CEMEX, S.A.B. de C.V.
Q2 2010 Earnings Call Transcript

Published: 28 Jul 2010

[Tim Castle:]

Tobias Woerner - MF Global Alejandro Luciano - Credit Suisse

[Operator:]

Good day, ladies and gentlemen, and welcome to the second quarter 2010 CEMEX earnings webcast. My name is Marcella 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) As a reminder, this conference is being recorded for replay purposes. Our speakers for today are Fernando Gonzalez, Executive Vice President, Planning and Finance; and Rodrigo Trevino, Chief Financial Officer. And I would now like to turn the conference over to your host for today, Mr. Fernando Gonzalez, Executive Vice President of Planning and Finance. Please proceed.

[Fernando Gonzalez:]

Good day to everyone. Thank you for joining us for our second quarter conference call and video webcast. 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. Today, we will be joined by Gilberto Perez, President of our U.S. operations, for the question-and-answer session. I would like to start with three key messages

[Rodrigo Trevino:]

Thank you, Fernando. Let me start by saying that in this period of greater transparency, we are improving our disclosure. During this quarter, we have made the following changes in our reported information. First, as Fernando mentioned, we have changed our reporting base for our cement volumes from total domestic cement volumes which included gray cement, white cement, mortar and clinker to only domestic gray cement which is by far our main product. This will reduce distortions in our reported volumes due to product mix. Second, we have integrated our results from Spain, the UK and the rest of Europe into a new Europe region. We will continue, however, to discuss the main European countries in our portfolio and in our quarterly reports and presentations. Third, we have added Poland and the Philippines to the list of individual countries for which we will provide historical and guidance information as a result of their increased importance in our portfolio. The countries we now report individually represent about 85% of our 2009 operating EBITDA. Regarding our results, operating EBITDA during the second quarter decreased as a result of lower volumes in some of our markets. In the case of Mexico, the decline resulted from a difficult second quarter 2009 comparison when our operations benefited from special government counter-cyclical programs that are no longer available. The Europe region was affected mainly by our Spanish operations and the South, Central America and Caribbean region, positive volumes in our Columbian operations were offset by lower volumes in other countries in the region. In contrast, the United States went through an inflexion point and delivered year-over-year increase in volume across the value chain on a like-to-like basis in the case. Operating EBITDA generation during the quarter was affected by lower year-over-year prices, especially in the United States and Spain. On a like-to-like basis adjusting performance change, effect and divestments, operating EBITDA was down 14% during the quarter. Operating EBITDA margin fell to 17.7% during the quarter from 19.6% in the second quarter of last year. Operating EBITDA margin was affected primarily by higher SG&A expenses as a percentage of sales resulting from lesser economies of scale due to lower volumes. SG&A expenses were further affected by higher transportation cost. With the closing of some of our facilities, our products in some cases have to travel farther to serve our customers. The increase in cost of sales and SG&A was partially offset by savings from our cost reduction initiatives. During the quarter, our free cash flow after maintenance capital expenditure was $187 million versus $456 million last year. A lower investment in working capital during the quarter partially mitigated the lower operating EBITDA generation higher financial expenses and higher cash taxes. The number of working capital days for our consolidated operations excluding the affects of securitization, declined to 32 days during the first half of this year from 37 days during the same period last year. We expect free cash flow for 2010 to reach about $680 million. We expect to have higher interest expense and maintenance capital expenditures, but lower investment in working capital. We expect to recover more than half of our year-to-date working capital investment during the rest of the year. Approximately, $73 million in higher interest expense is due to the exchange of our perpetual debentures into about $1.2 billion in principal amount of new senior secured notes. Due to our energy strategy, our kiln fuel and electricity cost on a per ton of cement produced basis increased by only 1% this year versus last year. For 2010, we now expect this cost to increase by approximately 2%. We continue to develop new ways to lower our energy input cost and to make them more predictable. As part of this effort, we are increasing the use of alternative fuels such as tires, biomass and household waste in our manufacturing process and reducing our use of conventional fossil fuels. This will help us recover energy from societies waste and is a positive contribution to the environment. During the second quarter, we have reached close to 21% in alternative fuel utilization up from 15% a year ago. The increase in financial expenses during the quarter reflects the terms of the financing agreement and the replacement of bank debt with higher coupon fixed rate bonds issued in the capital markets. During the quarter, we have recognized a foreign exchange loss of $101 million mainly due to the depreciation of the Euro against the US dollar. Most of these losses are noncash and related mainly to our European operations. We also recognized a loss in financial instruments of $43 million related to CEMEX and Axtel shares. Other expenses during the quarter were $96 million including severance payments, a loss on the sale of assets and the amortization of fees related to the early redemption of our debt. During the second quarter, we had a majority net loss from continuing operations of $301 million versus a gain of $173 million in the same period last year. This reflects the lower operating income, higher financial expense, a foreign exchange loss versus a gain last year and a higher loss on financial instruments. During the quarter, we continued to make progress on our plan for regaining our financial flexibility. In May, we completed the exchange of our perpetual debentures for new senior secured notes. This resulted in a reduction in net debt including our perpetual debentures of $437 million. Year-to-date, we have repaid $914 million of principal under the financing agreement, $330 million of which were paid during the second quarter. This is taken care of all of our schedule maturities under this agreement for 2010 and 2011. Also during the quarter, we announced the early payment of about $317 million of [inaudible]. After the quarter ended, we announced an agreement to sell non-core assets in the U.S. to Bluegrass Materials Company for $90 million. These included seven aggregate quarries, three resale aggregate distribution centers and one concrete block manufacturing facility, all of them in Kentucky. With the prepayments, we have greatly mitigated our refinancing risk for the upcoming two years. Our short-term debt excluding perpetual is now only 3% of the total. The average life of our debt is also increased for 4 years to 4.3 years during the quarter. Close to a quarter of our current debt excluding perpetual is in Euros. During the second quarter, we had a positive conversion effect in our debt of about $455 million, mainly as a result in depreciation of the Euro against the US dollar. As Fernando mentioned, we expect to use about $400 million of our free cash flow to reduce debt this year. With our planned debt reduction and operating EBITDA generation for the rest of the year, we expect to comply with our consolidated funded debt to EBITDA covenant of 6.75 times as of the end of this year. Our priority in the short term continues to be to pay down debt. To do this, we will work to improve our working capital management and continue to implement our global cost reduction and right sizing initiatives. Thank you for your attention and now we will be happy to take your questions. Operator.

