Cemex SAB de CV (CX) 2016 Q3 法說會逐字稿

Good morning. Welcome to the Cemex third-quarter 2016 conference call and webcast. My name is Karen; I will be your operator for today. (Operator Instructions) Please note this call is being recorded.

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. Good day to everyone and thank you for joining us for our third-quarter 2016 conference call and webcast. We will be happy to take your questions after our initial remarks.

During the third quarter we delivered strong underlying operational and financial results by remaining focused on the variables we can control. Overall, we saw higher consolidated cement and aggregates volumes during the quarter, as well as continued favorable results from the implementation of our value-before-volume strategy. Year-over-year pricing is higher for cement and aggregates, while ready-mix prices were flat.

Higher consolidated volumes and prices led to a growth in sales of 4% on a like-for-like basis during the quarter. This also had a significant impact on our EBITDA generation. In the case of pricing, the impact was $98 million, which materially exceeded the increase in our costs. This, together with favorable operating leverage in many of our markets, led to a 22% growth in operating EBITDA on a like-for-like basis or 15% in US dollar terms.

EBITDA margin expanded by 3.2 percentage points. All regions reflected increases in margins during the quarter. Both EBITDA and EBITDA margin were the highest achieved in a quarter since 2008.

Year-to-date free cash flow after maintenance CapEx reached slightly above $1 billion, 3.5 times higher than last year's level. This was driven by higher EBITDA generation, as well as our initiatives to reduce interest expense and working capital investment.

Conversion of EBITDA into free cash flow after maintenance CapEx reached 49% during the first nine months of the year. In addition, net income reached $286 million for the quarter. This was the fourth consecutive quarter with a positive net income and the highest net income in a quarter since 2008.

Our debt plus perpetual notes is close to $1.4 billion lower than that at the end of 2015. This represents a 9% reduction from the debt level as of the end of 2015. This is an additional step in our path to reach an investment-grade capital structure as soon as possible.

Now I would like to discuss the most important developments in our markets. In Mexico, the 10% growth in our cement volumes during the quarter reflects positive performance from all of our main demand sectors, as well as a low base of comparison in the third quarter of last year. Ready-mix volumes increased by 6% during the quarter, reflecting increased demand from the private sector.

Our cement and ready-mix prices increased on a sequential basis by 6% and 2%, respectively. On a year-over-year basis, our cement prices increased by 17% and our ready-mix prices increased by 7%. Additionally, we recently announced and implemented a price increase for bagged cement, which became effective October 1.

Our EBITDA margin increased by 3.8 percentage points and was the highest third-quarter margin since 2009. Strong commercial activity, as reflected in retail sales data, is supporting the industrial and commercial sector. Additionally, private investment projects related to commercial and industrial developments, as well as to the auto industry, have been contributing to growth in the sector.

In the formal residential sector, demand continues to be bolstered by increasing commercial bank lending. Additionally, total mortgage investment from Infonavit has accelerated in recent months, in line towards attaining the budgeted 3% growth for the full year. For the self-construction sector, prospects remain favorable given continued improvement in demand drivers including job creation, consumer credit, as well as remittances, which increased 26% in peso terms during the first eight months of the year.

Regarding infrastructure, data from the communications and transportation ministry shows increased investment in recent months. Year-to-date spending from this ministry is 7% higher versus last year. Our pavement business has grown in the double digits year-to-date. In light of all this, during 2016 we maintain our full-year mid single-digit growth guidance in our cement volumes.

In the United States, we saw a slowdown in activity in the third quarter as volumes for cement, ready-mix, and aggregates fell 2% on a year-over-year basis. The decline resulted from poor weather in most of our footprint, as well as a difficult 2015 comparable. This was compounded by some delays in infrastructure spending and the pull-forward of demand to the first half of 2016 due to a milder winter.

Cement prices were flat sequentially. The effect of the successful July price increase in Florida was offset by unfavorable geographic mix. Cement prices point-to-point from December 2015 to September this year are 7% higher. We have announced certain cement price increases for 2017.

In the residential sector, housing starts declined 2% in the third quarter, weighed down by a 9% decline in multifamily activity. Single-family starts, which are more cement-intensive, were up 2%. Year-to-date starts are up 4%, while the single-family sector grew 9%. Residential growth during the quarter was muted due to weather, demand pulled forward into the first quarter of 2016, and weakness in the Houston market.

Importantly, continued home price and rental rate increases suggest that demand conditions remain strong. We believe that stronger job creation, growth in income, low interest rates, high rents, and years of deferred home purchases will support the ongoing residential recovery.

Housing permits for the US are up 1% year-to-date September with single-family growing 8%. Permits for the states in our footprint are growing faster than the country as a whole. Overall, the US residential sector continues its steady, gradual recovery.

Construction spending in the industrial and commercial sector continues to slow down, reflecting a headwind from energy, agriculture, and manufacturing investment. We estimate national cement consumption for this sector was flat year over year during the quarter, with growth in the lodging, office, and commercial segments offsetting a decline in manufacturing.

