Holcim AG (HOLN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Q3 Trading Update. It's a pleasure to reconnect with all of you today. For those of you who do not know me, I am Bénédicte Mayer from the Investor Relations team. And I am here with our Chairman and CEO, Jan Jenisch; and with our CFO, Steffen Kindler. As usual, Jan and Steffen will share their perspective and discuss the company's performance over the last 9 months. And after that, we will open the floor for your questions. [Operator Instructions] With this, we are all set and with no further ado, I will now hand it over to you again you, Jan. Please go ahead.

Thank you, Bénédicte, and good morning, everyone. Thank you for joining our trading update on our Q3 results. Very satisfied with the results. We have achieved a record in EBIT in the Q3. Very happy about it. We had some softer markets in Q3, we had also significant ForEx headwind. In Q3 alone, our EBIT was negatively influenced by 10%. And nevertheless, we made an all-time high in real Swiss franc of CHF 1.6 billion. Very happy about it. It all comes down to the new strong earning profile of Holcim, which is based on many drivers from our fast expansion in North America with superior margins to the buildup of our 4 segment Solutions & Products, most prominently with roofing systems where we have huge success and also very significant margins in that business. And then I would say, all the way down to our sustainable product range with ECOPact, ECOPlanet and our newest family member ECOCycle, which helps us to go into value selling and provide sustainable building solutions, our customers are asking for. Let me go into some details before Steffen will give us more details on the financial results. I talked about this, the EBIT margin in Swiss francs. We were able to increase it absolute year-on-year, and I'm very happy about that. And this is based on our strategy on our strong earnings profile and will not stop this year, but we will continue in the future with very strong margins. This also -- our confidence is displayed in the upgrade of our guidance for the year, where we now upgrade from above 16% to above 17%, an industry-leading EBIT margin. We are very happy to do this upgrade. Our M&A is running. This is another driver for our strong earnings profile. We did 21 value-accretive acquisitions, which is a clear directed strategy. On the left side, you see the buildup of Solutions & Products. We are -- we started to build up in the U.S., our advanced roofing systems. Now you see we also go into Latin America, and we go into Europe with roofing acquisitions and also acquisitions for motors for facades and flooring adhesives. On the right side, our very value-accretive bolt-on acquisitions where we usually buy family-owned businesses in specific market locations. And also here, you see our focused approach with acquisitions in North America, in Europe and also in Australia where we were able to acquire a very successful admixture company. When we just had the roofing days last month. I was very proud that our teams in this new segment for Holcim. We just started in 2021. So basically, we started 2.5 years ago, and we are now able to have the ambition to become the leading -- a roofing system company in the world with more than $6 billion of turnover and an over proportional increase in EBIT of more than $1.3 billion. We have on the decarbonization side, we go at fast speed. One of the KPIs we are measuring is the CO2 per net sales. You see the significant reduction in the past 3 years with the shift of our portfolio, but also the strong decarbonization of our processes and our solutions, we were able to more than 40% decrease this footprint. And in the first 9 months of this year alone, we decreased by 20%. This shows that we are walking the talk and very happy here on this way to decarbonize. We have some more success stories for decarbonization, very important for me is to translate the decarbonization in building solutions. So just 3 years ago, we launched our sustainable product ranges, ECOPact for concrete, ECOPlanet for cement, and they became billion, billion Swiss franc brands just within 3 years' time. ECOPact is 19% already of ready-mix sales, ECOPlanet also 90% of cement net sales. So very successful, also very important for our margins going forward. The newest branding initiative we are having is ECOCycle, ECOCycle stands for all the circular construction we are doing. You remember last year already, we were the leading recycler of construction demolition waste with more than 7 million tons recycled, and we continue here with speed. We have 17% increase in recycled construction demolition materials in the first 9 months of the year. So very successful, and we expect those run rates to continue in the double-digit range. We want to be making circa construction and reality in all the metropolitan areas Holcim is active. Lastly, I'd like to share with you our progress in Carbon Capture, Utilization and Storage. You know we do all the steps to work with alternative raw materials to go fully for alternative fuels, to find new minerals to mix with the cement or the concrete, like construction demolition materials and for the last step in decarbonization, we make big progress for Carbon Capture, Usage and Storage. And we have just received already a sixth grant from the European Union Innovation Fund in one of our factories in Greece, and this brings our total now to 6 grants Carbon Capture, Utilization projects. I'm very happy to see -- that shows that our teams are spot on. They have projects which are smart and which are realistic and have ambitious time lines. And you see here the first project will be already with the start of production in 2027 and we have already 6 projects fully committed and fully approved by the European Union as part of the green deal, as part of decarbonizing Europe. So very happy with this. It's going to be a huge part for us in the future and also with significant return on investment. I think this was the last slide I wanted to share with you on the recent developments. And now I'm happy to hand over to Steffen, our CFO.

