Cemex SAB de CV (CX) 2017 Q2 法說會逐字稿

Good morning. Welcome to the CEMEX Second Quarter 2017 Conference Call and Webcast. My name is Richard, and I'll 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.

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

Thank you, Richard, and good day to everyone. Thank you for joining us for our Second Quarter 2017 Conference Call and Webcast. We will be happy to take your questions after our initial remarks.

Our second quarter operating and financial performance were essentially in line with our expectations as of the first quarter. Good results in Mexico, the US and Europe, increasing challenges in Colombia and Egypt, and to a much lesser extent in the Philippines.

In addition, we continued to further strengthen our balance sheet where the financial markets have allowed us to execute on our targets a bit faster than we anticipated earlier in the year.

Regarding our second quarter results, year-over-year pricing for our three core products increased in the low to mid-single digits. Our consolidated aggregate volumes increased by 1%, while cement and ready-mix volumes declined in the low single digits.

Favorable cement volume dynamics in our Europe region were offset by a decline in Mexico, as well as in our SAC and EMEA regions. Our US cement volumes during the quarter remained flat, in line with industry demand impacted by weather.

As a result of this volume and price dynamics, sales increased by 2%, while operating EBITDA declined by 8% on a like-to-like basis. If we adjust EBITDA generation for working days, reflecting the effect of Holy Week and Ramadan, the decline in EBITDA during the quarter is 5%.

EBITDA margin declined by 1.6 percentage points, reflecting, in part, an increase in raw materials in some of our ready-mix operations, higher energy and freight costs, as well as the impact of lower volumes.

Free cash flow after maintenance CapEx reached $353 million during the second quarter, compared to $478 million in the same period last year. The [delta] is mainly explained by a lower reversal in working capital.

We expect the total year-to-date investment in working capital to be reversed during the second half of the year to reach our guidance of no additional working capital needs during the full year 2017.

Our generated free cash flow during the first half of the year puts us on target to reach our full year free cash flow expectations.

In addition, net income reached $289 million during the quarter. This was the seventh consecutive quarter with positive net income.

Regarding our debt, we are pleased to see that our efforts to reduce our leverage continue to translate into an improvement in our credit ratings. During the quarter, Standard and Poor's placed our BB- credit rating on positive credit watch.

In line with our communicated targets, we applied the proceeds from our free cash flow generation asset sales mainly for debt reduction. Our total debt declined by $676 million during the quarter and by $3.4 billion since the end of 2015.

In light of this, we are updating our 2-year debt reduction target and now expect to reduce debt by about $4 billion in this period.

As we announced last week, we entered into a new facilities agreement for $4.05 billion under enhanced conditions, reflecting our improved credit profile, extending the average life and reducing the cost of debt. In addition, we now have more flexibility to return capital to shareholders when CEMEX is in the position to do so and if this maximizes shareholder return. This was an over subscribed transaction with a total of 20 institutions participating. Maher will provide more details on this later in the call.

Our expected free cash flow generation during the rest of the year will help us continue to delever, reach our updated debt reduction target for this year and bring us closer to an investment grade capital structure.

Now I would like to discuss the most important developments in our markets. In Mexico, daily sales volumes for domestic gray cement, ready-mix and aggregates, decreased by 6%, 2% and 4%, respectively. The decline in cement volume during the quarter reflects a high base of comparison in the second quarter of 2016, which experienced the highest quarterly volumes since 2009.

In addition, cement demand was further affected by lower investment in infrastructure, as well as the termination of some important projects in our order book.

On a sequential basis quarterly cement, ready-mix and aggregate volumes increased by 3%, 1% and 5%, respectively, during the quarter, reflecting favorable demand consumption trends.

Our quarterly cement and ready-mix prices increased on a year-over-year and sequential basis. Our operating EBITDA in the country increased by 3% on a like-to-like basis, while EBITDA margin declined by 0.6 percentage points. This is mainly to increases in energy, transportation costs and raw materials in our ready-mix business.

In our Mexican operations, our kiln fuel and electricity costs on a per-tonne of cement produced basis increased by 41% during both the second quarter and the first half of the year.

In the industrial-and-commercial sector, private investment projects like shopping malls, hotels, warehouses, as well as some manufacturing facilities, are being supported by growth in consumption, a favorable outlook for tourism and improving manufacturing activity.

Regarding the self-construction sector, prospects remain favorable, given solid [demands] drivers, including job creation, consumer credit and remittances.

In the formal residential sector, we expect that higher volume and more cement-intensive home investment will continue, supported by private banks and INFONAVIT stable lending. On the other hand, the affordable housing segment may continue to be affected by the lower budget for subsidies.

Infrastructure continues to be the sector with the lowest performance. The completion of relevant projects within the first quarter, as well as the lower government budget for this sector affected volumes.

Regarding Mexico City's new airport, we are pleased to announce that we have secured contracts for about 40% of the total estimated volumes required by the main projects, including the iconic terminal building. About 30% of the total estimated volumes are still under negotiations, with the relevant construction companies. Most of the airport-related volumes will be supplied next year.

In light of all of this, we maintain our guidance and expect our cement and ready-mix volumes to be from stable to increasing by 3% for the year.

In the United States, cement volumes on a pro forma basis, excluding the Odessa and Fairborn cement plants were flat on a year-over-year basis. Ready-mix and aggregate volumes on a pro forma basis, excluding the West Texas operations, fell 1% and increased 6%, respectively.

Our reported results reflect the treatment of the Pacific Northwest asset sales as a discontinued operation.

Our year-over-year volume performance continues to reflect a difficult 2016 comparison base and significant precipitation in our southeastern states.

