Cemex SAB De CV (CX)
Q2 2008 Earnings Call Transcript
July 28, 2008 10:00 a.m. ET

Executives

Hector Medina – Executive VP of Planning and Finance.
Rodrigo Trevino – Chief Financial Officer

Analysts

Carlos Peyrelongue – Merrill Lynch
Marcello Telles – Credit Suisse
Nick Delfas – Morgan Stanley
Gonzalo Fernandez – Santander
Nat Bates – JP Morgan
Steve Trent – Citigroup
Dan McGoey – Deutsche Bank

Operator

Good day ladies and gentlemen and welcome to the Cemex second quarter 2008 conference call. My name is Sylvana (ph) and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance please press * followed by 0 and accordingly someone will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I’d now like to hand the presentation over to your host for today’s call, Mr. Hector Medina, Executive Vice President of Planning and Finance. You may proceed, Sir.

Hector Medina -- Executive VP of Planning and Finance

Thank you. Good morning and thank you for joining us for our second quarter conference call. Today I’ll review our second quarter results and will share with you our estimates for 2008 in the light of our performance for the first half of the year. Then our CFO, Rodrigo Trevino will follow with a discussion of our financial results. During the quarter we had better than expected performance in most of our regions. This performance is not however truly compensated for the downturn in the United States and Spain and the negative impact from higher energy input costs. We continue to face a difficult economic environment in the United States with demand for construction falling more than we had originally anticipated. During the quarter and on a like-to-like basis for on going operations, consolidated cement volume was down 6%, ready mix volume declined 10% and aggregates volume decreased 9%. However consolidated price in US $ terms also on a like-to-like basis during the second quarter increased by 10% for cement, and 12% for both ready mix and aggregates. Cement, ready mix and aggregate price increases still fall short of the price increases for the building material products such as steel and asphalt. Steel prices for instance have doubled in the last few months and the California Paving Asphalt Price Index has also doubled in the same period.

Our EBITDA during the second quarter reached $1.4 billion, an increase of 21% versus the same period last year. On a pro forma basis for the on going operations, adjusting for the consolidation of Rinker, EBITDA decreased by 2%. For the first half of the year and on a like-to-like basis for the on going operations our consolidated EBITDA decreased 10% versus the same period last year reaching $2.3 billion. The under performance in the United States and Spain has been substantially mitigated by better than expected performance in other regions as I mentioned earlier. For the full year 2008, we continue to expect EBITDA of about $5.3 billion at the currently prevailing foreign exchange rates. This represents close to $3 billion of EBITDA generation during the second half of the year. We expect to achieve this growth organically from our global market including Mexico, the Central South American and Caribbean regions, Eastern Europe and Australia. With most of our portfolio with favorable pricing environment will take the liquidity portion into consideration. This along with realized synergies and productivity program initiatives is expected to mitigate lower volumes. We expect synergies from the Rinker integration to reach a run rate of $400 million per year by early 2009. About half of these synergies will be realized during the year and we continue with other cost containment initiatives company wide. Free cash flow in cement and capital expenditure is expected to exceed $3 billion in 2008.

Now, I’d like to discuss the second quarter performance of our principal markets and our outlook for this market for 2008. In Mexico cement volumes remained flat while ready mix volumes declined by 7% during the second quarter. The decline in volumes is mainly due to delays in infrastructure spending. Given the backlog of projects that have already been approved and assigned to us, we expect a recovery in the second half of the year. Higher than normal rain during the end of the quarter especially in the South Eastern and Central Regions where we have many of the most important recently ordered supply contracts for housing and infrastructure projects affected volumes during the quarter. For the first six months of the year cement volumes decreased by 3% and ready mix volume declined by 11% versus the first half of 2007. Two factors will continue to influence cement sales for the rest of the year. The first is sales spending on streets and highways public buildings and other infrastructure projects. The national infrastructure program from 2007 to 2012 announced by President Calderon represents an investment of about $230 billion. This program includes public and private standing on oil, power, railroads, telecommunications, and others.

For cement intensive projects such as highways, the investment under the program is expected to be $38 billion. During 2008, the region will plan for total project spending on cement intensive public works projects including national interest infrastructure program and other local investment is expected to reach $15.3 billion versus $11 billion last year, a 41% increase, which implies a very strong second half. Growth in this sector will be supported by the result of the fiscal accruement in 2007 and higher oil revenues. The fiscal reform and other initiatives will provide the federal government with approximately $14 billion in additional funds for the 2008 budget, a 10% increase versus last year. Oil revenues for the 2008 federal budget were approved with a surplus rate in the budgeted basic and oil mix price of $49 per barrel. In contrast the year-to-date average is about $97 and is expected to remain at higher than budgeted levels for the rest of the year. The additional oil revenues are being used for oil exploration and gasoline imports as well as for state infrastructure projects.

The second factor, housing continues to grow with a number of factors responsible for economy, the national bank, the federal bank and other institutions. This year, the goal is to reach 820,000 mortgages versus 730,000 during last year. Constructions taking place in the formal housing sector lacks the performance of home builders in the first half of the year due to intemperate build up over the year and 2007. This build up, was driven in part by fiscal benefits and the consequence of the newly approved fiscal home laws. We believe this inventory build up has been cleared and we now expect to see growth in this segment during the second half of the year.

