CEMEX, S.A.B. de C.V. (CX) Q2 2018 Earnings Report, Transcript and Summary

Thank you, Fernando. Hello, everyone. On a like-to-like basis, our net sales increased by 7% during the quarter while operating EBITDA increased by 4% despite energy headwinds during the quarter and unfavorable FX effect of $10 million, excluding $2 million from the effect of dollarized costs in our operations. Our quarterly operating EBITDA margin declined by 0.7 percentage points. The favorable impact of higher volumes and prices was offset mainly by higher cost in energy as well as logistics and raw materials in our ready-mix operations. Cost of sales as a percentage of net sales decreased by 0.1 percentage point during the second quarter, driven mainly by timing differences in maintenance expenses. Operating expenses also as a percentage of net sales increased by 0.3 percentage points, mainly as a result of higher distribution expenses. Energy headwinds continue. Our kiln fuel and electricity bill on a per-ton-of-cement-produced basis increased by 6% during the second quarter. Our quarterly free cash flow after maintenance CapEx was $260 million compared with $353 million last year, mainly explained by an increase in working capital investment, partially due to the high single-digit growth in sales versus a reversal in investment in the second quarter of 2017, partially mitigated by lower financial expenses. During the first six months of the year, working capital days declined to negative 11 days, a new record from negative one day in the same period last year. We expect to fully reverse the $417 million year-to-date investment in working capital during the second half of the year to reach our yearly guidance. We had a gain on financial instruments of $25 million, resulting mainly from derivatives related to GCC shares. Foreign exchange results for the quarter resulted in a gain of $102 million, mainly due to the fluctuation of the Mexican peso versus the US dollar, partially offset by the fluctuation of the euro and Colombian peso versus the US dollar. During the quarter, we had a controlling interest net income of $382 million, a 32% increase compared with $288 million in the same quarter last year, primarily driven by lower financial expenses and FX tailwinds. During the quarter, our total debt plus perpetual securities declined by $462 million. Debt variation during the quarter includes a favorable translation effect of $184 million. Our leverage ratio as of the end of June dropped to 3.96 times, which should enable us to initiate our share buyback program subject to our defined set criteria. We're also including a pro forma debt maturity profile, which reflects the full prepayment made on July 16 of the 4.75% floating rate notes which were to mature in October of 2018. The aggregate principal amount that was repaid was approximately $313 million. With this payment, CEMEX has no significant maturities through March 2020 when $521 million in convertible securities become due. These actions underscore our continuous and proactive efforts to reduce our debt and strengthen our capital structure. Despite recent increases in base interest rates in the U.S., CEMEX's interest expense is expected to decline this year by $125 million from the last year's level. This is a reduction of more than 50% from our peak interest rate level back in 2013. We are encouraged to see our credit profile improving and make steady progress towards our goal of reaching investment grade. Now Fernando will discuss our outlook for this year. Fernando? Fernando Ángel González Olivieri: Our full year estimates for consolidated cement, ready-mix and aggregate volumes remain the same as the ones we provided last April. Moreover, we anticipate our EBITDA generation to be higher during the second half of the year than that in the first half. This increase should be noticeably higher than historical levels due to sales momentum and a low base of comparison in the first half of the year. We now expect our cost of energy on a per-ton-of-cement-produced basis to increase by 6% during the year. The different free cash flow items on which we provide guidance, including financial expenses, working capital, CapEx and cash taxes are also unchanged from the one provided last quarter. And now, I would like to discuss a stronger CEMEX, a strategic and transformational program that will fortify our company's position as a leading company -- as a leading global heavy building materials company and deliver increased shareholder value. CEMEX's Board of Directors and management team have decided to take decisive steps to best position CEMEX to growth and maximize total shareholder return. This is at the heart of the program that we are announcing today. A stronger CEMEX includes first, optimize our portfolio by focusing on the markets with the greatest long-term growth potential, retaining those assets that are best suited to growth and selling by the end of 2020 between $1.5 billion to $2 billion of assets that are not fundamental to our portfolio and better positioned to growth with another owner. These efforts will be complemented by select strategic M&A and investment in inorganic growth opportunities. Second, implement $150 million of cost reductions expected by 2019. After performing a thorough analysis of our operations, we have identified opportunities to further improve our profitability, obtain higher returns and deliver more value for our shareholders. These combined efforts should lead to meaningful improvement to our bottom line or margin expansion of 100 basis points. As we discussed in our last CEMEX Day, we expect to reach EBITDA margin levels of about 20% in the medium term. Third, reduce our total debt by $3.5 billion, a reduction of about a third from current levels by the end of 2020. Upon successful implementation of all these initiatives, we should be able to accelerate our deleveraging and we expect to have metrics consistent with an investment-grade rating. And