9 November 2016

HeidelbergCement Publishes Q3 2016 Results

HeidelbergCement reports results for third quarter including first-time consolidation of Italcementi

Highlights Q3 2016 and Outlook:

  • Significant improvement in sales volumes, revenue, and operating income after first-time consolidation of Italcementi – premium earned on cost of capital
    • Sales volumes: 33 million tonnes of cement (+52%), 80 million tonnes of aggregates (+11%), 12 million cubic metres of ready-mixed concrete (+29%)
    • Group revenue up by 25% to €4.5 billion (previous year: 3.6)
    • Operating income before depreciation (OIBD) increased by 17% to €1.0 billion (previous year: €865 million)
  • Profit and net debt include acquisition-related costs
    • Group share of profit of €339 million contains acquisition-related extraordinary charges of €63 million; ytd adjusted EPS increaes to €3.39 (prior year: €3.34)
    • Rise in net debt to €8.9 billion following payment of the acquisition price for a 49% stake in Italcementi and takeover of the liabilities of Italcementi – pro forma leverage rose to 2.8x
  • Italcementi takeover completed
    • Mandatory takeover bid successful at the first attempt; squeeze out and delisting of Italcementi share completed
    • HeidelbergCement holds 100% of the Italcementi shares as from 12 October
    • Sale of business activities in Belgium and the USA almost completed as a condition of the antitrust authorities
    • Divestment proceeds totalled €1.14 billion (> €100 million above plan)
  • Italcementi integration faster than expected
    • Management changes in all key country organisations of Italcementi
    • Redundant headquarters closed
    • Reduction in staff much faster than expected
    • HeidelbergCement very confident to exceed the €400 million synergy target
  • New efficiency improvement programs initiated
    • “Competence Center RMC” (CCR): improvement in result of €120 million over three-year period thanks to optimisations in logistics and mix design
    • “Sales is a Science”: best-in-class sales and price management
  • Outlook 2016 including Italcementi confirmed
    • Increase in sales volumes of cement, aggregates, and ready-mixed concrete
    • Moderate increase in revenue and high single to double-digit increase in operating income on a comparable pro forma basis*

*) Comparable pro forma basis: taking into account the contributions of Italcementi since the beginning of 2015, revenue and results adjusted for currency effects, other consolidation effects, and sales of CO2 emission rights

Q3 sales volumes at significantly higher level – first-time consolidation of Italcementi and positive market environment in mature markets

In the third quarter, the sales volumes of HeidelbergCement’s building materials rose significantly, as a result of the first consolidation of Italcementi. In addition, demand developed positively in numerous markets, especially in Europe, where sales volumes of cement, ready-mixed concrete, and asphalt further increased. In contrast, a very rainy summer in some parts of North America resulted in a slight decline in demand for cement and aggregates.

The Group’s cement and clinker sales volumes rose by 52% to 33.2 million tonnes (previous year: 21.8) in the third quarter. The sales volumes of Italcementi’s markets in Italy, France, Spain, Greece, Bulgaria, Kazakhstan, India, Thailand, Egypt, Morocco, Mauritania, Gambia, and North America were included for the first time. Taking into account Italcementi’s deliveries in the same period of the previous year on a pro forma basis, the growth amounts to 5%. Cement sales could be increased in all Group areas. The strongest rise on a pro forma basis was achieved in the Northern and Eastern Europe-Central Asia Group area, followed by Asia-Pacific, and Africa-Eastern Mediterranean Basin. In North America, sales volumes rose slightly despite adverse weather conditions in some regions.

Deliveries of aggregates increased by 11% to 80.3 million tonnes (previous year: 72.6). The sales volumes of Italcementi’s markets were included in this figure for the first time, particularly in France, Italy, Greece, Morocco, and North America. Taking into account Italcementi’s deliveries in the same period of the previous year on a pro forma basis, the growth amounts to 1%. Higher sales volumes, particularly in the Western and Southern Europe as well as Africa-Eastern Mediterranean Basin Group areas, contributed to this development. Deliveries of ready-mixed concrete also rose as a result of the new consolidation by 29% to 12.5 million cubic metres (previous year: 9.7). On a pro forma basis, the increase reached 2%. Asphalt sales volumes grew by 8% to 3.1 million tonnes (previous year: 2.9). Italcementi has no asphalt production facilities and therefore did not contribute any additional sales volumes.