[Operator:]

(Operator Instructions) And our first question comes from the line of Carlos Peyrelongue with Merrill Lynch. Please proceed.

[Carlos Peyrelongue:]

Thank you good morning gentlemen. Two questions if I may, first one related to Mexico, you mentioned that you expect stable operating cash flow for the year and year-to-date Mexico's EBITDA is down 5% in margins down about 200 basis points. Could you give us some color as to what you are expecting the second half for this to revert? And the second question is related to free cash flow, you gave guidance, new guidance of $680 million, is that before interest payments for perpetuals? Thank you.

[Rodrigo Trevino:]

If I may take the first part of Mexico. The second half in Mexico will compare favorable to the second half last year and so even though in the total year we had expecting as mentioned a slight decline in volumes, we do expect to generate about the same EBITDA done last year and that part of the increase will happen during the second half of the year.

[Fernando Gonzalez:]

Regarding your second question Carlos on free cash flow, we report free cash flow after maintenance capital expenditures, but it is before the servicing of our perpetual debentures. As you know, we have exchange more than half of those perpetual debentures into senior secured notes and so the amount of perpetuals to be serviced has also decreased accordingly.

[Carlos Peyrelongue:]

Good. Thank you, Fernando and Rodrigo.

[Fernando Gonzalez:]

Thanks Carlos.

[Operator:]

And your next question comes from the line of Nick Sebrell with Morgan Stanley. Please proceed.

[Nick Sebrell:]

Hi gentlemen. Two questions as well, if you could talk about the pricing environment in a little bit more detail in the US, one would think that if the volumes are expected to rise particularly as we go into the second half, then maybe pricing would be healthier but you said in your comments that you see lower inflationary pressure. So does that mean flattish pricing or is there maybe some sort of competitive dynamic that might mean even lower pricing. That’s the first question. And the second, if you could talk a little bit more about the working capital changes, where might you reduce working capital in the second half, is it more on the asset side or liability side or if you could add anything to that it would be helpful?

[Fernando Gonzalez:]

Okay, Gilberto could you help us with the first question on prices in the US please?

[Gilberto Perez:]

Sure Fernando. Good morning everybody. Well, we have tied to implement price increases in every line of product since April this year, it failed. Then, July 1st, we're still waiting and trying to see if the pricing are going start in some of the places. What I can tell you is pricing in our has stabilized compared to what happened in the first quarter in which everybody was accumulating inventories because of the bad weather during the first two months. So, as I said, we have noticed that the pricing has been stabilizing in fact our cement pricing has been growing for two consecutive months and I think it’s important to notice that every time we announce price increases, also what we’re trying to do is to start potential downward spiral which I think we have succeeded in. We have another price increase for October 1st in cement, in ready mix and in aggregates. It’s early to say what’s going to happen, but we believe that if the second half of this year is going to be considerably better than the second half of last year in terms of percentage growth that might create an environment more suitable for price increases. I think the important issue of pricing is stable right now.

[Nick Sebrell:]

Thank you.

