Cemex Q2 Earnings Call Transcript

123jump.com Staff
19 Oct, 2008
New York City

Cemex second quarter revenue rose 29% to $ 6.4 billion on Rinker acquisition. Operating earnings increased 21% to $1.37 billion. Cost savings from Rinker acquisition are expected to reach $400 million by 2009. Cement, ready mix and aggregates sales fall more than 20% in the U.S. in the quarter.

Cemex SAB De CV ((CX))
Q2 2008 Earnings Call Transcript
July 28, 2008 10:00 a.m. ET

Executives

Hector Medina – Executive VP of Planning and Finance.
Rodrigo Trevino – Chief Financial Officer

Analysts

Carlos Peyrelongue – Merrill Lynch
Marcello Telles – Credit Suisse
Nick Delfas – Morgan Stanley
Gonzalo Fernandez – Santander
Nat Bates – JP Morgan
Steve Trent – Citigroup
Dan McGoey – Deutsche Bank

Operator

Good day ladies and gentlemen and welcome to the Cemex second quarter 2008 conference call. My name is Sylvana (ph) and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance please press * followed by 0 and accordingly someone will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I’d now like to hand the presentation over to your host for today’s call, Mr. Hector Medina, Executive Vice President of Planning and Finance. You may proceed, Sir.

Hector Medina -- Executive VP of Planning and Finance

Thank you. Good morning and thank you for joining us for our second quarter conference call. Today I’ll review our second quarter results and will share with you our estimates for 2008 in the light of our performance for the first half of the year. Then our CFO, Rodrigo Trevino will follow with a discussion of our financial results. During the quarter we had better than expected performance in most of our regions. This performance is not however truly compensated for the downturn in the United States and Spain and the negative impact from higher energy input costs. We continue to face a difficult economic environment in the United States with demand for construction falling more than we had originally anticipated. During the quarter and on a like-to-like basis for on going operations, consolidated cement volume was down 6%, ready mix volume declined 10% and aggregates volume decreased 9%. However consolidated price in US $ terms also on a like-to-like basis during the second quarter increased by 10% for cement, and 12% for both ready mix and aggregates. Cement, ready mix and aggregate price increases still fall short of the price increases for the building material products such as steel and asphalt. Steel prices for instance have doubled in the last few months and the California Paving Asphalt Price Index has also doubled in the same period.

Our EBITDA during the second quarter reached $1.4 billion, an increase of 21% versus the same period last year. On a pro forma basis for the on going operations, adjusting for the consolidation of Rinker, EBITDA decreased by 2%. For the first half of the year and on a like-to-like basis for the on going operations our consolidated EBITDA decreased 10% versus the same period last year reaching $2.3 billion. The under performance in the United States and Spain has been substantially mitigated by better than expected performance in other regions as I mentioned earlier. For the full year 2008, we continue to expect EBITDA of about $5.3 billion at the currently prevailing foreign exchange rates. This represents close to $3 billion of EBITDA generation during the second half of the year. We expect to achieve this growth organically from our global market including Mexico, the Central South American and Caribbean regions, Eastern Europe and Australia. With most of our portfolio with favorable pricing environment will take the liquidity portion into consideration. This along with realized synergies and productivity program initiatives is expected to mitigate lower volumes. We expect synergies from the Rinker integration to reach a run rate of $400 million per year by early 2009. About half of these synergies will be realized during the year and we continue with other cost containment initiatives company wide. Free cash flow in cement and capital expenditure is expected to exceed $3 billion in 2008.

Now, I’d like to discuss the second quarter performance of our principal markets and our outlook for this market for 2008. In Mexico cement volumes remained flat while ready mix volumes declined by 7% during the second quarter. The decline in volumes is mainly due to delays in infrastructure spending. Given the backlog of projects that have already been approved and assigned to us, we expect a recovery in the second half of the year. Higher than normal rain during the end of the quarter especially in the South Eastern and Central Regions where we have many of the most important recently ordered supply contracts for housing and infrastructure projects affected volumes during the quarter. For the first six months of the year cement volumes decreased by 3% and ready mix volume declined by 11% versus the first half of 2007. Two factors will continue to influence cement sales for the rest of the year. The first is sales spending on streets and highways public buildings and other infrastructure projects. The national infrastructure program from 2007 to 2012 announced by President Calderon represents an investment of about $230 billion. This program includes public and private standing on oil, power, railroads, telecommunications, and others.

For cement intensive projects such as highways, the investment under the program is expected to be $38 billion. During 2008, the region will plan for total project spending on cement intensive public works projects including national interest infrastructure program and other local investment is expected to reach $15.3 billion versus $11 billion last year, a 41% increase, which implies a very strong second half. Growth in this sector will be supported by the result of the fiscal accruement in 2007 and higher oil revenues. The fiscal reform and other initiatives will provide the federal government with approximately $14 billion in additional funds for the 2008 budget, a 10% increase versus last year. Oil revenues for the 2008 federal budget were approved with a surplus rate in the budgeted basic and oil mix price of $49 per barrel. In contrast the year-to-date average is about $97 and is expected to remain at higher than budgeted levels for the rest of the year. The additional oil revenues are being used for oil exploration and gasoline imports as well as for state infrastructure projects.

