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Morningstar | LafargeHolcim's Strategy 2022 Plan Underwhelms Relative to Expectations From the Original Merger

LafargeHolcim was formed in 2015 after the merger of the two largest cement producers in the world, Lafarge and Holcim. The company is one of the world's largest producers of cement, aggregates, and concrete. Because cement’s low value/weight ratio creates localized markets, LafargeHolcim’s segments depend entirely on regional dynamics, with minimal cross-border impacts.Construction activity is largely a function of economic growth. We use GDP, investment share of GDP, and cement intensity to inform our regional demand outlooks.For Asia, we forecast cement volume growth of roughly 3% annually through 2022. We expect India to drive healthy demand growth via increased housing and infrastructure activity, buoyed by government spending. However, tepid growth in other markets like China offset the performance of higher-growth countries.For Latin America, we expect slower cement volume growth of less than 3% annually through 2022. We expect healthy demand growth in Mexico to offset weakness in Brazil, Ecuador, and Argentina.For Europe, we expect cement volume growth of roughly 3% annually through 2022. We expect healthy demand growth in Central and Eastern European countries to offset weakness in more developed countries. While we expect European cement capacity utilization to drive margins higher, we expect utilization rates to remain lower than other regions. Given cement's high degree of operating leverage, we expect operating margins to remain well below peak levels achieved before the recession.At the announcement of the merger, we liked the strategic rationale of shifting away from slower growth Europe, where the predecessor companies struggled with underutilization. However, the company's Strategy 2022 financial targets are underwhelming. The four main financial targets of Strategy 2022 are annual net sales growth of 3% to 5%, annual recurring EBITDA growth of at least 5%, free cash flow conversion from EBITDA of 40%, and return on invested capital greater than 8%. These targets fail to exhibit the level of growth we had anticipated from the merger.