CEMEX, S.A.B. de C.V.
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Good morning. Welcome to CEMEX First Quarter 2013 Conference Call and Video Webcast. My name is Sandra, and I will your operator for today. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions] Our host for today are Fernando González, Executive Vice President of Finance and Administration; and Maher Al-Haffar, Vice President of Corporate Communications, Public Affairs and Investor Relations. And now, I will turn the conference over to your host, Fernando González. Please proceed.

[Fernando A. González:]

Thank you, operator. Good day to everyone and thank you for joining us for our first quarter 2013 conference call and video webcast. After Maher and I discuss the results of the quarter, we will be happy to take your questions. We are pleased with our operating EBITDA generation during the quarter with a growth of 9% on a like-to-like basis, adjusting for the favorable effect we had last year resulting from the change of a pension plan in our Northern Europe region, as well as the fewer working days this quarter. This is the seventh consecutive quarter with a year-over-year growing in operating EBITDA. In addition, on a comparable basis, we had a 1.6 percentage point operating EBITDA margin expansion. Improvement in pricing in several of our regions, as well as continued cost reduction efforts, resulted in the sixth consecutive quarter of year-over-year growth in our EBITDA margin. Prices in local currency terms for cement, ready-mix and aggregates increased by 1%, 3% and 4% respectively, on a sequential basis. In addition, our year-over-year cement and ready-mix prices are also higher and in line with our 2016 plan presented during our CEMEX Day in February. We are on track with the execution of our value-before-volume strategy with all of our regions already in the implementation stage at South, Central America and the Caribbean and Asia. The majority of our sales force has already completed training, and compensation metrics have been adjusted. On the volume side, consolidated volumes for our products were materially affected by 2.5 fewer days, fewer business days, on average due to the holidays and lower activity in the working days surrounding these holidays. Consolidated cement volumes adjusted for working days declined by 4%. This adjusted decline was also affected by adverse weather conditions in some of our markets during the quarter. On the financing side, we issued $600 million of 5 7/8% senior secured notes maturing in 2019. We also successfully bought back 43% of our 2014 Eurobonds, further reducing our debt maturities for next year. We also expanded the use of alternative fuels. Our substitution rate reached 28% during the first quarter and 29% during the month of March. On the commercial side, we continue to develop innovative higher-margin specialty products to satisfy the changing needs of our customers. As you may know, during the last 2 years, we have launched 3 global ready-mix concrete brands

[Maher Al-Haffar:]

Thank you, Fernando. Hello, everyone. Our quarterly operating EBITDA, on a like-to-like basis, adjusting for the pension fund effect and fewer working days, increased by 9%. Operating EBITDA margin, also on a comparable basis, increased by 1.6 percentage points versus the same period last year. This margin expansion is driven by higher prices in some regions, as already discussed by Fernando; our continued cost reductions, as well as a favorable operating leverage effect in the U.S. Cost of sales as a percentage of sales declined by 0.5 percentage point during the quarter. The decline was mainly the result of lower energy costs, including fuel and electricity, as well as a reduction in workforce. Operating expenses as a percentage of net sales, adjusted for the effect of change in the pension plan in Northern Europe last year, declined by 1.8 percentage points. The reduction reflects savings from our cost reduction initiatives, as well as lower distribution expenses. Our kiln fuel and electricity bill, on a per-ton-of-cement-produced basis, declined by 3% during the first quarter. The savings achieved for using alternative fuels instead of fossil fuels during the quarter reached $25 million. This is close to 20% of the total cement fuel bill in the same period. During the quarter, our free cash flow after maintenance CapEx was negative $483 million, versus a negative $287 million last year. The year-over-year variation in free cash flow is due mainly to lower operating EBITDA, as well as higher financial expenses, investment in working capital and cash taxes. The higher year-over-year working capital investment during the quarter is a result of higher inventories and lower payables. Working capital days remained flat at 28 days, compared to the first quarter in 2012. As in prior years, we expect to recover most of the investment in working capital in the second half of the year. Our cash taxes paid during the quarter reflect a higher tax payment related to fiscal consolidation in Mexico as originally scheduled and as disclosed each quarter in the notes to our quarterly report. In addition, we had a onetime payment of $70 million under a Mexican amnesty provision. In the income statement, we recognized a noncash exchange loss of $118 million, due primarily to the fluctuation of the euro and the Mexican peso versus the U.S. dollar. We also recognized a gain on financial instruments of $129 million, related mainly to CEMEX shares. During the quarter, we had a controlling interest net loss of $281 million, versus a loss of $30 million last year. This is due mainly to the noncash foreign exchange loss and higher income tax, which was mitigated by the higher gain in financial instruments. Regarding our debt, we successfully priced $600 million of senior secured notes maturing in 2019 at a coupon of 5 7/8%. These bonds were placed at a yield of 350 basis points tighter than the notes we priced last October. We are very pleased with the way our credit risk has re-rated and continue to monitor the markets for further liability management opportunities to reduce interest expense and enhance our maturity profile. We also completed a tender offer for our 4.75% 2014 Eurobond, reducing the outstanding amount under this bond to close to $300 million as of the end of the quarter. The increase in debt during the quarter plus the decrease in the cash balance were used to meet the negative free cash flow during the quarter. As in previous years, the seasonally negative free cash flow is part of the normal business cycle, and most of it is expected to be reversed during the second half of the year. Looking at our debt maturity profile, during the quarter, we reduced debt maturing in 2013 and 2014 by $240 million. In addition, we have now fully paid the original 2009 financing agreement and have addressed all our required amortizations under the New Facilities Agreement until 2017. We continue to be comfortable with our liquidity position, with cash and cash equivalents reaching $817 million as of the end of the quarter. In addition, we maintain over $2 billion of working capital and receivables financing facilities which further bolster our liquidity position. And now Fernando will discuss our outlook for this year.

