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

Q2 2014 Earnings Conference Call

July 18, 2014 10:00 a.m. ET

Executives

Fernando Gonzalez - CEO

Maher Al-Haffar - EVP of IR

Analysts

Carlos Peyrelongue - Merrill Lynch

Nikolaj Lippmann - Morgan Stanley

Ben Theurer - Barclays

Jacob Steinfeld - JP Morgan

Vanessa Quiroga - Credit Suisse

Chris Choi - SKY Harbor Capital Management

Dan McGoey - Citigroup

Mike Betts - Jefferies

Marcos Assumpcao - Itau

Francisco Suarez - Scotiabank

Heber Longhurst - Interacciones

Operator

Good morning. Welcome to the CEMEX Second Quarter 2014 Conference Call and Video Webcast. My name is Lorraine, and I'll be your operator for today. (Operator Instructions)

Our hosts for today are Fernando Gonzalez, Chief Executive Officer; and Maher Al-Haffar, Executive Vice President of Investor Relations, Communications and Public Affairs.

Now, I'll turn the conference over to your host Fernando Gonzalez. Please proceed.

Fernando Gonzalez

Thank you, operator. Good day to everyone, and thank you for joining us for our second quarter 2014 conference call and video webcast. After Maher and I discuss the results of the quarter, we'll be happy to take your questions.

We're pleased with our operating EBITDA generation during the quarter, with a growth of 3% on a like-to-like basis, adjusting for the fewer number of business days.

Consolidated cement and aggregate volumes increased by 1% and 2% respectively, while ready-mix volume declined by 1% during the quarter.

On a like-to-like basis and adjusting for the higher number of business days, all of our regions enjoy higher cement and ready-mix volumes during the quarter with the exception of Northern Europe, where in some countries construction activity was brought forward as a result of the very good weather during the first quarter. However, when we take a look at the year-to-date performance, volumes in Northern Europe still show healthy growth.

For the second half of the year, we expect consolidated volumes to continue performing well. Our volumes in Mexico should gradually increase as infrastructure activity picks up and year-over-year comparison becomes easier.

On a sequential basis and in local currency terms, our consolidated prices for both cement and aggregates increased by 1%, while ready-mix prices remain flat.

While year-to-date prices in U.S. dollar terms for cement are flat, reflecting weaker currencies in some countries, cement prices from December to June are up 4% similarly ready-mix and aggregate prices are up 3% and 10% in the same period.

We're pleased with the recent performance in volumes and prices, which is largely in line with our mid-term business plan presented earlier this year.

As part of our financial results, we reported a controlling interest net income during the quarter of $76 million. This is our first positive quarterly net income since the third quarter of 2009.

On the financing side, we continue to improve our debt maturity profile, reduce our interest expense and strengthen our capital structure. We're pleased with the way our credit continues to re-rate. We remain vigilant and prepared for windows of opportunity to reduce interest expense at the margin.

Also during the quarter, we announced that our subsidiary CLH has started the construction of a new 860,000 tons cement grinding plant in Nicaragua. The total investment will be approximately $55 million and the plant is expected to be completed by the end of 2017.

Now, I'd like to discuss the most important developments in our markets. In Mexico, adjusted volumes for cement increased by 1%, while ready-mix volumes grew by 6% during the quarter. The higher increase in ready-mix volumes corresponds to higher activity in formal construction, especially in the formal residential and commercial segments.

On pricing, we have had positive traction from our different price increases. Cement prices as of June were 7% higher than December prices in local currency terms, recovering most of our 2013 price erosion. In ready-mix, we announced a 9% price increase at the beginning of this month. We aim to recover our input cost inflation in cement and ready-mix production.

Now, talking about the different segments, we saw positive performance from the formal residential sector with housing starts, housing registries and subsidies showing double-digit year-to-date growth as of June, recovering from low levels last year. While housing credits from Infonavit have shown some decline affected by the low income segment, further entities including Fovissste, Sociedad Hipotecaria Federal, and commercial banks continue supporting housing credit activity.

The prospects for the residential sector for this year are more encouraging, reflecting an expected acceleration in housing mortgages and subsidies, as well as higher participation from medium and small homebuilders.

The self-construction sector was slightly down during the quarter. During the first months of the year, we saw more cautious consumption as a result of tax increases due to the fiscal reform. Recent indicators are showing a gradual recovering consumption. Moreover, positive trends in job creation and remittances should lead to slight growth in this sector for the full year.

The industrial and commercial sector showed slow growth during the quarter, driven mainly by the commercial segment in line with our recovering consumer confidence. Additionally, manufacturing activity indicators are showing signs of improvement. This sector should continue to show growth during the year in line with general economic activity.

Regarding the infrastructure sector, public investment has had a very positive year-to-date performance with a 43% growth as of May, mainly driven by the communications and transportation and water sectors. However, this spending has not yet translated into increased volumes in the sector. It is typically a lack between the granting of federal resources, which appear as already spent in the federal budget and the actual infrastructure spending at the state and the local levels.

In addition, our volumes in the sector were affected by the termination of some high volume projects during the quarter. We expect our volumes in the infrastructure sector to increase in the mid single-digits for 2014, driven by the anticipated increase in spending during the second half of the year.

Regarding cost and expenses, we continue with our productivity initiatives, including upgrades in our truck fleet, third generation of electric power, very few supply management and working capital improvement.

In summary, in Mexico, we see volumes picking up during the second half of the year, and expect to achieve annual cement volume growth in the low single-digits.

This growth will be mainly driven by higher infrastructure spending, a positive industrial and commercial sector and a growing residential sector. The different reforms been implemented in the country and the acceleration in the U.S. growth should result in stronger volumes going forward.