Thank you very much, Jan, and good morning, everybody. I'm glad to be here and give some more insights into our financials. Let's start with net sales. We had organic net sales growth of 6.2% for the 9 months, take you from left to right in this chart. First, the acquisitions and divestments. You know that by now, this is mainly the divestment of India and Brazil. This is mainly on the acquisition -- on the divestment side. On the acquisition side, it's mainly Duro-Last but then also the bolt-ons that we do and some smaller divestments and acquisitions. Leading to the 6.2% organic. The foreign exchange is quite significant with 7%. This is a mix of emerging market currencies like Argentina, Egypt, Nigeria, but also developed market currencies like the U.S. dollar, the Canadian dollar, the euro and so on and so on. That FX impact has actually increased in the last quarter versus the year-to-date. If we then move on to the same bridge for EBIT, again, left to right, acquisitions, divestments, the same topics that I told you on net sales. The organic growth with almost 14%, 500 -- almost CHF 500 million of increase of organic EBIT margin. And the FX here, again, very significant and again in the last quarter increasing. What we should also mention that Q3 had a positive EBIT already despite scope, despite FX and despite some softening in some markets. So this is a very good news. And lastly, what I wanted to highlight here is the 17.9% EBIT margin, which is the highest we ever had and which is obviously giving us confidence for the increased guidance that Jan just mentioned. Region by region, you see here in the overview, you see that every region contributes, every region had very good sales growth. Almost all regions had also over-proportional EBIT growth, and I'll take you one by one now very quickly through those regions. Starting with North America. We have organic net sales growth of almost 13% and organic EBIT growth of almost 20%. We have a record net sales and recurring EBIT leading to a margin of 22%, and we expect this good performance to continue in Q4. Latin America. Similarly, net sales growth of over 22% and recurring EBIT growth of almost 17% is the 13th consecutive quarter of profitable organic growth and also here, expect a good performance to continue into Q4. Europe. Strong increase in profitability, as you can see, net sales of 9% recurring EBIT of 28% with a record recurring EBIT with strong margin expansion in Europe and we're accelerating the progress in decarbonization. Asia, Middle East and Africa, net sales of almost 9% and recurring EBIT of 16% broad-based across our key markets in the region. And it's a large region, but the growth and the EBIT improvement is really broad-based. And we expect the strong trends to continue also into Q4. And that brings me lastly to Solutions & Products. Where we have a healthy underlying market demand in the U.S. and Europe. We have positive price over cost. Our margin improved in the third quarter led by roofing and we expect a strong growth in roofing in Q4. And a bit of a reminder to what we told you in the half year mark. We explained that Q2 and Q3 of last year, had destocking effect. You see the bars here. And then you see the destocking effect in Q4 and Q1. What you also see is that our sales level in absolute is normalizing. And also in Q3, we had good sales, but we were at the end of the destocking. And now in Q4, we'll also have the positive comparables to show positive growth numbers. With that update, I would like to give back to Jan for the outlook.

Yes. Thank you, Steffen. So we are confident to close 2023 with a strong results. We will fulfill the guidances we gave until now for profitable growth, for cash flow and we will have a significant reduction of CO2. And then we have upgraded the guidance on the EBIT margin from above 16% to above 17%. I think with this, I give back to Bénédicte for Q&A.

Thank you, Jan. Thank you, Steffen. [Operator Instructions] And we will now take the first question from the line of Elodie Rall from JPMorgan.

Yes. Can you hear me?

Yes.

Okay. First of all, could we have a little bit of color between volume and price development this quarter other than the last 9 months at global level at least? And maybe by the main regions that would be very helpful. And second, question on price. Did you start announcing or negotiating price increases in Europe or in the U.S. for next year? In cement and housing?

