By Elizabeth Collins, CFA
Earlier this year, we traveled to St. Louis to participate in Holcim's (HCMLF.PK) investor event and tour of the Ste. Genevieve cement plant. Ste. Genevieve is one of Holcim's roughly 100 cement plants. Presenters included CEO Markus Akermann, CFO Theophil Schlatter, and Benoit-H. Koch, member of the executive committee for North America. Given the fact that the largest cement companies we cover have hundreds of operating locations, analyzing the firms' financial statements and the economics of the underlying businesses can become a cloudy, abstract process. However, visiting a single cement plant gave us detailed insights into the key drivers of profitability. What we learned re-emphasized our inclination to examine not only cement producers' operating margins as a measure of profitability, but also their returns on invested capital.
- The Ste. Genevieve plant will be hard pressed to generate adequate returns for the foreseeable future.
- However, now that the capital is sunk, the plant is an advantaged player in its market.
Given capital costs and expected earnings, the Ste. Genevieve plant will be hard pressed to generate adequate returns for the foreseeable future. Following a near doubling of the originally estimated capital costs, the plant investment amounted to roughly 7.5 times to 10.1 times expected EBITDA, for a pretax return of 5%-9%. Robust EBITDA margins driven by efficient production methods are outweighed by the high capital costs. Holcim made decisions in plant design that call for more expensive pieces of equipment that have lower operating costs. For example, Holcim's 5-stage preheater has lower operating costs than a less expensive 4-stage preheater. Realized cement prices (net of distribution costs) will need to appreciate before Holcim can begin reaping higher returns on this asset. Given the current near-standstill in construction activity, higher prices and returns are not likely for the foreseeable future.
Return Calculation Details:
- The total capital cost for Ste. Genevieve was $1.6 billion (versus the original estimate of $800 million to $900 million). The cost escalation was driven by price increases for steel and other commodities and a tight labor market in St. Louis, as well as additional protection against natural disasters.
- The plant's annual production capacity is 4 million tonnes of cement. Assuming 100% utilization and current realized prices (less distribution costs) of $78 per tonne, the plant can generate $312 million in annual revenue.
- When producing 4 million tones per annum, Ste. Genevieve's cash costs are expected to be $25 per tonne (including plant overhead expenses). Therefore, the plant can generate roughly $212 million in EBITDA per year. This works out to a robust EBITDA margin of 68%. For context, note that Holcim's target EBITDA margin for its global cement operations is 33%.
- Assuming full utilization, the capital costs of Ste. Genevieve amount to roughly 7.5 times EBITDA. Considering roughly $64 million per year in depreciation, this works out to a 9.3% pretax return.
- If instead Ste. Genevieve produces 3 million tonnes per annum, revenue would total $234 million.
- Given operating leverage, cash costs per tonne under this scenario are expected to amount to $28 per tonne. EBITDA would amount to roughly $150 million, or a still robust 64% of sales.
- In this lower utilization scenario, the capital costs for Ste. Genevieve amount to roughly 10.1 times EBITDA, or a 5.4% pretax return.
That said, now that the capital has been sunk, the Ste. Genevieve plant will be a fierce competitor in its market. The plant's design leads to highly efficient operations, low costs, and high margins.
Competitive Advantage Details:
- Thanks to its location on the Mississippi River, cement from Ste. Genevieve can reach as far south as Houston, as far north as Minneapolis, and as far east as Ohio. Shipping cement by barge is less expensive than by rail or truck.
- The start-up of Ste. Genevieve, along with the closure or mothballing of four of Holcim's less efficient cement plants in the U.S., has lowered the emissions output of the company's U.S. cement fleet. In addition, a carbon dioxide cap-and-trade system, or carbon dioxide emission restrictions from the EPA, would increase Ste. Genevieve's competitive advantage, as long as cement imports from outside the U.S. were treated similarly. (Given cement's high carbon dioxide intensity, any regime would have a large impact on the entire industry.) However, any form of carbon dioxide regime in the U.S. looks unlikely in the near future. And of course, a carbon dioxide regime would increase Ste. Genevieve's competitive advantages versus other cement plants in the market; this could be more than offset by the overall decrease in cement demand and prices that would likely result from a punitive cap-and-trade or restriction system.
- In the U.S., Holcim's average kiln age is 15 years, while the average for competitors is 30 years.
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