Cemex's (CX) CEO Fernando Gonzalez on Q4 2015 Results - Earnings Call Transcript

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

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

Q4 2015 Earnings Conference Call

February 4, 2016 10:00 AM ET

Executives

Fernando Gonzalez – Chief Executive Officer

Maher Al-Haffar – Executive Vice President-Investor Relations, Communications and Public Affairs

Analysts

Ben Theurer – Barclays

Dan McGoey – Citigroup

Vanessa Quiroga – Credit Suisse

Gordon Lee – BTG

Yassine Touahri – Exane BNP Paribas

Jorg Friedemann – Goldman Sachs

Jon Brandt – HSBC Securities

Lillian Starke – Morgan Stanley

Operator

Good morning. Welcome to the Cemex Fourth Quarter 2015 Conference Call and webcast. My name is Sylvia, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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.

And now, I will turn the conference over to your host, Fernando Gonzalez. Please proceed.

Fernando Gonzalez

Thank you, operator, and good day to everyone. Thank you for joining us for our fourth quarter 2015 conference call and webcast. We will be happy to take your questions after our initial remarks. 2015 was a challenging year with China slowdown on the oil price decline, adversely affecting many of our markets, gearing to lower government spending, especially on infrastructure and ultimately to weaker economic growth.

The financial markets have also been impacted significantly by divergent monetary policies in developed markets, leading to an unprecedented appreciation of the US dollar versus most of our currencies, particularly in Mexico and Colombia and hurting corporate earnings across many industries. Despite this challenging environment, we were able to deliver strong underlying operational and financial results, while remaining focus on the variables that we control. Our volumes increased in our core businesses. Our prices in local currency terms increase as well, reflecting the implementation of our pricing strategy and exceeding input cost inflation.

Overall, our cost increases were contained, as we deliver on our cost reduction program of $150 million and benefited from operating leverage in several markets. As a result of our favorable volumes and price performance, during 2015 we increased sales by 5% on a like-to-like basis. Since prices increase more than our cost and we had a favorable operating leverage in many of our markets, we increased EBITDA by 9% like-to-like and generated a 1.1 percentage point improvement in EBITDA margin.

Lastly, net income for the year was $75 million and was positive for the first time in six years. We expect to continue this positive performance for our shareholders for years to come. Like many companies, our operating EBITDA was negatively impacted by the unprecedented strength of the US dollar. The FX impact on our EBITDA during 2015 was $370 million, excluding the impact of the dollarized costs in our operations which represented an additional $85 million.

Our free cash flow after total CapEx reached $628 million during 2015. We generated this increase of more than $400 million over 2014 levels even though our operating EBITDA was $60 million lower last year. This increase reflects our success introducing our working capital investment by $306 million, our financial expenses by $184 million and cash taxes by $72 million. The result is that we converted slightly more than 30% of our EBITDA into free cash flow after maintenance CapEx. This is the highest conversion, the highest conversion rate since 2009.

Our free cash flow generation plus proceeds from divestments enable us to reduce total debt by approximately $1 billion. In fact, over the past two years, we have reduced debt by more than $2 billion despite stable EBITDA generation. As a consequence, we lowered our total financial leverage by about 0.15 times, while maintaining our leverage ratio as defined in our financing agreement stable.

I want to stress that our most important priority is to reach an investment-grade capital structure as soon as possible. We are still not satisfied with our leverage ratio, and reducing it continues to be our primary concern. However, through proactive liability management, we have achieved a manageable maturity profile with no major maturities for 25 months until March 2018.

We continue to maintain a strong liquidity position with cash on hand of close to $900 million plus more than $1.5 billion in available bank facilities. In addition, we are very pleased that Standard & Poor's has affirmed our credit ratings, currently B+ for our global scale rating, as well as the positive outlook on these ratings. This reflects their view that we should be able to continue to improve our credit metrics during the next 12 months.

Now, I would like to discuss the most important developments in our markets. In Mexico, economic fundamentals continue to be strong. We believe that the Mexican government will remain focus on investment in housing and infrastructure, both of which have a high local content and contribute significantly to economic growth. This is reflected in the robust growth in demand for cement and ready-mix.

Now, our cement volumes declined by 6% during the quarter due to a higher base of comparison in the fourth quarter of 2014 as well as our pricing strategy. However, the good news is that on a sequential basis prices in local currency terms were flat, while volumes grew 4% with our market position remaining stable.

We expect our growth to gradually be more in line with the markets in upcoming quarters. Our EBITDA margin increased by 3.5 percentage points during the quarter and by 2.6 during 2015. This is the highest margin in three years. The industrial and commercial sector was the main driver for our cement volumes during 2015, with a moderation in activity during fourth quarter. Commercial activity continues to be strong. On the industrial side, construction activity should improve with the pickup in the manufacturing sector.

The formal residential sector also had a strong performance during 2015. Demand indicators, including housing credit investment and subsidies, improved in recent months. In addition, credit investment from the banking sector continues to grow in the double digits. This sector should continue to be an important driver during this year. In the infrastructure sector, investment continued to be muted, reflecting delays in the execution of the revised 2015 budget, which resulted in only 88% of the year's communications and transportation ministry budget being actually spent.

For 2016 the budget for this ministry reflects an 8% increase versus 2015 spending level, which should translate into higher growth in the sector. Furthermore, other investment vehicles for infrastructure projects like the Fibra A could further boost this sector in the mid-term.

For the self-construction sector, prospects remain favorable, given continued improvement and indicators included job creation, which grew 4% in 2015 as well as remittances, which increased 25% in peso terms in the same period with minimal inflation pull-through as a consequence of the Mexican peso weakness. In light of all of this, during 2016 we expect our cement volumes to grow in the mid-single digits, a healthy multiple of GDP, although lower than that in 2015.