Yes, look, first of all, I'd just like to remind everyone that volumes for us is not the KPI anymore. We go into value selling. We are selling systems for buildings. So volume for us is not a KPI anymore. We go into sustainable also solutions for the traditional products, which also is not volume-focused anymore. But of course, I answer your question. So we have in the Americas. We -- I would say we have a positive situation. We started the year strong with positive volumes. Then I think the interest rates are a big burden for the moment on the residential housing in the U.S. You all have read with the 30-year mortgage going to 8%. That's a very high number, which I think wasn't reached in the last 20 years or so that broad residential movements or new build to stop for now. That has, for us, a little bit of an impact now. But nevertheless, in the U.S., we expect growing volumes again next year. We are very focused on the infrastructure and those projects will come into place. And then at some point, we will have less stress on the residential housing market. So nevertheless, our volumes in traditional products is flat in the U.S. for this year, while we were able, obviously, to have a lot of value pricing in place. In the Americas, similar situation. Here, we have very strong market demand in Mexico, our biggest market is a lot of infrastructure, a lot of onshoring, ongoing for the U.S. market, all the factories, white goods, electronics, automotive. So we have significant volume growth in Mexico and then other markets like Ecuador, they were a little bit negative this year due to presidential elections. So in Americas, overall, we have a flat volume for this year now and -- but we expect growth for next year. In Europe, the situation is a bit different. We have a declining market for traditional volume products since May last year, I would say, around 5% to 6%, and this continues until today. So we're going to see -- and we don't expect these volumes to recover. I mean you're all reading. We have markets like Germany, but also France, they are impacted by the war in the Ukraine, high energy cost. They are also impacted by high interest rates. So we believe the long-term trends are very positive. We need more building. We need more housing, we need better infrastructure and we have to make everything sustainable, so insulated and energy efficient. So the long-term trend is good for Europe, but we're going to see, I think, also next year, rather softer volumes. Not in the case of -- in sales for Holcim, you have seen we had a record year in Europe this year despite lower volumes. And this is, I think, my important message, we are about value. We are not about volumes, and you see that in our numbers. That's the volumes in Europe. We have then big markets, not for us so much, but everyone talks about China. Here, volumes are softer. You all read about the real estate critical situation there and the market is -- this year also softer there, maybe minus 5% in volumes. And we have to wait now how the government is handling this. Real estate has always been a driver -- the driving engine for the domestic China development. And I expect that we're probably going to see a bit of stimulus, maybe for the next year.

All right. We'll take the next question from the line of Cedar Ekblom from Morgan Stanley.

It's another solid quarter of profitability from the business. And yet, the market seems quite unwilling to rerate Holcim's equity. So I wanted to ask how do you think about the different routes to a rerating here? You're generating a lot of cash flow. There's obviously an opportunity to buy back stock. But there is also the potential to talk about crystallizing some of the value in your roofing portfolio, which if you deliver your midterm target, we'll make it probably one of the largest, if not the largest roofing platform in the U.S. So just talk to us a little bit about how you're thinking about the levers to drive this rerating aside from good results, which seem to not be rewarded by the market at the moment.

Thank you for your positive remarks. We are also -- we like the development of Holcim and we have developed -- the company is significantly forward when you look at our earnings profile now, where we entered into roofing systems where we became already one of the big players globally with significant contributions on our results. When you look at our fast expansion in North America where this is already 40% of Holcim today and then all our value accretive bolt-on acquisitions, which we also are value accretive from year 1. So I think we do a good job in strategy and especially in execution. And the field I like personally the best is our sustainability, and this went from being a challenge or something like that into a big opportunity. And if you see now how fast we are running to decarbonize Holcim, but also to offer more sustainable solutions for the markets and the customers, I'm really satisfied with the speed. So now you ask me about what can we do different in capital allocation or maybe bolder strategic moves. That's a big feel for discussions. I think capital allocation, we are very positive. We had a very, I would say, successful share buyback of CHF 2 billion lately, where we reduced our share count by 6%. I like this program very much. We told you before that we're going to wait now this year to see how is the balance of our free cash flow versus the acquisitions, and then we probably take another decision on the capital allocation. And this -- we have to give us some time to do that. Obviously, the cash flow is coming, right? We are well on track here to achieve the CHF 3 billion. And if this is the case, I think we have a very solid balance sheet and can decide maybe what -- if we need to do a different capital allocation for next year.

All right. Let's move on with the next question, which is coming from the line of Arnaud Lehmann from Bank of America.

