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

Q3 2010 Earnings Call

October 26, 2010 10:00 am ET

Executives

Fernando González - EVP, Planning & Finance

Rodrigo Treviño - CFO

Analysts

Vanessa Quiroga - Credit Suisse

Gordon Lee - UBS

Nick Sebrell - Morgan Stanley

Mike Betts - Jefferies

Dan McGoey - Citigroup

Christopher Buck - Barclays Capital

Jamie Nicholson - Credit Suisse

Gonzalo Fernandez - Santander

Robert Gardiner - Davy

Eduardo Couto - Goldman Sachs

Eric Ollom - Jefferies

Aaron Holsberg – Santander

Operator

Good day ladies and gentlemen and welcome to the CEMEX third quarter 2010 results conference call. My name is Marcella and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. (Operators Instructions).

I would now like to turn the conference over to your host for today Mr. Fernando Fernando González, Executive Vice President of Planning and Finance. Please proceed.

Fernando González

Good day to everyone. Thank you for joining us for our third quarter conference call and video webcast. I have been asked 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 could change in the future due to a variety of factors beyond our control.

I would like to start with four key messages. First, the leveraging continues to be the focus of our financial strategy. Second, we still believe that economic conditions in most of our markets have stabilized and are bottomed out with the fourth quarter likely to be an infection point on a consolidated basis. However, visibility remains low and the US is expected to take longer to recover than originally anticipated.

Third, after the financing agreement last year, we took the following positive steps on equity offering, the sale of assets and issuance of bonds and compatible securities. We have seen a reduce in our exposure and our financing agreement ahead of schedule. However as slower than expected recovery has translated into lower than expected operating EBITDA generation.

In light of the difficult operating environment and to ensure that we remained in compliance with our covenants, we had conversations with our banks and private placement noteholders that resulted in the amendment of some covenants and our financing agreement. Rodrigo will provide details of these amendments later in the call.

And fourth, we continue to rightsize our business as necessary and are constantly looking for opportunities to reduce cost at both the operating and corporate levels. We are on track to achieve our budgeted $150 million in savings this year, reaching 17% of this benefit by the end of September. We have started our budgeting process for 2011 and are making sure our cost base continues to adjust the prevailing market conditions.

Now, I would like to discuss our third quarter results. Infrastructure and housing continued to be the main drivers of demand for our products during the quarter. Lower volumes and weaker pricing conditions in some of our markets partially mitigated by our cost reduction initiatives affected our quarterly results. The year-over-year pace of decline of quarterly sales and operating EBITDA has been moderating for five straight quarters and will likely reach an inflection point in the fourth quarter.

During the third quarter and on a like-to-like basis for the ongoing operations consolidated domestic gray cement volumes decline by 1%, ready-mix volumes decline by 3% and aggregate volumes decline by 2% versus the same quarter last year. Similar to the year-on-year trend in sales and operating EBITDA, this is also the fifth consecutive quarter in which we have seen lower or equal year-over-year decline in volumes for our products.

In the fourth quarter, we expect consolidated year-over-year volume growth in cement and ready mix. Adjusting for foreign exchange fluctuations, consolidated gray cement and ready-mix prices declined by 2% during the third quarter compared with the third quarter last year and decreased by 1% for aggregate. In Mexico, demand volumes were positive in the third quarter after declines in the first two quarters of the year.

Infrastructure spending was high in 2009 specially in the first half of the year due to expenditures on special government programs to promote growth and employment which totaled about MXN46 billion. CONAVI, the Mexican Housing Council expects investments in formal housing to increase by about 1% in real terms during 2010 led mostly by credit expansion from INFONAVIT, FOVISSSTE, and, to a lesser extent, commercial banks.

We see investment in the self-construction sector contracting slightly this year, reflecting the absence of the extraordinary social programs that were available last year. Recovery in this segment could begin in the fourth quarter after result of an increase in formal employment, underrecovery in monthly remittances from the United States which are now expected to be flat to slightly higher in peso terms for 2010.

We continue to expect total investment in infrastructure including non-cement intensive projects such as energy and electricity to drop by about 1% in real terms for this year. However, investment in cement-intensive projects is expected to decline by about 15%. A potential upside to this estimate is the deployment of federal resources to rebuild public infrastructure destroyed by hurricane Alex in Northeast Mexico.

The reconstruction effort is estimated at around $1.3 billion. Additional resources maybe allocated for reconstruction efforts in other affected areas including Veracruz and Tabasco. The industrial and commercial sector is expected to show mid single-digit growth in the year after two years of decline driven mainly by construction demand from the industrial sector.

In the United States, the volume growth on a year-over-year basis seen in the second quarter stall with the slowing economy. Our US volumes have lagged our expectations due to the weaker than expected pace of recovery in the economy to lower job creation, reduced confidence and weaker infrastructure spending. While we continue to expect that rebound in the construction market, visibility remains low and the timing of that recovery remains uncertain.

Growth in the near term will rely on infrastructure spending and a gradual upturn in residential housing. Public construction spending through August declined by 8% year-over-year and streets and highway spending was down 2%.

