Heidelberg Cement has announced its results for the third quarter of 2017.
Highlights Q3 2017:
Revenue up by 4% to €4.6 billion on a comparable basis*.
Result from current operations before depreciation and amortisation rose by 7% to €1,058 million on a comparable basis*.
Earnings per share significantly improved by 38% to €2.42 (previous year: €1.75).
Significantly improved free cash flow of the past 12 months to €1.2 billion.
Outlook for 2017 unchanged:
Positive outlook for global economy; accelerated growth in Europe.
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 year before non-recurring effects.
HeidelbergCement well positioned to benefit from good and stable development in industrial countries, particularly in the United States, Canada, Europe, and Australia.
* On a comparable basis: adjusted for currency and consolidation effects.
** Comparable pro forma basis: with the inclusion of Italcementi in the first half of 2016 and adjusted for currency and consolidation effects.
Solid development of sales volumes in the third quarter
Good operative performance continued in North America despite adverse weather conditions. The strongest growth recorded Australia, Morocco, India, as well as the markets in Northern and Eastern Europe. The countries in Southern Europe showed clear signs of recovery. While Germany achieved significant growth, the uncertainties regarding Brexit negatively affected sales volumes and results in the United Kingdom. The weak markets in some emerging countries, such as Ghana, Indonesia, Thailand, and Egypt, have passed their lowest point. Indonesia and Ghana show again clear signs of recovery of demand.
During the third quarter, the Group’s cement and clinker sales volumes grew by 2% to 33.7 million tonnes (previous year: 33.2). The strongest growth was achieved in the Asia-Pacific Group area, followed by Africa-Eastern Mediterranean Basin and Western and Southern Europe.
Deliveries of aggregates rose by 8% to 86.7 million tonnes (previous year: 80.3). Higher sales volumes in all Group areas, excluding Western and Southern Europe, and particularly the consolidation of the Mibau Group in Northern Europe contributed to this increase, as did the Pacific Northwest Materials Business taken over from CEMEX in the USA.
Deliveries of ready-mixed concrete fell by 0.5% to 12.4 million cubic metres (previous year: 12.5). Asphalt sales volumes grew by 3% to 3.2 million tonnes (previous year: 3.1).
In the first nine months of the year, cement and clinker sales volumes rose by 29% to 94.4 million tonnes (previous year: 73.0) owing to the consolidation of Italcementi. Deliveries of aggregates climbed by 15% to 229.0 million tonnes (previous year: 198.7) and deliveries of ready-mixed concrete also rose by 15% to 35.0 million cubic metres (previous year: 30.4). Asphalt sales volumes grew slightly to 7.1 million tonnes (previous year: 7.1).
On a pro forma basis**, cement and clinker sales volumes showed a marginal increase. Deliveries of aggregates rose by 7%, while deliveries of ready-mixed concrete fell by 3%.
Revenue and results continue to grow
Group revenue rose by 2% in the third quarter to €4,610 million (previous year: 4,520). On a comparable basis, which means excluding consolidation and exchange rate effects, it even increased by 4%. This primarily reflects the pleasing development of sales volumes as well as price increases in order to offset inflation. Exchange rate effects reduced revenue by €193 million.
The result from current operations before depreciation and amortisation improved by 5% to €1,058 million (previous year: 1,009). After depreciation and amortisation, the result from current operations grew by 7% to €787 million (previous year: 738). On a comparable basis*, the rise in result from current operations before and after depreciation and amortisation amounted to 7% and 8%, respectively. Besides the growth in sales volumes and price increases in important core markets, the realisation of synergies in particular and an efficient cost management also made a contribution to the positive development of results.
“As expected, the positive trend reversal in May led to a significantly improved development of results in the third quarter”, says Chairman of the Managing Board, Dr. Bernd Scheifele. “North America, Australia, Morocco, India, as well as Northern and Eastern Europe have developed very strongly. The countries of Southern Europe are showing clear signs of recovery, and the emerging countries have passed their lowest point. We have succeeded in reducing the rise in energy costs through the flexible use of various fuels. Synergies from the acquisition of Italcementi have already significantly exceeded the target for 2017. Furthermore, the refinancing of our maturities on favourable terms has made a clear impact on both result and cash flow. All in all, we have substantially increased the Group share of profit for the period and earnings per share. In this way, we clearly show that we are able to create value for our shareholders from the Italcementi takeover.”
