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Edited Transcript of HEI.DE earnings conference call or presentation 8-Nov-18 2:00pm GMT

Q3 2018 Heidelbergcement AG Earnings Call

Heidelberg Nov 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Heidelbergcement AG earnings conference call or presentation Thursday, November 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernd Scheifele

HeidelbergCement AG - Chairman of Managing Board & CEO

* Lorenz Näger

HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member

* Andreas Schaller

HeidelbergCement AG - Director Group Communication&IR

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Conference Call Participants

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* Arnaud Lehmann

BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director

* Gregor Kuglitsch

UBS Investment Bank, Research Division - Executive Director, Head of European Building and Construction Research, and Equity Research Analyst

* John Messenger

Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research

* Michael Frederick Betts

Data Based Analysis Limited - Director

* Paul Barry Roger

Exane BNP Paribas, Research Division - Sector Head of the Building Materials Team & Analyst of Building Materials

* Philip Anthony Roseberg

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Rajesh Patki

JP Morgan Chase & Co, Research Division - Analyst

* Robert Gardiner

Davy, Research Division - Industrials Analyst

* Arnaud Pinatel

On Field Investment Research - Analyst

* Alain Gabriel

Morgan Stanley - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you all for standing by, and welcome to today's interim financial report from January to September 2018. (Operator Instructions) I must advise you all that this conference is being recorded today, Thursday, the 8th of November, 2018.

And now I'd like to hand the conference over to our first speaker for today, Mr. Bernd Scheifele. Please go ahead, sir.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [2]

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Hello. Good afternoon to everybody. We are calling here from London. Thanks a lot for your great interest in our Q3 earnings call. I sit together, as usual, with Dr. Näger, CFO of the group; and our Investor Relation team, Andreas Schaller and Ozan Kacar.

I think, before I talk about the Q3 developments in our markets, I think I should shortly address the event, which was the negative event in Q3, which was our profit warning in mid-October, which came, obviously, as a surprise and which was, obviously, for myself and also for the company, a clear or a big disappointment because normally, it's part of our corporate culture that we try very hard to deliver what we promised.

And let me address a couple of points. The first question, there were questions in the market, why Heidelberg did a profit warning compared to other companies in the sector. Quite a few reduced their guidance even in a more significant way than we did, but that has only to do with German law. German law is very strict on that. And if we have a significant deviation compared to our guidance, then we have to act immediately. And the German financial authorities are now very sensitive on this issue because, as you know, after the Volkswagen scandal, there is a big discussion in Germany whether the Volkswagen top management informed the market in due time. So we are under very close scrutiny and that's why we have, from our perspective, no choice than -- and could not wait until the time of this earnings call and just release the guidance. That's why by law, we were kept to go that way.

If you look to the reasons why we did the profit warning, there are 3 big issues. The first impact is the weather in the U.S., and we come to that later. And you saw and other companies also reported, I think, September was a historically very bad month in the U.S. cement industry and especially in our core markets. In Texas and in the region Northeast, we had very significant rainfall. And when I was on my trip around the world in October, I met our guys, I think on the 10th of October. But on the region Northeast in Chicago, and I had a video conference with the South, and they came down with their forecast for the full year by about EUR 50 million. That's their first big point.

The second point is in Europe. You see that especially strong in the region Western/Southern Europe, in Q3, which is the summer period, July, August, September, in the last 4 years, electricity prices in Europe typically dropped significantly because we had a lot of renewable energy available. This year, this was not the case even at the opposite, electricity prices stayed high or even went up. And that's, for this reason in Europe, overall, electricity cost versus our July forecast internal estimate went up for the full year by another 10 -- EUR 20 million to EUR 25 million.

And the last point is that on the quarry sales. You know that according to our accounting rules, we report the sale of depleted quarries as part of the EBITDA because it's part and it's a significant part of the value chain of aggregates business, how do you commercialize exhausted quarries. Last year, as you know, we had a big quarry sale in Q4, which was in San Diego, Carroll Canyon, which had an impact of about EUR 80 million and which brought the EBITDA from quarry sales up for the full year to now around EUR 190 million. And we think this year, we're going to end up at around EUR 100 million. You might ask the question: Hey Scheifele, why didn't you tell us end of July. Very simple answer, we had a major quarry transaction and the LOI side in the Greater Seattle area close to the Boeing works in Everett. And here, the land developper of Vancouver walked away end of September when the stock market got very nervous about the cycle in the U.S., and we have now restarted the process for this big piece of property. And probably, we're going to finalize that transaction in 2019. That's it on the property.

If you look to our Q3 results, I think you see that there are some clear positive news. We have a strong organic growth with about close to 10%. That shows you that our markets are solid and growing. You see also that free cash flow generation is very good. The financial KPIs are moving in the right direction. Finance costs are down. Taxes are down. Net debt is reduced, and we earned, again, a premium on our cost of capital of about 10%. Message is clear. We're going to earn more money in 2018 than we did in 2017, and we're going to continue to increase our dividend in 2019 in the ninth year in a row.

