- Holcim initiates cost-cutting measures and is planning to close plants in Spain and the US
Development on a like-for-like basis*:
- Cement deliveries increased by 0.7 percent and ready-mix concrete volumes grew by 7.4 percent; sales of aggregates fell by 7.4 percent
- Net sales appreciated by 6.6 percent
- Operating EBITDA decreased by 5.2 percent
- Adjusted to a non-recurring capital gain and special dividend in 2007, net income attributable to equity holders of Holcim Ltd decreased by 5.8 percent
- Against the backdrop of a slowing global economy, Holcim forecasts that internal operating EBITDA development excluding the planned closing costs will continue to weaken in the fourth quarter.
* Factoring out changes in the scope of consolidation and currency translation effects.
Third quarter economic growth continued to weaken
Recently, the turbulence in the financial sector has increased significantly. This, along with rising inflation and a surge in the cost of energy and other resources has slowed down the real economy. As a consequence, third quarter economic growth continued to weaken.
The construction materials markets of the five Group regions were affected differently. The US, the UK and Spain in particular saw sharp falls in demand for construction materials. In contrast, several European Group companies recorded gains in terms of volume, particularly in central, eastern and southeastern Europe. Holcim operated successfully in Latin America and Group region Africa Middle East. With a few exceptions, capacity in the construction sector of the Asia Pacific region was well utilized and Group companies sold higher volumes.
Limited ability to quickly pass additional purchasing costs through to selling prices depressed margins despite numerous efforts to increase operating efficiency.
Substantial deconsolidations still have to be considered in relation to prior periods. Holcim South Africa and Egyptian Cement have been excluded from the scope of consolidation as of June 2007 and January 2008 respectively. In addition, many currencies have lost value against the Swiss franc, adding to the pressures on the consolidated income statement.
In view of the increasingly difficult market situation in Spain and the US, it is planned to close the plants Torredonjimeno of Holcim Spain and Dundee and Clarksville of Holcim US. These customers will be served efficiently from the neighboring plants. Expected closing costs of CHF 300 million will be recognized in the fourth quarter.
On a like-for-like basis and considering the changed economic environment, Holcim nonetheless posted encouraging results for the first nine months of the year.
Consolidated deliveries of cement decreased by 3.5 percent to 108.8 million tonnes, while consolidated sales of aggregates declined by 7.1 percent to 127.3 million tonnes. Ready-mix concrete volumes increased by 10.1 percent to 37 million cubic meters. Asphalt sales declined by 1.9 percent to 10.3 million tonnes.
Consolidated net sales amounted to CHF 19.3 billion (-4.7 percent) and operating EBITDA to CHF 4.4 billion (-18.3 percent). Factoring out changes in the scope of consolidation totaling CHF 253 million and negative currency translation effects of CHF 446 million, operating EBITDA decreased by only 5.2 percent. The decline reflects the worsening business environment in the US, UK and Spain as well as the margin pressure in the two Indian Group companies. The operating EBITDA margin was 22.6 percent versus 26.3 percent in the first nine months of 2007. While the margin contracted in the cement sector, the Group achieved an increase in the aggregates segment. As a result of the increase in net current assets and the lower operating EBITDA, cash flow from operating activities decreased to CHF 1.7 billion. Group net income declined by 45.4 percent to CHF 2.1 billion. However, in order to compare net income to the first nine months of 2007, the one-off capital gain and special dividend totaling CHF 1.3 billion arising from the sale of the stake in South Africa in 2007 need to be taken into account. Net income attributable to equity holders of Holcim Ltd decreased by 47.3 percent. Like-for-like and excluding the one-time effects of the previous year, it decreased by 5.8 percent or CHF 119 million.
Mixed economic development in Europe
During the course of the year, the change in the economic environment had a growing impact on the production sector. The UK and Spain in particular, but also Italy experienced declines in construction activity. In Switzerland and Germany, demand for building materials remained solid. Eastern and southeastern Europe also experienced a large volume of construction activity, particularly in Romania, Bulgaria, Russia and Azerbaijan.
The Benelux countries and northern France have seen a decline in construction activity since the summer months, but Holcim has benefited from major orders related to the expansion of the motorway and rail networks. In the UK, the government postponed projects for the extension of transport infrastructure. Additional factors were the unfavorable development in the real estate market and restrictive mortgage lending. While Aggregate Industries UK saw a rise in ready-mix concrete volumes due to the encouraging order situation in the Greater London area, deliveries of aggregates dropped. Holcim Germany sold more cement both within Germany and in exports. Due to acquisitions, the north German Group company also reported significant increases in sales of aggregates and ready-mix concrete.
