One MBA: US Opening Week Integrative Assignment - CEMEX

Presented by Global Team #1: Isaac Galicia Luis C. Ortega Rana Samani Teresa Van Oerle Michel Wintraecken Yan Man Brian Zee

One MBA: US Opening Week Integrative Assignment - CEMEX

Executive Summary: It is indisputable that CEMEX has risen from a regional player to a leading global giant during the last 2 decades. Cement capacity has been brought up almost 9 times, reaching 96 million, ranked world number 3, after Holcim and Lafarge. The CAGRs of Sales and EBITDA recorded from 1985 to 2006 are phenomenal in both absolute and comparative terms, achieving 22% and 20% respectively.1 Due to strong focus in vertical integration, its capacity in Ready Mix and Aggregates has become world no. 1 and no. 2 respectively in 2007. Its plants coverage exceeds 50 countries, lying across in all continents except Antarctica. CEMEX also allows us to visualize a vivid example of how a price sensitive commodity company, a typically primal constituent of industrialization, transforming it to a competitive post-industrialized global player. CEMEX has consistently demonstrated its focus in its main and only industry, commitment to implement unique and innovative ideas, top class knowhow, retention of world class talent, merging into capital market, as well as insistence in IT as a tool in its entire value chain. Lorenzo Zambrano, CEO of CEMEX since 1985, has played a critical role in shaping the vision and deploying the right strategies for CEMEX. After the acquisition of Rinker, USA becomes the single biggest EBITDA contributing country, accounting for 32%, seconded by Mexicos 24%. Owing to the latest unprecedented financial crisis, JP Morgan is forecasting that its 2008 EBITDA will be around $4,900m, about $400m below the companys guidance, which was announced before CEMEXs Venezuelan assets were nationalized in August, which JP Morgan further estimates that will reduce by another $75m. Nonetheless, it is also interesting to see whether the proclaimed USD400m synergies saving will come in the next 2 years. CEMEXs latest third quarter result shows a next sales decrease 5% and EDITDA down 4%. Zambrano may have a very tight time in the coming years!

CEMEX web site www.cemex.com.mx

a.) Outline the strategy followed by CEMEX to achieve its position of prominence in the cement industry. Lorenzo Zambrano probably is one of the most entrepreneur people in Monterrey. Even with all the Monterrey culture about having massive industrial conglomerates he took risky decisions that shaped what is todays CEMEX business strategy: 1. Focus on the cement industry Zambrano decided to focus in a state of the art cement company in the global arena. This requires a strong focus on this industry. While his ancestors were well known to be the old fashion type of Monterrey entrepreneurs having as many profitable businesses as one could get and then create a holding entity where the focus is to control the finance of the whole group - he took the approach of focusing only on the cement industry regardless the other business opportunities in the family. He sold CEMEXs petrochemical and mining subsidiaries. He engaged with Marriott to run its hotels. Zambrano pursued consistently in the direction of vertical integrations whereas the company could grow remarkably in terms of capacity by acquiring its international competitors, and down stream service in aggregates and ready-mix via its sophisticated distribution network. 2. Consolidation: inside first outside second Zambrano identified an important opportunity inside CEMEX: Process reengineering. He identified that any organization can run more efficient by analyzing current processes and then making the appropriate changes that could be translated into savings for the bottom line. This strategy helped CEMEX to be one of the most efficient and profitable companies in the cement industry with a CAGR of 21% in EBITDA and 22% in sales from 1985-2005 (see exhibit 1). Exhibit 1 CEMEX growth 1985 - 2005 Sales (billions of USD) EBITDA 1985 0.276 0.084 2005 15.3 3.6 CAGR % 22% 21%

