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integration

in review

Bimonthly publication with news and information for InterCement employees

nº 21 – jan/feb 2013

(BIG) NEW CHALLENGES Commitment to the future has always been a trademark of our company. Now that our company has an international presence we are facing new and exciting challenges 1


CONTENTS 03 05

Editorial

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Challenges 2013 – Argentina Focus on results

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Challenges 2013 – Paraguay In operation

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Challenges 2013 – Portugal and Cape Verde Exporting excellence

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Challenges 2013 – Egypt Return to growth

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Challenges 2013 – Mozambique Continued growth

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Challenges 2013 – South Africa Preparing for growth

Challenges 2013 – Brazil Strong upsurge expected

IMPRINT Integration: Published by InterCement President: José Édison Barros Franco CEO Cimpor: Ricardo Lima Vice President of Organizational Development: Nelson Tambelini Júnior General Coordination: Fernanda Guerra Editorial Committee: Tatiana Nelsen, Virginia Vannoni and Filipa Mendes

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Graphic and Editing Project: unodesign Text Editing: Vogal Comunicações Head Journalist: Alberto Sarmento Paz (MTb18523/SP) Reporting: Luciana Fleury Texts in in the publication may be reproduced, with the original sources indicated and with prior permission from the editor


EDITORIAL

THE FUTURE COMES KNOCKING At the end of 2012, more precisely on 21st December, InterCement and Cimpor started operating as one following the official conclusion of the asset swap with Votorantim. As I said at the time – and it reflects everyone’s feeling, both at InterCement and Cimpor, about the new situation, this move is not just fulfilment of a strategic objective: It is the fulfilment of a dream that was rightly shared by numerous employees. And I went further by calling on everyone to focus on making our company stronger, more competitive and a successful example of generating business, transparency, social and environmental responsibility, and a model to be followed. We worked hard on the Post-Merger Integration Programme to build a climate that was conducive to creating synergies between teams, to encourage an exchange of experiences and sharing information, certain that only in this way can we achieve excellence in capturing value. The results are extremely promising and I’d particularly like to note the string team spirit that has been established in such a short time. We have clearly felt a genuine desire from employees to be proactive, focus on better results and continual improvements. Senior managers also acted fast to create tools to allow strategic objectives to be opened out to all areas. And all that effort was communicated to our employees. Now, in the first quarter of 2013, we will hold the first meeting between corporate directors and all general directors of the countries where we are present, after consolidating the new organisational structure. It will be a very special moment when we will enhance concepts, consolidate expectations, and address local issues, amongst other matters. All of those corporate challenges along with those of the business units will be shared with each one of our employees. In short, the future is knocking at our door and with a cohesive and focused team we will walk a consistent line to establish ourselves as one of the world’s best cement companies.

José Édison Barros Franco

Chairman of the Board of Directors of InterCement

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CHALLENGES OF A COMPANY WITH AN INTERNATIONAL PRESENCE We are now a company that has 39 production units across eight countries and in three continents. In the year since the InterCement Cimpor integration we have doubled our volume as compared to the beginning of 2012 and are selling ten times what we were selling in 2003. And now after an extremely productive integration process, which opened up the way for excellent teamwork, we are moving on to a new phase. One in which our challenges include countries with entirely differing cultures. Not that each phase is isolated, one after another, they overlap - and that will always be the case. The difference is that now location action can become larger and be incorporated into other units. That is why we must keep to a routine of sharing information. Co-processing, for example, is a reality at our operations in Brazil and is starting to be implemented in South Africa. It is natural that different operations should share information to speed up results. The list of examples is long, but the most important thing is that it is a clear indication of how we can capture value, better manage our knowledge, and how innovation can be used by all areas of the business. To align our expectations we are planning soon to organise the first meeting of corporate and general directors from all InterCement units across the world. After consolidation of our business structure and drawing up our budget plan, amongst other corporate activities with a global reach, this is the time for a strategic meeting. It will increase integration amongst employees (in the next edition read about the results of that meeting). Exchanging information is one of the great strengths that international companies can use to improve their results. In this edition, Integration describes the general scenario that each operation will face in its local market. It is interesting to note how each has its peculiarities and how each country is experiencing a specific set of economic and social factors. So it is important to remember the adage of “think locally, act globally.” I am one of those people that do not believe that GDP is the only indicator that should be taken into account when assessing a market, because of the complexity of analyses of that kind and medium and long term outlooks. However, it is a fact that GDP droves government’s and markets as it is an indicator that an economy is doing well and that there is the possibility of social development. Each text about the units therefore includes information about the GDP outlook for each country. Enjoy this edition it is an interesting exercise on the new circumstance of InterCement.

