CEMEX SAB de CV Q1 2010 Earnings Call Transcript

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

CEMEX SAB de CV (NYSE:CX)

Q1 2010 Earnings Call

April 27, 2010 9.30 AM ET

Executives

Fernando Gonzalez - EVP of Planning & Finance

Rodrigo Trevino - CFO

Analysts

Carlos Peyrelongue - Merrill Lynch

Vanessa Quiroga - Credit Suisse

Gordon Lee - UBS

Robert Eason - Goodbody Ireland

Mike Betts - Jefferies

Jeff Davis - HSBC

Nicolai Sebrell - Morgan Stanley

David Heasman - RJM Investments

Gonzalo Fernandez - Santander

Jacob Steinfeld - JPMorgan

Olivier Fortesa - Amber Capital

Yaseen Turabi - Exane BNP Paribas

Alejandro Luciano - Credit Suisse

Harry Goad - Credit Suisse

Hari Ramanan - Eminence Capital

Operator

Good day ladies and gentlemen and welcome to the CEMEX first quarter 2010 earnings webcast. My name is Jasmine and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

Our presenters for today are Fernando Gonzalez, Executive Vice President of Planning and Finance; and Rodrigo Trevino, Chief Financial Officer. At this time, I would now like to turn the conference over to your host for today Mr. Rodrigo Trevino. Please proceed.

Rodrigo Trevino

Thank you, Jasmine. Good morning to everyone and thank you for joining us for our first quarter conference call and video webcast. We will keep our initial remarks short to allow more time for questions. I've been asked to remind you that any forward-looking statements we make today are based on our current knowledge of the markets and which we operate and could change for a variety of factors beyond our control.

I would like to introduce Fernando Gonzalez are recently appointed Executive Vice President of Planning and Finance. Fernando has served CEMEX in a variety of Executive Functions since 1989. He has been a member of CEMEX’s Executive Committee since 2003. He has managed business units in all of our operating regions and has also been responsible or strategic planning for human resources. Fernando is now responsible for all corporate strategic and developmental functions including CEMEX’s financial strategy.

Now, I will turn the call over to Fernando. Fernando.

Fernando Gonzalez

Thank you, Rodrigo. Good morning to everyone and thank you for joining us today. I would like to start with four messages. First, while our financial challenges are not completely behind us, we have aggressively implemented strategies to reduce financing risk over the next three years, giving us sufficient headway to capitalize on the recovery in our markets. We will continue to aggressively address financing challenges in the medium term. We continue to believe that our growth in the medium term continues not to be comprised by our financial obligations under our financing agreements.

Second economic erosion in most of our markets has stabilized and/or bottomed out. In fact we are beginning to see moderate signs of growth in markets that have experienced the deepest corrections like the US and parts of Europe. Having said this we continue to cautious about the traction that these trends will have. While these signs of growth are not evident in our results for the quarter, we are becoming more confident that we will see them in our full year results. This stability is still not where we would like it to be, but it has improved from last year. This is most evident in our US markets.

Third, our business model has demonstrated its strength, not just by how we can deliver growth in good times, but by how quickly we can adjust our business during the challenging times. While we will continue to rebalance our portfolio of businesses around the world we are happy with our geographies and products and we feel that our core markets should deliver healthy organic growth in the short and the medium term.

Fourth, we are never satisfied with our profitability levels and we are continuously and aggressively focusing on our profitability metrics and right sizing efforts and now I would like to discuss our first quarter results. I would like to start by saying that our first quarter results were inline with our expectations to deliver full year EBITDA of $2.9 billion. Bad weather during the quarter was partially offset by better pricing conditions in the strong markets and cost reduction initiatives and we continue to believe as we have mentioned last quarter, that most of the expected EBITDA growth and recovery in our hardest hit markets for 2010 we will be reflected in the second half of the year.

During the first quarter consolidated demotic cement volumes declined by 6% ready mix volumes declined by 16% and aggregates volumes declined by 13% versus the same quarter last year. Adjusting for foreign exchange fluctuations consolidated prices during the first quarter compared to the fourth quarter of last year increased by 1% for cement were flat for ready mix and increased by 2% for aggregates.

Volumes in Mexico dropped during the quarter versus a strong first quarter 2009 and which infrastructure spending was high in anticipation of the mid year elections. Infrastructure spending is expected to drop by about 12% as in 2009 there were some extraordinary programs to promote growth and employment that will not be available this year. The formal housing sector has affected by bridge financing constraints. The low income housing is expected to be flat for the year while meet and high income housing is expected to the client.

The self construction sector is also expected to decrease slightly during this year, reflecting lower remittances in Peso terms and absence of extraordinary social programs that were available last year. The industrial and commercial sector is expected to show moderate growth during year, after two years of the claim, but whether in the much of the United States, as well as the traditional slowdown in the industry first quarter, deferred construction until later in the year.

Leading indicators, however, continued to strengthen and support our growth expectations for the US in the infrastructure and residential sectors. First quarter 2010 Contract awards for streets and highways in the US are up in 38% -- real terms, year-on-year driven by ARRA fiscal stimulus monies and the extension in March of the favorable highways spending program until year end. To put the Contract awards numbers in some context, the growth in Contract awards for streets and highways for the six month period in March is the highest year-over-year percentage increase for his calendar period in the last thirty years.

The residential sector is show in modest recovery fuelled by improved affordability and the extension and expansion of the federal tax subsidy. It is worth mentioning that the increased volume resulting from public works projects that we have secure as of the end of first quarter, accounts for almost 50% of the high single-digit volume growth expectations for our cement operations in the US for 2010. This assumes that in the aggregate, total cement volumes from the residential, and industrial, and commercial sectors reminds stable.