After having a lean and cost efficient company he started with the next inside layer Consolidation of the Mexican market. With the entire monetary backup that his family provided he started to buy other cement companies. By early 90s CEMEX held 70% of the Mexican cement industry. Economies of scale started to pay off and when in the decade of the 90s president Salinas announce the SOLIDARIDAD program (government effort to help Mexicans to have a cement house in all the country) Zambrano was the big winner. After consolidated the inside/local market he started to target its global competitors (outside approach): Buy troubled cement companies, utilize CEMEX best practices, and

keep buying more companies in key cement countries. The strategy was to growth through major acquisitions in key markets (most of the big infrastructure growth is on developing markets ergo most of the acquisitions were on these type of countries), applying state of the art process reengineering, and innovate cement distribution through sophisticated technology platform. The acquisition process was highly systematic and logical. After consolidating the local market by taking over Anahuac (1987) and Tolteca (1989), CEMEX paved its way to enter the Southern US market. The first half of 90s demonstrated his first strategic path in Spanish-speaking countries, namely Spain, Venezuela, Panama and Dominican Republic. The second half of 90s marked its entry to Asia, Middle East and further strengthening its leadership position in the US. By entering into 21st century, it continued it globalization and vertical integration by stepping into Thailand, Puerto Rico and strengthening its position in North America & Europe with the acquisition of RMC. 3. Innovation, Innovation, Innovation While big part of CEMEX successful story can be attributed to his acquisition philosophy, technology innovation is a major component of CEMEX strategy. Since their initial efforts in rethinking the entire dispatch/delivery process through the establishment of an information network where senior management at Monterrey can track operations in 50 countries through the Americas, Europe, Africa, and Asia, CEMEX is constantly evolving his business procedures. Innovation is an important piece in his overall strategy. Much of the growth in CEMEX has come not from the organic side but through major acquisitions which requires a strong technological platform and devices to control and coordinate this delicate global business. With 69 cement plants (52 majorities owned), 456 ready-mix plants, 175 land distribution centers, 54 marine terminals, and 15 ocean going vessels and thousands of trucks running around the world, innovation in monitoring and communicating is a pillar in CEMEX business strategy. 4. Building across the Value Chain There is no doubt that in todays cement business world CEMEX is truly a global key player that leverages his global position by exploding their value chain across all product lines and across all regions. CEMEX EBITDA has evolved from an almost a 90% concentration in Cement at the beginning of the company to a more balance EBITDA distribution by type of business (see Exhibit 2)

Exhibit 2 CEMEX EBITDA by business2

CEMEXs strategy is to integrate fragmented units/markets into one valuable integrated position. By having fragmented units (Cement, Aggregates, and Ready-Mix) within CEMEX core business it could create little access to end users since different units have different strategies, different customer service, no synergies, etc. As a result this could potentially can be translated into disrupting strategies for a full companys growth and innovation path. Taking this into consideration CEMEX integrated their value chain into one single scope creating a focus on customer needs, innovation, and improvements in supply/demand dynamics; this integral approach on the products value chain has contributed to build the leadership that CEMEX has in cement, aggregates, and readymix core businesses. As Lorenzo Zambrano explained in his March 5, 2008 strategic meeting: Focus is always on core elements of value chain. b. What factors and resources equipped the company to grow so successfully over the period describe in the case? Identify CEMEXs core competencies and the true nature of CEMEXs business. The case study covered CEMEXs from their origination in 1906 to 1999. During these years, CEMEX used many resources and strategies to improve their business. As we mentioned above CEMEX followed a consolidation path in the early years together with technological innovation that have made CEMEX grow so successfully over the period describe in the case. In fact, all of the four strategy characteristics described in the first question (Cement business focus, Market consolidation, innovation, and building across all the core business value chain) are always part of the success of CEMEXs growth. The only difference is that depending on the decade we are analyzing, the depth of each part of the strategy will vary.
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CEMEX day March 2008

