7 cemex (uneditted)

CEMEX’S COST OF ‘GLOBALISED’ GROWTH – THE CASH CRUNCH?

Group 7 Deru R. Indika 29110301 Nisham Fiksriyoso 29110309 Erika Paraminda 29110310 Josia Prananta Tarigan 29110345

Presentation Framework

Company Summary

• History

• External Environment

• Internal Environment

Leadership

Strategy

• Business-Level Strategy

• Corporate Strategy

Acquisition Issues

Recommendation & Lessons Learned

HISTORY

Year Event

1906 Cementos Hidalgo established, begins operating cement plant.

1920 Lorenzo Zambrano open cement plan named Cementos Portland

1931 Cementos Hidalgo & Xcementos Portland merged into Cemex

1976 Cemex goes public, become largest cement maker in Mexico and acquire Cementos Guadalajara

1985 Grandson founder name Lorenzo Zambrano as a CEO and have ambitious program expansion.

1989 Acquisition of Cementos Tolteca, give Cemex 65% Mexican market

1992 Buys 2 largest cement company in Spain, Valenciana and Sanson

1994 Controlling stake in Vencemos (Large cement company in Venezuela)

HISTORY

Year Event

1995 Expand to Dominican Republic and Caribbean market

1996 Expand to Colombia and Panama to consolidate Caribbean market

1997 Take its first direct investment in Asia, purchasing 30% stake in Rizal Cement Company, Inc. of the Philippines

1999 Majority stake in Assiut Cement Company, leading cement market in Egypt.

2000 Houston Based Inc. (Second Largest U.S. Cement producer acquired

2002 Write-down from currency-hedging operations foreshadow company loss, Expand Puerto Rico.

2005 Acquisitation RMC that enhaced its position to world 3rd producer of sement

2007 Acquires Rinker, Australian company with major operation in US

2008 Stocks crumble as cement sales decline, company in huge debt crises trying to refinance.

PESTEL

• Different countries policy about FDI

• Trade barriers

POLITICS

• Economic Recession in US and Europe

• High growth Emerging market BRIC

• Different market demand between developed and developing country

ECONOMY

• Different culture and language

• Community contribution

• Social Media

SOCIAL

PESTEL

• ICT innovation and development

• Real time and direct communication

TECHNOLOGY

• Climate change (rehabilitation, air pollution, waste mgt)

• Alternative fuels and renewable energy energy

ENVIRONMENT

• CSI (Cement Sustainability Initiative) for audit global carbon emissions

• Health and safety work

• Regulatory by national and regional trade associations such as the European Cement Association (CEMBUREAU) and industry forums such as the World Business Council for Sustainable Development (WBCSD) and the Portland Cement Association

LEGAL

INDUSTRY ANALYSIS

Threat of New Entrants

Threat of Substitutes

• Low barriers entry, capital intense

• Limited FDI by government

• Highly regulated

• Decrease the use of cement in construction

• Proportion to use other material in construction but more expensive

• Consumer is price taker because the demand of cement is high

• Company can own raw materials

• Concentrate supplier especially in China

• Strong multinational company, and many regional and national company

• Pace of acquisition • Pace to entry potential emerging market

ATTRACTIVE

INDUSTRY

MODERATE LOW

The Cement Product

Ready Mix Concrete

Cement Aggregates

Market Needs By Construction Stages Development

• High demand for Cement, low demand for aggregates and ready mix concrete

BASIC

• Demand for cement and ready mix concrete is balance but low demand for aggregates

INTERMEDIATE

• More high demand for aggregates, and moderate demand for cement and ready mix concrete

ADVANCE

World Cement Production And Consumption

Source: Global Research: Egypt Cement Sector, Global Investment Hose, July 2009

World Cement 2008 by Region


World Expected Cement Demand by Region


Current Share Of Capacity Of The Multinational Cement Majors By Region

Source: FINANCIAL COMPETITIVENESS OF CEMENT COMPARED WITH OTHER BUILDING MATERIALS, Cementing the foundations of growth, J.P. Morgan, Estimates, Michel Folliet

Opportunity To Entry

Growth in World Cement Consumption


Cost Of Cement

The cost of imported cement may be considered low, but the operating expenses make the final price 50% more costly. This follows from the cost of fuel, freight, manpower, the dependence on transport (logistics) and the electric power used in the operational process.