In Europe, severe weather conditions also affected volumes in our operations. In most countries, in the region infrastructure continues to be the main driver for volume in the quarter. While we expect stabilization and potential growth in some European markets this year, Spain our biggest market in the region is expected to continue declining.

During in April, we have had some system ability related achievements in Europe. Our UK operations is the first cement company in the world to provide certified carbon levels for the cement using the Carbon Trust, Carbon Reduction level demonstrating the companies commitment to reduce environmental impacts of its cement.

In Germany, -- would receive notification, certification from the Eco Management and Audit Scheme or EMAS in two of our plants, Beckum and Rudersdorf. The EMAS Residential by the European Union and is the system for environmental management and environmental auditing according to which organizations voluntarily commit to having their environment performance appraised and to constantly improve it. For the next three years the two cement plants allow to use EMAS Logos for their operational protection measures.

In the South, Central America and the Caribbean region volume growth even the quarter was mainly driven by our Colombian operations. In this country, even though low-income housing is expected to decline as a result of the abolishment of their Mega proyecto de viviendas Social growth in cement is expected to be fueled by the general elections and the stabilization of middle and high-income housing.

In Panama, initiation of infrastructure projects such as the expansion of Panama City’s airport and Baitun hydroelectric project will contribute to our ready mix operations this year. Growth in the region for this year is expected to be mainly driven by our operations in Columbia, Panama and the Dominican Republic.

In the Africa and Middle East region, healthy growth in cement volumes in Egypt was upset by a significant volume decline in the United Arab Emirates where a slowdown in construction as resulted from the Dubai World restructuring. Going forward, the informal housing and infrastructure sectors will continue to be the main drivers of cement demand in the region.

In Egypt, expected recovery in tourism and Suez Canal receipts are expected to compliment with the already robust growth rates in construction. In Asia, the increase in cement volumes during the quarter was driven mainly by growth in the Philippines and Thailand. In the Philippines, construction is expected to continue shifting towards more private investment amid increasing appetite for Asian assets. For 2010, we expect consolidated volumes for cement and aggregates to increase by 2% and1%, respectively. While we expect ready mix volumes to be slightly lower than last year.

In Mexico, we expect our cement and aggregate volumes decline by about 4% and to decrease by about 8% for ready mix. In the United States, we expect cement ready mix in aggregate volumes to have high single digit increases. As regards our present strategies, we will continue to target recovering input cost inflation for our business in most of our markets.

We are encouraged by the increases in other construction input cost such lumber, steel, gypsum in the United States and other markets. Growth in volumes is expected to translate into a slight expansion in our consolidated EBITDA margin. Reflecting the robust operating leverage in our US portfolio, we also expect Mexico to continue to deliver stable operating cash flow generation and our South, Central America and Caribbean region to increase its EBITDA generation this year.

Accordingly, we expect our consolidated EBITDA on a like-to-like basis and based on current prevailing exchange rates to be about $2.9 billion. In addition, we expect free cash flow after maintenance capital expenditures to reach close to $1 billion, reflecting the impact of higher interest expense, maintenance capital expenditures and the exclusion of our Australian operations.

We will keep capital expenditures and other investments at a minimum and anticipate using about $600 million from our free cash flow towards debt reduction. This should enable us to comply with our total funded debt to EBITDA covenant for this year. I would like to assure to you that we will continue to be vigilant in focusing on our cost cutting efforts, maximizing our bottom line and strengthening of our capital structure.

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

Rodrigo Trevino

Thank you, Fernando. Our performance during the first quarter reflects the continued general slowdown in the global economy as well as severe weather conditions in the United States and Europe. EBITDA declined as a result of lower volumes in most of our markets. In the case of Mexico, the decline was the result of a very strong first quarter during 2009, resulting from increased infrastructure spending in anticipation of the mid-year elections.

In the United States and Europe, weather affected volumes during the quarter. In contrast, the South, Central America and Caribbean region had a year-over-year increase in volumes driven mainly by Columbia. Prices in local currency turned remain resilient in most of our markets versus fourth quarter. On a like-to-like basis that is adjusting for currency effects and divestments.

EBITDA was down 29% during the first quarter. EBITDA margin declined to 16.9% during the quarter from 19.7% during the first quarter of last year. SG&A expense is a percentage of sales increased by 2.3 percentage points, during the quarter versus the comparable period in ’09. This is a result of lesser economies of scale due to lower volumes.

In addition, we have experienced higher transportation with the closing of some of our facilities or products in some instances up to travel longer distances to serve our customers. These negative effects of our SG&A were partially offset by savings from our cost reduction initiatives. During the quarter, our free quarter after maintenance capital expenditures was a negative $171 million versus a positive $118 million last year. The negative free cash flow generation is due mainly to low EBITDA generation and higher financial expense.

Working capital during the quarter was an investment of $328 million, very similar to the amount invested during the first quarter of last year. During the first quarter, there’s an accumulation of inventories, which are sold later in the year. Accordingly, an important part of the investment in working capital during this first quarter is expected to be reverse later in the year. We expect free cash flow for 2010 to reach close to $1 billion virtually flat versus last year, adjusting for the sale of Australia. During this year, we expect to have higher interest expense and maintenance capital expenditures.