The second factor, housing continues to grow with a number of factors responsible for economy, the national bank, the federal bank and other institutions. This year, the goal is to reach 820,000 mortgages versus 730,000 during last year. Constructions taking place in the formal housing sector lacks the performance of home builders in the first half of the year due to intemperate build up over the year and 2007. This build up, was driven in part by fiscal benefits and the consequence of the newly approved fiscal home laws. We believe this inventory build up has been cleared and we now expect to see growth in this segment during the second half of the year.

Mexico is better prepared today to withstand the US economic slowdown than it was at anytime in the recent past. This is due to the high level of Internationals Reserves, a favorable exchange rate, a steady public external debt, the improved foreign account deficit, sustained flow of remittances from those as well as higher revenues. EBITDA margin in Mexico has improved by 100 basis points during the first half of the year despite increase in input costs. This increase is a result of continued improvement initiatives including fuel substitution, generator electricity and administration of our distribution channel. Volumes in the second half of the year are expected to improve significantly due to the execution of delayed infrastructure projects that have already been awarded or assigned to us. In addition, formal housing is also expected to be better due to an expected increase in the granting of mortgages during the second half of the year in several important states including Jalisco, Coahuila, Mexico, Tabasco as well as Mexico City. In light of the above we now see cement and ready mix volumes increasing by about 2% and 4% respectively for the full year 2008.

In the United States cement volume fell 7%, ready mix sales volumes increased by 27% and aggregates volumes increased by 111% during the second quarter versus the same quarter last year. Ready mix and aggregates volumes increase is the result of mainly the acquisition of the Rinker operations which expanded these businesses. On a like-to-like basis for the on going operations during the second quarter, our cement volume decreased by 20%, our ready mix volume decreased by 29% and our aggregates volumes declined by 26% versus the same period the prior year. The second quarter like-to-like decline in volume was driven mainly by the continued decline in the residential sector and the integration of Rinker’s operation into our results starting July 2007. This is because Rinker operations have a higher proportion of sales in markets that have attracted the highest amount of opportunity investment, especially in Florida, which is currently experiencing the biggest correction in the country. In addition, adverse weather conditions primarily in portions of the South East and Mid West regions, also negatively affected our volumes during the quarter.

For the first half of the year and on a like-to-like basis, our cement volume declined 20%, our ready mix volume decreased 29% and aggregates volumes decreased 26% versus the first half of 2007. Despite these historic declines across our core businesses, prices for most of our products remained resilient. Prices of imported cement has been escalating in 2008 due largely to higher freight and fuel costs as well as tight shipping conditions. Higher energy and other input costs are continuing to favor the price increase. There is continued uncertainty about the economic outlook in the United States. As such our guidance for the US operations is particularly sensitive to changes in this outlook. The foreign exchange factor has been most favorable historically than the residential and industrial and commercial sectors. We are continuing to see increases in construction taking place in nominal terms with the public sector including state run highways and other public constructions. However, these increases have been reduced in some instances fully offset by input cost inflation. Contract awards for state run highways have decreased by 12% from May versus the prior year. This decrease is primarily due to uncertainty about continued feats of cost inflation as well as due to visibility going forward related to the removal of safety rules which expect to apply from September 2009. However due to visibility at this point over the size of the next set of highway program we are confident that the substantial needs of infrastructure investment will drive many states to seek additional funds from their own bond program, as with the recent cases of California and Texas and through public private partnerships.

We now see volumes in the public sector which is expected to represent about 60% of total cement demand declining by 3% to 4% in 2008. In the industrial and commercial sector, while nominal construction spending is still up for the first five months of the year, contract awards for new projects declined by 26% in the same period. Growth in this sector is expected to slow down as credit conditions have tightened and contractors have become more cautious in the current economic environment. In 2008, we expect volumes in the industrial and commercial sector which is expected to represent about 20% of cement demand to decline by approximately 12% as a result of decline in new projects. This decline is expected to continue due to tight credit conditions and the recent impact of the current economic environment.

The residential sector continues to decline during the second quarter. Housing starts, the fundamental driver of cement demand in this sector, decreased by 31% in the same period. Our market has seen an even steeper decline, as the high growth residential market, have decreased at a more rapid pace. Exisiting vacant home inventories continued to increase due to acceleration in foreclosure activity and represent an excess inventory level of approximately 900,000 homes. However we are encouraged by the improving affordability which would meet the higher sales as the economic environment stabilizes.

The time frame for excess inventory absorption will depend on further price reductions, credit availability, job creations and the magnitude of home foreclosures. For 2008, we expect the US residential sector which this year will represent roughly 20% of our cement demand to continue its downward trend declining by about 30%. In light of the above we expect that on a like-to-like basis for the on going operations in 2008, our demand volume in the United States to decline by about 12%. Our ready mix and aggregate volumes are expected to decline by about 21% and 20% respectively. We see our year-over-year volume performance improving in the second half of the year as the residential decline will likely moderate. EBITDA generation in the United States has been affected mainly by the ready mix and other product operations. These operations which include concrete walls and other building materials are driven more by the residential sector than our cement and aggregate operation. The ready mix and concrete block operations suffered due to lower sales volumes and higher material costs.

We have taken steps to reduce the cost in the ready mix, aggregates and concrete block operations including plant structures, our reduced cost fees and head count. In addition we have identified substantial synergies during the post Rinker integration process that will further reduce our costs going forward. We look positively towards the future in the United States. We recognize that the current downturn is temporary and we know that the integration of Rinker prepares us for long-term growth and gives us a more balanced position throughout the cement value chain.