Source: Philippe Lasserre- Globalisation Cement Industry-2007

Financial Competitiveness Of Cement Compared With Other Building Materials

“cement remaining the most profitable compare to different building material segments”

Source: FINANCIAL COMPETITIVENESS OF CEMENT COMPARED WITH OTHER BUILDING MATERIALS, Cementing the foundations of growth, J.P. Morgan, Estimates, Michel Folliet

Financial Statistics for The Leading Global Cement Companies For 2009

Source: Cementing the foundations of growth, International Finance Corporation, Michel Folliet

CORE COMPETENCY Competence Category Lafarge Cemex

Core Competence • Low Cost Production and Better Product

• Low Cost Production • IT leadership

Distinctive Competence • Personalized product according region

• Research based on sustainable development

• Relationship with clients • Delivery Time • Client Satisfaction assessment

system

Organizatioal Competence • Investment in HR R&D in products and processes

• Logistic • People • IT and Knowledge Management

Supportive Competence • Financial Management for Investment

• Firm Acquistion

• Post-Acquisition integration team • Frequent trainings • Standardization of proesses

through IT

Dynamic Capability • Develop the capability to research aligned with centers of excellence centers of education and research HR management focus on High mobility, Allowing a dynamic sharing of experience and Best Practices

• Multi cultural adaptability Global mindset and the comprehension that cemment is not a commodity but a dream

Source: http://www.scielo.oces.mctes.pt/scielo.php?pid=S0873-74442009000100005&script=sci_arttext

CEMEX SUSTAINABLE COMPETITIVE ADVANTAGE

Resources Attribute

Valuable Rare Costly to Immitate

Nonsubstituable Competitive Consequences

Learning Organization

Yes Yes Yes/No Yes SCA

Expansion Strategy Yes No Yes Yes TCA

IT Leadership Yes No Yes Yes TCA

Lorenzo Zambrano Biography

• Educational Background:

– Bachelor in mechanical enginering from Tecnologico de Monterrery (ITESM) 1966

– MBA from Stanford Business School in 1968

• Career:

– Joined CEMEX in 1968

– CEMEX CEO in 1985

– CEMEX Chairman Board since 1995

• Others:

– Member of IBM BOD and the Citigroup International Advisory Board

– Chairman of the Board of Sistema Tecnológico de Monterrey

– Council of Daimler Chrysler AG until July 2005

• Honor:

– Woodrow Wilson Award for Corporate Citizenship

– the Americas Society's Gold Medal for Distinguished Service

– the Excellence in Leadership Award from the Stanford Graduate Business School,

– Ernest C. Arbuckle Award for Managerial Excellence from the Stanford Business School's Alumni Association.]

Mexico (1945 -Present )

The CEMEX Founder’s Grandson

http://en.wikipedia.org/wiki/Lorenzo_Zambrano

Lorenzo Zambrano Leadership Style Visionary Leader "He's a very sweet man. He has a rare combination of abilities to lead and mobilize and has a clear, long-term vision.“ Peter Schwartz, founder and chairman of Global Business Network Agresive "If there's an opportunity, either you grab it or you let go,“ he says. "If you let go, you don't grow.“ Zambrano Coach (Situational Leadership Theory) CEMEX came to rely less on command-and-control and more on senior management's setting goals and then letting employees figure out the best ways to reach them.

Lorenzo Zambrano in ACTION • Going Global.. • He imposed worldwide standards on

business practices • He shed subsidiaries to concentrate on

cement • He made English the company's official

language • Hire Cyber Visionary : Gelacio Liguez

(1987) • Launch CEMEX Way

Lorenzo Zambrano Step Of CHANGE

• The company's prime resource was its people

• To reach its goals, the company would have to convince its employees that they had to improve their performance constantly, and they'd have to be equipped with the means to do that

Basic Assumption

Create a sense of urgency

Working with a team of Arthur D. Little consultants

CEMEX asked employees to identify barriers to change and improvement

Employees at all levels were asked to undertake a "visioning exercise."

Employees looked at external benchmarks, but they also identified particularly effective practices inside the company

CEMEX Remuneration

Remuneration package1

• Median salary : $70,924

• Average salary : $68,649

• Salary Range : $40,000 - $141,918

Life and health insurance

World business travel insurance is offered for

those who travel.

Cafeteria System,

• Hot Meal Voucher

• Holiday Voucher

• BKV Pass

• Internet Contribution, etc.

