22229 Sun 23 Oct ... 100% -' Done 8 cdn.discordapp.com O Q @ CEMEX: Sunnier Days in Mexico? [DRAFT] By Dr. David Webb The February Investor Day was an important date in the 2014 calendar, particularly for Juan Romerol. Romero had recently taken over as President of CEMEX's Mexican business following an internal restructuring. The day offered a chance to emphasise the strength of this important part of the group. CEMEX had expanded dramatically in the 19905 and 20005 from its original home in Hidalgo and Monterrey in Northern Mexico to become a global giant with direct operations in over 50 countries. However, the Mexican business still contributed over 20% of the group's overall sales and almost 40% of operating EBITDA.2 With the Group pushing to regain its investment grade credit rating after the ill-timed Rinker acquisition in 2007 and the global financial crisis, his presentation was an important opportunity to convince analysts and shareholders of the firm's prospects in its home market. The previous year, 2013, had seen a large fall in sales and in headcount, as CEMEX Mexico looked to "right size" its operations and focus on value over volume. Romero had joined CEMEX in 1989 following his graduation in law, economics and business. After senior roles in Mexico, he had run both CEMEX's South American and European regions. He was seen as a possible future CEMEX Group CEO3 when Lorenzo Zambrano, who had led CEMEX for decades, finally retired. Looking across the Mexican business, Romero believed there were positive signs for investors. Despite a recent slow down in housing construction, national investment in highways and other infrastructure projects were expected to increase significantly over the coming years. Private and commercial construction was also expected to rise.4 In line with the Group's priorities, CEMEX Mexico's strategic focus was on better serving customers offering solutions where possible rather than just product. In country strategic themes put emphasis on \"value before volume", sales force effectiveness and on improving its distribution network. Cement and Concrete Production Cement is mainly a mixture of limestone and clay that when mixed with fine sand and water forms a mortar that has been used in construction for centuries. When mixed with sand and gravel you get concrete, which is used extensively in road building and other large construction projects. About 1.6 tons of raw materials are needed to produce 1 ton of cement and its manufacture requires heavy machinery and a large amount of heat. Super heated crushed limestone is loaded into a rotating kiln and heated to 1450C to produce clinker. This is then nely milled into cement powder. 1 CEMEX Day Presentation February 13 2014 1 CEMEX 2013 Annual Report 3 Reuters May 13 2014 "CEMEX leadership unclear after sudden death of CEO" 4 CEMEX Day Presentation February 13 2014 22229 Sun 23 Oct ... '6' 100% -' cdn.discordapp.com Given the bulk of cement and its raw materials, transportation is costly and hence cement plants are located near quarries or major ports to minimise costs. It also means that the logistics of distribution are important. The industry is highly capital intensive given the cost of machinery and distribution facilities. Combining 10-15% cement with quantities of gravel, sand and water produces concrete and this sets in to a rock-like mass after about 45 minutes. Consequently it is either mixed at the construction site or delivered in rotating drum trucks ("ready mix"). Logistics and timing are therefore critical. The production and distribution of concrete is an industry in itself, with "ready mix" rms a significant customer of cement producers. Many major cement manufacturers have forward integrated into concrete production and following its acquisition ofthe UK's RMC, CEMEX has become the global leader in ready mix. Cement is delivered in bulk to ready mix companies, fabricators and major construction sites. Smaller constructors and 'selfconstructors' buy cement in bags via building materials wholesalers and retail stores. The Mexican Cement Market Mexico consumes over 36 million tonnes ofcement every year with CEMEX holding an estimated 50% market share. Holcim Apasco and Cruz Azul account for another 25% combined. In Mexico there are 32 production facilities with an estimated capacity of 60 million tonnes. Unlike many other countries, the cement retail market comprises a large share ofthe market. In the USA less than 25% of sales come from retail, but in Mexico over 50% is sold in bags via hardware and construction materials stores.5 Hence retail distribution is a major strategic issue. At the same time an increase in large construction projects have meant a recent increase in the share of bulk sales. The industry consolidated massively over the 19905 and 20005 with dedicated cement companies acquiring and building regional capacity. With transportation costs high rms would seek to dominate regions and to vertically integrate (e.g. into raw material extraction, ready mix concrete and retail]. With over-capacity and the entry of global giants, Lafarge and Holcim, competition is intense. Holcim's Apasco was number two in the market behind CEMEX, and Lafarge was looking to grow by forming a joint venture with Elementia, a Mexican company. Lafarge had placed its Cementos Fortaleza subsidiary into this venture.6 CEMEX in Mexico CEMEX owns 15 cement plants with a total potential capacity of 29.3 million tons per year. They are spread across Mexico, although 2 are temporarily closed given market conditions? It also owns 49 quarries, and 85 distribution centres (including 7 marine terminals]. The distribution centres are supplied through the firm's own eet of trucks and railcars - in addition trucks. In addition rail facilities are also leased. They own 286 concrete ready mix plants [although 77 are idle) located in 80 cities, as well as 2,320 5 Oxford Business Group [2015) The Report: Mexico 2015 6 Reuters lanuary 8 2013 France's Lafarge in Mexican cement venture with Elementia 7 CEMEX 2013 20F Report 22:29 Sun 23 Oct 100% a cdn.discordapp.com ready mix concrete delivery trucks. 