Cemex Q3 Earnings Call Transcript

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

The cement company plans to sell assets worth $2 billion and reduce its leverage on the balance sheet. During the quarter, free cash flow after maintenance capital expenditures reached $957 million, 1% lower than in the same period of 2007. The company recorded $271 million in currency swaps.

Cemex SAB De CV ((CX))
Q3 2008 Earnings Call Transcript
October 16, 2008 10:00 a.m. ET

Executives

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

Analysts

Marcello Telles – Credit Suisse
Esteban Polidura – Merrill Lynch
Dan McGoey – Deutsche Bank
Gordon Lee – UBS
Gonzalo Fernandez – Santander
Michael Bates – JP Morgan
Steve Trent – Citigroup
Carlos Hermosillo – Vector Casa De Bolsa SA
Jamie Nicholson – Credit Suisse
Garrick Shmoies – Longbow Research
Christopher Buck – Barclays Capital
John Kohler – HSBC Securities

Operator

Good day ladies and gentlemen and welcome to the Cemex third quarter 2008 earnings conference call. My name is Beckie (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 a coordinator will be happy to assist you. Your hosts for today’s call are Mr. Hector Medina Executive Vice President of Planning and Finance and Rodrigo Trevino, Chief Financial Officer. I’d now like to turn the presentation over to Mr. Hector Medina, you may proceed.

Hector Medina – Executive VP of Planning and Finance

Good morning and thank you for joining us for our third-quarter conference call. I will briefly review our third-quarter results and will share with you our estimates for 2008 in light of our performance for the first nine months of the year. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results. We have shortened our prepared remarks today because I know you have many questions about our performance, as well as about our capital structure, maturities, and derivatives strategy. But I hope we touch on all the issues that are important to your understanding of Cemex’s performance. A transcript of our performance will be posted on our website for your convenience. We are living through a period of extraordinary volatility in the financial markets and economic weakness that is spreading throughout the global economy. Both have important consequences for Cemex, which we will discuss today. More importantly, we will also discuss the measures that we are taking in response to the challenges that this environment has presented.

During the quarter, we had slightly better-than-expected EBITDA generation. Our diversified portfolio has partially compensated for the downturn in the United States, Spain, and the United Kingdom and the negative impact from higher energy input costs. The economic environment continues to be difficult, and construction demand has fallen more than we had originally anticipated. During the first nine months of the year, and on a like-to-like basis for the ongoing operations, consolidated domestic cement and ready-mix volume was down 10%, and aggregates volume decreased 11%. However, consolidated prices in U.S.-dollar terms for the first nine months increased by 11% for cement and ready mix, and 12% for aggregates. Our EBITDA during the third quarter reached $1.3 billion, a decrease of 4% versus the same period last year. Adjusting for the exclusion of our Venezuelan operations starting August 1, 2008, to reflect the nationalization of assets in that country, EBITDA fell by 1%.

For the first nine months of the year, and on a like-to-like basis for ongoing operations, our consolidated EBITDA decreased 6% versus the same period last year, reaching $3.6 billion. For the rest of the year, we expect favorable supply-demand dynamics in most of our portfolio allowing us to offset a significant portion of input-cost inflation. In addition, we expect the synergies that we continue to realize from our cost-cutting process to partially offset lower volumes. Given the extreme levels of volatility in the availability of credit and the potential impact on the real economy in several of our markets as well as on the exchange rates in those markets, we are currently unable to provide a more updated full-year guidance for EBITDA and free cash flow for 2008. We are, however, reviewing all of the drivers of our free cash flow generation for 2009 and we are confident that we will be able to achieve a higher conversion rate of EBITDA dollars to free cash flow. This includes an assessment of our maintenance CapEx program, financing costs, working capital investment, and our global tax liability management strategy. As many of you are aware, in mid-September we announced that we have initiated a global cost-cutting initiative. But this one is not business as usual. We are rethinking our existing businesses with the same tools and disciplines that we apply to any new acquisition.

This is a work in progress. So far, we have identified close to $500 million in cost reductions that are under our control. These include a further reduction of our global headcount, capacity closures across the value chain, and an additional reduction in global operating expenses. Over the full year 2008 we expect our global headcount to be reduced by 10%. All of these initiatives will be executed before the end of this year, so that their full impact is realized in 2009. Associated implementation costs are approximately $80 million this year and less than $40 million next year. We expect to take further actions as part of this cost reduction process. Our goal is to reduce the company’s cost structure to a level that is consistent with the decline in our markets. However, it is important to remind you that we manage our business with a long-term view. We are determined not to undermine our strong global franchise that underlies our long term capacity to create value. As part of this process, we are also revising our capital-expenditures program for this year and the next. As you are aware, most of our cement-production and cement-grinding expansions are in their completion stages. As such, our maintenance plus expansion CapEx for next year is expected to be no more than $850 million versus about 2 billion this year.

In addition, we expect to close the sale of our Austrian assets within the fourth quarter, the proceeds of which will be used for further debt reduction. The sale of our assets in Hungary, the smaller of the two entities, will be delayed until next year due to a lengthier antitrust approval process than in Austria. We are pursuing additional initiatives to divest non-core operations, including the previously announced sale of our Australian concrete-pipe business. In total, these assets have an estimated value slightly in excess of $2 billion. Due to confidentiality requirements, we are unable to provide more information today, but will announce additional details when we can. Before I discuss the specifics of our country operations, I am pleased to announce that we will host an analyst meeting in early February 2009 to provide you with an update on our 2009 business plan, financial strategies, and cost-cutting efforts.

Now I would like to discuss the third-quarter performance of our principal markets and our outlook for these markets for 2008. In Mexico, cement volume declined by 5%, and ready-mix volume declined by 3% during the third quarter. The decline reflects lower economic activity, which is affecting informal construction, as well as unfavorable weather conditions during the month of September, which caused a delay in some infrastructure projects. Investment in infrastructure in Mexico increased 7% during the first half of the year. We expect the same trend to continue for the rest of the year. There have been some delays in projects from the National Infrastructure Plan during the third quarter. However, we expect to see more activity in infrastructure during the fourth quarter. In October, some important paving projects related to this plan, including highways and city works, have already begun. The government has also announced a program to promote growth and employment with a total of 65.1 billion pesos to be spent in the short and medium-term. This program is expected to bring an additional 26.7 billion pesos in resources for cement-intensive projects during 2009. During the third quarter, the formal residential sector slowed down, reversing the trend shown during the first half of the year. Financial institutions, which represent about 20% of the total number of mortgages granted in Mexico each year, or about 40% of formal housing investment, reduced the number of credits during the third quarter, reflecting current credit restrictions.

