Jan Jenisch, CEO of cement giant LafargeHolcim, talks about the course of business during the Corona crisis, his strategic goals, acquisition policy and the increasing pressure in terms of sustainability.
LafargeHolcim is facing a stiff wind in financial markets. For years, the cement group created in 2015 by the merger of French Lafarge and Swiss Holcim has failed to meet its targets and has not earned its cost of capital.
In September 2017 the long-time Sika manager Jan Jenisch took over the helm. Since then he has been working on the restructuring of the Group, supported by Chief Financial Officer Géraldine Picaud. He has capped the bloated Group superstructure, reduced costs, and increased margins and return on investment – and all metrics are pointing up.
However, there is one big road block halting the performance of LafargeHolcim at the stock exchange: Cement production emits enormous amounts of CO2, which is why more and more investors are turning away for sustainability reasons.
This leads to the paradoxical situation that, on the one hand, world demand for cement is growing structurally, but on the other hand, more and more Western investors are turning their backs on the industry. Jenisch tries to position his company as Best in Class in its peer group. «It is quite clear that LafargeHolcim has for years paid too little attention to the issue of sustainability. But now we are making great progress. We are world leaders in the industry in many areas», he says in an in-depth conversation with The Market.
Mr. Jenisch, you said at your mid-year presentation that you were expecting a rapid recovery in demand and a solid second half. Can you confirm this statement today?
Yes. Many construction sites around the world were closed in the spring, which meant that we were no longer able to supply our products. However, construction sites were quickly defined as important in practically all countries, and activities were quickly ramped up again. Our plants around the world have never stopped operating. So yes, we said that we were expecting solid demand in the second half of the year, and that proved to be true.
Now the second wave of the Covid-19 Pandemic is rolling over Europe and North America. Doesn't that affect the course of business?
One of the strengths of our business is that it is local. We generally produce where we sell and are therefore not dependent on cross-border supply chains. We have an intricate network of cement, concrete and gravel plants, and plant managers can decide locally what needs to be done. After almost every country went into a rigid lockdown in the spring, governments have learned, medical treatment has improved, and people understand that you can't just shut down the economy.
Do you see any reason today why your revenue and profitability targets set for 2022 would need to be revised?
No, based on current knowledge, we can stick to our goals. We have made very rapid progress and have exploited significant potential for cost reductions over the last eight months. LafargeHolcim will come out of this crisis stronger and more competitive.
You have set the target of achieving a return on invested capital of more than 8% by 2022. Without Corona, you would have achieved this earlier, right?
Yes, that is true. Last year we were already at 7.6% and for the first time in many years we exceeded the cost of capital. You can imagine that we have set ourselves the goal of reaching the target as early as 2020. Now we will achieve it by 2022.
You will probably not be satisfied with that. Is the next target 10%?
We will see about that when we have reached the first target. But you're right, 8% cannot be the end of the line. In the long term, ROIC should be in double digits.
What does the future dividend policy look like?
We'll have to look at that on a case-by-case basis, but I'm glad that we were able to pay out a dividend this year in the attractive amount of 2 Swiss Francs per share. It is my goal that we will be able to continue this.
You have been CEO of LafargeHolcim for a good three years, you have reduced costs and improved cash flow management. Where do you stand today in this restructuring process?
We have repositioned the company, reduced overhead, increased margins, and we have reached a new level of cash flow performance. We have reduced debt by over CHF 5 billion. With the new orientation, we have also ensured that the managing directors in the countries have more responsibility. The next step is to move forward in our fourth and youngest division, Solutions & Products, where we aim to offer products closer to the customer. And then we still have a lot to do in the area of sustainability.
Have the low hanging fruits been picked in terms of costs?
The results of our work are only now beginning to be seen. LafargeHolcim has not generated a strong cash flow for years, but in 2019 we have achieved a record cash flow of more than CHF 3 billion. I expect that we will continue to generate robust cash flows in the coming years. A good result alone does not make the market forget several disappointing years. We will show that this is our new performance level.
