1999 HOLDERBANK FINANCIAL REPORT “Holderbank”. The financial results posted in 1999 demonstrate that the Group has further consolidated its position and created real added value. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Consolidated Financial Statements Holding Company Results 5-Year-Review Stock Market Data Stock Market Evolution Statement of Income Balance Sheet Statement of Changes in Equity Cash Flow Statement Accounting Policies Notes to the Financial Statements Auditors’ Report Products and Services Company Data Statement of Income Balance Sheet Notes to the Financial Statements Appropriation of Net Earnings Auditors’ Report 2 10 11 12 13 14 17 39 41 42 60 61 63 66 67 68 69 70 The financial report is also published in German. The English version is binding. Please see the separate annual report for the business review by Group region. “Holderbank” Financière Glaris Ltd. CH-8750 Glaris Phone: +41 55 640 34 94 http://www.holderbank.com Investor Relations: Bernhard A. Fuchs Phone: +41 55 222 86 60 Fax: +41 55 222 86 69 Corporate Communications: Roland Walker Phone: +41 55 222 87 10 Fax: +41 55 222 87 19 1 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1999 The following discussion and analysis of the Group’s fi- nancial condition and results of operations should be read in conjunction with the Group’s financial statements and notes to the financial statements, which are presented on pages 10 to 38 of this annual report. Overview “Holderbank’s” financial results in 1999 were favorable at all levels despite rapidly changing market conditions. In early 1999, the outlook remained subdued due to crises in some Latin American and Asian countries. Facing this situ- ation, the Group’s strategy of geographical diversification proved to be sound. In fact, it was the strength of the Group that led to further opportunities which arose as a conse- quence of the crises in some emerging markets. Group net sales increased by CHF 926 million or 8.2% to CHF 12,194 million (1998: 11,268). The internal growth in net sales, excluding the impact of changes in foreign cur- rencies and the consolidation structure, amounted to CHF 435 million or 3.9%. These results reflect the Group’s positive development in rapidly changing global condi- tions in the construction sector and led to continued growth of operating profit in most regions. There were improved economic conditions in most of the Group’s Eu- ropean markets. In Latin America, the Mexican economy compensated for the decline in the rest of the region. As a result, operating profit in this Group region increased further. The need to import cement to North America to cover the demand created by strong business activity re- duced margins in this Group region. Asia Pacific region, which in certain countries showed some recovery, now appears to be on the threshold of a positive development in the years to come. Group region Africa Middle East also contributed to operational growth. An analysis of the geographical segments in which “Holderbank” operates again highlights the progress in further strengthening and more evenly balancing the Group’s global portfolio. 39.8% (1998: 40.2%) of the A global portfolio, firmly focused on cement, aggregates and concrete, coupled with a strong management, is our recipe for sustained value creation. 2 MD&A Group’s net sales were derived from Europe, the largest region. Net sales in Latin America represented 23.0% (1998: 23.5%) of the Group total, and the economic con- ditions in North America increased this region’s share to 22.7% (1998: 22.2%). Group regions Africa Middle East and Asia Pacific accounted for 7.9% (1998: 8.7%) and 6.6% (1998: 5.4%) of net sales respectively. The Group continues to focus on core activities and has thus disposed of certain operations, such as its concrete chemicals business. Goal was the further strengthening of core segments. 60.2% (1998: 59.3%) of net sales derived from the segment cement/clinker and 21.2% (1998: 21.6%) from aggregates/ concrete. The percentage of net sales attributable to other products/services was reduced to 18.6% (1998: 19.1%). Further growth was the result of merging “Holderbank” subsidiaryCorcemar S.A.(Argentina) withJuan Minetti S.A. (Argentina) and the first consolidation of the latter. Effect of Currencies and Inflation on Operations The Group generates in excess of 92% of its net sales in currencies other than CHF with transactions made in most of the major currencies. Statements of income and cash flow statements in foreign currencies are translated into CHF at the average exchange rate of the year, whereas balance sheets in foreign currencies are consolidated at year-end exchange rates. In 1999, the average valuation of the CHF weakened slightly against all major currencies. As a consequence, exchange rate movements had a minor impact on the con- solidated statement of income and the results of the Group. Due to exchange rate differences, net sales im- proved by CHF 173 million (1998: -331) and operating profit by CHF 31 million (1998: -35). A major impact on the consolidated balance sheet result- ed from the appreciation of the USD and some other cur- rencies by more than 15% at year-end. These movements led to a CHF 493 million (1998: -261) increase in share- 3 Net sales per Group region 1999 Europe 39.8% Latin America 23.0% North America 22.7% Africa Middle East 7.9% Asia Pacific 6.6% holders’ equity. The impact of inflation and devaluation in some