HeidelbergCement publishes 2016 consolidated financial statements

HeidelbergCement accelerates its growth with the takeover of Italcementi – dividend proposal of €1.60 per share

2016 consolidated financial statements

  • Revenue rises by 13% to €15.2 billion
  • EPS, adjusted for non-recurring effects, increases by 23% to €5.34
  • Cash flow from operations rises by 29% to €1.9 billion
  • HeidelbergCement earns premium on cost of capital
  • Dividend proposal: €1.60 per share (+23%)
  • Classification in investment grade by S&P, Moody’s, and Fitch

Outlook for 2017

  • Positive outlook for global economy; higher geopolitical and macroeconomic risks
  • Growth in sales volumes of cement, aggregates, and ready-mixed concrete expected
  • Moderate increase in revenue and mid-single to double digit percentage increase in result from current operations on a comparable pro forma basis*; significant rise in profit for the financial year before non-recurring effects
  • Integration of Italcementi ahead of plan: synergies increased to €470 million
  • HeidelbergCement well positioned to benefit from good and stable development in industrial countries, particularly in the USA, Canada, the United Kingdom, Germany, the northern European countries, and Australia

*) Comparable pro forma basis: taking into account the contributions of Italcementi for 2015 and first half of 2016; revenue and result from current operations adjusted for currency effects, other consolidation effects, and sales of emission rights 

2016 – successful acquisition of Italcementi and investment grade credit rating

HeidelbergCement has brought the 2016 financial year to a successful close despite a challenging environment. The decisive factors were the successful takeover of Italcementi and the strong operational development, especially as a result of the programmes to increase efficiency and margins as well as the significant decline in energy costs.

“2016 was an exceptional year for HeidelbergCement,” states Dr. Bernd Scheifele, Chairman of the Managing Board of HeidelbergCement. “With the successful takeover of Italcementi, we have accelerated our growth and are now in an excellent strategic position. In our core business lines of aggregates, cement, and ready-mixed concrete, we occupy first, second, and third place globally. We have also achieved a major milestone with the investment grade classification by the rating agencies S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings. Thanks to strong operational development and an improved financial result, we have been able to considerably increase our profit for the financial year before non-recurring effects. Our strategic priorities of ‘shareholder returns’ and ‘continuous growth’ are reflected in our figures as well as in the significantly raised dividend proposal.”

Significant increase in result before non-recurring effects – premium on cost of capital earned

The sales volumes of cement, aggregates, and ready-mixed concrete increased significantly as a result of the acquisition of Italcementi. On a pro forma basis, i.e. taking into account the contributions of Italcementi for the full years 2015 and 2016, sales volumes rose moderately in all business lines in comparison with the previous year. On the one hand, we benefited from the ongoing recovery in North America and Europe. On the other hand, the weaker demand in Asia – primarily in Indonesia due to the delayed start to infrastructure projects – adversely impacted cement and ready-mixed concrete sales volumes.

Revenue rose by 12.6% to €15,166 million (previous year: 13,465). The consolidation of Italcementi in particular contributed to this positive development. Revenue was impaired by negative currency effects of €326 million resulting from the depreciation of a number of currencies against the euro. On a comparable pro forma basis*, revenue decreased slightly.

The result from current operations rose by 7.5% to €2.0 billion; on a comparable pro forma basis*, the increase amounted to 6%, which is in line with the updated outlook. Besides the successful margin improvement programmes and realisation of initial synergies, the significantly lower energy costs also contributed to the positive development of results.

The additional ordinary result of €-324 million (previous year: -12) is heavily influenced by the acquisition of Italcementi and includes, for example, transaction costs, restructuring expenses, and other non-recurring expenses.

The financial result improved by €56 million to €-494 million (previous year: -550). Besides the reduction of €18 million in interest expenses, the financial result was positively affected by the increase of €19 million in currency results and the improvement of €26 million in the other financial result.

Profit before tax from continuing operations fell by €109 million to €1,204 million (previous year: 1,313). Income taxes rose slightly by €10 million to €305 million (previous year: 295). As a result, net income from continuing operations decreased by €119 million to €899 million (previous year: 1,019). Net loss from discontinued operations amounted to €-3 million (previous year: -36).

This resulted in a profit for the financial year of €896 million (previous year: 983). Adjusted for the non-recurring effects from the additional ordinary result of €-324 million, the profit for the financial year increased significantly by 24% in line with the forecast. The Group share fell to €706 million (previous year: 800). However, adjusted for non-recurring effects, it rose by 27% to €1,031 million. Likewise adjusted EPS rose by 23% to €5.34. Thanks to the positive development of results, the return on invested capital (ROIC) increased from 7.1% in 2015 to 7.2%, thereby exceeding the weighted average cost of capital (WACC) of 7.0%. Consequently, HeidelbergCement earned a premium on the cost of capital in 2016, even immediately after the takeover of Italcementi.