Despite the divestiture of two cement plants and flat volumes in the result of our businesses, we are reporting a 9% increase in year-over-year EBITDA for the quarter. On a like-to-like basis, the increase in EBITDA was 19%.

Cement prices on a pro forma basis rose 5% on a year-over-year basis and 2% sequentially. This reflects the successful implementation of our April price increases in California and the South Atlantic region, which represent approximately 45% of our US volumes.

We were disappointed that our announced high single-digit pricing increase in the stabilizing Houston market did not gain traction. We have announced additional October price increases in California and parts of Texas, where market fundamentals are supportive.

The residential sector continued to be the engine of growth in the US construction market. While housing starts for the quarter were nearly flat year-over-year, the cement-intensive single-family sector grew 9%. Despite recent increases in interest rates, leading indicators remain positive, with single-family permits up 9% in the quarter. For our 6 key states, housing permits as of May were outpacing the national average. The sector remains supported by low inventories, job creation, positive consumer sentiment and improved lending conditions.

In the industrial and commercial sector, construction spending was up 7% year-to-date May, with strong demand in office, lodging and commerce.

On the infrastructure side, while streets and highway spending is still down 1% year-to-date May, year-over-year spending has been improving during the second quarter. We attribute this improvement to increased state and local spending as well as easier 2016 comparisons.

We remain optimistic that this recent (inaudible) of the California Transportation Bill in April, as well as the other state highway spending initiatives should support infrastructure demand over the next few years.

During the quarter, pro forma EBITDA margin expanded by 2.4 percentage points year-over-year, reaching 18.6%, the highest second quarter results since 2007.

The margin improvement is related primarily to pricing gains and lower maintenance cost in the period. We enjoyed a favorable pro forma operational leverage year-over-year of approximately 80%.

We continue to see a steady recovery in the US business with good supply/demand dynamics, healthy consumer and business confidence, rising income, low unemployment and a new investment in energy.

As we enter the second half of the year, the 2016 comparison are easier, and we should see more improvement in infrastructure from the FAST Act, as well as some catch up from the bad weather on the east coast in May and June.

We remain comfortable with our guidance of 1% to 3% growth in volumes for our 3 core products.

In our South, Central America and the Caribbean region, cement volumes on a like-to-like basis, including TCL, decreased by 3% during the quarter, primarily reflecting declines in Colombia.

Operating EBITDA for the region decreased by 33% on a like-to-like basis, with a margin decline of 7.9 percentage points. The decline in margins reflects lower volumes and prices, especially in Colombia. This was [accentuated] by higher energy cost as well as more purchased cement mainly related to higher demand from our operations in [Haiti].

I will give a general overview of the region, and for additional information, I invite you to review CLH's quarterly results which were reported today.

In Colombia, daily cement and ready-mix volumes declined by 5% and 19%, respectively, reflecting macroeconomic challenges in the country as well as adverse weather conditions in several regions. Difficult competitive dynamics led to a sequential decline in cement prices. In this environment, we managed to maintain our market presence practically unchanged during the last 12 months.

For the remainder of the year, we expect infrastructure activity to be the main driver of demand for our products. Higher expected execution of regional and local public works as well as the initiation of the cement-intensive part of the initial (inaudible) projects should (inaudible).

In the residential sector, social housing continues to drive the month. In the first five months of this year, low income housing sales have increased 11%, supported by government-sponsored programs, while permits have increased 14% in the same period.

Cement volumes in our Colombian operations are now expected to be from flat to declining 3% from this year. In Panama, cement demand dynamics remain strong and have helped partially offset the weakness in the Colombian market.

Higher year-over-year volumes across our 3 core products reflect a pickup in the infrastructure and residential sectors as well as favorable comparison base with a low level of construction activities in the first half of the year. Cement prices remain flat in this period both sequentially and on a year-over-year basis.

Regarding the residential sector, demand for low and middle income segments remain strong and has offset the decline in high income residential developments.

Increased activity in the infrastructure sector from different projects should also continue to fuel demand for our products.

In our TCL operations, domestic gray cement volumes declined by 4% during the second quarter on a like-to-like basis. This mainly reflects reduced cement sales in Trinidad and Tobago as a result of the continued economic slowdown, as well as adverse weather conditions in Jamaica.

We currently expect (inaudible) EBITDA by the TCL group during 2017 to be flat or slightly higher than that in 2016.

In our Europe region, volumes for the 3 core products increased during the quarter and the first 6 months of the year. EBITDA declined by 11% during the quarter on a like-to-like basis, while EBITDA margin contracted by 2.8 percentage points, mainly as a result of higher variable cost in the region as well as a country mix effect with a lower contribution from our UK operations.

In the United Kingdom, our daily cement volume declined 4% during the second quarter, reflecting a high base of comparison during non-recurring industry sales in the first half of last year. Adjusting for those sales, our cement volumes increased by 2% during the quarter and remained flat during the first half of the year.

Pricing dynamics in cement and aggregates remain favorable during the quarter. The National Productivity and Investment Fund will focus on housing and infrastructure activity as a top priority and should bolster demand going forward.

In Spain, daily volumes for domestic gray cement increased by 20% during the quarter, [again] from a low level and with a low single-digit decline in pricing. Cement volume growth reflects continued strong activity in the residential sector. For the rest of this year, the residential sector should be supported by favorable credit conditions, job creation, pent-up housing demand, as well as the recent double-digit growth in housing permits.

The industrial-and-commercial sector should continue to benefit from improved political and business conditions.

In Germany, our daily volumes for cement, ready-mix and aggregates increased by 22%, 5% and 2%, respectively, with stable price and volume growth for our 3 core products was due to strong demand from the residential sector and ongoing infrastructure projects like the A100 motorway and the Bremerhaven Port Tunnel.

