Cemex SAB de CV

NYSE:CX

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. Welcome to the CEMEX Fourth Quarter 2017 Conference Call and Webcast. My name is Sylvia, and I will be your operator for today. [Operator Instructions] Our hosts for today are Fernando González, Chief Executive Officer; and Maher Al-Haffar, Executive Vice President of Investor Relations, Communications and Public Affairs. And now I will turn the conference over to your host, Fernando González. Please proceed.

[Fernando Olivieri, executive]

Thank you. Good day to everyone, and thank you for joining us for our fourth quarter 2017 conference call and webcast. We will be happy to take your questions after our initial remarks.

2017 was a challenging year. However, our 2 largest markets, which represent about 60% of our portfolio, performed well, with like-to-like increases in their EBITDA. We generated more than $1 billion in free cash flow for the second year in a row with a healthy conversion rate, and which resulted together with our asset sales initiative in a pro forma debt reduction of more than $2 billion during the year. In contrast, 3 of our main markets, Colombia, Egypt and the Philippines, underperformed materially due to different factors. Energy costs were also an important headwind during the year.

We expect those headwinds to abate this year. In fact, the growth outlook for 2018 is the best we have seen in the past 6 years, and we intend to take full benefit of that momentum. In a few minutes, I will discuss the very positive implications of our markets.

In CEMEX, we focus on the variables we control, not the ones beyond our reach. In 2017, that meant focusing on our value before volume strategy and initiatives to reduce costs and extract further efficiencies from our operations. This included the improvements in our energy mix, the bottlenecking efforts and higher operational efficiency in our kilns, among others. In that spirit, we have developed a revolutionary data platform that I believe will fundamentally transform how we interact with our clients. Our goal is to make our client relationships simpler, faster, more transparent and much more efficient. CEMEX' goal empowers our customers, allowing them to manage the entire commercial process anywhere, anyhow, anytime, thereby increasing their productivity and their capacity to worry about their project, not their supply chain. At the same time, it allows us to consolidate our points of sale, use our fleets more efficiently and realize our goal of truly putting the customer first.

CEMEX' goal is not a concept, it is a reality already on the streets of Mexico and the United States, used already by more than 2,000 customers, and soon to be launched in Colombia and the U.K. by the end of this year. And by the end of this year, CEMEX' goal will be a reality in all our markets for all our products. We already know that it is transforming our customer experience since they help us define it. I'm looking forward to discussing the details of this initiative with you at our upcoming CEMEX Day.

And now I will discuss our operating results in detail. Our consolidated ready-mix and aggregate volumes grew on a like-to-like basis during the year, while cement volumes remained flat, despite the occurrence of natural disasters in various countries in which we operate. Our consolidated prices in local currency terms for our 3 core products increased as well, reflecting the continued success of our value-before-volume strategy.

As a result of our favorable volume and price performance during 2017, our net sales increased by 3% on a like-to-like basis. Operating EBITDA in the same period declined by 6%, also on a like-to-like basis. The impact of higher consolidated prices was offset by the increase in cost, mainly energy and transportation. This led to a margin decline of 1.8 percentage points.

Our free cash flow after maintenance CapEx was close to $1.3 billion. We continued our initiatives to reduced interest expense and working capital investment, which more than offset the reduction in EBITDA generation. In the case of working capital, we were able to reduce our working capital investment by $350 million, on top of the $600 million achieved in 2016. We reached negative 13 average days during the fourth quarter and negative 5 average days during the full year.

Conversion of EBITDA into free cash flow after maintenance CapEx reached 50% during 2017. In addition, our net income increased by 8%, reaching $806 million for the full year, and was the highest net income generation since 2007.

Our free cash flow generation for the proceeds from the asset sales allow us to reduce total debt by $1.7 billion during 2017. In addition, last month, we used a cash reserve of $350 million to pay our 2022 Eurobonds, increasing our debt reduction to close to $2.1 billion. Maher will provide more details on this later in the call.

Our discipline and consistency in producing our leverage continues to translate into an improvement in our credit ratings. During 2017, we obtained 2 credit rating average from Standard & Poor's, reaching a global scale rating of BB. In addition, Fitch Ratings devised the outlook of their current BB- rating from stable to positive. All in all, we, again, successfully delivered on our financial targets. We surpassed our divestment target and sold assets for close to $2.7 billion during 2016 and '17. These asset sales were down at average multiples in the double digits. Going forward, we do not anticipate any further material asset divestments for deleveraging purposes.

Regarding debt, in the 2-year period, we reduced our total debt on a pro forma basis by $4.3 billion, exceeding our set target.

We also reduced our financial expenses by $170 million and ended the year with a leverage ratio under 4x. As we prepare for the next stage of value creation for our shareholders, we are announcing 2 new initiatives for approval at our Annual Shareholders Meeting in April. The first is a share buyback program of up to $500 million. The second is an increase of the equivalent of 375 million ADRs in authorized shares. Additionally, we will ask our shareholders to grant our board discretion to go to the market, if and when needed. I would like to stress that this request is intended to bring our capital flexibility in line with that of standard practices in North America and Europe, and we are not currently looking at a transaction that would involve a capital increase.

Now I would like to discuss the most important developments in our markets.

In Mexico, we continue to see the successful implementation of our value-before-volume strategy. Our cement and ready-mix prices increased by 16% and 10%, respectively, during 2017. We have recovered most of the historic lag in input cost inflation in our prices. Going forward, we will target recovery of our input cost inflation. To this effect, we announced price increases in our cement and ready-mix effective on January 1.

Economic fundamentals in the country continue to be strong. We estimate that national cement demand was flattish during 2017. Cement industry volumes during the year were supported by increased demand from the private sector, mitigated by lower infrastructure activity.

Our full year cement volumes underperformed the industry because of the continued implementation of our value-before-volume strategy. However, during the quarter, we saw an improvement in our market position, sequentially reaching the highest quarterly level in the year. Our operating EBITDA margin reached 37% during 2017, an increase of 0.6 percentage points and the highest margin in 8 years. This favorable performance was mainly the result of our value-before-volume strategy and despite the 27% increase in unitary cement, kiln fuel and electricity costs. We continue with the implementation of different initiatives to improve our operations like the reduction of our clinker factor and alternative fuel substitution, which reached a record 24% during the fourth quarter, a year-over-year increase of 8 percentage points.

The industrial and commercial sector was the main driver for our cement volumes during 2017, and is expected to continue growing this year. Private investment projects like shopping malls, hotels, warehouses as well as manufacturing projects are being supported by consumption growth, a favorable outlook for tourism and improving manufacturing activity.

