Annual report 2014

Haniel Group: Revenue and earnings performance

The Haniel Group has successfully lifted its operating profit in 2014 by more than 30 per cent1. A primary decisive factor for this positive development was the encouraging momentum in ELG’s and TAKKT’s sales markets, but CWS-boco and the Haniel Holding Company also contributed to this success. Moreover, the disposal of Celesio resulted in EUR 696 million in disposal gains – and thus also in a considerably higher after-tax result.

STABLE MACROECONOMIC ENVIRONMENT

With global gross domestic product increasing by 3.3 per cent in 2014, growth of the global economy was comparable to that in the preceding year. At the beginning of last year, an overall improvement in the economic momentum was still initially assumed for 2014. This estimate was not confirmed, however. The expectations for economic growth had to be corrected downward again during the course of the year as a result of a general economic slowdown.

Economic development in individual regions of the world varied greatly in 2014: While economic momentum in emerging markets weakened from the high level of the previous year, the developed economies, in which the Haniel Group primarily operates, posted slight to moderate growth. For example, the euro zone ended the economic contraction process of previous years and again grew slightly by 0.8 per cent. The regional differences within the euro zone remained, however: Germany posted above-average growth of 1.5 per cent, while economic growth in France was just 0.4 per cent and economic performance in Italy dropped by 0.4 per cent. The US economy developed significantly more positively than the euro zone. Following a brief period of economic weakness in the spring, the indicators at year’s end improved noticeably, adding up to growth of 2.4 per cent.

In addition to the economy, the development in the stainless steel market segment is of particular significance for the ELG division: overall heightened global demand in 2014 from industries which consume stainless steel resulted in an increase in global stainless steel production. The price of nickel, which is also a significant raw material for ELG’s business, also ranged at a higher price level than in the previous year.

The rather positive economic development in the US and Germany, as well as the encouraging development in the stainless steel market had an overall positive effect on the Haniel Group’s revenue and earnings performance.

ELG PROVIDED A SIGNIFICANT INCREASE IN CONSOLIDATED REVENUE

The Haniel Group posted a significant increase in revenue in 2014, rising 10 per cent to EUR 3,944 million. In addition to the positive business development, the first full-year consolidation of the companies acquired by CWS-boco and ELG in the prior year also made a positive contribution. By contrast, currency translation effects did not have a significant influence on revenue development. Adjusted for business combinations and disposals as well as currency translation effects, the Haniel Group increased revenue by 8 per cent. This is primarily attributable to the positive revenue development at ELG, where the increased demand for production of stainless steel and superalloys led to substantially higher output tonnage. Higher prices of nickel and titanium, significant raw materials for ELG’s business, also made a positive contribution to revenue growth. The TAKKT division benefited from the improved general economic conditions and also generated a revenue increase. In the US in particular, TAKKT was able to increase its revenue thanks to strong growth companies and the upturn in the public sector business. At the same time, slightly better business development in Europe contributed to revenue growth. The CWS-boco division reached the previous year’s revenue level despite intense competition in the market.

FRANZ HANIEL & CIE. GMBH

OPERATING PROFIT INCREASED BY 31 PER CENT

The Haniel Group improved its operating profit from EUR 166 million to EUR 217 million – an increase of 31 per cent. This is attributable in particular to ELG’s considerable gains, but also to the positive business development at TAKKT. In addition, CWS-boco experienced a strong increase in earnings thanks to savings in the area of operating expenses through the modernisation of its laundry network and its supply chain. The Haniel Holding Company also made a positive contribution to the increase in earnings. This was due, among other factors, to non-recurring income from the reversal of provisions which were no longer necessary.

PROFIT BEFORE TAXES FALLS

Despite significantly higher operating profit, profit before taxes declined from EUR 117 million in the previous year to EUR 31 million in 2014. This is attributable to the fact that the increase in operating profit was offset by a decrease in both the result from financing activities and investment result.

The result from financing activities, which is composed of finance costs and other net financial income, worsened from EUR -169 million in the previous year to EUR -200 million in 2014. The primary reason for this was that the proceeds from the disposal of Celesio were used in part to redeem bonds with a principal amount of EUR 413 million. The premiums paid on the repurchase had a negative impact on the result from financing activities in the current financial year. Going forward, however, these buy-backs will significantly relieve pressure on the net interest result of the Haniel Holding Company.

The investment result was also down in 2014, amounting to EUR 14 million, compared to EUR 120 million in the previous year. A decisive factor here was the decrease of the result from the Metro investment from EUR 96 million to EUR 14 million. The causes for this included portfolio, currency translation and non-recurring effects as well as lower income from property sales at METRO GROUP: In particular, the missing earnings contribution due to the disposal of Real’s eastern European business, impairment losses on goodwill at Metro Cash & Carry, negative impacts on earnings from store closures at Real and restructuring measures at Media-Saturn weighed down the result. Adjusted for the aforementioned effects, however, METRO GROUP’s operating profit was up slightly compared to the previous year. In addition, Haniel Group’s investment result declined year-on-year because in the previous year it included income from the disposal of two investment funds.