National contract awards are down 10% in the year ending August, partially as a consequence of the slowdown in the less cement-intensive manufacturing sector. On the infrastructure side, after a strong start in the first half of 2016, highway and bridge spending has slowed recently, registering a flat performance year-to-date August. We attribute the decline in the quarter to bad weather, delays in infrastructure projects, and reduced state spending.

During the quarter, EBITDA margin expanded by 2.6 percentage points year over year, reaching 18.4%. Operating leverage during the third quarter on a pro forma basis, adjusting for the sale of our gypsum business last year exceeded 100%.

Year-to-date pro forma operating leverage is close to 60%. Due to the headwinds experienced during the third quarter, we are reducing our volume guidance for the full year to growth in the low single digits in all three businesses. However, even with lower-than-expected volumes year-to-date, EBITDA for the US has grown 20%. Dynamics in the country continue to support our medium-term expectations for the business.

In our South, Central America, and the Caribbean region, third-quarter cement volumes declined by 1% while ready-mix and aggregates volumes declined by 16% and 17%, respectively. Cement volumes improved in the Dominican Republic, Nicaragua, Guatemala, and El Salvador.

Operating EBITDA for the region increased 4% with a margin expansion of 4 percentage points despite a decline in sales. I will give a general overview of the region. For additional information, you can also see CLH quarterly results, which were also reported today.

In Colombia, cement volumes during the quarter declined by 5%, affected in part by the longest transportation strike in the country's recent history. However, we estimate we continued to strengthen our market presence on a year-over-year basis.

The decline in sequential and year-over-year cement prices reflects softer demand dynamics in the country. In contrast, ready mix and aggregates prices are 4% and 10% higher, respectively, on a year-over-year basis.

In infrastructure, after the start of new terms by elected mayors and governors, there has been limited initiation of projects. We expect a better performance of the infrastructure sector during the fourth quarter as execution of works accelerate to meet the year's public spending budget and the beginning of some works related to 4G projects.

Regarding the residential sector, there was a deceleration in the execution of projects during the quarter. Activity in this sector should improve in 2017 given recent growth in housing sales and starts, as well as an expected increase in the government's housing budget. In light of this, we expect cement volumes in our Colombian operations to grow in the low single digits during 2016.

In Panama, our cement volumes declined by 5% during the third quarter. Adjusting for volumes to the canal project, the decline was 2%. Sequentially, both cement and ready-mix volumes are 8% higher, reflecting higher volumes to infrastructure projects, including the second line of the subway and the urban renovation of the city of Colon. During 2016, we expect the residential sector to continue to be the main driver for cement demand.

In our Europe region, our cement volumes decreased 2%, while both our ready-mix and aggregates volumes increased 3% during the quarter. Operating EBITDA for the region increased by 4% with an EBITDA margin expansion of 0.7 percentage points.

In the United Kingdom, volumes of our products to the residential and infrastructure sectors grew during the quarter and should continue driving demand for the rest of the year. Also, third-quarter cement volume growth reflects higher sales of cement blended with fly ash. Going forward, the implications in our business of the Brexit negotiations are still difficult to quantify.

In Spain, political uncertainty weighed on consumer sentiment and construction activity was particularly affected during the quarter. For the remainder of the year, the residential sector should remain supported by positive fundamentals and the industrial and commercial sector should improve once the political scenario stabilizes.

The residential sector is benefiting from favorable credit conditions and income perspectives, job creation, and pent-up housing demand. Also, higher numbers of housing permits together with an upturn in home prices should have a positive effect on this sector.

In Germany, our cement volumes during the quarter increased by 5%, reflecting an improvement in market dynamics. Fundamentals remained positive and should continue driving demand. In the residential sector, fast-growing immigration and continued favorable conditions should continue driving this sector and more than offset bottlenecks on the supply side and public authorities restrictions.

The industrial and commercial sector should benefit from growth in building permits. Regarding infrastructure, although there have been some delays in the granting of projects, this sector should be supported by a 9% increase in the public budget for traffic infrastructure as well as higher tax revenues.

In Poland, our cement volumes decreased by 4% during the quarter while year-to-date cement volumes remained flat. Our cement prices remained stable sequentially. The decline in cement volumes during the quarter reflects further delays in infrastructure projects and a slight loss in our market position. The residential sector was the main driver of demand during the quarter.

In France, our ready mix and aggregates volumes continued to increase during the quarter. The residential sector should continue to contribute to demand growth supported by the recent increase in construction permits and government's initiatives, which include buy-to-let programs and zero rate loans for first-time buyers. Also, the industrial and commercial sector should continue to be supported by the recent double-digit increase in construction permits.