Our operations in the United States accelerated in the second half of 2015 after a slow start due to weather. On the back of a seasonably warm full quarter, cement volumes improved 5% year-over-year or 10% excluding oil-well cement. Ready-mix volumes grew 9%, while aggregate volumes increased 8%. For the full year 2015, we also saw favorable growth in our three core products. Cement prices are flat sequentially, while ready-mix prices rose 2% in the quarter. Aggregate prices are down 1% due to product mix and we have announced robust pricing increases for January and April 2016 and we expect they will gain traction.

Full year EBITDA margin expanded by 3 percentage points was the highest since 2008. Incremental margins continued to reflect significant cost containment and continue healthy operational leverage. Regarding residential activity, housing starts increased 11% in 2015, driven by low inventories, stronger job creation and household formation. Importantly, there was a pick up in single family construction with double-digit growth after a relatively flat performance in 2014.

Housing permits in three of our four key states Florida, California and Arizona are outperforming the 12% national growth for 2015. In Texas, while permits have slowed in 2015, they still show mid single-digit growth. We remained encourage by the momentum in the residential sector as we entered 2016. In the industrial and commercial sector, construction spending for the cement intensive segments is up 18% year-to-date November, reflecting solid growth in the lodging and office spaces markets. National contract awards dropped 12% in the same period, largely as a consequence of bad weather in the first half of the year and a slowdown in the manufacturing sector.

Public sector activity pick up during the last half of 2015, driven by state spending and TIFIA funding. Highway and bridge spending registered an increase of 7% year-to-date November. Contract awards for highways and bridges are up 10% in the same period, due largely to approval of over $17 billion since TIFIA projects over the last year. Regarding U.S. highway spending we are encouraged by the passing of a five year $305 billion transportation bill with a 3% growth in yearly spending. These bill mark the first time since 2005 that the U.S. Congress has passed the transportation program that exceeds two years. The combination of growth in spending, uncertainty of funding should translate into more demand for our products and services.

For 2016, we continue to be confident of the sustained recovery in the U.S. construction market. Volumes are expected to be boosted by growth in single family construction and rising household formation as well as by the new Federal Highway Program. We expect mid single-digit volume growth in cement ready-mix and aggregates for this year. In our Northern Europe region, fundamentals in our portfolio remain positive with cement volumes increasing by 9% on a like-to-like basis in 2015 with flat ready-mix volumes. Cement volumes increase in all our operations with deception of Libya.

Quarterly Regional like-to-like cement and ready-mix prices in local currency terms are both up 1% sequentially while for the full year cement and ready-mix prices remain flat and decline by 1% respectively. Operating EBITDA for the region grew in 1.6 percentage points to 10.6% and was the highest margin in more than five years. In Germany, we expect the favorable volume dynamics seen in 2015 to continue this year.

In the residential sector, fast growing immigration and continue favorable conditions such as low mortgage interest rates, low unemployment, and rising purchasing power should continue driving this sector, and more than offset limited capacity of local construction industry and public authorities restrictions. Regarding infrastructure, although there have been some delays in the granting of projects. This sector should benefit from a 9% increase in the public budget for traffic infrastructure as well as higher tax revenues.

In Poland, the increase in volumes during the quarter was driven by favorable weather conditions. Our market presence remained stable during 2015 despite slower than anticipated demand and challenging market dynamics. For this year, we expect demand growth from infrastructure and residential sectors. Infrastructure activity should be supported by recent growth construction tenders and the delayed projects from 2015. The residential sector should benefit from the increase in construction permits and the support from government programs.

In France, our ready-mix and aggregate volumes increased during the quarter. For this year, the residential sector is expected to be the main driver of the demand supported by the recent pick-up in construction permits and government initiatives which included buy-to-let programs and new seeder rate loans for first time buyers. In the United Kingdom, we achieved the highest volumes on local currency prices in our cement and aggregate businesses since 2008. For this year, demand growth is expected from all sectors. The residential sectors should be supported by economic expansion, accelerating home prices and government sponsored programs such as the help to buy and affordable starter homes programs.

Higher activity in the industrial and commercial sector should come from office buildings, warehouses and factories. Also the infrastructure sector should continue to grow supported by public and private spending in highways, energy and water network projects. In the Mediterranean region, like-to-like domestic cement volumes declined by 3% and 9% respectively for the quarter and the full year. Regional ready-mix volumes increased by 8% and 5% during the quarter and the full year respectively, driven by improved performance in Israel, Egypt and the Emirates.

In Egypt, our cement volumes during the quarter benefited from continued – continuity of government projects. The sequential decline in cement prices reflects additional capacity coming on stream. Regarding energy, with the start of our petcoke grinding mill, we successfully started the switch of our kiln fuel from Massad to petcoke, which should translate into reduced production cost of about $40 million for this year and $60 million on an annualized basis. For 2016, we expect our volumes to grow by about 2% driven by the formal residential and infrastructure sectors. The residential sector should be supported by government's housing projects, while the infrastructure sector should benefit from projects related to the Suez Canal expansion.

In Israel, we ended the year with a 3% increase in ready-mix volumes, reaching historically high levels in the country. In Spain, macroeconomic conditions continue to improve during the year, resulting in a mid-single-digit growth for the cement industry. Our like-to-like domestic cement volumes declined 9% in this period mainly due to our focus on more profitable volumes.

Total cement volumes, including clinker and export cement, however, increased by 10% during the year on a comparable basis. During the year, like-to-like gray cement prices in local currency terms increased by 10%. During the quarter, sequential cement prices increased by 1% in local currency terms despite pricing pressure in the Central Region.

Operating EBITDA in Spain has been improving as a result of higher volumes and prices, a favorable operating leverage effect, and our focus on profitability. Looking into 2016, we expect our cement volumes to growth in the high single-digits in line with national cement consumption, supported by solid demand from the residential sector.

In our South Central America and the Caribbean region, full year cement ready-mix and aggregate volumes declined by 4%, 3% and 2% respectively, primarily due to Colombia and Panama. In the case of Colombia, cement demand dynamics continue to be favorable with industry volumes growing at approximately 4% during 2015. I will give a general overview of that region. For additional information, you can also see CLH's quarterly results, which were also reported today.

