Exane BNP Paribas Building Materials & Infrastructures XX

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[email protected] Pinatel +44 207 039 94 67 [email protected] Touahri +44 207 039 95 23 [email protected]

Sevilla, October 2010

XX Congress FICEM-APCACWorld Cement markets trends

“From stimuli support to austerity measures ?” Exane BNP Paribas’s new Scenario for 2010-2011

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Arnaud Pinatel (London): [email protected] +44 207 039 94 67

Arnaud Pinatel, 44, graduated with a degree in Economics from the Sorbonne University in Paris and went on to gain the French SFAF qualification (French financialanalysts’ association). Arnaud began his career at Group Ciments Vicat (1992-1997) where he worked first as a financial controller and later as a strategic assistant to theChairman and CEO of the Group. In 1997, he moved to Oddo Equities in Paris as an equity analyst covering the Building Materials sector on a Pan-European basis. Arnaudjoined BNP Paribas in London in July 2001 and heads the European Building Materials and Construction team at Exane BNP Paribas.

Su Zhang (London): [email protected] + 44 207 039 94 18

Su Zhang, 33, received his B.Econ from Fudan University, Shanghai, an MBA from HEC, Paris, and an MSc in Accounting and Finance from the London School of Economics. He started his professional career at PricewaterhouseCoopers as an auditor and at Standard Chartered Bank as a credit analyst. He joined Exane BNP Paribas’s Construction and Metals and Mining teams in January 2007.

Yassine Touahri (London): [email protected] + 44 207 039 95 23

Yassine Touahri, 26, received his MSc in Management from Grenoble’s Ecole de Management in 2008 and spent one year studying at the Warwick Business School in 2006/2007. In 2006, Yassine worked in Saint-Gobain’s investor relations department and joined Exane’s Building Materials and Construction team in August 2007.

Nicolas Mora (London): [email protected] +44 207 039 95 38

Nicolas Mora, 32, graduated from ESSEC in Paris in 2002. He began his career at Societe Generale in London, as an equity research analyst covering UK Food Retail, andthen joined the Hedge Fund Group within Societe Generale, as an analyst on Merger Arbitrage and Special Situations. In 2006, he moved to Ecofin, a London-basedUtilities and Infrastructure hedge fund, as a European analyst. Nicolas joined Exane's Building Materials & Infrastructure team in June 2009, with a focus on Infrastructureand Construction stocks.

Stanislas Coquebert (London): [email protected] +44 207 039 94 14

Stanislas Coquebert, 26, graduated from HEC Paris in 2007 with a specialization in Macroeconomics. After working in audit in Paris at PricewaterhouseCoopers and in M&Ain London at UBS, Stanislas joined Exane BNP Paribas as a telecom operators analyst. He joined the Building Materials and Construction team in 2009 with a focus onInfrastructure and Construction stocks.

European Building Materials and Infrastructure team

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What happened in 2010 ? - Cement volume declined more than we thought initially in mature markets- Growth was stronger in emerging markets

Our scenario for Construction markets in 2011- Residential- Non Residential - Infrastructure

Our scenario for cement volume in 2011

What scenario for cement prices in 2010-2011 ?

Two main challenges exist after 2 to 3 years of downturn

Conclusion

Summary

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November 2009 SCENARIO for Cement Volume in 2010e :+3 to +4%e excl. China; +6%e incl. China

We presented one year ago a scenario of slight volume improvement …Scenario presented at the FICEM-APAC congress in Bogota Colombia - USA : 1st step of recovery expected driven by infrastructure & stimulus package- Western Europe: could bottom out, except in Spain & Germany- Eastern Europe : continuing weakness- Latam :better trends , especially in Brazil - Asia & MENA :continuing growth

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…which was too optimistic for mature markets and not enough for emerging markets Decoupling between mature and emerging markets is still visible- Strong demand in BRIC countries- Among mature markets, Canada significantly stands out- Difficult picture for highly indebted Southern/Eastern European countries

November 2010 : current cement volume scenario for 2010e (YoY % change)World: +7%; +2% excluding India & China

Emerging countries: +9%; +4% excluding India & China

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This situation was already visible in H1 2010 - A weak Q1 outside emerging markets… followed by an improvement in Q2 - Weak Q1 trends in Northern hemisphere (except Canada) partly due to “bad weather”- Q2 trends have been improving versus Q1 in mature markets (except. Spain)- Emerging countries growth was strong with the exception of Eastern Europe outside Russia

Cement Volumes in Q1 2010-6%e excl. India & China; +9%e incl. China

& India (YoY % change)

Cement Volumes in Q2 2010+5%e excl. India & China; +10%e incl.