EBITDA margin in the United States decreased to 17.9% during the quarter from 25.7% in the second quarter of 2007. The year-over-year margin drop was the result of the change in product mix resulting from the integration of Rinker as well as lower volumes and higher energy and transportation costs.

In Spain cement volume during the second quarter decreased by 26% while ready mix volumes decreased by 23%. Cement volumes for the quarter ended slightly above the more recent strike due to a lower than expected impact from the transportation strike during the month on June. For the first six months of the year, cement volumes decreased by 21% while ready mix volumes declined by 19%. Cement consumption in our markets continued to fall at a comfortable rate than the overall market during the quarter as a result of lower construction activity especially in the central region, Levante, Baleares and Canarias which had shown an above average growth in previous years. We now expect the GDP growth rate to be lower than 1.7% for 2008 compared with the 3.8% growth registered last year. This is the reflection of lower than expected economic activity. The residential sector continues to decline. Housing starts in 2007 declined 19% versus the previous year, reaching 616000. For this year we expect housing starts to decline an additional 45% to about 340,000. This would translate into significant decline in cement consumption in this sector. Infrastructure projects continued to be on standby as a result of the general election in the country. Additionally, some construction companies want to renegotiate some of the projects given the high increase in cement costs. We expect the reactivation of the sector to start around the fourth quarter of this year. Construction in the non-residential sector is also expected to decline during 2008.

Payment supply, demand dynamics, cost reduction initiatives, initiation of our production and negotiation networks, higher use of organic refuse and utilization of much less imported clinker in our operations have partially offset lower volumes and higher energy and transportation costs. Additionally the import buffer is expected to continue to be sizeable as a percentage of local consumption. We expect demand conditions in the second half to be better because of an expected increase in GDP and infrastructure side, additionally sequential comparisons to be easier as a consequence of the bad weather in May and the transportation strike in June. Year-over-year comparisons should also get easier due to the deterioration of volumes that we experienced in the second half of last year. In the light of the above, we estimate that during 2008 cement volume would decrease by about 18% to 20% and ready mix volume would decline by about 17% to 19%.

During the second quarter of 2008, in the United Kingdom, cement volume decreased by 10%, ready mix volumes declined by 11% and aggregates volumes decreased by 5%. Adjusting for the investment completed during 2007, ready mix volumes decreased by 6%. Weaker than expected housing markets and a sizeable home loan restructuring during the back date of the second quarter we saw a stronger than expected downturn in orders and higher than expected pricing pressure. For the first half of 2008, cement volume decreased by 10%, ready mix volumes declined by 14%, 9% when adjusting for the dynamics and aggregates volumes rose 5% over the same period last year. For 2008, in the United Kingdom we expect cement volumes to decline by about 10%, the volume of ready mix to drop by about 9% on a like-to-like basis and the volume of aggregates to decrease by approximately 4%.

In France, our ready mix volumes increased by 3% during the second quarter and 5% during the first half of the year. During the second and third quarters of 2007, we began consolidating into our operations prior to the expansion that we had acquired. On a like-to-like basis for our on going operations our ready mix volumes have increased by 2% for the second quarter and by 3% for the first half of 2008. Aggregates volumes increased by 1% in the second quarter and by 2% in the first half of the year versus the comparable periods last year. The main driver for volume growth in the country continues to be the public works sector. The residential and non-residential sectors are reflecting a decline in building cement. For 2008, we now see ready mix volume on a like-to-like basis for the on going operations growing by about 2%.

In Germany our domestic cement volume increased by about 11% during the second quarter and by2% during the first half of the year versus the comparable periods of last year. Supply and demand conditions continue to be favorable. We continue to export part of our production to the Netherlands which should improve our profitability. For 2008, the main drivers for cement demand will continue to be the non-residential sector and to a lesser extent the civil engineering sector. We continue to expect a mid single digit increase in our domestic cement volume in Germany.

Eastern Europe, mainly Poland, Croatia, the Czech Republic and Latvia, domestic cement volumes declined by 3% during the quarter and increased by 1% during the first half of 2008. For the full year 2008, we expect the weighted average GDP growth rate for the four nation countries to come in at about 4%. This is lower than the usual rate at the beginning of the year reflecting the impact of credit restraint and inflation. The prospect for the regions remains attractive. Cement consumption is expected to increase and supply demand dynamics are expected to continue to be referable at the convergence of these countries to the European Union Federation.

Regarding the nationalization of the cement industry in Venezuela on June 18th 2008, the Government of Venezuela issued the nationalization decree mandating that the cement production industry in Venezuela be referred to the state and ordering the conversion of foreign owned cement companies including Cemex Venezuela, inter state and foreign companies to the Venezuelan Government holding an equity interest of at least 60%. The nationalization decree provides for the formation of transition committee to be integrated with the Board of Directors of the relevant Cement Company to guarantee the transfer of control of all activities of the relevant cement companies to Venezuela by December 31st 2008. The decree further establishes a deadline of August 17th to document for the shareholders of the foreign owned cement companies to reach an agreement with the Government of Venezuela on the compensation for the nationalization of their assets. The decree also provides that this deadline maybe extended by mutual agreement. Crucial to the decree, if an agreement is not reached Venezuela shall assume exclusive operational control of the relevant cement company and a Venezuelan National Executive shall decree the expropriation of the relevant shares according to the Venezuelan expropriation laws. No payment can be given until an agreement with the Government of Venezuela is reached. Government of Venezuela has been advised by its associates in Spain and Netherlands that are investors in Cemex Venezuela that the shareholders reserve their rights to bring expropriation claims in arbitration under the Bilateral Investment Treaties, Venezuela signed with those countries.