Dividend proposal raised by 23%

In view of the positive business development, the Managing Board and the Supervisory Board will propose to the Annual General Meeting on 10 May 2017 a substantial increase in dividend of 23% to €1.60 (previous year: 1.30) per share. This proposal is in line with our progressive dividend policy announced previously and reflects our strategic priorities concerning shareholder returns as well as our focus on a solid investment grade rating.

 

Free cash flow significantly improved – Italcementi acquisition increases net debt

Cash flow from operating activities from continuing operations increased by €392 million to around €1.9 billion as a result of the consolidation of Italcementi and the solid operational performance. In light of the takeover of Italcementi, other investments were cut back as planned; excluding the investment activities of Italcementi, they remained stable at around €1 billion and thereby slightly below the target of €1.1 billion. Additional cash-relevant investments of around €2.9 billion related to the purchase of Italcementi shares. In addition, net liabilities of €2.2 billion were taken over from Italcementi. Free cash flow rose by 40% to €1.3 billion. Thanks to disciplined cash flow management, the acquisition-related rise in net debt was limited to just under €9 billion at the end of 2016. Gearing (net debt-to-equity ratio) increased to 50.4% (previous year: 33.1) by the end of the year as a result of the acquisition. The dynamic gearing ratio (net debt to result from current operations before depreciation and amortisation ratio) increased on a pro forma basis, i.e. taking into account the contribution of Italcementi to the results for the first half of 2016, to 2.8x (previous year: 2.0). In 2017, we will focus on bringing the dynamic gearing ratio back down to around or below 2.5x. The liquidity reserve increased from €4.1 billion to €4.8 billion.

Italcementi integration: faster than anticipated – synergy target increased

On taking over control at the beginning of July, the management at all of Italcementi’s major national organisations was replaced and HeidelbergCement’s management philosophy and bonus system were introduced. National headquarters that are no longer required have been closed and activities were consolidated in Heidelberg. The implementation of synergies is progressing more quickly than planned and HeidelbergCement has recorded projected savings of around €155 million for the full year. By the end of 2016, 1,870 jobs had already been cut worldwide, considerably more than the figure of just under 500 originally planned for the end of 2016. Overall, at least 2,500 jobs worldwide are affected by the restructuring measures. In view of the good progress made, HeidelbergCement has increased the synergy target to €470 million.

Outlook for 2017

In its forecast from January 2017, the International Monetary Fund (IMF) expects global economic growth to increase slightly, from 3.1% in 2016 to 3.4% in 2017. Accelerating growth in the USA is one of the drivers behind this trend. 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 particularly expected for countries in Africa south of the Sahara and in Asian countries with the exception of China.

Global risks have increased considerably compared with the previous year. This relates both to geopolitical and macroeconomic risks. The geopolitical risks include especially the conflicts in the Middle East and in eastern Ukraine. The macroeconomic risks concern mainly the increase in energy prices and inflation, the unpredictable consequences of the slowdown in the Chinese economy, and the political uncertainties in Europe due to upcoming elections.

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 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 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 repercussions on export volumes are limited, however, because a large proportion of Chinese capacities is located inland.

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.

HeidelbergCement estimates that the cost base for energy will increase considerably in 2017 as a result of the rising oil and coal prices since the beginning of 2016. A slight to moderate increase in the cost of raw materials and personnel is also expected. HeidelbergCement further focuses on the continuous improvement of efficiency and margins. In this context, we are implementing the Continuous Improvement programmes in the cement and aggregates business lines to establish a culture of consistent 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 each business line 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 start 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 line at the end of 2016. Over a three-year period, the optimisation of logistics and concrete formulations are expected to achieve an improvement in results of €120 million.

In 2017, we anticipate a significant decrease in financing costs due to our 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 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.

“Completing the integration of Italcementi will be a point of focus of our activities in 2017,” explains Dr. Bernd Scheifele. “The rapid progress makes us very confident and we have therefore increased the synergy target from €400 million to €470 million. Another area of focus is the reduction of debt following the Italcementi acquisition by disciplined cash management. Our declared target remains to maintain a solid investment grade rating. Operationally, we concentrate on five areas: an 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 of our customers, especially in the world’s rapidly growing metropolitan areas. We have added the programme “Competence Center Readymix” (CCR) for ready-mixed concrete to our existing set of global programmes to optimise costs and processes as well as increase margins for aggregates (“Aggregates CI”), cement (“CIP”), and purchasing (“FOX”).

