value driven corporate management key success factors holcim

Key Success Factors Cement and aggregates are the core business Holcim is one of the world’s leading building materials groups.. However, Holcim also produces ready-mix concrete, concret

Clear strategy proves effective even in difficult times

The Group’s strategy is based on three pillars: trating on the core business, geographical diversifica-tion and balancing business responsibility betweenlocal and global leadership This formula holds goodeven during difficult economic times High priority isalso given to rigorous cost management and a strongbalance sheet

concen-Global presence with focus on growth markets

Holcim is a globally active company The Group ates in around 70 countries on all continents, employs

oper-a workforce of some 80,000 oper-and hoper-as production foper-acili-ties at around 2,000 locations This broad-based pres-ence helps stabilize earnings by evening out cyclicalfluctuations in individual markets more effectively

facili-Our sound revenue streams from Asia and Latin Americaconfirm that this compensatory effect operates welleven during recessionary phases With the acquisition

in Australia, Holcim has once again succeeded in panding its geographical presence

ex-Holcim has held its own in a difficult economic environment, gaining strength This means that the Group will be among the winners in the next upturn.

In 2009, the Group companies in the emerging kets, i.e in Eastern and Southeastern Europe, LatinAmerica, Africa, the Middle East and Asia, accountedfor 52.4 percent of Group net sales

Key Success Factors

Cement and aggregates are the core business

Holcim is one of the world’s leading building materials

groups Our success over decades is founded on a

clear product strategy At its heart are the production

and distribution of cement and aggregates (crushed

stone, gravel and sand) – key basic materials for the

construction industry Our investment activities and

value creation focus on processing natural resources

This is by its nature highly capital-intensive and ties

up assets over the long term

However, Holcim also produces ready-mix concrete,

concrete elements and concrete products as well as

asphalt, albeit mainly in mature markets and major

conurbations Alongside product-specific advice, its

services also include innovative sales concepts and

system solutions for major projects

Madrid-based Holcim Trading occupies a leading

mar-ket position in the international trading in cement,

clinker, mineral components and fuels and helps

Group companies buy and sell such products outside

their market areas

Extracting raw materials, operating cement plants anddistributing building materials to local or regionalmarkets call for a strong presence in the respectiveenvironment and an awareness of corporate responsi-bility this entails

Cement and building materials are a cyclical businessand in 2009, this was reflected in a sharp decline indemand which was most pronounced in the maturemarkets Over the longer term, though, global popula-tion growth and rising expectations will lead togrowth across the board Many countries, particularly

in the emerging markets, still have major quantitativeand qualitative deficits in their infrastructure andhousing sectors In future, Holcim stands to benefitfrom this in all segments

Central pillars of value creation

Creating added value is Holcim’s paramount objective, an objective that is based on the three strategic pillars and determines guide- lines in the functional sectors The most important foundation on which everything rests is a workforce that gives its best on a daily

Creation of value

Product focus

Geographic diversification

Local management Global standards Goal

Mindsets

Sustainable environ- mental performance

Better cost manage- ment

Permanent marketing innovation

Human resources excellence

Corporate social respon- sibility Strategy

© Holcim Ltd

Holcim increases efficiency along the value chain

The recession in North America and Europe and thedecline in growth in several emerging markets alreadyprompted Holcim to launch an extensive cost-cuttingprogram in the second half of 2008 During the yearunder review, additional measures were taken in criti-cal markets along the value chain

Major corrections were undertaken in the cement ment, where capacity was reduced by around 10 milliontonnes through permanent and temporary plant clo-sures In other segments too, production was reduced

seg-to match lower demand In seg-total, more than 100 gates and ready-mix concrete plants were mothballed

aggre-The cost-cutting measures also extended to sales andadministration, including corporate staff units

At the beginning of 2009, Holcim was already aiming

to substantially reduce its fixed costs for fiscal 2009 as

a whole and the savings actually achieved came to animpressive CHF 857 million on a like-for-like basis

