Wienerberger Continues Cost Cuts Following Tough 1st Half (posted 8/20/09)
Wienerberger recorded a 29% drop in revenues to €898.1 million (approximately $1.3 billion) for the first six months of 2009. After a weather-related very weak first quarter (down 37% year-on-year in revenues), the second quarter decline was more moderate in comparison (22%). Results for the first half-year were the consequence of a stronger-than-expected downturn on new residential construction markets across Europe and North America in the wake of the global economic and financial crisis. The loss of consumer confidence and a lack of financing have notably slowed the pace of new construction.
A drop in sales volumes, lower average prices and costs arising from extensive standstills throughout the Group’s plant network to reduce inventories as part of active working capital management triggered a decline in operating earnings for Wienerberger. Operating EBITDA (before restructuring costs) fell by 57% to €100.6 million (~ $142.0 million) and operating EBIT by 94% to €7.8 million (~ $11.0 million) for the first six months of 2009.
Record prior-year results in Central-East Europe were followed by the strongest revenue and earnings declines in the Group due to the spread of the global financial crisis to the construction industry in this region. Weaker demand, especially in the UK, had a negative impact on revenues and earnings in North-West Europe. Earnings in Central-West Europe were influenced by continuing weakness on the new residential construction market in Germany, as well as the costs of extended plant standstills at the beginning of this year. The U.S. reported a further decline in housing starts during the first months of 2009 from the very low prior-year level.
Against this backdrop, impairment testing for the Group's assets was based on very conservative assumptions for the future development of Wienerberger's business. These stress tests resulted in impairment charges of €125.4 million (~ $177.0 million) to goodwill, which were recognized primarily in the U.S., the UK, France, Italy, Germany, Scandinavia and the Baltic States. The impairment charges of €50.4 million (~ $71.1 million) recognized to goodwill in the North America segment during the first half-year are related primarily to the Group's regional business unit in the Midwest. Wienerberger continues to view the U.S. as a growth market, but the structurally weak Midwest (where the automobile industry is a key driver for growth) is not expected to recover significantly over the mid-term and an impairment charge was therefore required. Weaker demand for facing brick, as well as expectations for reserved market recovery after a turnaround, both in the UK and Continental Europe, are the main reasons for the impairment charges recognized by Wienerberger in the UK, France and Germany.
“Exceptional times require exceptional measures,” said Heimo Scheuch, CEO. “Stronger-than-expected declines on our markets during the first half-year called for further action, and we responded quickly to the very weak first quarter by extending our restructuring program. Specifically, we implemented an action plan that includes additional adjustments to production capacity, active working capital management, a reduction in fixed costs and a cutback in investments to a minimum. This year, we intend to close or mothball 26 plants, instead of the originally planned 20, to adjust our capacity to reflect the weaker demand and also reduce inventories.
“We estimate the costs for these measures at €100 million (~ $141.2 million), whereby approximately €60 million (~ $84.7 million) represents special write-downs. Wienerberger took 18 plants off-line during the first six months, which resulted in €59 million (~ $83.3 million) of restructuring costs and unfortunately also involved nearly 1000 jobs. In addition, extensive temporary standstills were scheduled throughout the entire plant network to reduce inventories. Together with the mothballed production lines, these temporarily closed locations represent a substantial capacity reserve that we can reactivate quickly, as needed.
“During the past half-year, we were able to realize savings of €90 million (~ $127.1 million) in personnel and maintenance costs compared with the first six months of 2008. This reduction in fixed costs resulted mainly from capacity adjustments and the optimization of administration and sales beginning in mid-2008, but also includes positive effects from measures launched in early 2009. Maintenance capex totaled €30.7 million (~ $43.3 million), which is 38% or roughly €19 million (~ $26.8 million) less than the first half of last year, and growth investments of €60.3 million (~ $85.1 million) will only be used to complete the projects started in 2008. Even though the operating environment is adverse, we were able to generate free cash flow of €7.9 million (~ $11.2 million) for the first six months. Active working capital management also helped us to reduce inventories by roughly €58 million (~ $81.9 million) during the first half of 2009, even though the building materials market remains difficult. I am therefore confident that we will be able to reach our goal to reduce net debt by €100 million this year.”
Wienerberger expects a further drop in revenues and earnings during the second six months of 2009, but these declines should be more moderate than the first half-year because of the lower prior-year values. “From today’s perspective, it is too early to speak of a recovery since the economic outlook remains uncertain,” said Scheuch. “Cash preservation and the reduction of net debt by €100 million are our top priorities in this difficult operating environment. We will therefore continue to focus on the implementation of our action plan over the coming months. For the full year, I expect cost savings of €150 million (~ $211.8 million). The steps taken in 2009 should bring additional savings of at least €25 million (~ $35.3 million) beginning in 2010, or a cumulative reduction of €175 million (~ $247.0 million) in fixed costs. We will limit investments to a minimum in 2010, whereby my estimates call for €80 million (~ $112.9 million) that will be invested almost exclusively in maintenance capex. From my point of view, we have taken all the necessary steps. In spite of the challenging market environment, I am convinced that Wienerberger will be able to emerge from this crisis as an even stronger player. The balanced country portfolio and innovative product range of Wienerberger form a sound basis to realize long-term benefits from a recovery.”
Additional details are available at www.wienerberger.com.