HeidelbergCement publishes Q1 2016 results

HeidelbergCement achieves significant increase in results in first quarter of 2016

• Growth in sales volumes of cement, aggregates, and ready-mixed concrete
• Group revenue stable at €2.8 billion (like-for-like* +1%)
• Operating income improved by 19.9% to €138 million (previous year: 115; like-for-like* +34.9%)
• Margin improvement in all business lines
• Net debt reduced to €5.9 billion (previous year: 6.1)
• Outlook for 2016 raised:
  • Positive outlook for the global economy; geopolitical and macroeconomic risks remain
  • Increase in sales volumes of cement, aggregates, and ready-mixed concrete expected
  • Moderate rise in revenue* and high single to double digit increase in operating income* and profit for the financial year**
  • Conclusion of the Italcementi takeover in the second half of 2016
  • HeidelbergCement well positioned to benefit from continued recovery, particularly in the USA and the United Kingdom, Northern Europe, and Australia

*Adjusted for currency and consolidation effects; **adjusted for non-recurring effects

Changes in the reporting structure

Starting with the first quarter of 2016, we have reorganised our Group areas and thus the reporting structure. The changes were made in the context of the generation change on the Managing Board and the intended acquisition of Italcementi. HeidelbergCement is divided into six Group areas:

• Western and Southern Europe: Belgium, Germany, Netherlands, United Kingdom, and Spain
• Northern and Eastern Europe-Central Asia: Denmark, Iceland, Norway, Sweden, and the Baltic States as well as Bosnia-Herzegovina, Croatia, Czech Republic, Georgia, Hungary, Kazakhstan, Poland, Romania, Russia, Slovakia, and Ukraine
• North America: Canada and USA
• Asia-Pacific: Bangladesh, Brunei, China, India, Indonesia, Malaysia, Singapore, and Australia
• Africa-Eastern Mediterranean Basin: Benin, Burkina Faso, DR Congo, Ghana, Liberia, Sierra Leone, Tanzania, Togo, as well as Israel and Turkey
• As before, Group Services comprise our trading activities.

The only changes concern the shift of the northern European countries from the former Western and Northern Europe Group area to Northern and Eastern Europe-Central Asia and of Spain from the former Africa-Mediterranean Basin Group area to Western and Southern Europe.

Q1 sales volumes benefit from market recovery in North America, Europe, and Asia

The continued recovery of the construction industry in North America and Europe as well as a trend reversal in Asia, particularly in Indonesia, has contributed to a positive development of sales volumes in the first quarter. In the North America Group area, sales volumes for cement and aggregates even grew in the double-digit percentage range. The development in the North and South regions, as well as in Canada for aggregates, was particularly pleasing. In Europe, sales volumes for cement increased in Germany, Benelux, Northern Europe, and Romania. While cement sales volumes rose in all countries of Asia, they remained at approximately the previous year’s level in Africa. In Indonesia, the demand situation improved following the delayed start to infrastructure projects.

The Group’s cement and clinker sales volumes rose by 4.5% to 17.6 million tonnes (previous year: 16.8). Deliveries of aggregates across the Group amounted to 49.3 million tonnes (previous year: 46.3), representing an increase of 6.5%. Deliveries of ready-mixed concrete rose marginally by 1.3% to 8.0 million cubic metres (previous year: 7.9). Asphalt sales volumes fell by 11.9% to 1.4 million tonnes (previous year: 1.6).

Revenue stable – results considerably improved

Group revenue remained virtually stable in the first quarter of 2016 at €2,832 million (previous year: 2,835). Excluding consolidation and exchange rate effects, the increase amounted to 0.9%. This primarily reflects the positive development of sales volumes of cement, aggregates, and ready-mixed concrete. Changes to the scope of consolidation of €57 million had a positive impact on revenue. Exchange rate effects, however, reduced revenue by €83 million.

Operating income before depreciation (OIBD) improved by 7.2% to €321 million (previous year: 299). Operating income increased significantly by 19.9% to €138 million (previous year: 115). Excluding exchange rate and consolidation effects, the rise in operating income before and after depreciation and amortisation amounted to 13.0% and 34.9%, respectively. Besides the growth in sales volumes and price increases in core markets, the declining cost of fuels in particular also made a contribution to the positive development of results.

