CEMEX, S.A.B. de C.V.'s Management Hosts CEMEX Transactions Conference (Transcript)

| About: Cemex, S.A.B. (CX)

Cemex, S.A.B. de C.V. (NYSE:CX)

CEMEX Transactions Conference

August 28, 2013 10:00 am ET

Executives

Maher Al-Haffar

Juan Pablo San Agustín Rubio - Executive Vice President for Strategic Planning and New Business Development

Analysts

Vanessa Quiroga - Crédit Suisse AG, Research Division

Carlos Peyrelongue - BofA Merrill Lynch, Research Division

Adrian E. Huerta - JP Morgan Chase & Co, Research Division

Michael Betts - Jefferies LLC, Research Division

Yassine Touahri - Exane BNP Paribas, Research Division

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Kenneth Williamson

Operator

Good morning. Welcome to the CEMEX Conference Call and Webcast. My name is Lorraine, and I will be your operator for today. [Operator Instructions] Our host for today are Juan Pablo San Agustín, EVP of Strategic Planning and New Business Development; and Maher Al-Haffar, VP, Corporate Communication, Public Affairs and Investor Relations.

And now, I will now turn the conference over to Maher Al-Haffar. Please proceed.

Maher Al-Haffar

Good day to all. I'm Maher Al-Haffar, and I would like to thank you for joining us in this teleconference and webcast to discuss a series of transactions CEMEX will conduct to strengthen its strategic footprint in Europe.

This morning, we announced these transactions, which include: first, CEMEX's acquisition of Holcim's operations in the Czech Republic; second, CEMEX's divestiture of its assets in the western part of Germany to Holcim; and third, the combination of the operations of CEMEX and Holcim in Spain.

During this presentation, we will explain why we think these transactions will create value for our shareholders and our customers. Juan Pablo will outline the details of each transaction, and then we will take your questions. I would like to remind everybody that this call is to address the transactions at hand. Any questions that you may have about CEMEX or any other of our operations, we would suggest that you hold off and we can address them separately.

Before we start, our lawyers have asked us to remind you that the information that we are about to present may contain forward-looking information and judgments made in good faith and based on information we have available today, which could change in the future. We therefore urge you to consider our full disclaimer as you evaluate our presentation.

And now, I will turn the call over to Juan Pablo San Agustín. Juan Pablo?

Juan Pablo San Agustín Rubio

Thank you, Maher. Hello, everyone. Good morning to those of you in the Americas, and good afternoon to those of you here in Europe. As some of you may recall, last February, during our CEMEX Day, I discussed to you our holistic approach to value creation. And if you'll remember, it has mainly 2 pillars. Under the first pillar, which is the operational side, we have been proactively improving our operating performance by focusing mainly on pricing, but also on our value-added products and services and maintaining our profitability [ph]. And in addition to improving our operating performance, we have stated that we will focus our efforts on optimizing and improving our portfolio.

So let me summarize what has happened over the past 2 years. We have proactively managed our asset base with different initiatives, including the initial public offering of CEMEX Latam Holdings, which happened at the end of last year, which resulted in net profits of close to $1 billion for CEMEX. Also, we have divested about $400 million worth of nonoperating assets which have significantly derisked our balance sheet. Also, during our CEMEX Day, we said that we will look for ways to fine tune our portfolio, and that is precisely what this transaction is about. We have stated, if you recall, our interaction [ph] will be through at least transactions with industry players, the one we are discussing today.

So today, we're announcing an important step in our efforts to optimize our asset base and improve our returns on capital. With this transaction, we will strengthen our strategic footprint in Europe and increase our productivity and extract synergies that will result in recurring improvement in our operating EBITDA of at least $30 million, which will further enhance our total capital employed. And as you also may remember, we expect CEMEX's return on capital employed to exceed 10% by 2016.

Now let me summarize the details of the 3 [ph] transactions. First, CEMEX will acquire all of Holcim's assets in the Czech Republic, including a cement plant with a clinker production of close to 1 million tons, plus a network of ready-mix plants and aggregate quarries. Second, we will divest our operating assets in the western part of Germany to Holcim. These assets include a cement plant of similar clinker capacity to the one we are acquiring in Czech Republic, plus 2 grinding mills and a network of ready-mix plants and aggregate quarries. Third, Holcim will contribute to CEMEX all of its operating assets in Spain, which means that CEMEX and Holcim will combine all of our cement, ready-mix and aggregates operations in this country. In this combined entity, we will have a 75% controlling interest for the combined assets, which means that we will fully consolidate these operations, and we'll also have a leading industry position in Spain. And last, but not least, as part of these transactions, CEMEX will receive a cash payment of EUR 70 million from Holcim.

