Holcim AG (HOLN) Earnings Call Transcript

[Interpreted] Dear shareholders, on behalf of the Board of Directors and the Executive Committee, I extend a very cordial welcome to you at the occasion of this year's AGM here in the Bossard Arena in Zug. What a pleasure to see you have turned up so numerously today. What a pleasure also that Thomas Schmidheiny, our honorary President, is also present, welcome. We have another important shareholder that we would like to welcome specially Dr. Martin Ebner, as well as Chairman of the Board -- former Chairman of the Board, Beat Hess. Welcome. I also welcome our independent proxy, Dr. Sabine Burkhalter Kaimakliotis, independent proxy also in this year, who was mandated by many shareholders for this AGM. I also welcome Jacques Pierres and Daniel Zaugg from Ernst & Young AGS representatives of the auditors. Members of the Board and the Executive Committee are present at this AGM. I'd now like to introduce our colleagues on the podium here on my right, we have our CFO, Steffen Kindler; our new CEO, Miljan Gutovic; Secretary of the Board, Dragana Simijonovic; and our Vice President and Lead Independent Director, Hanne Sorensen. Before we report on the course of business in more detail, a couple of technical and housekeeping matters. If you want to follow the AGM in English, please select Channel 2; for French, Channel 3; for German, Channel 1. We would like to be efficient in our AGM. All shareholders who wish to speak are asked to go to the speaker's desk. It's on the left-hand side of the podium. Report to the speakers' desk, explain what agenda item you would like to speak about. And when that agenda item comes up, you will be asked to step up to the speakers' desk and to make your comment or to ask your question. Health and safety is what matters most to us. This is also true for today's AGM. Please look around and see where the nearest exit is. Emergency exits are marked in green. They're on either side of the hall. And in a very unlikely case of an evacuation of this building, please follow the instructions of our staff. The food. After the statutory part of the AGM, you are cordially invited to lunch. Last year, there was not much space. So this year, we set up food stalls also on the first floor where you can meet for lunch. With this, I wish us all a good AGM and afterwards, a good lunch. With this, I would like to move on to my Chairman's address, dear shareholders. At the beginning, I would like to thank you all on behalf of the Board of Directors for the trust you have placed in us last year. A year ago, we decided to put together the office of the Chairman of the Board and the task of the CEO for a transitional year. It was me who carried both functions for that year. It was a good decision. It was the right decision with hindsight because we had an excellent transitional year. We were also able to appoint a new CEO to succeed me. We had record results. And hence, I would like to thank you personally for you to have approved of that decision in that transitional period. I thank you for your loyalty that you have shown us. Thank you. We will provide you with an overview over the past financial year and then take a look at what this year had in store. I will also present to you our next milestones. Notably, our plan to float Holcim's North America business on the U.S. Stock Exchange as a stand-alone entity. Before I hand over to our CFO, Steffen Kindler, for a review of the last year's results, I'd like to highlight a few points. Holcim achieved record results in 2023. A positive business trend continued into the first quarter of 2024. We have an outstanding earnings profile, industry-leading margins and a strong balance sheet. This is the accomplishment of our entire workforce who assume responsibility day in, day out. I would like to express my personal thanks to all our 63,000 employees that have made Holcim stronger. On behalf of the Board and the Executive Committee, I would like to thank all Holcim employees for their contribution to this record year. They have delivered an amazing performance. I will now hand over to my colleague, Steffen Kindler, our CFO, who will walk you through last year's results, before our new CEO Miljan Gutovic, says a few words about our outlook and his priorities.