Another KPI, which is, for me, always very important, is the productivity or the efficiency in the company. And if you look to our detailed quarterly report, you will see that our manpower is down compared to last year by about 1,600 full-time employees. If you take acquisition and disposals out, we have organically reduced manpower by 600 FTE. The workforce is around 60,000. So we have a reduction of about minus 1% on workforce. Whereas volume, average are up in the first 9 months, 3.5%. So also productivity in the company clearly went up by about 4.5% or even to 5%. So core message, results are negatively impacted by weather. It's not the markets. We had a clear spike in energy costs and the one-off on the quarry sale. The underlying business is okay.

We, as a board, obviously, were sitting together after the profit warning and said, okay, what can we do? And that's why we have initiated an action plan, which focuses on 3 areas. And the overall message is here. It is a clear signal that, obviously, the top management listens carefully to the capital market. We understand the concerns of the shareholders, and it's also clear that we act accordingly. And it's also for us, obvious, that at the current share price level to buy our own shares, there is more value in that than doing acquisitions, which are above that hurdle rate and which have higher risks to buy your stock, which you own and control yourself.

The 3 points I mentioned, we will now accelerate our portfolio optimization. We have further divestment potentials now under review. We will have an opportunistic approach. So we do not detail the countries for what we think we plan to do because we also need a good buyers world, but we have initiated, we have started new actions and are confident that we can accelerate that.

On operational excellence, we are starting -- we have started already to implement a new efficiency program, in a first step to focus on SG&A. We commit to cut SG&A cost in the group over the next 2 years by about EUR 100 million. And we will check that in a second step whether we have other areas where we still have room for improvement, and we will update you in March when we publish our final results where we are in that area.

And the other one is we want to cut back our gross -- growth CapEx to EUR 350 million by average for 2019 and 2020, and the hurdle rate is share buyback valuation. And we will reconsider mid-2019 when we see how our measures are implemented going, whether we have cash available to do a share buyback.

Message is also clear, we try to pull all levers in order to improve margin and cash flow and also support a good investment-grade rating. We also believe and are committed that our net debt target of our 2020 vision of EUR 7 billion is now more ambitious, but it's still feasible. And with the 3 levers, which I just mentioned, I think we will try very hard to reach that target.

If you go to the next chart, you'll see in the overview of the financial figures. I think you see on the right side, the revenue (inaudible). That's a pretty steep number. And then you will see also the EBITDA margin. The problem on the EBITDA is not in aggregate. So I think we will -- at the end of the year, the aggregates are going to be fine. The problem is the cement division. And in the cement division, it's the energy piece of the business, which is the major problem. If you look to our energy cost for the full year, they're going to be up only on pricing, not on volume, about EUR 100 million compared to last year. And that's what's hitting our cement EBITDA margin.

And then you see earnings per share down - in the quarter - down on the page, +12%; year-to-date, +19%. We stay committed that for the full year, we're going to keep our guidance that we will have a double-digit increase in group share profit and earnings per share.

Chart 5 gives you a little bit an overview on the Q3 EBITDA. And what you see is pricing is okay, not bad, but not enough to compensate energy in a way, if you want. Then we have net volume is up EUR 78 million. And then you see costs are up by about EUR 165 million, out of which, about EUR 65 million or EUR 70 million are energy.

Next chart, Chart 3 shows you a little bit the history of this year. And here, again, what I told you, we had the 3 drivers for the profit warning, the increase in electricity and variable costs in Europe. Then, harsh weather in core US markets and then the lower gain from the asset sales form depleted quarries. That's the core message. We had growth, like-for-like in Q3, but it was obviously not enough to compensate to the -- to compensate the very slow start in the year of Q1.

Chart 7 shows you the weather impact in the U.S., and this is not a chart made up by Heidelberg, That comes from the Portland Cement Association, the American cement association. I think the right one is very important. It shows you that West/South Central, that's mainly Texas, 20% down in the months of September. And you see the reach in Northeast Mid-Atlantic, Virginia, Maryland, we are down 21%. That's, for us, a core area. That's where we have our biggest cement plant in the U.S. in the Lehigh valley. That's Union Bridge. That's in Maryland. Mid-Atlantic, minus 19.6%; New England, minus 26%; Midwest, down 8% to 9.6%. And our North American business, in this region, Texas and the region Northeast, we do about 60% of our cement business and about 50% of our aggregate sale. And as you know that September is probably the most important month in our industry also -- not only volume-wise but profit-wise, but it was clear that with that miss due to weather in September, it will be very difficult or impossible to hit the numbers.