“We remain cautiously optimistic about 2017,” continues Dr. Bernd Scheifele. “While the overall outlook for the global economy is positive, the major macroeconomic and particularly geopolitical risks have increased at the same time. HeidelbergCement will benefit from the good and stable economic development in the industrial countries, above all in the USA, Canada, the United Kingdom, Germany, the northern European countries, and Australia. These countries generate approximately 60% of our revenue. With the acquisition of Italcementi and its rapid integration, we have impressively demonstrated our high business potential and strong momentum. From a global perspective, we are well positioned to achieve our strategic goals – continuous growth and sustainable increase in shareholder returns.”

Overview of the HeidelbergCement Group

Key financial figures

January-December October-December
€m 2015 2016 Vari-
ance
Like-for- like1) 2015 2016 Vari-
ance
Like-for- like1)
Sales volumes                
Cement (Mt) 81,105 103,816 28% 1% 20,525 30,769 50% -2%
Aggregates (Mt) 249,244 272,024 9% 0% 63,257 73,337 16% -5%
Ready-mixed concrete (Mm3) 36,708 42,537 16% 0% 9,585 12,131 27% -2%
Asphalt (Mt) 9,122 9,371 3% 3% 2,202 2,300 4% 4%
Income statement                
Revenue 13,465 15,166 13% -2% 3,389 4,238 25% -7%
Result from current operations before depreciation and amortisation (RCOBD)2) 2,613 2,939 13% 2% 696 818 18% -9%
in % of revenue 19.4% 19.4%     20.5% 19.3%    
Result from current operations (RCO) 2) 1,846 1,984 7% 3% 499 507 2% -11%
Profit before tax from continuing operations 1,313 1,204 -8%   361 164 -54%  
Group share of profit 800 706 -12%   172 121 -30%  
Earnings per share in € (IAS 33) 3) 4.26 3.66 -14%   0.92 0.60 -35%  
Adjusted earnings per share (IAS 33) 4) 4.32 5.34 23%   0.98 1.95 98%  
Dividend payment in € 5) 1.30 1.60 23%          
Statement of cash flows and balance sheet                
Cash flow from operating activities 1,449 1,874 425   912 1,112 199  
Investments (cash outflow) -1,002 -4,039 -3,037   -371 -2,339 -1,969  
Net debt 5,286 8,999 3,713          

1)     Adjusted for currency and consolidation effects
2)     Result from current operations before/after depreciation and amortisation corresponds to operating income before depreciation (OIBD) / operating income (OI) reported in previous years. The change of name occurred in the context of the application of an ESMA directive (European Securities and Markets Authority)
3)     Attributable to the shareholders of HeidelbergCement AG
4)     Excluding additional ordinary result of €m -324
5)     Recommendation to the Annual General Meeting of 10 May 2017

 

Pro forma key financial figures

January-December Q4
€m 2015 2016 Vari-
ance
Like-for- like1) 2015 2016 Vari-
ance
Like-for- like1)
Sales volumes                
Cement (Mt) 121,929 124,983 3% 2% 31,155 30,769 -1% -1%
Aggregates (Mt) 278,452 287,405 3% 0% 70,653 73,337 4% -5%
Ready-mixed concrete (Mm3) 47,433 48,117 1% 1% 12,379 12,131 -2% -2%
Asphalt (Mt) 9,122 9,371 3% 3% 2,202 2,300 4% 4%
Income statement                
Revenue 17,331 17,084 -1% -1% 4,358 4,238 -3% -4%
Result from current operations before depreciation and amortisation2) 3,153 3,195 1% 5% 818 818 0% 2%
in % of revenue 18.2% 18.7%     18.8% 19.3%    
Result from current operations2) 2,037 2,073 2% 6% 530 507 -4% -3%
in % of revenue 11.8% 12.1%     12.2% 12.0%    

1)     Adjusted for currency and consolidation effects and CO₂ gains in Q1 2015: €m21 ; Q2 2015: €m29 ; Q2 2016: €m17; Q4 2016: €m -20
2)     Result from current operations before/after depreciation and amortisation corresponds to operating income before depreciation (OIBD) / operating income (OI) reported in previous years. The change of name occurred in the context of the application of an ESMA directive (European Securities and Markets Authority)

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Christoph Beumelburg

Christoph Beumelburg

Group Spokesman, Director Group Communication & Investor Relations

Heidelberg Materials AG Berliner Straße 6
69120 Heidelberg
Germany

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