Hidden within LafargeHolcim's recent earnings transcripts lies a story that has seemingly gone unnoticed by the broader analyst community – the steady, relentless march upward of the company's Aggregate business margins. While much attention has been paid to the company's strategic shift towards downstream products and mature markets, this quiet revolution in a traditionally low-margin segment speaks volumes about LafargeHolcim's operational prowess and commitment to maximizing value across its entire portfolio.

Back in 2017, when CEO Jan Jenisch unveiled his ambitious Strategy 2022, LafargeHolcim's Aggregate business was languishing with a 19% EBITDA margin. Fast forward to the present day, and that figure has surged past 21%, marking a remarkable turnaround in a segment often characterized by its vulnerability to pricing pressures and the cyclicality of infrastructure spending.

What's even more impressive is that this margin expansion has been achieved despite headwinds from softening volumes, particularly in Europe. This suggests that the driving force behind this upward trajectory is not simply a favorable market environment, but rather a deliberate and sustained effort by LafargeHolcim to optimize its Aggregate operations, relentlessly pursue pricing discipline, and leverage its scale and network to extract every ounce of efficiency.

This observation begs the question – how high can these margins go? Jenisch himself acknowledges that there is "no structural reason" why LafargeHolcim's Aggregate margins should trail those of its competitors. While he refrains from setting a specific target, he hints at a potential range of 25% to 30% EBITDA margins, a prospect that would have been considered unthinkable just a few years ago.

Let's crunch the numbers to understand the magnitude of this opportunity. In 2022, LafargeHolcim's Aggregate business generated CHF 6.5 billion in revenue. Assuming a conservative 25% EBITDA margin, that translates to an EBITDA of CHF 1.625 billion. Compared to the CHF 1.3 billion EBITDA achieved at a 21% margin, that represents a potential uplift of CHF 325 million – a significant boost to the company's overall profitability.

Moreover, this margin expansion has a multiplier effect on returns. With the Aggregate business being relatively capital-light, even modest improvements in profitability translate into substantial enhancements in return on invested capital. This further strengthens the attractiveness of this segment, allowing LafargeHolcim to generate robust returns even amidst softening volumes and economic uncertainty.

While the spotlight may be on LafargeHolcim's bolder strategic moves, such as its recent foray into digitalization and its ambitious sustainability goals, the quiet revolution in Aggregate margins deserves equal attention. It represents a testament to the company's operational discipline, its focus on maximizing value across its entire portfolio, and its ability to deliver sustainable growth even in the face of challenging market conditions.

This underappreciated aspect of LafargeHolcim's story offers a compelling investment thesis, suggesting that the company's commitment to operational excellence and its relentless pursuit of margin expansion are creating a formidable competitive advantage that extends beyond its headline-grabbing strategic initiatives.

Projected Aggregate EBITDA Margin Expansion

The following chart shows the hypothetical growth of LafargeHolcim's Aggregate EBITDA margin based on the provided hypothesis.

Hypothesis:

Projected Aggregate EBITDA margin: 25% by 2025

Projected Aggregate revenue: CHF 7.5 billion by 2025 (assuming modest growth)

Projected Aggregate EBITDA: CHF 1.875 billion by 2025

EBITDA uplift from margin expansion: CHF 575 million (compared to 2022 EBITDA at 21% margin)

This hypothesis highlights the potential for substantial value creation stemming from the ongoing margin expansion in LafargeHolcim's Aggregate business. It suggests that this quiet revolution, driven by operational excellence and pricing discipline, could become a significant driver of the company's future profitability and shareholder returns.

"Fun Fact: LafargeHolcim produces enough cement every year to build a wall around the equator – twice!"