HeidelbergCement reports Q2 2013 results

HeidelbergCement increases revenue and results in second quarter – earnings per share improved significantly

Highlights Q2 2013 and outlook:

• Strong operating performance compared with previous year despite adverse weather conditions in Europe and North America:
  • Group revenue stable at €3.8 billion
  • Operating income before depreciation (OIBD) increased by 6% to €734 million
• Continued margin improvement:
  • Successful price increases in principal markets
  • Savings programmes progressing according to plan
  • Lower energy costs
• Earnings per share more than doubled to €2.19
• Outlook for 2013:
  • Sustained growth in Asia-Pacific and Africa-Mediterranean Basin; continued economic recovery in North America;
  • positive development in Germany, Northern Europe, and UK;
  • Benelux and Eastern Europe weak; central Asia stable
  • Aiming for an increase in revenue and operating income as well as a marked improvement in profit before tax

Overview January – June 2013

*Amounts restated

North America, Asia, and Africa support cement sales volumes in Q2

The development in sales volumes was regionally divided in the second quarter of 2013. While construction activity in Europe and parts of North America was hindered due to heavy rain and flooding in some areas, our cement deliveries benefited from the sustained increase in demand in our Asian and African markets as well as from the continued economic recovery in North America, especially in the southern states.

During the second quarter, the Group’s cement and clinker sales volumes dropped slightly by 0.8% to 24.3 million tonnes (previous year: 24.5). Development in individual Group areas was mixed. The Asia-Pacific Group area experienced the strongest growth in sales volumes, followed by North America and Africa-Mediterranean Basin. Cement sales volumes in the Western and Northern Europe Group area remained almost stable. Deliveries in the United Kingdom were more than 10% above the values of the previous year due to the emerging recovery in private residential construction. Sales volumes in Germany and in the bordering countries of Eastern Europe were adversely affected by heavy rainfall and flooding. The Eastern Europe-Central Asia Group area recorded a decline in sales volumes of more than 10%. Poland, Romania, and the Czech Republic were the most severely affected. In addition, the harsh austerity policy of these countries had a negative effect on public infrastructure construction. Deliveries of aggregates declined by 2.2% to 65.6 million tonnes (previous year: 67.1); adjusted for consolidation effects, the decrease amounted to 3.0%. Rising sales volumes in the United Kingdom and Australia could not offset the volume losses experienced in many European countries. Aggregates sales volumes in North America remained almost stable. Deliveries of ready-mixed concrete rose by 4.5% to 10.9 million cubic metres (previous year: 10.4). The key growth drivers were the markets of Indonesia and Malaysia. Asphalt sales volumes declined marginally by 1.1% to 2.3 million tonnes (previous year: 2.3).

In the first half of the year, cement and clinker sales volumes decreased slightly by 0.8% to 42.4 million tonnes (previous year: 42.7). While deliveries of aggregates fell by 5.7% to 107.5 million tonnes (previous year: 114.1), deliveries of ready-mixed concrete rose by 1.6% to 18.8 million cubic metres (previous year: 18.5); asphalt sales volumes declined by 4.0% to 3.5 million tonnes (previous year: 3.7).

Development of revenue and results

Group revenue rose by 0.5% in the second quarter to €3,799 million (previous year: 3,781). Successful cement and aggregates price increases had a positive impact on revenue growth in key market regions. However, exchange rate effects adversely affected revenue development in all Group areas. Excluding exchange rate and consolidation effects, revenue grew by 1.8%, with all Group areas recording an increase in revenue, except for Eastern Europe-Central Asia.

Operating income before depreciation (OIBD) improved by 5.6% to €734 million (previous year: 696). The corresponding margin increased by 90 basis points to 19.3%. In the second quarter, margins increased in all business areas as well as in the Group areas North America, Asia-Pacific, Africa-Mediterranean Basin, and Europe in total. Operating income rose by 6.4% to €524 million (previous year: 493). Successful price increases and declining energy and raw material prices contributed to the improvement in results. In the second quarter, currency and consolidation effects were offset within operating income.

“HeidelbergCement has successfully continued the positive earnings development in the second quarter despite challenging conditions”, stated Dr. Bernd Scheifele, Chairman of the Managing Board. “The measures we introduced to improve margins are showing results. We were able to implement price increases in our principal markets, and our efficiency improvement programmes are progressing according to plan.”

