Jan 27, 2010
Executives
Hector Medina - EVP, Finance & Legal Rodrigo Trevino – CFO
Analysts
Mike Betts - JPMorgan Chase & Co. Gonzalo Fernandez - Santander Investment Nicolas Godet - BNP Paribas Carlos Gonzalez- IXE Eric Ollom - ING Group Carlos Peyrelongue - Bank of America/Merrill Lynch Vanessa Quiroga - Credit Suisse Nick Sebrell - Morgan Stanley Stephen Trent - Citigroup
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2009 the next earnings conference call. My name is [Shansa Le] and I’ll be your be your facilitator today.
At this time all participants are in a listen-only mode. We’ll be facilitating a Q&A session towards the end of this conference.
I would now like to turn the presentation over to your speakers for today’s call, Mr. Hector Medina, Executive Vice President of Finance and Legal and Chief Financial Officer Rodrigo Trevino.
At this time Mr. Hector Medina, you may proceed.
: Let me start by saying that CEMEX day in the New York Times with different public and senior management. Although during this call, we will be providing general guidance EBITDA, free cash flow and consolidated volumes from 2010.
Ultimately, we will discuss our guidance and our financial in more detail. The event will provide ample time for us to outline our expectations and their underlying assumptions.
The CEMEX day proceedings will be webcast live to enable the [brothers] participation in the event and allow listeners the opportunity to pose questions, we have the webcast live. We encourage your participation to the webcast.
For more information, please visit our website and follow the link to the event where we will soon post a schedule date as well as a detailed agenda of the presentations. In light of this, we would very much appreciate focusing the Q&A session today on fourth quarter results and related matters.
And now I will briefly review our year end 2009 results. Then our CFO, Rodrigo Trevino will follow with a discussion of our financial results.
In 2009, we saw the worst crisis we had experienced in the last 75 years. We have significant progress in our plans for regaining our financial.
We completed the refinancing of $15 billion of CEMEX results standing debt and we issued closed to $2.3 billion in bonds including the $500 million freight this month. Additionally, we raised $2.2 billion in equity and equity-linked capital.
And we completed the sale of our Australian operations to Holcim for $1.7 billion. With the proceeds from the capital market and asset sale construction, we were successful in first reducing our debt under a financing agreement by $4.8 billion and therefore satisfying the 2010 milestone.
Second, lowering our Mexican fixed income outstanding by about $385 million. And third, reducing our reliance from short term debt and replenishing our liquidity.
In addition to these financial achievements, we also had other important accomplishments sides of the business, and the cost reduction program, which reduced our cost base by about $900 million, most of which is sustainable. In addition, we increased the use of alternative fuels from 10% in 2008 to 16% exceeding the 15% target we set four years ago for 2015.
We will continue working to further increase alternative fuel utilization. Furthermore, we are on track to achieve a 25% reduction in specific CO2 emissions by 2015 from 1990 level.
The global economic crisis presented challenges for our businesses around the world. Towards the end of the year, we have seen some signs of stabilization in many of our key markets as well as the partial infrastructures spending under the fiscal stimulus programs in many of our countries.
And while overall credit in markets show some improvement, industrial and commercial sectors continue to be affected by tight lending standards. A number of leading indicators in several of our markets are showing signs of stabilization and in some, modest increases.
It is important to note that despite the signs, we still have not seen material pending from fiscal stimulus programs launched in a number of our markets. A more pronounced contribution from this program is expected for 2010.
The decline in our 2009 EBITDA and consolidated volumes was due primarily to the better economic environment that prevailed in the prior year. Also, contributing to the favorable year-over-year comparison is the re-consolidation of the Venezuelan assets.
It is important to note that our fourth quarter report the results of our Australian operations for 2008 and 2009 has been [identified] and are now reflected in a discontinued operation (inaudible)item in our financial statements. With regards to our 2009 consolidated volumes on a like-for-like basis for our ongoing operations, the main volume declined by 14%, ready-mix volume by 23%, and aggregate volume by 20%.
Adjusting for foreign exchange fluctuations, 2009 consolidated and increase by 1% for domestic cement and decreased by 2% for ready-mix and aggregate. In U.S.-dollar terms, prices for cement, ready-mix, and aggregate declined by 9, 10, and 9% respectively.
For 2010, we expect consolidated cement and aggregate volumes to increase by about 4% and ready-mix volume to grow by about 2%. These estimates include the following assumptions for our three main countries.
With expect the cement volumes in Mexico to be flourished throughout the 2010 with ready-mix volumes growing in. Greater demand in ready-mix is due to our expectations of the expansion of an industrial and commercial sector.
In the U.S., we anticipate our volumes for cement, ready-mix, and aggregates to enjoy high single digit increase. A significant portion of this growth is anticipated in the second-quarter and beyond.
In Spain, we expect cement volumes to be out at 2009 levels. Ready mix and aggregates volumes are expected to decline by 11% and 2% respectively during 2010.
As regards our pricing strategies, we will continue to target recovering input concentration for our business in most of our markets. Growth in volumes is expected to translate into a slight expansion in our consolidated EBITDA margin, reflecting there were [bulk supply and pricing] leverage in our U.S.
portfolio. Accordingly, we expect our consolidated EBITDA on a like-for-like basis and based on currency prevailing and exchange rates to be about $2.9 billion.