I have 2 questions, please. Firstly, on ECOPact and ECOPlanet, you take 19% of cement and with the mixed sales, which is quite an impressive number, I must say. Could you give us an indication by region? I'm assuming that it's more than 19% in Europe already? And do you disclose literal targets for where you think 19% could be in the coming years? That's my first question. And secondly, on U.S. roofing, you give a more positive message for Q4, with the end of destocking and the base effect is easier. On the other hand, have you seen any signs of delays in some commercial projects in the U.S.? I think some of your competitors were highlighting that some of the more kind of traditional office retail, warehousing projects were being delayed and beyond the discounting, there could be a negative effect there.

Yes. Arnaud, thank you, and great questions. I'll start with the second question. So roofing that was the unique situation for us that we have this stocking effect in the first place where even contractors in the time where products were hard to get. We're building up their own inventory and then we saw the correction. We provided an interesting slide, I think, in the presentation where you can see that Q3 was really the last quarter with an above-average comparison period, and we should see in Q4 now, I'm expecting strong results for our roofing business. We don't see delays. We see our customers or the roofers, they are busy. They have projects. So then we see, especially in the reroofing also due to all these severe weather effects you have in the U.S., we see a lot of reroofing going on. So we are very positive for Q4 and believe we're going to have a significant growth in that quarter. And the margins are already at a good level and then we want to grow now significantly above last year. For ECOPact, I'm happy to share with you. I really think this is a great story. We just introduced that brand 3 years ago. With the simple promise that it's at least a 30% CO2 reduction compared to a traditional product. You are right. We have good progress in Europe. So we have markets like -- of course, Germany, France, Switzerland, the U.K. is actually in Central Europe, the strongest country, also depends a little bit on the local building codes and the local available CO2-free minerals we can use. So in the U.K., we are very advanced. We have a high share also in some of the Eastern European countries. So it depends a bit. It's a great global brand name, but it needs a lot of translation into local building environment and local capabilities. And for us, it's a great strategy to encourage all our people to make this happen. If you go to the Americas, a different picture, we have in the U.S., a bit more challenging building norms. So we have a more difficult time to go strong with those brands. They are there, but they are in the, let's say, maybe in the single digits still. And now we are working to change building norms. We are working to change, to lower the clinker factor in our plans to make ECOPlanet the reality on a much larger scale. Latin America comparatively, it has always been a strong performance quality reputation Holcim brand reach. And here also, they are very leading with those brands. And the customer in Latin America is very interested to buy those products. So we have a similar high penetration in Latin America like in Europe.

All right. Let's take the next question from the line of Martin Hüsler from ZKB.

Yes. Maybe a question on the cost situation. What do you see inflation wise and maybe also energy-wise for Q3? And maybe how does this trend price over cost going to develop for the next couple of quarters? That's the first question.

Martin, look, I think we have proven that we will be delivering strong margins and increasing margins, and this is also what we intend to do for next year. We have on the energy side. We still -- and we shared that with you that the first half of the year still has quite a challenging comparison base for energy cost, but also for logistics costs, packaging costs, maintenance costs. So the first half of the year was not easy for us to deliver our promise of improving margins. And in Q1, we were just there. In Q2, you saw another improvement. And then in Q3, our best quarter of the year, and we expect this to continue. We still see a high inflationary environment for a lot of cost. And this -- we have to see how this now turns out. But wherever it will turn, Holcim has the right price over cost strategy for the fourth quarter but also for next year.

Okay. And then maybe linked to that, your outlook and the current situation in Europe, obviously, is a bit more difficult. So what do you think would this mean for pricing next year? Do cement prices hold, even though demand is coming back further?

Yes, they will hold. Look, Martin, we have put everything in place from our value-added ECO products to the system selling solutions we have offered and the decarbonization is the new reality in Europe. So we have significant CO2 cost now from that European certificate scheme. And now with the one company who decarbonizes faster is benefiting from lower CO2 costs. And the market prices, in my view, will not come down. They will only go in one direction because the CO2 cost will be in the market prices. And Holcim decarbonizes at the forefront, so we will benefit. You have seen that this year already that we had record profitability in Europe this year, and we expect this trend to continue.

All right. And the next question comes from the line of Gregor Kuglitsch from UBS.

Can you hear me?

Yes, we can hear you.

