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Edited Transcript of CEMEXCPO.MX earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 Cemex SAB de CV Earnings Call

SAN PEDRO GARZA GAR Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cemex SAB de CV earnings conference call or presentation Thursday, July 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Ángel González Olivieri

CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director

* Maher Al-Haffar

CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing

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Conference Call Participants

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* Adrian E. Huerta

JP Morgan Chase & Co, Research Division - Senior Analyst

* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Cecilia Jimenez

Santander Investment Securities Inc., Research Division - Head of Cement and Construction

* Daniel McGoey

Citigroup Inc, Research Division - MD and Head of Research of Brazil

* Daniel Sasson

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Eduardo Altamirano

HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate

* Yassine Touahri

On Field Investment Research LLP - Founding Partner

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Presentation

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Operator [1]

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Good morning. Welcome to the CEMEX Second Quarter 2019 Conference Call and Webcast. My name is Richard, and I'll be your operator for today. (Operator Instructions). Our host for today are: Fernando Gonzalez, Chief Executive Officer; and Maher Al-Haffar, Executive Vice President of Investor Relations, Communications and Public Affairs. And now I will turn the conference over to your host, Fernando Gonzalez. Please proceed.

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [2]

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Thank you. Good day to everyone, and thank you for joining us for our Second Quarter 2019 Conference Call and Webcast. We will be happy to take your questions after our initial remarks.

The second quarter proved to be one of our most difficult quarters in several years due to the challenging global economic environment. Weaker-than-expected industrial activity and continued trade conflicts have resulted in lower investment in several of our markets. Mexico, in particular, has been affected by these factors, which, together with the post-electoral transition process led to lower-than-expected volumes. Adverse weather in the U.S. also translated into muted activity during the quarter. In contrast, our Europe region performed well. Despite lower quarterly volumes due to weather, favorable pricing dynamics translated into EBITDA growth and EBITDA margin expansion.

We continued to focus on our pricing strategy and cost reduction initiatives under our stronger CEMEX program to mitigate the lower-than-expected volumes. During the quarter, prices improved in all our regions. On the volume side, we saw the clients in our consolidated cement, ready-mix and aggregate volumes, reflecting lower volumes in most of our markets with the exception of ready-mix and aggregates in the U.S. Our EBITDA during the first 6 months of the year declined by 10%, with a 1.5 percentage point drop in our EBITDA margin, out of which 0.9 percentage points were due to the decline in volumes and 0.3 percentage points to product mix. While our consolidated price improvements and cost reduction initiatives covered our input cost inflation, they were not enough to offset the decline in volumes.

We anticipate our EBITDA generation to improve during the second half of the year, driven by expected increased government spending in Mexico, higher pricing levels in the U.S. and Europe, moderation in energy headwinds as well as a higher contribution from stronger CEMEX savings. Our free cash flow after maintenance CapEx reached $217 million during the quarter. Average working capital days were minus 10 days, a 3-day reduction from last year's level. We expect most of the year-to-date investment in working capital to be reversed during the second half of the year to reach our guidance of an investment in the $50 million to $100 million range for the full year.

Our stronger CEMEX initiatives continue to be on track. On asset sales, we received the proceeds from the asset divestments in Germany and France during the quarter. We expect to receive about $180 million from the divestment of most of our white cement business during the second half of the year.

We are pleased with the asset sale activity in the building material sectors at attractive multiples from both industry and financial buyers. As we commented last quarter, we have ongoing negotiations for additional divestments totaling more than $1.5 billion, and we believe we will achieve a high percentage of these divestments in upcoming quarters to reach our target. Regarding our cost reduction efforts during the first half of the year, we achieved $75 million in savings from different initiatives, including operating expenses, low cost sourcing, energy, operations and supply chain. We expect these savings to accelerate during the rest of the year.

Total debt plus perpetuals declined by $182 million (sic) [$185 million] during the quarter. Proceeds from divestments and free cash flow generation in upcoming quarters are expected to be mainly used for debt reduction. We continue to be committed to meet our debt reduction target and to an investment-grade capital structure by the end of 2020. And lastly, on dividends, we paid half of the improved $150 million cash dividend during June. The other half will be paid in December.

Now I would like to discuss the most important developments in our markets. In Mexico, the first half of the year proved challenging and was characterized by worse than expected volume performance for our products. The post-election transaction process has translated into a below-trend spending of funds under the federal budget, along with delays in the implementation of the new housing programs. In addition, investment from the private sector has been muted. Our daily cement volumes declined by 15% during the quarter. However, on a sequential basis, daily cement volumes increased by 7%, driven by a double-digit improvement in bag cement with a slight recovery in our market position.

In this fragile environment, we are focused on input cost inflation recovery, which has been difficult to achieve. Despite a slight sequential price erosion, our cement prices as of June are 2% higher than December levels. Our operating EBITDA margin reached 32.5% during the quarter, 4.5 percentage points lower on a year-over-year basis. About 1.8 percentage points of the decline was due to lower volumes. The rest reflects higher raw materials in our ready-mix business, higher transportation costs as well as product mix effect.

During the second quarter, we still use high-cost pet coke inventories. We expect energy headwinds to reverse during the second half of the year. The industrial and commercial sector was the primary driver of cement consumption during the quarter, stimulated by tourism-related investment as well as by commercial activity. In the residential sector, the delays in permitting in Mexico City continue during the quarter. In addition, formal residential activity was affected by the slower-than-anticipated start of new government programs.