In the case of streets and highways, states have prioritized the usage of their ARRA funds which have tighter deadlines and no matching requirements. The increase ARRA spending however has been offset by delays in the annual obligation process of the Federal Highway Program as well as the execution of construction projects coupled some reductions is dedicated states’ spending levels.

Much of the reduced states’ spending we have seen is the result of timing issues, affectively deferring the impact of the fiscal stimulus over a much longer period that originally contemplated. Several leading indicators suggest a more robust outlook for infrastructure. As of August, only 36% of the ARRA-related infrastructure funds have been spent. Contract awards for streets and highways are up 4% year-over-year. Notably, we have seen a significant pickup in ARRA-related highway spending in recent months, reaching $1.4 billion per month in the June-September period versus an average of about 600 million in the first five months of this year.

In addition with the end of the federal government fiscal year in September, states have moved rapidly to speed up their obligation of federal highway money. This should translate into higher content awards and construction activity in coming months.

With the November elections coupled with the expiration of the Federal Highway Program extension in December, we expect some government al action regarding 2011. Federal highway spending levels as well as progress towards a new six-year transportation program. President Obama's recent endorsement of the passage of a more robust transportation bill along with his proposal for $50 billion in infrastructure spending give us grounds for cautious optimism regarding possible increased federal highway funding in 2011.

Recovery in residential construction activity in 2010 has been more muted than anticipated. Housing starts as of September are running at a level of 610,000, approximately 10% above the 2009 rate. Job creation and consumer confidence remains the critical drivers for this demand sentence. While the rate of decline in the industrial and commercial sector has stabilized in terms of spending and contract awards this year, the architectural billings index which typically leads construction spending by nine to 12 months in this sector rose in August to a level signaling growth in billings for the first time in two years.

In light of all this, we have lowered our volume expectations for the year to reflect this lower than expected US recovery. As a result of these new expectations we continue to adjust our US operations to the current market environment during the third quarter. Headcount was reduced by 3% in the third quarter from the previous quarter and 10% from same period last year.

In third quarter we also reduced the ready-mix fleet by 106 trucks or 5% of the active fleet. We close nine additions of ready-mix plants or 4% of the active plants and we close six aggregate quarries or 6% of our operating plants.

In relation to our US operations early this month we announced that pursuant to the exercise of a put option by Ready Mix USA, we will acquire its interest in the two joint ventures we have with this company. The purchase price will be around $360 million plus the consolidation of net debt held by one of the joint ventures at closing which is expected to take place in September 2011.

In Europe, the residential sector was the main driver for volumes in the quarter. Cement volume growth from Germany and the UK and ready-mix volume growth in France were partially offset by declining volumes mainly from Spain. Volumes in Poland were affected by rainy weather in September. In the region we observed mix results during the first three quarters of the year.

Better then expected volume growth was observed in the UK and to a lesser extent, Germany and France. In these countries, the recovery of the housing sector from very low levels last year, a gradual improvement of private non-residential sector, and lagged effects from fiscal stimulus packages contributed to better than expected volume growth.

In other European countries like Spain, private sector activity remains subdued and the first signs of fiscal tightening have become visible. There are signs however, that the housing adjustment is coming to an end. We expect the positive momentum to persist in the short term in most countries reflecting ongoing projects in Western Europe and the increase in private construction permits.

Looking ahead, we expect volumes to decelerate as the current growth rates in housing will moderate and the first negative impact of the announced fiscal consolidation measures will become more evident. To mitigate the volume decline in Spain we have increased our exports to other countries especially in the Mediterranean.

Year-to-date experts from the country have more than doubled versus the same period last year. In Spain, we continue implementing our rightsizing efforts, adjusting our operations to the current environment. During the third quarter, headcount was reduced by about 10% on a year-over-year basis. In addition, during the quarter we reduced our ready-mix fleet by 6% and our number of ready-mix plant by 5% from our active operations.

During the quarter we continue with our alternative fuel substitution efforts in Europe, achieving records in plants in Germany with 7% substitution; Poland, for alternative fuel utilization reached 72%; and the UK with substitution reaching 54%. In the South/Central America and Caribbean region, we saw decline in our major markets in the third quarter reflecting a delay in infrastructure projects in Costa Rica, Panama, and Columbia, and bad weather conditions in Puerto Rico and Guatemala. In Columbia, the slightly lower volumes were a result of delays in streets and highways projects. We expect this volume loss will be recovered during the fourth quarter when this projects begin.

In the case of Columbia despite a drop in third quarter volumes, the expectations for cement consumption going forward continue to be positive. The better economic environment are syndicated by high confidence levels as well as low interest rates and information, we suspected to have a positive impact in the residential sector, specially low income housing.

Housing licenses, a leading indicator for construction were up 21% from January to July versus the same period last year. President Juan Manuel Santos has committed to the construction of 250,000 homes per year during the four years of his term. This yearly rate is significantly higher than the 170,000 houses started during 2007 which represents the peak year of residential construction to date.

In Panama, the Panama City Airport project under and the Baitun hydroelectric plant started earlier this year. Activity in this project is expected to be slow during the rainy seasons and gain momentum in the beginning of 2011. Additionally, there were a lot of major projects have been delayed to 2011 due to a slower approval process.