Regarding the self-construction sector, indicators including the economic activity index job creation and remittances, continue to be solid. These indicators, in addition to the reconstruction-related efforts and the expected favorable impact of the federal elections in spending, are expected to translate into a mid-single-digit growth for this sector in 2018.

In the formal residential sector, total investment for home acquisitions increased by 9% year-to-date November. With the introduction of new higher value loans products, INFONAVIT mortgage investment grew in the double digits during both the quarter and full year, and resulted in a moderation in growth by commercial banks.

Low income housing activity remain affected by the decline in government subsidies. A rebound in housing registers and starts during the fourth quarter as well as the reconstruction efforts should support this sector, which we expect will grow in the low single digits.

Infrastructure sector activity experienced a mid-single-digit decline during 2017, affected by the budgetary constraints. For this year, Mexico City's new airport and the 3 public-private partnerships projects already awarded will provide volume support.

Regarding the airport, we now have more visibility on the cement volumes required for the main projects and expect about 1.2 million tons to be consumed in the 2017-2020 period, about 0.5 million tons during this year. We have already secured about 40% of the volumes that have been awarded for this project, and we expect our participation to remain strong on volumes that are still being bid. However, due to the decline in the physical investment budget for 2018, we expect cement volumes to the infrastructure sector to decline in the mid-single digits this year.

Considering all this, we expect our cement volumes in Mexico to grow by 3% during 2018. In the United States, our cement volumes on a like-to-like basis, excluding the Odessa and Fairborn cement plants, increased by 5% year-over-year. Both ready-mix and aggregate volumes increased by 3% on a like-to-like basis, excluding the West Texas operations. Our reported results reflect the treatment of the Pacific Northwest asset sale as discontinued operation. Growth in the U.S. came despite significant precipitation in much of our footprint and the lingering impact of the hurricane in Florida on our operations. On a like-to-like basis, cement prices rose 5% year-over-year, with ready-mix and aggregate prices up 2% and 3%, respectively. We implemented 2018 price increases for our cement in Florida and Colorado states, which represent roughly 23% of our U.S. volumes. And currently, we have also introduced ready-mix and aggregate increases as well. While it is still early, we believe the increases have traction. In April, we will implement increases in the rest of our U.S. markets.

Residential activity accelerated significantly in the fourth quarter, with single-family construction and improvements driving the business. While water housing starts were flat year-over-year, the cement-intensive single-family sector grew 7%. Parts were supported by catch-up from the hurricanes in the prior quarter.

Single-family housing permits were up 10% in the quarter and 13% in our 4 key states, suggesting strong fundamentals for our business in 2018.

In the industrial and commercial sector, national contract awards were down 1% in 2017. Awards for our 4 key states, however, rose 4%. Florida and Texas were responsible for much of the outperformance. On the infrastructure side, streets and highway spending is down 4% year-to-date November. This performance reflects poor weather as well as reduced state and federal spending. Uncertainty surrounding the federal budget resolution continues to wait on deployment of FAST Act funds. We are optimistic, however, an increased state and local funding, particularly in our footprint, will drive highway spending.

The California transportation bill and Proposition 7 in Texas should support infrastructure demand over the next few years. During the quarter, pro forma EBITDA margin adjusting for end-of-year onetime adjustments declined by 0.8 percentage points. For the year, like-to-like EBITDA margin expanded by 0.8 percentage points. Margin performance for the quarter and full year was affected by severe weather, geographic mix, higher inputs and higher energy costs. For 2018, we are optimistic about the growth prospects of our U.S. business. We have seen demand for our products accelerate in the back half of 2017, and that momentum is expected to carry forward into 2018. With healthy consumer and business confidence and higher disposable income from tax reform, we believe the residential and industrial and commercial sectors should be the biggest contributors to growth. We expect some improvement in the infrastructure sector due to state funding initiatives in several of our key markets. Additionally, assuming timely approval of the federal budget, FAST Act increases should support incremental federal highway spending. Hurricane reconstruction is anticipated to bring incremental volumes. The timing of such volumes, however, is difficult to predict due to labor and funding constraints.

For 2018, we expect 3% volume growth in cement, ready-mix and aggregates in our U.S. operations. In our South, Central America and the Caribbean region, on a like-to-like basis, our volumes during the quarter declined 1% for cement, 3% for ready-mix and 5% for aggregates. For the full year, cement, ready-mix and aggregate volumes declined by 1%, 6% and 5%, respectively. Cement volumes during 2017 improved in Panama, Costa Rica, Nicaragua, El Salvador and Haiti. The decline in quarterly and full year operating EBITDA and EBITDA margin in the region is mainly the result of lower prices and increased energy on freight costs. I will give a general overview of the region. And for additional information you can also see CLH's quarterly results, which were also reported today.

In Colombia, both cement and ready-mix volumes declined by 8% during the quarter, reflecting the continued macroeconomic challenges the country is facing. During the full year, our cement volumes declined by 6%, while ready-mix volumes decreased by 13%.

Regarding pricing, we continue to see recovery during the quarter. On a sequential basis, quarterly cement prices increased by 2%. From June to December, cement prices increased by 3.5% in local currency terms or about $5 per ton. We also implemented a price increase for both bagged and bulk cement, which started on January 1. We remain committed to continue implementing our value-before-volume strategy going forward. The residential sector is expected to be the main driver of demand for this year, especially middle income housing as a result of downward adjustments in interest rates and mortgages as well as their execution of already funded government subsidies. Low income housing had a good performance during 2017, supported by government programs and resulting in a high base of comparison for 2018 activity. Regarding infrastructure, lower public investment is anticipated for this year, as the 13% decline in federal investment budget for transportation and infrastructure is expected to outweigh increased demand from 4G projects.

We anticipate our cement volumes for this year to be flat versus 2017, in line with expectations for the industry. 2018 should be the turning point for demand of our products in the country. In Panama, quarterly cement volumes declined by 3%, affected by a slowdown in the high income residential and industrial and commercial sectors. Our cement volumes during 2017 increased by 3%.

Infrastructure activity as well as low and middle income residential projects were the main drivers of demand during the quarter. For 2018, we expect our cement volumes in Panama to grow by 1%, which subdued demand during the first half of the year, resulting from a flat comparison base and as new infrastructure projects, such as the fourth bridge over the canal and the third line of the subway begin construction works.

In our TCL operations, domestic gray cement volumes remained flat during the fourth quarter and declined by 2% during 2017 on a like-to-like basis. Favorable volumes dynamics continue in Jamaica, driven by infrastructure and commercial activity in the tourism and retail sectors.