lastly, implement a cash dividend for shareholders of $150 million starting in 2019. Let me provide some context for why we decided to take these actions now and what else has changed since we presented to you at CEMEX Day. These initiatives are the result of an extensive review of our business at the micro-market level as well as feedback received from our shareholders on how to best position the company for long-term shareholder value creation. As I mentioned earlier on the call, we have seen our fair share of challenges. Macroeconomic and business-specific factors weighted on certain aspects of our operations. Various headwinds persist, including higher-than-expected increases in energy, logistics and labor costs as well as continuous supply/demand tensions. All of these factors together and our recognition that we need to be in a greater control of our performance are driving us to announce a stronger CEMEX today. We remain confident in our long-term outlook in CEMEX ability to growth. But by rebalancing our portfolio, we believe we will create a profile positioned to deliver higher growth over time, which will translate into greater total shareholder return. We plan to take a number of actions starting this year, which are designed to streamline and reposition our portfolio in order to enhance diversification and achieve higher profitable growth. By selling assets not fundamental to our strategy, we will free up more free cash flow to delever faster and reduce our financing costs sooner. This, in return, will accelerate our operating cash flow generation and therefore, enable us to invest in more avenues for greater growth, ultimately delivering more value to shareholders. While we believe that the asset divestment program on its own will accelerate the growth trajectory of our operating cash flow over the medium term, this program will be further complemented by potential organic and/or inorganic investments. By 2020, we aim to divest approximately $1.5 billion to $2 billion in assets which we believe will offer substantial value for potential buyers better positioned to grow them. I want to stress that we will remain disciplined sellers and we'll work to attain the highest possible value for these businesses in line with our past achievements. Our successful track record to facet sales underscores our commitment to this disciplined sales approach. As part of our business improvement program, we have identified $150 million in operational improvements in our regional and corporate operations. We plan to realize these efficiencies through focused operational efforts, including operational performance improvement and SG&A rationalization, which includes improvements in cement plant efficiencies through new operational models and increasing performance based on maintenance cost reductions and third-party services optimization; increased utilization of alternative fuels in several countries, including developing initiatives to increase our sourcing and processing of alternative fuels with emphasis on higher RDF utilization; serving our customers better and at a lower cost; optimizing our production and logistics supply chain models; optimizing our procurement strategy through implementing new sourcing strategies from lower-cost suppliers. And we are beginning to implement all these initiatives today and anticipate the savings to be achieved by the end of 2019. We remain committed to returning to investment grade but now expect to get there sooner. We have made significant progress on this front. From the end of 2013, we have reduced our debt from $17.5 billion to $10.9 billion at the end of the second quarter 2018, a reduction of approximately 38%. As a result of the program announced today, we expect to free up substantially more cash to enable us to further reduce our debt levels, invest in the business and return capital to shareholders. By the end of 2020, we expect to be well within investment-grade metrics by further reducing our debt balance by $3.5 billion or about a third from the level as of the second quarter of 2018. This would bring the total debt reductions since the end of 2013 to more than $10 billion. In addition to reducing our leverage, we intend to return capital to shareholders via cash dividends and share buybacks. We are aligned with our shareholders in recognizing this as top priorities. As a result, we are extremely pleased to announce that beginning in 2019, subject to shareholder approval, CEMEX will begin a cash dividend program starting with an amount of about $150 million during the first year. We intend to continue paying a regular annual dividend target in metrics consistent with our global heavy building materials peer group in the midterm. We also intend to maintain an active share buyback authorization of up to $500 million that will complement our dividend program. As I have discussed, we are taking actions to optimize our portfolio and drive growth through maximizing our margins. Importantly, we also will remain disciplined in how we evaluate inorganic growth opportunities. The criteria that we outlined at CEMEX Day for M&A opportunities remains the same. I want to stress that if and when we do move towards M&A, it would be complementary to what we have announced today and it would be consistent with our plans to accelerate the time line of our deleveraging path to investment grade and towards enhancing to the -- a total return to our shareholders. Let me conclude with a summary of what we have outlined today. We are working to build a stronger CEMEX, and we believe we have identified a quicker path to getting there. All of these actions taken together will position CEMEX to be a stronger global leader and even more formidable competitor in the heavy building materials industry. We are committed to proactively managing the business to drive value for all stakeholders, and we remain confident in both our outlook and CEMEX's ability to growth. Thank you for your attention.