In Colombia, economic growth in the country continues to be driven in great part by construction, including housing and infrastructure, which translate into increased demand for our products. Now the decline in our cement volumes for the quarter and full year reflects the effect of our pricing strategy as well as the high base of comparison. Our cement market position stabilized sequentially with an increase in local currency prices of 5% in this period and by 18% year-over-year.

The residential and infrastructure sectors were the main drivers of demand growth last year and should continue with a positive trend during 2016. Residential activity for 2016 should continue to be supported by the different low income housing programs for the – from the government as well as growth in middle class segments, supported by the interest rate subsidies.

In infrastructure, during this year we should see the continuation of several projects as well as new ones related to the government plan to promote employment and productivity. In addition, we expect the initiation of the first highway projects related to the 4G program. In light of this, we expect cement volumes in our Columbian operations to grow in line with the market in the low to mid single digits during 2016.

In Panama, our cement volumes declined by 9% during 2015, reflecting lower volumes sold to the Canal expansion project, as well as the end of some infrastructure projects such as the Corredor Norte. Adjusting for the Canal project, our cement volumes were flat. The year-over-year increase in cement prices mainly reflects a mix effect from lower volumes to the Canal project. During 2016, we expect the residential sector to continue to be the main driver for cement demand. In infrastructure, there should be an improvement in public investment this year.

In Asia, cement volumes increased by 10% during the quarter and by 15% for the full year 2015. In the Philippines, we also saw double-digit growth in cement volumes, during both the quarter and the full year 2015, driven by improved demand in all sectors. The positive volume trends should continue this year. The housing backlog in the Philippines should positively impact the residential sector performance. Growth in the industrial and commercial sector should come from the expected expansions in business process outsourcing services. For this year, the government's budget includes an increased in infrastructure outlays expected to reach 5% of GDP. We should further support this sector.

In summary, we had strong fundamentals in most of our operations, which translated into positive volume and pricing dynamics. These favorable trends should continue to this year.

And now I will turn the call over to Maher to discuss our financials. Maher?

Maher Al-Haffar

Thank you, Fernando. Hello, everyone. It is important to note that in our fourth quarter report, the results of our Croatian operations for 2014 and 2015 have been reclassified as per IFRS accounting standards and are now reflected in a discontinued operations line item in our financial statements.

Our net sales and operating EBITDA on a like-for-like basis, increased by 2% and 7% respectively during the quarter. There was higher like-for-like EBITDA contribution from Mexico, the U.S. and the Northern Europe and Asia regions. Our operating EBITDA margin during the quarter increased by almost 1 percentage point. Full year EBITDA margin is the highest since 2008. This margin expansion reflected better prices and volumes, as well as greater operating efficiencies.

As Fernando mentioned during the quarter, we continued to see the effect of the appreciation of the U.S. dollar versus some currencies in our markets. The full year FX impact on our EBITDA was about $317 million excluding about $85 million of the effective dollarized cost in our operations. If we include this effect on cost, the increase in like-for-like EBITDA would have been about 12%.

Of the full year FX impact on EBITDA about 40% was related to the Mexican Peso, 30% to the Columbian Peso, and 20% to the euro and euro like currencies. Our increase in prices during the year in countries that have been impacted by FX volatility, adjusted for the effect of variable cost and freight rate increases has offset close to three quarters of the adverse FX impact.

Cost of sales plus operating expenses as a percentage of net sales declined by 1.1 percentage points during the quarter. Our kiln fuel and electricity bill on a per-ton-of-cement-produced basis declined by 10% during the fourth quarter and by 6% in 2015.

During the quarter, our free cash flow after maintenance CapEx was $566 million, this is an increase of 35% compared with a $421 million in the same period in 2014. This is mainly explained by lower financial expenses and taxes as well as a higher reversal in the working capital investment. During the fourth quarter, we recovered the year-to-date investment in working capital as of September and even more ending the year with a reduction in working capital investment of close to $300 million.

For 2015, working capital days declined to 20, a new record from 27 days in 2014. Other expenses net during the quarter for $92 million were mainly due to impairment of assets and severance payments. We had a loss on financial instruments of $21 million, related mainly to Cemex shares. We also recognized a foreign exchange gain of $21 million resulting primarily from the fluctuation of the Mexican peso versus the U.S. dollar, partially offset by the fluctuation of the euro versus the U.S. dollar.

During the quarter, we had a controlling interest net loss of $144 million, which resulted in positive full year net income for the first time in six years. Free cash flow during the quarter plus proceeds from divestments were used mainly for cash replenishment and debt reduction. Total debt plus perpetual securities decreased by $254 million during the quarter. The quarterly decline in debt reflects a non-cash positive conversion effect for $71 million.

As Fernando mentioned earlier, we managed to reduce debt by close to $1 billion during 2015 despite slightly lower EBITDA. Regarding leverage, the negative impact that FX fluctuations had on our leverage ratio was offset in great part by our pricing strategy and cost reduction efforts, as well as the positive effect of our euro-denominated debt and asset divestments.

Average life of debt is – of our debt is currently at 5.1 years. Our maturity profile is very manageable with $352 million of convertible notes maturing two months from now, which we will pay with cash on hand and $373 million corresponding to the first amortization under the syndicated bank loan facility in September 2017. We have no significant maturities until March 2018. Of course, we have done – of course, as we have done in the past, we will be proactive in taking market opportunities to manage our maturities and ensure that our debt profile will continue to be manageable.

Now, Fernando will discuss our outlook for this year. Fernando?

Fernando Gonzalez

For 2016, we expect consolidated cement volumes to grow in the low-single digits, while ready-mix and aggregate volumes should grow in the mid-single digits from last years levels.

Regarding our cost of energy on a per-ton-of-cement-produced basis, we expect a 10% reduction from last year's levels. Guidance for total CapEx for 2016 is about $700 million, this includes $450 million in maintenance CapEx, and 250 million in strategic CapEx.