To reinforce housing investment, the CONAVI, or National Housing Council, added 1 billion pesos during September, a 24% increase, to the 4.1 billion pesos granted during the first eight months of 2008. The informal residential sector has been affected by higher construction costs, higher interest rates, lower remittances, and slower economic activity. In light of all of the above, we now see cement and ready-mix volumes declining by about 3% and 7%, respectively, for the full year 2008. EBITDA margin has improved by 180 basis points during the first nine months of the year, despite the increase in input costs. This increase is the result of continuous-improvement initiatives, including fuel substitution, self-generated electricity, and the optimization of our distribution channels. In the United States, cement volume fell 19% during the third quarter. On a like-to-like basis for ongoing operations, ready-mix sales volume declined by 30%, and aggregates volume decreased by 31% during the third quarter versus the same quarter last year. The third quarter like-to-like drop in volume was driven mainly by the continued decline in the residential sector and tighter credit conditions, which have negatively impacted other demand sectors. In addition, adverse weather conditions, primarily in Florida, the Carolinas, Arizona, and Texas, also negatively affected our volumes during the quarter.

Despite these historic declines across our core businesses, prices for most of our products have remained resilient. We announced a $25 per cubic yard price increase for ready mix starting October 1. We are monitoring the situation very closely and, while the prospects appear very positive for many of our markets, it is too early to determine how much of this increase will be realized. The impact of this increase will not be evident, until the first quarter of 2009, as the backlog of projects based on the prior price, gradually expire. In addition, we have announced a nationwide $15 per short ton price increase in cement starting January 1, 2009. The public sector has been more stable, historically speaking, than the residential and the industrial-and-commercial sectors. We have continued to see increases in construction put in place in nominal terms for the public sector, including streets and highways and other public construction. These increases have been reduced, however, and in some instances fully offset, by input-cost inflation. While there is little visibility at this point over the size of the next federal highway program, we are confident that the substantial need for infrastructure investment will drive many states to seek additional funds from their own bond programs, as was recently the case in California and Texas, and through public-private partnerships. There have been ongoing discussions in Congress about a second economic stimulus bill and many lawmakers favor including additional infrastructure spending as a key element of such a program to create new jobs.

We now see volumes in the public sector declining by about 5% in 2008. In 2008, we expect volumes in the industrial-and-commercial sector to decline by approximately 16% because of the decline in new projects, which is expected to continue due to tight credit conditions and the uncertain economic environment. The residential sector continued its decline during the third quarter.

Housing starts, the fundamental driver of cement demand in this sector, decreased by 31% year-to-date August. Our markets have seen an even steeper decline, as high-growth residential markets have decreased at a more rapid pace. We are encouraged by improving affordability of houses, which should lead to higher sales as the economic environment stabilizes. This was anecdotally evidenced by the recent 7.4% increase in pending home sales from July to August. For 2008, we expect the U.S. residential sector to continue its downward trend, declining by about 33% for the country and by about 38% for our markets. In light of the above, we expect that, on a like-to-like basis for ongoing operations, in 2008 our cement volume in the United States will decline by about 19% and we see our ready-mix and aggregates volumes declining by about 29% and 28%, respectively.

In Spain, cement volume during the third quarter decreased by 33%, while ready-mix volume decreased by 26%. Cement consumption in our markets continued to fall at a faster rate than the overall market during the quarter. Many of the regions we are in, which in previous years had shown above-average growth, now have lower construction activity. The residential sector continues to decline. For this year, we expect housing starts to decline by about 60%, to about 250,000. This will translate into a significant decline in cement consumption for the sector. Infrastructure projects continue to be on stand-by. Finished projects are not being replaced with new projects because of liquidity constraints and an increase in building costs. Nonresidential construction is also expected to decline during 2008. Lower volumes and higher energy and transportation costs have partially been offset by more favorable supply-demand dynamics as well as cost-reduction and optimization initiatives.

In light of the above, we estimate that cement and ready-mix volumes will decrease by about 30% during 2008. During the third quarter of 2008, in the United Kingdom cement volume decreased by 19%, ready-mix volume declined by 26%, and aggregates volume decreased by 11%. Adjusting for the divestments completed during 2007, ready-mix volume decreased by 21%. The housing, industrial-and-commercial, and infrastructure sectors continue to be very weak. For 2008, in the United Kingdom we now expect cement volumes to decline by about 19%, ready-mix volume to drop by about 20% on a like-to-like basis, and aggregates volume to decrease by approximately 14%. In France, our ready-mix volume decreased by 1% while our aggregates volumes decreased by 6% during the third quarter versus the comparable period last year. The main driver for volume growth in the country continues to be the public-works sector. The residential and nonresidential sectors are reflecting a decline in building permits. For 2008, we now see ready-mix volume, on a like-to-like basis for ongoing operations, to be flat versus last year.

In Germany, our domestic cement volume increased by 10%during the third quarter versus the comparable period of last year. Supply-demand conditions continue to be favorable. For 2008, the main driver of cement demand will continue to be the non-residential sector and, to a lesser extent, the civil-engineering sector. We expect domestic cement volume in Germany to increase by 4% for the year. In Eastern Europe, namely Poland, Croatia, the Czech Republic, and Latvia, domestic cement volume declined by 11% during the quarter and increased by 6% during the first nine months of 2008.