Regarding our input costs, during the first quarter our Kiln fuel and electricity costs, on a per-ton-of-cement-produced basis declined by 2% versus the same period last year. For 2010, we expect this cost to increase by approximately 5%. We continue to develop new ways to lower our energy input cost into make them more predictable. We’ve remain committed to increasing the use of alternative fuels in our operations.

In Egypt for instance, we have increased alternative fuels utilization from 10% as of the end of last year to 23% as of the end of March. Alternative fuels in this country include agriculture ways including rice husks, corn corpse, rice straw, maize and cotton stakes, as well as wood waste and tires.

We continue pursuing clean development mechanism projects such as a wind driven 250 megawatt power plant in Wahaca, Mexico. The increase in financial expense is during this first quarter, reflects the new terms of the financing agreement as well as the substitution of bank debt with bonds issued in the capital markets, which of course carry a higher fixed rate coupon.

During the quarter, we recognized an exchange gain of $57 million primarily as a result of the appreciation of the Mexican Peso against the US dollar. We also recognized a loss on financial instruments of $41 million, resulting from the equity derivatives related to CEMEX and Axtel shares. The increase in the notional amount of equity derivatives during this first quarter reflects the capped call transaction made in connection with the Convertible Subordinated Notes issued this March.

Other expenses during the quarter were $88 million, including the impairment of the Davenport plant in the United States, which was close permanently, CEMEX payments and others. The income tax line during the first quarter was an expense of $86 million versus a gain of $173 million in the same quarter last year, which included a positive effect on deferred taxes.

During the first quarter, we had a majority net loss from continuing operations of $341 million versus a loss of $61 million in the same period last year. This reflects the lower operating income higher financial expenses, an income expense versus positive contribution from deferred taxes last year. These declines were partially mitigated by an exchange gain and a smaller loss on financial instruments.

In addition to the reopening of 2016 US dollar notes in January, we continued to make progress in our plan for regaining our financial flexibility. We issued $715 million in five year convertible subordinated notes with an annual coupon of four and seven-eighth percent, our 49.9% on Ready Mix USA joint venture completed the sale of 12 active quarry and certain other assets for $420 million with a cash distribution of approximately $100 million to CEMEX.

During the quarter, we also issued short-term notes under our Certificados Bursatiles program. The outstanding amount of these notes was $800 million pesos as of March 31. The current all-in cost of these peso instruments is about 5.1% in peso terms, a drop of more than 700 basis points compared with a year ago.

Year-to-date, we have prepaid $762 million under the financing agreement, a $180 million of which were done in April. This is taken care of all of our schedule amount decisions under this agreement for the entire 2010 and 2011. With these prepayments, our refinancing risk for the upcoming two years has been greatly reduced.

As Fernando, we expect to use about $600 million from our free cash flow to reduce debt this year. With our planned debt reduction and EBITDA generation for the year, we expect to be incompliance with our total funded debt to EBITDA covenant of 7.75 times as of June and 6.75 times as of the end of the year.

Our priority in the short-term, continues to be to paid down debt to do this, we will aim to improve our work capital management and continue to implement our global cost reduction and right-sizing our initiatives.

Thank you for your attention and now, we will be happy to take your questions; Jasmine.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from line of Carlos Peyrelongue with Merrill Lynch.

Carlos Peyrelongue - Merrill Lynch

Two questions if I may, first one related to your full-year guidance for EBIDTA. You are reducing your guidance for cement and ready mix volumes in Mexico and you still are staying with your guidance for full-year in EBITDA. Could you please provide some light us to whatever markets would be able to take the cushion for the Mexican operations? The second question is related to free cash flow. On the first quarter you had a minus $200 and you also mentioned in that you’re keeping your guidance of $1 billion for full-year. I think, will you mention some related to working capital, if you could provide also some light on these would be very helpful.

Fernando Gonzalez

Yes, we are lowering our guidance and volumes in Mexico, but some other countries, basically all countries in emerging countries I think in order to that volume, but volume is not that only reason why we are keeping -- a guidance there are two other reasons. In some countries, we are slightly increasing our margins, which we’ll have to achieve our guidance. We mentioned, we continue with efforts in order to increase the efficiencies as well as continue adjusting whatever business is need to be licensed.

Rodrigo Trevino

On the second question of course, what helps to mitigate the effect of volumes is the fact that some of the currencies in the markets in which we operate are stronger, particularly the Mexican peso. This together with our continued efforts on working capital management and other right-sizing initiatives, will allow us to stay with our target of close to a $1 billion in free cash for the full-year; and in addition, the sale of the assets in our joint venture in the US and other asset sales proceeds should allow us to reduce that are used $600 million of that free cash flow to pay down debt.

Of course during this first quarter, we have seen a reduction in net debt. In addition to that of our operations as a result of the foreign exchange rate moments and the issuance of the convertible securities and we will see an additional reduction in debt total obligations including our perpetual obligations as a result of the exchange offer currently underway for our perpetual securities.

Operator

Your next question comes from the line of Vanessa Quiroga with Credit Suisse.

Vanessa Quiroga - Credit Suisse

My question is to regarding pricing in the US. I recall that you had announced price increases to be effective in some markets in April. So I was wondering if you already have some color on what has been the response for your clients. The other question would be, if you could being any more specific regarding the most recent trends in the disbursement of the monies from the stimulus package and by how much it seems to be compensating for the lower discretionary consumption at the states level in terms of highways and streets?

The other question would be regarding the inter company line. We thought that it was positive. There have been very few quarters, if any that in the first quarter this inter company EBITDA line is positive. Last year, in the first quarter it was positive, but you had mentioned that you had a onetime benefit from bringing back some provisions that you have made the year before in 2008 regarding some compensation to employees that were not given at the end. So that was clearly non-recurring. So at this time, I'm wondering if there was anything non-recurring in the first quarter in the inter company EBITDA line? Thanks.

