Cemex's Management Discusses Q3 2012 Results - Earnings Call Transcript

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

Cemex SAB de CV (NYSE:CX)

Q32012 Earnings Call

October 15, 2012 10:00 am ET

Executives

Fernando Gonzalez - Executive President of Finance and Administration

Maher Al-Haffar - Vice President of Corporate Communications, Public Affairs and Investor Relations

Analysts

Esteban Polidura - Deutsche Bank

Gonzalo Fernández - Santander

Gordon Lee – BTG

Vanessa Quiroga - Credit Suisse

Adrián Huerta - J.P. Morgan

Nikolaj Lippmann - Morgan Stanley

Mike Betts - Jefferies

Romuald Urvoas - Exane

Operator

Good morning, and welcome to the Cemex third quarter 2012 conference call and video webcast. My name is Andrew and I will 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, Executive President of Finance and Administration and Maher Al-Haffar, Vice President of Corporate Communications, Public Affairs and Investor Relations.

Now, I will like to turn the conference over to your host Fernando Gonzalez, please proceed.

Fernando Gonzalez

Thank you, Andrew. Good day to everyone and thank you for joining us for our third quarter 2012 conference call and video webcast. After Maher and I discuss the results of the quarter, we will be happy to take your questions.

We are quite pleased with our 13% growth in operating EBITDA on a like-to-like basis on the back of a 2% growth in consolidated net sales. This is the highest EBITDA generation since the third quarter of 2009 and the fifth consecutive quarter with a year-over-year EBITDA increase. Improvement in pricing and volume in several of our regions, as well as the continued success of our transformation effort, has led to the highest operating EBITDA margin in three years.

Infrastructure and housing continued to be the main drivers of demand for our products. Mexico, the U.S., the South Central America and the Caribbean and Asia regions contributed strongly to our third quarter consolidated cement volumes. The favorable volumes from these regions partially mitigated the declines we experienced in the Northern Europe and Mediterranean regions.

We also have double digit growth in our quarterly ready-mix and aggregate volumes in the United States. Prices for domestic gray cement and ready-mix were stable sequentially in local currency terms with aggregate prices down 2%.

Although we are recovering part of input cost inflation, we continue to be at levels below our targeted return on capital employed and the low capital cost. On this front, we continue with the execution of our value before volume strategy focusing on value enhancement, efficiency gains in our customer relationships, ensuring the sustainability of our products, and generating returns sufficient for reinvestments.

With this strategy, we aim to recover our cost and obtain an adequate return on investment in our coal businesses. In Europe, we are well advanced in the implementation of this strategy. We are training our sales force and will align the compensation mechanism to support the implementation.

In cement, we are informing customers about the introduction of surcharges starting in January 2013, changes in pricing standards and policies, service prices and revision of pricing cycles to bi-annual price negotiations in March and the second half of the year. In ready-mix and aggregate, we are working on a new pricing strategy which will be implemented next year. Although we have started implementation in Europe, this initiative is global in scope and it is quite advanced in the U.S. In all other regions, we are currently in evaluation stage.

In addition to our operating achievements, on the financing side, we completed the refinancing of our August 2009 financing agreement with over 92% participation. We are very pleased to have achieved this significant milestone with the support of our 55 banks and institutions. Maher will provide more details on the results of this refinancing process later in the call.

Earlier this month, we announced the closing of 9.38 senior secured notes for $1.5 billion which will mature in 2022. The proceeds from the offering will be used to prepay principal outstanding under the new facilities agreement allowing us to satisfy the March 2013 $1 billion prepayment milestone and the $500 million amortization due in February 2014 under this agreement. These payments will reduce the interest rate on new facilities agreement debt by 25 basis points.

We remain focused on our transformation program. We continue to anticipate an incremental improvement of $200 million in our steady state EBITDA during 2012, most of which we achieved during the first half of the year. We are on target to reach the run rate of $400 million by the end of this year.

We also continue with our efforts to increase the use of alternative fuels. Our substitution rate reached close to 28% during the third quarter. In July, Cemex Latam Holdings presented an application to the Columbian authorities related to the potential sale of a minority stake in its Latin American assets. This past week, we made significant progress and expect to receive authorization for this transaction soon.

Also in July, we signed a 10-year strategic agreement with IBM which will result in approximately $1 billion in savings. Under this agreement, IBM will provide finance, accounting and human resources back office services as well as IT infrastructure, application development and maintenance services.

We foresee reaching steady state savings of about $100 million per year by 2014 when all contemplated services will have been transferred to IBM. In addition, the agreement will improve the quality of the services provided to Cemex, enhance business agility and scalability, maximize internal efficiencies and allow the company to better serve its customers.

Now, I will like to discuss the most important developments in our market. In Mexico, we are very pleased with the 2 percentage points increase in the operating EBITDA margin on year-over-year basis. Cement volumes increased by 4% during the third quarter while ready-mix volumes were flat. Favorable performance from the informal residential and industrial and commercial sector was partially mitigated by lower than expected interest structure activity in cement-intense projects and the still weak formal residential sector.

We expect a recovery in our volumes during the fourth quarter with new infrastructure projects in the pipeline, however, we now anticipate gray cement, ready-mix and aggregate volumes to grow by 1% each for the full year. Volumes to housing developers during the quarter continued to be weak reflecting working capital constraints. Formal builders still have high inventories of homes and land which will take some time to clear as some of these home developments are in places where there are still inadequate public services.

The informal residential sector continues to be supported by higher employment levels and an increase in aggregate wages. Despite a decline in remittances from the U.S. during July and August, year-to-date remittances as of August in U.S. dollar terms continue to be positive showing a 3% growth.

For 2012, we anticipate total investment in infrastructure will increase by about 4% in real terms considering that projects at the state level have increased at a more moderate rate versus what was expected. The industrial and commercial sector is forecast to grow in line with economy driven by manufacturing activity and favorable momentum in private consumption.