Now what you see now on next slide is the energy or the power side. What I told you in Europe, the EUR 20 million to EUR 25 million. And you see now in Q3, electricity cost inflation for Heidelberg, that's not the index. The index looks even worse for Heidelberg in Q3. And if we start with BeNe, you ask yourself, 53%, what's the problem? Belgium is a country running 100% on nuclear power. They have 7 power plants, out of which, 6 are down for the moment. So the power in BeNe is short. And the situation also in October has not improved.

You see France. Germany is up only 17% for us because we changed a little bit the hedging strategy during Q3. But just to give you an example, and you can check that by Internet, if you go to the Leipzig, electricity stock exchange in Germany, and you check what was the stop -- the spot price for electricity last summer in July, August, September per megawatt hour, you will see the price was around EUR 32, EUR 34 per megawatt hour. This year, we have prices between EUR 54, EUR 56 or EUR 57 per megawatt hour, and that's mainly driven by the significant increase in CO2 pricing. And you see the same for Norway and Sweden. And that has, obviously, created additional headwind for us. And we have not foreseen that end of July because our July forecast, we do in -- based on the June numbers, and then the 3 months period comes with July, August, September. And finally, when we came to the end of Q3, it was clear that we have a significant negative development on electricity pricing.

Chart 9 talks a little bit about more in detail about our portfolio optimization and the acceleration. I think we do this with a lot of attention. As you know, this year, we have already disposed for about 350 -- disposing of about EUR 350 million. We have sold the German sand lime business. We have sold white cement in the U.S. We have sold white cement in Egypt. We have sold participation stakes in the Arabic Peninsula. We are about to sell Sri Lanka and whatever. So we are on our way. We think this year we will have disposal proceeds of about EUR 400 million.

Operational excellence, we talked about that, that's SG&A with a EUR 100 million saving target. This number is not coming out of my guts. It's based on a detailed study, which Dr. Näger had done already during the summer break on my behalf over the SG&A development in Heidelberg out of the Italcementi acquisition over the last 4 years. And he came to the conclusion that we can cut EUR 100 million, and the split up is we want to cut EUR 65 million on country level. We have about 60 or 57 countries in our portfolio. And EUR 35 million will come on group overhead. That's mainly area -- Heidelberg, and area overhead -- including area overhead in Dallas and Singapore. We have already started to implement that. We are taking out, in total, 3 group functions and merge them together in order to streamline the organization and to delayer. And we are also taking out 3 area functions. That's what we already have executed, and we are confident that we're going to hit this number.

We see this as a first step. We will check in more detail where we have further efficiency improvement potentials. In my opinion, the one area is digitalization. I think we can work smarter and efficient if we use really digitalization not only in the cement plant, but maybe also in the shared service center, et cetera. I think we have also upside in real estate management. We're very good in the technical part of real estate management, whatever whether we are in the commerce -- commercialization process already world-class. I would make a question mark. We're going to study that. We have significant -- we have a very significant real estate portfolio.

And the third point is also on purchasing. We have to make sure that with digitalization, we pull all levers of purchasing. And this organization goes back to the years 2005 when I joined Heidelberg. I think we have to review that critically, whether that's still the best of class and what can be done.

And then on the CapEx we discussed, message is clear, share buyback is the hurdle rate. We cut it to EUR 350 million for the next 2 years. It is clear that we might exceed it a little bit in 2019 because we have still some projects where we are more -- where some we are committed, some we are halfway committed, but we will compensate that by a reduction beyond EUR 350 million in the year 2020.

Okay. And then good news is Indonesia. You see here our result development, July, August, September. I think, Indocement and Semen Gresik published their Q3 results yesterday. And the message is clear. We see in the numbers a clear turnaround in profitability in the months of September. September was after 41 months the first month where the result was above last year and above our internal budget. And that's mainly driven by a price increase, which we successfully executed starting end of June.

And if you -- in June, the price level in Indonesia arrived at the historically lowest level for the last, whatever, 6, 7, 8 years. And from there, we have increased prices, in bag cement by about $6 or 13%. And that's clearly visible now in the September figures.

If you look to the Q3 results of Indocement, you check that by Internet, you will see that the Q3 result on EBITDA level more than doubled compared to Q2. And the EBITDA margin went up in Q3 by about 4.4% compared to Q2. It's also worth noting that in the first 9 months, we gained market share by 0.3%. For us, it was clear that we want to defend our core market position in West of Java and Jakarta. We did not want to give up market share or to sell market share. And I think this is good. And we expect a solid Q4 in Indonesia, finally.

If we look to the group areas, chart -- what's it chart, Chart 12. You see on the right side, Q3 sees a clear improvement in profitability compared to the 9 months, but it's clearly not enough to catch up. We are 9 months like-for-like still down, minus 1.6%. And I explained to you the various areas that affected us.

