Profitability Cemio Building Materials

Case prompt: Our client, Cemio, is an Indonesian cement manufacturer with about $1.5B in revenues.
They have seen a sharp decline in their profitability over the past years, as their EBITDA margin
declined by 8 percentage points to 2% between 2020 and 2022. The board appointed a new CEO to turn
the company around, and the CEO asked us to identify potential recovery solutions.

Question #1: How would you approach this case?

Possible clarification questions:

Before we start the case, I want to clarify some points about Cemio’s objectives.
• What does a successful turnaround stand for in the client’s eyes?
• Does the CEO have any strategic objectives besides recovering the profits?

Answers, in case interviewee asks the questions above:

• The CEO aims to generate more than $500M net cashflow in total in the next 3 years.
• Strategically, they want to reduce exposure to macroeconomic fluctuations.

Answer to question #1:

We can approach this issue as follows:
1. Context to understand the client’s business in more detail.
a. Products
i. What are the main product segments?
ii. How much revenue is generated from each segment?
1. What is the breakdown of revenues to sales volume and price?
b. Customers
i. How can we group the main customers?
ii. What are the sizes of these groups?
c. Competition
i. How is the competitive landscape?
2. Diagnosis to understand key drivers for the profitability decline and assess potential turnaround
actions. This can be done by the following:
a. Profit tree to analyze changes in key P&L items for our client, as well as competitors:
i. Revenues:
1. Average cement price
2. Cement volume sold
ii. Costs:
1. Fixed costs
2. Variable costs
b. Trends to understand the reasons for the changes in the mentioned items.
c. Deep dive into the focus P&L items that are worth investigating.
3. Assessment of the potential turnaround actions, such as:
Profitability Cemio Building Materials

a. Topline:
i. Entering into a new market
ii. Introducing a new product
iii. Raising prices
b. Bottom-line:
i. Reducing fixed or variable costs
ii. Shrinkage via selling assets (if none of the alternatives are effective)
4. Evaluation of the risk brought about by the identified turnaround scenario, which may include
the following:
a. Lack of demand
b. Increasing competition
c. Regulatory risks

To start with the qualitative assessment, I would like to deep-dive into products. Do we have any
information on the following:
• What are the main product segments?
• How much revenue is generated from each segment?
o What is the breakdown of revenue to sales volume and price?

Interviewer responds:
They produce mostly one product type, ordinary Portland cement (OPC). They used to produce large
amounts of white cement, which makes up a tiny proportion of their sales today. Regarding the volume
and price, they sold 20M tonnes last year at an average price of $75 per tonne.

Interviewee continues:
Okay, I would like to understand how the price and volume changed over the past years in the
diagnosis part; but before that, I would like to analyze their current customers. Do we know who
Cemio’s customers are and how big they are?

Interviewer provides information on customers and shows exhibit #1:

Cemio’s customers are construction companies. You can segment them as follows:
• Companies working on large infrastructure projects
• Heavy construction companies
• Small construction companies

Please find exhibit #1 for the revenue split.

Profitability Cemio Building Materials

Exhibit #1: Cemio 2022 annual revenues (M $)

Interviewee summarizes the chart and continues:

I see that the large infrastructure companies make up 2/3 of the total revenues, as the remaining
segments evenly split the remaining part. It would be interesting to see how this mix has changed over
the past years. However, before that, I would like to cover the last part of the qualitative assessment,
the competition. Do we know who our client’s key competitors are and their market share?

Interviewer responds:
Cemio is the market leader, with a 45% market share, and its other two competitors have 25% and 30%
market shares, respectively.

Interviewee continues:
Interesting. It seems that our client is a clear market leader. I would like to switch gears to finding the
root causes of our client’s problem. We can analyze the key drivers of profitability as follows:
Profitability Cemio Building Materials

Do we know the values of these drivers and how they have changed in the past 2 years for our client? It
would also be helpful to analyze the revenues for all three customer segments separately.

Interviewer responds and shows exhibit #2 and #3:

Please find the information in exhibit #2 about the quantity and price evolution. You can assume that
the price was the same for all customer segments.

Regarding the costs, we have the following information in exhibit #3:

Exhibit #2: Cemio sales volume and price by customer segment 2020-2022

Cement sold (M tonnes) Price ($ per tonne)

17,8
18 80
16 14,9
14 13,0 78
12
76
10
8
74
6 5,0
4,0 3,6 3,4
4 72
2,3 2,3
2
0 70
2020 2021 2022

Large infrastructure Heavy construcGon Light construcGon Price

Exhibit #3: Cemio P&L breakdown in 2020-2022

M$
1,800
1,800
1,624
1,600 1,500
1,400
1,200
1,350
1,000 1,212
1,200 Variable costs
800
600
400
272 275 Fixed costs
200 280
179 137 EBITDA
0 20
2020 2021 2022
Profitability Cemio Building Materials

Interviewee summarizes the exhibits and continues:

There is a clear decline in quantity sales across all customer segments, driven mainly by large
infrastructure companies.

