CEMEX S.A. de C.V.

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CEMEX S.A. de C.V.

Avenida Constitución 444 Poniente
Apdo. Postal 392
64000 Monterrey, Nuevo León
Mexico
Telephone: (81) 8328-3000
Fax: (81) 8328-3188
Web site: http://www.cemex.com

Public Company
Incorporated: 1906 as Cementos Hidalgo
Employees: 26,452
Sales: 67.92 billion pesos ($6.54 billion) (2002)
Stock Exchanges: Bolsa Mexicana de Valores New York
Ticker Symbol: CEMEX CPO
NAIC: 327310 Cement Manufacturing; 327320 Ready-Mix Concrete Manufacturing; 551112 Offices of Other Holding Companies

CEMEX S.A. de C.V. (Cemex) is the third largest cement producer in the world, trailing only France's Lafarge S.A. and Switzerland's Holcim Ltd., and holds leading positions in cement in Mexico, the United States, Spain, Egypt, the Philippines, and a number of Latin American countries. Operating as a small regional player in Mexico for much of its history, Cemex embarked on an aggressive global expansion program in the early 1990s, completing a string of acquisitions in targeted markets. By the early 2000s, the company had amassed an impressive international portfolio of operations within more than 30 countries on four continents, with revenues breaking down as follows: 34 percent, Mexico; 24 percent, United States; 14 percent, Spain; 7 percent, Central America and the Caribbean; 4 percent, Venezuela; 3 percent, Colombia; 2 percent, Egypt; 2 percent, Philippines; and 10 percent, other countries. Cemex's primary markets are in countries with a great need for infrastructure and a growing demand for housing. In addition to cement, which comprises about 76 percent of revenues, the company also produces and distributes ready-mix concrete (21 percent) and clinker (3 percent), an intermediate cement product made from limestone, clay, and iron oxide. Cemex holds the distinction of being the world's largest trader of cement, based on its trade relations with more than 60 nations. Its more than 50 wholly owned cement plants worldwide have an annual capacity of 80.9 million metric tons, and the company has nearly 500 ready-mix concrete plants.

1906–89: From Local to Regional to Number One Cement Maker in Mexico

Cemex traces its origins to 1906, when Cementos Hidalgo was founded near Monterrey in northern Mexico; it began operating a cement plant with a capacity of 5,000 metric tons per year. In 1920 Lorenzo Zambrano established Cementos Portland Monterrey and began operating a 20,000-metric-ton cement plant in nearby Monterrey. Zambrano engineered the 1931 merger of these two companies, creating Cementos Mexicanos, later known as Cemex. The firm was headquartered in Monterrey, where its head offices remained through the early 2000s.

Cemex remained a small, local company for the next 35 years. It adopted a regional profile in 1966–67 when it acquired a plant in Mérida, Yucatán, from Cementos Maya and also constructed new plants in Ciudad Valles, San Luis Potosí; and Torreón, Coahuila. A national presence was gained in 1972–73 when Cemex installed new kilns at its plants in Mérida and Monterrey and acquired a plant in central Mexico. Then in 1976 the company was listed on the Mexican bolsa (stock exchange), and it also became the leading cement maker in Mexico by acquiring the three plants owned by Cementos Guadalajara. By the mid-1980s, Cemex had more than 15 million metric tons of annual production capacity.

Despite having operated successfully within Mexico for more than 70 years, Cemex saw its future as a cement supplier and distributor dim in the 1980s when the governments' relaxation of protectionist policies—which opened the market up to aggressively expanding multinational players—posed a considerable challenge to Cemex's market position. Fortunately for the company, the founder's grandson, also named Lorenzo Zambrano, a savvy, Stanford University-educated M.B.A., was named chairman and CEO in 1985. He had spent his teenage years at the Missouri Military Academy in Mexico, Missouri, and later earned an industrial engineering degree from the Institute Tecnologico in Monterrey, Mexico's version of MIT, according to Forbes writer Claire Poole. In 1968 he returned to Monterrey after earning his M.B.A., and took a job with Cemex, where his uncle sat on the board, and proceeded to climb the corporate ladder for 18 years before becoming Cemex's CEO. Undaunted by the changing market climate, Zambrano began the implementation of an ambitious expansion plan, giving the company a near-monopoly in Mexico, where cement is the primary building material, beginning with the purchases of several smaller Mexican cement companies, including the 1987 purchase of Cementos Anahuac and the 1989 buyout of Cementos Tolteca, his biggest domestic competitor. Cemex ended the 1980s having secured domestic market share of 65 percent and having become one of the ten largest cement companies in the world. Cemex also diversified into other Mexican industries, such as tourism and hotels, but decided by the late 1980s to divest its non-cement holdings and concentrate on geographic diversification.

