appeal of it to alleviate some of the restrictions that you have on investments, the interest rate environment, [and the environment].

Do you want to take it about the converts?

Yes, sure. The converts, as you've seen, Dan, that we have been opportunistic in the good sense of the word and so we will continue to do that, frankly. We see that as a risk management process.

We are, obviously, focusing on the near-term maturities, so we will continue to focus on the 2015. We've also been reacting, frankly, to reverse inquiries. So, yes, we will continue to do that.

On the refinancing side, as you have seen us, we have been very proactive. We have been very vigilant on an ongoing basis. We are always ready to hear proposals.

We are not timing markets, frankly, and any time we see a good opportunity to either extend and/or reduce the cost of our debt, we will be taking it. And we are very pleased with the way the market has supported us in every transactions that we've come to the market with. So we are quite pleased and we will continue -- I don't think we see any change in the approach, frankly.

Maybe the second half of that question, Maher, is the importance of I guess moving restrictions on the ability to do acquisitions or investments, specifically as there's potentially opportunities from divestitures from your global peers. How important is that internally from CEMEX?

As in the past, whenever it has been needed -- and we might or we might not need it -- we have proposed to the banks participating in the financial agreement for certain amendments or waivers. And what we have seen is that when there is a good reason to do it, we have been receiving their support. Again, if for whatever reason you are referring to acquisitions, we might need for an amendment or a waiver. We will proceed as we have done in the past.

Okay, thank you.

Mike Betts, Jefferies.

Yes, thank you very much. My two questions; the first one. I think from memory in Q1 there was a $54 million hit from the maintenance and inventory issue. We have heard a bit about Colombia and we've heard a bit about the US -- apologies for the alarm you can probably hear in the background.

Could you give an update to what that $54 million stands at the end of the first half? Has it gone up or has it gone down? I think you indicated for the US how much you expected to get back in the second half. Do you have a similar feeling for the group?

Then my second question, please, just on Egypt. Could you indicate what sort of capacity utilization you are operating at now currently in Egypt? I think you indicated you were still having problems with the fuel supplies. Have they eased at all as you've gone through the quarter?

Then if you could just clarify the comments about new capacity, because I thought there wasn't any further new capacity to come on stream. Or was that just assuming that people would be able to operate at higher utilization rates than in the past? Thank you.

Regarding Egypt, we are operating at full capacity and we have managed to do so because of a combination of a couple of factors. Because of the type of fuel we use in Egypt, which is a fuel oil that is called Mazut and that's different to the fuel that is used in most of the cement plants in the Cairo area, which is gas and which is the area in which there has been some restrictions to the energy needed to run those plants at full capacity.

And the other factor is our alternative fuels strategy that in Egypt has been evolving very nicely. So far we've been operating at full capacity.

Now regarding the question you made about maintenance, the number you are mentioning, you're right it was $50-something-million and the calculation right now is that, as of the first half, the additional amount, that $50-something, $54 million, currently is about $36 million. So that is the amount and we do expect in the second half part of it again to be reversed.

Also, Mike, if I can add also, there's some inventory component that we are expecting to be reversed just a little bit under -- about $7 million that we expect in the second half.

So to just make sure I got the number right, the $54 million turned down to $35 million at the end? Sorry, to $36 million at the end of H1 or did I mishear that?

Yes, roughly.

This is the number.

Just a reminder, just a reminder, I mean as you recall last quarter we said maintenance and inventory was $54 million. And it was roughly broken down half-and-half between inventory and maintenance.

So there was -- in the second quarter there was an $18 million reduction or $18 million-ish reduction. Is that right?

Roughly, yes.

$54 million minus $36 million. And I guess what I'm trying to get to is what region did that occur in or where did that reduction occur? So which regions saw the benefit from it?

As you remember, the biggest contributor to that in the first quarter was the US, so that's where we have seen both the inventory and the maintenance. And, of course, SAC has also been a contributor as well, but the US is the biggest chunk. As you recall, last quarter we said that out of the $54 million, close to $30 million was coming out of the US business.

But shouldn't that have boosted the operating leverage in the second quarter then in the US, the re-credit back of that? Or am I missing something?

Should it have boosted --? Of course it has a positive contribution, but there are other pieces that are moving that is fading away a little bit of the operating leverage, right? So, of course, it had a positive impact but there may be -- for example, Mike, transportation is an area that has worsened a little bit for us as we are getting to full capacity in several of our markets and we are having to transport our products longer distances.

So you know there are many moving pieces, right? It definitely did positively contribute, but there were other items that may have dampened that effect.

