Weaker demand for construction materials in the third quarter As anticipated in the half-year report, the building materials markets suffered a setback in global terms in the third quarter of 2010, but many of the emerging markets - in which Holcim has a very good footing - continued to experience further strong growth. However, there were temporary challenges due to economic and seasonal influences, particularly in the US, Mexico, Eastern Europe and India.
(Details on Group regions after the outlook)
Operating EBITDA declined only slightly
Operating EBITDA - the key operational performance indicator - declined only slightly in the first nine months of the year. The reasons for this decline are increased pressure on prices in important markets and a trend toward higher variable production and distribution costs. Holcim was severely affected by this in India. The onset of the monsoon - which was particularly harsh this year - prompted a slide in cement prices right across the country. In addition, ACC in India had to contend with delivery bottlenecks due to operational factors. In the third quarter especially, the price situation also worsened in Europe and the US. Encouragingly, price levels in Latin America and Group region Africa Middle East were generally stable or even slightly better. Mexico, however, suffered a further decline in volumes owing to market and weather conditions.
Holcim successfully managed factors it could influence directly. Despite the commissioning of around 5 million tonnes of new cement capacity in emerging markets, the Group succeeded not only in maintaining its fixed costs on a year-on-year basis, but reduced them further from quarter to quarter. Overall, total fixed cost reduction for the first nine months was CHF 188 million. This is the outcome of the major savings exercise conducted in all business areas and across the whole Group.
Like-for-like, the aggregates segment virtually matched the previous year's level. Thanks to the successfully integrated Australian company, activities could be expanded further.
Worthy of particular mention is the fact that a number of Group companies have achieved substantially better results in the current financial year. They include Holcim Canada, Holcim US and Holcim Brazil, as well as Ambuja Cements in India and the companies in Indonesia and the Philippines. A substantial contribution to the successful operating performance was made by the two Australian firms, which have been fully consolidated since October 2009. The broad-based strategy of geographic diversification therefore continues to prove itself to be an important cornerstone of the Group's success.
Consolidated cement deliveries increased by 3.7 percent to 102.8 million tonnes in the period to end-September. The biggest increases were posted by Ambuja Cements in India and the Group companies in Brazil and Thailand. Cement Australia was fully consolidated in this reporting period for the first time. Sales of aggregates were up 15.1 percent at 118.8 million tonnes, while for ready-mix concrete there was a rise of 13.2 percent to 34.4 million cubic meters. The increase in these segments was primarily attributable to the newly consolidated Holcim Australia. Sales of aggregates were down slightly on a comparable basis, and volumes of ready-mix concrete remained at the year-back level.
Operating EBITDA declined by 1 percent to CHF 3.6 billion. On a like-for-like basis, however, it fell by 6.7 percent. Negative factors included not only the trend in volumes, prices and costs, but also the weak euro and low US dollar exchange rate. In the aggregates business, margins slightly increased while decreasing in the other segments. Cash flow from operating activities reached CHF 2.1 billion, a fall of 6.3 percent. Net income was down 22.4 percent at CHF 1.2 billion and the share of net income attributable to shareholders of Holcim Ltd declined by 27.1 percent to CHF 875 million. The reduction in net income is explained not only by the poorer level of business but also by the previously reported one-off, cash-neutral tax charge in connection with the restructuring of the Group's interests in North America in the first quarter of 2010.
Apart from a few exceptions, prospects for the European construction markets remain subdued for 2010. Also in North America, little is set to change on the demand side. In both continents however, developments hinge to some extent on weather conditions for building work into year-end. The construction industry in Latin America is expected to remain robust in most cases - the exceptions being Mexico and Central America. The Group regions of Africa Middle East and Asia Pacific will continue to grow. In India, a rapid rise in demand for building materials is expected following the monsoon.
It will be challenging for the Group to reach previous year's operating EBITDA.
Holcim continues to place a strong emphasis on strengthening its cost and environmental efficiency and competitiveness.
Detailed information on Group regions:
Subdued demand for construction materials in Europe
The contrasting economic development in Western and Eastern Europe continued into the third quarter of 2010. While economic activity picked up in the UK, France and especially Germany - despite the euro crisis and austerity measures in the public sector - most countries in Southern and Southeastern Europe struggled with their high levels of government debt.
