Summary of financial review

Underlying EBIT bridge

Bekaert’s underlying EBIT increased by 32% to € 305 million, reflecting a margin of 8.2%. This was the result of solid volume growth, positive pricing and product-mix and inventory adjustments, and significant cost savings. These margin enhancing effects were partially offset by the integration of the Bridon activities in the Bridon-Bekaert Ropes Group, adverse currency effects, low margins in Venezuela due to volume losses and currency evolutions, and various other impacts.

Sales and financial review

Sales
Bekaert achieved consolidated sales of € 3.7 billion in 2016, an increase of 1% compared with last year. Volume growth drove up consolidated sales by 4%(1). This growth was largely offset in Bekaert’s top line by the lower wire rod prices (-1%) and price-mix effects (-2%).The net effect of mergers, acquisitions and divestments was +2.5% while adverse currency movements accounted for -2.5%.

(1) 2.7% volume growth when including the -1.4% effect of the shutdown period of the Venezuelan operations due to raw material shortages. The latter impact was limited to -0.4% at the consolidated sales level and is included in ‘currency movements’.

Fourth quarter sales were up 9% compared with the last quarter of 2015. Mergers and acquisitions accounted for 6% and the organic sales growth was 3%, driven by strong volume growth in Asia Pacific. Currency effects were almost neutral after a steep climb of the Brazilian real and the Chilean peso in recent months.

Combined sales(2) totaled € 4.4 billion for the year, slightly down (-1%) from 2015 due to flat organic growth, a limited net effect of mergers, acquisitions and divestments (+1%) and unfavorable exchange rate movements (-2%).

(2) Combined sales are sales of consolidated companies plus 100% of sales of joint ventures and associates after intercompany elimination.

Dividend
The Board of Directors confirms its confidence in the strategy and future perspectives of the company and will propose that the General Meeting of Shareholders on 10 May 2017 approve the distribution of a gross dividend of € 1.10 per share, compared with € 0.90 per share last year. The dividend will, upon approval by the General Meeting of Shareholders, become payable as of 15 May 2017.

Summary of financial review

Financial results
Bekaert achieved an operating result (EBIT-Underlying) of € 305 million (versus € 231 million in 2015(3)). This equates to a margin on sales of 8.2% (versus 6.3% in 2015). The one-off adjustments amounted to € -45 million (€ -12 million in 2015) and included restructuring costs in Turkey, Malaysia and Bridon-Bekaert Ropes Group (totaling € -27.1 million), impairment losses on PP&E Huizhou, China (€ -16.2 million), M&A related fees (€ -8.6 million) and various one-off gains (€ +7 million). Including these one-offs, EBIT was € 260 million, representing an EBIT margin on sales of 7.0% (versus € 219 million or 6.0%). Underlying EBITDA was € 513 million (13.8% margin) compared with € 436 million (11.9%) and EBITDA reached € 481 million, representing an EBITDA margin on sales of 13.0% (vs 12.0%).

(3) 2015 was restated. See tab "Annex" for restatement elements and effects.

Selling and administrative expenses increased by € 18 million to € 315 million due to the impact of mergers, acquisitions and divestments (€ 23 million) and costs related to the customer excellence program (€ 7.8 million), effects which were partly offset by overhead cost reductions such as the reduction of costs related to the manufacturing excellence program (€ -6.7 million savings compared with last year) and the positive impact from currency movements. Research and development expenses decreased from € 65 million to € 64 million. Other operating revenues and expenses mainly reflect the one-off elements referred-to above.

Interest income and expenses amounted to € -73 million, significantly higher than last year (€ -62 million) as a result of the gross debt increase (by € 320 million) related to the Bridon merger. Other financial income and expenses amounted to € -37.5 million (versus € -33.8 million) and was the result of an adverse non-cash impact of € -42.7 million related to the fair value adjustment of the conversion option of the previous bond in line with the evolution of the share price, and the fair value adjustment of the option under the new convertible bond which resulted in a positive impact of € +5.3 million. Other financial income and expenses reduced by € 16 million in the second half of 2016 due to the repayment of USD-loans in Vicson, Venezuela, which resulted in the release of a provision set up for this purpose.