[Fernando A. González:]

Thank you, Maher. For 2013, we expect consolidated volumes for cement, ready-mix and aggregates to improve by 1%, 2% and 1% respectively. We expect the improvement in volumes from our operations in Mexico, the U.S., the South Central American and the Caribbean region and Asia will more than offset the expected weaker northern volume and Mediterranean regions. Our cost of energy, on a per-ton-of-cement-produced basis, is expected to increase by approximately 1% during 2013. Total CapEx for this year is expected to be about $700 million, including $525 million in maintenance CapEx and $175 million in strategic CapEx. We expect cash taxes for 2013 to be slightly higher compared to last year. Regarding working capital, we expect the working capital investment during this year to be similar to last year's. We also anticipate no major change in this year cost of debt, including our perpetual and convertible securities from 2012 levels. In closing, I want to emphasize 3 points

[Maher Al-Haffar:]

Before we go into our Q&A session, I would like to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operate and could change in the future due to a variety of factors beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to our prices for our products. And now, we will be happy to take our questions. Operator?

[Operator:]

[Operator Instructions] And the first question is from Carlos Peyrelongue from Merrill Lynch.

[Carlos Peyrelongue:]

Two questions, if I may. First one related to prices in the U.S. Can you give us some visibility as to whether you have announced price increases in Texas and California and the size of those price increases if you are implementing any changes there? And second, on Mexican volumes, you have a 2% volume growth guidance, the first quarter numbers, of course, point to a much weaker volume growth even if you strip out the calendar effect. Do you still think that, that 2% is achievable? Or you think that the volume growth is likely to be different than the 2%?

[Maher Al-Haffar:]

Yes. Carlos, maybe I'll take the first question on pricing in the U.S. for the -- first, the pricing reaction from the market in January was quite positive. As you recall, we announced a close to a $9 price increase in all markets except Texas, because we had announced pricing earlier. And just wanted to emphasize that the pricing increase is holding in all of our markets, that's Florida, California, Colorado and some other states. All of the states where we've increased prices in the first quarter represented close to about 60% of our sales. The area that we've had some pushback is the mid-south region, and we realized price increases between, I would say, about $2.25 to close to $8.80, depending on the region. And that's evidenced in the sequential pricing increase. What's really important in pricing increases, both for cement and even more importantly for ready-mix, is the year-over-year increases. We've had very positive year-over-year increases, and as Fernando mentioned in his conversation, that as we bring in new business into the book, prices will drift upwards. Now if we can go to the April price increase, we did announce some pricing increases there. We announced prices -- price increases in Southern California of close to about $3.30, and we did have a pricing increase in Texas of about $5.50. We're also pushing a price increase in the mid-south by about $5.50. In terms of ready-mix, we've announced a $10 per cubic meter for Texas and mid-south, and we're also looking at a pricing increase in Arizona, about $6.50 per cubic meter. And we're optimistic on the pricing increases. And it's very important to mention that in the case of Texas, we're sold out, and the market is getting awfully tight being close to sold out. So we look forward to those pricing increases being successful.

