29 July 2016
HeidelbergCement Publishes Q2 2016 Results
HeidelbergCement significantly increased results in second quarter of 2016
Highlights Q2 2016 and outlook:
- Increased sales volumes in all business lines
- Group revenue stable at €3.6 billion
- Operating income rose by 8% to €601 million (previous year: €557 million; like-for-like* +11%)
- Improvement of margins in all business lines
- Significant improvement of free cash flow; net debt reduced to €5.9 billion (previous year: €6.3 billion)
- Outlook for 2016 confirmed:
- Positive outlook for global economy; geopolitical and macroeconomic risks remain
- Expected increase in sales volumes of cement, aggregates, and ready-mixed concrete
- Moderate rise in revenue* and high single to double digit increase in operating income* and profit for the financial year**
- Conclusion of the Italcementi takeover in the second half of 2016
- HeidelbergCement is well positioned to benefit from the recovery in mature markets, particularly in the USA, Germany, Northern Europe, and Australia
* Adjusted for currency and consolidation effects; **adjusted for non-recurring effects
Q2 sales volumes benefit from positive market environment in Europe, the USA, and Australia
In the second quarter, sales volumes increased in all business lines. The positive market environment, particularly in Europe, the USA, and Australia, made a significant contribution to this growth.
The Group’s cement and clinker sales volumes rose by 1.6% to 22.3 million tonnes (previous year: 21.9) in the second quarter. The strongest increase was achieved in the Northern and Eastern Europe-Central Asia Group area, followed by Western and Southern Europe. Northern Europe recorded double-digit growth in sales volumes on account of the sustained high level of construction activity in Sweden and a better than expected development in Norway. Cement sales in Eastern Europe rose almost everywhere. In Western and Southern Europe, cement sales volumes increased in Germany, the Netherlands, and the United Kingdom, in some cases significantly. In contrast, cement sales volumes fell in the Asia-Pacific Group area due to the delayed start to infrastructural projects in our core markets in Indonesia.
Deliveries of aggregates increased by 2.9% (adjusted for consolidation effects 1.2%) to 69.1 million tonnes (previous year: 67.1). Higher sales volumes, particularly in Australia, the USA, and Germany, contributed to this development. Deliveries of ready-mixed concrete rose by 4.2% to 10.0 million cubic metres (previous year: 9.6), while deliveries of asphalt increased by 4.2% to 2.6 million tonnes (previous year: 2.5).
In the first half of 2016, cement and clinker sales volumes rose by 2.9% to 39.9 million tonnes (previous year: 38.8). Deliveries of aggregates climbed by 4.4% to 118.4 million tonnes (previous year: 113.4) and deliveries of ready-mixed concrete rose by 2.9% to 17.9 million cubic metres (previous year: 17.4). Asphalt sales volumes fell by 2.0% to 4.0 million tonnes (previous year: 4.0).
Revenue stable – results considerably improved
Group revenue remained virtually stable in the second quarter of 2016 at €3,575 million (previous year: 3,635). Excluding consolidation and exchange rate effects, it increased by 0.6%. This primarily reflects the pleasing development of sales volumes in all business lines. Changes to the scope of consolidation had a positive impact of €72 million on revenue. In contrast, exchange rate effects reduced revenue by €151 million.
Operating income before depreciation (OIBD) improved by 5.2% to €791 million (previous year: 752). Operating income rose by 7.8% to €601 million (previous year: 557). Excluding exchange rate and consolidation effects, the rise in operating income before and after depreciation and amortisation amounted to 8.5% and 11.2% respectively. 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.
“In operational terms, the second quarter of 2016 was the best since the financial crisis and thus continued the positive trend of the previous year,” said Dr. Bernd Scheifele, Chairman of the Managing Board. “The positive market environment in our mature markets and the recovery of demand in Eastern Europe made a significant contribution. We were able to raise the margins in operational terms in all business lines thanks to our margin improvement programmes and price increases in core markets. Furthermore, we have benefited from the declining fuel costs.”
The additional ordinary result deteriorated slightly to €-12 million (previous year: -5) in the second quarter. The financial result improved by €20 million to €-107 million (previous year: -127) especially due to the further reduction in net interest expenses. Profit before tax from continuing operations rose correspondingly by 12% to €493 million (previous year: 439).