8 In cement and concrete the firm claims to "cover the territory like no one else".9 In 2013 cement represented 52% of CEMEX's net sales in Mexico, ready mix concrete 24% and aggregates 5%. Exports of cement and clinker were to the USA, the Caribbean and South America. 10 Capital expenditure in 2013 for Mexico was US$86m down from US$98m in 2012. It was expected to be around US$80m in 2014. 11 The company's employee head count was 12,200, falling from 14,600 in 2011 as the firm globally made cost savings. 12 CEMEX as a group have a strong emphasis on staff training, as well as health and safety in what can be a dangerous industry - there were 10 fatalities in CEMEX's Mexican operations in 2013. CEMEX attracts high calibre staff - as a global leader the company was an attractive employer in Mexico and claimed to have the best people in the industry. Logistics and Technology The Mexican geography and economy had always presented challenges to consolidation in the cement industry. Infrastructure compounded the challenge of transporting cement, raw materials and, especially in chaotic cities, ready mix concrete before it set. As a result a cement producer would tend to dominate its local market and expansion was typically via acquisition to gain another company's market, as well its plants. Integration of geographically dispersed production facilities and a fragmented distribution system was faces the added issue of an unreliable telecommunications infrastructure. CEMEX had, over the last 25 years, significantly invested in technology and logistics to overcome these challenges and realise operational improvements. As CEO from 1985 Zambrano had championed the use of information technology and operational data across the business. With the Mexican phone system unreliable and insufficient to network the company's operations, CEMEX invested in its own satellite communications system called CEMEXNET.13 This, combined with a suite of bespoke production, and decision-making IT applications had allowed the firm to drive best practice and standards throughout production and effectively manage order fulfilment. The transparency of all operations allowed the optimisation of production across CEMEX's plants and flexibility in responding to fluctuations in demand and unexpected issues. The investments transformed the company's approach to logistics and its supply chain and it believed that, as a result, it was well ahead of its international and especially local rivals. 'One CEMEX" Culture The increasing ability to operate as "One CEMEX" in Mexico together with the availability of operational and commercial data had a profound impact on CEMEX's culture. Moving 8 ibid 9 CEMEX Day Presentation February 13, 2014 10 CEMEX 2013 20F Report 11 CEMEX 2014 20F Report 12 CEMEX Day Presentation February 13, 2014 13 Hoyt, D (2005) CEMEX: Transforming a Basic Industry Company, Stanford Graduate School of Business (Ref GS-33)22229 Sun 23 Oct ... '6' 100% -' cdn.discordapp.com from the hierarchical family approach typically seen in many traditional Mexican rms\22:30 Sun 23 Oct 100% cdn.discordapp.com Appendix: Slides from Juan Romero's CEMEX Day Presentation CEMEX February 13, 2014 Juan Romero President - CEMEX Mexico 2013 results driven by historic drop in volumes /CEMEX Sales and EBITDA 1 (US$ M) 3,376 3,458 3,190 1,196 1,253 1,021 2011 2012 2013 EBITDA Margin 35.4% 36.2% 32.0% (1) Using constant exchange rate of 12.85 Mexican Pesos per U.S. dollar22:30 Sun 23 Oct . . . 100% cdn.discordapp.com Aggressively right-sized our business W/CEMEX Sales 1 Headcount (US$ M) (Thousands) -8% 14.6 3,458 -9% 3,376 3,190 13.4 12.2 2011 2012 2013 2011 2012 2013 Despite lower sales, our labor productivity kept growing (1) Using constant exchange rate of 12.85 Mexican Pesos per U.S. dollar Competitive advantage through unique commercial strategy /CEMEX Leadership in market value creation Ready-mixers / Better serving Contractors / concrete each type of Distributors construction Government products customer companies manufacturers Building Value before Volume Committed and Superior distribution capabilities to prepared strategy network capture value sales force 1122230 Sun 23 Oct ilnnovative solutions for our distributors Loyalty program Attracts more customers.\" All purchases are done in Construrama cdn.discordapp.com m onstrurama Financing ...who purchase '1! H'IOI'O Pun-imam In! ""14; \"WI TAL Financing options for all Construrama customers Grow the pie ...with better results... Access to more products at better prices to increase share of wallet Professionalism ...and quality standards To close gaps between current and minimum quality standards West positioned to serve government clients ' 1 Building Materials Supplier ' Nationwide presence Cement Ready-mix Aggregates Technical services Turnkey Solutions Provider ' Solutions for road and transportation projects - Technical experience Largest fleet of equipment for road construction I We guarantee the performance of our products and solutions 100% ( ant rete Pavmg Soul Stabilizatlon 'II Project Developer Identification / development of infrastructure projects Legal financial structuring Coordination of all project stages Technical and maintenance services "5' 100%