North America, Chart 13. Our result in Q3, if you look to the weather, I think, was okay, but it was clearly not enough to catch up. That's why region North and region South reduced their October forecast compared to July by about close to EUR 50 million driven by weather.

Our result in Q3 is very strongly positively impacted by Canada where we had strong markets in Vancouver, Seattle and Portland, which are really booming, which are growing double digit. Pricing overall is okay. We have clear price pressure in the region New York and New England due to McInnis. There pricing is down by about USD 4 per ton. And we think we have a good outlook for the remainder of the year. October was a good month in the U.S. for us. The order book is in good quality, in good shape. So the outlook for U.S. is okay. But we are running now against the clock. You know what I mean. Thanksgiving is coming. And the big question mark in U.S. and our businesses is always whether after Thanksgiving, you better -- you restart the quarry on operation or you just keep it close then you save on costs. And that's why the year comes very fast now to an end.

On the margin side, you see we had done well. I think cement is okay. Aggregates, the margin is up. The margin is up compared to last year. The reason there is a one-off of quarry sale of about USD 20 million, which is included in the Q3 result, which is also visible on the margin.

Western/Southern Europe, you see also here that the trend, result trend is clearly improving. EBITDA was still down, 3.5%. We are improving against the weak first half, and we expect an acceleration of this trend in Q4, especially in the U.K., but also in France.

Western/Southern Europe suffers the most for an increased variable cost. We talked about electricity in Western and Southern Europe due to our business mix in BeNe and U.K. We have very low clinker incorporation, meaning we use a lot of slack. Slack prices have increased due to the increased CO2 prices that increases the input cost for us for the cement production in a significant way. And also, in the U.K., in the asphalt business, we were hit very much by the increase of bitumen costs, which were, for the full year, about GBP 10 million, which is weighing on our result. And that's what you see then also in the margins.

What we see, if we come to Northern and Eastern Europe, I think here, everything looks okay. Results are up in the quarter, 12.7% over 9 year -- for the 9 months, 9.1%. We have a very strong performance in Poland and Czech Republic where volumes and prices is clearly up.

We had a little bit of weaker quarter in Sweden, but that's just the timing of maintenance repair stop in our largest plant in Slite. And we had weak results, continued market pressure and weak results, especially in the Ukraine. You see the margins, I think, are okay. And the volumes are significantly up in Poland and Czech Republic, significantly double digits. So we got our numbers around 20% or more. So markets are very, very strong in Q3.

Asia Pacific. If you look to the right side, you see on EBITDA, we are only down 0.9%. And that comes only from Indonesia. Indonesia in the quarter or including ForEx was down again by about EUR 14 million. That shows you the other countries in Asia were up. And especially, China was good. Thailand was good. Australia was okay overall. And that's what you see also in the margin. The newly acquired Alex Fraser business, this asphalt business in Melbourne and recycling business is doing very well. And we expect a solid Q4 due to the better pricing in Indonesia.

Africa-Eastern Mediterranean. The figures, if you look, you see EBITDA, down minus 10.4%. You say, hey, this is ... what's happening there? But you have to see the numbers are relatively small. We talk about EUR 11 million. If you look to year-to-date for the first 9 months, we are still up 6%. The markets are okay. The Tanzania and Ghana markets are strong. Egypt, until September, was okay. October was more difficult because the army started to supply more to the market that led to pricing pressure. And the main deviation in the quarter comes that last year, we sold our fancy headquarter in Downtown Cairo. That was a book gain of whatever of about EUR 2 million or EUR 2.5 million. That makes the numbers move because the numbers are small. And then we have a license expiring in Israel for our important quarry, Hanaton, in the north. And the last one is obviously the market in Turkey is under pressure.

Volumes in the quarter in cement were strong, especially in Egypt with about 9%; Ghana, 9%. In aggregates, you see volumes down 27.9%. That's the quarry in the northern part of Israel.

From trading, I think the results are okay. They are not so meaningful. I think there are always 2 key issues. One is about the clinker export prices. That shows you a little bit about the growth, demand and supply situation. And it is so that in Asia, clinker prices are clearly up by USD 4 to USD 6. If you want to buy a clinker on Shanghai, it's up to $40 per tonne. That shows you the underlying strong demand in Asia.

And the second point is in Mediterranean. Due to the overcapacity and the fall in the Turkish market, prices are coming down to $30 or even below $30. So we have a quite divergent development. And the second part, and that's a little bit a joke, China becomes now one of the largest cement-importing countries in the world. We expect China to import next year about 11 million or 12 million tonnes because the Chinese government manage the market in a way that the prices are very high and especially, the Vietnamese players are importing now significantly to China.

Okay. That's it from my side. And I hand over to Dr. Näger for the financial report.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [3]

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Okay. Thank you, Dr. Scheifele. Good afternoon, everybody. Also from my side, I would like to lead you through the financial report, and we start that on Page 20.