We continue with our efforts to reduce cost. In addition, we have been able to increase the use of alternative fuels in Mexico reaching an 18% substitution rate during the first nine months of the year from 14% a year ago.

In the third quarter, we saw continued evidence of recovery throughout our markets in the United States. Year-over-year sales increased by $92 million with operating EBITDA showing a favorable swing of $39 million, continued evidence of the operating leverage in our results. Cement volumes were up 8% on a year-over-year basis, largely reflecting higher demand in the residential and industrial and commercial sectors.

On a year-over-year basis, our quarterly ready-mix and aggregate volumes increased by 13% and 14% respectively. The strength in our aggregates volumes in the quarter is due to the start of a large infrastructure project in Florida.

The residential sector in the U.S. continues to drive the recovery. Houses starts, year-to-date, as of August 2012, are up 25% versus the prior year and trending towards our estimate of 750,000 starts for 2012. In our key states of Florida, California, Texas and Arizona, housing permits grew at a rate of 37% year-to-date as of August, versus a 27% growth for the country in the same period.

The industrial and commercial sector contributed to the growth during the quarter. On a year-over-year basis, spending grew 16% year-to-date August. Contract awards were up 8% for this period. Public construction spending increased 5% through August 2012, with streets and highways up 4%.

With improved revenue generation for the states, the initiation of more cement-intensive growth projects and a new two-year highway build in place for the first time in four years, the infrastructure sector is marginally outperforming our expectations for the year. We continue consolidating our January and April price increases in the third quarter in all our markets, except Florida and Southern California. In West Texas, we were successful in implementing a second price increase of $16 per metric ton in June.

On a sequential basis, cement prices during the quarter are flat due to customer and geographic mix and ready-mix prices increased 1%. The gain in ready-mix reflects market prices drifting up as well as our effort to capture necessary fees and surcharges for value added products and services. Sequential aggregate prices fell 5% in the third quarter due to product mix related to the infrastructure project in Florida.

On a year-over-year basis, prices during the quarter were up 2% for cement and 3% for ready-mix. Aggregate prices fell 4%. The decline in aggregate pricing year-over-year again results from changes in product and market mix.

As we look to 2013, we continue to be focused on increased productivity and margin expansion. Importantly, we have already announced two $8.08 per metric ton price increases in our markets from January and July 2013. We are cautiously optimistic that we can achieve this first step towards pricing our products at necessary levels to create value.

Optimizing our energy mix remains a key objective in the U.S. business. Our alternative energy usage was 22% in the third quarter, 4% higher than in the same period last year. Nine of our 11 active plants can use alternative fuels. Natural gas, as a kiln fuel constituted 21% of our fuel usage in the quarter.

Based on our nine months results, we are increasing our 2012 volume guidance for the U.S. from high single digit growth for cement and ready-mix to growth in the low teens. Due to the large volumes associated with the Florida infrastructure project, we will also raise our aggregates guidance from mid single digit to growth in the low teens. This change reflects the continuous trend of the residential and industrial and commercial sectors as well as higher demand from the infrastructural sector.

In our Northern Europe region, the slowdown in some countries and the uncertainty about the eurozone has affected private and public construction spending affecting volumes for our products. On a year-over-year basis, operating EBITDA margin in the region declined by 0.4 percentage points during the quarter but is up 1.4 percentage points year-to-date reflecting our continued cost reduction initiatives which have offset lower volumes and prices in U.S. dollars.

During the quarter, we recovered part of the market share temporarily lost earlier in the year in the U.K., Germany and Poland. We continue to expect to recover this market share in a more related way. In the region, we continue with our value before volume strategy. We have gone through cement capacity shutdowns and closing of ready-mix plants to support this strategy. We continue to adapt our cement production to customer needs.

In Germany, despite the declining housing permits during the first months of the year, permits increased by 8% during the second quarter and by 7% in the past 12 months ended in June. The environment for residential construction continues to be positive with low mortgage rates, low unemployment, increasing wages and the absence of a speculative residential bubble.

Industrial and commercial permits also increased by 13% during the second quarter and by 10% in the last 12 months ended in June, driven by manufacturing, offices and commercial construction. A slowdown in permits is expected in the upcoming months and a higher percentage of permitted projects maybe postponed.

On the infrastructure side, there have been some bottlenecks in the German construction industry that have affected some projects and increased the backlog in the past months.

In Poland, there has been a sharp reduction in infrastructure spending from a very high consumption base in 2011 and as road and sports related infrastructural projects built in anticipation to the EURO2012 Championship came to an end. The decline in EU funds for capital investment in the public sector and the liquidity problems faced by some construction companies has also affected infrastructure construction.

Housing starts are also expected to end on a lower level than last year as some of the growth registered during the first half of the year was artificially driven by the changes in the Developer's Act that were was introduced at the end of April. In contrast, the industrial and commercial sector is expected to show growth this year driven in part by office construction as the country becomes an important world player in business process outsourcing services.

In France, slight growth from the infrastructure sector is expected for this year as some projects should begin construction. Housing starts for the year are expected to decline by about 15% reaching about 310,000 to 320,000 reflecting the decrease in the tax benefit on buy-to-let investments and tight credit availability. In our Mediterranean region, during the third quarter of 2012, positive ready-mix volumes from our operations in Croatia partially mitigated the declining volumes from our operations in Spain, Egypt and the Arab Emirates while ready-mix volumes in Israel remained flat.

In cement, we saw generalized declines throughout the region. Prices in local currency terms were higher for aggregates and flat for ready-mix on a quarter-on-quarter basis. In cement, the drop in sequential pricing mainly reflects declines in Spain and Egypt.

