The FINANCIAL — HeidelbergCement has brought the 2017 financial year to a successful close despite a challenging environment.
The decisive factors were the successful integration of Italcementi and the strong operational development, especially as a result of the successful management of energy costs and the programmes to increase efficiency and margins.
“2017 was an exceptional year for HeidelbergCement,” states Dr. Bernd Scheifele, Chairman of the Managing Board of HeidelbergCement. “In its history stretching back over 140 years, HeidelbergCement has never sold more cement, concrete, gravel, and sand than in 2017. New record figures were also achieved in revenue and result from current operations. Moreover, we have fulfilled the promise we made when we announced the Italcementi acquisition, which was to create added value for our shareholders. The successful integration of Italcementi played a key role in this respect. The creation of value is reflected in the relatively low non-recurring costs of around €345 million, compared with the synergies of €513 million realised by the end of 2017. As a result, we were able to raise the earnings per share by a disproportionately high 36% and propose the eighth consecutive increase in dividends with a new record value of €1.90.”
Considerable improvement in result – premium earned on cost of capital
The sales volumes of cement, aggregates, and ready-mixed concrete increased significantly and reached new record figures, particularly as a result of the acquisition of Italcementi. On a pro forma basis, i.e. taking into account the contributions of Italcementi for the first half of 2016, sales volumes rose slightly for cement and moderately for aggregates, while a slight decline was recorded in ready-mixed concrete. In cement and aggregates, we benefited from the continued recovery in North America and Europe, the positive development in Australia, and a turnaround in individual emerging countries, such as Indonesia and Ghana.
Revenue rose by 14% to €17.3 billion (previous year: 15.2) as a result of consolidation. Revenue was impaired by negative currency effects of €311 million. On a comparable pro forma basis, revenue increased by 2%.
The result from current operations rose by 13.5% to €2.2 billion; on a comparable pro forma basis*, the increase amounted to 10%, which is line with the outlook. The positive development of results was partly due to the revenue growth but also largely to the effective management of energy costs and the fact that the synergy goals in connection with the Italcementi acquisition were exceeded considerably.
The negative contribution of the additional ordinary result fell significantly to €-133 million (previous year: -324). As in the previous year, this figure primarily includes restructuring and integration expenses connected with the Italcementi integration, as well as impairments and other non-recurring expenses.
The financial result improved significantly by €102 million to €-391 million (previous year: €-493). Besides the reduction of €89 million in interest expenses, this figure was positively affected by the other financial result, which rose by €18 million.
Income taxes increased substantially by €292 million to €606 million (previous year: 314). In particular, the revaluation of deferred tax assets in connection with the US tax reform, which amounted to €285 million, contributed to this rise.
Overall, this resulted in a significantly increased profit for the financial year of €1,058 million (previous year: 831). Adjusted for the non-recurring effects from the additional ordinary result and the US tax reform, the profit for the financial year improved significantly by 28% in line with the forecast, reaching a new record figure of around €1.4 billion. The Group share rose to €918 million (previous year: 657). Earnings per share improved by 36% to €4.62; adjusted for non-recurring effects, earnings per share rose by 32% to €6.73. Owing to the positive development of results, HeidelbergCement earned a significant premium on the cost of capital in 2017. The return on invested capital (ROIC) increased from 7.0% in 2016 to 7.2%, thereby significantly exceeding the weighted average cost of capital (WACC) of 6.6%, according to HeidelbergCement.
Italcementi integration faster than planned – synergy target increased
Synergies from the Italcementi integration are being realised more quickly than expected. HeidelbergCement already exceeded its synergy target of €470 million by the end of 2017 with a total of €513 million – a year earlier than planned. As a result of this pleasing progress, HeidelbergCement has raised its synergy target to €550 million by the end of 2018. The non-recurring costs recorded so far for integration and restructuring were considerably lower than the realised synergies of around €345 million.
Free cash flow significantly improved
Free cash flow increased by 10% to €1.4 billion as a result of the consolidation of Italcementi and the operational performance. Thanks to disciplined cash flow management, we were able to reduce net debt significantly from €9 billion to just under €8.7 billion at the end of 2017, despite considerable negative exchange rate effects of €-381 million. The net debt-to-equity ratio (gearing) rose slightly to 54.2% (previous year: 50.6) by the end of the year. The dynamic gearing ratio, i.e. the ratio of net debt to result from current operations before depreciation and amortisation, improved to 2.6x (previous year: 2.8x on a pro forma basis). In 2018, we will focus on bringing the dynamic gearing ratio back down to the target range of 1.5x to 2.5x. The liquidity reserve increased from €4.8 billion to €4.9 billion.