high-inflation countries is minimized by functional currency accounting – usually USD accounting. In 1999, the devaluation of the Real in Brazil led to a temporary margin decrease at “Holdercim” Brasil S.A., which was, however, eliminated by year-end. Change in Group Structure Total financial investments amounted to CHF 1,261 million (1998: 2,372) due to major changes in the scope of con- solidation by merging Corcemar S.A. (Argentina) with Juan Minetti S.A. (Argentina) and the first consolidation of Ruhunu Cement Company Ltd. (Sri Lanka) and Tenggara Cement Manufacturing Sdn Bhd (Malaysia). Various initiatives were directed into strengthening the Group’s participation in subsidiaries. Minority buyouts were undertaken at HISALBA – Hornos Ibéricos Alba S.A. (Spain), Société Suisse de Ciment Portland SA (Switzer- land) and Portland-Cementwerk Thayngen AG (Switzer- land). Group participation in Tvornica Cementa Koro- ma˘cno (Croatia), Apasco S.A. de C.V. (Mexico), Puttalam Cement Company Ltd. (Sri Lanka), Alsons Cement Corpo- ration (Philippines), Milburn New Zealand Ltd. (New Zealand) and others was further increased. In addition, further minority stakes have been acquired at Egyptian Cement Company S.A.E. (Egypt), Huaxin Cement Com- pany Ltd. (China), Siam City Cement (Public) Company Limited (Thailand), and controlling positions were taken in Cimus SA (Romania) and Garadagh Cement J.S.C. (Azerbaijan). Divestments included operations falling outside the Group’s core activities. Focusing on the development of products and expertise in the field of cement additives, Group activities in the area of concrete chemicals were sold, including Holderchem Euco AG (Switzerland), C.I.A. of Origny S.A. (France), Holderchem Euco S.A. (Spain), Euclid Chemical Company (USA), Polchem S.A. (Chile) and others. After commissioning the new plant on Min- danao, Alsons Cement Corporation (Philippines) sold the Iligan Cement Corporation (Kiwalan plant). Although the change in Group structure increased net sales by CHF 318 million (1998: -38), there was no mater- ial effect on overall operating results. The divestments mentioned above, together with amortization of goodwill on the acquisitions, offset the impact of new investments on the operating results. Results of Operations In 1999, operations achieved a further increase in ca- pacity utilization to reach 83% despite the fact that the newly commissioned plants in Vietnam, Australia and the Philippines operated for a full year for the first time. The percentage of the Group’s net sales represented by statement of income items is detailed in the following table: Per year-end in % 1999 1998 Net sales 100.0 100.0 Cost of products and services sold (59.9)(60.5) Gross profit 40.139.5 Distribution and selling expenses (17.1)(16.5) Administrative expenses (7.2)(7.4) Other depreciation and amortization (1.8)(1.7) Operating profit 14.013.9 Additional ordinary income 2.31.1 Financial expenses (4.9)(4.4) Group net income before taxes 11.410.6 Income taxes (3.4)(3.2) Group net income before minority interests 8.07.4 Net Sales Net sales increased by 8.2% compared with the previous year. Internal growth (volume and price) of CHF 435 mil- lion (1998: 372), favorable impacts arising from exchange rate movements of CHF 173 million (1998: -331) and changes in Group structure amounting to CHF 318 million (1998: -38) contributed towards this improvement. The cement / clinker segment increased its net sales by 9.4% and now generates 60.2% (1998: 59.3%) of total Group turnover. 4 Operating Profit The gross profit margin improved to 40.1% (1998: 39.5%) primarily due to favorable market conditions – particularly in Europe – and the closure of redundant capacity in previ- ous years. Production costs per tonne of cement de- creased further as a result of improved capacity utilization and the related higher absorption of fixed costs. In addi- tion, variable costs also reduced. Fuel costs benefited primarily from the Group’s initiative to increase its use of alternative fuels. A project to achieve excellence in maintenance has been extended to all Group companies and the first cost reductions were realized during the year already. Distribution and selling expenses amounted to 17.1% (1998: 16.5%) of net sales. The opportunities presented by a booming US cement market were supported by addi- tional imports from various Group companies. The higher cost level was primarily due to the cost of distributing these imports in the US. Administrative expenses amounted to 7.2% (1998: 7.4%) of net sales. Various initiatives have been launched to stream- line administration and reduce costs. The reduction in ad- ministration expenses also reflects early results of efforts to optimize the Group’s structure. Furthermore, an initiative was launched to harmonize the management accounting system Group-wide. This new management information system and related activities will facilitate international benchmarking, enable Group companies to share services, and further strengthen the efficiency and effectiveness of administration. Other depreciation and amortization expenses increased to 1.8% (1998: 1.7%) of net sales. This increase, which contains amortization and depreciation on other operating assets, was mainly due to the amortization of goodwill arising from the Group’s recent investing activities. Operating profit amounted to 14.0% (1998: 13.9%) of net sales. The increase of CHF 139 million or 8.9% is primarily