In addition, we expect free cash flow after maintenance capital expenditure to reach close to $1billion reflecting the impact of higher interest expense, capital expenditure, cash taxes, and the exclusion of our Australian operations. These affects our partially mitigated through lower investment in our working capital positions as a consequence of more normalized supplier terms and receivables etc.
We will keep capital expenditure and another investments at a minimum and anticipate using about $600 million from our free cash flow towards that result. This should enable us to be in compliance from the debt to EBITDA equivalent for this year.
Now I would like to discuss the fourth quarter performance of our principal markets and our outlook for this markets for 2010. In Mexico, our cement volumes decreased by 10% during the fourth quarter versus the same period in 2008.
For the year the main volume declined by 4% in line with our initial estimates despite the worst economic environment than we anticipated at the beginning of the year. The concrete GVP contracted by about 7% last year, ready-mix volumes declined to 28% during the quarter and by 14% for the full year 2009.
This contraction was mainly due to a decrease in the residential and non-residential sectors, which was only partially offset by the expansion by the expansion in infrastructure spending. For 2010, we expect Mexico (inaudible) to increase by about 3% to 4%.
Investment in infrastructure increased by an estimated 20% during last year. For 2010, even though the infrastructure spending including in the national budget, is essentially flat compared to last year, total profit (inaudible) declined by about 10% versus last year, due to the absence of extra-budgetary expenditure.
During 2009, the formal residential sector was affected by a more cautious approach among commercial banks at the time of great economic (inaudible). And also by a reduction in the number of mortgages accounted by SOFOLES resulting from the lower liquidity, higher delinquency levels, and increase in funding process.
SOFOLES were a very important player in the granting of rich loans for home construction, although the banking institutions have been very slow to adopt. For 2010, the CONAVI, our National Housing Council expects formal housing [in debt] to be reduced by about 6% in real terms in 2010.
In CONAVI we have set a target to grant 475,000 mortgages also for the year compared with approximately 450,000 granted in 2009 reflecting a 6% growth. Investment in the formal or self construction sector is expected to decline by about 1% (inaudible).
Federal government (inaudible) for housing improvement programs that dropped most of the growths in the segment in 2009, I expected to contract this year. Additionally, the positive effect stemming from remittances which in fact were higher last year, will also be absent.
Expected modest recovery in employment and aggregate wages will potentially mitigate the decline. Investment in industrial and commercial sectors expected to grow by about 15% in 2010, after two consecutive years of acute contraction.
This sector was down 17% in 2008 and down 30% in 2009. This moderate recovery will be attributable to mainly to the inflation of previously suspended projects, as well as by a modest recovery in new investment as economic growth is expected to resume.
In the United States, cement volume fell by 25%, ready-mix sales volume declined by 30%, and aggregates volume decreased by 29% during the fourth quarter versus the same quarter in 2008. For the full year of 2009, cement volume declined by 32%, ready-mix volume decreased by 38%, and aggregates volume declined by 33%.
The fourth quarter decline in sales volume was driven mainly by the continued weakness in the residential and industrial and commercial sectors, as well as poor weather during December. Probably, construction spending was the main driver for cement in 2009 and represented about two-thirds of cement consumption last year.
Although, we saw price softness in our products during 2009, it was moderate in view of that unprecedented volume declines we have experienced since 2006. From December Yield-to-Date nominal public construction spending was up 2% with spending for street and highways up 4%.
Contract awards, which is a leading indicator, were up 6% for streets and highways and down 9% for other infrastructure, public infrastructure, and (inaudible). During this year, we expect cement demand from the public sector to increase by about 9% driven by disbursements under the ARRA stimulus.
In addition, the Federal Transportation Program for fiscal year 2010 was recently founded at a slightly higher level. Spending of the $29 billion in ARRA highway infrastructure funds is becoming evident.
As of January 8, about eight four 84% of the ARRA highway funds have been obligated with only about 20% spent. For our markets, the percentage of obligated fund is also 54% (inaudible) national level is only 11% spent as of the same date.
We are cautiously optimistic about this prospect of a new round of fiscal stimulus. In December, the House of Representatives, thanks to the $174 billion jobs for Main Street (inaudible), which includes $48 billion in additional infrastructure spending.
The (inaudible) process now moves to the cement. The situation is too fluid (inaudible) whether these efforts will be successful in securing additional fiscal stimulus.
The six-year Federal Transportation Program expired last September and has been extended in a series of short-dated roll-overs, the latest of which expires on February 28. It is likely that the next extension will be for a longer period thereby providing a more funding certain (inaudible).
The House Transportation and Infrastructure Committee has developed a new six-year $500 billion program, a significant increase from the $287 billion [safety loop] the previous six-year federal transportation program. The timing of passage of a new transportation program, however, is still difficult to predict and will be influenced by the legislative priorities of the present administration as well as the November mid-term elections.
During the first 11 months of 2009, contract awards in the industrial and commercial sectors declined by 58 (inaudible). Much of this decline occurred in the beginning of the year and we have seen stability in the award level since March.
For 2010, we expect cement demand from the sector to decline by about 19%. In the housing sector, new home started bit low in first quarter of 2009 and have increased moderately over the rest of the year.