The additional ordinary result from the second quarter improved by €71.1 million to €27.1 million (previous year: -44.0), helped particularly by profits from the divestment of a non-controlling interests in a precast concrete producer in Saudi Arabia. Furthermore, the same quarter of the previous year included impairment losses on goodwill and property, plant, and equipment in Spain totalling €25.5 million as a technical reaction to the increase in the risk interest rate in Spain. The financial result improved slightly by €2.0 million to €-149.3 million (previous year: -151.3) mainly due to a decrease in net interest expenses by 13% to €126 million.

Profit before tax from continuing operations improved considerably by 32.3% to €415.7 million (previous year: 314.3). Tax expenses in the second quarter of 2013 amounted to €43.0 million (previous year: 83.4). The decrease was primarily due to the capitalisation of deferred taxes arising from losses carried forward. As a result, net income from continuing operations rose to €372.7 million (previous year: 231.0).

A positive final decision of the Supreme Court of California regarding the Hanson asbestos claims in the USA has led to a marked reduction in the risk position. As a consequence, net income from discontinued operations increased significantly to €96.2 million (previous year: 13.8).

Overall, profit for the period rose notably by 91.6% in the second quarter to €468.9 million (previous year: 244.7). The share of results attributable to non-controlling interests fell by €5.5 million to €59.0 million (previous year: 64.5). This was mainly the result of the increase in the stake in the Russian cement producer CJSC Construction Materials in the Republic of Bashkortostan from 51% to 100%. The Group share increased by 127.3% to €409.9 million (previous year: 180.3). Accordingly, earnings per share improved considerably to €2.19 (previous year: 0.96).

In the first half of the year, Group revenue decreased slightly by 0.3% to €6,560 million (previous year: 6,580). In contrast, operating income before depreciation (OIBD) improved by 5.1% to €953 million (previous year: 907); operating income increased by 7.0% to €540 million (previous year: 505). The profit for the first half of the financial year rose significantly to €284.5 million (previous year: 85.7). The profit attributable to non-controlling interests decreased to €109.5 million (previous year: 113.0). The Group share therefore improved considerably to €175.0 million (previous year: -27.3).

At the end of the first half of 2013, the number of employees at HeidelbergCement stood at 53,566 (previous year: 54,362). The decrease of 796 employees results essentially from two opposing developments: on the one hand, the number of jobs in the North America Group area, the United Kingdom, Benelux, Spain, and some Eastern European countries declined by almost 2,000 as a result of efficiency increases in sales and administration, location optimisations, and capacity adjustments; on the other hand, more than 900 new employees were hired in growth markets such as India and Indonesia. Furthermore, our number of employees increased by around 300 due to the increase of our share in the proportionately consolidated cement company Cement Australia and the acquisition of the remaining 50% in the hitherto proportionately consolidated Midland Quarry Products, United Kingdom.

Net debt close to prior year’s level

At the end of the second quarter of 2013, HeidelbergCement’s net debt amounted to €8.2 billion, which was largely stable compared with the end of the second quarter of 2012. Gearing improved slightly to 61.6% (previous year: 58.1%).

Development of net debt in comparison with the previous year was influenced by the complete payment of €161 million for the cartel fine confirmed by the Federal Court of Justice in Germany and extraordinary high investments.
Investments of €302.2 million were considerably higher than the value of €168.6 million for the same quarter of the previous year. In the first half of 2013, investments therefore amounted to €720.0 million (previous year: 332.2). In the first half of 2013, HeidelbergCement took advantage of favourable opportunities for add-on investments with a low risk profile as well as the organic expansion of capacities in growth countries. At the end of March, HeidelbergCement increased its share in the largest Australian cement producer Cement Australia from 25% to 50%. Furthermore, in the second quarter of 2013, shares in the Russian cement producer CJSC Construction Materials in Baschkortostan and in the English building materials manufacturer Midland Quarry Products (MQP) were increased from 51% to 100% and from 50% to 100%, respectively. The increased investment activities in the first half of the year are the result of a “timing effect”. The overall restrictive investment policy remains unchanged.