[Fernando A. González:]

Well regarding your question on volumes on Mexico, yes, we are not changing the guidance. We do think that it is feasible, mainly because of the performance of the industrial and commercial sector is strong. Self-construction is still there. And the main cause of the decline in volumes eliminating working days effect is infrastructure. And we do believe this is a temporary delay on government spending that for sure will come in the -- mainly in the second half of the year. So because of that, we do believe it is feasible and we are not changing our guidance.

[Operator:]

Our next question is from Vanessa Quiroga from Credit Suisse.

[Vanessa Quiroga:]

And my question is just to clarify on the pricing. If all of these targets are successful, all of these price increases that you intend to implement, what would be the blended increase in prices for the full year for cement and ready-mix in CEMEX U.S.A?

[Maher Al-Haffar:]

Well, Vanessa, it's kind of tough. I mean, we never give, as you know, I mean, and I -- of course, I don't blame you for trying. We -- it's very difficult to give expectations for pricing increases. I mean, clearly, our approach is not only to get inflation for the year, because we think we've chronically underpriced our products now for quite a while. So we are definitely shooting for pricing increases beyond input cost inflation for the period, but we'll have to wait and see. There's a lot of dynamics that are in play. We're quite excited and pleased by the demand dynamics, but we'll have to wait and see. I mean it's very difficult to give an outlook on pricing.

[Vanessa Quiroga:]

Okay. No problem. And for Mexico, the price increases that you intend to implement, I mean, by how much are these price increases? And in what sectors? What type of clients are you implementing these prices to?

[Fernando A. González:]

Well, as commented, we just announced a price increase of MXN 80, tax included, so that's about 5%. And as commented, it's not a general announcement, it's not all over the country, it's in 13 states in the country, and it represents about 30% of our total volume.

[Operator:]

And the next question is from Adrian Huerta from JPMorgan.

[Adrian E. Huerta:]

My question is regarding the U.S. I was just wondering that despite continuing the weather conditions and the less working days in the quarter, it seems the 2% growth in cement volume is a bit low, given the data you provided on housing, highway and infrastructure. So why do you think that the number was at this level? Was that probably related to the price increases that you did in the -- early in the year? Can you just give more color on that, please?

[Maher Al-Haffar:]

Yes, Adrian. I mean, first, I think it's important to mention that our volume growth is double the national average. Now, of course, our markets are quite positive in their markets that have corrected the most. There was some specific dynamics in some of our markets in the southern region. There was some ownership changes in some of our clients, one client in Texas, that translated to some loss of business. But I would say that, really, when you adjust for working days, weather and that particular dynamic, we're quite pleased with the way that volumes are shaping up and we continue to be pleased by the way the housing market being ahead of our expectations frankly for the year. And in particular, as we mentioned -- as Fernando mentioned, ahead of our -- in the high-growth markets, California, Florida, Texas and Arizona. So we're still in line in our expectations, frankly. And we believe there's just some seasonality and, like I said, some specific issues in 1 market.

[Adrian E. Huerta:]

And then can you just repeat what you mentioned about being positive on ready-mix? Is that in all of the states where you're present?

[Maher Al-Haffar:]

Well the -- I think, the ready-mix business, very importantly, a little bit less than half of the ready-mix business is on a contract basis, right? And so it's very important that while sequentially prices have only improved by 1%, on a year-over-year basis, ready-mix prices are up 6%. And very interesting, contrary to previous cycles, we're seeing, actually, ready-mix kind of leading the tightening of pricing because of the significant shortage of trucks on the roads. I mean, there has been significant underinvestment or shutdown of capacity in that segment in the U.S. And so we're seeing very healthy pricing increases. You're not seeing it yet because we need to see the new orders kind of flow through our order book. So we're actually quite constructive on ready-mix prices during the course of the year. I don't know if that answers the question. And we did, as I mentioned, we did announce pricing increases in all markets except for Texas and mid-south in about $6.50 per cubic meter. And the other thing that I want to mention -- Adrian, the other thing I want to mention which is also very important, as part of the value-before-volume strategy, as we mentioned, we are really focusing on surcharges. And that's also been a very important area of success for us. We are getting those surcharges through and we're implementing them fairly, I hate to use the word religiously, but fairly religiously so.