In the Africa and Middle East region the growth in cement volumes immediate was offset by a continued volume decline in the United Arab Emirates. The informal residential sector continues to be the main driver of cement in Egypt. During the third quarter we saw a continued decline in public spending by the Egyptian government reflecting the fiscal situation of the country as well as a Ramadan holiday.

Going forward, however, with elections next year, we expect infrastructure to be an important driver of cement consumption. Additionally, the government is focusing on public private partnerships to speed up infrastructure in areas such as roads, railways, ports, hospitals and waste water treatment. In Asia, the increase in cement volumes during the quarter was driven mainly by our Philippines operations, which continued to benefit from strong infrastructure spending.

With the new administration led by President Aquino, there is a high level of confidence in the country translating into high consumption on frame investment. The rate of growth in cement volumes has moderated after the elections but still remains high. The main driver of cement consumption in the country is the residential sector where we continue seeing strong remittances.

For the full year 2010, we expect consolidated volumes for cement to decline by about 2% and ready-mix and aggregate volumes to show a middle single digit decline compared with last year.

In Mexico, we expect our cement volume to decline by about 4%, ready-mix volume to decrease by about 8% and aggregates volumes to fall by about 7%. In the United States, we expect cement and ready-mix to decline by about 1% and 7% respectively.

Aggregates are expected to drop by 3% on a like-to-like basis for the ongoing operations. Regarding our pricing strategy we will continue to target recovering input cost inflation for our business in most of our markets.

For 2010, we anticipate that Mexico, South/Central America and Caribbean region, Africa and Middle East and Asia will continue to generate stable operating cash flow. We expect lower contribution from Europe reflecting the fiscal austerity measures adopted in response to the European debt crises as well as slower growth in the United States.

Accordingly, we now expect our 2010 consolidated operating EBITDA based on currently prevailing exchange rate to be about $2.4 billion. It is important to emphasize that this means that the operating EBITDA in the full quarter is expected to be about $100 million higher than that in the full quarter, last year being the first quarter with year-over-year growth in several years unmarking an important inflection point in our trailing twelve months EBITDA.

Free cash flow after maintenance capital expenditures this year is now expected to exceed $500 million reflecting lower operating performance, the impact of higher interest expense, maintenance capital expenditures and the exclusion of our Australian operations. We will keep capital expenditures and other investments at a minimum and anticipate using about $250 million of our free cash flow towards debt reduction. We will continue to be vigilant of our cost cutting efforts, maximizing our bottom line and strengthening our capital structure.

Thank you, and now I will turn the call over to Rodrigo.

Rodrigo Treviño

Thank you, Fernando and thank you all again for joining us on this teleconference and video webcast. Operating EBITDA generation during the quarter was effected by lower volumes in some of our markets and by lower year-over-year prices, especially in United States and Spain, on a like-to-like basis adjusting for foreign exchange effects and divestments. Operating EBITDA was down 13% during the quarter, operating EBITDA margin fell to 17.2% during the quarter from 19.5% in the third quarter of last year.

Operating EBITDA margin was effected primarily by softer prices and also as a result of higher cost of sales and SG&A expenses as the percentage of sale due to lesser economies of scale from lower volumes. SG&A expenses were further affected by higher transportation costs. The increase in cost to sales and SG&A were partially offset by savings from our cost reduction initially.

During the quarter our free cash flow after maintenance capital expenditures was $250 million versus $260 million last year. Our lower investment and working capital and positive other cash items which included the sale of operating assets and a tax refund mainly from our US operations offset the lower operating EBITDA generation, higher financial expenses and higher cash debt.

The number of working capital days for our consolidated operations excluding the effect of securitization program, declined to 32 days during the first 9 months of this year from 37 days in the same period in 2009. As Fernando mentioned, we expect free cash flow after maintenance capital expenditures for 2010 to exceed $500 million. We expect to have higher interest expenses and maintenance capital expenditures, but lower investment in working capital. We expect to recover more than half of our year-to-date working capital investment during the fourth quarter.

Approximately $73 million in higher interest expense this year is due to the exchange of about $1.6 billion of perpetual debentures into about $1.2 billion in new senior secured notes. With this exchange, however coupons on our perpetual instruments are reduced by close to $70 million, but more importantly our net debt including perpetual debentures was reduced by $437 million. Our kiln fuel and electricity costs on a per ton of cement produced basis increased by 3% year-to-date versus the same period last year.

For 2010, we now expect this cost to increase by approximately 4% over last year reflecting higher input cost inflation. We continue to develop new ways to lower our energy input cost and to make them more predictable. We remain committed to increase in the use of alternative fuels in our operations.

During the third quarter, we achieved an alternative fuel utilization rate of close to 22%, up from 17% a year ago. We also continue pursuing clean development mechanism projects. Three CDM projects that have passed the challenging process of validation and registration are; one, the EURUS 250 megawatt wind farm in Oaxaca, two; the utilization of biomass fuels in our Colorado plans in Costa Rica and three; the use of biomass fuels in our Caracolito plant in Colombia. The implementation of these three projects is now complete and they have already begun to generate carbon emission reductions. These initiatives are expected to generate about 800,000 metric tons of Co2 credits annually.