In the first nine months of 2016, cement and clinker sales volumes rose by 4% on a pro forma basis to 94.2 million tonnes (previous year: 90.8). Deliveries of aggregates increased by 3% to 214.1 million tonnes (previous year: 207.8) and deliveries of ready-mixed concrete rose by 2% to 35.7 million cubic metres (previous year: 35.1). Asphalt sales volumes also increased by 2% to 7.1 million tonnes (previous year: 6.9).

Accelerated growth of revenue and operating income

As a result of the first-time consolidation of Italcementi, revenue and operating income also increased significantly. Group revenue grew by 25% in the third quarter of 2016 to €4,520 million (previous year: 3,606). Operating income before depreciation (OIBD) improved by 17% to €1,009 million (previous year: 865) and operating income rose by 9% to €738 million (previous year: 675). On a comparable pro forma basis*, revenue increased slightly by around 1%. Currency effects reduced revenue by almost €100 million.

On a comparable pro forma basis*, the operating income before depreciation improved by 2% and the operating income after depreciation by 4%. 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.

“With the acquisition of Italcementi, HeidelbergCement made a big leap in growth and is now the clear number two in the buildling materials industry,” said Dr. Bernd Scheifele, Chairman of the Managing Board. “In the third quarter, we also recorded a further increase in operational terms despite adverse conditions in some markets. The integration of Italcementi is progressing faster than expected and we are very confident that we will be able to exceed the identified synergies of €400 million and to continue our profitable growth both quickly and successfully.”

The additional ordinary result deteriorated by €70 million to €-81 million (previous year: -11) in the third quarter. This was primarily due to extraordinary charges connected with the acquisition of Italcementi. The financial result remained unchanged at €-142 million (previous year: -142). Increasing interest expenses as a result of the assumption of Italcementi’s net debt and payment of the purchase price for 49% of the share capital were offset by lower interest expenses linked with favourable refinancing terms and the partial repayment of bonds. Profit before tax from continuing operations declined by 2% to €533 million (previous year: 546) due to the restructuring costs.

In the third quarter of 2016, tax expenses increased significantly by €95 million to €169 million (previous year: 74). Decisive for this development were higher tax expenses in North America because of the significantly increased profit and the consolidation of Italcementi. Net income from continuing operations consequently fell to €364 million (previous year: 472).

As a result, the profit for the period in the third quarter of 2016 decreased to €384 million (previous year: 520). The profit attributable to non-controlling interests rose by €3 million to €44 million (previous year: 41). The Group share therefore decreased to €339 million (previous year: 479) and the earnings per share to €1.75 (previous year: 2.55). Adjusted for acquisition-related charges of €63 million, the Group share amounted to €402 million.

In the first nine months of the year, Group revenue grew significantly by 8.5% to €10,927 million (previous year: 10,076). OIBD improved by 10.7% to €2,121million (previous year: 1,916) and operating income (OI) rose by 9.7% to €1,477 million (previous year: 1,347). The consolidation of Italcementi in the third quarter made a substantial contribution to this growth. On a comparable pro forma basis*, revenue grew slightly by 1% to €12.8 billion. OIBD improved by 6.4% to €2.4 billion (previous year: 2.3) and OI increased by 10.4% to €1.6 billion (previous year: 1.5). The additional ordinary result deteriorated by €98 million to €-98 million (previous year: 0). This was largely due to charges connected with the Italcementi acquisition. The financial result improved significantly by €64 million to €-363 million (previous year: -427), particularly because of a reduction in interest expenses and an improved currency result. Profit before tax from continuing operations increased by €88 million to €1,040 million (previous year: 953). Expenses relating to taxes on income grew by €83 million to €300 million (previous year: 217). As a result, net income from continuing operations rose slightly to €740 million (previous year: 736). Net loss from discontinued operations declined by €29 million to 
€-2 million (previous year: 27). The profit for the period reduced to €737 million (previous year: 762). The profit attributable to non-controlling interests increased to €152 million (previous year: 135). The Group share consequently dropped to €585 million (previous year: 628). Adjusted for acquisition-related charges, the Group share increased to €648 million and EPS increased to €3.39 (previous year: €3.34).

At the end of September 2016, the number of employees at HeidelbergCement stood at 61,945 (previous year: 46,772). The increase of 15,173 employees results primarily from the acquisition of Italcementi.

