HeidelbergCement reports Q2 2011 results

HeidelbergCement increases turnover and net profit in second quarter – further growth in sales volumes achieved

Highlights Q2 2011 and outlook:

• Sales volumes of cement, aggregates, and ready-mixed concrete further increase in comparison with previous year
• Group turnover at EUR 3.4 billion (+3.0% compared with same quarter of previous year)
• Profit for the period increased to EUR 208 million (+25.2% compared with same quarter of previous year) because of lower financing costs
• Significant rise in energy costs and time lag of price increases, particularly in cement
• Operating income before depreciation (OIBD) declines to EUR 651 million (-6.1% compared with same quarter of previous year)
• "FOX 2013" savings programme progressing according to plan
• Net debt reduced by EUR 492 million compared with same quarter of previous year
• Sustained growth in Asia-Pacific and Africa-Mediterranean Basin and continuing recovery in Europe and, to a lesser extent, North America expected
• Continued focus on increasing efficiency, reducing costs, and raising prices in order to offset increased energy and raw material costs as well as rising inflation

Overview January – June 2011

Q2 sales volumes benefit from recovery in Europe and Central Asia

In the second quarter of 2011, the sustained recovery in demand for building materials in Europe and Central Asia and the continuing growth in the countries of Asia and Africa led to a further increase in sales volumes in all business lines compared with the same quarter of the previous year. In North America, demand continued to develop weakly and was also adversely affected by a very long and harsh winter in Canada and a prolonged rain period in the North of the US; this resulted in a decline in deliveries of cement, aggregates, and asphalt. However, the growth in the other regions clearly outweighed these losses.

During the second quarter, the Group’s cement and clinker sales volumes rose by 8.2% to 23.7 million tonnes (previous year: 21.9). The largest contribution was made by the Eastern Europe-Central Asia Group area, followed by Western and Northern Europe, Asia-Pacific, and Africa-Mediterranean Basin. In Central Asia, the recovery of the construction industry continued. In Western and Northern Europe, cement sales volumes rose in all countries in comparison with the same period of the previous year. Indonesia recorded double-digit growth in sales volumes and was thus able to more than compensate for declining sales volumes in other Asian countries. In comparison with the previous year, HeidelbergCement benefited from the consolidation of cement production in the Democratic Republic of the Congo and the Russian Republic of Bashkortostan. Adjusted for consolidation effects, cement sales volumes grew by 6.0%. Deliveries of aggregates rose by 1.3% to 68.9 million tonnes (previous year: 68.0); adjusted for consolidation effects, the increase amounted to 1.1%. Declining sales volumes in North America were more than offset by growth in all other Group areas, particularly in Asia-Pacific and Western and Northern Europe. Deliveries of ready-mixed concrete rose by 7.8% to 10.2 million cubic metres (previous year: 9.5). Asphalt sales volumes grew by 6.9% to 2.5 million tonnes (previous year: 2.4); adjusted for consolidation effects, the increase amounted to 6.1%.

In the first half of the year, cement and clinker sales volumes rose considerably by 10.7% to 41.0 million tonnes (previous year: 37.1). The deliveries of aggregates increased by 6.4% to 115.2 million tonnes (previous year: 108.3). Deliveries of ready-mixed concrete rose by 13.2% to 18.6 million cubic metres (previous year: 16.4); sales volumes of asphalt increased by 10.5% to 4.1 million tonnes (previous year: 3.7).

Development of turnover and results

Group turnover rose by 3.0% in the second quarter to EUR 3,394 million (previous year: 3,296). Negative exchange rate effects impaired the development of turnover, particularly in North America, but also in Asia-Pacific and Africa-Mediterranean Basin. Excluding exchange rate and consolidation effects, turnover grew by 6.0%, with all Group areas apart from Group Services recording an increase in turnover.

Operating income before depreciation (OIBD) declined by 6.1% to EUR 651 million (previous year: 693). The price increases implemented so far were unable to compensate for the considerable rise in energy costs since the beginning of the year. Operating income decreased accordingly to EUR 441 million (previous year: 492).