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 your questions. Operator?

[Operator Instructions] Our first question online comes from Benjamin Theurer from Barclays.

So -- well, first of all, thank you very much for the update and, I guess, the good news in terms of the strategic changes, the new asset sale program. Clearly, the dividend and the savings program, they're obviously taken well by the market. Now, I have a question for you. We've been talking in the past a lot about asset sales. And I remember you said, if I remember right, actually, during the last CEMEX Day that asset sales would not be necessary anymore, that you basically sold assets that you deemed to be non-core to a certain degree and that the asset sale program would have been closed. So what's up now for asset sales? Could you give us a little bit of an idea? Is that just fervor in improving operating base in regions where you might as well not have the significance you would like to have? Is it an asset sale program that is somewhat targeting to -- just getting maybe out of some countries, regions? Or is it more of a punctual asset sale within certain countries? So if you could specify a little bit what you're thinking of the asset sales and what -- if you maybe want to mention 1 or 2 what could be a potential asset for sale? And then I have a follow-up question. Fernando Ángel González Olivieri: Sure, Ben. Let me start by saying that if you remember, we started a plan or a program to speed up our deleveraging process in early '15. And in a couple of years, I think we've managed to divest the assets we thought we could have divested in reasonable multiples. We did increase our free cash flow. You remember, we were close to breaking even. And now we are in the range of $1 billion and a fraction. And the program was, I do believe, successfully executed even though there were some headwinds, particularly in 2017, and you know which headwinds I'm referring to, I'm referring particularly to the Philippines, Egypt and Colombia. What is happening is -- and also, the material increases of prices in pet coke and other fuels. So what we realize now is that some of those headwinds do continue. And we don't want to lose momentum on our target of gaining back our investment grade. So we don't want just to wait and see what happens. We are, again, proactively taking actions to be sure that at the fastest speed, we can gain investment grade. Now regarding which assets, I think during the last few months, we have had the chance to -- as I mentioned, to go on a kind of a very detailed analysis, micro market per micro market. This is not analysis of assets at a, let's say, country level. So we do have a number of assets to be divested, either because they are low growth, either because they are not necessarily integrated to other business lines, meaning a sort of a ready-mix standalone businesses. And we have already a good idea on which assets are the ones that we would like to divest. Of course, we cannot disclose for commercial reasons which assets are those. But what I'm saying is it is not a target to be fulfilled with some ideas to be developed in the next few months. It's already -- the job is already done and we are already in a execution mode. I don't have that answer to your question, Ben. You mentioned you have a follow-up question.

Yes. Follow-up, it's obviously of the same program, so -- but $150 million operating efficiencies by 2019, I assume that means the full $150 million run rate by 2019. Is there something we could already somehow back into our assumptions? Would you think you have a more immediate chance to realize those efficiencies, maybe even already some part of it in 2018? Fernando Ángel González Olivieri: I think there are some, but I don't have a figure to share with you. It might be -- we have some very preliminary figures. But what I can tell you, Ben, is that we have same, like in divestments, we have already very specific actions to be taken and we are executing them at the latest during the month of September. Let me share just a couple of them and the dimension of them. One is a very interesting initiative that we have been developing since last year and we call it -- internally, we call it low-cost country sourcing, meaning buying equipment and spare parts and all type of consumables in low-cost countries like China. We did open procurement offices in China. And as we speak, we are reducing the cost of equipment and other spare parts in the average of 30% to 40%. When fully executed, that initiative will reduce expenditures by around $160 million. Not all of them impacting the EBITDA. It's like half-and-half. We expect for next year that, that initiative alone to save like, let's say, around $40 million out of the $150 million. The other very interesting option that I feel like starting to share publicly, although it's still preliminary, is all the benefits that we're getting from our CEMEX Go digital platform. What we are started, already evaluating, because we have the platform fully deployed and with high levels of adoption in Mexico, US, Colombia, we do see the value that is creating for our customers and for ourself. By the way, the value that, we think, is creating to our customers is larger than ours. We're already happy because of that. But the good experiences we have, I think, our cost to serve from -- or not just the cost to serve but from order taking, cost to serve and managing all the administrative commercial tasks are going to be reduced materially, as you can imagine, by moving to a digital platform. I don't have any specific number to share right now, but it's going to be sizable. So those are two examples of things that we are already executing, that we're pretty sure that will be fully deployed by September this year and we will get all the benefits for 2019. There are some others, like we've been working, for instance, in kiln efficiency. In the last few years, we have increased 5 percentage points of kiln efficiency, from 84% to 89% and a fraction. It sounds like -- it might sound like irrelevant, but in CEMEX, 1% of kiln efficiency implies $20 million of EBITDA. So we have increased, but at 5 points, and we think there is still room to improve another 3 to 4 percentage points. And we're already working in that. We have put in place the mechanism that we have used for acquisitions, the PMI process, in order to go back to our operations -- cement operations we're starting in the U.S. and in Europe and try to find more opportunities to increase efficiencies in those plants. So again, just a few examples on how is it that we believe that we can manage to reduce cost by that amount.

