KHD Humboldt Wedag International AG

Quarterly Report • Nov 13, 2015

News Details

Ireland | 13 November 2015 09:14

KHD Humboldt Wedag International AG: Interim Report as of 09/30/2015

KHD Humboldt Wedag International AG / Release of an announcement according to Article 37x of the WpHG [the German Securities Trading Act]

13.11.2015 09:14

Interim report according to Article 37x of the WpHG, transmitted by
DGAP - a service of EQS Group AG.
The issuer is solely responsible for the content of this announcement.

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KHD Humboldt Wedag
International AG, Cologne, Germany

Interim Report Pursuant to Section 37x of the
German Securities Trading Act (WpHG)
as of November 13, 2015

/

ISIN: DE0006578008
GERMAN SECURITIES IDENTIFICATION NUMBER (WKN): 657800
Stock Exchange Symbol: KWG
www.khd.com

Summary of for the First Nine Months of the 2015 Financial Year

• Continued restraint among customers in awarding orders

• Revenue decrease of 26.2% compared with the same period in the previous
  year to EUR 125.4 million

• Significantly negative EBIT of EUR -35.1 million due to a negative
  gross profit margin caused by cost overruns in some projects.

• Confirmation of the forecast for the financial year 2015 with regard to
  key financial targets

Key Figures at a Glance

                     Jan. 1 -              Jan. 1 -
                    Sept. 30,             Sept. 30,            Variance

in EUR million 2015 2014 in %
Order Intake 125.8 80.2 56.9
Revenue 125.4 169.9 * -26.2
Gross Profit -5.4 25.0 *
Gross Profit margin
(in %) -4.3 14.7 *
EBIT -35.1 -0.1 *
EBIT margin (in %) -28.0 -0.1 *
EBT -28.8 1.7 *
Group net result for
the period -32.1 0.0 *
EPS (in EUR) -0.65 0.00 *
Cash flow from
operating activities -35.3 -19.1
Cash flow from
investing activities 3.6 -51.8
Cash flow from
financing activities 0.0 ** 32.0 **
Sept. 30, Dec. 31, Variance
in EUR million 2015 2014 in %
Equity 178.6 211.0 * -15.4
Equity ratio (in %) 50.9 55.6 *
Cash 94.0 123.6 -23.9
Intercompany loans *** 100.0 100.0 0.0
Net Working Capital -0.5 3.3 *
Order Backlog 207.5 207.1 * 0.2
Employees 745 777 -4.1

* In the Half-Year Financial Report 2015, the KHD Group retrospectively
corrected the income statement, the statement of comprehensive income, the
balance sheet and the statement of cash flows for the 2014 financial year
according to IAS 8.41ff. Due to the correction, the previous year's figures
published in this Interim Report differ from the figures published in the
Interim Report as of November 14, 2014 and in the Financial Report 2014,
respectively. For a detailed explanation of the corrections, please refer
to pages 25ff. in the Half-Year Financial Report 2015.
** The interest received is disclosed under cash flow from operating
activities or cash flow from investing activities from the 2015 financial
year onwards.
*** Including intercompany loan of EUR 50 million with the entitlement to
call for early repayment by giving 30 days' notice

Please note that the use of rounded amounts and percentage figures may
result in differences due to commercial rounding.

Market Environment

The International Monetary Fund (IMF) predicts global growth of 3.1%
(previous year: 3.4%) for the year overall. The current IMF forecast is 0.2
percentage points lower than the estimate provided in July. The root causes
for this decrease are primarily weaker pricing for raw materials,
decreasing inflow of capital in developing countries and the related
pressure on their respective currencies.

The IMF analysis shows that regional growth rates differ strongly from each
other. In contrast to the previous year, a slight recovery is predicted in
particular for the developed industrialized countries. However, it is
predicted that growth in the developing countries will again remain at a
relatively low level for the fifth year in a row.

The key sales markets of the KHD Group (hereinafter referred to as 'KHD' or
'Group') demonstrated quite different tendencies with regard to cement
consumption:

• In India, cement production has increased, but due to the lengthy
  monsoon season in the South and the unexpectedly high amount of rain in
  the North, cement demand has remained behind expectations. In addition,
  the slow development in industrial sectors that are important for
  cement sales (including residential construction and infrastructure)
  has resulted in less than satisfactory development of demand.

• In Russia, the construction sector continues to be hindered by
  difficult economic conditions - above all, the devaluation of the ruble
  and the generally weak macroeconomic climate have had a negative effect
  on infrastructure projects and, therefore, on cement consumption.