[Operator:]

And our next question, we'll have a question from the webcast.

[Maher Al-Haffar:]

Okay. The question from the webcast is from Mark Conway from Arrowgrass. And the question is

[Fernando A. González:]

Okay. Well, as we have been explaining, what we did is to get the permit from our shareholders just in case it is advisable to -- for us to proceed with any transaction. Under Mexican law, that permit was needed, it doesn't mean we are doing the transaction with our convertibles. It is just that we have – right now, we do have all the permits needed just in case we do think that because of the [indiscernible] favorable market conditions it is advisable to do a transaction, but we have -- currently, we have no plans.

[Operator:]

The next question is from Mike Betts from Jefferies.

[Michael Betts:]

I had 3 quick questions, if I could. The first one was just a follow-up on Adrian's, about the 2% volume growth in the U.S. We've, obviously, seen industry data for January and February, and it was tracking a lot higher than that. Was there a big slowdown in U.S. volumes in March is my first question, please? My second question is when I add the country EBITDAs up, I get a residual, which at the moment is -- for this quarter was about minus 30. It was running at about minus 50 for each of the 4 quarters, or a bit more in 2012. Was there anything of a one-off nature in that other line item? And then, just finally, Northern Europe, I mean, if you strip out the pension gain, it was pretty flat, and yet even if you take out weather and other distortions, volumes were off mid- to high-single digits, and prices sequentially were only up 1% or 2%. Was there a very good cost performance in Europe? Was there something special going on in Northern Europe?

[Maher Al-Haffar:]

How you want to start?

[Fernando A. González:]

We'll go ahead with number one and…

[Maher Al-Haffar:]

Yes, Mike. The -- no, there hasn't been a slowdown. I think, again, the performance has been, frankly, all over the place in the U.S. And like I said, very importantly, on a year-over-year basis, our markets were quite a bit outperforming what the expectations are. And there are some markets we had better performance than others, but at the end of the day, I think that the 2% is definitely, when you adjust, again, for less working days and seasonality and we still fairly -- we're still fairly comfortable about the full year guidance that we have outstanding. This is in the case of cement.

[Fernando A. González:]

In the case of North Europe EBITDA, I think the EBITDA is almost flat as -- to some extent because of price increases, margin improvements. There is also some mix effect because some of the countries with the higher prices didn't -- volumes on countries with higher prices didn't adjust as much as others countries with oil prices but I think it's mainly additional contribution in North Europe.

[Michael Betts:]

The fair pricing?

[Fernando A. González:]

The question on the EBITDA. Yes, pricing. The question on U.S. EBITDA, I didn't...

[Maher Al-Haffar:]

No. I think you had a question regarding, Mike, on the others and intercompany, right? Others and eliminations of accounts.

[Michael Betts:]

That's correct. Yes. It was running at, like, minus 50 or minus 60 for -- in 2012 and yet, it was only minus 30 in Q1 this year.

[Maher Al-Haffar:]

Right. Well, it's -- I mean, it's primarily, I would say, a reflection -- I mean, there are many items in that account, obviously, that is -- that are at play. Head office cost allocations are getting better. But probably the most important is the historic amortizations of sales of CO2 credits historically. And so we've had a significant diminishing of those amortizations coming through. We're -- I would say that, going forward, our -- that line -- although, as you know from prior years, very difficult to project, should be stabilizing at quarterly levels that are in line with what we're seeing in the first quarter, maybe a little bit higher. But generally speaking, that's where it should be. Now it's also very important that the amortization of CO2 credits are really -- are regional. And then they're essentially taken out through this particular account, right? So there's no -- there's absolutely no impact to the consolidated EBITDA number at the end of the day.