"Despite a positive development of turnover and results, we are not satisfied with the second quarter," comments Chairman of the Managing Board Dr. Bernd Scheifele. "We were not able to offset the increase in energy costs in the cement business line with the price increases implemented so far. In contrast, the aggregates business is experiencing a pleasing development, which confirms our strategy of focusing on two core products. Our “FOX 2013” programme is well on schedule and generated cash effective savings of EUR 134 million in the first half of the year."

The additional ordinary result from the second quarter improved by EUR 40.6 million to EUR 4.1 million (previous year: -36.5). In the same quarter of the previous year, restructuring expenses of EUR 43 million had negatively affected results. The financial result improved by EUR 67.7 million to EUR -152.8 million (previous year: -220.5). One-off effects of EUR 57.8 million in connection with the refinancing of the syndicated loan from June 2009 had impaired the financial result in the same quarter of the previous year.

The profit before tax from continuing operations amounts to EUR 319.1 million (previous year: 240.9). Tax expenses in the second quarter of 2011 amounted to EUR 100.6 million (previous year: 67.0). Net income from continuing operations amounted to EUR 218.6 million (previous year: 173.9).

Overall, profit for the period rose by 25.2% in the second quarter to EUR 208.4 million (previous year: 166.5). The Group share of profit improved by 32.6% to EUR 159.2 million (previous year: 120.1).

In the first half of the year, Group turnover rose by 9.5% to EUR 5,996 million (previous year: 5,476). Operating income before depreciation (OIBD) improved by 4.6% to EUR 904 million (previous year: 865) and operating income rose by 5.7% to EUR 501 million (previous year: 474). The profit for the period amounted to EUR 88.2 million (previous year: 4.6) and the Group share to EUR -1.4 million (previous year: -78.7).

At the end of the second quarter of 2011, the number of employees at HeidelbergCement stood at 54,539 (previous year: 53,572). The increase of 967 employees is primarily due to the expansion of our cement capacities in Africa and Russia. This includes the consolidation of cement activities in the Democratic Republic of the Congo and the CJSC "Construction Materials" cement plant in the Russian Republic of Bashkortostan, as well as the increase in the workforce for the new TulaCement plant south of Moscow. In the North America Group area, the number of employees decreased by around 600 following the successful implementation of the "WIN NAM" programme to increase efficiency in sales and administration. Location optimisations and capacity adjustments also led to a significant number of job cuts in the United Kingdom and some Eastern European countries.

"FOX 2013" programme progressing according to plan

The three-year programme for financial and operational excellence ("FOX 2013") presented at the start of January is well on the way to achieving the targeted improvement of EUR 600 million in cash flow over the next three years. Liquidity-related savings of EUR 134 million have already been achieved in the first half of the year. In particular, improvement in working capital and savings against the significantly increasing energy cost indices have been achieved. The first results of the CLIMB project to decrease specific costs in the aggregates business line confirm the targeted potential for improvement.

Net debt reduced in comparison with the previous year – rating improved

At the end of the second quarter of 2011, HeidelbergCement's net debt amounted to EUR 8.57 billion, which corresponds to a reduction of EUR 0.49 billion in comparison with the end of the second quarter of 2010. The gearing remained almost unchanged at 71.4% (previous year: 71.0%). In May, the rating agencies Fitch Ratings and Moody's
Investors Service improved their ratings for HeidelbergCement by one notch to BB+ and Ba1 respectively. Both these rating agencies thus regard HeidelbergCement as being just one notch away from its targeted investment grade rating.

Targeted expansion of market position in growing markets – new projects announced

On 1 April, HeidelbergCement opened a cement terminal in Supsa, western Georgia, to supply cement to the Black Sea coast. In mid-July, we opened our new TulaCement plant in the town of Novogurovsky in the Moscow area. The production facility, which is located approximately 150 km south of Moscow in the Tula region, has a production capacity of 2 million tonnes of cement. This year, HeidelbergCement plans to put new cement capacities totalling more than 6 million tonnes per year into operation.

