VideoRodrigo Treviño, CFO of Cemex, the third biggest cement maker in the world, likes the sound of the phrase "free cash flow."
A former Citibank executive who once worked on the Cemex account, Treviño thinks the cement company's copious free cash flow enables it to shift direction fast and take advantage of changing political and economic circumstances. In 2001, for instance, the Monterrey-based Cemex made a virtue of its failure to grab a controlling interest in Semen Gresik, the state-run Indonesian cement company. Instead, Cemex used the cash to help take down its net debt to the tune of $1 billion, a move which delighted investors.
Indeed, Treviño, who holds an engineering degree from Stanford, prides himself on the prudence Cemex has shown in steadily bringing down its net debt and elevating its interest coverage since he joined it in 1997. But he acknowledges that the company's acquisitions in Asia, Latin America, Spain, the U.S., and elsewhere have been its main driver of growth. Cemex's purchase in 2000 of Southdown, the second-biggest U.S. cement producer, helps the manufacturer distribute its wares more quickly -- and erase anti-dumping tax liabilities.
Recently, the 44-year-old Treviño visited CFO.com and talked with editors Jennifer Caplan, Craig Schneider, and David M. Katz about running the finance department at a huge, multinational manufacturer. Along the way, he discussed Mexico's increasing economic links with the United States, the difficulty of doing business in Asia, and how Cemex hedges its global risks.
In 2001, a year in which most companies had little to smile about, Cemex's shares appreciated nearly 37 percent (in U.S. dollar terms). How much of your success last year stems from debt reduction?
That's an important reason. We also started the year off a low base. Our multiples came down significantly from about the middle of '98 through the end of 2000, more for technical reasons than fundamental performance reasons. We had the crises in Russia and Asia, and that affected capital flows into the emerging markets in general. In 1999, a lot of money also flowed out from traditional old-economy stocks to new-economy stocks. Also, 2000 was a year of rising U.S. interest rates, and the conventional wisdom is: If rates are going up, stay away from cyclical companies.
But we did pursue debt reduction very aggressively last year. A big reason for our high growth rates is acquisitions, not just organic growth or what our portfolio gives us. And we have been able to do that at the same time that we strengthened the balance sheet because we generate strong free cash flow.
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How and why did you take down the debt as much as you did?
Well, we generate very strong free cash flow. Close to 50 percent of our EBITDA translated into free cash flow in the last two or three years. That allows us to aggressively pay down debt or to make acquisitions. The priority was to pay down debt, because our rating is at the BBB- level, and we're doing everything that we should be doing so that we get our ratings up to more solid BBB level. We don't like to be at the limit where we could be exposed to a downgrade by a rating agency that would take us below investment-grade rating.
Deleveraging the balance sheet seems to have been a big part of your career at Cemex.
Since the beginning of 1997, we have had a continuous improvement of interest coverage, even though in the last couple of years net-debt-to-EBITDA has stayed pretty much between 2.7 and 3. Our interest coverage has continued to improve from 3 in 1998 to 3.6 in 1999 to 4.1 last year. Before I joined the company, we were always sailing very close to the wind, with very high net-debt-to-EBITDA levels, a non-investment grade capital structure, and we were exposed because we were more concentrated in Mexico. As the situation worsened in Mexico in '95, not only did our net debt-to-EBITDA worsen because our EBITDA hurt, our interest expense also went up. Interest coverage went dangerously low, to 1.3.
Since then, we have taken measures so that no longer happens to us. We have aligned the financial strategies with the operating business cycle. For example, starting about three years ago, we started to shift a lot of our funding strategy away from fixed rate to floating rate, anticipating that a down part of the cycle would come.
A Credit Suisse /First Boston report made an intriguing connection between your ability to reduce debt and your stalled acquisitions in Asia. Do you think that the fact that you didn't take over Semen Gresik, for instance, contributed to your good performance in 2001?
Yes. Nevertheless, I think the market's reaction had we succeeded in acquiring a controlling interest in Semen Gresik would have been positive, because it would have been a very accretive investment for us to make. We already own more than a quarter of the equity in the company, and the price we had negotiated with the Indonesian government would have been very attractive even before synergies and operating improvements we know we can make. I think that it's a pity that that acquisition didn't go through. We had high hopes that it would have happened toward the end of last year, because it would have given us the ability to continue to grow into 2002.
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