Low-income housing has been particularly affected by the elimination of CONAVI subsidies. While mortgages for new homes provided by the banking sector grew by about 30% year-to-date, May, mortgages from government entities declined by 10% in this period. The self-construction sector also experienced a decline during the second quarter primarily due to lower demand for bag cement related to government social housing programs as well as moderation in the growth rate of employment, currently at 2.4% year-to-date, June and remittances, which grew 6% year-to-date, May.

Infrastructure activity has been affected by a slow start in the execution of this year's budget. While investment in communications and transportation is significantly down during the first 5 months of the year, we saw a 37% year-over-year increase in spending during the month of May. The government has indicated its intention to spend the full budget during the year. Some projects have been announced recently and are expected to be executed in the next few months. Others, like the Pilares dam in the state of Sonora, are already under construction. To further bolster our EBITDA generation in Mexico, we have intensified our focus on operating efficiency initiatives. We are further optimizing our production logistics. With the decline in demand, we are producing more volumes in our more efficient operations, while at the same time, we aim to improve our logistics network. We continue to increase our alternative fuel utilization, which reached 28% substitution during the first half of the year. We expect to ship a 30% utilization for the full year 2019, an increase of close to 5 percentage points versus last year.

We are taking advantage of a new pet coke mill at our Tepeaca plant, which will bring cost down in this operation. We have also taken actions to optimize our ready-mix network by shooting down temporarily or permanently close to 10% of our plants. These cost reduction initiatives, together with our pricing strategy materially mitigated the impact of the higher-than-expected volume decline we experienced during the first half of the year.

In summary, while we have seen a drop in construction activity on a year-over-year basis. We are encouraged by the favorable sequential performance year-to-date in several indicators of demand for our products.

Both private and public mortgage lending grew at a compound monthly rate in the teens from January to May. Remittances during the first 5 months of the year are up 6% and are currently at historic high levels. Investment in communications and transportation has also accelerated. As of May, 76% of the year-to-date budget had been spent versus only 7% as of February. This should translate into a better performance in the second half of the year and beyond. In light of all this, we now anticipate our cement and ready-mix volumes to decline in the 12% to 15% range for 2019. In our U.S. business, we are pleased with the traction of our April price increases, which were implemented in markets representing about 80% of our footprint. Quarterly, cement prices were up 4% year-over-year and 3% sequentially. Our cement volumes for the quarter declined by 3% year-over-year, while ready-mix and aggregate volumes rose 3% and 9%, respectively. We continue to experience poor weather conditions. States representing approximately 63% of our cement volumes saw a 94% increase in precipitation year-over-year. The principal demand drivers in the quarter were the Infrastructure & Industrial and commercial sectors. The infrastructure sector, which accounts for approximately half of our volumes continued to show significant strength. Infrastructure spending is up 7% year-to-date May, while street and highway spending, the more cement incentive segment within the infrastructure is up 18%. This growth is fueled by a pickup in state transportation revenue initiatives over the last few years. Several of our key states have been the most active in identifying new transportation funding. Contract awards for the trailing 12 months as of May, in our 4 key states are up 6% compared with a 2% increase at the national level. This growth is occurring off a high base in 2018 when contract awards increased 24% for our 4 key states. We expect infrastructure to be the primary driver of growth in 2019.

While housing starts have been flat in the second quarter year-over-year, we have seen some sequential improvement from first quarter as affordability has improved. Additionally, weather, labor shortages and rising material costs have contributed in large part of deceleration in the first half of the year. The recent decline in interest rates as well as lower appreciation of home prices should bring renewed momentum to this sector. Supporting this view, mortgage applications for purchase of new homes are 14% up from December 2018 to June 2019.

In the industrial and commercial sector, construction spending is up 3% year-to-date May. Growth in office, lodging and manufacturing segments are more than compensating for a slowdown in commercial. Due to loss volumes related to weather during the first half of the year, we now expect our cement volumes to be from flat to growing 2% for the year. This is more a reflection of capacity constraints and supply chain in our business rather than underlying demand conditions, which remains solid. Despite higher prices, EBITDA and EBITDA margin during the quarter were impacted by rising cost in freight, timing of plant's maintenance and inventory drawdown. EBITDA generation during the second half of the year is expected to be better as a result of anticipated improvement in volumes and prices as well as lower energy and maintenance costs. This will be further bolstered by roughly 2/3 of the stronger CEMEX savings being realized in the second half.

In our South, Central America and the Caribbean region, our regional cement prices during the quarter increased by 3% on a year-over-year basis and by 1% sequentially. Our cement ready-mix and aggregates volumes declined by 4%, 5% and 11%, respectively. However, we are very pleased with Colombia's double-digit growth in cement volumes. This is the third consecutive quarter of volume improvement in the country.

Operating EBITDA for the quarter declined by 14% on a like-to-like basis substantially because of lower contribution from Colombia, Panama, Costa Rica and Guatemala, with a margin decline of 2.4 percentage points. The decline in margin reflects lower regional volumes, higher purchase clinker and cement, reflecting high-capacity utilization in several of our markets, increased energy and freight cost as well as higher maintenance cost during the quarter. I will give a general overview of the region. And for additional information, you can also see CLH's quarterly results, which were also made available today.