Taxation on profit amounted to € 62 million, compared with € 36 million in 2015. The increase was due to higher profitability and to the significant share of non-deductible (non-cash) items, mainly from the convertible bond exchange which drove a higher effective tax rate.

The share in the result of joint ventures and associated companies increased from € 18 million to € 25 million. The results of the joint ventures in Brazil were stable while the loss-generating entities in Xinyu (China) were deconsolidated as per year-end 2015.

The result for the period thus totaled € 112 million, compared with € 105 million in 2015. The result attributable to non-controlling interests increased from € 4 million to € 7 million. After non-controlling interests, the result for the period attributable to the Group was € 105 million, compared with € 102 million last year. Earnings per share amounted to € 1.87, up from € 1.82 in 2015.

Balance sheet
As at 31 December 2016, shareholders’ equity represented 37.1% of total assets, down from 38.9% in 2015. The gearing ratio (net debt to equity) was 66.8% (versus 55.4%).

Net debt was € 1 068 million, down from € 1 148 million as at 30 June 2016 and up from &euro 837 million as at year-end 2015. The significant reduction since 30 June 2016 was primarily driven by strong cash generation. The increase versus 31 December 2015 includes the effect on net debt of the Bridon merger (€ 279 million). Net debt on underlying EBITDA was 2.1, compared with 1.9 on 31 December 2015. Excluding the net debt effect of the Bridon merger, net debt on underlying EBITDA dropped to 1.5, reflecting strong cash generation.

Cash flow statement

Cash from operating activities amounted to € 400 million, a decrease from € 584 million in 2015. The improved cash generation was offset by higher taxation and the operating working capital reduction was less than in 2015.

Cash flow attributable to investing activities amounted to € -107 million (versus € -363 million): € -159 million related to capital expenditure (PP&E) and € +41 million to the net impact of acquisitions and divestments.

Cash flows from financing activities totaled € -302 million (versus € -268 million in 2015) and were driven by the repayment of interest-bearing debt, dividend payments and interest expenses.

Investment update and other information

Net debt increased to € 1 068 million, up from € 837 million as at year-end 2015 and down from € 1 148 million as at 30 June 2016. Net debt on underlying EBITDA was 2.1, compared with 1.9 on 31 December 2015. Excluding the net debt effect of the Bridon merger, net debt on underlying EBITDA dropped to 1.5, reflecting a significant underlying reduction primarily driven by strong cash generation.

Bekaert has announced today the decision to close the manufacturing plant in Huizhou, Guandong Province (China). Investment restrictions in Huizhou had put a burden on the plant’s potential to grow its scale and cost effectiveness to the level of our other operations. Therefore the decision was taken to stop operations in Huizhou.

The Bridon-Bekaert ScanRope AS manufacturing plant in Tønsberg (Norway) has been closed. The plant’s activity level had been heavily affected by the downturn in oil and gas markets which set in early 2015.

On 17 February 2017, the management of Bridon-Bekaert Ropes Group has announced the realignment of the Bridon-Bekaert ropes plant in Belton, Texas (US). A workforce reduction combined with equipment upgrades will align the operations with future needs and opportunities.

We are in discussions of bringing Bekaert’s wholly-owned subsidiary in Sumaré (Brazil), a high-margin tire cord subsidiary acquired from Pirelli, into the BMB (Belgo-Mineira Bekaert) joint venture partnership with ArcelorMittal. Bekaert holds 44.5% of the shares in the joint venture and would – upon reaching an agreement and receiving regulatory approvals – no longer report the results of the Sumaré plant in its consolidated statements.

In 2016, 392 049 treasury shares were disposed of in connection with the exercise of stock options and the sale to members of the Bekaert Group Executive in the context of the Personal Shareholding Requirement Plan. As a result, the company currently owns 3 885 446 treasury shares.