The additional ordinary result increased by €76 million to €-6 million (previous year: -81). The previous year’s figure included significantly higher acquisition-related extraordinary expenses. The financial result improved by €38 million to €-104 million (previous year: -142). Net interest expenses were reduced by around €25 million due to favourable refinancing.
Group share of profit improved significantly by 42% to €481 million (previous year: 339) and the earnings per share by 38% to €2.42 (previous year: 1.75).
In the first nine months of the year, Group revenue rose considerably by 19% to €13.0 billion (previous year: 10.9) as a result of the consolidation. The result from current operations before depreciation and amortisation improved by 13% to €2,405 million (previous year: 2,121); after depreciation and amortisation, it rose by 7% to €1,578 million (previous year: 1,477). On a comparable pro forma basis**, revenue exceeded the previous year’s level by 1%. The result from current operations before and after depreciation and amortisation increased slightly by 1%. The additional ordinary result improved by €56 million to €-42 million (previous year: -98). The financial result increased by €78 million to €-285 million (previous year: -363), particularly because of a reduction in interest expenses. Expenses relating to taxes on income increased by €100 million to €400 million (previous year: 300) owing to the first-time consolidation of the Italcementi Group and a non-recurring effect in Indonesia in the previous year. The Group share of profit grew considerably by 31% to €768 million (previous year: 585) and the earnings per share to €3.87 (previous year: 3.06).
At the end of September 2017, the number of employees at HeidelbergCement stood at 60,830 (previous year: 61,945). The decrease of 1,115 employees essentially results from two opposing developments. On the one hand, more than 2,400 jobs were cut across the Group – firstly, as part of the realisation of synergies in former Italcementi subsidiaries and, secondly, in connection with efficiency increases in sales and administration as well as location optimisations. On the other hand, the headcount grew by around 700 as a result of the full consolidation of the Mibau Group and the acquisition of construction activities from Cemex in the northwest of the USA as well as the business operations of the Saunders Companies in the US state of New York. Furthermore, there was an increase of a little over 600 employees in some countries in the Group areas of Western and Southern Europe, Northern and Eastern Europe-Central Asia, and in particular in Australia as a result of the solid market development and the insourcing of truck drivers.
Free cash flow significantly improved
In the past 12 months, HeidelbergCement generated a free cash flow of €1.2 billion due to its strong operating performance, an improved working capital, and lower interest payments. As a consequence, net debt could be reduced by almost €500 million to €9.6 billion compared with the end of the previous quarter. Compared with the same quarter of the previous year, net debt was around €800 million higher, as a result of the acquisition. Gearing (net debt-to-equity ratio) at the end of the third quarter rose to 59.4% (previous year: 53.6). Leverage (net debt-to-result from current operations before depreciation and amortisation ratio) increased to 3.0x (previous year: 2.8x). We confirm our goal of decreasing leverage back down to 2.5x by the year end and anticipate a further strengthening of cash flow through disciplined capital expenditure and sale of non-core assets.
Very successful integration of Italcementi
The implementation of the measures to integrate Italcementi is continuing to progress well. In North America, the operating margin in the acquired plants has already increased markedly. At €254 million, the synergy target for 2017 of €175 million has already been significantly exceeded after just nine months. We are confident that we can reach the 2018 target already at the end of 2017. Due to our many years of experience with the integration of companies, we were able to limit considerably the costs for restructuring and integration. Besides the achieved operating improvements, we significantly reduced refinancing costs, and benefit from the sale of non-core assets. Overall, the acquisition of Italcementi will have a clearly positive impact on earnings per share already in 2017.