In our Asia, Middle East, and Africa region, domestic-gray cement volumes increased by 3%, while ready-mix volumes decreased 3% during the quarter. Operating EBITDA increased by 32% a like-to-like basis with a margin expansion of 5.3 percentage points. Part of the margin improvement reflects the introduction of a new pet coke grinding mill in our operations in Egypt.

In Egypt, the growth in our cement volumes during the quarter was driven by the residential and infrastructure sectors. Also, the increase in value-added tax implemented in mid-September brought some cement demand forward into the quarter.

Going forward, the formal residential and infrastructure sectors should continue to drive cement demand. The residential sector should be supported by high-end developments and governments' low-cost housing projects. The infrastructure sector should benefit from ongoing projects, such as the tunnels under the Suez Canal and new port platforms in the city of Port Said.

In the Philippines, the growth in our cement volumes was mainly driven by the industrial and commercial sector. Infrastructure was slower mainly due to transition effects related to a new government administration. In addition, adverse weather conditions affected consumption during the quarter.

For additional information on our Philippines operations, you can also see CHP's quarterly results, which will be available late tonight, early Friday in Asia.

In Israel, our ready-mix volumes increased by 8% during the quarter, due in part to a higher number of working days due to the timing of some religious holidays and the residential sector was the main driver of demand.

In summary, we had strong fundamentals in most of our operations, which translated into positive volume and pricing dynamics which, together with our operating efficiencies, resulted in stronger EBITDA generation during the quarter. We expect these favorable trends to continue for the rest of this year.

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

Thank you, Fernando. Hello, everyone. It is important to note that in our third quarter the results of our operations in Croatia, Austria, Hungary, Bangladesh, and Thailand have been reclassified as per IFRS accounting standards and are now reflected in a discontinued operations line item in our financial statements.

Our net sales and operating EBITDA, on a like-to-like basis, increased by 4% and 22%, respectively, during the quarter. There was higher like-to-like EBITDA contribution from all regions in our portfolio. Our operating EBITDA margin increased by 3.2 percentage points and it was the highest third-quarter EBITDA margin since 2008. This margin expansion mainly reflects better volumes and prices, lower energy costs, as well as greater operating efficiencies.

On a year-over-year basis, we continued to see the effect of the appreciation of the US dollar versus some currencies in our markets. The quarterly FX impact on our EBITDA was $45 million, excluding about $11 million of the effect of dollarized costs in our operations. As Fernando mentioned earlier, this was more than offset by the favorable contribution of higher prices on our EBITDA.

Cost of sales as a percentage of net sales decreased by 2.4 percentage points during the third quarter as a result of our cost reduction initiatives as well as lower energy costs. Operating expenses as a percentage of net sales declined by 0.9 percentage points in the same period, reflecting lower distribution expenses and our cost reduction initiatives. Our kiln fuel and electricity bill on a per ton of cement produced basis declined by 14% during the third quarter on a year-over-year basis.

Our quarterly free cash flow after maintenance CapEx was $548 million, $112 million higher from last year's level. This is the highest free cash flow in a third quarter since 2008. This is mainly explained by higher EBITDA and lower financial expenses, as well as a higher reversal in working capital.

Free cash flow after maintenance CapEx for the first nine months of the year reached $1.05 billion, a positive swing of $757 million from last year's level. Free cash flow after total CapEx was $470 million during the third quarter, an improvement of $93 million compared with the same period last year and the highest in a third quarter since 2008.

During the first nine months of the year, working capital declined to 7, a new record from 22 days in the same period last year. Investment in working capital at the end of September was $11 million, equivalent to zero working capital days. Our investment in working capital has been reduced by close to $1 billion during the past three years.

Other expenses net during the quarter for $26 million were mainly due to impairment of assets and severance payments. We had a gain on financial instruments of $23 million related mainly to Cemex shares. Foreign exchange results for the quarter resulted in a gain of $87 million, mainly due to the fluctuation of the Mexican peso versus the US dollar.

During the quarter we had controlling interest net income of $286 million, the highest generated in a quarter since 2008. This higher net income mainly reflects higher operating earnings before other expenses, lower other expenses, a gain on financial instruments, as well as better foreign exchange results.

We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. During the quarter we used the cash reserve for $270 million we created in the second quarter, as well as the proceeds from the Philippines IPO, for debt reduction.

This month we reached an agreement with a group of existing lenders in our credit agreement to exchange $664 million of currently-funded commitments maturing in 2018 into a revolving facility, maintaining the same terms and conditions. This exchange will become effective if and when we prepay $373 million corresponding to the September 2017 maturity under the credit agreement. This initiative would provide us with greater flexibility to optimize the use of proceeds from our asset sales effort and free cash flow generation until we can efficiently prepay outstanding notes.

Year-to-date our total debt plus perpetual securities has decreased by close to $1.4 billion. Our leverage ratio as of the third quarter reached 4.52 times, from 5.21 times as of the end of 2015. The average life of our debt is currently at 5.3 years.

