Holcim AG (HOLN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2022 Results Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] 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 Ms. Swetlana Iodko, Head of Investor Relations. Please go ahead, madam.

Thank you, Sandra. Good morning, ladies and gentlemen, and welcome to Holcim Q3 Trading Update Call. As usual, we'll start with the opening remarks by our CEO, Jan Jenisch, following by more financial details by our CFO, Geraldine Picaud. Afterwards, we'll take time for your questions. The call is limited to 1 hour, and therefore, to give everybody the opportunity to ask a question, please limit yourself to two questions only. Now without any further ado, I would like to hand over to our CEO, Jan. Go ahead.

Good morning, everyone, and thank you for joining. I'm very excited today to share a bit more background information on our excellent results and then also to have a good discussion with you. You have seen the results already. We are very happy that we continue the excellent momentum of the first half into the year, also for the third quarter. And again, we're achieving a new record for sales for operating profit. I think we couldn't really ask for more. What is more is that a big part of this success is based on our transformation of Holcim, transformation into the new segment Solutions and Products, which is now already showing significant results and result contribution. Also our successful transformation in the geography where we very fast expand in North America, which already makes 40% of our sales, and even more on the profit side. And then also the sustainability profile has changed very positively, and I will speak about this in a minute. So altogether, we are pleased we have good order books. We don't see a decline in demand for Holcim also in the fourth quarter or for the start of the year. So we are confident to do the upgrades in the outlook, which we did upgrade on the net sales, upgrade on the EBIT, then of course, the new exciting low level on the debt leverage. So I'm very happy we could do that. Let me just point out a bit on a couple of the slides. I would just like to comment on Slide 5, where you see this high activity level we have on the transformation of the company. In the first 9 months of the year, we did 16 acquisitions, and we did the 2 significant divestments of India and Brazil. Also very remarkable how much speed we have on the expansion of Solutions and Products with another 6 acquisitions to further strengthen our roofing and insulation systems, but also to enter here into tile adhesives and into facade systems. On the other side, we did 10 so-called bolt-on acquisitions to further strengthen our business segments of aggregates and ready-mix. And very happy to see that. And this will also be our focus for the future. We want to continue with this activity level. We have a super strong balance sheet and cash position, and we will continue here to acquire and to transform Holcim here for Solutions and Products and also for the geographic focus. You have then on Page 7, you see how we progress. So from originally 8% Solutions and Products, we are now already at 25% in 2022, if you account for all the changes being made on a full year basis. So we are, I would say, ahead of our target of 30% for 2025. So I look forward to hopefully overachieve the strategic target when it comes here for the expansion of Solutions and Products. Most exciting for me is on Slide 8, how this is already contributing. When you look at the four business segments, you see that a big part of our success is now based on Solutions and Products, or it's based on the growth. So the first 9 months, we had an EBIT growth of CHF 390 million, and that's fantastic to see that how fast this segment became already our second segment in the Holcim group after our business segment of cement. And this is, as you can see from the numbers, the reason why we have a growth in operating profit, even despite strength in Swiss francs, we were able to have new records, and this is due to this transformation, more Solutions and Products, but also more North America. Talking about North America, we have on the next Slide #9, this impressive geographic transformation of Holcim. You see the numbers, how we were based in five different regions back in 2019, before the pandemic. And now through all the portfolio changes, now North America is 40% of our company. Also, Europe has improved to 32%. And then our super strong foothold in Latin America makes these 3 regions now more than 80% of Holcim, and this is what we want to see in the future here to have these regions where we have strong market shares and excellent earnings profile, which you see on the next Slide #10. You see the earnings profile slightly overproportion in North America, largely overproportion in Latin America, and also the same picture. These three regions now make more than 80% of our earnings. So that's very great. We could do this in such a rather fast period of time, and I'm happy that our strategy works, also works already into the numbers. On sustainability, a lot of excitement from new science-based framework for 1.5-degree scenario. I'm personally the most excited about our green product range, ECOPact, ECOPlanet with sales growth beyond our expectations. And we have included a new slide for you, Slide #12, where you see now that the decarbonization of Holcim, but also the growth in Solutions and Products leads to a totally new sustainability profile of the company, where in this year we reduced our CO2 per dollar of sales by 30%. So very impressive, I think. And I think with this background on transformation and a bit background on the results, I hand over to Geraldine, who gives us more details on the results and performance.