In the residential sector, immigration and continued favorable conditions such as low mortgage interest rates, low unemployment and rising purchasing power should continue driving demand.

The infrastructure sector continues to benefit from increased central government spending. Although we still have low visibility on the EUR 270 billion infrastructure plan for 2030, the plan should support volume growth in coming quarters.

In Poland, daily volumes for domestic gray cement decreased by 3% during the quarter and by 1% during the first half of the year, slightly underperforming the industry.

Our quarterly cement prices, however, increased 3% both on a year-over-year and on a sequential basis, reflecting favorable traction from our April price increase.

The residential sector was the main driver of demand during the quarter, supported by growth in housing starts and permits. In addition, some infrastructure projects had expected to continue and accelerate during the rest of 2017.

In France, daily ready-mix and aggregate volumes increased by 10% and 15%, respectively, during the quarter, with sequential pricing increases in the low single digits. Volume growth during the quarter reflects continued activity in the residential sector as well as our participation in the Grand Paris-related projects.

For the rest of the year, the residential sector should be the main driver of demand for our products, supported by the recent increase in housing permits and some government initiatives.

In the infrastructure sector, continued works related to Grand Paris highway projects, including the A63 in Toulouse and other like [land reclamation] project in Monaco should support volume growth.

For our Europe region, we are encouraged by the favorable demand conditions, which should translate into better supply/demand dynamics and help us better offset our input cost inflation in the region going forward.

In our Asia, Middle East and Africa region, domestic gray cement and ready-mix volumes decreased by 3% and 4%, respectively. The decline in EBITDA reflects lower contribution from our operations in Egypt and the Philippines. In the Philippines, daily cement volumes remain practically flat during the quarter, compared with an estimated low single digit growth for the industry in the same period.

Our volume performance reflects a high base of comparison during the first half of last year, with strong construction activity prior to the presidential elections, heightened competition due to growth and input volumes, as well as supply challenges due to extended repairs in our cement mill at our Apo cement plant. These dynamics translated into slightly weaker sequential pricing.

For the rest of the year, the residential and industrial sectors should be the main drivers of demand for our products, supported by the recent double-digit increase in construction permits.

For additional information on our Philippines operations, please see CHP's quarterly results, which will be available late tonight, Thursday morning in Asia.

In Egypt, daily cement volume declined by 4% during the second quarter, with as 5% year-over-year cement price increase. The decline in volumes reflect reduced consumer purchasing power resulting from the currency devaluation and high inflation in the country.

For the rest of the year, the infrastructure sector should benefit from ongoing projects related to the Suez Canal work, the new port in Port Said city, as well as the new administrative capital. In the coming months, the implementation of macroeconomic reform should improve the government's ability to execute infrastructure projects.

In Israel, daily ready-mix volumes during the quarter decreased by 1%, while aggregate volumes increased by 2%, both with stable sequential pricing. Solid economic growth and low unemployment continue to support the residential sector, which was the main driver of demand. Israel represented more than 30% of the EBITDA generation of the EMEA region during the second quarter.

In summary, we are particularly satisfied with the results (inaudible) in Mexico, the US and Europe. We expect favorable volume and price dynamics to continue in these markets, more than offsetting the challenges we will continue to face in some of our other markets.

The combination of our diversified portfolio of high growth markets with strong fundamentals and our consistent strategic execution should continue to support improved sales and EBITDA generation during the rest of 2017.

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

Thank you, Fernando. Hello, everyone. On a like-to-like basis, our net sales increased by 2% during the quarter, while our operating EBITDA declined by 8%, reflecting lower contribution from our Europe, SAC and EMEA regions. Operating EBITDA during the quarter adjusted for the number of working days declined by 5%. Our quarterly operating EBIDA margin declined by 1.6 percentage points. This is due to an increase in higher energy cost as well as an increase in raw materials in some of our ready-mix operations. Our kiln fuel and electricity bill on a per-tonne of cement produced basis increased by 16% during the second quarter. The EBITDA margin decline also reflects the unfavorable country mix effect from our Europe region.

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. Although the impact was lower than the same period last year, the fx impact on our EBITDA, including the effect of dollarized cost during the quarter, was $22 million, compared with $86 million in the second quarter of 2016. Operating expenses as a percentage of sales remained flat in the same period.

Our quarterly free cash flow after maintenance CapEx was $353 million, compared with $478 million last year, mainly explained by a lower reversal in working capital investment during the quarter. The conversion rate of EBITDA into free cash flow after maintenance CapEx during the quarter reached 51%.

During the first 6 months of the year, working capital days declined to negative 1 day, a new record, from 8 days in the same period last year. This translated into a reduction in our average year-to-date working capital investment of more than $300 million, compared with the same period last year.

We expect to fully reverse the year-to-date investment in working capital during the second half of the year to reach our yearly guidance.

In relation to our US dollar/Mexican peso hedging program, as of today, we have a notional amount balance of approximately 70% of the $1.25 billion maximum amount under the program.

Regarding other items in the second quarter income statement, the other expenses net line was $10 million, which mainly included severance payments. We had a gain on financial instruments of $8 million, resulting mainly from derivatives related to CEMEX shares. Foreign exchange results for the quarter resulted in a loss of $21 million, mainly due to the fluctuation of the Mexican peso versus the US dollar.

The income tax line during the quarter was positive $92 million. We recognized more deferred tax assets in our balance sheet in anticipation of better operations in markets where we have tax loss carry-forwards. As a result of this, we recognized an income tax gain on our P&L during the quarter.