China & India (YoY % change)

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Uncertainty exists (outside the emerging markets where growth is expected) and caution is visible within the outlooks posted by International groups :

(i) HeidelbergCement – Q2 press release 30/07/2010 : “…According to all forecasts, uncertainties still remain over the strength and timescale of the economic recovery because of the high level of unemployment and national debt in individual countries...”

(ii) Lafarge 2010 outlook – Q2 press release 30/07/2010: ‘Based on demand trends seen through the second quarter, the Group has reduced its growth estimates in its markets and expects cement demand to be between -1 to +3 percent in 2010 [instead of 0 to +5%] as compared to 2009…”.

(iii) Holcim 2010 outlook – Q2 press release 19/08/2010: “…Certain countries are witnessing signs of economic slowdown and increasing pressure on prices…”. Quote from Q2 conference call : “…I certainly do not believe personally in the mature markets in an upswing in 2011 in the first half maybe in the in the second half hopefully and in 2012…”

(iv) CRH 2010 outlook – Q2 press release 24/08/2010: ”…Our Americas Materials business has experienced weaker than expected volumes and more competitive pricing due to lower than anticipated levels of commercial construction and pull-backs in state and municipally funded projects…” . Quote from Q2 conference call :”…[2011 US] infrastructure, I think, will remain at broadly similar levels [than in 2010]…”

Uncertainty exists for H2 and visibility is low

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Conclusion

Summary

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Hope still exists… but timing is uncertain Housing starts and permits are at very low historical levels in mature markets- In most countries were are at the minimum (1985-2010)…- … and still below the historical average=> However and based on our analysis of leading indicators, a weak construction recovery outside emerging markets will not gain traction before mid 2011-2012

Housing starts/permits per '000 capita

1985-2010

Housing starts/permits per '000 capita(Western Europe + USA average )

0.0

5.0

10.0

15.0

20.0

25.0

US

A

UK

FRA

NC

E

GE

RM

AN

Y

SP

AIN

ITALY

IRE

LAN

D

NE

THE

RLA

ND

S

SW

ITZER

LAN

D

Weighted

AV

ER

AG

E

MIN 2010 MAX Average

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011e

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European Construction Leading indicators and end users outlook 1) Northern European housing is improving2) Southern and Eastern Europe to remain weak, except in Russia and Poland 3) Infrastructure spending at risk in most markets due to austerity measures => Northern Europe is a better place to be in relative terms but the overall picture is still poor and risks exist in 2011 linked to the Governments austerity measures (Fiscal deficits)

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Americas Construction Leading indicators and end users outlook 1) Canada and Brazil as drivers. US is improving but less than expected. Mexico is stabilising 2) Regional differences exist in the USA. Housing recovery is not as strong asanticipated. High expectation on Infrastructure exist for H2 10. => Latam should continue to grow. US trends should improve but less than expected previously.Overall visibility is poor , especially on US Infras in 2011.

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RoW Construction Leading indicators and end users outlook 1) Emerging markets remain well oriented especially in Asia (India/China…)2) South Africa is still weak. Australia is improving.3) Egypt is not as strong as expected. Turkey is recovering => Emerging markets growth is still anticipated in 2011 in most regions . Growth rate in china should be lower than in the previous years.

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Our residential construction scenario (revised down for 2011)1) Better developments than expected in 2010 in Europe but lower in the USA…2) …except Southern/Eastern Europe, revised down in 2011

2010 Residential: +3% excl. China (+8% incl. China) 2011 Residential: +9% excl. China (+8% incl. China)

0%

+17%

+20%+10%

-5%5%-11%

0%

+10%

+15%

+8%+15% +5%+5%

+5%

+10%

+10%

+15%

+6%

+8%

+10%+15%

+15%10%

+10%

+15%+5%

+5%+15%

0%+5%

DecreasePressureStagnationSlight IncreaseStrong IncreaseNot covered

(Sources : Exane BNP Paribas estimates)