• On the Turkish cement market, prospects are declining. The reasons for
  this decline include excess capacities in cement production, decreasing
  cement exports to the Middle East and North Africa due to geopolitical
  tensions, and the recession in Russia. Despite these conditions,
  several cement manufacturers have announced expansion investments.

• In the USA, cement consumption continues to increase and, for this
  reason, a further increase in cement prices is expected.

Significant Events and Business in the Reporting Period

• New orders from Russia

On September 11, 2015, ZAB Zementanlagenbau GmbH Dessau ('ZAB'), Dessau,
Germany, a subsidiary of KHD Humboldt Wedag International AG has signed
contracts for a total value of over EUR 100 million for providing equipment
and services for a new cement plant. The plant will have a production
capacity of 4,500 tons of cement clinker per day and will be built in the
Northern Caucasus region in Russia. The projects will be booked as order
intake as soon as the pre-conditions for commencing project execution are
fulfilled.

• Loan contract with the Bank of China Limited, Frankfurt Branch

On September 30, 2015, KHD Humboldt Wedag International AG and the Bank of
China Limited, Frankfurt Branch signed a loan contract for EUR 25 million.
The bank loan has a fixed term and is due for repayment in October 2018. It
will be used to strengthen the business operations of the US subsidiary.

The interest rate for this loan from the Bank of China is significantly
lower than the interest rate that KHD obtains on the loans granted to AVIC
International (HK) Group Ltd.

General Business Development

In the first three quarters of 2015, order intake was EUR 125.8 million.
This is considerably higher than the level reached in the same period in
the previous year (EUR 80.2 million), but is still not satisfactory. In the
Capex segment, several customer investment decisions have been postponed
until the first quarter of 2016. Due to the challenging business
environment KHD expects order intake in the final months of the financial
year to be below original targets. Due to the postponement of the award of
contracts the order intake forecast for financial year 2015 will not be
reached. In the first three quarters of 2015, orders with an overall volume
of EUR 91.8 million were won in the business unit Capex. This is an
increase of 139.1% compared with the same period in the previous year (EUR
38.4 million). Spare parts and services (Parts & Services segment)
continued to make a solid contribution, with an order intake of EUR 34.0
million; however, the segment did not reach the previous year's figure of
EUR 41.8 million.

Order intake for the first three quarters of the financial year nearly
matches the revenue recognized from the execution of ongoing projects in
the amount of EUR 125.4 million. This means that order backlog as of
September 30, 2015 (EUR 207.5 million) is at a similar level as at December
31, 2014 (EUR 207.1 million) and - in contrast to June 30, 2015 - has again
reached a value over EUR 200 million.

Group Earnings Situation

In comparison with the previous year's revenue (EUR 169.9 million), revenue
decreased by 26.2% to EUR 125.4 million. The root cause for this decrease
is the low order backlog at the beginning of the financial year.
Significant contributions to revenue in this reporting period came
primarily from projects in Russia and North America. Due to unexpected
challenges and the related cost overruns in the execution of some large
projects, the gross profit margin decreased considerably to the current
figure of EUR -5.4 million (previous year: EUR 25.0 million). KHD is
currently negotiating with individual customers and suppliers on variation
orders and/or back charges for these cost overruns. These negotiations
provide the opportunity to be compensated for some of the additional costs
incurred, which would improve the KHD Group's net result for the period.
Some of these negotiations should have reached an advanced stage by the end
of the financial year 2015, which will provide evidence about the
probability of the outcome and thus have an effect on the Group Financial
Statements for 2015. Overall, the margin quality of the order backlog,
which has been won in previous years in a highly competitive environment
with strong margin pressure, is not satisfactory.

In comparison to the first nine months of 2014, sales expenses decreased by
7.9%, from EUR 7.6 million to EUR 7.0 million. Sales activities remain
focused on strategically important projects in KHD's core markets. Despite
cost increases due to one-time effects, general and administrative expenses
of EUR 13.5 million have remained nearly constant (previous year: EUR 13.2
million). Other expenses increased considerably to EUR 12.7 million
(previous year: EUR 5.3 million). In addition to EUR 3.6 million in
expenses for research and development (previous year: EUR 3.3 million),
this total includes, in particular, idle capacity costs of EUR 2.7 million
(previous year: EUR 0.0 million), expenses due to changes in market value
of foreign exchange forward contracts for hedging exposure on foreign
currency receivables (EUR 2.4 million; previous year: EUR 0.0 million) and
from currency exchange rate fluctuations (EUR 2.1 million; previous year:
EUR 0.4 million). From an economic perspective, the income resulting from
the effects of currency exchange rates on the foreign currency receivables
(EUR 3.1 million, previous year: EUR 0.4 million) should be offset against
the expenses from fair value adjustments of foreign exchange forward
contracts and currency exchange rate fluctuations. As a result of low order
backlog, the capacity of the operational departments was not fully utilized
in the first nine months of the year; the resulting idle capacity costs of
EUR 2.7 million were reclassified from the cost of sales to other expenses.