In June, HeidelbergCement announced the construction of a cement plant in western Kazakhstan, near the city of Aktau, with a capacity of 0.8 million tonnes of cement, which is scheduled to be commissioned by mid-2013. In addition, the cement capacity of the Cesla plant near Saint Petersburg is set to be expanded to 1.5 million tonnes by 2014, with the construction of a new kiln line. In Ghana, we are constructing a new cement mill with a capacity of 1 million tonnes; production is scheduled to start in 2012. An additional new cement mill with a capacity of 650,000 tonnes is scheduled for commissioning in Burkina Faso in 2013. All capacity expansion plans are covered by our existing investment planning.

Outlook

The OECD and IMF still forecast a continuation of the global economic recovery this year, although it should be somewhat weaker than in 2010. The growth rates in the emerging countries of Asia and Africa will remain significantly above those of the mature markets in North America and Europe. However, the IMF's latest growth forecasts showed shifts between individual countries and regions because of the varying development since the beginning of the year. The growth expectations for the US were corrected downwards slightly, with economic data proving to be disappointing so far; in contrast, the prospects for the emerging countries in Eastern Europe and the stronger exporting nations in Western Europe, such as Germany, were raised.

The uncertainties regarding the impact of the debt crisis in the US and in individual countries of the euro zone, as well as the current growth forecasts, have also been reflected in the latest projections of the North American cement association PCA and the European research and advisory network Euroconstruct. The PCA further reduced its expectations for the increase in cement consumption in the US and now anticipates only a very slight recovery for 2011 and 2012. In Europe, the forecasts for cement growth in 2011 for HeidelbergCement's core countries in Scandinavia and Western and Eastern Europe, with the exception of the United Kingdom, were raised; in contrast, the expected growth rates in the euro zone's crisis regions in Southern Europe and Ireland – areas in which we do not have a presence apart from some small-scale activities in Spain – were reduced further. In addition, HeidelbergCement is not active in the crisis regions of North Africa or in Japan.

In the Western and Northern Europe Group area, we generally anticipate further recovery in demand and thus increasing sales volumes for cement and aggregates, which will be primarily driven by strong trends in Scandinavia and Germany. We expect varying trends in the Eastern Europe-Central Asia Group area: while we continue to anticipate consistently weak development in Hungary and Romania, we expect a rise in
demand particularly in Poland and in the Czech Republic. For Central Asia, we anticipate a further increase in demand and a price recovery. Subject to new decisions on debt reduction by the US government, which could also adversely affect expenditure on road construction, we continue to expect a slight volume increase in cement and aggregates in North America driven by sustained investment in road construction in the US and the continuing growth of the oil and raw materials industry in Canada. We expect demand to continue developing positively in the Asia-Pacific and Africa-Mediterranean Basin Group areas.

Following the significant rise in the first half of 2011, the Group expects a sustained high level of energy and raw material prices in the second half of the year, as well as a further increase in inflation, particularly in emerging countries. We also anticipate rising personnel costs, particularly in the mature markets as well as in Asia. HeidelbergCement's aim still is to offset the rise in costs through cost-saving measures as well as targeted price increases and fuel surcharges in the individual markets. Once again, the Managing Board has set the objective of increasing turnover and operating income in 2011 in comparison with the previous year.

"For the whole of 2011, we still anticipate a slow recovery in the mature markets as well as continuing growth in the emerging countries. Our objective is to offset the cost and inflationary pressure, particularly in the cement business line, by means of continued cost-saving measures as well as the price increases already implemented and those planned for the second half of the year," explains Dr. Bernd Scheifele. "We will consistently continue our efforts to reduce costs and increase efficiency within the scope of the "FOX 2013" programme. The CLIMB subproject is well on the way to further increasing margins in our aggregates activities. In addition, we are maintaining our focus on improved cash flow in order to reduce our debt and further improve the key financial ratios. At the same time, we will continue our targeted investments in new cement capacities in growing markets. Thanks to the advantageous geographical presence in attractive markets and as global market leader in aggregates, HeidelbergCement is ideally positioned to benefit over-proportionally from a further global economic recovery."

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