Capacity utilization in the Swiss construction industry remained solid, and Holcim was able to moderately improve its cement deliveries. Following the completion of the major bridge and tunnel construction projects on Zurich's southern bypass, sales of aggregates were similar to previous-year levels; ready-mix concrete volumes decreased slightly. In a demanding business environment, Holcim Italy sold more aggregates and ready-mix concrete. The Spanish Group company suffered from the crisis in the residential construction segment and the reluctance of the public sector to award contracts. As a result, deliveries of cement and aggregates fell markedly. However, ready-mix concrete sales increased due to the first-time consolidation of the operations acquired from Tarmac Iberia in September 2008. Due to the declining market development, Holcim Spain decided to start a cost reduction program in all activities - including the planned close down of the cost-intensive plant Torredonjimeno with an annual capacity of 0.3 million tonnes of cement.
In eastern and southeastern Europe, the Group achieved solid volume growth, particularly in Romania and Bulgaria. Holcim Romania benefited from the higher capacity at the Campulung plant. Holcim Serbia also sold more cement. Here, the Group acquired further minority interests in the third quarter 2008, increasing its shareholding to 100 percent. After a successful start to the year, Holcim Croatia's business was adversely affected by higher cement imports. However, output of gravel and sand saw a robust development. In Slovakia, demand for cement was supported by a favorable domestic market. The Group company increasingly supplied cement to Holcim Group ready-mix concrete plants in neighboring Hungary. Publicly financed projects for the expansion of the Czech Republic's transport infrastructure and brisk construction activity in Prague led to an increase in deliveries of aggregates and ready-mix concrete. Cement sales including exports were down slightly compared to the corresponding previous-year period.
In Russia also, a decline in demand emerged in the third quarter of 2008.Maintenance-related production cuts and stronger competition from Turkish imports led to a fall in cement deliveries of Group company Alpha Cement. The project to expand capacity of the Shurovo plant continued as planned. As from September 2008, Alpha Cement holds 100 percent of the share capital of Shurovo Cement and Volsk Cement. In Azerbaijan, the brisk residential construction activity and infrastructure expansion continued without a letup. Holcim has decided to build a new kiln line with an annual capacity of 1.7 million tonnes of cement by 2011 in this growth market. The state-of-the art facility will not only improve efficiency but also be more environmentally friendly.
In Europe, consolidated deliveries of cement increased by 0.4 percent to 26.2 million tonnes. Sales of aggregates declined by 3 percent to 74.1 million tonnes. By contrast, sales of ready-mix concrete rose by 8.1 percent to 16.1 million cubic meters. With the exception of Aggregate Industries UK and Holcim Spain, all other Group companies achieved better financial results. In total, operating EBITDA decreased by 6.5 percent to CHF 1.7 billion. Internal operating EBITDA development was -2.1 percent. The Group companies in eastern and southeastern Europe, including Azerbaijan, Holcim Germany and Holcim France Benelux presented a sound performance. A positive note was that a significant proportion of the increase in energy costs was offset by price adjustments and efficiency gains.
Sluggish construction activity in North America
Distortions in the financial markets increasingly impacting the real economy combined with higher energy prices left the US construction sector facing major challenges. Despite the temporary tax relief and other actions, private residential construction activity remained weak. A reluctance to invest in the commercial and industrial construction sectors had an increasingly detrimental impact on orders. The only support for demand came from the government's multi-year infrastructure program. Compared with the US, the Canadian construction sector held up well, although showing a slowdown in growth in the course of the year.
Holcim US sold less cement in almost all regions, with a particular decline in volumes in the Great Lakes and Mississippi regions. The east coast and southeast region experienced bad weather which further worsened the downturn in sales. This led to cutbacks in cement production at a number of plants and the halting of imports. At the beginning of 2008, due to rationalization measures Holcim US took over the cement business of its Canadian sister company in the northeastern US.
Consistent with the market forecast, Holcim US is planning to close the Dundee plant in Michigan and the Clarksville plant in Missouri. The combined annual production capacity of the plants is 2.2 million tonnes of cement.
Due to the economic conditions, Aggregate Industries US as well saw a significant decrease in sales of aggregates, ready-mix concrete and asphalt. The decline was compounded by the adverse weather conditions at the beginning of the road construction season.
In Canada, cement deliveries of St. Lawrence Cement increased slightly. Demand was supported by the construction of large multi-family units and commercial buildings as well as the expansion of transportation and utility infrastructure. Volumes of ready-mix concrete increased sharply due to the strengthened market presence.