For the full year 2008, we expect the weighted-average GDP growth rate from the aforementioned countries to come in at about 3.5%. This is lower than was initially expected at the beginning of the year and reflects the impact of credit restraints and inflation. The prospects for the region remain attractive, as cement consumption is expected to increase and supply-demand dynamics should continue to be favorable as the convergence of these countries into the European Union accelerates. In the South and Central America and Caribbean region, on a like-to-like basis for ongoing operations, that is, excluding our Venezuelan operations, cement volume declined 2% during the quarter and increased 2% for the first nine months of the year. In Colombia, our main country in this region, the main drivers of cement demand are middle and high-income housing, as well as non-residential construction.

In Egypt, domestic cement volume increased by 3% during the third quarter with continued favorable supply-demand conditions. The private sector, especially upper and middle income 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 5% and aggregates volume increased by 8% during the third quarter. Supply-demand conditions continue to be favorable. The main drivers of growth in ready-mix and aggregates volumes for 2008 will continue to be the public-works and commercial sectors. For Australia, we expect ready-mix volumes to increase by 7% and aggregates volumes to increase by 3%.

Before I turn the call over to Rodrigo, I would like to stress an important commitment to our shareholders. We continue to strive to sustain our record of disciplined profitable growth in the short, medium, and long-term. However, given the environment in which we are living, our over reaching commitment in the immediate future is to maximize free cash flow from operations and asset disposals and to deploy those resources towards de-leveraging.

Thank you for your time. I will 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. Most of our countries and regions registered EBITDA 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 sector. In the United Kingdom, EBITDA declined due to lower volumes that reflect a general slowdown across all sectors. Our consolidated EBITDA margin remained flat during the third quarter. Lower margins from our U.S. operations were mitigated by better margins in Mexico and other regions, as well as by the contribution from the temporary excess emission allowances sold during the quarter. SG&A expenses as a percentage of sales increased from 17.7% in the third quarter of last year to 19.2% this third quarter due to lower economies of scale resulting from lower volumes and an increase in transportation costs, which were partially mitigated by the cost reduction initiatives we have currently in place.

During the quarter, our free cash flow after maintenance capital expenditures reached $957 million, 1% lower than in the same period of 2007. For the first nine months of the year, free cash flow after maintenance capital expenditures was $2.2 billion, 17% higher than in the same period last year. During the first nine months of the year, our kiln-fuel and electricity costs, on a per-ton-of-cement-produced basis, increased by 20% over the same period of 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 20% for the year, which is lower than our latest expectations. We continue to develop new ways to increase predictability and reduce volatility in our energy costs. We remain committed to increasing the use of alternative fuels in our operations and continue pursuing Clean Development Mechanism projects, such as the wind-driven, 250-megawatt power plant in Mexico. This wind farm, together with the Termoeléctrica del Golfo power plant, will allow us to self-generate the majority of our current power needs in Cemex Mexico.

During the quarter, we sustained a loss on financial instruments of $271 million, due mainly to our peso-dollar cross currency swaps and also to equity derivatives related to Cemex and Axtel shares. We will provide additional details on our exposure management strategy in a minute. Our majority net income decreased by 74% during the quarter, to $200 million, this was due to lower operating income, mainly from our US operations, a drop in the monetary position gain, as inflationary gains are no longer being recognized under Mexican accounting standards during low inflation periods, as well as a foreign exchange loss and a loss on financial instruments, as mentioned earlier.

Prior to discussing the details of our derivative positions, I would like to share with you the drivers behind our exposure management strategy. First, we tap the cheapest markets for financing available to us while diversifying our sources of funding. Second, we minimize the volatility in our free cash flow and capital structure. And third, we achieve the desired level of flexibility while aligning our liability management with our assets and operating cycles. It is very important to note that the notional amount of our derivatives reflect each step of a conversion of a liability to the desired currency and fixed-versus-floating mix. For example, if we are converting peso debt equivalent to $1,000 from peso floating to US dollars fixed, the notional amount of derivatives underlying this transaction may reflect $2,000, 1,000 corresponding to the change from peso floating to US floating, and later 1,000 to the change from US floating to US fixed. Of course, if we collapse some of these transactions into the net final exposure, our notional amount of outstanding derivatives would be substantially lower.

Now I would like to go into each of the specific strategies. First, I will talk about our interest-rate derivatives. As of September 30, we had total of $17.9 billion, of which 14.1 billion is funded in US dollars, either directly or in Mexican pesos or Japanese yen swapped into US dollars, and 3.8 billion in euros. About three quarters of our total debt is on a floating rate basis, but most of it with protection against rising interest rates. The balance is at a fixed rate. In order to achieve the current mix of fixed versus floating, we have entered into a series of plain-vanilla interest-rate swaps. Due to our exposure to LIBOR and EURIBOR and our concern with inter-bank market conditions, we decided before the middle of September, to put in place strategies to minimize exposure to increasing base rates while maintaining the flexibility to benefit from lower rates.

As regards LIBOR, we have put into place: 1) $8.5 billion of caps, floors and collars, at a weighted average LIBOR rate cap of 3.5%. The majority of our interest-rate caps are from June 2009 to June 2011. 2) $3 billion in interest-rate locks at an average LIBOR rate of 3%, from December 2008 to June 2009. With respect to EURIBOR, we have $2.4 billion of caps at an average EURIBOR rate of 4.2%. We also have some yen interest-rate locks for about 81 million US-dollar equivalent mainly for coupons falling during 2010 and 2011. As of October 14, the mark to market on our total interest-rate derivatives is positive at $194 million.

Second, under our foreign-exchange derivatives, we include our capital hedge program and cross-currency swaps to achieve our desired liability management strategy. Our capital hedge program is designed to hedge the net asset exposure in our foreign subsidiaries. Since we have a net long dollar and euro-denominated asset positions, this program is achieved by buying pesos forward against US dollars and euros. It is important to note that this hedging program covers only a fraction of our actual net-asset exposure in our foreign-owned subsidiaries. As of September 30, the notional amount under our capital hedge program was $3.5 billion, down from 3.7 billion as of June 30, and 5.8 billion as of March 31. Since September 30, we have completely closed these hedges, lowering the risk of future margin calls. In light of the tightness in the global credit markets, we are not likely to enter into any capital hedging going forward.