Ricardo Lima CEO Cimpor

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CHALLENGES 2013 – BRAZIL

Strong

upsurge expected Around 40% of InterCement’s assets are located in Brazil and it is therefore a very important market for the company, particularly if we also consider that the country is expected to see high economic growth over the next few years (projected GDP growth of 3 to 4% in 2013), after experiencing tentative growth (around 1%) in 2012.

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Scenario Projections in several studies point to growth forecasts of between 3% and 4%, thus returning to the average seen between 2004 and 2010 (around 4.5 percent per year). The International Monetary Fund (IMF), for example, projects growth of 4% and an increase in consumer prices of around 4.9% (figures from report published in October 2012). A sharp economic downturn in the second half of the year was due to a number of factors such as the severe crisis in the Euro Zone, the delay in recovery of the US economy and lower flow of capital (partly because of the policy to reduce interest rates, which is beneficial and encourages investments in the medium and long term). The authorities responded quickly by adopting economic stimulus measures that are expected to create a climate that is more conducive to growth in 2013, such as payroll tax exemption for several sector, reduced taxes, a drop in bank spreads, and a record drop in the Selic rate (base interest rate). The Euro Zone is also expected to see a return to growth, albeit a slow one, alongside a more positive climate in the United States and neighbouring Latin American countries,

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with which Brazil has strong economic ties. Infrastructure was a particular focus of the announcement of further state investments in 2012. Port facilities, which are perhaps the country’s biggest logistical bottleneck, will receive investment of R$54 billion by 2017. The plan for investments in Roads and Railways, announced in August, has an investment target of R$79 billion in the next five years. For a broader view of the infrastructure market, the CriActive and Exit8 consultancies published a report pointing to investments of US$1.683 trillion in the 2012-2017 period, and noting that US$424.4 billion had already been invested and channelled into work that has been completed or is now underway. Of that total, 43% is to be channelled into the oil and gas sector, 24% to the transport sector, 13% to the energy sector and 11% to the industrial sector. This impressive investment figures largely explain the expected upsurge in economic growth over the next few years.


InterCement The main focus remains on the InterCement Cimpor integration with a view to excellence in capturing synergies and identifying new opportunities, with a conquering spirit. Specific activities include leveraging results at the new Cubatão plant, which is expected to lead to a greater presence of our products in the Greater Sao Paulo and Baixada Santista areas, two important markets, and seeking to operate at full capacity at all of our 16 Brazilian production units. As for direct investment in production, there are three highlights: The Caxitu project (new plant in Paraíba state), scheduled to start up in the first half of 2014, expansion of line 3 of the Cezarina unit, due to be delivered in the second half of 2014; and increasing the capacity of the Apiaí cable car – increase from 325 to 400 tons per hour – due to be delivered in October 2013.

With our eye on the long term we plan to begin premarketing activities in the Northern region, where a new plant is due to be installed. In order to do this, in 2013 InterCement in Brazil plans to work on obtaining environmental licenses to set up the plant in Manaus and another one in Cerrado Grande (PR), and both construction projects are expected to begin in 2014. In environmental and social terms the highlights will be a focus on improving co-processing rates (strategic planning outlines energy replacement at the end of 2013 of 11.9 percent as compared to 8.9 percent achieved in 2012) and taking all the social programmes developed in partnership with the Camargo Corrêa Institute – ICC to all of Cimpor’s production units.

We have made great advances in the integration process and have had extremely positive results. The synergies of InterCement and Cimpor operations in Brazil along with the skills and enthusiasm shown by our managers and teams, allow us to feel certain that we still have a lot to gain by boosting integration.Focusing on results, operational excellence, a culture of safety, improvement of processes, management systems and teamwork are factors that will allow the company to become stronger and more competitive.” Cleber Acurcio Machado Managing Director Brazil BU

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CHALLENGES 2013 – ARGENTINA

Focus on

results Market leadership is an asset that we should not give away. In order that we don’t we need to assess all efforts and chances to keep and increase market share.

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Maintaining InterCement’s leadership of the Argentinean market, both for sales and product quality, is our biggest challenge and also our greatest strength in a broader analysis of the market. The biggest challenge will, without doubt, be to ensure real gains (above the rate of inflation) in order to maintain investments intended to boost industrial competitiveness.

Scenario

InterCement

Argentina’s economic growth totalled 2.7 percent between October 2011 and October 2012 and is expected to end next year at 2.5 percent. The drop against the GDP for 2011 (8.9% growth) is common to most Latin American countries which experienced a sharp economic slowdown in the second half of the year due to the European sovereign debt crisis and other oneoff circumstances.

Market leadership is an asset that we should not give away. In order that we don’t we need to assess all efforts and chances to keep and increase market share. The customer loyalty programme, for example, should be boosted by broadening its scope and increasingly making it a real opportunity not only to boost existing partnerships, but also to generate new business.

