Cemex SAB De CV (CX)
Q3 2008 Earnings Call Transcript
October 16, 2008 10:00 a.m. ET

Executives

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

Analysts

Marcello Telles – Credit Suisse
Esteban Polidura – Merrill Lynch
Dan McGoey – Deutsche Bank
Gordon Lee – UBS
Gonzalo Fernandez – Santander
Michael Bates – JP Morgan
Steve Trent – Citigroup
Carlos Hermosillo – Vector Casa De Bolsa SA
Jamie Nicholson – Credit Suisse
Garrick Shmoies – Longbow Research
Christopher Buck – Barclays Capital
John Kohler – HSBC Securities

Operator

Good day ladies and gentlemen and welcome to the Cemex third quarter 2008 earnings conference call. My name is Beckie (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 a coordinator will be happy to assist you. Your hosts for today’s call are Mr. Hector Medina Executive Vice President of Planning and Finance and Rodrigo Trevino, Chief Financial Officer. I’d now like to turn the presentation over to Mr. Hector Medina, you may proceed.

Hector Medina – Executive VP of Planning and Finance

Good morning and thank you for joining us for our third-quarter conference call. I will briefly review our third-quarter results and will share with you our estimates for 2008 in light of our performance for the first nine months of the year. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results. We have shortened our prepared remarks today because I know you have many questions about our performance, as well as about our capital structure, maturities, and derivatives strategy. But I hope we touch on all the issues that are important to your understanding of Cemex’s performance. A transcript of our performance will be posted on our website for your convenience. We are living through a period of extraordinary volatility in the financial markets and economic weakness that is spreading throughout the global economy. Both have important consequences for Cemex, which we will discuss today. More importantly, we will also discuss the measures that we are taking in response to the challenges that this environment has presented.

During the quarter, we had slightly better-than-expected EBITDA generation. Our diversified portfolio has partially compensated for the downturn in the United States, Spain, and the United Kingdom and the negative impact from higher energy input costs. The economic environment continues to be difficult, and construction demand has fallen more than we had originally anticipated. During the first nine months of the year, and on a like-to-like basis for the ongoing operations, consolidated domestic cement and ready-mix volume was down 10%, and aggregates volume decreased 11%. However, consolidated prices in U.S.-dollar terms for the first nine months increased by 11% for cement and ready mix, and 12% for aggregates. Our EBITDA during the third quarter reached $1.3 billion, a decrease of 4% versus the same period last year. Adjusting for the exclusion of our Venezuelan operations starting August 1, 2008, to reflect the nationalization of assets in that country, EBITDA fell by 1%.

For the first nine months of the year, and on a like-to-like basis for ongoing operations, our consolidated EBITDA decreased 6% versus the same period last year, reaching $3.6 billion. For the rest of the year, we expect favorable supply-demand dynamics in most of our portfolio allowing us to offset a significant portion of input-cost inflation. In addition, we expect the synergies that we continue to realize from our cost-cutting process to partially offset lower volumes. Given the extreme levels of volatility in the availability of credit and the potential impact on the real economy in several of our markets as well as on the exchange rates in those markets, we are currently unable to provide a more updated full-year guidance for EBITDA and free cash flow for 2008. We are, however, reviewing all of the drivers of our free cash flow generation for 2009 and we are confident that we will be able to achieve a higher conversion rate of EBITDA dollars to free cash flow. This includes an assessment of our maintenance CapEx program, financing costs, working capital investment, and our global tax liability management strategy. As many of you are aware, in mid-September we announced that we have initiated a global cost-cutting initiative. But this one is not business as usual. We are rethinking our existing businesses with the same tools and disciplines that we apply to any new acquisition.

This is a work in progress. So far, we have identified close to $500 million in cost reductions that are under our control. These include a further reduction of our global headcount, capacity closures across the value chain, and an additional reduction in global operating expenses. Over the full year 2008 we expect our global headcount to be reduced by 10%. All of these initiatives will be executed before the end of this year, so that their full impact is realized in 2009. Associated implementation costs are approximately $80 million this year and less than $40 million next year. We expect to take further actions as part of this cost reduction process. Our goal is to reduce the company’s cost structure to a level that is consistent with the decline in our markets. However, it is important to remind you that we manage our business with a long-term view. We are determined not to undermine our strong global franchise that underlies our long term capacity to create value. As part of this process, we are also revising our capital-expenditures program for this year and the next. As you are aware, most of our cement-production and cement-grinding expansions are in their completion stages. As such, our maintenance plus expansion CapEx for next year is expected to be no more than $850 million versus about 2 billion this year.

In addition, we expect to close the sale of our Austrian assets within the fourth quarter, the proceeds of which will be used for further debt reduction. The sale of our assets in Hungary, the smaller of the two entities, will be delayed until next year due to a lengthier antitrust approval process than in Austria. We are pursuing additional initiatives to divest non-core operations, including the previously announced sale of our Australian concrete-pipe business. In total, these assets have an estimated value slightly in excess of $2 billion. Due to confidentiality requirements, we are unable to provide more information today, but will announce additional details when we can. Before I discuss the specifics of our country operations, I am pleased to announce that we will host an analyst meeting in early February 2009 to provide you with an update on our 2009 business plan, financial strategies, and cost-cutting efforts.