In Colombia, the positive trend in consumption for our products continued during the quarter with our daily cement and ready-mix volumes increasing by 13% and 5%, respectively. Cement prices in local currency terms were up 6% from December to June, reflecting the successful price increases in bag cement implemented in January and May of this year. Additionally, last week, we implemented a 3.5% price increase in bulk cement in some parts of our footprint. Infrastructure continued its favorable performance during the quarter with industry volumes to this sector expected to grow in the mid- to high single digits for 2019. Activity in this sector should be reinforced by a higher budget for transportation as well as an increase in the budget of royalties from restructuring activities, part of which is used for transportation projects. In the residential sector, improved demand from the informal and housing -- and social housing segments was offset by a decline in the higher income segments. We expect informal and social housing activity to continue to be strong during the rest of the year and translate into a low single-digit increase in industry volumes to the residential sector during 2019. We expect national cement consumption for this year to increase up to 3% considering our volume performance for this first half of the year, we expect our cement volumes to increase from 4% to 6% during 2019.

In Panama, our daily cement volumes declined by 3% during the quarter, affected by continued high levels of inventory in apartments and offices, project delays in infrastructure as well as increased participation of imported cement. The infrastructure sector is expected to drive cement demand during the year. We expect our volumes to decline from 6% to 8% for the full year.

In Europe, we are very pleased with the year-to-date 4% growth in sales, driven by favorable volume and pricing dynamics. Operating EBITDA increased by 29% and EBITDA margin expanded by 2.4 percentage points as a result of our stronger CEMEX initiatives, which include the restructuring of the region into a function-based organization as well as favorable operating leverage. Regional cement volumes decreased by 9% during the quarter, while ready-mix and aggregate volumes declined by 4% and 1%, respectively. However, for the first half of the year, but regional volumes for Cement were stable, while regional ready-mix and aggregate volumes grew 2% and 5%, respectively.

Our quarterly performance mainly reflects fewer working days to -- due to timing of holidays, adverse weather conditions in Poland, Germany and the U.K. As well as demand brought forward to the first quarter, given the unusually mild winter. Good pricing dynamics in cement continue during the quarter. Regional cement prices increased by 6% year-over-year and by 1% sequentially, reflecting the successful implementation of the April price increases in Germany, Poland, the Czech Republic and Croatia. Regional ready-mix and aggregate prices increased by 5% and 3%, respectively, on a year-over-year basis. The infrastructure sector continued to be the main driver of demand during the second quarter. We expect EU funded infrastructure activity in Poland to regain its pace in the second half of the year after being affected by adverse weather this quarter. In addition, our volumes to the infrastructure sector in the region should continue to be driven by Germany's Federal Transport Infrastructure plan and the Grand Paris project in France, among others. We continue to see favorable activity in the residential sector, especially in Spain, where housing has benefited from favorable credit conditions and improved income as evidenced by the double-digit growth in permits.

In Germany, we expect this sector to grow as a consequence of sustained demand driven by low unemployment and low interest rates. Cement demand to the industrial and commercial sector should continue to grow in most countries in the region. The decline in second quarter volumes was mainly weather-related. And as such, we expect demand to continue to grow during the second half of the year. We have adjusted our guidance for volumes for our 3-core products in Europe and now expect them to grow between 2% and 4% during 2019.

We expect higher contribution from our stronger CEMEX initiatives in the region during the second half of the year, which should translate into an increase in regional EBITDA margin of at least 2 percentage points for the year.

In our Asia, Middle East and Africa region, we had higher regional prices for our 3-core products, both during the quarter and the first half of the year on a year-over-year basis.

Our domestic gray cement and ready-mix volumes decreased 14% and 3%, respectively, during the quarter. These declines were mainly driven by lower contributions from Egypt. The decline in operating EBITDA reflects lower contribution from our operations in Egypt, Israel and the United Arab Emirates. In the Philippines, our daily domestic gray cement volumes increased by 3% during the quarter. We saw a slowdown in construction in this period due to the delay in approval of the national budget and restrictions on building activities surrounding the mid-term elections held in May. Our cement prices in local currency terms increased by 5% compared with the same period last year. Sequentially, our prices show a 1% increase, mainly due to changes in regional and product mix.

Growth from the industrial and commercial sector was the main driver of demand during the quarter with continued activity from business process outsourcing firms and offshore gaming operations. The residential sector was stable during the quarter and is expected to continue growing during the rest of the year, supported by the sustained rise in remittances, up 4% year-to-date May, as well as lower interest rates and demand from FRANWORKS. The slowdown in infrastructure activity is expected to revert in the second half of the year, as the government has announced actions to accelerate the execution of projects related to the build, build, build program, which include the implementation of 24/7 construction schedules and accelerating administrative authorization processes to compensate for the delay in the approval of the budget.

For 2019, we now expect our cement volumes in the Philippines to grow between 3% and 5%. For additional information on our Philippines operations, please see CHP's quarterly results, which will be available late tonight, Friday morning in Asia.

In Egypt, our cement volumes decreased by 28% during the second quarter as the market continues to be affected by difficult supply-demand conditions and other client in cement consumption. Our performance also reflects a high base of comparison in the same quarter of last year, which benefited from a temporary increase in volumes to lower Egypt due to the temporary limited supply of 2 cement plants in the Sinai region as well as continued government actions to stop the construction of buildings that do not meet certain administrative requirements. During the quarter, cement prices in local currency terms remained flat year-over-year.

In Israel, our ready-mix and aggregate volumes during the quarter increased by 3% and 1%, respectively. The industrial and commercial sector was the main driver of demand for this quarter and the first half of the year. For the rest of the year, we expect the solid economic growth and high levels of employment to continue supporting our volume growth.