During the past twelve months, the positive cash contribution from our capital hedge program has been $349 million. Over the past ten years, the cumulative positive cash contributions have been significantly higher than the existing negative mark to market, which will not increase going forward as we have closed our entire position. Our cross-currency swaps are the other component of our foreign exchange derivatives. Here, we are primarily borrowing from markets with the most competitive cost of funding on an all-in basis in the desired currency, for example, we borrow Mexican peso loans converted to US-dollar funding. Under these derivatives, the fluctuation of the mark to market has no bearing on the US-dollar net debt outstanding. As the mark to market becomes negative, the dollar amount required to pay the underlying peso obligations will be reduced by an equal amount of the negative mark to market, thus maintaining net debt in US-dollar terms unchanged.

For more than 10 years, we have adopted a strategy of funding ourselves in dollars and euros in line with our investments. Since 2000, our investments in the United States of America exceeded our US-dollar debt. We also hold significant investments in the Euro region with a total value in excess of our euro debt. In light of the underperformance of our US operations, and, given the deterioration of the ratio of operating cash flow to debt in US dollars, we have decided to decrease our funding in US dollars. We will look for all the opportunities to reduce US dollar debt from all sources available for us going forward and until our US businesses have recovered. The remainder of our notional amounts under foreign-exchange derivatives as of September 30 corresponds to cross-currency transaction related a US-dollar liability swapped to euros, which has since September 30th been closed out since then with a positive mark to market of about $25 million, and cross-currency swaps entered into to eliminate the exposure to yen interest and yen-US dollar foreign-exchange rates for coupons related to our bank perpetual facility and our perpetual debentures for most coupons through 2010 and one coupon beyond that year.

As of October 14, the mark to market of our total foreign-exchange derivates was negative $501 million. Third, we have equity derivatives, with a notional of $963 million as of September 30, related to shares of Cemex and Axtel. Most of the exposure under these derivatives has been covered through margins already posted and we have taken actions to mitigate the risk of future margin calls.


We have three major types of equity derivatives, the largest of which relates to a $500-million equity-linked, 3-year financing. Under this loan, the cost of financing varies between 0% and 11.2% depending on the price of the Cemex stocks at maturity in 2011. At a stock price below $22.18 for ADR, our cost is capped. Because we are currently trading significantly below that level, there is very limited risk of additional margin calls. $257 million is related to the sale of our Axtel shares earlier this year to our banks. Given the fact that the final sale to the market has not yet occurred, we retain both the upside and the downside on these shares. Considering that Axtel shares have dropped from $2.17 to $0.71 per CPO, we have limited further risk of margin calls. The remainder relates to the hedges put into place against the balance of our executive stock option program. We have secured financing and hold cash on hand sufficient to meet all future margin calls on these transactions. The complete details of all of these transactions have been fully disclosed and can be found in our most recent 20F filing status.

As of October 14, the mark to market of our total equity derivates was negative $404 million. Looking at our capital structure, our interest coverage for the trailing twelve months through September increased to 4.8 times from 4.4 times last quarter i e June 30th of this year. The improvement in the interest coverage is the result of the lower interest expense given the floating rate nature of our debt. Our leverage ratio, as measured by net debt to trailing-twelve-month EBITDA using inflationary accounting, end-of-the period convenience translation, and the addition of financial income to the denominator in accordance with our contractual obligations, decreased to 3.4 times from 3.5 times at the end of the second quarter. We reduced net debt by $1.2 billion during the third quarter, in part by applying realized gains of $262 million from our capital-hedge program, and also from positive foreign exchange conversion effects for $548 million resulting primarily from a weaker euro. Going forward, we expect to use more of our free cash flow and asset-divestiture proceeds to pay down debt.

During the quarter we rolled over, under our Certificados Bursátiles program, issuances of short-term notes for a total amount of 1.7 billion pesos. The notes issued were swapped to US dollars at a weighted average rate of close to LIBOR. As of October 14, we had cash on hand of about $945 million, out of which $385 million has been posted as margin with banks, to support our derivatives. There is an additional $70-million cash collateral which is not part of our cash on hand and which has been posted as margins with our banks. For next year, our most important debt maturity is the $3-billion syndicated loan facility at Cemex España related to the Rinker acquisition. It will not come due until December of 2009. The remainder of our maturities are spread out throughout the year. We have already initiated contact with the Mandated Lead Arrangers in that facility and have received close to $1 billion of commitments and $300 million of positive indications to extend the facility out to December 2010. We have indicated to the banks that we are willing to improve the profitability on this facility through better pricing. We expect to extend this offer shortly to all the banks in the syndicate. The extension of the maturity to 2010 is justified by the low level of maturities in that year. We expect to convene a syndicate bank meeting soon and we look forward to maintaining the support of our banks. Our priorities in the short-term will continue to be to regain our financial flexibility. To do this, we will significantly reduce our capital-expenditure programs both for expansion and for maintenance capital expenditures. We will continue to implement our global cost-cutting initiatives, and we will use as much of our free cash flow as possible to reduce debt. In addition to all of this, we have expanded the list of assets that have been identified for disposals, as we intend to regain our financial flexibility as soon as possible. Finally, and as always, I have been asked to remind you that any forward-looking statements we make here today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control.

Thank you for your attention and now we will be happy to take your questions.

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 and your first question comes from the line of Marcello Telles of Credit Suisse. You may proceed.

Marcello Telles – Credit Suisse

Hi, good morning gentlemen. I have a couple of questions. The first one regarding your derivatives strategy, I mean you mentioned in the press release that you have about $455 million in cash that is being held as collateral by banks. This will be related to the loss in derivatives that you had. I was wondering if that money you may not have a flat estimate, if that is going to jeopardize your ability to meet some of your like short-term financing needs. So, if you could elaborate on that that’ll be great and the other point is given that the deterioration in the operating environment in general for the market, you could consider a capital increase at this stage in order to improve your liquidity position and your net debt to EBITDA ratios and lastly you mentioned in your press release you’d be willing to do light impairment testing on your assets. So, I was wondering if you’d have preliminary figure of what potential write offs we could expect from that analysis? Thank you.

Rodrigo Trevino

Yeah, let me take the first question, Hector.

Hector Medina

Yeah, sure.