The Case-Shiller home price index of 20 major cities (inaudible) about 5% since reaching the top in April 2009. These price improvement follows a 33% decline in the index from the peak level reaching 2006 and indicates that housing market-supply demand dynamics are beginning to improve.
The significant home price correction combined with the historically low interest rates has thus improved affordability, which set a strong foundation for a recovery in home sales. During 2009, existing home sales rose 4.9% to 5.16 million homes from 4.91 million homes in 2008.
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Home sales will be fueled by improvements in affordability as well as extension and expansion of the federal tax subsidy until April of 2010. In Spain and on a like-for-like basis, cement volumes decreased by 6% and ready-mix volumes decreased by 24% during the fourth quarter.
For the full year 2009, cement volumes decreased by 30% and ready-mix volumes decreased by 37% versus the previous year. Construction activity has been affected by the economic slowdown and limited growth about availability.
Cement consumption in our markets continue to fall at the faster rate than the overall Spanish market during the quarter. The residential sector continues to contract.
For 2009, housing starts, a leading indicator of the sector, effected to decrease to about 140,000 to 150,000 from 316,000 in 2008. A further decline to 100,000 is expected through 2010.
Although housing prices have decreased by about 8% year-over-year up till September, the decline is still not enough to reactivate, and further declines in housing prices are expected. Investment in the residential sector is expected to fall by about an additional 18% to 20% during 2010, with this sector representing about 10% of total cement demand.
The non-residential sector is also expected to decline during 2010.Lack of activity (inaudible) and financing difficulties have affected this sector. The infrastructure sector has been relatively stable, but it is still insufficient to compensate for the falling demands in other segments.
Last year, the government announced and completed an 8 billion Euro infrastructure program (inaudible) projects. A new short-term 5 billion Euro program had been put in place, but we are uncertain about its actual impact on cement demand, even the results of the previous program.
In addition, Spain has announced an extraordinary 15 billion Euro infrastructure program, which will be spent during the next three years. However, (inaudible) effect on cement demand is still unknown.
The plan has yet to be completely defined. In the United Kingdom, cement volume decreased by 40%, ready-mix volume declined 23%, and aggregate volume declined 12% during the fourth-quarter of 2009.
For the full year 2009, cement volume declined by 90%, ready-mix fell by 25%, and aggregates volume decreased by 19% versus the previous year, reflecting weakness across all business segments with a deceleration in the rate of decline to every year. In our rest of Europe region excluding Spain and the U.K., cement volumes declined by 80% for the fourth quarter and by 70% in 2009.
Ready-mix volumes fell by 40% during the quarter and by 17% for the full year. In France, (inaudible) aggregate volumes decreased by 17% and 13% respectively, during the fourth quarter.
For the full year 2009, volumes for ready-mix and aggregate, decreased by 18% and 16% respectively. The infrastructure sector continues to be the main driver of volume growth.
However, only about a third of the regional incentive infrastructure package announced by the (inaudible) last year was actually spent last year versus the two-thirds originally planned. The remainder of the package is expected to be spent during 2010.
In addition, the government approved a new Euro 35 billion plan last December. (inaudible) from this program is expected for this year (inaudible) only a very small portion will be to dedicated to infrastructure.
In the residential sector, housing starts for the first 11 months of 2009 declined by 19% with permits declining by about 18%. However, the rate of decline and in permits and starts gradually eased during the year.
We think housing permits and starts in 2010 will be at level similar to those in 2009. In Germany, our domestic cement volumes decreased by 16% during the fourth quarter and by 18% for the full year 2009 versus the comparable periods in 2008.
During 2009, we saw the initiation of some projects under the announced EUR 50 billion stimulus program. The infrastructure portion of the fiscal stimulus package accounts for about EUR 13 billion to EUR 18 billion to be spent during 2009 and 2010.
Many of these would be maintenance projects however, which are less cement intensive than new projects. About a third of the stimulus funds were disbursed during 2009 with every mandate to extend it this year.
Although residential spending declined during the first 10 months of the year, residential permits (inaudible) indicator shows month-over-month increases from June to October and constructions under this permit is expected to be done this year. [Within] the nonresidential sector continued to decline and are not expected to stabilize until the second half of this year.
In Eastern Europe which includes Poland, Croatia, The Czech Republic, and Latvia, domestic cement consumption declined by 25% during the quarter and by 19% during 2009.
Financing conditions will remain tight and EU related infrastructure projects will be lifted by co-financing problems, even the poor states of public finances. In our South/Central America and the Caribbean region, cement volumes declined by 1% during the quarter, while ready-mix volumes declined by 21%.
For the full year, cement and ready-mix volumes declined by 30% (inaudible) eventually. In Colombia, cement volume during the fourth quarter remained flat and ready-mix volume decreased by 15%.
For the full year, cement and ready-mix volumes declined by 6% and 17%, respectively. The infrastructure sector was the main driver of cement consumption, during 2009 and is expected to continue to be an important contributor to volumes in 2010.
The former residential sector has benefited from a subsidy in interest rates for new home purchases, started in April 2009. This program has had a positive effect on the number of homes sold as pre-sales, which will affect housing starts mainly during this year.
In addition, the government has initiated several low-income housing projects as part of its stimulus plan to reactivate the construction sector. The industrial and commercial sectors will remain weak, reflecting the decline economic (inaudible) and higher unemployment rates.