In the case of Spain, cement prices are 2% higher on a year-over-year basis. In Spain, our volumes continued to be affected by low construction activity in the different sectors. The continued fiscal austerity measures keep infrastructure spending at very low levels.

Housing starts are expected to drop by about 35% this year from a very low base last year reflecting the high existing home inventory levels. We continue to export from Spain to other countries in order to mitigate the decline in domestic cement volumes. Exports account for about a third of our volumes during the quarter.

We are also implementing commercial initiatives to grow our pie, including the increased utilization of ready-mix for road construction, new potential market niches and the introduction of new premium products among others. In addition, and as part of our value before volumes strategy, we have gone through cement capacity adjustments focusing on fire from coal cement operations first, where exporting of cement production is not an option.

Under the current environment where cost of capital continues to be very high and CO2 credits will not subsidize unnecessary installed capacity our production will continue to be adapted adequately while continuing to meet the needs and requirements of our customers. Structurally, we believe that current over capacity in Spain is about 20 million to 25 million tons based on an expected sustainable cement demand of about 15 million tons in the long-term.

In the case of Egypt the decline in volumes and prices during the quarter reflects the increase in cement capacity in the country. Lower demand during Ramadan also had a negative effect on prices. Shortage of energy continues to impact the delivery of cement, partially mitigating the entry of this new capacity.

The main driver of cement consumption continues to be the informal sector. There was a slight pickup in residential demand during the quarter as more attractive credit terms were introduced to the market. Infrastructure activity continues to be low. A constitutional reform is expected later this year and parliamentary elections are scheduled to take place in December and January.

In our South Central America and the Caribbean region we are pleased with the operating EBITDA expansion seen during the quarter. On the back of a 15% increase in net sales our operating EBITDA increased by 25%.

The infrastructure and residential sectors were the main drivers of growth. In the region, Panama, Costa Rica, Nicaragua, Brazil and Haiti showed double-digit growth in cement volumes during the quarter on a year-over-year basis. In the case of Panama, the quarterly growth was 40%. The year-over-year decline in ready-mix volumes was due mainly to declines in Argentina and the Dominican Republic.

In Colombia, our cement volumes remained flat for the quarter on a year-over-year basis, mainly reflecting two fewer business days this quarter, increased cement preordering in June in anticipation of the July price increase and a slight temporary slowdown in residential construction. We expect the residential sector to continue having a favorable performance during the rest of the year.

The government has approved $1.4 billion to extend the benefit in mortgage interest rates for low income housing. In addition, President Santos announced the construction of 200,000 free houses for the poor by 2013, divided equally between the urban and rural areas.

Infrastructure in the country should continue to be a driver for growth with the $19 billion program, which will be invested during the next few years. The first bidding for projects under this program is expected to take place at the beginning of next year.

We continue developing our value-added proposals for our customers, offering not only products, but integrated building solutions that meet their needs. During the quarter, Colombia opened its first Construrama. As in other countries, the Construrama concept will support our main distributors in the country with branding, advertising and the sale of different construction materials while strengthening Cemex distribution channel.

In Panama, the infrastructure sector continued to be the main contributor to cement consumption during the quarter driven by projects such as the hydroelectric plants in the western part of the country, the Panama City Metro as well as the ongoing canal expansion. There are some new projects in the country's pipeline which are expected to start in the following months such as the Cinta Costera 3 highway which will unite Panama City with the Canal Zone, the Corredor Norte highway, the third bridge over the canal and the expansion of the Panama City Airport.

In Asia, net sales increased by 2% in the quarter while operating EBITDA increased by 46% driven by strong cement volumes and prices and an EBITDA margin expanding by more than 6 percentage points on a year-over-year basis. The regional 7% increase in domestic cement volumes during the quarter reflects the continued positive performance of our operations in the Philippines and Bangladesh.

Prices in local currency terms also increased by 2% sequentially. Domestic cement volumes in the Philippines increased by 8% during the quarter on a year-over-year basis. Prices in local currency terms continued to show a favorable trend. The increase in volumes in the country was driven by the continued recovery trend in infrastructure as well as favorable performance from the residential sector.

Infrastructure spending is expected to remain strong during the rest of the year with infrastructure projects still in the pipeline. In addition, upcoming midterm elections should also have a positive effect. To satisfy the fast growing market in the country, we announced an expansion of our grinding capacity in the Philippines of 1.5 million tons per year. This expansion is expected to be operational during the first quarter of 2014.

In summary, we were able to mitigate the weakness that we are experiencing in our Northern Europe and Mediterranean regions, with a favorable market dynamics and strong operating leverage evidenced in the rest of our portfolio.

Now, I will turn the call over to Maher to discuss our financials. Maher, please.

Maher Al-Haffar

Thank you, Fernando. Hello everyone. Our quarterly operating EBITDA increased by 9%. On a like-to-like basis for the ongoing operations and adjusting for FX, this increase was 13%. Operating EBITDA margin increased by 1.8 percentage points on a year-over-year basis reaching 18.7%. If we adjust for FX effects, EBITDA margin during the quarter exceeds 20%.

This margin expansion is driven by higher volumes and prices in some regions as already discussed by Fernando, the continued results of our transformation process, as well as a favorable operating leverage effect in several of our markets, especially the U.S., South Central America and the Caribbean, as well as Asia.

Cost of sales as a percentage of net sales decreased by 1.1 percentage points during the quarter versus the third quarter of 2011. SG&A, also as a percentage of net sales, declined by 1.8 percentage points in the same period. The decrease in these costs and expenses reflects the savings of our cost reduction initiative, lower fuel costs and increased utilization rates.

Our kiln fuel and electricity bill, on a per ton of cement produced basis, fell on a year-over-year basis by close to 5% during the third quarter. This decline is due to drops in the price of Petcoke and coal from last year's levels, an increase in the use of alternative fuels and the introduction of natural gas as part of our fuel mix in the U.S.