During the quarter recovery of our U.S. business continue good advances in pricing and volumes. On a year-over-year basis, cement volumes were up 7%. Ready-mix volumes on a pro-forma basis, adjusting for the transfer of our ready-mix assets into the joint venture in the Carolinas were up 5% over year.

Aggregate volumes declined 1%, primarily due to the completion of the Fort Lauderdale Airport project in Florida in 2013.

After our muted performance in the first quarter due to weather conditions, residential demand picked up in our markets in the second quarter. The industrial and commercial sectors continue to drive volume performance in the quarter due to marginal contribution from infrastructure.

Housing permits in our four key states, 1% increase at the national level. Texas and Arizona have led the way with growth rates in excess of 10%.

Construction spending for industrial and commercial rose 11% year-to-date May. Activity in our key states continues to outperform national levels. In particular, office construction has contributed to year-to-date volume growth in this sector.

Contract awards for our key states are up 10% year-to-date May, compared to a flat performance nationally. The public sector also contributed to volume growth during the quarter. Public infrastructure spending is up 5% year-to-date May versus the same period of last year.

Highway and bridge investment increased 4% during the same period, primarily driven by state activity and the initiation of TIFIA projects. We attribute this increase to improving state fiscal conditions. However, uncertainties surrounding the federal highway program is putting pressure on contract awards for highways, which are down 14% year-to-date May.

The value-before-volume initiative continued to deliver with prices for cement, ready-mix and aggregates up 8%, 6% and 7%, respectively, from December 2013 to June 2014. The increase in pricing is a result of our April pricing increase, which was successful in literally all markets. We have begun to rollout our summer/fall pricing increases with July cement in Colorado and Florida, and ready-mix increases in East Texas and Florida.

Summer/fall cement price increases are in the range of 550 to $1110 per ton. We're pleased with the inroads we're making with our value-before-volume initiative in the U.S., but we have a long way to go to eliminate the chronic underpricing of our products and to capture a fair return on the capital employed in this business.

In our Northern Europe region, the decrease in quarterly cement and ready-mix volumes mainly reflects the clients in Germany and Poland. In these two countries there was very good weather at the beginning of the year, which brought forward activity to the first quarter. However, year-to-date volumes for our three core products in all countries, in the region are higher versus last year.

In Germany, the residential sector continued to be the main driver of demand for our products during the second quarter. We expect this sector to grow in the mid single-digits, benefiting from low unemployment, low mortgage rates, growth in wages and net immigration into the country. The infrastructure sector should be positively impacted this year by transportation infrastructure projects, finance in part by the increased toll tax.

In Poland, better macroeconomic conditions have translated into an improvement in all sectors. As explained earlier, the decline in volumes was mainly due to the different quarterly conception patterns versus last year.

Year-to-date cement volumes are up 2%. Infrastructure is expected to be the main contributor to cement demand in 2014 from a very low base last year. The residential and industrial and commercial sectors should also show some growth this year.

In France, there was some moderation in new infrastructure projects after the March 2014 elections. In addition, financing constraints and the government's efforts to reduce its deficit have also affected the sector. However, infrastructure activity will continue to be supported by the multiyear highway and high-speed railway projects started two years ago. In the residential sector, declines in housing starts and permits reflect tight credit availability.

In the United Kingdom, general confidence and market conditions continue to improve. The residential sector continues to be the main driver for growth in our cement and ready-mix volumes positively impacted by the help-to-buy policy and catch-up effect from the floating last quarter. Improved sentiment is also translating into increased activity in the industrial and commercial sector. In contrast, there are limited new projects in the infrastructure sector.

In the Mediterranean region, during the quarter, we saw growth in cement volumes in Spain, Croatia and the Emirates. Ready-mix volumes grew double-digit in Croatia and the Emirates. We continue to modulate capacity in the region based on customer demand and in support of our value-before-volume strategy.

In Egypt, energy and electricity disruptions continue during the quarter. However, we continue to operate normally, supported by our alternative fuel strategy. In electricity, we continue to manage our operations to reduce utilization during peak hours.

At the beginning of this month, the Egyptian government announced a new law increasing fuel and electricity prices. Our cement prices should continue to reflect the reduction in subsidies and the future increase in energy prices.

During the second quarter, our cement prices increased by 14% sequentially and by 19% on a year-over-year basis. The informal sector remains the main driver of cement consumption in the country. Going forward, we expect some downward pressure on our volumes, reflecting the increased cement production capacity.

In Israel, ready-mix volumes declined by 3% during the quarter, reflecting the current political situation. Year-to-date volumes are up 6%.

In Spain, macroeconomic conditions continue to improve during the quarter. Our domestic gray cement volumes showed year-over-year growth for the first time since the first quarter of 2011. Considering our export activity, total cement volumes increased by 56%.

In infrastructure, probably pleadings as of April have shown growth for the ninth consecutive month from very low levels. This largely reflects lower pressure from fiscal absurdity measures and anticipation of municipal elections next year.

Present indicators including housing sales and permits indicate that the residential sector might have reached bottom. The stabilization of home prices and increased housing demand from foreigners should contribute to the clearing out of inventory in some regions.

In our South Central America and the Caribbean regions, during the quarter cement and ready-mix volumes increased by 1% and 7% respectively. In Colombia–Nicaragua, we reached new quarterly cement and aggregate volume records. Year-to-date regional cement and ready-mix volumes are up 8% and 11% respectively.

As explained yesterday in CLH's resource call, the decline in quarterly margins was driven mainly by the clients in Colombia and Panama. More than half of the decline was due to scale of maintenance during the quarter. We anticipate our margin recovery during the second half of the year.

In our operations in Colombia, we are encouraged by the double-digit year-to-date growth in volumes for our three core products driven by positive dynamics in our demand segments.