Rodrigo Trevino

We have close to $600 million cash on hand in addition to all the cash on hand that we’ve posted with our banks on margins. So, we have sufficient liquidity for the short-term and we continue to generate cash from our operations and so yes, we have what we need to meet all of our obligations, Marcello.

Marcello Telles -- Credit Suisse

Perfect, thank you.

Hector Medina

And on the second question, yes as we had pointed in our remarks initially, the operating environment is really challenging and for some of our main markets and we also announced that we are doing a total review of all our operations. As we mentioned this is as if we were acquiring all of this as if we hold the same discipline and things we do when we do that when we integrate a new acquisition and with respect to this cost cutting efforts as I mentioned about $500 million up to now of cost cutting savings and together with that of course, which is improving our operation environment in terms of our efficiencies, we are also as we mentioned, we are also as Rodrigo mentioned increasing the list of standard asset disposals so that we can face this challenging environment. That’s what we are doing. We think that this what we have to do to regain our financial flexibility as soon as we can, and for the impairment testing we are normally doing this up to the month of November and we should be able to report to you as soon as possible when we finish this process.

Marcello Telles -- Credit Suisse

Perfect and just a follow up on this impairment question, if in case you arrive at a number, I mean whether that number is negative or whatever the result is, would you be booking that into your income statement or your equity. Is that just an exercise or does it actually go through your financials?

Hector Medina

We will see whenever we get to that point, what is the appropriate action to take. As of now we have to finish first with this to see what happens, but whatever it is, it will not be a cash impact of course.

Marcello Telles -- Credit Suisse

Sure. Thank you very much.

Hector Medina

Thank you, Marcello.

Operator

And your next question comes from the line of Esteban Polidura of Merrill Lynch. You may proceed.

Esteban Polidura – Merrill Lynch

Thank you. Good morning Hector and Rodrigo. Most of my questions have been answered but I’d like to ask you how likely you see a scenario in which volumes in Mexico decrease next year?

Hector Medina

Well we have not given any guidance for next year and we are of course in a very volatile environment. We are assessing the impact of the new measures taken by the Mexican government to promote growth and employment and to see whether that is going to do for the Mexican market to grow. We will be much more able to give you guidance on these issues and all the relevant issues of our operating environment early February or maybe earlier if we can, and Rodrigo anything?

Rodrigo Trevino

If I may add, we are very encouraged by some of the actions we have seen taken by the government around the world. We think it is likely that as we enter into a recession as that’s where we are now, it is reasonable to expect that governments will take action to increase spending in infrastructure and public works and of course these kinds of actions taken by governments around the world are the actions that create jobs that have a multiplier effect in the economy. We have already seen announcements in the United States and in Mexico and we’d expect if the situation worsens macro economically that the public works and infrastructure sector that consumes our products which by the way is the largest of the three sectors that consume our products, should show signs of growth.

Esteban Polidura – Merrill Lynch

Great, thank you.

Hector Medina

Thank you.

Operator

And your next question comes from the line of Dan McGoey of Deutsche Bank. You may proceed.

Dan McGoey -- Deutsche Bank

Good morning gentlemen, I have a question on the derivatives. Rodrigo I think you mentioned some of the areas of potential risks from margin costs. One of the areas I think probably that still sees some of the high volatility is foreign exchange. While the gains on the depreciation of the debts has been offset by the derivatives, I’m wondering if you could talk a little about the risk of not having a cash flow match meaning that you’ll have to pull additional collateral for the FX derivative losses and whether or not where those instruments were held and if they are related to the debt may provide you some greater restraints of not having to put cash up because of those losses and I guess just to expand on that also a little bit if you could mention how much credit lines you have with institutions that hold your derivatives and whether or not you are thinking of strategies that Hector mentioned to include your thinking the financial strategy and specifically to the derivatives?

Rodrigo Trevino

Yeah, that’s a very good question and let me take the first part of the question. Of the remainder of the exposures we had as of October 14th and of course September 30th, an important portion was related to the cross currency written derivatives related to our Peso debt.. Since then, we have actually closed more than 70% of that position. In essence we have reduced our debt and I am talking over the last three days. So as we speak what was happening of course there was an auction this morning and we participated and so we have in essence we have reduced our debt and increased the proportion of Peso debt on our balance sheet. Now, why have we done that? Well on the one part you point out and it is true that had we maintained it the way it was, there was a significant risk of margin costs and so we have eliminated that risk on more than 70% of that exposure and the reason why we have decided to reduce dollar debt is because our US dollar businesses which as we have mentioned, we have invested over $17 billion into the US over the last 7 years, and on a pro forma basis at the peak perhaps these businesses generated significantly more than $2 billion, probably more $2.4 billion, are generating significantly less than that now, and so yes, you are right. Now, as whereas before there wasn’t a mismatch, today we do have a mismatch in the currencies in which we borrow and we have decided to reduce the percentage of dollar debt and increase the percentage of Peso debt and of course we do have a large business in Mexico that supports that debt, and so yes, there is a change going forward.

Everybody realizes that we are living in turbulent times. The volatility we have seen in the last few weeks was unheard of, was totally unexpected, caught everybody by surprise and forces everybody to adapt to the new environment. One of the consequences though it is likely we are not going to be hedging our net asset exposures or receipts. Why, well again even though it has generated a net positive contribution over the long-term, it does have a high volatility and does require a significant line against that volatility from institutions and lets face it. In today’s market conditions, it is difficult to obtain incremental facilities from banks. In our case we do generate strong free cash flows. I think it is important to highlight that for next year a significant greater proportion of those free cash flows will be available for us to pay down debt. As Hector Medina mentioned, our maintenance CapEx plus expansion CapEx which this year has been about $2 billion, for next year we expect it to go down to below $850 million. Clearly that releases a lot more of our free cash flow to pay down debts and we do have a longer list of assets that we have put up for sales. And so yes, we do expect that we will sell some of these assets and we will use some of that free cash flow to reduce debt. So, we need incremental lines of credit going forward, not really. We intend to pay them down in an orderly fashion and we need to because we need to recover our financial flexibility and let us face it. Today our net debt to EBITDA is significantly above our steady state targets, and so we are taking action to do that, and we will continue to take aggressive actions to do that. Of course we have been meeting with our major financial institutions. We will continue to meet with them regularly. We will call for a general bank meeting soon and we expect to continue to maintain the support from our banks because we do generate strong free cash flows and we do have a plan to reduce debt. In fact our net debt today is lower that what we expected it to be at this time, when we bought Rinker, more than a year ago. And so we have made progress in recovering our financial flexibility but of course our ratios don’t reflect it because our trailing 12-month EBITDA has not grown. In fact it is in line with what’s happening in the world, has gone down.

