HeidelbergCement publishes Q1 2014 result

HeidelbergCement increases revenue and results in Q1 2014 – mild winter and positive economic development in Europe lead to significant growth in sales volumes

• Double-digit increase in sales volumes in all business lines
• Group revenue rose by 5.7% to €bn 2.75 (previous year: 2.60; on a comparable basis +14.8%)
• Operating income before depreciation (OIBD) improved by 15.6% to €m 229 (previous year: 198; on a comparable basis +44.9%)
• Continued margin improvement:
  • Successful price increases in key markets
  • Ongoing cost control
• Disciplined management of cash flow and working capital
• Financing structure improved
• Prospects for 2014 confirmed:
  • Positive outlook for global economy due to recovery in the mature markets of North America and Northern Europe, esp. USA and UK
  • Growth in sales volumes of cement, aggregates, and ready-mixed concrete
  • Increase in revenue, operating income, and profit for the financial year on a comparable basis 

* Amounts were restated due to retrospective application of IFRS 10 and IFRS 11

Q1 sales volumes benefit from mild winter and economic recovery in Europe 

The mild winter weather and the positive development of the economy in HeidelbergCement’s markets have led to a significant increase in sales volumes in all business lines in Europe. In North America, the sales volumes of building materials were affected by the cold and snowy winter, but still remained at virtually the same level of the previous year. The markets in Asia and Africa continued to develop positively.

Overall, the sales volumes for cement, aggregates, ready-mixed concrete, and asphalt all increased by a double-digit percentage.

The Group’s cement and clinker sales volumes rose by 10.0% to 17.5 million tonnes (previous year: 15.9). The Western and Northern Europe as well as Eastern Europe-Central Asia Group areas reported double-digit growth rates. Poland, in particular, experienced a significant increase in demand. Sales volumes in North America declined slightly due to the cold and wet weather in the northeast of the USA and in Canada. Asia and Africa, however, were able to build on the positive development in sales volumes of the previous years.

Deliveries of aggregates across the Group amounted to 44.3 million tonnes (previous year: 39.8), an increase of 11.3%. Ready-mixed concrete deliveries rose by 11.2% to 7.7 million cubic metres (previous year: 6.9). Asphalt sales volumes grew by 28.2% to 1.5 million tonnes (previous year: 1.2).

Relevant changes in accounting

The financial figures of the first quarter 2014 were prepared for the first time in line with the new international accounting standards IFRS 10 und 11. According to the new standards, revenue and operating income of joint ventures – among others – are no longer proportionately included in the items of the consolidated income statement. This means that the results from important operations, e.g. in Turkey, China, Hungary, Bosnia and Herzegovina, and Texas, would be no longer included in the operating income of HeidelbergCement. As a consequence, the strength of HeidelbergCement’s operating performance would no longer be reflected completely in the operating income. To improve the presentation, HeidelbergCement will therefore include the net result from joint ventures as part of the operating income before depreciation (OIBD), starting with the first quarter of 2014.

Revenue and operating income increased despite negative currency effects

Group revenue for the period of January to March 2014 rose by 5.7% to €2,750 million (previous year: 2,602). Excluding consolidation and exchange rate effects, the increase amounted to 14.8%. This primarily reflects the positive development of sales volumes in all business lines and the successfully implemented price increases in major markets. While positive effects from changes in the consolidation scope to the amount of €18 million were negligible, the weakening of numerous currencies against the euro amounting to €221 million had a considerable negative impact on the development of revenue.

Operating income before depreciation (OIBD) rose significantly by 15.6% to €229 million (previous year: 198). Besides the pleasing development of sales volumes and revenue, the increase in the result from joint ventures – due to the positive development especially in Turkey and China – to €22 million (previous year: 7) contributed to this growth. Operating income increased by €41 million to €50 million (previous year: 9).

“HeidelbergCement showed strong operational development in the first quarter of 2014, continuing the positive trend of the previous year,” said Dr. Bernd Scheifele, Chairman of the Managing Board. “Europe contributed significantly to the improvement of results due to the mild winter and the positive economic development in our markets. In addition, we were able to implement price increases in some important markets of our Group. Our measures to increase the margins continue to be effective.”

The additional ordinary result rose by €43 million to €11 million (previous year: -32). The previous year’s figure included a €32 million addition to provisions in connection with the decision by the German Federal Court of Justice in the German antitrust proceedings. The financial result deteriorated by €22 million to €-162 million (previous year: -140). The main reason for this is the non-recurring depreciation and amortisation of the transaction fee for the early refinanced syndicated credit facility.

Profit before tax from continuing operations rose by €60 million to €-104 million (previous year: -164). Expenses relating to taxes on income decreased by €21 million to €2 million (previous year: 23). As a result, net income from continuing operations increased to €-106 million (previous year: -187).

Overall, the loss for the period amounts to €-108 million (previous year: -187). The profit attributable to non-controlling interests fell by €9 million to €39 million (previous year: 48). The Group share therefore amounts to €-147 million (previous year: -235).

At the end of March 2014, the number of employees at HeidelbergCement stood at 50,908 (previous year: 49,960). The increase of 948 employees essentially results from two opposing developments: on the one hand, more than 300 jobs were cut in some Eastern European countries, in Benelux, and India in connection with efficiency increases in sales and administration as well as location optimisations. Furthermore, the number of employees was reduced by around 180 due to the sale of the cement grinding plant in Raigad, India. On the other hand, more than 700 new employees were hired in growth markets such as Indonesia and Central Asia. In the United Kingdom, Germany, North America, and Australia, the workforce grew by just under 450 employees as a result of the good development of demand. Moreover, our number of employees increased by around 230 due to the acquisition in April 2013 of the remaining 50% in the hitherto proportionately consolidated Midland Quarry Products, United Kingdom, and the increase in shares in January 2014 in Cimescaut Group, Belgium, which was previously accounted for at equity.