Our maturity profile has no significant maturities in the short term. Our current level of free cash flow generation now represents more than 50% of our senior debt maturities in any given year.

As we have done in the past, we will be proactive in taking market opportunities to manage our maturities and ensure that our debt profile will continue to be manageable.

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

For 2016, our volume guidance for consolidated cement remains unchanged. We now expect consolidated aggregates volumes to grow in the low single digits, while we expect consolidated ready-mix volumes to remain flat.

Regarding our cost of energy on a ton of cement produced basis, we expect a 10% reduction from last year's levels. Our guidance for total CapEx for 2016 is now expected to be about $700 million. This includes $440 million in maintenance CapEx and $260 million in strategic CapEx.

Regarding working capital, we now anticipate a reduction in working capital investment of about $250 million from last year's level. We now expect cash taxes for 2016 to be about $300 million. Regarding financial expenses, we now anticipate a reduction of about $170 million for this year.

Now I would like to go over the messages and targets we have provided since the beginning of the year, aimed at strengthening our growth in EBITDA and free cash flow and dampening the effects of the continued volatility in our business environment. We are well on track to reach our cost and expense reduction target of $150 million. We now expect free cash flow initiatives of $670 million, reflecting our lower anticipated investment in working capital, lower financial expenses, and lower taxes, as I mentioned earlier.

We are updating our debt reduction target for 2016. As of the third quarter, we have reduced debt by close to $1.4 billion since the beginning of the year. Debt reduction for the fourth quarter should come from additional free cash flow generation and subject to closing conditions, debt proceeds from pending divestments including our announced sales of the Odessa and Fairborn plants in the United States.

Based on this, we now expect to decrease our debt by about $2 billion to $2.5 billion during 2016, up to a 16% reduction from end of 2015 levels. This should bring our leverage ratio as defined under our credit agreement to about 4.25 times by the end of this year.

Regarding asset divestments, given our performance to date as well as the announced sales in the US, as mentioned earlier, we continue to be comfortable with our target to sell assets for $1.5 billion to $2 billion by the end of next year. With higher debt reduction this year, expected divestments and continued favorable free cash flow generation for next year, we have greater comfort with our estimated debt reduction target of $3 billion to $3.5 billion during 2016 and 2017. This would represent close to 25% drop from our December 2015 debt level. We will keep you updated on the progress of our different initiatives.

In closing, I would like to reiterate that we continue to deliver strong results by focusing on the variables we can control. Our year-to-date EBITDA grew 17% on a like-to-like basis with a 5% growth in sales. This was the highest year-to-date growth in EBITDA in the last decade.

In addition, our free cash flow generation was the highest since 2008, reflecting our initiatives to reduce financial expenses and improve working capital, translating into a record low seven working capital days in the first nine months of the year.

I would also like to take this opportunity to summarize our efforts since 2014 to regain our investment-grade capital structure. In this period we have sold assets for $1.1 billion. With our current guidance on asset divestments, this figure will reach up to $2.4 billion by the end of next year.

Additionally, we have lowered our total debt by $3.5 billion, a reduction of 20% in our debt since the beginning of 2014. This percentage will increase to more than 30% by the end of 2017, based on our current debt reduction guidance. We will continue with our initiatives and focus our efforts to reach an investment-grade capital structure as soon as possible.

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 have made 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. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases, or decreases refer to our prices for our products.

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

(Operator Instructions) Adrian Huerta, JPMorgan.

Thank you. Good morning, Fernando and Maher, and congratulations on the results. I have two questions.

The first one on the free cash flow generation and the outlook for cash taxes for the year. This has been reduced quite a bit throughout the year, probably partially explained by the FX. But now with the year almost over and now seeing that you're expecting to pay around $200 million for the year, how sustainable is this level of taxes assuming a stable FX rate for next year?

Then the second question is on asset sales. Given the announcement that you have made up to now and the guidance that you have for $2 billion for the end of next year, which there is not much more to sell to get to that guidance, is there more that you're planning to sell on top of that guidance? Thank you.

Thanks, Adrian. On your question on taxes, as you mentioned, part of the reduction is because of the exchange rates, but there is another reduction which you know is the new rules for consolidation in Mexico that were valid starting this year and you know it will continue. So with some variances in different countries is very difficult to give a very precise guidance, because we are not completely sure yet.

But with small variances in different countries, I think the main variation, which is mainly the consolidation regime in Mexico will persist so we might be able to continue having about the same level of cash taxes.

And on asset sales, I think your question is if we're going to sell more than what we have guided I think. What can I tell you? We -- on our main initiatives to assure EBITDA growth, free cash flow generation, and debt reduction, as you can imagine, if we really want to divest what we have said, we are putting in play 2 or 3 times the amount of assets to be sure that we will end up divesting the amount that we have already commented and promised.