[Fernando Gonzalez:]

Yeah, on your second question on working capital, we have improved during the first half of this year from 37 days to 32 days at the business unit level. Net of securitization program were more or less flat at about 20 days and we do have a seasonal business and so every year we tend to invest in working capital during the first and second quarter and we tend to recover a good portion of that during the second half of the year. A lot of it has to do with working capital, management of inventories and account receivable. We have marginally improved also the terms from our suppliers on the consolidated whole.

[Nick Sebrell:]

Okay, so the change in the second half is you would say seasonally normal or is it more than just seasonality? In other words, you are also improving…?

[Fernando Gonzalez:]

We expect to further improve the investment in accounts receivable, for example for the rest of the year, but to a very large extent it's seasonal, I would say most of it is seasonal.

[Nick Sebrell:]

Great, thank you.

[Operator:]

And your next question comes from the webcast.

[Robert Eason:]

Yes, the question is from Robert Eason. Can you give us indication of the regional variation in the US around the 8% cement volume growth reported in the second quarter and similarly for pricing?

[Fernando Gonzalez:]

Could you please answer Gilberto?

[Gilberto Perez:]

Yes, thank you. Well, most of our regions have experienced growth in cement consumption during the first six months. Obviously, the first quarter as I said we experienced heavy rain during the first two months, so the second quarter experienced high growth compared to the first one and we’re talking about more than 20% in places like California and Texas, low teens in Arizona and around 5% to 6% in the case of Florida second quarter compared to first quarter. When we talk about second quarter compared to the second quarter of last year, mainly the growth came in Texas, in Florida, while California was pretty much flat and we experienced a decrease in volume in Arizona. I’m talking about those four states because those four states account for around 70% of our sales. The mid-Atlantic and the South East also experienced growth compared to last year and obviously compared to – because of seasonality and weather compared to the first quarter. I don’t know if that answers your question. The second part of the question was about prices, right?

[Robert Eason:]

Yes, if you could give us some color on the regional variations on prices in the US?

[Gilberto Perez:]

Well, there is no – not much difference among regions, probably the region that has suffered the most in the case of cement, it’s Arizona, because of a supply-demand situation, but the rest of the regions are pretty much at the same level in the case of cement. In the case of ready mix, the April increase that we announced for ready mix was favorably received in Arizona, but prices of ready mix in Arizona are 8% higher in the second quarter compared to the second quarter of last year. The other regions are pretty much the same. And in the case of aggregates, prices are flat, except for the case again in Arizona which we had an increase of 3% in the second quarter compared to that of last year.

[Robert Eason:]

Thank you Gilberto.

[Operator:]

And your next question comes from the line of Gonzalo Fernandez with Santander.

[Gonzalo Fernandez:]

Hi, good morning everyone. I have two questions. Can you explain the reduction on debt, does this includes $550 million reduction because of changes in exchange rates that you commented during the CEMEX Day and [Inaudible] explained by the use of free cash flow and there approaches of there back logs there. And the second question is you reported an EBITDA margin in the US of minus 0.6% in the first half of the year. With this new guidance in volumes, which margins do you expect in the US for the full year? Thank you.

[Rodrigo Trevino:]

Yes. Let me take the first question on the debt Gonzalo. I presume you are asking about total funded debt for purchases of the calculation for the leverage covenant under the financing agreement and there we include the perpetual securities, and so of course what explains the total consolidated funded debt is in part the exchange of the perpetual securities as well as the conversion effects as a result of the weaker Euro. Those are the two primary explanations.

[Gonzalo Fernandez:]

Can you quantify how much you say for each?

[Rodrigo Trevino:]

I’m sorry.

[Gonzalo Fernandez:]

Could you quantify how much is the effect of each one and how much is from the exchange of Pesos and how much because of exchange rates?

[Rodrigo Trevino:]

Yes, the perpetual exchange reduction was -- the effect was $437 million, the positive conversion effects were approximately $450 million during the quarter and so those are the two most important. I don’t want to use cash balances at the end of the first quarter during the second quarter to reduce debt.

[Fernando Gonzalez:]

Okay, Gilberto can you take the second question to related to EBITDA margin for the full year?

[Gilberto Perez:]

Yes, well I thin that we need to say that the margins in cement and aggregates haven’t suffered as much as those in ready-mix. I think our margin in cement and aggregates continue to be very healthy and you could say they are around in the case of cement from mid 20s to high 20s, in the case of aggregates for the whole country are in the low 20s, but we are suffering in ready mix. So, what we have been doing is to reduce the number of plants, to reduce the fleet in the case of ready mix to those places in which with the pull-through effect of cement and aggregates, we are making money. We are practically getting out of markets in which we are not making money, taking obviously care of our market share which is very, very important to us. So we did a margin in the United States is being heard by the weight that our ready mix business has, so as long as that business recovers or as volume recovers in that part of our business, our margins are going to experience growth. The margin was negative for the first half of the year. We are operating pretty much in this kind of environment at breakeven. We think that for the second half, this is going to change with volume increases and some of the small price increases that we have had and probably cement and aggregates are going to grow by about 3% or 4% at this point. We don’t see ready mix growing much, so our margins are going to remain probably in the 5%, 6%, 7% range for the whole company in the US.