CEMEX founded in 1906 with the opening of Cementos Hidalgo plant in northern Mexico. CEMEX was able to establish locally by introducing rotating kilns and staying focused on cement products. In 1960, CEMEX began exploring ways to expand outside of northern Mexico by acquiring smaller cement companies and continued to increase their kilns around the region. In late 60s CEMEX was able to develop dry-process cement and improved their technology by using Pozzolan processes, electrostatic precipitator and pre-heaters, which gave them the competing edge at that time. Strong management and leadership skills of the leader; Lorenzo Zambrano joined Cemex in 1968 and became CEO in 1985; are among major factors of CEMEXs growth. He understood details of the company and knew how to lead and turn CEMEX from industrial to a post-industrial firm. Inherited his familys superior control in CEMEX, coupled with outstanding academic background, he obviously endowed with a very supreme position to lead the company. Zambrano started his job in plant level in order to learn the operation. Apart from acquiring production and product knowledge, this allowed him to understand how to make his production unit, probably the core of CEMEX, to think about their day to day work process, so the team can increase its productivity. His vision in shaping the company, preparing CEMEX to face the unperceivable challenges induced by globalization, from our opinion, it is one of the most critical factors that transformed CEMEX successfully from industrialization to postindustrialization stage. He knew clearly that globalization would be the trend whereas none of the company was affordable to neglect. He understood the importance of multinational presence; otherwise a vulnerable regional player would be subjected to external forces. Zambrano re-engineered almost all of CEMEXs business processes starting with hiring highly educated engineers and mangers with MBAs from top business schools. He also established processes to transfer best practices between plants to create constant and similar systems in all of CEMEXs plants. By building a robust IT platform, worldwide employees could exchange knowledge and idea whereas working processes could be improved tremendously. Its superior knowhow in making cement allowed CEMEX to lower production cost and increase sales, bringing immediate positive cash flow for further expansion. In Spain alone, cost cutting and sales growth doubled net profits between 1993 and 1994, from USD37.7 million to USD95.5 million. Valencianas operating margin increased from 7 percent in 1992, to 12 percent in 1993, to 19 percent in 1994, to 48 percent in 1995. There is no European cement company that reports such margins, noted an industry analyst.3 The repetitively successful experience in acquisitions also allowed CEMEX to build a special unit, PMI team (for Post-Merger Integration). This expertise enabled CEMEX to ensure rapid recovery of its investment.
3

Joel Millman, Cementing Latin America, Forbes (26 February 1996)

Financially, the global presence enabled CEMEX to repay its debt in a basket of currencies, acting as a strong leverage against the very volatile Peso. In 1994, Peso was devaluated 20% and Mexico economy ran into turmoil. CEMEXs was not as severely affected as others by having diverse set of cash flow from overseas operation as well as re-orientating domestic sales to export. CEMEX expanded into the U.S. by acquiring local distribution and ready-mix facilities, continued its expansion into Latin America and Asia by both acquisition and opening new plants. Its continuous investment in IT infrastructure improved management and increased operating margins at more than twice of the industry. It has grown from a local player to one of the leading global companies in the cement industry. They lived up to their slogan Always ahead of the curve . During this time CEMEX remained updated with highest available technology. CEO and management team shifted sales strategies whenever needed to satisfy market needs. CEMEXs core competencies: One of the core competencies of CEMEX is the fact that they know how to make Cement and they know it well. They understand the science of making cement, from formulating, operations and delivering it to their customers site. They mastered details of making cement, ready- mix concrete and aggregates. Making cement has rooted in Mexican culture; its a skill hand down from father to son. CEMEX employees take pride in being part of one the best cement companies. Leadership and management skills of CEO and highly educated management team They have deep understanding about cement business and they have the skills to sell their products. Executive management team and CEO understand how to manage and grow their company in post industrial market, and how to compete in such a global market. CEMEX has a solid business model and a dynamic enterprise. People at CEMEX are one of the core competencies of the company. Over the years CEMEX has created a culture of empowering their employees. They hire educated workers and encourage them to improve and continue their educations while working. Sustainability and clean technology CEMEX has created a sustainable business model by modernizing the cement industry. Customer Focus throughout the years CEMEX remained focused on their customers needs and shifted their strategies to respond to their consumers demand. Today CEMEX takes pride in their high customer satisfaction scores.

