Adani Enterprises Limited (HOLN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Holcim India Transaction call. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Swetlana Schoordijk from Head of Investor Relations. Please go ahead, madam.

Good morning, everybody, and thank you very much for joining us on such short notice. Today, we are going to hold a brief 30 minutes call to discuss our Indian transaction. With me in the room are our CEO, Jan Jenisch, and our CFO, Geraldine Picaud. [Operator Instructions] For the sake of time, please limit yourself in the Q&A session to 1 question only. Shouldn't you get an opportunity to ask your question directly. We'll take a note and we'll connect to each of you individually right away after the call. Right now, I'm pleased to hand over to our CEO, Jan. Go ahead, please.

Yes. Good morning, everyone, and thank you for joining the call. I'm very excited to give you some more background on the transaction and then also very happy to discuss certain details with you. We have announced the transaction yesterday on Sunday at 6:00 p.m. in order to be not only ahead of the Swiss stock market, but also ahead of the Mumbai stock market, where we have 3.5 hours time difference. So I hope you had some time to review the material. Besides the press release, we have put together a fact sheet for you, which is available under the Investor Relations section. So we made -- I think it was a bit rumored in the press already. We were busy in the last 3 months or so to negotiate with various parties to try if you can find a win-win solution. So win-win on the 1 hand, of course, to get a superior valuation for our Indian assets. On the other hand, to find the right owner who is respectful to our employees, customers and who takes the business to the next era of growth. I think we have done this. We have found a fantastic new buyers, The Adani Group, who will be here safeguarding a great future for the business. For us at Holcim, we are very happy with the valuation and this gives us now a lot of room to continue to develop Holcim into the future, will accelerate our strategy. If you recall, we just spent more than CHF 5 billion in the last 15 months only to expand into solutions and products with various acquisitions. And now we are very confident that we can continue that also here in the coming months and years. I think with this, I'm very happy to have your questions and comments.

[Operator Instructions] The first question comes from Cedar Ekblom from Morgan Stanley.

My question relates to any approvals needed for the deal to close risks around it not closing. I know that in your report, you say that you need Competition Commission of India approval. I'd like to understand why that is considering that Adani doesn't seem to be a large player in the cement industry at all. Does that relate to previous investigations around price fixing, I believe that there's some issues there that need to be resolved before you look on?

Thank you for your questions. We have quite a simple contract. So basically, the only condition precedent is the approval of the Competition Commission of India. This has nothing to do with any potential litigation. This is a standard process. You have that in the EU. You have that in the U.S. And as you mentioned already, as Adani doesn't have building materials in this portfolio today, it is expected that this will be a very fast approval. Besides this is a simple contract, we are basically even selling our company holding the shares of the 2 businesses. So very straightforward and no further conditions, no further due diligence or anything involved here in the transaction. So crossed fingers, this should go quite smooth over the next 2 to 3 months.

Our next question comes from Lars Kjellberg from Credit Suisse.

Just a quick question on the CHF 6.4 billion in cash proceeds, is there any tax implications from this? And also, of course, the important fears to allocate that capital. So what is your urgency to do that? And what is your pipeline you can do that?

So according to our analysis, this is a tax-free transaction. Never know if any complication arises, but we assume that we will get the CHF 6.4 billion as net proceeds. So it's very good from that perspective as well. Again, we have just spent over CHF 5 billion in the last 15 months, and we hope we can keep a similar pace. So we will put this money to work very fast.

The next question comes from Gregor Kuglitsch from UBS.

A quick question just on whether you're assuming sort of giving any kind of guarantees or whether it's just very simple. You're selling your shareholding and that's it. I mean I'm thinking for instance about the outcome of the antitrust investigation. So are you just selling without any sort of guarantees or liabilities that you're retaining?

Yes, that's correct. We have a simple share deal and even selling this within the holding company. So there is no reps warranties or indemnifications from our side.

The next question comes from Arnaud Lehmann from Bank of America.

My question is regarding CO2 emissions on regenerate are quite large in terms of capacity for you. What is the implication on your CO2 emissions per ton of cement produced? I think the Indian company historically have had quite good performance on this topic. Does that make your CO2 targets more challenging to achieve?

Arnaud, I think there are 2 sides to this. I think more important is that we have around 1/4 of our total CO2 emission is in India. So we reduced our CO2 footprint quite significantly. You are also correct that the clinker factor is one of the lowest globally in India. This is not due to sustainability. This is simply due to a lot of minerals being available in the Indian market. And so for us, again, we are -- how do we say this? We are -- I think it's good that we reduce our CO2 exposures overall, so significantly and our ambition per ton or something we will make a precise calculation, but it doesn't really change much for us. We have our sustainability footprint here to move into circular construction, complete all the alternative fuel projects we are having and drive all our new eco-friendly products out there. So that doesn't change. I think it's rather supportive here.

