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Cemex Looks Solid As Mexico Sinks (Int'l Edition)


Business Week International The Corporation: STRATEGIES

CEMEX LOOKS SOLID AS MEXICO SINKS (int'l edition)

Lorenzo Zambrano sits in his office in Monterrey, Mexico, and plugs his IBM ThinkPad into a desktop port. As CEO of Cementos Mexicanos (Cemex), he's checking up on his company's international operations. Although Cemex' main product is a basic commodity, its information system is definitely high tech. With a keystroke, Zambrano calls up a bar chart plotting the previous day's erratic performance of a kiln in Venezuela and projects it on a big-screen TV set. He groans.

But another keystroke produces a smile. The graph of Kiln No.1 at Balcones, the New Braunfels (Tex.) plant purchased last fall from competitor Lafarge-Coppee, shows that its downtime has shrunk to 5% from more than 20% when Cemex bought it last fall. "And this was a plant that was supposed to be very well-run, by a French company," Zambrano says, a bit smugly.

MAJOR STEP. The maximum performance being squeezed out of Cemex' far-flung organization helps explain why the company is weathering Mexico's peso devaluation and ensuing economic crisis. Since taking over as CEO 10 years ago, Zambrano has helped Cemex extend its reach into 26 countries and acquire cement production facilities in six, including Spain, Venezuela, and the U.S. This year, the company is expected to cross a major milestone: non-Mexican operations will account for 51% of the company's $3 billion in annual sales. That's why, despite being head of Latin America's most heavily leveraged company, Zambrano is smiling. "It will be tough for our Mexican operations but not for Cemex as a whole," he says.

Investors, including foreigners who held an estimated 20% of Cemex stock before the devaluation, have been taking a show-me attitude. Cemex shares, traded in Mexico City and over the counter in New York as American Depositary Receipts, plummeted to $3.33 in mid-February, down from $9.40 in November (chart, page 50). The plunge reflected doubts about Cemex' ability to meet payments on its $3.2 billion hard-currency debt.

Zambrano and other executives jetted to New York three times to reassure investors, and their persuasion could be starting to work. "I was tremendously worried at first, until I ran through their numbers and saw it was feasible to service the debt," says Roberto Carrillo, who tracks Cemex for Baring Securities Inc. in Mexico City. "These guys know what they're doing--they know how to finance things." Baring still rates Cemex as a "buy."

Helping Cemex ride out the turbulence are the savvy moves the company made in anticipation of a peso devaluation. Last September, for example, it issued a $400 million convertible bond at just 4.25% interest to recycle short-term debt to a more manageable three-year maturity.

But it is the cushion of rising hard-currency revenues from abroad (chart) that is giving investors the most confidence that Cemex will be able to handle the debt that Zambrano piled up in his global outreach. In 1994, of a $1.03 billion cash flow, Cemex got $800 million from Mexican operations and $230 million from abroad. This year, it expects that a sharp drop in cash flow from Mexico to $580 million will be offset by a bigger flow of $430 million from foreign operations. Brags Cemex CFO Gustavo Caballero: "Our diversification strategy has worked."

Of course, it could not protect Cemex against a complete meltdown of the Mexican economy. But if Zambrano can stay the course, his company will reflect Corporate Mexico's coming of age. Mexican companies were challenged to become world-class competitors by former President Carlos Salinas de Gortari's opening of the economy to foreign trade and investment. Some inefficient companies have simply been blown away, but others have been working for years to respond. "We knew we had to become an international company to survive," Zambrano says.

A relative handful of these more outward-looking business leaders, many based in Monterrey, saw the market-opening more as an opportunity than as a threat. Grupo Maseca, another Monterrey company that is Mexico's biggest tortilla maker, has expanded into the U.S. and Central America. Grupo Pulsar, a conglomerate involved in everything from cigarettes to telecommunications, recently purchased Upjohn Co.'s international seed business. And Vitro has several joint ventures with U.S. companies, including Whirlpool. Companies that ride out the peso storm could emerge leaner and more competitive, at home and internationally.