The European construction sector made hardly any progress. Reluctance to invest on the part of governments, together with declining commercial and industrial construction activity, muted the demand for building materials. This effect outweighed the slight recovery in residential construction in some western markets.
Third quarter results 2010 Europe
Aggregate Industries UK sold more aggregates, primarily for infrastructure projects, as highway construction in Scotland led to higher asphalt deliveries. Volumes of ready-mix concrete declined, however.
Holcim France Benelux could increase cement and ready-mix concrete volumes. Sales of aggregates declined. Thanks to deliveries to the Nord Stream gas pipeline consortium, Holcim Germany managed to nearly maintain cement sales. Deliveries of aggregates and ready-mix concrete increased.
Holcim Southern Germany and Holcim Switzerland sold higher volumes in all segments. The construction industry benefited from an excellent order situation in residential construction and infrastructure projects. For Holcim Switzerland, the start of work on the NEAT rail tunnel through the Monte Ceneri also had a positive impact.
The crisis in the Southern European construction sector continued. Holcim Italy experienced lower sales of cement and aggregates, however posted a rise in deliveries of ready-mix concrete. Holcim Spain increased its sales of cement, but only due to higher exports. The demand situation for aggregates and ready-mix concrete remained difficult, and sales volumes decreased.
In the markets of Eastern and Southeastern Europe, sales were impacted by the limited awarding of construction contracts by the public as well as the private sector. Thanks to EU-funded infrastructure projects, the decline in deliveries slowed over the course of the year. The Czech Group company recorded a rise in cement shipments. In all other markets in the region, there was a fall in sales volumes. The economic situation as well as weather conditions also negatively impacted sales of aggregates and ready-mix concrete. Holcim sold more aggregates in Hungary, the Czech Republic and Slovakia, as well as more ready-mix concrete in Slovakia and Serbia.
Russia's economy recovered even though the lengthy drought - followed by wide-spread forest fires - dampened activities. Following an easing of mortgage lending, private residential construction in Moscow increased. Nevertheless, Alpha Cement could not offset the fall in deliveries from the first half of the year. Garadagh Cement in Azerbaijan benefited from solid demand for construction work. Cement deliveries increased despite project delays and ongoing pressure from imports. In Russia and Azerbaijan, expansion of cement and clinker capacity proceeded according to plan.
Cement sales in Group region Europe declined by 3.8 percent to 20.1 million tonnes. Deliveries of aggregates fell marginally by 0.2 percent to 59.5 million tonnes. Ready-mix concrete sales contracted by 4.6 percent to 12.4 million cubic meters.
Operating EBITDA for Group region Europe decreased by 17.4 percent to CHF 855 million. This figure includes sales of CO2 emission certificates totaling CHF 75 million (2009: 61). Many Group companies could only partly offset the decline in volumes and prices through cost-cutting measures. Additionally, the result was impacted by an unfavorable currency translation effect. Internal operating EBITDA development was -14 percent.
Differing market developments in North America
Economic growth continued in the US. The recovery, however, was less vigorous than expected and demand for building materials remained subdued. In Canada, better economic activity positively impacted the construction industry.
The insufficient demand for residential and commercial real estate in the US prevented a sustained recovery in volumes. The number of homes for sale increased again when the tax break for prospective homebuyers expired. Unfavorable weather conditions put further pressure on the construction sector. Industrial building projects and the economic stimulus program initiated by the Obama administration last year took up some of the slack in terms of volumes. Infrastructure projects at the state level were hit by the precarious budget situation. At local level too, public-sector construction projects were either postponed or canceled. Nevertheless, cement sales at Holcim US remained more or less stable.
Third quarter results 2010 North America
Aggregate Industries US recorded a fall in the volume of shipments of aggregates and ready-mix concrete. Difficult market conditions prevailed in the northeast and west of the country, while demand was sustained by transportation projects on the Atlantic coast, as well as airport and roadbuilding projects in the Midwest.
