Holcim AG (HOLN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the LafargeHolcim Q3 2020 Trading Update Conference Call. I'm Andre, 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, Head of IR. Please go ahead.

Thank you, Andre. Good morning, everybody, and very well welcome on behalf of LafargeHolcim to our Q3 Trading Update Analyst and Investors Call. With me in the room are Mr. Jan Jenisch, the CEO of LafargeHolcim; and Mrs. Geraldine Picaud, CFO of LafargeHolcim. It's my pleasure to hand over right now to Mr. Jan Jenisch. Jan, go ahead.

Yes. Good morning, everyone, and thank you for joining our call regarding the Q3 performance. Very happy, I will make some remarks to start with and then Geraldine will lead us through the details before we come to the outlook. And then, of course, to your comments and questions. First of all, excited to share the great news with you. I think we are very happy how volumes came back in the last months, and what a strong performance, I think, well ahead of everyone's expectations we could deliver here. If -- maybe I quickly start with some comments on the volumes, you have seen that our volumes are very broadly based. We had the best results in Latin America, where our cement volumes are up 6% for quarter 3, fantastic results. Here, we are very helped by our branded product sales. So all the branded cement bags we are selling there, and where we have a leading position has helped us and our strong foothold in distribution. And in the retail markets here has been a big plus for us in Q3, all going into the future. We have then in Asia Pacific, also here ahead of last year, 3%. The volumes are also excellent. And here also, we have the same effect of this very strong branded product sales in the distribution and retail channels in markets like India and the Philippines. We have on Europe and Middle East, very resilient demand. Europe, just slightly below last year and the same for Middle East Africa. So also here, a big resilience on the demand, while North America is a bit later in the disruption cycle. As you remember, they had a very good first half year. And now they have to deal with some of the disruptions from pandemic a bit later than the other markets, so we see that in our Q3 volumes. Nevertheless, I think this will also come back to normal volumes very soon. Then I'm very happy that our action plan, HEALTH, COST & CASH brings very strong results. If you remember, we started this already in March and really focused here on cost reduction on one side, but cash generation on the other side, very solid financing and liquidity. And you see that on the slide, we are here clearly above targets and you also see that then also in our margins, where our margins are up. EBIT is up 10% against last year's. And I can also share with you that all financial KPIs are better than last year's quarter. So really excellent. And this makes us also very confident then going into the future, which I will comment later. For now, I'm asking Geraldine to give us a bit more details on how Q3 went.

