HeidelbergCement publishes Q2 2012 results

HeidelbergCement increases revenue and profit in the second quarter – significant improvement in operating cash flow

Highlights Q2 2012 and outlook:

• Strong operative development compared to previous year, based on growth in sales volumes in North America and Asia as well as successful price increases
  • Revenue up 11% to €3.8 billion
  • Operating income before depreciation (OIBD) up 7% to €698 million
  • Operating cement margin improved
• Operating cash flow improved by €196 million to €505 million
• Net debt reduced by €456 million compared to Q2 2011
• “FOX 2013” savings programme ahead of schedule; new initiatives started to reduce logistic costs (“LEO”) and improve cement margins (“PERFORM”)
• Sustained growth expected in Asia-Pacific and Africa-Mediterranean Basin as well as continuing recovery in North America; weakening demand in parts of Europe
• Targets for 2012 confirmed: increase in revenue and operating income

Overview January – June 2012

Q2 cement sales volumes benefit from strong demand in North America and Asia
In Q2 2012, cement sales volumes benefited from the sustained recovery of North America’s construction activity as well as from the strong growth of demand in HeidelbergCement’s markets in Asia. The increase in sales volumes in these Group areas more than compensated for losses in some European markets, caused by declining infrastructure expenditure. Due to a very positive development, aggregates sales volumes in North America rose, but could not completely offset the decrease in sales volumes in Europe.

In Q2 2012, the Group’s cement and clinker sales volumes rose by 3.5% to 24.5 million tonnes (previous year: 23.7). Group area Asia-Pacific contributed the most to this increase, followed by North America, Eastern Europe-Central Asia, and Africa-Mediterranean Basin. Indonesia and Bangladesh achieved double-digit growth. Cement sales volumes in North America continued to develop strongly with an increase of 10% compared to Q2 2011. In Northern Europe, cement sales volumes further increased, but could not compensate for the decline in deliveries in the United Kingdom and the Netherlands. Aggregates volumes fell by 2.6% to 67.1 million tonnes (previous year: 68.9); adjusted for consolidation effects they declined by 3.4%. Increased sales volumes in North America could not offset the volume losses in Europe and Australia. Ready-mixed concrete deliveries increased by 1.6% to 10.4 million cubic metres (previous year: 10.2). Asphalt sales volumes fell by 9.3% to 2.3 million tonnes (previous year: 2.5).

In the first half of the year, cement and clinker sales volumes rose by 4.1% to 42.7 million tonnes (previous year: 41.0). Aggregates shipments slightly declined by 1.0% to 114.1 million tonnes (previous year: 115.2). Deliveries of ready-mixed concrete remained almost stable at 18.5 million cubic metres (previous year: 18.6); sales volumes of asphalt fell by 11.0% to 3.7 million tonnes (previous year: 4.1).

Development of revenue and results

In Q2 2012, Group revenue rose by 11.4% to €3,781 million (previous year: 3,394). Positive exchange rate effects supported the development of revenue particularly in North America, Asia-Pacific, as well as Western and Northern Europe. Excluding exchange rate and consolidation effects, revenue grew by 6.4%, with all Group areas apart from Western and Northern Europe recording an increase.

Operating income before depreciation (OIBD) increased by 7.1% to €698 million (previous year: 651); operating income improved by 12.3% to €495 million (previous year: 441). The growth in cement sales volumes and successful price increases contributed to this improvement in results. Excluding exchange rate and consolidation effects, OIBD increased by 3.8% and operating income by 9.8%.

“The quality of our results has clearly improved in the second quarter,” says Dr. Bernd Scheifele, Chairman of the Managing Board. “This is reflected especially by the significant increase in operating cash flow which led to a noticeable reduction in net debt. The price increases that we have implemented to offset the rise in energy costs were mostly successful. This enabled us to increase our cement margins in the second quarter of 2012 compared to the previous year. We will do everything in our power to continue this positive trend in the second half of 2012.”

The additional ordinary result of the second quarter deteriorated by €48.1 million to
€-44.0 million (previous year: 4.1). This is mainly due to impairment of goodwill as well as property, plant, and equipment in Spain of €25.5 million as a technical reaction to the increased risk interest rate in Spain. The financial result slightly improved by €2.7 million to €-150.1 million (previous year: -152.8).

Profit before tax from continuing operations amounted to €317.8 million (previous year: 319.1). Tax expenses in Q2 2012 fell to €83.0 million (previous year: 100.6). Net income from continuing operations rose to €234.8 million (previous year: 218.6).

Overall, profit in Q2 2012 rose by 19.3% to €248.6 million (previous year: 208.4). Group share of profit went up 15.6% to €184.1 million (previous year: 159.2).

In the first half of the year, Group revenue rose by 9.7% to €6,580 million (previous year: 5,996). Operating income before depreciation (OIBD) improved by 0.8% to €912 million (previous year: 904); operating income went up 1.6% to €509 million (previous year: 501). The profit for the first half of the year amounted to €93.2 million (previous year: 88.2). Profit attributable to non-controlling interests increased to €113.0 million (previous year: 89.6). Therefore, Group share of profit amounts to €-19.7 million (previous year: -1.4).