The residential sector continues to benefit from different programs to promote home ownerships. During the second quarter, the government awarded the construction of the 86,000 homes that will benefit from our 5% mortgage rate subsidy. Construction of these houses should start soon. The government is working on new housing initiatives. We should continue to support the favorable performance of the residential sector.

In the infrastructure sector, increased activity in the first half of the year was driven by an infrastructure law approved last year which has accelerated the execution of several highway projects. Cement volumes in this sector should increase in double-digits during 2014.

In Panama cement volumes during the quarter declined by 20% reflecting the impact of construction workers' strike in April as well as reduced consumption from the canal expansion project on a year-over-year basis. The sequential decline in cement prices is due to a mix effect with higher volumes going to the canal project compared with the first quarter.

The residential sector continues to be the main driver for cement demand in Panama supported by middle income housing activity.

In the industrial and commercial sector, we are encouraged by recently initiated projects. We expect these sectors to continue driving volumes during the rest of 2014. In the future infrastructure spending should continue to be supported by different projects like the Corridor Northway already in construction. In the inter-American highway, the second and third lines of the Panama series subway and several hydroelectric projects among others.

In Asia, cement volumes increased by 1% during the quarter and by 5% during the first half of the year. The decline in regional EBITDA margin is mainly due to higher scheduled maintenance during the quarter and the restarting of one kiln in the Philippines.

Cement volumes in Philippines during the second quarter adjusted by business days grew 5% during the quarter driven by continued strong demand from all sectors. The infrastructure sector remains healthy with the construction and rehabilitation projects with our focus on more disaster resistant construction.

In the residential sector there is continued growth in the low cost and high end segments. Stable inflation, low mortgage rates and strong remittances continue to benefit this sector. Our new grinding capacity of 1.50 million tons in the Philippines is now in operations.

In summary, we're pleased with the year-to-date trends in our consolidated volumes and prices. Our value before volume strategy continues to pay off. We aim to capture the intrinsic value of our products recovering input cost inflation and getting an appropriate return on capital employed.

In addition, we are now increasingly getting paid for services delivered together with our products which we use to provide for free. Lastly, we are more systematically recovering transportation cost increases by surcharges.

And now, I'll turn the call over to Maher to discuss our financials. Maher?

Maher Al-Haffar

Thank you, Fernando, and hello to everyone. Net sales on a like for like basis and adjusting for the fewer number of business days increased by 5% for the quarter and by 7% for the first half of the year.

Adjusted operating EBITDA increased by 3% and adjusted operating EBITDA margin declined by 0.3 percentage points. Cost of sales as a percentage of net sales remained flat during the quarter. Operating expenses also as a percentage of net sales increased by 0.4 percentage points. This increase is mainly due to higher distribution expenses during the quarter.

Our kiln fuel and electricity bill on a per ton of cement produced basis declined by 1% during the second quarter. During the quarter our free cash flow after maintenance CapEx was $63 million compared with negative $86 million in the same period in 2013.

During the quarter we had slightly higher EBITDA, lower financial expenses and working capital as well as positive other expenses which more than offset higher maintenance CapEx and higher taxes.

The other expenses lines include proceeds from asset sales mainly real estate assets in Northern Europe. The lower year-over-year working capital investment during the quarter is mainly due to an improvement in receivables. Year-to-date working capital days declined to 27 from 28 in the same period in 2013. As in prior years we expect to recover most of the investment in working capital during the second half of the year. Other expenses met during the quarter resulted in an income of $62 million which includes a gain in sales of assets including real estate assets in Northern Europe mitigated by severance payment.

We also had a foreign exchange gain of $65 million resulting primarily from the fluctuation of the Mexican Peso versus the U.S. Dollar. We also recognized a gain on financial instruments of $77 million related mainly to CEMEX shares.

During the quarter, we had controlling interest net income of $76 million compared with a loss of $152 million in the same quarter of 2013. This is primarily due to an income in the other expenses line again on financial instruments, lower income taxes and higher operating earnings before other expenses mitigated by higher financial expenses and a lower foreign exchange gain.

We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. During the quarter we entered into additional private transactions with some institutional holders of our 2015 convertible notes, under which these holders converted approximately (indiscernible) of these notes for about 11.50 million ADSs. Following the closing of these transactions, approximately $320 million of these notes remain outstanding.

We also continue to be successful in accessing the global capital markets and are pleased with the strong support we have received. During April we issued $1 billion in senior secured notes due in 2024 with a coupon of 6%. In addition, we issued 400 million Euros in senior secured notes due in 2021 with a coupon of 5.25%. We used the proceeds from these notes to pay higher coupon dollar and Euro notes maturing between 2017 and 2020.

Total debt for perpetual security has decreased by $125 million during the quarter. The decline in debt reflects mainly the conversion of a portion of our 2015 convertibles discussed earlier. In addition there was a positive conversion effect during the quarter of $5 million. The free cash flow during the quarter plus the reduction in cash was mainly used to pay the financial fees and refinancing premiums related to the issuance, vendors and calls of different notes during the quarter.

Pro-forma average life of debt is currently at 4.6 years. Assuming our 2015 convertibles converts CEMEX will not have any significant maturities until the September 2015.

The liability management exercises during the quarter are expected to represent annual cash interest savings of approximately $40 million. We continue to be comfortable with our liquidity position with cash and cash equivalents reaching $737 million as of the end of the quarter. We also maintain over $2 billion of working capital and receivables financing facilities which further boaster our liquidity position. We continue with our liability management initiatives to lower our interest expense, lengthen the average life of our debt and reduced refinancing risk.

Now, Fernando will discuss our outlook for the year.