In Egypt, domestic cement volume increased by 7% during the fourth quarter and by 13% for the full year 2009 versus the comparable periods in 2008. The informal housing and infrastructure sectors will continue to be the main drivers of cement demand during 2010.
While we are seeing a bottoming out in some of our markets as evidenced by slum living indicators, we expect first quarter 2010 to continue to be weak and that-- and the most of the expected growth in EBITDA will occur in second half of the year. Despite the challenges we faced in 2009, we consider we have positive achievements during the year including the refinancing of $15 billion of the debt.
The bolstering of our capital structure, and the improvement in our liquidity position through the issuance of equity and long-term debts, together with the sales of our Australian assets. I would like to assure you that we will continue to vigilant (inaudible) our cost cutting efforts, maximizing our bottom line, and the strengthening of our capital structure.
Thank you and now I will turn the call over to Rodrigo.
Rodrigo Trevino
Thank you, Hector. Good morning everyone and thank you for joining us on this call and webcast.
Our performance during 2009 reflects the continued general slow down in the global economy. In fact the decline as a result of lower volumes, which were partially mitigated by a resilient pricing environment in local currency terms (inaudible) markets except the U.S.
and Spain. On a like-to-like basis, that is adjusting (inaudible) effects, the appropriation of Venezuelan operations and the divestment of our Australian and Canary Islands and other assets, EBITDA was down 39% during the quarter and 25% for the full year.
EBITDA margin declined to 18.3% during 2009 from [23%]in the previous year, adjusting for Venezuela, Australia, the Canary Islands (inaudible) allowances, EBITDA margin had a slight decline of 0.4% points despite a 19% decline in sales on a like-to-like basis. Our cost reduction initiatives, partially mitigated the effects of the volume declines seen during the fourth quarter and the full year 2009.
SG&A expenses as a percentage of sales increased by 1.5% points during the quarter and by 1.2 points during the full year 2009 versus the comparable periods in 2008. This is the result of economies of scale due to lower volumes.
In addition, we have had higher transportation cost since with the closing of some of our facilities, (inaudible) travel long in terms to serve our customers. These negative effects of our SG&A were partially upset by savings from our cost reduction initiatives.
During the quarter our (inaudible) after maintenance capital expenditure reached $401 million, 15% lower than the same period of 2008. For the full year 2009, free cash flow after (inaudible)capital expenditure was $1.2 billion down from $2.6 billion the year before.
The lower free cash flow generation is due mainly to lower EBITDA generation, higher financial expenses, and higher investment in working capital. These results were partially offset by lower maintenance capital expenditure.
Of the $662 million invested in working capital during the first nine months of 2009, we recovered close to $500 million during the fourth quarter. We expect free cash flow for 2010 to reach about $1 billion.
Practically flat versus last year (inaudible) is equal to sale of Australia. During this year, we expect to have higher (inaudible) capital expenditure which will be partially mitigated by lower investments in working capital.
Regarding our input calls during 2009, our chunk fuel and electricity cost on a per ton of cement produce basis declined by 16% versus 2008. For 2010, we expect this cost to increase by approximately [0.5%].
We continue to develop new ways to lower our energy input costs and to make them more predictable. We remain committed to increasing the use of alternative fuels in our operations and we continue pursuing clean development mechanism projects, such as the wind driven 215 mega watt power plant in Wahaka, Mexico.
The increase in financial expenses during the quarter reflects the new terms of the financing agreement. During the quarter, we recognized an exchange gain of $48 million, mainly as a result of the appreciation of the Mexican Peso.
We also recognize a gain on financial instruments of $21 million resulting from an improvement in the [multi]market of our equity derivatives. Other expenses during the quarter were significantly lower in the fourth quarter of 2008.
These include goodwill impairment, which was $40 million for this past quarter and other charges related to the refinancing. The income tax line for 2009, shows a positive contribution, reflecting the effect of tax losses in many of our operating jurisdictions, due to reduced operating volumes, combined with local currency exchange losses.
In relation to Mexico’s recent fiscal reform, we estimate the impact of the changes in the rules in Mexico for good tax consolidation to be about $799 million, which will be payable over a 10-year period. Accordingly, fourth quarter we have (inaudible) a liability for this amount in our balance sheet.
It’s important to note, however, that we have also recognized a deferred tax asset for $628 million resulting from the losses from prior periods that are being deconsolidated, due to the (inaudible). The difference between the tax, asset, and liability of a $171 million is being recognized as a reduction in retained earnings.
And as a result no impact on our income statement. In 2010, the expected impact on cash taxes from this tax rule change is about $30 million.
During 2009, our majority net income from continuing operations was $418 million versus $47 million in 2008. Lower foreign exchange losses, lower losses on financial instruments, and lower impairment (inaudible) objectives more than offset, lower operating income and higher financial expenses during the year.
In December, we issued $4.1 billion basis or approximately $320 million in a convertible securities transaction. (inaudible) to exchange outstanding Certificados Bursatiles into new mandatorily convertible securities.