Regarding our third quarter income statement, the increase in financial expense during the quarter compared to the same quarter last year reflects the terms of the financing agreement and the replacement of bank debt with high coupon fixed-rate bond. In the quarter we recognized a foreign exchange gain of $109 million, due mainly to the appreciation of the euro against the US dollar. Most of these gains are non-cash and are related primarily to our European inter-company operations. We also recognized a loss on financial instruments of $34 million related to CEMEX and Axtel shares.

Other expenses during the quarter were a $125 million including impairments and fixed assets, a loss on sale of assets and severance payments. During the third quarter, we had a net loss from continuing operations of $86 million versus a gain of $78 million last year. The loss in the quarter reflects mainly the lower operating income generation and higher financial expense partially mitigated by a higher foreign exchange gain.

As Fernando mentioned earlier, we have obtained approval for sufficient participant creditors to amend some governance under our financing agreements. These amendments include a financial covenant reset, maximum consolidated leverage ratio of consolidated fund of debt including our perpetual debentures to trailing 12 months EBITDA is now not to exceed 7.75 times for the periods ending December 31, 2010 and June 30, 2011, and then decreasing every six months to 4.25 times for the period ending December 31, 2013.

A consolidated coverage ratio of trailing 12 months EBITDA to consolidated interest expense of not less than 1.75 times for each period beginning on December 31, 2011 to the period ending on December 31, 2012 and two times for the remaining periods through December 31, 2013. We also have amended the terms of our Certificados Bursatiles reserve in order to improve the liquidity and refinancing risk management and we have completed other amendments that will provide us with more flexibility to perform liability management when appropriate.

In order to obtain the aforementioned amendment, we have agreed to an upfront amendment fee of 25 basis points paid to consenting participant creditors. In addition, we have agreed to a digital compensation that is contingent of uncertain events not happening in the future. If additional prepayments between October 1st 2010 and December 31st 2011 under the financing agreement are less than 15.45% or approximately $1.5 billion of the aggregate exposure of participating creditors as of September 30th 2010, we will incur an additional one time fee as follows; if the prepayments are between 5.15% and 15.45% or between $500 million and $1.5 million approximately, then the flat fee will be 12.5 basis points.

If the prepayments are less than 5.15% or approximately $500 million, then the flat fee will be 25 basis points. Furthermore if we have not raised at least $1 billion from equity or equity-linked subordinated securities by September 30th 2011, the prevailing margin will increase by 100 basis points beginning on October 1st 2011 and will only revert to the original margin, the $1 billion of equity or equity-linked securities has been raised.

Also during the quarter, we issued various short term notes under our short term Certificados Bursatiles program with an outstanding amount of MXN676 million at the end of this quarter. Notes were issued during the quarter at rates in Mexican pesos of about 5%, about 500 basis points lower than those we were paying a year ago.

With the prepayments we have made under the financing agreement we have greatly mitigated our refinancing risk until June 2012. In the third quarter, we used our free cash flow and proceeds from sale of non-core assets in Kentucky, mainly for debt reduction. However, debt during the third quarter was higher then that in the second quarter due to the negative point of change conversion effect of close to $500 million. This is related primarily to the euro exchange rate and it essentially reversed the positive conversion effects reflected in our second quarter reports. Our priority in the short term continues to be to pay down debt. To do this, we will work to improve our working capital management and continue to implement our global cost reduction and right sighting initiative.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Vanessa Quiroga with Credit Suisse. Please proceed.

Vanessa Quiroga - Credit Suisse

Hi. Thank you for taking my question. It is regarding the condition to issue equity or equity-linked instruments by September 2011. Could you just make it clear, so this is mandatory? It's not depending on any indebtedness level? This is something that you have to do next year? Thanks.

Rodrigo Treviño

Yes Vanessa, thank you for your question. The consequence of not issuing equity or equity-linked securities similar to the convertible securities we issued a year ago and earlier this year will be an increase of 100 basis points on the financing agreement debt. And that increased margin will be reduced only when we have raised that billion dollars in equity or equity-linked securities.

Vanessa Quiroga - Credit Suisse

And can you not issue the equity at any time?

Rodrigo Treviño

The consequence would be the increase cost on the financing agreement debt and again it will not come down to the original margin until you have raised such equity proceeds.

Vanessa Quiroga - Credit Suisse

And any other additional conditions in these amendments that you've reached with the banks regarding any certain other levels of debt payments?

Rodrigo Treviño

No, the amortization schedule does not change. The amortization schedule that we have under financing agreement debt remains as is. There are of course economic incentives for us to make additional prepayments and thus avoid increased cost on the financing agreement debt, but those prepayments are voluntary and if we do them it is because it is in the best economic interest of both the company as well as the capital structure.

Operator

Your next question comes from the line of Gordon Lee with UBS. Please proceed.

Gordon Lee - UBS

A couple of questions, actually on the operating results. The first was, SG&A was actually flat for the year-on-year period and it was the first time in several quarters that that happened. Do you feel that you can continue to see declines in SG&A going forward, or do you think you've sort of reached the steady-state limit for the current size of the operation? And then the second question was on the South American/Central American operations. You noted in your release that Colombian volumes, cement volumes fell by 1% but the overall region was down by 7%. I was wondering if you could give us a bit more color on specifically what country drove that decline. Thank you.