There, you can see the group share of profit is up. Earnings per share increased from EUR 2.42 to EUR 2.72, so the trend of improvement in fiscal net share of profit continues to improve. This is mainly financial result and lower taxes overcompensate weaker-than-expected RCOBD. And you can see that the financial result in Q3 improved by roughly EUR 12 million. So on a yearly basis, our finance cost goes down by EUR 50 million roughly as guided, and the trend will continue.

On the tax side, we see an improvement by 100 -- more than EUR 100 million. This mainly comes from a one-off previous year where we did a provision for a pending tax audit.

Cash flow is encouraging. We have a high cash conversion rate. We have kept the free cash flow stable at EUR 1.2 billion despite the comparable EBITDA going down. So we have created more free cash flow out of the EBITDA compared to previous year. It shows that the quality of result, the quality of earnings are pretty good this year.

We see a significant increase in working capital still at the end of September, which reflects the high business activity in September but also in October. And we expect a normalization of the working capital towards the yearend.

We have earned premium on cost of capital. Return on invested capital is 7.1% last 12 months trailing at the end of Q3. And that exceeds our cost of capital, which is 6.3%. I will come back on that in detail on a later slide.

Slide 21, then you can see the profit and loss statement. We have a little additional ordinary result, minus EUR 34 million, which comes from antitrust provision in Italy and some smaller restructuring. We see financial result improving. As discussed, we see income tax improving, and we see pretty stable discontinued operations and minorities. So a balanced group share of profit at EUR 539 million and 12% up compared to last year.

Then on the cash flow statement. As I mentioned earlier, we see a high change in working capital, a high increase and investment in working capital. As I said, I would expect this to come down towards year-end.

If we look to the CapEx, we see that the sustaining CapEx is about EUR 370 million and same level as previous year, whereas the growth CapEx is EUR 844 million. You know, we have invested EUR 360 million earlier this year in January. In Italy, market consolidation mainly was the acquisition of Cementir and the buildup of asphalt business on the East Coast in Australia. So after that 2 acquisitions, together, roughly, it's EUR 500 million, growth CapEx has very much normalized. And as Dr. Scheifele has said, we have now increased the hurdle rate to the level of the expected return from a share buyback, and this will bring down growth CapEx even further from now on.

If you look to the proceeds of fixed asset disposal, EUR 369 million until end of September. Also here, we are well on track to reach our 3-year target of EUR 1 billion to EUR 1.5 billion. And we will see further disposals toward the end of the year and also early 2019.

So basically, on the cash flow side, we are well underway, and we will continue to generate cash flow from that.

If you look to the functional chart, Slide 23, you can see again what I mentioned earlier. The company is able to finance its growth CapEx and its dividend from the free cash flow and, on top of that, pay down debt now down to EUR 9.5 billion at the end of September.

Slide 24 shows the balance sheet. You see very little movement there. What you can see is a significant increase in the accounts receivable, as I have said, a buildup of working capital due to strong business activity by end of Q3.

Then on Slide 25, I put the return on invested capital, and I have given to you on the right-hand side quite a number of detail on our WACC because there have been some questions from the capital market how our WACC is calculated. The WACC calculation is unchanged for more than 10 years now. And you can see the improvement in the WACC mainly comes from external factors like the risk-free interest rate, which went down from 1.3% down to 1.1%. And mainly the beta factor, this has probably the highest influence on that, which is a 0.83 coming from 0.94. Currently, the volatility of the HeidelbergCement share over the last time was lower than the volatility of our benchmarks. So that leads to a visible reduction in the WACC, and that allows us to earn even bigger margin on the WACC.

Also, tax rate down. Tax rate has a little bit smaller impact and comes, as I said, that overall, our tax rate goes down in the group.

What brings the WACC also to a lower level is that roughly 80% of our assets are in mature countries with a WACC below 5%. Only 20% of our capital employed is in emerging market with significantly higher WACC rates.

I mean, that's it from the finance side. And I would like to give it back to Dr. Scheifele for the outlook.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [4]

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Okay. I'll keep that short. Revised outlook, you have seen that. Dr. Näger explained that the expansion capex this year is higher due to the 2 acquisitions at the beginning of the year. Energy costs, we are now guiding higher more to the low double digits. So it's going to be close to -- only close to 10%.

And then we have the last chart on CO2. You have seen that CO2 prices went up significantly, that drives power prices, that drives slack prices.

