HeidelbergCement publishes Q3 2012 results

HeidelbergCement increases revenue and operating income in the third quarter – significant reduction of net debt

Highlights Q3 2012 and outlook:

• Strong operative development driven by successful cost savings and price increases
  • Revenue up 9% to €3.9 billion
  • Operating income before depreciation (OIBD) up 12% to €874 million
  • Operating cement margin further improved
• Significant net debt reduction by €740 million compared to Q3 2011
• “FOX 2013” programme already beats annual target after 9 months and generates €241 million cash savings
• Pricing initiatives “PERFORM” and “CLIMB Commercial” started in order to improve margin by €350 million until 2015
• Sustained growth expected in Asia-Pacific and Africa-Mediterranean Basin as well as continuing recovery in North America; weakening demand in parts of Europe
• Targets for 2012 confirmed: increase in revenue and operating income

Overview January - September 2012

Q3 cement and ready-mixed concrete sales volumes stable while aggregates volume declines

In Q3 2012, cement and ready-mixed concrete sales volumes benefited from the sustained recovery of North America’s residential construction activity as well as from the continued strong demand in HeidelbergCement’s markets in Asia. The increase in sales volumes in these Group areas compensated for losses in some European markets, caused by declining infrastructure expenditure. Aggregates sales volumes declined in total as demand in key markets in North America and Europe weakened.

In Q3 2012, the Group’s cement and clinker sales volumes remained stable at 24.3 million tonnes compared to Q3 2011. Sales volumes in North America increased strongest among all Group areas, followed by Asia-Pacific and Africa-Mediterranean Basin. In North America, the recovery of the residential housing market is driving demand for cement. The Indonesian cement market continued to develop strongly in the third quarter based on increasing demand for housing and infrastructure. In Central Asia, cement volumes further increased, but could not compensate for the decline in deliveries in Poland and the Czech Republic. Cement sales volumes in Western and Northern Europe declined due to weak demand in the United Kingdom. Aggregates volumes fell by 9.4% to 68.8 million tonnes (previous year: 75.9). Ready-mixed concrete deliveries were about stable at 10.5 million cubic metres (previous year: 10.6). Asphalt sales volumes fell by 6.9% to 2.9 million tonnes (previous year: 3.1).

In the first nine months of the year, cement and clinker sales volumes rose by 2.5% to 67.0 million tonnes (previous year: 65.4). Aggregates shipments declined by 4.3% to 182.9 million tonnes (previous year: 191.1). Deliveries of ready-mixed concrete remained almost stable at 29.0 million cubic metres (previous year: 29.2); sales volumes of asphalt fell by 9.3% to 6.5 million tonnes (previous year: 7.2).

Development of revenue and results

In Q3 2012, Group revenue rose by 8.9% to €3,944 million (previous year: 3,624), driven by increasing prices, and a favourable development of exchange rates. Positive exchange rate effects supported the development of revenue particularly in North America, Asia-Pacific, as well as Western and Northern Europe. Excluding exchange rate and consolidation effects, revenue grew by 1.7%, with Asia-Pacific recording a double digit increase.

Operating income before depreciation (OIBD) increased by 12.4% to €874 million (previous year: 778); operating income improved by 15.5% to €649 million (previous year: 562). Cost savings and successful price increases contributed to this improvement in results. Excluding exchange rate and consolidation effects, OIBD increased by 6.9% and operating income by 10.2%.

“The quality of our results has further improved in the third quarter,” says Dr. Bernd Scheifele, Chairman of the Managing Board. “This is reflected by the improving margins and the noticeable reduction in net debt. Our “FOX 2013” programme is a great success and we already beat our 2012 cash savings target. In addition, we were able to complete first disposals of non-core businesses in North America. The balanced approach of cash savings, working capital improvement, disciplined capex, and disposals of non-core businesses is clearly successful. We will do everything in our power to continue this positive trend.”

The operating income of the third quarter 2012 includes profits of €48 million from the orderly commercialisation of a depleted quarry in Canada. These were comparable with non-cash effective contributions to operating income in the prior year third quarter of €52 million from the successful conversion of pension schemes in Western Europe.

The additional ordinary result of the third quarter deteriorated by €28.6 million to
€-59.0 million (previous year: -30.4). Business units were sold for €57.3 million in North America which led to a loss of €43.8 million. The financial result deteriorated by €35.6 million to €-180.3 million (previous year: -144.7) mainly due to a non-cash-effective discounting of long-term provisions in accordance with IFRS.

Profit before tax from continuing operations amounted to €427.4 million (previous year: 402.8). Tax expenses in Q3 2012 increased to €98.4 million (previous year: 82.1). Net income from continuing operations rose to €329.1 million (previous year: 320.7).

Overall, profit in Q3 2012 rose by 2.2% to €322.9 million (previous year: 316.1). Group share of profit however declined by 3.3% to €258.9 million (previous year: 267.7).

In the first nine months of the year, Group revenue rose by 9.4% to €10,525 million (previous year: 9,620). Operating income before depreciation (OIBD) improved by 6.2% to €1,786 million (previous year: 1,682); operating income went up by 8.9% to €1,158 million (previous year: 1,063). The profit for the first nine months of the year amounted to €416.2 million (previous year: 404.2). Profit attributable to non-controlling interests increased to €177.0 million (previous year: 137.9). Therefore, Group share of profit amounts to €239.2 million (previous year: 266.3).