Thank you, Jan. I suggest we start with our net sales. That's Slide #6. You can see our Q3 net sales stood at CHF 6.5 billion. That's down 9.6% compared to Q3 2019. On a like-for-like basis, sales reduced by 2.6%, mainly driven by an average volume decline of 3.4%, which was partly offset by an average price impact plus 1.8%. The small scope effect that you can see results from bolt-on acquisitions closed in the last 12 months. As was the case in H1, translation of local currencies into Swiss francs had a negative impact of 7.4%. This stems from all currencies, which have depreciated against the Swiss francs, primarily Indian rupee, U.S. and Canadian dollars and the Mexican peso. If we now turn on to the recurring EBIT, you can see on Slide 7 that our recurring EBIT has increased by 1.9% in total, of which the like-for-like improvement is plus 10%. The currency translation effect of 8.5% is similar to the impact on net sales. The volume effect based on variable margins explain a decline by CHF 114 million. Our HEALTH, COST & CASH program has continued to produce strong fixed cost savings of CHF 121 million by reducing mainly maintenance, production cost and SG&A. The market price for energy has continued to be favorable. And overall, our operating costs have declined by 6.3% on a like-for-like basis, over proportionate to our sales and volumes. The average increase in our selling prices was 1.8% across the group. In total, these actions have offset more than the impact of volume loss and have improved our recurring EBIT margin rate by 250 basis points. If we now move on to the results by segment. In Q3, the cement sales increased by 0.3% like-for-like, benefiting from positive pricing of 2.3%, which more than offset lower volumes. The EBIT margins that you can see also improved by more than 4 points, fully benefiting from the HEALTH, COST & CASH program. The aggregate volumes declined by 6% and prices were flat. Cost management has allowed to keep recurring EBIT margin almost unchanged versus Q3 2019. The ready-mix sales declined by 3.5% like-for-like, combining volumes declined by 6.1% and a price increase of 1.7%. The margins also showed progress here. Well, after the segments, this Slide #9 provides an overview of the results by region. And all regions demonstrated excellent margin expansion, largely driven by our HEALTH, COST & CASH program and effective management of prices. And I will now comment on each region in more detail. Let's start with North America. Firstly, let me remind you that North America enjoyed very strong results in Q3 2019, which mechanically creates an unfavorable comparable basis. Net sales were down 9.1% like-for-like and recurring EBIT down 3.5% like-for-like. While the impact of the pandemic remained broadly limited in Q2, the region faced more disruptions in Q3. Canada East showed resilient performance, while our business in Canada West remained affected by the slowdown in oil and gas industry. However, our strong focus on cost and effective price management allowed us to improve the recurring EBIT margin of North America by 1.9 percentage point for this region. Let's now turn to Latin America. Latin America showed outstanding performance in the quarter, with our net sales up 14.6% and recurring EBIT up 35.8% like-for-like. Mexico remained the key contributor to the recurring EBIT growth of the region. Cement demand in the country grew above last year's level, notably supported, as Jan explained, by bagged cement and our strong branded products. Additionally, our business benefited from participation to iconic infrastructure projects. Brazil experienced a good volume recovery in Q3 and in COVID-19 impacts. Recovery is also gaining momentum in Ecuador, Argentina and Colombia, with volumes flat or positive in all 3 countries. Excellent execution of our HEALTH, COST & CASH action plan, combined with effective price management, allowed us to remarkably expand our recurring EBIT margin in the region by 6 percentage points in Q3 2020. Let's now go to Europe. Europe experienced a good recovery volumes in the quarter, following a series of strict lockdowns in Q2. Our net sales were flat and recurring EBIT up 14.7% like-for-like. Major markets in Western Europe, such as France, Spain and Italy, heavily impacted in Q2, recovered very well and recorded volumes above last year in Q3. Demand in the U.K. remained soft, however. Central Europe, again, as in Q2, proved to be very resilient again this quarter. In contrast, the demand in Eastern Europe slowdown due to pandemic disruption. Successful execution of our cost action plan and effective price management contributed to the recurring EBIT margin of Europe to improve by 2.3 percentage points in Q3. Middle East Africa delivered a strong performance in the quarter. Our net sales were down 2.2% like-for-like and recurring EBIT up 19.9% like-for-like. While Nigeria experienced a significant improvement in its local markets, the volumes remained overall a bit softer in other countries, notably in Lebanon and in Egypt. Successful turnaround initiatives and strict cost discipline have been applied across the region, which supported a substantial margin improvement of 3.5 percentage points. APAC. APAC recorded a solid performance in Q3. Net sales were close to last year level and our recurring EBIT up plus 5.4% like-for-like. A solid contribution was delivered by our Chinese operations despite heavy floods during the quarter. In India, after a challenging Q2, cement volume recovered, notably supported by residential demand from rural areas driving sales of bagged cement and branded products. This, combined with effective price management, cost savings actions and lower input costs, contributed to significant margin expansion in India. In Australia, the overall economy remained slow and was further impacted by pandemic disruptions. In the Philippines, we observed a slow market recovery. But again here, strict cost discipline across the region and strong performance in India supported margin expansion. Let's now turn to Slide #15 and talk about our financial strength. As in our previous earnings presentations, I would like to remind you of our excellent liquidity situation and the strength of our balance sheet, as this is obviously key in the current environment. We have more than CHF 8 billion of liquidity, which results from cash and deposits and from secured committed facilities. These committed lines are currently undrawn and have no restrictions attached. Thanks to the level of financial strength we have reached since 2019, our 2 rating agencies have confirmed our strong investment-grade rating at BBB, Baa2 with stable outlook despite the crisis. The attractiveness of our debt has allowed us to successfully continue our refinancing transactions, as you know, with the issuance of 2 bonds amounting to more than CHF 700 million at attractive interest rates and maturities. And last but not least, to demonstrate our commitment to sustainability, we have decided to link our funding and liquidity management with our achievements in this area. We recently concluded our first issuance of ESG notes under our new EUR 3 billion commercial paper program. To keep ESG qualification, we have to remain ranked by Sustainalytics within the top of our industry as we are. We have also linked the cost of CHF 1.8 billion of committed lines with our ESG performance, which will become cheaper if we further improve our ESG rating and more expensive should the rating deteriorate. Finally, we have also invested some of our cash in sustainable deposits to help finance activities supporting the United Nations sustainability goals. And with this, I hand over now to Jan for the outlook.

Yes. Thank you, Geraldine. So we have obviously a good situation. Also going further, we expect for Q4 to have a resilient demand. This is, first of all, based on the coming back to normal levels in Q3. We also see that going onwards now. If you have questions for lockdowns, we don't see them for construction sites. I think the governments are handling now the pandemic or the second wave we have currently in Europe in a different way. So business is asked to continue. Construction sites are open. So we expect that our positive demand will also continue into Q4. In addition, we have a strong demand from the retail and distribution segment for all the smaller home builders for the renovation projects, for the smaller contractors that is running amazingly. To give you here one number, we have for branded bagged cement, we had a growth of 5% in volumes in quarter 3 compared to last year. So this is another very strong base. LafargeHolcim has invested a lot to build up the brands and the channels and this pace of now here in the crisis. And going forward, we're not guiding on the next year but if you take these trends into effect, you can see that we are also quite optimistic for 2021 volumes. Here, we also have now a lot of stimulus packages coming in. We have a long list from Australia to the U.S. to Canada, India, China, European Union plus many countries. We have a start of a big number of stimulus packaging for infrastructure and for private housing, so I think we will see that being very positive. LafargeHolcim is, here, very well positioned in those markets where we have those stimulus programs coming up. We have for the bottom line, we made now a super performance here in Q3. This will continue. We keep executing our action plan HEALTH, COST & CASH. Our decentralized operating model enables us to get results very fast. The people are very flexible and agile, and you can expect also that these are not just a quarterly cost saving. This is here to remain also for the future. We have then increased our guidance for the free cash flow. I'm very excited about that. We always said the business has to be measured more on cash flow than on any other figure. And we also see that this year, even though we don't display the free cash flow number, you can see from our upgrading of the guidance to above CHF 2.75 billion that we are very confident also here to continue into the Q4 quarter with a strong performance. And all this performance then leads to a strong balance sheet. If you remember when the crisis started, we made several steps for securing our liquidity, a few financing actions. Very happy that the rating agencies support our rating and confirmed all of that, so we will keep here with a very strong balance sheet and a good debt leverage, which makes us ready for opportunities for M&A if they come up. With this outlook, I think I can pass over to you, as you probably have a number of questions or comments. So let us start the Q&A session.