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2011 Non residential : +4% excl. China (+6% incl. China)

Our non-residential construction scenario (Revised down since last scenario )1) Lack of financing2) subdued Macro-economic trends

+10%

+3%

+3%+0%

+5%

-5%+5%

-10%

+0%+0%

+5%

-5%

+5%+5%

+2% +5%+5%

+6%+5%

+5%

+0%

+7%

+10%

+5%

+0%+0%

+10%+10%

+3%

+5%

-5%

+1%

-18%-13%

-13%

-13%-8%

-20%-13%

+8%

-20%

-13%-13%

+12%

+5%+5% +5%+5%

+0%+5%

+3%

-10%

+7%

+5%

+5%

-17%-12%

+5%+10%

+5%

-3%

-5%

+1%

-18%-13%

-13%

-13%-8%

-20%-13%

+8%

-20%

-13%-13%

+12%

+5%+5% +5%+5%

+0%+5%

+3%

-10%

+7%

+5%

+5%

-17%-12%

+5%+10%

+5%

-3%

2010 Non residential: -1% excl. China (+3% incl. China)

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Our scenario for infrastructure spending (Revised down)1) Public finances are under rising scrutiny 2) Decrease of local spending3) Timing issues, especially in US

2011 Infras: +3% excl. China (+2% incl. China)2010 Infras: +4% excl. China (+7% incl. China)

+12%

+2%-15%

+15%

-15%-3%

-6% +14%

+8%

-10%

-3%

+12%

+5%

-11%+5% +10%+5%

+3%

-10%

+3%

-4%

+10%

+9%

+12%+3%

+5%

-5%

+5%

-5%

+5%+3%

+0%

+3%

+12%

+2%-15%

+15%

-15%-3%

-6% +14%

+8%

-10%

-3%

+12%

+5%

-11%+5% +10%+5%

+3%

-10%

+3%

-4%

+10%

+9%

+12%+3%

+5%

-5%

+5%

-5%

+5%+3%

+0%

+3%

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Conclusion

Summary

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An early tentative of scenario for Cement demand in 2011 Growth in emerging markets and continuing weakness in mature markets- No real Recovery in USA - Weak European trends but more resilient in Northern Europe- Emerging countries are growing but China growth rate is slowing down

Cement Volumes trends forecasted for FY 11e as of last update (YoY % change)World: +3%; +3% excluding India & China

Emerging countries: +4%; +5% excluding India & China

Volu

me

dow

n by

-1%

in W

E +

USA

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Conclusion

Summary

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Prices were resilient until 20092007-2011 average Growth components- Volume collapsed in 2008-2009- Savings and restructuring were visible in 2009- Prices are under pressure in 2010 …following resilience during the recession- A question mark exists about the pricing behaviour of the industry in 2011 ?

Source: Exane BNP Paribas estimates

Sector Growth components (e)Based on international groups results

Sales (e) Operating profit (e)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

2007

2008

2009

2010

2011

Pricing effect var % Volume effect var %Perimeter effect var % Currencies effect var %

(80%)

(60%)

(40%)

(20%)

0%

20%

40%

60%

2007

2008

2009

2010

2011

Pricing effect var % Volume effect var %Energy impact on OP var % Savings impact on OP var %Perimeter effect var % Currencies effect var %

??

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Pricing pressures were visible in 2010 Prices weakened in Q1 … and deteriorated further in Q2- Energy Cost deflation, new entrants, surplus , export and low utilization rates - Producers pushed volumes at the expense of prices in most markets- South East Asia (except. China, India and Vietnam)

Source: Exane BNP Paribas estimates

Cement Prices in Q1 2010-2.5% excluding China, -1.5% including

China (YoY % change)

Cement Prices in Q2 2010-5% excluding China, -4.5% including

China (YoY % change)

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What Pricing Power in 2011 ?Energy cost inflation is back=> Energy bill could increase by +10 to15% in 2011 => Pricing trends will be a key issue for 2011… but visibility is poor

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Average 1994

Average 1995

Average 1996

Average 1997

Average 1998

Average 1999

Average 2000

Average 2001

Average 2002

Average 2003

Average 2004

Average 2005

Average 2006

Average 2007

Average 2008

Average 2009

Average 2010

Average 2011

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Fuels billin EUR/t

Increasein %

Cement Energy bill in EUR/tonne(Yoy variation)

Cement pricing scenario for 2011e (YoY % change)

World: 0%; +2% excluding India & China

?

