Sales development and financial results
In the mature markets, demand for building materials decreased further in the third quarter. However, in many emerging markets the construction industry continued to grow, particularly in Asia, driven by the strong market growth in China and India.
Therefore, operating EBITDA development remained clearly negative in Europe. Also North America has yet to see a pick-up - however, the third quarter performance was better than in the first six months. Group region Africa Middle East nearly maintained its position compared with the previous year. Latin America and primarily Asia Pacific achieved solid organic growth.
The current results have only been possible because Holcim reacted quickly and decisively to the macroeconomic environment and took the following measures:
Holcim has reduced production capacity by roughly 10 million tonnes of cement in markets with weak demand. This was achieved through temporary and permanent plant closures. Also numerous operations in the aggregates and ready-mix concrete business were shut down.
Throughout the Group, Holcim continued to implement the extensive cost-cutting program, with a large number of cost-reduction measures taken along the value chain.
In the period from January to September, Holcim saved CHF 573 million in fixed costs. These restructuring measures unavoidably involved job losses, which were conducted in such a way as to minimize the social impact.
Also in focus was maintaining the liquidity and lengthening the average term of debt financing. As of September 30, cash liquidity reached CHF 5.7 billion, which is well above the internal target. However, the payment for the acquisition in Australia in the amount of CHF 1.7 billion was only made in the fourth quarter. By the end of October, bonds totaling CHF 5 billion were placed in the capital market.
Despite the somewhat difficult market environment, Holcim continued to pursue its strategic expansion program as planned and commissioned 5.6 million tonnes of cement capacity in the course of the year. This allows the Group to grow in attractive markets and gain in efficiency.
The acquisition of Cemex Australia also shows great promise. The new Group company now operates under the name of Holcim Australia and will be fully consolidated as of October 1. It gives Holcim an optimal position in cement, aggregates, ready-mix concrete and concrete products on a continent that is back on the growth path.
Consolidated cement deliveries decreased by 8.9 percent to 99.1 million tonnes in the first nine months. Sales of aggregates also fell by 18.9 percent to 103.2 million tonnes, and volumes of ready-mix concrete sold were down by 17.8 percent to 30.4 million cubic meters. Asphalt sales amounted to 8.1 million tonnes, which represents a decrease of 21.4 percent.
Group net sales declined by 18.4 percent to CHF 15.8 billion, impacted mainly by lower volumes. Operating EBITDA fell by 17.2 percent to CHF 3.6 billion, and the related margin reached 22.9 percent, which is higher than the corresponding previous year's figure of 22.6 percent - a strong signal that the Group has gained in efficiency. In particular, the cost-cutting drive, lower energy costs and the largely stable price situation had a positive impact on the income statement. A contribution of CHF 61 million came from the sale of CO2 emission certificates by some European Group companies due to reduced cement production. The development of currency exchange rates against the Swiss franc was unfavorable. Due to the strict management of net current assets, cash flow from operating activities came to CHF 2.2 billion, 32.2 percent higher than the previous year's figure, and the free cash flow doubled to CHF 2 billion. Net income decreased by 25.2 percent to CHF 1.6 billion. Net income attributable to shareholders of Holcim Ltd declined by 31 percent to CHF 1.2 billion. The downturn in profit primarily reflects the poor business development in Europe. Reductions in sales volumes decreased in the third quarter. Due to cost savings, operating EBITDA and net income increased like-for-like by 5.5 percent and 13.7 percent respectively.
Higher cost efficiency in Europe
In the European Union, there were growing signs of an economic stabilization in the third quarter. France and Germany returned to modest economic growth. Nevertheless, the situation in Europe's building materials markets remained for the most part difficult. In particular, Spain, the UK, Italy and Eastern European countries including Russia and Azerbaijan experienced a weak level of private and public construction activity. By contrast, the construction level held up well in Switzerland.
Third quarter results 2009 - Group region Europe
In the UK, Aggregate Industries UK sold significantly less aggregates and ready-mix concrete. However, the situation stabilized to a certain degree in the third quarter. A contributory factor was the major construction activity in the run-up to the 2012 Olympic Games in London. Resurfacing work on the road systems supported deliveries of asphalt. Volume developments at Holcim Spain remained unfavorably influenced by the residential construction crisis.
In France and Belgium, Holcim sold less cement and aggregates. The reason for this was the continued challenging situation in the construction sector and the completion of significant infrastructure projects. There was evidence in Belgium of increased competition in the ready-mix concrete business. Holcim Germany also felt the weak domestic construction activity and sales volumes decreased in all segments. The company only increased cement exports. Government programs to cushion the ailing industrial and commercial construction sector have yet to impact on demand.