Thank you, Jan, and good morning, ladies and gentlemen. So we'll start with our Q3 net sales, which reached CHF 8 billion, up 16.3% like-for-like compared to the same period last year. Cement aggregates and ready-mix recorded a like-for-like growth of 14%, attributable to 16% price increase. The negative scope effect mainly comes from Russia and the divestment of India and Brazil, which were closed at the beginning of September. Solutions and Products recorded a huge growth of 46%, attributable to both like-for-like growth of the roofing business, and the acquisition of Malarkey, PRB and other bolt-ons. Let's now move on to the 9 months net sales bridge. Over the 9 months, the like-for-like growth reached 13.9%, also driven by the outstanding performance of Elevate and the strong pricing on our cement aggregates and ready-mix business. In total, the scope effect amounted to a net positive of CHF 500 million as a consequence of the group transformation. Effectively, on the one hand, we have CHF 1 billion of acquisitions in roofing and specialty building solutions like motors. And on the other hand, we have CHF 0.5 billion of divestments in cement. We delivered a record recurring EBIT of CHF 1.6 billion for the quarter with a strong like-for-like growth of plus 7.7%. The recurring EBIT of cement, aggregates and ready-mix decreased by CHF 109 million, almost entirely due to the divestments. As in H1, we managed to achieve positive price over cost, reflecting our ability to offset inflation through strong pricing, successful sourcing strategies, and cost discipline. The recurring EBIT of Solutions and Products grew by CHF 134 million, boosted by the outstanding performance of Elevate. The 9 months recurring EBIT waterfall shows the same trend as for the 3 months with a positive price over cost in cement, aggregates and ready-mix. Our JV contributions have declined under China's lockdowns. The outstanding performance of Elevate remains the #1 driver of our EBIT like-for-like growth this year. Again, this demonstrates that our new Solutions and Products business segment, in which we invest, is already our #1 growth engine. Before getting into more detail, this slide, Slide 18, provides an overview of the regional performance. And all the regions grew in recurring EBIT, except Asia Pac, which was impacted by high inflation in India with limited ability to increase prices, and by the lockdowns in China. So let's begin with North America. The region continued to deliver an outstanding performance in the quarter. Market dynamics remained very positive. Our traditional businesses benefited from strong market growth, excellent price momentum and continued positive market acceptance of our low-carbon building products. Led by the strong growth of our roofing business and the recent acquisitions, Solutions and Products have now reached 38% share of net sales in the region. If we go next to Latin America. The region recorded another quarter of strong performance with volume growth, especially in Argentina, Colombia and El Salvador. The region achieved a positive price over the cost led by strong pricing. We maintain an excellent pipeline of infrastructure projects in the region and in Mexico, in particular, including the new project, refinery Salina Cruz on the Pacific Coast, and an additional section of the Tulum Airport. The region also advanced well with the expansion of ECOPact and ECOPlanet products. Significant investments were made in materials recycling, supporting further increase in the usage of alternative fuels. Let's now move on to Europe. The region delivered a resilient performance. We observed softer volumes on the back of project delays, strong price trends continued and helped to contain the cost inflation, enabling the region to achieve a positive price over cost. The region made further progress in our sustainability journey with a significant increase in green CapEx, driving the increase in materials recycled and the usage of alternative fuels. Turning next to Middle East and Africa, the region recorded another quarter of profitable growth. Price over cost was positive in the quarter, driven by strong pricing, especially in Egypt and in Nigeria. We saw robust market trends in Nigeria and in Algeria. Egypt had a successful turnaround with good volume growth and a successful price management. The region improved margins, another quarter of clear achievements against the backdrop of high inflation. Let's now move on to APAC. The region continued to be challenged by the inflationary environment. We saw a significant negative price over cost in Q3 as price increases were not enough to negate inflation. We further observed a softer level of demand in China, largely due to COVID lockdowns. The successful divestments of India marked another milestone in our portfolio transformation, in line with our Strategy 2025, accelerating green growth. Finally, this slide focuses on solutions and products where strong momentum continued in Q3. Solutions and Products now represents 25% of the group net sales on a pro forma basis. In North America, we accelerated growth with a successful acquisition of SES Foam and Polymers Sealants North America, broadening our offerings in insulation, waterproofing and coatings, which are highly complementary to our roofing business. In Europe, we acquired Cantillana, a leading specialty building solutions provider in Belgium, to complement the recent acquisitions of PRB, PTB, and Izolbet. In Q3, Solutions and Products EBIT doubled compared to the prior year, and our roofing business reached 20% EBIT margin thanks to strong demand and improved raw material supply. Let's now go to our capital allocation strategy. As we just reviewed it, the group transformation continues to be executed successfully and remains our key priority. Solutions and Products now represent 25% of the group net sales on a pro forma basis. The debt leverage is far below our 2025 commitment of 1.5x. Therefore, we are delighted to announce the launch of a share buyback program, which will allow our shareholders to share in our success. The program will start next month and run until May next year. Depending on market conditions, we expect to buy back shares for a maximum amount of CHF 2 billion. With this, I hand over to Jan.