Cost cuts in all Group regions

Whereas the previous year’s cost reductions in Europefocused on the two difficult building materials mar-kets Spain and the UK, the year under review sawother countries, mainly in Eastern Europe (includingRussia) come under economic pressure Holcim re-sponded swiftly in the cement segment, permanentlyclosing the Torredonjimeno plant in Spain and moth-balling the Lábatlan plant in Hungary The Pleven plant

in Bulgaria now only operates as a grinding station

Two old kilns at the Shurovo plant in Russia weredecommissioned Until the new kiln line comes onstream in the second half of 2010, this plant willsource the necessary quantities of clinker from its sis-ter plant in Volsk The network of ready-mix concreteand asphalt plants was also streamlined, and quarrieswere temporarily closed Maintenance investment wascut to a minimum In addition, the marketing andsales operations of Holcim White Ltd were integratedinto the two Group companies which produce whitecement in Slovakia and Russia

The economic environment in the US remained verydifficult, and conditions in Canada’s construction mar-kets were not easy either The Group companies there-fore continued implementing cost-cutting measures.Having already announced the closure of the Dundeeand Clarksville plants in 2008, Holcim US also had tomothball the Artesia and Mason City plants in 2009

In North America, the cost-cutting package includedtemporary plant closures in the areas of aggregates,ready-mix concrete and asphalt

In Latin America, the economy held up relatively well,but cost-cutting measures were nonetheless required.One kiln line in each of Mexico, El Salvador, Brazil andArgentina was mothballed In Chile, a rotary kiln linewas closed down Operations in aggregates plants andready-mix concrete facilities in several Group marketswere also shut down temporarily There were welcomereliefs in energy costs thanks to a combination oflower input costs and measures to optimize the fuelmix, mainly by making greater use of petcoke Thelargely stable price environment also had a positiveimpact

The Group companies in Group region Africa MiddleEast also implemented cost-cutting programs, despitepredominantly brisk demand for building materialsthere

As demand in Asia Pacific mostly remained sound, thepotential for savings was limited In India in particular,the building materials market continued to growdynamically leading to a high rate of plant utilization.Demand was also brisk in the markets of Vietnamand the Philippines Thailand’s construction sectorexperienced a slight uptrend, and the Saraburi plant’sfour big kiln lines were running at full capacity on thestrength of export orders

Key Success Factors

Economic situation necessitates substantial job losses

Declining demand and the ensuing restructuring

measures had an impact on the Group’s headcount

Whereas at the end of 2008, the Group had 86,713

em-ployees, by the end of 2009 the figure had decreased

to 81,498 The staff cuts were made in such a way as to

minimize the social impact

Strategic expansion program continuing

in growth markets

From a longer term point of view, the Group is rily aiming to establish and grow cement capacity inthe emerging markets, where some 74 percent of pro-duction capacity is currently located Regardless ofshort-term requirements, capacity there will need

prima-to be increased by expanding existing plants andbuilding new facilities in line with the anticipatedtrend in cement consumption

The strategically important capacity expansion gram launched in 2008 continued with few exceptions

pro-The main focus of these projects is on the US, Asia,Latin America, Russia and Azerbaijan

In 2009, Holcim commissioned 9.8 million tonnes ofcement capacity Group-wide This includes theSte Genevieve plant in the US state of Missouri, whichopened in July and has an annual capacity of 4 milliontonnes of cement With its own port and loading facili-ties on the Mississippi, the factory is a model

facility in every respect and is highly energy efficient

Compared with the US plants shut down, the ment per tonne of cement equals around 40 percent

improve-As of the end of 2009, out of the total of 25.9 milliontonnes of capacity expansion originally embarkedupon, only 16 million tonnes were still under con-struction The new capacity meets the highest techno-logical standards in terms of costs and environmentalefficiency In many instances, it is being installed atexisting sites, where Group companies have robustmarket positions and secured reserves of raw materials

Change in personnel by Group region

As expected, staff numbers declined sharply in

Group regions Europe and North America, which both

bore the brunt of the crisis The Group’s headcount

remained comparatively stable in Group region Asia

Pacific, where the economy was strong

Approved capacity expansion within the Group in million tonnes 2010 to 2012

* Project on hold.