Regarding working capital, we anticipate the working capital investment during this year to be flat, to marginally higher. We expect cash taxes for 2016 to be under $400 million. We also anticipate a reduction in financial expenses for this year of about $50 million. Based on these expectations and despite continue FX volatility, we expect our EBITDA in U.S. dollar terms to grow this year.

In closing, I want to emphasize that we continue to see profitable demand growth throughout our portfolio. We have delivered strong results during 2015 despite headwinds cause by currency fluctuations and volatility in the financial markets. Our EBITDA margin during the year was the highest since 2008. We also had the highest free cash flow levels since 2009, reflecting our initiatives to reduce financial expenses and improve working capital translating into record low 20 working capital days.

We deliver on the targets we provided at the beginning of 2015. We reduced cost and expenses, improved working capital and lower financial expenses. We also sold assets and reduced debt. For this year, we are setting new targets to respond to the continued volatile environment and further booster our road to investment grade. First, we are announcing a cost and expense reduction target of $150 million. Second, we expect free cash flow initiatives of $200 million, our guidance for our free cash flow items reflects this initiatives.

Third, we are targeting to pay between $500 million and $1 billion of debt this year, and up to $2 billion by the end of 2017. And fourth, we expect to sell assets for $1 billion to $1.5 billion in the next two years.

Thank you for your attention.

Maher Al-Haffar

Before we go into our Q&A session, I would 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 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 would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ben Theurer from Barclays.

Ben Theurer

Hi. Good morning, Fernando. Good morning, Maher. So, first of all, congratulations on those results.

Fernando Gonzalez

Thanks.

Ben Theurer

I actually have a couple of questions, so one operationally in the U.S. more on the pricing. So we've seen a minor decrease on a sequential basis fourth quarter versus third quarter on cement prices. Just my suspicion is that because of the mix shift in the different regions, if you could clarify that quickly where that sequential decline is coming from?

And then, looking into 2016, you said already you're looking for price increases in January-April. But are you also targeting something for July-October, as you've done in some years, like just in order to push further on the pricing side in order to implement the value before volume strategy? That would be question number one.

Maher Al-Haffar

Yes. Thanks, Ben. I'll take the answer. First, very quickly for the first part of the question, it is a geographic mix that is translating that and primarily Texas essentially having had higher prices because of the oil component of it. In terms of the pricing increases, the pricing increases that were announced last year for January of this year affected roughly half of our markets. That's Colorado, Florida, Midwest and Southeast. That's half of our volumes, I should say. And we had fairly good reception to those pricing increases. Roughly, two-thirds of the affected markets experienced about a 70% plus realization, which is very good.

In Florida, unfortunately, we got less pricing traction. Florida is about a third of the affected markets, and there we had somewhere around 35% realization. Now, of course, we will continue – in the case of Florida, we will continue with our very strong and focused efforts to execute our pricing strategy. In April, obviously, the April increases, we will discuss those when that happen. Second round pricing frankly, I mean, we haven't announced it. It's questionable, but we're certainly evaluating the conditions right now.

Ben Theurer

Okay. Perfect. Thanks for that. And then just a question on free cash flow outlook and, clearly, two things that are, to some sort of related to your target for over $200-million improvement in free cash flow in 2016. So, number one, you had a tremendous improvement on the working capital cycle. You've mentioned down to 20 days now from the 27. Actually, there was a bigger reversal. So we're very positive in 2015. So how many – so how much room do you think you're still having within improvements on working capital and where is that – where was that mainly coming from? Was that an improvement in the U.S. where we know it was used to be in the past little bit weaker and what's the outlook on that?

And then second one of the initiatives what I've realized is your lowering by about €100 million maintenance CapEx, question here is that 100 million reduction on maintenance CapEx, is that temporarily because you don't sense you have to go through that maintenance in 2016 and is likely to revert in following years? Or has that to do that you just can save money because of the asset divestments you have especially in Europe and the Mediterranean region? Thanks.

Fernando Gonzalez

Let me start with the – why is that we believe that we can enhance the free cash flow for 200 million this year. It will come mainly because of an increased – an expected increase of our non-productive asset sales. It will also come to some extent because of reduction we mention of about $50 million of financial expense. There will be some taxes lower also compared to last year and on CapEx, we're expecting like 50 million less compare to last year. So, that will make about $200 million now. And on CapEx and the amount of CapEx maintenance or strategic, we feel comfortable with amount we have. From year-to-year, we can increase or decrease it slightly, but I don't – I think the current amount again is sustainable with some variations, slight variations in the near future.

Now regarding the possibility of continue improving working capital, well, let me put it this way. I think in 2014, we were very happy with the new record of 27 days and as far as I understand is the lowest in the industry or one of the lowest. And last year we even improved that to 20 days. Can that be improved materially in 2016? I think the answer is yes. And improvement will mainly come from the U.S. and Mexico. When you count the working capital in Cemex and you look at Mexico and the U.S, we have higher investment in working capital in those countries compared to other.

So, the incentive – I mean the initiative to continue improving it will allow us to continue optimizing the investment in working capital in 2016. Now is that going to provide a large amount of free cash flow compared to last year? I don't think so. That is not the reason why – or not the main component of the $200 million we think we can increase.

Ben Theurer

Okay. Perfect.

Fernando Gonzalez

As commented, we will have either flat or an investment in working capital this year.

Ben Theurer

Okay. Perfect. Thank you very much for clarification. And once again congratulations.

Fernando Gonzalez

Thank you.

Maher Al-Haffar

Thank you. Operator?

Operator

Your next question comes from Adrian Huerta from JPMorgan.

Maher Al-Haffar

Hello.

Operator

And your next question comes from Dan McGoey from Citigroup.

Dan McGoey

Good morning, gentlemen. Congratulations on the results. Two questions from me. If I could ask on the U.S., the margin, the EBITDA margin in the U.S. 17.9%, was particularly strong for the fourth quarter. The pricing up only, I guess, you would say about 3% in volumes. But I am wondering with 17.9% margin in U.S. in the fourth quarter, if you could talk a little bit about, what helped that margin and then outlook for 2016?