Are we going to base those? I think most probably we will, but we don't have any specific, let's say any specific plan. Most probably, after finishing our budget exercise and looking at the outlook later during the year, early next year, we will again make a similar decision like the one we did in early 2015 and early 2016. Meaning trying to better understand the outlook and to prepare and to be sure that we are making decisions conducive to our objective of continue our deleveraging process until we gain back our investment grade.

Very good. Thank you so much, Fernando.

Mike Betts, Jefferies.

Yes, thank you. I've got two questions as well, please. First one is on energy costs.

I think Maher said that they were down 14% in Q3. Could you let me know what they were for the nine months? And then also maybe talk a little bit about whether we are now seeing or starting to see a trend in increasing energy costs? When you would expect that to start to hit and is it going to be particularly substantial in any of the regions?

Then my second area of questioning was on Colombia. I think I saw on the CEMEX LatAm site that the new project has been delayed. Could you just explain a little bit more in terms of what the implications are for that in terms of how you are going to supply the market with that delay? Thank you.

Sure, Mike. Let me start with the question of Colombia. As you know, we still continue reviewing, auditing all the situation in our Maceo project. Now we know that there are some reasons that make us believe that the best way to go or the way to go in the site and starting up the plant should be in the second half of next year.

It is about the road. The main road is a road that is more than 40 kilometers that has not been properly finished. We need to finish that to be sure that we can safely transport cement from the plant to main roads in the area. And there are other issues with different type of permits that we need to put in order or to get all of those before starting up.

So that's why now we believe that instead of starting up the first quarter, it might be let's say for the time being around the third quarter of next year. Now we don't believe there is going to be an impact in our current business activity. With the capacity we have in Colombia, we do believe we can serve our customers.

As you know, you know the dynamics that are going over there and the performance of the market as a whole, meaning volumes are not necessarily growing. So we don't expect any type of shortage or any type of impact in the way we serve the market.

So what sort of growth do you expect in the Colombian market next year, again sort of low single digit?

Mike, I don't think -- we haven't guided towards next year so we will have to wait and see. But the expectation is that the growth, the weakness that we have seen so far, there are some obviously drivers to change the situation next year. We have had some challenges in terms of the starting of the 4G projects, but we haven't given guidance for next year yet, to be fair.

Okay, so then on energy?

Sure. On the energy, the year-to-date number is minus 16% and it's important to note that prices of pet coke in particular have ticked up in the fourth quarter. So if you take -- if you consider our guidance of minus 10% for the year with year-to-date minus 16%, that kind of gives you an idea of the fourth-quarter dynamics.

Does it hit quicker in particular regions, the higher energy costs, or is it --? If I assume it's spread across the whole group, is that a reasonable assumption?

The major mover is pet coke, because of some very specific dynamics that are taking place in demand from Asia particularly. So it would be the regions that has pet coke exposure, like Mexico for instance.

Okay.

(multiple speakers) We can give you the details more -- with more granularity offline if you want.

That's great, thank you.

Carlos Peyrelongue, Bank of America.

Thank you. Thank you for the call. Two questions, if I may. First one related to working capital.

You increased the working capital initiatives from $150 million to $250 million. Can you comment what is the working capital days target embedded in this new guidance for the US and Mexico?

The second question is related to infrastructure in the US. You commented that there were some delays, both at the federal and state level. Can you comment if you have seen any pickup yet in infrastructure and when do you expect, if it's in 2017, to see this pickup; if you can point out to the [FAS] program or something in particular that you are expecting to occur? Thank you.

Sure, I will take the working capital question. If I remember correctly, the last March in our Cemex day we presented the, let's call it, objective/aspiration to move to zero days in working capital.

There is a rationale for that because in some regions we have already achieved that target. I am referring to Europe and to AMEA region. And South America, which is very close to it. I remember we said that most of the upside in optimizing our investment in working capital was going to come from US and Mexico.

US and Mexico have improved a lot. They have reduced 16 and 20 days when compared to last year on the use of working capital, but they are still in -- US in 27 and Mexico in 13 days this year. So the idea or the aspiration is that the US and Mexico continue improving as much as they improved this year and for them to get closer to the zero objective.

What I can tell you, as shown in the numbers, an improvement of, in the case of Mexico, more than 50%. In the case of US, it's 16 days out of 43 is very sizable. And I don't see why they cannot continue improving next year. So our aspiration target is zero days this year. I think we are still in seven so we still have room to go.

Carlos, on the infrastructure, there are two dynamics. One, we had very strong first half and there's been some pull-forward I guess of some performance on the infrastructure side. And then the third quarter we have seen kind of a little bit of the opposite.

We have seen some slowdown in state spending, which represents close to half of the investment. On the federal side, however, it's improving. And looking forward, clearly of course, we need to monitor post-election what happens. Obviously there's potentially some volatility because of what's happening there, but looking forward we are optimistic about spending under the highway bill that has been approved for next year.