Fernando González

Let me start with the second one related to South America. We mentioned in some cases these volume declines are due to delays in projects like the ones in Panama and to some extent also to weather, so we do expect in the future these volumes to respond and not to continue declining.

Gordon Lee - UBS

Great, thanks. And on the SG&A?

Fernando González

The SG&A expense, I don’t have a specific estimate particularly for next year but it will tend to continue being stable or flat for the rest of the year.

Gordon Lee - UBS

And if I could just have one quick follow-up. I think one of the positives in the report was that US prices were pretty steady Q-on-Q, although there's been a lot of sort of anecdotal evidence or concerns that across the industry you have seen some pressure. Is there anything that you could mention in terms of what you've seen thus far in the fourth quarter that could provide any color on US pricing? Thank you.

Fernando González

Maybe what I can comment is that as you have practically mentioned as sequentially prices aren’t getting much more stable, year-to-date the figure and there is a price decline, but the sequential figure in the last few months and quarters have been getting now stable. So it’s almost already flat.

Gordon Lee - UBS

And would you say that that stability has continued into what we've seen thus far in the fourth quarter?

Fernando González

I think it will.

Operator

Your next question comes from the line of Nick Sebrell with Morgan Stanley. Please proceed.

Nick Sebrell - Morgan Stanley

A quick question again on the SG&A, you said that the higher transportation costs were part of the reason that the SG&A was maybe a little bit higher as a percentage of revenue than we might have expected. Is that due to consolidation of the ready-mix plants or is there something else in that? And then, looking at Europe, it seems like the weakness in Europe was predominantly due to Spain. We saw cement demand in Germany go up 7%, UK, 9%. I think French ready-mix also had an increase. Is the current trend in Europe sustainable? It seems like it should turn around and that as Spain becomes a smaller part of the mix, do you see Europe turning around next year and growing based on what we've seen in Germany and some of the core countries? And I'll leave it at those two questions. Thank you.

Fernando González

Thanks for the questions. Let me start with Europe. I think as we have already mentioned the stability is not that high and we know there will be adjustments in Europe mainly because of fiscal reduction in expenses next year. What I can say is that what we have seen and seems we will continue seeing for the rest of the year is basically North Europe with some improvements in volumes north as well as the east part, while the south part, Spain in our case, Spain and Croatia are still declining in a significant way. Difficult to say for next year but most probably this trend will continue for the rest of the year.

Nick Sebrell - Morgan Stanley

I just thought it was an interesting observation that you said austerity measures could be an issue and, of course, we've all seen that in the papers. But Germany, despite austerity measures, seems to be growing and the cement demand seems to match the growth that we have seen in GB, and France is certainly not on-board with the austerity measures, right? They don't seem to be tightening the belt so much, and so we've seen growth there, too. So I was just sort of wondering how important those are in the mix overall. And if Spain keeps having issues next year, is that the dominant factor?

Fernando González

Spain, as you know is our main business in Europe but the rest of Europe despite the potential impact of expense reduction programs, we do have certain structural issues. Remember that some countries in Europe like the UK or France, they do not have any sort of surplus in housing or there is investment in that sector that do have the stability of amendment, which is not the case in Spain as you know. The housing sector in Spain is completely different, it’s a completely different situation.

Nick Sebrell - Morgan Stanley

It's completely different, yes. And then on the transportation cost?

Rodrigo Treviño

Going to your first question, part of the explanation was because increase in the percentage of sales is as a result of our rightsizing initiative as we have shutdown some of our ready mix plans and our product has to travel further to service our customers from the plans that remain in operation, you incur an higher transportation cost as a result of that.

Operator

Our next question will come from Michael (inaudible) from Wellington Management

Unidentified Analyst

What do you expect maintenance and growth CapEx to be for 2010 and 2011?

Rodrigo Treviño

We still don’t have a figure for 2011 and the figure of 2010 will be around 500 million or so. It would be around 500 million, maintenance loss, other CapEx.

Unidentified Analyst

And for 2011?

Rodrigo Treviño

You don’t have a figure yet?

Unidentified Analyst

Still working on the budget?

Rodrigo Treviño

Yes still working in the budget, we will provide that information afterwards.

Operator

The next question comes from the line of Mike Betts with Jefferies. Please proceed.

Mike Betts - Jefferies

Firstly maybe Rodrigo, just to clarify on the new covenants. You researched, obviously, the potential equity or equity-linked issue. Can the proceeds from that be used to repay the first element? You referred to where you needed to generate between US$500 million and US$1.5 billion, are those mutually exclusive?

My second question was, I think you're talking about a US$100 million increase in Q4 EBITDA. But when I looked at your forecast for the year versus nine months, it’s a bit of an improvement in Mexico, not much in the US. Where are you expecting that improvement in Q4 to be driven from which regions?

