Cement earnings down on lower prices

Looking at cement sales volume numbers, it appears cement makers are having a ball of a time; but looking at their financial statements that might not be exactly the case.
Two of the countrys leading cement producers, Lucky and DG Khan announced their nine months profits yesterday, and contrary to what the market expected, their profits fell more-than-expected year-on-year.
With depressed prices at home and lower FOB export prices, the two manufacturers felt a strong pressure on their topline. Thankfully, however, due to growth in volumetric sales (17 percent & 29 percent for LUCKY and DGKC respectively), both firms were able to absorb the negative impact arising from weak cement prices.
Lucky fared better than DGKC during the nine months ending March as geographical proximity to seaports has really made the former lucky in cement business.
Big cement manufactures located in the countrys south are typically able to perform relatively better than those located in the north, given that they have easy access to overseas markets through the economically viable sea route.
Being from the southern lot, Luckys exports, therefore, rose 12 percent enabling to mitigate the dent on its gross margins.
Luckys margins decreased by 200 bps to 35 percent - a drop much lower compared to its peer DGKC which saw margins lopped by 1000 bps to 18 percent, despite lower coal prices.
Of course, selling more bags in overseas markets had its own implications, and for Lucky, it meant higher distribution costs which leapt by 46 percent during the nine months period.
As a percentage of sales, Luckys distribution costs rose by 500 bps to 14 percent, whereas those of DGKC reduced by 400 bps to 6 percent. This helped DGKC offset the impact of lower sales enabling the firm to report 21 percent growth in bottomline, as against Lucky which saw profits down 17 percent.
Looking ahead, two things will benefit these firms.
First, with the industry wide 35 percent freight subsidy on, which can potentially help save $3.25 and $5 on every ton sold to Lucky and DGKC respectively. And second, the commencement of the waste heat recovery project by Lucky and also shortly by DGKC will result in substantial savings in the manufacturing cost going forward.

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Nine months change FY10 over FY09   LUCKY     DGKC

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Net sales                             -6%     -10%

Cost of sales                         -2%       3%

Gross profit                         -12%     -43%

Gross margin                          -6%     -37%

Distribution cost                     46%     -50%

Finance costs                        -58%     -31%

Profit after taxation                -17%      21%

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Source: Company accounts