And then, secondly, Fernando your comment on the asset divestiture program, I think it was the new target of $1 billion to $1.5 billion over the next 1.5 years. Can you give us an update on how far you are through the original program and whether or not this would be in addition to that $1 billion to $1.5 billion which was outlined previously?

Fernando Gonzalez

Sure. Let me start with the asset divestment question. In February 2015, we announced divestment in the range of $1 billion to $1.5 billion in the period of 18 months, that means June 2016. In 2015, we successfully divested close to $700 million. So what we are doing today is increasing the amount of assets to be divested meaning that the new $1 billion to $1.5 billion in the next two years are on top of the $700 million that we have already sold. So that will make a total of $1.7 billion to $2.2 billion at the last year up to 7 to 17.

Now we have several business units and non-productive assets in a divestiture process in February last year. So I feel kind – I feel confident that we will manage to divest – what is missing for the new target or what is missing for the 2015 target. As you can imagine, the volatility and current conditions in the market are not necessarily the best conditions in order for divest. So we don't – we are going to divest but we are not in the position to divest at – on convenient prices. So we are doing that. We have shown that it can be done even in the moments with uncertainty and on investors and we will continue doing it this year.

Dan McGoey

Okay. And when we say non-productive, can we take that to mean basically non-EBITDA contributing at this point?

Fernando Gonzalez

Exactly, exactly. It could be real estate and other investments that from time to time we get, because our business activity and we proactively divest in those. In the last few years, we normally divest from $150 million to $250 million of those type of assets.

Dan McGoey

Got it.

Maher Al-Haffar

And Dan on the questions on the U.S., yes, I mean, going forward – first, I mean, maybe going back to kind of what was driving it. The important driver there was pricing that was roughly 2 percentage points improvement and you had volumes 1.4 percentage point improvement, and then you had, obviously, some variable cost inflation, bringing it down and there were some other items, which took us to close to about 18%, which represented about a 3% percentage points improvement.

Obviously, we continue to benefit from operating leverage. Operating leverage, I believe for the quarter was more than 50%. And many of our markets continue to have low capacity utilization. So going forward frankly, we definitely look forward to expansion of the EBITDA margin in the U.S., driven by really three factors. Number one, especially in 2016, we are not going to have the big oil headwind that we had in 2015. So that should translate to expansion of the margin. The other component is that we do expect to continue to see growth in markets that have lower capacity utilization in the system, which means you're going to get a bigger kick of operating leverage.

So essentially, you have operating leverage, lower capacity utilization markets and then the absence of the oil headwinds. So, all those three should continue to have positive impact on our EBITDA margin into 2016. I don't know if that addresses the question.

Dan McGoey

It does. Great. Thank you.

Maher Al-Haffar

Thank you very much.

Fernando Gonzalez

Thanks.

Maher Al-Haffar

Operator?

Operator

And your next question comes from Vanessa Quiroga from Credit Suisse.

Vanessa Quiroga

Hello, good morning and Fernando, Maher, thanks for the call. My question is probably more specific for Fernando. Fernando during your mandate and since you've progressed your position, there has been a big emphasis in reaching investment grade faster for Cemex, microeconomics and market volatility having felt. What if this volatility continues if currency weakness lasted for longer, or a U.S. slow down prevented Cemex to grow in EBITDA in dollar terms going forward, what else could Cemex do to reduce debt faster than $1 billion per year?

Fernando Gonzalez

Well, thanks for your question Vanessa. What can I say? To start with – as we have said 2014 and 2015, which is the first couple of years of, in my new position, having EBITDA neutral. I mean EBITDA has really not grown. An even with EBITDA not growing we have managed to reduce to more than – to slightly more than $2 billion of debt. What if – the economic contest continue been above the same. Well, let me start by saying that I don't believe that the current economic conditions for 2016 will have a negative impact the size of last year.

For sure the dollar might continue been very strong, but I – very hard to believe that it will continue getting stronger as much as it was last year. So we will not have remembered the amount that we mention on FX impact for last year in EBITDA is just this $300 million. So we might have an additional impact on FX this year, because of – when you compare the aspect that the FX for this year compared to the average FX of last year, but not as much as that amount. So I feel confident that, EBITDA this year will grow. Now what else can we do? At this point in time, we – to start with – we are confirming our objective of being focused on gaining back our investment grade. And that's a way to say that we are – our interpretation is that there is a way to create value for our shareholders, needed a change in our capital structure. And we are focused on doing that.

Given that the EBITDA has been flat, we are helping ourselves with asset divestments and another different options, we have evaluated that is the way to go. It is working. It worked last year. As in mentioned that our several units or businesses that were in the process of divesting, we think that it's going pretty well and so we are confident that we will continue divesting assets at reasonable prices. So for the time being that will continue, being the strategy. Now if everything fails, if – well, we will see, but so far, we think that we – that the way we are – the strategy we are following it is working, again. We believe that the strategy, the business model and the specific actions we are taking are working.

Vanessa Quiroga

Thank you for that color, Fernando. Could we probably change a little bit more to the operations in the U.S. given then a situation or risk of further slowdown in China deceleration, can you remind us of that barriers to entry for China imports today in the U.S. and if there has been an important change given M&A accruing recently in the region? Thanks.

Fernando Gonzalez

Well, as you know Vanessa, the U.S. is little-by-little is getting to a point in which most of capacity – cement capacity is utilized. I mean it's not spread at all over the country, but in some parts it's already high and getting higher, the markets continue increasing. And as you know the U.S. is a country that traditionally, let's say, before the 2007 crisis, was – what we call a structural importer out of the 120 million or 130 million tones the U.S. was consuming before the crisis about 25 million were imported.

So, what we have been seeing during 2015 perhaps even since second half of 2014 is that imports started increasing in the U.S. little-by-little. Now, most of imports in the U.S. are done by local producers, most of facilities, most of permits, most of integrated value chains are owned and managed by local producers. So far, even before the crisis and currently I do believe that inputs will follow the logic of local producers instead of, let's say, independent traders that might have different economic views or objectives. So, I don't see a major impact; let's put it that way, because of inputs. The inputs in the U.S. are needed at certain, let's say, on top of 100 – between $100 million and $110 million of consumption that inputs are needed and they will come.