Now let me give you more details on the 2 main blocks of the transactions. First, let me start by Central Europe. The 2 transactions that we're announcing in Central Europe will rebalance and fuel [ph] our portfolio in the region and will result in a higher value-added regional network, as you can see in the map in the presentation in Slide #5. The Czech Republic is a market with a strong economy and solid prospects. We believe that cement consumption in the country will grow [ph] this year, and we're expecting the demand to grow between 3% and 4% per year in the next 4 years.

By segregating [ph] Holcim's assets, the cement plant, the ready-mix and various facilities in the Czech Republic into our existing asset base, we expect to extract synergies and significantly strengthen and improve our position, becoming one of the top 3 producers of cement building materials in the country. In addition, we are increasing our presence in the markets surrounding the Prague markets, which are some of the highest growth markets in the Czech Republic. Furthermore, the proximity of these assets to our remaining operations in the east of Germany and Poland will enhance our network in the region, and will enable us to further improve asset utilization and achieve higher economies of scale. We will continue to have and maintain an important process in Germany, with a solid footprint which is core to our network in Central Europe. These enhancement of our network of assets will help us optimize our supply chain, which, in the end, will translate into higher return on capital in the region in Central Europe.

Now let me move into Spain. As most of you know, during the past years, both companies, Holcim and CEMEX, a lot of the main competitors in Spain have gone through important capacity adjustments in one of our businesses as a result of the challenging industry conditions and general macroeconomic environment. So we expect that the combination of our operations with Holcim's in this country within our synergies and additional opportunities to further optimize our asset base, opportunities that all of us on a standalone basis would have been able to capture.

With this transaction, we expect again to increase asset productivity, reduce costs and deliver further efficiencies. We should also be able to better adjust our asset footprint to current market conditions, improving our logistic networks and reduce costs to serve our customers in the regions where we're operating in Spain. Another important element to this transaction is that we will strengthen our capability to continue to -- Spain, sorry, as a natural platform for our exports to North and West Africa and the Mediterranean. In summary, all of these efforts should translate into higher value-creation from our operations in Spain. And we have said that going forward, as demand recovers, we should also have a positive operating leverage effect, especially in our most dynamic markets. As I commented earlier, CEMEX will have a 75% controlling interest over the combined operational assets. As a result, CEMEX will fully consolidate the benefits and result in synergies from this transaction. And going forward, we will also reflect any upside in sales and profitability, as well as their market conditions.

Now let me remind you that these transactions that we have just announced and have discussed today are not final. They are still subject to the fulfillment of value silence, including our due diligence, process and certain regulatory approvals. [indiscernible], we currently expect to finalize these transactions during the fourth quarter of 2013, of this year.

Now let me summarize bottom line. We are conducting these transactions to strengthen our strategic footprint in Europe. We have the management, the systems, the network and most important, our PMI experience to integrate these new assets quickly and effectively. It's an important milestone in our efforts to optimize our asset base. And we believe that the combination of our more efficient use of our assets will result in synergies, will further improve our return on capital. But most importantly, we will continue to deliver on our commitments by being flexible to [indiscernible] and willing to make compromises that will result in higher value-creation for our shareholders.

Thank you very much. And now, we'll be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Vanessa Quiroga from Crédit Suisse.

Vanessa Quiroga - Crédit Suisse AG, Research Division

The question is regarding the competition, the competition on authorities' approval, do you expect any issue there, especially in Spain, given your existing -- your leading position there?

Juan Pablo San Agustín Rubio

Thank you, Vanessa, for your questions. Actually, no, we don't expect -- according to the advice from our legal team, we don't expect any problems in getting the approval in the 2 markets. And if you take a look to the situation in Spain, as you can see, the assets are highly complementary. So there is almost no overlap between our positions and the ones from Holcim. So no, we don't -- we expect to get the approvals before year end.