Substituting primary fossil fuels with alternative fuels has several advantages. First, they are cheaper. Year-to-date, we have saved about $80 million by using alternative fuels instead of fossil fuels. Second, when using alternative fuels with biomass content, a portion of the CO2 emissions are considered carbon neutral reducing the number of emissions allowances utilized by some operations. Third, alternative fuels are generally quoted and purchased in local currencies. This reduces volatility of our margins resulting from the exchange rate fluctuations.

During the quarter, our free cash flow after maintenance CapEx was double that of the period last year, reaching $204 million. The year-over-year variation in free cash flow is due mainly to higher operating EBITDA, lower investment in working capital and other cash items which more than offset higher maintenance CapEx and cash taxes.

The year-to-date investment in working capital is close to $127 million lower than last year. Working capital days in the first nine months of the year decreased to 30 days from 32 days in the same period of 2011. As in prior years, we expect to recover a significant portion of the incremental year-to-date working capital investment during the fourth quarter.

In the income statement, other expenses net of $168 million include mainly a provision related to the implementation phase of the outsourcing agreement for back-office services as well as impairment of fixed assets. We also recognized the gain on financial instruments of $19 million related mainly to Cemex shares. During the quarter we had a net loss of $203 million versus a loss of $730 million last year. This is primarily due to a higher operating income, a lower foreign exchange loss and a gain on financial instruments versus a loss in the third quarter of 2011.

As Fernando mentioned earlier, in September we announced the successful refinancing of our financing agreement. Participating creditors representing proximately 92.7% of the aggregate principal amount outstanding under the agreement agreed to exchange their loans and private placement notes.

The results of the refinancing were, first, the issuance of about $6.2 billion of new loans and new private placement notes pursuant to a new facility agreement and a new note purchase agreement both dated as of September 17, 2012. The final maturity of the new facilities agreement is February 2017. Second, the issuance of $500 million of new 9.5% senior secured notes due in 2018. Third, approximately $525 million remained under the original financing agreement.

Earlier this month we issued $1.5 billion in senior secured notes. This transaction was oversubscribed, demonstrating strong support in the global capital markets for Cemex. With the proceeds from these notes we will pre-pay the 2013 and 2014 maturities under the new facilities agreement and thereby reduce the interest rate on all remaining new financing agreement loans by 25 basis points to LIBOR plus 500 basis points. With these prepayments we will have no significant maturities until February 2014.

During the quarter, total debt plus perpetual securities increased by $14 million. This increase reflects a negative foreign exchange conversion effect of $56 million. We continue to be comfortable with our liquidity position with cash and temporary investments reaching close to $800 million as of the end of the quarter. Additionally we are well advanced in several tracks towards further de-risking of our balance sheet.

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

Fernando Gonzalez

Thanks, Maher. For 2012, we now expect consolidated volumes for cement to decline by 1% and ready-mix and aggregate volumes on a like-to-like basis to drop by 2%, mainly reflecting lower anticipated volumes in our European countries. We anticipate that the estimated increased profitability from our operations in Mexico, the U.S., the South Central America and the Caribbean region and Asia will more than offset the expected weaker Northern European and Mediterranean regions.

Our cost of energy, on a per ton of cement produced basis, is expected to decline by approximately 2% during 2012. We also plan to continue to keep capital expenditures and other investments at a minimum. Total CapEx is expected to be about $620 million including $420 million in maintenance CapEx and $200 million in strategic CapEx.

Regarding our cash taxes we anticipate no major change from 2011 levels excluding the payment made in Mexico in March. Regarding working capital we expect to recover a significant portion of the incremental year-to-date working capital investment during the fourth quarter. We expect our cost of debt including our perpetual and convertible securities to be marginally higher than last year given our current financial obligations.

In closing, I want to emphasize three points. First, as I said at the beginning of the call, we have seen five consecutive quarters of operating EBITDA growth. Also, in this quarter, we have the highest operating EBITDA margin in three years. The anticipated recovery in many of our markets should produce consolidated volume, price and margin increases to improve our return on invested capital going forward.

Second, we continue to work hard to ensure we achieve the expected $200 million in incremental savings from the initiatives under our transformation program during 2012.

Third, we continue to be confident in our ability to meet all of our financial obligations. We have substantially prepaid all of our principal debt payments until February 2014 and proactively bolster our liquidity needs.

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.

Now we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Esteban Polidura, Deutsche Bank. Please proceed.

Esteban Polidura - Deutsche Bank

Thank you very much. Good morning, Frenando, Maher.

Fernando Gonzalez

Good morning.

Esteban Polidura - Deutsche Bank

I have two questions, if I may. The first one, could you please remind us the amounts and strike prices of the outstanding convertibles and which are optional and which are mandatory?

The second one, in today's press release, you mentioned lower than expected infrastructure activity in Mexico, especially in terms of cement intensive projects. Do you expect this to prevail in the fourth quarter? Thank you.

Fernando Gonzalez

I think I will take the second one. I think we commented that we saw some delays in infrastructure projects in Mexico, but starting third quarter, we see they are picking up. So the expectation is for the fourth quarter for those projects to be developed. On the first one, I have part of the answer, the convertibles, the one on the '15 is 12.09, '16 and '18 is 10.43, both.

Maher Al-Haffar

Esteban, we have, as you know, four convertible transactions. We have three that are normal converts and one that is a mandatory convert. In order of maturity the convertibles are, at 2015 the amount is $715million and as Fernando said, the strike price is 12.09.

Then we have the 2016 notes, the amount there is $977.5 million, the coupon is 3.25. I don't know if you need that, but we can get you that amount and the strike price is as Fernando mentioned. Then the third is a 2018 and that's $690 million. Then we have a mandatory convertible that we issued that matures in 2019 and that was sold in the Mexican market and that has a strike price of 21.27 pesos per CPO.