Vanessa Quiroga

Thank you very much for your answers Fernando.

Fernando Gonzalez

More than welcome.

Operator

And your next question comes from Gordon Lee from BTG.

Gordon Lee

Yes, hi, good morning, gentlemen. Thanks for the call.

Fernando Gonzalez

Good morning.

Gordon Lee

Two quick questions both related to the balance sheet. The first, just reading sort of the footnotes in the release, the section on the Mexican tax reform. I see that it looks like you significantly reduced the tax liability, depending tax liability from back taxes, is that correct and could you just maybe walk us through how that occurred and what depending liability is and when you would expect that to pay that?

And then just the final question, just following up on your comments in terms of the use of cash and the pay down of the convert. What would be a normal sort of run rate cash level for you sort of once you pay down this debt and that's just obviously for purposes of computing the leverage ratio going forward? Thank you.

Maher Al-Haffar

Okay. Gordon, just on the tax change. First, just to kind of reiterate the guidance for the year, we're guiding just slightly under $400 million in taxes. And that includes taxes that are payable under the consolidation regime. Now, what happened is that under the Tax Reform Laws of 2016 that were approved in 2016. There are two important changes that took place in that regime. Number one was, allowing the use of tax loss carry forwards at a punitive rate to the fees tax obligations that were assessed under the consolidation regime.

And the punitive rate, meaning, I believe it was almost a two to one. In other words, you need to use, twice as much tax laws carry forwards for every dollar of liability under the tax consolidation regime, that, that was in place. And so we took advantage of that. The other component of the Tax Reform is that there were certain deductions that were disallowed under the consolidation regime, that were then later determined to be inappropriate. We think, we believe and they were that was changed. And we are talking specifically about the intercompany dividends element.

So the combination of those two translated to a reduction in that amount from a little bit 1 billion to the 226 that we have with the – what I believe a similar payments schedule as the original amount that we had outstanding under the consolidation regime, which translates to somewhere around $40 million to $50 million payments per annum. And Gordon, I am sorry, did you have another – was the – the other question was the cash, the cash balance...

Gordon Lee

Basically just to understand, I mean, obviously I know you are accumulating cash now to pay for the convert in a couple of month's time or a month's time. But, my question is, because the leverage ratios are calculated on a gross basis as we sort of model for the leverage ratio going forward, obviously, to ensure that you are in compliance with the covenants. My question was what would be on the normal circumstances a cash level that you would be happy with running the operations at, if you weren't paying up cash to deal with maturities?

Fernando Gonzalez

Well, just to start with – just to be sure on the calculations. Cash does not go into funded debt calculation. It is total debt minus converts, and some other adjustments that is not included. Now, currently cash balances we can run with less than previously because of the committed credit facility. Now, on the other hand cash needs are – because of our cash cycle, and the cash needs are different, I will say they are larger during the first half and then lower during the second half. But if what you want is let say a range of cash needed in average is between $300 million perhaps $400 million.

Gordon Lee

Perfect. That's exactly what I need. Thank you very much.

Maher Al-Haffar

Thank you, Gordon.

Fernando Gonzalez

More than welcome.

Gordon Lee

Thank you.

Operator

And your next question comes from Yassine Touahri from Exane BNP Paribas.

Yassine Touahri

Yes. Good morning. A couple of questions, first the question on the U.S., so I think you mentioned a couple of markets being impacted by your January price increase that's Colorado, Florida and the Midwest. I just want to know how much – what's the proposition of this market as a percentage of your U.S. sales? And then the other question is what proposition of your U.S. sales – what is proportion of the market, in which you have announced price increase in April?

Maher Al-Haffar

Yes. Hi, Yassine. The amount – the markets that were affected by the January pricing increase, which again just to repeat for clarity sake are Colorado, Florida, our Midwest markets and our South East markets, which, of course, would – including Florida as I mentioned. The combined volumes from these markets are 50% of our volume in the U.S. market. And roughly two-thirds of that affected amount, so two thirds of the 50% actually achieved a pricing realization of close to 70%. And April – the April pricing increase, which affects California and Texas and other unaffected markets represents the other 50%. California and Texas just by themselves are roughly around 45% of their volumes.

Yassine Touahri

And another question the deliver of the price increase was it something like $10, $15, what's the average price increase?

Maher Al-Haffar

Well, we announced mid-teens, low to mid-teens and now, of course, we – that's what we announced, but obviously since we're not interested in the case of – I mean we are not willing to impact our market position. Clearly what happens is that prices will tend towards the – whatever is the lowest clearing price. And so you know that there would be some adjustments obviously in different markets.

Yassine Touahri

But if I understand what you mentioned is that in January, prices would have increased by a bit more than $7 in Colorado and the Midwest and a bit more than a $4 in Florida, is that the correct way to understand what you said?

Maher Al-Haffar

Yes, I would say probably a little bit higher in the Midwest and in the – yes, I would say, a little bit higher than that. And Florida is pretty close. It's a little bit higher than the number that you are coming up with, with around five to six bucks.

Yassine Touahri

Okay. That's very clear. And then I would have another question on your pricing strategy in Mexico and Columbia. I think you are forecasting slight volume growth in those two markets in 2016, do you expect to grow with the market or will you continue to focus on pricing?

Maher Al-Haffar

Sorry, just to clarify Yassine, you said flat for 2016?

Yassine Touahri

No, no, you are taking slight volume growth, I understand in Mexico and Columbia in mid single digit, low single digit volume growth and I just wanted to understand what is going to be your pricing stability, you want to grow with the market or will you continue to focus on pricing?