Holcim Switzerland continued to benefit from robust construction activity. The order volume remained at a high level, particularly in the large conurbations. Cement and ready-mix concrete sales virtually reached the previous year's level, and the company sold more aggregates. In Northern Italy, the building materials markets remained under pressure.
The situation in Eastern and Southeastern Europe was influenced by the heavy economic slump. Despite the fact that Slovakia, the Czech Republic and Hungary somewhat recovered after the decline in the first half of the year, the demand for building materials was nevertheless restrained. Holcim Hungary had to mothball a kiln line at its Lábatlan site. Holcim Romania saw all segments fall short of last year's volumes. The situation was particularly difficult in Bulgaria, where not only weak construction activity but also large volumes of cement imports from Turkey weighed on the cement industry. To reduce costs, clinker production was mothballed in the Pleven plant.
In Russia, the recession weakened to a certain extent in the third quarter. In Moscow at least, there was a very slight increase in demand for building materials, which meant the decrease in cement volumes at Group company Alpha Cement was less dramatic than in the previous quarters. However, there was still a significant decline in cement volumes from January through September. In the Shurovo plant, clinker production was stopped until the new kiln line comes on stream in the second half of 2010. The necessary clinker will be obtained from the Volsk plant, situated further south. In Azerbaijan, both higher imports and the crisis in residential and industrial construction put pressure on the sales of Garadagh Cement.
In Group region Europe, delivery volumes declined. Nonetheless, the reduction slowed in all segments in the third quarter. In the first nine months, cement sales fell by 20.2 percent to 20.9 million tonnes, while sales of aggregates decreased by 19.6 percent to 59.6 million tonnes. Ready-mix concrete volumes declined by 19.3 percent to 13 million cubic meters.
Operating EBITDA decreased, also due to exchange rate fluctuations, by 39.7 percent overall to CHF 1 billion. However, the broad and consistently implemented cost-cutting measures provided some relief to the income statement. In particular, the financial results of Aggregate Industries UK, Holcim Spain and Holcim France Benelux remained significantly below the figures of last year. The operating result was also impacted by weaker results from the Eastern and Southeastern European companies, including Alpha Cement and Garadagh Cement. The internal operating EBITDA development was -33.5 percent. Compared with the previous quarters' results, the decline slowed.
Better third quarter in North America
Various indicators suggest that the North American economy has bottomed out, but the US construction industry has yet to see any upturn. The situation was somewhat more robust in Canada.
Third quarter results 2009 - Group region North America
Residential construction in the US has stabilized at a low level. The number of new housing starts rose slightly over the summer months. However, the inventory of real estate for sale remained high and the vacancy rate in the commercial real estate area has increased. The only momentum has come from industrial construction sites together with new clinics and hospitals. The wait-and-see attitude in the run-up to the launch of the stimulus programs to expand the country's infrastructure has likewise affected the demand for building materials.
Holcim US again experienced volume losses in all market regions in the third quarter. The east of the country, the Great Lakes region and Texas have been strongly affected. Flooding along the Mississippi and Missouri rivers also impacted cement demand.
The low level of construction activity put pressure on the business of Aggregate Industries US. Less building materials were sold than in the previous year's period. However, asphalt sales benefited somewhat from road construction in the third quarter.
As a result of weak domestic demand and a lack of export opportunities to the US, Holcim Canada sold less cement. In Ontario, commercial and industrial construction declined in particular. In Quebec, commercial and infrastructure construction cushioned the decline in demand in other segments. The weakness in private housebuilding had a negative effect on the sale of aggregates and ready-mix concrete, particularly in Ontario and Western Canada.
The three North American Group companies responded to the difficult market environment by reducing production early in the downturn. Two cement plants of Holcim US were shut down and two others mothballed. In both countries, Holcim also reduced the number of aggregates plants and ready-mix concrete facilities including its fleet of mixer and pump trucks. In the administrative area, a number of rigorous cost-cutting measures were implemented.
On a consolidated basis, cement deliveries in North America declined by 25.9 percent to 8.3 million tonnes. Sales of aggregates dropped by 21.2 percent to 29.7 million tonnes and ready-mix concrete sales amounted to 4.1 million cubic meters, equivalent to a reduction of 25.5 percent.
Operating EBITDA fell by 26.1 percent to CHF 328 million and internal operating EBITDA development amounted to -25.7 percent. However, cost savings partially offset the decline in volumes and prices. The weak market environment especially impacted the financial results of Holcim US. The operating EBITDA of Holcim Canada remained virtually unchanged. The strongest improvement was achieved by Aggregate Industries US.