Of course, the previous prices that Fernando gave were prices per ADS. I don't know if that answers your question. I don't know if that answers all the questions.

Esteban Polidura - Deutsche Bank

Yes, it's perfect. This is very clear. Thank you, Maher and Fernando.

Operator

Thank you. Your next question comes from Gonzalo Fernández. Please proceed.

Gonzalo Fernández - Santander

Hi, good morning. Fernando and Maher, congratulations on your results. I have two questions. I was wondering about EBITDA margin in the Mediterranean, despite a very sharp reduction in volumes is 28% which is very high, I don't know if that margin is due to any extraordinary items, as due to credits or anything related to the sub-contracting of IT or if that margin sustainable going forward?

The second question, you mentioned changes in your guidance for Mexico and the U.S. I don't know if you have any changes in your guidance regarding for Colombia given what we have seen in the first nine months of the year? Thank you.

Fernando Gonzalez

On the first one, related to margins in the Mediterranean region, we don't have an extraordinary thing. We have a combination of performance of different variables like, lower fees costing in Spain and Egypt and also Croatia. We have also done rationalization of capacity. We have, as you know, lowered headcount and also freight optimization. You also know we have a lower energy costs and maintenance cost. So it is a combination of several reasons. The second question, I didn't listen it properly.

Maher Al-Haffar

I think that, Gonzalez was it on the changes in guidance in Mexico and in the U.S.?

Gonzalo Fernandez - Santander

No, if there are any changes in the guidance regarding for Colombia.

Maher Al-Haffar

For Colombia, yes. We reduced the volume guidance for cement from 7% to 5% and also we reduced the guidance on ready-mix from, I believe, about 29% to 15%, and then we trimmed back the aggregates from 40% to 31%. Now the aggregates and the ready-mix reduction is connected. Obviously, it's because of the connection of the business.

One thing that is very important to note is that, the first half of the year, as you saw, the improvement in operations in Colombia was extremely strong, and the reason for that is that first we started with a relatively weaker first half 2011 and then things kind of picked up in the second half.

So, second half should be a slightly more difficult comparison. I don't know Fernando you want to address the other changes in terms of Columbia, why we changed the guidance?

Fernando Gonzalez

There are, in the case aggregates, we have some changes because we started few months ago increasing the trading of our aggregate business, so that is changing the results every quarter also on our estimates, but I think the main points you have already addressed them, Maher.

Maher Al-Haffar

The other thing, Gonzalo, in terms of the cement guidance, okay. There were several issues that drove that. Number one is that we had two less business days in the quarter and that had the impact of a little bit of a reduction in volumes, about three percentage points.

We also had a bit of a pre-buying or anticipation buying in the month of June. So, some of the volumes moved from the third quarter to the second quarter because of the pricing situation. In some of the urban centers, residential construction, which is in many instances is exposed to ready-mix, was also slowed down because of maybe a little bit of a lag in terms of utilities being put into place.

So, when you add all of those things together, we saw the performance is in the third quarter and it caused us to change our guidance for the year. But what's very important is that despite this change in guidance for volumes, while we can't provide guidance for the year for Colombia we continue to be in fact pretty much on target in terms of operating cash flow generation.

So I don't know if that addresses all of your questions, Gonzalo. If there's any follow-up please tell me.

Operator

Thank you. Your next question comes from Gordon Lee, BTG. Please proceed.

Gordon Lee – BTG

Just two quick questions. First, on sort of global pricing initiative that was discussed at the beginning of the call and obviously an important factor in determining whether the price increases can stick or not is whether the competitors are playing ball as well. I was wondering if you have any color on whether the behavior of the key competitors in some markets where pricing has been challenging if that has changed?

The second comment or the question is, with the U.S. now seemingly reviving somewhat at the margin at least, are some of the asset sales in some of the non-core sort of southern belt states that you were thinking of a few years ago in the U.S., are you looking at doing some of those as well alongside the IPO of Cemex Latam or are you putting those aside for now? Thank you.

Fernando Gonzalez

Thank, Gordon. On asset sales we continue with our program of non-productive asset sales or assets that are not currently generating EBITDA. So we are moving forward. On other type of sales we continue exploring different opportunities including the ones we mentioned. We don't have any specific or additional information we can share in that regard.

On the global pricing initiative, what I can tell you because you were specifically, if I understood correctly asking or commenting if the success of this type of initiative will depend on third parties or other companies or behaviors. I cannot comment on that but what I have seen is the same thing you have seen through public information. Particularly in Europe and the U.S. the industry needs to at least pay for its cost of capital.

Currently that is not the case. In some cases, because volumes have deteriorated in some markets that will come back whenever thee economic activity comes back, but in some others, it is just that current prices just don't pay for the cost of capital. So, that's why we have this on very serious global effort. Again, we already mentioned starting in Europe and the U.S., but going to other markets, in which we think it is necessary.

Now, if you think of what we are doing, we have already explained what we're doing, is to be more efficient and more precise, not only in the way we serve our customers, but in the way that we charge for value-added product and services. So, we are organizing ourselves in the sense of properly offering and communicating our services to customers. We are properly modifying our platforms.

So, we can do it in a simple and expedited way. We are organizing and training our sales force in order to execute properly the strategy and we are modifying our compensation systems for our sales force, so we can support them in order to develop and execute this strategy. So, I think, for us, and as part of our transformation initiative being effective in prices in certain markets so we can go back to pay our cost of capital as you can imagine is very, very high priority.

Maher Al-Haffar

If I can add also, Fernando, it's very important to note that most of the actions would take effect both in Europe and in the case of the U.S. in 2013. So a number of the announcements whether its the introduction of surcharges or the introduction of price list or pricing increases, all of those changes are taking place effective January and beyond in that year, and we are seeing support.