We see that as -- finally, as an opportunity for Heidelberg for various reasons. First of all, we are the ones who are long on CO2 rights. There are not all players in Europe long, to our understanding. So we are long, and we are covered until beginning of 2023. So it's not an imminent problem for us. And secondly, we believe that the high CO2 price and the new trading period will drive consolidation in the markets because there are quite a few markets where the government granted excessive CO2 rights to the cement players. This is now in the new trading period. And that meaning living from selling CO2 rights from a cash perspective will no longer be a business model. And you will see capacity closure and by then, also increased utilization rate. And finally, I think such a tight environmental regulation as in a lot of industries is not good for the small players. The big ones are going to make it, and it will drive consolidation. And by consolidation, finally, pricing power.

Okay. That's it from our side. And we're happy now to answer any question you might have. I hand over to Mr. Schaller now.

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Andreas Schaller, HeidelbergCement AG - Director Group Communication&IR [5]

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We are ready for the Q&A session, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from the line of Paul Roger.

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Paul Barry Roger, Exane BNP Paribas, Research Division - Sector Head of the Building Materials Team & Analyst of Building Materials [2]

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So just 2 questions, then. Firstly, maybe going on to the margins in Europe, could you help us understand why the margin pressure was bigger in Southwest Europe than Northeast? And really, I asked that because it looks like both of them have very good growth, very similar to the cost inflation. So just wonder if there's a particular market, [vis-à-vis] maybe their pricing was weak in U.K. or Germany or something like that. And then the second one is on Indonesia. I think you mentioned on the second quarter call that you might be interested in buying some assets in the country. Clearly, now you're talking about buybacks versus M&A. Should we interpret that to mean you're less interested in buying assets in Indonesia at this stage?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [3]

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So Mr. Rogers, hello, second question first. The answer is yes. You are spot on. And the second point is on Southern Europe and Northern Europe. You are right. There is one thing, and we mentioned that because we try to be transparent. We said that we lost -- last year, we lost market share. We are underperforming the market in London and U.K. We rearranged the management. We are back in the markets. We were growing volumes in all business lines. So our volumes are back in the U.K., but we have to buy back a little bit in the market. So our pricing, especially in U.K., was relatively weak. And that, coupled with high input costs, obviously, led to a pressure on margin. The top focus in the U.K. is obviously now to get pricing up. And if you take a look up to '19, and I talked to our guys in London yesterday evening to prepare for the call and with investors meeting, is that we planned double-digit price increases in the U.K. across all business lines. So we plan to increase in ready mix by about GBP 7 grouper cubic meter; in asphalt, GBP 8; aggregates, GBP 2.5; and in cement, GBP 4, so cement is only 5%, which means significant price increase in order to regain margin. That's now high on the agenda. And on the other side, in NEECA, you know what I mean, with all respect, the competition in Norway and Sweden is different than in the U.K. or in Italy because we are the only producers in these countries. And secondly, in NEECA we include very strong performing countries like Poland and Czech Republic where I mentioned that volumes are up significantly double digits. We have a very good cost control. And here, also, the results came up very nicely, and that, obviously, helps to drive the results to NEECA. And also, to make one comment, I saw that as obviously, we follow our competitors, and competition is always good. If you sum up competitors report on Europe only in one bucket, we have separated in East/West or in West/South and in North. If you put that as a Europe all together and then you compare it with the other large European player, then you will see that our EBITDA development is just spot on where they are. So we have separated it. We had a weaker part in U.K. and also partially in Bene and Southern France, but we have good in other parts. So if you put that together, overall, Europe is I think up Dr. Näger 4% or whatever.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [4]

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4.4%.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [5]

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4.4% on the EBITDA if you look at the combined level.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [6]

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No, 4.6%, and our friends are 4.4%.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [7]

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And then the competitors from the south of Germany are 4.4%. So we watch the numbers, so we are very self critical. And -- but if you look together, I think we are -- overall, it's okay.

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Operator [8]

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You next question comes from the line of Mike Betts.

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Michael Frederick Betts, Data Based Analysis Limited - Director [9]

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My 2 questions, the first one, maybe I just need a bit more explanation, if you wouldn't mind. On this expansion CapEx, on the slide this time, it shows EUR 700 million in 2018. The slide back in July, it showed EUR 400 million. The EUR 300 million doesn't seem to be to do with the acquisitions. But correct me if I'm wrong and maybe just explain if you could, a little bit more on that. And then the second question and maybe it's too early to ask in detail. But it's great announcing these big price increases. But how do you make sure that they get delivered? And on one of the slides, it talks to -- about an aggressive commercial excellence initiative. Could you give us some clues as to what that entails?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [10]