Gaining almost 5 percent of the U.S. cement market, Zambrano spent heavily to acquire marketing facilities all over the southwestern United States. Awakening to the Cemex threat, U.S. producers, including eight cement companies and two labor unions, filed an antidumping suit against Cemex, claiming "they had unfairly deflated cement prices and hurt the American companies' expansion plans in the Southwest and Florida," according to Poole. Zambrano was hit with a 58 percent countervailing duty when the International Trade Commission ruled that the U.S. producers had been hurt by the prices Cemex and other Mexican producers were charging—despite the fact that cement in Arizona and California was selling for the same price that Cemex charged. Zambrano reduced exports to the U.S. by 30 percent because the 58 percent import duty substantially affected Cemex profits. Zambrano held on to his U.S. market share in areas where the company could remain competitive due to higher prices. A GATT (General Agreement on Trade and Tariffs) later ruled that the antidumping duties levied by the U.S. Department of Commerce on imports of cement from Mexico were unfounded. Cemex's U.S. holdings, which were controlled through a subsidiary called Sunbelt Corporation, were augmented by the purchases of the Western U.S. affiliates of Blue Circle Industries and two Houston companies, Houston Shell & Concrete and Gulf Coast Cement. Because of the close proximity and language/cultural similarities, Cemex continued to develop ties within the mini-trade zone between northern Mexico and southern Texas, California, Arizona, New Mexico, Kentucky, Florida, and even as far north as Minnesota.

Pouring Pesos into Mexican Infrastructure: Early 1990s

The economic situation was becoming more lucrative at home, where Mexico's president, Carlos Salinas de Gortari, a Harvard-educated political economist, initiated public works programs for infrastructure modernization, increasing the demand for cement, as well as increasing the government-set price for cement. The government gradually allowed cement prices to rise from $46 per ton to $72 per ton. The production costs of about $30 per ton at Cemex's Mexican plants were the lowest in North America. By 1990, the company reached sales of approximately $1.2 billion, and accounted for 66 percent of Mexico's cement market, gaining the attention of investors who also appreciated Cemex's operating margins: 27 percent versus 9 percent for U.S. rival Lafarge. Ten years after Mexico's debt crisis, the ratio of government debt to annual gross domestic product was down to about 40 percent, versus 60 percent in the United States. Zambrano was an outspoken proponent of the North American Free Trade Agreement (NAFTA), although he admitted that the opening of the Mexican economy would be damaging to many of their industries not well-prepared in the areas of managerial expertise, technology, and marketing. Cemex invested heavily in robots and computers, giving them a far-reaching efficiency edge. Their main competitor in Mexico was Aspasco, left with a 20 percent market share—a company controlled by Holderbank of Switzerland.

Company Perspectives:

Our mission is to serve the global building needs of our customers and build value for our stakeholders by becoming the world's most efficient and profitable cement company. Our strategy is to: Focus on our core cement and ready-mix concrete franchise in the international markets we serve; Primarily concentrate on the world's most dynamic markets, where the demand for housing, roads and other needed infrastructure is greatest; Maintain high growth by applying free cash flow toward selective investments that further our geographic diversification.