I mean certainly in the U.S. for instance, I can tell you that we announced a pricing increase of $8.08 per ton starting January in some of the markets and we are seeing good support from the market. In various parts of Europe, also there has been similar support to some of the announcements that we have made.

So, I think that everybody realizes that after three years of trying to shore up your return on capital through streamlining and making your business more efficient, that you know revisiting one of the most important drivers of value creation for our stakeholders needs to be done and that's how we price our products. I don't know if that addresses your question, Gordon.

Operator

Thank you. Your next question comes from Vanessa Quiroga. Please go ahead.

Vanessa Quiroga - Credit Suisse

My question is regarding the leverage, couple of structural strategies. After your latest issuance on the capital markets, I think you reached more than 60% of the total debt exposure to capital markets. So, I am wondering if this is the maximum that you expect to have or are you willing to continue increasing that exposure going forward as more of the maturities debt if the loans come due?

My second question is regarding Cemex Latam. I don't think that you have published financial statements for this new entity. Could you guide us on what is the appropriate leverage you think this subsidiary or at least that entity should have? Thanks.

Maher Al-Haffar

Well, maybe starting with your first question Vanessa. Cleary, we have maturities under the new facilities agreement that we need to meet. At some point in time, of course, this is too early to talk about is that, we may have a discussion again about how the terms and conditions of that facility agreement, but until then, I mean we have maturities that we need to meet.

Those maturities are being met through a combination of things. They are being met through operating cash flow generation, through cash on the balance sheet, as we have discussed a number of times. We are keeping somewhere between $700 million to $800 million, sometimes a little bit more of cash on the balance sheet.

Obviously, not all of that cash is needed to operate the business. We can operate the business with a much lower level. So, some of that can be used. We also will definitely continue to take a look at opportunities as we did this month in the capital markets to do liability management that way.

Then, of course, as you know, we did talk about a combination of asset sales, and/or the sale of a minority stake in Cemex Latam and it's very important to note that that transaction was discussed during the discussions with the banks very specifically and as you heard this morning, we did say that, we are quite pleased by some of the reactions that we have gotten from the regulators in this past week. So clearly, what that tells you is that, there is some rotation towards the capital markets, but we also expect to reduce total debt as well from internal cash generation and from some of the asset sales that we are planning.

However, I think it's very important, when you talk about leverage, actual leverage, the biggest source of de-leveraging and de-risking of the balance sheet is really going to be through the improvement of our operating EBITDA. We are where we are because of the dynamics of the market and we think that certainly like the U.S. market, for instance, we look forward to a much, much more important contribution in the future. So that's going to be the biggest source of de-leveraging.

I forgot the second question, Vanessa. What was the second question? It was about CLH financials; I believe?

Vanessa Quiroga - Credit Suisse

Yes, thanks, Maher. About the financials, just if you could provide guidance on what is the appropriate leverage that you think this entity should have and is there a maximum ownership that you are willing to sell of Cemex Latam?

Maher Al-Haffar

Yes, unfortunately, we can't say much just because we are where we are in the process and our lawyers are quite vigilant in making sure that we don't do anything that is not right. What I can tell you is that, there is no specific amount that we are targeting to sell.

There is a requirement under the facilities agreement that if we go below a certain threshold, we would have to divest our whole interest in the company and that's below 51%. So you imagine we are not likely to do that.

In terms of leverage, I mean all I can tell you is that, all of the competitors or potential competitors of the company, they may not be investment grade because they may not have securities that are rated, but certainly they have a capital structure that would lead to that level. So it would be unlikely that the company would be created when and if it comes to the market would come at a disadvantaged position.

Operator

Thank you, and your next question comes from the webcast.

Maher Al-Haffar

Right. The next question is from, and please, I apologize if I am not pronouncing it correctly, Romuald Urvoas from Exane. The question is, can you kindly give us the details of your new covenants for 2013 until 2016? That's the first question. Then the second question is, do you think that the EBITDA in the U.S. will be at the breakeven in 2013?

Fernando Gonzalez

Well, we can relate the previous question to this one. It is precisely because of the new mix of profile in our debt that covenants were relaxed compared to the previous ones for the new financial agreement. So, we are already back to a leverage ratio of seven times already starting this December to December 2013. Then it will start being reduced let's say 6.50 for the first half of '14 and six times for the '15 and the reduction continues from then on same flexibility given for our coverage ratio, which was 1.75 and now it's back to 1.50 until the first half of '14 and then it starts being adjusted little by little afterwards.

I think this is necessary, convenient and it was recognized and accepted by the banks that we needed the flexibility to be able to tap the capital markets without having, let's say, this perception of risk because of low margin on compliance in these two covenants.

Maher Al-Haffar

If I can add to Fernando's, Romuald, is that it's very important to note, I mean as you saw our leverage ratio was slightly under six times. It was 5.98 as at the end of the third quarter. So while you we have quite a bit of a cushion, that cushion was primarily there not because we expect our EBITDA performance or leverage to be at anywhere these levels.

I think as Fernando said, and I just want to reiterate, the reason we have the level of cushion that we have was really to try as much as possible to mitigate the kind of the being six feet ahead of the steamroller on an ongoing basis. So that was extremely important. So we feel very comfortable that we will be well within these ratios.

Then on your second question, do you think that that EBITDA and U.S. will be at a breakeven in 2013. Well, our guidance for this year certainly is that we will be positive and we were positive certainly as of the second quarter. So, things are turning in the right direction.

A lot of the drivers, housing, industrial and commercial, to a lesser extent, infrastructure in the U.S., seem to be moving in the right direction. Now, we are certainly not discounting a double dip in our outlook, but we are still in that process of business plan formation. We are not there yet and in any case, we really typically don't provide guidance at this stage for the following year.

I don't know if Fernando you want to add anything to that.

Fernando Gonzalez

No, not really.