An important part of your work was divestments, specifically the cement business in Southeast Asia. What more can we expect on that front?
We didn't do very much actually, basically we only sold Malaysia and Indonesia. We are constantly reviewing our country portfolio in the cement business. There will still be some divestments to come. We are talking about two to three positions, but you shouldn't expect anything revolutionary.
In the Philippines, your sale of the cement business to San Miguel was prevented by the regulator. What will you do now?
That was unfortunate, of course. But we are still the market leader in the Philippines, the market is growing, it is attractive, and we will continue the business accordingly.
You no longer aim to sell?
No, not at present.
There has been speculation for months that you would sell parts of the cement business in the Middle East and Africa.
We are active in twenty countries in the region, so there will always be rumors. But at the moment there is nothing we can communicate.
JPMorgan's analysts have written that LafargeHolcim could put all its cement activities in all emerging markets at disposal. Is this true?
No. Overall, we have an attractive country portfolio. Ten years ago, you were rewarded for being active in emerging markets, but now every investor and analyst just sees instability and weak currencies. Don’t forget: These are markets with great potential. At the beginning of the Covid crisis, many analysts expected LafargeHolcim to have major problems in India or Latin America. But that did not happen. On the contrary, these markets have shown very stable demand. If everyone in financial markets thinks that emerging markets are bad now, then perhaps it is the time to show backbone and stick with it.
LafargeHolcim is also present in China through its stake in Huaxin. Does it make sense to be in a market that is dominated by overcapacity and state-owned competitors?
Yes. We own just under 42% of Huaxin, which is listed and is the fifth largest cement producer in China. Huaxin is very successful. Developments in China are very positive, with suppliers there now also moving into the aggregates and alternative fuels sectors. That is exciting. We paid for the majority of our share in Huaxin with our own cement plants that we had operated in China. The market capitalization of Huaxin has doubled in the last two years, so we are very satisfied.
You want to reduce your dependence on the capital-intensive cement business and build up less capital-intensive business areas in the Ready-mix Concrete, Aggregates and Solutions & Products divisions through acquisitions. What will this strategy look like in the coming years?
In the ready-mix concrete and aggregates sectors, you can continue to expect complementary bolt-on acquisitions. These business areas offer major synergies. For the Solutions & Products segment, I would like to acquire a larger product platform. A year ago, we were involved in the process of buying BASF's construction chemicals division. The business would have been a good fit, but we had to pull out of the process for various reasons. But something like that would be very attractive.
So bolt-on acquisitions in the ready-mix concrete and aggregates divisions and something bigger, transformative in the Solutions & Products division?
In 2020 you have not yet announced any acquisitions. Doesn't the crisis environment offer opportunities?
Many people thought so, and I think that will happen. We simply have a delay, which is also due to the fact that sometimes you can't visit the companies and plants at all. This makes it impossible to conduct a proper due diligence. This delay will probably be resolved in the next few months.
The acquisitions you made in 2018 and 2019 were all in mature markets like the US, Europe and Australia. Will that remain so?
Yes. The ready-mix concrete and aggregates business lines are only developing with market maturity. In a market like India, 80% of cement sales are still in bags. Ready-mix concrete plays a subordinate role there, so there are hardly any opportunities for acquisitions. We therefore see the greatest growth in these business segments in developed markets.
What is your size definition of a bolt-on acquisition?
For us, the ready-mix concrete and aggregates business is about companies that are active in a local market. Our most recent acquisitions have all been in the range of $20 to $80 million, but it could well be as much as $150 million.
The traditional business of LafargeHolcim is cement. Are acquisitions still an issue in this sector?
Well, you should never rule anything out. But we have always said that we are sufficiently strong in the cement business, and this statement still holds true today. Rounding off is always possible, but we have no ambitions in the cement business to grow through acquisitions.
You said you would like to see a transformative acquisition in the Solutions & Products Division. What is your strategic ambition in this still very small division?
We see this area as a natural development of the company. The more the construction market develops, the more products that are closer to the customer are in demand.
Do you want to become a second Sika?