LONG CLIMB. But among these entrepreneurs, Zambrano has been the most aggressive. After earning a Stanford MBA and climbing the corporate ranks for 18 years, he became CEO of Cemex in 1985, at the age of 41. Although the extended Zambrano clan owns around 30% of Cemex' stock, it's not a family-run company, and he is the only member of his immediate family working in it.

Zambrano launched his expansion campaign by first snapping up smaller Mexican cement companies. But what catapulted Cemex into the big league was a $1.8 billion move into Spain, where Zambrano grabbed two Spanish cement companies in 1992 at low prices and combined them into the country's biggest, Valenciana de Cementos. In Spain, Cemex competes head-on against subsidiaries of all three of its global rivals--Swiss-based Holderbank, France's Lafarge-Coppee, and Italy's Italcementi. "We wanted to go to Europe because our competitors are Europe-based," says Caballero. Cost-cutting and stepped-up sales have paid off: Last year, Valenciana's net profit jumped to $95.5 million, up from $37.7 million in 1993.

After digesting Valenciana, Zambrano moved to strengthen Cemex' presence in Latin America last April by paying $320 million for 60% of Vencemos, a Venezuelan company with 4 million tons of capacity. Vencemos practically fell into Zambrano's lap. He had been discussing a strategic alliance with the Mendoza Group, the banking and industrial conglomerate that owned Vencemos, when a Venezuelan banking crisis suddenly forced Mendoza to sell Vencemos for cash to save the group's bank. "The day before I was to fly to New York to talk about it," Zambrano recalls, "they called me and said it's going to be a sale--and they expected a decision that weekend." Under Cemex' tighter management, Vencemos is producing at full capacity with half its former workforce.

Now, Cemex has become an influential player in a group that shapes the terms of competition in many markets. The club is led by Holderbank, with more than 55 million tons of capacity in 1994, followed by Lafarge-Coppee and Italcementi with 46 million tons each, and Cemex with 44, a figure that will rise to 47 with a new plant now coming onstream. "The world is dominated by four companies that will be setting trends in prices and supplies," explains Salomon Brothers analyst Juan-Carlos Garca. "The attitude is, don't mess with my markets, and I won't mess with yours."

PRICE EDGE. The key battleground will be the emerging markets, and Cemex has real strengths there. Already, Cemex has become the world's biggest cement trader, buying and selling 8 million tons last year alone. And Cemex is widening its foothold in Asia's fast-growing markets, with orders for 2 million tons this year from customers in Taiwan, Thailand, and Indonesia.

Underpinning these global moves is Cemex' highly competitive cost structure: $25 to $30 per ton, compared with an average of more than $30 for cement makers in Europe and around $35 in the U.S. And Cemex' worldwide operating margin of 26.8% is much better than its competitors', which average below 10%. In Spain, a 23-member "workout" team sent by Zambrano slashed Valenciana's costs with measures such as reducing the number of corporate offices from 19 to just 1, and its vice-presidents from 18 to 6. At New Braunfels, operating margins have been hiked to 42% from 10% in just four months, by steps such as cutting personnel, using cheap off-peak electricity, and negotiating a new union contract that freezes wages for two years.

Inspired by these successes abroad, Zambrano last October unleashed the workout teams on Cemex in Mexico, with orders to look at the Mexican operations as if they were new acquisitions. The teams identified $85 million in annual cost savings to be realized in two years--a timetable now shortened to one year because of the peso crisis.

A key to Cemex' competitiveness is its online information system, developed by computer chief Gelacio Iguez over the past six years. It links all of Cemex' offices in Mexico and abroad via a network of satellite dishes, leased lines, and microwave communications. Zambrano, who travels with his ThinkPad, and all other executives can obtain detailed data on any of Cemex' worldwide operations, from a department's sales goals to the efficiency of a single kiln in a cement plant. The system even provides a morning report each day, via rooftop dishes at 100-odd independent distributors, on how many bags of cement each sold the previous day.