driven by changes in the segment mix and partly offset by increased distribution costs and amortization of goodwill. In addition, positive effects of exchange rate movements and changes in the consolidation structure further im- proved operating profit. The largest growth was achieved in Group region Europe, which increased its operating profit by 24.5% and now accounts for 31.6% (1998: 27.6%) of Group operating profit. Regions not showing an increase in operating profit were North America (-2.1%), largely due to the proportional increase in imported ce- ment in this area, and Asia Pacific (-1.4%). Operating profit in Latin America increased by 4.5%, despite the crises in various countries noted earlier. Declines in Venezuela, Ecuador, Colombia, Chile and Brazil were offset by strong results from Apasco S.A. de C.V. (Mexico), the Group’s Central American companies as well as the first consolida- tion of Juan Minetti. EBITDA margin of “Holdercim” Brazil S.A., which had previously suffered from the devaluation of the Real, recovered by the end of the year. Group region Latin America accounts for 34.2% (1998: 35.6%) of Group operating profit and remains the highest regional contributor within the Group. Financial Expenses Financial expenses amounted to 4.9% (1998: 4.4%) of net sales. The increase resulted from higher levels of net financial debt arising from investing activities over the past few years as well as higher interest rates of 5.9% (1998: 5.6%) on short and long-term financial liabilities. Income Taxes The expected income tax rate for the Group remains at 33%. In 1999, the effective tax rate was 29.8% (1998: 30.4%). Main reason for this lower than expected rate are deferred taxation credits arising from the benefits of restructuring certain operations in Africa Middle East. Net Income Net income after minority interests improved significantly (+16.6%) especially due to capital gains on the sale of fixed and financial non-core assets. Accordingly, fully diluted earnings per share increased by 14.6% to CHF 108.50. 5 Cash Flow The high level of cash flow achieved in the previous year was maintained in 1999. Cash flow from operating activi- ties amounted to CHF 1,902 million (1998: 1,887). Cash generated from operations increased by 8.7%. This in- crease was able to cover higher interest and tax pay- ments of CHF 217 million. Interest payments in turn increased due to higher borrowing levels which were needed to finance the non-consolidated positions in the emerging markets. Tax payments were higher because various Group companies had used up their tax-de- ductible tax losses carried forward. Analysis of cash flow from operating activities by region show improvements in Group regions Europe and North America compensat- ing the decreases in all other Group regions. Balance Sheet Consolidated shareholders’ equity grew by CHF 1,437 mil- lion to CHF 6,430 million (1998: 4,993). Currency trans- lation adjustments of CHF 493 million (1998: -261) and a capital increase of CHF 375 million contributed, in addition to net income, to the increase in shareholders’ equity. Interests of minority shareholders increased by CHF 379 million to CHF 1,802 million (1998: 1,423) main- ly due to currency translation adjustments offsetting the buyouts of minority interests. “Holderbank” strengthened the shareholders’ equity through the creation of additional share capital. 25 of the existing bearer shares entitled the holder to subscribe to one new bearer share at CHF 50.– par at an issue price of CHF 1,350.–. 25 existing registered shares entitled the holder to subscribe to one new registered share at CHF 10.– par at an issue price of CHF 270.–. The subsequent capital increase through the issue of 209,371 bearer and 404,000 registered shares generated CHF 375 million net in new equity capital for the company. In addition, the general assembly approved a condi- tional share capital of 200,000 bearer shares to cover a future issuing of convertible bonds to finance investments in emerging markets. This transaction will permit to build- 6 up new positions in growth markets without diluting earn- ings of present shares as conversions will be timed to match profit expectations. The Group’s net financial debt of CHF 7,631 million (1998: 7,069) increased by 8.0% primarily due to currency trans- lation adjustments and cash requirements for expansion through property, plant and equipment and financial in- vestments. From the proceeds of a called CHF 250 million convertible bond issue, a new CHF 448 million zero coupon convert- ible bond due 2014 was issued during the year. Gearing (net financial debt divided by shareholders’ equity includ- ing minority interests) benefited from the capital increase and improved from 110.2% to 92.7%. As a result, the cash position strengthened to support the Group’s acquisition strategy. In 1996, the Group established a specific provision of CHF 560 million necessary to restructure operations. The remaining provision of CHF 108 million covered the final expenses of this restructuring exercise during 1999 mainly in Group region Europe. Sustainable Development In 1999, the Group became a member of the World Busi- ness Council for Sustainable Development, further rein- forcing its commitment to the environment. The use of alternative fuels and raw materials as well as the produc- tion of blended cements is being systematically pursued in all regions to bring environmental, economic and