Upon conversion, these securities will be settled approximately $17.5 million ADSes. Also in December, we returned to the international (inaudible) income market and issued notes in excess of $1.7 billion including a seven years U.S.
dollar tranche or $1.25 billion with a yield of 9.5%. And an eight year (inaudible) for 315 million Euros with the yield of 9.58%.
In January, we re-opened the $2016 U.S. tranche and issued an additional $500 million with yield-to- maturity of 8.47%.
During the quarter, we also issued short-term notes on the (inaudible) program. The outstanding amounts of these notes was PESOS 800 million as of December 31st.
The current holding cost of these special instruments is below 5%, a drop of more than 600 basis points compared with the past six months ago. It is important to note that with the proceeds from the equity offering we completed in September, the sale of our Australian operations and the issuance of notes, we have accumulated prepayments in access of the first financial milestone under the financing agreement of [$4.8 million].
As Hector mentioned, we expect to use about $600 million from our free cash flow to reduce that this year. With our planned debt reduction and EBITDA generation for the year, we (inaudible) compliance with our total funded debt to EBITDA covenant ratio of (inaudible) [75] times by the end of the year.
In order to improve the margin for compliance, we will be implementing a number of initiatives and at further strengthening our capital structure. Our priority in the short term continues to be to pay down debt.
To do this, we will aim to improve our working capital management and continue to implement our global cost reduction and right sizing initiatives. Finally, (inaudible) I have been asked 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.
Thank you for your attention and now we will be happy to take your questions. [Shansa Le] Question-and-Answer Session
Operator
Yes, sir. [Operator instructions] And your first question comes from the line of Carlos Peyrelongue of Merril Lynch.
Please proceed.
Carlos Peyrelongue - Merril Lynch
Thank you. Good morning gentlemen.
Two questions if I may, first one I apologize I was not able to hear the guidance you probably provided for sale and EBITDA for 2010?
Hector Medina
I have provided only guidance for EBITDA in terms of approximately $2.9 billion.
Carlos Peyrelongue - Merril Lynch
Perfect thank you. And the second, related to the U.S.-- the federal support programs for infrastructure and having met with the difficult fiscal situation at the state level, and as you mentioned housing remains in a difficult situation and commercial construction is still falling.
When would you expect cement volumes for your operations to start showing a positive growth on the year-over-year basis?
Hector Medina
Well as we mentioned in the -- in our guidance, we would expect this year to show positive and substantial volumes, but that would certainly be not loaded in the year, or as we want [throughout].
Rodrigo Trevino
Well may be just to complement that -- of approximately $15 billion allocated to the states we are in, about $13 billion has been obligated and only 11% has been spent. And so clearly we do expect significant additional moneys to be spent during 2010, when compared to 2009.
Carlos Peyrelongue - Merril Lynch
From the (inaudible) implementation of this moneys in the second – probably in the second half of the year, that will than turn volumes positive on the year-over-year basis.
Hector Medina
Yes, that’s what we expected for our markets.
Carlos Peyrelongue - Merril Lynch
Thank you.
Rodrigo Trevino
Well and also in the case of the US it is important to note that we do respect significant growth in the residential sector for the full year as well.
Carlos Peyrelongue - Merril Lynch
Okay, Thank you.
Hector Medina
Thank you Carlos.
Operator
Our next question comes from the line of Gonzalo Fernandez of Santander Investment. Please proceed.
Gonzalo Fernandez - Santander Investment
Hi, good morning every one. I also have a two questions, and I know these are unusual (inaudible) will be doing the operating margin and the EBITDA margin and significantly and in (inaudible) profits, I don’t know, if you can explain and [point] with that and if you can repeat your target, level of acquisitions for the end of 2010 and thank you.
Hector Medina
You take the first part of the question.
Rodrigo Trevino
Yeah. The major difference that explains the light fluctuations between the fourth quarter of 2008 and the fourth quarter of 2009, has to do with the sale of additional allowances that took place during that fourth-quarter of 2008, and we can help you reconcile that Gonzalo.
Medina Hector
As for the leverage ratios, we mentioned that it is actually in compliance with our leverage target ratio of 6.75 for the year -- end of the (inaudible).
Gonzalo Fernandez - Santander Investment
I think I …
Rodrigo Trevino
I think with the expected usage of approximately $600 million of free cash flow to be around that and with the EBITDA guidance of $2.9 billion for the full year, you can easily calculate the leverage ratio year end and this will allow us to be in compliance with our stated governance by the end of the year and throughout the year.
Medina Hector
That would be in fact closer to EBITDA. (inaudible) double than to EBITDA.
Gonzalo Fernandez - Santander Investment
Okay, and you are relying to use $600 million of free cash flow to pay that debt, correct?
Medina Hector
That’s correct.
Gonzalo Fernandez - Santander Investment
Thank you very much.
Medina Hector
Thank you.
Operator
Your next question comes from the line of Vanessa Quiroga from Credit Suisse, please proceed.
Vanessa Quiroga - Credit Suisse
Good morning. Thank you for the call.
I have a question regarding your view on the demand-supply balance achieved for that different markets where you operate, I was wondering if you could give a small color on any opening of plans, if any that you are planning to do this year insofar your competitors are moving in defense and any indication of a possible price increases in your markets and my other question would be regarding your capital structure strategy. You are still have to comply with the milestones for December 2011 and I was wondering if you could give us any details on what would be your preference between asset sales with markets for (inaudible) with this milestone.