In the second quarter of 2016, tax expenses decreased by €13 million to €95 million (previous year: 108). Net loss from discontinued operations amounted to €-12 million (previous year: -9) in the second quarter of 2016.
Consequently, the profit for the period in the second quarter of 2016 rose by 19% to €385 million (previous year: 322). The profit attributable to non-controlling interests rose by €16 million to €67 million (previous year: 51). The Group share therefore improved considerably by 17% to €318 million (previous year: 271).
In the first half of the year, Group revenue remained virtually stable at €6,407 million (previous year: 6,470). On a comparable basis, it increased by 0.7%. OIBD improved by 5.8% to €1,112 million (previous year: 1,052) and operating income (OI) rose by 9.9% to €739 million (previous year: 672). Adjusted for negative currency effects and negligible consolidation effects, OIBD improved by 9.8% and OI even saw a marked increase by 14.9%. The financial result improved significantly by €64 million to €-221 million (previous year: -285), particularly due to a reduction in interest expenses and an improved other financial result. Profit before tax from continuing operations increased by €101 million to €507 million (previous year: 406). Expenses relating to taxes on income declined by €11 million to €131 million (previous year: 142). As a result, net income from continuing operations improved to €376 million (previous year: 264). Net loss from discontinued operations remained unchanged at €-22 million. The profit for the period rose to €354 million (previous year: 242). The profit attributable to non-controlling interests increased to €108 million (previous year: 94). The Group share therefore improved considerably by 66% to €246 million (previous year: 148).
At the end of the first half of 2016, the number of employees at HeidelbergCement stood at 46,632 (previous year: 45,558). The increase of 1,074 employees essentially results from two opposing developments: on the one hand, more than 600 jobs were cut in particular in Eastern Europe, Central Asia, Indonesia, and India in connection with efficiency increases in sales and administration as well as location optimisations. On the other hand, the number of employees in Northern Europe rose by just under 1,400 due to the merger of our Swedish subsidiary Abetong AB and Contiga AB to form Nordic Precast Group AB. In addition, the workforce in Australia grew by around 300 employees mainly as a result of the purchase of the aggregates company Rocla Quarry Products and the insourcing of truck drivers.
Operating cash flow significantly improved – net debt reduced
Net debt at the end of the second quarter amounted to €5.9 billion, thus more than €450 million less than the same quarter of the previous year. A considerable improvement of free cash flow for the last twelve months by €331 million to €1,169 million (previous year: 838) contributed to the reduction in net debt. The net debt-to-equity ratio (gearing) decreased slightly to 38.1% (previous year: 40.7). Leverage fell from 2.6x to 2.2x and was therefore within the targeted range of 1.5x to 2.5x. The liquidity reserve rose from €4.1 billion to €5.4 billion as a result of measures for the pre-financing of the Italcementi takeover.
Takeover of Italcementi well on track
The takeover of Italcementi is making good progress. In the second quarter of 2016, HeidelbergCement implemented another measure for the pre-financing of the Italcementi takeover at attractive conditions: In June, an eight-year Eurobond with an issue volume of €750 million and a fixed interest rate of 2.25% per year was placed. These are the most favourable conditions that HeidelbergCement has ever achieved in this maturity segment. With this bond issue, the refinancing of the Italcementi acquisition is largely completed.
On 1 July 2016, HeidelbergCement completed the acquisition of a 45.0% stake in Italcementi from Italmobiliare. All conditions for the closing of the transaction have been fulfilled following the approval by the relevant competition authorities.
In the context of acquiring the 45% stake in Italcementi, HeidelbergCement carried out a capital increase in return for contributions in kind in July 2016. The issuance of 10.5 million new shares to Italmobiliare resulted from the Authorised Capital II excluding the subscription rights of shareholders. The Group’s subscribed share capital thus rose by €31,500,000, from €563,749,431 to €595,249,431. The implementation of the increase in the subscribed share capital was recorded in the commercial register on 7 July 2016.
The acquisition of the 45% stake in Italcementi entails an obligation to submit a mandatory tender offer to the remaining shareholders of Italcementi. The offer document was published on 28 July 2016. The subscription period will commence on 29 August 2016 and end on 30 September 2016. The offer price will be €10.60 per Italcementi share. This corresponds to a premium of 70.7% compared to the average price of the Italcementi share during the three months prior to the publication of the Italcementi takeover at the end of July 2015. HeidelbergCement expects the entire transaction to be completed in the second half of 2016.