In our Europe region, improved economic fundamentals supported volume growth for our 3 core products during the quarter and the full year. Domestic gray cement, ready-mix and aggregate volumes increased by 8%, 4% and 3%, respectively, during the full year. Domestic cement volumes during this period increased in the double digits in Germany, Spain, Croatia and Latvia, and grew in the single digits in Poland and the Czech Republic. EBITDA increased by 9% during the quarter on a like-to-like basis, and EBITDA margin increased by 0.5 percentage points, mainly because of higher volumes and prices. During the full year, regional EBITDA declined by 9% on a like-to-like basis, mainly due to a geographic mix with lower contribution from our U.K. operations as well as higher energy costs.

In the United Kingdom, our cement volumes remained flat during the quarter and decreased by 6% during full year 2017. Adjusting for the nonrecurring industry sales during 2016, yearly cement volumes declined by 1%. On a like-to-like basis, our cement prices remain stable sequentially. The British Treasury recently released its autumn budget with an ambitious plan to improve productivity through an increase in public investment. Additional funding prioritizes high-value infrastructure projects and housing developments with a target to increase the supply of homes per year from 217,000 in 2017 to 300,000 by 2022. However, for 2018, given the continued uncertainty around Brexit, we expect our cement volumes to remain flat, in line with industry prospects.

In Spain, our domestic gray cement volumes increased by 28% during the full year. This growth reflects favorable activity in the residential and industrial and commercial sectors. For this year, the residential sector is anticipated to continue to be supported by favorable credit conditions, job creation, pent-up housing demand as well as the recent double-digit growth in housing permits. The industrial and commercial sectors should remain driven by improved business conditions and the recent double-digit growth in construction permits. Considering all this, we expect a 5% growth in our cement volumes during 2018.

In Germany, our cement volumes increased by 15% during the full year with stable pricing. Volume performance reflects solid consumption from our main demand sector as well as our participation in major infrastructure projects. We believe these positive trends will continue in upcoming months and expect a 2% growth in our cement volumes during 2018.

Infrastructure activity continues to benefit from increased federal government spending. In the residential sector, immigration and continued favorable conditions, such as low mortgage interest rates, low unemployment and rising purchasing power should continue driving demand during this year. In Poland, domestic base gray cement volumes increased by 15% and 5% during the quarter the full year, respectively. In addition, there were improved pricing dynamics during 2017, with an increase in our cement and ready-mix prices of 3% and 4%, respectively, on a year-over-year basis. Infrastructure activity accelerated during the quarter, and we expect this trend to continue in upcoming months. The residential sector was supported by low interest rates, low unemployment and government-sponsored programs. For 2018, we're guiding to a 4% growth in our cement volumes, driven by increased demand from the infrastructure and residential sectors.

In France, our ready-mix and aggregate volumes increased during the full year by 7% and 10%, respectively. There was higher activity in traded aggregate volumes during the year. In the residential sector, the government recently announced the continuation of the buy-to-let and first-time buyer 0 interest rate loans, but now with a focus on CDs with high residential demand.

In the infrastructure sector, works related to the Grand Paris project, the first part of the Nord-Seine canal and the Lyon-Turin tunnel will support volume growth this year. Considering all this, we expect our ready-mix volumes to increase 2% during 2018. For our Europe region, we are encouraged by the favorable demand conditions expected for this year, which should translate into better supply-demand dynamics and help us better offset our input cost inflation in the region going forward.

In our Asia, Middle East and Africa region, volumes for our 3 core products increased during the quarter. In the case of cement and ready-mix, the quarterly increase was in the double digits. During the full year, cement volumes declined by 2%, while ready-mix and aggregate volumes increased by 7% and 4%, respectively on a year-over-year basis, driven by favorable activity in Israel and the United Arab Emirates.

The decline in operating EBITDA reflects lower contribution from the Philippines and Egypt. In the Philippines, our cement volumes increased by 10% during the quarter and remained flat during the full year. Our volume performance during the quarter reflects improved infrastructure activity with increased government spending as well as a low base of comparison in the same period last year due to postelection transition effects.

Our cement prices on a year-over-year basis reflect heightened competitive conditions. For 2018, we expect our cement volumes to grow by 8%, mainly driven by the infrastructure and residential sectors. Infrastructure activity should be supported by the $21.9 billion government budget for this year, 27% more than that in 2017. The residential sector is expected to benefit from the recent double-digit growth in mortgages, improved remittances and higher disposable income due to the recently approved tax reform.

For additional information on our Philippines operations, please see CHP's quarterly results, which will be available late tonight, Friday morning in Asia.

In Egypt, our cement volumes increased by 23% during the fourth quarter and decreased by 6% during the full year. Demand volume growth during the quarter benefited from improved demand in the residential and infrastructure sectors as well as a low base of comparison versus the same period last year. During the full year, the decline in cement volumes reflects the impact of the economic reforms, including currency dollarization and fuel subsidies reduction, which affect the demand for our products particularly during the first half of the year. Our cement prices in this period increased by 10% in local currency terms and partially offset significant input cost inflation we had throughout the year.

For 2018, we expect national cement volumes to increase in the low single digits, driven by the infrastructure and residential sectors. However, we are guiding to a decline in our cement volumes in Egypt due to the continued challenging supply-demand dynamics, as new capacity is expected to come online this year. In Israel, our ready-mix and aggregate volumes during the full year increased by 10% and 6%, respectively, reaching quarterly and yearly record levels. Solid economic growth and low unemployment continue supporting activity in all our main demand sectors. Israel represented more than 30% of the EBITDA generation of our EMEA region during the year.

In summary, during 2017, we delivered solid operational and financial resources despite the significantly lower contribution from our operations in Colombia, Egypt and the Philippines as well as increased energy costs. We have a robust growth portfolio of operations, which will continue to improve its proceedings going forward.

And now I will turn the call over to Maher to discuss our financials.

[Maher Al-Haffar, executive]

Thank you, Fernando. Hello, everyone. On a like-to-like basis, our net sales increased by 4% during the quarter, while operating EBITDA declined by 7%. We had higher like-to-like EBITDA contribution for Mexico and the Europe region. Our quarterly operating EBITDA margin declined by 2.4 percentage points. The favorable impact of volumes in our pricing strategy was offset mainly by higher costs in energy, freight and raw materials in our ready-mix operations. The full year impact of foreign exchange fluctuations on our EBITDA was $31 million, excluding about $44 million of the effective dollarized costs in our operations, which mainly consists of energy and maintenance-related parts. Cost of sales as a percentage of net sales increased by 2.2 percentage points during the fourth quarter, driven by higher energy costs. Operating expenses, also as a percentage of net sales, increased by 0.2 percentage points as a result of higher distribution expenses. Our kiln fuel and electricity bill, on a per ton of cement produced basis, increased by 15% during the fourth quarter and 13% in 2017. This increase is in great part due to the increase in energy cost in Mexico.