The next question comes from Yassine Touahri from On Field Research.

A few questions. You're mentioning a tax-free transaction. Does it mean that there will be no capital gain on transaction that you're expecting no impact on capital gain? Then the second question on the process, will the purchase of the offshore holding company, which owns Holcim Indian business avoid the need for Adani Group to make an offer on drive minority? And then the last question, after selling your Indian assets, what do you expect will be the solution and products division as a percentage of your revenue and as a percentage of your operating income?

Okay. I think first, the capital gain tax is also included in my previous answer. So we expect that we have no taxes to be paid for the CHF 6.4 billion of proceeds. The offer is -- has to be made. So according to my information, the Adani Group has to make also an offer for all the other shareholders. So this is, I think, properly planned. And the last question was around the percentage how it changes. I think we are on the right track here to transform Holcim into a balanced portfolio. We will always do cement. We will decarbonize cement, but that's our DNA. That's a big part of our future. But we are happy to build up the other segments, most prominently solutions and products. And of course, this transaction helps. I'm not sure, we don't have it in the fact sheet yet, the effect, but I think Swetlana will provide you soon with the exact numbers, how much cement exposure is reduced now from this transaction.

The next question comes from Martin Hüsler from ZKB.

First of all, so according to my calculation, Solution & Products will be roughly 20% of overall sales after the divestment of India. And I was just wondering how should we think about the take in science in '25 so far. So far, I think we were assuming kind of a growing group. And now after this divestment, obviously, the take in size is becoming much smaller. So should we think of in '25 that net sales will be below at the level, let's say, we were in '21?

Martin, I think the opposite is true. When you saw our start of the year where we had sales growth of 20%, you can expect a very healthy 2022. You also saw how much now the new segment is contributing, but also how healthy our traditional segments are also driven by significant price increases. So we have not the target to shrink the group. Our target and our mandate is to grow also profitably. So you have to expect for '25. I think as you mentioned, maybe solutions products is now around 20% of group sales. And we expect this to go to 30% for '25. That's our target. And for the group size, I very much believe that the group will be bigger than today. So we closed last year at CHF 26.8 billion in sales. I think this year will be even if we are have a smooth process in India goes out. I think we will close the year above that number. And for the coming year, I think my mandate is to grow the company and not to shrink it.

Okay. And maybe the second question, just to make sure, again, if any of the investigation's still pending in India would lead to a fine for Ambuja or ACC or rather Ambuja, who would have to pay for it, you or the new owner then?

I think that would be the new owner, Martin. We have really -- we sold the company. We have no indemnification and no warranties a straightforward sales of the shares with no further indemnification from our side.

The next question comes from Siya Brijesh from HSBC.

I have one as well. So, just wanted to understand what's the main driver of the deal? Is it pressure to cut carbon or you thought that there's a better owner who to grow this business where the local management failed to do in India?

I think it's a combination. I think we made it clear that we want to grow the company also with this transformation portfolio. So we want to bring solutions and products to 30% of group sales already in the very near future. And in order to do this, we also need to shift a bit the portfolio. We need to divest a bit to raise money and to have money to invest through acquisitions. And this is what we are doing. And then keep in mind, the last 15 months alone, we spent over CHF 5 billion to buy Firestone, to buy Malarkey, to buy PRB in France, but also to buy the other mortar companies in Poland and in Belgium. So I think we have a very good transformation progress here. When I look at our M&A pipeline, this is quite well filled. I think at the moment, we are working on around 10 transactions. This ranks from the usual bolt-on acquisitions. We do for aggregates and ready mixed concrete, but also to some exciting projects for Solutions & Products. So we're very optimistic that we will now further accelerate here the transformation. And then the combination, what I maybe also want to add is to divest something that only works for us if you also get a superior value. So we are not divesting just to divest. And you have seen that from us in the past that we are well in the double-digit EBITDA multiples for all our divestments is in Brazil was Indonesia, Malaysia was also the smaller markets in Africa. And this also what we did here for the transaction in India.

Okay. If I just ask a supplementary on the last part of your answer. So you -- clearly, India was kind of the highest valued market at this point in time in terms of cement and all other market markets, we would probably get a lower multiple. So does this mean that you're finding it difficult to exit other markets at this point in time?