And then finally, you referred to a bit of additional cost cutting on the call that you've done in Q3. I presume that's over and above the US$150 million, which I think was a previous number for this year. Do you have a revised target for cost savings for this year, and do you have a number for any that you've done so at this point for 2011?

Fernando González

Can I address the last one on cost cutting. The figure, the target figure is the same, it’s $150 and we have proportionately executed those savings during in the year. So we are quite confident to achieve the full figure by yearend and the main components of this program are, to some extent as we mentioned some additional rightsizing efforts in the US and Spain and also contributions of our cost cutting measures. One of them we have already mentioned, we have been reporting, is the use of alternative fuels which is supporting this 150 million saving problem for 2010.

Rodrigo Treviño

Going to your first question Mike, the use of proceeds from an equity issuance, according to the financing agreement rules today would allow us to replenish our cash reserves as needed to the minimum level that we’re required to operate and then the proceeds beyond that will be used to make repayments of some of the financing agreement.

Proceeds from a subordinated convertible security, as the one we issued earlier this year could be used in part to pay the Certificados Bursatiles coming due later in the year in September of next year. And so they don’t necessarily have to be used to make repayments under the financing agreement, but of course we have economic incentives is to make repayments under the financing agreement that in order to avoid the increase flat fee as a result of the amendment that we just obtained, but also to avoid the step-up that we agreed to last year when we signed the financing agreement and which of course has been disclosed in our 20-F filing and we have strong economic incentives to make repayments, in excess of $2 billion from now until the end of next year to avoid additional increased cost that we have already agreed to.

Of course you can use proceeds from free cash, from issuance of high yield notes, or other equity-linked securities.

Mike Betts - Jefferies

May be you could help me, Rodrigo, just remind me what the step it was in last year’s financing agreements in the 2010?

Rodrigo Treviño

Yes, I am going to have to give you the exact amount but we have made prepayments of about $5.2 billion under the financing agreement. In order to avoid additional step-ups all together we would have to make additional prepayments of about $2.5 billion. If we make additional prepayments of about $1.3 billion, $1.2 billion, $1.3 billion from now until the end of next year, then the step-up would be 50 basis points, if we don’t make additional prepayments then the step up could be a 100 basis points. We will follow up on the exact levels.

Mike Betts - Jefferies

Okay and just as I want to know about which regions are you looking for the increase in Q4?

Rodrigo Treviño

Yes it’s basically Egypt, its North Europe, UK, Columbia and Mexico. Those are the countries in which we are expecting those additional volumes compared to same quarter last year.

Mike Betts - Jefferies

Do you have any measure what your energy cost might do in 2011 or is too early to make that estimate?

Fernando González

We are still not providing estimates for 2011, we are starting or in the middle of our budgeting process as soon as we are ready to provide that information we will gladly share it.

Operator

Your next question comes from the line of Dan McGoey with Citigroup.

Dan McGoey - Citigroup

First, on the operations in Mexico. Mexico saw volumes positive year-on-year as well as pricing flat to positive, yet there was significantly lower margins. Could you talk a little bit about what pressured margins in Mexico? And then, just a clarification as well on the covenant amendments. The increase of 100 basis points if there's not an equity issuance. Does that consist of US$10 billion of refinancing, or what is the amount that that additional step-up in cost would be applied to?

Fernando González

I am taking your first question on margins. Several reasons, the first one is lower economies of scale, a reduction of 6% in sales. There is a second reason which is slightly higher cost of fuel in Mexico and also some higher maintenance works of third quarter compared to second quarter and also as mentioned it’s a 1% decline in price compared to second quarter, so those are the main reasons for the decline of the margins from 35 to 33%.

Rodrigo Treviño

Yes, going to your first question then the most of the debt under the financing agreement is floating rates and based on LIBOR. And the existing margin is 450 basis points, so LIBOR plus 450 basis points is the current cost of more then 90% of the debt under the financing agreement, that of course is an all in cost carry of less than 5% and that is a debt that would go out by 100 basis points if we have not issued equity or equity-linked securities by the end of September of next year and so bringing the cost up, from levels of 450 to levels of 550. The current debt in the financing agreement, I believe the exposure is under $10 billion, something in that range.

Dan McGoey - Citigroup

It's not applied to other debt that has since been refinanced?

Rodrigo Treviño

It applies to the financing agreement debt which is the debt that is subject to the covenants that were recently amended. I guess only to that debt.

Operator

And your next question comes from the webcast.

Christopher Buck - Barclays Capital

Can you please repeat the numbers regarding the fixed additional payments to the financing agreement orders? How much of the financing agreement needs to be paid, I guess prepaid? Additionally, can you provide more details about the debt pay down during the third quarter and how much of the financing agreement is currently outstanding?

We paid about 300 million during the quarter of debt under the financing agreement and other debt. However as a result of the negative conversion effect as we convert our Euro debt into US dollar, our debt increase during the quarter, pretty much reversing the positive conversion effects we reported during the second quarter. The outstanding under the financing agreement today is that little under $10 billion is close to $9.7 billion. And the increase cost, well I just explained that in the previous answer that I gave to the previous question.

Operator

Your next question comes from the line of Jamie Nicholson of Credit Suisse. Please proceed.