Our quarterly free cash flow after maintenance CapEx was $680 million, $62 million higher from last year's level, mainly explained by lower financial expenses and a higher reversal in our working capital investment, which more than offset higher maintenance CapEx and lower EBITDA. This is the highest free cash flow in a fourth quarter ever. Our free cash flow initiatives during 2017 led our free cash flow after maintenance CapEx to reach close to $1.3 billion. Both our free cash flow after maintenance CapEx and our free cash flow after total CapEx surpassed $1 billion for the second year in a row. The fourth quarter was the fifth consecutive quarter with negative average working capital days, reaching negative 13 days in a record level for our fourth quarter.

During 2017, we reached negative 5 working capital days, also a record level compared with 3 days in 2016. Other expenses net during the quarter reached $271 million, and mainly due -- mainly include impairment of assets, severance payments as well as the expense related to the antitrust fine in Colombia, which was paid early this year. We had a gain on financial instruments of $27 million, resulting mainly from the remeasurement of CEMEX' previous ownership interest in TCL. When CEMEX acquired an additional participation and started consolidating this company, the fair value of TCL's assets was determined and resulted in a $32 million gain in CEMEX' previously held ownership of 39.5%.

Foreign exchange results for the quarter resulted in a gain of $58 million, mainly due to the fluctuation of the Mexican peso versus the U.S. dollar, partially offset by the fluctuation of the euro versus the U.S. dollar. Income tax for the quarter had a negative effect of $96 million, mainly due to a write-down of deferred tax assets in the U.S., as these were recalculated at a lower statutory tax rate. During the quarter, we had a controlling interest net loss of $105 million. Net income for the full year increased by 8%, reaching $806 million, and was the highest since 2007. We continue with our initiatives to improve our debt maturity profile and strengthen our capital structure. We paid the outstanding aggregate principal amount of the 9 3/8% senior secured notes due in 2022 in October and of the 6 1/2% senior secured notes due in 2019 in December. In addition, we issued EUR 650 million in senior secured notes with a coupon of 2 3/4% due in 2024. In December, we called the outstanding principle amount of the 4 3/4% euro-denominated senior secured notes due in 2022. For this purpose, a cash reserve for $350 million was created in December and used for the redemption of these notes on January 2018. Our debt maturity profile shows these 2022 euro notes reclassified as short-term debt. During the quarter, our total debt, plus perpetual securities, decreased by $209 million, translating into a full year debt reduction of more than $1.7 billion. That variation during the quarter includes a negative translation effect of $45 million. Our leverage ratio at the end of the year reached 3.85x from 4.22x as of the end of 2016. We have included a pro forma debt maturity profile, which shows the utilization of the cash reserve created in December and a portion of our revolving credit facility to pay the 2022 euro notes. The payment was made on January 11. This brings our pro forma debt reduction during the year to close to $2.1 billion. Our current maturities for the year's 2018 to 2023 should be well below our free cash flow generation for those years. Our cash cost of debt during the fourth quarter is approximately 5.11%, still much higher than that of an investment grade company. There is still significant room for additional financial savings as we continue to improve our capital structure and reduce debt. As we have done in the past, we will be proactive in taking market opportunities to manage our maturities and reduce financial expenses, ensuring that our debt profile continues to be manageable.

Now Fernando will discuss our outlook for this year. Fernando?

[Fernando Olivieri, executive]

The growth outlook for 2018 is very favorable, better than it has been for almost a decade. We expect national cement consumption in our main markets to be from stable to growing during 2018, and conservatively anticipate both our consolidated cement and aggregate volumes to grow by 2%, while our ready-mix volumes should grow by 4%.

Regarding our cost of energy, on a per ton of cement produced basis, we expect a 4% increase from last year's levels. Guidance for total CapEx for 2018 is about $800 million. This includes $550 million in maintenance CapEx and $250 million in strategic CapEx, which includes investments in expansions of our Tepeaca plant in Mexico and our solid plant in the Philippines.

We also anticipate a reduction in financial expenses for this year of about $125 million. With respect to working capital, we anticipate no variation in total investment from last year's levels. Cash taxes for 2018 are estimated to be between $250 million and $300 million.

In closing, I want to emphasize the importance and sustained progress that we have made on our road toward regaining our investment grade capital structure. And I want to remind you that progress occurred despite FX and energy headwinds as well as less than exuberant growth in some of our markets. In these past 3 years, we had important financial and operational achievements. We sold assets in excess of $3 billion. We mainly use the proceeds from these asset sales, plus free cash flow generation, to reduce debt. Total debt, plus perpetuals, was decreased by close to $5 billion in this period. We reduced our level of ratio from 5.19 at the end of 2014 to 3.85x today. We raised our conversion rate of EBITDA into free cash flow after maintenance CapEx from 15% to 50%. We became much more efficient in our use of working capital, which we reduced from 19 days on a year-end basis to negative 23 days, representing a reduction in total working capital investment of approximately $1.2 billion. Controlling interest net income reached $806 million, the highest in a decade, from a net loss of $507 million 3 years ago. We improved the operational efficiency of our cement cadence from 84% to 89%. During 2018, we will continue on our value creation path consolidating these and all of our other achievements over the past 3 years to reach an investment grade capital structure as soon as possible. Thank you for your attention.

[Maher Al-Haffar, executive]

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. Now we will be happy to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Adrian Huerta from JPMorgan.

[Adrian Huerta, analyst]

My question has to do with these shareholder initiatives. So the first question is on the buyback proposal. First, congrats on the proposal. Can you tell us how you will decide between going forward between a buyback program and a potentially a cash dividend? What are your views on both ways to return cash to shareholders? And the second question, regarding the potential capital increase, I have 2 questions on that. First, if you can share with us the criteria that management will use to assess a potential investment. Now what are the most important aspects in your decision process analysis? And the other question on the capital increase is, will you look for investments that will strengthen your market position to expand to new territories or to expand on your value chain? I understand that doesn't seem to be a priority right now still, but I would like to understand the management way of thinking when assessing this.