[Gonzalo Fernandez:]

Terrific. Thank you very much. And just a very quick follow-on to Rodrigo. With the euro strengthen in June, going should we see a reversal in this positive impact on debt or did not seen debt reduction in that?

[Rodrigo Trevino:]

Yes now you would see a negative conversion effect during the month of July, as a result to the Euro strengthening. Never the less you’d still see a positive effect from March to now and it remains to be seen with Euro exchange rate towards the end of the year. But of course we do have the operating cash flows in the Euro, and so we have a natural hedge on our balance sheet and income statement.

[Operator:]

And your next question comes from the line of Mike Betts with Jefferies. Please proceed.

[Mike Betts:]

Two questions from me, as well if I could. First one, I wonder if you could talk about U.S. volumes, the trend in June specifically, and also what you can say about what’s happened in July. On cognizant to the charts that you gave on the investor day, but they only when up to May, so some indication what’s happened subsequently please. And my second question is just on the European cement prices which of course sequentially had fallen 4%, Q2 versus Q1; that does seem to be worsening back. Could you just explain may be a bit more detail as to what had gone on their and what was behind it please, and which countries were particularly to blame for that?

[Fernando Gonzalez:]

Okay, Trevino can you just take the first one please.

[Rodrigo Trevino:]

We are following very closely our daily our shipping rate. Up to June the hourly shipping rate compared to June of last year is up 7% when [Inaudible] was up by about 11% and it was up by about 7% too. So that gives us an 8% growth compared to the second quarter of last year. For July the tradition is heavily affected by the 4 of July weekend. The later or the later part of July, we have experienced growth compared to last year, for the first part of July we were below last year, because of the 4 of the July weekend and some weather specially in the eastern part of the continent excess in Georgia, Alabama, Florida have been affected by weather during the second quarter. Those are more or less the numbers in terms of our shipping by day, so also the number of days compare to last year, last year we have 20 days and this year we have 18 days that will affect the monthly volume. So, that’s why we are looking at daily average shipping rate.

[Mike Betts:]

Okay, and just to clarify while we are still on, the forecast for the year now for the U.S. is plus 5% or it is plus 3 to 4. I through within the presentation the number 5 was given and then may be number 3 to 4 was mentioned. Could you just give us what now your expectation for U.S. volumes is in 2010 please?

[Rodrigo Trevino:]

We think that the volume growth for the U.S. is going to be 5%.

[Mike Betts:]

Okay thank you.

[Fernando Gonzalez:]

Mike, regarding your second question, I think it was more detail on the decline of 4% in cement prices in Europe, the main, the country as you said it is the country to be blamed. Half of the decline comes from Spain, we have commented that before prices are eroding in Spain, so the half of the drop is because of Spain and then the second country that it does effect the decline of prices in Europe, its Germany with a sequential drop of 2% compare to first quarter and then there are several others but these two countries, but again mainly Spain are the once effecting prices in Europe.

[Operator:]

Your next question would come from the webcast.

[Rodrigo Trevino:]

Yes, the question is from [Inaudible] from Credit Suisse. What future plans does CEMEX have for expansion, specifically in organic in coming 6 months to 12 months already given and extremely high exposure to emerging markets specially EBITDA, the CEMEX plan to increase it or maintain the emerging to develop geography in there.

[Fernando Gonzalez:]

I think its too soon to, if I might take the question would talk the expansion planting projects, its really the -- we have been mentioning our priority, now is continuously bean like that. Now of course there are always move investments that could be considered expansion in organic terms, but as you have seen our investments and capitals are quite low. So, the investments we can do that kind of qualify expansions are really replenishing aggregate referred and some more investments here and there, but really we don’t have a material organic expansion program. As we have already commented or we have commented before, we are in the process of being part of a firm in which we would be investing $100 million and the idea is to participate in that firm, as a strategic investor through that firm we might be doing some expansion in investments in the near future. If I think we mentioned it during the CEMEX day our interest in Peru the same way we commented our interest in India and some other markets and I’m referring basically to even though it’s consecutive, but its mainly in instrument.

[Operator:]

And your next question comes from the line of Dan McElwee with Citigroup. Please proceed.

[Dan McElwee:]

Good morning gentlemen. I just regular to a question on the costs in U.S. and the margins, if you can talk a little bit more about how much of the weakness in U.S. margin is from the weaker pricing and how much from the additional I think Rodrigo said it, transportation costs principally? And then also just looking at the price and having shut down certain facilities, are the prices particularly on the cement and ready mix side cost including freight, I mean that there is some of that transportation effect also contributing to the weak pricing?

