- Biggest cement maker facing first shareholder meeting Thursday
- Shares down almost 40% since merger; profit misses estimates
Facing disgruntled LafargeHolcim Ltd. investors at a shareholders’ meeting for the first time since the creation of the world’s biggest cement company, Chief Executive Officer Eric Olsen was forced to defend a merger that’s seen the shares plunge and earnings disappoint.
As an impatient man by nature, he would have preferred for the benefits of the deal to have emerged quicker, Olsen told about 600 investors at the annual meeting in Zurich on Thursday. That said, the share price, down almost 40 percent since the first day of trading on July 14, doesn’t reflect the true value of the company, he said.
“As we deliver on our targets, the true value of LafargeHolcim will be reflected in the share price,” Olsen said. ““No merger of this size is friction free.”
The CEO’s reassurances came after first-quarter profit fell 22 percent, missing analysts’ estimates, hurt by lower prices in India and a slowdown in Brazil and Russia. Delays in asset disposals and high-profile executive departures have further eroded investor confidence at a time when competitors such as HeidelbergCement AG are benefiting from improved demand in North America and Europe.
While shareholders voted for the board’s nomination for chairman, electing Beat Hess to replace the departing Wolfgang Reitzle, some investors remain skeptical. Swiss pension-fund advisory firm Ethos lamented that the combination of Lafarge of France with Holcim of Switzerland had “destroyed value.” The group recommended investors reject last year’s remuneration report because of what it called “inappropriate” merger premiums granted to the chairman and management, although the directors’ payout were duly approved.
“One year ago Ethos recommended the rejection of the planned tie-up of Holcim and Lafarge,” Vincent Kaufmann, Ethos chief executive officer, said at the meeting. “Unfortunately, many of our fears have come true.”
LafargeHolcim shares fell as much as 4.4 percent after the quarterly results were released, extending a decline that stands in stark contrast to smaller German competitor HeidelbergCement, which has gained 4 percent during the 10 months LafargeHolcim has been trading. The larger company’s stock traded 1.9 percent lower at 5:11 p.m. in Zurich, valuing LafargeHolcim at 26.2 billion Swiss francs ($27 billion).
The Swiss company had pledged to deliver more than $1 billion in annual cost savings as a result of the deal, touted as an advantage over rivals after a global recession eroded demand for building materials.
“In the coming quarters, LafargeHolcim will have to prove that synergies and improved business environment will lead to an increase in adjusted EBITDA,” Vontobel analyst Christian Arnold wrote in a note to clients. “Disposal news is needed to strengthen its balance sheet.”
Adjusted operating earnings before interest, taxes, depreciation and amortization fell 22 percent in the first three months of the year to 824 million Swiss francs, the Jona, Switzerland-based company said in a statement. That compared with the 942 million-franc average estimate of eight analysts surveyed by Bloomberg. The company said it’s on track to meet 2016 targets, which include high single-digit growth in adjusted operating EBITDA.
“The first quarter is not indicative of our full year performance,” Olsen said on a call with journalists. “We see pricing improving, we see costs improving, and we see solid demand overall.”
The company is “well advanced” with a divestment program expected to raise 3.5 billion francs in 2016, helping to reduce net debt this year, Olsen said. To hit this target, the cement maker is also considering a “substantial” amount of further disposals, which will spill over into 2017, Olsen said.
“The overall amount would be less in 2017 than in 2016, but it will still be a substantial effort,” Olsen said on the call. The sale of assets in India is expected to close “somewhere in the range of the third quarter.”
In India, LafargeHolcim’s biggest single market, pricing fell 10 percent in December. This recovered in the first quarter, but mostly in March, and so was not visible in the figures reported on Thursday, Olsen said. “We would expect favorable trends to continue through the second quarter,” he said.
The market situation remains “challenging” in Europe, where earnings were affected by lower demand in Russia and Azerbaijan, LafargeHolcim said. While the U.K. also slowed, France and Switzerland showed some signs of improvement. Demand in Brazil remained under pressure from an economic recession, and prices fell in Nigeria. In the U.S., activity was boosted by new-home building and spending on infrastructure.