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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
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
Source: Global Research: Egypt Cement Sector, Global Investment Hose, July 2009
World Expected Cement Demand by Region
Source: Global Research: Egypt Cement Sector, Global Investment Hose, July 2009
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
Source: Global Research: Egypt Cement Sector, Global Investment Hose, July 2009
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
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
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
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
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
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%
Financial Highlights
Financial Highlights
-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: Cemex 2006 SUSTAINABLE DEVELOPMENT REPORT
Source: Holcim AR 2009
Source: Cemex 2009 SUSTAINABLE DEVELOPMENT REPORT
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
Source: Cemex 2006 SUSTAINABLE DEVELOPMENT REPORT
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
Financial Highlights
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: Analysis, 2012
Source: www.investopedia.com
Financial Highlights
-
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
Source: Analysis, 2012
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
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
Source: Global Research: Egypt Cement Sector, Global Investment Hose, July 2009
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
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