[Rodrigo Trevino:]

Fernando Gonzalez, take that one please.

[Fernando Gonzalez:]

Well, I will disagree that even though, obviously we are looking for better prices. I would disagree that the pricing is weak. I mean we have been able to improve pricing, but given downturn and given that fall in the macro of products, I think prices have been fairly stable and the interest has been very rational. I don’t think transportation cost is affecting pricing because we are going exactly to the same markets; we were going to in the past. It’s sometimes we are going from other sources. We have shut down capacity, it was more expensive and when we do we obviously take care of, I mean make sure that the savings derived from shutting down those facilities are higher than the additional transportation cost we are going to incur. So, just to give you an example, our unit cost of production in cement have gone down more than $4 per ton compared to last year, while unit rate has gone up less than $2 compared to last year. The margins just from those two are [Inaudible]

[Dan McElwee:]

One follow up if I may on the US, on the borrowing side the, if we move back to positive growth; we are stronger in cement than aggregates. Is that more to the euro on your comps or are you seeing more of a recovery on the residential side in your markets than the non-residential and streets and highway side?

[Fernando Gonzalez:]

No, I think that what’s sustaining the manage -- the right now, its public spending. We obviously had a spike on our markets which are tend to be much more dynamic in residential because of the tax credits. Obviously, we’re expecting a pull back in residential because of the expiration of the tax credit. It also has to do with our geographic portfolio. We’re very big in Florida, so what happens is employees affect our results in a greater way. I don’t know if that answer your question.

[Dan McElwee:]

Sure. Thank you.

[Operator:]

And your next question comes from the line of Gordon Lee with UBS. Please proceed.

[Gordon Lee:]

Good morning. Just a quick question for Rodrigo, on the covenant test for year-end, obviously, you’ve made it clearly, the statement that you can be focusing on doing everything possible to comply with that by year-end and you’re confident that you will but as Fernando said visibility is low. One question that I had is if you were to end the year above that limit, have you disclosed what the penalties are for CEMEX as far as immediate charges or ramp up in expense, anything of that nature?

[Rodrigo Trevino:]

Well, of course you would have to sit down with the banks to discuss that. We do expect to have a certain margin for compliance towards the end of the year, but of course we’re not comfortable with that margin for compliance. When we negotiated with the banks, the financing agreement, we agreed with the banks a 20% margin for compliance and of course with the new estimate for EBITDA for the full year versus what we expect for EBITDA for this year, a year ago, has significant portion of that margin, the 20% margin for compliance has diminished. And so we will look to implement the leveraging initiatives as we did during the second half of the year so that we can again increase that margin for compliance to a more comfortable level. And we will do our best to remain in compliance for the life of the financing agreement.

[Gordon Lee:]

Great. Thank you.

[Operator:]

And your next question comes from the webcast.

[Rodrigo Trevino:]

Yes, the question is from [Garrick Schmitt]. In the US, your new guidance implies approximately 10% volume growth for the second half of the year in cement, even more in aggregates and ready mix, but you cited weaker trends in June from what you saw in April and May. What are your assumptions regarding an acceleration in volume growth in the second half of the year vis-à-vis the recent trends? Fernando, I think this question is for you.

[Fernando Gonzalez:]

Well, basically what we think is going to happen is that most of the man is going to come from the public sector which in our case, in our markets, it’s going to represent around 68% to 70% of our volume this year. What happened during the first half of the year specifically with public spending is that we noticed that public spending didn’t grow in the first quarter of the year compared to that of 2009. Some of it was related to weather we think, but a part of it was related also to cannibalization of funds that states would have spent otherwise with or without our program. So, what we concluded is that there are fund has cannibalized about 100% of works that would have been done by the states anyway. That trend is coming down drastically and through, right now the last of few we have is of cannibalization is around 25% and we are continuing to see increases in public spending, in the places in which we participate. So most of the growth will come from the public sector and also I mean we are believing that the macroeconomic conditions in the United States are going to improve, that employment generation is going to be much more strong during the second half giving way to slight increase in the residential sector as well. We’re still expecting the growth in housing starts are compared to last year. We’re expecting around 650 housing starts which is a correct consensus within that it’s an achievable level despite the fact that we had a big pull down after the expiration of the tax credit.

[Operator:]

And your next question comes from the line of Yaseen Turabi with Exane BNP Paribas. Please proceed.