Premium earned on cost of capital

As a result of the acquisition of Italcementi, HeidelbergCement’s weighted average cost of capital (WACC) decreased from 7.0% to 6.9%. On the basis of the pro forma result of the past 12 months, HeidelbergCement achieved a return on invested capital (ROIC) of 7.0%, thereby earning a premium on cost of capital already shortly after the acquisition of Italcementi.

Rise in net debt in connection with the acquisition

Net debt at the end of the third quarter amounted to €8.87 billion, which was around €2.9 billion more than at the end of the same quarter of the previous year. The payment to Italmobiliare of the cash component of the purchase price for the 45% share in Italcementi, the acquisition of a further 4.0% share in Italcementi via the stock exchange, and the takeover of around €2.2 billion of liabilities of the former Italcementi Group contributed to this substantial increase. The net debt-to-equity ratio (gearing) at the end of the third quarter rose accordingly to 53.4% (previous year: 39.0%). Leverage grew to 2.8x, taking into consideration the pro forma operating EBITDA including Italcementi for the preceding 12 months. The liquidity reserve totalled €4.6 billion.

Net debt and leverage are expected to remain at approximately the same levels at the end of the year. The cash outflows for the purchase of the remaining 51% in Italcementi and the proceeds from the sale of the business activities in Belgium and the USA, as well as cash inflow from operating activities, should roughly offset each other. HeidelbergCement intends to reduce leverage to the target bandwidth of 1.5x to 2.5x as rapidly as possible and is targeting an investment grade rating.

Italcementi takeover completed

As from 12 October 2016, HeidelbergCement is the sole shareholder of Italcementi and has 100% of the share capital. Prior to this, the high acceptance rate for a public takeover bid ending on 30 September 2016 enabled HeidelbergCement to squeeze out the remaining shares straightaway. The Italcementi shares were delisted on 12 October 2016.

The sale of assets in Belgium in connection with the Italcementi acquisition was also completed. Closing of the sale of assets in the USA is expected in the coming weeks. Taking also into account the sale of the non-core activities of Italcementi, HeidelbergCement realised proceeds of €1.14 billion, thereby clearly exceeding the target of €1 billion.

Italcementi integration faster than expected

In all key Italcementi country organisations the management was changed and the management philosophy as well as the bonus system of HeidelbergCement was introduced, starting with the takeover of control at the beginning of July. Redundant headquarters on country level were closed and activities concentrated on one location. The synergy implementation is ahead of plan with a €135 million annual run-rate expected by end of 2016. Until the end of October, more than 1,300 jobs were cut, significantly exceeding the initially planned around 500 jobs cuts by the end of 2016. Staff reduction is expected to increase to around 1,500 by the end of 2016. Overall, at least 2,500 jobs will be affected by the restructuring measures. Due to the good progress, HeidelbergCement is convinced to exceed the synergy target of €400 million.

New efficiency improvement programs initiated

Two new competence centers were established as part of the reorganisation of the Managing Board at the start of the year and the acquisition of Italcementi. The Competence Center RMC – the name reflects the program - aims to increase operational efficiency in ready-mixed concrete and achieve margin improvements of €120 million over a three-year period. Focus lies on optimisations in logistics and mix design. Objective of the “Sales is a Science” program is to further professionalise sales in order to become best in class. The focus is on market intelligence, sales processes and price management. The program is supported by the competence center Global Market Intelligence and Sales Processes.

Outlook 2016 including Italcementi confirmed

In its latest forecast of October 2016, the International Monetary Fund (IMF) has reduced the growth rate for the global economy in 2016 to 3.1%, a decrease of 0.1 percentage points in comparison with the forecast of April 2016. The lowering of the forecast reflects the anticipated consequences of the considerably increased macroeconomic and political uncertainty following the Brexit decision and slower than expected growth in the USA in the first half of the year. The IMF currently predicts that the growth rate in the industrial countries will drop by 0.5 percentage points in 2016 and rise slightly by 0.2 percentage points in the emerging countries.

The risk factors in the development of the global economy include not only the consequences of the Brexit, which are difficult to estimate at present, but also the price trend for oil, 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 continuing solid condition of the German economy, and stable economic growth in Northern Europe and Benelux. So far, we have not yet seen any negative effects of the Brexit decision on demand for building materials in the United Kingdom. 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 and India. At the same time, the cement capacity and therefore the competition in Indonesia has grown due to the entry of new manufacturers. In China, a further decline in demand and an increase in excess capacities are expected. 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 – both without and including the consolidation of Italcementi (on a pro forma base for 2015 and 2016) – a rise in the sales volumes of the core products cement, aggregates, and ready-mixed concrete.