Fernando Gonzalez

I will take the third one and then we will elaborate the other two. This year there aren’t did several reasons for the positive variation. The main one being CO2 credit dissolved in the first quarter and the second one again reverse of variable compensation provision given that this year as well as last year, we didn’t provide or we didn't pay variable compensation to the executive team.

I think the most relevant one is share to variation and I’d like to extent the comment a little bit, because CEMEX has proactive approach to share to and we have been developing since after RMC acquisition in 2005, developing a very comprehensive program in order to generate this year to credits in proactive and generating them.

What I can tell you, when there’s much more information related to this, but what I can tell you is that, as of today with initiatives and projects we have already developed and they already in place, we generate about a little bit more than 1.5 million tons of CO2 credits per year.

That includes projects like EURUS in Mexico, it includes, as Rodrigo mentioned, a higher usage of alternative fuels and I’m referring mainly to alternative fuels would have very high content of biomass from which we gets to credit. Just to give an idea in most of our plants in Europe, we already using household waste and commercial waste to produce cement and that fuel has about the content of between 50% and 60% of biomass.

Now the reason why, how we define how much CO2 we can sell is the simple balance on what we need on what we have. So constantly we’re reviewing the information and whenever we think we can’t sell additional CO2 credits we do, at the same way, we need investments in order to produce more CO2, we also proceed. With information available as of today, what we sold in the first quarter seems to be all we’re going to sell for the year unless that our material changes we don't proceed for the time being.

Rodrigo Trevino

Let me take the second question on the American Recovery and Reinvestment Act enacted by President Obama as a fiscal stimulus to reactivate the economy. Let me give you an update on that. The good news is that 96% of the close to $27 billion allocated to highways has been obligated. In fact in some of our most important states, California and Florida, it's higher than 99% has been obligated, of the total funds that have been obligated that is projects have been approved and signed only 26% has been spent in the entire US.

In the States that are most relevant to us however, is closer to 11% to 13%. Florida again and California only 11% to 13% has been actually spent, that is because some of the projects that are scheduled to be undertaking with these funds or expansions which of course are more cement intensive and so the good news is that we're likely to see these volumes during the second half of this year and of course during 2011 as well.

This is what -- it has been factored into our full-year guidance that we have provided. It is true that during this first quarter, some of the markets and which we operate in the US have been weaker than expected primarily as a result of weather conditions, but this of course is an impact on supply demand dynamics and prices are softer during the first quarter, both on a sequential basis, when compared to fourth quarter of last year as well as on a year-over-year basis, but we remain with our target for the fully over however, I don’t know everyone have compliment on that, Fernando?

Fernando Gonzalez

Not any additional information.

Vanessa Quiroga - Credit Suisse

Regarding pricing, do you have any update on the increases that you had announced?

Fernando Gonzalez

Regarding prices in the US, the announcement did in the stick completely. So we are announcing other additional price for about mid-year. It's different on a part of the regional basis and we think that behavior impresses will improve in the next few months, the reason being is that we are looking at positive signs of volumes increasing, which this is not shown in the quarter figures, but what I can share to you is that during the month of March, volumes of cement in the US were higher than March 2009, which sounds like a sort of an insignificant decent information, but we have to take into account, but this is the first time that our volume in the US in the month is higher than the month from the previous year since 2006, still to be seen, how much attraction would these tendencies will have.

I also can share that volumes in April, it has a growth compared to April last year for almost double-digit percentage, which is sort of confirming what we saw in March and it also encouraging our review that during the year. Again even though we believe, this is not the one we would like to, but we believe that our high single-digit growth will happen.

Rodrigo Trevino

I think if I may also complement Fernando. It’s true that prices were softer during the first quarter of this year about 3% versus a fourth quarter of last year, but so have unitary cost of production or cost of production is down on a per ton of cement basis by more than 5% during this first quarter versus the fourth quarter of last year and we have an announced price increases for July and we will have to wait until then to see how much of that is absorbed in the market. Of course it will make a big difference as Fernando pointed out. If the market is growing and volumes are growing at a faster rate than others have assumed in the industry on our sales.

Vanessa Quiroga - Credit Suisse

Regarding the increases that you saw in volumes already in March, April, could you confirm that housing residential was the main sector driving this growth?

Fernando Gonzalez

I think it’s a combination, that the infrastructure accounts for within 65% and 70% of our volumes and infrastructure is evolving in a positive way. Monies are much spent on the --fiscal stimulus has been spent up to this, but from state-to-state, but it’s about 30%. I think the last few year, we gave it was a wrong 11% or 12% in evidence, so that is happening and you know there has been some positive indications slightly on the residential sector. We know our estimates on the residential sector that higher than PCA, and other institutions, but for the time being and because of the information, we do see -- we are keeping our guidance from on high single-digit grows in the US.

Operator

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

Gordon Lee - UBS

Just a couple of questions, first, if you wouldn’t mind quantifying what the amounts of CO2 emission rights sales were during the quarter and the second question on the balance sheet. I was wondering if you could tell us as of the end of the first quarter, what’s your leverage ratio is calculated as per the terms of the covenant and on that, if you could clarify what the treatment of the most recently issued convertible, not the mandatory ones, but the other ones. How that is treated in the calculation of the covenant and how that is shows up in the total debt number that you post in your release? Thank you.