Mexico is better prepared today to withstand the US economic slowdown than it was at anytime in the recent past. This is due to the high level of Internationals Reserves, a favorable exchange rate, a steady public external debt, the improved foreign account deficit, sustained flow of remittances from those as well as higher revenues. EBITDA margin in Mexico has improved by 100 basis points during the first half of the year despite increase in input costs. This increase is a result of continued improvement initiatives including fuel substitution, generator electricity and administration of our distribution channel. Volumes in the second half of the year are expected to improve significantly due to the execution of delayed infrastructure projects that have already been awarded or assigned to us. In addition, formal housing is also expected to be better due to an expected increase in the granting of mortgages during the second half of the year in several important states including Jalisco, Coahuila, Mexico, Tabasco as well as Mexico City. In light of the above we now see cement and ready mix volumes increasing by about 2% and 4% respectively for the full year 2008.

In the United States cement volume fell 7%, ready mix sales volumes increased by 27% and aggregates volumes increased by 111% during the second quarter versus the same quarter last year. Ready mix and aggregates volumes increase is the result of mainly the acquisition of the Rinker operations which expanded these businesses. On a like-to-like basis for the on going operations during the second quarter, our cement volume decreased by 20%, our ready mix volume decreased by 29% and our aggregates volumes declined by 26% versus the same period the prior year. The second quarter like-to-like decline in volume was driven mainly by the continued decline in the residential sector and the integration of Rinker’s operation into our results starting July 2007. This is because Rinker operations have a higher proportion of sales in markets that have attracted the highest amount of opportunity investment, especially in Florida, which is currently experiencing the biggest correction in the country. In addition, adverse weather conditions primarily in portions of the South East and Mid West regions, also negatively affected our volumes during the quarter.

For the first half of the year and on a like-to-like basis, our cement volume declined 20%, our ready mix volume decreased 29% and aggregates volumes decreased 26% versus the first half of 2007. Despite these historic declines across our core businesses, prices for most of our products remained resilient. Prices of imported cement has been escalating in 2008 due largely to higher freight and fuel costs as well as tight shipping conditions. Higher energy and other input costs are continuing to favor the price increase. There is continued uncertainty about the economic outlook in the United States. As such our guidance for the US operations is particularly sensitive to changes in this outlook. The foreign exchange factor has been most favorable historically than the residential and industrial and commercial sectors. We are continuing to see increases in construction taking place in nominal terms with the public sector including state run highways and other public constructions. However, these increases have been reduced in some instances fully offset by input cost inflation. Contract awards for state run highways have decreased by 12% from May versus the prior year. This decrease is primarily due to uncertainty about continued feats of cost inflation as well as due to visibility going forward related to the removal of safety rules which expect to apply from September 2009. However due to visibility at this point over the size of the next set of highway program we are confident that the substantial needs of infrastructure investment will drive many states to seek additional funds from their own bond program, as with the recent cases of California and Texas and through public private partnerships.

We now see volumes in the public sector which is expected to represent about 60% of total cement demand declining by 3% to 4% in 2008. In the industrial and commercial sector, while nominal construction spending is still up for the first five months of the year, contract awards for new projects declined by 26% in the same period. Growth in this sector is expected to slow down as credit conditions have tightened and contractors have become more cautious in the current economic environment. In 2008, we expect volumes in the industrial and commercial sector which is expected to represent about 20% of cement demand to decline by approximately 12% as a result of decline in new projects. This decline is expected to continue due to tight credit conditions and the recent impact of the current economic environment.

The residential sector continues to decline during the second quarter. Housing starts, the fundamental driver of cement demand in this sector, decreased by 31% in the same period. Our market has seen an even steeper decline, as the high growth residential market, have decreased at a more rapid pace. Exisiting vacant home inventories continued to increase due to acceleration in foreclosure activity and represent an excess inventory level of approximately 900,000 homes. However we are encouraged by the improving affordability which would meet the higher sales as the economic environment stabilizes.

The time frame for excess inventory absorption will depend on further price reductions, credit availability, job creations and the magnitude of home foreclosures. For 2008, we expect the US residential sector which this year will represent roughly 20% of our cement demand to continue its downward trend declining by about 30%. In light of the above we expect that on a like-to-like basis for the on going operations in 2008, our demand volume in the United States to decline by about 12%. Our ready mix and aggregate volumes are expected to decline by about 21% and 20% respectively. We see our year-over-year volume performance improving in the second half of the year as the residential decline will likely moderate. EBITDA generation in the United States has been affected mainly by the ready mix and other product operations. These operations which include concrete walls and other building materials are driven more by the residential sector than our cement and aggregate operation. The ready mix and concrete block operations suffered due to lower sales volumes and higher material costs.

We have taken steps to reduce the cost in the ready mix, aggregates and concrete block operations including plant structures, our reduced cost fees and head count. In addition we have identified substantial synergies during the post Rinker integration process that will further reduce our costs going forward. We look positively towards the future in the United States. We recognize that the current downturn is temporary and we know that the integration of Rinker prepares us for long-term growth and gives us a more balanced position throughout the cement value chain.