Cemex’s King of Cash

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

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.

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.

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