Vanessa Quiroga - Crédit Suisse AG, Research Division

Okay, excellent. Will you become the largest company in Spain after this transaction?

Juan Pablo San Agustín Rubio

Yes. With the information we have right now, Vanessa, that's the case. We will become the largest building materials company in Spain, yes.

Vanessa Quiroga - Crédit Suisse AG, Research Division

Okay, excellent. And this higher EBITDA that you're expecting, between $20 million and $30 million per annum, can you describe where it comes from exactly?

Juan Pablo San Agustín Rubio

Right now, the $40 million, Vanessa, it's difficult for us to share that information. We would like to share that in more detail with all of you during our Investor Day, after the earliest that we can cover for the information we have right now. And hopefully, we'll [indiscernible] the numbers.

Operator

And now, we will take a question from the webcast.

Maher Al-Haffar

Okay. The question from the webcast is from Benjamin Theurer from Barclays. And the question -- well, first, he starts, "Hi, Juan Pablo, hi, Maher." Thank you, Ben. "The $20 million to $30 million of recurring EBITDA improvement takes into consideration that you sell more assets than you purchased, i.e., having a smaller asset base does not have a negative impact on your -- does that not have a negative impact on your consolidated EBITDA? Thanks, Ben."

Juan Pablo San Agustín Rubio

Thank you, Ben. Well, the answer is -- I can speak for CEMEX. This transaction, before any synergies, is EBITDA-neutral for CEMEX, which means that those $30 million that -- we'll call this at least in terms of synergies, you can assume that is 100% of their incremental EBITDA for next year. I hope that I have fully addressed your question, Ben.

Operator

Our next question comes from Carlos Peyrelongue from Merrill Lynch.

Carlos Peyrelongue - BofA Merrill Lynch, Research Division

Two questions, if I may. With regards to market share, can you give us an idea of what will be your market share, both in the Czech Republic and in Spain? And with regards to pricing, can you give us an idea of cement pricing in the Czech Republic? Or are cement prices per ton good?

Juan Pablo San Agustín Rubio

Thank you, Carlos. Regarding Spain, with the information we have right now, the latest information, our market share will be around 22% in the goods of Spain. Now in the case of Czech Republic, the information we have is that last year, the cement demand in the country was like 3.5 million tons of cement. And we expect that the combined sales of the 2 entities in the Czech Republic will be around 750,000 tons. And regarding the prices in Czech Republic, the prices in Czech Republic are around the same level as in generally in Central Europe, in Germany also, and in Poland, and they're around EUR 75 per ton nowadays. That's the information we have right now, Carlos.

Operator

And our next question comes from Adrian Huerta from JPMorgan.

Adrian E. Huerta - JP Morgan Chase & Co, Research Division

Most of my questions were answered. Just on the -- you mentioned on the Czech Republic, you say that combined ones will be 750,000 tons. This is for CEMEX with additional capacity that you're getting, is that correct?

Juan Pablo San Agustín Rubio

Yes. If I heard you correctly, Adrian, the combined sales adding up our sales on -- the sales that we load from Holcim last year will be around 750,000 tons, yes.

Adrian E. Huerta - JP Morgan Chase & Co, Research Division

And that will be a cement capacity of how much? Because you're adding 1.1, and how much did you have in the Czech Republic?

Juan Pablo San Agustín Rubio

No. In the Czech Republic, the size of the plant we are acquiring from CEMEX is close to 1 million tons of clinker and around 1.2 [ph] in terms of cement.

Adrian E. Huerta - JP Morgan Chase & Co, Research Division

This is what you are acquiring. And the capacity that you had there before?

Juan Pablo San Agustín Rubio

We have no clinker capacity. We had only a grinding mill in the Czech Republic that we were supplying from Poland.

Operator

And our next question will come from the webcast.

Maher Al-Haffar

Yes. The next question is from Carlos Hermosillo from Banorte. The question is, "Does the EUR 70 million payment from Holcim refer only to the Czech-Germany transaction? Are these deals mutually exclusive? What are the current sales EBITDA and capacity utilization of Holcim Spain?"

Juan Pablo San Agustín Rubio

Thank you, Carlos. The EUR 70 million payment is as a result of the 3 transactions. The 3 transactions are interlinked, the 3 of them. So the payment is the result of all the 3 of them. And regarding the last part of your question, the sales EBITDA and capacity utilization of Holcim in Spain, I will prefer for Holcim to answer that question, Carlos.