Question c: How has globalization and post-industrialization converged in the companys ascent? The combination of the globalization and the post-industrialisation at CEMEX reinforces each other. This is a typical example of 1+1=3. Globalization gave CEMEX numerous competitive advantages. Firstly, the global presence allows different operational units to share best practices, the so called, Two-way best practice sharing. Taking Rinker as an example, CEMEX could learn its practices in mobile equipment maintenance, innovative design for standard blocks, activity-based costing and management in Aggregates production, as well as automatic slumping stations in Ready-Mix division. On the other hand, CEMEXs best practices could be implemented in Rinker, including maintenance of intervals and oil filtering, Optimal Ready-Mix dispatch model, recovery and reclaiming techniques, and fuel control systems. Secondly, as the demand of cement is very much tied with GNP, sales and profitability are highly cyclical. Empirically, for every point of GNP growth the cement demand grows three or four times in developing countries. Therefore by having a global presence, CEMEX could much be easier to leverage the downside of any single countrys economical or political drawbacks by exporting the excess capacity to higher return countries. The international coverage definitely generates market intelligence for the company to define best return markets. By diversifying into markets with different cycles, financial performance could be more stable. Lastly, the global spread enables CEMEX to service its debt in a basket of currencies more stable than the Mexican peso alone, and produce a diverse set of cash flows that more easily secure loans. The post industrialisation enabled CEMEX to further improve and benefit from the global structure they built. They created an IT space embracing CEMEX everywhere in the world. The IT platform was developed in the following phases; - build IT infrastructure, - office automation - improve management: integration of data - IT to focus on the fostering of new conversations about business innovation and the reduction of complexity. This new IT conversation is about peer-to-peer networking, integrative processes and work-as-dialogue, human timing rather then accounting timing, and alliance building above and beyond the corporate structure. The IT platform enabled CEMEX to re-design the different business processes; - dispatch and delivery process: After 6 months 98% of the deliveries arrived within 10 minutes of the promised time

Waste management: Within 6 months the team implemented specific logistics practises to eliminate 40% of waste. CEMEX transformed Promexa into a vibrant retailing branch network. Capital investment budgeting; CEMEX implemented digital request documents and Action Workflow software; in the first year the savings were 5 million $, 2% of the total investment value

d. Porter argues in Strategy and the Internet (HBR, March 2001, pp.63-78) that the Internet has the potential to make companies both more similar (and erode competitiveness). Does this apply to CEMEX, and if so how and in what proportion? Internet has the potential to make companies similar, when it is reinforcing me-too competition and accelerate competitive convergence. The result is increasing rivalry and put pressure on the profitability of the industry.4 On the other side, Porter shows that Internet technologies can as well make companies more distinct, when technology is integrated into an overall strategy, i.e., tailoring the deployment of internet technology throughout companys value chain. We think that CEMEX used internet technology to leverage the business, by strengthening its distinctive strategic positioning and gaining in operational efficiency. An important sustainable competitive advantage of CEMEX is the way they built its value chain and internet technology proved to have an important role to support it, with applications that connect various activities and players. The most prominent applications of the internet in the CEMEX Value Chain help to support our point of view. CEMEX developed an IT platform to promote namely data sharing and collaborative work in order to stimulate innovation, improve business practices and product design across locations. Procurement in CEMEX is a consolidated and centralized business function area that also handles inventory planning and control for purchases, global packaging and the management of all the warehouses for all business units.5 To support this business area, CEMEX has a global sourcing team for global negotiations and web based supplier portals for more than 30 countries. The supplier portals permit CEMEX to have an effective local negotiation and purchasing of goods and services to obtain the best cost while ensuring quality and continuous supply. On the suppliers side, this portal gives access to them to become a CEMEX supplier through a transparent and fair selection process. This portal promotes interaction with the suppliers through three web systems6: E-Procurement: This is a system used for buying goods and services that automates the electronic procurement process which links buyer and suppliers by using a set of Internet-based applications and services. Global tracking: This reduces logistics process and follow-up time of foreign purchases made by CEMEX worldwide. E-balance: This allows client to carry out invoice formalities for payment purposes. CEMEX clearly created a proprietary procurement system, with distinctive tools, creating value to its suppliers and being more difficult to be imitated by competitors. Therefore this makes the differentiation.
4 5

