Vitro S Quarterly Results Came in Below Expected, with Revenues and EBITDA Dropping 3

BUY

Cemex revenues grew 15.7% in 1Q00, above expected, driven by higher sales in Mexico, Spain and the Philippines, and the consolidation of the Egypt operations. Volumes were stronger than anticipated in Mexico and Spain, but were lower than expected in the US. Prices were stronger in the Philippines, Colombia and Mexico, allowing for margin improvements. Operating profit and EBITDA increased 22.4% and 21.3%, respectively, more than expected. The improvement in operating results was more than offset by lower monetary gains and FX losses, and by a higher tax rate under bulletin D-4, leading to a 15.7% drop in net income. Interest coverage ratio was 4.3x. Net debt fell US$ 152 million vs. 4Q99 to US$ 4.6 billion. Leverage increased slightly to 91.3% due to the effects of bulletin D-4. Our current projections show that operating cash flow will grow 9% in 2000 (12% in dollar terms), with improvements in most of Cemex operations worldwide, and the addition of the new Egyptian venture. Mexican operations, which represent two thirds of Cemex EBITDA, will continue growing since we expect firm prices and strong margins due to the solid domestic cement market. The EV/EBITDA multiple should drop to 5.2x by year-end. With a target multiple of 7.0x (the average multiple for Cemex has been 9.1x in the past five years, while other global cement producers are currently paid above 8x), the stock should reach a price of Ps 66 by February 2001. We reiterate our BUY rating.

(1) Revenue, Price and Cash Flow increases are calculated in dollar terms vs. 1Q00

Mexico. During the quarter, revenue growth was driven by volume improvements. The domestic demand remained strong, fueled by the informal construction and housing sectors. Prices remained unchanged in real terms vs 1Q99 levels. Ready-mix volumes improved due to a small increase in public sector spending. Operating margin was similar to 1Q99, with average cash costs per ton increasing 17% in dollars due mainly to the higher cost of energy. Operating profit grew 30% in dollars.

United States. Volumes declined due to unfavorable weather conditions in California and Arizona, which led to lower margins. Operating profit decreased 16%.

Venezuela. The Venezuelan cement market remains depressed affected by the weakness in economy. Operating margin fell 5.0 pp to 29.8% due to the low prices. Operating profit dropped 14% in dollars.

Colombia. Volumes are improving as the Colombian economy has presumably bottomed out. Higher prices and a concentration of production in the more efficient Ibagué plant led to a 23 pp improvement in operating margin, and to an increase of 151% in operating profit.

Spain. Due to favorable weather conditions, strong public investment and growth in commercial and residential construction, the Spanish subsidiary recorded strong volume improvements. However, the weakness of the Euro led to lower prices in dollar terms. Lower prices and higher distribution costs associated with the cost of fuel did not allow for margin improvements. Operating profit increased 3% in dollars.

Philippines. Sales more than doubled due to the inclusion of the APO operations, which were not present a year ago. On a like to like basis, however, volumes declined 29% due to a continued difficult political and macroeconomic environment. However, operating margin went from a negative 35.8% in 1Q99 to a positive 15.2% in 1Q00 due to higher prices and to the shifting of production to the more cost efficient APO facility.

Egypt. The last Cemex acquisition added almost 3% to total sales, with a 32.4% operating margin. Production capacity will increase by 25% by 2002.

Financing Activities

Cemex posted an integral cost of financing of Ps 111 million, which compare to a financial gain of Ps 814 million in 1Q99, due mainly to lower monetary and FX gains. Quarterly effective tax rate increased from 7.8% to 16.9% in part as a result of deferred taxes under bulletin D-4. However, cash taxes amounted only to US$ 17 million (31% of taxes recorded). Net income declined 15.7%.

Net debt decreased US$ 152 million compared to 4Q99 to US$ 4.6 billion. In this calculation are included both on and off-balance sheet debt, and the preferred capital security (US$ 250 million). Free cash flow reached US$ 194 million, up 10% from 1Q99, and was mostly used to reduce debt. However, leverage deteriorated slightly from 84.4% in 4Q99 to 90.3%, due to a an increase of US$ 402 million in liabilities booked against stockholder’s equity under bulletin D-4. Interest coverage improved to 4.3x. Net Debt / EBITDA fell to 2.45x, below the 2.7x target set by management. As a result of the stronger financial ratios, rating agencies DCR and Moody’s upgraded Cemex debt ratings.

Outlook

We are expecting volumes to improve in all operations for 2000, with the exception of the US. We believe Mexican volumes for Cemex will grow 6.2% driven by higher building activity from the self-construction sector, from the government in an election year, and also from a slight improvement in private investment and housing. We believe demand growth will allow to fully absorb the expected increases in installed capacity of Cruz Azul and Moctezuma, and will not affect significantly cement prices. The 10% price increase completed in April throughout the country will allow margins to remain at high levels. We expect Mexican revenues to improve 15% in dollars this year. We also expect the Spanish market to continue growing with a 9% volume rise and stable prices. Having dropped significantly in 1999, we think the Venezuelan and Colombian operations will experience volume improvements in 2000, ranging from 3% to 5%, once recession affecting these economies has presumably hit the bottom. Venezuelan exports should decline slightly, due to lack of capacity. In the US, volumes for the year will probably drop 2-3%. The Philippine unit will improve substantially, and the consolidation of Assiut Cement will add around 4% in Cemex revenues and operating cash flow in 2000. We expect overall EBITDA to grow 12% this year in dollar terms. Net earnings will improve 9%, since the effective tax rate will be higher under bulletin D-4, although it will be a non-cash item. With our current EBITDA projections, the EV/EBITDA multiple will drop from the current 5.9x to 5.2x by year-end. If Cemex stock was to be paid at a multiple level of 7.0x, our target price for 2000 is Ps 66. We believe 7.0x is a good target multiple since Cemex 5-year average level is 9.1x, and other global cement producers are currently paid above 8.0x. We confirm our BUY rating on Cemex.

The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.

1