In 1992 Zambrano negotiated a bridge loan from Citicorp, among others, for the acquisition of majority holdings in the two largest Spanish cement companies—Valenciana and Sanson—spending $1.84 billion, and causing Cemex stock to plummet because of investors' fears that the company was expanding too rapidly. The move into Europe pitted Cemex against world leaders such as Switzerland's Holderbank and France's Lafarge Coppee. Zambrano told Joseph L. McCarthy in Chief Executive, "Every time we acquire a company, we are told that we paid too much, that we are buying at the wrong time, and that we are crazy. Our critics know a lot about Mexico, but not enough about the cement industry." Cemex had paid less than half of what Cemex's competitors Lafarge and Ciment Français (now part of Italcementi) paid for smaller Spanish cement companies in 1989. Critics worried that Cemex was taking on too much debt, and questioned whether or not the company had sufficient international management expertise. Cemex repaid a large portion of the loan by reselling nonstrategic assets in the Spanish cement companies. Justifying his ambitious expenditures, Zambrano explained to McCarthy, "We had to become one of the biggest global companies. If we didn't, someone undoubtedly would have acquired us." The two Spanish companies were combined into Valenciana de Cementos, becoming Spain's largest cement producer. In 1994 Valenciana's net profit jumped to $95.5 million, up from $37.7 million in 1993. Cemex operated ten plants, four grinding units, and 23 distribution terminals in Spain, both maritime and land-based. The Economist reported that Cemex almost doubled the operating margin of its Spanish plants by firing a third of its workers there, adding that the purchase enabled Cemex to bypass antidumping duties imposed by the Bush administration to protect American cement producers, whose costs averaged a third more than Cemex's. Despite NAFTA, the Clinton administration maintained the duties (until a later ruling), which Cemex compensated for by exporting from duty-exempt Spain.

The company bought a cement plant located in New Braunfels, Texas, from Lafarge Corporation, which included four cement terminals and 52 percent of Parker Lafarge Inc., which was an aggregate plant producing an annual capacity of 820,000 metric tons. During this period Cemex had 18 cement production plants and 36 distribution terminals strategically located in Mexico and the United States. The company's first quarter 1994 American sales increased by 45 percent over the previous comparable quarter.

Mexico's economy began to decline and private investors were discouraged by the uprising in the south and the murder of the ruling party's candidate. Cemex's foreign operations gave the company a hedge against the weakening peso, down 7 percent against the dollar in the first half of 1994. The recession had the effect of paralyzing mortgage loans in Mexico, which in turn affected the housing sector and the demand for cement. Still, net sales dropped only 2.3 percent, offset somewhat by a decline in the costs of sales and operating expenses derived from lower fuel and electric energy prices (a major expenditure in the cement industry), a decrease in personnel, and a 23 percent increase in worker productivity. To strengthen Cemex's presence in Latin America, Zambrano bought 60 percent of Vencemos, Venezuela's largest cement company, for $550 million, partly in preparation for export to places such as northern Brazil, Panama, and the Caribbean. In the Caribbean, Cemex completed negotiations for the acquisition of 50 percent of Scancem Industries, Ltd., a company that operated in five countries in the area. The transaction enabled the company to market half a million metric tons of cement to the region, accounting for approximately 50 percent of the imported cement consumption there. At a Panamanian government-held auction, Cemex was awarded Cementos Bayano of Panama, for a price of $60 million, furthering the consolidation of its Caribbean market. Cemex was pursuing its ambitious plan to provide raw materials for the large infrastructure projects developing in Spain, Asia, Africa, Europe, and other Latin markets. Within seven years the company had tripled its global production capacity.

Emerging Markets Throughout the 1990s

Chief Financial Officer Gustavo Caballero Guerrero told Victoria Griffith of CFO Year that "the company's main commitment is in emerging markets, and future purchases are likely to take place either in Asia or Latin America. Emerging markets have a number of advantages. First, they will grow much faster than the First World in the long run, and strong economic growth is essential in the cement market. Second, emerging markets view cement not as a commodity, like the First World, but as a brand-name product. It's much easier to differentiate ourselves in emerging markets from our competitors." Cemex established a sales office in Hong Kong, hoping to enter economies of scale necessary to beat its competitors, while also diversifying its sources of borrowing. Caballero explained that their financing of eurobonds, convertible bonds, and other sources of credit made raising money easier for Cemex than for other Mexican groups, but that financing is still expensive compared with international competitors. He admitted to one disadvantage of operating in Asia having to do with cultural and language differences, unlike their commonalities with Spain, the Latin countries, and the border with the United States, but acknowledged that Asia usually moved in different cycles from Latin America, which could be a significant overall market-equalizing factor. Cemex crossed a major milestone in 1995 when non-Mexican operations accounted for 51 percent of the company's $3 billion in annual sales, balancing declining cash flow from Mexican operations. In that year the company exported two million tons of cement products to Taiwan, Thailand, and Indonesia.