Excluding the Italcementi consolidation, HeidelbergCement estimates that the cost base for energy will remain stable in 2016, supposing that energy prices will drop and sales volumes 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 was launched at the beginning 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.

For 2016, we expect stable financing costs in consideration of the Italcementi takeover, as the savings in the first half of the year and an increase in financing costs on account of the financing of the purchase price and the takeover of the liabilities of the Italcementi Group in the second half of the year more or less offset each other.

The existing forecast for 2016 was confirmed and now applies also including Italcementi; this means, on a comparable pro forma basis*, a moderate increase in revenue and a high single to double-digit increase in operating income are expected.

“The swift completion of the Italcementi takeover and the rapidly progressing integration give us reason to be very positive about the further development,” explains Dr. Bernd Scheifele. “We are very confident that we can exceed the synergy target of €400 million. Moreover, as part of the integration we have created two new global competence centers for ready-mixed concrete and sales management, which should enhance the margin potential in these areas. Overall, we consider ourselves to be well positioned to successfully advance our strategic priorities: shareholder returns and continuous growth. Our declared aim is still to achieve a solid investment grade rating. In operational terms, we will continue to focus on the 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.”

“The outlook for the global economy is positive, even though the macroeconomic and political risks have increased following the Brexit decision,” adds Dr. Bernd Scheifele. “HeidelbergCement will continue to benefit from the good and stable economic development in the industrial countries, above all in the USA, Germany, Northern Europe, and Australia. With the acquisition of Italcementi, we have strengthened our global market position. In our core business lines aggregates, cement, and ready-mixed concrete, we occupy first, second, and third place globally. In the next few years, we intend to consistently develop the characteristics that set HeidelbergCement apart from the competition: 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 January-September 2016

Key financial figures

€m20152016VarianceLike-for- like1)20152016VarianceLike-for- like1)
Sales volumes
Cement (Mt)60,58073,04721%3%21,80233,15352%2%
Aggregates (Mt)185,987198,6877%1%72,58280,30911%-1%
Ready-mixed concrete (Mm3)27,12330,40512%1%9,70412,48329%0%
Asphalt (Mt)6,9207,0712%2%2,8823,1158%8%
Income statement
Operating income before depreciation (OIBD)1,9162,12111%6%8651,00917%1%
in % of revenue19.0%19.4%24.0%22.3%
Operating income1,3471,47710%8%6757389%1%
Profit before tax from continuing operations9531,0409%546533-3%
Group share of profit628585-7%479339-29%
Earnings per share in € (IAS 33) 2)3.343.06-8%2.551.75-31%
Adjusted earnings per share in € 3)3.343.390.052.552.08-0.47
Statement of cash flows and balance sheet
Cash flow from operating activities537762225552548-3
Investments (cash outflow)-631-1,699-1,069-225-1,256-1,031
Net debt5,9708,8682,898

1) Adjusted for currency and consolidation effects
2) Attributable to parent entity
3) Excluding restructuring costs of €63 million

Pro forma key financial figuresJanuary-SeptemberQ3
€m20152016VarianceLike-for- like1)20152016VarianceLike-for- like1)
Sales volumes
Cement (Mt)90,77594,1874%4%31,52533,1535%5%
Aggregates (Mt)207,799214,1443%2%79,74580,3091%-1%
Ready-mixed concrete (Mm3)35,05435,7052%1%12,25612,4832%1%
Asphalt (Mt)6,9207,0712%2%2,8823,1158%8%
Income statement
Operating income before depreciation (OIBD)2,3362,3963%6%9961,0091%2%
in % of revenue18.0%18.7%22.0%22.3%
Operating income1,5071,5855%10%7167383%4%

1) Adjusted for currency and consolidation effects and excluding CO2 gains:
2015 €m 50 (Q1: €m 21; Q2: €m 29)
2016 €m 17 (Q1: €m 17)

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Financial Calendar

Andreas Schaller

Group Spokesman, Director Group Communication & Investor Relations
+49 6221 481 13249
+49 6221 481 13217
HeidelbergCement AG
Berliner Straße 6
69120 Heidelberg