[Michael Betts:]

Okay. Then just one very quick question to finish with. Egypt volume is minus 3%, I've heard a lot more negative numbers from other companies. Were you not impacted by any problems in terms of political? I think you're in a different fuel, aren't you? By way -- no production problems in Egypt in Q1?

[Fernando A. González:]

Well, no. I think, to some extent, as you are suggesting, our volumes to some extent were benefit by the situation. As you may know, there has been issues or shortages of energy in the country, most of them or all of them affecting cement plants, which produce cement out of gas, natural gas. In our case and because of the location of our plant, we are using heavy fuel, what they call maxsuit [ph] which has not had any, let's say, shortages so far. So our production has been stable. Other production on other facilities in the country seems like they have not been stable as ours, and we have been benefiting from that situation.

[Maher Al-Haffar:]

Maybe I could add -- maybe I could just add to what Fernando was saying. I think it's important just to highlight that most of our sales are bags. And interestingly enough, talking to our guys in Egypt a couple of days ago, they were telling me that despite -- the chaos is actually causing some folks to take advantage of the situation to build the outside code. And so demand has been -- actually, in our market, has been pretty positive and we're sold out in that facility.

[Operator:]

And the next question is from Gordon Lee from BTG.

[Gordon Lee:]

Just 2 quick questions. The first on Mexico, which is -- obviously, I guess, you must be monitoring closely what's happening to the polyurethane [ph] homebuilders and specifically the balance sheet deterioration seen in the very recent past. And so my question related to that is when you have your target of 2% growth in Mexico for the year, what are your assumptions for growth in the formal housing sector? And related to that, what, if any, sort of steps have you taken to make sure you're not stuck with bad receivables from these customers? Because clearly, they're having very serious liquidity constraints. And the second point, just if you could remind us on the strategic CapEx, what the breakdown of that CapEx is for the different projects?

[Fernando A. González:]

Okay. On your first question, Gordon, on Mexico, we believe that for the year, the formal residential is going to grow at about 1%. The formal residential sector, currently, accounts for about 1/4 of the total market. And again, we believe that the performance through the year will be around 1%. There are issues in that sector, it's been public. The largest construction companies in the sector are going through some issues. Now those companies, let's say, grouping the largest companies in the formal housing sector, they account for no more than 1% of total demand. So they are very relevant. But it's not as bad as, let's say, some people can think. On our exposure, as you can imagine, we do monitor that situation very closely. And so far, we have not had major issues with our receivables. We are in permanent contact with our customers and we are business as usual. We've been dealing with the situation properly. So no major negative consequences for us so far.

[Gordon Lee:]

Great. And would you be able to provide a breakdown of the $175 million strategic CapEx, how that is being directed to the different projects?

[Fernando A. González:]

Well, I think, one of the main strategic projects is the grinding mill in the Philippines, the grinding mill in Colombia. We do have, to some extent, a portion for -- in order to continue with our alternative fuel program, as you heard initially during the call. We continue doing progress in this very relevant initiative for us, getting closer to 30% substitution. So we continue investing in this front. That accounts for most of the strategic CapEx. Now, by the way, strategic is for, in some cases, expansion and in some cases, profitability gains, not just expansion projects.

[Operator:]

And the next question is from Yuri Serov from Morgan Stanley.

[Yuri Serov:]

This is Yuri Serov calling from Morgan Stanley in Europe. Could we please just talk a bit more about your pricing in Europe? You -- as far as I can read, you're reporting a 6% sequential increase in cement prices across Northern Europe. Could you give us more details please as to in which markets is this? How are you managing to do it, given that you are seeing volume falls in the markets here in Europe? And how sustainable is this?

[Fernando A. González:]

Okay. Well, to provide some color in North Europe, in the case of cement, for instance, we are increasing prices in Norway by 7%. By the way, in Norway, we sell 50% of what Poland sells in volumes. In Poland, we are increasing 2%. In Germany, we are increasing 1%, and that's for cement. In the case of ready-mix, we are increasing in Poland 6%; in Austria, 5%; Germany and France, about 2%. And that's for main countries in ready-mix. And in aggregates, we are increasing, in Austria, about 5%; in France, 2%; and in other countries like the U.K. is a negative figure by 1%. So that's about on a per-country basis. But as I also commented previously, because of the question of how can we offset the close to $70 million effect of the pension fund in the U.K. is because there is also a mix effect, because, in general terms, the -- our volumes in the U.K., in the 3 sectors, dropped less than others. And the U.K., having one of the highest prices in North Europe, is affected because of this volume mix. So that's about the, let's say, the information on prices for North Europe.