Earnings before interest and taxes (EBIT) amounted to EUR -35.1 million,
significantly lower than the previous year's value (EUR -0.1 million). As a
result, the EBIT margin was -28.0% (previous year: -0.1%).

The Group's net finance income of EUR 6.3 million improved significantly
over the previous year (EUR 1.7 million). The primary reason for this
includes interest income of EUR 4.6 million from two loans granted in the
2014 financial year to AVIC International (HK) Group Ltd. for a total
amount of EUR 100 million. The profit before taxes (EBT) amounted to EUR
-28.8 million (previous year: EUR 1.7 million).

The group net loss for the period was EUR -32.1 million (previous year: EUR
-0.0 million), which translates into diluted and basic (undiluted) earnings
per share of EUR -0.65 (previous year: EUR 0.00).

Segment Earnings Situation

Due to low order backlog at the beginning of the year, the Capex segment
contributed just EUR 87.2 million to revenue in the first nine month of
2015 (previous year: EUR 131.3 million). The Parts & Services segment
revenue totaled EUR 38.2 million (previous year: EUR 41.9 million).

While gross profit of EUR -13.9 million (previous year: EUR 16.7 million)
in the Capex segment was unsatisfactory due to the execution of projects
with low margins, and particularly due to high unexpected cost overruns in
some projects, the Parts & Services segment generated gross profit of EUR
8.5 million (previous year: EUR 11.6 million). As a result, the Parts &
Services segment achieved a positive gross profit margin of 22.3% (previous
year: 27.7%), whereas the gross profit margin in the Capex segment was
significantly negative, -15.9% (previous year: +12.7%),

EBIT in the Capex segment of EUR -39.9 million (previous year: EUR -4.9
million) reflects the difficult economic environment of recent years, high
unexpected margin deterioration and idle capacity costs, which resulted
from under-utilization of existing capacities. The EBIT in the Parts &
Services segment of EUR 4.8 million (previous year: EUR 8.1 million) only
partly offset the markedly negative result of the Capex segment.

Financial Position and Net Assets

Liquidity

In the first nine months of the financial year, the total cash and cash
equivalents decreased significantly from EUR 123.6 by EUR 29.6 million to
EUR 94.0 million. The main reason for this development is the notable
decrease in cash flow from operating activities, which amounted to EUR
-35.3 million, another significant decline from the previous year period
(EUR -19.1 million). The root causes for the significant outflow of funds
in the operational business included not only unexpectedly high payments to
suppliers as a result of cost overruns on some large projects, but also
payment delays by customers for projects with particular challenges in
execution.

Cash flow from investing activities amounting to EUR 3.6 million (previous
year: EUR -51.8 million) can be attributed to both the outflow of funds for
investments in the expansion of the IT environment and the inflow of funds
due to interest received. The interest received results from the two loans
in a total amount of EUR 100.0 million, which were granted to AVIC
International (HK) Group Ltd. in the financial year 2014. In the previous
year, the interest received was disclosed under cash flow from financing
activities. Taking into consideration the effects of currency exchange
rates in the amount of EUR 2.1 million, the cash and cash equivalents as of
September 30, 2015 now total EUR 94.0 million.

Total Assets

In comparison with the end of 2014 (EUR 379.4 million), the balance sheet
total was reduced by EUR 28.6 million to EUR 350.8 million. This was
primarily the result of the decrease in cash and cash equivalents by EUR
29.6 million. While the gross amount due from customers for contract work
increased considerably from EUR 10.1 million to EUR 46.1 million,
receivables decreased by EUR 7.6 million. Other current and non-current
assets changed only slightly.

Financing

On the liabilities side, commitments under construction contracts increased
by EUR 15.5 million from the total at the end of 2014, while provisions
shown as current liabilities, trade payables, and other payables decreased
by a total of EUR 11.1 million.