Cement sales in Group region North America fell by 9.7 percent to 11.2 million tonnes, and volumes of aggregates sold were down by 12.3 percent to 37.7 million tonnes. Deliveries of ready-mix concrete rose by 3.8 percent to 5.5 million cubic meters. Operating EBITDA decreased by 42.4 percent to CHF 444 million. Apart from the decline in sales and the rise in input costs, the weak US dollar also depressed the income statement in Swiss francs. Internal operating EBITDA development was strongly negative at
Positive development of demand in Latin America
In general, the construction sector in Latin America continued to successfully develop. Domestic demand was robust in many Group countries, with private and public sector housing construction and large infrastructure projects providing support for the industry. However, in the second half, the distortions in the US financial markets led to a reduced momentum in demand for building services in Mexico and El Salvador.
In Mexico, Holcim Apasco again sold substantial volumes. There was a sharp rise in sales of aggregates and ready-mix concrete, and the Group company benefited from several infrastructure projects. While domestic cement deliveries were adversely affected by heavy rainfall, exports posted an increase. Cemento de El Salvador mainly increased its exports of cement and clinker to neighboring countries. Construction of concrete roads and coastal protection structures led to double-digit growth rates for aggregates and ready-mix concrete. Also Holcim Costa Rica continued to report very positive sales despite the postponement of construction work on a major dam.
In Venezuela, deliveries of cement and aggregates continued at high levels, while volumes of ready-mix concrete declined. In Ecuador and Colombia, sales held up very well across all segments. Holcim Colombia is expanding cement capacity at the Nobsa plant to meet the predicted growth in demand.
Due to brisk construction activity, Holcim Brazil reported strong growth in all segments. In Argentina too, the local Group company exceeded the previous year's volumes, with a particularly marked increase in sales of ready-mix concrete; cost pressure remained, however. Despite the difficult competitive environment, Cemento Polpaico in Chile achieved increases in the volumes of cement and ready-mix concrete.
Consolidated cement sales in Latin America rose by 4 percent to 20.6 million tonnes, while aggregates reported an increase of 6.4 percent to 10 million tonnes. Deliveries of ready-mix concrete showed above-average growth rates in virtually all countries, rising by a total of 15.4 percent to 9 million cubic meters. Operating EBITDA reflects not only the positive volume development, but also the massive spike in the cost of energy and the less favorable exchange rate against the Swiss franc. In some countries, government controls prevented necessary price adjustments. At CHF 924 million or -0.9 percent, operating EBITDA was down slightly compared to the previous-year period, but showed an increase of 11.2 percent after adjusting for currency factors. Internal operating EBITDA growth reached 11.2 percent.
In August, Holcim signed a basic agreement in the context of the nationalization of the Venezuelan cement industry. Under the agreement, an 85 percent stake in Holcim Venezuela will be transferred to the government. Holcim will retain a 15 percent interest. The transaction is expected to be concluded this year.
Strong internal growth in Africa Middle East
Group region Africa Middle East continued to report positive performance favoring mainly the construction sector. The Group companies improved significantly the delivery volumes recorded during the same previous-year period.
Morocco enjoyed particularly intensive construction activity, with government housing construction programs and projects for the expansion of transportation infrastructure and tourism strengthening the sector. Holcim Morocco recorded considerable growth rates in all segments. The new plant in Settat near Casablanca made a key contribution to this result. In light of the forecast market growth, the Group company will expand the existing plant in Fez in a forthcoming expansion stage.
In Lebanon, the political situation has eased slightly, and the Group company increased its sales of ready-mix concrete in the south of the country. Exports of cement and clinker from the Chekka plant were also up. By contrast, Holcim Lebanon experienced a slight decline in domestic volumes.
The economies of West Africa have major pent-up demand. Due to the more stable situation, demand for construction materials was slightly better. Sales of cement also increased significantly in the Indian Ocean area. Due to minor acquisitions, deliveries of aggregates and ready-mix concrete increased on La Réunion in particular.
As a result of the deconsolidation of the Group's South African and Egyptian subsidiaries, sales of cement in this Group region declined by 37.5 percent to 7 million tonnes. Deliveries of aggregates fell by 61.5 percent to 2 million tonnes, and ready-mix concrete volumes dropped by 40 percent to 0.9 million cubic meters. However, on a like-for-like basis cement sales increased by 6.3 percent, deliveries of aggregates were 5.8 percent higher, and ready-mix concrete volumes were up 6.7 percent. Operating EBITDA came to CHF 307 million, which corresponds to a decline of 42.6 percent. Factoring out changes in the scope of consolidation and currency translation effects, operating EBITDA rose by 11 percent. While Holcim Morocco and Holcim Outre-Mer improved their financial results, Holcim Lebanon and the Group companies in West Africa fell short of their corresponding previous-year figures.