In summary, in order to extract more value from our operations, we continue our intense focus on pricing strategies, always keeping in sight our market share positions in our different markets. Additionally, given the higher-than-expected declines in volumes in several of our markets, we are doubling our efforts to extract greater operating efficiencies. And now I will turn the call over to Maher to discuss our financials.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [3]

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Thank you, Fernando. Hello, everyone. On a like-to-like basis, our net sales decreased by 3% during the quarter, while operating EBITDA decreased by 14%. More than 2/3 of the EBITDA decline is explained by lower contribution from Mexico. Our quarterly operating EBITDA margin declined by 2.3 percentage points. About half of this drop was due to volumes and the rest to product mix and other items. Favorable pricing and the contribution from stronger CEMEX savings offset the increase in our costs and transportation expenses. We had a negative FX impact on EBITDA of $7 million during the quarter.

Cost of sales as a percentage of net sales increased by 2.1 percentage points during the second quarter, driven mainly by higher purchase cement and clinker, mostly in markets where we are operating at high-capacity utilization as well as higher maintenance costs.

Operating expenses, also as a percentage of net sales, grew by 0.8 percentage points, about half of the decline was due to increased selling and marketing expenses in Mexico. In addition, there were higher distribution and logistics expenses in the U.S. and our South Central and Caribbean region due to weather. Our kiln fuel and electricity bill on a per ton of cement produced basis was 2% lower year-over-year. This is the first quarterly decline since the fourth quarter of 2016. Our energy bill was flat during the first quarter of the year, reflecting a 2% increase in kiln fuels, as during the quarter, we still consumed higher-priced inventories and a 3% decline in electricity. During the rest of the year, we expect fuel cost to decline, but anticipate an increase in electricity costs. We anticipate energy, including kiln fuels and electricity on a per ton of cement produced basis to be from flat to declining 1% during 2019.

Our quarterly free cash flow after maintenance CapEx was $217 million compared with $241 million last year, mainly explained by the lower EBITDA generation during the quarter. The higher year-to-date working capital investment mainly reflects a negative effect in suppliers due to the lower level of operations as well as reduced payment terms extensions. We expect most of the year-to-date investment in working capital to reverse during the rest of the year to reach our guidance. Working capital days reached negative 10 days during the quarter from negative 13 in the same period last year.

Our total debt plus perpetual securities declined by $100 million year-to-date and by $182 million during the second quarter. The quarterly debt variation includes a negative translation effect of $27 million. Under our stronger CEMEX plan, our debt reduction reached $571 million since the end of the second quarter of 2018. On a pro forma basis, reflecting the use of proceeds from the divestment of most of our white cement operations, which is expected to close during the second half of this year, the debt reduction would be $751 million. During April, we redeemed the EUR 550 million, 4.375% senior secured notes due in 2023. We used the proceeds from the asset divestments in Germany and France, plus free cash flow to reduce debt, pay $75 million in dividends and other items. Our leverage ratio reached 4x at the end of the quarter, mainly due to the decline in EBITDA. Currently, we do not have any substantial debt maturities until July 2020, other than our subordinated convertible notes, which mature in March of 2020. And now Fernando will discuss our outlook for this year. Fernando?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [4]

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Thanks, Maher. Given our year-to-date performance, we have lowered our guidance for consolidated volumes and now expect cement volumes to decline from 1% to 2% while our consolidated ready-mix and aggregate volumes for the year should drive from minus 1% to 1% compared with those in 2018. In contrast, we have improved our guidance for cost of energy on a per ton of cement produced basis are now expected to be from flat to declining 1% from last year's level. On working capital, we now expect an investment of $50 million to $100 million during the year. Our guidance for CapEx, cash taxes and cost of debt remains unchanged from the one provided last quarter. As I mentioned at the beginning of the call, we anticipate our EBITDA generation to improve during the second half of the year, driven by expected rejuvenation of Mexico's public sector spending and its broader impact on aggregate demand, better pricing levels in addition to higher cement volumes in the U.S. and Europe, moderation in energy wins as well as a higher contribution from stronger CEMEX savings, and we will continue to be disciplined and responsible with our pricing strategy, always keeping sight of our market position in each market. In addition, we reiterate our commitment to our stronger CEMEX targets and to an investment-grade capital structure by the end of 2020. Thank you for your attention.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [5]

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Before we go into our Q&A session, I would like to mention that in the appendix of our results presentation, we have included regional sales and EBITDA information per quarter for 2018, adjusted for IFRS 16 and discontinued operations. Also, 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 during our -- beyond our control. In addition, unless the context indicates otherwise, all references to pricing initiatives, price increases or decreases refer to our prices and to our products. And now we will be happy to take your questions.

Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question on the line comes from Benjamin Theurer from Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [2]

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Just two quick ones. So first of all, the -- you mentioned various times in some of the regions and also on a consolidated basis, advanced maintenance costs having impacted some of the profitability. Now particularly in the U.S., I mean, obviously, volume was relatively good, considering the situation of weather and so on, pricing was really strong sequentially on a year-over-year basis. Nonetheless, EBITDA was down 12% and margin contraction of about 3.5 percentage points. Can you give a little more detail on how much of that margin contraction was actually associated with the maintenance, you've mentioned in the report, that would be great if we could get some details here? And essentially the same question for the SAC region.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [3]