The net working capital - the difference between current assets (less cash)
and current liabilities - improved from the figure reported on December 31,
2014 (EUR 3.3 million) to a current amount of EUR -0.5 million. The main
reasons for this positive development are the decrease in trade receivables
and the increase in commitments under construction contracts.

Equity was at EUR 178.6 million, a significant decrease from the figure at
the end of 2014 (EUR 211.0 million). The primary reason for this decrease
is the negative group net result for the period of EUR 32.1 million. As a
result, the equity ratio as of September 30, 2015 was 50.9%, a decrease
with respect to the value as of December 31, 2014 (55.6%).

Risks and Opportunities Report

KHD's approach to risk management ensures that changes in the risk position
are promptly identified. To the extent required, provisions are set up for
specific risks. The risks identified do not pose a threat to the KHD Group
as an ongoing concern, either individually or in combination.

As already described in the Half-Year Report 2015 and in the Financial
Report 2014, project risks represent one of KHD's primary risk areas, due
to the growing complexity of the contractual obligations combined with the
expansion of performance obligations and rising customer demands. Even
after taking risk mitigating measures into consideration, project risks
remain at a high level. To mitigate project-related risks, KHD management
has established improvements in project execution, including project
management and controlling.

Over the financial year, KHD has had to accept considerable cost increases
in several projects. KHD is currently negotiating with individual customers
and suppliers about variation orders and/or back charges for these cost
overruns. These negotiations provide the opportunity to be compensated for
some of the additional costs incurred, which would improve the KHD group
net result for the period. Some of these negotiations should have reached
an advanced stage by the end of the financial year 2015, which will provide
evidence about the probability of the outcome and thus have an effect on
the Group Financial Statements for 2015.

In comparison with the Financial Report 2014 and the Half-Year Financial
Report 2015, there have been no significant changes as of the date of this
Interim Report in the assessment of risks and opportunities. Please refer
to the relevant sections in the KHD Group management report as of December
31, 2014 (page 39 ff. of the Group Annual Report) and to the half-year
version of the KHD Group management report of June 30, 2015 (page 12 of the
Half-Year Financial Report).

Outlook

Growth in KHD's core markets will remain at a moderate level over the
medium term. The market research firm CW Group expects a decrease in global
cement demand in 2015 of 2.7% (previous year: +2.6%) to 4.0 billion tons
(previous year: 4.1 billion tons). In particular, the Chinese cement market
is proving difficult. The CW Group is predicting that it will take until
2020 for demand for cement in China to reach the 2014 level again. As a
result, it is expected that despite sustainable growth in the USA, global
cement demand will decrease. Positive signs for growth in cement
consumption over the medium term can be expected from India, Southeast Asia
and Iran - assuming sanctions will be lifted.

After the close of the third quarter of 2015, KHD confirms the outlook
regarding the market environment and economic development of the KHD Group
and maintains the updated forecast (published in the Half-Year Financial
Report 2015) with regard to the relevant parameters, except for the order
intake that is estimated to be 60 - 70% above the value of the 2014
financial year.

Conformance with the submitted earnings forecast is affected by the ongoing
negotiations with individual customers and suppliers on variation orders
and/or back charges for cost overruns in several large projects. The
progress / outcome of these negotiations can significantly affect the
forecast figures for revenue, gross profit, EBIT, EBIT margin and EBT.

Regardless of the progress of these negotiations and despite the
considerably negative impact on earnings and liquidity, KHD's financial and
net asset position will remain solid. As the liquidity situation and the
high equity ratio remain comfortable, this provides us with the flexibility
to successfully cope with difficult market phases as well as the current,
unsatisfactory earnings situation. In spite of the difficult market and
margin situation, KHD is convinced that the Group will achieve a successful
economic turnaround in the medium term. We will continue to develop our
service and product portfolio and use opportunities for internal and
external growth.

Cologne, Germany, November 13, 2015

The Management Board

(s) Johan Cnossen (s) Jürgen Luckas (s) Yizhen Zhu (s) Daniel Uttelbach

Disclaimer:

This Interim Report contains statements regarding future and/or expected
developments. These statements are based on current estimate and are
naturally associated with risks and uncertainties. Actual results may
differ from the statements included here.

13.11.2015 The DGAP Distribution Services include Regulatory Announcements,
Financial/Corporate News and Press Releases.
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Language: English
Company: KHD Humboldt Wedag International AG
Colonia-Allee 3
51067 Köln
Germany
Internet: www.khd.com

End of Announcement DGAP News-Service

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