In Columbia, cement volumes in our operations declined by only 2% during the quarter despite bad weather and increased by 1% during the first half of the year versus the comparable periods of last year. Supply demand situation continues to be very favorable in the country. The main drivers of cement demand continue to be infrastructure spending, middle and high income housing and non-residential construction. Infrastructure projects continue with roads and highways, airports, roads and others and the residential sector specially loans from housing is experiencing a slow down resulting from an increase in interest rates and higher town power supply. The non-residential sector will continue its strong performance. These trends in the different sectors are expected to continue throughout the year. For 2008, we expect an increase in domestic cement volume of about 2%.

In Egypt, domestic cement volume was flat during the second quarter and increased by 2% during the first six months of the year with continued favorable supply demand conditions. The private sector specially upper and middle class housing continues to be the main driver of cement demand. For 2008, we expect cement volume to grow by about 3%.

In our operations in Australia, ready mix volume increased by 23% and aggregates volume increased by 12% during the second quarter of 2008. For the first six months of the year ready mix volumes increased by 15% and aggregates volumes increased by 7% versus the comparable periods last year. Supply demand conditions continue to be favorable. The public works sector is benefiting from major road and storage supply infrastructure projects. The need to increase the contract price through commodities, especially iron ore and coking coal are underwriting private investment in this resource sector. Office, hotel and warehouse construction supported by strong employment and growth in real estate is driving growth in the commercial sector. The main drivers for growth in ready mix and aggregates volumes for 2008 will continue to be the commercial and public works sectors. Even if we prefer to take the performance of our Australian operations we now expect ready mix volumes to increase by 8% and aggregates volumes to increase by 4%. As usual before I turn over the call to Rodrigo I’d like to reiterate that as an important commitment to our shareholders which is to assure that our capital location establishment remains on course to sustain a record of disciplined and profitable growth in the short and medium and long-term. Going forward we intend to invest our free cash flow in two ways. First and foremost we’ll use our free cash flow to strengthen our capital structure. We remain committed to achieving net debt to EBITDA capital structure level of three times by the end of 2008. To reach this target we’ll use free cash flow as well as more than $500 million in after sales during the second half of the year to continue reducing that. Second, we intend to invest part of our free cash flow to increase our production capacity primarily in the cement and aggregates in the market that we serve today. We want to do this in order to further integrate our procedural and value chain and make sure of our ability to participate in the future growth of our markets. In light of this, we are in talk with our expansion capital expenditure projects announced in 2006 and 2007. We are currently increasing cement production capacity by about 13.5 million metric tons in Mexico, the United States, Panama, Spain and Latvia. In addition, we are increasing cement grinding capacity by 3.2 million tons in Spain, the United Kingdom and the United Arab Emirates. We expect these expansion projects to provide an average return well in excess of our stated acquisition investment criteria. We have the people, the culture and the opportunities to continue on our path of discipline and profitable growth. Thank you for your time. I’ll now turn the call over to Rodrigo.

Rodrigo Trevino – Chief Financial Officer

Thank you, Hector. Good morning everyone and thank you for joining us today. Our performance during the second quarter was supported by the integration of the Rinker operations beginning July 1st of last year. EBITDA for the quarter increased by 21%, reaching $1.4 billion and on a like-to-like basis for the on going operations EBITDA would have decreased by 2%. Most of our counties and regions registered growth during the quarter, the exceptions being the United States, Spain and the United Kingdom. In the case of the United States and Spain, EBITDA fell, mainly as a result of the ongoing correction in the residential sectors. In the United Kingdom, EBITDA declined due to lower volumes reflecting a general slow down across all sectors. Our consolidated EBITDA margin decreased from 23.1% in the second quarter of 2007 to 21.6% this second quarter. This drop in EBITDA margin is due to higher (inaudible), electricity and transportation costs and also higher fixed costs due to lorry garnering to scale resulting from our lower volume primarily in our US operations. For 2008, as Hector mentioned, we expect to reach our EBITDA target of $5.3 billion at the currently prevailing exchange rates. This implies we reach close to $3 billion during the second half of the year. We expect four sources to get there, sources of growth, growth organically from our diversified portfolio , two the realization of synergies from the integration of Rinker, three other productivity initiatives that we have implemented and four the strong currency exchange rates in most of our markets.

On June 30th the Mexican Peso exchange rate has strengthened from over 10.30 to less than 10.10 per Dollar. Furthermore based on the fact that the interest rate differential between the Peso and the US Dollar is expected to widen and considering Mexico’s strong foreign exchange reserves and strong external account balances we do not expect the Peso to weaken going forward. From a capital structure perspective we are not exposed to the movements in the Euro exchange rates and we maintain a portion of our debt fund in Europe and therefore the net debt to EBITDA ratio at the end of the year would be unchanged at different Euro Dollar exchange rates. SG&A expenses as a percentage of sales decreased from 19.2% in the second quarter of last year to 19.0% in this second quarter. We await our year-to-date results of our cost containment initiatives and are on track to achieve our objective for the full year. Higher distribution expenses have been partially offset with the savings from these initiatives. During the quarter our free cash flow after maintenance capital expenditures reached $739 million, 31% more than last year as a result of higher EBITDA and lower investment in working capital, which together more than offset higher financial expanses remitted to the higher debt level after the Rinker acquisition.

