The FINANCIAL — In the second quarter, the sales volumes of HeidelbergCement’s building materials rose substantially as a result of the consolidation of Italcementi.
On a pro forma basis, i.e. taking into account Italcementi’s deliveries in the same period of the previous year, sales volumes declined slightly. Growth in sales volumes was impaired by fewer working days due to Easter and the end of Ramadan as well as rainy weather, especially in the South, Northeast and Midwest of the USA.
The Group’s cement and clinker sales volumes increased by 47% to 32.8 million tonnes (previous year: 22.3) as a result of the acquisition. On a pro forma basis, sales volumes declined slightly by 1%. The strongest increase on a pro forma basis was recorded in North America followed by Northern and Eastern Europe-Central Asia as well as Africa-Eastern Mediterranean Basin. In Asia-Pacific, cement sales volumes declined due to festivities at the end of Ramadan in June and the resulting fewer selling days in Indonesia. Sales volumes in North Africa decreased accordingly. This decline was more than offset by the significant growth in sales volumes in the countries in sub-Saharan Africa, according to HeidelbergCement.
Deliveries of aggregates also registered an acquisition-related rise of 18% to 81.4 million tonnes (previous year: 69.1). Taking into account Italcementi’s deliveries in the same period of the previous year, the growth amounts to 5%. Higher sales volumes in all Group areas, excluding Western and Southern Europe and North America, and particularly the consolidation of the Mibau Group in Northern Europe contributed to this increase.
Deliveries of ready-mixed concrete also rose as a result of the consolidations by 22% to 12.2 million cubic metres (previous year: 10.0). On a pro forma basis, sales volumes fell by 6%. Asphalt sales volumes declined by 5% to 2.4 million tonnes (previous year: 2.6).
In the first half of 2017, cement and clinker sales volumes rose as a result of the consolidation by 52% to 60.7 million tonnes (previous year: 39.9). Deliveries of aggregates climbed by 20% to 142.3 million tonnes (previous year: 118.4) and of ready-mixed concrete rose by 26% to 22.6 million cubic metres (previous year: 17.9). Asphalt sales volumes fell slightly by 1% to 3.9 million tonnes (previous year: 4.0).
On a pro forma basis, cement and clinker sales volumes declined slightly by 1%. Deliveries of aggregates increased by 6%, whereas deliveries of ready-mixed concrete declined by 4%.
Accelerated growth of revenue and result from current operations before depreciation and amortisation due to the Italcementi acquisition
As a result of the consolidation of Italcementi, revenue and result from current operations before depreciation and amortisation increased significantly. Group revenue rose by 29% in the second quarter to €4,611 million (previous year: 3,575). The result from current operations before depreciation and amortisation improved by 22% to €964 million (previous year: 791). After depreciation and amortisation, the result from current operations rose by 14% to €683 million (previous year: 601).
On pro forma basis, revenue increased slightly. The result from current operations before and after depreciation and amortisation, however, declined slightly by 1% and 3%, respectively. Cost inflation and a decline in sales volumes due to fewer working days as well as bad weather were almost offset by successful price increases and the realisation of synergies. In California, weather-related production problems prevented a more significant improvement in results. The results in the emerging countries of Asia and Africa were significantly below prior year due to a sharp drop in prices in Indonesia, Thailand and Ghana and the weakening of the Egyptian Pound. In Northern and Eastern Europe, however, the positive development continued.
“In the light of the difficult general conditions, we achieved a good result in the second quarter,” says Dr. Bernd Scheifele, Chairman of the Managing Board. “We were able to almost offset the effect of higher energy costs, bad weather conditions, fewer working days, and increased competition in some emerging countries. The synergies from the Italcementi acquisition are clearly visible in the results. Thanks to the ongoing refinancing of our maturities at more favourable terms, we could further improve the financial result and thereby make an important contribution to the further rise in our cash flow. All in all, we have again increased the Group share of profit for the period despite the challenging environment.”
The additional ordinary result decreased by €8 million to €-20 million (previous year: -12). The financial result improved by €8 million to €-99 million (previous year: -107). Net interest expenses were reduced by €17 million. In contrast, the currency result and other financial result developed slightly negatively.