[Fernando Olivieri, executive]

Thank you, Adrian. Let me start with the second question about the capital increase. So what we're doing, given that we have our AGM next April, is asking for approval. Of course, we are not issuing equity. That's what we're doing, asking for an approval. Now on the criteria that we have revised and defined or redefined for potential investments in the future, I think we started communicating that since our Investor Day in March last year. And we continue having the same criteria. Meaning the preference or the guidance or our main interest is investing in cement, in high-growth profitable markets, especially large markets, with the potential of CEMEX developing through time an additional profit pool, together with investments in aggregates, mainly in developed markets, meaning U.S. and Europe. And in the case of ready-mix, we might invest in ready-mix as long as it is complementary towards either cement or -- and/or aggregates in integrated markets. That means mainly, again, U.S. and Europe. So that's basically the criteria. We do have somewhat additional criterias. But I think regarding the type of investments, that definition or that criteria will help all of us to understand what is it that we should be doing in the next year. Remember that we have been commented that -- we consider CEMEX entering already in a sort of a transition phase. I think that was the term I used in our last CEMEX Day. We have moved away from very high leverage ratios. We are not yet in investment grade. We're kind of getting there, but not there yet. And we are preparing, and we are giving the company options moving forward. So that's why we are now requesting for this approval. An additional comment I can make is that I remember we also -- that we communicated some criteria on the financing of potential acquisitions. You might recall, Adrian, that we commented that in the past, if you look at this churn, every acquisition of CEMEX, we have used almost 100% debt -- almost 100% bank debt. So we have in the past privileged short-term, low-cost type of debt.

And moving forward, we have commented that we would -- we have not changed our mindset. So we stick to what we have commented before is that we want to make -- we want to finance potential moves or acquisitions in the future with a combination of -- it's part equity, debt and free cash flow. So that's -- again, this is a step into that direction. Hopefully, it would be approved in the AGM, so we can have much more options for CEMEX in the near future. Regarding share buybacks, I think, again, we want to have options open. So what if we don't find through time at a reasonable or a transaction that complies with all of these criteria. By the way, I forgot to mention, perhaps the most important characteristics, which is, we won't do any investment that deviates us from our target of gaining back our investment grade. But you can imagine we are kind of imposing so many parameters to a potential transaction. Now going back to the buyback proposal. Again, we want to have options open. We are asking for approval of $500 million, even though we know the cost of covenants. We have a limitation of $200 million. And again, we will take the opportunity. If there is no other better use and we find good opportunity to buyback, if it is this year, up to $200 million, not to up to the $500 million we are requesting. So we will do it. So we are trying to find ways, different ways, different -- to have different options in order to create shareholder value. Does that answer your question?

[Operator]

Your next question comes from Gordon Lee from BTG.

[Gordon Lee, analyst]

Two questions. The first is a follow-up on the previous question, on the request for the capital increase. So should we interpret then that if those shares were to be used, it would really only be used to finance an acquisition? In other words, we should not expect the issuance of shares to help you reach the investment grade status. You expect to reach that gradually over time with EBITDA improvements and free cash flow usage, I assume. And then the second question is just on the balance sheet, just really more out of curiosity. If you look at the currency composition of your debt this quarter, roughly 30% is in euros, which is much more than you've carried in the past and double really what the EBITDA from that region is. Is that something temporary or is that something that we should expect going forward?

[Fernando Olivieri, executive]

Let me take the first one, Gordon. The idea of this issuance, and I was remembering the last time we issued [indiscernible] definitely is to post a profitable growth. By no means, we are thinking of using proceeds of a potential equity issuance to support, let's say, paying some debt, which, as you know, it just doesn't make sense under our current financial situation. On the second one, I don't know if you have any comment, Maher.

[Maher Al-Haffar, executive]

Sure. Yes. Well, first, maybe I could also, Gordon, complement just a little bit in terms of our thinking, right. I mean without using our own calculations if we were to take the just kind of the consensus, back of the envelope consensus of our cost of capital that we hear from investors and analysts, it's probably somewhere between the 11% and 12%, that's equity capital. And then, on the debt side, we did say that our current cash cost is just a bit over 5%. So even if you say it's a little bit more than that, with our current tax structure that would translate on an after-tax cost of debt that's somewhere between 3% to 4%. So clearly, it does not make any -- it would not make any sense for us to be issuing equity, which today based on current valuations is more than 4 or 5x as much as our after-tax cost of debt. So the answer is, definitely we would not be doing that, that's extremely important. Now in terms of the question on euros, I think the -- there -- probably the most important reason that we have temporarily, I would say, because you're right, our EBITDA is certainly not as big as the percentage of the debt component, is really different driven by cost. And we just -- we just did a transaction at a very attractive coupon. It's very competitive to the dollar market both in cost and in tenor. And so that's really the reason. There is really not a bias. Now, we do expect also the EBITDA to grow out of Europe. I mean, you've seen the volumes that we did last year. We saw the inflection point in the last quarter in Europe. And so we do expect growth, but -- and also remember that we have to take a look at the liability management that was taking place right at the end of the year into the beginning of the year. So if you recalculate those numbers, it probably will reduce the percentages a little bit. So there is -- again, to recap, there's really no bias towards raising debt in euros. If you recalculate the amount after the paydown, it should go back to more in line with historic levels. And we have been able to raise funding in euros in very attractive terms and we do expect growth in EBITDA out of our euro-denominated portfolio.

[Operator]

Your next question comes from Vanessa Quiroga from Crédit Suisse.

[Vanessa Quiroga, analyst]

Just a quick one on the board approval that you are seeking. On the board's communiqué there was an mentioned about potential convertibles issuance as a trigger for looking for this approval. But please clarify, if I'm mixing things. That's a quick one. Also a question about free cash flow. Do you expect in 2018 to be able to keep a 50% free cash flow conversion, been given the -- how far, you've improved the working capital cycle already? Would you expect to be able to repeat that high free cash flow conversion in 2018? And thirdly, also on the working capital, can you update us where the cycle stands as of the fourth quarter in the U.S.?

[Fernando Olivieri, executive]

Taking the second one , Vanessa. Yes, we think we can maintain the realization of free cash flow when compared to EBITDA. I think if you go to the guidance we gave in the different elements of free cash flow, what you can see is that all of them, except for the CapEx, I think, they are being reduced. And in the case of working capital, is no change. Again, in the case of working capital, it's not that easy to estimate, particularly the last quarter or particularly the last month of the year. But I do remember commenting before in other calls or even during our presentation of working capital in our last Analyst Day is that we can expect some improvement in certain countries and that's what happened by December last year. And this year, I think, the U.S., still has potential to improve. Out of the different business units, they are the ones -- and I'm not saying the rest are not going to improve or to maintain their current levels of investment in working capital. But because of its size and because of their current capital -- working capital investment, I think, this will -- might provide an additional contribution. But we will review that during the year, and if there is any change, we will timely guide to that change.

