HeidelbergCement operational report
Published by Joseph Green,
2014 - the best year in operational terms since the financial crisis
HeidelbergCement has brought the 2014 financial year to a successful close despite a challenging environment. The decisive factors in this achievement were the Group's geographical positioning in countries experiencing solid economic development in North America, Europe, Asia, and Africa, successful price increases in major markets, and the successful implementation of the margin improvement programmes.
"HeidelbergCement is in the best shape of the last 15 years", said Dr. Bernd Scheifele, Chairman of the Managing Board of HeidelbergCement. "Revenue and operating income are experiencing a definite growth trend. With the sale of the building products business we have successfully repositioned the company towards our core products cement and aggregates as well as ready-mixed concrete and asphalt. Taking into account the selling proceeds, we have reduced net debt by almost €9 billion since the end of 2007 to noticeably less than €6 billion, thereby clearly falling below the goal of €6.5 billion we communicated to the capital market."
Operating income significantly increased - dividend proposal raised by 25%
All business lines clearly improved their sales volumes year on year. In operational terms, the sales figures for cement and aggregates rose in all Group areas. Thanks to this growth in sales volumes and successful price increases in major markets, revenue improved moderately to €12 614 million (previous year: €12 128) despite substantial negative exchange rate effects of €515 million.
Operating income rose significantly by 12.9% before exchange rate and consolidation effects. This clearly exceeds the forecast published in the 2013 Annual Report. Besides the price increases and the successful implementation of the margin improvement programmes, stable energy costs also made a contribution to the positive development of results. Although the operating income was impaired by negative exchange rate effects of €118 million, it rose to €1595 million (previous year: €1519).
Additional ordinary result declined by €76 million to €-63 million (previous year: €13 million). In the previous year, disposal proceeds and a high non-cash gain from the sale of a company structure that was no longer required balanced out impairment losses and restructuring expenses to generate a small gain. In the reporting year, both income and expenses decreased considerably. Net disposal proceeds of €22 million were not able to offset non-cash impairment of goodwill in the Ukraine amounting to €41 million, impairment of property, plant, and equipment totalling €17 million, and restructuring expenses of €19 million, which were predominantly incurred in the fourth quarter.
Financial result fell by €92 million to €-629 million (previous year: -537). Although we were able to reduce net interest expenses, this was not sufficient to compensate for currency losses and a decline in the other financial result. The profit before tax from continuing operations decreased by €91 million to €931 million (previous year: €1022).
Expenses for income taxes declined by €147 million to €65 million (previous year: 212). Besides a drop of €35 million in current taxes, this was largely due to significant tax revenue from the capitalisation of existing losses carried forward in view of the improved market and business prospects in the USA.
Net income from discontinued operations fell by €302 million to €-179 million (previous year: €123 million). The result for 2014 was impaired by a non-recurring evaluation loss of €236 million from the sale of the building products business. The income for 2013 results primarily from the capitalisation of receivables against primary insurers based on a positive court ruling.
The profit for the financial year decreased by €246 million to €687 million (previous year: €933 million). The previous year's figure, however, included numerous non-recurring effects amounting to around €420 million. Adjusted for these non-recurring effects, the profit for the financial year improved substantially, surpassing the forecast published in the 2013 Annual Report.
In view of the overall positive business development, the Managing Board and Supervisory Board will propose to the Annual General Meeting on 7 May 2015 an increase of 25% in the dividend to €0.75 (previous year: €0.60) per share. The Group is thus continuing the dividend's steady, moderate upward trend of the past few years. In the medium term, HeidelbergCement remains on course to reach its goal of a payout ratio of 30% to 35%.
Operating cash flow improved - net debt markedly reduced
Operating cash flow increased by €313 million to around €1.5 billion as a result of the good operating performance. The average days working capital was further optimised and fell to a record low of 37 days. Net debt at the end of the year amounted to €6.9 billion, which was €378 million less than at the end of 2013.
Gearing (net debt-to-equity ratio) decreased to 48.6% (previous year: 58.3%) by the end of the year. Dynamic gearing ratio (net debt-to-operating income before depreciation (OIBD)) improved to 3.0x (previous year: 3.3x). The liquidity reserve totalled €4.0 billion.
Taking into account the proceeds from the sale of the building products business of €1.245 billion, net debt would have been significantly below €6 billion and the dynamic gearing ratio just 2.5x at the end of the year thus beating our targets of €6.5 billion net debt and a dynamic gearing ratio of below 2.8x.
Targeted expansion of market position in growth markets
In 2014, HeidelbergCement remained consistent and disciplined in pursuing the targeted expansion of its market position in the cement business line in growth countries. Cement and clinker facilities with a capacity of over 5 million t were put into operation. At the Citeureup production site in Indonesia, a grinding facility with an annual capacity of 1.9 million t became fully operational in May 2014. In July, production started at the new CaspiCement cement plant in western Kazakhstan, with an annual capacity of 0.8 million t. At the beginning of October, HeidelbergCement put into service a new cement mill with an annual capacity of 0.8 million t in its cement plant in Tanzania. In the fourth quarter, the commissioning of a clinker plant in Togo with an annual capacity of 1.5 million t and a cement mill in Burkina Faso (0.8 million t per year) followed. In 2015, we are planning to put additional capacities of over 5 million t into operation, including 4.4 million t at the Citeureup production site in Indonesia alone. Consequently, HeidelbergCement is continuously creating new potential for further growth.