[Yaseen Turabi:]

I just had three questions. My first question would be on the US, could you give us another magnitude of the breakdown between fixed cost and variable cost? Just to understand the operating of there. Then I would have a second question on your covenants. I understand that your covenants is becoming significantly tighter in 2011 and I would like to know if you have already in lined the debt strategy to be in compliance with your covenants in 2011, economics recoveries is a bit slower that expected. For example, as you already explored the possibility of selling some stakes that driving the cement [Inaudible]. And my third question would be on the European pricing, you commented on the cement pricing, but we have to still see that aggregate prices has deteriorated by 6% sequentially. Could you give us a bit more color on the aggregate pricing in Europe?

[Fernando Gonzalez:]

Rodrigo, could you take the first one please.

[Rodrigo Trevino:]

If I heard correctly, the first one was about giving you a breakdown between viable cost and fixed cost.

[Yaseen Turabi:]

In the US, yes.

[Rodrigo Trevino:]

In the US. Well, I don’t know how the breakdown I can give you without giving too much information for other audiences, but I could tell you that the viable costs are right now with a level of pricing that we have around 30% of our total cost in cement. The rest I think it will be easier for you with this information to…

[Yaseen Turabi:]

Then I guess it would be lower in aggregates and earnings increase. Well higher; ready mix would be higher, yes.

[Rodrigo Trevino:]

Ready mix, most of the cost is viable. This component is very small, because most of the fixed cost in really -- the driver is up and the fixed cost component is just a plant personnel, but it’s not much compared to viable. In the case of aggregates, viable costs, I can tell you they represent less than 20% of the total cost component.

[Yaseen Turabi:]

Okay. Thank you.

[Rodrigo Trevino:]

Okay.

[Operator:]

And your next question will come from the webcast.

[Rodrigo Trevino:]

We still have two questions we haven’t answered, so we will take those two first and then we’ll go to the webcast. Your second question has to do with the covenant compliance for this year and next. We believe that after more than three years of seeing drops in our trailing 12 months operating cash flow or operating EBITDA, as a result of the sharp contraction in some of our major markets, we believe that we are seeing an inflection point this year and we expect significant growth in EBITDA for the second half of the year. When we negotiated the covenant package with our banks, the assumption was that we would have a recovery in our volumes. That of course contributes significant operating leverage that allows our trailing 12 months EBITDA to recover and a big portion of the leveraging that will take place during the next several years is a result of that operating leverage and that recovery in operating EBITDA. We don’t have yet guidance for 2011, but an important component of the reduction in leverage from 2010-2011 will come from that operating leverage. Of course, we are not complacent and we will continue to do things to delever as quickly as we can. We have certainly been proactive in implementing as many of the deleveraging initiatives that we could. We have in fact of the $15 billion of debt refinanced last year. We have now prepaid more than $5 billion of that and we will continue proactively looking for opportunities to prepay and reduce our debt and thus delever at the fastest rate possible, so that we remain in compliance. The third question I believe was related to Euro pricing in aggregates I believe.

[Fernando Gonzalez:]

Yes, I think the question was giving some color on the decline of aggregate pricing in Europe. Again it’s Spain, the country that is affecting, with a drop of 8% quarter-to-quarter and also France and Germany for about the same variation. UK, in which we had our high single digit negative, I think the decline in the first quarter 2010 compared to fourth quarter 2009 seems to be stabilizing, because this quarter the decline is almost flat, 1 minus 2% drop compared with the first quarter. So those are the countries explaining the top of prices in aggregates in Europe.

[Rodrigo Trevino:]

The question from the web is from [Mary Collom] from Jefferies and her question is, how much of the $400 million of debt reduction from free cash flow has already happened during the first half of 2010. Well in fact, none of it. As you know we generated free cash flow due to the seasonality of our business during the first quarter and although we started to generate free cash flow during the second quarter, we expect the contribution to debt reduction from free cash flow for 2010 to happen during the second half of the year.

[Operator:]

Your next question comes from the line of [Tim Castle with Darby]. Please proceed.

[Tim Castle:]

Hello. My first question is relating to US pricing if that’s possible. Could you just say, a little bit your rational. As I understand there’s utilization rates in the US depending on region and sometimes 60%, 65%. I suppose I am wondering what sort of push back you are getting from your customers and why you think that the next price increases should be successful, even though obviously it’s been quiet tough pricing environment over the last few months. If you were to see some sort of stabilization of volumes in the second half of the year as supposed to descend growth, without making you a little bit more cautious about being successful with your next attempt to price increase. Then secondly my next question was just in relation to your balance sheet again. If we do see that kind of slightly more stable or tougher environment than you’re forecasting, as well as what is the next plan of action in relation to using debt? Would it be to sell more assets or would it be more like to go down the equity rules in terms of raising fresh equity. What would be kind of the Plan B for reducing debt? Thank you.

[Rodrigo Trevino:]

Trevino can you take the first part, the first question please.