Our next question from the line comes from Adrian Huerta from JPMorgan.

Congrats on the announcement. My question is, now you said that you're more in the executing mode on this plan to sell assets, can you tell us how advanced you are on potentially selling an asset soon? And the second one is, how do you -- what's your views on the potential IPO of your US asset, is that a possibility as well? Fernando Ángel González Olivieri: Thank you, Adrian. Again, we have a definition. We know which assets we're trying to divest. As you can imagine, if we want to divest $1.5 billion to $2 billion, we need to think of more than that. So be sure that we will succeed on that specific amount. There might be some divestments already this year. But I cannot assure you. You know how uncertain these processes are, not particularly in negotiations, but in closing and all the legal aspects. But again, frankly, we have already started the process. So certain divestments might happen any time. Regarding the IPO in the US, Adrian. This is an issue that we have analyzed time and time again. We have been, let's say, asked or proposed with the idea. And what we believe is that we -- you have to take into consideration when comparing the US with other IPOs we have done, CLH and the Philippines, the US is a very large business unit on the one hand, on the other hand, the US is where most of CEMEX's upside is located. If we believe that the market will continue growing, which is what we believe in. We do believe that by listing these assets in the same market where CX is listed is going to compete in different ways. It's going to deteriorate the story of CX by taking away part of the upside story. Now on the other hand, I think what we have done instead of the option of an IPO is divesting some of assets in the US. We have divested already close to 1.5 billion. Remember, Odessa, Fairborn, Pacific Northwest, Concrete Pipes in a small block business. So it is not that we are not doing anything with our assets in the US. It is that -- it is just that every time we analyze the option, our preference has been, of course, the one that we have executed. So let's see how it goes moving forward. But for the time being, that has not been necessarily our preference.

Our next question on the line comes from Francisco Suarez from Scotiabank.

Thanks and congrats for taking this bold initiative rolling, guys. Fernando Ángel González Olivieri: Thank you.

The question that I have is to what extent this is similar to what CRH has done and if you can guide us on what might be different from what CRH has done? And secondly, is, your portfolio repositioning might affect CEMEX System Holdings as well? And if you think that we might see dividends as well in CEMEX System Holdings in 2019? Fernando Ángel González Olivieri: I don't know what to tell you about CRH, man. I don't know, maybe we should ask them. But no, I mean, some of the actions are similar. But perhaps the financial position, the objectives might be different. They are trying to -- for instance, they are trying to divest part of the portfolio which is not, let's say, it's certain type of businesses that we are not in. So it's very difficult to make a comparison. The other part -- sorry, but the other part of the question?

CLH. Potential CLH dividend.

Cemex System Holdings. I mean, if your portfolio repositioning in that might affect CEMEX System Holdings and if you expect dividends from CEMEX System Holdings as well? Fernando Ángel González Olivieri: We're not considering that as of today. But we will see. We will continue evaluating.

Our next question on line comes from Daniel Sasson from Itaú.

My first question is basically on the asset sale front. I'd like to know what -- in the past you said you basically concluded your divestment program, you would pursue only opportunistic transactions. What has changed or what exactly are you trying to -- that you saw differently versus your previous views on divestments? And my second question, on dividends, you mentioned that future dividends after 2019 are going to depend on, obviously, the operating performance. But your goal is to pay a percentage of the free cash flow you generate to pursue a target [indiscernible] steadily growing dividends. Do you expect to have a formal dividend policy at some point down the road? And last -- Fernando Ángel González Olivieri: We lost connection. We heard a couple of questions.