[Operator Instructions] Your first question comes from the line of Elodie Rall from JPMorgan.

I'll limit them to two then. First of all, on capital allocation, I mean you are going to be comfortably now below your previous targets of 2x this year of net debt-to-EBITDA, now looking at even below 1.8x. So are you looking at acquisitions again? And if yes, can you share any areas of interest with us? Or would you need to see more divestments first? So that would be my first question. And second, I guess, I'll go on guidance since I'm the first to ask. You're looking for Q4 to be a resilient quarter. So how does that compare with Q3 like-for-like sales down 2.7%? Are you talking about resilience in terms of like-for-like revenues or like-for-like EBIT? And if you could share some trends that you are seeing in October with us.

So maybe on the capital allocation. I think since I have started with the company 3 years ago, I think we took out about CHF 5 billion of debt. And at the same time, almost double the cash flow and also some other financial KPIs. So it's our clear target that we continue with this. So when we talk about M&A, we are excited to have opportunities here. However, you will see us safeguarding our financials and our strong balance sheet also in this case. Regarding the divestments, I think we have done only a little bit in Southeast Asia. However, that has helped us greatly to the debt ratio and all that. And there might be some opportunities for divestments. But I think the overall message is you should count on us that we keep the debt ratio below what we announced here and that we keep a very strong balance sheet. On your question if I share my forecast for October with you, well, I'm not allowed to do that. But you can see from our message in the outlook that, obviously, we see now these trends which we have for quarter 3, for this resilience in demand. At the half year report, we shared with you this very fast tsunami decline in April and then the full recovery in June. So we are already now 4 months back to normal business activities. And at the moment, that's what we see. So we believe that we are continuing with the Q3 performance also into Q4.

The next question comes from the line of Martin Husler from ZKB.

First of all, you were mentioning this increase in volumes of your branded products by 5%. I was just wondering how important as maybe percentage of overall does branded product composite of and what's the price benefit against the nonbranded products. That's the first question. And the second question is a bit longer term. Could you please try to remind us how much of additional CapEx do you think you have to face in order to achieve the longer-term sustainability goals?

So on the branded product, that's about half of our sales. So we have, for example, bagged cement. That makes half of our total sales, and that grew 5%, whereas the bulk cement decreased accordingly. So we have this a big shift now with this very resilient construction activity, especially smaller construction side, residential renovation refurbishment. And then the disruptions are mainly in the bigger cities where we have more ready-mix operations and we have cement delivered in bulk, and that is suffering more than the bag one, the bagged products. And you can see that also from the regional mix that in Asia and Latin America, where we have the highest rate of bagged products versus bulk. You can see that we are even above last year. So very positive movement, and I'm very happy that we have such strong brands in such very strong distribution channels. For pricing, that's a great question because you can see that for the first 9 months, the pricing is up 1.5%. In quarter 3, it's even up 1.8%. This shows you that, of course, for these branded products, we have a certain premium in the price, and this goes fully into our margin. You have your second question for the Capex, for the sustainability targets. Here, our clear target is that all the CapEx we are doing has to have a double-digit return on investment. So everything we do for alternative fuel. We have, at the moment, we have 52 projects in Europe to increase the use of alternative fuel, and they have actually a very high payback based on cheaper fuel, but also on saving on CO2 certificates. So we are not intending to make any investments which have a negative return on investments. All these investments have to have a positive payback directly through cost, through CO2 certificates or through higher cement prices. And the later one is something we see now very strongly. If you have followed our recent launch of ECOPact, this largely carbon-reduced concrete types here, we get very well paid for those products and have excellent return on investments.

That helps a lot. Just maybe one add-on. What assumptions of CO2 emission rank prices flow into your calculation for double-digit return on invested capital?

Yes, Martin. It's at the moment, the CO2 price -- in my personal opinion, the CO2 price could be higher. So we are now what we are trailing, EUR 25 to EUR 30 or something. That's nice. That gives us a certain payback. At the same time, we still have a big payback on the pure fuel cost. So it's a mixed return at the moment. And so I'm actually encouraging higher CO2 prices, then our push for innovation and for these CapEx projects will be even having better returns.

The next question comes from the line of Ekblom, Cedar from Morgan Stanley.