The discontinued operations line in the income statement mainly reflects the effect of the sale of our Pacific Northwest operations in the US. During the quarter, controlling interest net income increased by 41%, reaching $289 million, compared with $205 million in the same quarter of last year.

Controlling interest net income during the first half of the year reached $626 million and was the highest first half net income since 2008.

We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. On May 31, we redeemed our EUR 400 million 5 1/4% senior secured notes originally due in 2021. In addition, certain institutional holders of our convertible subordinated notes due in 2018, converted approximately $325 million in aggregate principal amount of the notes in exchange for approximately $43 million CEMEX ADSs. CEMEX did not pay any cash to these holders in connection with these conversions.

Approximately $365 million in aggregate principal amount of the convertible subordinated notes due 2018, remain outstanding.

The CEMEX ADSs that were delivered are exempt from registration under applicable US laws.

As Fernando mentioned earlier, last week we entered into a new facilities agreement for $4.05 billion. The agreement has a 5-year term and with an average debt maturity of 4.3 years, compared with 2.2 in the previous credit agreement. The total amount includes a revolving credit line of approximately $1.135 billion, with a 5-year term. The remaining $2.915 billion are under term loan traunches and include approximately $1.61 billion, EUR 741 million and GBP 344 million, amortizing in 5 equal semi-annual payments beginning July 2020.

The initial cost under this agreement is either LIBOR or EURIBOR plus a spread of 250 basis points, subject to a margin grid based on the company's leverage ratio. The spread is between 50 to 125 basis points lower than that in our previous credit agreement, when our leverage is below 4.5x.

The new agreement includes a maximum leverage ratio that starts at 5.5x as of September 2017, and gradually tightens to 4.25x by June 2020. We estimate that the savings related to the utilization of funds under this new credit agreement, as well as free cash flow generation during the second half of this year for debt reduction and liability management efforts, should translate into savings of more than $100 million during 2018, under current market conditions.

In addition, under the agreement, we now have more flexibility to return capital to shareholders and enter into M&A transactions. However, as we have repeatedly stated in the past, our priority continues to be to get back to an investment grade capital structure as soon as possible.

During the second quarter, total debt plus perpetual securities decreased by $676 million, translating into a year-to-date debt reduction of $1.15 billion. In addition, debt variation during the quarter reflects the exchange of the convertibles as I mentioned earlier, as well as a non-cash negative translation effect for $186 million.

Our leverage ratio as of the second quarter reached 4.04x, from 4.93x a year ago.

We have included a pro forma debt maturity profile which shows the amortizations under the new facilities agreement. Current maturities for the years 2018 and 2020 should be well below our expected free cash flow generation for this year.

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

For 2017, we are constructive on our volume outlook for our biggest markets, leading us to expect consolidated cement and ready-mix volumes to grow in the 1% to 3% range, while aggregate volumes should be from flat to up 3% compared with last year's levels.

Regarding our cost of energy on a per-tonne of cement produced basis, we now expect an 8% increase from last year's levels.

In financial expenses, we now anticipate the reduction of about $175 million for this year, reflecting our liability management efforts. Guidance for total CapEx for 2017 remains unchanged at about $730 million. This includes $520 million in maintenance CapEx and $210 million in strategic CapEx.

Regarding working capital, we now anticipate no change in working capital investment from last year's level.

We now expect cash taxes for 2017 to be about $300 million. The improvements in guidance and financial expenses, working capital and cash taxes versus the ones provided last quarter translate into incremental free cash flow for $125 million.

Due to the seasonality of our operations, we anticipate stronger EBITDA free cash flow generation during the second half of the year.

As regards one of our most important priorities, which is regaining our investment grade, we continue to make important progress during the quarter. On our 2016/2017 divestment project of $2.5 billion, we have closed asset sales for more than $2.4 billion. These asset sales have been done at average multiples in the double digits.

Regarding our debt reduction target, given our performances of the second quarter, we now expect to reduce total debt during the 2016/2017 period by about $4 billion. Debt reduction for the rest of the 2017 should come from free cash flow generation as well as other divestments.

We will continue with our efforts to reach an investment grade capital structure as soon as possible.

In closing, let me emphasize two things. First, we continue to expect to generate increased operating EBITDA for the full year, both because of positive volume expectations in our main markets and the continued sustainable results of our value-before-volume strategy. Second, we are confident that we are on track to produce increasing shareholder value in the months and years to come.

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 operated, 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.

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

(Operator Instructions) Our first question online comes from Gordon Lee from Banco BTG Pactual S.A., Research Division.

Two quick questions. The first is, if we look at your guidance at the consolidated level for volumes for 2017 as a whole where you expect volumes to rise 1% to 3% that implies, I would say meaningful recovery from what we saw in the first half. And I was wondering, as you look across the markets, which ones do you feel most confident with? In terms of fulfilling that outlook, which ones are the ones that you feel a little bit less clear about? And then the second question, just on the deleveraging and divestment side. Could you remind us what is the amount pending to be collected from divestments that have already been announced? Thank you.

On divestments, I don't have the exact figure with me. But it should be minimum. I think we have sold and collected most of the divestments we targeted for deleveraging purposes, Gordon. There might be some additional, but not --let's say $100 million, $200 million, but not no more than that.

Perfect. Thank you. And on the outlook?