Sorry. The last thing, if you allow me to. The U.S. is clearly your best performing operation right now. What are the risks that you're seeing -- that you could see in that region? Fernando Ángel González Olivieri: Let me take the first one. Now I see an echo here. But let me try it. I think what we are addressing with this plan, the stronger CEMEX, is not just a single purpose or it is not caused just because of a single reason. I think we have, through time in the last few years, clearly outlined a strategy on gaining back our investment grade as a premise for CEMEX to get normalized and, let's say, resume growth whenever we achieve it. What is it that is different? I think already mentioned. We have -- we did define a program, we executed successfully, but we didn't achieve the end result of it because of headwinds that we started having mainly in 2017. On the other hand, we have been receiving and, of course, we do welcome and appreciate feedback from different investors, different shareholders. And we have, let's say, we have defined this plan in order to address, I would say, mainly three aspects of the -- on the one hand of the feedback we have received, on what we believe we need to do for CEMEX to create value. The first one is to speed up the process of gaining back to investment grade. Again, there are factors that we do not control. There has been an increase of 230% in coke prices since early '16 as of last quarter. So there are issues we do not control, that did affected our plans and we are again putting a plan to be sure that with the variables we control, we can get there, hopefully in 2020. So it's gaining back investment grade. The second one is optimizing our portfolio for growth. Our portfolio has not been growing. I mean, if we eliminate the EBITDA, we have sold lately in the last few years, but growth has not necessarily distinguished our portfolio in the last few years. So we are taking parts of our portfolio a way that are not necessarily either highly profitable or not providing growth and we're going to divest those or some of those. So it's optimizing growth, it's making an emphasis of EBITDA growth as the means to shareholder value creation. And the third part, which is different to our previous program, and that's thanks to the position we currently have, is initiating again or returning or rewarding our investors with a cash dividend. And as you know, we still have and we will stick -- still keep the flexibility on our buyback share program. So again, it is not just one simple reason why we decided to put this holistic plan in place. The end result we do foresee is for CEMEX, as fast as possible, hopefully in the next couple of years, to be well within parameters of investment grade with a better or an optimized portfolio and rewarding our shareholders. That's the end of -- at least at the end objective of this program.

And Daniel, maybe if I can just respond to your questions about the dividends. I mean, our thought is initiating the dividend payment with the $150 million in 2019 gives us a little bit over 1 percentage point dividend yield. When we looked at the average in the sector today, it's somewhere between 1.5% to 2%. So we're kind of, today, we are in the middle of the pack. Obviously, we can't comment on future payouts because those will have to be recommended by the board to shareholders and we'll make those decisions. But in the medium term, as Fernando said, we're going to be aspiring to a dividend payout program that is in line with some of the most critical metrics in our sector. I mean, obviously, we're going to look at potentially a cash payout percentage as one metric that we look at and we evaluate. We may look at dividend yield as another metric that we may be evaluating. We're refining that process as we speak. And -- but we're optimistic to -- for the program. Obviously, it's a program. And hopefully, it will improve with the performance of the company. I don't know if that answers your question, Daniel.

Yes. It does. Thank you. And on your main concerns regarding your best operating region in the U.S.?

Yes, yes. Actually, I mean, not to sound naïve, but we are actually quite constructive about the U.S. for the next couple of years. The momentum that we have seen in the first half of the year is very encouraging, frankly. And it's not just us, right? I mean, I think if you take a look at some of our peers, either in the aggregate sector or in the cement business or other sectors, frankly, they are getting kind of similar read throughs. And frankly, in -- there are some -- a couple of very important bottlenecks that we hope, as time progresses, will get resolved. One of them is labor. I mean, we're getting awfully tight on a variety of types of labor, specifically drivers. That's -- it's a nice problem to have, but that gives you kind of an indication of the level of employment in our markets. The other is logistics. And frankly, I mean, we suffered a little bit from that because the volume growth in the first half was a lot higher than a lot of people expected. And that momentum, we expect will continue to take place. And the other thing, I mean, if you take a look at the performance and the outlook, I mean, we had growth in all of our segments, residential, infrastructure, industrial and commercial. And frankly, residential continues to have a lot of legs to it. The biggest constraint in residential, frankly, is labor, framers, roofers. And the reason that sometimes the data on housing statistics is not good is not because of demand. It's because of supply. On the infrastructure side, we're seeing a lot more activity from states designating and raising funding specifically at the state level to initiate infrastructure projects. We're seeing that in California, in Texas, in Florida. So that's very positive. And industrial-and-commercial, particularly lodging, commercial and office space also continues to be good. So I think the outlook, frankly, and I wouldn't be surprised if when you take a look at GDP, the next number, the next print on the GDP numbers are going to be probably a surprise to people. They're probably closer to 4% than a lot of people expected. So that's our view. And inflation seems to be reasonably controlled. So we really do -- I mean, obviously, everybody is kind of very watchful on an inflection point. But for the time being, for the next 1 or 2 years, our expectations are pretty favorable.