[Interpreted] Thank you, Jan. Good morning. Dear shareholders, my name is Steffen Kindler. I have been a member of the Executive Committee of Holcim and I joined Holcim just over a year ago from Nestle, where I spent 25 years of my career. I would like to thank you for attending the AGM today. In particular, let me welcome all of you who have made it here to Zug to be with us in person. It's an honor for me to be presenting Holcim's 2023 results to you today. These are the highlights of our business here. 2023 was Holcim's most successful business year so far. In almost all of our relevant key performance indicators, KPIs, we achieved new record levels. We also achieved our 2025 financial targets 2 years ahead of time as these charts are showing in terms of Net Sales growth and disproportionate growth in recurring EBIT, all the way to our cash conversion, Return on Invested Capital and our debt leverage or net financial debt over EBITDA. Allow me to walk you through some of the highlights as well as the most important drivers of our results. Recurring EBIT, let's begin with that, is an important measure of our operating performance. It reached CHF 4.76 billion, which is an organic increase of 14.7% over the previous year. EBIT margin, that is the recurring EBIT over sales reached 17.6%, an increase of 1.3 percentage points since 2022 and an increase of 3.8 percentage points since 2018. This is both a measure of the successful strategic shift of our company from volume to value and at the same time, proof of increasing efficiency. With a margin of 17.6%, we're the leading company in our industry. And you can see the evolution of the margin here in this chart. On to the next item. Free cash flow of CHF 3.7 billion and cash conversion of 58%. Our free cash flow exceeded CHF 3 billion for the last 5 years and Holcim has built a track record of reliability in delivering strong cash flows. These operational results are rooted in Holcim's deeply embedded performance culture, which plays a key role in setting Holcim apart in its industry and beyond. Now I have not moved up from the ranks of the company, and I'm deeply impressed with the decentralized approach with while clearly aligned with group targets, individual leadership is encouraged. There are more than 500 leaders around the world empowered for customer-centric decision-making and P&L decision -- P&L responsibility. Coming back to the earnings figures. Our earnings per share, or EPS, before impairments and divestments reached CHF 5.42 per share, which is an increase of 9.2% and an indicator of very disciplined cost and business management all the way down to the bottom line, our net profit. Next, I would like to mention our return on invested capital, or ROIC, which also reached a new record level of 10.6%. This is proof of careful capital management, both in terms of CapEx and M&A. An efficient use of existing -- of our existing asset base as well as increased profitability. Over and beyond that, Holcim's M&A process is another standout attribute of the company. That's the way we acquire companies. Between 2018 and 2023, Holcim performed 97 value-accretive transactions, including 6 major acquisitions in Solutions & Products and 72, what are called bolt-ons, acquisition of smaller companies, of which 80% were family-owned businesses, bringing significant synergy upside to us. In the same period of time, Holcim made 19 divestments. In the first quarter of this year, we continue to execute value-accretive transactions, making 5 acquisitions and closing 4 divestments. The momentum is being maintained with a net M&A adding more than 3% to our net sales in the first quarter. Our superior value creation through the M&A process is based on our target for acquisitions to be EPS accretive from year 1 and ROIC accretive in year 3. Our M&A process is very disciplined with an average time from signing to closing of 4 months. There is full accountability of local management for integration and synergy. Local management bear full responsibility. In the last 5 to 6 years, M&A has indeed played key role in Holcim successfully shifting to the most appealing geographic markets with strong growth drivers and high margins. Europe was 34% of net sales in 2023, up from 28% in 2018. And North America 39%, up from 22% in 2018. Solutions & Products has grown from 9% of net sales in 2018 to 21% last year. Last but not least, our debt leverage, which is a reminder of net financial debt over EBITDA at a factor of 1.2x, its loan puts us comfortably into a strong investment-grade credit rating of BBB+ currently. We achieved these results also by making decarbonization a driver of profitable growth, especially here in Europe. In 2023, our CO2 emissions per million of net sales were reduced by 20% in 2023 and by a total of 42% since 2020. Offering our customers the most advanced building solutions, Holcim generated 30% of 2023 net sales from our multi-billion Swiss franc brands from ECOPact and ECOPlanet to OneCem & Elevate. When we look at the evolution of Holcim's performance over 2023, we can see increasing momentum with the last and fourth quarter being the strongest for EBIT growth versus the same period in 2022. We have also had a strong start to this year, as shown at our Q1 trading update 2 weeks ago with recurring EBIT in local currency up 17.1% and a further expansion of our industry-leading EBIT margin. With this strong performance, we have confirmed our guidance for 2024 and have proposed a dividend per share of CHF 2.80, an increase of 12%, which places us among the leading companies in the SMI in terms of dividend yield after tax. Given our record free cash flow, a strong balance sheet and positive outlook for this year, we announced at our financial year results in February, a new share buyback program of CHF 1 billion to be completed by the end of 2024. This program began on the 18th of March. Dividends will be paid after foreign capital contribution reserves and will not be subject to Swiss withholding tax. I would emphasize that Holcim remains committed to its strong investment-grade credit rating. I'll conclude my review of the 2023 full year results by noting that we have reinforced our track record of increasing shareholder returns while strengthening the balance sheet. Between 2018 and 2024, Holcim expects to have returned CHF 11.4 billion in cash to shareholders cumulatively through share buybacks and dividends, even as we have reduced our net debt leverage ratio from 2.2x to 1.2x. Again, our commitment to a strong balance sheet that is. With that, I would like to thank you and hand over to our new CEO, Mr. Miljan Gutovic.