For the first half of the year free cash flow after maintenance capital expenditures was $1.2 billion, 42% higher than in the same period last year. We expect free cash flow for the full year to exceed $3 billion. This implies a generation of about $1.8 during the second half of the year, which we expect to achieve with greater EBITDA generation in this period and lower financial expenses. Because most of our interest and dividend coupons fall in the second and the fourth quarters, we expect the availability of free cash flow to be stronger during the third quarter allowing us to continue to de-leverage forward our capital structure targets. With regards to our input costs our estimates at the beginning of the year for increases in energy and (inaudible) and energy inputs were significantly lower what we have seen here today. There has been a dramatic change in the energy commodity markets compared to that expected at the beginning of the year with substantial price increases in oil, coal, natural gas, pet coke and other fuels. These increases have also impacted the electricity markets.

During the second quarter our clinker fuel and our electricity costs on a corresponding cement unit basis increased by 30% for the same period last year. Given year-to-date performance as well as the continued price volatility in the International energy markets we now expect an increase in these energy input costs of about 25% for the full year or about $4 per ton produced. We continue to develop new ways to increase the predictability and to reduce the volatility of our energy input costs. We remain committed to increasing use of alternative fuels in our operations and to continue pursuing steam development mechanism projects such as the wind-driven 250 mega watt power plant in Mexico. The wind farm together with the thermo electrically controlled power plant will allow us to self generate the majority of our current power needs in Cemex Mexico.

In second quarter freight rates as measured by (inaudible) charter rate remain at high historical levels about 40% more than the levels seen during the second quarter of 2007. The (inaudible) rate declined at the end of last year but has since rebounded. New capacity coming on stream has been lower than expected due to order cancellations because of the tight credit markets as well as cost over runs. We also continued to see important increases in ground transportation costs in our markets. These cost increases which are highly correlated with our prices reflect the continued rise in fuel costs and tight supply in those markets. The higher energy, shipping and transportation costs impacted cement supply globally translate into higher average equilibrium market prices for our product. Historically our price increases in cement, ready mix and aggregates have more than offset the input costs inflation. However riding these price increases fell short of input costs increases during the first half of this year. During the rest of the year further price increases across all products and geographies might be necessary to compensate for continued input cost inflation.

During the quarter, there was a loss of financial instruments of $159 million mainly due to a negative non-cash impact arising from the rise in the Yen long-term interest rates embedded in our professional securities. It is important to highlight however that for the first half of the year the loss in financial instruments was $19 million and was more than fully offset in foreign exchange gains. Our majority net income decreased by 27% during the quarter to $444 million and this is due mainly to a drop of $94 million in the monetary position gain as inflationary gains are no longer being recognized under Mexican accounting standards and also as a result of the drop in operating income in our US operations. Looking at our capital structure, our interest coverage for the trailing 12-months in June decreased to 4.4 times from 8.9 times a year ago. The decline in interest coverage is the result of addition of debt related to the Rinker acquisition. We now expect our trailing 12 months interest coverage to improve going forward as a result of both the drop in our interest expense due to the recent 6 moth LIBOR resets at lower LIBOR rates, and the expected growth in consolidated EBITDA going forward. Our leverage ratio as measured by net debt to trailing 12 month EBITDA. Using inflationary accounting and the end of the period convenience translation and the addition of financial income to the denominator in accordance with our contractual obligations, the decrease is likely to be below 3.5 times from 3.7 times at the end of the first quarter.

Similarly we are confident this ratio will improve going forward as we use more of our free cash flow and asset based divesture proceeds to pay down debt and also as we expect our trailing 12-month EBITDA to improve going forward. We expect our net debt to EBITDA ratio to reach 3.0 times by the end of the year. To achieve this we intend to reduce debt by using about $1 billion for free cash flow generation and an additional more than $500 million from asset sales during the second half of the year. Under denominator side the trailing 12-month EBITDA used to calculate the leverage ratio as per our contractual obligations is expected to improve from $5.05 billion as of June to more than $5.4 billion in December at currently prevailing exchange rates.

Improvement in our capital structures in June resulted mainly from the issuance during the quarter of two identical $525 million perpetual note facilities. The cost for this $1.05 billion capital raising transaction has been locked in US Dollar terms at about 2.6% for the first 12-months and 2.9% for the second 12-months. During the quarter we also completed under our Certificados Bursatiles program an issuance of medium term loans with an outstanding amount of close to 1.9 billion Pesos. Additonally we entered into a $500 million bank facility with a bullet maturity in April 2011. For the rest of 2008, our available committed facilities in place exceed our maturities. We will use proceeds from asset sales and free cash flow to prepay other short-term maturities and we’ll continue to lengthen the maturity profile of our obligations. About 60% of the requirements for next year will not become due until December of 09. In the meantime net debt will be further reduced from three sources at once. First cash flow generation from organic growth and the minor contribution from exponential CapEx projects coming on stream, second, our continued strong free cash flow generation most of which will be allocated to bail out debt, and third, from proceeds from asset sales.