Fernando Gonzalez

I will take the CO2 question. During the first quarter, we sold about -- compared to first quarter last year, we sold like $2 million credits more, which accounts for more or less around $30 million. That was a question I think.

Rodrigo Trevino

The various between the first quarter of this year and last year -- same quarter last year was approximately $30 million.

Gordon Lee - UBS

The absolute dollar amounts for the sales in the first quarter of 2010 alone?

Fernando Gonzalez

The amount in the first quarter of 2009?

Gordon Lee - UBS

No. Just what was the actual amount of CO2 from a revenue standpoint in the first quarter of 2010 or from a cost reduction standpoint, not the variance, but just the absolute amount?

Fernando Gonzalez

It’s a $30 million more than last year, which was about $60 million.

Operator

The next question comes from the line of webcast.

Rodrigo Trevino

I’m sorry. Let me take the second question that Gordon Lee had on the treatment of the convertible for leverage calculations. Before the issuance of the Convertible Subordinated Notes, we want to our financing agreement lenders and as for amendment. So, that the proceeds from this transaction and the obligation under the security would not be counted towards the leverage calculation and the reason that is because the clients are subordinated and the majority comes behind the financing agreement.

So, really yes, it did help substantially to reduce the total debt for purposes of calculating the debt covenant, which currently stands at about 7.3 times and we do expect to be in compliance for June and December. We will continue to do things that we will generate additional margin for compliance.

Clearly, we offered to exchange the purpose for the new securities is another initiative that will help us to widen that margin for compliance and as the operating cash flow begins to grow. We should continue to increase that margin for compliance. I don’t know that answer your question. We can move onto the next question. The next question comes from the webcast, is that right Jasmine?

Operator

Yes, sir.

Rodrigo Trevino

The question is from Robert Eason from Goodbody Ireland.

Robert Eason - Goodbody Ireland

Can you explain the regional variation you were seeing and how you’re pricing in the US that made off the 5% decline in the first quarter?

Rodrigo Trevino

I don’t know we have the details here, but we can follow-up with you Robert, in the answer inviting and we will follow-up soon with that.

Operator

Your next question comes from the line of Mike Betts with Jefferies; please proceed.

Mike Betts - Jefferies

I had a few questions, if I could. Maybe the first one in your slide it talks about both the improvements in the US, but also in parts in Europe. Maybe you could explain which countries specifically you’re referring to? Also the same point; maybe you could also talk I think, there was an increase and I was just trying to find the figure in the EBITDA margin in Spain compared with a year ago, which somewhat surprised me, given the big volumes. If that’s correct, maybe you could explain what’s caused that please?

Then my other question was in terms of US price increase in July; what was the magnitude of that price increase please? Then also, if you could talk about the leverage impact that you get as you get additional volumes in the US? I mean the two US aggregates companies have indicated that they may get 50% to 60% of the additional sales as profits. I think we briefly had a discussion on this on one of the previous calls, but maybe you have a more up-to-date estimate, given your mix of business. As you see volume recovery in the US, what the sort of leverage benefit is in terms of additional EBITDA growth for every 1% change in volumes, is it possible to calculate that?

Fernando Gonzalez

Let me take the last one before I forget it. I can’t comment that, specifically the figure of cement we calculate that every additional ton of cement will provide for above between 65% from 70% of marginal EBITDA, that’s what we are expecting.

Rodrigo Trevino

Regarding the EBITDA margin improvement in Spain, Mike last year we did implement significant cost savings initiatives, right-sizing initiatives and our operations in Spain to adapt to the new operating environment. We also implemented several energy initiatives including the increase of alternative fuels and always that have yielded savings and of course we’ve generated through the investments we’ve made in clean development mechanisms, CO2 credits that also had helped. So all of this combined is what has contributed to our ability to maintain the margin in that market.

Fernando Gonzalez

If I may, I would like to add some color to this concept or idea of alternative fuels, because we’re insisting when it will turn to fuels, and why is it important especially in Europe, in 2006 after learning on how some German plants in RMC were using very high quantities of alternatives fuels. We proceed through after 11 from them to replicate the idea all over our cement plants in Europe, which were not the exempt of investments, but the business proposition is very attractive. Especially, when you focus on household waste and commercial waste, because in some countries in Europe fuels can be an income, instead of a cost; you’re paid to burn it on besides that and again especially household waste and commercial waste with a high content of biomass, you get CO2 credits, that’s the simple proposition.

Now, in the case of Spain, our alternative fuel substitution was very low, and nowadays we have cement plants using over co-processing alternative fuels in cement plants as much as 40% or 50% of the total fuel needs. We have all that examples in Europe finishes in the case of Poland, there is plant called Helm in which move from zero alternative fuel substitution, to last year I think it was a 73% or 74% of alternatives fuels meaning 72% or 74% of the fuel used to produce cement in that plant is household waste or commercial waste with economic that come with it.

Rodrigo Trevino

There is one another factor that did have a positive contribution during this first quarter 2010, when compared to ’09 in Spain and that is, SG&A was significantly lower in 2010 versus ’09. As a result of the lower charges for bad accounts receivable and so that also helped contributed to the positive margin evolution. What was the first question you had, Mike?

Mike Betts - Jefferies

I’ve got one more at the end if I may, but just to quantify the July price increase in the US?

Rodrigo Trevino

11% is what has been announced on average.

Mike Betts - Jefferies

Then the final question; is it possible just to give us an overall total in terms of any additional cost savings that you’ve implemented in 2010; not so much the carryover -- what you did in ‘09, but I mean there’s obviously an additional charge for cost-cutting. I mean is there a cost savings number that goes with that?