Successful pension strategyIn 2014, the plan assets of HeidelbergCement's pension funds achieved income totalling €678 million or 18% of the plan assets. This more than compensated for the actuarial increase in the funded pension obligations.
Outlook for 2015
In its forecast from January 2015, the International Monetary Fund (IMF) expects growth rates of the global economy to increase only slightly in 2015 in comparison with the previous year. The acceleration is supported by the continued rise in economic growth in the USA and a further recovery of the economy in the euro zone. The significant drop in the oil price since September 2014 is also acting as an additional economic stimulus programme for countries that import crude oil. In contrast, the growth rate of the emerging countries is expected to stagnate. This is due, on the one hand to the weakening growth in China, and on the other hand, to the subdued outlook for countries that export raw materials.
Uncertainties concerning the future development of the oil price represent an additional risk factor for global economic development. These include the effects of monetary policy measures, particularly those of the US Federal Reserve, on cash flows and exchange rates in the emerging countries, in addition to geopolitical risks related to the political crises and conflicts in the Middle East as well as eastern Ukraine and Russia.
In North America, HeidelbergCement, in conformity with the IMF, expects a continuing economic recuperation and consequently a further increase in demand for building materials. Besides new housing construction, commercial and infrastructure construction also contribute increasingly to this growth. In Eastern Europe, markets should continue to stabilise and the first impetus is expected to stem from the EU's new infrastructure programme. We anticipate a further rise in demand for building materials in Central Asia. The crisis in eastern Ukraine is impairing the sales volumes and results of the country, but has not yet had a significant effect on the operating activities of HeidelbergCement in Russia.
However, the currencies of both countries have depreciated considerably against the euro since the crisis began. In Western and Northern Europe, positive market development is expected. This is based on the recovery in the United Kingdom, the consistent solid state of the German economy, and stable economic development in Northern Europe 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.
HeidelbergCement expects that the cost base for energy will slightly to moderately increase in 2015 on account of the forecast growth in sales volumes, the elimination of subsidies for electricity and fuels in Indonesia, and the weakening of the euro. A moderate rise in the cost of raw materials and personnel is also expected, partly because of the weakening euro. The objective is to offset this by means of suitable measures and to further improve our margins in the cement and aggregates business lines. To this end, HeidelbergCement will continue pursuing its two price initiatives "PERFORM" for the cement business in the USA and Europe as well as "CLIMB Commercial" for the aggregates business. Another area of focus in 2015 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 this in mind, the Group started the "Continuous Improvement Program" (CIP) in 2014, which will also establish a culture of continuous improvement of work processes. Process optimisations are expected to achieve a sustainable improvement in results of at least €120 million by the end of 2017. In addition, the optimisation of logistics activities in connection with the "LEO" programme will be pursued with the aim of reducing costs by €150 million over a period of several years.
For 2015, HeidelbergCement anticipates a significant decrease in financing costs because of the noticeable decline in net debt due to cash flow from operating activities and the sale of the building products business.
On the basis of these assumptions, the Managing Board has set the goal of significantly increasing revenue, operating income, and profit for the financial year in 2015. Additionally, HeidelbergCement should earn its cost of capital in 2015.
"Our strategic points of focus remain unchanged in 2015", explained Dr. Bernd Scheifele. "These are: cost leadership through continuous efficiency improvements, reduction of debt in order to regain our investment grade rating, and targeted investment in cement capacities in growth markets as well as in raw material deposits to strengthen our global market leadership in aggregates. We will continue to exercise strict expenditure discipline in 2015."
HeidelbergCement expects to make investments of around €1.2 billion to upgrade and expand capacities in 2015. New capacities of more than 5 million t are set to be commissioned in 2015, primarily in Indonesia and the countries south of the Sahara. Furthermore, investments are planned for modernisation measures and increasing efficiency, as well as environmental protection, particularly in the USA and Germany.
"We are confident about 2015", continued Dr. Bernd Scheifele. "The outlook for the global economy is positive, but there are still macroeconomic and especially geopolitical risks. We will continue to benefit from the positive development in North America, the United Kingdom, Germany, and Northern Europe. These countries generate almost 50% of our revenue. The considerable drop in the oil price and the weaker euro will provide us with additional tailwind. The results of the first two months in 2015 confirm our outlook. In view of our strong positioning in raw material reserves, our production sites in attractive locations, our outstanding vertical integration, and our excellent product portfolio, we are well-equipped to achieve our goals."
Edited from various sources by Joseph Green
Read the article online at: https://www.worldcement.com/europe-cis/19032015/heidelberg-cement-operational-report-551/
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