Okay, understood. Then, if I could, just one follow-up on Egypt. How do you see that market developing? I thought -- I maybe misheard, but I thought you were talking about potentially seeing either slower volumes or as new capacity opens. Maybe I missed the point, Fernando, on that.

Is that that you think that other plants will get up to better utilization rates and, therefore, you won't be able to keep it 100% capacity utilization? Was that the point you were making?

I think the supply of energy in Egypt will improve in the country as a whole, because there will be, more or less, the same amount of natural gas available plus, as you may know, very recently authorities authorized imports of coal and pet coke for different players. So in the case of Egypt, and again mainly in the north in the Cairo area, there is capacity that has not been able to be used because of this shortage of energy. So that should start changing during the second half.

Even though these authorizations have been done, we don't believe that the higher capacity utilization in the country will happen immediately. It will take some time, but we think that will be the dynamics of the market. And, in our case, we do expect continued use in our capacity utilization full -- already close to full capacity.

Understood, thank you very much.

Marcos Assumpcao, Itau.

Good morning, everyone. First question on the cash flow perspective for the second half of the year. Could you comment a little bit on your expectations for free cash flow?

We already had a quarter of positive free cash, but mainly impacted by the sale of assets. So we are seeing an improvement in EBITDA probably Mexico, continued improving results in the US, probably lower taxes, and also lower financial expenses a little bit. So what is your perspective on the free cash in the second half?

My second question is on Europe. If you could comment both on northern Europe and then in the Mediterranean, we are seeing positive growth on EBITDA and probably a little bit ahead of expectations as well. Do you expect that trend to continue in northern Europe and also in Spain if you really saw the market bottoming out right now?

Well, the direct answer to Europe is that, yes, Europe has been performing slightly better than we expected and we have commented that already for a couple of quarters. And we do expect Europe to continue performing.

In the case of Spain, yes, the market for the first time is bottoming-up, but as you may know, it is doing it at a very low base. So the good news is that Spain -- the domestic market in Spain started reacting and we do expect, again starting from a low level, but that it will continue evolving positively.

Now regarding the question to cash flow, as you may know, we don't provide cash flow guidance as such, but also as you may know the second half of the year, because of seasonality and economic activities, are much, much better. Free cash flow is the highest free cash flow half of every year.

All right, thank you.

Francisco Suarez, Scotiabank.

Thank you very much. Good morning. If I may, a question on your cap calls. It seems that that could be actually a major source of value for you guys. Any chances of seeing a potential commitment to the conditions on your cap calls at this moment?

Can you repeat that, the question? I didn't hear the last part of --.

Yes, sorry. My question relates to if there is any chance of doing perhaps a new negotiation with your banks and a potential amendment to the cap calls that you have.

Not necessarily negotiating with the cap calls. That is an asset we have, as you may know, related to -- we did them related to the converts. But they are -- definitely they are a source of value, but currently we have been sort of monetizing the ones related to converts in 2015. But the ones related to 2016 and 2018 we are keeping them and we don't have immediate plans for those.

But as you are -- you're right; it is an important asset. I am referring to the value those assets have.

I agree. If I may, a last question on your overall outlook for certain regions in the United States because certain players are pointing out that amid a low base, northern Florida, Georgia, and the Carolinas seems to be the most dynamic markets at this moment. I don't know if you can actually share with us any color on those regions particularly, thank you.

For us, the most dynamic markets have been California, Texas, and Florida. Texas and Florida, in particular, have been the biggest contributors to growth and employment since the beginning of the year and so we definitely continue to see that trend in those markets. Capacity utilization in the southern part of Florida is approaching very high levels.

In Texas, as you know, we are -- it is at the maximum and we are having to bring cement from adjacent markets. In California, similar situation as well, so the highest growth certainly will continue to be in those three markets. But, of course, also we are seeing some important growth in the -- north of the Florida markets, as you said, Alabama and Georgia, but not to the same level as we are seeing in those markets.

Interesting. Lastly, in the Odessa plant is your debottlenecking has already entered the market, the increasing capacity in Odessa?

No, we haven't completed that yet.

Thank you very much.

Heber Longhurst, Interacciones.

Thank you for taking my call. I have one quick question. Which, if any, regions do you expect to see higher-than-average maintenance expenses during the third and fourth quarters?

Which region? I think most of major maintenance, which are referred to cement, are done in the first half. That is particularly true because of seasonality in North Europe and parts of the US and in most of the cases is first half. So I don't -- right now I don't have in my mind and I don't foresee any additional or special maintenance when comparing it to second half of last year.

Okay, thanks so much.

Thank you. I would now like to turn the call over to Fernando Gonzalez for closing remarks.

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