The one thing is that both candidates are very pro-infrastructure and in particular -- not to say anything specific, but both candidates have boasted interest in increasing spending on infrastructure. The only candidate that has given a number is Clinton and I think she has announced something like $275 billion, five-year infrastructure program potentially.

So we think there is -- there has been good bipartisan support, but we think post-election we should see slightly improved spending at the federal level.

Maher, anything on Texas? I believe there was some slowdown also on Texas at the state level in terms of spending.

Texas really the big factor is not a slowdown, it's weather. It has been an important topic. I think we have had some of the worst weather and flooding in Houston, particularly where our biggest market is.

But having said that, there hasn't been really any major slowdown in spending from the DOTs and there is additional funding for this year as you know. So really I would say that in terms of infrastructure, it has been mostly weather impact because of our exposure in the Houston market where we have had some of the worst weather.

Okay, thank you very much.

Gordon Lee, BTG.

Good morning. Thanks very much for the call. Just two quick questions on Mexico actually.

The first was there were some reports in the press that you had pushed through another price increase, either very early in October or late September. I was wondering if you could just confirm whether that was accurate or not.

Then the second question on Mexico. As you know there's a couple of expansions that are hitting the market over the next several months. I just wanted to see how you felt about the market dynamics going into those expansions. Thank you.

On the pricing, it was announced this month, effective this month, and so we still have a way to go to really evaluate how successful it will be.

Regarding expansions, yes, there are some expansions in the country coming. Not sure about the timing, but coming next year or mid next year or late next year or 2018. Let's see how it goes.

What I can tell you is that our estimate is that we need the market to grow at an average around 2% for the next three years for that new capacity to be absorbed. So it is an issue in the sense there is additional capacity, additional supplies to the market, but I think the market will continue having a very high capacity utilization in the next at least two or three years.

Perfect, thank you. If I could just have a quick follow-up, on that price increase that was announced for October, what was the magnitude and was it across -- was it bulk and bag?

It was bag and it was 8%.

Perfect, thank you very much.

Vanessa Quiroga, Credit Suisse.

Thank you, Fernando, Maher, and thanks for the call. My first question is regarding the revolving line that you negotiated with the banks from the credit agreement. Will the cost of that line be different from the rest of the funds that you have in the credit agreement?

And also, I have a question about the notes that you could call in the coming quarters, the amount. Thank you.

Regarding your first question on the revolver, conditions didn't change, so it is the same conditions. Well, the only condition is for us to pay the $373 million that are due next year. And then the revolver will come effectively but under the same conditions.

And what was the --?

What was the other question, Vanessa? Sorry.

The amount of callable notes in US bonds that you have for the next few quarters.

We haven't -- just the call dates you mean?

Well, the notes that you could refinance, the amount of refinancing that you could do in the next few quarters.

You know, there is a few of them and if you want we can get back to you with the detail on that.

Okay, no problem. The other question that I have is regarding what you are seeing in terms of pricing in Mexico. A little bit of a follow-up there; is it your view that the strength in remittances is a driver of pricing and if FX stabilizes that momentum could be reduced? Or do you think it is entirely related to how tight the demand/supply is in key parts of Mexico right now?

As we have commented before, we are permanently evaluating market conditions, market dynamics which are related, for instance, to what you were mentioning: remittances, employment, and also to demand and supply issues or conditions in the market. I do remember in the last quarterly call saying we will continue reviewing it and as long as we believe that conditions are favorable, we will continue trying to recover inflation that we have not recovered in past year. I'm referring to general inflation and to the inflation particularly in the construction materials sector.

So later during the year, early next year we will evaluate and we will decide accordingly.

Okay, great. Thank you.

Dan McGoey, Citigroup.

Good morning, gentlemen. Congratulations on the results. A question about the US, if I may. You had good margin expansion both year on year as well as even quarter on quarter, even though the volumes were pretty much similar to the prior quarter. Can you talk a little bit about what led to the margin expansion, even if we look on a sequential basis?

Then second question, Fernando you mentioned about the degree of operating leverage; I think you had mentioned 100% in the third quarter and 60% year to date. Can you talk a little bit as we look forward as to where the largest pockets of continued operating leverage potential is, whether that be in the concrete business or perhaps on other cost savings initiatives?

Dan, the first question on the margin expansion, we continued to have very good operating leverage. Actually it's close to almost 800%. And, very importantly, we sold some assets last year, which was the gypsum business, which had virtually no EBITDA associated with it and so that probably contributed. Of course, pricing has been also a source of that widening of margin.

And if we look versus the second quarter, because I think the volumes are very similar in the third quarter versus the second, there was still about a point of margin expansion or more than a point of margin expansion. The gypsum business was excluded already as of the second quarter, correct?

Yes. There are also raw materials that have had a contribution and there's seasonality also when you are talking about sequential analysis.

Okay. As far as energy costs, was it continued moving lower in the third quarter or it had already kind of stabilized at that point?

No, it's fairly stabilized.