[Maher Al-Haffar, executive]

And Vanessa, regarding the authorization request, I mean, and I think, we -- Fernando also mentioned it in the remarks, what we're doing is really, we're just trying to -- now that we are kind of a getting closer to the investment grade capital structure, we want to do what frankly our peers and other companies in the U.S. market and the European markets do. And the authorization, covers the issuance of shares as well as convertibles to give us that flexibility. I mean, that's just to -- it's not a particular signal that we want to do one thing or the other, it's just to enable us to do both as needed, if needed and when needed. And then of course, when we do -- I mean, as Fernando said earlier, I mean, it's very important to note that, to the extent that we are looking at something like this, obviously it raises the threshold of return on any transaction that we would contemplate. And we would look at, obviously any such issuance if it happens, to be accretive to shareholder value. I mean, so it's really just providing that flexibility. Vanessa, you had a question...

[Fernando Olivieri, executive]

The third one.

[Maher Al-Haffar, executive]

There was a third one about the cycle, the U.S. cycle. Could you please repeat that, I didn't quite get it?

[Vanessa Quiroga, analyst]

Yes, the working capital days in the U.S., where did they end as of December?

[Maher Al-Haffar, executive]

I mean, we haven't -- we don't give that number out, but I can tell you that they were -- there's still some work to be done, I don't know, Fernando, if you want to comment on that.

[Fernando Olivieri, executive]

Well, I think I already mentioned that out of the progress we have done in our different regions and business units. I think, the story has been that in the last few years, let's say, 3 to 4 years, several business units, we're doing progress in this initiative and this area, except for Mexico and the U.S., Mexico and the U.S. added an additional effort, I think it was 15-or-so. Mexico has done much more progress than the U.S., that's why I'm saying that U.S. still have some potential of optimization in their -- in the working capital there still, while Mexico is still in double-digit negative days, the U.S. is still in double high positive investment days. So -- but again, there are so many uncertainties on this aspect that we -- for now we prefer to guide to no additional investment, and again, we will review it through time and we think there is evidence that we might achieve much better results in optimization of working capital in the U.S. then we will share that with you.

[Operator]

And our next question comes from Ben Theurer from Barclays.

[Benjamin Theurer, analyst]

So I have a question a little off the whole financing and free cash flow. It's more about the outlook 2018 and pricing in the U.S. and Mexico. So clearly, in the U.S., as we saw in the fourth quarter, you've been muted in price increase so there was nothing on a sequential basis. Could you shed a little bit light on what you're planning in terms of price increases or what you've put out in terms of price increases in the U.S. in the different states and what you think, you might be able to achieve here on a full year basis, considering that we're getting in even more areas to a more restricted supply/demand domestic environment? And then second, in Mexico, we saw about a month ago you did increase prices as others did as well back in December. Despite being in election year and I remember in the past, in election years usually, there hasn't been much of movement on pricing in Mexico. But I would assume you do not oppose if your peers raise prices in Mexico to follow that. But how do you think is that going to cause noise or maybe some backdrop here into what's coming in the next let's say, 3, 4 months in Mexico on your pricing power? And what you're seeing in terms of pricing for Mexico for the rest of the year? Those would be my questions.

[Fernando Olivieri, executive]

Okay, thanks. Let me take the one, for Mexico. I think the strategy, that we have been following in Mexico, we have been describing it already for 3 years, because that's the period of time in which we have been developing this strategy. It was to recover input cost inflation, that in the previous years -- several years, we didn't manage to do that because of different reasons. As of December '17, we have already achieved that. So current prices in Mexico are already the level of prices, that have already offset input cost inflation of several years. So the change start in this year is that, our intent is to -- has to recover input cost inflation. So we have already announced on price increase in January for around 10%. General inflation Mexico is expected to be around in the range of 6% to 7%. So that's what our pricing strategy in Mexico will be this year. We -- if the price announcement sticks to a higher proportion, we -- that might be only price increase for the year. But at this point in time, we just don't know that. So again, what is clear is that we have achieved already our target, that we have been trying to achieve for the last 3 years, and that from now on, it is just an effort of maintaining current prices in peso terms, plus getting additional pricing just to offset inflation.

[Benjamin Theurer, analyst]

So basically, to just to recap that for Mexico, Fernando. You've done one and if there's nothing major from an externality to happen in 2018, that's likely to be the one and only one. So everything else equal, I mean, clearly, if we were to get a sharp devaluation on the currency, because of election outcome, NAFTA, whatsoever, that would translate in higher energy cost for you, because their price [indiscernible] dollar linked, that would be basically driving for rate increase, correct?

[Fernando Olivieri, executive]

I think that is a good summary. Just making a clarification, we have never mentioned anything related to the valuation. What we have been saying since early last stages of this strategy is that, for several years, we lost as much as 40% of pricing in constant peso terms and that's what we have impact. And we are pleased with the result of the strategy and the message now on is that, we are not going to try to increase, whatever. It is that simple. It's gaining back our own inflation. We're currently estimating our inflation at the same level of general inflation 6% to 7%. Let's see how it goes and let's see how much of the price increase sticks, because if -- you saw what happened with the price increase we announced in mid-last year. And so again, we will evaluate in a few months from now the result of this price increase and then we will decide accordingly.

[Benjamin Theurer, analyst]

Okay, perfect. And on the U.S. pricing?

[Maher Al-Haffar, executive]

Yes, on the U.S., Ben, maybe I could just start. I mean, we -- last year, I think, we ended the year total demand in the market close to about 96, maybe a little bit more. This year, our expectations and certainly if we take a look at the PCA, we're expecting almost close to 100 million tons of demand. And we are beginning to reach, I mean, the industry is reaching and we are reaching very high capacity utilizations. I mean in California, we're -- in Texas, we are in the 90% level, in Florida, we're close to 80%. And on average we're probably in the mid-80% capacity utilization. So clearly, the supply/demand dynamics are getting better. And frankly, one of the reasons that profitability has been impacted is because of imports needing to come into the country to satisfy demand, which on one side is not good, because it reduces the profitability of those tons. But on the other side, it's a very positive indicator that we're getting to that tension point of supply and demand, which should be more supportive of pricing. Now as you saw pricing that was realized last year on a like-to-like basis, was 5%. And we have announced pricing increases that are in the high-teens, in some markets and in the high single digits in some of our markets. For January implementation, we announced -- we essentially implemented pricing in Florida, North Atlantic and Colorado. Those markets represent about close to a third, it's about 35% of our volumes, and we're getting reasonably good traction in those markets. In April, the second wave of price implementations will come into place. And essentially California, South Atlantic, Arizona are the markets that were probably experiencing higher pricing increases than Texas, where we announced high single digits. And then in October, we're expecting some actions as well. So when you take a look at the announcements, and we take a look at the tightness in supply/demand, and we take into consideration, the kind of a leading indicator of tightness, the increasing imports, we are constructive on prices. And when we take a look at the fundamentals in the U.S., which is extremely important here, leaving out also the volatility that we've been seeing over the last few days, residential demand continues to have a lot of legs, we're seeing single-family housing, in particular, continuing to be very healthy. The tax reforms that have taken place in the U.S. are likely to be supportive. Frankly, the only market that we're that may get slightly negatively impacted as a consequence of the state tax deduction is California. The rest of our states in our portfolio really don't have that issue. We have a lot of first-time buyers that are likely to benefit from the tax availability. So we're quite constructive. And we also see continued pickup in industrial and commercial price of energy going up is likely to drive some demand in Texas as well. So we are constructive on pricing, and let's see what happens on the volume side at the end of the day. I don't know if that addresses your -- that addresses your question.