(1) http://www.salarydom.com/company-cemex-salaries-view-5.htm (USA Based) (2) http://www.cemexssc.eu/culture/benefits

http://www.salarydom.com/company-cemex-salaries-view-5.htm










Five Growth Phases

CEMEX Organizational Structure

Chairman of the Board and Chief Executive Officer

President CEMEX South, Central

America and the Caribbean

President CEMEX Asia

President CEMEX Northern Europe

President CEMEX Mediterranean

President CEMEX Mexico

President CEMEX USA

Chairman of CEMEX Latin American Advisory Board and

Advisor to the CEO on Institutional Relations

Executive Advisor to the Chairman and

CEO

Executive Vice President of Finance and Administration

Executive Vice President of

Organization and Human Resources

Executive Vice President of Strategic Planning and

New Business Development

CEMEX Executive Lorenzo H.Zambrano CEO/Chairman of the Board/Director

Rafael Garza Chief Accounting Officer

Juan Romero President, Geographical

Fransisco Garza President, Geographical

Ramiro G. Vilarreal General Counsel/secretary

Rodrigo Trevino CFO

Fernando Gonzalez Executive VP, Divisional

Roberto Zambrano Villarreal Director

Dionisio Garza Medina Director

Rodolfo Garcia Muriel Director

• Mr. Zambrano is a first cousin of Lorenzo Milmo Zambrano and Rogelio Zambrano Lozano

• Both members of our board of directors, as well as of Rodrigo Trevi, our Chief Financial Officer. He is also a second cousin of Roberto Zambrano Villarreal and second uncle of Tomas Milmo Santos, both members of our board of directors

Hey! CEMEX is a family Business

Rafael Garza (47 Years Old)

•Joined CEMEX in 1985 and has served as chief accounting officer since 1999.

•certified public accountant and

•master degree in administration and finance from ITESM.

•attended executive programs at ITAM, IPADE and Harvard University

Francisco Garza (55 Years Old)

•graduate in business administration from ITESM

•M.B.A. from the Johnson School of Management at Cornell University in 1982.

Ramiro G. Villarreal (62 Years Old)

•He is a graduate of the Universidad Autnoma de Nuevo Len with a degree in law.

•Master of Science degree in finance from the University of Wisconsin

Ramiro G. Villarrea (65 Years Old)

•Member of our board of directors since 1987

•President of finance committee since 2009.

•Cousin of Lorenzo H. Zambrano and our chief executive officer, a first cousin of Lorenzo Milmo Zambrano, a member of CEMEX board of directors and uncle of Tom’s Milmo Santos, a member of our board of directors

Dionisio Garza Medina (56 Years Old)

•Member of the advisory board of the Mexican Minister of Economy

•the advisory committee of the David Rockefeller Center for Latin American Studies at Harvard.

•Chairman of the Harvard Business School Latin American advisory board

• the Advisory Council of Stanford Engineering School

Family connections didn't assure him a fast rise, however. He toiled 18 years in all aspects of the company. Then in 1985, at age 41, he was named chairman and CEO.

BUSINESS STRATEGY

Focus on core business of cement, ready-mix

concrete, and aggregates.

Provide customers with the best value

proposition.

Strengthen capital structure and regain financial flexibility.

Maximize operating efficiency.

Recruit, retain, and cultivate world-class

managers.

Foster sustainable development.

Porter Generic Strategies St

rate

gic

Targ

et

Advantage

Uniqueness Low Cost Position

Broad Differentiation Cost Leadership

Narrow Focus Differentiation Focus Low Cost

Cemex business strategy is a combination of DIFFERENTIATION and COST LEADERSHIP strategy.

Differentiation

• By providing customer with the best value proposition.

• Initiating program that give value to the customer.

Cost Leadership

• Implementing Operating Efficiency :

• Through IT

Treacy & Wiersema Value Discipline

Operational Excellence

• Through IT Implementation, Epod, GPS system in delivery truck.

Customer Intimacy

• Through IT Implementation, GPS system in delivery truck, construmex, track shipment online.

INDUSTRY LIFE CYCLE & MARKET TURBULANCE IN CEMEX

The type of market turbulance that Cemex face is equilibrium where the environment is characterized by long periods of competence-destroying turbulance.

Cemex is in the mature stages due because the sales are stagnant.

-50%

0%

50%

100%

CEMEX Net Sales Growth

Growth

0

10000000

20000000

30000000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

CEMEX Net Sales

Net Sales

Corporate Strategy

• Corporate Strategy: Acquisition

• Parenting Propositions: – Build Propositions

– Stretch Propositions

BUSINESS STRUCTURE

ACQUISITION STEP

Pra-Merger Integration

Post Merger Integration

(Cemex Way)

Superior Value

PRA-Merger Integration

Provide ROI well above the Cost of Capital

Enable to Maintain its financial strength and credit quality

Able to Increase acquired company’s value

Post Merger Integration

System and process standardization

A new Governance Model

e-Enabling Process

CEMEX WAY

Source: www.cemex.com/MediaCenter/Files/Winning_Globally.pd

Manage Our Global Knowledge Base More Efficiently

Identify and disseminate best practices

Standardize our business processes

Implement key information and Internet based technologies, and foster innovation

CORPORATE PARENT

CULTURE INTEGRATION

CORPORATE PARENT

“CEMEX WAY”