Fernando Gonzalez

Well, on market growth and our growth we are expecting mid single digit, low to mid single-digit. And our expectation is to grow according to the market. I mean if the question is referred to the impact on our pricing strategy, I think – and as you can imagine, our pricing strategy is like the one we started mid last year. It takes time. It – and in our opinion is all being in the right direction. So, we do and as you know we already announced price increases in Mexico in January for both bulk and bag [ph] so we do expect for prices to increase and for us to grow at least at the same pace than the market.

Maher Al-Haffar

And Yassine if I could just add to that perspective okay I mean the volumes – the volume growth by the industry in Mexico was quite encouraging for 2015. It was almost closed to – we guestimate, we have to wait and see how everybody else does, but we guestimate that it's growing in the high single-digit, which is an important multiple of GDP closed on between two and a half to three times GDP growth in 2015. And frankly we may see a drop in that ratio to GDP, but the expectation for GDP in Mexico for 2016 is somewhere around 3% and even it if deteriorate little bit less than that, the multiple is continuing to be certainly higher than one, right? So, in Mexico, we solidly expect kind of the mid-single-digit growth in volumes just to put into perspective, okay.

Yassine Touahri

Okay. Thank you very much.

Maher Al-Haffar

Thank you. Operator?

Operator

Our next question comes from Jorg Friedemann from Goldman Sachs.

Jorg Friedemann

Thank you very much. Congratulations for the results.

Maher Al-Haffar

Thank you.

Jorg Friedemann

I have two questions. First coming back to the effect of the New Mexican tax regime that you mentioned already. I am intrigued by the guidance of lower than $400 million of cash taxes this year. So – and coming from the fact that you paid over $350 million of cash taxes in Mexico in 2015. And you just, guided for something around 40 million to 50 million, if I am not mistaken. So could you elaborate further if there is room for your cash taxes this year to be under $400 million or maybe even below $300 million to $100 million or if we are losing something else may be an increasing tax effect in other countries that you are, you are at. And then I come to my next question. Thank you.

Fernando Gonzalez

Okay. Let me start by saying that Maher already explained that the tax reform is benefiting us in a significant way that has been already explained, because it allows the tax reform. It’s allows us to use the tax loss carry forwards, to sell the tax consolidation regime at a discount factor. So that has been already commented.

Jorg Friedemann

Yes.

Fernando Gonzalez

Now the direct answer to your question is that if the $400 million could be lower? The direct answer is, yes. It is a possibility. Now as you might have seen in previous years, there are several uncertainties in our tax planning scheme. So early in the year we prefer to give an amount that will be adjusted, let's say favorable – favorably. We don't want to provide much lower guidance just to find out mid-year that we need perhaps to make higher payments in taxes. So for the time being we feel comfortable with this guidance that it might be lower than the 400 but definitely there is the possibility of yes been much lower. But too early – too early to say.

Jorg Friedemann

No, that's perfect. I just found I know too conservative given the potential for decline in cash taxes that you could have in Mexico just that. But – going to my second question, I know that this is strategic CapEx guidance of $250 million, so just wondering, if this would come from already announced projects such as Colombia, if there is any missing investments to be done maybe even Tepeaca if you want to restart that process or if we could expect new announcements in the near future? Thank you.

Fernando Gonzalez

No, we – there are not new strategic CapEx that we have not, let's say described before. Most of the expenditure is related to our Colombian plant. There is also some amount in aggregate reserves, we – every year we do invest – an amount this year it might be between $30 million and $40 million in aggregate reserves. And there are still some expenditures, for instance, in the case of the petcoke project in Egypt, so this year there is a small amount, but still – it still counts as one of the strategic projects.

And our projects in Mexico in Tepeaca and the Philippines this year will not require significant amount of CapEx. We are going through the – all the engineering phase. And in the case of the Philippines, we will be using some equipment that we'll have available from other projects. So I don't think there will be any significant requirement from this expansion projects for this year.

Jorg Friedemann

Perfect. But I now this Tepeaca project should be still count, that given the current market condition I know this would be expected for the next two, three years?

Fernando Gonzalez

Sorry, can you repeat the question?

Jorg Friedemann

Yes, just if you – given market conditions in the Mexico and overall market conditions, if this expansion is still on?

Fernando Gonzalez

It is still on, but as I mention it will not require a significant CapEx this year. We have not – let's say we have not cancelled the project if that is the question. We have not cancelled the project in Tepeaca. We have not cancelled the one in the Philippines.

Jorg Friedemann

Perfect. Okay, great. Thank you very much.

Fernando Gonzalez

Thank you.

Operator

And the next question comes from Jon Brandt from HSBC Securities.

Jon Brandt

Hi. Good morning. Fernando. Good morning, Maher. My first question is related to the oil price and I know you said you were expecting the cost of energy on a per ton basis to fall by about 10%. I am wondering if you could elaborate on that a little bit. I mean is there a one country or one region that will – we will be able to take advantage of, although lower oil and energy prices are disproportionally to the others. Does this include distribution and ready-mix expenses which I would assume would be more advantageous than in the U.S.? And then the secondly, just a question on refinancing, I know you are paying off the convertibles in March. I am wondering if you are expecting or wanting to go to the credit market to refinance any securities if it makes sense to do that. I know you still have some high coupon debt out there. So if you could maybe touch on that little bit as well? Thank you.

Fernando Gonzalez

Sure. Let me start with energy. As we mentioned we do expect savings of about $100 million that's about 10%, that's the 10% we mentioned. And as you know the fuels we use are petcoke, coal and alternative fuels. There are some others, but mainly these are the fuels. The country that is going to reduce the cost of fuel significantly is Egypt, as we mentioned in 2016, given that we are starting using our petcoke grinding mill and Assiut doing the Mazout, which is a fuel oil that is more expensive. We will save 40 out of the 100. So if you are looking for a specific entry where these savings are going to occur that's Egypt. And again, it's mainly because of the switching from this fuel oil to petcoke.