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Ben. Outages were -- I mean, I guess, maintenance, we call it outages or maintenance, but out of the drop that we saw and the margin decline that we saw of a little bit under 3.5 percentage points. Roughly -- almost 1/3 -- about close to 1 percentage points of that came due to maintenance costs. We have close to 10 days of additional outages year-over-year, and that represented one of our plants in Texas, Balcones and then the Knoxville plant. So that's the one -- that's one variable that was impact. Of course, freight was impacting as well. And of course, for the whole business, raw materials essentially cement going into ready-mix also impacted the margins in the U.S. now, of course, for the second half, we expect things to get better. Because also one of the things that are happening in the U.S. is the stronger CEMEX, almost 1/3 of the stronger CEMEX savings actually only 1/3 occurred in the first half. So we're expecting 2/3 to happen in the second half, we are expecting future -- fewer outages in the second half of the year. And also, we do see energy, in general, kind of abating and should be a source of savings during the second half of the year. And of course, not referring the -- to the volume effect that clearly is implied by our guidance in the back half of the year. And one thing -- and Ben, one thing also that's very important to mention is that close to 90% of the maintenance expenses that are expected for the year happened in the first half of the year. So there is a disproportionate amount of maintenance costs in the first half of the year that exacerbated that EBITDA margin drop. And in South Central America, Caribbean, I mean, obviously, you noticed the FX impact in terms of the pricing, right? I mean, pricing was up in local currency terms, but in dollar terms was down because we had a 12% depreciation so that's very important. Obviously, volumes, negative volumes impacted us. We performed very well on pricing. This is the -- this is kind of the third quarter that we see improving pricing in our Colombian business. But what happened actually in Colombia, is that because of the growth also in the business, there was an issue of shortage in available cement that we're producing. And so that plus weather, I mean, we had, as you know, major landslide in Colombia. And so both of those 2 items translated into higher logistics cost. Then in addition, because of the weather conditions, the supply of electricity that is based on hydro has been disrupted, and there was a switch from hydro to coal. And so price of coal locally, totally contrary to global markets, shot up through the roof. And we've, unfortunately, had to bear the brunt of that. That's something that we don't expect in the back half of the year. So those are the 2 -- I don't know if that commentary on the U.S. and SCAC, particularly Colombia covers your concerns.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [4]

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Yes, totally. And then just a very technical one. Can you pay the second installment of the dividend now that the leverage is above 4x again, how does that work? What's the restriction here from the covenants? Can you remind us quickly on that?

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [5]

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Yes. Ben, I -- there shouldn't be any issue. I mean, there is no issue. It's -- because the covenant setting is -- once the approval is done, it is not an issue.

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Operator [6]

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Our next question online comes from Cecilia Jimenez from Santander.

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [7]

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I have a follow-up on U.S. margins and another one on Mexico. In U.S. margins, would it be fair to say that at least half of the 340 basis points margin decline is related to maintenance, and we shouldn't see that impact in following quarters. Would that be fair to say? And second, in Mexico, you managed to increase prices 2% despite the volume decline. So how likely you see prices sustainable at this level considering the weaker outlook for the second half. And our old industry players behaving in a rational way regarding prices? I know you don't talk about competitors, but in a general basis, do you think everyone is behaving rationally?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [8]

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Thanks Cecilia. Let me start with your question about Mexico. I think what you see, what is -- what we have been doing already for some time in the sense of what is the pricing strategy we are following in Mexico as well as other markets. There has been stability in pricing in Mexico, even though at a market level, volumes have declined between -- estimates between 10% and 11%. As you saw, our volumes are declining, like 3 to 4 percentage points more, which suggest loss in market share. As you know, our strategy goes beyond a quarter, meaning competitive dynamics, takes some time for strategies to be executed. The good news is that prices are stable, slightly growing. The bad news to put it in our way is that in peso terms, cement prices have declined in real terms, meaning, we have not been coping with accumulated inflation in the country. We think, although we don't have yet public info, but with info -- public information up to May and making some internal estimates, we believe that in the dynamics of our pricing strategy, we gained 0.5 percentage point of market share in the second quarter compared to the first quarter, which is still not enough. But considering market situation, we are very pleased with the result. Now as you were commenting or asking for price stability, as you can imagine, in the market, in which volumes are declining, stability in prices could be threatened because of that new market condition. So on our particular strategy, we are, of course, monitoring, following up very closely. Our position in the different markets in Mexico and the country, and we are reacting accordingly. Of course, we -- the objective is to maintain the stability of prices. Hoping that volumes, as we -- as I commented before, we do expect for volumes to start recovering, meaning for the drop of the whole year to be less than the one we saw in the first -- or in the first quarter, second quarter and the whole first half of the year. So that's what we are intending. That's our aim in our strategic prices and its implications in market share. Commenting about competitors is very challenging. As you know, there is no official public info, and there is very few things we can say, we can -- what we can say is that the balance is delicate. We are -- we've been successful so far during the year to maintain price stability, and we will continue with the same study moving forward.

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [9]

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And regarding U.S. margins?

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [10]

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Yes. Cecilia, if I can address that. Again just by way of reminder to everybody margin decline is 3.4 percentage points. And as I mentioned earlier, the direct impact of the outages was probably a percentage point of that. But what's also important is...

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [11]

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Okay. I didn't get that, sorry.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [12]

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Yes. But there are other impacts, right? I mean there are several impacts due to outages. And let me just enumerate the impacts, okay? You have an impact from an increased cost of freight. There is an impact that is coming out of inventory variation and there is a labor impact. Now freight for the quarter, about 1.5 -- 1.5 percentage point was impacting our EBITDA margin. Most of it was because of longer distances traveled due to outages. We also have an inventory variation effect, I mean, part of it from cement because of the outages. And also, lastly, we had an impact because of labor costs. And labor cost contributed to almost 1 percentage point of the 3.4%. So if I had to add all of these things together, it is probably more -- well above half of the 3.4 percentage terms. And frankly, these things in the second half of the year may -- can be a turnaround somewhere between $40 million to $50 million. I mean this is not a guidance, but that's the magnitude of the potential impact. And as I said in my comments earlier that 90% of the maintenance activity took place in the first half of the year. So many of these impacts that were related to the maintenance shutdowns are not going to happen in the second half of the year. I hope that addresses your question, Cecilia?

