Shareholders’ Letter

Dear Shareholder,

With our third quarter results, we are demonstrating that our focus on pricing, synergies and cash flow is delivering results. Our earnings momentum is accelerating and we are on track to achieve our commitments for 2016, resulting in a year of solid progress towards our 2018 objectives.

These results demonstrate the strength of our balanced portfolio with solid contributions from across our regions. As we anticipated, challenging conditions in Nigeria continued to impact our earnings, but we started to see the positive effects of higher prices and of our actions to diversify our fuel mix towards the end of the quarter.

Beyond the benefits from the divestment program, we continue to focus on reducing net debt and driving strong cash flow generation.

Solid growth in the third quarter came from both emerging and mature markets with several countries delivering increased Adjusted Operating EBITDA. The Philippines, the US, Mexico, Argentina, Egypt and Algeria were among the significant contributors as cost discipline, synergies and widespread implementation of our pricing strategy continued to drive positive results. China showed further signs of the recovery seen in the second quarter while India grew Adjusted Operating EBITDA despite the slowing effect of a longer and more intense monsoon season compared to last year, which bodes well for coming quarters.

A few markets continue to be challenging. The economy in Brazil remains difficult for the construction sector while Indonesia and Malaysia were affected by market overcapacity and tough competitive environments. Decisive steps have been taken to reduce costs in Brazil while in Indonesia and Malaysia actions to improve competitiveness and performance are being implemented. Measures to increase fuel flexibility in Nigeria following disruptions to gas supplies in the first half, combined with actions to reduce costs, are beginning to have a beneficial effect. However, Nigeria again had a significant impact on Group earnings in the quarter; excluding Nigeria, growth in Adjusted Operating EBITDA for the Group would have been 15 percent.

Globally, cement sales volumes in Q3 reduced by 4 percent year-on-year on a like-for-like basis. Notably, this was impacted by short term declines in Nigeria, as a result of gas supply interruptions, and India, affected by the extended monsoon period. Excluding Nigeria and India, volumes were down 2 percent on the back of lower demand in the US, non-recurring volume gains in Mexico in the prior year and continuing challenging conditions in Brazil and Indonesia.

Cement prices were slightly higher on a sequential basis in the third quarter and were up for Q3 at constant exchange rates compared to the same period last year.

Synergies contributed CHF 183 million in Q3. As a result, at the end of the third quarter the 2016 synergies target of CHF 450 million had been achieved. The Group now expects to deliver full year incremental synergies of at least CHF 550 million.

Adjusted Operating EBITDA was CHF 1.69 billion for the quarter, a year-on-year improvement of 10.5 percent on a like-for-like basis. Margins showed the benefits of synergies, reduced costs and increased prices; Adjusted Operating EBITDA margin rose to 23.9 percent in Q3, a 290 basis points increase on the figure for the prior year period.

On a like-for-like basis, Operating Free Cash Flow improved by CHF 1 billion year-on-year. It stands at CHF 317 million after nine months, impacted by the traditional seasonality of our working capital. The closing of divestments in Sri Lanka and Saudi Arabia and the deconsolidation of Morocco and Ivory Coast contributed CHF 795 million in cash proceeds in Q3.

Net debt stood at CHF 16.5 billion, down from CHF 17.3 billion at the end of the fourth quarter 2015.

Group – Pro forma information

 

 

July–Sept
2016

July–Sept
2015

±%

±%
like-for-like

1

Excluding merger, restructuring and other one-offs.

2

Cash flow from operating activities less net maintenance and expansion capex.

Sales of cement

million t

57.9

65.5

–11.6

–4.2

Sales of aggregates

million t

83.4

86.8

–3.9

–2.8

Sales of ready-mix concrete

million m3

14.4

15.3

–5.9

–5.5

Net sales

million CHF

7,036

7,824

–10.1

–3.1

Operating EBITDA

million CHF

1,594

1,309

+21.8

+32.9

Operating EBITDA adjusted1

million CHF

1,685

1,645

+2.4

+10.5

Operating EBITDA margin

%

22.7

16.7

 

 

Operating EBITDA margin adjusted1

%

23.9

21.0

 

 

Cash flow from operating activities

million CHF

1,255

608

 

 

Operating Free Cash Flow2

million CHF

856

30

 

 

Group – Pro forma information

 

 

Jan–Sept
2016

Jan–Sept
2015

±%

±%
like-for-like

1

Excluding merger, restructuring and other one-offs.

2

Cash flow from operating activities less net maintenance and expansion capex.

Sales of cement

million t

177.2

189.4

–6.4

–1.5

Sales of aggregates

million t

213.6

216.3

–1.3

+0.2

Sales of ready-mix concrete

million m3

41.9

42.6

–1.5

–1.4

Net sales

million CHF

20,378

22,041

–7.5

–1.8

Operating EBITDA

million CHF

3,947

3,655

+8.0

+14.5

Operating EBITDA adjusted1

million CHF

4,214

4,356

–3.3

+2.0

Operating EBITDA margin

%

19.4

16.6

 

 

Operating EBITDA margin adjusted1

%

20.7

19.8

 

 

Cash flow from operating activities

million CHF

1,516

990

 

 

Operating Free Cash Flow2

million CHF

317

(697)

 

 

Divestments and capital allocation

Net of tax, the proceeds of the deals announced since the beginning of the year will result in a total net debt reduction of around CHF 3.5 billion expected in 2016. These proceeds, which we expect to have received by the end of the year, will contribute to the achievement of our target to reduce net debt to around CHF 13 billion by the end of 2016.

Following the extension of the program to CHF 5 billion we expect to complete the remainder by the end of 2017.

With divestments closing and our cash generation from synergies and reduced capex gaining momentum, our credit ratios will significantly strengthen, consistent with our commitment to maintain a solid investment grade rating throughout the cycle. We will return excess cash to shareholders through share buybacks or special dividends commensurate with a solid investment grade credit rating.

2016 Outlook

2016 will be a year of progress towards our 2018 targets.

We expect demand in our markets to grow at between 1 to 3 percent for the full year. Our pricing recovery actions, commercial excellence initiatives and a continuing focus on growth will demonstrate tangible results in 2016.

Based on the trends we see, our full year expectations remain unchanged, except for synergies where we now expect to deliver at least CHF 550 million of incremental synergies.

For 2016 we therefore expect:

  • Capex to be below CHF 2 billion
  • Incremental synergies of at least CHF 550 million of adjusted operating EBITDA
  • Net debt to decrease to around CHF 13 billion at year end, including the effect of our planned divestment program
  • CHF 3.5 billion divestment program to be completed. Target extended to CHF 5 billion by end of 2017
  • At least a high single digit like-for-like increase in adjusted operating EBITDA

We are committed to maintaining a solid investment grade rating and commensurate to this rating, returning excess cash to shareholders. We confirm our commitment to the 2018 targets announced in November 2015 and will provide an update at our Capital Markets Day presentation in London on 18 November 2016.