Xella Q2 Adj. EBITDA Falls 40% YoY to €60M as Construction Slowdown Continues, Inventory Reduction Gets Free Cash Flow Close to Breakeven, Net Leverage Climbs to 6.1x

German building materials group Xella took further measures to preserve margins and liquidity as the sharp slowdown in the German construction market showed few signs of letting up. As a result, the group has maintained its sizable liquidity buffer while it faces no major maturities until its term loan becomes due in 2028, leaving it well placed to ride out the construction downturn, sources noted.

Sales fell 23% during the second quarter to €297.3 million from €387.1 million in the second quarter of 2022 as a result of further cooling demand for residential construction. Adjusted EBITDA fell almost 40% to €59.7 million from €99.1 million in the same period a year earlier, sources said.

First-half sales reached €586.3 million and adjusted EBITDA €109.4 million, with Western Europe accounting for €390.9 million, or 67.7%, of the group’s sales and €66.5 million of adjusted EBITDA, while Eastern Europe accounted for €195.4 million, or 33.3%, of sales and €45.6 million of adjusted EBITDA.

Xella is preparing for an extended slump in the residential construction segment, its core market, as reported. After having permanently closed two plants in Germany and mothballed two plants in Poland, it will permanently close a plant in Belgium by the end of 2023 as well. It is also using flexible production processes to further cut headcount, and has reduced inventories during the second quarter by €23.7 million, which helped it reduce trade working capital by €12.6 million. As a result, it managed to almost break even in terms of free cash flow during the quarter with only a modest €1.7 million drop in its cash balance to €249.3 million, while its €283 million RCF remains undrawn.

Xella generates over 65% of its sales in the residential new-build market, which has contracted sharply as a result of rising mortgage rates as well as raw material and wage inflation driving up costs, while continued investment into energy efficiency is also diverting resources from new construction.

According to a research note by German bank Helaba, a low number of new construction approvals and notably weak order activity suggest that the level of residential construction units is set to fall to around 235,000 in Germany this year from over 300,000 a year over the last eight years. However the pace of the slowdown has moderated during the second quarter, which suggests German residential construction activity should stabilize by year-end. Rental costs are continuing to rise, raw material costs are starting to drop and real wages in Germany are growing, which should provide some support for residential construction demand, the note said.

Net leverage based on adjusted EBITDA rose to 6.1x at the end of June from 5.3x at the end of March.

Xella’s capital structure as of June is below:

According to Reorg’s CLO database, Xella’s loans are held by the following managers. Click HERE to see the full list of holders in the database.

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--Robert Schach