HIGH PROFIT AFTER TAXES DUE TO DISPOSAL OF CELESIO

Celesio has been reported as a discontinued operation since 2013 and is therefore no longer included in the Haniel Group’s revenue, operating profit and profit before taxes. The profit after taxes from discontinued operations in 2014 was comprised solely of the earnings from Celesio and totalled EUR 714 million. Celesio’s profit after taxes from operating activities is accounted for up to the disposal date and was EUR 18 million; the disposal gain after taxes amounted to EUR 696 million. In the previous year, profit after taxes from discontinued operations was EUR 185 million and solely comprised Celesio’s current operations.

At EUR -28 million, profit after taxes from continuing operations was below the previous year’s figure of EUR 82 million. Although the profit before taxes was lower, the tax expense increased from EUR 35 million in the previous year to EUR 59 million. This increase was caused by non-recurring tax income in the previous year and the fact that, while the premiums to be paid on the repurchase of bonds and the lower result from the Metro investment reduced earnings before taxes, they did not result in a reduction in taxes.

The Haniel Group’s aggregate profit after taxes in 2014 was EUR 686 million, thus significantly exceeding the previous year’s EUR 267 million.

FRANZ HANIEL & CIE. GMBH

HANIEL VALUE ADDED AND ROCE IMPROVED

In addition to the revenue and earnings figures, the Haniel Group also uses Haniel value added (HVA) and the Return on Capital employed (ROCE) as value-oriented performance indicators2. HVA expresses the value contribution generated within a single year. Positive value is added if earnings after taxes and before finance costs, i.e., the Return, exceeds the Cost of capital. The cost of capital is calculated by multiplying the weighted average cost of capital with the average capital employed. The weighted average cost of capital reflects the Return expectations of equity and debt holders, factoring in the risks associated with providing capital. The costs of equity and debt are determined each year, as is their weighting. A weighted average cost of capital of 8.1 per cent was used to calculate HVA in 2013 and 2014.

EUR million 2013 2014
Return 607 907
– Cost of capital 824 634
Haniel value added (HVA) -217 273
 
Return 607 907
/ Average capital employed 10,173 7,832
Return on capital employed (ROCE) 6.0% 11.6%

HVA was EUR 273 million in 2014 and EUR -217 million in the previous year. The increase had two causes: first, at EUR 907 million in 2014, the return was significantly higher than in 2013 due to the disposal gain from the Celesio transaction. Second, the cost of capital fell because the average capital employed declined significantly as a result of the disposal of Celesio.

The performance indicator ROCE reflects the return realised on the average capital employed. The Haniel Group’s ROCE increased from 6.0 per cent in the previous year to 11.6 per cent in 2014. Hence, the return on capital employed during the 2014 financial year was significantly above the weighted average cost of capital of 8.1 per cent; it had been below that figure in the previous year.

EXPECTED INCREASE ATTAINED IN REVENUE AND PROFIT AFTER TAXES

In last year’s annual financial statements, Haniel Holding Company forecast that the improved economic environment in particular would have a positive impact in the Haniel Group’s business development in 2014. ELG and TAKKT particularly benefited from an improved economic environment in 2014 in their markets and increased their operating profit even more than expected. In comparison, the CWS-boco division did not increase its revenue as forecast due to intense competition; however, it did achieve a significant increase in operating earnings compared to previous years.

As expected, the METRO GROUP posted a slight increase in revenue adjusted for business combinations and disposals as well as currency translation effects. As assumed, the operating profit before non-recurring expenses was below the previous year’s level. This was due to lower income from property sales and the loss of the earnings contribution from Real’s eastern European business, which was sold. Currency translation effects also had a negative impact. The result from the Metro investment at Haniel was – contrary to the projection – below the previous year’s level: While the METRO GROUP did achieve improvements in its net financial income and tax expense as expected, there were unexpectedly high non-recurring expenses.

The Haniel Group’s profit before taxes was not – as assumed – above the previous year’s level, but rather well below it. This was due in part to the result from the Metro investment remaining below expectations, but also to bond repurchases turning out higher than originally planned. These repurchases weighed down the result from financing activities as a result of the premiums to be paid in 2014, albeit with the objective of achieving significant savings on the interest expense in subsequent years.

As expected, Haniel obtained a high net disposal gain of EUR 696 million on the disposal of Celesio. The Haniel Group therefore posted high positive profit after taxes – as expected – in the 2014 financial year despite a lower result from the Metro investment and a decline in the result from financing activities.

Haniel value added and ROCE, the value-oriented performance indicators, improved significantly as expected because, on the one hand, the net disposal gain on the disposal of Celesio increased the return significantly, and on the other hand, the outgoing assets significantly reduced the annual average capital employed.

1 Prior-year figures have been adjusted in the report of the Management Board in accordance with IFRSs; also see the explanations in the notes to the consolidated financial statements.
2 For a detailed calculation of the HVA and ROCE indicators, see the explanation in the notes to the consolidated financial statements.