[Yuri Serov:]

Okay. So if you exclude that mix effect, you may have said this already but I probably missed it, what's the increase across the countries if you just literally go average across all of them sequentially?

[Fernando A. González:]

I don't have that information.

[Maher Al-Haffar:]

We have to get back. I mean I don't think we calculated them. We have to get back to you on that.

[Yuri Serov:]

But I mean you're saying 2% Poland, 1% Germany. How much is it in the U.K.? How much are you increasing prices there?

[Fernando A. González:]

Where?

[Yuri Serov:]

In the U.K., in cement.

[Fernando A. González:]

That -- your question is, let's say, eliminating the mix effect, what is the price increase per sector?

[Yuri Serov:]

Sorry. I've thrown too many questions here. The -- let's say, the first question, you -- when you were going through countries, you didn't mention the U.K. by -- can you tell us by how much you're increasing prices in the U.K. sequentially?

[Fernando A. González:]

The prices in the U.K., it's 2% down in the first quarter compared to fourth quarter 2012. So it's a reduction. I think I mentioned it in...

[Yuri Serov:]

And then what about sequentially?

[Fernando A. González:]

This is sequentially. This is first quarter '13 compared to fourth quarter '12.

[Yuri Serov:]

Oh, fourth quarter, sorry. I thought that you said first quarter. Okay.

[Fernando A. González:]

Sorry.

[Yuri Serov:]

I understand. So much of the 6% improvement there is because of the mix effect, I'm concluding.

[Fernando A. González:]

Yes. There is an impact of this mix effect. Yes.

[Operator:]

And the next question is from Fernando Ramos from GBM.

[Fernando Ramos Amtmann:]

I -- by what you've said, I read through that most of the decline seen in Mexico was really an effect of a lower government spending, more so than the tight environment of the formal housing sector, and I wanted to ask you if this assessment is correct. And second -- and my second question is if you could talk to us a little bit about what kind of pricing environment you are seeing in Egypt and what has been the reaction of the industry as a result of the relation midstream [ph] in the Egyptian pound.

[Fernando A. González:]

Okay. I will take the first one. Just giving some additional color to the impact, the negative impact in the first quarter on volumes, cement volumes in Mexico. The main reason of this adjustment, again, eliminating the working days effect and everything, is infrastructure spending. The new government has hardly exercised the budget, and that's why there is a decline during the first quarter in infrastructure. Infrastructure, the weight of infrastructure in total demand is similar to the formal residential sector, it's about 25%. And the drop in this sector is twice what the decline was in formal residential. So I think you were suggesting that -- or you were asking for clarification if infrastructure drop is -- accounts for more, or is much more relevant than formal residential, and the answer is yes. And the answer is also that we think it is quite normal. We have checked that up for previous administration -- federal administration changes, and it is normal. And it is expected that this will come little by little during the rest of the year. Related to the government expenditure, it will come, projects are there, they've been announced, so it will come during the second half of the year.

[Maher Al-Haffar:]

If I could just add a little bit to what Fernando is saying, we're also fairly pleasantly surprised by the reaction that the government has taken in terms of the formal residential sector. They have been quite forthcoming in terms of making financing available. I don't know if you saw, but just last night, I think towards the end of the day, Infonavit announced that they -- a more generous risk financing scheme for vertical housing. I think that there's -- we expect the subsidies for home purchases, which have been reduced by the new administration, to start flowing, and that will have a positive impact on mortgage origination. So we're -- I mean, given the fact that they've been in office for such a short period of time, I think they have made a lot of indications that they're supporting both infrastructure and the formal residential sector. So we're optimistic about it. Now on the question of Egypt pricing. I think Fernando mentioned in the discussion, I think the whole market is reacting to the reduction in government subsidies for energy. And that is likely to continue. I mean given what's happening over there, there's -- we certainly do not expect those -- the reduction in subsidies to abate. So there's going to be a fair amount of pressure, frankly, to compensate for those increases. And while there is new capacity in the background, that new capacity has not been able to come in because of the energy situation as well. And so pricing has been tight and it's reflecting that situation. And the whole market has reacted. And as you saw, our prices were up about 7% in the first quarter, in local currency terms.