And in terms of the outlook, Gordon, I would say that as we mentioned in the remarks, clearly Mexico, the second half should provide an easier comp. And I know that the whipsaw that we saw between the first quarter and the second quarter has caused a little bit of consternation with some folks. But remember our value-before-volume strategy implementation last year translated to lower volumes in the first quarter, higher volumes in the second quarter, and so the comps were working against us. We think a combination of easier comps this year and continued strength in the different drivers and also working days is very important. I mean, we think that we may have actually a few more working days in the second half of the year in Mexico. So between underlying operating environment, slightly more working days and an easier comp, Mexico, definitely back half should be better and we feel quite confident with it. The US is, frankly, another market that we feel quite confident with that, because we had actually quite -- in terms of average daily volume, we were very good until May, and then weather conditions in several of our markets came in, in June, and that kind of created a problem. And we're seeing the pull-through, frankly, as weather gets better in some of these markets, as we speak. There's an easier comp as well in the US business. In the UK is another market you don't have the industry sales distortion that we saw in the first half of the year; so, and the fundamentals in the UK business, as we discussed, excluding the industry sales, it continues to be growing and we're growing in line with the market. Prices have also been attractive in the UK market. And so we feel fairly confident about that. The Philippines, frankly, is another market that has caused a little bit of distortion, and for similar reasons. We think that there's a much easier comp in the second half of the year. The overall market and order book in the several segments of the market continue to be positive. So comps are easier. Overall aggregate demand is getting better and pricing is relatively stable. Also, I mean, the European markets, frankly, I mean the underlying fundamentals in Europe, although we haven't seen the pricing dynamics reflecting that, but the underlying dynamics in our European segment is actually quite positive and we expect the continuation of that to continue in the back half of the year. What else can I tell you? I think those are kind of the main markets. I mean, obviously, we will continue to be challenged in Colombia. We'll continue to be challenged in Egypt. Although, even in Egypt, the second half, the comparisons should be a little bit better.

That's very clear.

I don't know if that answers your question, Gordon.

It does. Thank you very much.

Our next question on line comes from Francisco Suarez from Scotiabank Global Banking and Markets, Research Division.

Congrats for the signing of the new credit agreement. Two questions, if I may. The launch of the Disensa franchise by LafargeHolcim in Latin America, any comments on that, if that might change? Or I mean anything on the [specific] front? How do you think that your Construramas are positioned compared to the Disensas? And secondly, on the credit agreement, can you give us a little bit of feedback of when you might be actually using this new credit agreement to take out the most expensive debt that you have in the markets, by how much you can actually do that? And of course, considering, for instance, the new leeway that you have on M&A, perhaps at least in CLH might be an option in the future? Thank you.

Thanks, Francisco. Let me start with your first question regarding Lafarge strategy on the retail of bagged cement, assuming we understand it completely. But it seems to me that what they are doing is something similar to what we did long, long time ago with our Construrama franchise or our Construrama retail stores in most of Latin America. Perhaps the only difference is that they are supporting -- they are trying to develop their own Construrama retail system together with -- or a company with a digital solution. And on that regard, if you remember during our CEMEX Day, I did mention, I did share our digital strategy, that it's moving forward very nicely. And on that regard for us, we're not working only in digital solution for the customers of our Construrama stores, I mean, a digital retail solution. But we have already a solution (inaudible) cash for our cement and ready-mix business that we're implementing all over the world. I remember saying in our CEMEX Day that my expectation is that by next CEMEX Day, by March next year, we might have around 50% of our customers attended by our digital solutions in cement, ready-mix, aggregates, multi products, and Construrama digital solutions. So there is very little more that I can add to what I see happening in Disensa. And on the second question, Maher?

Yes. [Pacco], thank you very much for your question, okay. I mean, while we can't specifically talk about our liability management, I think first we should start with the facilities, the new facilities agreement, right. The new facilities agreement has availability of $4.05 billion. And under that currently, we have only $2.2 billion outstanding. So we have roughly $2 billion available in terms of capacity, or a little bit less than that, okay. Plus, of course, as you know, as we said in the remarks, we expect a disproportionate amount of our free cash flow generation to happen in the second half of the year. So between that free cash flow generation, there's quite a bit of fire power that we can bring to bear in terms of liability management opportunities. Now, without being specific, I think just looking at the most immediately callable bonds, we have close to $2.5 billion of callable bonds. I mean, you start with the most expensive, the 2022s. That's $1,050,000,000, and that has a coupon of 9 3/8%. So as we're talking about potentially funding it, either paying it down or funding it through the loan facility, the savings could be quite significant there on an annualized basis. You have the $620 million 6 1/2% notes. Those are callable in December of this year. I'm sorry. The first bond is callable in October of this year. Then we have a euro note that has an equivalent in dollar terms of $465 million. That's the 4 3/4%. It matures in early January of next year. So that certainly would be on the radar screen. And then you have a piece of the 7 1/4% notes, $340 million of that, that also matures in January. So if you add all of those together, you're talking about $2.5 billion of potential liability management. A good portion of that would be paid from free cash flow, so it would represent a reduction, complete reduction in interest expense. So we're quite optimistic. And as we said in the remarks, we think a combination of all of those transactions potentially, given current market conditions, should translate to about $100 million of saving during next year. That's just for these transactions, right.

Yes. Got it.

Now, I don't know if that answers the question on the loan facility and liability management.

Perfect, Maher. Thank you.

On CLH, Pacco, number one, I mean, we feel very strongly about the long-term viability and health of our Colombian business. And leading up to the last couple of years, I think the business has been growing quite a bit and we think that things are kind of, on the volume side, beginning to stabilize. Unfortunately, we're seeing some not particularly pretty pricing dynamics, but also, for those of us who've been through some of those dynamics over time, we do know how quickly sometimes those situations reverse themselves when the supply/demand conditions change. So we're optimistic about Colombia. While we think it's a very interesting opportunity, we also don't want to reduce liquidity. We would like to maintain liquidity. So it's an interesting opportunity. We'll have to wait. And as we said, most important thing right to be focusing on is investment grade, right. So we're really focusing on deleveraging.