Porter, M. (March 2001). Strategy and the Internet. Harvard Business Review, 63-78 Website , http://www.cemexsuppliers.com/portal/cp/cp_lp.aspx, retrieved October 15, 2008 6 Website, http://www.cemexsuppliers.com/paises/USA/to/to_lp.aspx, retrieved October 15, 2008

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This confirms as well the analyses of Porter 7 when he argues that in concentrated markets, digital market places are having less chance to prosper. Thus, some big players, like CEMEX has strong bargaining power over the marketplace and capture most of the value generated. The Global trading network of CEMEX8, plays a determinant role on operational efficiency, on the upstream of the Supply Chain Management (SCM). This is a network of reliable suppliers and shippers to optimize the allocation of CEMEX worldwide production capacity. This seems to be very integrated in the value chain using advanced communications systems and international intelligence network. In another area of the SCM, CEMEX has as well created differentiation, through web technology, by providing to its customers, convenience, service, specialization and customization. One of these tools is the CEMEX web-based inventory management system for the ready-mix business. The system automatically communicates and coordinates cement deliveries among CEMEX, customers and carriers - enables us to monitor, replenish, and optimize cement-inventory levels at our customers ready-mix plants; and keeps our customers apprised of the status of their cement deliveries 9. CEMEX has rethought the ready-mix business, providing add value and competitive advantage both to CEMEX and to its customers, letting the clients focus on their construction projects, instead of worrying about Cement supplies issues. On other hand CEMEX built as well a Customer On-line service10, which permits not only to the customers to plan, place and track on-line orders, but also includes as well product and services information, customers account balances and valuable tools, such as management tools and on-line courses to resolve clients critical issues. By promoting open communication with the customers, CEMEX can integrate customer needs with Research & Development (R&D) centers in Mexico and Switzerland 11, developing appropriate product for project specific requirements. Another interesting aspect is that CEMEX has a flexible architecture12 that enables tailoring the online service offerings per country to fulfill specific local requirements, which helps to show how technology supports the customer orientation strategy of CEMEX strategy. These tools demonstrate as well the advanced stage of Value Chain integration within CEMEX, using internet technology that links activities of SCM with Customer Relationship Management (CRM), which gives them advantages in terms of customer loyalty. CEMEX has as well launched other successful commercial initiatives to increase efficiency and flexibility to the clients, such as the bulk-cement dispatch system, which
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Porter, M. (March 2001). Strategy and the Internet. Harvard Business Review, 63-78 Cemex website, http://www.cemex.com/ps/ps_tr.asp, retrieved October 15, 2008 9 Cemex website, http://www.cemex.com/ps/ps_cs.asp, retrieved October 15, 2008 10 Cemex website, http://www.cemex.com/ps/ps_cs_os.asp, retrieved October 15, 2008 11 Cemex website, http://www.cemex.com/ps/ps_rd.asp, retrieved October 15, 2008 12 Cemex website, http://www.cemex.com/ps/ps_cs_os.asp, retrieved October 15, 2008

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enables clients to pick up cement at their convenience, shorten their loading times, and cut back on their paper work13. Concerning distribution channels, seems that internet technology helps CEMEX to keep better control of its own retail network Construrama, which certainly helps to preserve CEMEX brand image. Our conclusion is that in CEMEX has tailored the value chain in a unique way and used Internet technology strategically throughout the entire value chain to enhance service, increase efficiency and leverage existing strengths. Porter14 says that a sustainable competitive advantage can be achieved in two ways: Operational effectiveness (doing the same as the competitor, but better) and Strategic Positioning (doing differently, delivering unique type of value to the customers). In CEMEX, both aspects were positively affected by internet technology, making CEMEX more different, achieving a sustainable competitive advantage.