It's Cedar Ekblom here. Two questions here. The first one, you started talking about it there on your sustainable product offering, can you give us a bit of color in terms of the growth rates you're actually seeing in the demand for those products relative to your more generic cement offering? And can you give us a bit of understanding on what percentage those products actually make up of your total offering at the moment? And then secondly, on the margin progression from here. So we obviously had a very strong margin improvement in the third quarter. Is it fair to assume a similar type of margin expansion into Q4 or are we now getting into a situation where noncontrollable costs like raw materials potentially start to offset some of the benefits that you've done on cost-cutting that you can control?

Yes, and thank you for the question. So the first one on the green products is we have now, for example, ECOPact. We launched now globally, in Switzerland, Germany, France, we went already into U.S. So it's just the start. So I cannot give you now a great number on how -- what the percentage is for those green products compared to the standard products. But it will be -- it really is very significant. To give you an example, in Germany or in Switzerland, where we may be spearheading the campaign, we expect that those products will take up maybe 10% to 20% of our product sales in the next 2 to 3 years, so very significant inroad. I think it's important that for those products, we are not waiting for regulation or for any new standards or something. We are really selling those products to the consumer who wants greener products. And there is quite a demand. It's usually starting with the bigger cities. So we have a big demand in Zurich, in Berlin, in London, in Paris. But this will be a mainstream demand pattern in the future. So we are very excited to do that type of product and really now spearheading here the development and not waiting for anyone who's imposing that on the industry. So I'm very excited. The products, again, they have good margins so even we have to invest a bit. For example, use all the recycling demolition waste now into the concrete and into the cement, very exciting. And that cost us a bit of investment to, of course, take the demolition waste and process it properly. But very nice products with very healthy margins. So we are really pushing now to make that a big part of our business. And I will follow up with your question, I think, on the next reporting sequences when we have more numbers to demonstrate what a big part of the business it's becoming. On your margin question, I'm in a difficult spot now as I cannot give you the details for Q4. If you look at our guidance a bit, so we say that our action plan, HEALTH, COST & CASH, which is basically behind the margin expansion that we continue ahead of targets. So while I cannot give you now the number for Q4, what we see now is that we still have potential and more exciting, we believe, that the cost reduction we see now, especially on the fixed cost, will stay.

Next question comes from the line of Robert Gardiner from Davy.

Two quick ones for me. One, just maybe back on capital allocation. I'm just wondering in the absence of finding the right deal in the current environment, we should consider buying back our own shares in the context of where the share price is today. And second then, just looking at the performance of the business, obviously, very, very strong in cement. Aggregate seem to suffer more than most. I'm just wondering what's behind that or if you could give us a little bit more color on that.

The question on capital allocation I...

We do buybacks.

Okay. So we have no plans at the moment for share buybacks. I think it's -- again, it's good. We are in that position that we could think about it. But on the other hand, we just also paid a significant dividend in May. And let's see what we do -- let's see what we do with the cash allocation, capital allocation once we get there, once we finish the year as strong as we believe we finish it, then I think we're going to have that discussion early in 2021. For the segments, yes, we have now a very fast reaction in the cement business segment, while the other 3 segments are a bit slower. What we expect here that we will catch up here, we experience that we take a little bit more time to get our action plan working for the other segments, but it will come.

The next question comes from the line of Lars Kjellberg from Credit Suisse.

Two concrete ones. You're talking about CapEx running ahead of target, meaning the CHF 400 million reduction you talked about. So can you comment where you think you can end up the current year? And also on the comments about there's a lot of stimulus coming. Can you give us any sense of any concrete business that you're seeing today from stimulus packages or still just lose plans out there? And obviously, there's a whirl from the political side to get this going, right? But are you actually seeing any concrete measures today that is coming into your order books?

Yes, thank you. So on the CapEx side, I think we have a guidance out here for the full year, which we will not change at this point in time. I think we made a big progress not in just cutting projects, but what we really accelerated now in the crisis is to lower the CapEx unit costs. I talked to you about this before that we have spent actually too high CapEx both for development and for maintenance simply on the unit cost, and we haven't taken full advantage of more standardization and more global sourcing. And this is something where we are just half through. And you will see from us different CapEx levels in the future because we have adapted simply the unit cost needed. So we don't give a new guidance on CapEx, but as we showed, we are fully in line with what we promised, maybe a little bit better for the full year, and that's where we stand. Great on the stimulus, it always gets a bit neglected. We have tons of stimulus, really concrete announcement from governments out there, and I'm going to ask Investor Relation to give a brief overview, maybe beginning of next week for you. We have a big announcement from the European Union for infrastructure and green renovation, very excited about that. More importantly, we have additional announcements from countries. For example, France has announced a EUR 7 billion program for building refurbishment, renovation and social housing and another EUR 3 billion for private building owners. So these are very exciting, and this also will give us a lot of opportunities here for demand. We have then other European countries, but I think we will get the proper list. I think all governments who need now to stimulate the economy, we all know that construction activity is a stimulus. This is really hitting the people positively so I expect this almost in all our key markets to happen. When we look at the U.S., they have just extended the so-called FAST Act. That's a high-rate transportation and transit program. They have extended it until September next year. It's a $59 billion program. And you saw our numbers there in recent years in the U.S., we have been already benefiting from that. So great to see that it continues. We all know the talk now about what next program will be started, I guess we have to wait for the election. But I think whoever wins the U.S. race will have an even bigger program. The people I talked to, they're probably going to launch like a 1 trillion program for infrastructure and housing in the U.S. That's our intelligence at the moment. We have in Canada some very nice programs just started. For example, in Quebec, we have a 10-year infrastructure program, which was started this year. And another couple of programs also in Canada, which we'll give you the list. When you look down to Brazil, they have a nice new program, it's called green and yellow housing. It's a USD 4.7 billion program to support 1.6 million families to buy homes. So that's another program, and we have other activities in other Latin American countries. In India, we have a huge program. They have a flagship program, it's called Rural Housing scheme, which they will, I think, increase now with all the problems we are seeing there. It the Philippines, huge infrastructure program was announced. Same in Australia. They just launched 7 -- I think it's AUD 100 billion, 10-year program for infrastructure. China has done a similar thing. So I think we are really in a very good territory as LafargeHolcim. All our key markets, they have announced programs, and we expect them to start rather soon, beginning of next year. So that makes us quite confident.