HeidelbergCement renews its commitment to sustainability
In October, HeidelbergCement renewed its commitment to sustainability with the publication of the Sustainability Commitments 2030. Focus of the company is on six key areas of action aiming at actively supporting the UN Sustainable Development Goals. Climate protection is a particularly important issue for our industry. HeidelbergCement is committed to fulfill its share to limit global temperature rise to less than 2°C. In line with the objective agreed in Paris, HeidelbergCement aims to reduce specific CO2 emissions by 30% by 2030 (compared to 1990). The company has a leading role in large research projects to avoid CO2 emissions or use them as raw material, such as the carbonation of concrete in the recycling process.
Outlook for 2017 confirmed
In its latest forecast from October 2017, the International Monetary Fund (IMF) anticipates a stronger rise in global economic growth from 3.2% in 2016 to 3.6% (July forecast: 3.5%) in 2017. Accelerating growth in Europe and Canada and increasing growth rates in the emerging countries are the drivers behind this trend. Higher growth rates are expected in particular for the countries of Eastern Europe as well as the ASEAN-5 countries.
Global risks have increased considerably compared with the previous year. This relates both to geopolitical and macroeconomic risks. Among the geopolitical risks, the conflicts in the Middle East and in eastern Ukraine are especially noteworthy. In terms of macroeconomic risks, special mention must be made of the unpredictable consequences of a downturn in the Chinese economy, the impact of monetary policy measures, particularly by the US Federal Reserve, and the shift of political measures towards protectionism.
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 consistent solid condition of the German economy, the stable economic development in Benelux, and the beginning recovery in Southern Europe. For Northern Europe, we expect the strong market conditions to continue. In Eastern Europe, we anticipate growing demand for building materials as a result of the EU infrastructural programme, among other factors. The crisis in eastern Ukraine is continuing to impair the country’s sales volumes and result. 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. In China, we expect a continued market recovery supported by stable macroeconomics and government mandated production stops.
In view of the overall positive development of demand, HeidelbergCement continues to project increasing sales volumes of the core products cement, aggregates, and ready-mixed concrete.
HeidelbergCement estimates that the cost base for energy will increase moderately in 2017 as a result of the rise in oil and coal prices since the beginning of 2016. A slight to moderate rise in the cost of raw materials and personnel is also expected. HeidelbergCement remains focused on the continuous improvement of efficiency and margins. With this in mind, we are implementing Continuous Improvement programmes in the cement and aggregates business lines to establish a culture of consistent advancement 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 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 at the end of 2016. Over a three-year period, the optimisation of logistics and concrete formulations is expected to achieve an improvement in result of €120 million.
In 2017, we anticipate a significant decrease in financing costs on account of our disciplined cash flow management and the refinancing of maturities on more favourable terms.
On the basis of these assumptions, the Managing Board maintains unchanged 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 rate 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.
As a consequence of our disciplined capital spending, we reduce our cash-relevant investments planned for 2017 from €1.4 billion to €1.2 billion. The reduction relates only to investments in growth.
“The result for the third quarter confirms our expectations for the full year”, states Dr. Bernd Scheifele. “From a strategic perspective, we will maintain our focus on concluding the integration of Italcementi and reducing net debt through disciplined cash flow management and the sale of non-core assets. Our declared aim remains to achieve a long-term investment grade rating. We will focus our investments on projects that strengthen our market position and offer synergy potential. In operational terms, we will continue to concentrate on these 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 level of our customers, especially in the world’s rapidly growing metropolitan areas. We will continue to drive forward our global programmes to optimise costs and processes as well as focus more strongly on the potential presented by the digitisation of our value chain.”
“While the overall outlook for the global economy is positive, substantial macroeconomic and particularly geopolitical risks continue to exist at the same time”, continues Dr. Bernd Scheifele. “HeidelbergCement will benefit from the good and stable economic development in the industrial countries, above all in the United States, Canada, Europe, and Australia. These countries generate more than 60% of our revenue. With the acquisition of Italcementi and its rapid integration, we have impressively demonstrated our tremendous business potential and strong momentum. From a global perspective, we are well positioned to achieve our strategic goals – continuous growth and sustainable value enhancement for our shareholders.”
