November 8, 2018 / 6:25 AM / a year ago

HeidelbergCement tightens purse strings as energy costs rise

FRANKFURT (Reuters) - HeidelbergCement (HEIG.DE) on Thursday announced plans to cut costs and investments to protect profit margins and also flagged a recovery in the North American market, where tough conditions forced the group to cut its outlook last month.

FILE PHOTO: A logo of HeidelbergCement in Heidelberg, Germany, June 21, 2016. REUTERS/Ralph Orlowski/File Photo

HeidelbergCement’s shares rose as much as 7.8 percent, hitting a 5-week high and topped the German blue-chip index GDAXI.

The company had to cut its full-year profit outlook in October, blaming higher-than expected energy costs and bad weather in the United States. North America accounts for more than a third of the group’s core earnings.

Rain, floods and hurricanes had caused the weakest September in the United States in terms of cement demand since the financial crisis, the group said.

But looking ahead, HeidelbergCement said a healthy customer order book gave it confidence on North America for the fourth quarter and 2019.

CEO Bernd Scheifele said he expected a boost to U.S. infrastructure spending after Democrats took control of the House of Representatives.

Along with larger rival LafargeHolcim (LHN.S), the group was caught off guard by the higher energy costs, a big factor for cement-makers. This forced both groups to cut their full-year outlooks.

HeidelbergCement said it expected energy costs to rise by a high single- to low double-digit percentage in 2018.

Scheifele said the company would take “strong actions” to drive earnings and cash flow generation.

HeidelbergCement said this would include 100 million euros ($114 million) of administrative cost savings over the next two years. The group will also step up its asset disposal program and put additional non-core or under-performing units under review with a view to sell them.

Annual investments aimed at growing the business will be capped at 350 million euros for 2019 and 2020, down sharply from the 1.1 billion euros expected for this year. The group said it will also consider a share buyback in mid-2019.

“The new measures are a positive surprise but perhaps not enough to counter the extent of the negative margin trend revealed in the results,” Davy Research wrote in a note.

HeidelbergCement’s core earnings margin shrank to 16.6 percent in the first nine months of 2018, compared with 18.5 percent for the same period last year. According to Refinitiv estimates, it is forecast at 17.9 percent in 2019.

HeidelbergCement, which also released broadly in-line third-quarter results, said it would provide further details of its cost and investment cuts at its full-year news conference scheduled for March 21, 2019.

($1 = 0.8746 euros)

Editing by Maria Sheahan/Adrian Croft/Jane Merriman

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