It is this increasingly sophisticated, globalized operation that Cemex argues is giving it the means to pay its mostly dollar debt. With a projected cash flow of around $1.1 billion this year, Cemex faces $470 million in interest payments and $690 million due on principal, plus $160 million in operating cash requirements--a total of more than $1.3 billion. But to cover these needs, Cemex has $330 million cash on hand, $60 million in short-term investments, and $500 million in committed lines of credit.

NO CHANCES. It helps, too, that CFO Caballero spent the past two years extending Cemex' debt to longer maturities averaging 4.5 years, up from 2 years when he began the effort. Because devaluations have marked recent Mexican presidential transitions, Zambrano wanted to take no chances. "Here in Mexico unfortunately, it's always wise to be liquid and in a defensive position when there's a change of government," he notes.

To further shore up its finances, Cemex is discussing with Citibank and J.P. Morgan & Co. an 18-month rollover of existing "swap" loans totaling $350 million that are backed by shares of Cemex and Tolmex, a publicly traded Mexican subsidiary. And Cemex is taking advantage of its multinational profile in another important way. In the U.S., Caballero is looking at ways to borrow against $500 million of assets of Cemex subsidiary Sunbelt Corp., which operates businesses from ready-mix concrete to construction materials and loading terminals.

Although major expansion moves are now on hold, Zambrano hopes to return as soon as possible to building Cemex' global profile, even across the Pacific. A Hong Kong office, opened in 1993 to promote exports and check out business opportunities, has several ventures in China under study. "We'll be there, one way or another, relatively soon--in the next two years at most," Zambrano says. Several non-Chinese investors have approached Cemex, and Zambrano plans to start with a small project--$100 million or so--with local partners as well. He is also eyeing several projects in Brazil.

The one overseas operation that Zambrano is reluctant to talk about is a cement plant in Havana, originally built by Connecticut-based Lone Star Industries Inc. and confiscated by Fidel Castro in 1960. The state-owned Mexican Bank for Foreign Trade took a 50% interest in the venture last year in a swap for Cuban debt, and Cemex is helping run it. "Two or three" executives shuttle between Mexico and Havana to provide "technical assistance," Zambrano says.

It's a sensitive issue because of U.S. efforts to isolate Cuba, particularly current proposals by anti-Castro legislators to deny U.S. visas to executives of companies that invest in formerly U.S.-owned properties. But Zambrano says that Cemex is working with a plant built in the 1970s, not the "obsolete" plant built by Lone Star in the 1950s. Somewhat testily, he points out that the Cuban plant "has some strategic value for us."

SOME SKEPTICS. That single-minded vision reflects three generations of Zambrano commitment to Cemex. Founded in 1906 under another name, the company was reorganized in 1920 by Zambrano's grandfather. When Zambrano returned from Stanford to join the company, he recalls, he had to overcome skepticism: "People said I'd be a disaster because I was a family member." He quickly proved them wrong, and of the doubters, he says drily: "I fired a few people in the first few months."

Now, Zambrano, a lifelong bachelor, is enjoying some of the rewards of success with expensive hobbies such as collecting Ferraris and an impressive array of contemporary Latin American art. He escapes his cement empire by strolling the extensive gardens of his country home in neighboring Coahuila state. Occasionally, he invites a flock of Zambranos for a family gathering at a Cemex-owned hotel in the vacation resort of CancPound n, one of the company's few non-cement-related assets. If Zambrano can navigate his company through Mexico's economic crisis, he'll be able to enjoy more than just a fancy lifestyle. He'll be able to say he firmly established Mexico's first true multinational on the world stage.By Geri Smith in Monterrey and John Pearson in New York


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