Our priorities in the short-term will continue to be to regain our financial flexibility and to achieve the cost savings from the Rinker synergies and other productivity enhancing initiatives that have been put in place. Finally and as always I’ve been asked to remind you that any forward-looking statements that we make today are based on our current knowledge of the markets in which we operate and of course could change in the future due to a variety of factors beyond our control. Thank you for your attention and now we’ll be happy to take your questions, operator. 40:35

Operator

Ladies and gentlemen if you wish to ask a question please press * followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question press * followed by 2. All questions must be submitted at this time in order for it to be registered. Questions will be taken in the order received. Please press “*1” to begin and the first question comes from the line of Mr. Carlos Peyrelongue from Merrill Lynch. You may proceed.

Carlos Peyrelongue – Merrill Lynch

Thank you, good morning gentlemen. Could you provide us some visibility regarding prices in Mexico where you have implemented unit price increase in the second half and could you also give us some guidance on the US? As you mentioned 80% increase in the facilities. So would you implement any price increase in the US in the second half? Thank you.

Hector Medina

Yes, thank you Carlos. In the case of Mexico, there was a 5% price increase announced for cement on July 4th. Of course we are expecting that this increase will hold, but it is difficult to tell and in the US as in any other place, the increase in energy cost and other raw materials has been very significant and as you mentioned in the initial comment price increase is the issue in most of our markets but going forward we continue to watch the market and see how the situation is for cement. We have not announced second round of nation wide increase in the US for cement but we have announced price increases where demand allows us to. For example in East Texas in July we announced a price increase of about $6 and in Corral also where there is no one $2. That’s about it.

Rodrigo Trevino

Interestingly if I may add in addition to the price increase that Hector mentioned which of course is in local currency because the Peso today is close to 5% stronger than it was for the average of the first half of the year, and so in Dollar terms it makes it priceless for the second half where it should be appropriately higher.

Carlos Peyrelongue – Merrill Lynch

Understood. Thank you very much.

Hector Medina

Thank you, Carlos.

Operator

And the next question comes from the line of Marcello Telles from Credit Suisse. You may proceed.

Marcello Telles – Credit Suisse

Hi good morning gentlemen. I have a follow up question on Carlos question regarding cement prices. First in Mexico, I mean you said you expect to recommend a price increase in July but when you look in the second quarter there was actually a 2% decline in cement prices in Mexico. So, what is the likely attributes that you have actually been able to successfully implement that price increase and what segments led to the 2% decline in cement prices in the second quarter versus the first quarter all in local currency? The other question I have was you also lowered likely your forecast for Mexico in the cement volumes versus your previous guidance especially ready mix. Which segment explains that reduction and a final question, what is your assumption for the infrastructure sector for cement for 2008 that is embedded in your guidance? Thank you.

Hector Medina

As far the sequential price decline in Mexico in the first quarter the reason was of course an issue of geographic weeks of surprises, then as we mentioned demand was weaker. We expect demand to strengthen in the second half of the year as we mentioned in the initial comment. We are already seeing some of the large infrastructure projects coming on stream and so that will strengthen consumption of cement in some of the markets as we mentioned. So, that’s where the 5% volume additions are based on. It is infrastructure we see increasing in the second half of the year. So, that in fact goes to the third part of your questions which is infrastructure segment we expect to remain relatively stable, and again essentially second half of the year is strengthened because of the infrastructure projects, also to mention some of the housing inventory that were created towards the end of 2007 because we had to tax the benefit. We see that already some how being worked out. So, we expect housing also to pick up in the latter part of the year.

Marcello Telles – Credit Suisse

Thank you and just a follow up question on the US market, regarding prices. We also saw 2% decline in the cement prices in the US. Can you elaborate which markets I mean have led to that decline in cement prices? Thank you.

Hector Medina

I already mentioned we have put up some price increases in Texas, East Texas in Corral. So, those are the markets that are stronger but of course as opposed to that we have some pricing pressures because of increased capacities on other markets in California in fact and that brought down the average prices 2% as you mentioned. But we don’t see a major issue of pricing in the US today. That is essentially a localized situation.

Marcello Telles – Credit Suisse

Okay, thanks very much.

Hector Medina

Thank you.

Operator

And the next question comes from the line of Nick Delfas from Morgan Stanley. You may proceed.

Nick Delfas – Morgan Stanley

Hi, gentlemen, a couple of questions. First will you talk a little bit about progress on the Venezuela sale and partuclarly what happens after the government deadline? I believe it is in August. Is there any extension that is automatically granted or do they give you a price that is somehow defined by a formula. I know there is a lot associated with that deadline, and then second you mentioned 12%, I believe expected decline in the US on a like-to-like basis. What does that work out on a reported basis? Thanks.

Hector Medina

The Venezuelan situation you should understand that we cannot comment any further, other than my initial comment because of the seriousness of the situation.

Nick Delfas – Morgan Stanley

Okay, so…

Hector Medina

That’s as much as I can say.

Nick Delfas – Morgan Stanley

So then, is there a known action that happens after the deadline is reached and there is no agreement up until the deadline and is there anything you can say about that, just if we feel about asking?

Hector Medina

According to the Nationalization decree the deadline can be extended for another 60 days if the parties agree.

Nick Delfas – Morgan Stanley

Got it.

Hector Medina

Now for the 12% decline in cement on a like-to-like basis that translates into a 4% decline on a reported basis for 2008.

Nick Delfas – Morgan Stanley

Great, thank you.

Operator

And the next question comes from the line of Gonzalo Fernandez with Santander. You may proceed.