On the other hand, if we compare the unit variable cost evolution by doing the following:

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑖𝑛 2022 $1,200𝑀 $1,200𝑀

= = = $60
𝑇𝑜𝑡𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑜𝑙𝑑 𝑖𝑛 2022 (13𝑀 + 3.6𝑀 + 3.4𝑀) 20𝑀

𝑣𝑠.

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑖𝑛 2020 $1,350𝑀 $1,350𝑀

= = = ~$54
𝑇𝑜𝑡𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑜𝑙𝑑 𝑖𝑛 2020 (17.8𝑀 + 5𝑀 + 2.3𝑀) 25.1𝑀

Then we see that the unit variable costs increased in both years, while the client had not reflected this
change to the price in 2022.

Thus, both demand and cost harm the client’s profitability. Do we know any specific market trend that
might have caused a decline in quantity or an increase in the raw material cost? These can be the
following:
• Decrease in quantity:
o An aggressive pricing move from a competitor
o A decrease in the overall market demand
o Demand shift toward an alternative product

• Increase in variable costs

o Lack of production
o Trade barriers
o Increase in the exchange rate

Interviewer responds:
We know that the construction industry has shrunk by 30% since 2020. Regarding costs, the client
states that the increase in COGS was due to the 15% depreciation in the local currency within the
analyzed period.

Interviewee continues:
We see that there is an industry-wide problem. The trends in the source market and the
macroeconomic factors are deteriorating the client’s profitability.

In this case, we can evaluate the following potential actions to turn around:
• Top-line:
Profitability Cemio Building Materials

o Entering a new market: Since the Indonesian market has been shrinking, Cemio may
want to enter new geography. This can be done in various ways, such as:
i. Shipping its products to the neighboring countries
ii. Building a new production facility
iii. Acquiring an established player
o Introducing a new product: If Cemio can leverage its capabilities and production facility,
it can start producing a new product with high expected demand.
• Bottom-line:
o Making new procurement deals with local suppliers to lower the unit variable cost.
• Balance sheet:
o Shrinkage via selling assets: If it is not feasible to serve/invest in a new market, and if
Cemio cannot serve the Indonesian market with an alternative product, it may consider
selling some of its assets and shrinking its business. The CEO has committed to
generating a $500M cash flow, so this can be a viable option.

Do we know whether the executive committee has ever stated its opinions about these options?

Interviewer responds:
• Top-line:
o The management had considered entering a new market and targeted some focus
countries. However, these options require an investment cost of $800M-1,700M.
o Introducing a new product is not an option for Cemio, as they have already had a
negative experience with the white cement.
• Bottom-line:
o The supply chain unit has already renewed most of its contracts with the suppliers with
a certain volume of order guarantee.
• Balance sheet:
o The CEO has never seriously considered shrinkage before. So, we do not know how they
would welcome that idea.
Interviewee continues:

I understand. In that case, neither growth nor cost initiatives seem viable for the client, in the current
situation. Therefore, we can assess the shrinkage option to identify whether it would help the CEO
meet their targets.

Interviewer intervenes:
Okay, that is a very useful action step to give Cemio direction. We can go with that recommendation
and analyze that option in more detail. At this stage, this is a sufficient piece of information for the
client.

Before you conclude, could you please share the risks related to that option?
Profitability Cemio Building Materials

Interviewee continues:
Regarding potential risks, the client should consider the following:
• A possible pick-up in the Indonesian construction market may recover the demand for cement,
and Cemio may lose the opportunity to serve that demand with its lower production capacity.
• Shrinkage may damage Cemio’s brand name and reputation in the market.
• Asset sales may hurt the company’s market value.

Interviewee concludes:
To sum up, we can recommend that Cemio evaluate the option of selling its current assets and
shrinking its business because of the following reasons:
• The Indonesian cement market is going through an industry-wide profitability problem due to
the shrinking construction market and a depreciating currency.
• Potential turnaround options require heavy investment, which would make it challenging for
Cemio to meet its cash flow targets.
• Asset sales would generate additional cash flow and help Cemio to meet its objective.

While proceeding with the shrinkage option, Cemio should analyze the market trends in more detail
and consider investor relations.

Going forward, Cemio may want to conduct due diligence on its current assets and approach potential
investors regarding asset sales.
 To share
Profitability Exhibit
Cemio#1 Building Materials

Exhibit #1: Cemio 2022 annual revenues

 To share
Profitability Exhibit
Cemio#2 Building Materials

Exhibit #2: Cemio sales volume and price by customer segment 2020-2022

Cement sold (M tonnes) Price ($ per tonne)

18 17,8 80
16 14,9
14 13,0 78
12
76
10
8
74
6 5,0
4,0 3,6 3,4
4 72
2,3 2,3
2
0 70
2020 2021 2022

Large infrastructure Heavy construcGon Light construcGon Price

 To share
Profitability Cemio#3
Exhibit Building Materials

Exhibit #3: Cemio revenue breakdown in 2020-2022

M$
1,800
1,800
1,624
1,600 1,500
1,400
1,200
1,350
1,000 1,212
1,200 Variable costs
800
600
400
272 275 Fixed costs
200 280
179 137 EBITDA
0 20
2020 2021 2022