Key Dates:

1906:: Cementos Hidalgo is established near Monterrey in northern Mexico and begins operating a cement plant.
1920:: Lorenzo Zambrano opens a cement plant in Monterrey through his newly founded firm, Cementos Portland Monterrey.
1931:: The two companies merge to form Cementos Mexicanos, later known as Cemex; firm is based in Monterrey.
1976:: Cemex goes public; it becomes the largest cement maker in Mexico following the acquisition of Cementos Guadalajara's three plants.
1985:: The founder's grandson, also named Lorenzo Zambrano, is named chairman and CEO; the new leader embarks on an ambitious program of expansion.
1989:: Acquisition of Cementos Tolteca, the number two cement producer in Mexico, gives Cemex 65 percent of the Mexican market and makes it one of the ten largest cement companies in the world.
1992:: The company buys the two largest cement companies in Spain, Valenciana and Sanson, for $1.84 billion.
1994:: A controlling stake in Vencemos, the largest cement company in Venezuela, is acquired.
1997:: Cemex makes its first direct investment in Asia, purchasing a 30 percent stake in Rizal Cement Company, Inc. of the Philippines.
1999:: A majority stake in Assiut Cement Company, the leading cement maker in Egypt, is acquired.
2000:: The second largest U.S. cement producer, Houston-based Southdown, Inc., is acquired for $2.63 billion.

Into the 21st Century As Industry World Leader

Company officials credited Cemex's competitive abilities to its online information system. A network of satellite dishes, leased lines, and microwave communications linked all of the company's offices in Mexico and abroad. A Cemex competitor noted that their network is phenomenal, giving the company flexibility, for example, of where to bring in their product. Caballero told Jim Freer in Latin Finance, "Carrying our laptops is like carrying our telephones around. We do about 90 percent of our communications through e-mail," making global interactions instantly possible, and even acting to reduce the hierarchy, for example, because anyone could shoot off an e-mail to anyone else in the company. Cemex set the curve for Latin technology users, and attributed its successful global expansion efforts to its hands-on approach. Cemex was the only Mexican company named in Computerworld 's 1995 "Global 100" listing of the world's most outstanding users of information technology. A company official stated that he was surprised that Cemex's competitors have next to no computers. Cemex began by using technology to reduce costs and improve efficiencies, but improved on that functional view, and transformed the way it delivered to the market. Its system kept a constant log of the chemical composition of the cement it produced, of the reasons for kiln problems and shutdowns, and of the delivery routes of the company's trucks. Cemex's information technology department was maintained by a staff of 25, who worked with Cemtec, an engineering technology division to provide and develop information access. Gelacio Iniguez Jauregui, the company's director of information technology, told Freer that Cemex planned to continue to build on its record of developing information technology, "not just for the sake of having information, but for using it, sharing it, and providing access to it."

One of Zambrano's proudest achievements, according to Daniel Dombey, writing for Industry Week, was Cemex's Tepeaca complex—probably the most modern cement plant in the Americas, located two hours outside of Mexico City. Situated among green fields, the unassuming-looking plant screened out pollutants via bags of glass fiber that "filter out smoke before it reaches the open air; pollutants are gathered at 60 points throughout the complex," according to Dombey. Its emissions were far below legal requirements, attributable to a system financed by 10 percent of the total cost of the plant. With more capacity than any other kiln on the continent, Tepeaca supplied one-fifth of the Mexican market and was the lowest-cost cement producer in the world.

Having survived the worst recession in memory, Zambrano, while entrenched in Mexico, did not wish to place too much emphasis on operations there—it was foreign revenues that kept Cemex's top line growing during 1995–96, when Mexico's gross domestic product tumbled by more than 6 percent. Cemex's debt was at an enormous $4.8 billion, making it Latin America's biggest corporate debtor, restricting the company's cash flow. Nevertheless, Zambrano continued his dealmaking, purchasing Cementos Nacionales in the Dominican Republic in 1995 and controlling stakes in two Colombian cement makers, Cementos Diamante, S.A. and Industrias e Inversiones Samper, S.A., the following year. The addition of the latter two firms, which cost $700 million, gave Cemex a one-third share of the Colombian market and also made Cemex the third largest cement company in the world. Cementos Diamante was subsequently renamed Cemex Colombia, S.A., and in 1998 Samper was merged into that entity, creating the number two cement producer in the country. Colombia became a base for Cemex's penetration of the Caribbean market.