Thank you.
Rodrigo Trevino
Sure. Let me take the first part of the question on (inaudible) which is supply-demand dynamics in some of our markets.
I guess the most important one is the U.S. where we are seeing some capacity increases in 2010 as a result of construction that is being -- of a new plant -- but (inaudible) expansions.
And this is in the region of around 5 million tons. In 2010, they would come on line, but they would probably [measured] by our transporters and we would expect that the net increase to be practically zero.
And then of course, as demand shows some strengthening, as we have mentioned in the later part of the year, there might be some additional plant re-openings or [key] re-openings but nothing that is significantly (inaudible). I would -- the expected the capacity would be fully utilized that is the one that remains open.
Now there are other markets are very important to us in which we don’t see any major addition of capacity like the case of Mexico or Spain or the U.K. So we believe that the industry keeps a very rational attitude to take the next.
Regarding the second question what will be the milestone for 2011. Of course, we expect an addition as we mentioned in our opening remarks, in addition to using most of our free cash flow to pay down debt and continue to repay some of these re-financed debt.
We also expect to implement the other de-leveraging initiatives such as (inaudible) sale of assets that may not be generating EBITDA, that can help us to significant de-lever in terms of both the amortization of the debt as well as the actual leverage ratio. And we expect to implement those not only throughout 2010, but also during 2011.
Clearly, we have not provided guidance for 2011, but should the recovery continue, we would expect to see growth in free cash flow for 2011 as well. And of course, we will be proactive in dealing with the milestone of 2011 well before we get to that point.
Very important to know however, that it is a milestone. It is not an amortization of the debt.
We have practically complied (inaudible) with 97% of the debt amortizations on the re-finance debt through December of 2011. In fact, the amounts of re-financed debt that becomes due in December of 11 today is less than $200 million and it is important to highlight that.
Medina Hector
I have just a little bit of additional information for the first of the question and I think that is important and is that over the (inaudible) 2009 we saw a net reduction of capacity in the U.S. of 5 million tons which of course it is a key indication of the rationality of the industry, as for capacity utilization.
Vanessa Quiroga - Credit Suisse
Thank you very much.
Hector Medina
Thank you Vanessa.
Operator
And our next question comes from the webcast.
Rodrigo Trevino
Yes, I believe the question comes from Mike Betts from JPMorgan, and the question is how much scope is there to (inaudible) working capital. It was reduced by (inaudible) million in the fourth quarter, but was still up for the year despite the 19% reduction in sales.
How much of a reduction in working capital have you assumed in your 2010 free cash flow estimate?
Rodrigo Trevino
We actually haven’t assumed a reduction in the working capital for 2010, but we do expect that we will have a significantly lower investment in working capital during 2010. And this of course, is before additional initiatives that we would expect to implement to help us to better manage our working capital and hopefully reduce the investment in working capital, but we do believe there is a significant room for improvement as conditions normalize and as access to the credit markets improves for all of our counter parties--both suppliers, customers, and everybody else that contributes to the working capital.
Operator
Your next question comes from the line of Nick Sebrell of Morgan Stanley. Please proceed.
Nick Sebrell - Morgan Stanley
Hi, gentlemen, two questions. First, if you could discuss the tax credits, I was wondering if you could tell us some normalized basis with (inaudible) operations that will be the same and if it would be the same then may be, describe what is in there and what we can expect to see in terms of tax rate, going forward and the second question is just with respect to the US margin and second question is with respect to the U.S.
margin upon negative EBITDA margin this quarter in the U.S. and obviously there is some operating leverage there, but how quickly do you think this will reverse?
Do you think we might expect in the first quarter of 2010? It could also be difficult, a negative margin there again.
Rodrigo Trevino
Maybe, I can answer the second question. Nick, in the case of the U.S.
more than a 100% of the drop in margin leading to the drop in--slight drop in EBITDA for the quarter, had to do with volume decline. And superiorly to the standard volumes begin to come back into the U.S.
market, we would expect our margins to begin to improve. Now as we mentioned, we will continue to implement cost reduction initiatives, right sizing initiatives, to make sure we are adapting to the operating environment we are in and all of that will also contribute to margin recovery, but clearly the biggest component to margin recovery in the U.S.
will be volume driven as the sharpest reason for the contraction has also been volume driven.
Nick Sebrell - Morgan Stanley
Very nice, good.
Medina Hector
When we go to the first part of the question in terms of (inaudible) we see the major change in our tax situation, except for the tax consolidation rules are changing in the case of Mexico that we already discussed in the remarks and would have an impact on cash factors for 2010 of about $30 million. We don’t see any other major impact in 2010.
Nick Sebrell - Morgan Stanley
Okay and then the tax credit itself, you saw this quarter what exactly is in there? I am trying to understand…[what is the current $15 million]
Rodrigo Trevino
If you are referring to the deferred tax asset that was created, it has to do with expectation that as a result of the losses that we have in several of our subsidiaries, that will no longer be consolidated. It may result in lower cash taxes in the future and this is the estimate that we have as of today.
Nick Sebrell - Morgan Stanley
Right. Okay thanks.
Rodrigo Trevino
Thank you Nick.
Operator
And your next question comes from the line of Christopher Buck of Barclays Capital. Please proceed.