Just to follow-up. So my question was really, are you already now seeing any of these programs coming through into your pipeline for next year? And the final one, just wanted to understand the ESG angle to financing. Appreciating the benefits will come going forward, but how does ESG financing stack up versus the financing today?

You mean for the markets or for us?

Well, I mean the first question was relating, are you actually seeing any of these stimulus packages already generating some degree of visibility into 2021? That was the first question. The other one was ESG, how does ESG compare versus traditional financing?

Okay. So on the stimulus package, we have to see that. We still have programs running. So we have the U.S. program. We have a couple pro -- we have a big program in the U.K. running. So we have ongoing programs where we are supplying. And when you look at our demand pattern now for the last 4 months, we are fully here in the race. And now, we have a lot of new programs, which are announced this year and will start next year. So we are quite confident that the stimulus will be not ongoing, will be increasing and accelerating now for next year.

And on those -- yes. And on the sustainable financing, the rates, actually when you go for ESG financing are slightly better than for traditional financing. Of course, as long as we rate top of our industry, which is the case according to Sustainalytics.

The next question comes from the line of Gregor Kuglitsch from UBS.

I've two questions. The first one is on carbon capture. So I went on your website and your communication, I think you're talking about 20 projects that you've got going. I think there was a funding the other day in the U.S. My question is basically this. If you had to kind of look at the cost, either CapEx or OpEx and ideally both, what's, in your view, the breakeven price essentially to make this economically stack up against basically without assuming subsidy? I appreciate today, it's still subsidized in many cases by various governments. So I guess what I'm interested in, is in your view is kind of a carbon price that makes these investments actually worth your while or kind of a breakeven price, basically. I'm sure you've calculated this. And then the second question is on -- going back to M&A. I'm a little bit surprised you're kind of saying that the basic, in the short term, it sounds more like balance sheet preservation priority. But at the same time, you've now been in charge of the company for 3 years, and there was obviously ambition to grow the fourth leg, the product and solutions business. And basically, so far, I guess, nothing has really happened. So I guess the question is, do you think there's something to do there? Or are you kind of giving up on it?

Yes, Gregor, I'm not giving up. I'm not giving up. So we have, as you know, we had a big project last year in construction chemicals. But -- and it didn't materialize for one, two reasons. And one of the main reasons is we want to be financially disciplined. So we want to make a step in M&A, and hopefully, we see that sooner than later. But I just wanted to give the comfort that we are not intending to do this if a higher debt leverage or something. We will take care that the balance sheet will be fully intact while we do that. So let's see what opportunities come up. And again, we have not given up. We are just actually prepared to do when we can do it. On the carbon capture, you're asking the right question. Because at the end of the day, it has to be in the price or in the regulation, we have CO2 or we have cement price. So that's totally the right question. I cannot give you the exact number today. We have certain simulations, but the issue is we need to -- we have now first pilots, we're building first pilots now. And we have to -- because this has not been done before. You have to get technical solutions, and which gives us the right cost, also the operating costs for that. And then I can answer your question. So it's not -- it has to have a significant higher cement price. That's clear. But I don't want to give a number today. We have different scenarios and looks like it's going to work, but we need to pilot first in the plants before we can really finalize the solution.

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

My first question is on your Q3 results. I want to say, for one, we see a good performance from some of the emerging markets, including Latin America and Middle East Africa, in particular. How much do you think of this Q3 performance is more of a catch-up effect on a weak Q2? Or do you think it could be sustainable into year-end and into next year? That's my first question. And my second question is on your mix. I mean we see the cement business was basically the driver of the performance in Q3, on the other hand, the Solution & Products business looks still quite weak. Could you please give us a bit of color why this is the case? And what are you doing to try to improve the profitability of Solutions & Products?