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Cecilia Jimenez, Santander Investment Securities Inc., Research Division - Head of Cement and Construction [13]

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Yes, it's very clear Maher.

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [14]

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Okay. If I may add some comment over Maher's. He already said that about 90% of our program shutdowns of cement plant for the year have been done during the first half. And on top of the direct maintenance costs related to it, meaning, most of them being concentrated in the first half, there are also other impacts because of the outages that we are not going to have the second half, for instance, when you are shooting down kiln, the consumption of energy is higher so we would not have that effect in the second half. When you are shooting down kiln, you have to support markets moving materials for longer distances, affecting freight cost, we will not have that in the second half. Because of not being producing as much cement as needed because of most of the concentration of shutdowns during the first half, then you have to use your inventories with a negative impact on the cost of it, a temporary one, but it is what it is. So what I'm saying is -- what you can expect in the second half is a sizable increase in margin because of us being able to have a very little maintenance during the second half. And the other reason why we think, and we have already commented, the other reason why we think second half should be much better than first half is because the -- how price increases that were announced in April in 80% of our markets are sticking. So that will be another contribution for our EBITDA and our margins in the U.S. for the second half of the year.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [15]

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Thank you very much, Cecilia. Any other comments. Operator, I think we can go to the next question.

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Operator [16]

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Our next question online comes from Dan McGoey from Citi Group.

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Daniel McGoey, Citigroup Inc, Research Division - MD and Head of Research of Brazil [17]

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I was wondering if you talk a little bit on the U.S. price increases the -- from April. And you managed to get some, but not near all of what was announced. Could you comment a little on the sort of regional success? And how much some of those might have been undermined by adverse weather in the different regions? And then secondly on Mexico, I think, Fred, you mentioned closing down about 10% of the ready-mix plants. So I'm wondering, given the depressed level of demand and volumes in Mexico, if there's other sort of more aggressive strategies to take cost out of the business in Mexico to improve the margins going forward?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [18]

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Yes. I think what we are doing in Mexico, there is a EBITDA rightsizing effort because of the drop of volumes. And we continue doing so depending on how volumes evolve. The -- on top of the rightsizing, Mexico is already contributing in our stronger CEMEX savings plan. And we do expect that contribution to continue for the rest of the year. I don't have any specific additional measure to communicate, let's say, particularly on things like shooting down ready-mix plants because that will depend on how volumes evolve. So hopefully, in the future, we will continue updating how the trading activity is evolving, and what type of measures we're taking to be sure that we adjust to this part of the cycle.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [19]

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Yes. And then, if I can address the -- your question on pricing. I mean, obviously, we would have liked to have better pricing in our market. But just as a reminder, I mean, U.S. cement prices were up 4% in the second quarter and 3% sequentially. We're getting, I would say, good traction of our April pricing increase. We've implemented by now all of our markets. As you recall, Florida had a pricing increase in the beginning of the year. And unfortunately, do competitive situation there, I think the pricing performance was probably not as good as expected. But approximately 80% of our volumes received pricing increases effective April. In markets like Texas, Northern California, prices increased sequentially by close to 5%, maybe a little bit of -- a little bit better than 5%. We're getting better pricing traction, frankly, than in prior years. And that's not just for us, it's -- I would say that we're noticing that pretty much all over our markets. The weather has been a factor in very select markets. I would say that probably, maybe Colorado was one of the markets that they've had tremendous snow, as you know, late in the season, very surprised. And so that may have had some impact there, some pressure on the pricing, but I would say, the general dynamics are pretty good. And while our cement volumes were a little bit, let's say, less than expected. If we take a look at what's happening to our aggregates business. Aggregates volumes are doing exceptionally well in the U.S. as a demonstration of what's happening in the infrastructure side of the business. I mean, our volumes in the quarter, in aggregate, are up 9%, and pricing in the aggregate sector is also very positive. It's in the low single digits increase. That pricing dynamic is mostly a function of product mix, we're selling less valuable aggregates, but that could certainly change depending on our order book. But the outlook for the second half of the year in terms of demand in cement and in aggregates and ready-mix is pretty positive. We have a very good solid order book, and we think we should see continued strength in pricing in the U.S. I don't know if there are any other clarifications that you would like us to go over?

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Daniel McGoey, Citigroup Inc, Research Division - MD and Head of Research of Brazil [20]

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No, that's helpful, Maher. Just on the -- and thank you for the detail on the margins and the impact of the maintenance cost. Just a question, when you talk about the first half maintenance, and you're looking at it year-on-year. So are these -- when you talk about the margin differences, are these non-annual maintenances or these multiyear maintenances to cause that effect, especially when you're looking at on a year-on-year basis?

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [21]

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I mean, it's -- I would say that we -- it's probably fairly normalized. I mean, there's nothing particularly exceptional. But the maintenance cycle is fairly normal. I don't think there's anything particular that is taking place in this year.