Christopher Buck - Barclays Capital
Good morning. I am wondering if you can walk us a little bit through the from the cash flow for the quarter and particular whether or not you realize both that $1.7 billion in cash from the Australia sale and the bond as well as the 1.75 there and if I add those up, I mean it is actually $3.5 billion but I just saw a net reduction in debt of --again net debt about of $2 billion.
I am just trying to understand the rest of those numbers.
Rodrigo Trevino
Well we did significantly improve our liquidity position during the quarter. We did use the proceeds from the sale of Australia also to pay some other short term obligations that were coming due.
And we did have to pay some of the expenses related to the re-financing of the debt during the fourth quarter as well. We can help you reconcile the specific amounts from the starting point to the end of the year.
Christopher Buck - Barclays Capital
Okay, but both of the $1.7 billion from the sale of Australia and $1.75 billion from the bond were both realized during the quarter?
Rodrigo Trevino
The, you said from the sale of Australia. Yes, of course the issuance of the bond doesn’t reduce that.
It just helps you pay older debt with the new debt that was issued. With the new debt that was issued, it also will very partially replenish our liquidity during the quarter.
Christopher Buck - Barclays Capital
Okay, fair enough. Thank you.
Operator
And our next question will come from the webcast.
Rodrigo Trevino
Yes, the question comes from [Rahul Ghosh from Austin], you see volumes increasing in the US in 2010, what are your assumptions regarding pricing? Are you seeing price pressure?
Hector Medina
So, as we discussed, there is at least in our markets, as expectations that we will see in positive volumes in 2010 as we mentioned, but most likely backlogged at the end of the year and that, well of course, it’s based on the fact that we believe that some of the infrastructure spending, (inaudible) are reaching the market as we speak and also a significant decrease in housing construction. Now, I think the (inaudible) inflation in the US, of course, is to be expected with the very significant volume declines has been affecting some of the prices, but from input across the inflation recovery is expected in the market, so we would expect prices to more or less hold stable.
Operator
And your next question comes from the line of [Diablo Tureg] of ING. Please proceed.
Diablo Tureg - ING
In terms of the tax cashes for 2010, do you any figure yet in terms of which will be the total amount of – that it will be disbursed.
Hector Medina
Yes, we expect a slight increase in the consolidated cash taxes paid for the company as a whole, from 2009 to 2010.
Diablo Tureg - ING
Perfect. And I also --shall we expect which would be that amount of cash on hand for (inaudible) at end of 2010.
Does that amount will be close to the $1 billion that you have right now or you expecting something less or more?
Rodrigo Trevino
Well it should be relatively similar since we have the agreement with a financing agreement for the cash (inaudible) Any funds in excess of $650 million must be used to prepay part of the refinance debt, and so we expect the ending cash balance to be similar for 2010 versus 2009.
Diablo Tureg - ING
If the financial agreement has got the cash [slip] it should be there cash balance moved towards the 650 instead of that 1 billion.
Rodrigo Trevino
Well, it’s not the cash balance as defined by the accounting. Cash balance is another definition of cash.
So always the accounting definition of cash is slightly higher than that is freely available to be used to prepay the (inaudible) and yes we did have a slightly higher than that amount for December 31st and of course, the cash we have during the month of January to settle and so we would expect to use some of that cash that we ended the year with, to be used to prepay some of the refinance debt during January. In fact, it already has been and that is why we stated that we have met the first milestone of paying $4.8 billion as of now.
That was not the case as of December 31st, but it is as of today and that means we have paid more than 30% of the debt that was refinanced during the second half of last year within a relatively short period of time, that is, six months.
Diablo Tureg - ING
Perfect. Thank you.
Operator
Your next question comes from the webcast. Please proceed.
Rodrigo Trevino
Yes the question comes from [Matthew Riner] of (inaudible).
Operator
Your next question comes from the line of Stephen Trent of Citigroup. Please proceed.
Stephen Trent - Citigroup
Good morning gentlemen. Most of my questions have been answered at this point.
Just one quick follow up, if I may. We saw sale news in some of the press over the past several weeks that certain regulatory authorities in the EU, I think particularly in Spain and Poland have been looking into price fixing (inaudible).
I think several cement players and I am wondering if you have any comment or additional color on this. Thank you.
Rodrigo Trevino
Sure, Steve. Thank you for the Thank you for question.
We have certainly the (inaudible) all over the legal proceedings that we are involved in our current documents. But I would just point out the fact that in the case of the European Commission, the recent investigations, and then this we are cooperating with the authorities in this investigation.
There are no new developments, except for the ones that have been already disclosed. I mean, there is a complete legal disclosure in our bond offering memorandum, which is the last document that we published.
But again, I mean, we are cooperating with the European Commission in connection with this investigation as no major other (inaudible) back in this – in this investigation.
Stephen Trent - Citigroup
Fair enough, thanks very much.
Rodrigo Trevino
Thank you.
Operator
And our net question comes from the webcast.
Rodrigo Trevino
Yes the question comes from Olivier Tabouret from AL CENTRA. What is your capacity utilization currently and target for 2010?
And, could you clarify the cost reduction amount, how much of (inaudible)?