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I think, Mr. Betts, the first one is technical and I leave that to Dr. Näger. And on the pricing side, Mr. Betts, you are probably in the industry for a long time. It is always difficult for this industry if you have a significant short-term price increase in energy prices to translate back immediately, transfer back to our customers. In an industry, which for example, in Europe and also in emerging markets has a low capacity utilization, this is difficult, but we have typically a time effect where we then get a wake up call, get pressure from the Capital Market and then we push very hard and that's what you -- what we see now. And how I read the market is, for example, in the U.K., what I see in Germany, what I see in the U.S., there is a clear push in the market to recover lost margins due to the significant inflationary cost pressure. And we train our sales force globally now very much on price increases, and we have very clear targets to do better. And due to the CO2 issue in Europe, which is a problem, which is a bigger problem for some players than for us because some players are not long. I think that the need and the must to increase prices, if you look to these electricity prices, others have also similar issues depending a little bit whether we are short or long in euro, there is a clear pressure to move on prices because otherwise, you will never get the margin back. That's why I think we will see movements -- for example, in Germany we are out now with EUR 8 plus freight cost increase. And I think in Germany, we should get less, at least EUR 5.50 or whatever because even the private smaller players are out with price increases of EUR 6 or more because they have the same issue with the electricity like we had in Heidelberg. And a similar issue I see also in the U.S.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [11]

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Okay. And your technical question. You referred to Slide 23 as I see on the right top here, you have the 544 net gross CapEx. So that is in that figure, including the, I think the disposals. And you have to note these are last 12 months' figure. So it includes the Q4 2017 to make it comparable quarter-over-quarter. So in Q4 2017, as you know, we have an extraordinarily high figure on disposals, which is roughly EUR 130 million, EUR 140 million. And now, if you go forward in Q4 2018, you will not see this EUR 130 million. So if you add up the EUR 130 million, EUR 140 million to the EUR 544 million, you end up EUR 680 million roughly. And that's the guidance, EUR 700 million, around it.

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Operator [12]

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The next question comes from the line of Phil Roseberg.

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Philip Anthony Roseberg, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [13]

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The first one is on the action plans, the accelerated portfolio optimization. Can you give us a little bit more detail of what has changed since the -- since you announced this Capital Markets Day? In other words, is the targets still the EUR 1 billion to EUR 1.5 billion from now to 2020? And what are the criteria for these divestments? And the second question is just on the price costs. I see in Q3, the price cost is still not in balance. How are the trends in costs going forward at the moment in your view? And when can we expect that, that price cost will become in balance overall for the group?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [14]

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Yes. Okay, on the portfolio, as I said, the profit warning was a disappointment and was an alarm call also within the company. And I took that very positively. You have always to make as a -- out of a problem you have to make an opportunity. You have to turn it to an opportunity. That's why I said now, we take clear actions there and the acceptance in the company to take also tough action, for example, in SG&A it's clearly now there. That's why we said also we have to expand our view on the portfolio, whether we can do more in order to streamline the portfolio more aggressively what we originally thought. And secondly, we want to accelerate. And we talk about countries and it's also clear there are some countries in the world, which we believe are very important, are very attractive, which are absolutely core. And then there are countries, if you look from a German point of view, which are a little bit far east of Germany, moving closer to Russia and then going even beyond Russia to Central Asia, where we think maybe whether we are there or not is not a must. And then also in Africa, there are some countries where you can make a question mark. Thirdly, it's also clear. We have a lot of -- we have quite a few public listed companies in our portfolio where we have majority holding and where we do not want to give up the majority, but whether you need to own 75% or 80% or only 51%, that's something, for example which you can debate. As I told you, we are opportunistic. So we're not going to sell below value. We look to areas where we have a good buyer's world, where prices and profitability is, at the moment, on a high level, and where we can do a good deal for the company. And we will upgrade you -- or update you regularly on that. And what was the second on the price cost balance? On the price cost balance, you are totally right. That's the problem, the 165, I'm on Chart 5 now. And what I told you at the beginning with the productivity is the clear message. If you look to the price cost balance to Heidelberg and to another big European player, then you will see they are better positioned then you ask yourself whether we hired 1,000 people more that brought the cost up, the answer is not. We are still very efficient. So productivity, in my calculation, is up 4.5%, which is a good number. The problem is the variable cost, meaning especially the energy that's why I mentioned the price inflation in energy, the EUR 100 million in energy. And that year, we are, at the moment, how we read the numbers. We are, due to our hedging policy, we are worse off than companies who took a lot more longer position into '18 on energy because I told you at the beginning, our electricity -- our energy price inflation, compared to last year and plan is up in the forecast EUR 100 million. If we had forward by forward contracts covered all potential energy cost, which we can cover in the company, our energy bill and forecast for this year, would be more than $100 million down. You know what I mean? So the price cost inflation in our year, this year plays very much on your hedging strategy when you were more longer hedged, obviously, you had lower prices, where if you were more shorter hedged, then you have higher prices. And our budget on energy is always based on the forward prices for next year because I'm going to quote our electricity experts. So our budget in November is always for the -- is what is the forward price for next year. And then we have a hedging policy which rolls over quarter by quarter, which tends to be a little bit short, which is bad if prices go up but which is good if prices go down. You know what I mean. And that's what you see on the energy cost inflation. So my answer is, I think we're going to review our hedging strategy for next year, obviously. I think -- and we will see -- and we should see a clearly better trend next year.