Our next question online comes from Dan McGoey from Citigroup Inc, Research Division.

Two questions, if I may. First, on the new facilities agreement, Maher, you mentioned improved flexibility to either return capital to shareholders or pursue M&A. Wondering if you can be a bit more specific what restrictions were either revised or lifted and which are remaining? And then in terms of returning capital to shareholders, can you talk a little bit about in what way CEMEX might do that? Would it be a return to the sort of election and stock dividend or potential cash dividend? And then the second question is on the kiln and electricity costs. Fernando, you mentioned they were up 16%, I think, year-on-year in the second quarter. And I think I heard 41% in Mexico. Can you talk a little bit about or get a little bit more granular in terms of the regions that drove that, and specifically between fuel, electricity?

Yes. So, Dan, in terms of the changes on dividends and share buybacks, as you know, under the 2014 club loan, we had, really, we had no dividends or share repurchase provisions at all. In our bond indentures, we did have some provisions, some baskets, and by, we think, given our liability management profile and given the definition under the bond indentures, which is driven off of the cumulative net income of the company, we think that probably by towards the end of 2018, we would have, under the bond indentures, about $350 million to $400 million capability of returning capital to shareholders, either through dividends or share repurchases. Under the new club facility, 2017 facility, assuming that our leverage is under 4x, we have a limit of $200 million per year. So whether we look under the club or under the bond facility, I mean, clearly the club facility continues to be the tighter limit. And, of course, as we said, while we are paving the way, it is extremely important that this is subject to the board and shareholders receiving a recommendation and, of course, approving this. So this is just a paving the way, from our perspective, and to get the flexibilities as we get closer to investment grade. In terms of our ability to conduct M&A, the limits have expanded. I mean, we had a limit under the club facility of $400 million, plus any equity or asset sales that we would sell. Now, of course there are limitations. I mean, there's some ability on resource -- on sources, but there's also limitations on uses. In the new club facility, it's $400 million plus free cash flow of past 12 months and equity and asset sale proceeds. So it's a bit more, but, obviously, there are leverage ratios. We've agreed to a slightly tighter leverage ratio as a consequence of this. And so, you know. And of course, again, reiterate that our primary priority right now is reaching investment grade as soon as possible. So I don't know if that answers your question as far as the club deal.

It does, Maher. It's complicated, and I won't ask you to go through most of the details. But just to understand, the limit on the new 2017 is, for the club facility's $400 million plus any equity raise or asset sale; is that right?

And the free cash flow from the past 12 months.

Okay, got it. Thank you. Yes, Fernando, on the electricity and kiln fuel?

Yes. The most relevant variation is the one related to fuels. And when you look at the fuel we use the most, which is pet coke, and you look at the trend of price increases due to last year, and what is going on this year, you realize that first half of last year, the price of pet coke were on the historical low side, let's put it that way. And it started increasing, I don't recall, but it was midyear or so, it started increasing to the highest end of historical prices in pet coke. And that's why in the first half we have a material increase in energy cost all over CEMEX, and as you mentioned, in the case of Mexico, in part, 41% of our cost base. The increase in pet coke in the first half of '17 compared to first half of '16, is as high as 109%. Now, again, moving forward, what we are expecting and which is what it's been happening in the last few months, is for pet coke prices to decrease. So on the second half, by any way we [aren't] expecting an impact as relevant as the impact we had in the first half. And we have seen this mainly in Mexico, in Spain, UK, Panama, Colombia, and to some extent in the US. Does that answer your question, Dan?

It does. If I just may ask, does it prompt any alteration in strategy, either hedging or new fuel procurements? Is there any change as a result of those increases?

Well, not really. What we are permanently doing is analyzing the best fuel mix for each and every plant. To put an example, which is very recent, you know that we invested in a pet coke grinding mill in Egypt to move from mazut, the fuel that we were using there, to pet coke. Because of the local dynamics and the exchange rates and the price of energy in Egypt, we moved back to mazut because that was even cheaper than pet coke. And now we are already switching back to pet coke. So in some plants where we have fuel flexibility and different competitive sources of fuels, we do that on a permanent basis. Sometimes we move to natural gas, when sometimes we move to additional [trend] of fuels. But we do that on a permanent basis.

Understood.

Our next question online comes from Benjamin Theurer from Barclays PLC, Research Division.

I have a question on the competitive environment in Mexico. So I was talking to my colleague in Europe who takes a look at LafargeHolcim. And he mentioned that they were having Mexican volumes actually [up in] quarter by about 4% and pricing, in a similar way, positive as you had. So could you share a little bit the dynamics, what you've been seeing throughout the second quarter in terms of shift of volume in between competitors? And obviously, your guidance towards the second half would imply certain regaining here and obviously an improvement in growth and volume. So if you could share a little bit your thoughts on the competitive environment right now, Holcim Lafarge, but also with the new plant that [Allamentair] put out just recently. Thanks.

Yes. I've not seen that from Lafarge. Just a couple of figures here and there, but I suppose I have to go deeper into that information. We don't have market information, reliable market information until, I don't know, perhaps the month or two from now. But what is clear is that there is a dynamic going on in the country. And I think since early, I don't know, mid-'15 or so, we started on a specific strategy on pricing in Mexico, because through time the cement prices in Mexico lost as much as 40% in cost in pesos for a long period of time. Let's say 15 years or so. And we started as part of our value-before-volume strategy, we started trying to gain back prices in real terms. And it's not been that easy. I mean, the market conditions in Mexico and our specific strategy has [prevailed]. And suddenly we lose relevant portions of market share during a quarter or during half of the year, perhaps even a year, and then to gain it back afterwards. Right now what I know is that our volumes were down and others like the company you just mentioned are up. We have to consider what happened in the first half or the second quarter of 2016, because of this market share changes, I would say material changes that is affecting comps. But again, what I can tell you is that we have a very clear pricing strategy. We do evaluate market conditions. Of course, we are concerned of not losing position in the market. And we continuously evaluate the results of our value-before-volume strategy in Mexico.