Fernando Gonzalez

For 2014, we expect our consolidated cement ready-mix and aggregates volumes to grow in the mid single-digits. As detailed in our per country guidance, we anticipate most of our major countries to exhibit volume growth during the year.

Regarding our cost of energy on a per ton of cement produced basis, we expect it to be relatively flat from last year's levels. Guidance for total CapEx for 2014 is about $670 million. This includes $505 million in maintenance CapEx and $165 million in strategic CapEx. The increase in strategic CapEx guidance reflects the new grinding plant in Nicaragua announced in May.

Regarding working capital, we anticipate the working capital investment during this year to be similar to last year's. We expect cash taxes for 2014 to reach about $600 million. As a result of our liability management initiatives, we anticipate a marginal reduction in this year cost of debt including our perpetual and convertible securities from 2013 levels.

In closing, I want to emphasize three points. First, pricing trends continue to be favorable. Consolidated prices for our three main products in local currency terms increased on a year-over-year basis. Sequential prices were up for cement and aggregates and flat for ready-mix.

Second, we expect improved performance from our Mexican operations during the second half of the year. We should lead to stronger overall EBITDA generation for the full year 2014.

Third, we remain focused on value creation proactively improving our operating performance by focusing on pricing value added products and services, maintaining our cost discipline and outsourcing support activities while at the same time looking for ways to optimize our portfolio.

Thank you for your attention.

Maher Al-Haffar

Before we go into our Q&A session, I'd like to remind you that any forward-looking statements 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.

In addition, unless the context indicates otherwise all references to pricing initiatives, price increases or decreases refer to our prices for our products. And now, we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first comes from Carlos Peyrelongue from Merrill Lynch. Please go ahead.

Carlos Peyrelongue - Merrill Lynch

Thank you. Good morning. Thank you for the call.

Fernando Gonzalez

Good morning.

Carlos Peyrelongue - Merrill Lynch

Two questions, if I may; first one related to Mexico. Could you elaborate a bit more on the expected recovery for the second half? If you could breakup -- give us an idea of what sector would be infrastructure? Are we covering self-construction? Or where do you see the pickup coming to achieve mid-single-digit volume growth in Mexico, would be great.

And the second is related to margins in the South and Central America, and the Caribbean region. Big drop year-over-year, 600 basis points. Can you comment on what type of recovery you will expect and what would drive that recovery? Thank you.

Fernando Gonzalez

Sure, Carlos. Thanks for your question. I can start with the question referred to volume recovery in Mexico. What I can comment first is that if you remember in 2013 the second half of the year was the part of the year in which volumes erode. So, assuming same current volumes for the second half compared to a lower base in second half '13, that will give us around 2% increase of volumes.

Second, besides this base effect, as we mentioned during the first half, it was the former construction sector, the housing, particularly the one providing for most of growth, while informal is slightly below. Now, we do see very direct indicators that make us believe that informal construction will be much stronger during the second half.

Indicators like job creation increasing by 3%. I think we have been commenting on a change in the trend of remittances which the current information we have at this year-to-date May is that remittances has increased for about 13%. Besides that, consumer confidence is increasing. So we do believe that the informal sector would provide for additional growth during the second half.

Carlos Peyrelongue - Merrill Lynch

Okay. Thank you, Fernando.

Fernando Gonzalez

Thank you.

Carlos Peyrelongue - Merrill Lynch

And the one on South America?

Fernando Gonzalez

Do you want to take that one?

Maher Al-Haffar

Sure. Yeah -- Carlos, hi. The most important driver of the margin decline, probably two thirds of the number is coming from maintenance in the quarter compared to last year. We had very little maintenance taking place in Colombia, and so doing that distorted the numbers. In first half we maintained six gallons, while last year we only maintained one gallon.

The other thing of course is our currencies. That had an impact. Colombian Peso was quite weak. The Dominican Peso was quite weak, the Colon was weak. Looking into the second half of the year, we certainly expect pick up in margins. We see continued pick up in volumes. Obviously the maintenance is behind us now. As you know the Columbian Peso already started appreciating as we speak. I don't know if that answers your question.

Carlos Peyrelongue - Merrill Lynch

Yeah. Thank you, Maher.

Fernando Gonzalez

I'd like to go back to your first question, Carlos, because I should have also mentioned the -- how the public spending is evolving and we expect we will continue evolving during the second half. As you know expenditure has been increasing materially. As we mentioned we have not seen it reflected already in volumes for the first half, but clearly there are early indicators that are showing us the number of large projects that the government is already putting in place like rail roads, highways and another projects. That also for sure will impact this sector during the second half.

The question is still to -- how much and how soon, but compared to a few months ago, not to say to last part of last year, these indicators are much, much concrete, much clear. So we feel much more confident. But this sector will start improving during the second half.

Carlos Peyrelongue - Merrill Lynch

Thank you, Fernando.

Fernando Gonzalez

Thanks. Operator?

Operator

Thank you. Our next question comes from Nikolaj Lippmann from Morgan Stanley. Please go ahead.

Nikolaj Lippmann - Morgan Stanley

Thank you. Hi, gentlemen. How are you doing? Thanks for the call and for taking my question. Two questions if I may. First one on Mexico, and then on the asset swaps; Mexico, it looks like we are doing really well on ready-mix and of course we see cement volumes rocketing. Can you help us to understand what's going on, understand from a European competitors have changed their strategy. So you are taking market share in ready-mix? Are you taking it from European competitors? Can you say anything about whether you think you are losing share on the cement side in Mexico.

Then my second question is related to Europe. How should we think about the idea of asset swaps after the rejection in Europe asset?