“FOX 2013” programme ahead of schedule – margin improvement initiatives “PERFORM”, “CLIMB Commercial”, and “LEO” progressing according to plan

The three-year programme for financial and operational excellence (“FOX 2013”) has already led to an improvement of €139 million in cash flow in the first half of 2013 and is therefore ahead of schedule to achieve savings of €240 million in 2013.

The projects that were launched in order to improve margins – “PERFORM” for cement, “CLIMB Commercial” for aggregates, and “LEO” to reduce logistics costs – are progressing according to plan and have already contributed to improvements in margins in the second quarter.

Targeted expansion of market position in growth markets

In July, HeidelbergCement commissioned a new cement mill with an annual capacity of 0.5 million tonnes in Liberia. The subsidiary Cemenco is the only cement manufacturer in Liberia and holds a strong market position. This company, which forms part of the HeidelbergCement network of cement grinding plants on the West African coast, strengthens the Group’s regional presence. The capacity expansion enables HeidelbergCement to serve the growing markets in key coastal towns and therefore to ensure its competitive advantage in West Africa.

Outlook for 2013

In its latest forecast, the International Monetary Fund (IMF) has once again slightly reduced growth rates for the world economy. The determining factors were the slowdown in growth in some key emerging countries as well as the protracted recession in the euro zone. For 2013, the IMF now expects merely stable economic growth compared with the previous year. However, this remains subject to the industrial countries in North America and Europe continuing unabatedly with their efforts to resolve the debt crisis and to achieve budgetary consolidation. The euro debt crisis, the high level of debt in the USA, and the armed conflicts in the Middle East continue to pose political risks to the development of the world economy.

In North America, HeidelbergCement still expects ongoing economic recovery and consequently a further increasing demand for building materials, especially from residential construction and the raw materials industry. A three-layered economic development is anticipated in Europe and Central Asia: The markets in Germany, Northern Europe, and the United Kingdom should continue to develop positively. Markets in central Asia should remain stable, and in Benelux and Eastern Europe a continuing weak development of the economy and demand for building materials is anticipated. In Asia and Africa, the Group still expects sustained positive demand.

In terms of costs, the Group anticipates a light to moderate increase in the cost base for raw materials and personnel. For energy costs, we expect stable or slightly declining development overall for 2013, following the slight decline in the first half of the year compared with the previous year. The objective remains to recover the margin loss that has arisen from the massively increasing energy costs in recent years. Price increases have top priority. To this end, the Group started two sales excellence programmes in 2012 – “PERFORM” for the cement business in the USA and Europe as well as “CLIMB Commercial” for the aggregates business line – with the objective of achieving a margin improvement of €350 million by 2015. The Group wants to realise a further €240 million of cash-relevant savings in 2013 as part of the “FOX 2013” programme, in comparison with the base year 2010. Furthermore, HeidelbergCement is following the “LEO” programme for optimising supply chains, which should reduce costs by €150 million over the coming years.

On the basis of these assumptions, the Managing Board is continuing with the objective of further increasing revenue and operating income in 2013 and significantly improving profit before tax.

Based on the increase in the stake of Cement Australia, Midland Quarry Products, and CJSC “Construction Materials”, we will probably exceed our CapEx target of €1.1 billion and reach a level of about €1.35 billion. We nevertheless stick to the original target and will continue with our disciplined investment policy.

“Considering the positive development in the second quarter, we confirm our earnings outlook for 2013”, says Dr. Bernd Scheifele. “In view of the weakening economic development in some emerging countries and in large parts of Europe, we will continue unabatedly with our measures to improve margins. We will maintain our focus on increasing sales prices. For this purpose, we will intensify our implementation efforts for the “PERFORM” and “CLIMB Commercial” sales excellence programmes. At the same time, we will continue to drive our efforts to lower costs and increase efficiency with the “FOX 2013” and “LEO” programmes. Deleveraging with the aim to improve the decisive key financial ratios is still a top priority for us, in order to qualify for an investment grade rating. We will also remain on course with our successful strategy of targeted investments to expand cement capacities in emerging countries. With our global market leadership in the aggregates business line and our advantageous geographical positioning in attractive markets, we will do all we can to benefit over-proportionally from the continued economic growth.”

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