In Canada, stronger residential and industrial construction activity coupled with stimulus programs in the infrastructure sector ensured rising demand for building materials. Holcim Canada sold more cement and ready-mix concrete. In Holcim's key province of Ontario, the improved order situation in the automotive components industry exerted a positive effect. Also Quebec and the country's central provinces saw some increase of construction activity. Sales of aggregates reached the previous year's level.
Consolidated cement deliveries in North America increased by 1.2 percent to 8.4 million tonnes due to the growth in sales at Holcim Canada. In the aggregates segment, there was a decline of 3 percent to 28.8 million tonnes owing to the difficult US market. Consolidated sales of ready-mix concrete increased by 2.4 percent to 4.2 million cubic meters, however.
The drastic cost reduction achieved over the last few months in the US and the very good efficiency of the new Ste. Genevieve cement plant, as well as the better results of Holcim US and Holcim Canada, led to a consolidated operating EBITDA increase of 11.6 percent to CHF 366 million. Group region North America posted internal operating EBITDA growth of 9.8 percent.
Stable delivery volumes in Latin America
In general, the construction sector in Latin America proved relatively resistant to the crisis. In most countries of South America, construction sector activity remained solid, with a particularly large volume of work in Brazil and Argentina. However, construction markets in Mexico and Central America remained under pressure.
Third quarter results 2010 Latin America
In Mexico, the demand for cement was impacted by weak domestic economic activity. Furthermore, construction activity in some parts of the country was to a large extent adversely affected by hurricanes and record rainfalls. New construction projects were scarce, and there were no export opportunities. Holcim Apasco consequently sold less cement. However, thanks to major infrastructure projects, the Group company was able to sell more aggregates and ready-mix concrete. The government of El Salvador had to cancel previously announced housebuilding programs and postponed planned highway construction projects. Private construction activity also declined, with the result that Holcim El Salvador sold less building materials. Market conditions in Costa Rica and Nicaragua were comparable. Both local Group companies shipped less cement.
Holcim Colombia benefited from higher grinding capacity at the Nobsa plant, and sold more cement. Sales of aggregates fell due to the temporary closure of a gravel operation near Bogotá. The situation in ready-mix concrete was slightly better. Activity in the Ecuadorian construction sector cooled after a lengthy period of expansion. New projects were few and far between, and a number of road expansion projects on the coast were put on hold. Holcim Ecuador's delivery volumes declined in all segments.
In Brazil, the robust state of the economy strengthened demand for building materials. Growth drivers were private construction as well as infrastructure projects in the run-up to major sporting events. Holcim Brazil has experienced a continuous rise in sales of cement and aggregates since the start of the year. In ready-mix concrete, the company concentrated on high-margin projects with shipments similar to the previous year's level. In Argentina, Minetti increased cement sales in the domestic market and raised cement and clinker exports to Bolivia and Paraguay. The volume of aggregates declined, while sales of ready-mix concrete benefited from highway construction projects. In Chile, Cemento Polpaico recorded lower cement sales in a difficult competitive environment. Following the earthquake, the Group company felt the effects of a temporary fall in housebuilding approvals. Initial measures to rectify major damage, but also new mining projects, resulted at least in an increase in deliveries of aggregates and ready-mix concrete.
Cement deliveries in Group region Latin America fell by 1.8 percent to 16.8 million tonnes. Shipments of aggregates showed a positive trend, and were up by 1.1 percent to 9 million tonnes. Sales of ready-mix concrete increased by 1.3 percent to 7.7 million cubic meters.
Operating EBITDA reached CHF 762 million, representing a decline of 6.8 percent. The substantially better results achieved by the Group companies in Brazil and Argentina could not offset the reductions in other markets, particularly Mexico. Internal operating EBITDA development was -8.3 percent.
Mostly solid markets in Africa and the Middle East
Group region Africa Middle East developed positively overall. In Lebanon, the favorable investment climate was conducive to residential construction activity as well as infrastructure expansion projects. In Morocco and Holcim's markets in the Arabian Gulf, demand for construction work remained high. The construction industry in West Africa and the Indian Ocean region was stable.