Fernando Gonzalez

At this point in time, we are not disclosing on a specific number, but actually we will do that in our CEMEX Day in June.

Operator

Your next question comes from the webcast.

Jeff Davis - HSBC

Yes and the question is from Jeff Davis from HSBC. You’ve guided to 7% to 9% volume growth in the US for 2010, ahead of BCA and your competitors’ guidance. Could you provide some color on what is driving your relatively optimistic volume guidance? Also could you give some color on US pricing for 2010?

Fernando Gonzalez

Let me comment on it Rodrigo, and then you can compliment. I think on pricing we already commented maybe the question was posted before to last comment. The price increase we tried during the first quarter didn’t stick that much and we have another one announced on around to 11% as for the legal.

Rodrigo Trevino

I’m sorry it was $11.

Fernando Gonzalez

$11, Rodrigo mentioned. In volumes, what I have commented is that we see all the stimulus packages really evolving and moving perhaps it was not late last year we were commenting it, it was not happening as fast as we would like for them to happen, but it is happening. More than 90% of the monies of this program is already committed and the figure I have in mind that has been already spend is about 30%.

Rodrigo Trevino

It’s actually much lower in our -- but that is also one of the reasons why all markets of likely to benefit more. As a 100% of the projects that have been obligated only 13% of the moneys have been spent at some point they have to get spent; and it’s also true that some of the markets we are in the US and California, and Florida also dropped more than the rest of the US and we’re coming of a lower base. And the combination of the two explains the difference in our estimates.

Fernando Gonzalez

So just summarizing is 30% as of March for the US and in our own markets it’s close to 20%. On volumes, I think infrastructure being about 60%, something 65%, 66% of our volumes that explains a lot, but I also mentioned a while ago that we do have slightly higher estimate in the residential sector in our markets compared to consensus. So both issues have the one that explained and that make us think that the US market will grow at about high single digit. I wish, we could have even much more visibility, but that’s our current estimate.

Operator

Your next question comes from the line of Nicolai Sebrell with Morgan Stanley.

Nicolai Sebrell - Morgan Stanley

Could you talk a little bit about the major drivers behind the electricity costs, the increase of 5% and what is the percentage of COGS that is electricity? Is that increase in 5% inflation is it something else? Then we mentioned in the news that CEMEX might be looking to sell some minority stakes and some of its operations, but keeping control of those operations around the world. As one you had any comment on that. Then last, for the $7.6 billion, I believe that’s the target milestone of refinancing in 2011; that I understand is already been met, because you’ve already met all of the refinancing requirements for 2011, is that correct?

Fernando Gonzalez

Let me start with the minority stakes, it was commented by Mr. Zambrano, in an interview as of today and or just early. It is a possibility, I mean, it is something we might do, it will depend on several factors and including dealing with that the specific scheme with banks involving the financial agreement, but it is a possibility at the right price on that right conditions that something we might do to continue improving our balance sheet.

Rodrigo Trevino

Regarding the milestones, we have met the milestone for December of 2010 that is the $4.8 billion of prepayments under financing agreement $15 billion refinance debt. In fact we have now prepaid close to $5 billion. The next milestone will come in December of 2011 and that’s a good more than a year and half away. We do have an aggressive target to delever that is clear from this statement from our Chairman and CEO Lorenzo Zambrano.

We aspire to recover our financial flexibility as quickly as we can and we are exploring all of the different alternatives available to us including the sale of non-productive assets that don’t contribute to EBITDA today and including other initiatives that might be value accretive to our shareholders. So, clearly we cannot discard any of them and we have to proactively pursue all of them. If we want to reach our target sooner than everybody expects and we will work diligently to those that objective.

Fernando Gonzalez

Now, referring to your first and second question it related to electricity costs. The electricity increase in these prices mainly because of fuels and in some cases because of CO2 in Europe and there are some cases in which markets are the changing these structures, so different reasons; and the electricity cost in average for as is about 5% of our total cost.

Nicolai Sebrell - Morgan Stanley

Total cost of goods sold?

Fernando Gonzalez

Yes.

Operator

The next question comes from the internet from David Heasman from RJM Investments.

David Heasman - RJM Investments

Does the company have any direct or indirect exposure to Brazil, if not what prevents the company from entering Brazil?

Rodrigo Trevino

Since 1996, I think we have an input business in the North part of Brazil, place called Manaus and besides that we have not made any other additional investments. So it’s a small important business in the country. Now what is preventing us to going to Brazil, nothing specific, it is yes, that we continuously and before the crisis analyzed different opportunities and it just happens that whenever we decide, we have found other propositions more attractive the other one we find in Brazil. Right now of course what we would prevent us from entering a market such as Brazil that requires heavy capital commitment is a leverage ratio and our intent on reducing that leverage ratio.

Fernando Gonzalez

That valid for Brazil and that's valid for other countries as well.

Operator

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

Gonzalo Fernandez - Santander

If I understand correctly, you mentioned that you are expecting moderate improvement in EBITDA margin for this year. I previously understood that you would have a very strong operating leverage because of the cost cutting efforts on turnarounds, while a moderate improvement in margins and specifically, I don't know if you can provide us with your estimated EBITDA margin for 2010 and particularly in the US, where the EBITDA margin is currently negative.