20% Retained practices

80% Best practice

(benchmarked again local practices)

Parenting Proposition

ACQUIRED COMPANY

E- groups

LEARNING ORGANIZATION (CULTURE)

A culture that embraces constant change and is enthusiastic about incorporating the latest information technology in all aspects of business

GLOBAL LEADERSHIP PROGRAM

Strategic Alliance with Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM)

CEMEX’S TECHNOLOGY CENTER, located in Monterrey, Mexico

CEMEX INTERNATIONAL STRATEGY

International Strategy

Organizational Factor

• The role of senior management team.

• Firm Specific Factors

Environmental Factor

• The ‘Bandwagon’ Effect

Global Strategy

Transnational Strategy

International Strategy

Multidomestic Strategy

Cemex

• Export

• Acquisition

• Wholy-owned subsidiary

Entry Mode Strategy

DIAMOND MODEL OF NATIONAL ADVANTAGE

DIAMOND MODEL OF NATIONAL ADVANTAGE

Factor Condition

• Capital

• GDP : 872.088 Million US$

• Labour

• Population in 2009, 109.610 people.1

• High participation of labour force come from men.

• Mexico only produce 3500 to 6000 per year student from institute.

• Technology

• Technological readiness in Mexico is rank of 71 from the whole country.2

Demand Condition

• In Cemex Annual Report for year 2009, Mexico still hold 21 percent of Cemex sales. This data show that Mexico still have a high demand in Cemex product.

Related & Supporting Industry

• Industries in Mexico provide support in Cemex operation, especially to fulfill resources that needed for the company operation.

Firm Strategy Structure & Rivalry

• The rivalry for Cemex in Mexico is relatively low since Cemex already dominate the Mexico market for 66%.

GEOGRAPHIC LOCATION

• L 6 • H 6 • C 6

• L 8 • H 9 • C 5

• L 15 • H 6 • C 2

• L 9 • H 10 • C 2

• L 2 • H 2 • C 1

• L 5 • H 9 • C 6

L : Lafarge H: Holcim C: Cemex

The Cash Crunch

• Issues : (external issues) – Recession in 2008 US financial crisis

economic slow down distressed market decreasing demand …..

• Issues : (internal issues) – ….. decreasing sales + higher cost

– Wrong in Rinker Acquisition overvalued

– Foreign Exchange Loss due to Falling Dollar & Mexican peso devaluation • Huge currency swaps and related devaluation

hedging

Financial Highlights

In millions of US dollars, except per-ADR data

2006 % 2007 % 2008 % 2009 % 2010 % 2011

Net Sales 18.429 18 21.673 0 21.696 (33) 14.544 (3) 14.069 8 15.139

Operating Income 2.946 1 2.971 (16) 2.487 (53) 1.165 (27) 856 12 960

EBITDA 4.138 11 4.586 (5) 4.343 (39) 2.657 (13) 2.314 1 2.332

Consolidated Net Income 2.488 (1) 2.467 (92) 203 (49) 104 N/A (1.304) (18) (1.533)

Earnings (loss) per ADR 3,31 (3) 3,22 (92) 0,27 (52) 0,13 N/A (1,30) (13) (1,47)

FCF after maintenance CAPEX 2.689 (4) 2.578 1 2.600 (53) 1.215 (58) 512 (25) 386

Total Assets 29.972 66 49.662 (9) 45.387 (2) 44.483 (6) 41.675 (6) 39.276

Net Debt 5.811 225 18.904 (5) 17.908 (16) 15.053 18 17.729 2 18.067

Total Stockholders' Equity 12.859 16 14.942 (7) 13.879 18 16.339 (4) 15.710 (13) 13.683

Debt 17.113 34.720 31.508 28.144 25.965 25.593

Net-Debt-to-EBITDA ratio 1,4043 4,1221 4,1234 5,6654 7,6616 7,7474

Equity 42,9% 30,1% 30,6% 36,7% 37,7% 34,8%

Debt 57,1% 69,9% 69,4% 63,3% 62,3% 65,2%

DER 1,33 2,32 2,27 1,72 1,65 1,87

ROA 8,3% 5,0% 0,4% 0,2% -3,1% -3,9%

ROE 19,3% 16,5% 1,5% 0,6% -8,3% -11,2%



-5,000

-

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012

mill

ion

USD

Year

Financial Highlights of CEMEX

Net Sales

Consolidated NetIncome

Net Debt

EBITDA

How can net debt increase significantly ?