And then there is a reduction that is spread at all over the cement businesses because the price of petcoke is lower than last year. There was not – we didn't see a direct relation of the reduction in oil prices compared to coal and petcoke compares more to coal than to anybody else, but it is already happening. So, coal and petcoke have been reducing prices and as you know, by now we have made all the contracts for the year. So, we would be saving, let's say, around on top Egypt – on top of the 40 million from Egypt, 60 million into rest of the countries. Now, this is part of our 150 million plan reduction in our cost structure. And I think it is quite secure, meaning, in the sense that these are prices already contracted, and they should happen and they should – as we advanced during the year.

Maher Al-Haffar

Okay. And then I don't know if you had any – so maybe I'll address the bond question. I mean, clearly – I mean, I don't need to tell you that the high yield market has been quite impacted – negatively impacted in the U.S. by what's happening in the energy and mining sectors. As you know, energy and mining represent almost the third of the U.S. high yield market and that is the market that we trade in and that we raise capital in mostly I would say. So, that market has widened quite a bit, in fact spreads have gone up by almost quite a bit let say close to 30%, 40%. So, today, as we sit here, we don't see a lot of opportunities of doing things. But, of course, we're always monitoring the markets. And we hope that things will stabilize and normalize down to where we were prior to the last say 12 months, when those markets widen quite a bit.

Now, this year, we do have $1.2 billion of callable bonds. Three bonds actually that are callable in April, June and – so – there is an opportunity there, but we have to see if it make sense. In terms of total opportunity to reduce our funding cost, we have $2.8 billion of bonds that are in excess of 9% coupon. So that's clearly, an opportunity, if you take a look at our cash cost of debt today it's slightly under 6%. So, there is clearly, as we get better conditions in those markets and we are able to take advantage of the opening of the markets. There is clearly an opportunity to reduce our interest expense further. And we will do that as I said in the initial remarks.

Jon Brandt

Okay. And just the follow-up on the energy prices, the cost of energy, the reduction that you're expecting that does not include distribution expenses, is there a potential savings there and I'm thinking more from the U.S. side?

Fernando Gonzalez

Yes.

Jon Brandt

And does that help impact margins in the fourth quarter in the U.S.?

Fernando Gonzalez

Yes. It's not in – distribution expenses are not included, and it might be – it will depend on what happens during the year. But it might be – there might be additional savings on that part in countries where there is a free market for this type of fuels.

Jon Brandt

Okay. Was there a big impact from lower oil prices on distribution and expenses in the U.S. in 4Q?

Maher Al-Haffar

I mean, there was an impact, but I wouldn't say it was an outsized impact. We didn't – it doesn't move that quickly. And it's because, obviously, we're talking about refined products, and there is definitely a benefit there but not particularly outsized impact in the fourth quarter. But for the full year...

Jon Brandt

Okay.

Maher Al-Haffar

...it was a big number, I mean, throughout the system and, as Fernando stressed, in markets where there is free markets for those fuels like the U.S., like Europe, like parts of Asia, the Philippines, for instance. So does that – I don't know if that addresses the second part of the question.

Jon Brandt

Yes. Yes. No, that's helpful. Great. Thank you.

Operator

We have time for one more question. That question comes from Lillian Starke from Morgan Stanley.

Lillian Starke

Hi. Thank you for taking my call. I just wanted to follow up on the three drivers that you mentioned that could extend margins in the U.S. When you say that we will not see the big headwind this year, obviously, that I expect you make it in reference to the volume pressure in cement markets or maybe [indiscernible], more specifically. Would you say that as you go forward, I mean, to compensate for that, simply the fact that you're seeing volume recovering in other markets or I just want to understand what would be the benefit of not having the oil headwinds? Is this simply a driver of demand or is there something else? And the other question that I had is – are you importing into the U.S. from any other markets at this moment or not? I mean, do you prefer rather to move the volume around within the country first?

Maher Al-Haffar

Okay. Well, thank you for the two questions. For the first question, oil well cement volumes dropped by more than 60% in 2015. I think we are around 65%. So we think we pretty much bottomed out. As you know, that market is highly correlated to oil well – oil rig counts. And you could monitor that, but there have been relatively reasonable amount of stability. Now, to your question, are there other markets that are offsetting that? And the answer is yes. I mean, today, if you take a look at – California is now almost the size of Texas in terms of volume consumption, and that's growing very nicely. Florida is getting there in terms of proportionality, and that's also growing very nicely actually. And there are other markets that are doing very well.

So, in that respect, we think that – could we see more impact in Texas? I mean, it could be. But I mean, in Texas, there are many [indiscernible] to further negative impact of the economy, because of the oil market. As you know, last year, there was a particular law that was initiated that transferred some money out of an oil rainy day fund. They transferred about $1.7 billion into the highway fund or highway trust for the state. A lot of that amount was not spent last year, so that's likely to be spent this year and beyond. We expect a similar amount – not a similar amount, a slightly lesser amount to be transferred this year. So we have some very good support on the infrastructure side, and the other thing is that there has been taxing events at the local level again to support projects in the infrastructure side.

And then, the most important thing that we need to remember in Texas that despite all of this activity, the market is sold out and it's actually continuing albeit at a much lesser amount continues to transport cement from other markets, neighboring markets into the state. So, in reality, the negative impact of loosing those volumes at the margins from the oil well, the impact on EBITDA has been limited. And if we take a look at what happened to transportation cost in the US, that's more than offset the loss of volume. Now, in terms of...

Lillian Starke

Okay. Perfect.

Maher Al-Haffar

In terms of imports, I mean, we take a look at a system basis and we do sometimes move cement volumes from neighboring areas, but there are no big imports coming from across oceans that is meaningful. And I don't know if we mentioned this in the call, it's very important that 97%, 98% of the imported cements into the U.S. has been brought in by producers, which is – that's very favorable as well. I mean we don't see that frankly changing. As Fernando said, the infrastructure, the market access and all of that is really – is in the hands of the local producers and it's difficult to see that changing very quickly in the near future.

Lillian Starke

Okay. Perfect. Thank you very much.

Maher Al-Haffar

Great. Thank you.

Operator

I would now like to turn the call over to Fernando Gonzalez for closing remarks.

Fernando Gonzalez

Thank you very much. And 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

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

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