HeidelbergCement Publishes Q3 2018 Results

HeidelbergCement grows sales volumes, revenue and earnings per share in the third quarter of 2018 – action plan initiated

• Growth in sales volumes in all business lines and positive pricing lead to organic revenue growth of 10%
• Result from current operations before depreciation and amortisation increases by 2% like-for-like
• Earnings per share improve by 12% to €2.72 (previous year: 2.42)
• Action plan initiated focusing on three major levers:
  • Portfolio optimisation: Accelerate disposals and review further divestment potentials
  • Operational excellence: Launch of new efficiency programme focusing on SG&A with a €100 million savings target
  • Cash flow and shareholder return: Adjust capex hurdle rate to share buyback valuation. Limit growth capex to an average of €350 million per year over the next two years.

Growth in sales volumes in all business lines

The positive market dynamics continued in the third quarter in all Group areas and led to growth in sales volumes in all business lines.

In the third quarter, the Group’s cement and clinker sales volumes rose by 5% to 35.1 million tonnes (previous year: 33.4). Adjusted for the disposal of the white cement business in the USA, deconsolidation of the business in Georgia and acquisition of Cementir Italia, the growth rate amounted to 6%. All Group areas contributed to this increase. While sales volumes in the emerging countries rose above average, North America grew only slightly due to the harsh weather in Texas as well as in the Midwest and Northeast of the USA.

Deliveries of aggregates rose by 1% to 87.7 million tonnes (previous year: 86.6). With the exception of Africa-Eastern Mediterranean Basin, all Group areas recorded increasing volumes.
Deliveries of ready-mixed concrete grew in all Group areas, rising by 4% to 12.9 million cubic metres (previous year: 12.4). Asphalt sales volumes improved by 5% to 3.4 million tonnes (previous year: 3.2) owing to the positive development of demand in the UK and in California as well as consolidation effects in the northwest of the USA and Australia. Excluding consolidation effects, sales volumes came in slightly above last year’s level.

Earnings per share rose significantly – premium earned on cost of capital

Group revenue rose by 7% in the third quarter to €4.9 billion (previous year: 4.6). Adjusted for negative currency and consolidation effects in the amount of €105 million, revenue even increased by 10%. Growth was driven particularly by strong demand in many markets and positive pricing.

Result from current operations before depreciation and amortisation (RCOBD) decreased by 2% to €1,039 million (previous year: 1,058), due to currency and consolidation effects. However, adjusted for these effects, RCOBD grew by 2%. Volume growth, successful price increases and efficiency programmes more than compensated cost inflation, particularly for energy.

“In the third quarter, the positive revenue and earnings per share trend continued and we could once again earn a premium on our cost of capital,” says Dr. Bernd Scheifele, Chairman of the Managing Board. “Improved financial costs and lower taxes overcompensated weaker than expected results from current operations due to significant rainfalls in our core markets in the USA as well as a higher than planned energy cost inflation. However, due to the weaker operational development, we had to partially adapt our outlook for 2018. As a countermeasure we have initiated an action plan with focus on three levers: portfolio optimisation, operational excellence as well as cash flow and shareholder return.”

The financial result improved by €12 million to €-92 million (previous year: -104). A further reduction of net interest expenses contributed to this development. Expenses for income taxes decreased significantly to €71 million (previous year: 176).

As a result, profit for the period increased by 12% to €581 million (previous year: 519). The profit relating to non-controlling interests rose by €3 million to €41 million (previous year: 38). The Group share consequently improved significantly by 12% to €539 million (previous year: 481), and earnings per share rose by €0.30 to €2.72 (previous year: 2.42).

HeidelbergCement continued to earn a premium on cost of capital in the third quarter. The return on invested capital (ROIC) of 7.1% clearly exceeded the weighted average cost of capital (WACC) of 6.3% of the last twelve months.

Employees

At the end of September 2018, the number of employees at HeidelbergCement stood at 59,589 (previous year: 60,830). The decrease of 1,241 employees essentially results from two opposing developments: On the one hand, more than 2,900 jobs were cut across the Group through portfolio optimisations, the realisation of synergies and due to efficiency increases in sales and administration as well as location optimisations. On the other hand, just under 1,700 new employees joined the Group, particularly as a result of the company acquisitions in Italy and Australia in the first quarter of 2018. Furthermore, there was an increase in some countries in the Western and Southern Europe and Northern and Eastern Europe-Central Asia Group areas, and in particular in Australia, owing to the solid market development.

Good cash flow development – net debt reduced

With around €1.2 billion, free cash flow of the last 12 months was stable at the prior period’s level. Lower cash outflow for interest payments and taxes compensated for weaker RCOBD and an increase in working capital due to the strong business activity. Working capital is expected to normalise by year-end. Net debt decreased by €135 million to €9.52 billion compared to the end of the third quarter 2017. Leverage, however, increased slightly from 3.0x to 3.1x due to the decline in RCOBD.

Outlook for 2018 – action plan initiated

HeidelbergCement partially adapted its outlook for 2018 on 18 October.

Sales volumes and revenue of the first nine months of 2018 developed in line with expectations and the guidance for the full year remains unchanged.

However, the outlook for 2018 for RCOBD, adjusted for currency and consolidation effects, was adapted to a low to mid single-digit percentage decline (previously: a mid to high single-digit percentage increase). Reason for the adjustment is – besides persistent adverse weather conditions in the core markets of HeidelbergCement in the USA – among others an energy cost inflation that significantly exceeded our expectations and could only partially be compensated by price increases over the course of the year. We expect now energy costs to increase by a high single to low double-digit percentage. In addition, gains from the sale of depleted quarries are anticipated to be lower than in the prior year. Net capex spending is expected to amount to €1.3 billion for the full year, slightly higher than the €1.1 billion originally planned. Consequently, we expect now that the leverage at year-end will rise to just above the so far anticipated value of 2.5x.

Outlook for Group share of profit for the year 2018 remains unchanged, which means we continue to expect a significant increase.

“In light of the weaker than expected operational result development, we take strong actions to drive earnings and cash flow generation,” says Dr. Bernd Scheifele. “We remain committed to improving shareholder value and maintaining a solid investment grade rating.”

The company has initiated an action plan with focus on three levers: portfolio optimisation, operational excellence as well as cash flow and shareholder return.

• Portfolio optimisation: Accelerate disposals and review further divestment potentials.
• Operational excellence: Launch of a new efficiency programme focusing on SG&A with a €100 million savings target over the next two years. Start of an aggressive commercial excellence initiative to regain margins by significant price increases.
• Cash flow and shareholder return: Adjust capex hurdle rate to share buyback valuation. Limit growth capex to an average of €350 million per year for the next two years. Share buyback to be considered in mid-2019.

Further details of the portfolio optimisation and operational excellence initiatives will be announced with the full year 2018 results in March 2019.

Overview of the HeidelbergCement Group

1) Adjusted for currency and consolidation effects

2) Attributable to the shareholders of HeidelbergfCement AG

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