Why were net income going

decrease ?

What did happen here ? What did implications

lay there ? What Cemex should do ?

Rinker’s Acquisition

were overvalued and CEMEX

get excessive debt

Financing Agreement with Major

Creditors had extended term

maturity

CEMEX sales still not enough to pay the debt

therefore CEMEX should increase sales

significantly

Source: Analysis, 2012

Source: Cemex 2009 SUSTAINABLE DEVELOPMENT REPORT

Source: Holcim AR 2009

34%

16%15%

29%

6% Europe

NorthAmericaLatinAmericaAsia Pasific

Africa &Middle East

Source: Lafarge AR 2009

The biggest areas which generated cash are from Europe and US (more than 58%), both of regions affected by Recession so that CEMEX decrease in sales significantly

Rinker Acquisition

Rinker acquisition increase cost due to

higher energy, electricity and transportation

Rinker’s Acquisition were overvalued and CEMEX get excessive

debt

CEMEX + Rinker penetrate market in US and Europe

while Financial Crisis

Affect by Southdown-US and RMC-UK

Influence by Lafarge-French and Holcim-Swiss which are

not focus in Aggregate industry


Source: Holcim AR 2009


Source: Lafarge AR 2009

BENCHMARKING BY PRODUCT DIVERSIFICATION

Rinker Acquisition

CEMEX diversified in aggregate industry by Rinker aquisition, in the other hand CEMEX became not focus and

STUCK IN THE MIDDLE

Influence by Lafarge-French and Holcim-Swiss which are

not focus in Aggregate industry


1.4043

4.1221 4.1234

5.6654

7.6616 7.7474

0

1

2

3

4

5

6

7

8

9

2006 2007 2008 2009 2010 2011 2012year

Net-Debt-to-EBITDA ratio of CEMEX


The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative

Net debt to EBITDA company’s ability to decrease its debt Ratio > 4 company less likely handling its debt burden less likely taking additional debt

Too High !!


Source: www.investopedia.com


-

10,000

20,000

30,000

40,000

50,000

60,000

2006 2007 2008 2009 2010 2011 2012

mill

ion

USD

year

Financial Highlights of CEMEX

Total Assets

Debt

Total Stockholders' Equity

Net Debt


LOSS IN FOREIGN EXCHANGE AND FINANCIAL INSTRUMENT

• Incurred a US$386 million foreign-exchange loss

– Depreciation of MXN, EUR and GBP

• Loss in financial instrument of US$1,35 billion

– MXN/USD cross-currency swaps and equity forward derivatives

Source: Cemex 2009 Annual Report

Restructurisation • Close Davenport Plan in California due to sharp decline

in new home construction • November 2008, Cemex’s Spanish unit offloaded

operations in the Canary Islands for $211 million, (grossly undervalued according to industry analysts)

• November 2008, sold assets in Hungary and Austria for $100 million

• Nasionalisation in Venezuela, government seized Cemex’ assets

• 2009, sell some Australian operations to competitor Holcim for $1,62 billion (consideration to serve its payment till mid 2011)

Credit Restructuring • Refinancing large debt nearly $2,2 billion in debt

maturing in 2009 to through 2010 – Citi group Inc., Banco Bilbao Vizcaya Argentaria SA,

Banco Santander SA, HSBC Holdings and Royal Bank of Scotland Group

• CEMEX get extent $1,5 billion of the total $3 billion due in December 2009

• Restructure the debt of $4 billion in January 2009 and further $15,5 billion on August 2009

• CEMEX would still require additional refinancing in near future

Credit Rating

Financing Agreement

Source : www.cemex.com

Source : www.cemex.com

FINANCIAL STATISTICS FOR THE LEADING GLOBAL CEMENT COMPANIES FOR 2009

Source: Cementing the foundations of growth, International Finance Corporation, Michel Folliet

World expected cement demand by region


Market Development

Market Development

Recommendation Questions • Would banks allow it to come to negotiations or

would it be forced to offload some of its acquired assets in distressed?

• The cash crunch?

In order to solve crash crunch and win-win negotiation with bank, CEMEX should to : • Focus in Cement and Ready Mix industry • Develop Asian and Middle-East market Acquire

Asia company • Prepare Global Leader especially for Asian market

development • Improve Credit Rating by execute Good Corporate

Governance in supervising risk management conducted by Victor Romo, especially in hedging strategies

• Penetrate existing market

Documents

7 cemex (uneditted)