By the mid-1990s Cemex had built up a large presence in Asia as a cement trader, and in the final years of the decade it completed its first acquisitions there. Demand for cement was growing rapidly in the region, fed by a boom in construction. Moreover, although the economic crisis that gripped the region in 1997 and 1998 put a hold on a number of construction projects, it also created opportunities as conglomerates began shedding noncore assets and governments began selling stakes in state-owned cement operations, opening the way for Cemex and other global competitors to enter these markets. The first such move for Cemex came in the Philippines, where the company spent about $70 million in 1997 for a 30 percent stake in Rizal Cement Company, Inc. Cemex then gained a controlling 70 percent interest in Rizal in November 1998 for an additional $130 million. In February 1999 APO Cement Corporation of the Philippines was acquired for $400 million, making Cemex the largest cement producer in that country. Indonesia was the next Asian market targeted for direct investment: Cemex acquired a 25 percent stake in the state-owned PT Semen Gresik, that nation's largest cement producer, for about $241 million.

To help raise financing for its growing presence in Asia, Cemex created an investment holding company called Cemex Asia Holdings Ltd. in 1999. That same year, the company continued to expand outside of Asia as well. In Latin America, it took a 12 percent interest in the largest cement producer in Chile, Cementos Bio Bio, S.A.; acquired 95 percent of Cementos del Pacífico, S.A., the leader in Costa Rica; and purchased two terminals in Haiti that supplied 70 percent of the cement to the Central American and Caribbean markets. The company made its first acquisition in the Middle East, paying the Egyptian government about $319 million for a 77 percent stake in Assiut Cement Company, and adding yet another national leader to the Cemex global portfolio; the stake in Assiut was increased to 90 percent in June 2000. Cemex ended the 1990s with net sales of $4.83 billion, a 12 percent increase over the previous year, and net income of $1.03 billion, a 22 percent jump.

Early 2000s: The Purchase of Southdown

In what turned out to be a foreshadowing of the next dramatic event in the company's history, Cemex's shares, which had been trading over the counter for some time as American depository receipts on the New York Stock Exchange (NYSE), received a full listing on the Big Board in September 1999. The NYSE listing was intended to provide Cemex with heightened visibility and financial transparency as well as offer investors increased access to the shares. Cemex's U.S. profile received a much larger boost, however, through the October 2000 acquisition of the second largest U.S. cement producer, Houston-based Southdown, Inc. Valued at $2.63 billion, this was the largest acquisition in company history. Southdown, which achieved 1999 sales of $1.3 billion, operated 12 cement plants and 45 distribution centers, mainly in the Southwest and Florida, through which it sold cement in 27 states. Southdown's plants had a production capacity of 11 million metric tons. The deal made Cemex the largest cement producer in North America. One of the key rationales for the acquisition was that it created a better balance between high-growth and mature markets in the Cemex portfolio. It also provided a measure of vindication for Cemex because Southdown was the company that had led the antidumping campaign against Cemex in the late 1980s. Southdown was merged into Cemex's existing U.S. business in March 2001, creating Cemex, Inc., which accounted for nearly 30 percent of the parent company's sales during that year.

Following its acquisition, Southdown received a postmerger treatment—known as the "Cemex Way"—given to all of Cemex's conquests. A "postmerger integration team" is quickly dispatched to analyze the acquired company, to identify ways to cut costs and reduce head count, and to harmonize the technical systems and management methods with those of Cemex—in fine detail. This somewhat authoritarian approach yielded substantial savings.