In July, Holcim US started the commissioning of the new Ste. Genevieve cement plant in the State of Missouri and produced its first clinker. The plant, which is also exemplary from an ecological standpoint, has an annual capacity of 4 million tonnes of cement and production will be gradually ramped up as construction work on the site comes to completion. Thanks to this new plant, containing integrated shipping and dispatch facilities on the Mississippi river, Holcim US will be able to supply customers on a new, cost-efficient basis. The Group company is ideally positioned to benefit more than most from an upswing in demand.
Organic growth in Latin America
Despite strong regional differences, Latin America's economy remained very stable overall. However, Mexico and Central America have experienced a significant weakening of their economies due to their proximity to the US. This had a negative effect on the construction industry. In contrast, demand for building materials in Ecuador increased and remained at a solid level in Colombia and Argentina. As the first country of this Group region, Brazil returned to moderate economic growth in the middle of the year. In Chile, the wait-and-see investment attitude had a noticeable impact on cement consumption.
Third quarter results 2009 - Group region Latin America
In Mexico, both private housebuilding and commercial and industrial construction remained weak. Holcim Apasco sold less cement and ready-mix concrete. However, government programs to stimulate residential and infrastructure construction strengthened demand in some parts of the country.
Due to the delayed release of public funds for roadbuilding and a strong decline in private construction, Cemento de El Salvador saw a volume decline in all segments. Private construction activity in Costa Rica and Nicaragua was very weak, and the Group companies experienced declining sales volumes.
Holcim Ecuador significantly increased its sales in all segments. Holcim Colombia sold less cement, but achieved higher sales volumes of aggregates and ready-mix concrete. In Brazil, Holcim focused on high-margin cement types, consciously accepting volume declines. The sales of aggregates suffered from various project delays and sometimes difficult weather conditions. Sales of ready-mix concrete slightly increased. For Cemento Polpaico in Chile, the recession and the market entry of a new competitor led to lower volumes in all segments. Minetti in Argentina sold less cement due to market conditions, but increased its sales of aggregates and ready-mix concrete.
In Group region Latin America, cement sales declined by 17 percent to 17.1 million tonnes. Deliveries of aggregates fell 11 percent to 8.9 million tonnes. Sales of ready-mix concrete decreased by 15.6 percent to 7.6 million cubic meters. This reduction in volumes is partly attributable to changes in the scope of consolidation. Due to the nationalization by decree in June 2008, Holcim Venezuela was deconsolidated. As a consequence, Holcim decided for strategic reasons to sell its interests in Panama, the Dominican Republic, Haiti and the Caribbean at the end of July 2009, which also reduced sales volumes.
Nevertheless, Group region Latin America increased its operating EBITDA in local currencies. Comprehensive cost-cutting measures, lower energy costs and the largely stable price environment made it possible to offset the decline in volumes and increase operating margins. In Swiss francs, operating EBITDA decreased by 11.5 percent to CHF 818 million. The reason for this was the unfavorable exchange rates, particularly against the Brazilian real and the Mexican peso. Internal operating EBITDA growth amounted to 8.9 percent.
Holcim held up well in Africa Middle East
The demand for building materials varied in the markets supplied by Holcim. In Morocco and Lebanon, the construction industry enjoyed a high level of activity. However, local factors dampened the construction industry in West Africa and the Indian Ocean.
Third quarter results 2009 - Group region Africa, Middle East
In Morocco, despite the early Ramadan, demand for cement reached the previous year's level. The continued high demand for building materials was driven by public programs for residential construction and the expansion of infrastructure in roadbuilding and tourism. Significantly higher were the aggregates sales of Holcim Morocco, partially due to the commissioning of a new quarry.
The more stable political situation in Lebanon helped the Chekka plant to enjoy a high level of capacity utilization. Holcim Lebanon slightly decreased its cement exports to neighboring countries to better serve the domestic construction industry. Sales of ready-mix concrete rose substantially.
Despite political and economic turbulence, the West African group of countries, managed by Holcim Trading, maintained its volumes. Due to the expansion of its grinding capacity, the Abu Dhabi-based affiliate National Cement experienced a further increase in sales. In the Indian Ocean area, business activity was moderate. The government crisis in Madagascar and the lack of follow-up orders from infrastructure projects in La Réunion led to a substantial decrease in sales volumes.
The cement sales of Group region Africa Middle East decreased by 5.7 percent to 6.6 million tonnes. Comparable with the previous year's level, sales of aggregates were 1.9 million tonnes and volumes of ready-mix concrete decreased by 11.1 percent to 0.8 million cubic meters. Mainly as a result of the deconsolidation in Egypt, operating EBITDA declined by 9.1 percent to CHF 279 million. Internal operating EBITDA development was -2 percent.