Lively construction activity in Asia Pacific
In Group region Asia Pacific, capacity utilization in the construction industry remained good. Volumes increased in a number of construction materials markets - also the higher than average market momentum was partially lost. This is particularly the case for India, Vietnam, Malaysia, Indonesia and Australia. In Thailand, the political situation created uncertainty among investors in construction projects. In the Philippines and New Zealand, the economic situation deteriorated after a good start at the beginning of the year.
Due to residential construction activity and a number of infrastructure projects, sales of cement by the two Indian Group companies were up compared to the previous-year period. In a number of market regions, growth in cement consumption was slightly muted. Rising cement imports from Pakistan led to tougher competition in some places. During the monsoon season, northern India and large parts of Bihar and Uttar Pradesh were plagued by land slides and severe flooding which temporarily halted cement deliveries at ACC and Ambuja Cements. The ready-mix concrete business continued its dynamic trend.
In Bangladesh, cement production was hampered by nationwide energy shortages, but Holcim was nonetheless able to increase its deliveries of cement. Despite the political tensions, Holcim Lanka succeeded in increasing its sales of cement slightly.
Holcim Vietnam sold substantially more cement. In the ready-mix concrete sector, delivery volumes more than doubled compared to the previous-year period. In the south of the country, the Group company acquired a cement grinding station with an annual output of 1 million tonnes. This strengthens the Group's competitive position in Ho Chi Minh City and the upper Mekong delta.
Siam City Cement in Thailand was able to partially compensate declining cement sales by improving efficiency and achieving better prices. Sales of ready-mix concrete continued to follow a positive development in the Greater Bangkok area. In Singapore, partially due to an acquisition, more ready-mix concrete was delivered to major building sites.
Although government investment was more cautious after the presidential election year, Holcim Philippines succeeded in increasing domestic cement deliveries. Holcim Indonesia benefited from the robust state of the domestic economy and significantly improved sales of aggregates and ready-mix concrete. Cement Australia also reported a positive order situation. In contrast, New Zealand slipped into a recession; the sales of aggregates and ready-mix concrete were affected in particular by the sharp downturn in residential construction activity.
Consolidated cement deliveries in Asia Pacific increased by 1.2 percent to 49.1 million tonnes. Sales of aggregates improved significantly by 16.7 percent to 3.5 million tonnes. Volumes of ready-mix concrete rose by an impressive 34.1 percent to 5.5 million cubic meters. This primarily reflects the expansion of the market presence in several major urban centers. Despite the positive volume development, operating EBITDA declined by 18.9 percent to CHF 1.1 billion. This was due to the massive rise in energy, other primary resources and transport costs, which mainly in India could only be offset to a limited extent by price adjustments and efficiency gains. The negative currency effect also had an unfavorable impact. Therefore, internal operating EBITDA development was negative at -7.4 percent.
Outlook for 2008
In the third quarter, the global economy declined much more than expected. Holcim is expecting that the course of business will remain difficult in the coming months.
The construction markets of western and southern Europe will decline further; the east and southeast regions will see a slowdown. In North America, the US construction sector has not yet bottomed out, and the Canadian market looks set to slow down. In Latin America, the volume of construction orders is likely to remain relatively high, but the difficulties facing the US economy will also negatively impact this region. Group region Africa Middle East will be able to maintain generally good business. In Asia Pacific, demand will slow down at least in some markets, and in India, the slight improvement in prices will not compensate for the general upward pressure on costs.
Therefore, additional cost-cutting measures and targeted price adjustments are being initiated, including the planned plant closures in Spain and the US. Thanks to a disciplined approach to investment expenditure and a high level of liquidity, Holcim still has a strong balance sheet. Unlike any other building materials group, Holcim operates in more than 70 countries worldwide, focusing mainly on regions in which demand for building materials is being stimulated by infrastructure expansion and housing construction.
In recent years, in a positive business climate Holcim has significantly exceeded the long-term objective of an average annual internal growth rate of 5 percent on the level of the operating EBITDA. Against the backdrop of a slowing global economy, Holcim forecasts that internal operating EBITDA development excluding the planned closing costs will continue to weaken in the fourth quarter.
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Holcim is one of the world's leading suppliers of cement and aggregates (crushed stone, gravel and sand) as well as further activities such as ready-mix concrete and asphalt including services. The Group holds majority and minority interests in more than 70 countries on all continents.
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