Dan McGoey -- Deutsche Bank

Great thanks. Sorry I just need a clarification. Including the action in the last couple of days can you provide an updated notional amount on the FX derivatives, or the foreign exchange derivatives?

Rodrigo Trevino

I believe the exposure to Peso-Dollar where we swap the Peso debt into Dollar debt today after what we have done is probably something in the range of $800 million. It is definitely less than a billion. It is in that ball park and so of course the exposure to that is significantly less than what we had even a couple of weeks ago.

Dan McGoey -- Deutsche Bank

Thank you.

Rodrigo Trevino

Thank you.

Hector Medina

Thank you.

Operator

And your next question comes from the line of Gordon Lee of UBS. You may proceed.

Gordon Lee – UBS

Hi good morning. I am just wondering on the derivatives, a couple of questions. The first question is under the terms of the derivatives that you still have outstanding, does that debt really downgrade or the ones that happened earlier in the week, or if one were to happen below investment grade, does that have any implications for the terms of the derivatives for any margin calls etc and the second question is just on the cash balance. You mentioned Rodrigo that your existing cash available is $985 million. At the end of the third quarter I see that it was $1.4 billion. I was wondering if you could just explain what would happen to that cash during this timeframe and whether you’ll still have any untapped committed credit facility available should you need them? Thank you.

Rodrigo Trevino

Yes there has been no impact on either the cost of our debt or the lines available to us as a result of the rating actions that have taken place. Of the cash available to us at the end of September, part of it was used to make margin calls, part of it was used to pay suppliers, part of it was used to pay Certificados Bursátiles in Mexico that became due. Part of that cash is cash in transit. Every time you have your cash balance you don’t necessarily have access to all of that cash and of course you have cash which is tied up in the operations and is not freely available. So, that’s what explains the difference between September and October 14th.

Gordon Lee – UBS

Perfect and if I could just…

Rodrigo Trevino

Yes, we still have working capital facilities. In addition to the excess cash we have on hand and we believe we have decision flexibility to meet all of our obligations.

Gordon Lee – UBS

Perfect and if I could just follow up on those questions, on the ratings issue I was wondering if you have any exposure or again if the terms of the derivatives are affected by any future rate cuts, not the ones that happened last week necessarily but if you were to have a rating cut that would take your derivatives below investment grade, does that have any implications for the terms of the derivatives and just a follow up question on the effect of sort of swapping out of dollar debts back into the Peso debt that you’ve done, I was wondering if you could give us a sense of how that affects your cost of debt? Just by having done that what does it say in the third quarter, I believe it was around 5% and what it would be now given the changes to the hedge book that you have done in the past few days?

Rodrigo Trevino

Well, I don’t have the exact figures but Peso debt has clearly a higher interest rate than dollar debt, so yes for those portions of the debt the cost of borrowings will go up but of course if the Peso depreciates then the principal may be less. If the Peso appreciates, well the Peso debt doesn’t change and we do have the operations in Mexico to support it. Related to the future ratings actions by the rating agencies I’m not going to sit here and speculate about that. I think in some of our derivatives is that there is a significant reduction in thresholds, once we get to the levels of BB minus but of course we are three levels beyond that. We are at BBB minus and in any event, we are not going to have many derivatives with exposure going forward any way. So, it is really a non-issue.

Gordon Lee – UBS

Great, thank you very much.

Hector Medina

Thank you, Gordon.

Operator

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

Gonzalo Fernandez – Santander

Okay, good morning Hector and Rodrigo. Two quick questions, one on what is the balancing expansions of capacity in Mexico and when are you planning to open that additional capacity which is the amount that you need to finish your expansion program and the second would be, considering lower expansion CapEx next year, do you expect that to have any effect on your tax structuring?

Hector Medina

The first one of the backup plan we expect it to come in line around March next year and the Iraqi expansion is already in line and it is already finished and it is already there. In terms of the expansion CapEx for next year as we mentioned, together with the maintenance CapEx, there is a significant reduction and that is because only those projects that have already started and are finishing by early next year or already finishing this year, are being continued. We don’t expect that to affect our tax situation for next year in the case of Mexico at least from the perspective today. We will of course give you more guidance at the beginning of the year.

Gonzalo Fernandez – Santander

Right and if I may follow on, do you think that with the current weaker volumes and then expositions of the construction, do these expansions lose potential with any additional capacity from your competitors is going to affect prices in Mexico?

Hector Medina

Well, the rationality of the industry has been tested again and again, not only in Mexico and so our expectation is that in these situations which are of course challenging, in our case we will review our capacity on the Mexico and all the markets where we are to rationalize it and make it more efficient as possible. That means that some of the less efficient capacity might be out of line for a while, while the market recovers, and so that capacity rationalization I think is a matter of normal practice of the industry. I think that will take care of the capacity pressures.

Gonzalo Fernandez – Santander

Okay, that’s very clear, thank you, Hector.

Hector Medina

Thank you, Gonzalo.

Operator

And your next question comes from the line of Mike Bates of JP Morgan. You may proceed.

Michael Bates – JP Morgan

Yeah, good morning, I had a number of questions but they should all be relatively short. The first one is could you give us some idea of how that $500 million of cost savings fits by geography?

Hector Medina

We’ll be able to do that in lot of detail as soon as possible but at the latest in our early February meeting, because as I mentioned work in progress and of course we won’t limit it to $500. You’ll find more. There will be more.