so- cial benefits to both the Group and the communities in which it operates with a long-term perspective. Invest- ments in environmental protection are clearly a priority in acquired companies, especially in developing countries. CHF 73 million (1998: 70) was invested to further improve the environmental sustainability of production facilities. Group companies provide for their environmental liabili- ties based on legal or contractual obligations. A provision 7 Operating profit per Group region 1999 Latin America 34.2% Europe 31.6% North America 24.9% Africa Middle East 5.3% Asia Pacific 4.0% 8 of CHF 130 million (1998: 89) has been made for reculti- vation and other environmental liabilities. Beyond this provision the Group does not anticipate any material ad- verse effect of environmental liabilities on future results of its operations. Derivative Financial Instruments Derivative financial instruments are mainly used to fix the interest rate of long-term variable-rate liabilities and to hedge liabilities denominated in foreign currencies against swings in currency exchange rates on specific transactions. Corporate Governance During 1999, the first phase of the rollout of the Group’s comprehensive business risk management program was completed. This phase focused on an initial assessment of risks for individual Group companies, including the iden- tification of relevant risks. In 2000, the rollout of the busi- ness risk management program will continue with the de- velopment of risk management strategies in Group com- panies and procedures related to their implementation and continuous improvement. Risks Associated with International Operations The Group includes operations in the emerging markets of Eastern Europe, Latin America, Africa and Asia. It is these areas which have produced the highest levels of growth in cement demand over the past several years and have provided “Holderbank” with strength and flexibility in a rapidly growing market. In several Southeast Asian markets the economic down- turn witnessed in previous years appears to have ended and an initial recovery was in evidence during the year. The decision to boost the Group’s presence in this region proved strategically sound and Group companies are well positioned to take advantage of expected economic growth in the future. In some Latin American countries, the effect of the Asian crisis and political uncertainty im- pacted negatively on demand for construction. However, general business conditions are expected to improve. Accounting Policies There were several changes in accounting policies adopted during the year under review, including some which were adopted prior to their effective date as encouraged by the International Accounting Standards Committee. In- ternational Accounting Standards introduced were IAS 16 (revised) on property, plant and equipment, IAS 19 (revised) on employee benefits, IAS 22 (revised) on busi- ness combinations, IAS 36 on impairment of assets and IAS 38 on intangible assets. In addition, the Group adopt- ed the findings of the Standard Interpretation Committee (SIC) 16 that treasury shares are to be offset against equi- ty and not disclosed as an asset as was previously the case. When the Group introduced IAS 12 (revised) on income taxes in 1996 for certain Group companies operating in a hyperinflationary economy and thus using a hard curren- cy for reporting, the deferred tax provisions calculated were not fully adequate. The accounting treatment has now been corrected. As a consequence of all these accounting changes, share- holders’ equity was reduced by CHF 284 million as at January 1, 1998. IAS 37 on provisions, contingent liabilities and contingent assets will be implemented in 2000. The introduction of IAS 37 will not have a material effect on the financial re- sults of the Group, as the balance sheet at December 31, 1999 is already largely compliant with the principles of this standard. Year 2000 Compliance The measures taken for a smooth transition at year-end were successful. The advent of year 2000 did not have a sig- nificant impact on the Group. The important operating and administrative systems were compliant and there was little disruption arising from major suppliers and business part- ners. Total spending on upgrades, replacements and con- sulting prior to year 2000 amounted to approximately CHF 30 million. These costs were expensed as incurred and did not have a major impact on the Group’s financial position. 9 Events after the Balance Sheet Date After the balance sheet date, the Group invested in Eastern Bulkcem Co. Ltd. (Nigeria) and Palestine Cement Company (Palestine). Furthermore, the Group strength- ened its export markets in the Caribbean Islands with the acquisition of five import terminals. After successfully concluding the joint venture negotiations with our partner in Siam City Cement (Public) Company Limited (Thailand), the company will be consolidated as of January 1, 2000 using the proportionate method. Outlook The Board of Directors and the Executive Committee are optimistic about 2000 and expect a further increase in Group operating profit, provided the CHF remains roughly at its current level. The past year has demonstrated that the Group is stronger and more flexible now than at any previous stage. Thus, “Holderbank” is able to take appro- priate and successful action in a rapidly changing en- vironment and in an industry that is consolidating. In Europe, the economic upturn is visible and continued positive results are expected. In North America, cement demand should remain favorable and new capacity in this region will ensure that the high cost of importing cement, necessary during 1999, can be gradually reduced. The process to renew and extend production facilities in the NAFTA area has started with the permission phase for three flagship plants at very low investment cost. Latin America will resume its growth path and make another pleasing contribution to Group results this year. In Africa Middle East indications are that demand will increase. Signs of slow recovery are evident in Asian markets and should accelerate during the coming year, with strategic investments made in this area rendering significantly improved results. [...]