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Wienerberger Announces Strategy for Weak Market Environment (posted 11/17/08)

November 17, 2008
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The Group’s managing board has postponed growth projects and defined the maximization of cash flows as the top priority.

The Wienerberger Group recorded a 2% increase in revenues to €1,926.8 million (~ $2,431.0 million) for the first nine months of 2008, but operating EBITDA before restructuring costs fell 14% to €364.7 million (~ $460.1 million). The spread of the financial crisis to Europe and a significant deterioration in the macroeconomic framework triggered declines on the construction sectors of most West European countries. In addition, the U.S. reported a drop in housing starts that was much stronger than forecasted at the beginning of this year. Positive reports from Eastern Europe contrasted this trend, with construction activity showing sound development.

“We were able to increase revenues during the first nine months in this difficult operating environment, but earnings were negatively affected by lower sales volumes, more flexible pricing and an inflation-based increase in costs that we could not pass on in full to the market, as well as costs for idle capacity and the shutdown of production facilities,” said Wolfgang Reithofer, chief executive officer. “Our analyses at the beginning of July indicated a continuation of the economic downturn, and we reacted immediately by adapting our strategy to meet this shifting market environment. As part of an extensive program, we have started to optimize our plant network and adjust fixed costs to meet the change in sales volumes.”

According to the Wienerberger Group, liquidity and a healthy financial base are its most important goals in this changing market environment. The Group’s managing board has adjusted the corporate strategy, postponed growth projects and defined the maximization of cash flows as the top priority. The most important task is to adjust fixed costs as quickly as possible to match the current developments in markets and sales volumes, and the extensive optimization of the plant network represents a key element of this plan.

Related measures were introduced this past summer and have resulted in the shutdown of 16 plants. A total of 27 mostly older plants will be shut down or mothballed this year, and 11 production lines will be closed on a temporary basis. An extensive cost reduction program has also begun to cut administrative and selling expenses. Nearly 1400 Wienerberger employees will be affected by this restructuring. The costs for plant shutdowns have amounted to roughly €30 million (~ $38 million) so far, whereby €19 million (about $24 million) represent restructuring costs and €11 million (about $14 million) special write-downs.

Active working capital management will be strengthened by widespread plant closings that have been scheduled for the coming winter season. This year, Wienerberger will spend €100 million (~ $126 million) on maintenance and less than €450 million (about $568 million) on growth. In 2009, a maximum of €100 million (~ $126 million) will be spent to complete the growth projects currently in progress, and maintenance capex will be limited to €80 million (about $101 million). The goal is reduce net debt from the current level of €897 million (about $1,132 million).

“Liquidity is our top priority in these uncertain times,” said Reighofer. “Wienerberger had liquid funds totaling €180 million (~ $227 million), as well as €290 million (about $366 million) of undrawn committed lines of credit at the end of September. This means our refinancing requirements, which will equal approximately €475 million (about $599 million) up to the end of 2010, are now secured.”

Results for the reporting period were influenced by the deteriorating economic climate on many markets. Central-East Europe remained at a sound level, serving as the primary driver for revenue growth in the Group and generating 57% of Group EBITDA. In this segment, revenues rose 10% to €716.1 million (~ $903 million) for the first nine months. EBITDA before restructuring costs roughly matched the comparable prior year level at €209.2 million (about $263.9 million).

Poland followed solid growth during the first half of this year with an increase in sales volumes for the third quarter. Bulgaria and Romania reported another substantial increase in sales volumes, while momentum on the Russian market began to slow. Hungary also remained weak during the third quarter, and this situation was reflected in a steady decline in the demand for bricks. In the Czech Republic and Slovakia, greater flexibility in the Group's pricing policy was successful in reducing imports from Germany. However, revenues and earnings in both countries were negatively influenced by an inflation-based rise in costs.

Central-West Europe reported only a slight 2% year-on-year decrease in revenues to €340.1 million (about $429.1 million). However, EBITDA fell by nearly half to €36.3 million (about $45.8 million) due to the disappointing development of residential construction in Germany and growing pressure on brick prices in Italy. In North-West Europe, revenues rose 7% to €720.4 million (about $908.9 million) for the reporting period. The collapse of new residential construction on the British market was offset by the consolidation of Baggeridge and Sandtoft. The 13% decline in EBITDA to €125.0 million (~ $157 million) resulted from a strong inflation-driven increase in costs, as well as the lower utilization of capacity in Great Britain. Despite a positive contribution from the initial consolidation of Arriscraft, revenues in the North America segment fell by 29% to €183.4 million (~ $231.4 million) and EBITDA by 56% to €12.8 million (~ $16.1 million) as a result of the further sharp drop in residential construction and the weak U.S. dollar.

Wienerberger expects the effects of the financial crisis on the real economy will grow even stronger, and the resulting loss of jobs will have a negative influence on all sectors of business. This, in turn, will lead to a further deterioration in the market climate for Wienerberger, whereby the consequences will not be limited to Western Europe: the eastern regions of the continent have already shown the first signs of approaching economic weakness.

Wienerberger is forecasting moderate revenue growth for Central-East Europe up to the end of 2008, which will be supported by higher sales volumes in Poland, Bulgaria and Romania that should offset lower sales volumes in Hungary, the Czech Republic and Slovakia. However, earnings in this region are expected to decline slightly from the previous high level because of the inflationary impact on production costs. In Central-West Europe, market weakness and the costs for shutdowns and idle capacity will bring about a significant year-on-year decline in earnings. For the North-West Europe segment, the company expects a slight improvement in revenues but lower earnings. A continuation of the negative trend in sales volumes is forecasted for North America.

“For the full year, I expect a decrease of ca. 15% in operating EBITDA,” said Reithofer. “However, the decline could also be slightly higher (but no more than 20%) if the market downturn is stronger than expected. Depending on the development of the economic environment, we plan to pay a dividend for this financial year. The remaining funds will be used to strengthen our capital base and provide liquidity for our business operations.”

Visit www.wienerberger.com for additional details.

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