Disciplined management of cash flow and working capital – improved financing structure
Operating cash flow, which is traditionally negative in the first quarter, improved by around 10% to €-317 million. This development is attributable to the improved net result and the continued discipline in the management of working capital. Days working capital could be further reduced to the record low of 43 days. Net debt at the end of the first quarter amounted to €7.96 billion, which was around €0.35 billion more than at the end of the same quarter of the previous year. At the end of 2013, net debt was still around €0.5 billion above the previous year’s figure. The relative reduction is a consequence of the improved operating cash flow and less investment activities. In the previous year, HeidelbergCement increased its participation in the Australian company Cement Australia from 25% to 50% as part of a strategically sound and low-risk acquisition. At the end of the first quarter, gearing was at 64.0% (previous year: 55.1%) and the ratio of net debt to operating income before depreciation (OIBD) was 3.4x. The liquidity reserve remained almost unchanged at €4.1 billion.

HeidelbergCement was able to further improve its financing structure in the first quarter of 2014. The signing of a new €3 billion syndicated credit line at better conditions, as well as the issuance of a 5-year €500 million bond with a fixed interest rate of only 2.25% p.a. contributed to this improvement. The new syndicated credit line replaced the previous credit line, which would have expired in December 2015. The new credit facility offers significantly better terms and conditions compared to the previous one. Out of the box margin is reduced from 125 bps to 95 bps. In addition, formerly existing upstream guarantees and share pledges could be removed.

Outlook confirmed for 2014

In its latest forecast, the International Monetary Fund (IMF) slightly lowered the growth rates for the global economy, but continues to expect a considerable acceleration in economic growth compared with the previous year. The slowdown is solely attributable to weaker performance in the emerging countries. In the mature markets, the growth rates were even slightly raised in part, e.g. for Germany and the United Kingdom. However, the necessary budgetary consolidation measures in the industrial countries and their effects on the emerging countries continue to threaten the development of the global economy. The continued tapering of the US Federal Reserve may lead to further capital outflows and exchange rate adjustments. In addition, the political tensions in the Middle East and the Ukraine pose risks to the economic development.

In North America, HeidelbergCement expects a continuing economic recovery and consequently a further growth in demand for building materials. Besides residential construction, commercial and infrastructural construction are increasingly making a contribution to this growth. A stabilisation of the Eastern European market is anticipated following the weak phase experienced during 2013. Poland is expected to be the first country in this region to benefit from an incipient recovery. We project a further rise in demand for building materials in Central Asia. Although the crisis in the Ukraine does not affect operating business in the Ukraine and Russia, the currencies of both countries have significantly lost in value against the euro since the beginning of the crisis. In Western and Northern Europe, positive market development is expected in all countries. This is based on the healthy economic development in Germany and Northern Europe, as well as a recovery in the United Kingdom and Benelux. In Asia and Africa, the Group still counts on sustained growth in demand. In view of the positive development of demand and the commissioning of new capacities, HeidelbergCement anticipates an increase in the overall sales volumes of the core products cement, aggregates, and ready-mixed concrete.

In terms of costs, the Group expects a light to moderate rise in the cost base for energy, raw materials, and personnel. The objective is to offset this increase by means of suitable measures and to improve our margins in the cement and aggregates business lines, bringing them back to pre-crisis levels. To this end, HeidelbergCement will continue pursuing its two price initiatives “PERFORM” for the cement business in the United States and Europe, and “CLIMB Commercial” for the aggregates business. Another area of focus in 2014 will be to not only safeguard but continuously improve the cost savings and efficiency increases in cement and aggregates that were achieved in the past few years with “OPEX” and “CLIMB”. Moreover, the “LEO” programme aims to optimise logistics with the goal of reducing costs by €150 million over the next few years. For 2014, HeidelbergCement projects a slight decline in financing costs due to the improved financing structure and despite the higher level of net debt at the start of the year.

On the basis of these assumptions, the Managing Board has set the goal of further increasing revenue, operating income, and profit for the financial year in 2014 on a comparable basis, i.e. adjusted for exchange rate and consolidation effects as well as non-recurring effects.

“Business development in the first quarter has strengthened our confidence in the outlook for the 2014 financial year,” says Dr. Bernd Scheifele.” Deleveraging in order to regain investment grade rating, remains the highest priority for us. To this end, we will continue to be very disciplined in our spending in 2014 and focus more intensively on the sale of the building products business line in the United Kingdom and North America, as well as other assets that do not belong to our core business. At the same time, we will remain on course with our successful strategy of targeted expansion of our cement capacities in growth markets. We will continue unabatedly with our programmes to improve margins – “PERFORM” in the cement business, “CLIMB Commercial” in the aggregates business – and “LEO” to optimise logistics.”

“In 2014, we will benefit from the economic development in the industrial countries, particularly in North America, the United Kingdom, Germany, and Northern Europe”, continues Dr. Bernd Scheifele. “These countries generate almost 50% of our revenue. Furthermore, we are improving our market position in growth markets with the commissioning of modern production facilities. In view of these factors as well as our high operational efficiency, we consider ourselves well-equipped to benefit over-proportionally from the accelerating economic growth in the interests of our shareholders.”

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