In 2009, Huaxin Cement, Holcim’s affiliate in China,increased its cement capacity by 12 million tonnes toover 50 million tonnes Furthermore, with the proceedsfrom an anticipated capital increase and ongoingreinvestment, capacity will be further increased

Investments are also being made in aggregates

and concrete

As an economy becomes more mature, vertical

inte-gration becomes increasingly important for Holcim

In this type of market, major infrastructure projects

and residential and commercial construction activity

raise demand for high-quality aggregates and

ready-mix concrete At the same time, secured reserves of raw

materials are always of major strategic importance

because of the high degree of regulation

Holcim therefore took the opportunity to move toward

vertical integration in Australia, a market with

attrac-tive future prospects For AUD 2.02 billion (equivalent

to CHF 1.73 billion), the Group took over Cemex Australia,

which has around 80 aggregates plants and 1 billion

tonnes of raw material reserves, nearly 250 ready-mix

concrete facilities and 16 plants producing concrete

products The transaction also included a 25 percent

interest in the Group company Cement Australia

Cemex Australia, now renamed Holcim Australia,

has been fully consolidated since October 1, 2009

The holding in Cement Australia, which has risen

to 75 percent, is now also fully consolidated Holcim

is increasingly offering system solutions for new

construction projects Large construction groups opt

more and more for efficient total solutions which

include sophisticated logistics, particularly in the

case of complex construction projects

Concrete is an indispensable, environmentally friendly building material

Concrete is an energy and CO2-efficient buildingmaterial which is used on a huge scale in constructionprojects worldwide It is the world’s second mostsought-after commodity after water Modern infra-structure would be inconceivable without concrete

To meet customers’ high-quality requirements, Holcimemploys innovative, customer-focused solutions

Our expertise is intended to help customers increasetheir productivity and gain competitive advantagesthrough differentiated product offerings

Holcim is committed to using building materials thatare more competitive and sustainable than other prod-ucts In the production of concrete, Holcim is thereforestepping up its use of composite cements containingspecial mineral components in addition to clinker andgypsum In recent years, the Group has seen a steadyincrease in the proportion of overall sales of hydraulicbinders accounted for by these cements (end 2009:

more than 70 percent)

1 Excluding cash and cash equivalents.

2 WACC before tax of 11.76 percent.

3 Excluding the majority sale in South Africa.

Holcim Value Added (HVA) 1

Margin targets per segment

In 2006, Holcim defined specific operating EBITDAmargin targets for each segment Various programsdesigned to cut costs and increase efficiency havebeen implemented in all areas of the company How-ever, the challenging economic situation in variousmarkets and the resulting decline in volumes meansthere will be some delay in achieving the marginstargeted Holcim nonetheless continues to aim forfurther improvements in margins with a view toexceeding the Group’s after-tax weighted average cost

of capital (WACC) of 8 percent on a sustainable basis

This is also confirmed by the cost reductions andprogress achieved during the year under review

In 2009, the cement margin was weighed down by ward pressure on costs, changes in the scope of consol-idation and the still relatively high cost of energy andresources However, the pressure on costs was coun-tered somewhat by efficiency gains in the productionsector and price adjustments On balance, the operatingEBITDA margin in the cement segment was at 28.4 per-cent, up on the previous year’s figure of 27.3 percent

up-In Group regions Latin America and Africa Middle East,the margin target of 33 percent was exceeded In thecase of aggregates, the operating EBITDA marginincreased to 19.7 percent (2008: 19.5) The margintarget of 27 percent was exceeded in Latin America

The operating EBITDA margin of the other constructionmaterials and services segment declined to 3.7 percent(2008: 4.3)

Sustainable value creation as paramount objective

Holcim’s goal is to be most attractive company in thebuilding materials industry The Group’s appeal alsoincludes its return on invested capital, which shouldexceed its after-tax weighted average cost of capital(WACC) of 8 percent on a sustainable basis

Measured according to Holcim Value Added (EBIT –

standard capital costs ⫻ invested capital), the Group

has, over many years, created substantial added valueabove the WACC of 11.76 percent before taxes Owing

to the difficult economic situation, the Group return

on invested capital (Group ROIC) declined to 9.1 percent

in 2009 Measures were taken in all areas with a view

to restoring the desired rates of return as quickly aspossible

HVA before taxes in million CHF ROIC before tax in % 1200

1000 800 600 400 200

0 2 –200 –400 –600 –800 –1000 –1200

24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Key Success Factors

Cement and gates are the basis – concrete and asphalt bring us closer to the end consumer.

