Cemex: Solid As Mexico Sinks

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.

BIG SMILE. 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 at the end of November (chart). The plunge reflected doubts about Cemex' ability to meet payments on its $3.2 billion hard-currency debt. "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 it 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 piled up by Zambrano in his global outreach. This year, Cemex expects that a shrinking $580 million cash flow from Mexican operations, down from $800 million in 1994, will be offset by a rising $430 million flow from abroad, up from $230 million in 1994. Brags 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.

Zambrano was among the handful of entrepreneurs who responded aggressively, seeing open markets as an opportunity, not a threat. "We knew we had to become an international company to survive," he says. He had become CEO of Cemex in 1985 at 41, after earning a Stanford MBA and climbing the corporate ranks for 18 years. Although the 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.

PROFITS JUMP. 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. Cost-cutting and stepped-up sales have yielded a handsome payoff: 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 Venezuelan cement maker Vencemos.

As a result of all these moves, Cemex has become an influential player in a group that shapes the terms of competition in many markets. The club, led by Swiss-based Holderbank, includes France's Lafarge-Coppee and Italy's Italcementi as well as Cemex. The key battleground will be the emerging markets, where the Mexican group has real strengths. In Asia, for example, Cemex is stepping up exports with orders for 2 million tons in 1995 from Taiwan, Thailand, and Indonesia.

Underpinning these moves is Cemex' competitive cost structure and high worldwide operating margin of 26.8%, much better than rivals' average of less than 10%. Zambrano sent a 23-member "workout" team to Spain to slash Valenciana's costs. And last October, Zambrano unleashed the team on Cemex in Mexico. It quickly identified $85 million in annual cost savings.

A key to Cemex' competitiveness is its online information system. 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 details on any of Cemex' worldwide operations. The system is crucial in managing Cemex' responses to market conditions. Referring to Cemex' Caribbean operations, competitor Gerald Essl, president of San Antonio-based Texas Lehigh Cement Co., says: "It's just phenomenal, the network they have and the flexibility of where to bring in product," he says.

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.

It helps, too, that CFO Caballero spent the past two years extending Cemex' debt to maturities averaging 4.5 years, up from 2 years when he began. "In Mexico unfortunately, it's always wise to be liquid and in a defensive position when there's a change of government," Zambrano notes. To further shore up its finances, Cemex is discussing with Citibank and J.P. Morgan & Co. a rollover of existing "swap" loans totaling $350 million that are backed by shares of Cemex and a Mexican subsidiary. And Caballero is looking at ways to borrow against $500 million of assets of U.S. subsidiary Sunbelt Corp.

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. Cemex' Hong Kong office is studying several ventures in China. "We'll be there, one way or another, in the next two years at most," Zambrano says.

SOME SKEPTICS. Such 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 had to overcome skepticism: "People said I'd be a disaster because I was a family member." He quickly proved himself. Of the doubters, he says drily: "I fired a few people in the first few months."

Now, Zambrano, a lifelong bachelor, is enjoying the rewards of success with expensive hobbies such as collecting Ferraris and Latin American art. If he can navigate Cemex through Mexico's 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.

Before it's here, it's on the Bloomberg Terminal.