Michael Bates – JP Morgan

Okay, the second thing is you put out a press release on Austria and Hungary giving the total disposal of proceeds, two questions to that if I could. Could you indicate roughly what proportion of that and I think it was something like 300 million euros, what proportion was Austria and did you take anything out to cover the exchange rate in terms of euro-dollar to cover that transaction?

Hector Medina

We got about 310 million euros as the price of this transaction. About 240 is Austria. About 70 is Hungary and I don’t think we need to...

Rodrigo Trevino

We don’t have the full year Mike because what we do to the Euro proceeds we pay Euro debt, because clearly we have that Euro debt to support the euro investments which are now being diminished.

Michael Bates – JP Morgan

Okay thank you. My next question cutting CapEx to about 850 I saw in the past that was pretty close to your estimates of maintenance CapEx. So, maybe two parts to this, could you just explain what you think of real minimum level of maintenance CapEx is now for Cemex and secondly have you actually cancelled any cement projects or is it just a case of not starting any new plants?

Hector Medina

Well, the first question we will be able to give you more ideas at that level of maintenance CapEx when we see how this will affect our capacity utilization, I mean the whole volume situation affects our capacity utilization world-wide, and on the new plants we have said that we will only finish those investments where we have an early 09 finishing and that will contribute to our EBITDA. What I could say is that we’ve not started any new projects and we will not start any new projects in ’09 essentially.

Michael Bates – JP Morgan

Okay, thank you very much.

Hector Medina

Thank you.

Operator

And your next question comes from the line of Steve Trent of Citi. You may proceed.

Steve Trent – Citigroup

Good morning gentlemen.

Hector Medina

Good morning.

Steve Trent – Citigroup

Most of my questions have been answered but I got cut off for part of the call and so I apologize if I’m repeating anything. As a follow up to Mike’s question just to make sure the expansion CapEx that you guys have mentioned in various places about expansion Iraqi, Panama, Latvia, the UAE etc can we assume that these projects will be complete next year?

Hector Medina

Yes Steve, all of them will be completed. They all contribute significantly to our operations. So, I’d think that makes economic sense. In the case of Panama of course is certainly very important for us as that volume is already sold.

Steve Trent – Citigroup

Okay great and just to make sure I didn’t miss anything, may I ask you at this point are you maintaining your full year EBITDA guidance for 2008?

Hector Medina

Well we mentioned in the initial remark the volatility of both volumes and financial markets make it very difficult for us to guide for this quarter EBITDA and that of course affects the full year EBITDA.

Steve Trent – Citigroup

Fair enough. That was the part of the call I wasn’t able to get on. That’s all for me then. Thanks you very much.

Hector Medina

Thank you, Steve.

Operator

And your next question comes from the line of Carlos Hermosillo of Vector. You may proceed.

Carlos Hermosillo – Vector Casa De Bolsa SA

Good morning Hector and Rodrigo. Two quick questions regarding your mission allowances you said that you used 116 million as a cross grade. I’m wondering if you can elaborate on how was that allocation between Spain and others and if this is a one time event? Thank you.

Hector Medina

Well this mission allowances come from proceeds. Of course come from what we estimate we will not need for this year as volumes have declined significantly all throughout the cement industry in Europe and Spain and so that’s where they come from but we cannot elaborate on the breakdown between countries. Well it’s a 116 million for this quarter that we have told. It is something we have to estimate as we go on and so we would be estimating what we would do for volumes in the next quarter and then that’s something that we have to keep looking at and making reference to the boys that we see going forward.

Carlos Hermosillo – Vector Casa De Bolsa SA

Okay thank you.

Hector Medina

Thank you.

Operator

And your next question comes from the line of Jamie Nicholson of Credit Suisse. You may proceed.

Jamie Nicholson – Credit Suisse

Hi thanks for the call. I just have a question on your tax relief that you received on September 9th. When will you know what the amount of tax you would have to pay and are there any disagreements that you have with the government on what that tax obligation is? Thanks.

Hector Medina

We don’t have an estimation. We are currently in conversations with the authorities on that issue. So, we will be able to give you any information when we get to our final estimation.

Jamie Nicholson – Credit Suisse

Do you have any…your initial press release said that you did not think it would be material but additional amounts that may be lead to a different conclusion. Have you done any additional amounts as to what the potential obligation might be and which is to say that it is not material or is that still uncertain?

Hector Medina

We still believe that it will not be material but we are currently doing those analyses. So, if in the end it becomes immaterial we will of course inform that.

Jamie Nicholson – Credit Suisse

Okay, thank you and then just a clarification about your cash collaterals and your cash positions, the 366 million loss resulting from the closure of your FX derivatives, was that a cash loss? In other words, did that contribute to your cash reduction and then additionally if you have 455 million of cash collateral based on the 7/11 mark-to-market loss, that seems like a high percentage of margins? What margins do you have to put? What percent, can you give us a little guidance on how the margin estimation works? Thanks.

Rodrigo Trevino

Well it does vary a lot from institution to institution and we do have therefore rational amount with each institution and it depends whether it is a diversified portfolio. The derivatives that we have with certain institutions on June 1 are in derivative position. For example there is one institution that only have one derivative position which is the Axtel shares and so of course as the Axtel shares drop we receive further margin calls. The other part of the question I’m sorry was…what was the first part of the question?

Jamie Nicholson – Credit Suisse

Yeah, you have in your release said you 366 million of your 7/11 mark-to-market losses as closing out of the FX derivatives, I was wanting to know if that was cash?

Rodrigo Trevino

Yeah, it is important to mention that in the case of the capital hedge program for example, over the last 12-months we have taken cash out of those derivative positions to reduce debt I think to the tune of close to $300 million. So yes they are quarters, there are periods of time and periods of time when we take cash out and periods of time when we will pay it back. Now, currently the mark-to-market is still there and when we pay that mark-to-market over time, then yes the cash will flow we pay it, as we want to pay down debt faster for example.

Jamie Nicholson – Credit Suisse

Okay great and one final question. What are your fourth quarter debt service requirements for principals and interest? Thank you.