Cemex continued to invest heavily in technology in the late 1990s and early 2000s, staying on the cutting edge of information technology (IT). Because ready-mixed concrete has to be poured within 90 minutes of mixing, it is a major challenge to coordinate and properly time the movements of ready-mixed concrete trucks from the plants to construction sites. Cemex equipped every truck with a computer and a global positioning system receiver. By combining the positions of the trucks with the output at the plants and the orders from customers, Cemex was able to create a system that not only calculated which truck should go where but also enabled dispatchers to redirect the trucks en route. Truck productivity was thereby increased by as much as 35 percent. There were other IT initiatives as well. Miami-based CxNetworks was formed in September 2000 as a wholly owned, independently operated subsidiary to manage Cemex's various e-business efforts. Among these were Construmix, a construction industry online marketplace aimed at small and medium-sized contractors in Latin America; and Latinexus, an online exchange for indirect goods and services created in partnership with other leading companies in Mexico and Brazil.

In the wake of the blockbuster Southdown acquisition, Cemex once again focused on less-developed markets. In May 2001 the company gained a foothold in Thailand via the $73 million purchase of Saraburi Cement Company Ltd. (later renamed Cemex Thailand Co. Ltd.). Later that year Cemex attempted to take over one of the top three cement producers in Thailand, the debt-ridden TPI Polene PCL, but Cemex and the creditors of the ailing Thai firm were unable to reach an agreement. Cemex also ran into trouble in its attempt to acquire the Indonesian government's remaining 51 percent stake in Semen Gresik. The Padang people of West Sumatra protested the proposed foreign ownership of Semen Padang, a subsidiary of Semen Gresik. By late 2003 it appeared that Semen Padang would be spun off from its parent, perhaps finally clearing the way for Cemex to gain its long-sought-after controlling stake. In the meantime, the company encountered yet another setback for its expansion plans, this time in the Caribbean, when the shareholders of Trinidad Cement Limited (TCL) in July 2002 blocked a move by Cemex to acquire the 80 percent of TCL it did not already own. One month later, however, Cemex managed to enhance its Caribbean operations by way of a $180 million takeover of Puerto Rican Cement Company, Inc. That same month, the company purchased the 30 percent of the Philippines firm Rizal Cement it did not already own for $95 million. In December of that year, Rizal completed a merger with its subsidiary, Solid Cement Corporation, in which Solid was the surviving entity.

Cemex's global expansion program, concentrating in large part on developing markets, had clearly paid dividends by the early 2000s. Cemex was more profitable than either of its two big international rivals, Lafarge and Holcim, mostly because of its concentration on emerging markets that offered both long-term growth potential and high profit margins. Its longstanding commitment to IT investment also provided Cemex with a productivity edge. Critics of the company—as well as some financial institutions—consistently raised concerns over the company's massive debt load; long-term debt stood at $4.37 billion at the end of 2002. But Cemex continued to generate a steady flow of free cash with which it could keep this burden under control. Another potential concern for the future was the more limited acquisition opportunities—particularly in southeast Asia—that existed following the consolidation drive of the 1990s and early 2000s. Cemex had yet to directly penetrate either India or China, prompting some analysts to wonder whether Cemex was being too cautious about expanding into these two huge and potentially quite lucrative markets.

Principal Subsidiaries

CEMEX México, S.A. de C.V.; CEMEX España, S.A. (Spain; 99.5%); CEMEX Venezuela, S.A.C.A. (75.7%); CEMEX, Inc. (U.S.A.); Cementos del Pacífico, S.A. (Costa Rica; 98.4%); Assiut Cement Company (Egypt; 95.8%); CEMEX Colombia, S.A. (98.2%); Cemento Bayano, S.A. (Panama; 99.2%); Cementos Nacionales, S.A. (Dominican Republic; 99.9%); Puerto Rican Cement Company, Inc.; CEMEX Asia Holdings Ltd. (Singapore; 92.3%); Solid Cement Corporation (Philippines; 94.6%); APO Cement Corporation (Philippines; 99.9%); CEMEX Thailand Co. Ltd.; Latin Networks Holdings, B.V. (Netherlands).

Principal Competitors

Lafarge S.A.; Holcim Ltd.; Heidelberg Cement AG; Italcementi S.p.A.; Sociedad Cooperativa Cruz Azul; Dyckerhoff AG; Buzzi Unicem S.p.A.; Cimpor - Cimentos de Portugal SGPS, S.A.; Ash Grove Cement Company.