[Benjamin Theurer, analyst]

Absolutely. Absolutely, Maher. Just one last one and I've heard it from other companies, I mean, really the difficulty, lack of labor, the higher energy cost, obviously you've mentioned that it had an impact already on the fourth quarter. So you just said higher energy prices are likely to be good for Texas, but then in the end in other areas, you're going to face higher cost of energy. You've said, Mexico, your inflation figures -- your inflation -- input cost inflation is roughly at that 6%, 7% range. What's that number in the U.S.? What are you seeing there, just because of the lack of labor and the increase in energy cost. I meant that must be definitely higher than what the U.S. general inflation's running it, correct?

[Maher Al-Haffar, executive]

;

Not really, I mean, I think that the -- there's definitely some increase. But also we have alternative fuels. I mean, yes, you're right. There is a shortage of drivers for instance, yes, there are shortages of framers for housing. I mean, the housing market, frankly, the only reason is not growing faster is because of shortage of labor. And that's of course, supporting prices and supporting rentals levels and all of that. So -- and that should also be reflected as well in pricing -- I mean, the pricing of our products. Energy is -- in the U.S. is definitely nowhere near what we have seen in Mexico. And in Mexico, you saw the comment. I mean, we reacted very active, very proactively and very aggressively in the form of alternative fuels. I mean, as Fernando said in the comments, we've increased alternative fuels in Mexico fairly rapidly to 24% of total fuels consumed there to a record level and we're still working. I mean, the mandate to everybody is to try to increase alternative fuels as much as possible, and that will dampen the increase in price of energy and may even reduce the weighted average cost of energy. Transportation fuels is one area, but that again -- I mean, that should make its way into pricing as well at the end of the day, in the U.S. and in Mexico.

[Operator]

Our following question comes from Carlos Peyrelongue from Bank of America Merrill Lynch. If your line is muted, please unmute yourself.

Our following question comes from Alejandra Obregon from Morgan Stanley.

[Alejandra Obregon, analyst]

I think top line is there, I mean, you've been mentioning a better outlook for 2018 with Mexico having a better pricing trends on the U.S. and single-family being healthy. So my question is more related to the cost structures. So maybe if you could help us narrow down how should we think of 2018 outlook for profitability, particularly, now that you've mentioned high raw material prices, the energy cost that you've been talking about. And how does this fit with these new improvements in energy mix, I believe you mentioned this for Mexico, but can we think of this for other markets? Anything on these. And I have another question related to the shareholders' approval, but maybe I can ask that afterwards.

[Maher Al-Haffar, executive]

Yes. So on -- I mean, first, in terms of energy, we're definitely not expecting the headwind that we saw last year. I mean, we're guiding towards 4% growth in cost of energy for cement. Transportation cost, I mean, we'll have to wait and see. I mean, and again, you have to take a look at what happened last year, I mean, pet coke and coal and to a lesser extent, natural gas everything was up like 40-plus percent. We certainly see potential strength in the energy markets and that should impact us positively on the demand side in the U.S., for instance. But we don't see anywhere near that kind of an acceleration next year, and like I said, alternative fuels is going to be another positive factor that will dampen that. In terms of transportation, we are pushing very hard to make sure that, that gets reflected in our pricing. I think everybody is doing that in all products, we're not unique in that respect. And frankly, I mean, if you do the numbers between volumes and prices, I mean, you have to see a positive impact on margins at the end of the day. And I think that certainly the margin that we saw -- the EBITDA margin that we saw in the U.S. in the fourth quarter is really not indicative of what the margin should be like. And I think that as we see some growth both on the volume and price side, we should -- maybe, I don't know if we'll go back to the guidance or the outlook that we gave of 200 basis point expansion per year, but it's probably going to be definitely positive and very different from what we have seen this year. And we're still working on all of the operating efficiencies. And I mean, whether it's clinker utilization, whether it's kiln efficiencies, those definitely translate to improvements in margin at the end of the day. So on the cost side, we're definitely seeing less of a headwind this year than we did last year. And we also see probably as good or better of volume outlook. I mean, don't forget last year, 2017, our volumes in Mexico for the full year were down 4% against the flattish market. So that's why we're constructive in terms of our volume outlook for us and for the market for 2018. I don't know if that answers your question. If I left anything out please tell me, and I'll be more than happy to cover it.

[Alejandra Obregon, analyst]

No, it does. Maybe just another question on the shareholders' approval. And forgive me, if you already explained this, but it's kind of confusing at this moment. You mentioned that you could either issue convertible bonds or do an equity offering, so this is flexible to do as needed and when needed. But my question is related, as how will you get to this decision. Is this investment-grade related or is this cost related for the option? Or how should we think of which option will you take in the longer term? I mean, if it's maybe cheaper to do convertible bonds, but then this will delay your investment grade. Is this something that you would be considering? How should we think of that?

[Maher Al-Haffar, executive]

Yes, I mean, look, first, I think it's very important to note that other than -- in terms of convertibles, okay, other than what we may do for liability management purposes of our existing convertibles, the issue of -- issuing convertibles or equity in combination with debt for a potential acquisition is going to be very dependent on the circumstances at the time of doing something like that. It would be very speculative to kind of say today that we have a certain criteria of mix. I mean, you're absolutely right. I mean, there could be an opportunity, because of markets in the convertible market, but you could raise convertible debt at attractive coupon, at attractive conversion prices. But that is -- that's going to be very, very situation specific at the time that something like that happens. Again, that is outside of the kind of ordinary course of business liability management of our existing convertibles. And again, I mean, the other thing is, I want to stress here that, the focus is on both of the 2 shareholder approval request that we put out, is that we're looking at essentially getting flexibility on both M&A and a share buyback, right? I mean, depending on how much value creation we can deliver through each one. Again, very specific situation, fact specific.