“In operational terms, the first quarter of 2016 was the best since the financial crisis and thus continues the positive trend of the previous year”, commented Dr. Bernd Scheifele, Chairman of the Managing Board. “The continued recovery in our mature markets and the improved demand situation in Asia-Pacific, especially in Indonesia, made a significant contribution. We were able to raise the margins in operational terms in all business lines thanks to our margin improvement programmes and price increases in core markets. Furthermore, we have benefited from the declining fuel costs.”

The additional ordinary result fell by €20 million to €-4 million (previous year: 16). The financial result substantially improved by €43 million to €-114 million (previous year: -158). Net interest expenses were reduced by a further €19 million. The improved currency results added to the positive development.

Profit before tax from continuing operations rose considerably by €47 million to €14 million (previous year: -33). Expenses relating to taxes on income remained almost unchanged at €36 million (previous year: 34). As a result, net loss from continuing operations improved to €-21 million (previous year: -67). Net loss from discontinued operations of €-10 million accounts for operations of the Hanson Group that were discontinued in previous years.

Overall, the typical seasonal loss for the period was reduced considerably to €-31 million (previous year: -80). The profit attributable to non-controlling interests declined by €2 million to €41 million (previous year: 43). The Group share consequently improved to €-72 million (previous year: -123).

At the end of the first quarter of 2016, the number of employees at HeidelbergCement stood at 45,979 (previous year: 45,205). The increase of 774 employees essentially results from two opposing developments: on the one hand, around 900 jobs were cut in particular in Eastern Europe, Central Asia, Indonesia, and India in connection with efficiency increases in sales and administration as well as location optimisations. On the other hand, the number of employees in Northern Europe rose by just under 1,400 due to the merger of our Swedish subsidiary Abetong AB and Contiga AB to form Nordic Precast Group AB. In addition, the workforce in Australia grew by more than 300 employees mainly as a result of the purchase of the aggregates company Rocla Quarry Products and the insourcing of truck drivers.

OIBD improved – net debt reduced

Net debt at the end of the first quarter amounted to €5.9 billion, thus more than €200 million less than at the end of the same quarter of the previous year. The further increase in operating cash flow contributed to the reduction in net debt. The net debt-to-equity ratio (gearing) at the end of the first quarter remained almost unchanged at 38.7% (previous year: 38.5%). Leverage fell to 2.2x and was therefore within the targeted range of 1.5x to 2.5x. The liquidity reserve rose from €4.4 billion to €4.9 billion as a result of measures for the pre-financing of the Italcementi takeover.

Takeover of Italcementi on track

The takeover of Italcementi is making good progress. At the start of April, HeidelbergCement formally filed the purchase of Italcementi with the European Commission in order to receive the required approval. Discussions with the American competition authority are also at an advanced stage. Decisions on these two last outstanding anti-trust procedures are expected by end of May/beginning of June. At the same time, preparations for divestments necessary in this context in the USA and Europe are underway. Banks have already been mandated to support the sales process. There is a very high level of interest in the market positions available for sale in the USA and Belgium.

In the first quarter of 2016, HeidelbergCement implemented measures for the pre-financing of the Italcementi takeover at attractive conditions. Initially, debt certificates totalling €645 million were placed. With a term that expires by 20 January 2022, these certificates consist of one tranche with a floating rate and one tranche with a fixed rate. The fixed rate is 1.85% per year, and the variable rate is 1.5% above the six-month Euribor rate. A seven-year bond with an issue volume of €1 billion and a fixed interest rate of 2.25% was also placed. These are the most favourable conditions that HeidelbergCement has ever achieved in this maturity segment.

Outlook for 2016 raised

The anticipated development of the HeidelbergCement Group, without taking the Italcementi takeover into consideration, is described in the following.

In its latest forecast, the International Monetary Fund (IMF) lowered the growth rates for the global economy, but continues to expect a slight acceleration in economic growth compared with the previous year. The downward revision of the forecast is, on the one hand, owing to the sustained headwind for countries exporting raw materials as a result of the low raw material prices and, on the other hand, due to a slight weakening of growth in mature markets because of abated investment activities. The IMF currently predicts that the growth rate in the industrial countries will stagnate in 2016 and increase to some extent in the emerging countries, before growth will start to accelerate in 2017. Uncertainties concerning the future development of the oil price represent a risk factor for the global economic trend. These continue to include the effects of monetary policy measures, particularly those of the US Federal Reserve, on capital flows and exchange rates in the emerging countries, as well as geopolitical risks related to the crises and conflicts in the Middle East and eastern Ukraine.