Rodrigo Trevino

Well during the fourth quarter in Mexico we have approximately I believe the number is $300 million equivalent of maturities in the domestic capital markets through commercial paper and Certificados Bursátiles. The balance is with banks bilateral facilities, working capital facilities and we have maintained support from our banks till now and we expect that we will continue to maintain support from our banks. We are meeting with them regularly and will continue to meet with them next week and the following week and we will give you an update on a quarterly basis as we expect to maintain these facilities in place.

Jamie Nicholson – Credit Suisse

So, the 300 million of maturities….

Rodrigo Trevino

Yeah, the concern that we have in the very short-term, in the immediate short-term, is the domestic capital market. We have seen actions taken by governments around the world to give comfort. For example in the US they assured us with a commercial paper program. In Mexico we have been rolling our commercial paper program. In fact last Wednesday, Wednesday of last week we rolled our commercial paper program. However, we are concerned that going forward, there maybe concerns in the market with the volatility at large and that’s why I mentioned those maturities if they come due and the market has not stabilized, and there is no other mechanism of support to support the market, we may have to pay that and yes we do generate free cash flow and we expect to sell assets and we have cash on hand to meet those obligations.

Jamie Nicholson – Credit Suisse

Okay thank you very much.

Hector Medina

Thank you.

Rodrigo Trevino

Thank you.

Operator

And your next question comes from the line of Garrick Shmoies of Longbow Research. You may proceed.

Garrick Shmoies – Longbow Research

Hi, good morning, thanks for taking my call. Just one quick question, I was wondering if you can account for a little bit of detail in the US. Just recently where you are seeing the price weakness and maybe if there are pockets of strength where you are actually seeing some price increases in the second half of the year in the US? Thank you.

Hector Medina

There is as we mentioned price increases announced in the US not us but part of other companies in the industry but it is too early to tell whether those margins for cement and ready mix will hold. So, that’s what I can tell you about pricing. I don’t think I got the second part of the question. I couldn’t hear it.

Garrick Shmoies – Longbow Research

The second part of the question was related to the price increases which you answered, thank you. The first half of the question was the prices in the US down by about 2%. I was just wondering if you could break it out geographically where you are seeing the lowest weakness in pricing.

Hector Medina

I don’t have the original break down but I would certainly think that those are I mean geographic mixes and part of the mix is FX. 2% increase, we don’t see as very significant.

Garrick Shmoies – Longbow Research

Okay, thank you very much.

Hector Medina

Thank you.

Operator

And your next question comes from the line of Christopher Buck of Barclays Capital. You may proceed.

Christopher Buck – Barclays Capital

Good morning. You have answered many of my questions already but I have a follow up on Jamie’s question. You had about 3.8 billion in short-term debt as of the end of the third quarter. You walked us through about 300 million that are coming due in the fourth quarter and I’m just wondering if you can go through the rest of the 12-month period and let us know when those maturities are coming due?

Rodrigo Trevino

Well most of it is bank debt bilateral facilities that we have. We also have been paying some of the specially Certificados Bursátiles that have matured. We mentioned we have some further Certificados Bursátiles towards the end of the year. We don’t have anything in the international capital market that is coming due in the very short-term and so most of our refinancing need to be well with the bank market and we are in conversations with our banks.

Christopher Buck – Barclays Capital

Okay so that’s shifted the 3 billion in December but also the 3.8 billion….

Rodrigo Trevino

The 3 billion is December of ’09.

Christopher Buck – Barclays Capital

Right, and so that’s not half of that 3.8 billion short-term, as of third quarter?

Rodrigo Trevino

No we can get into the details with you later on but I don’t have the details in front of me right now but I know that with the capital market we don’t have any major maturities. The only ones are in the Mexican capital markets. I mentioned the amounts and the rest is with the banks and we maintain good relations with the banks and we maintain support.

Christopher Buck – Barclays Capital

Okay great and you had also mentioned that there are some additional debt facilities available to draw down but I missed it. I don’t if you gave an amount for what is available?

Rodrigo Trevino

No, these are working capital facilities that we have and we have of course drawn many of our facilities and we have cash on hand and of course to the extent that we can we will negotiate for additional facilities going forward and we are in conversations with different institutions and there are bridges we could do to asset sales, there are funding we can do to potential tail end lease backed transactions and yes we are looking at all different options in order to have as much liquidity as we think we will need against any scenario that may develop.

Christopher Buck – Barclays Capital

Okay great and just a follow up on the asset sales issue, is there any more guidance you can give us and clearly asset values have come down pretty significantly. It seems like you have locked up this one year PNBO, so, any more news in terms of Venezuela or other parts of asset sales?

Hector Medina

Other than that is expressed in the press release and what I said in the remarks there is no additional information but as soon as we can share with you we will.

Christopher Buck – Barclays Capital

Okay thanks very much.

Hector Medina

Thank you.

Operator

We have time for one last question and that question comes from the line of John Kohler of HSBC Securities. You may proceed.

John Kohler – HSBC Securities

Good morning gentlemen, thanks for the call, just a quick follow on to a couple of the bank loan questions that have been asked here specifically as it relates to the bank ones. Are there any debt rating triggers in those bank facilities that you currently have outstanding that might require the acceleration of the principal amount if the rating agencies were to further downgrade your debt ratings?

Rodrigo Trevino

No we don’t have any rating triggers. We do have pricing grids and so we do have the intention to pay down debts and de-leverage to lower the spread on our loans. So, we don’t have any rating triggers. We think that’s really toxic and I think we did at one point in time more than five years ago, had some rating triggers in some of our derivatives is that we got eliminated those long time ago.

John Kohler – HSBC Securities

Great thank you and one other quick question, in your comment about in constant negotiations with the banks on a regular basis, have you gotten any feeling from the banks at all, any interest that they maybe interested in trying to improve their position in the capital structure by securing the bank lines.

Rodrigo Trevino

Well I mean one of the things we did mention in our opening remark is that we have already gone through the Mandated Lead Arrangers in our acquisition facility for Rinker and we have actually already obtained commitments for a billion dollars to extend the maturity of December of next year into 2010 and in exchange for that the only thing we are looking at is pricing. We are improving the profitability for them. We are improving the debt maturity profile for us and of course we are reducing the overall risk for the benefit of all banks that particip