Jamie Nicholson - Credit Suisse

Just a little more clarification again on your financing strategy. As I gather your comments regarding the strong incentives that you have to prepay an additional US$2 billion or US$2.5 billion of debt, does that signal that you plan to tap the public markets for debt as well as equity? And if so, do you have any sense of what timing strategy you might have? Would you wait till later when there's maybe more visibility on your earnings or come to market as they're open? If you can give a little clarity on what your financing strategy from a timing perspective, both debt and equity would be helpful.

Rodrigo Treviño

Well currently we don’t have any maturity coming due for the remainder of this year or the early part of next year that will require us to go to market sooner rather than later. It is important also to highlight that we currently do not have shares that have been authorized by our shareholders to be issued in connection with either an equity or an equity-linked transaction. And so most likely the market would know the timing well before we intend to go to market because we will require to ask for approval from our shareholders for the share capital increase that would be required for that.

Going to your question of whether or not we will tap the fixed income capital markets from now until the end of next year, I think the answer to that is that if we have made prepayments under the financing agreement debt already during the rest of this year and the early part of next year and the amount that you need to prepay in order to avoid the increased cost as a result of the step ups that have been agreed to is relatively small, then yes, you are incentivated economically to go to the fixed income capital markets even if it is more expensive than the bank debt to make those additional prepayments and avoid the step up on the entire balance of the financing agreement debt. And that most likely would happen in the latter part of next year when we know what is the short fall to avoid the step ups.

Jamie Nicholson - Credit Suisse

And then for the JV put option, how do you plan to finance that? Do you anticipate that coming out of equity proceeds?

Fernando González

Well I think we have the time to explore this in ways, different options. As you know we will be paying for that excision in September next year so there's plenty of time to explore different ways.

Jamie Nicholson - Credit Suisse

And then one final question if I may, just a detail. On your press release regarding your derivative transactions you mentioned cash collateral of about US$200 million. Can you just clarify, is that included in your cash balance or excluded? And are there any cash liabilities from some of these derivative transactions that you have footnoted here that you anticipate having to pay in the coming quarters? Thanks.

Rodrigo Treviño

No, it is not included in the cash balance and yes as the stock prices of both CEMEX and Axtel recover, we will recover some of that cash posted on margins on those contracts.

Operator

Your next question comes from the line of Gonzalo Fernandez with Santander. Please proceed.

Gonzalo Fernandez - Santander

My question is, I don't know if you can repeat the guidance for free cash flow for this year and for volumes in Mexico? And the second question is regarding the exercise of the put option on Ready Mix. And if I remember correctly this, you have a maximum CapEx including expansion of $700 million for next year. Do you think that with that CapEx you can finance the acquisition of Ready Mix or would you need to exceed that CapEx? More precisely, what is your CapEx estimate for next year including the exercise of the put option?

Rodrigo Treviño

As Fernando mentioned, just an answer to the previous question, we are analyzing all of the options to fund the payment for that put obligation. Clearly we don’t want to increase the level of our debt, we don’t like the level of leverage and our financing strategy is aimed at de-leveraging our balance sheet. So that is not the preferred option. Clearly also, aim with it by issuing equity would be very expensive because equity today is the most expensive source of funds for given both operating and financial leverage that we have. And so clearly we have to explore the other option which is to sell assets. You have to sell other assets in order to pay for the assets that you are acquiring. But we don’t see the payment of the put option as part of our CapEx. Clearly is an obligation that we have and we have to find the best way which to fund it. But we have time to explore that from now until the middle of next year.

Going to your question on volumes for Mexico, gray cement there remain for the full year at minus 4 in line with what we guided during the second quarter teleconference so that hasn’t changed.

Gonzalo Fernandez - Santander

Sir, on the free cash flow?

Fernando González

Yes, there was another one.

Rodrigo Treviño

Free cash flow is related to $500 million.

Fernando González

$500 million after maintenance CapEx.

Rodrigo Treviño

And an important component of that free cash flow for the full year is the fact that we do expect that as we have in previous years given the seasonality of our working capital, we expect to recover more than half of the investment in working capital that we have made during the first nine months of the year and that is an important source of the free cash flow during the fourth quarter, that contributes to the full year of course.

Operator

And your next question comes from the webcast.

Robert Gardiner - Davy

What countries are you exporting to from Spain and how many times?

Fernando González

We are exporting mainly to Africa and volumes are slightly higher than $1 million, about $1.2 billion or something.

Operator

The next question comes from the line of Eduardo Couto with Goldman Sachs.

Eduardo Couto - Goldman Sachs

Just to make sure that I understood the terms of the FA. If you don't issue equity by September and don't prepay the $2.5 billion of the FA, your cost of debt will go up by 200 basis points? Is that correct?

Rodrigo Treviño

Well lets put it this way, if you don’t issue equity or equity-linked securities of the type that we issued recently then you have a step up of a 100 basis points starting on October 1st of next year until you have raised those proceeds from those securities. In addition to that, if you have not made prepayments under the financing agreement by December of next year, you may save a 50 or 100 basis point increase in the margin. You're right, it could be anywhere between a 150 to 200 basis point increase in the cost of debt if we have done neither additional prepayments for issuance of equity or equity-linked securities.