Operator

And the next question comes from Mike Betts from Jefferies.

Michael Betts - Jefferies LLC, Research Division

Yes, just one question remaining from me. I mean, obviously, capacity utilization in Spain is low at the moment. I mean, the only obvious overlap is in the Madrid area. I mean, but presumably, are you planning significant closures of that combined capacity in Spain?

Juan Pablo San Agustín Rubio

Well, in the case of Spain, more than overlapping, what is made from Holcim is a grinding station. So what we are supplying the Spanish -- the Madrid market? Yes. That's -- from a market point of view, is that the only phase that we are both supplying the market, some other markets in the [indiscernible] region, no? But from a facilities production, there is no overlapping, even in the center.

Michael Betts - Jefferies LLC, Research Division

So you don't find any capacity closures as part of that $20 million or $30 million in Spain?

Juan Pablo San Agustín Rubio

It's difficult to address that right now, Mike. As I said at the beginning of my presentation, what we would like to do is improve the position of Spain and trying to use this as a network platform to improve our positioning in the western part and north parts of Africa. So what we'll try to do is try to use as much capacity as we can. After this, we will be in a much better position to communicate and share with you if we need to do more capacity closure. We hope and we expect that will not be the case, no? And also because we expect that the Spanish market has bottomed out, and we expect that as of the second half of this year, the Spanish market to begin recovering.

Michael Betts - Jefferies LLC, Research Division

Okay. And in the Czech Republic, in answer to Adrian's question, I mean, you obviously have now got capacity in excess of what is required for the existing Holcim operations in the Czech Republic. Will you be replacing some of those imports from Poland with Czech clinker? Is that where some of the synergies come from there?

Juan Pablo San Agustín Rubio

Yes. In the case of Czech Republic, our further analysis is that we will save money in terms of logistics by redirecting those flows of cement and clinker to the new facility we will acquire from Holcim. That's the case, Mike, yes.

Operator

And our next question comes from Yassine Touahri of Exane.

Yassine Touahri - Exane BNP Paribas, Research Division

A question as well on Spain, which is probably far from the one of Mike. I understand that in Spain, the capacity is approximately 40 million tons. And last year, consumption was less than 14 million tons. So it looks like there is a lot of excess capacity there. I just wonder, do you see that, not only for CEMEX, but do you see that the Spanish industry will have to close more capacity or -- especially when I look at your plants in Morata de Jalon and Castillejo, I'm just wondering -- what is the kind of utilization rate in this plant inland? And do you see more capacity closure, not only for CEMEX, but for the industry as a whole, in Spain in the coming years? And my second question would be on Spain -- sorry, on Germany. I understand that your cement capacity in Germany is approximately 2.5 million tons according to Holcim's presentation. But I just wanted your view what is your clinker capacity in West Germany?

Juan Pablo San Agustín Rubio

Now let me take the last part of your question. Those numbers are right. In terms of our cement capacity, in the 2.5 million that you mentioned. In terms of clinker capacity, the plant that will come from there is close to 1 million tons of clinker capacity. Now in the case of Western Germany, we use a slag as part of our additions, and that is why we have that 2.5 million tons of cement capacity. So both numbers are right. We are selling a plant with close to 1 million tons of clinker capacity. And as part of the network, there's another 2 grinding mills, so the total cement capacity with additions is close to 2.5 million tons. That's right. Now in the case of Spain, I cannot talk about other players in the industry where they have plants. In our case, we expect that by combining both Holcim and CEMEX operations in Spain, we'll be able to be much more efficient in our supply chain and also further improve our presence in the export market. So we will try to avoid further plant foreclosures. Our EDA [ph] is trying to maintain as much of the capacity that we can. For sure, we will adjust some of the clink [ph], depending on market conditions. We will always try to avoid plant foreclosures, and we'll try to maintain as much of the employment base that we have in the country. That's our obvious long-term commitment to our employees now.

Yassine Touahri - Exane BNP Paribas, Research Division

And for the products, a follow-up on these, I understand that -- is it fair for me to assume that most of your EBITDA -- additional EBITDA donation is going to come from logistics and additional exports...