[Fernando A. González:]

As you may know, the International Monetary Fund in Egypt are trying to put in place a facility of close to $5 billion. And part of the agreement is related, or is conditioned to eliminating energy subsidies in the country, which account for about 20% of government expenditure. And so as long as these subsidies in energy are reduced or eliminated, that will be an increase in our cost structure. Energy is one of the most relevant costs in our cost structure, and it will be an incentive for us to, again, adjust because of inflation. So most of the increase, most probably, will come depending on the -- on how the energy subsidies evolve in the country.

[Operator:]

We have time for one last question, and it will come from Josephine Shea from Hartford Investors.

[Josephine Shea:]

I still want to come back to Mexico. Have -- since the housing -- residential housing is still 25%, could you perhaps highlight whether there has been, on a monthly basis, a slowdown more towards the end of the quarter? We've seen that there is a considerable slowdown in construction, and I was just wondering what your assumptions, going forward, are? I understand infrastructure should come back, but in your guidance assumptions of 2% volume, do you foresee a growth, again, in residential as well? Or are you keeping it at, let's say, March levels?

[Maher Al-Haffar:]

Yes. I think that what we saw in general, both in infrastructure and formal residential, both of which are very much related to the transition process for the government. And I'd just like to, again, reiterate what Fernando was saying earlier. I mean, we not only have a -- we have a change in administration and a change in party. So the dynamics of that transition are very deeply felt. If you take a look at prior succanyos [ph] we have seen drops in spending from the public sector in the first quarter, anywhere between 70% to 80%. If we take a look at particularly, for instance, one area, transportation for instance, that ministry has hardly spent any of its budget in the beginning of the -- in the first -- during the first quarter. And then you had all of the issues that were taking place in the formal housing area, and in particular, in some of the top builders and also the delays in the subsidies. I mean, what happened -- I don't know if you're aware, but last year -- or in the previous administration, there were subsidies that were close to about MXN 70,000, MXN 75,000 per house. That subsidy has been reduced to about MXN 50,000, and there has been a delay in the approval process. Now typically -- that's just to give you an idea, that's roughly 20% of the price -- the acquisition price of a house. And so if you're not -- if you're a buyer, if you're getting that subsidy and it's not getting approved and you think it's going to get approved 1 month or 2 later, and based on that, then you go get your mortgage, you're clearly not going to go and make the buy decision. Now we certainly do not expect these delays to persist for the rest of the year. So we are quite constructive about that changing during the course of the year, and we do expect the formal housing sector to certainly pick up in the 3 -- in the following 3 quarters of the year, as we do in the case of infrastructure as well. I don't know if that answers your question.

[Josephine Shea:]

Well, you have to appreciate that, of course, when we look at the top 4 home builders, it's an industry-wide phenomenon that because of financial difficulties, they are not able to finish their homes. So we're just wondering whether you can give a little bit more color, I mean, I appreciate absolutely that the top 4 are only 1% of total demand. But a little bit more color would help understanding the dynamics between the formal housing sector and yourself.

[Maher Al-Haffar:]

Yes. I mean it's also important -- first, I think a lot of people sometimes think of the listed companies and they forget that we have about 1,600 home builders in Mexico. And so the dynamics that you may be seeing for the top-listed guys may be quite different from the rest. And also, it's very important to mention that about 30% of the formal construction side is not low income, and it's not dependent on government spending. Some of that -- this is in terms of cement volume, okay? When I talk about 30%, it's cement volume. And if you take a look at the differences in credit dynamics, if you take a look at what's happening to credits that are being extended by the government, those have dropped much -- at a much higher rate than what we have seen from the private sector. The private sector decline has been close to about 1%, 1.5%. And so we're seeing growth there. And typically, those mortgages are substantially higher than those mortgages that are given. In fact, if I remember from my memory, it's close to 2.5x to 3x as much in actual absolute amount. So that's why we're constructive. I mean...

[Operator:]

I will now turn the call over to Fernando González for closing remarks.

[Fernando A. González:]

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

[Operator:]

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