Now I would like to discuss the third-quarter performance of our principal markets and our outlook for these markets for 2008. In Mexico, cement volume declined by 5%, and ready-mix volume declined by 3% during the third quarter. The decline reflects lower economic activity, which is affecting informal construction, as well as unfavorable weather conditions during the month of September, which caused a delay in some infrastructure projects. Investment in infrastructure in Mexico increased 7% during the first half of the year. We expect the same trend to continue for the rest of the year. There have been some delays in projects from the National Infrastructure Plan during the third quarter. However, we expect to see more activity in infrastructure during the fourth quarter. In October, some important paving projects related to this plan, including highways and city works, have already begun. The government has also announced a program to promote growth and employment with a total of 65.1 billion pesos to be spent in the short and medium-term. This program is expected to bring an additional 26.7 billion pesos in resources for cement-intensive projects during 2009. During the third quarter, the formal residential sector slowed down, reversing the trend shown during the first half of the year. Financial institutions, which represent about 20% of the total number of mortgages granted in Mexico each year, or about 40% of formal housing investment, reduced the number of credits during the third quarter, reflecting current credit restrictions.

To reinforce housing investment, the CONAVI, or National Housing Council, added 1 billion pesos during September, a 24% increase, to the 4.1 billion pesos granted during the first eight months of 2008. The informal residential sector has been affected by higher construction costs, higher interest rates, lower remittances, and slower economic activity. In light of all of the above, we now see cement and ready-mix volumes declining by about 3% and 7%, respectively, for the full year 2008. EBITDA margin has improved by 180 basis points during the first nine months of the year, despite the increase in input costs. This increase is the result of continuous-improvement initiatives, including fuel substitution, self-generated electricity, and the optimization of our distribution channels. In the United States, cement volume fell 19% during the third quarter. On a like-to-like basis for ongoing operations, ready-mix sales volume declined by 30%, and aggregates volume decreased by 31% during the third quarter versus the same quarter last year. The third quarter like-to-like drop in volume was driven mainly by the continued decline in the residential sector and tighter credit conditions, which have negatively impacted other demand sectors. In addition, adverse weather conditions, primarily in Florida, the Carolinas, Arizona, and Texas, also negatively affected our volumes during the quarter.

Despite these historic declines across our core businesses, prices for most of our products have remained resilient. We announced a $25 per cubic yard price increase for ready mix starting October 1. We are monitoring the situation very closely and, while the prospects appear very positive for many of our markets, it is too early to determine how much of this increase will be realized. The impact of this increase will not be evident, until the first quarter of 2009, as the backlog of projects based on the prior price, gradually expire. In addition, we have announced a nationwide $15 per short ton price increase in cement starting January 1, 2009. The public sector has been more stable, historically speaking, than the residential and the industrial-and-commercial sectors. We have continued to see increases in construction put in place in nominal terms for the public sector, including streets and highways and other public construction. These increases have been reduced, however, and in some instances fully offset, by input-cost inflation. While there is little visibility at this point over the size of the next federal highway program, we are confident that the substantial need for infrastructure investment will drive many states to seek additional funds from their own bond programs, as was recently the case in California and Texas, and through public-private partnerships. There have been ongoing discussions in Congress about a second economic stimulus bill and many lawmakers favor including additional infrastructure spending as a key element of such a program to create new jobs.

We now see volumes in the public sector declining by about 5% in 2008. In 2008, we expect volumes in the industrial-and-commercial sector to decline by approximately 16% because of the decline in new projects, which is expected to continue due to tight credit conditions and the uncertain economic environment. The residential sector continued its decline during the third quarter.

Housing starts, the fundamental driver of cement demand in this sector, decreased by 31% year-to-date August. Our markets have seen an even steeper decline, as high-growth residential markets have decreased at a more rapid pace. We are encouraged by improving affordability of houses, which should lead to higher sales as the economic environment stabilizes. This was anecdotally evidenced by the recent 7.4% increase in pending home sales from July to August. For 2008, we expect the U.S. residential sector to continue its downward trend, declining by about 33% for the country and by about 38% for our markets. In light of the above, we expect that, on a like-to-like basis for ongoing operations, in 2008 our cement volume in the United States will decline by about 19% and we see our ready-mix and aggregates volumes declining by about 29% and 28%, respectively.

In Spain, cement volume during the third quarter decreased by 33%, while ready-mix volume decreased by 26%. Cement consumption in our markets continued to fall at a faster rate than the overall market during the quarter. Many of the regions we are in, which in previous years had shown above-average growth, now have lower construction activity. The residential sector continues to decline. For this year, we expect housing starts to decline by about 60%, to about 250,000. This will translate into a significant decline in cement consumption for the sector. Infrastructure projects continue to be on stand-by. Finished projects are not being replaced with new projects because of liquidity constraints and an increase in building costs. Nonresidential construction is also expected to decline during 2008. Lower volumes and higher energy and transportation costs have partially been offset by more favorable supply-demand dynamics as well as cost-reduction and optimization initiatives.

In light of the above, we estimate that cement and ready-mix volumes will decrease by about 30% during 2008. During the third quarter of 2008, in the United Kingdom cement volume decreased by 19%, ready-mix volume declined by 26%, and aggregates volume decreased by 11%. Adjusting for the divestments completed during 2007, ready-mix volume decreased by 21%. The housing, industrial-and-commercial, and infrastructure sectors continue to be very weak. For 2008, in the United Kingdom we now expect cement volumes to decline by about 19%, ready-mix volume to drop by about 20% on a like-to-like basis, and aggregates volume to decrease by approximately 14%. In France, our ready-mix volume decreased by 1% while our aggregates volumes decreased by 6% during the third quarter versus the comparable period last year. The main driver for volume growth in the country continues to be the public-works sector. The residential and nonresidential sectors are reflecting a decline in building permits. For 2008, we now see ready-mix volume, on a like-to-like basis for ongoing operations, to be flat versus last year.