Our next question online comes from Dan McGoey from Citigroup.

Fernando, if I can just ask a little bit. I know you won't get into specifics on the asset sales, you made that clear. But maybe you can characterize a little bit the shareholder feedback that's contributed to the decision to pivot back to asset sales. And how much of that feedback stemmed or concentrated on desire for lower leverage? Or perhaps a simpler business footprint in fewer regions or a more growth oriented portfolio, which are some of the different objectives that you mentioned. And then my second question is on energy cost per ton. If you could talk a little bit about what the energy cost per ton increase in the first half was and your visibility for that 6% full year target? And whether any sort of mitigating factors were in there, like hedges that might expire along the course of the year. Fernando Ángel González Olivieri: Okay. Well, let me take the -- your first question then. We do keep in touch with our investors and shareholders and we have been receiving feedback. We always receive feedback. I think there is some feedback that is very clear. For instance, rewarding investors. So definitely, the element of our plan regarding dividends, and it was also early this year when we proposed and was approved by our shareholders the buyback program, the idea is to reward them as much as our financial situations allow us to do that. So that's a very direct, let's say, result of the feedback received from our shareholders. On the other hand, we have received feedback in the sense of they would like to see CEMEX more develered or with a lowered risk or getting into parameters of investment grade. But there has not been, let's say, direct feedback in the sense of divest businesses for instance. So what I'm saying is that we are taking feedback from our shareholders. We are analyzing our situation position, as I already mentioned in the previous question. We are acknowledging the headwinds that we have had in the last few -- 1.5 years or so. I mean, the first half of '18 and '17. And this is the program that we think is going to create or will allow us by managing the variables that we control to produce as much value to shareholders as we can. So that's what I can tell you on why is it that we're pulling all these, let's say, angles or variables in the plan. Again, maybe I might be redundant. It is 3 main issues. It's speeding up the deleveraging process, taking into account the headwinds that we have had in the last, let's say, 1.5 years. That's one. The other one is optimizing our portfolio. We want our portfolio to grow more than what it has been growing in the last few years. We need to make decisions there. And the third one definitely is rewarding the investors. So that's what I can comment on the plan and the influence or the relation on the feedback received by us.

And Dan, maybe I can take the energy question. And I'll talk -- all this discussion that we'll have in a second is a quarter-focused discussion, be more than happy to also talk about what happened in the first half. But -- and just to kind of, for all the listeners, to make sure that we're on the same page here. I mean, cost of energy on a per ton basis used in the cement production was up 6%, which is up -- which about -- which was about a bit under $20 million for the quarter. Now where is that coming from? I mean, that's the total, that's fuels plus electricity. The big mover is not electricity. It's actually combustibles. Combustibles in the quarter were up 11% on back of a little bit more than 30% growth in pet coke prices and more than 18% growth in coal prices. Now offsetting that, we had very healthy nat gas prices, which during the quarter declined by close to 10%. And that is what is positively impacting the electricity side. And so we've seen much less pressure on electricity and it's more on the basis of combustibles, right? And now what are we doing to offset that? I would say probably the biggest effort in the company this year and for probably the next couple of years is going to be the increase of alternative fuel strategy. We have not given guidance yet, but we think we can increase our alternative fuels probably 3 to 4 percentage points for the full year without a lot of investment. With some small investment, which again, we have not announced, we could actually move that up quite materially. One of the biggest, I guess, implementers of that strategy is Mexico. Mexico is looking at materially -- they have done a terrific job up to now and they're looking at improving their alternative energy mix quite materially by the end of this year. They're going from 25% to close to 37%, 38% by the end of the year. So that's a terrific -- for our largest market to be shifting that much into alternative fuels is very positive. We're taking similar actions in the U.S., Spain is another potential upside here because of nature -- the nature of things to come. So we feel very confident that we can offset some of this or dampen some of these headwinds through the strategy with relatively minimal cost. Most of these investments have payoff periods of not more than 1 year or 2 years maximum. So we think it's very accretive to be investing in those areas. The other area, frankly, Egypt has been a real source of whipsawing in terms of fuels. And as they remove and we think most of the subsidies have been removed, we should have less of that whipsawing going forward. Just to give you an idea. Energy represents roughly 25% of total COGS and SG&A. And it's in COGS and SG&A because of the mix of the business. You have cement, ready-mix and aggregates. And the way we account for it in these different businesses may differ. The other component that has contributed to energy, and it's important to not forget about, is transportation fuels. Diesel, year-over-year for the quarter, was up a little bit more than 20%. And so there, we do have some hedging strategies that works -- that work in several of our markets. We're trying to scale those strategies. And hopefully, that will help mitigate the volatility in diesel fuels going forward. So the total impact, I mean, I guess as a percentage when you add everything together, it's a little bit under -- it's about 27% of total COGS and SG&A for all the pieces. Does that address your question, Dan?