In October the IMF published a study forecasting growth of 3.1% (some institutions project up to 3.9%) and inflation of 9.7% in 2013. The growth projection may be linked to increase soy exports (the 2012/2013 harvest is expected to be a record), Brazil’s recovery (which implies an increase in the sale of manufactured goods) and increased domestic demand.

With this in mind the first steps are due to be taken in 2013 to build a new production unit, in San Juan, which is expected to increase our production capacity by 8%. The social activities carried out by the Loma Negra Foundation will remain a priority in 2013. The idea is to continue with all existing programmes and, if possible, to expand activities and continue to encourage teams to get involved in voluntary work.

Maintaining our market share should be a constant target for us. Our brand is the most memorable and has great credibility, which is one of the primary assets of our business. As well as this, our tradition and our knowledge allow us to seek continual performance improvement with a view to reducing costs. This is a way of having better conditions to invest and getting higher results.” Osvaldo Schutz Managing Director Argentina BU

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CHALLENGES 2013 – PARAGUAY

In operation InterCement has been in Paraguay since 2000 through Cementos Iguazu and now owns 67% of the company. Construction of the Villa Rayes plant, in partnership with Concret-Mix, has led the company to be directly involved in sales and marketing activities, thus preparing the way for the launch of the cement mill, scheduled for June 2013, and full operation of the unit in April 2014. Scenario

InterCement

The Paraguay Central Bank expects to end the year with an economic contraction of 1.2 percent, which is the worst performance in South America. A drop in the soy harvest and a foot and mouth break out at the end of 2011, which affected meat exports in the first half of the year, were the main reasons behind the sudden drop in growth.

Our market share, of around 24%, has great potential for growth once the new factory goes online. That share is currently maintained by importing cement, notably from Portugal. The challenge is exactly to increase our participation in the local market exponentially.

In 2013, with institutional stability preserved, recovery of soy and meat exports along with investments in heavy and civil construction, Paraguay is expected to see one of the world’s highest rates of economic growth. The Paraguay Central Bank expects growth of 10.5% and the IMF has forecast 11%. The recent discovery of new oil and gas fields in the Chaco region, with exploration expected to begin in the second half of 2013, may drive those results.

The knowledge acquired so far by the Commercial, Marketing and Logistics teams will be important to expand the market. As well as this, employees in Paraguay can make use of the expertise of employees in Argentina, thus creating a synergy that will lead to improved results in a short period of time.

The pre-marketing work was important in order to consolidate our brand and to play an expressive role in the local market. Once our plant starts operating the challenge will be to expand our presence with increased profitability.” Cleber Ceroni Paraguay Superintendent

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CHALLENGES 2013 - PORTUGAL AND CAPE VERDE

Exporting excellence

The sovereign debt crisis led to a sharp downturn in the Portuguese economy and maintaining operating results is closely linked to cement exports. In Cape Verde necessary investments in infrastructure allow us to have a positive outlook. Scenario

InterCement

Portuguese GDP is expected to have contracted by 3% in 2012 and according to projections in 2013 it will remain on that negative path at around -1.5% (the IMF projects -1% with inflation of 0.7%). The slight improvement is partly due to expected growth in the Euro Zone in 2013. Portugal will thus have had three consecutive years of recession in a climate of adjustment of structural and budgetary imbalance.

In Portugal we have installed capacity of over 7.5 million tons and four production units, as well as being the clear market leader (55% market share). The challenge is to turn local operations into a benchmark for exports, bringing excellence to all necessary stages to improve the efficiency of the export process. In this way we will keep operations stable and competitive and will be much stringer when the domestic and European markets recover.

Cape Verde, one of the most stable countries in Africa, has also been affected by the Euro Zone crisis, but substantial reforms have improved the business climate and there is a need for infrastructure investment to allow for sustainable development. The African Development Bank (ADB) expects GDP to have posted growth of 4.8% in 2012 and projects growth of 5% in 2013, which are close to the government’s forecast of 5.1 percent, as well as inflation of between 2.5% and 3.5%.

The strategy of increasingly adding to foreign sales has had positive results. In 2012, Portugal posted 38% growth in the volume of exports against 2011, and contracts already ensure growth of 34% in 2013. Now it is a case of extending that policy and increasing foreign sales even further. Another important issue is to readjust the business structure and its actual implementation and operation in Portugal and Cape Verde, leading to greater alignment, synergy and focus of the teams.