No, we do not have any role models. As I said, the Solutions & Products division is a natural development of LafargeHolcim's business areas: products that are in demand for construction applications. Construction chemicals can be a part of that.
But what exactly are your ambitions in this division in terms of growth and margins?
It's a bit difficult to give a concrete answer to your question, because we first have to develop this area with major acquisitions. We can't develop this purely organically. BASF's construction chemicals business was a €2.5 billion unit. That would have been a great step, but unfortunately it did not work out.
So a purchase in the order of several billion would also be possible?
There aren't that many large companies in this sector, so it could be a bit smaller.
In recent years, you have greatly reduced LafargeHolcim's balance sheet. Would you be prepared to take on significantly more debt in order to handle a major transaction?
We currently have the right level of debt. Under the new IFRS rules, our net debt is 1.5 times our EBITDA, which under the old rules would have been about 1.3 to 1.4 times. That is a good level of debt. We should not make the mistake now and go back to more than twice Net Debt/EBITDA at the next best opportunity. As a company, you must always have the flexibility to act. If an opportunity presents itself, you must be able to access it without coming under pressure from the credit market at the worst moment. Basically, I believe you should generate a free cash flow that allows you to hunt.
LafargeHolcim's share price has been going nowhere for years. The cement business is incredibly CO2-intensive, and for sustainability reasons many investors avoid your industry. How do you intend to solve this dilemma?
The pressure has become immense in the last two and a half years, whether through ESG ratings, the carbon footprint or initiatives from various stakeholders. It is quite clear that LafargeHolcim has for years paid too little attention to the issue of sustainability. But now we are making great progress. We are world leaders in many areas of the industry and have set ourselves the goal of reducing the CO2 intensity of a tonne of cement from 561 kilograms at present to 475 kg by 2030.
You position yourself as Best in Class in the industry. Is that enough in view of the fact that the cement business is generally performing poorly in terms of CO2 emissions?
Being Best in Class is certainly the right start. Then, of course, investors have to decide for themselves how they want to position themselves. But I am basically confident: The megatrends for construction are intact, starting with the growing world population and urbanization, which requires much more intensive construction for infrastructure. How do you intend to build all this without cement? We have done too little in the past to show that cement-based building materials are the best and most sustainable materials. They offer the best values for insulation, durability, earthquake and fire resistance, and in particular, you can recycle concrete completely. We have now started to do this. One third of our ECOPact brand concrete we sell in Switzerland consists of recycled building materials. We are currently rolling this out in other markets.
Is there any demand from the construction industry at all, and is there a willingness to pay a little more for a more sustainable product?
The products are developed in such a way, with the recycled material, that they are interesting in terms of cost. So it's not that they have to be more expensive in principle. Cities such as Zurich, Paris, London or Berlin are increasingly imposing environmental specifications on which types of concrete should be used. We ourselves are positively surprised at how strongly this is developing. Over the next three to four years, we will probably switch a third of production in Switzerland to cement with recycled materials.
Is this simply an issue in rich countries like Switzerland, but not where the really large volumes are involved?
Europe is certainly a pioneer in the field of sustainability. This is not yet the case in other large markets like the U.S. But it is an advantage for us that we are being challenged so much in Europe. We can then offer the products in other markets later. We have now also introduced our ECOPact brand cement in the United States.
In the production of cement, large quantities of CO2 are released that are bound in clinker, the raw material. Is there much you can do about this?
We have to work on a number of individual steps, which together lead to significantly better results. We are reducing the proportion of clinker in cement and further expanding the use of alternative fuels. Larger steps are at work in our innovation centers, for example in the field of CO2 capture and storage, where we are working on projects with well-known partners such as Total. We have major steps in the pipeline, but they need time and innovation.
Do you see the possibility of substituting cement in the long term?
You always have to be careful that you are not the one who shows too little creativity. There are materials that would like to be an alternative, but in terms of volume that is certainly not practicable in the foreseeable future. Just look at how urban centers are built, with infrastructure such as subway shafts, bridges, tunnels: there is no alternative to cement with which you could do this.