Management discussion and analysis 2014

Holcim achieved a solid financial performance with an increase in like-for-like operating profit and net income, despite restructuring and merger costs of CHF 149 million and further setbacks in the global economy this year. The Holcim Leadership Journey exceeded expectations, while the recovery in the US and UK, as well as the right-sizing initiatives implemented in previous years, proved advantageous for the operational results.

This discussion and analysis of the Group’s financial situation and results of operations should be read in conjunction with the shareholders’ letter, the individual reports for the Group regions, the consolidated financial statements and the notes thereto. The quarterly reports contain additional information on the Group regions and business performance.

Overview

In 2014, the uneven global recovery continued. Among the advanced economies, the United States and the United Kingdom regained speed leaving the crisis behind; however, some European countries still had to address the legacies of the financial crisis, ranging from debt overhang to high levels of unemployment. In emerging economies, the growth was below the expected levels. The Indian economy experienced a rebound after the elections, partly thanks to a renewal of confidence and effective policies. The economy in a number of Latin American countries remained in a low gear. Political tensions and uncertainties took their toll in Russia as well as in certain economies in Africa Middle East. As a consequence, the demand for building materials was below prior-year levels in some Holcim markets.

Against this backdrop, Holcim was well-positioned to take advantage of opportunities and reduce costs further after the restructuring measures undertaken in the previous years. The clear focus toward customer excellence proved successful. A like-for-like operating profit and margin growth could be achieved thanks to successful price increases and cost optimizations, largely supported by the Holcim Leadership Journey.

The Holcim Leadership Journey launched in 2012 realized a total benefit of CHF 1.8 billion, exceeding its operating profit objective by CHF 348 million. The Group had set itself the target of contributing CHF 1.5 billion to the operating profit by the end of 2014, compared to the base year 2011 and under similar market conditions. In 2014, the contribution of the Holcim Leadership Journey to the Group’s operating profit amounted to CHF 748 million.

Holcim also succeeded in improving its net income. However, the continued uncertainty in the economic situation was reflected in the currency market; the Swiss franc appreciated against a number of currencies in 2014, mainly the Indian Rupee, the Indonesian Rupee, the Canadian dollar along with a number of Latin American currencies. Overall, this led to a significant negative impact on the results reported in Swiss francs.

In the year under review, Holcim achieved an operating EBITDA of CHF 3,747 million, showing like-for-like growth of CHF 77 million or 2.0 percent. The currency translation effect and the change in Group structure affected the operating EBITDA by -5.4 percent and -0.4 percent respectively. Adjusted for restructuring costs of CHF 61 million and merger costs of CHF 77 million, the operating EBITDA increased by CHF 215 million or 5.5 percent on a like-for-like basis. The Group’s operating EBITDA margin decreased by 0.1 percentage point to 19.6 percent. On a like-for-like basis, the margin dropped by 0.2 percentage point. Adjusted for restructuring and merger costs, the like-for-like operating EBITDA margin increased by 0.5 percentage point.

The Group generated an operating profit of CHF 2,317 million, which was up CHF 100 million or 4.2 percent on a like-for-like basis. The currency translation effect heavily impacted the operating profit growth by -6.2 percent while the positive change in structure effects contributed 0.3 percent to operating profit. Adjusted for restructuring costs of CHF 72 million and merger costs of CHF 77 million, the operating profit grew by CHF 249 million or 10.6 percent on a like-for-like basis. The Group’s operating profit margin increased by 0.2 percentage point to 12.1 percent. On a like-for-like basis, the margin increased by 0.1 percentage point. Adjusted for restructuring and merger costs, the like-for-like operating profit margin increased by 0.9 percentage point.

Net income increased by CHF 23 million to CHF 1,619 million. The net income attributable to Holcim shareholders grew by CHF 15 million to CHF 1,287 million.

Cash flow from operating activities dropped by CHF 288 million or 10.3 percent. The currency translation had a substantial negative effect of CHF 103 million or 3.7 percent on the cash flow from operating activities, while changes in consolidation structure affected the cash flow by -0.2 percent. On a like-for-like basis, cash flow from operating activities decreased by CHF 179 million or 6.4 percent.

Net financial debt increased by CHF 183 million to CHF 9,644 million. The impact from the currency translation effect of CHF 250 million or 2.6 percent and the changes in consolidation structure of CHF 45 million explained this growth. Adjusted for these effects, net financial debt decreased by CHF 113 million or 1.2 percent on a like-for-like basis.