Eduardo Couto - Goldman Sachs

And for the additional 50 bips you need to prepay 1.3 billion? Is that right?

Rodrigo Treviño

We have to get to the exact number, expressed as a percentage of the financing agreement, it’s disclosed in our 20-F, so the information is public, but we'll get the exact figure for you and if it varies of course depending on exchange rates.

Eduardo Couto - Goldman Sachs

Just because we are talking about 500, 550, 650 basis points plus LIBOR, which is still something significant below your cost of equity, so do you think that it makes sense for you to raise this equity, even with this lower cost of that?

Rodrigo Treviño

Well, it’s a fine balance. We still don’t like the leverage that we have today. We know that our financial leverage will down as the recovery takes place and as we get closure to middle of the cycle EBITDA cash flow generation for the existing assets we have on our balance sheet. But, the recovery has been delayed in the US and there is still no visibility, so that we want to just wait until recovery or should we perhaps lower the risk of our capital structure by some means before the recovery gets here and that is a decision that we and our board and the shareholders will have to make during the course of the coming months.

Eduardo Couto - Goldman Sachs

After this 100 basis point increase, there's no additional increase on the top of that if you don't do anything? It's just your 100 basis additional, right?

Rodrigo Treviño

Yes, but if you don’t do anything whatsoever, you are in the next 12 to 18 months and you went to sit down and negotiate something again with the banks in 1.5 year time is going to become more difficult. You have to consider not only what is the agreement today, but the ongoing relationship with the banking community and we cannot ignore that.

Eduardo Couto - Goldman Sachs

And this upfront payment that you're doing, it's basically 25 basis points over the $10 billion under the FA, like $25 million? Is that right?

Rodrigo Treviño

That’s correct and because we have more than three years still outstanding on our financing agreement that, you can do the math but it means that the cost of borrowing under the financing agreement debt will go up on a per annum basis by 11.1%.

Eduardo Couto - Goldman Sachs

In relation to your free cash this quarter, you had this gain of around US$100 million. This is non-recurrent, right? What is that exactly, these other non-cash items that you had this gain of US$100 million?

Rodrigo Treviño

I think it’s primarily to do with a tax rebate we received but we can follow-up on that.

Eduardo Couto - Goldman Sachs

But its non-recurrent, right?

Rodrigo Treviño

It is non-recurrent because it’s a tax rebate that we would cover during the quarter. I think it was in the US.

Operator

Your next question comes from the line of Eric Ollom with Jefferies. Please proceed.

Eric Ollom - Jefferies

Was there anything in the covenant change or the recent negotiation with the banks regarding your ability to make coupon payments on the perps? And also, given the linkage, if you will, between the coupon payments on the perps and dividends on the equity and the need to raise equity, is there anything you can comment on dividend policy over the next year? Thank you.

Rodrigo Treviño

Yes we are not prohibited from making payments on the coupons, on the perps under the financing agreement debt. We are strained in order to pay cash dividend on our common equity and if fact, we haven’t been mostly in the form of stock, even before the financing agreement debt. Close to 97% of our shareholders elected to receive stock instead of cash dividends in the past. Most of our shareholders by and large have not bought CEMEX because of the cash dividends that it was paying in the past but most likely until we have delevered and refinanced the existing financing agreement that we are not going to be making common, payment of dividend on common equity.

Eric Ollom - Jefferies

So just to extrapolate from that, you should expect no change in the dividend payment? Obviously, that would hurt stock price if it did. And we should expect no change in the policy of paying the coupons on the perps over the next year?

Rodrigo Treviño

Well that is something we will have to decide as the situation evolves.

Operator

And your final question comes from the line of Aaron Holsberg with Santander. Please proceed.

Aaron Holsberg - Santander

Further to what you were saying on Gonzalo's question about asset sales, are you actively reviewing possible asset sales? Do you think it's likely that you will be making a significant asset sale in 2011?

Fernando González

We have not stopped on our efforts on divesting non-strategic assets. Lets say in the intensive we have today is different to the one we use to have it last year. Meaning divesting assets will not significantly reduce our leverage ratio. So although there are always good reasons to divest from assets because they are now strategically really needed, we are looking for possibilities exploring all of them but taken into account that the price to be paid to be the right one.

Aaron Holsberg - Santander

Right. And again, that would be in addition to free cash flow debt and equity or equity-linked securities. I guess my other question is if you would reconsider either opening the perp exchange or offering another exchange for the perps which didn't tender the first time?

Rodrigo Treviño

To do that it would have to be based on reverse inquiry. If there was interest on the part of significant holders of the perps to reconsider an exchange, certainly we consider it. But by and large the people who wanted to exchange and the people that wanted to hold on, held on, and so we would be surprised if there is significant interest for another exchange but of course we remain open to reverse inquiries.

Operator

At this time I would like to turn the call back over to Mr. Fernando González for final remarks. Please proceed, sir.

Fernando González

Thank you very much. In closing, I would like to thank you all for your time and attention and we look forward to your continued participation in CEMEX. Please feel free to contact us directly or visit our website at anytime. Thank you and good day.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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