Significant improvement of results in Asia Pacific
Group region Asia Pacific benefited from a positive business and investment climate. In India, the government's infrastructure push and residential construction led to higher sales volumes of building materials. Construction activity was also brisk in Vietnam, the Philippines and Indonesia. In Thailand, the construction industry began to grow slightly after a long period of stagnation. However, in New Zealand the building recession continued. In Australia, the demand for building materials rebounded somewhat after the slowdown in growth in the first half of the year.
Third quarter results 2009 - Group region Asia Pacific
Indian Group company ACC sold more cement in all regions of the country. Deliveries of ready-mix concrete remained stable at the previous year's level. Ambuja Cements likewise enjoyed high capacity utilization, increasing its cement sales volumes both domestically and in the export market. Holcim Bangladesh also sold more cement.
Siam City Cement in Thailand saw full capacity utilization of the four large kiln lines at its Saraburi plant thanks to higher exports. In the domestic market, the Group company sold less cement and deliveries of ready-mix concrete also declined. By contrast, there was a considerable increase in sales of aggregates. The robust market situation in Ho Chi Minh City and in the southern Mekong Delta region led to higher sales of cement and ready-mix concrete at Holcim Vietnam.
Although there are a number of industrial building projects underway on the peninsular of Johor, sales at Holcim Malaysia recovered only modestly as a result of subdued business levels in the other construction sectors. In Singapore, the intensive price competition in infrastructure construction continued, and the Group company delivered less ready-mix concrete to large building sites. However, building materials volumes in residential construction picked up somewhat.
Holcim Philippines benefited from solid residential and infrastructure construction across the country, selling significantly higher volumes of cement. In order to maximize its service to domestic customers, the Group company refrained from exporting cement. As a result of the healthy market situation, a mothballed kiln line in the Lugait plant will be brought back into production before the end of this year. The good investment climate in the region also had a favorable impact on cement exports of Holcim Indonesia. The company compensated almost completely for the decline in sales volumes for infrastructure projects on Java through higher cement and clinker exports. Deliveries of aggregates and ready-mix concrete continued to suffer from a shortage of major construction sites.
Due to market and weather conditions, Cement Australia sold less cement, particularly on the East Coast. The sales of Holcim New Zealand remained under pressure in the third quarter. However, due to an acquisition, the Group company reported an increase in sales in the aggregates segment.
Cement sales in Group region Asia Pacific rose by 1.6 percent to 49.9 million tonnes in the first nine months of 2009. Sales of aggregates declined by 11.4 percent to 3.1 million tonnes and ready-mix concrete deliveries dropped by 10.9 percent to 4.9 million cubic meters.
The majority of Group companies improved operating EBITDA in local currencies and generated higher operating margins. Operating EBITDA likewise rose in Swiss francs by 14.9 percent to CHF 1.3 billion despite negative exchange rate development.
The region's successful financial results were due not only to the favorable sales situation and innovative marketing, but also to effective cost control and lower purchase prices for operating resources such as energy. Both Indian Group companies as well as Holcim Vietnam and Holcim Philippines achieved good results. Internal operating EBITDA growth in Group region Asia Pacific was a very positive 25.7 percent.
Following the successful completion of due diligence and the approval of the Australian authorities, Holcim completed its acquisition of Cemex Australia as of October 1, 2009. The new Group company, which now operates as Holcim (Australia) Pty Ltd, will be fully consolidated as of this date. Holcim has already started the integration process in Australia. Through this acquisition, Holcim has also extended to Australia its mature market strategy of operating not only in the cement business but also in aggregates and ready-mix concrete. The capital increase at Huaxin Cement in China has yet to be completed.
In Europe, especially in Spain, the UK and Eastern Europe including Russia, the markets will remain challenging for a longer period. More optimistic is Holcim with regard to the development in North America, as building materials markets are expected to return to modest growth in the second half of 2010 on the back of the stimulus programs. The situation going forward looks more positive for most of the emerging markets in Latin America, Africa Middle East and Asia Pacific. Here, building activity will for the most part remain solid. Especially in Asia Pacific, many of the countries can expect to see strong demand.
In the fourth quarter, Holcim will concentrate its activities on exploiting existing market potential. The target to reduce fixed costs in 2009 by CHF 600 million will be exceeded. Replacements will be kept to a minimum and the current capacity expansion program will continue as scheduled.
The acquisition in Australia will be a solid contributor to the Group's performance next year.
The Board of Directors and the Executive Committee are convinced that Holcim will start the new financial year from a strong position and show growth.
Third quarter results 2009 - Group key figures
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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 around 70 countries on all continents.
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