Yes, Arnaud, thank you very much for the questions. I think yes, I'm happy you noticed in quarter 3, for the first time in quite a while, we were benefiting from emerging markets. We all know in recent years from volatility to currencies to other topics, emerging markets wasn't the preferred highlight of the investors and also didn't shine in our results. So I'm very happy because I still think many, many of those emerging markets, they're going to have a great future. And I think everyone is a bit surprised now how sustainable the demand is, even topping the demand of the mature markets. So as you can see, this is not a catch-up. What we see now, because it's already lasting now for 4 months then going into October, so we really have a sustained solid demand from those emerging markets, switching a lot to this branded cement bag sales, which is beautiful. And I think this will continue. You always have to consider for the future that the big megatrends for LafargeHolcim, they are fully intact. So the whole population growth and all this population growth is in the cities, is in the organization, which brings all these needs for infrastructure, from water treatment plants to highways to tunnels to subways to high-rise buildings. This is fully intact and plus, the wish of the people for better living conditions, which I believe. With COVID-19 has maybe even increased the desire of people now to have more comfortable homes and maybe think about changing apartments or houses. So we believe these trends are fully intact and maybe even coming out stronger now through the pandemic. So we are quite positive now that this will continue not only in quarter 4, but also for the years to come. I think your question on the business segment is, first of all, I'm very happy we have this huge performance in the cement business segment. I commented a little bit before that we were faster, able to execute the action plan in cement, maybe also in the countries where there was a bit more focus on cement. At the same time, you also see that the recovery was stronger in cement. And especially, we benefited from this strong growth in cement bags, which helped of course a lot the P&L, whereas the volumes in aggregates and in ready-mix concrete, they were more challenged because they were also more disrupted in Q3. But nevertheless, we see this will also recover and come back strongly, and we still have the target to increase margins also in these other 3 business segments going forward.

And was there a particular country in the Solutions & Products business that put pressure on the volumes?

Yes. It was the -- the U.K. paving activity suffered, impacted our Solutions & Product segment during the quarter, Arnaud.

The next question comes from the line of Jean-Christophe Lefevre-Moulenq from CIC Market Solutions.

I have two questions, if you didn't mind. First, could we have more flavor on the volume and pricing activity both in North America and in Europe? Maybe in U.S., do you have implemented price hikes in September like your competitors? I think the price hikes were postponed from April to September. A second issue, your strong target in terms of free cash flow, CHF 2.7 billion, how do you reach that number? Do we have a special effect in working capital requirements and also tax rate?

Yes. Chuck, thanks for questions. And yes, well, I don't want to go too much into detail, but of course, we follow the standard procedure in pricing, price increases. So we did very well. I mentioned earlier that while for the 9 months we are standing at 1.5% price increase, in Q3, we were even able to achieve 1.8%. You can assume this is across the board. We had good pricing in Europe and in the U.S. So I don't think we give the details, Geraldine, but you can assume that all this is pretty much in line. We have, of course, the benchmark here in-house and very solid pricing also in Europe and of course, in the U.S. On the free cash flow, unfortunately, we don't share the number with you in Q3. It's a bit a pity. But you can assume that we made progress this year in all aspects of the free cash flow. So in net working capital and within net working capital, we improved from receivables to inventories to Capex. And then, of course, the stronger EBITDA in the third quarter helped us also a lot. Taxes are, I think, getting into the right territory. I think we are targeting or we can confirm a tax rate for the full year, I think what I saw is 25% to 27% in effective tax rates. So we are really working on all aspects of the P&L and of the free cash flow. And it looks very good after 9 months, otherwise, we wouldn't increase the guidance from above CHF 2 billion to above CHF 2.75 billion.

Jan, a follow-up question. Did you restore this tax scheme based in Brussels? And Brussels like in the past at the time of Holcim there was so-called [indiscernible] Brussels and a very good in terms of tax optimization. I don't think if you accept it to share this with us.

Yes, Jean-Christophe, yes, thanks for that. But no, all these tax schemes from the past are close.

The next question comes from the line of Bernd Pomrehn from Vontobel.

Also two questions from my side, please. What I still would like to better understand is the sound growth of your branded products in the third quarter. Was this just a change in market dynamics or is there more behind this, meaning that you actively started to change your sales and marketing strategy, which then obviously could have a more sustainable positive impact on your margin going forward? And then second question on M&A. Are you currently seeing potential sellers prepared to sell at this point of the cycle? Or are they rather still waiting for further market recovery? So the underlying question, obviously, is when could we get news about a further step in your targeted portfolio transformation from you?

Okay, yes, Bernd, first of all. Then on the branded products, I mean, this is a big part of our business. Half of our sales is branded. And when you look in more details in markets like India, but also Colombia, Mexico, Brazil or many markets in Africa, we have super strong brands, and this has always been a key part of our strategy. We invest a lot into the distribution channels in those markets, most prominently in Latin America, we have a big rollout of these Disensa stores. We have thousands of our own retail stores, which we franchise to people. And we have invested a lot in the last years and this pace of now, very nicely. The pandemic is just changing how we live and how we work. So you can imagine, when I report now 5% plus in cement bags, you make the math, that means minus 6% in bulk cement, right? So that shows how the business activity is shifting. And so even when we go now into 2021, you are asking, is that sustainable? I think for next year, we're going to see a similar pattern. A lot of people are focused now on house renovation and house refurbishment, and we are happy here to provide the LafargeHolcim product. I think on the bulk side, we will see a more recovery. But this is what we see for maybe next year, if you talk about these 2 different product segments. Your question on M&A is interesting. So on the time-wise, it's of course, a bit challenging at the moment to make due diligence or make negotiations. So I think when the crisis started, a lot of people thought, oh, in the summer or towards the fall, there's going to be quite a big sell off or many sellers in the market. And I think this is a bit postponed just due to the inability to be able to meet and do due diligence. So I think we're going to see in the months to come, and especially next year, you're going to see quite opportunities coming up.

