Holcim Executive Insights: North America Incremental Margin, Cost Inflation
On Wednesday, Holcim Ltd (VTX:HOLN.VX) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.
North America Incremental Margin
Paul Roger – Exane BNP Paribas: Just couple of questions, firstly on North America, obviously you saw a very strong performance in terms of sales, but just looking at the flow through, it looks as if incremental margin was a little bit disappointing. You’ve said that actually pricing covered cost in all regions except (indiscernible), so just wonder if you can explain a bit, what happened in North America and maybe if you could comment about whether any timing issues like any planned maintenance or destocking in that business? And then the second question, officially you are not going to comment at this stage on cost cutting itself. But can you confirm that the 8% return on capital employed target does not assume what you recover in the end market. Is the market right to assume that that basically implies EBITDA of about CHF5.2 billion?
Bernard Fontana – CEO: First on North America, I’ve mentioned to you price increase if we talk about cement of 4% achieved in April, this price increase has developed gradually over the quarter and that’s why we do not have the full impact in Q1 results. Second, if you – in more detail the pricing, we have also a mix effect because accordingly this hasn’t been done uniformly according to the different regions. But now, those price increase continue to develop and focus on cost is there. So I hope to see some impact on the margin. As for the cost cutting program, yes, our mission is to – we have a target that is, in the company that is not a new one to our return on invested capital after tax about 8%, is to be 8% as soon as possible. As for – what it means in EBITDA operating profit and you can make calculation in the model and as I mentioned we’ll be more specific on this next week.
Thomas Aebischer – CFO: Maybe if I can add Paul, its Thomas Aebischer speaking. Just one more comments or two more comments about the U.S. or North America performance has nothing to do with maintenance or shutdowns. I think these things are gradually as we go through the year. So there significant impact, they were always impacted but nothing of any significance, and just to make sure on the pricing we are clear you see now 0.4% in the U.S. on cement pricing so that’s compared to quarter one. You may recall that pricing at that point in time was still sliding in the U.S. So it’s actually positive that we are back to Q1 levels more or less in Q1 ’12 compared to Q1 ’11. More importantly now in April we are little bit more than $4 above the fourth quarter price levels in the U.S. so a very significant development. In our view volumes have developed nicely as you can see and price now should develop even better going into the second quarter of 2012 in the United States.
Paul Roger – Exane BNP Paribas: Can I just have a quick follow-up maybe I didn’t phrase the question correctly. Could you just confirm whether I’d see any gross margin squeeze in cement aggregate and concrete, and actually when I just look at the detail, now it looks as if the concrete maybe on the gross margin so it was a little bit weaker. Is that a fair assumption?
Thomas Aebischer – CFO: That’s a fair cement did well absolutely just the volume in sales and absorption of fixed costs we have a good development on the cement margin in the U.S. but you have seen the aggregates and ready-mix development which in the aggregate space, it had mainly to do with certain projects or aggregates and ready-mixes are lot of project-related work, and I guess Bernard Fontana referred to the product mix and as that product mix changes, you have an impact on the margin. So, it’s mainly coming from aggregates and ready-mix and definitively not from cement.
Cristina Giordano – Deutsche Bank: I have three quick questions please. The first one is on cost inflation. (You found this) while you mentioned you would expect – you will not expect further increases in cost inflation for the reminder of the year. Could you please provide what was the total cost inflation for Q1, and how does this compare with 6% energy costs guided for the full year? Second question is on CapEx. During the quarter, the CapEx has been CHF 200 million, which seems low compared to the full year guidance. Is there any specific reason for this? My last question is on tax rate. If I am not mistaken, it has been in Q1 more than 40%, again is there any specific reason? Does this affect the long-term guidance of 27%?
Bernard Fontana – CEO: Maybe (indiscernible) is already on energy. So you see that our energy cost is close to CHF 17 per tonne, which is our guidance. We have maintained our guidance of CHF 17 per tonne. if you remember when we were presenting our last Q4 results, one of our main concerns was a change of scheme in India with a gross calorific value priced by a quarter of India and this scheme didn’t happen yet and with the new scheme that is expected to happen in April or even in May we expect a much lower impact and the impact we see from today is between CHF 8 million and CHF 10 million for each company ACC and Ambuja. So in this context we have combined with also a mix of different activities in the world. We confirmed the guidance of the CHF 17 per tonne for the energy. As for the CapEx it reflects our cautious aspect while we are preparing the year, we have decided to be a bit careful to closely monitor our cash flow and our balance sheet and once we get more confidence with positive outlook we will move on our CapEx. So it reflects a cautioned approach we had in beginning of the year. As for tax may be Thomas.
Thomas Aebischer – CFO: Thank you, Bernard. With respect to tax the guidance is confirmed the 27% that you have mentioned. We are – and you are also correct, we are now in the first quarter, and our Group effective tax rate calculation at 42.9%, first quarter of 2011 was 34.7%. So you picked up on this right, that’s a pretty significant increase in tax rate. It does not mean that the guidance is changing. And why have we a significantly higher tax rate in the first quarter, the main reason – or two reasons I would like to mention. The main reason is the dividend,non-recoverable withholding tax on dividends. So dividend within Holcim, (flowing) within Holcim, that’s non-recoverable withholding tax which is both higher in the first quarter as compared to last year that will then dilute itself as we go through the year. And the second reason clearly is the more important one to understand. Spain for example, clearly loss making situation in Spain, and as you know, a market which is hit very hard and we have stopped capitalizing deferred tax assets in Spain starting 1st of January 2011. And that non-capitalization of deferred tax assets in Spain, of course when you look at such a short period of time, also has a significant negative impact, but it will also dilute as we then progress during the year.