P&L Check

Heidelberg Cement Buys Growth

  • Why it matters

    Why it matters

    Heidelberg Cement’s risky acquisition of the ailing Italcementi should allow for another year of double-digit growth and has increased the company’s cash flow, allowing a takeover in North America.

  • Facts

    Facts

    • In 2016, total revenue for Heidelberg Cement increased by approximately 13 percent.
    • In July last year, Heidelberg Cement acquired its erstwhile Italian competitor Italcementi for €3.7 billion, sending its net indebtedness spiraling to €9 billion, or $9.8 billion.
    • In April, the company purchased US-based Pacific Northwest Materials Business, a subsidiary of Mexican competitor Cemex, for $150 million.
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HeidelbergCement AG – Produktion
Heidelberg Cement has solid foundations despite some risky moves. Source: Uwe Anspach, DPA

“Value enhancement and continual growth” are Heidelberg Cement’s strategic goals and boss Bernd Scheifele can take pride in the fact that he largely stuck to the plan in 2016.

Total revenue for Germany’s leading building materials company increased last year by 13 percent. The company’s market cap soared by one quarter to €17.6 billion, or $19.2 billion, or by 17 percent if you exclude the effects of a significant capital increase. Shareholders can look forward to significantly higher dividend payments from €1.30 to €1.60 per share. When it comes to turnover, the company told investors on Tuesday that another year of double-digit growth is in the making.

But shareholders may wonder what exactly he means by the adjective “continual.” Far from unfolding organically, HeidelbergCement’s growth has been spurred mainly by expansion, the most significant being the company’s €3.7 billion buy of its Italian rival Italcementi in July 2016. The acquisition – its biggest since its 2007 purchase of the UK-based Hanson Group – has in one fell swoop increased Heidelberg Cement’s business volume by 30 percent and helped the company keep pace with industry leader LafargeHolcim.

In April, the company purchased a US subsidiary of Cemex for $150 million.

On the balance sheets, Heidelberg Cement’s giant leap forward will be divided between 2016 and 2017. Only half of Italcementi’s €4 billion in sales from 2016 showed up in Heidelberg Cement’s books, but all 2017 sales will be included in this year’s numbers. Alone this full consolidation effect all but guarantees another year of double-digit growth.

And when it comes to takeovers, Mr. Scheifele isn’t letting up. In April, the company purchased US-based Pacific Northwest Materials Business, a subsidiary of Mexican competitor Cemex, for $150 million to cement the German company’s presence in North America.

But Heidelberg Cement’s acquisition of Italcementi last year has left some analysts scratching their heads. The firm, headquartered in Lombardy, has had weak profits in the past and was seen by some analysts as in need of serious restructuring. Heidelberg Cement, however, sees a chance to prove its skill in cost reduction and efficiency enhancement. To that end, Mr. Scheifele increased the company’s “synergy goal” from €400 million to €470 million.

In the past year, the Italian firm saw net profits fall by 9 percent to €896 million. The acquisition cost €150 million in restructuring, costs which included valuation allowances for factories in Ukraine and Congo and for currency depreciation in Egypt. In all, the additional burdens add up to more than €312 million.

Minus these costs, Heidelberg’s net profits are set to spike by €200 million, or 23 percent. Integrating Italcementi, the adjusted EBIT (earnings before interest and taxes) margin would only decrease slightly from 13.7 percent to 13 percent, and the EBITDA (earnings before interest, taxes, depreciation and amortization) margin could remain steady at 19.4 percent. In other words, Heidelberg Cement is still sitting pretty relative to its main rivals, LafargeHolcim and CRH.

HeidelbergCement
CEO Bernd Scheifele has appetite for more takeovers. Source: Uwe Anspach/DPA.

The company has gained significant strength, and this is reflected in its free cash flow — operating profit minus expenditures — which grew by 50 percent to €834 million, Heidelberg Cement’s highest in more than a decade. This success was bolstered by the company’s Italian acquisition, but positive developments in the US business contributed significantly too.

In the end, financing the takeover of Italcementi wasn’t too big a challenge, with a quarter of the sum coming from Heidelberg’s issuing of new shares. It raised another €900 million by selling off additional Italcementi holdings. To be sure, the transaction left its mark on Heidelberg’s balance sheet: buying Italcementi meant the German company assumed over €2 billion in debt, meaning Heidelberg Cement’s overall net indebtedness increased from €5.3 billion to €9 billion. With that, its debt-equity ratio deteriorated from 2 to 3.1.

These figures, however, have done little to dampen enthusiasm for the German building materials giant. Subsequent to the acquisition, Moody’s and Standard & Poor’s rewarded Heidelberg with its first investment grade rating since the financial crisis.

In spite of higher debt, financing costs are regressive, which also helped increase the company’s cash flow. For Mr. Scheifele, refinancing – swapping out high-interest loans for low-interest ones – offers great potential. For example, the company in March secured a nine-year loan of more than €1 billion with a fixed interest rate of 1.625 percent. This particular line of credit replaced one which had the company paying an interest rate of more than 6 percent.

This all provides Heidelberg Cement with an opportunity to buy more, including its recent purchase of Cemex’s Pacific Northwest subsidiary. Mr. Scheifele is pragmatic and is betting on the construction boom in the United States. The company’s numbers there were solid in 2016, with EBIT soaring by one-fifth to €724 million. This figure alone made up one-third of Heidelberg’s overall profits. Mr. Scheifele is reckoning with another good year in North America, which should buy him time to smooth out the rough edges of the Italian job.

 

Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. Martin-Werner Buchenau reports from Stuttgart as Handelsblatt’s Baden-Württemberg correspondent. To contact the authors: hofmann@handelsblatt.com, buchenau@handelsblatt.com.

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