Hector Medina
Globally, I would say that the CEMEX aims to maintain this capacity of utilization at a good rate, I mean, full capacity utilization was in terms of (inaudible) utilization was about 88% in the US, for example. But that means, what is the hours that we use our kilns, the number of hours our kilns are available (inaudible).
So this is the rate that we would seek to maintain all throughout our operations and I guess that would be a global figure that you could use of around 80% to 85%.
Rodrigo Trevino
And regarding the cost reduction initiatives that we achieved during the year.
Hector medina
Good.
Rodrigo Trevino
Well we did implement the close to $900 million of cost reduction and expense reduction initiatives during the year and we expect to maintain 60% of those on a recurrent basis. Clearly some of those have to do with right-sizing and as volumes come back we would expect some of these expenses to come back, but then it would be because of EBITDA and free cash flow is growing as a result of that.
Operator
Your next questions come from the line of Nicolas Godet of BNP. Please proceed.
Nicolas Godet - BNP
Yes, good morning.
Rodrigo Trevino
Good morning.
Nicolas Godet - BNP
I wasn’t connected during the call. So maybe you have that already (inaudible) provided a guidance of $2.9 billion.
How much is that if you would do incremental cost cutting measures?
Medina Hector
What?
Nicolas Godet - BNP
…cost cutting measures.
Medina Hector
Well there is to specific initiative in this case, but we have every one of our markets are operations on the constant monitoring of the way the demand develops and of course, we are adjusting our cost when we see that the demand is still weak. So there has to be significant right pricing in our market.
In some of them because we are seeing the possibility of volume increases for (inaudible), for [segment] cost increases would occur as the volume happens, but then some of the operating leverage that we have achieved during the past months will then also kick in. So, in a way you would see in some of our markets, as we told that will show some volume increases is more than the effect of current cost cutting rather the effect of cost cutting that we already did.
Rodrigo Trevino
And I would say that, as guided, we have guided for approximately 4% growth in volumes globally, in cement and this is one of the biggest drivers of the recovery in the operating cash flow for the year as a whole. As you know we have seen most of the drop in EBITDA these years also as a result of the dropping volumes that we have seen from that period to now.
Nicolas Godet - BNP
Okay, you also said that (inaudible) should be of (inaudible) them any further questions (inaudible)
Rodrigo Trevino
I would like to increase in the cost of production of cement as a result of energy that is fuel and electricity of approximately 5% for 2010 versus 2009 and we intend during the summers day to get it to greater details in the supply-demand dynamics and how this may affect prices but of course, prices is the most difficult part of the equation to forecast. So, whenever we prepare our budget (inaudible) it is not reasonable to assume that the components of the growth will commence a result of price increases and we have not in this budget exercise.
Nicolas Godet - BNP
Last question from me. In future you have 25 the real impact of (inaudible) in your whole on your margin could you quantify again if there is a (inaudible)?
Rodrigo Trevino
So you could you repeat the question there is a little bit of noise in the (inaudible). Yes.
Could you repeat the question?
Nicolas Godet - BNP
I mean if you have [regions] for investors in the U.S. this fall it had an impact on your margins, could you quantify this impact?
Rodrigo Trevino
We will have to follow up with you as we cannot understand the question, the audio is not very good on our side.
Nicolas Godet - BNP
Okay, I will call you back then. Thank you.
Rodrigo Trevino
Thank you.
Operator
Your next question comes from the web cast.
Rodrigo Trevino
Yes the question comes from John Kohler from HSBC Securities and he says good morning as you need your debt amortizations under the new bank agreement, so that free cash capacity under the facility, whether the size of the facility decline as payments are made?
Rodrigo Trevino
Yes, and as we amortize the debt, the size of the facility declines. This is not a revolving credit facility.
This is a term facility that goes to February of 2014. And what we have done with by meeting the milestone is we have taken care of the maturities for 2009, 2010, June of 2011, and practically all of the December 2011 and so as we generate free cash and as we apply some of that to further pre-pay, this refinance that facility, we would expect to meet the amortization commitments well before the dates that we have agreed with the banks.
Operator
And we have time for one final question and that question comes from the line of Carlos Hermosillo of Vector
Carlos Hermosillo - Vector
Yes, good morning. Just quick question regarding the operations in Venezuela, I don’t know, if you could provide those with an update with the proceedings, you are having there.
The legal proceedings and also we saw a significant decrease in the net asset values you are reporting on this operations. I would like to know if that has to do with the asset impairment process, that you effected in the fourth quarter.
Thank you.
Rodrigo Trevino
For the legal proceedings several of these dates are continuing. We have started the process, the panel has been named, there is some process to confirm the panel members, but that goes on.
We continue to suffice the requirements of the panel. That is for your information and at this --what is happening there is no significant change in that process.
As to the asset value, mostly we can give you some information now talk with you later. I don’t have any…
Rodrigo Trevino
But the reduction during the quarter has to do mainly with the sale of Australia, of course.
Carlos Hermosillo - Vector
No but, I am talking about the specifically the amount you recorded in the asset value of Venezuela.
Medina Hector
Venezuela.
Rodrigo Trevino
We will have to follow up with you on that Carlos.
Carlos Hermosillo - Vector
Thank you.
Rodrigo Trevino
Well thank you very much and closing, I’d like to thank you all of you for your 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 good day.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a wonderful day.