Okay. Great. I want to understand a little bit more sort of directionally where you think you're heading into next year? I think you've given us some picture on volume. So thank you for that. It sounds like you think price cost can continue to be positive. So I want to understand, do you think at this stage, and I appreciate it's a bit early that you can continue to grow earnings and margins in 2024? And then maybe a second question, specifically on roofing or perhaps Solutions & Products. You sound quite bullish, let's say, on Q4 and not really sure about next year, but maybe you care to elaborate, probably a bit more so than some of your peers. I saw yesterday, Carlisle was saying they still expect some sort of top line decline in Q4? So I want to understand kind of where we are now, how significant do you think the rebound can be after you sort of went through the destocking cycle, which I think you said is over now.

Gregor, No, I think it's important to see, we have been positive on price over cost, not just for the quarter but for many quarters now, and that's clearly the target of the Holcim strategy with the strengthened earnings profile. From sustainability to building up building -- to building up products and solutions to also do proper value pricing and system pricing for our services and products and solutions. And we have been successful, and this is our #1 priority also going forward. So that's why we are very positive that our EBIT margin will stay strong and the price over cost is positive for next year, even so we are not at a time where we would give any guidance for next year. On the roofing, I can just give you my personal situation. And we have a slide in the presentation where again, we show this stocking and then destocking effect, and you can clearly see that, obviously, Q3 last year was an inflated number and people were putting products on stock. And now they have to decrease their own stocks, but that is over now after Q3. So Q4, we expect to be strong in sales. The margin is already on a good level, so that will continue. So we're going to expect strong results from roofing in the fourth quarter.

All right. Let's move on to the next question, which comes from the line of Yassine Touahri from On Field Research. .

Can you hear me?

Yes. We can hear you.

So a couple of questions. So do you expect to achieve CHF 4 billion of sales in roofing in 2023? And when I look at the 2026 target, it seems like a big part of the additional CHF 2 billion of sales might come from acquisition, given uncertainty on the volumes? Can you give us a little bit more color on your merger and acquisition pipeline? In which region do you feel there is the most opportunities in the coming years? And also, what kind of returns do you target on acquisition in this business? Do you think about multiple? Do you think about return on invested capital? That would be very helpful to get a little bit of color on your strategy and where you see the merger and acquisition activity going forward.

Thank you for your question. Very happy to answer that. I don't want to go now into details and give more guidance on the roofing. I think we have given a lot of guidance already from last year achieving already 19% of EBIT margin in the roofing segment, and this will not decrease this year and will go very strongly forward. You are right that the target of above CHF 6 billion will be a mix of M&A, but also strong organic growth. We have put all the pieces together nicely. So we have a lot of innovation in the roofing space coming from self-adhered roofing to the system selling, which can still be further increased in our key markets. So we have a lot of organic and acquisition growth in the roofing space. You also have seen maybe on our Roofing Day, we shared a bit oncoming new factories we are having, especially in the U.S. So we have very strong plans going forward to make those CHF 6 billion plus a reality already in 2026. On the M&A, this is a very good question because we are -- obviously, we have changed the earnings profile of Holcim, very much also by M&A. We have divested a big parts of our business. And we have invested in new parts for Holcim. And I'm very proud that we made this very value accretive. If you put the numbers together in the past 3, 4 years, how we have lowered the debt leverage. At the same time, we increased our financial performance. I think we did that very well. And we are very rigorous in the valuation for those acquisitions. And you can -- the first proof of it is that we are able to increase the EBIT margin, including all the M&A. So we don't do any special line and say, okay, this is now before acquisitions or something or after acquisitions, we only have one number, and we're very happy to put the acquisitions in. We have -- the 21 acquisitions you have seen for the first 9 months, they are all value accretive next year. So we are not wasting any time. On the ROIC, we have -- so the question on the multiples you were asking. That's for me, a question always what are you going to do with the business. So if you sometimes buy a company and you have to pay a bit higher multiple, maybe the ROIC you start with is 5% or 6%. And I'm very happy that for the roofing acquisitions, we are already at 10% ROIC as of now. So very important for me to have the discipline on the valuation and the discipline in the execution. Because you don't want to be hanging with 21 acquisitions already in the first 9 months, you want to make sure they contribute from day 1, and this is what is happening at Holcim.

And the next question comes from the line of Luis Prieto from Kepler Chevreux.