Okay. And then on a completely different note, just go a little north in Texas. You mentioned on the prepared remarks that the price increase you were targeting for the Houston area was unfortunately not successful. So just to reconfirm, and I'm not sure if I got it right. So you're trying to basically raise prices in that area again, by October; is that correct?

Yes. Ben, if I can address that. I mean, I think one thing to stress is that pricing in Texas actually was successful virtually everywhere except for the Houston market. I mean, Houston we got some traction; not as much as we would like. But Houston is in recovery mode. And Houston represents a disproportionate percentage of our Texas volume. So whatever happens to Houston has quite a big impact on that. Now, we will try again. And some of the markets certainly are becoming more supportive. We're seeing stabilization in the market. We're seeing a bit of a pickup in housing permits, although, the housing market is substantially slower in Houston than it is, say in Dallas or in Austin. I mean, just to give you an idea, okay, I mean, the housing starts were about 2.5% in Houston versus 42% in Dallas. This is April year-to-date. And in Austin, they were 22%. San Antonio, they were 25%. So we're fairly optimistic as we see a little bit more investment in the energy sector as we see oil prices improving a little bit, and especially the downstream energy business is also starting to pick up. We should see some pickup in the pricing dynamics. And that's why we are kind of revisiting pricing in October in a couple of the markets. And we're a bit optimistic for that to get some more traction.

Our next question online comes from Eduardo Altamirano from HSBC, Research Division.

Just very quickly, on your working capital guidance where you now are guiding for a slight [lumpy] investment this year versus a $50 million investment last year, would it be safe to assume that you do not plan on growing or at least growing on the lower end in aggregate of your guidance? Or is this from some sort of material improvement in your operations [somewhere] in the world?

I didn't hear well your question. Can you repeat it please, Eduardo?

Yes. No problem. Sorry about that. That in terms of working capital guidance, you're now guiding for flat [lumpy] investment this year versus a $50 million investment previously. So would it be safe to assume that you are expecting, let's say growth on the lower end of guidance or even no growth or just some material improvements in terms of working capital efficiencies across your operations?

Yes. No, Eduardo, if I can maybe address that question. No, the improvement in our working capital guidance is because of continued improvement in our working capital structure, not because we're expecting worse performance in our operations. I mean, we continue to have a good improvement in volumes. We think pricing should be doing well in the second half of the year. But, and we're hitting an all-time record in terms of number of days. So I think the improvement is because of continued improvement in our working capital practices, not because of a weaker performance on the operating side.

If I may add to that, Eduardo. You know that the working capital initiative is a company-wide initiative that we've been executing and it's moving forward and we continue improving our levels of working capital. But different countries are progressing at different speeds. And what we have seen, perhaps, during the first half of the year is that the contribution of the US, which is a country that has been, because of the size and because of the level of their improvement during the first half. When comparing working capital in the US in days, year-to-date, 2017 is 15 days and that compares to 16, with 27 days. That's an improvement of 13 days. And again, considering the size of the business, that's a very sizeable contribution. And what I can also comment on this initiative is that some regions have already done lots of progress. But we can expect some additional improvements. For instance, like the ones I mentioned in the case of the US.

Our next question online comes from Vanessa Quiroga from Credit Suisse AG, Research Division.

I have a question regarding debt and another one about Mexico volume. Regarding debt, just very quickly, after the new bank loan, are you satisfied with exposure that you have between US bonds and bank loan? Or would you expect to increase again a US bond exposure as a percentage of total once you delever a little bit more of the company? And my question about Mexico volumes is, if you expect during the second half of year that daily cement volumes will remain more or less in line with levels that we saw in the second quarter? Thank you.

On your first question, I think we're trying to have an equilibrium or a [consolidation] on the cost of our debt, as well as the near refinancing risk and needs and everything. And I think we will continue moving forward, more or less, with what we have already done. Through time we might be changing the proportion of bank and market debt compared to total debt. But currently we are pleased with what we have. What we cannot lose sight is that we have to continue reducing our interest expense. As you know, from our peak to currently levels of interest expense, we have reduced it materially. I don't remember the figure, but it's around $600 million or so.

Yes.

And on our current level of around $800 million, I think I mentioned again during our CEMEX Day, we still have to reduce it whenever we get investment grade and whenever we have the proper conditions to do additional liability management. But we have to reduce our [interest] expense still by another $500 million. And if it takes to increase or decrease a proportion of bank or market debt, that's what we will do. But for the time being, I think we are pleased with what we have.

And if I can address, Fernando, the question on the bank debt. I mean, right now we're probably a little bit under 30%, if you take a look at actual exposure of bank debt as a percentage of our net total debt plus perpetuals. I mean, total net debt plus perpetuals net of cash on hand is about $11.5 billion. So we do have, of course, under the facility, to go up to about $4 billion. If we do go all the way up, everything else being equal based on our current debt outstandings, that would take us to around 35% bank debt versus bond debt. Now, I'm sure you were on the call earlier when we talked about the possibilities of addressing some of the bonds that are callable that are worth about $2.5 billion. So clearly, that will enable us to take up the full utilization under the bank facility and reduce, potentially, the amount of bonds as well, because of utilization of free cash flow. Clearly, as we generate more cash, I think that we're going to be more interested in more flexible financing that is repayable with more flexibility, frankly. So I think 40%, a little bit more, a little bit less, is probably not a bad mix. I don't know if you want add anything to that, Fernando?