Okay, thanks. Then looking forward, when you look at the opportunities for continued operating leverage recovery in the US, are there areas of the business that you would point to that still represent strong opportunity?

Geographically -- our geographic footprint actually continues to be fairly leveraged. Florida, for instance, continues to have lower capacity utilization than nationally. California, to some extent, also as well.

So I think that -- and those are the markets that continue to grow. Particularly if you take a look at the Florida and pretty much north of that area, the whole kind of Southeast region and Mid-Atlantic region.

Okay. Great, thank you.

Benjamin Theurer, Barclays.

Good morning, Fernando, Maher. Thank you very much for questions. Just one follow-up on the US.

If you could share a little more light on how the demand of the housing sector was in your areas of operations, mostly (inaudible) operation in, because clearly we've seen a little bit of deceleration here. But just to get a sense of what you are seeing in your specific states, especially Florida, Texas, and California; that would be great if you could shed some light on the housing market there.

I think housing in the US is very interesting. The deceleration is primarily driven by the multifamily component of the housing sector. We have seen actually quite healthy single-family growth, which is really the most leveraged to demand of our products. In fact, single-family is growing at close to about 8% in the markets that we are in.

Weather, obviously, is a big issue and, frankly, we continue to see labor shortages also as a limitation for that business as well. So we think that there definitely continued to be a good upside in that and continued growth. We have seen probably a little bit of the top-line housing starts a little bit slower than we expected for the full year, but for the single-family side we continue to see growth.

And then on the permits, they look quite good, which bodes well for forward-looking production in that segment.

Thank you very much, Maher. Now that you've mentioned it, shortage of labor and so on, we have seen a decent cost reduction as well in the US and obviously the operating leverage still is strong with EBITDA margin expanding.

Do you see any headwinds in terms of labor costs on truck drivers and so on, which also could affect you on the logistics side? Are you seeing anything there that might be a little bit of a headwind on margin expansion going forward?

We definitely -- you kind of hit the nail on the head in one respect. Truck drivers is one area that we are seeing definite shortages and we've seen upward pressure in terms of compensation, but also construction workers in general. Certainly fewer than before.

A lot of people left and, of course, migration from down south, as you know, the numbers have not been good. Contrary to urban legend, the numbers have actually been flowing the other way and that has been putting pressure, frankly, on this segment.

Is that something you see already affecting somewhat --? Would your margin be much better if you would not see such pressure or do you see that worsening going forward? More shortage affecting your profitability, especially in the US?

Obviously yes, but also that should be encouraging from a pricing perspective. And as you have seen on a point-to-point basis, pricing in the US for cement -- and I'm focusing on cement for the moment -- is up like 7%. And there has been some healthy pricing increases announced by us and in different markets, mid to high teens in several of our markets for January. Some have -- will most likely be announced later during the course of the year.

I believe -- from what we hear, I believe that other players in other markets have taken similar actions in terms of pricing. Again, this is a reflection I think of what's happening on the cost side as well as the demand side and the tighter capacity.

Now the other thing to consider is that nationally speaking, and to some extent we are at that level too, capacity utilization now in the US is getting close to north of 90%, close to about 95%. We are probably a little bit lower than that and that is going to continue to create a positive environment for pricing in our view.

On the pricing side, anything you can already share what your plans are for 2017: region, magnitude, and timing? Or not yet?

We had -- we have already announced prices in the high teens, mid to high teens and the regions that are covered are Florida, North Atlantic, Colorado. That's for January. And then, for April, we are looking at California and South Atlantic.

Okay, perfect.

Marcos Assumpcao, Itau BBA.

Good afternoon; this is Daniel actually. Just a quick follow-up on your question, on the previous question on Mexico.

If demand dynamics in 2017 are not enough to absorb the capacity increases or the capacity that will come to the market, would you consider postponing the startup of your [DAC] project? If I remember correctly, you mentioned that you put 1.5 million tons of capacity in the fourth quarter 2017 and the remaining 2.5 million tons would come sometime in 2018. Would you consider postponing that or are you already at a point of no return for this project?

My second question would be a follow-up on Colombia. You mentioned that dynamics, demand dynamics are somewhat weak right now and that competition is actually picking up. When do you expect volumes from the 4G projects to actually start contributing to cement demand in the country?

Some of the projects there haven't had the financial closures yet or are taking a bit longer than what investors are expecting, so if you could give us some color on that front that would be great. Thanks.

Sure. On pricing on Mexico, again we have to evaluate; there is still some time to go. We are not completely sure when this new capacity is coming to the market, so we need to evaluate the feasibility of including our strategy depending on when that capacity is coming on stream.

And on the other hand, we don't know exactly what is going to happen in the sense of what the strategy of our competitors would be. We just don't know, so we have to be vigilant, understanding the dynamics. Let's see what happens in the next couple of months, three months, and we will decide accordingly. It's very soon to say exactly what is it that we are going to do.