Gonzalo Fernandez – Santander

Hi good morning, it is Gonzalo. You mentioned that you are assuming in your estimates an improvement in the second half of the year. I want to know in which regions you are seeing improvement because what we are hearing is that at least in the Spain and the UK are not improving, they are worsening, and if the better EBITDA for the second half of the year will come say basically from revenues or from increased margins which we use and if you are already witnessing some kind of improvement in July, I know that it is too early, but are you seeing some signs of improvement already?

Rodrigo Trevino

Well, one of the biggest increases in the second half versus the first half of course is Mexico, where we are seeing an impact growth of 7% and growing percent in the second half and we saw a contraction in the first half which is also what supports the recent price increase that we see in Mexico, that we announced in Mexico. Where is it coming from? As Hector, mentioned it is coming primarily from public works and infrastructure, large projects that had been delayed but have now been started. I mean some of you that live in Mexico City are probably acutely aware of the (inaudible) project that is undergoing, reconstruction, that’s a very large project. There are other large projects that have also started and are consuming our products such as the Arco Norte or the Chihuahua repaving project. These projects even in themselves account for a significant contribution for the growth in the second half and so when we estimate the full year growth and the growth in the second half it is based on the actual backlog of projects that we have in the market. Other markets have also been growing in the first half and are expected to continue to grow into the second half, markets in Eastern Europe and elsewhere. So, that’s where the growth is coming from but of course also in the second half part of the growth comes from the strength in the foreign exchange rates. Many of the currencies around the world today are stronger than they were at the beginning of the year or last year and of course that would be an additional source of growth and of course then the contribution in terms of EBITDA growth will also come from the cost saving initiatives that we have implemented not just in the synergies of the Rinker acquisition but also across our operations and corporate overheads, not just in central but also in different regions and countries in which we operate. Those are the sources of growth.

Gonzalo Fernandez – Santander

Okay, that’s very clear Rodrigo and in the electronic records you have shown that your net debt to EBITDA calculation ratio shows $5.4 billion of EBITDA when your guidance is 5.3.

Rodrigo Trevino

Yes, we had to calculate our net debt to EBITDA in accordance with our contractual obligations with our bank governance and for those who need to continue to use inflationary accounting and end of the period exchange rates and when you do that of course there is some inflation around the world and there are stronger currencies today than they were over the last 12-months and so therefore the EBITDA is used to calculate the net debt to EBITDA coverage is greater than the actual nominal US Dollar. For some of the months EBITDA was reduced by just adding the quarters. That’s why we say we expect to get on prevailing exchange rates more than $5.4 billion whereas we expect the nominal reported EBITDA to be about 5.3.

Gonzalo Fernandez – Santander

That really helps. Thank you very much.

Hector Medina

Thank you, Gonzalo.

Operator

And the next question comes from the line of Mr. Nat Bates from JP Morgan. You may proceed.

Nat Bates – JP Morgan

Yes good morning. I had I guess three power questions all related to cost cutting. I’m just trying to get an indication of I think in Monterrey you indicated the Rinker synergies this year would contribute an extra about $180 million. Could you give us some idea of how much of that came in the first half? The second part also relates to similar issue on the SG&A savings that you indicated. Roughly how much of that you got in the first half and then finally could you indicate whether you’re putting any further cost cutting programs in place given the deterioration in the market in the last few months? Thanks.

Hector Medina

Yeah for the US Rinker synergies first half if I remember right was around 80 million in checked price and what we said was that about half of the 400 million would kick in this year, while I’d say with that that would be around 200 million for the full year of synergies between the US and Australia.

Nat Bates – JP Morgan

And you got about 80 in the first half?

Hector Medina

About 80 and I’ll have to confirm that. Let me get back to you on that. About the SG&A as Rodrigo mentioned the SG&A reduction is about 30 million in the first half of the year. That will be the number.

Nat Bates – JP Morgan

Okay.

Hector Medina

Of course further cost cutting in the company, I mean it goes on always. We are always reviewing our operations and trying to improve as much as we can. Of course with the reduction of volumes in some of the markets like the US and Spain as I mentioned in the initial comment we are doing as much as we can in terms of cost containment and cost cutting and resizing our operations accordingly as the situation of demand.

Nat Bates – JP Morgan

I mean when you indicated Hector, the three or four reasons why the H2 would be a lot greater than H1, one of them was the synergies, that’s only an extra 40 million. As you know if we use your number of 80 and the 200, that’s a 120 in the second half. It is 40, I mean this additional 40 is still useful but it’s a relatively small additional contribution. Is it the SG&A that really kicks in, in the second half and if it is can you give me an idea of what that saving in H2 might be on SG&A?

Hector Medina

Oh certainly, the SG&A company wide we expect to be reduced significantly in the second half which is in addition to the synergies that is also being included in EBITDA.

Rodrigo Trevino

But its also important to highlight as you know our business is quite heavy, has heavy seasonality to it and so the second half usually as it is, everything else being equal, is always much stronger than the first half and so if you say why is that’s so? That’s the way our business behaves. We have the winter months in Europe in the first quarter and of course we have better weather conditions across our geographies in the second half, then that always happens. The other major source of growth this year is the strong foreign exchange rates. Currencies are today stronger not just in Europe but also in Columbia, in Mexico and elsewhere and that’s an important source of growth in operating cash flow when we report it in US Dollar terms.

