Cemex’s King of Cash

The Cemex CFO discusses debt servicing, hedging--and how to benefit from not making a key acquisition.
David KatzFebruary 1, 2002

Rodrigo 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.

How Startup CFO Grew Food Company 50% YoY

How Startup CFO Grew Food Company 50% YoY

This case study of JonnyPops’ success highlights the unusual financial and operational strategies that enabled rapid expansion into a crowded and highly competitive frozen treat market. 

Recently, the 44-year-old Treviño visited 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.


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.

Are the politics of privatization the biggest obstacle to completing the acquisition?

Yes, that is the biggest driver. I don’t think the Indonesian government has the political power to execute the reforms that they need. While the government didn’t privatize and sell the controlling interest in Semen Gresik, they didn’t privatize anything else. I think we would be one of the most logical assets for them to privatize, which means we’re still in the pipeline, that it could still happen.

Haven’t you grown tired of wrangling with government leaders in Indonesia?

No, we’re patient. I remember when we started to become involved in Asia, we took one of these seminars that tries to get you in the right cultural mind, and one of the things they emphasized was to be very patient. Things happen at a different pace in Asia.

Even slower than in Latin America?

On the contrary, in Latin America, things happen very fast. Sometimes they tend to be too volatile– so they happen too fast.

Have you thought about buying transactional liability insurance to cover your risks in doing mergers?

We have decided not to take it on. We know that there are always contingencies, and we try to negotiate clawbacks and the like. But we don’t purchase insurance because it tends to be more expensive. We’d rather assess the risk, and if it’s too great, not do the transaction.

Is that also how you handle political risks?

You know, political risk insurance is expensive. You might think that, among our assets in Latin America, Venezuela, for example, is one of the riskiest macroeconomic environments. And yet for us it’s been one of the lowest-risk investments that we make. Our assets there have performed very consistently year after year, even through the cycles and through devaluations of the currency. The assets we bought are low-cost production facilities that are very efficient, are near the water, and are ones from which we have been able to export the balance of the production capacity that we haven’t been able to sell to the domestic market

That turns out to be a more predictable, lower-risk investment, than for example, those we made in the U.S. before the acquisition of Southdown. They were among our riskier assets, because they tended to be more volatile and so less predictable. We prefer to look for those opportunities that are likely to perform and are more predictable, regardless of the fact that the country may be a high risk for, say, a bank to invest in. That may not necessarily be a high risk for cement.

In a 1998 interview you did with CFO Asia, you said you were sure you could make money by acquiring more of Semen Gresik, even though you expected a big drop in demand among the markets it served. Your reasoning was that the drop-off would be less than that of other, more saturated markets. Are such geographic hedges a key part of your acquisition strategy?

Well, Indonesia is similar to Venezuela in that we know, because it is very efficient, low-cost producer that has modern facilities, that we can export what doesn’t get sold domestically at a healthy margin. For us, Indonesia would prove to be a relatively stable operating asset.

We also do other types of hedges. For example, in the middle of 2000 we decided to change the currency with which we were funding our investments in Indonesia, the Philippines, and elsewhere in Southeast Asia. Instead of funding them in dollars we decided to swap that through the derivatives market into what would be the equivalent of yen financing. We figured that there was a better correlation between the yen and the Southeast Asian economies than between the dollar and the Southeast Asian economies. It’s a not a perfect hedge, but it’s proven to be very nice. As those assets have underperformed on the operating side, it’s coincided with the yen weakening versus the dollar.

If the opposite were to happen, yes, we could perhaps have expensive financing on our hands. But if the yen is very strong and Japan is doing very well, then it’s likely to be supporting the region. That doesn’t mean we won’t hedge the other way. If the yen weakens too much, then we will buy an out-of-the-money call and try to limit the downside.

Once you acquire a company, how much freedom do you give its managers? Are you hands-on or decentralized?

We’re very hands-on. We’ve achieved the high growth rates and margins we have because we’re very focused on cement and cement-related products. As we’ve invested outside our home market, we’ve not only taken best practices to our targets but also from our targets.

In Spain, we learned that most of the fuel our companies there used was petroleum coke. A cement kiln is a very efficient incinerator of that byproduct because it absorbs all of the waste, and there are no emissions. In some cases we have to add sulfur in manufacturing cement; petroleum coke already has sulfur. We learned how to do that well, and then we brought it to Mexico, where we hadn’t been burning any petroleum coke. This year, 75 percent of our kilns will burn petroleum coke, and we think that over the long term that could reduce the cost of fuels for us in Mexico to half versus burning fuel oil.

We also learned that Southdown had a very efficient maintenance program for their ready-mix trucks in Florida. So we’re using that elsewhere in the U.S., in Mexico, and elsewhere. There are also huge opportunities to create value by managing operations as a system rather than as individual parts. Cement is very bulky and very expensive to move, so if you can shorten the average distance your product is traveling from your plants to the end consumers, you’re reducing costs considerably and improving the margins.

A centralized management system can help with that. Finance, treasury, exposure management, energy—even purchasing—are also managed centrally. What are decentralized are all the commercial and marketing aspects of the business. You need to be as close to the markets as you can to understand the opportunities.

Free cash-flow seems to be the metric you refer to most.

Maybe it’s the banker in me. It’s free cash flow that pays debt. But it’s also free cash flow that’s available to pay dividends.

What achievements are you proudest of?

Many times people feel that there are tradeoffs, that we need to do this or this. I rather try to look at things and say why not do this and this. Being able to grow and at the same time strengthen the balance sheet was important to us. Being able to make those acquisitions and improve the rating of the company was important to us. Before, maybe it was a given that when we’re hurt on the operations we’ll get hurt on the financial end. Why not try to do things so that you’re better aligned? Getting over the or’s and looking for the and’s has given us a lot of pleasure.