Fernando Gonzalez

Okay. So let me start with asset swap. So in Europe I think the process continues. You know how these processes are. There are -- I don't know if we -- I should call them rumors or unofficial information regarding the rejection of the transaction, which is not necessarily the case. We will continue the process and we will follow the indications from authorities in order to finalize or to find out the conditions in which we can finalize this transaction in Europe. You know the part in -- the business in Germany, Czech Republic is already approved. So we are still working on the Spanish part of the transaction. So whenever we have concrete information to share with you, we will gladly do so.

Nikolaj Lippmann - Morgan Stanley

In Mexico?

Maher Al-Haffar

Yeah. Nikolaj, in Mexico -- in cement, I think our position reflects, I would say, the market. There has been a lag in particular on the infrastructure side. On the ready-mix side the reason that we have seen better performance. I don't know if you are aware, but in terms of infrastructure projects we are probably, I want to say, uniquely positioned. But certainly we probably have the biggest exposure to the formal sector, and particularly the large infrastructure, large formal housing because of the product offerings that we have, because of the quality and because of the credibility we have in the market.

Certainly the first half growth and continuing into the second quarter was predominantly driven by the formal construction sector, the bulk cement ready-mix area. That's why our performance has been higher. Commercial also has been doing very well and we have a big participation about that.

Now, in terms of commenting about market share loss or gain, frankly, we prefer not to address that point.

Nikolaj Lippmann - Morgan Stanley

Okay, thanks.

Fernando Gonzalez

Thank you very much.

Operator

Thank you. And our next question comes from Ben Theurer from Barclays. Please go ahead.

Ben Theurer – Barclays

Hey, good morning, Maher. Good morning, Fernando. Congratulations first of all, and thank you for the call.

Fernando Gonzalez

Good morning.

Ben Theurer – Barclays

I have two quick questions. First of all on the U.S. doing a little bit of math and what we've seen on expansion in total sale. How that then translates through the operating leverage into EBITDA growth? It has been let's say surprisingly low in the second quarter with approximately 44%. I remember last year that figure was more like 80% and actually the expectation for this year was more like toward 60%. So what were the reasons for why that operational leverage in the U.S. did not materialize in such a good way? Or where we are seeing pricing actually, very strong, up year-over-year approximately 6% and sequentially 5%; with that strategy in mind there should be a much better operational leverage. So that would be question one.

The second question would be following up on the Mexico price increases in local currency terms. Do you have any plans to further increase prices throughout the year, because if we take a look into the different price increases in local currency terms, it's till relatively minor on cement, what we've seen compared to last year. I know you've increased compared to the fourth quarter. But it's still not a very strong increase at least in local currency terms i.e. compared to the U.S., what we are seeing. So what are the pricing initiatives in Mexico going forward?

Fernando Gonzalez

Okay. Well, starting with your first question, the operating leverage in the U.S. In the case of the U.S. we had an effect similar to the one in South America or in Colombia which is maintenance, because of equipments that needed to be maintained because of the additional volume we are having those markets.

If we adjust the 44% you were mentioning of operating leverage due to this additional maintenance expense, that will go up to about 50% and I am referring to the first half of the year, because this additional maintenance we think is around $17 million. We do not expect any additional and we might turn around on this amount of maintenance in the first half, before the second half. So operating leverage in the second half should be higher compared to the one we had during the first half because of that reason.

Ben Theurer – Barclays

Okay. Just to clarify those 17 million you just mentioned. It's only second quarter. This is not what was already in the first quarter where I think you already mentioned, was a little bit over 20 million we are expecting on maintenance. So basically you spend an additional maintenance into the second quarter as well affecting your EBITDA growth in the quarter and it would have been more like really to be towards 135 million instead of 120 million. Is that correct?

Fernando Gonzalez

Well, the total effect in the first half should be around 25 million and what we should be recovering in the second half is around 17 million, so that what we can expect for the year. There are also some effects that I didn't mention, which is related to inventory. But that's a little bit more uncertain, because in the first have we deal some inventories and there is an impact that we will use them during the year that we will reverse that impact also. But the main numbers are the ones that I already mentioned.

Ben Theurer – Barclays

Okay, perfect.

Maher Al-Haffar

Yeah. The Mexico pricing, Ben, as you know last year prices December-to-December declined by 9%. Of course that's a point-to-point pricing drop. If we would take a look at kind of weighted average realized prices during the year was much less than that. So far this year we've recovered on the same basis point-to-point, beginning of January or end of December to end of June, 7%. We are actually now at prices higher than last year. And of course as Fernando mentioned earlier we just announced the ready-mix pricing increase, a 9% ready-mix pricing increase earlier this month. It's too early to talk about traction. But we will continue and certainly we are targeting to recover input cost inflation in all of the core products in Mexico.

And also as Fernando indicated, we are expecting things to improve on the volume side in the second half of the year. And that should provide better support to some of the pricing announcements that we have made in Mexico. So we are optimistic about things holding up and improving in the second half of the year.

Ben Theurer – Barclays

Okay. Thanks, Maher.

Fernando Gonzalez

Thank you.

Operator

Thank you. And our next question comes from Jacob Steinfeld from JP Morgan. Please go ahead.

Jacob Steinfeld - JP Morgan

Hi. Good morning, Fernando, Maher.

Fernando Gonzalez

Good morning.

Jacob Steinfeld - JP Morgan

I have two questions. First one is on the cash flow slide that you have in the deck on slide 15. Can you walk us through the 148 million positive gain that you have in the quarter?

Fernando Gonzalez

Was it under one question or we will have the connection?

Jacob Steinfeld - JP Morgan

No. No, that's it.

Fernando Gonzalez

Okay. Jacob, about $157 million was essentially the fixed asset sales, which was offset by other expenses like severance and some other items.

Jacob Steinfeld - JP Morgan

Okay. Thank you very much. And my second was what was your opinion, I guess, what was your biggest disappointment in the quarter?