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Operator [22]

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Our next question online comes from Adrian Huerta from JP Morgan.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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My question -- two questions. One is, given that the outlook for the year has clearly deteriorated, and there could be further downside risk, especially on lower CapEx investments globally. So considering this, and a much lower free cash flow generation for the year versus the original expectations early in the year. What changes could you implement to achieve your leverage goals? That's my first question. And the second one, and you were talking about that a little bit, just on the prior question, Maher, if you can explain just further this large disparity that we saw on growth on the U.S. Cement volumes versus ready-mix and aggregates. Is it just basically because of the strength of infrastructure versus the other sectors? What else could explain this?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [24]

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Regarding your first question, Adrian, as I commented, we continue committed to our target of gaining back investment grade, and the current estimate is December 2020. So we will continue executing all the variables that we are putting in place like -- as we commented savings in our stronger CEMEX program, divestments. And as you suggest, the deterioration of market conditions in our main markets -- or in Mexico, in particularly, we already commented that in the case of the years, we do expect a rebound in the second half. We will adjust accordingly. We don't have now any specific adjustments or changes to communicate and said that we continue committed and we will adjust on as needed basis depending on our trading activity. We still have almost 1.5 year to think and react and act and execute on different measures that we can think of. But again, for the time being, we continue with our current plan, divesting up to -- the range of divestments is from $1.5 billion to $2 billion. Now, we think, is more on the $2 billion side. And the savings and committing all proceeds to the production. That's as far as I can comment right now.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [25]

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And, Adrian, if I can address the question on the U.S. And just to recap, I mean, to make sure that I understood you, you were just asking the disparate -- about the difference in growth rates in our cement business versus the aggregates and ready-mix, correct?

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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Correct.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [27]

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Yes. So I mean, there is a few things that are driving that during the quarter. I would say that definitely, geographic footprint plays a lot into that. And of course, weather is a big issue plus the actual business mix. So number one, I mean, ready-mix and aggs are more exposed, at least in the second quarter to Florida. And as you may know, we had much better weather during the quarter in both Florida and California. And so that contributed largely also ready-mix in Texas, for instance, Houston is our biggest area for production of ready-mix in Texas, and that market was actually growing high teens during the quarter, which is -- has been very attractive. It's a turnaround situation. And certainly, we have easier comps for aggs when we compare it to last year. And also, there is the natural kind of garden-variety timing of specific projects frankly. When you add all of that together and then having weather impacting what's happening in cement, you get this disparity, but we definitely -- I mean, although we've lowered our guidance for the full year for cement, I mean, clearly, the back half performance is expected to be much better in the U.S. in cement, as you would see from the implied growth.

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Operator [28]

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Our next question online comes from Yassine Touahri from On Filed Investment.

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Yassine Touahri, On Field Investment Research LLP - Founding Partner [29]

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Just a couple of question on my side. First, on your strategy, you visited a couple of countries in Europe. You saw the positions and position in Nordics. Some position in Germany, in France, or white cement plants in Spain. How do you see Europe going forward? Would you consider further disposal? Could you consider exiting completely the region? And then maybe just another question on the U.S. As I understand that you had some extra maintenance costs. Could you quantify this extra maintenance cost in a million of dollar? Or is it too difficult to do -- the extra maintenance cost that you had in the second quarter.

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [30]

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Yassine, regarding your first question, we do have a portfolio consider for divestments. There might be other divestments in Europe as well as in Nordic regions. As you know, we don't disclose it for -- on a very specific manner on potential divestments. But what I'm saying is that, yes, there could be more divestments, but it's not, let's say, they're not specifically because of Europe. It's -- we have to comply and we want to comply with our commitment of divesting up to $2 billion. We are on our way to do it, and there is a variety of assets that we are considering in order to complete our target.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [31]

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Yes. And Yassine, I think we -- I don't know if you've just turned the call, but we talked about the maintenance situation in the U.S. at length without going through it for the sake of everybody else. I did mention that when you add all of the impacts of maintenance, whether it's energy, transportation impact, labor and so forth and so on, because of the outages, we're expecting somewhere between $40 million to $50 million pickup in the second half as a consequence of not having that and as a consequence of having 90% of our maintenance costs occurring in the first half of the year. The other thing that that I think we did not mention is also what's been happening in maintenance in terms of efficiencies. I mean, we have reduced the number of maintenance per -- I mean, number of days per maintenance quite materially. And so that should also translate to better performance in that in the second half of the year. That's specifically to the U.S.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [32]

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And maybe a quick follow-up on the energy cost inflation. So you gave a clear guidance for the year. But so you're expecting some decline in total energy cost. What do you expect for the second part of the year for H2 in terms of fuel costs and electricity costs, as you look at it this way?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [33]

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Glad you made the question, Yassine. I think I don't remember if we commented already. But this quarter, it is the first time in 2.5 years that our energy cost is lower than when compared to the previous year, same quarter previous year. That's why we did correct it slightly our guidance on energy. And what we see is a decline we have seen, and we think it will -- we will continue seeing a decline in the price of pet coke and other primary fuels. So that's -- it seems like this quarter is kind of an inflection point for inflation in fuels -- to a deflation in fuels, which we see very, very convenient. And on the other hand, we did comment at our -- the progress that we are doing in our alternative fuels plan, particularly, in the case of Mexico, which is increasing materially the use of this type of fuels, hoping to complete the year with a 30% substitution of alternative fuels compared to primary fuels. So I think what I'm saying is that on that front, there are good news, and we should continue seeing this trend for the -- for sure, for the second half because of all the inventory effect and everything and most broadly for -- at least for the first half of next year.

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Operator [34]

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Our next question online comes from Vanessa Quiroga from Crédit Suisse.