The profit before tax from continuing operations increased by €92 million to €585 million (previous year: 493). Expenses relating to income taxes rose significantly by €81 million to €176 million (previous year: 95) due to the first-time consolidation of Italcementi and a non-recurring effect in Indonesia in the prior year. Normalisation of tax expenses is expected by the end of the year. Net income from continuing operations increased to €409 million (previous year: 398). The net loss from discontinued operations remained stable at €-12 million and represents operations of the Hanson Group that were discontinued in previous years.
The profit for the period rose to €397million (previous year: 385). The profit relating to non-controlling interests fell by around €28 million to €39 million (previous year: 67) mainly due to a weaker result in Indonesia. The Group share of profit consequently improved by 12% to €358 million (previous year: 318) and earnings per share rose to €1.80 (previous year: 1.69).
In the first half of the year, Group revenue rose significantly by 31% to €8,394 million (previous year: 6,407) as a result of the consolidation. Result from current operations before depreciation and amortisation improved by 21% to €1,347 million (previous year: 1,112) and after depreciation and amortisation it rose by 7% to €791 million (previous year: 739). On a comparable pro forma basis*, revenue increased slightly compared to the previous year’s level. Result from current operations before and after depreciation and amortisation declined slightly by 1% and 4%, respectively. The additional ordinary result declined by €20 million to €-36 million (previous year: -16), mainly due to expenses from the disposal of subsidiaries, integration costs, as well as other non-recurring income and expenses. The financial result improved by €40 million to €-181 million (previous year: -221), particularly due to a reduction in interest expenses and an improved other financial result. Profit before tax from continuing operations increased by €87 million to €594 million (previous year: 507). Expenses relating to income taxes increased by €93 million to €224 million (previous year: 131). As a result, net income from continuing operations declined slightly to €370 million (previous year: 376). Net loss from discontinued operations improved by €14 million to €-8 million (previous year: -22). The profit for the period rose to €362 million (previous year: 354). The profit attributable to non-controlling interests declined to €74 million (previous year: 108). The Group share of profit therefore improved to €288 million (previous year: 246) and earnings per share rose to €1.45 (previous year: 1.31).
At the end of the second quarter of 2017, the number of employees at HeidelbergCement stood at 60,993 (previous year: 46,632). The increase of 14,361 employees is primarily attributable to the acquisition of Italcementi.
Refinancing on favourable terms continued
In the second quarter, HeidelbergCement repaid a bond of €500 million with a coupon of 4.75%. A new ten-year bond of €500 million with a fixed coupon of 1.5% was placed for refinancing purposes. Owing to its investment grade credit rating and the low interest environment, HeidelbergCement is able to refinance its maturities on substantially more favourable terms, thereby improving the interest result and cash flow.
Net debt at the end of the second quarter amounted to €10.1 billion, which was around €4.3 billion more than at the end of the same quarter of the previous year as a result of the acquisition. The rise in net debt compared to the end of the first quarter is mainly due to a rise in working capital following strong business activities in May and June as well as higher investments due to the acquisition of operations in the Northwest of the USA. Gearing (net debt-to-equity ratio) at the end of the second quarter rose correspondingly to 62.3% (previous year: 38.1). Leverage (net debt-to-result from current operations before depreciation and amortisation ratio) increased to 3.2x (previous year: 2.2x). We confirm our target of bringing leverage back down to around 2.5x or less by the end of the year and we expect a reduction of net debt based on a strong cash flow in the second half of 2017. The liquidity reserve fell from €5.4 billion to €4.4 billion. At the end of the same quarter of the previous year, the liquidity reserve was exceptionally high due to the prefinancing of the Italcementi acquisition.
Integration of Italcementi is progressing well
The implementation of the measures to integrate Italcementi is still progressing well. In North America, the operational margin of the acquired plants was already significantly increased. The synergy target for 2017 of €175 million was already achieved in the first half year. We are confident to reach total synergies of around €500 million.
Outlook for 2017 confirmed
In its latest forecast from July 2017, the International Monetary Fund (IMF) continues to expect a rise in global economic growth from 3.2% in 2016 to 3.5% in 2017. Beside accelerating growth in the USA, an improved economic outlook for the Eurozone and increasing growth rates of the emerging markets are drivers behind this trend. Higher growth rates are particularly expected for the countries in Africa south of the Sahara and in the countries of Eastern Europe.