Fernando Gonzalez

Sorry. Could you repeat that? You broke a little bit, Jacob.

Jacob Steinfeld - JP Morgan

Sorry. My second question was what was your biggest disappointment in the quarter and the result?

Fernando Gonzalez

I didn't think on disappointments. But I will think about it.

Jacob Steinfeld - JP Morgan

Okay. Thanks. That was it.

Fernando Gonzalez

Great. Thanks a lot, Jacob. Operator?

Operator

Thank you. And our next question comes from Vanessa Quiroga from Credit Suisse. Please go ahead.

Vanessa Quiroga - Credit Suisse

Hi, Fernando, Maher, thank you for the call.

Fernando Gonzalez

Hi, Vanessa.

Vanessa Quiroga - Credit Suisse

My question is regarding Mexico and if you can give us a little bit more color on the infrastructure, the better infrastructure indicators that you are seeing. Is it correct to say that the better performance that could be expected from this sector going forward will come from private sector investment, meaning the infrastructure plan actually ramping up rather than government spending with a projects? And then linked to that would be, at these current conditions, when would you expect to be able to reinitiate the new capacity that is pending in the forecast? Thanks.

Fernando Gonzalez

Well, as I mentioned before, Vanessa, what we see is some indicators in showing much more activity in the public sector or in the segments related to public investment. And we have a larger number of vendors. We have already won some of these tenders. The actual consumption of a product is still not available. It will come during the second half. The ministry is the ones much more related to construction expenditure is much higher than last year. Those are the indicators that make us believe that the activity is increasing. During the first half as we are -- the whole trend is that the activity in this sector started to be adjusted. We went to sort of an inflection point for the whole half of the year. The activity is flat.

So if you add to this flat trend, these additional volumes coming from these projects, I think we have already mentioned which projects, highway from Acapulco to Chilpancingo, a dam in Sonora. There are a couple of highways being tampered as to speak, large highways, more than 600 kilometers. All of that is making us believe that the sector will start growing or it has already changed its trend and we started growing during the second half.

Maher Al-Haffar

Vanessa, if I can add to that, I mean, although it's not infrastructure. I think that we are quite pleased in what we are seeing from the governments behavior in the formal housing, affordable housing. I mean if we take a look at housing starts in general, they were up 21% year-to-date. That's a very impressive acceleration in the housing numbers. And also we have seen quite immaterial acceleration in subsidies, almost 16% year-to-date. So I think that we are seeing definitely the formal sector really stepping up. And that's really what's going to continue to drive the growth in volumes in the second half of the year.

Vanessa Quiroga - Credit Suisse

Excellent. So given those conditions what is your outlook for the Tepeaca plant?

Fernando Gonzalez

We don't have yet any specific plans to make an announcement. But I think we are getting closer to that point. So whenever we are saying that we should continue with the project in Tepeaca plant, we'll do it. As you may know, Vanessa, most of the investment in Tepeaca is already done. Yes, we still need to invest some additional amount, but depending and according to demand we will consider investing in Tepeaca, but for the time being we don't have any specific plan.

Vanessa Quiroga - Credit Suisse

Okay, excellent. And apologies if I missed your specific comments about pricing in the U.S., but you did have a schedule of new price increases for July. Is that still your expectation that you will implement price increases this month in some markets?

Fernando Gonzalez

Yes, Vanessa. As you saw the performance on pricing across all of our products, the April pricing increases, certainly the earlier pricing increases have been quite positive and very well received by the market. I know that in the early part of the year we had a little bit of cautiousness on the summer and fall pricing increases, but we're seeing a lot more support in the market and we're optimistic about the summer and fall pricing increases getting traction.

Vanessa Quiroga - Credit Suisse

Okay, excellent. Thank you very much.

Fernando Gonzalez

Thank you.

Maher Al-Haffar

Thanks, Vanessa.

Fernando Gonzalez

Operator?

Operator

Thank you. The next question will come from the webcast.

Maher Al-Haffar

Okay, thank you. The question from the webcast is from Chris Choi from SKY Harbor Capital Management. The question is can you elaborate on the impact of the uncertainties surrounding highway trust fund in the U.S., and your outlook on the U.S. business going forward?

Fernando Gonzalez

Yes, go ahead.

Maher Al-Haffar

Yeah, the -- I don't know if you're -- Chris, I'm sure you're following this in the U.S. We're quite -- On one hand, we're pleased; on the other, we're cautious. I mean we're pleased to see quite a bit of alignment between both the President, and certainly both parties, and both Houses, frankly. And as you know, there has been a House bill that provides for about an $11 billion infusion passed the House Tuesday. And we're waiting for the Senate. We're optimistic that it's likely to go through.

Now, frankly, nobody is high five-ing each other, because of that, we wish and we looking forward to the administration providing us with a longer term solution to the situation. So we're happy about that. We think that that's going to lower the volatility in infrastructure projects awards. The problem that we've seen from prior years is that when we see these extensions, the quality of contract awards tend to be biased towards maintenance projects, instead of new miles put into place. And that unfortunately tends not to translate in as much cement demand as we'd like it to be.

But having said that, in our markets the performance of infrastructure and particularly, streets and highways have been particularly good. So we're optimistic, but we wish the administration and both parties would come up with a longer term solution and not have to suffer, but we sufferer the last time around, which is an extended period of extensions.

Operator

Thank you. And our next question comes from Dan McGoey from Citigroup. Please go ahead.

Dan McGoey - Citigroup

Hi. Good morning, gentlemen. Thanks for the call.

Fernando Gonzalez

Good morning.

Dan McGoey - Citigroup

Can you talk a little bit about priorities on balance sheet management, including scope for further early conversion of the convertible debentures? And also, I guess the appeal of it alleviate some of the restrictions that you have on investments, the interest rate environment?