Thank you, Steffen. Good morning, everyone. It is a pleasure to stand before you, the shareholders, as the new CEO of Holcim. Your support and commitment are fundamental to our company's success. And your trust in Holcim's vision, strategy and management team is essential. We are deeply grateful for your continued investment in our growth journey. First, I have a few words for you, Jan. Your exceptional leadership since 2017 has made Holcim the company it is today. You have led the company's transformation. And today, we are best-in-class when it comes to financial performance, sustainability, innovation and branding. During your time as a CEO, Holcim became a global leader in innovative and sustainable building solutions, accelerating growth in the most attractive markets with our advanced branded solutions and highly disciplined, high value-creative M&A strategy. We have executed more than 100 transactions since 2018, including the milestone acquisition of Firestone Building Products, which we built upon to become a global leader in advanced roofing systems in just 3 years. That was one bold strategic move. Another one was the announcement this January of the planned U.S. listing of our North American business to unleash a new chapter of profitable growth. Holcim has become a leader in sustainability as well as making decarbonization and circular construction drivers of profitable growth and building new from old in major metropolitan cities around the world. These accomplishments and the new level of financial performance we reached led us to achieving Strategy 2025, 2 years ahead of the plan. As a company, Holcim is stronger than ever, delivering record results and superior earning profile with industry-leading margins and strong balance sheet. On behalf of all of us, Jan, thank you. Dear shareholders, building on these strong foundations, we are committed to deliver another year of record results for Holcim with focus on continued execution of our strategy. With the industry-leading financial performance, continued M&A execution to grow in the most attractive markets, accelerating innovation in advanced branded solutions to deliver more value for our customers. Leading in sustainability with decarbonization and circular construction as drivers of profitable growth. Holcim is best positioned to capture on opportunities ahead. We expect continued profitable growth in 2024 with organic net sales growth of over 4%, plus additional growth of more than 2% from M&A. Building on our growth momentum with 28 acquisitions in 2023, we have made 5 acquisitions in Q1 of this year and our successful M&A machine continues to drive growth as well as value creation. We expect over-proportional growth in recurring EBIT, which will further improve our EBIT margin. Holcim's industry-leading EBIT margin of 17.6% in 2023 was driven by our shift from volume to value and growth in the most attractive markets. Our commitment is to reach 18% or more in 2024. Free cash flow will continue to be above CHF 3 billion, which is important because it allows us to invest in profitable growth and create value for you as shareholders. In summary, Holcim will continue to deliver superior performance as the leader in innovative and sustainable building solutions. So let's talk more about what we do and also why we do it. Everyone at Holcim is driven by our purpose as we decarbonize building at scale. I'm excited about the prospect of decarbonization and circularity. Both are central to our strategy, and we will continue to invest in these areas because it makes good business sense and because it is the right thing to do. Together, we want to use our advanced building solutions to help our customers build the kind of cities and the kind of world that we all want to live in. We reduced CO2 per net sales by 20% in 2023 and by total of 42% since 2020, as we take decisive actions to become a net zero company by 2050. Decarbonizing concrete and cement is at the core of Holcim's journey to net zero. And we are accelerating the decarbonization of our formulations and energy mix. Carbon capture, utilization and storage is a game changer in our industry. We have an industry-leading decarbonization roadmap in progress with 17 flagship projects worldwide. 