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Holcim Ltd (HOLN.VX) Thursday said the strong franc, high raw material costs and difficult market conditions in some European countries and the U.S., which hurt second quarter earnings, will keep a lid on business during the remainder of 2011 even as the Swiss cement maker said it was on track to reach its full-year operating target.
The world's second largest cement maker in terms of sales after French competitor Lafarge SA (LG.FR) said net profit for the three months to end June fell 13% to 347 million Swiss francs ($436 million) from CHF399 million in the year-earlier period. This was below market expectations as the company's cost reductions and price increases were outweighed by high prices for raw materials and transportation.
And even as Holcim was able to lift construction material volumes thanks to healthy demand in emerging markets in Asia and Latin America, the strong franc, its reporting currency, hurt revenue, which dropped 11% to CHF5.49 billion from CHF6.16 billion during the reporting period. The lower sales also hit profit margins, which dropped to 18.7% from 21.5% during the first half. Holcim didn't detail second quarter operating margins.
Due to the current difficult business environment, Holcim remained cautious about its prospects, saying that "there isn't yet a sign of an upturn in the construction sector in North America" and that "the global rise in energy, raw material and transportation costs" will dent earnings. Nevertheless, Holcim said it expects to reach an operating profit margin that will be close to last year's level as some markets in Europe are showing signs of an upswing, especially in countries such as Russia, Romania, the Czech Republic and Serbia.
Holcim's plight is shared by many in the industry such as Mexico-based Cemex S.A.B. de C.V. (CEMEX.MX) and Germany's HeidelbergCement AG (HEI.XE) and analysts say the sector is likely to come under further pressure should the global economy weaken if markets in Europe and the U.S. stall or even fall into recession. During the crisis in 2008 and 2009, Holcim struggled to keep up profits even as it benefited from a construction boom in Asia.
"Holcim's second quarter performance was weak, but that was expected as the franc strengthened against all major currencies," said Patrick Appenzeller of brokerage Helvea. "But Holcim's plan to reach the year-ago operation profit margins shows that it expects that it will be able to further increase prices and I believe they are able to do so as they have a strong position in markets such as Thailand, Vietnam or Argentina, which are growing fast."
But other analysts were skeptical and shares of Holcim, which has lost more than 30% this year on concerns that construction activity will remain subdued in mature markets, opened sharply lower amid investor fears that the recent financial market turmoil could hurt the economy and undermine the company's prospects in Asia. At 0701 the shares were down 4.7% at CHF45.7.
-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; firstname.lastname@example.org