Third quarter results 2010 Africa, Middle East
Holcim Lebanon sold significantly more cement and ready-mix concrete. Rising demand in Northern Cyprus supported exports of clinker from the Chekka plant. The situation for construction orders in Morocco was robust but growth has tapered off. Capacity expansion within the industry added to competitive pressure. Thanks to the excellent market position, Holcim Morocco sold higher volumes of cement as well as aggregates. However, sales of ready-mix concrete declined.
The companies managed by Holcim Trading registered stable sales volumes in West Africa; in the Gulf region they declined. In Qatar, construction projects in the liquid gas industry sustained demand. In the Indian Ocean region, cement deliveries were maintained despite the political crisis in Madagascar. In La Réunion, deliveries of aggregates and ready-mix concrete suffered from project delays caused by administrative factors.
Cement sales in Group region Africa Middle East rose by 3 percent to 6.8 million tonnes. Shipments of aggregates and ready-mix concrete remained stable at 1.9 million tonnes and 0.8 million cubic meters respectively.
Group region Africa Middle East's operating EBITDA increased by 2.5 percent to CHF 286 million and posted internal operating EBITDA growth of 11.5 percent.
Growing demand for building materials in Asia Pacific
In Group region Asia Pacific, demand remained on a high level. Particularly, the markets in Indonesia and the Philippines showed a dynamic performance. In India, economic conditions remained predominantly favorable despite heavy monsoon rains. A large volume of construction work is in progress in Sri Lanka, Bangladesh, Thailand, and Vietnam.
Third quarter results 2010 Asia Pacific
Overall, the two Indian Group companies sold more cement than in the previous year. While Ambuja Cements generated significantly higher sales of cement and clinker, ACC saw a fall in deliveries due to market and operational factors. Thanks to strong demand in key urban centers across the country, there was a marked rise in the volumes of ready-mix concrete sold by ACC. Holcim Bangladesh and Holcim Lanka benefited from various infrastructure projects. In cement, these Group companies generated double-digit growth rates.
Siam City Cement in Thailand increased its sales in all segments despite competitive pressure. The Group company also took advantage of additional export opportunities. Holcim Vietnam sold more cement and in particular - bolstered by the company's increased presence in the south of Ho Chi Minh City - more ready-mix concrete. In Malaysia, dynamic activity in the domestic economy as well as in exports resulted in increasing shipments of cement and ready-mix concrete. Holcim Singapore focused its marketing efforts on technologically sophisticated projects.
In the Philippines and Indonesia, demand remained strong. Sales of cement and ready-mix concrete were boosted by infrastructure projects as well as numerous private and public construction projects. Both Group companies therefore exported less cement.
Infrastructure expansion projects and a recovery in the residential construction market enabled volumes of shipments of Cement Australia to be similar to the previous year's high level.
At Holcim Australia, project delays and unfavorable weather conditions impacted negatively on sales of aggregates. Sales of ready-mix concrete also suffered from bad weather and a tightened competitive environment. In New Zealand, the still weak construction sector weighed on sales of cement and ready-mix concrete. Earthquake-related damage to the road and rail network at the start of September also impaired deliveries. The Group company's plants survived the event without significant damage, with the result that Holcim is able to devote its entire capacity to reconstruction efforts.
Consolidated cement sales in Asia Pacific increased by 6.6 percent to 53.2 million tonnes. Deliveries of aggregates rose by 532.3 percent to 19.6 million tonnes, and ready-mix concrete sales were up by 89.8 percent to 9.3 million cubic meters.
Operating EBITDA in Group region Asia Pacific increased by 10.2 percent to CHF 1.4 billion. The good result was due in particular to Ambuja Cements in India, as well as the Group companies in Indonesia, the Philippines, and Australia. Temporary price pressure in India during the monsoon season and the significant increase in variable production and distribution costs reduced internal operating EBITDA development to -8.6 percent.
Third quarter results 2010 Key Figures Holcim Group
* * * * * * * 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. * * * * * * * Corporate Communications: Phone +41 58 858 87 10 Investor Relations: Phone +41 58 858 87 87 * * * * * * * Additional information such as the Third Quarter Interim Report is available at www.holcim.com/results * * * * * * *