It does, Maher. And no special help in the second quarter from hedges that wouldn't recur in the second half of the year?

No, no. But we do expect things on the energy side in the second half of the year to be a little bit better. I mean, if you recall, we had -- the first quarter, our energy bill was like -- it was up 12%, we're up 6%. This now -- again, when I say 6%, we're focusing on fuels for the cement business, not including the other pieces. And our guidance is upped a little bit. We'll have to wait and see what happens.

Our next question comes from Vanessa Quiroga from Credit Suisse.

Congrats on the plans. I have three quick questions about it. First, on the divestitures. How can we imagine the final portfolio to look like in terms of margins and returns compared to where we are today? The second question is about the criteria for the share buyback program. Do you think that at these prices, you would start using it? Or is it just something that you want to have in case you need it? And on the dividends, should we look at the $150 million amount as the minimum to start with? Fernando Ángel González Olivieri: Let me take the one on dividends. That -- what we are announcing is a fixed amount of $150 million. And we will decide afterwards what to do in following years. Of course, it will depend on our situation. We are expecting for our financials to grow for sure. So we will review that afterwards. We're not necessarily committing today to other years. Regarding divestments, you want to?

Yes, I mean. It's -- Vanessa, it's kind of -- first, we think that just by through the asset divestments that we're targeting, we should improve not only the margin because of the type of assets that we are looking at divesting. They are assets that, as Fernando mentioned earlier, may not be fully integrated through other core businesses. And so as a consequence, the returns -- not the returns, but the margins are going to be lower. So to the extent you remove some of those out of the portfolio, everything else being equal, that should translate to an improvement in the margin over time. Now where is it going to be in the medium-term? I think that we continue to target the 20% or slightly higher than 20% that we mentioned at CEMEX Day. And that is going to be a combination of better performance of our existing portfolio. It is going to be also as a consequence of the rebalancing of the portfolio that we're talking about. And then at some point in time, I mean, there may be very accretive opportunities to invest in our portfolio. And there may be also opportunities to look at outside of the portfolio. And the approach is going to be always focused on how do we improve the trajectory of our EBITDA growth or operating cash flow growth and free cash flow growth. That is an overarching, let's say, consideration in the stronger CEMEX plan that we are announcing. I mean, we know that we need to deliver that growth and we're looking at multiple strategies to achieve that over time. And we think just doing one thing, the divestitures should actually do both of those things, should improve the trajectory and should improve the profitability of the business. Now if I can move to the third point, the share buybacks. I mean, we -- as I mentioned in my comments, that with -- there is a constraint on when we could initiate the share buyback program. The main constraint was being under 4 times consolidated funded debt leverage. And as of the second quarter, we were below that. So we do have the ability to do that. We wouldn't rule out something happening under the share buyback program before year-end. The board has mandated a certain criteria, which obvious -- for obvious reasons, we cannot publicly discuss. But the criteria is very simple. We do take a look at valuation. We do take a look at timing. We do take a look at -- there are limits per year that the board has placed on the program. Liquidity is another element in the markets. We don't want to be kind of distorting the natural price discovery of our securities in the markets through the -- because of the program. And of course, the thought about share buybacks is that it would come, assuming that we have a residual available after we address all of the other items, deleveraging, investing in the business and -- this is for 2018, okay? 2019, obviously you do have the dividend program in place. And so that -- so it would be additive to that to the extent there's a residual in terms of free cash flow.