Rodrigo Trevino

Well, maybe as part of the answer, it’s important to emphasize that, for each marginal ton of cement that we sell in the US, the contribution significantly higher than what we realize today, and that is because, we are very capital intensive business with a significant component of fixed cost in our cost structure and on the margin given the variable cost a ton of cement sold, that utilizes more of our unutilized capacity in the US will have a margin of in the order of 65% to 70%, which of course will change the margin for the business as a whole, especially volumes begin to recover as expect they will during the later part of this year.

Fernando Gonzalez

Well, I think part of the question was margins at a consolidated level that information is in the information we disclosed and for 2010 is expected to be around 16 -- that’s the first quarter 16.9. Specifically in the US, the expected margin is around 10%, the reason being the one that Rodrigo has been mentioned and we have explained before. We do expect that with additional ton, and with additional cubic meter of concrete to provide a much higher margin and EBITDA than the one we are getting as of today.

Gonzalo Fernandez - Santander

So let me see if I understand correctly, you’re expecting same EBITDA margin of first quarter for the full year, or which would be there in the margin for the full-year?

Rodrigo Trevino

No, we significantly expect increase the margin in the US during the remaining three quarters as volumes begin to recover and we captured some of the operating leverage that we have in our US business.

Operator

Your next question comes from the line of Jacob Steinfeld with JPMorgan; please proceed.

Jacob Steinfeld - JPMorgan

A couple of questions, first I’m calculating growths in that leverage at 7.5 and 6.9 times that of the subordinated convertible notes as the end of the first question. I just wanted to confirm these figures.

Rodrigo Trevino

I’m sorry, what was the figure you mentioned?

Jacob Steinfeld - JPMorgan

About 7.5 times on a total funded basis and 6.9 times net, that’s excluding the converts.

Rodrigo Trevino

Yes, total debt to last 12 months EBITDA as of March is actually closer 7.3 times; and the reason that is and probably you have not made that adjustment. Is that one of the other amendments we obtained from the banks when we amended the financing agreement, was that the cash that we maintained in our reserve to meet future obligations under either the financing agreement or our Certificados Bursatiles program would also be netted out of the calculation.

So in the total debt calculation, not only do we not include the obligation and there’s a subordinated convertible transaction, we also don’t include the cash that is held in a special reserve to meet obligations under either the financing agreement or the Certificados Bursatiles program.

Jacob Steinfeld - JPMorgan

Okay and how much cash is currently in that reserve account?

Rodrigo Trevino

I think it is slightly less than $500 million, I don’t have the exact number, but we can get it to you; so what about the 7.3 times and yes, we do expect to be incompliance with the ratio in June and December.

Jacob Steinfeld - JPMorgan

Okay, so in terms of the $600 million that you expect of debt to reduce from free cash flow; is it fair to assume that all of that’s going to come in the next three quarters?

Rodrigo Trevino

Well, yes, because the free cash flow actually during the first quarter was negative. So clearly, we did not use any proceeds from cash flow to bet on that during the first quarter in fact that increase. So maybe for the full-year, the actual reduction with proceeds from cash and other sources during the last nine months will be greater than $600 million, yes.

Jacob Steinfeld - JPMorgan

Then I understand the cash balance was high at the end of the quarter from the issuance of the $715 million of converts, but I was wondering why it was so high at the end of the quarter. I mean, it was one point or almost $1.5 billion. I was wondering how much of that do you expect to use in the second quarter to repay debt?

Rodrigo Trevino

Well again its close to $500 million of that is the reserve that I just explained that would be used only to pay down debt either under the financing agreement or under our capital market transactions in Mexico. So, that is what explains the temporary excess in cash at the end of March.

Operator

Your next question comes from the line of the webcast.

Olivier Fortesa - Amber Capital

Yes, in the question is from Olivier Fortesa from Amber Capital. Could you give us an indication of valuation multiple at which you sold your quarries in the US. This is the joint venture ready mix USA?

Fernando Gonzalez

I actually I think we cannot disclose that because of confidentiality issues related to the transaction, but what I can comment is that those cash flow coming from those assets was not significantly eroded before we divested. For us it was an attractive divestment.

Rodrigo Trevino

Well, we own 49.9% of that joint venture and proceeds for the quarries sold was $420 million, a little more than half of that was use to pay down debt at the joint venture and then $200 million was distributed to the partners 100 to CEMEX and 100 to our the majority partner in that joint venture.

Operator

Your next question comes from the line of Yaseen Turabi with Exane BNP Paribas. Please proceeds.

Yaseen Turabi - Exane BNP Paribas

I would have a question on the pricing in Europe. Have you announced a price increase in Germany or the United Kingdom and then I would have a question on your German outlook; you're forecasting volume up 3% in Germany in 2010. That's much more optimistic than the German Association. If I remember well, the German Cement Association is expecting a 5% decline in cement volume. Then I would have a question on your backlog in the United States. Do you have any backlog in the US and could you give us a bit more color on that?

Fernando Gonzalez

Let me start commenting in Germany again as I have commented before I wish visibility was much better. The figure we are disclosing is the figure we believe the market will deliver and you know still to be seen mainly because of the harsh winter we had in Germany as well as so that markets in North Europe, but we are sticking to our estimate on prices what I remember is in Germany we announced prices is last year I think valid April 1, UK was a little bit earlier than that. UK volumes are also behaving as you know the UK doesn’t have a surplus in residential sector so that helps and what was the question of the US on the backlog?

Yaseen Turabi - Exane BNP Paribas

Do you have any backlog on the U.S.? But perhaps to come back on Europe; do you have any color or any feel in mind about the trends in March or April?