No, no. No, not really.

Does that cover your question, Vanessa?

Yes, that's perfect for the debt question.

Great. Thank you very much. Anything else?

The volumes.

There was that question about the Mexico volume, whether you expect they daily volumes --

I'm sorry. Could you repeat that again, please? I just kind of was focusing on the debt thing.

Okay. Sure, yes. In the second half of year, do you expect Mexico daily volumes to remain more or less at the same level as you saw in the second quarter?

Well, I mean, look. Year-to-date, we're growing kind of on the low end of what we're expecting for the range that we indicated, which is flat to 3%. So I think if we just maintain what happened in terms of average daily volume in the second quarter in the back half, we would get to flat volumes in Mexico. So that's the minimum. So clearly out expectation's that there should be, frankly, better performance in the second half of the year. And so that's on a daily average volume perspective. From a total volume perspective, I mean, you do have the easier comps and you do have potentially more business days in the second half of the year.

Yes, exactly. That's my question. And so you would expect the performance of daily volumes to improve in the second half. And the driver of that, what would it be if infrastructure should remain subdued?

Well, housing certainly is one of the areas that will continue to do well. We think industrial and commercial will continue to do well. Infrastructure is going to continue to be challenging. We have, as we mentioned, we have secured a very important percentage of the business available in the Mexico City airport. I mean, we said 40% out of the -- let's put it this way. 40% out of the total pie, but only 70% of the total pie has been actually awarded. There's 30% that are remaining, and a big chunk of -- not a big chunk, but an important percentage of that will happen this year. Most of it is coming into 2018. And so that's where we're expecting it from, frankly: industrial and commercial, formal/informal housing and, to a lesser extent, infrastructure. And, of course, as you know, I mean, all the fundamentals, drivers for demand in those segments continue to be very positive, whether are remittances, inflation, consumer spending's still very positive, formal employment is continuing to be good. So we feel that all of the underlying drivers of demand in those segments are very good. We're continuing to see very healthy bank lending in Mexico into the middle market, and we'll continue to see support -- I mean people using their INFONAVIT accounts to play in that segment as well.

We have time for one more question. And our final question comes from Nikolaj Lippmann from Morgan Stanley, Research Division.

Three very quick questions. And I know many questions have been asked already. First on the US, if I may, could you give us -- so you've talked a lot about transportation cost in the US. And it seems that there's a lot of growth in sort of north Florida, the southeast corner of the US, maybe even the south of California. Could you give us some color on whether you think that you could save on transportation cost there in sort of second half and beyond? And I understand there were some weather issues here in the second quarter. And my second question is on Mexico. And it seems that we're not seeing a lot of election, sort of pre-election spending. Is that something that you expect as we approach maybe '18 a little bit more, any early signs of that? And finally, just to be sure I got it on the debt, it looks like you're not moving more of the debt towards pesos. Is that the correct -- you continue with roughly the same fx exposure? Is that the right way of thinking about it?

Well, let me take your question regarding pre-electoral, potential pre-electoral impact in Mexico. We don't see any relevant activity because of elections. They are still very far away. But what we do expect that you have seen forecast about Mexico's economy have been improving lately. Still lots of uncertainty. Just to point out an example is the current negotiations of NAFTA. But the outlook of Mexico, despite the very specific infrastructure, the phenomena we're going through, our infrastructure sector, but it seems to be more positive than what it was. So that make us positive and cautiously optimistic about Mexico in next year. But on your specific question, I think we need to wait and see.

And, Nik, if I can address the Florida/transportation guidance. Just caveat emptor here, as you know, we don't guide towards transportation costs. I think it's important that Florida and other markets in the southeast have suffered clearly from rain in kind of the latter part of May and certainly June. I mean, do we have a logistic advantage in Florida? The answer is yes. I mean, we do have an important rail system and port system that we will continue to optimize. Clearly, from a market activity perspective, southern Florida is more sold out, but demand is not growing that fast. So are there opportunities for reducing transportation costs in a place like Florida? The answer is yes. Overall in the country, I mean, I would probably have to get back to you on that. Our cement has been traveling longer distances, and that's likely to get better as certainly a place like Florida grows maybe better than other markets in the US. I don't know if that addresses your question on Florida.

That's helpful. I appreciate it, Maher. And in terms of not taking more debt in pesos, in Mexican pesos I mean, is that the correct way of interpreting --

Yes. Just to recap. I mean on the loan facility, I mean, most of our exposure is in dollars, but we do have about EUR 740 million. We do have about 350 -- close to GBP 150 million as well. Our mantra, our mantra, has been, frankly, to go for the most efficient funding at the end of the day. And given the fact that we're not yet at the appropriate level of investment grade in the Mexican market, we feel that cost of funding for us in the Mexican market is disproportionately high. So we're addressing our exposure to peso risk, as you know, through our hedging program that we announced and put in place, the $1.25 billion program. So, so far, we haven't seen it appropriate yet for us to do so. We're getting much better credit evaluation in the dollar, euro, British pound markets and US and Europe, essentially. But we're keeping an eye on it. And to the extent there's an opportunity, we'll look at it.

This concludes our question-and-answer session. I would now like to turn the call over to Fernando Gonzalez for closing remarks.

Thank you, Richard, and thank you all for your time and attention. We look forward to your continued participation in CEMEX. And please feel free to contact us directly or visit our website at any time. Thank you, and good day.

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