Fernando Gonzalez

Sure. I mean the converts as you've seen, Dan, that -- we've been opportunistic in the good sense of the word. And so we will continue to do that, frankly. And we see that as a risk management process. We're obviously focusing on the near-term maturity. So we will continue to focus on the 2015. And we've also been reacting frankly to reverse increase. So, yes, we'll continue to do that.

On the refinancing side, as you've seen us, we've been very proactive. We've been very vigilant on an ongoing basis. We're always ready to hear proposals, where -- we're not timing markets, frankly. And anytime we see a good opportunity to either extend and/or reduce the cost of our debt, we'll be taking it. And we're very pleased with the way the market has supported us in every transactions that we've come to the market with.

So, we're quite pleased, and we'll continue -- I don't think we see any change in the approach, frankly.

Dan McGoey - Citigroup

And maybe second half of that question, Maher is the importance of moving the restrictions on the ability to do acquisitions or investments specifically there is potentially opportunities from divestitures from your global peers. How important is that internally in size?

Maher Al-Haffar

As in the past, whenever it's been needed, we might or we might not need it. We have proposed to the banks participate in the financial agreement for certain amendments or waivers and what we've seen is that when there is a good reason to do it, we will do that. We've been receiving their support. So, then, if -- for whatever the reason you are referring to acquisitions, we might need for an amendment or a waiver, we'd proceed as we've done in the past.

Dan McGoey - Citigroup

Okay, thank you.

Fernando Gonzalez

Thanks.

Maher Al-Haffar

Thanks, Dan. Operator?

Operator

Thank you. And our next question comes from Mike Betts from Jefferies. Please go ahead.

Mike Betts - Jefferies

Yes, thank you very much. My two questions; the first one. I think from memory in Q1 there was a $54 million hit from the maintenance and inventory issue. We have heard a bit about Colombia and we've heard a bit about the U.S. -- apologies for the alarm you can probably hear in the background. Could you give an update to what that 54 stands at the end of the first half? Has it gone up or has it gone down? I think you indicated for the U.S. how much you expected to get back in the second half. Do you have a similar feeling for the group?

Then my second question, please, just on Egypt. Could you indicate what sort of capacity utilization you are operating at now currently in Egypt? I think you indicated you were still having problems with the fuel supplies. Have they eased at all as you've gone through the quarter? Then if you could just clarify the comments about new capacity, because I thought there wasn't any further new capacity to come on stream. Or was that just assuming that people would be able to operate at higher utilization rates than in the past? Thank you.

Maher Al-Haffar

Regarding Egypt, we're operating at full capacity. And we've managed to do so because of a combination of a couple of factors because of the type of fuel we use in Egypt, which is a fuel oil that is called Mazout. And that's different to the fuel that is used in most of the cement plants in the Cairo area, which is gas and which is the area in which there has been some restrictions to the energy needed to run those plants at full capacity. And the other factor is our alternative fuel strategy that in Egypt has been evolving very nicely. So far we've been operating at full capacity.

Now, regarding the question you made about maintenance, the number you're mentioning; you're right, it was 50-something million. And the calculation right now is that as of the first half the additional amount -- that 50-something -- 54 million correlates about $36 million. So that is the amount. And we do expect in the second half, part of it again to be reversed.

Fernando Gonzalez

And also Mike, if I can add also; there's some inventory component that we're expecting to be reversed just a little bit under -- about $7 million that we expect in the second half.

Mike Betts - Jefferies

So to just make sure I got the number right, the 54 turned down to 35 at the end? Sorry, to 36 at the end of H1 or did I mishear that?

Fernando Gonzalez

Yes, (indiscernible). And just a remainder, okay, as you recall, last quarter we said maintenance and inventory was 54 million. That was roughly broken down half-and-half between inventory and maintenance.

Mike Betts - Jefferies

So there was -- in the second quarter there was an $18 million reduction or $18 million-ish reduction. Is that right?

Fernando Gonzalez

Roughly, yes.

Mike Betts - Jefferies

Fifty four minus 36, and I guess what I'm trying to get to is what region did that occur in or where did that reduction occur? So which regions saw the benefit from it?

Fernando Gonzalez

Yeah. As you remember, the biggest contributor to that in the first quarter was the U.S. And so that's where we've seen both the inventory and the maintenance. And of course SAC has also been a contributor as well. But the U.S. has the biggest chunk. As you recall, last quarter we said that out of the 54, close to 30 million was coming out of the U.S. business.

Mike Betts - Jefferies

But shouldn't that have boosted the operating leverage in the second quarter then in the U.S., the re-credit back of that? Or am I missing something?

Fernando Gonzalez

Sure, it boosted -- Well, of course it has a positive contribution, but there are other pieces that are moving, that is fading away a little bit of the operating leverage, right.

Mike Betts - Jefferies

Okay.

Fernando Gonzalez

So, of course it had a positive impact, but there maybe -- for example, Mike, transportation is an area that has worsened a little bit for us as we're getting to full capacity in several of our markets, and we're having to transport our products longer distances. So, there are many moving pieces, right? So it definitely did positively contribute, but there were other items that may have dampened that effect.

Mike Betts - Jefferies

Okay, understood. Then, if I could, just one follow-up on Egypt. How do you see that market developing? I thought -- I maybe misheard, but I thought you were talking about potentially seeing either slower volumes or as new capacity opens. Maybe I missed the point, Fernando, on that. Is that that you think that other plants will get up to better utilization rates and, therefore, you won't be able to keep it 100% capacity utilization? Was that the point you were making?