Fernando Gonzalez

In Germany or the UK I don’t have that info with me right now, but we can provide that to you and what I can tell you in the case of the US and I think I have already mentioned it is that volumes in March were about 3% higher than March last year which I already mentioned is the first time that happens in 2006, so we are looking for some indications are indicators that make us thing that the US had already bottomed and some reparation will come, that indicator is a useful one.

I also commented that April is confirming the trend in March, that is confirming and it’s increasing it, because increasing volumes as of, I think it was yesterday in April, in the US compared to April, last year about two digits higher. So, seems like, but again, let’s see, how much traction that industry has that seems like after the winter in the US. March and April are behaving positively and according to our expectation of high single digit growth.

Yusain Tujari - BNP Paribas

My question on the US is, do you have a backlog in the US in the year, and could you give us some color on what’s happening in your orders there?

Fernando Gonzalez

I have to come back to you with that information, I don’t have it here handy, but we do use at as part of our estimate for the full year and the backlog is very important particularly in the ready-mix area, which is a good indicator, good leading indicator for what volumes of cement may do and yes, we do use that information in estimating the full year and that’s why despite the weather and the performance during the first quarter, we have this guidance for the full year.

Yusain Tujari - BNP Paribas

Okay and I would have a last question on Mexico. We saw that prices were up 3% sequentially. Have you announced any other price increase in the kick-off of 2010?

Rodrigo Trevino

The price increase we’ve seen in the Mexico during the first quarter is a result of the price increase that happened I think middle of the quarter more or less and so, actually we’re to do it point-to-point the increase is slightly better than that. Because what you see in the first quarter is the average prices for the quarter. But I think more importantly in the case of Mexico as we convert our operations and we translate operations in to US dollars, given the fact that the peso has appreciated versus the US dollar. The contribution in US dollar terms from Mexico is stronger than we had originally anticipated.

Yusain Tujari - BNP Paribas

And just to come back on prices in Europe; what was the order of magnitude of your price increase in the UK and in Germany?

Fernando Gonzalez

I don’t have info with me right now. I will get back to you on both, but for the full-year we expect prices to remain relatively flat in Europe.

Operator

Your next question comes from the line of Alejandro Luciano with Credit Suisse.

Alejandro Luciano - Credit Suisse

First question, I was wondering if you can give some additional color regarding the comments made at the perpetual exchange on your press release regarding the option to defer interest on the perpetual securities. I was wondering first of all if you can confirm that you are eligible for the interest and secondly if you can give some color regarding what would you take into consideration in order to take up that option to defer? Thanks.

Rodrigo Trevino

Well, we did mention in the transaction that today we are not eligible to differ primarily as a result of the preciously the offer to exchange and so, coupons on June can not be differed, what we did highlight was that we do intend to meet all of our contractual applications and if in the future we comply with all the required conditions for deferral and it is required for us to meet our other contractual obligations, for example in terms of liquidity needs or in terms of covenant compliance or if it’s important for us to achieve our financial objectives. This is something that we will have to consider and this is something that is a risk factor, but of course those people participating in the exchange need to consider.

Alejandro Luciano - Credit Suisse

Can you confirm that whether or not right now you are or do I understand that you are not eligible for the June coupon in exchange?

Rodrigo Trevino

We are not.

Alejandro Luciano - Credit Suisse

If I could have a follow-up question regarding your mandatory convertible securities, until the equity portion under MFRS accounting that is attributed to CEMEX holding company under the perpetual security indentures, did they qualified as a qualifying equity security?

Rodrigo Trevino

Well, that’s a very technical question that I would have to follow-up with you on that.

Operator

Your next question comes from the webcast.

Harry Goad - Credit Suisse

The question is from Harry Goad from Credit Suisse. Please provide more details on which European markets are experiencing improved demand or where you are more optimistic for the second half of 2010?”

Rodrigo Trevino

As I mentioned in my remarks, in general all markets are set for Spain, there are some more market I didn’t mentioned like Latvia for instance, but in the case of UK, Germany all the countries in the North, Norway, even France, Poland, Czech Republic, in general terms they are behaving better than we originally expected, but it’s slightly better, I mean it is not materially better and again remember that all those countries were affected by the harsh winter so we need some additional time to really change our current estimates on market growth in that area, in that geography.

Operator

We have time for one last. Your last question comes from the line of Hari Ramanan with Eminence Capital.

Hari Ramanan - Eminence Capital

Just a quick question on your tax rate growing forward, I didn’t read some changes that have been taking place at the Mexico level, could you just comment on over the next couple of years what do you expect to see in terms of tax rate?

Rodrigo Trevino

Well, I think we mentioned that in the fourth quarter teleconference a few months back, we expect the impact from the changes in the Mexican tax laws to have a cash impact of about buck 30 million hours this year. So it is not going to move the needle for the consolidated company as a whole during this year and we will continue to proactively look for ways in which to optimize our cash burn.

Hari Ramanan - Eminence Capital

Over the next two to three years, do you see the tax rate going up from, I think historically it’s been between 15 to 20% of your pre-tax income is what’s been taxed, do you expect that to go up?

Rodrigo Trevino

We’ll tax laws change every year almost everywhere, so it is impossible to forecast two to three years forward in fact is difficult to estimate the year we are operating under so we will do our best to manage it, but it is difficult to say what the actual outcome will be going forward. We don’t try to estimate, we think most of the market players don’t try to estimate it, most would assume that the cash tax burden will gradually go up overtime. Fernando, do you want to --?

Fernando Gonzalez

I don’t have any additional comments.

Rodrigo Trevino

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

Fernando Gonzalez

Thank you.

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