Juan Pablo San Agustín Rubio

Yes, that the case. In the case of -- although transactions, we expect that the main source of value-creation will be logistics and also increasing -- in the case of Spain, hopefully, we'll be able to improve our supply chain and increase our exports.

Operator

And we will now take a question from the webcast.

Maher Al-Haffar

Okay. The question from the webcast is from Miguel Medina from JB Capital. The question is, "Aren't the transactions contingent on each other, i.e., if Spanish transaction is blocked, German and Czech transactions are called off? Thanks."

Juan Pablo San Agustín Rubio

Thank you, Miguel. As I said at the beginning, according to the advice of our legal team, we expect to get the approval from all the respective authorities, and the 3 transactions are interlinked. Thank you.

Operator

And our next question comes from Jamie Nicholson from Crédit Suisse.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Just a quick question on your control of the Spain operation. You'll have a 75% controlling interest. Will Holcim have any management say in that, or will you have full control? In other words, if you just -- to make decisions such as divestitures or major spending, what's the management structure there?

Juan Pablo San Agustín Rubio

Well, yes, basically, we will have the balance -- we will run the company. It will be our management team, it will be our CEMEX management team. And CEMEX will have a representation on the Board of Directors. So through the Board of Directors, they would have a say in running the company. But the management, the day-to-day operations, will be 100% owned by CEMEX people.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Okay. So Holcim will have a say on the Board of Directors, but CEMEX will control the board?

Juan Pablo San Agustín Rubio

Yes, exactly. They will have a proportional representation through the so-called -- in the Board of Directors, exactly.

Operator

And our next question comes from Kenneth Williamson from JPMorgan.

Kenneth Williamson

I had another question for you about the Holcim interest in the Spanish operation. Can you -- have they communicated to you what their plan is for that ownership interest? And are there any kind of options in place for CEMEX for Holcim to change their stake in that operation?

Juan Pablo San Agustín Rubio

No, right now, there is no provision in order for us, for any of us to change our shareholding. Right now, it will be maintained at 75-25.

Kenneth Williamson

So there's no put options or call options for either party?

Juan Pablo San Agustín Rubio

No. Part of the transaction, there is no contingent that we will carry in our books regarding the transaction, no.

Operator

And our next question comes from Vanessa Quiroga from Crédit Suisse.

Vanessa Quiroga - Crédit Suisse AG, Research Division

Just a follow-up question about the capacity -- sorry, about the percentage of fixed cost that you will have now in your Northern Europe region, if you could provide what would be the pro forma percentage of fixed costs in that region.

Juan Pablo San Agustín Rubio

The fixed cost, what, Vanessa?

Vanessa Quiroga - Crédit Suisse AG, Research Division

Yes, of the total cost, what percentage will be fixed cost? Do you have an idea of the operational leverage on a pro forma basis?

Juan Pablo San Agustín Rubio

Right now, we have not done yet significant, Vanessa, so right now, we don't have yet that information that we can share with you. I hope that after the [indiscernible], we would be able to share that with you. But right now, we don't have that information yet, Vanessa.

Operator

And our next question comes from Fernando Galvan [ph] from Cuendos [ph].

Unknown Analyst

I don't know if you have already mentioned this before, but I just wanted to know if this transaction will have any effect in your current debt on a consolidating level?

Juan Pablo San Agustín Rubio

No, there is no -- it will have no impact at all on our current debt, as you know. No impact, Fernando.

Operator

And I would now like to turn the call over to Maher Al-Haffar for closing remarks -- oh, actually, we have a call from the webcast.

Maher Al-Haffar

Yes. Okay, I think the question from the webcast is a follow-up from Carlos Hermosillo from Banorte. "Will Holcim have an exit clause on Spain's operations?" I think you may have already addressed that, Juan Pablo, but I don't know if you want to...

Juan Pablo San Agustín Rubio

Yes, [indiscernible] as part of the agreement, there is no contingent that will occur in our books regarding this transaction, Carlos.

Operator

And I am showing no further questions, and I will turn the call back over to Maher Al-Haffar for closing remarks.

Maher Al-Haffar

Great. Thank you very much, everybody, for joining us and for your time and attention, and we look forward to your continued participation in CEMEX. Obviously, as usual, please feel free to contact us directly or through our website. Thank you very much, and good day.

Juan Pablo San Agustín Rubio

Thank you very much to everybody.

Operator

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

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