What I can tell you is that we don't believe that the capacity is coming let's say early next year. So, again, let's see what we can do.

In terms of Colombia, we -- obviously as you know, there was some very important changes in terms of elections just because of regional mayors and governors, so that has probably led to some of the slowdown in the first half.

We certainly think that things should get a little bit better next year, although I think a warning needs to be taken into consideration. The peace effort in Colombia was -- the fact that the vote did not go through may have some negative impacts on the fiscal reforms which are expected to be submitted next month. And those were going to be an important source of revenue for the government for next year. Assuming that that happens, then we should see certainly stronger infrastructure starts next year.

Having said that, there has been a number of proposals, almost nine proposals now for private and public partnership that have been approved for about $3.5 billion. And eight out of the 10 projects in the first wave have also secured funding; that's about $4.5 billion. So the outlook is a little bit better than what we have seen in the first half of the year, which was more impacted by some of the political changes that were taking place.

Okay, thank you.

Marcio Prado, Goldman Sachs.

Good morning, everyone. Thanks for the call. Two questions. One is a bit of a follow-up on the US, but I'd like also if you guys could give us some color on the import, the cement import market in the US. You mentioned that US as a whole is north of 90% if a decision factor. Cemex not much lower than that.

So question is, with the recent asset divestments in the US, do you have any constraint with regards to volume growth when we think of 2017? So should we expect growth from the US coming much more from pricing than from volumes? For that matter, if you could comment on the market as a whole, like there's this huge increase on imports, so it's basically the margin growth will be absorbed via imports.

And the second, just a quick one also follow-up on Asia. You've mentioned -- just want to confirm that -- that the marginal higher energy costs for Q1 compared to the first nine months of 2016 will mainly impact Asia. So you had this fantastic EBITDA margin of 27% in Asia, so if you just could comment on energy costs and the Asia business, if we should expect some normalization in terms of margins. Thank you.

Maybe I'll take the first couple of questions on the US. The percentage growth or the percentage of cement demand that is being satisfied through imports is fairly flat to last year.

Year-to-date imports -- year-to-date, the latest data that we have, not as recently as September, it's in the mid-teens growth. So we haven't seen, frankly, any disruptive nature on imports in any of our markets. Now in terms of divestitures and the impact, the transactions that we're talking about are both fairly internal. They are not importing facilities and should not have any impact on our ability.

Texas, of course, imports are declining as a consequence of the slowdown in demand in that market, but we are very well-positioned -- if needed, we are very well-positioned with import terminals in our footprint where we expect growth in the next 12 to 18 months. And of course, again because of our footprint in Florida, Southeast, we still have a decent amount of capacity. We have also a fairly decent amount of capacity in California as well, so that should not be an issue.

Sorry, just a follow-up there. When we think of Cemex is a higher share of your market being served in the US through Cemex own imports? And also if you could comment; in the previous question you had mentioned some price increase in the US, so I just wanted to confirm.

I didn't quite understand the first part of the question.

If Cemex is using imports (multiple speakers) share.

Fairly small amount of our sales are imports at this point in time.

Thank you. And in the previous question about the US, you had mentioned some price increase; just wanted to confirm.

You mean to confirm what the pricing increases were?

Yes.

Just to repeat, we had made announcements for January and April pricing increases mid to high teens and in January the regions that are affected are Florida, North Atlantic, and Colorado. And for April it's California and South Atlantic.

I think one thing that I would like to mention, as I mentioned earlier, frankly, one of the folks asked the question, we are reaching fairly tight capacity utilization in most of our markets and so we are quite optimistic about the pricing increases. We also understand just from our salesforce that other competitors have announced pricing increases as well.

Thank you.

Regarding your question on margins in Asia, let me clarify that the margin you mentioned is for the AMEA region, which is Africa, Middle East, and Asia.

Most of the improvement is coming from the benefits of our pet coke project in Egypt. That counts for almost 4 percentage points. It is the switch we did, changing the fuel oil that we were using to pet coke. That's the main reason.

Thank you.

Alejandro Azar, GBM.

Thank you for taking my questions. Most of them have already been answered; however, if you could give us more color regarding the European Commission (inaudible) regarding the Croatia asset sales?

Yes. Well, the authorities requested additional information so we already moved to a phase two and estimates are that next year, perhaps March or April, we will have the -- we will be able to close the transaction.

But are you positive on the transaction or do you see -- do you have concerns regarding the competition?

It will depend. With the authorities you are never sure, but we believe that the transaction will go on. There will be requirements of remediation according to competition issues in the markets we serve from our Croatian assets, but we will see what the requests are and we will decide accordingly. Again, we do think that it's going to be happening March or April.

If I could just add, just some comfort. We've experienced similar timing situations with other transactions that we've done there as well, so this is not out of the ordinary.

Okay, Maher. Thank you very much and congrats on the results.

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

Thank you very much and just to thank you for all 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 anytime. Thank you and good day.

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