In North America, HeidelbergCement, in conformity with the IMF, expects a continuing economic recovery and consequently a further increase in demand for building materials. In Western and Northern Europe, positive market development is expected. This is based on the continued recovery in the United Kingdom, the consistent solid condition of the German economy, and stable economic growth in Northern Europe and Benelux. In Eastern Europe, we anticipate growing demand for building materials as result of the EU infrastructure programme, among other things. The crisis in eastern Ukraine is continuing to impair the sales volumes and results of the country. The economic situation in Russia and Kazakhstan remains difficult due to the low oil price. In the African markets, we expect a rise in competition besides the continuing growth in demand. In Asia, HeidelbergCement anticipates a general upturn in demand, thanks in particular to increasing infrastructure investments in Indonesia. In China, however, a further decline in demand and an increase in excess capacities are expected. The repercussions on exports are limited because a large proportion of Chinese capacities is located inland.

In view of the overall positive development of demand and the commissioning of new capacities, HeidelbergCement anticipates an increase in sales volumes of the core products cement, aggregates, and ready-mixed concrete.

HeidelbergCement estimates that the cost base for energy will remain stable in 2016, supposing that prices will drop and sales volumes will increase throughout the year. A moderate rise in the cost of raw materials and personnel is expected. HeidelbergCement further focuses on the continuous improvement of efficiency and margins. To this end we started the “Continuous Improvement” programmes in the cement and aggregates business lines to establish a culture of continuous improvement of operational and commercial work processes at employee level. Process optimisations are expected to achieve a sustainable improvement in results of at least €120 million in both business lines over a three-year period. The “CIP” programme for the cement business line started at the beginning of 2015, and the “Aggregates CI” programme for the aggregates business line was launched at the start of 2016. We also continue to optimise our logistics with the “LEO” programme, which has the goal of reducing costs by a total of €150 million over a period of several years. In addition, the “FOX” programme in purchasing is expected to achieve cost savings of around €100 million.

In 2016, we anticipate – without taking into account the takeover of Italcementi – a significant decrease in financing costs due to disciplined cash flow management and the refinancing of maturities at more favourable terms.

On the basis of these assumptions, the Managing Board has set the following goals for 2016: Excluding exchange rate and consolidation effects, a moderate increase in revenue and a high single to double digit increase in operating income and – before non-recurring effects – profit for the financial year are expected.

“The year 2016 has started better than expected,” says Dr. Bernd Scheifele. “We have therefore increased our result prospect for the current year from a moderate to a high single to double digit increase. We will concentrate on the strategic areas of focus published in 2015: shareholder returns and continuous growth. Key prerequisites for the achievement of these goals are investment discipline, a solid investment grade rating, and a progressive dividend policy. Furthermore, we are concentrating on four strategic levers: high operating leverage, maintenance of cost leadership, pronounced vertical integration, and optimal geographical positioning. In this way we will increase our efficiency and the satisfaction of our customers, especially in the world’s rapidly growing metropolitan areas. Our global programmes to optimise costs and processes and to increase margins will once again be consistently pursued in 2016. These include, in particular, the Continuous Improvement Programmes for the aggregates (“Aggregates CI”) and cement (“CIP”) business lines, as well as “FOX” for purchasing.”

“We are confident about 2016,” continues Dr. Bernd Scheifele. “The outlook for the global economy is positive, even if major macroeconomic and particularly geopolitical risks still exist. HeidelbergCement will benefit from the good and stable economic development in the industrial countries, above all in the USA, the United Kingdom, Germany, Northern Europe, and Australia. These countries generate approximately 60% of our revenue. With the acquisition of Italcementi, we are strengthening our global market position. In our core business lines aggregates, cement, and ready-mixed concrete, we will occupy first, second, and third place on a global scale. In the next few years, we intend to consistently develop the characteristics that set HeidelbergCement apart from the competitors: cost leadership and operational excellence. At the same time, we plan to achieve a sustainable level of earnings power for shareholders that is unprecedented in the Group.”

Overview of the HeidelbergCement Group

1) Adjusted for currency and consolidation effects
2) Attributable to parent entity

Financial Calendar

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