Thank you, Geraldine. As this is a trading update, so we only go down to the EBIT. We like to give you a bit of more information on this onetime effect on profit and cash flow. You see this on Slide 27. And we also have a good situation here. We're going to have an overall significant positive impact on the net income, driven by this very value accretive divestments of Brazil and India. And so we will have more than CHF 1.5 billion of extraordinary profit. And then we can balance off the resolution with the U.S. Department of Justice, the fine, and then also we can balance off a little bit of reduction we have from these divestments on the bottom line. So a good situation. Overall, we are obviously very cash rich at the moment. And we also have here significant lower debt leverage of around 1x. Brings me to the outlook. And again, we have very good results and also now a very strong earnings profile. So we're happy to upgrade the guidance here. On the net sales, we go from at least 10% growth to at least 12% growth. We believe the group will reach CHF 29 billion for the full year. On Solutions and Products, we also upgraded the outlook by another 10% growth from originally, at least CHF 5 billion of sales to above CHF 5.5 billion. Bottom line EBIT, we guided at the beginning of the year, we will want to see a positive growth. Now we are more specific and believe we will end up in the mid-single-digit EBIT growth for the full year. Debt leverage, I mentioned, we're going to be around 1x, even with the share buyback, and very important here, the share buyback is not a change of our profitable growth strategy. It's simply the fact that we have so much cash now from the divestment, but also from our strong cash flow profile that we are happy now to continue with our attractive returns to shareholders. Nevertheless, even with the share buyback, we will continue with our acquisitions. We have already 16 acquisitions this year. So maybe we end up with 18 to 20 acquisitions, which is a new record, and we also plan next year to be very active here to even further strengthen this transformation of Holcim. That's it for the outlook. And now I'm very excited to have your questions and comments, please.

[Operator Instructions] The first question comes from Paul Roger from BNP Paribas.

Congratulations again on the results. So I'll have two then. I guess starting with the buyback. I mean, obviously, it's quite substantial. I mean it's basically 15% of the market cap, if you were to annualize it. I'm just wondering to what extent that's a one-off post the disposals? Or could it be recurring? And then second question, you obviously had a slightly positive price/cost spread in the traditional businesses last quarter. How do you expect that to look in Q4 and maybe next year given the planned price increases and recent cost moves?

Paul, yes, look, for the buyback, I'm not sure if I fully got the question right.

I was just wondering, Jan, whether it's basically a one-off or whether it could be more of a recurring type program?

Okay. So look, I think our first priority is to make our profitable growth happen and you see now that we can show the results of the move to North America, of the fast expansion in Solutions and Products, this will remain our #1 priority. Nevertheless, I think our share price is on a very low level. So for a share price level below CHF 50, I'm personally very excited to buy back the share and then increase our profile also earnings per share and so on. So that's, I think, very attractive. And that comes just probably with that we have so much cash at the moment that we want to put this to work. And so we continue the acquisitions, but also we can reserve now CHF 2 billion to show the shareholders that we care about the returns for them, and that's what we do. So it's a onetime for now, and let's see how it turns out, Paul, but I'm excited to make both happen actually. I think it's great that we can do that. Your question, price over cost, I think we are in a very good position. Look, originally, we all thought that the quarter 2 will be the toughest quarter of the year, because if you remember last year, we still had a significantly lower cost base from energy and other third party. And so we thought that quarter 2 is going to be a decisive quarter for us if we can make a new record year or not. And of course, we were successful in quarter 2. And the quarter 3 was then maybe even more challenging from that aspect. And we also made it, right? So we had a high activity here to put forward the pricing, a bit of mitigation from energy and so on. But very happy to do that. Now going forward, I think we are super well positioned. We have our energy supply secured. We have the pricing on a level that we can even have another cost inflation coming in the first quarter or first months of next year. So I believe we are in a very good position to have a positive price over cost going forward. And I think, we don't give guidance today for next year, but we are very positive for next year.