Global risks have increased considerably compared with the previous year. This relates both to geopolitical and macroeconomic risks. Among the geopolitical risks are notably the conflicts in the Middle East and in eastern Ukraine. In terms of macroeconomic risks, special mention must be made of an increase in energy prices and inflation, the unpredictable consequences of a downturn in the Chinese economy, the impact of monetary policy measures, particularly by the US Federal Reserve, and the shift of political measures towards protectionism.
In North America, HeidelbergCement, in conformity with the IMF, expects a stronger economic recovery and consequently a further increase in demand for building materials. In Western and Southern 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 the stable economic development in Benelux. In Northern Europe, we expect a continuation of the good market conditions. In Eastern Europe, we anticipate growing demand for building materials as a result of the EU infrastructure programme, among other factors. The crisis in eastern Ukraine is continuing to impair the country’s sales volumes and result. The economic situation in Russia and Kazakhstan has improved following the increase in the oil price. In the African markets, we expect an acceleration in demand growth together with a persistent level of competition. In Asia, HeidelbergCement anticipates an upturn in demand, thanks in particular to increasing infrastructure investments in Indonesia. Nevertheless, a further decline in demand and an increase in excess capacities are expected in China. The impact on export volumes is limited, however, because a large proportion of Chinese capacities is located inland.
In view of the overall positive development of demand, HeidelbergCement still projects increasing sales volumes of the core products cement, aggregates, and ready-mixed concrete.
HeidelbergCement estimates that the cost base for energy will increase moderately in 2017 as a result of the rising oil and coal prices since the beginning of 2016. A slight to moderate rise in the cost of raw materials and personnel is expected. HeidelbergCement remains focused on the continuous improvement of efficiency and margins. With this in mind, we are implementing “Continuous Improvement” programmes in the cement and aggregates business lines to establish a culture of consistent advancement 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 commenced at the beginning of 2015, and the “Aggregates CI” programme for the aggregates business line was introduced at the beginning of 2016. We also continue to optimise our logistics with the “LEO” programme, which has the goal of reducing costs by €150 million over a period of several years. In addition, we launched the new efficiency improvement programme “Competence Center Readymix” (CCR) in the ready-mixed concrete business at the end of 2016. Over a three-year period, the optimisation of logistics and concrete recipes is expected to achieve an improvement in result of €120 million.
In 2017, we anticipate a significant decrease in financing costs on account of our disciplined cash flow management and the refinancing of maturities on more favourable terms.
On the basis of these assumptions, the Managing Board has set the goal for 2017 of increasing revenue moderately and the result from current operations before exchange rate and consolidation effects by a mid-single to double-digit percentage on a pro forma basis – i.e. taking into account the contributions of Italcementi for the first half of 2016 – as well as significantly improving the profit for the financial year before non-recurring effects.
“We have seen a clear upward trend since Easter and expect a significantly stronger development in the second half of the year,” explains Dr. Bernd Scheifele. “We confirm our outlook for 2017. Strategically, we will maintain our focus on concluding the integration of Italcementi and reducing net debt through disciplined cash flow management. Our declared aim is to maintain a long-term investment grade rating. We will focus our investments on projects which strengthen our market position and offer synergy potential. In operational terms, we further concentrate on the following five areas: increase in customer satisfaction, high operating leverage, cost leadership, vertical integration, and optimised geographical positioning. As a result, we will increase our efficiency and the satisfaction level of our customers, especially in the world’s rapidly growing metropolitan areas. We will continue to drive forward our global programmes to optimise costs and processes. Furthermore, we will deal more intensively with potentials arising from the digitisation of our value chain.”
“We remain cautiously optimistic about 2017,” continues Dr. Bernd Scheifele. “While the overall outlook for the global economy is positive, major macroeconomic and particularly geopolitical risks remain. HeidelbergCement will benefit from the good and stable economic development in the industrial countries, above all in the USA, Canada, Europe, and Australia. These countries generate more than 60% of our revenue. With the acquisition of Italcementi and its rapid integration, we have impressively demonstrated our tremendous business potential and strong momentum. From a global perspective, we are well positioned to achieve our strategic goals – continuous growth and sustainable returns for our shareholders.”