6 of these have been selected by funding by our European Union. And our commitment to Europe alone is to capture 5 million tons of CO2 per annum by 2030. This will make net zero cement a reality within this decade, allowing us to offer 8 million tons per annum by 2030. Demand has also increased for our low-carbon brands such as ECOPact and ECOPlanet. In Q1 this year, ECOPact reached 26% of net sales in ready-mix and ECOPlanet accounted for 26% of net sales in cement. If decarbonization is one of the profitable growth opportunities for Holcim, then circular construction is another. To seize it, we are scaling up our presence in the cities worldwide, both organically and also through M&A to ensure that we can recycle construction and demolition materials in all metropolitan areas where we operate. For example, in 2023, we acquired Sivyer Logistics, a leading producer of construction and demolition materials in London. London -- Europe's largest urban mine. Tens of millions of tons of construction and demolition materials are generated each year, and they go to landfill. By recycling these valuable resources, we can reduce our dependency on primary materials. Thanks to our advanced technologies, recycled construction and demolition materials can be used in everything, cement, ready-mix and aggregates. Holcim now has 135 recycling centers globally, and we expect 20% growth in recycled construction demolition materials this year to reach 10 million tons with our ECOCycle circular technology platform. At the same time, repair and refurbishment is a global mega trend. 80% of the buildings that stand today will still be in use by 2050. Solutions & products, which focuses on advanced roofing and insulation systems as well as tile adhesives, facades and mortars is seeing a strong demand as a result. It complements our materials business, allowing Holcim to offer customers a one-stop shop for advanced building solutions. We have touched on growth opportunities, decarbonization, circular construction, solutions and products. Now I want to talk about our company's biggest asset. The 63,448 people who work for Holcim. Every one of them matters to me, and I'm proud to call them my colleagues. Having visited more than 40 markets where we operate and spoken with many of them, I have seen Holcim's team spirit first-hand. We have a deeply embedded performance culture with more than 500 talented P&L leaders. Holcim is a place where we put our people and their health and safety first, where talent is nurtured, performance is recognized and innovation is encouraged. I want us to continue building the best workplace where everyone is respected, and diversity and inclusions are celebrated. This is because the success of our people will determine the success of Holcim across all our markets as we drive sustainable growth with integrity and deliver superior value for customers and for you, our shareholders. Together, we will challenge the status quo and push the boundaries of innovations to put sustainability at the core as we continue building a business that is stronger than ever for you to invest. Dear shareholders, you can trust us. Team Holcim will deliver. Thank you.