At the end of Q3 2012, the number of employees at HeidelbergCement stood at 53,729 (previous year: 54,335). The reduction of 606 employees essentially results from two opposing developments: on the one hand, almost 1,300 job cuts were made in North America, the United Kingdom, Spain, and in some Eastern European countries as a result of efficiency improvement programmes in sales and administration, location optimisations, and capacity adjustments. On the other hand, HeidelbergCement hired more than 600 new employees in growth markets including India and Indonesia.

Net debt significantly reduced in comparison with the previous year

At the end of Q3 2012, HeidelbergCement’s net debt amounted to €7.76 billion, which corresponds to a reduction of €740 million compared to the end of Q3 2011. Gearing improved to 55.0% (previous year: 65.9%), accordingly. Net debt was also €11 million lower than at the end of 2011. The balanced approach of HeidelbergCement to net-debt reduction proves to be successful. A strong operational development with a further reduction of working capital by 5 days, disciplined capex spending, and €100 million proceeds from disposals of non-core assets contributed to the significant net debt reduction.

“FOX 2013” programme beats 2012 target after 9 months

After nine months of 2012, the three-year programme for financial and operational excellence, “FOX 2013”, already surpassed the annual savings target of €200 million and generated cash savings of €241 million. Specifically the reduction of working capital and the savings from purchasing and from the OPEX project exceeded the expectations.

Pricing initiatives “PERFORM” and “CLIMB Commercial” started in order to improve margin by €350 million – Logistics initiative “LEO” on track

In order to further improve the margin by €350 million until 2015, HeidelbergCement started the pricing initiatives “PERFORM” for cement and “CLIMB Commercial” for aggregates. The project “PERFORM” aims at margin improvements in cement in Europe and North America by optimising internal pricing strategies and sales staff training, accordingly. Project “CLIMB Commercial” focusses on margin improvement through optimisation of product- and customer-mix in aggregates. The logistics initiative “LEO” is on track. First pilots in Europe show savings potential above expectations.

Organic growth of cement capacities in attractive emerging markets

In cement, some important capacity expansion projects are near completion. The commissioning of new clinker and cement plants in Central India with a cement capacity of 2.9 million tonnes is expected in Q4 2012. In Ghana and Liberia, HeidelbergCement is constructing new cement mills with capacities of 1 million tonnes and 0.5 million tonnes, respectively. Commissioning of the mill in Ghana is planned before year-end 2012, production start in Liberia is expected for early 2013.

Outlook 2012

The global economy is still dominated by high political and economic uncertainties. The ongoing need for countries to deleverage suggests that economic growth will remain below pre-crisis level for some time, especially in Europe. In its latest forecast, the International Monetary Fund again lowered the growth rates for the world economy and both industrial and emerging markets for 2012 and 2013. GDP growth rates are however expected to increase slightly in 2013 compared with 2012. Neither an intensification of the debt crisis nor a significant drop of China’s economic growth is anticipated. The growth rates in the emerging countries of Asia and Africa are still expected to remain significantly above those of the mature markets in North America and Europe.

In the Western and Northern Europe Group area, HeidelbergCement continues to expect a slight decline in demand and therefore falling sales volumes of cement and aggregates. This is mainly due to the weather related strong level of sales volumes in the previous year, the cold spell in Europe in the first quarter of 2012, and the decline in demand in the United Kingdom and the Netherlands. In the Eastern Europe-Central Asia Group area, HeidelbergCement continues to expect further growth in Russia and Central Asia driven by solid demand and additional capacities, while sales volumes are anticipated to decline in Eastern Europe due to weakened demand especially in Poland and the Czech Republic. Based on the strong development in the first nine months of the year in North America, the company expects increasing demand for cement due to the recovery of investments in private residential construction and commercial construction. HeidelbergCement anticipates the demand for building materials from the raw materials industry in Canada and the United States to further support its sales volumes. In the Group areas Asia-Pacific and Africa-Mediterranean Basin, HeidelbergCement continues to expect a sustained positive demand trend.

Regarding costs, HeidelbergCement anticipates a further increase in energy and raw material prices – albeit significantly weaker compared to the previous year – as well as rising personnel costs. HeidelbergCement aims to offset the cost increase and recover some of the margins lost in 2011 by cost reduction measures, operational efficiency and targeted price increases. The Managing Board sticks to its target of further increasing revenue and operating income in 2012 compared to the previous year.

“The achieved margin improvement and net debt reduction in the third quarter underline that we are well on our way to reach our targets for 2012”, explains Dr. Bernd Scheifele. “However, macroeconomic risks remain meaningful. The need for countries to deleverage will likely dampen volume growth in mature markets for the foreseeable future. In addition, we still have not recovered the margin loss from increasing energy costs. As such, we will unabatedly continue our efforts to reduce costs and improve efficiency and will continue to right-size capacities where necessary. On top, we are pushing further margin improvements with two pricing initiatives for cement and aggregates. Deleveraging remains the highest priority for us, in order to regain our investment grade rating. We will also continue our successful strategy of targeted investments to expand cement capacities in the growth markets of Asia, Africa, and Eastern Europe. More than 5 million tonnes of additional cement capacities are expected to be commissioned in emerging markets in 2013. Operating from a strong German base and with excellent positions in attractive growth markets – in both emerging and industrialised countries – HeidelbergCement is very well positioned to benefit over-proportionally from the continued economic growth.”

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