e/I). Determine how CEMEXs market/competitive position have changed since 1998 and comment upon whether you think the company is more or less competitive now than it was in 1998. The strategies and actions of major competitors (Holcim or LaFarge) can be taken into account. The 1998-2008 periods could easily be called CEMEXs transformation. It took only ten years to transform a trans-Atlantic cement player focused on cement to a truly global leading player in the building materials industry, having presence in more than 50 countries and with leadership positions in Cement, Ready-Mix & Aggregates. In the late 90s CEMEX entered the Southeast Asia & African markets. The strategy behind was to enter markets still or migrating from the pre-industrial to the industrial stage, where heavy investment in infrastructure would require a high demand for cement. The company established operations in Indonesia & Egypt in 1999, Taiwan & Bangladesh in 2000 & Thailand in 01. The year 2000 represented also the consolidation of CEMEX in the US market as they bought Southdown. One of the main reasons behind Southdowns acquisition was the mayor footprint it had in the Sunbelt markets (i.e. California, Texas, Florida), which represented the highest potential for cement demand, as these states were growing at a faster rate than the rest of the country. The acquisition of RMC in 2005 gave CEMEX several advantages vs. its main competitors. Firstly it consolidated its presence in more than 50 countries, started the vertical integration as it combined its own leadership in Cement with RMC leadership in concrete & aggregates.
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Cemex website, http://www.cemex.com/ps/ps_cs_ci.asp, retrieved October 15, 2008 Porter, M. (March 2001). Strategy and the Internet. Harvard Business Review, 63-78

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Secondly it gave CEMEX access to the developing countries in Eastern Europe, with an enormous potential in cement volume and also it gave the company the ability for cheap money from developed countries (i.e. Germany, France, UK) to finance future acquisitions with a competitive interest rates in a stable economy as the ones in Western Europe. CEMEXs latest and by far its largest acquisition was the 15.3 bn15 transaction for Australian based company; Rinker. With this acquisition CEMEX gained a strong footprint in the Australian market as well states in the US with an estimated population growth rate of 10 to 15%16 (i.e. Florida & Arizona). Also it enhanced CEMEXs position across the value chain of cement, ready-mix & aggregates (Exhibit 3). Exhibit 317

One of the advantages of the Geographic diversification is that based on the global economic cycles, growing markets offset declining markets. For the coming years (20092010) CEMEX will depend on the growth of developing countries as they still will have a positive growth rate, although decreasing due to the effects of the economic slowdown especially in construction & infrastructure sectors (Exhibit 4).

15 16

JP Morgan Building Materials Report Sept 2008 Based on U.S. Census Forecast 17 CEMEX Day March 2008

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Exhibit 4 18

In the years to come CEMEX will continue focusing in its 3 basic pillars; Geographic diversification, Vertical Integration & Profitable Growth. This will be possible by focusing mainly in acquisitions in markets with ample EBITDA, growth potential, favorable industry structure and acceptable political risk19. There still many opportunities for further M&As, as of today CEMEX EBITDA represents only 7% of the 85 bn. of global EBITDA in the cement, ready-mix & aggregates business (Exhibit 5).

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CEMEX Day March 2008 CEMEX Day Presentation March 2008

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Exhibit 5

This could also represent an opportunity for Cemexs main competitors; Holcim & Lafarge. The top three cement companies apparently are following the same growth strategy. With the recent acquisition of Orascom Cement, emerging markets accounted for nearly 60% of Lafarges EBITDA, similar to Holcim & Cemex.20 Holcim & Lafarge are still concentrated in the cement business, as today it accounts for more than 80% of its earnings. Its probable that both companies would look for opportunities in the Ready-Mix & aggregates business to continue the integration of the value chain. By investing, operating & controlling the value chain of cement they can maintain their margins & minimize any risk.

20

JP Morgan Building Material Report, September 2008

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From our point of view CEMEX is a stronger & more competitive company than 10 years ago. These 10 years made them a more disciplined company focusing in geographical diversification, with an integrated value chain and maintaining profitable growth rate. Its clear that CEMEX will maintain its pace through organic growth and M&As as there is too much room for further integration in the building materials industry. One clear example is CEMEXs low profile in the BRICs economies. (Exhibit 5) Exhibit 621

