Zacks_Analysts' Blog : CEMEX Reports a Loss - Analyst Blog

CEMEX, S.A.B. de C.V. (CX) reported a third quarter fiscal 2010 loss of 9 cents per ADS compared with earnings of 14 cents in the year-ago quarter. The loss reported was wider than the Zacks Consensus Estimate of a loss of 3 cents per ADS.

Net loss was $86 million versus a loss of $78 million in the year-ago quarter. Lower operating income, higher financial expenses, which were partially offset by a foreign exchange gain, were culpable for the loss in the quarter.

Net Sales

Net sales during the quarter suffered a 2% year-over-year decline to $3,765 million, below the Zacks Consensus Estimate of $3,829 million. Net sales plunged mainly due to lower contribution from the company’s U.S. and European operations, partially offset by a higher contribution from the Mexican operations. The infrastructure and residential sectors mainly drove demand in most of the markets.

Consolidated cement sales volumes increased 2% compared with the year-ago quarter while both ready-mix and aggregates sales volumes decreased 3%.

Operational Update

Cost of sales, as a percentage of sales, jumped 210 basis points to 70.9% from 68.8% in the year-ago quarter, mainly due to lower volumes. Selling, general, and administrative expenses, as a percentage of sales, inched 20 basis points to 21.6% in the quarter as higher transportation costs were partially offset by savings from CEMEX’s cost-reduction initiatives.

Gross profit dipped 9% year over year to $1,097 million, pulling down gross margins by 207 basis points to 29.1% in the quarter. Operating income plunged 25% to $284 million and operating margin contracted 230 basis points to 7.6%.

Operating EBITDA decreased 13% to $649 million, affected by lower contributions from U.S. and European operations. Operating EBITDA margin decreased 230 basis points to 17.2% in the quarter.

Sales by Geography

Revenue at Mexico operations increased 14% to $868 million and operating EBITDA decreased 3% to $286 million. United States reported net sales of $683 million, down 9% and operating EBITDA was a loss of $2 million in the quarter compared with a profit of $45 million in the year-ago quarter.

In Europe, net sales dipped 9% to $1.4 billion and operating EBITDA plunged 22% to $193 million. Sales in South/Central America and the Caribbean went down 3% to $366 million and operating EBITDA in the region decreased 20% to $108 million.

Net sales in Africa and the Middle East were $246 million, down 4% year over year while operating EBITDA increased 18% to $103 million. Asian operations reported a 9% increase in net sales to $124 million while operating EBITDA declined 8% to $29 million.

Financial Position

Free cash flow after maintenance capital expenditures went down 4% to $250 million in the quarter. During the quarter, free cash flow of $228 million plus proceeds from the sale of non-core aggregates and concrete block assets in Kentucky were used mainly to pay down debt.

Despite the debt pay back, total debt increased to $16.8 billion as of September 30, 2010, from $16.6 billion as of June 30, 2010, due to negative conversion effects in the amount of US$497 million.

Our Take

Following its acquisition of Rinker Group Limited, an Australian producer of construction materials, for $14.2 billion (which does not include $1.3 billion of assumed debt), CEMEX has been reeling under substantial debt. Lately, CEMEX has been selling non-productive assets to reduce its debt. 

This was the fifth consecutive quarter of CEMEX experiencing lower or flat year-over-year volumes for its products. Added to the company’s high debt levels, these overhangs remain palpable concerns. We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.

Mexico-based CEMEX and its subsidiaries, engage in the production, marketing, distribution, and sale of cement, ready-mix concrete, aggregates, and other construction materials. It sells its products primarily to distributors in the construction industry.