The Mexican cement giant quashed a near default. But the old days of double-digit growth could be years off
Monterrey, Mexico - For the head of a company that has just been through the worst stretch in its century-plus history, Lorenzo H. Zambrano is awfully cheerful. Over the past year the CEO of Mexican cement giant Cemex (CX) has seen the company's stock collapse, its investment-grade rating stripped away, its sales wither, and its creditors balk at refinancing $15 billion in debt, raising the specter of default. So why is the 65-year-old in such good spirits? "Because things are so much better than six months ago," he says with a belly laugh. "I really hope to never go through something like this again."
Cemex's latest results hint that the worst may indeed be over. True, third-quarter earnings fell 40% as sales dropped 27%. But that's better than the previous quarter, when profits fell 58% and sales were off 34%. Still, it may be years before Cemex returns to the days when serial acquisitions delivered double-digit growth and bankers vied to finance Zambrano's dealmaking.
In his 24 years at the helm, Zambrano has built Cemex into the world's No. 3 cement producer, with operations in 50 countries and $17.8 billion in revenues last year. Along the way, Zambrano's crew developed a well-honed formula, heavy on high tech and dubbed The Cemex Way, for squeezing out efficiencies. Cemex's knack for integrating acquisitions became the subject of Harvard Business School case studies and earned it a place in the elite club of emerging multinationals.
So when Zambrano saw an opportunity to be a major player in the U.S. three years ago, bankers didn't flinch. They jumped at the chance to lend him $15 billion to buy Rinker Group, an Australian company that did 85% of its business stateside. But in mid-2007, as Cemex was finishing the hostile deal, credit markets were tightenimg, making it tough to find buyers for $5 billion in Rinker assets Zambrano had hoped to unload to pay down debt. With the turmoil in global real estate, sales in Cemex's top three markets—Mexico, the U.S., and Spain—were plunging. Then a slide in the Mexican peso last October triggered $700 million in losses on currency hedges.
But the worst was yet to come. Last January, Standard & Poor's (MHP) dropped Cemex's investment-grade rating. Then in March, Zambrano had to pull the plug on a $500 million bond offering after prospective buyers demanded 20% returns. It didn't help that the prospectus noted that auditors had "substantial doubt" whether Cemex could "continue as a going concern."
Zambrano sat down with creditors to renegotiate the $15 billion in debt from the Rinker acquisition. The talks kept executives holed up at Monterrey headquarters nights and weekends where, despite 100 degree-plus weather, the air conditioning was shut off to save money. Other moves yielded bigger savings. Last year's bonuses were canceled, the workforce was trimmed by 9%, and capital expenditures were cut 75%.
Lenders in August agreed to refinance Cemex's debt, but they demanded that through 2014 the bulk of the company's cash flow go toward repayment. And if the U.S. economy doesn't recover quickly, Cemex "could take another hit," says Gordon Lee, Latin America research chief for brokerage UBS (UBS). Zambrano, though, isn't about to apologize for past risk taking. "If every time we were buying something we made plans for a tragedy that only comes every 100 years," he says, "we never would have made a move."