No, no, when you look how we do the divestments, we make it very responsibly and in a very proper steps. And in India was something we were thinking if we can get a win-win and win-win means we have a proper responsible new owner who takes care of our people, who takes care of our customers and then, of course, also who pays us a proper value, and that's what we achieved in the negotiations with the Adani Group.

The next question comes from Tobias Woerner from Stifel.

3, if I may, cheekily, you're clearly reducing your emerging market exposure with this divestment India has cement consumption per capita, well below 250 kgs still to below 250 kgs; China, above 1,500 kgs, well above 1,500 kgs. What is your view on who sits on the back of that in this context? It's also only you don't have full control. The second question is there was some commentary around FEMA, i.e., the foreign exchange authority in India that they could limit the amount of cash they take out. Is that an issue? And then thirdly, just quickly the valuation when you compare to fares India sort of comes out at $160 a ton to $180, So the fare in India being higher. Did you purposely not engage in any transactions where synergies could have been an issue or a cartel authority intervention?

We look to your last question, I think we did -- again, we did a very proper process. And -- and you are right, and we talked about this before, to make such a transaction, you have many dimensions to consider. So we talked about valuation. We talked about the new owner. And of course, we talk about the smoothness of the execution of such a transaction. And this goes from indemnifications all the way, of course, to approval process by the Competition Commission of India, which is a very proper commission, of course. So it is not in our interest here to engage maybe with very competitive companies and then you are hanging in there and you have a very lengthy process. So that was, of course, another consideration for us and we are happy that they found a solution where we could get the smoothest possible execution of this agreement. I think your question is for the emerging market. So I think while we talk a lot about the portfolio transformation when it comes to our 4 business segments, cement, aggregates, ready-mix concrete and Solutions & Products. And this goes, of course, in line with emerging markets versus mature markets. And this goes hand in hand. Our Solutions & Products business is mostly focused on the mature construction markets, so meaning North America and Europe. And so we have a natural shift in the portfolio also less emerging more mature markets.

And with regards to FEMA, do we have to -- is there any issues around potentially taking the money out of India for a time?

No. No, it's -- to be as it's an offshore deal. So there's no issues about getting the cash out of India.

The next question comes from Yuri Serov from Redburn.

It's a dramatic move. But can you please explain to us why now? What's the reason behind the timing?

Why now? We talked about it, we have multi-dimensions for such a transaction. So from valuation to a new owner and also smoothness of the transaction. And we just had the right...

We'll take the next question from Yassine Touahri from On Field Investment Research.

Just a follow-up question. When I look at the calculation that you provided on your slide, I don't see any impact in the capital. Can you confirm that there is no capital gain and that there is no taxes in production because it's an offshore vehicle, just we had permission there.

Yes, that's correct. We have the -- our analysis comes to the conclusion, there is no capital tax gain or any other tax to be paid for this transaction.

And maybe a second one, if I can, just very quick on the -- you mentioned that investments into solutions and products. But would you consider a share buyback if you don't find the right assets?

Again, we have quite a good pipeline in M&A. So our job at the moment is to check all the transactions and hopefully, we come up with some very attractive ones. If this is not possible, I think if we could do no transactions now on the M&A side, I think the balance sheet might be a bit too healthy. And then, of course, we can think about all sorts of things to give back money to the shareholders. We are not against it. We are a very shareholder-focused management here. But our #1 priority here at the moment is, of course, to put the money back to work.

The next question comes from Sven Edelfelt from ODDO.

Yes. So just 1 for me. When looking at the press release from Adani, the valuation from their point of view is set to be USD 10.5 billion. So can you explain the difference with your CHF 11.3 billion, I guess it's not ForEx-related?

Yes. So that's a good -- thank you for the question. Happy to explain that. This is simply based on the fact that the Adani Group has also to make an offer to the other shareholders. So while we own 63% of Ambuja and Ambuja owns 50.5% of ACC, there's a lot of other shareholders, minority shareholders, and he has to make a proper offers to all of them. So that's why he is assuming that his deal transaction size is beyond our CHF 6.4 billion and 10-point something.

And they have to do a mandatory trading offer of a minimum of 26% on the floating that's what they are going to do. And if you take that, you will find that USD 10.5 billion.

I think this was our last question, and thank you so much for joining us today. This was all very short notice, but I very much appreciate the opportunity. We can talk a bit about the background and give you some more information here as Swetlana and her team is, of course, available for you throughout the week to give you more data if you need that. And other than that, I hope to see you all soon, and I wish you a very good week. Thank you very much, and bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.