Fitch Ratings says that the Q112 results of the main rated Western European cement producers, Holcim Ltd ('BBB'/Stable), Lafarge SA ('BB+'/Stable) and HeidelbergCement AG ('BB+'/Stable) had mixed indications.
The trend in Western European markets remained negative, partly due to harsh weather conditions during February, which depressed cement volumes sales. While Fitch expects volumes to improve, the outlook in the region remains difficult with uneven trends across different countries and margins still under pressure.
Positive news came from the North American cement market, where the trend is probably more favourable than Fitch was anticipating at the start of the year. The agency was not expecting any major recovery in the market but Q112 results for the major rated cement producers showed good progression in volume sales, with double-digit growth. However, this volume improvement is largely attributable to more favourable weather conditions in the quarter and is unlikely to be maintained for the rest of the year. Prices are also rising, with some price hikes already passed in Q112 and others to take effect from Q212. In addition, the impact of low shale gas prices is easing energy cost inflation. If these trends continue, profitability in the region will be better than anticipated.
Fitch notes that a moderate improvement in the US and Canadian markets would be rating neutral, due to the relatively low weight of North America on the consolidated EBITDA of the Western European cement producers.
The trend is also slightly positive for some emerging markets, especially in Asia and Latin America. As anticipated by Fitch, volume growth continues to be robust, but cost inflation remains the main issue. In Q112, the price trend was also favourable, with price increases largely offsetting cost inflation. In addition, the strong volume increase allowed operating margins to improve in absolute terms for all the producers in most of the emerging markets. However, in some cases, profitability (operating profit margin) deteriorated. In Fitch's view, this is the main concern for the sector. Q1 volume and margins are usually not particularly meaningful, due to seasonality. However, the trend in profitability could be a signal the companies will need further price hikes in order to offset cost inflation and preserve operating profits in the next months.
Overall, Fitch believes that while some positive signals were evident from interim results, the outlook remains broadly unchanged. The ability of single companies to cut costs and gain efficiencies will be crucial to preserve operating profits and cash flows. Fitch expects all the rated companies to maintain very tight capex policies and control leverage. Even though the operating performance in some regions could be marginally better than anticipated, Fitch does not expect any significant improvement in the credit metrics of the rated companies. Therefore, potential positive rating actions in the sector are subject to a stronger recovery in 2013, especially in Western Europe, where visibility is still poor.