The next question comes from Elodie Rall from JPMorgan.

Congratulations on the results. Can you hear me?

I think we will proceed to take the next question with Matthias Pfeifenberger from DB.

So the first one is on dividends. So you mentioned share buyback is a onetime, but then also you have special effects on net profit. So will those be accounted for in determining the payout? You know where I'm getting at, is there scope for a special dividend? And then on the CO2 targets, obviously, a lot of relief from the disposals. Will you set a new absolute per tonne CO2 target as well? And how low could that be?

Matthias, on the dividend, I think it's a bit early to answer the question precisely. But you know that we want to have attractive returns for the shareholders. I was personally very pleased the Board decided to increase the dividend last year from CHF 2 to CHF 2.2, and I hope we can continue with this trend, also helping if we have a reduced number of shares that will already be a technical increase of the dividend. Too early to answer, but I think we can have an attractive continuation of the dividend policy. On the CO2 targets, it's important for us. We are fully committed to decarbonize cementitious products, to decarbonize the processes of Holcim. We made good progress there. At the same time now, we are shifting the portfolio to be the leading company in building materials with Solutions and Products already accounting for 25% of our net sales. So we will now also include different KPIs. So for today, we show you the first time the CO2 per net sales. I think that's an important also KPI for investors, and that's, of course, our target to lower the absolute CO2 of the Holcim Group. So we will continue now to also report this and show the progress we are making.

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

My first question is regarding your fine in the U.S. [Technical Difficulty] all the comments. Can you confirm that beyond the $778 million fine, there are no other implications of you pleading guilty on this occasion in terms of being able to, for example, bid for U.S. public projects or potential other lawsuits that could come from your decision to plead guilty? That's my first question. Secondly, you announced a share buyback. And obviously, you haven't done that since you joined as CEO, Jan. So that's quite a big change. So what does that tell us in terms of your M&A strategy? You've been very active with acquisitions in the last 2, 3 years. Does that mean that you are not excluding a larger acquisition? Or are you still being opportunistic with M&A?

Arnaud, thank you. No, no, we are ready for any deal coming. That's clear. So just simply, we have been quite successful with the divestments for very high multiples, $7.3 billion net cash back plus the cash flow we generate. So we simply think it's wise now to use the money for this, I would say, almost limited share buyback. I'm happy to do that. I'm not a fan of capital increase or something. I think a company should always provide the capital for expansion. And we are just simply now in a position. We have a lot of cash in the company. Doesn't change anything. I think we are super happy with a full pipeline of acquisitions. We have 16 already this year, and we will continue with this be assured. You see the math, then with the new guidance on the debt leverage going down to 1x, even with the share buyback, it just shows you we are in a very comfortable position here from the balance sheet. And this is why we took this decision. And yes, I'm very satisfied with this. On the fines, also here, it's a significant fine. I'm not happy about the amount, but I'm very happy about the resolution, because the resolution where the Department of Justice is especially confirming that the Holcim company was not involved in this legacy transactions. There were no U.S. employees or U.S. operations involved in this misconduct. And most importantly, they specifically confirm that Holcim has a state-of-the-art compliance system. And this is why they didn't ask us to have an independent monitor. So we are not here under further investigations. Instead, they tell us we run the compliance in a state-of-the-art fashion, and this is why we don't need a monitor going forward. So I'm very happy with the wording of the resolution. And this also brings us then to your question of the collaterals. And of course, this is very good news. So we don't expect any collaterals from the customer side or from public projects. We also had positive reactions, I think, from financial institutions. I don't know if -- is the Moody's report public?

Yes, it is.

So you can even read Moody's report. This is now a plus. The resolution is a plus for our credit rating because it takes away the uncertainty. And we have received a lot of this positive feedback. And again, I'm not happy about the amount of the fine, but I'm very satisfied with the resolution that brings a closure to this Department of Justice inquiry and now we can continue what we do best to grow the business and create the future for Holcim.

Next question comes from Gregor Kuglitsch from UBS.