Our last question comes from Cecilia Jimenez from Santander.

So I have a few follow-ups. The first one would be on the asset sale. I understand on the levered side, the first step could be reaching investment grade. But in the medium and the long run, what will be your desired leverage level? Is it 2 times net debt-to-EBITDA, 2.5 times? And this is because on the asset sale, $1.5 billion or $2 billion, it's a lot of assets to divest. So my question is, how further would you go in the deleveraging process before starting maybe the M&A side of the growth part? That will be my first question. And then if you can comment on Mexico. If you could give us some color on the margin contraction. I guess part of that is a result of the mix change in -- during the year. But if you could break down the margin contraction between mix and what is actually cost pressure. That will be my two questions. Fernando Ángel González Olivieri: Okay, Cecilia. Let me take your first question. We have commented that the main objective regarding our portfolio is to optimize it in order for higher profitable growth that the one -- that we have been having the last few years. So we are divesting with, let's say, a couple of purposes. One is deleveraging, of course. We are going to use the proceeds of those divestments in order to delever. And also to optimize our portfolio for growth. What is our desired, let's say, or our preferred level of ratio is, of course, if we have been saying that we want to go back to investment grade, we want to keep it once we get there, meaning we need to be well within parameters of keeping investment grade once we are there. Now on the other hand, you say $1.5 billion to $2 billion is lots of resources. We have also said that we don't discard some inorganic growth in this objective of reshaping or optimizing our portfolio. And we have said, just to clarify, to be sure that we properly communicate, that if there is any M&A activity, it has to be aligned to all the objectives of the plan that we -- on the strategies that we disclose, have disclosed before, the last time during the CEMEX Day. And according to the quorum plan that we are communicating today. So that's regarding your question on desired level of ratio and uses of proceeds and the like.

And Cecilia, maybe I can address the margin question. I mean, obviously, as we mentioned, our margin in Mexico declined by 1.5% while, of course, EBITDA was actually growing. And a very important component of the margin contraction, despite the fact that we had very strong pricing in cement, in ready-mix and aggregates, 3% is cement, 9% in ready-mix and 8% on a year-over-year basis in ags. We did have some headwinds, right? I mean, one of the big headwinds, obviously, is input cost into ready-mix, which is important. Freight was an important component. I mean, so -- and then there is a product mix effect. I mean, the quarter was -- which is a high-class problem to have. I mean -- so the negative product mix on its own contributed almost to a little bit over 1.5 percentage points because cement was growing much less compared to ready-mix, which was growing by 15% and aggregates was growing by 14%. And as you know, the margin for ready-mix is substantially lower than the more asset-intensive part of our business, which is cement. So I would say that the product mix was an important contributor to the lower margin. And of course, there's the cost headwinds that we mentioned. Freight, energy and the input cost into ready-mix because of the escalation in aggregates and cement prices. Does that answer the question? Or was there something more that you --

Yes. No, no, no. That was basically -- just making sure, but I would say is it fair to assume most of that margin contraction came from mix rather than a cost pressure particularly. Is that fair to say?

Yes, it is. And we expect, as you know, volumes for the first half were flattish. And we're guiding to growth for the full year. So we do expect some of the volume under performance in the first half of the year to be better in the second half of the year. We think that certainly, formal housing, which was the biggest contributor to growth in the first half of the year, should continue. Self-construction, which was kind of very muted in the first half because of the uncertainty surrounding the elections, we think that's going to probably pick up in the second half of the year. We're seeing very solid numbers on remittances. They're up 11%, year-to-date May. Consumer loans are up 7%, year-to-date May. Retail sales are doing extremely well. And so we're optimistic about the housing sector, both formal and informal. Industrial-and-commercial is kind of similar. We do think that post the election, I think people are feeling a lot better and we are likely to see a resumption of investments or acceleration in investment. And in infrastructure, frankly, there's a little bit of a lag effect because we did see an uptick or an acceleration in spending in -- by the Ministry of Transportation. And so we should see some of that kind of working its way through in the second half of the year. So again, that should also contribute, obviously, to a positive dynamic on the margin side.

At this time, we have no further questions. I'd like to turn the call back over to Fernando González for closing remarks. Fernando Ángel González Olivieri: Well, thank you all and 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 all and have a good day. Bye now.