At the end of Q2 2012, the number of employees at HeidelbergCement stood at 54,362 (previous year: 54,539). The reduction of 177 employees essentially results from two opposing developments: on the one hand, almost 700 job cuts were made in North America, the United Kingdom, Spain, and in some Eastern European countries as a result of efficiency improvement programmes in sales and administration, location optimisations, and capacity adjustments. On the other hand, HeidelbergCement hired about 500 new employees in growth markets like India and Indonesia.

Net debt noticeably reduced in comparison with the previous year

At the end of Q2 2012, HeidelbergCement’s net debt amounted to €8.12 billion, which corresponds to a reduction of €456 million compared to the end of Q2 2011. Gearing improved to 58.0% (previous year: 71.4%), accordingly. A major contributor to this noticeable debt reduction was the significant increase in operating cash flow by €196 million to €505 million, compared to the previous year.

“FOX 2013” programme ahead of schedule – new initiatives “LEO” and “PERFORM” started

Already in the first half of 2012, the three-year programme for financial and operational excellence, “FOX 2013”, led to an improvement in cash flow of €138 million. It is thus well ahead of schedule to generate total savings of €200 million in 2012.

To further improve operating margins, HeidelbergCement started two new initiatives: “LEO” and “PERFORM”. “LEO” is a project for the reduction of logistic costs Group wide. The aim is to achieve €150 million in cost savings by the end of 2014 by implementing an integrated material flow management system across all three core business lines. The project “PERFORM” aims at margin improvements in cement in Europe and North America. In order to achieve this goal, internal pricing strategies will be optimised and the sales staff trained, accordingly.

Targeted expansion of market positions in growth markets

The planed expansion of cement capacities in attractive emerging markets is progressing. In Tanzania, the modernisation of cement kiln No. 3 at the cement plant of Tanzania Portland Cement has been completed. The kiln is currently in the ramp-up phase and is expected to increase the clinker capacity of the plant by 250,000 tonnes. The commissioning of new clinker and cement plants in Central India with a cement capacity of 2.9 million tonnes is expected for the second half of 2012. In Ghana and Liberia, HeidelbergCement is constructing new cement mills with capacities of 1 million tonnes and 0.5 million tonnes, respectively. Production is scheduled to start in Q4 2012.

Outlook

Global economy is still dominated by high political and economic uncertainties. The ongoing need for countries to deleverage suggests that the economic growth will remain below pre-crisis level for some time, especially in Europe. In its latest forecast, the International Monetary Fund slightly lowered the growth rates for the world economy and some key countries such as the United States, the United Kingdom, China, and India while improving the outlook for Germany. Neither an intensification of the debt crisis nor a significant drop of China’s economic growth is anticipated. The growth rates in the emerging countries of Asia and Africa are still expected to remain significantly above those of the mature markets in North America and Europe.

In the Western and Northern Europe Group area, HeidelbergCement continues to expect a slight decline in demand and therefore falling sales volumes of cement and aggregates. This is mainly due to the weather related strong level of sales volumes in the previous year, the cold spell in Europe in the first quarter of 2012, and the decline in demand in the United Kingdom and the Netherlands. In the Eastern Europe-Central Asia Group area, HeidelbergCement expects further but more moderate growth in cement sales volumes. This growth will be largely driven by additional capacities and, to some extent, by strong increases in demand in Russia and Central Asia, but will be slightly weakened by the recent drop in demand in Poland and the Czech Republic. Based on the strong development in the first half of the year in North America, the company expects increasing demand for cement due to the recovery of investments in private residential construction and commercial construction. HeidelbergCement anticipates the demand for building materials of the raw materials industry in Canada and the United States to further support its sales volumes. In its Group areas Asia-Pacific and Africa-Mediterranean Basin, HeidelbergCement continues to expect a sustained positive demand trend.

Regarding costs, HeidelbergCement anticipates a further increase in energy and raw material prices – albeit significantly weaker compared to the previous year – as well as rising personnel costs. HeidelbergCement aims to offset the cost increase and gain back some of the margins lost in 2011 by cost reduction measures and targeted price increases. The Managing Board sticks to its target of further increasing revenue and operating income in 2012 compared to the previous year.

“The result of the second quarter confirmed our outlook for the 2012 financial year”, explains Dr. Bernd Scheifele. “In North America, we see a stronger than expected growth in demand. In contrast, construction activity in some European countries has weakened. Regarding margin development, we expect further declining cost pressure for energy in the second half of the year. We will unabatedly continue our efforts to reduce costs, improve efficiency, and increase prices. To further support those measures, we have started the two new initiatives “LEO” and “PERFORM”, which are aiming at reducing logistic costs across all business lines and improving cement margins. Deleveraging remains the highest priority for us, in order to regain our investment grade rating. We will also continue our successful strategy of targeted investments to expand cement capacities in the growth markets of Asia, Africa, and Eastern Europe. Thanks to our advantageous geographical positioning in attractive markets – in both emerging and industrialised countries –, and the global market leadership in the aggregates business, HeidelbergCement is excellently positioned to benefit over-proportionally from the continued economic growth.”

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