I've got two, please. So the first one is on Solutions and Products, which obviously had a very strong first 9 months. I think as you said, the earnings doubled. So I guess the question is how comfortable or how convinced are you that, that is sustainable? I don't know whether there's something specific going on in flat roofing membranes in the U.S. supply demand, I don't know. If you could just tell us whether you think you can hold that? And then the second question is, I think you briefly mentioned it, but if I can just check, you were talking about that you already covered for energy. Did I understand that correctly? So I guess what I'm getting at is, I'm trying to figure out how much visibility you've got on the energy costs going into 2023, particularly, I guess, on power, but perhaps also more broadly?

Yes. Thank you, Gregor. Solutions and Products, I think we are just starting. If you look at the results, now they are impressive, of course. We have this one slide in there, how much they contribute already. And you mentioned we are doubling the profit. And honestly speaking, it's just the start. We started the roofing systems in April last year. So just 1.5 years ago with the acquisition of Firestone from Bridgestone and that went very successful. The start was not that seamless. We had issues on the raw material side and a couple of hiccups. But then after we sorted out everything, it really runs very well. And now we smartly added on. We bought the Malarkey for residential roofing. We went into insulating foams with SES. Now we bought an adhesive company from ITW. So honestly speaking, we're just starting in Solutions and Products. And the results you see now, I'm not asking my people if the result is sustainable, I'm asking them how long do you need to double it, because it's just the start, and you have benchmarks even better performing on margin than us. The market is good. The order books are extremely -- we are sold out at the moment. We're sold out in 3 months, in 4 months. So I'm not even overly optimistic. I'm just saying, we are just starting in Solutions and Products and we are happy about this fast progress in just 18 months, but you should ask us for more, not for sustainability on the results. On the energy side, that was obviously a very challenging situation for everyone, everyone globally in our sector or in other sectors. I'm proud our people made this happen for us. One thing is to have a positive price over cost, which obviously was very challenging. Another aspect is, of course, supply sustainability. And also here, we have secured safe energy supply also for the upcoming months for next year. I think on the cost side, we have a very strong position now with the mitigation and the pricing we have in place. So as I said earlier, we are also expecting positive price over cost for the months or even for next year.

The next question comes from Cedar Ekblom from Morgan Stanley.

On costs, will you see lower sequential costs in the fourth quarter linked to energy considering what's happened in the spot market? Or is lower cost more of a tailwind to the 2023 margin? And then can you just give us a little bit of color on the free cash flow impact from the divestments? I know in the slides, it says that it's a CHF 400 million one-off impact. Is that on an annualized basis? Because that looks to be a bit lower than where that might have been 12 months ago, appreciating that the profitability of India has come down a lot. Just to try and understand what the free cash flow on a normalized basis for the remaining businesses?

Cedar, I hand over the energy question to Geraldine in a moment. She loves to talk details about the monthly status and the quarter status. But on the cash flow, I also like to clarify, because we don't have the cash flow in the third quarter reporting. That's why we gave you this details before the outlook that we have this impact from the fine and the impact maybe from some missing business from the divestments in the last 4 months of the year. So I think it's going to be like a CHF 1.2 billion adjustment. But this is a onetime effect, and this is for the full year of 2022. So we're still guiding the cash flow of CHF 3 billion or CHF 3 billion plus. And then we are guiding now to have these two onetime effects on the cash flow. And let's see, and I'm, of course, hoping that we can do better than that, but we have these onetime effects, which will not influence next year. That's also important to say. Even the second cash flow impact we have from the divestments, we're going to make that up, of course, with the other businesses, with the expansion you are seeing, and now being a CHF 29 billion company. It's also, I think, an all-time high for us. So you can expect from us that we will deliver on our cash flow conversion ratio also in 2023.

Right. So on the energy, we are covered for Q4, mostly covered. So that's all good. For uncovered portion next year and end of this year, we're actually riding on the market correction. So all good from that standpoint. So we feel that there are going to be more tailwinds going into next year from that standpoint.

The next question comes from Nabil Ahmed from Barclays.

Congratulations for the good numbers. Actually, I had a question about China. It's obviously been a very challenging year. How do you think about 2023 at this point? Is there a chance for volume and pricing rebound perhaps? Or that's too early to tell? And also, could you remind us how do you think China sits from a strategic standpoint? Watching ready-mix is trading on very low multiples, but could you perhaps consider selling that business too at some point? And the second one, I guess, is more a follow-up on the free cash flow question and more of a clarification. When you talk about CHF 3 billion free cash flow before DOJ resolution and divestment and then CHF 400 million impact on free cash flow from divestment, so should we think about CHF 2.6 billion as the normalized starting point for free cash flow?