[Fernando Gonzalez:]

Sure. Well, we are being very conscious about the pricing environment in the US, but the nature of competition here is very regional and we believe that there are regions in which the possibility of price increases obviously are higher than other. Right now we have price increase announcement for all of our products for October 1, in what we called the worst, which is pretty much worst of what we have West of the Mississippi. For October 1 or for $11 in the case of cement, about $13 in the case of ready-mix and $1 in the case of aggregates. In cement, we have had to pour from almost all of our competitors, in places which are big volume for us like California, Nevada and we have also announced some net price increases and all products price increases in the east, which is again east of the Mississippi, Florida, George, Lavaca, Kentucky and up. For September we haven’t had the support we have had in the west and there are very specific reasons for it. I mean, we had an expansion in the Mississippi river system of our European competitors who brought $4 million tons into the equations, and they trying to sale that plan out and that’s putting a lot of pressure in the market. So the possibilities in the east are not very good, specifically due to this reason. As we are a little bit more optimistic about it, we think that the places in which we participate are pretty much going with what we have forecasted in terms of housing, which I really believe the housing is what’s going to bring the demand up in the long term, except for Florida in which we saw the pull back after the tax credit expiration was higher than that of other States in which we participate. So going forward we think that with job creation the residential sector is going to start to recuperate and things are going to stabilize further in terms of demand and obviously affecting the pricing environment.

[Tim Castle:]

And just one more question to confirm that given that you are now talking about the October and September price increases, is it fair to say that the July price increases in succeeded in stopping prices falling, but you no longer are optimist about your increasing prices in July. Is that’s fair or is that wrong?

[Fernando Gonzalez:]

It depends. We talk about Florida which you have some hope that the price increase will stick in cement. In the case of wiring, it’s Florida. We have a US competitor that is pretty much dumping rock in Florida. So that’s making the present environment in aggregate a little bit difficult. So we still have some hope in some individual regions. It’s not widespread for the whole country, but I think it has helped stabilize the prices as you well described.

[Tim Castle:]

Thank you very much, and just the final question on the debt reduction.

[Rodrigo Trevino:]

Yes and your question on the balance sheet, clearly are leverage today is very high because our trailing 12 months EBITDA is less than $2.5 billion. As we recently indicated in the CEMEX day last month, we estimate our middle of the cycle operating EBITDA to be in the range of $5 billion. So clearly the biggest contributor to deleveraging going forward will be the recovery in our EBITDA, as the operating leverage begins to have its affect once volumes begin to recover in some of the markets that suffer the greatest drops. In the meantime, we will continue aggressively and proactively looking for ways to delever, reduces our debt, sell our assets that are non-productive and are non-contributing to out consolidated EBITDA. We have done some of that during the second quarter of this year and we will continue to search for those opportunities, but I would say that the biggest contributor to deleveraging in the medium term will be the recovery in our operating EBITDA.

[Tim Castle:]

Sorry, just to clarify that, because to me I think, one thing we’ve all learnt from this cycle is that visibility is obviously quite low and there is very few uncertainties out there. So, if you were to see a kind of a more benign environment, I just wanted to know if there is more disposal on the equity side that what you would then turn to.

[Rodrigo Trevino:]

Clearly we need to adapt. I think if anything we have demonstrated during the last year, year and a half, that we have been very aggressive at adapting both at the operating level as well as at the financial level and we have right-sized the business and reduced cost and expenses and if have to do some more of that of course we will, and we have done that this year, and we will continue to look for ways on the financial side to complement our efforts on the operating side. I don’t know Fernando if you would like to…

[Fernando Gonzalez:]

I think you mention before that even though we have a margin, it’s not much enough to make us feel comfortable. So we will continue in exceeding the financial markets and doing whatever is needed to have a larger margin on complying that with our limited ratio for December. But right now we cannot say specifically what is it that we’ll be doing. It would depend, but as you have seen in the last previous months, we have done some and again, we will be proactively doing whatever is needed in the financial markets to assure we have the margin to comply with our covenant.

[Tim Castle:]

Thank you very much.

[Fernando Gonzalez:]

Thanks.

[Operator:]

Your next question comes from the line of Tobias Woerner with MF Global. Please proceed.

[Tobias Woerner:]

Yes, good afternoon. Tobias Woerner for MF Global. Two questions if I may; firstly with regard to the highway bill. I don’t know whether you’ve discussed this on the call already, but it seems to me that any passing of the highway bill is highly optimistic. I wonder what your view on that is; whether we are just kind of going to get an extension and what the implications well mean for you. Secondly with regards to prices, official statistics points to about half a percent increase in June over May. You mention July earlier a little bit, but maybe you could little bit more color in the US and maybe on a more general basis where there are trend changes in terms of pricing around the world.

[Rodrigo Trevino:]

Okay Fernando, can you just take the first part of the first.

