It's safe to say this has been one of the most difficult years in the life of Lorenzo Zambrano, the 65-year-old chairman and CEO of Cemex (CX), the world's third-largest cement producer, founded by his grandfather a century ago. In January the company lost its investment-grade rating from Standard & Poor's (MHP) when the company came perilously close to defaulting on nearly $15 billion in short-term bank loans it had taken to buy Rinker Group, an Australian cement company with big operations in the U.S..
Cemex, one of Mexico's star "emerging multinationals," has operations in 50 countries around the world, but its exposure to the depressed U.S. housing and construction market has hit earnings hard. In March the company had to ditch a planned $500 million bond offering when lenders demanded 20% returns. In mid-August, Cemex finally refinanced its debt with dozens of banks. Zambrano recently emerged from a year of silence to talk with BusinessWeek Mexico Bureau Chief Geri Smith about lessons learned. The following are excerpts from their conversation.
How are you feeling now that your $15 billion debt has been rolled over?
Better than I felt a year ago. Things are so much better than six months ago! [This crisis] was a new experience for us, and I really hope to never go through something like this again. But I think our team responded quickly to the new circumstances. Our sales dropped dramatically in many markets around the world—the U.S., Spain, England. We cut costs—$900 million this year. We cut back heavily on investment. We made difficult decisions, like selling [our operations in] Australia. If your business falls by half, you have to do something significant.
Your share price has been incredibly volatile—from a high of $37 in June 2007 to a low of $4 earlier this year, and now it's around $11. The company came close to defaulting, and you had to dilute capital through new shares. What can you say to battered shareholders?
I don't agree that we've made our shareholders suffer. If you look at share prices over the medium term, they've been very good. This was a very small-market-cap company and now it's very large.
Cemex has bought many companies around the world, and on several occasions you've bought right before a country has gone into recession: Spain in the early 1990s, Southdown in the U.S. in 2000.
Inside Cemex we used to joke that every time we bought something, [the country where it was located] would go into recession. We called it the "Cemex effect" [laughing]. But the truth is, if you look at our investments five years out, [they look] very good. Sometimes we knew the economy was going to fall but we knew we could compensate that with much more efficient operations. The timing isn't [always good]: You have to buy when someone's willing to sell.
But this time, it wasn't our fault. When we bought Rinker [in 2007], we saw clear signs of a mortgage problem [in the U.S.], of over-construction. But we didn't expect credit to disappear…financial institutions to go bankrupt…and large banks to be practically propped up by the American government. [We didn't expect] a serious meltdown…leading to a widespread global financial crisis. That's very different from a classic over-building slowdown.
When did you realize Cemex might be in trouble?
September of last year. I was in New York on business and watched on TV the news of Lehmann and AIG (AIG), after what had happened at Bear Sterns. The most damaging thing was the Lehman Brothers bankruptcy. No one saved it, and that was a very clear signal that a serious crisis of confidence was coming.
Was taking on $15 billion of short-term debt over three years a mistake?
If there was any mistake made when buying Rinker, it wasn't the purchase itself, but the way we financed it, over 36 months. Hindsight is easy. We didn't envision a drastic fall in demand; we thought maybe a 15% to 18% fall in volume, not the 50% [we saw] in the U.S. Second, we didn't see such a grave financial crisis coming that would affect the whole world. The market believed in our Rinker buy at the time. When we announced the purchase, the share price didn't fall [right away]; it started falling seriously a year ago, a bit before the financial markets meltdown last September.
Cemex has always used short-term debt to finance big takeovers. Your debt jumped from around $6 billion to $22 billion when you bought Rinker. Wasn't that risky?
[The strategy] worked fine until Rinker. What happened in the world economy is something that happens every 100 or 120 years, it was completely unexpected. It was never our plan to keep $22 billion in debt but to have around $16 billion, after the sale of $5 billion in assets. [But] with the financial meltdown, our buyers evaporated.
Did Cemex—did you—suffer from hubris, overconfidence?
No, though it might seem that way from outside. The truth is, if every time we were buying something, we made plans for a tragedy that only comes every 100 years, we never would have made a move. It was a perfect storm.
You were perhaps fortunate to be able to refinance your debt with a small group of loyal banks rather than a large group of bondholders.
Yes, it was a difficult process, but…it took just a few months. Otherwise it would have hurt the share price more; even so, it was badly battered. Many well-informed friends in the financial community tell me that they thought we weren't going to survive.
In the prospectus for your recent share issue in September, you had to acknowledge that "our independent auditors expressed substantial doubt about our ability to continue as a going concern."
When auditors who've known us for decades, who've been with us through everything, come out with something like that, they were covering their behinds legally, and I told them that. They were practically making it a self-fulfilling prophecy. Many things have bothered me, but that phrase was one of the most irritating. We proved them wrong.
What was the worst moment—when you had to withdraw the $500 million bond offering in March after would-be buyers demanded 20% returns?
Yes. If we had accepted those interest rates, it would have set a very negative precedent not just for us but for many Mexican companies. The market was very skeptical that we could sell assets; we told them we could, and we did. [During the road show in the U.S. and Europe] there were some questions planted by people who wanted our share price to fall, short-sellers. There was a lot of that, many people betting we weren't going to make it. That was disappointing…and very unpleasant.
Cemex also recorded more than $711 million in derivatives losses last year.
They weren't speculative derivatives, they were a way of protecting our assets, lowering the cost of our debt, accessing markets outside of Mexico. And they couldn't be renewed because we lost our funding. It was a catastrophic, 100-year event; everything happened to us at once.
In other countries, in a company that suffered such big derivatives losses, share price volatility, and a near-brush with default, the CEO or CFO would get the boot, but not at Cemex. Why not?
If what you did was an error, there has to be a change in management. But if it…was an act of God, and it wasn't your fault, why? I believe that in many companies [fired execs are] sacrificial lambs, to make it look as if you're doing something when you're not. When you're in a crisis, changing management is a false move. None of our biggest institutional investors—very big, sophisticated funds who've known us a long time—ever sent us messages [suggesting] a change in management. On the contrary.
Your loan-refinancing agreement restricts Cemex; you have to spend your free cash paying down debt. Obviously you can't grow by making acquisitions for now.
Clearly we have limitations, but our hands won't be tied all the time. When we've had other crises, we've always found a solution and a way out, and I hope the same will occur this time. When there were grave problems in Mexico [years ago], we started exporting, and that opened other doors to us.
Obviously, right now we can't make acquisitions with cash. But I believe that if we present banks with a reasonable acquisition that is very accretive and good for the company, they would approve it. But buying isn't the only way to create shareholder value. It's not sexy, but we [can do that by] streamlining our business processes even more. I put an accountant in charge of our IT systems. We're advancing on ways of producing less CO2 and getting credits for it: investing in the wind farm, changing to alternative fuels.
Over the years, Cemex somehow managed to make cement sexy. Investors liked the high-tech, developing-country, international nature of the stock. After this tough year, is Cemex still sexy?
It will be again. Just watch us.