Nat Bates – JP Morgan

Okay and then final question, the $500 million of divestments. I mean obviously you haven’t been announced, so they are not completed yet. I mean what sort of confidence you have in being able to complete that divestment, I mean most of it in the due diligent stage or you’d rather not comment given the uncertainties at this point?

Hector Medina

Well, what I can tell you is that we are quite confident that we can achieve those divestments and of course any additional comment we are not prepared given the state of that although profit is overlying. I would stop with that.

Nat Bates – JP Morgan

Okay and last question, the ones you identified in the press release, can you tell us how much you did? Did they all contribute, three in Hungary, Austria, and the UK?

Hector Medina

Well, I could tell you that the margins in these operations are around lower teens. That’s al I can say.

Nat Bates – JP Morgan

That’s great. That’s perfect, thank you very much.

Hector Medina

You are welcome.

Operator

And the next question comes from the line of Mr. Steve Trent from Citigroup. You may proceed.

Steve Trent – Citigroup

Good morning gentlemen. Most of my questions have been answered at this point but just one or two items. Looking at your comments about importation and import costs supporting prices we are hearing from similar local contacts that they expect maybe similar import prices on the West Coast. Given the terrible tragedy that occurred in China this past May with that big earthquake that they had, may be some of the importation may be gets diverted. I’m wondering what you guys are hearing about that, if anything and my second question relates to Mexico. You mentioned new projects kicking in Bay of Banderas and Jalisco and some other areas, I’m wondering if you could identify one or two big projects which you’ve already been awarded?

Hector Medina

In the case of the trading situation in the pacific coast we have noted that our trading group has indicated that they see some reduction of exports from China due to several things. One of course is the earthquake consequences and we find that lot of cement is being diverted to the reconstruction after the earthquake. So, that’s in fact putting pressure in Pacific for prices and raking up resources with shipping across the Pacific has increased as Rodrigo mentioned in his initial comments. The specific projects that have been awarded to us, we have supply contracts awarded to us. One of course is as Rodrigo already mentioned the (inaudible), then there is that Tepark and Hondo in Toucan and Logesca Dam also in South West Mexico. There are many other relatively small projects like in the South East there is Arco Norte also in Mexico City and then another (inaudible) is another large project where we participating in the supply of concrete.

Steve Trent – Citigroup

Great, as these projects get under way for example, any possibility of at least marginal benefit with respect to taxation, given Calderon administration’s adjustment for tax for this year?

Hector Medina

I would have to forego with that answer Steve. I don’t know if there is any specific resolution in this respect.

Steve Trent – Citigroup

No problem. Thanks very much guys.

Hector Medina

Thank you.

Operator

At this time we have time for one more question from the line of Dan McGoey from Deutsche Bank. You may proceed, sir.

Dan McGoey – Deutsche Bank

Morning, my question is related to fuel and energy costs. You made a pretty material upper revision into unit energy costs for this year. Why don’t you talk a little bit about specifically where are you seeing them revise to substantial revision now in the second quarter? What fuels are specifically driving those increases and just a little bit about the nature of any long-term price contracts and pricing that you have in place? Second question is just on the UK margins continued extremely low in UK I think. You had once provided guidance for at least double digit EBITDA margins this year having solved some of the raw material bottlenecks from last year. Are double digit margins in the UK business out of reach at this point? Thanks.

Hector Medina

Well for energy costs Dan, naturally we hedge some of our fuel costs but not all of them are hedged and some of the spot prices are being tricky in practically all of the fuels and then there is the case of electricity which is also very important and we have to pay spot prices for the portion of our needs. The only case is in Mexico we have been able to practically supply, self supply all those needs but in other markets we have to pay for that. So, that is part of the expected increase in energy costs for our market. Now in the case of the UK the fact is that volumes as we mentioned declined more than we had originally expected and that is affecting our margins further, in spite of the fact that we have solved some of the cost problems. We will keep of course doing as much as we can to reduce costs and restructure our operations in UK so that we can increase our profitability.

Dan McGoey – Deutsche Bank

There is one follow up on the energy cost question. I mean in the US I think the fuel remains primarily coal. So, I guess in part of those energy costs, is it the spot price of coal that you are seeing the most effect from or is it diesel transportation like two or three costs and then specifically what are some of the principle cost minimization strategies in US in particular that you might be putting into place?

Hector Medina

Well it is market wide increase in terms of energy costs and coal has not been the exception and during 2008 the spot price of coal has been hedging and so minimization in this context has made the price coal for our operation higher.

Rodrigo Trevino

We have the cost for the rest of the year and of course we continue with our efforts to switch to alternative fuels when can so as to reduce the input costs of the fuels we use but of course the energy price includes also the fuel, the cost of electricity that we have to pay in the US and that has been an important source of the growth in the cost of energy in particular for the second half of 2008.

Dan McGoey – Deutsche Bank

Any difference in the price of coal that you have marked or hedged for this year?

Rodrigo Trevino

I don’t have that but we can give you a percentage change of rate over 07.

Dan McGoey – Deutsche Bank

Okay, perfect thank you.

Operator

And at this time I’ll pass the call over to Mr. Hector Medina for closing remarks.

Hector Medina

Thank you very much. In closing I’d like to thank you all for your time and attention. We look forward to your continued participation in Cemex. You can contact us directly or visit our website at any time. Thank you and good day to all.

Operator

Thank you, ladies and gentlemen for your participation in today’s call. You may now disconnect.