The big challenge in exporting cement is the opportunity we have to face the current downturn in the local market, preserving our operations and using the potential and knowledge of our teams.� Luis Fernandes Managing Director Portugal BU

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CHALLENGES 2013 – EGYPT

Return to growth

After a period of political and social instability, Egypt is getting into a new routine, opening the way to a return to consistent business activities and long term investments. Scenario

InterCement

Even in a scenario of significant political instability, Egypt ended 2012 with estimated growth of between 2% and 3% for 2013. As well as the domestic situation the Euro Zone crisis also had a negative impact on the local economy, as tourism accounts for around 6% of Egypt’s GDP.

Local operations employ over 1,000 people who are aligned to the company’s commitment of increasing productivity and the competitiveness of our products in order to increase our stake of the local market, which currently stands at around 6.5%.

Egypt, which is Africa’s third largest economy, is a regional powerhouse. The IMF’s 3% projection for GDP growth may turn out to be conservative if greater political stability is achieved in the country. This return to growth is expected to boost the cement market.

As well as being prepared for new corporate challenges and expected growth of the local economy, InterCement will invest in revamping a production line; in the electricity supply in order to attend the production, given the shallow electricity availability in the summer and potential Mazout (a type of fuel oil) price increases; and in the strategic development of the commercial policy, in order to assure the alignment of the prices with the inflation.

The focus in 2013 will be a search for excellence bolstered by the tools in our management system and finding solutions to ensure a constant supply of thermal and electrical energy. To do this we plan to prioritise our human resources, build lasting relationships with our customers and strengthen sustainability processes.” Ricardo Frederico Buarque Barbosa Managing Director Egypt BU

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CHALLENGES 2013 – MOZAMBIQUE

Continued growth

Our factories and products are all over Mozambique due to our longstanding presence in the country. A great commitment to development and offer of high quality products has consolidated our leadership position, with over 70% market share. And it is on maintaining and even increasing that share that the company needs to focus. Scenario

InterCement

Large mining projects in Mozambique are the basis of Mozambique’s economic growth. In 2011 Mozambique became a global exporter of minerals. In the last decade it has posted an impressive average of 7.2% growth per year. This has allowed the government to implement recently an ambitious plan to invest in infrastructure and to set up a more effective social welfare system.

During the teams’ integration opportunities were identified for operational improvements, which are now being implemented. By sharing information and focusing on results, operations in Mozambique will become stronger, thus ensuring the company’s leadership and expanding productivity.

The government forecast growth of 7.2% in 2012 and projected 8.4% for 2013. These estimates are close to the projections from the African Development Bank (7.5% in 2012 and 7.9% in 2013). Introduction of a strict monetary policy has also reduced inflation. In 2013 inflation is expected to total 7.5% (against 12.4% in 2010).

As family income increases, growth of civil construction continues, which opens up the way for increased sales and production.

Expanding productivity and implementing operational improvements are fundamental to transform enormous potential into results. And we have ways of achieving this as our teams are very motivated about this new way of working and there is corporate support that brings knowledge and the use of new tools along with it.” Sérgio Bandeira Managing Director Mozambique BU 13


CHALLENGES 2013 – SOUTH AFRICA

Preparing for growth

As the biggest economy in Africa, accounting for over 20% of the continent’s GDP, South Africa has a developed economy that is ready for bigger and better things. And InterCement, with its team of over 500 employees in the country, is prepared to meet the demands that will arise. Scenario

InterCement

South Africa’s economic growth in 2012 was affected by a long strike in the mining sector. Even so, the Organization for Economic Cooperation and Development (OECD) expects South Africa to have ended 2012 with GDP growth of 2.6% and good future prospects (growth of 3.3% in 2013), despite inflationary pressure that has already been identified, particularly due to prices of electricity and coal, which rose above the annual rate of inflation of 5.4%.

The company faces big operating challenges. The biggest is regaining previous market share of around 10% of the domestic market. Another important objective is to continue with the coprocessing plan, which was launched at the end of 2012. The target is to end 2013 with an energy replacement rate of 1.2%, which will prepare the company for greater levels in the future.

The cement market in particular is expected to have posted growth of 5.8% in 2012, against sales in the previous year. Higher than GDP growth indicates that the civil construction sector is seeing a revival and growing at a higher rate than the local economy.

Structural adjustments, implemented during the Post-Merger Integration, particularly to increase productivity and operational efficiency, have already started to have an effect. Strong commitment is needed from everybody to continue making those adjustments to improve operating results. The launch of a new brand of cement will contribute to reaching targets.

Our main challenges are to regain our record share of the local market, whilst facing competition from imported cement. To do this we are going to launch new products and develop new sales tools. Co-processing is an opportunity to reduce our variable costs and to increase our competitiveness. Those challenges will be achieved with commitment, team spirit and by taking advantage of integration with the company’s operations in other countries.” Pieter Strauss Managing Director South Africa BU

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Integration Review Ed. 21