[Interpreted] Thank you, Miljan. Thank you for sharing your outlook on Holcim's future. Ladies and gentlemen, I would now brief you on what we have in store for North America. We announced at the end of January that we are planning to float Holcim's North America business on the U.S. Stock Exchange with full capital market separation. You may ask why we are making this transaction? Well, as I mentioned, Holcim has an outstanding earnings profile, industry-leading margins and a strong balance sheet. Everything we do to further increase stakeholder value, we can currently do from a position of strength. In North America, we have become the leading provider of building solutions in recent years. Our excellent customer relationships coupled with the fact that the market environment is set to become even more promising in the years ahead, mean that we have a significant additional growth potential. A separate U.S.-based company is far better placed to leverage this potential than the subsidiary of a global group. Spinning off our North American business and listing it on the U.S. Stock Exchange would enable the new entity to unleash its full potential. We aim to be the partner of choice for our customers in one of the world's most attractive construction markets. Added to this are the region's major infrastructure packages and the construction boom, which will allow the new business to grow even faster and create value for all stakeholders. Following the listing of the North American business, the future business outside North America will continue to operate under the successful Holcim brand as the leading provider of innovative, sustainable building solutions and is expected to remain a component of the top-tier Swiss market index. Thanks to the successful progress that we have achieved in decarbonizing as well as selective acquisitions, the company will continue to grow profitably. This is how we aim to continue generating market-leading margins and attractive returns for you, our shareholders. At the same time, we're securing attractive jobs. How are we going to implement our plans? Well, we're preparing to carve out the North American business and list it in the U.S. with full capital market separation. The transaction is to take the form of a spin-off. It will be structured in the interests of the existing shareholders. Both companies will pursue their own strategies, enabling them to accelerate their growth and unlock added value. The transaction is designed to generate value for you as shareholders, by creating distinct and compelling investment profiles with attractive returns. We will announce further details of the transaction and of the projected entities at two investor days in the second half of this year. You, our shareholders, will then be invited to vote to approve the spin-off of the North American business at an extraordinary general meeting. If accepted, we aim to complete the spin-off and the ensuing listing in the U.S. in the first half of 2025, subject to other necessary approvals. We'll keep you updated on this going forward. Let's move on to another important topic that is close to my heart: Health and Safety at Holcim. The well-being of our employees is our top priority, and I commend the important work of our colleagues last year to further improve our performance. We'll continue to do everything we can to ensure that all Holcim employees go home healthy every day and feel comfortable at the workplace. I would now like to comment on some of the items of the agenda for today's AGM. We have a first this year. We are presenting our first report on non-financial matters. This report summarizing the most important non-financial matters relating to our financial year is fully integrated into the annual report and was also available as a separate document on our website in advance of the AGM. We published our Climate Report this year for the third year in a row. It shows how we stepped up climate action in 2023 and made strides across all of our decarbonization levers. Given that sustainability is at the core of our company and our business activities, the Climate Report is fully integrated into our Annual report for the first time ever. For voting purposes, we have also made it available to you as a separate document. In this way, we are continuing our tradition of giving you, our shareholders, the opportunity to vote separately on key issue of climate action as we've done in the past 2 years. Moving on to our dividend proposal. Last year, as mentioned, we achieved record earnings. That's why the Board of Directors is proposing a 12% increase of the dividend to CHF 2.80. The dividend is to be paid out of foreign capital contribution reserves and is not subject to Swiss withholding tax. In addition, we have launched a new share buyback program under which we'll repurchase shares with a total value of CHF 1 billion by the end of the year. The cancellation of the shares will be voted on next year's Annual General Meeting. With the dividend increase and the share buyback program that we launched new, the Board of Directors seeks to offer to you, our shareholders, an attractive investment opportunity and allow you to participate in the company's success. The measures will be financed from Holcim's existing liquidity. Irrespective of these two measures, Holcim will continue to have an exceptionally strong liquidity position. We remain committed to ensuring that Holcim retains its strong investment-grade rating as was said. One key agenda item is the election of the members of the Board of Directors. Today, the Board of Directors proposing two new candidates: Catrin Hinkel and Michael McGarry. Catrin Hinkel is CEO of Microsoft Switzerland and previously held leadership positions at Accenture. With her extensive knowledge of the technology industry, focusing on digital transformation, should contribute important expertise to the Board. Michael McGarry was CEO of PPG Industries from 2016 to 2022. And then Chairman of the PGG Industries Board of Directors until 2023. It's one of the world's largest specialty coatings companies, generating sales of $18 billion in 2023. His in-depth knowledge of the chemical market, notably the specialty market, coupled with his broad global industry experience will bring valuable expertise to the Board. Dear shareholders, on behalf of my 63,000 colleagues, I'd like to thank you most sincerely for the trust you have placed in Holcim. With your investment, you provide the foundation upon which we will shape tomorrow's progress. Thank you for your attention, ladies and gentlemen, and now you have an opportunity to ask your questions on general question -- on general items. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]