... property, plant or equipment selling price and value in use The net selling price is the Gains from a sale are included in the liability, and the fi- amount obtainable from the sale of an asset in an arm’s nancing costs are allocated over the term of the lease in length transaction while value in use is the present value such a manner that the costs are reported over the rele- of estimated future cash... (Thailand), and the increase in participation at Egyptian Cement Company S.A.E (Egypt) The valuation of financial investments in associates is based on the equity accounted carrying value that resulted in a CHF 9 million (1998: 1) increase in investments in associates 22 Proper ty, Plant and Equipment Land Buildings, installations Machines Furniture, vehicles, tools Construction in progress Total 1999. .. Million CHF Nominal value Market value Book value 1999 Interest rate instruments Currency instruments Total 1998 1999 1998 1999 1998 2,192 2,337 (110) (163) 2 (16) 596 1,640 (75) 28 0 0 2,788 3,977 (185) (135) 2 (16) The nominal value reflects the contract volume By com- value discloses that portion of a financial instrument that bining various derivative instruments, individual hedging has already been... taken to the statement of income The transactions may be several times larger than the under- underlying transaction disclosed in the financial state- lying transaction The market value is the price differen- ments reflects the nature of the derivative financial in- tial as at year-end marked against the market The book struments Interest Rate Risks The Group enters into various types of interest rate... taxes on the undis- end of the period, profit sharing, bonuses and deferred tributed earnings of Group companies since these compa- compensation 16 nies can decide themselves when dividends are to be distributed Derivative Financial Instruments Through the use of various kinds of derivative financial in- Employee Benefits – General struments, the Group hedges certain currency and inter- The Group adopted... consolidated financial statements have been pre- change differences on monetary positions between the pared in accordance with the International Accounting local currency and the functional currency are included Standards (IAS) as published by the International Ac- in the annual statement of income Exchange gains and counting Standards Committee (IASC) The listing rules of losses resulting from the translation... Valuation differences are included in the statement of income Securities held as long-term in- Consolidation Method vestments are included under financial investments and The consolidated financial statements include the ac- are valued at the lower of acquisition cost or market price counts of Swiss and foreign companies and their subsidiaries (Group companies) of which Holderbank Fi- Inventories nancière... Buyout of minorities Capital paid -in 32 Profit distribution December 31 30 Purchase Commitments, Contingencies and Guarantees Million CHF The decrease in purchase commitments reflects the smaller demand for imported cement of US subsidiary Holnam Inc during the last quarter of the year 31 Retained Earnings In 1999, the Group adopted IAS 16 (revised 1998), prop- In addition, the Group restated the balance... Amortization of investments in associates Total 11 Financial Expenses Million CHF Of which to associates Financial expenses capitalized comprise interest expen- ing plants at Holnam Inc (USA) and Juan Minetti S.A (Ar- ditures on larger-scale projects during the year In 1999, gentina) The average rate of interest for financial liabilities such projects included construction of cement and grind- on hand at December... granted 16 Group Net Income After Minority Interests The 16.6% increase was mainly due to stronger results in (1998: 682), representing 81.3% (1998: 81.5%) of Group Group regions Europe and Africa Middle East Group net net income before minority interests income after minority interests came to CHF 795 million 17 Earnings Per Share (EPS) Earnings per share is calculated on the basis of Group net convertible . 1999 HOLDERBANK FINANCIAL REPORT Holderbank . The financial results posted in 1999 demonstrate that the Group has further consolidated its position and created real added value. Management’s. and the corresponding financing costs are significant relative to the total financing costs of the reporting company, then the relevant financing costs are capitalized and depreci- ated for the. 2000 and expect a further increase in Group operating profit, provided the CHF remains roughly at its current level. The past year has demonstrated that the Group is stronger and more flexible