The next question comes from the line of Ephrem Ravi from Citigroup.

Two questions from my side as well. First, on the carbon-free cement, the EcoLabel cement products. I understand this is predominantly in Europe today. Can you talk about your plans to take it to probably the other developed markets in the U.S. and abroad, just to get a sense as to how scalable this could be as a product in the medium term? Second question, more financial one. One of your subsidiaries, Ambuja Cement in India kind of announced a bumper dividend much higher than its free cash flow or earnings. A lot of it will go obviously to you. Are you building up a cash chest at the group or the headquarters for potential acquisitions or growth? Is that how investors should see it?

And so on the EcoLabel we just launched, I think last week, our new EcoLabel, very -- I'm extremely proud of that. We started of course in parallel, we have ECOPact, there's the concrete label going. That's very exciting. And we are a bit surprised how strong the demand is from the consumer side. So we have to market those products a little bit different and target more the house owner, and not so much the construction company, who's looking more into cost. And we see huge demand for green products, not only in Europe. So we just launched, I think, 2 months ago, we launched the ECOPact range in the U.S. and we have very significant demand. We have already some eco products in the Indian market, also with significant demand. And our goal is now to really roll out this EcoLabel globally and to attract more consumers to LafargeHolcim.

Yes. Your second question was, even though I didn't get it completely well, but it was about Ambuja and ACC. So you wanted to refer to a potential merger or about the dividend of Ambuja? What was precisely the question?

Yes. The question was more on the dividend of Ambuja. I mean it is significantly about Ambuja's cash flow or earnings. And there's a view that essentially, this is to build cash at the group level rather than at a consolidated level. It's almost $500 million from very rough math. Would that be a fair statement that you are building cash at the group level rather than leaving it at the subsidiaries? And should we extrapolate that to your growth ambitions and how close you are to deploying that cash flow for growth?

Yes, yes. We would obviously, as Jan said, if there is any opportunity that we'll serve that opportunity. So we had a lot of cash in India. We have above CHF 1 billion equivalent. So given the risk on the Indian rupee, it was the right decision to have that dividend done out of Ambuja. That's why we decided to pay out such a dividend of approximately, as you said, 500, more precisely $460 million. Yes.

The next question comes from the line of Yassine Touahri from On Field Investment Research.

So two questions. The recent energy cost trends suggest there might be some cost headwinds in 2021 and that you might have to accelerate the pace of your price increase. So what commercial strategy are you considering to adopt in an environment where there might be pressure from imports in region with independent terminal and also in the context where there is not yet any carbon border adjustment mechanism in Europe? And the second question is just to check a number. I think in your sustainability report, you're mentioning that approximately 40% of your fuel for cement is pet coke. I'm estimating that it represents approximately more $500 million of bill. Is it correct?

So first of all, I think the first question, if I understood correctly, was about if we're going to see more imports into Europe for cement. Is that...

No. What commercial strategy you've got more concentration, so you might have to increase price more? And what will be your commercial strategy so you've got more import into, let's say, Europe or Texas or anywhere in the world? Will you focus on prices margin or would you focus on market share?

Okay. Thank you, thank you. So first of all, we are very happy with the pricing this year, as you can imagine. And also, we are, in parallel, of course, we are measuring the market share and the idea is not to give up market share because of price, and this has not happened in 2020, and we will maintain this way. So while pricing margins, branding is important, we are not -- don't want to give up any market share that is clear.

And the pet coke bill is exactly what you estimated. So it's effectively around $500 million.

The next question comes from the line of Paul Roger from Exane BNP Paribas.

So just two then. Firstly, on India, if we look at your subsidiary results, it looks as if you did better than some of your peers in Q3, particularly Ambuja, where even the top line was quite strong. Can you just say a bit about what's maybe driving your outperformance and whether that's sustainable? And then the second question is on Phase 4 of the ETS. Can you remind us of your CO2 permit position? And obviously, we've seen production fall into the industry of lull. So could we see a situation a bit like Phase 3, where actually, the industry does have a surplus and therefore, CO2 is maybe less of an issue than originally feared?

Yes, Paul. Thank you for the question on India. Yes, thank you, that's -- about your nice comment. We have a situation in India where our business has performed well this year. We have also here the plan to catch up, further catch up in margins because if you really make your reality check, you also realize that we don't have the highest margins in India, and we are trying to catch up and have a strong action plan here. Ambuja has done better than ACC this year, which is basically due to the fact that we have a ready-mix business in ACC in India, and we don't have one in Ambuja. So while cement sales are up in quarter 3 in India, ready-mix volumes are very depressed because we have these lockdowns or disruptions in the big cities. So the ready-mix, which is centered in the cities, that is hardly hit, still or disrupted. While overall, we are selling more in India with all these retail channels we have for cement. So that's India. And very resilient, we have been now -- had a volume growth in cement for the last 4 months. So that's very, very positive. And hopefully, the ready-mix will also come back helping our ACC result in the months to come.