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Conclusion

Summary

Equities23Change in cement consumption per capita 2006-2010e

An unprecedented situation exists after 2 to 3 years of downturn - Mature markets collapsed and Free cash-flows generation disappeared- Emerging markets growth continued and attracted new entrants

World : +18% (Mature -31%e & Emerging +36%e)





-17%

WE: -28%

EE:-17%

NA: -46%

Oceania:-8%

Asia:+33%

South America:

+26% Middle East:+35%

Africa:+12%

Med Rim.: +39%

+46%

+30%+53%

+12%

+21%

+16%+24%

+34%

+37%

+31% +55%+23%

-12%

-48%

-11%

+4%

+35%

-13%

+5%

+38%

+44% -3%

+32%

+28%

-30%

-17%

-4%

+36%-15%

-16%

-58%

-7%

-19%

-41%

-65%

-33%

+3%-32%

+12%

-3%

+9%

-9%-34%

-12%

-32%

+55%

+33%

-7%

-12%

Key issue = Restructuring & cost leadership

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Change in net debt /EBITDA ratio (e) (based on 10 top multinationals)

An unprecedented situation exists after 2 to 3 years of downturn - the Debt remains high- free cash flows in mature markets have disappeared=> the leaders are not able to reduce quickly their debt and need to achieve more disposals

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Net Debt/EBITDA

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1%


>100%80% to 100%

Utilisation rates (e)

70% to 80%

< 60% 60% to 70%

Sub-Saharan Africa: 60%

North Africa:

80%

Central America:

54%

North America:

60%

South America:

63%

Asia: 74%

Western Europe:

65%

Estearn Europe:

47%

Middle East: 73%

Oceania: 74%

Two main challenges exist after 2 to 3 years of downturn 1- Restructure mature markets -to keep a cost leadership (surplus weigh on margins/prices)but CO2 & Neshap regulations delay the restructuring ?2-Capture in time emerging markets growth- to follow market shares through organic & external growth - to deter new entrants projects but constraints exist : the Free cash flows generation of mature markets has disappeared. The debt of international leaders is high

Utilisation rate below 60% / Key issue = Restructuring & cost leadership / CO2 + Neshap regulations delay restructuring 2010e utilisation rates (e) : world ~ 70%e

CO2 regulation

Neshap

NESHAP= National Emissions Standards for Hazardous Air Pollutants

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Conclusion

A weak construction recovery outside emerging markets will not gain traction before mid 2011-2012A weak construction recovery will not gain traction before mid 2011-2012 as the sector moves from “stimuli support to austerity measures” in mature markets. In addition, the return of cost inflation , the lack of discipline on prices and the limited potential of incremental savings after three years of restructuring are unlikely to support a strong earnings momentum within the industry in the short term… and 2011 should remain a challenging year outside emerging markets with a poor Free cash flow generation

The industry is facing two main challenges : restructuring in mature markets

After an unprecedented downturn in mature markets, capacity utilisation rates are very low, even if capacity reduction have beenimplemented in 2009. In an environment where the pace of recovery remains uncertain, the cement industry could decide to focus on more restructuring in mature markets in order to restore its margins while waiting for a demand rebound. However, the CO2 and Neshap regulations are delaying the process of restructuring in our view.

financing and investing in emerging marketsOn the other hand, in emerging markets, capacity utilisation rates remains high, the outlook for volumes is still bright and we expect the industry to continue to invest to capture additional growth and deter new entrants. Capacity addition is continuing.

As a consequence the level of debt and the cash power of the different players will allow them or not to face successfully this two challenges, or impose them to find creative solutions to finance their development (IPOs of assets in emerging markets, disposals of minorities stakes, partnerships with other investors in greenfield projects, capital increases, disposals of non core assets…)

Latam continues to offer opportunities of capex and regional consolidation. The most ambitious regional leaders will adopt an external growth strategy outside Latam as M&A competition with multinationals could be less intense in the coming semesters . The latest should continue to focus on debt reduction and disposals rather than aggressive growth .

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Gracias - Obrigado

Thank you - Merci


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Exane BNP Paribas Building Materials & Infrastructures XX