Civil engineering contractors

Infrastructure

© Holcim Ltd

Ready-mix concrete Direct sales

Concrete products

Mortars

Asphalt

Attractive dividend policy

The Group’s success should also bear fruit for the

shareholders of Holcim Ltd In 2003, the Board of

Directors determined that one third of Group net

income attributable to shareholders of Holcim Ltd

should be distributed For the 2009 financial year,

the Board is proposing to distribute a cash dividend

of CHF 1.50 per registered share

Value chain

Sales channels

Environmental commitment and social responsibility enhance our reputation

Holcim’s reputation is also based on its substantial forts to promote sustainable development The Groupaccepts its responsibility in terms of the “triple bottomline” of value creation, sustainable environmental per-formance and social responsibility, and has for yearsregarded these as integral components of its overrid-ing strategy This also includes engaging in continuousdialog with a wide range of stakeholders and in strate-gic partnerships with such bodies as the InternationalUnion for Conservation of Nature

ef-Holcim Ltd is once again listed in the Dow JonesSustainability Index 2009/2010 and as such is regarded

as one of the most sustainable companies in theconstruction sector

In 2010, Holcim will again publish a separate ability report

sustain-Globally active foundation for sustainable construction

Holcim wishes to take the issue of sustainability yond the sphere of products, production and processesover which it can exert a direct influence Underpinningthis objective, it established the Holcim Foundation forSustainable Construction in 2003 The Foundation’stask is to promote worldwide dialog on sustainableconstruction between architects, planners, constructionengineers, investors and the public

be-Since its establishment, the Foundation has ated closely with the companies of the Holcim Groupand with leading technical universities, with a view

cooper-to promoting sustainable construction solutions inthe technological, environmental, socio-economic andcultural context

In the second competition cycle, which ended in 2009,around 5,000 sustainable projects from 121 countrieswere submitted Within Group region Asia Pacific inparticular, the number of entries increased signifi-cantly compared with the first cycle The Foundation’swide range of activities, illustrated in this AnnualReport, is meeting with broad acceptance in specialistcircles

The Foundation will begin its third three-year cycle byholding another forum for architects, urban plannersand other interested groups at the UniversidadIberoamericana (UIA) in Mexico City Moreover, thethird cycle of five regional Holcim Awards competi-tions for sustainable construction projects and visions

is to be launched on July 1, 2010

Organization and Management

Efficient management and control

The aim of corporate governance, which defines the

management processes, the organization and

moni-toring of the highest corporate management levels,

as well as business policy principles and internal and

external control mechanisms, is to ensure responsible

management and control of the company with the

focus on sustainable value creation It is the

precondi-tion for the Group’s credibility and good reputaprecondi-tion

and strengthens confidence among investors,

busi-ness partners, employees and the public at large

The principles of corporate governance developed in

recent years are continuously being adjusted to

requirements The internal control system (ICS)

intro-duced in 2007 and 2008 for the presentation of the

annual financial statements conforming with the

requirements of Art 728a of the Swiss Code of

Obli-gations and Swiss Auditing Standard 890 continued

to prove itself in 2009

The Group’s management and line responsibility is

structured by regions A broad Code of Conduct ensures

that all employees know what rights and obligations

apply in the work environment.

Value creation in a competitive environment

The Code of Conduct defines Group-wide standards

of behavior expected of all staff and it underscoresour responsibility as entrepreneurs and employers

The current Code of Conduct can be found on ourwebsite under www.holcim.com The Code of Con-duct, which is binding on all Holcim Group companiesand their employees, was issued by the Board ofDirectors and the Executive Committee in 2003

It requires in particular compliance with the rules

of fair competition and explicitly prohibits any competitive conduct or abuse of dominant marketpositions Non-compliance will result in disciplinarymeasures, which could go as far as termination of theemployment relationship To ensure that the princi-ples are firmly established in the Group, Holcim hasintroduced a centrally coordinated training program

anti-In addition, the Group companies undergo regularchecks in this regard which are carried out by inde-pendent lawyers In 2009, all training and supportmaterials concerned with fair competition werebrought into line with the latest developments incompetition law A new manual on the subject ofgood commercial practices reflects current Europeanand US competition legislation

Organization and management