Fernando Gonzalez

I think the supply of energy in Egypt will improve in the country as a whole, because there will be more or less the same amount of national gas available, plus as you may know, very recently authorities authorized imports of coal and pet coke for different players. So, in the case of Egypt, and again mainly in the north end of Cairo, there is capacity that has not been able to be used because of this shortage of energy. So that's should start changing during the second half.

Even though these authorizations have been done, we don't believe that the higher capacity utilization in the country will happen immediately. It would take some time. But we think that will be the dynamics of the market. In our case, we do expect to continue using our capacity utilization full or very close to full capacity.

Mike Betts - Jefferies

Understood. Thank you very much.

Fernando Gonzalez

Thanks.

Maher Al-Haffar

Thanks, Mike.

Operator

Thank you. Our next question comes from Marcos Assumpcao from Itau. Please go ahead.

Marcos Assumpcao - Itau

Hi. Good morning, everyone. First question on the cash flow perspective for the second half of the year. Could you comment a little bit on your expectations for free cash flow? We already had a quarter of positive free cash, but mainly impacted by the sale of assets. So we are seeing an improvement in EBITDA probably Mexico, continued improving results in the U.S., probably lower taxes, and also lower financial expenses a little bit. So what is your perspective on the free cash in the second half?

My second question is on Europe. If you could comment both on northern Europe and then in the Mediterranean, we are seeing positive growth on EBITDA and probably a little bit ahead of expectations as well. Do you expect that trend to continue in northern Europe and also in Spain if you really saw the market bottoming out right now?

Fernando Gonzalez

Well, the direct answer to Europe is that, yes, Europe has been performing slightly better than we expected. And we've commented that already for a couple of quarters, and we do expect Europe to continue performing.

In the case of Spain, yes, the market for the first time is bottoming up, but as you may know, it is doing at a very low base. So the good news is that Spain, the domestic market in Spain started reacting and we do expect again starting from a low level, but that it will continue evolving positively.

Now, regarding the question to cash flow would -- as you may know we don't provide cash flow guidance as such, but also as you may, the second half of the year because of seasonality and economic activities are much, much better, free cash flow is the highest free cash flow half of every year.

Marcos Assumpcao - Itau

All right, thank you.

Fernando Gonzalez

Thanks.

Maher Al-Haffar

Thank you, Marcos. Operator?

Operator

Thank you. Our next question comes from Francisco Suarez from Scotiabank. Please go ahead.

Francisco Suarez - Scotiabank

Hi, thank you very much. Good morning.

Fernando Gonzalez

Good morning.

Francisco Suarez - Scotiabank

Thank you very much. Good morning. If I may, a question on your cap calls. It seems that that could be actually a major source of value for you guys. Any chances of seeing a potential amendment to the conditions on your cap calls at this moment?

Fernando Gonzalez

Can you repeat that question? I didn't hear the last part of …

Francisco Suarez - Scotiabank

Yes, sorry. My question relates to if there is any chance of doing perhaps a new negotiation with your banks and a potential amendment to the cap calls that you have.

Fernando Gonzalez

Well, not necessarily negotiating with the cap calls. That's an asset we have. As you may know, related to -- we did them related to the coverts. But definitely they're a source of value. And currently we have been monetizing the ones related to converts in 2015, but the ones related to '16 and '18, we're keeping them and we don't have immediate plans for those. But, yes, you're dead right. It's an important asset, I'm referring to the value those assets have.

Francisco Suarez - Scotiabank

I agree. If I may, a last question on your overall outlook for certain regions in the United States because certain players are pointing out that amid a low base, northern Florida, Georgia, and the Carolinas seems to be the most dynamic markets at this moment. I don't know if you can actually share with us any color on those regions particularly. Thank you.

Fernando Gonzalez

Yeah. Well, for us, the most dynamic markets have been California, Texas and Florida. Texas and Florida in particular have been the biggest contributors to growth and employment since the beginning of the year. And so, we definitely continue to see that trend in those markets. Capacity utilization in the southern part of Florida is approaching very high levels. In Texas, as you know, we're -- it's at the maximum and we're having to bring cement from adjacent markets. In California, similar situation as well. So, the highest growth certainly will continue to be in those three markets, but of course also we're seeing some important growth in the north of the Florida markets as you said, Alabama and Georgia, but not to the same level as we're seeing in those markets.

Francisco Suarez - Scotiabank

Interesting. Lastly, in the Odessa plant is your debottlenecking has already entered the market, the increasing capacity in Odessa?

Fernando Gonzalez

No. We haven't completed that yet.

Francisco Suarez - Scotiabank

Okay, thank you very much.

Fernando Gonzalez

Thanks.

Maher Al-Haffar

Thank you. Operator?

Operator

Thank you. We have time for one more question. And it will come from Heber Longhurst from Interacciones. Please go ahead.

Heber Longhurst - Interacciones

Thank you for taking my call. I have one quick question. Which, if any, regions do you expect to see higher-than-average maintenance expenses during the third and fourth quarters?

Fernando Gonzalez

Which region? Well, I think most of major maintenance, which are referred to cement are done in the first half.

Heber Longhurst - Interacciones

Okay.

Fernando Gonzalez

That's particularly true because of seasonality in North Europe and parts of the U.S. And in most of the cases is first half, so I don't -- right now, I don't have in my mind, and I don't foresee any additional or special maintenance when comparing it to second half of last year.

Heber Longhurst - Interacciones

Okay. Thanks so much.

Fernando Gonzalez

Thank you.

Maher Al-Haffar

Thank you. Operator?

Operator

Thank you. I'll now like to turn the call over to Fernando Gonzalez for closing remarks.

Fernando Gonzalez

Well, thank you very much. And in closing, I'd like to thank you all for your time and attention. We look forward to your continued participation in CEMEX.

Please feel free to contact us directly or visit our Web site at any time. Thank you, and good day.

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