Operator

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

Nikolaj Lippmann - Morgan Stanley

During the Cemex Day last year in September you mentioned that you want to sell sort of $800 million worth of non-producing assets. In the statement today you said that the Colombian asset sale or the South American listing is part of that previously announced plan. How should we think about it? Can you give a total? Should we think about the $1 billion, that the Colombian sale was part of that?

You also mentioned that you would sell assets for generating less than 10% of return on invested capital and it would contribute to debt reduction. As far as Colombia, it's doing much better than that and it's contributing quite a lot. So, I was just wondering if you could give a total target for debt reduction and how we could reconcile the different statements from the Cemex Day and what you are saying now?

Second, if I may, can you give us a sense of the changes in CapEx? You have, as far as I understand, less pressure from the covenants. You are running close to full capacity in Colombia. So are you looking at increasing capacity in that market and maybe even Mexico where you had a plant that is sort of half ton. So those are my two questions, if I may?

Fernando Gonzalez

Okay, let me start with the target of $1 billion. I think we announced it during the Cemex Day last year, I think, in September.

Maher Al-Haffar

Last September.

Fernando Gonzalez

Then we started modifying it during the year. I think we started lowering that target, and remind me, Maher, I think it was $0.5 billion figure we gave.

Maher Al-Haffar

Yes.

Fernando Gonzalez

So, what I am trying to say is that the target on asset sales is changing. As you know we now have a new refinancing agreement, different covenants, at the same time we did execute $1.5 billion high yield bond. So we have to reevaluate our strategy.

What I can tell you is that we are committed to sell assets. As you know the Cemex Latam Holding, its one important component of that strategy. It adds up to our strategy meaning, we are not necessarily thinking on Colombia plus group of additional assets.

We are willing reduce our total debt through asset sales and we are proceeding beyond the one that it's, let say, public to some extent. Nowadays is the minority stake in Cemex Latam, but as you can imagine and as we have said before, we have several and we are exploring several different possibilities on asset sales.

On the other questions regarding CapEx, in the case, I think you mentioned Colombia. In the very short-term, we have capacity enough to deal with volumes in Colombia, but at the same time we are evaluating different possibilities for the mid-term. Market in Colombia has been evolving and we think will continued evolving in a very positive way.

So, at some point in time, we will need to give a solution to comply with demand in the market. We just did it in the Philippines. Whenever we think it is appropriate we will do it in Colombia. You also mentioned in the case of Mexico, again in all cases and depending on current volume growth plus the perspective we see, we will be reactivating additional, either the bottlenecking or adding grinding facilities or additional clinker production capabilities.

But for the time being, we don't have any specific additional information besides what we have already given.

Nikolaj Lippmann - Morgan Stanley

A follow-up question, if I may. So, in terms of debt reduction, as we think about whatever you are selling in South America and Colombia plus $500 million. Am I correct of the free cash flow?

Maher Al-Haffar

Say it again. We couldn't hear you, Nik.

Nikolaj Lippmann - Morgan Stanley

Sorry, so, in terms of debt, like a target for total debt reduction, that will be $500 million, for non-EBIT debt reducing assets, sort of what you talked about during the Cemex Day last year, one two, whatever proceeds you would get from Colombia; three, your free cash flow over the course of whatever period, 2012, et cetera?

Maher Al-Haffar

Nik, I really think what Fernando was trying to indicate is that the target that we mentioned in our Cemex Day has evolved and it's changed. So I wouldn't necessarily take that number as and try to kind of reverse engineer as to what could be the size of the transaction that may happen out of Cemex Latam.

There is a certain strategy for de-risking the balance sheet and we are pursuing that strategy. Beyond what we have said publicly, we are not able to comment anything more, frankly. We have sold some assets so far this year, about $80 million that are part of what we talked about in terms of non-EBITDA generative assets. We continue to take a look at some of those possibilities in many other markets.

I don't think the Cemex Latam transaction was really a part of that asset sale target at the time. It's really a new project, a new concept that we are pursuing. Among others, obviously, it's not the only path that we are pursuing.

Operator

Thank you. Your next question comes from Adrián Huerta, J.P. Morgan. Please proceed.

Adrián Huerta - J.P. Morgan

Good morning, everyone. Most of my questions were answered, so just one final question. If you can share with us your views on the potential impact on the industry from the potential fiscal cliff in the U.S.? Thanks.

Maher Al-Haffar

Adrián, that's a very good question. I mean number one, I would like to say before I go through the different elements of the fiscal cliff, well, maybe we can do that. I mean obviously the most important part of the fiscal cliff is the potential effect of the sequestration process, which is the, across the board budget cut that has been agreed to in Congress.

I have to tell you that there were two other items. There's the tax cut and there was, in our view for our business, was the renewal of the Highway Bill. We started this year being quite not so optimistic, let's put it this way, being nice to the guys on the hill is that the Highway Bill would get done this year and we were pleasantly surprised by a Highway Bill. Not exactly what we expected, but we won't say no for it.

It represents a little bit of growth covering inflation, has a very interesting element to it, which is a federal guaranteed program that could be anywhere between $15 billion to $20 billion per year if it gets taken up to the full max. Of course we don't expect that to happen, but when you add those numbers up it gives, number one, a lot of visibility to states and it also creates the possibility of expanding spending on infrastructure in the U.S.

The tax cut seems like both sides are kind of now saying the same thing and there seem to be a lot of support towards it. There's some fine tuning, but we are fairly constructive on that.

The biggest piece, I would say, that could have quite a significant impact on the U.S. economy is the sequestration. Now, as far as we are concerned, the immediate effect on the infrastructure spending is not likely to be significant, and I say immediate, it's very important.

Only 25% of the federal financed budget, a portion, I mean and 50% of highway spending comes from federal general budget which may be subject to this sequestration. Less than 15% of the annual highway spending would be subject to sequestration or an across-the-board cut.