[Fernando Gonzalez:]

Well highway bill; we are not considering a highway bill, we have [Indiscernible] this year. We think that the political environment is such that nothing is going to happen until after the November elections, after everyone knows if the Republicans are going to recuperate the house or the Senate or both or what. We are not even a lot of hope to our reauthorization of the highway bill for this year. Nevertheless we have had, which is not the best news, but is good news. We had an extension with I think the figure is $41 billion. The House of Rotation Committee has approved an addition $4 billion, which is a 10% increased funding for fiscal year 2011. This has to serve as both the House and the Senate, but what we think is that due to political environment what they are doing is just an increase of just 10% for 2011, obviously because of spending in transportation is needed and everybody is putting pressure on it. So depending on what happens at the end of the November elections, we are going to have a little bit more cold war or what’s going to happen with the highway bill. Right now what we are considering for the long term is that the highway bill doesn’t increase in real time from the Q1. Whatever increase we experience in the highway bill will be a plus in our long-term projections. Now in prices, I think that consecutive price increase announcements that we have made and we have try to lead, as I said have stopped the further deterioration in the pricing levels in the United States and all products have shown stabilization during the last three, four months. We think that that trend is going to continue. We don’t see the pressures we saw in the first quarter of course the deterioration in price compared to last year and hopefully we are going to succeed in September, October with further price increases.

[Tobias Woerner:]

Can you just interrupt you quickly before you move on to the change in trend in the world? It seems to me that wholesome is one of the main drivers of more volume being put into the market and putting pressure on prices. Has that effectively stopped?

[Fernando Gonzalez:]

Well no, I don’t think so. I think that probably wholesome has stopped, but with wholesome, I mean the dynamics of the market now is that people losing market share to wholesome are trying to fight back for market share, so that the dynamic in the east right now. We haven’t suffered in market share, but there are other competitors that I know have, so that’s the dynamic right now. I mean it’s a lot of volume, 4 million tons when the market is going down. So obviously it has an affect on the competitive environment.

[Tobias Woerner:]

Thank you.

[Rodrigo Trevino:]

With related to prices in other parts of the world, I think we have commented in let’s say on the country or region basis, that there has been erosion basically or mainly in those countries in which volumes have suffered the most. As you remember we were committed to prices in the case of Spain. We both have met an aggregate, but in other geographies price evolution is positive. Mexico’s neutral to positive. South America is positive, 4% higher than last year. Asia with the lead is also positive, it’s in the range of 5% to 10% higher than last year, and Asia also is positive in about 5%. So I think in general terms, unless a business of a country has been materially affected, the volumes, prices are holding and even increasing.

[Tobias Woerner:]

Thank you.

[Rodrigo Trevino:]

Thanks.

[Operator:]

We have time for one more question and that question comes from the line of Alejandro Luciano with Credit Suisse; please proceed.

[Alejandro Luciano -- Credit Suisse:]

Hi, good morning. Thanks for taking my question. I just have a quick clarification on your calculation for the total debt to EBITDA covenant. So you have consolidated funded debt to EBITDA being 7.19, and your trailing EBITDA is about $2.4 billion, which gives me a total debt number of around 70.3. However your total debt plus the perpetual is just about 17.9 and I was wondering basically two questions. What’s the difference -- I know that you have a cash reserve account in your balance sheet, so I wanted to know what was that amount? And secondly, are you excluding now the optional convertible subordinate notes out of your total debt figure presented in your press release?

[Rodrigo Trevino:]

Yes, that is exactly why the Alejandro. The covenant calculation under the financing agreement excludes the convertible, as we amended that financing agreement in order to receive credit from the banks, because that convertible is subordinated and matures after the bank debt, and for that reason it is not included in the total funded debt calculation under the financing agreement. That is the biggest explanation, to reconcile the two numbers that you have.

[Alejandro Luciano:]

Thanks, but even if I take out the optional convertible, I mean that’s $715 million, and the difference between your total debt and the total funded debt is about only $500 million. So I was wondering, does that mean that your total funding actually increased?

[Rodrigo Trevino:]

Well, for purposes of the calculation you will also need to add other things such as for example guarantees if you are providing any, and you have to go into the financing agreement to get a detailed way in which to calculate the total funded consolidated debt for purposes of that covenant. We can help you review that if you like.

[Alejandro Luciano:]

Alright, but does that mean overall then the consolidate debt of CEMEX is then more around I guess, around $18.5 billion then.

[Rodrigo Trevino:]

Well, I mean it’s everything that is in the financing agreement, plus everything that is disclosed such as the convertible securities and other transactions that are on the balance sheet as well.

[Alejandro Luciano:]

Alright, thank you very much.

[Rodrigo Trevino:]

Thank you.

[Operator:]

Our question and answer session has now ended. I would now like to turn the call over to Mr. Fernando Gonzalez for closing remarks.

[Fernando Gonzalez:]

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

[Operator:]

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.