[Operator]

Your next question comes from Dan McGoey from Citigroup.

[Daniel McGoey, analyst]

Just wondering if you could split out on the energy costs, I think you mentioned the increase in 2017 was 13%, kind of breakdown between fuel and electricity. And how much of it was concentrated in Mexico? And then finally, on the guidance for a 4% increase in 2018, whether that is pretty much continuing the cost levels that you saw at the end of the year, steady into 2018 or if you are forecasting some type of either increase or savings initiative in it?

[Fernando Olivieri, executive]

Well, I think what I can comment on it, for most of our view, we do have a good idea on the cost for almost all 2018 because we make most of the contracts, either the last quarter of last year or early this year. So our estimate of 4% is more than a educated guess. Remember that, for instance, during last year, we guided to 12%, I think, increase. We ended up having 13%. So it was close to what we were guiding, so I think you can expect the same thing for 2018.

[Maher Al-Haffar, executive]

And in terms of, I mean, just to complement, Fernando, and to answer your question, Dan, in terms of percentage, roughly three quarters of the increase was energy -- was fuels -- combustible fuels. And the balance was electricity. And in the case of fuels, the bulk of that as we said was really Mexico.

[Operator]

Our next question comes from Eduardo Altamirano from HSBC.

[Eduardo Altamirano, analyst]

Two questions, actually. So one is on the notional amount of your exchange rate derivative. Basically, I wanted to see that what the mix is and why the amount has increased roughly from let's say, $18 million last year and let's say, on a sequential basis from $1 billion to $1.5 billion, if you could please provide some color and just explanation on that first, and then I'll ask my next question?

[Maher Al-Haffar, executive]

Yes, I mean, look we do -- as you know, we do have a program in place as an FX hedge and we have said that, it's a dynamic program. And it's a series of contracts that are constantly rolling off and being put on. And so, from time to time, we -- the notional amount may go up or reduce. As of the end of the year, for the fourth quarter, the notional amount is close to $1.2 billion. And so it's really the dynamism. I mean, and I don't -- we do obviously have certain internal policies on where you get in or get out and reduce the concentration of the positions, but that's really it.

[Eduardo Altamirano, analyst]

Okay. So this wouldn't be an indication any which way of your, let's say, especially, with the elections coming up in Mexico this year, if there was any sort of kind of concerns with slippage with the peso or any other local currencies within the region?

[Maher Al-Haffar, executive]

No, not at all, not at all.

[Eduardo Altamirano, analyst]

Okay, Maher. And then the next question is on the European carbon market reform that's set for 2018. At the end of this year, it seems that there is the emissions trading scheme will begin some sort of negotiations process. What are your expectations on, let's say, the outcome of that? How are you preparing? What is your expected impact, let's say, in terms of from your capacity standpoint or what effects do you think you'll have in terms of any cost that you might have to do for any, let's say, additional pollution control? And also just let's say from the European perspective, what the impact would be from a market basis in terms of capacity potential -- potential capacity closures?

[Maher Al-Haffar, executive]

Yes. I mean, just to -- to my -- best of my recollection, I mean, the next kind of round is taking place in 2020, not this year. And frankly, it's a complicated question. I mean, we don't think that it should be impacting us in any material way going forward. We do think that the expectation is that, it will take away the incentive of keeping capacity open that doesn't make sense. So we do expect markets to become more rational, in terms of installed capacity. And that should be very good for everybody, frankly, at the end of the day. And you're -- I hope that you will join us at CEMEX Day. We're planning to really discuss the energy situation in -- at length. But again, we don't think, it should impact us in any material way. And we do think that it should reduce the amount of let's say, irrationally kept capacity in those markets and it should make things better, not worse certainly.

[Operator]

We have time for one more question. And that question comes from Daniel Sasson from Itaú BBA.

[Daniel Sasson, analyst]

My first question is on Mexico. Your prices declined on local currency for the first time sequentially. I mean, for the first time since 4Q, '15. Do you think that the forces or the competitive dynamics, that were in place in Mexico in the fourth quarter last year have already been eased and do you -- how comfortable are you with the price increase announcement that you announced for January? And still on competition, Mexico, despite the slight sequential decrease in prices, prices are still at a very high levels versus the past let's say, 5 or 7 years. Do you see any risks of someone actually establishing an import channel in Mexico, or do you think that's unlikely? And finally, what do you believe is the expected sustainable EBITDA margin for a business in the Philippines, considering that it is -- this was a year with important swings in volumes, and competitive dynamics changing with imports coming in the Philippines, and so on so forth. So if you could elaborate a bit on that, that would be great.

[Fernando Olivieri, executive]

Well, let me start with the Mexico prices. I think, you referred to the decline, when compared sequentially fourth quarter to third quarter. As we have been commenting, we have been already for 3 years executing a price strategy, in order to recover cost inflation that we didn't manage to recover for several years before.

And the process is not, of course, that -- we do cause some instability in the market by doing it. Meaning, we do increase prices at the expense of some market share loss and then we manage to recover the market share that we lost, which is what happened during the last quarter. If you look at the public information on volume growth in the last quarter, in Mexico, our volumes grew more than what the market grew during the quarter. It was not enough during the 2017 period to recover completely market share, but it was some progress done then. So we believe that's a kind of a normal dynamic. And as commented before, I think with the results on our pricing strategy in 2017, we believe we have already recover the inflation that we didn't manage to recover from several years before. And from now on, what you expect from us is just trying to recover the current period inflation. That's for prices. Regarding competition, what can I tell you? I mean, this is a free market. So either here or in some other free markets, that is always a possibility. And regarding EBITDA in the Philippines, the comment I can make is that the Philippines -- the economy itself in our sector is doing very well. We are expecting volume growth this year, there was -- it was flat last, last year. The issue is some dynamics going on with the local production of cement, which is not enough, as you may know. We're investing in expanding the capacity of our solid plant in [ Buhisan ] . And imports have been taking the place of locally produced cement. We do expect that to change, not immediately, but there are several projects of new capacity coming on stream in the Philippines, and that will help in order to improve or to go back to a much higher EBITDA in the country. So that's what I can tell.

[Maher Al-Haffar, executive]

Does that answer your questions?

[Operator]

No further questions. I will now turn the call over to Fernando González for closing remarks.

[Fernando Olivieri, executive]

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

[Operator]

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