Segment reports

EMEA
Bekaert’s activities in EMEA delivered excellent results with record EBIT, EBITDA and ROCE performance.

Compared with a strong 2015, demand from European markets remained solid. This applied to automotive and construction markets in particular, while demand for profiled wires declined as a result of investment delays and cancellations in the oil and gas sector. Sales were lower in the second half of the year due to the usual seasonal effects.

The strengthened business portfolio after recent acquisitions, divestments and business exits and the increased benefits from various transformation programs drove EMEA’s solid, double-digit profit base to a record full-year underlying EBIT margin of 12.2% and € 141 million in absolute numbers, up 10% from last year.

The one-off adjustments amounted to € -5 million and were mainly related to restructuring costs in Turkey.

Capital expenditure (PP&E) was € 52 million and included capacity expansions and equipment upgrades in all plants, particularly in Slovakia, Romania and Belgium.

Bekaert anticipates continued good demand from most markets except oil and gas. The European activities have made a strong start to the year but do project some temporary margin pressure due to the time needed to pass fast increasing raw material prices on to the market. Moreover, we remain cautious about the potential impact of growing uncertainty in Europe, following Britain’s choice to leave the European Union.

North America
Bekaert’s activities in North America recorded an organic volume growth of 8%, driven by the volume increase from the plant reconstruction in Rome, Georgia (US). This growth was more than offset on the sales level due to the lower wire rod prices (-4.4%) passed on to our customers; unfavorable mix effects (-5.2%) from firm growth in lower priced product groups; and the effect of business divestments (-1%).

Automotive, agriculture and industrial steel wire markets performed well, while decreased demand from the oil and gas sector drove sales of profiled wires down.

Underlying EBIT was almost doubled compared with last year as a result of better capacity utilization driven by higher volumes and the effects from actions put in place to raise our competitiveness in target markets. Profit margins have not yet reached the desired levels but the effects of the implemented measures are clearly visible. Cash generation (underlying EBITDA) was 60% better than in the previous year and ROCE rose to almost 12%.

In 2016 there were no one-off adjustments, as opposed to 2015 which included € +14 million impact from the final insurance settlement proceeds related to the Rome fire.

Capital expenditure (PP&E) amounted to € 21 million and related mainly to investments in tire cord activities.

Bekaert projects more effects from the transformation programs in the course of 2017. We also expect to see the first benefits from the ongoing capacity investments aimed at meeting a growing demand for products ‘made in America’. We do remain cautious about the effects on margins of US trade policy and related tariff changes.

Latin America
In Latin America, consolidated sales were down 4% as a result of the volume losses in Venezuela caused by shutdown periods due to raw material shortages (-2%) and unfavorable currency movements (-2%).

Fourth quarter sales were up 2.5% compared with the same period last year as a result of positive currency effects following the steep rise of the Brazilian real and the Chilean peso in recent months. Significant fluctuations of local currencies against the USD explain the counterbalancing effects of wire rod prices (+7%) and the price-mix from sales in local currency (-7%) in the fourth quarter, year-on-year.

Bekaert’s activities in Latin America outperformed the market in most countries. EBIT and ROCE increased by about 50% as a result of: a strengthened business portfolio in the region, particularly in Ecuador and Brazil; strong demand in Chile throughout 2016; and better pricing and cost competitiveness in Peru. The EBITDA margin of 13% drove strong cash generation.

Bekaert invested € 14 million in property, plant and equipment across the region, particularly in Ecuador and Chile.

We expect a continued weak economy in Brazil and general economic uncertainty across the region. We anticipate increasing pressure from Chinese imports as a result of stronger local currencies and perceive some difficulty in timely pushing increased wire rod prices into the market.

We are in discussions of bringing Bekaert’s wholly-owned subsidiary in Sumaré (Brazil), a high-margin tire cord subsidiary acquired from Pirelli, into the BMB (Belgo-Mineira Bekaert) joint venture partnership with ArcelorMittal. Bekaert holds 44.5% of the shares in the joint venture and would – upon reaching an agreement and receiving regulatory approvals – no longer report the results of the Sumaré plant in its consolidated statements. This would affect the overall margin level of the segment as the entity’s profitability is above average.