The divestment of assets in the context of the Italcementi acquisition is making good progress. On 30 June 2016, non-core assets of Italcementi were sold to Italmobiliare for total proceeds of € 237 million. As announced on 25 July 2016, HeidelbergCement, via its subsidiary Ciments Français S.A.S., entered into an agreement with Aalborg Portland Holding A/S, a wholly owned subsidiary controlled indirectly by Cementir Holding, to sell business activities in Belgium, primarily comprising Italcementi’s Belgian subsidiary Compagnie des Ciments Belges S.A. (CCB). The agreement needs to be approved by the European Commission. This transaction has an enterprise value of €312 million. There is a high interest in the assets offered for sale in the USA, and binding offers are expected in the first half of August 2016. Overall, HeidelbergCement is well on track to reach its target of at least €1 billion of proceeds from divestments.
Outlook for 2016 confirmed
The anticipated development of the HeidelbergCement Group, without taking the Italcementi takeover into consideration, is described in the following.
In its latest forecast of July 2016, the International Monetary Fund (IMF) has reduced the growth rates for the world economy in 2016 by 0.1 percentage points and now estimates economic growth at the previous year’s level of 3.1%. The lowering of the forecast reflects the anticipated consequences of the considerably increased macroeconomic and political uncertainty following the Brexit decision. The IMF expects a deterioration of economic confidence and declining investments, which are likely to have a negative impact on the United Kingdom in particular but also on the countries of continental Europe. It is already assumed that the United Kingdom and the EU will reach agreements to prevent a significant rise of economic barriers. The IMF currently predicts that the growth rate in the industrial countries will drop slightly in 2016 and increase to some extent 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. In China, however, a further decline in demand and an increase in excess capacities are expected. The 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 an increase in sales volumes of the core products cement, aggregates, and ready-mixed concrete.
HeidelbergCement estimates that the cost base for energy will remain stable in 2016, supposing that energy prices will drop and sales volumes will 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 start 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.
In 2016, we anticipate – without taking into account the takeover of Italcementi – a significant decrease in financing costs due to 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 following goals for 2016: Excluding exchange rate and consolidation effects, a moderate increase in revenue and a high single to double digit increase in operating income and profit for the financial year (before non-recurring effects) are expected.
“The good results of the second quarter confirm our outlook for 2016,” states Dr. Bernd Scheifele. “We will continue to concentrate on the strategic points of focus announced in 2015: shareholder returns and continuous growth. Key prerequisites for the achievement of these goals are investment discipline, a solid investment grade rating, and a progressive dividend policy. Furthermore, we are concentrating on 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.”
“Thanks to the positive development in the first half of the year, HeidelbergCement is in a strong position to successfully conclude the takeover of Italcementi,” continues Dr. Bernd Scheifele. “The outlook for the global economy is positive, even though the macroeonomic and political risks have increased following the Brexit decision. 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 are strengthening our global market position. In our core business lines aggregates, cement, and ready-mixed concrete, we will occupy first, second, and third place on a global scale. 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-June 2016
|€m||2015||2016||Variance||Like-for- like1)||2015||2016||Variance||Like-for- like1)|
|Cement ('000 t)||38,778||39,894||3%||3%||21,934||22,293||2%||2%|
|Aggregates ('000 t)||113,405||118,378||4%||3%||67,128||69,077||3%||1%|
|Ready-mixed concrete ('000 m3)||17,419||17,922||3%||2%||9,562||9,960||4%||3%|
|Asphalt ('000 t)||4,038||3,956||-2%||-2%||2,470||2,575||4%||4%|
|Operating income before depreciation (OIBD)||1,052||1,112||6%||10%||752||791||5%||9%|
|in % of revenue||16.3%||17.4%||20.7%||22.1%|
|Profit for the period||242||354||46%||322||385||19%|
|Earnings per share in € (IAS 33)2)||0.79||1.31||66%||1.44||1.69||17%|
|Statement of cash flows and balance sheet|
|Cash flow from operating activities||-15||214||228||359||475||117|
|Investments (cash outflow)||-406||-444||-38||-218||-187||31|
1) Adjusted for currency and consolidation effects
2) Attributable to parent entity