(Operator Instructions)

Okay. And we're moving on. Our next question. We have time for one more question from Daniel Sasson from Itaú.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [35]

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Actually 2 pretty quick ones. In Mexico, given the lower volume growth expectations for 2019, is there any chance that you could change your estimates in terms of the start of Tepeaca, that if I'm not mistaken was supposed to be operational by mid-2020. Obviously, I'm talking about the expansion. Is there any chance that you could revise that plan? And my second question, on U.S., I mean, industrial-and-commercial sectors are doing well, how much of a drag do you think the residential segment could be -- maybe, if not, in 2019, maybe in 2020. So if you could give us more color on what do you expect for the residential segment, specifically in the U.S., that would be great?

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [36]

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Starting with your question about Tepeaca. No, we are not stopping or freezing the investment in Tepeaca. Tepeaca expansion is already in a point of no return. We are very pleased with the decision we made on having Tepeaca, the same way, we are very pleased with the decision of increasing our capacity, which happened with a very low investment. What might change depending on how the market performs, let's say, once Tepeaca is finished, let's say, how the market performs in the second half of next year. What we will do is that we will be adjusting the way we serve the market. Remember that in the case of the central region for us, we were kind of short of capacity. And we were supporting the market with moving and transporting cement from other plants with some logistics, additional logistics cost. So what might change is the model on how we will serve the market in the central area. Now expansions like Tepeaca and the one in Huichapa, cost of those -- production costs on those plants is 20% to 30% lower than other plants in the area. So again, maybe what we will do, again, not now, it will be next year, during most probably second quarter of next year, we adjust in our models and see what's the optimal way to serve those markets.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [37]

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And Daniel, I'll address your question on -- you're absolutely right. I mean, we're definitely seeing much healthier performance in infra and industrial and commercial. I mean, and we're also seeing contract awards in infrastructure are very strong, and particularly for streets and highways. I mean, year-to-date, May, we've seen about 18% growth in contract awards. And it's very important to mention that a lot of these contracts are very long, are multi-year contracts. So the tails on execution are very strong and important. And that translates to a very predictable backlog in that sector. And as I mentioned earlier, our Aggregates business is probably more indicative of what's happening in infrastructure than anything else at this point in time. We continue to see very healthy spending at the state and local level from our top 4 states. And the same thing with industrial and commercial, it's -- we're seeing very good pickup in spending. The year-to-date spending is -- to May, is up 3%. It's primarily office, lodging, manufacturing, spending. Now on the housing side, you're right. We have seen sluggish performance up to now, but we have to kind of put things into perspective. I mean, if you recall, last year, towards the end of the year, October, November, we had tons of volatility about the outlook for interest rates. It spilled over into all of the capital markets, created a lot of volatility, frankly, in that environment, plus affordability was still not as good as we are seeing it now. So a couple of things are happening, and we have some fairly good indicators that lead us to believe that with more accommodating interest policies in the back half of the year and into 2020, with better affordability, we're clearly seeing much better affordability, both for first-time buyers and in general. And we've seen a deceleration in the cost of houses in many markets. One of the top markets that we have seen a little bit of slow -- of deceleration in pricing is the West Coast, California in particular. And so when you see lower rates -- and then you take a look at mortgage rates. I mean, mortgage rates from a peak late last year to now, they've gone from 10% to almost a little bit over 3%, 3.2% as we speak. That's a 25% drop in -- potentially in rates. So that plus availability of credit. If we take a look at any of the credit indices, so lower interest rates, availability of credit, better affordability. And now it seems like there's a better outlook for rates going down and staying down. We do think that there should be renewed momentum in the housing sector.

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Operator [38]

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We have a question online from Eduardo Altamirano from HSBC.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [39]

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I wanted to just follow up on the rationale between the dividend now in place, considering the slowdown that you've had already seen? And what the view is going forward and using maybe just all the sources of cash internally for deleveraging purposes?

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [40]

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Sorry, Eduardo, we -- I don't know, the line is breaking up. Can you repeat the question? I don't know if you're using a headset or something, maybe it would -- can you repeat the question, please? We didn't hear you very well.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [41]

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Sure, Maher. Apologizes on that. No, the question was, essentially, what the rationale is with keeping currently the cash dividend program, especially in light of the slowdown that we're seeing right now and maybe there could be a little bit more prolonged, especially in Mexico. I understand that the outlook is that the second half will improve. But more than anything, why not use all the sources of cash that the company is generating organically for debt reduction purposes.

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [42]

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Yes, Eduardo. I mean, good question. I mean, as you know, of course, and for the benefit of everybody on the call. I mean, we did not -- we purposely, we did not announce an ongoing program. I mean, we announced a dividend for this year, and we said that we would evaluate things. We obviously have the intent to do so, but clearly, we have to evaluate things. Now in terms of the second half -- the second half of the dividend payment. I mean, we've announced it, we're committed to it. It is going to be paid in December and there's no change of that in our business plan and deleveraging plans incorporate those assumptions.

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Eduardo Altamirano, HSBC, Research Division - Analyst, LatAm Cement and Construction, Real Estate [43]

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Understood. Makes sense. And then -- so with your current, let's say, debt reduction targets, how comfortable are you that you can pretty much achieve this by 2020? Is it still a firm target? Or is this a little bit more directional at this point?

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Maher Al-Haffar, CEMEX, S.A.B. de C.V. - Executive VP of IR, Corporate Communications, Public Affairs & Digital Marketing [44]

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I think we can't -- we really can't say. I mean, it's too early. We still have the second half of the year. And so it's really too early. I mean, we have to evaluate it, and this is something that the board and ultimately, shareholders will have to approve.

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Operator [45]

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And that was our final question. I'd like to turn the call over to Fernando Gonzalez for closing remarks.

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Fernando Ángel González Olivieri, CEMEX, S.A.B. de C.V. - CEO & Non-Independent Director [46]

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

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Operator [47]

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