Notwithstanding the economic and ownership evolutions, we expect to maintain the benefits of our strong market positions, sustained cost savings and an increased impact from the implementation of our transformation programs.

Bekaert’s combined sales decline (-1%) was mainly due to the average currency impact of the Brazilian real (-4% year-on-year), despite the steep climb of the currency in the second half of 2016. The results of our joint ventures in Brazil outperformed the weak economic conditions in the country and their contribution to Bekaert’s net result was equal to 2015.

Asia Pacific
Bekaert achieved 8.5% organic volume growth in Asia Pacific, compared with 2015. Strong demand from automotive markets throughout the year boosted the growth. The wire rod price impact was limited in the aggregate (+1.5%) after significant price drops in the first half of the year, followed by a steep climb in the second half. Price erosion and currency movements totaled -4% each. The net effect of mergers, acquisitions and divestments was less than +1%.

Bekaert’s activities in Asia Pacific achieved a robust performance in the last quarter of the year. The organic sales growth of 10% compared with the same period of 2015 stemmed from increased volumes (+5%) and sharp wire rod price increases (+10%), tempered by price erosion and mix effects (-5%). Demand from solar markets picked up as from the second half of November, after the sudden drop in the third quarter which was driven by changes to feed-in tariffs in China in July 2016. Sawing wire accounted for 12% of Bekaert’s sales in Asia Pacific in 2016.

Our activities achieved strong margin growth across the region: underlying EBIT increased by 72% to € 119 million, reflecting a margin of 11.3%. Underlying EBITDA was € 222 million, 25% higher than last year and representing a margin of 21%. ROCE almost doubled to more than 12%.

This robust performance across the whole region was the result of high capacity utilization, M&A activity, and significant benefits from various transformation programs.

As announced before, Bekaert started to phase out the Shah Alam plant in Malaysia and the move of certain product lines to the Ipoh facility, also in Malaysia. We also decided to close the small tire cord plant in Huizhou, Guandong province (China). Investment restrictions in Huizhou have put a burden on the plant’s potential to grow scale and improve cost effectiveness to the level of our other operations. Therefore the decision was taken to stop operations in Huizhou, and invest in other existing locations in the country.

Bekaert invested significantly across the region and recorded a total of € 59 million investments in PP&E in 2016, including expansion investments in tire cord activities in China, India and Indonesia.

The one-off adjustments (€ -19 million) reflect the asset impairments of the Huizhou plant in China and the costs related to the closure of the Shah Alam plant in Malaysia.

We expect the high run rate in our tire markets to continue into 2017, and project solar markets to make a strong start to the year, in anticipation of new changes to feed-in tariffs, upon which we expect strong volatility in demand. We expect our transformation programs will enable us to sustain the higher revenue and profitability trends in 2017.

Bridon-Bekaert Ropes Group
Bekaert achieved 34% sales growth in the ropes and advanced cords segment. The integration of the Bridon activities accounted for an increase of 37%. Unfavorable currency effects (-2%) and a slight organic sales decline (-1%) tempered the growth. Depressed market conditions in the oil & gas sector affected the sales volumes and the overall capacity utilization in most ropes plants. Ropes volumes picked up modestly in the fourth quarter and the advanced cords business performed well throughout the year.

We project continued difficult market circumstances in oil & gas markets in the near future. We do expect improved results from Bridon-Bekaert Ropes Group in the course of 2017. The management is implementing actions to strengthen its market position and gradually leverage the benefits of its increased scale through improvements in the manufacturing footprint and the global business portfolio. This includes the closure of the Bridon-Bekaert ScanRope AS manufacturing plant in Tønsberg (Norway) and the recent announcement of the realignment measures at the Belton facility in Texas (US).

The one-off adjustments accounted for € -22 million: € 9 million from M&A transaction fees and € 13 million related to asset impairments and restructuring costs, mainly regarding the closure of the ScanRope facility.