HeidelbergCement to return more cash to shareholders

HeidelbergCement to return more cash to shareholders. The German group increases dividend payout ratio and sets new sales and profit goals

As rivals Lafarge and Holcim pursue a €41bn merger to create a new giant in building materials, Germany’s HeidelbergCement is poised to return more cash to shareholders., London’s Financial Times reports.

On Wednesday, the world’s largest producer of aggregates (sand, gravel, and crushed rock) and number three cement maker by sales, increased its projected dividend payout ratio and said it could return additional cash through share buybacks.

The company now aims to achieve more than €17bn in sales and more than €4bn in operating earnings before interest, taxation, depreciation and amortisation by 2019, compared with €12.6bn in sales and €2.3bn in ebitda last year.

The announcement caps a dramatic recovery for the group since it was saddled with €14.7bn of net debt after the ill-timed £8bn acquisition in 2007 of UK rival Hanson. In a bid to regain an investment grade rating the company has since issued new shares, cut costs and raised cash flows through growth in emerging markets. In December it agreed the $1.4bn sale of its bricks and construction materials business to private equity group Lone Star.

Management believe the company is in the best shape of the past 15 years and the stock outperformed the blue-chip German Dax and MSCI World Construction Materials Index last year.

For 2015, HeidelbergCement is forecasting a double-digit increase in revenue and operating income, thanks in part to the weak euro and lower oil price, which has driven down energy costs.

With net debt now down to €6.1bn and interest payments set to fall significantly this year the company is faced with an attractive problem: what to do with the surplus cash?

The company is therefore targeting a dividend payout ratio of 40 to 45 per cent of net income by the end of 2019, compared with 29 per cent last year and a previous medium-term target of 30-35 per cent.

“We will decide case by case of what is better for company from a value perspective: whether we give more cash to the shareholders, do a share buyback…or whether we have M&A opportunities,” says Bernd Scheifele, chief executive.

Aynsley Lammin, analyst at Citi, says the new profit target and strategic aims look “sensible” and “should not come as a big surprise”. However, he told clients that the balance between using surplus cash for M&A versus share buybacks will be a “key issue” for shareholders.

Like its rivals HeidelbergCement is betting that urbanisation, population growth and new entrants to the middle class in emerging markets will spur further construction growth in coming years.

“Urbanisation means you either [build] deeper underground or you [build] up and in both [directions], without concrete, nothing works,” says Mr Scheifele.

The company added some 17m tonnes of new cement and clinker (cement’s main ingredient) capacity since 2011 – primarily in Russia, Indonesia, India and parts of sub-Saharan Africa.

Today the group has 45,000 employees at 2,300 locations in more than 40 countries. However, China is not a priority for the group.

“We believe the boom in the construction business in China is over…and that a significant exposure to China is more of a threat or a burden, than an opportunity,” the CEO says. “We see more opportunities in India or Indonesia than we see in China.”

Due to the still relatively low levels of capacity utilisation at its plants, the German building products company believes it can increase revenues without large additional fixed cost investment. It also aims to derive more from existing raw material assets by deepening integration in urban markets. “Additional sales will trigger over-proportionally higher ebitda, that’s the message,” cheifele adds.

Swiss building materials group Holcim considered an acquisition of HeidelbergCement before settling on a merger with Lafarge last year. When Holcim and Lafarge later put assets up for sale in a bid to secure regulatory approval for the deal, Mr Scheifele declined to enter the bidding, due to price concerns and fears that the assets would dilute HeidelbergCement’s margins. The assets were instead snapped up by CRH, the Irish cement company, for €6.5bn.

Even though the merger is set to create a new dominant force in building materials, the deal should be positive for HeidelbergCement as fewer competitors typically leads to higher prices. Four big global players – Lafarge, Holcim, HeidelbergCement and Cemex – already dominate the industry, which has been under investigation by the European Commission for cartel behaviour and price-fixing since 2008. “Overall we welcome consolidation in our industry, it’s an important trend…and I think we will see more consolidation coming. For the industry it’s the right move,”  Scheifele says.

HeidelbergCement does not believe that greater size will bring a competitive advantage for the new Franco-Swiss entity. Due to transport difficulties cement production is typically a local business – most customers are within about 200km of the plant – and therefore economies of scale are more limited.

Scheifele is also not a fan of the concept of a “merger of equals” because it can lead to more complex corporate governance. “The [pressure] to earn the synergies is not really there and then you try, like in politics, to make big decisions in a fair and politically correct way – which is typically a compromise…whereas in business we look for the best solution,” he said.

“Let’s wait and see…There are lots of mergers of equals which did not work. It’s for Lafarge and Holcim to show that they can make it happen.”


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