Dividend proposal: eighth consecutive increase to record value of €1.90 per share
In view of the positive business development, the Managing Board and Supervisory Board will propose to the Annual General Meeting on 9 May 2018 a significant increase of 19% in the dividend to €1.90 (previous year: 1.60) per share. This dividend proposal is in line with the progressive dividend policy announced previously and reflects our strategic priority of value creation for shareholders and our focus on a solid investment grade rating. This is the eighth consecutive increase in dividends, and the proposed dividend represents a new record figure in the history of HeidelbergCement.
Sustainability – an integral part of the Group strategy
Sustainable business is an integral part of our Group strategy. In 2017, we introduced our Sustainability Commitments 2030, which define the key topics and principles for HeidelbergCement’s future sustainability strategy. These focus on the six areas: economic strength and innovation, occupational health and safety, ecological footprint, circular economy, relationships with our neighbours, as well as compliance with legal standards and transparency. We have made a commitment to accept our share of the global responsibility to limit the worldwide rise in temperature to below 2°C. In line with the target set in Paris, HeidelbergCement aims to reduce its specific CO2 emissions by 30% by 2030 (compared with the 1990 level). We had externally verified that this target and the relevant measures defined by us are in accordance with the roadmap defined by the International Energy Agency (IEA) for our industry. In addition, we play a leading role in major research projects that aim at avoiding CO2 emissions and using them as raw materials.
Outlook for 2018
In its forecast from January 2018, the International Monetary Fund (IMF) expects a further acceleration of global economic growth from 3.7% in 2017 to 3.9% in 2018. In many countries, the economy has started to recover, resulting in a synchronous economic upturn on the broadest scale since 2010. The main drivers behind this trend are, on the one hand, the further acceleration of growth in the USA, boosted by the recently adopted tax reform, and the continuing economic recovery in the eurozone. On the other hand, it is also anticipated that the growth rates in the emerging countries will increase again, despite a further economic slowdown in China. Higher growth rates are expected in particular for countries in North Africa, the Middle East, and in Africa south of the Sahara, partly because of the considerable increase in the oil price over the past year.
The risk situation has not changed, and macroeconomic as well as geopolitical risks remain. In terms of macroeconomic risks, particular mention must be made of the faster than anticipated rise in inflation and in the interest rate in the USA as well as the unpredictable consequences of the downturn in the Chinese economy. The geopolitical risks include, in particular, conflicts in the Middle East, Ukraine, or with North Korea, and any escalation of these situations could have a negative impact on the business environment.
HeidelbergCement will benefit from the good and stable economic development in the industrial countries, above all in the USA, Canada, Germany, the countries of Northern Europe, and Australia. The continued economic upturn, particularly in the countries of Eastern Europe, as well as in France, Spain, and – somewhat less pronounced – in Italy, will also be to our advantage. These countries generate approximately 75% of our revenue. In the growth countries such as Egypt, Indonesia, Thailand, India, and Morocco, as well as in Western and Eastern Africa, we anticipate an ongoing economic recovery.
In view of the overall positive development of demand, HeidelbergCement projects an increase in the sales volumes of the core products cement, aggregates, and ready-mixed concrete.
In terms of costs, we anticipate a further rise in the prices of energy and raw materials; in contrast, the personnel costs will only increase moderately. Our global programmes to optimise costs and processes as well as to increase margins will be further consistently pursued in 2018. These include the Continuous Improvement programmes for the aggregates (“Aggregates CI”), cement (“CIP”), and concrete (“CCR”) business lines, as well as “FOX” for purchasing. As in previous years, we expect these programmes to contribute significantly to further improving our efficiency and result.
On the basis of these assumptions, the Managing Board has set the goal for 2018 of increasing revenue moderately and result from current operations by a mid- to high-single digit percentage before exchange rate and consolidation effects, and significantly improving the profit for the financial year.
“We are confident about 2018,” continues Dr. Bernd Scheifele. “The outlook for the global economy is positive. Nevertheless, major macroeconomic and particularly geopolitical risks still exist. HeidelbergCement is globally well positioned for sustainable and profitable growth. Our strategy is clear: to achieve continuous growth, create long-term value for our shareholders, and safeguard high-quality jobs. We are on track!”