e/ii) what will keep CEO awake at night? The demand in some of the main markets (US, Spain, UK) for CEMEX is decreasing by 20-30%. The main reason across the regions is the downtrend in the residential sector, probably induced by the sub prime crisis. It has proved seriously affecting the global economic growth. The entire commodity market has become very sluggish. Market price of commodity dropped like a stone during the last few months. Banks are reacting very sensitively by tightening lending policies for almost all sectors. Market sentiment becomes very dull across the world. With the decrease in sales volume, the EBITDA is expecting to down. The net-debt-toEBITDA ratio was marginally below 3.5 times by the end of the second quarter in 2008. This in combination with the financial crisis, which will probably result in higher interest rates, will put the ratio at higher numbers. The net-debt-to-EBITDA ratio is an important
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Cemex Day March 2008

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parameter for the bank to grant further loans and competitive interest rates to CEMEX. If the ratio deteriorates, the interest rate of the loans will increase. Coupled with the continuously decrease in share price and EBITDA, the cost of fund is very likely to increase in the coming quarters. The share price has been falling since May 2008 from $30 USD to 6.04 $ in the week of October 20, see Exhibit 6. Exhibit 7 CX price

By continuously looking into some financial figures, its EBITDA decreased by 8% while the revenue increased by 2% compared to the same period in 2007. All these prove that the economic environment is not favourable indeed. As Mexicos economy is highly correlated with US, if US is facing economic downturn, Mexico is likely immune from suffering. Bear in mind the both markets together account for 56% of its EDITDA. The outlook for above figures is not too optimistic in the coming quarters. Some of the biggest concern about CEMEX future is its real organic volume growth. Most of the growth rate is coming through acquisitions of other companies. Industry analysts estimate that the real/organic volume growth is at best half of his two major competitors (Holcim from Switzerland and Lafarge from France). Furthermore, with the contraction of the housing market stated above and with the potential reduction in net income the capability to reduce their debt seems a major challenge right now for CEMEX. While the company has been able to reduce debt by close to US$3.0 billion since the Rinker acquisition, leverage remains higher than originally anticipated. At Sept. 30, 2008 CEMEX had total adjusted debt of US$23.3 billion. While the company should continue to focus its efforts on debt reduction, prevalent weak operating market conditions in its main markets, as well as revised economic growth prospects for most of the regions in
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which it operates should result in a slower than expected pace of growth. The US financial market crash really put CEMEX in an uncomfortable position to face his obligations. Apart from these major things there are a few smaller issues that potentially could cause problems for CEMEX. One of the wild cards is the Nationalisation of the Venezuelan operation of CEMEX. As of today, it is not clear at what price the asset will be nationalised. e/iii) Make recommendations on what you would do about the factors that you highlight as of concern. An important recommendation is to create better/profitable markets in other locations outside US and Spain. CEMEX has a history of good process reengineering that probably they can adapt in todays operation. In addition, selling some properties in low profitable markets can help to remain a more control operation. Diversification has become more relevant as profitable markets like US are starting to go down. The company needs to start to refocus their efforts on what operations are critical to the business and start thinking on probably selling some of the less profitable operations around the world. CEMEX recently announced a cost cutting program that will provide US$500 million in recurrent annual savings, starting in 2009. The company has also reduced its capital expenditure program for 2009 to US$845 million, coming down from US$2.0 billion in 2008 and has targeted additional assets to divest. These measures should provide additional free cash flow to be used towards debt repayment. As we mentioned, a strong focus of our recommendations is based on todays financial crisis. It is very important to be financial savvy nowadays and CEMEX is no exception to the rule. CEMEXs liquidity position is tight, as the company faces maturities of US$5.7 billion during 2009. Of this figure, US$3.0 billion consist of a syndicated loan related to the Rinker acquisition which matures in December 2009. The company has started negotiating with its main banks, and has closed commitments totaling close to US$1.3 billion to extend the maturity until December 2010. Renegotiating debt is a key success factor for CEMEX. Its cash position is compromised so any initiative that can bring cost reduction to the operations will become a critical project for CEMEX. Based on CEMEX historical growth and operations reengineering strategy we believe that CEMEX will take advantage of this financial crisis and create a more efficient company.

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