And Paul, I think your question was about a situation with regards to CO2 credit. Did I understand that well?

Yes. Well, it was basically 2 parts, yes. So what is your credit position? I think originally, you said you were long to something like 2022. But I wonder if that's been pushed out slightly because of lower production. But I was also just interested in the industry of lull. If production has come down, is the industry also in a long position for longer, and therefore, maybe we don't get this pressure point where everyone is having to buy CO2 in the next couple of years?

So we don't communicate, as you know, in detail about our long positions of credit. I think what is important is to remember our commitment to be neutral on the Phase 4 of the ETS scheme. Where thanks to the CapEx investments of CHF 160 million we communicated a year ago, we will be neutral.

The next question is from the line of Sven Edelfelt from ODDO.

Yes. Holcim Philippines has recently promoted some project for green builder. Is it presumably the ECOPact that you just mentioned? I understood this project or such Holcim Solido, Holcim Excel, Holcim Wallright. I mean overall, can you perhaps tell us more about the specifity of this project? And what is the interest for clients to buy this project? That's the first question. Second question is on the pricing. Overall, it seems to me that it's way better than in the previous year. We've seen pricing power a little bit back. Is this, in your view, a fair assessment? And to what extent it is linked to the upcoming CO2 investments?

Yes. So that's a challenging question on the Philippines. I think I like to come back to you with a bit more detail because you are actually asking about the formulation of the product where I'm not sure at this point. The product is not labeled ECOPact in the Philippines, shows the potential we have even in the Philippines. You're asking about the motivation. Well, talk to my children. They are requesting if we build anything in the house, they're always checking the footprint of the product. And I think this is a bit where we have to get ready to -- we want to have a green product offering in any of our markets, no matter if it's a mature market or emerging market. Even in emerging markets, people have big interest to have a good sustainability footprint. And this is what we're doing now, and this is now where we have just started with this new eco branding where we can then transparently report what we are doing and what success we are having. So we just started that. So we still have in markets like India or the Philippines, we have a lot of local brands, which go in the right directions. But we want to put them together in a more clear and more transparent global branding scheme and also then we can report to you how successful it is. We have the second question was on the price. Yes. I think you can imagine, we are also -- I think the pricing, especially when you look at price over cost, we have been very successful this year. And I think that was better than in the years before. So that's the right track. I think it's very sustainable because we see now the power of the brand going forward. And also the price premium we get for green products. So we are quite confident that this is a sustainable pricing.

The last question for today comes from the line of Tobias Woerner from MainFirst.

Two, if I may. The first one to Jan, please. You've obviously repositioned the company, and we're starting to see the fruits of that coming through as we speak. Having said that, in my opinion, there is more potential going forward in terms of, let's say, the simplification of the group. Would you agree with that? And if so, what sort of actions do you still think possible and needed for the group? That's number one. Number two is for Geraldine, if I may. And it's a hypothetical question. Assuming everything else remains the same into 2020 other than volumes going up, shouldn't the free cash flow generation of CHF 2.7 billion, CHF 2.75 billion or greater than that not come down given the need for higher working capital?

Thank you, Tobias. Can you -- your first question on we have more potential, I think I didn't fully get the area you were referring to. Could you repeat that?

Simplification is one of the areas you're focused on. And I agree with you that, that is an important area, given the number of listed companies you have and minorities around the world, but not just simplification. What else in your mind do you think you can do to improve the company going forward?

Yes. No, thank you, yes, that's -- I appreciate you see more potential and I agree to this. We have maybe our action plan, HEALTH, COST & CASH, we have launched in March, we really see an acceleration not only in cost savings but in simplification. So for example, all the CapEx projects we have, either for development or for maintenance, we see here a big potential for more standardization and more global sourcing. And we haven't really been maybe strong enough to push that in recent years. And now under the new action plan, we have a huge potential to really standardize processes that not everyone reinvents the size of a mill, for example, but that we rather use standard equipment here. And that also means we can use standard spare parts and maintenance parts. And here, we are really, I would say, not even have done half the journey what we can do. And we also see that in other areas, you have spoken about our amazing number of publicly listed entities. We could continue to say we have a big number of joint ventures. Also a lot of -- I don't necessarily mean the big ones, we have a lot of joint ventures in the country. So we have, still in simplification, we have a lot to do. And I think it shows results now, but there's a lot more we can do and we will do.

Yes. On your question, Tobias. I mean we have, as Jan explained, gained a lot of discipline on the net working capital thanks to our HEALTH, COST & CASH plan. And we're going to keep that discipline in 2021 and going forward. We also look at our CapEx in terms of returns with the same financial discipline, and that, we will also keep. So you're saying if volumes grow, then EBITDA grows. And as you know, we committed to be about 40% cash conversion. So then you can do the math of what we could potentially achieve as free cash flow.

Okay. I think we are out of questions now. And thank you very much, it was a very exciting session this morning. And I look forward to a successful closing of the year, and I very much hope we can meet in the very soon future. Thank you very much for that. And I wish you all a great Friday. Thank you.

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.