It's likely to have an impact in a forward-looking fashion. So it's likely to be six months to maybe a year for the impact, if it happens, to be felt. So as you can see the impact on 2013 is likely to be de minimis.

Now the effect of an unresolved fiscal cliff on all consumption sectors is huge. I mean, our economist, I think is in the consensus pack. We think the impact could be anywhere between 3% to 4% drop in GDP.

There would be a very meaningful increase in unemployment. There would be lower consumer spending. This may lead to a major setback in residential recovery. So when you add all of that stuff I don't think anybody that expects to get vote is going to want to see that happening and I hate to use that example but it's a little bit sausage making, while it's happening it may not look that good but hopefully when it comes out it will be acceptable.

So we are not expecting, there could be some noise, immediate impact is very de minimis but medium term we think that should not be an issue hopefully. I don’t know if that answers your question, Adrián.

Operator

Thank you. We have time for one last question. The question comes from Mike Betts, Jefferies. Please proceed.

Mike Betts - Jefferies

Yes, thank you very much. I have two questions, if I could. First one, cost cutting in Europe, are you able to quantify, because I assume the 200 you are talking about from last year's program was really, and that's the group level, was before the latest cost cuts that were required in Europe given the sort of the renewed weakness?

Then secondly, I am looking at Page 15 of the report and sequentially, what looked initially fairly significant declines in cement prices Q3 versus Q2, both in Northern Europe and Mediterranean and I guess my question there is, where were those declines particularly concentrated and given the volume outlook is there any risk that that situation worsens? Thank you.

Fernando Gonzalez

On your first question, Mike, I think we have not given a specific information on our transformation initiative on a region or country level. So we cannot give you at this point in time, but we will think on a way to update you on additional figures that can help to understand specifically the North Europe region.

Mike Betts - Jefferies

If I presume you have done more since the transformation program, Fernando, I presume you have done more cost cutting?

Fernando Gonzalez

We are continuously adding initiatives to our transformation initiative. Transformation is type of, let's say, all the improvement, cost cutting initiatives that we find through time and we execute through time. So, this is not transformation initiatives. It is not something that we did last year or mid last year. It's something that we are continuously doing, so we are adding additional initiatives of cost cutting.

We are including everything from reductions of shutting down plants, any additional material initiative that can help us reduce our cost and expense base. You have seen how our administrative expenses related to sales are decreasing. It is because of same reason, some initiatives that we are including in our transformation initiatives.

Our agreement with IBM is part of our transformation initiative and as you can imagine we are just starting up executing that initiative that would be bringing additional savings to the ones we have commented in the past. Not that material during 2013, but very material starting 2014, just this particularly agreement with IBM, we think we will get additional to what we have commented about $85 million of savings.

So, we are adding additional possibilities. Most of these additional initiatives are global. In some cases there they are specific to countries or regions, but most of the time these are opportunities we find and execute globally. I think in the past we have commented that we strive to really move the needle by mobilizing the company globally.

So, an idea here an idea there can, if applicable, be executed at a global level very fast. I think a good example of this capability is our alternative fuel strategy that's started in 2006 or 2007, I think, with 5% and we are currently at a level, as mentioned in the last quarter close to 28%, which is much, much higher on what the company that used to be the leader in this front is currently and like I don't know, two, three times higher than most of our global peers.

So again, we are taking additional cost cutting or transformational initiatives and applying them globally as fast as possible.

Mike Betts - Jefferies

Okay, and just to clarify, the $85 million IBM saving that's in 2014, is there any contribution in 2013?

Fernando Gonzalez

It's very small. It's not material, $15 million to $20 million.

Maher Al-Haffar

Fernando, you want me to talk about the price?

Fernando Gonzalez

Yes.

Maher Al-Haffar

Yes, maybe on the prices, Mike, Northern Europe as you saw in local currency terms sequentially quarter-on-quarter was down couple of percentage points, 2%. Now obviously we can fine tune this, but when you are at these low single-digit levels there could be geographic mix, it could be product mix distortions as well.

The two main, I would say, contributors to the change is that we saw a very low almost flattish pricing situation in Germany. It's a little bit on the negative side. Poland was mid-single-digit drop sequentially. U.K. was flat and so that kind of gives you an idea of the drivers. I don't know, you also had a question about pricing in the Mediterranean?

Mike Betts - Jefferies

Yes. Thanks, Maher, because that also showed a sequential decline, I think, of about 3%. So I mean again was that any particular country?

Maher Al-Haffar

Yes, well, Egypt as you know we had we had Ramadan this quarter, the Muslim holy week and typically business activity does slow down a little bit. So we did see a little bit of a drop in Egypt, again low single-digit drop in Egypt in local currency terms. We also saw a low single-digit drop in Spain in local currency, but I would say Egypt is probably the biggest contributor there. Croatia, which is another part of that region, was flat.

Mike Betts - Jefferies

But the basic message, by the sound of it, is it's worn off. It's not something to worry about with the weaker demand outlook. It's not something that particularly concerns you.

Maher Al-Haffar

Well, if I can comment maybe first on Northern Europe. In Northern Europe, we are quite pleased with the way the organization is responding to the value over a volume proposition and we think going into 2013, we should certainly benefit from that and it looks like we are getting support for that approach.

In the Mediterranean, Egypt frankly, if you take a look at the market itself as a whole for the year, we are expecting it to grow. National consumption of cement is going to probably be in the mid-single-digit growth. So that should take up the slack that is being created by the new capacity that is coming on stream, not as fast as we would like to see it, but then as things get resolved hopefully in Egypt we should see an acceleration of that.

Spain frankly, a low single-digit. There could be a little bit of slippage drifting downwards of pricing, it could be also a little bit of product mix.

Operator

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

Fernando Gonzalez

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!