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Philip Anthony Roseberg, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [15]

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Okay. Is that from the beginning of next year? I mean, is that just a factor of...

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [16]

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And beginning next year. And we see also, Mr. Rosenberg, coal price for example, on the Newcastle index for Asia, which is a big issue for us, has stayed around spot around 108, 110. When we make the budget last year, second half of November in Asia and Singapore, you can check that again what I tell you. The Newcastle forward contract for coal in Asia was about $85, $86 per tonne. That was our budget assumption. That was the budget assumption for Indonesia, for Thailand and for the coal in India, which we buy externally. And it's also, by the way, the index for China, because in China, we buy also partially externally. And okay, the spot price, the year-to-date spot price on Newcastle, if you go now is about $108, $110 per tonne. It stayed there, but it went up during the first 6 or 8 months, the Newcastle went up by that. That's the problem. That shows -- that is shown on the cost price relationship that you rightfully mentioned. It's not a fixed cost problem, it's an energy problem. And the key question is how long and how short have you been in your energy hedging strategy. And that plays this year around a triple digit million Euro amount.

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Operator [17]

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The next question comes from the line of Arnaud Pinatel.

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Arnaud Pinatel, On Field Investment Research - Analyst [18]

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Just to follow up on pricing in Europe for next year because, obviously, what you are telling us is very ambitious in terms of price increase. I mean, we understand this looking at the cost inflation you are planning to. I understand that the CO2 issue is impacting Northern Europe, the Nordics, German, Poland and other countries. Could you also give us a little bit more visibility on what you're going to do in Italy? And if you are facing the some type of situation in emerging market and perhaps, on pricing, too? My second question - as we are limited to two if I am right, would be on the CapEx. During your Capital Markets Day, I think you mentioned that you could rebuild your plant in (inaudible) from wet process to dry process. Just wanted to understand if your new CapEx envelope are you willing to achieve this brownfield project?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [19]

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Yes. Mr. Pinatel, to your last question, what did you mention, upgrade cement plant from wet to dry in?

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Arnaud Pinatel, On Field Investment Research - Analyst [20]

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In the U.S., if I'm right. At the Capital Markets Day, you said you want to modernize your plants because you still have wet processes. And I just wanted to know if in the new CapEx envelope if possible.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [21]

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Mr. Pinatel, we have not checked that in detail. But anyway, the cost for [Mitchell] (corrected by company after the call) would be partially -- there will be nothing into '19 and there are only $10 million for permitting or whatever because we are applying for the permit at the moment. And there will be some cost into 2018 would start immediately. And then it would become more on 2021. So I think principally, we would stick to that, but we have to do that again. On pricing in Europe, on Italy, I think just to update you on Italy where we are. In Italy, at the moment, in Italy, we are, in September at a price of about EUR 65, EUR 66 per tonne, which is about EUR 5 per tonne up compared to last year. The target is now to keep that price at that level because normally in Q4 it dropped. At the moment, it looks okay. And if we keep the September price until December, then we would be in December about EUR 10 better than last year as a starting point for the new year. The price increase announcement for Italy is about EUR 7 per tonne. I think with our competitors in Italy and whatever, we're relatively confident that we will get EUR 5.

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Arnaud Pinatel, On Field Investment Research - Analyst [22]

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And for France is?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [23]

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Sorry?

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Arnaud Pinatel, On Field Investment Research - Analyst [24]

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So France?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [25]

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France, we plan for a price increase net about EUR 2 to EUR 3. That would be the first significant in France. But what I see from the market, what you saw on our numbers on electricity, EDF is also charging the other guys. So electricity in France is up and that is a major issue. So we think price increases in France, EUR 2 to EUR 3. It depends a little bit how much action is needed in order to stop the new grinders of our friend Sefrioui. The other one from (inaudible) will not come in next year. So that will come eventually, it will come only in 2021. So that's it.

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Operator [26]

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Our next question comes from the line of Robert Gardiner.

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Robert Gardiner, Davy, Research Division - Industrials Analyst [27]

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Two for me, please. Can I ask maybe just on the buyback? What kind of criteria do you need to see in mid-2019 to engage a buyback? Do you think you'd be back close to your leverage targets by then, allowing the buyback kick in? Or I'm just wondering what's going to kickstart that buyback and whether you are more confident to get into that kind of 2.5x or EUR 7 billion that you talked about before? And secondly then, if I could just ask on the property numbers. So you mentioned the 20 million gain in Q3 in the United States. Could you give me maybe three numbers? So one, your total property sales for '17, your total property sales in the 9 months '18 and where you think '18 lands, please?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [28]

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Okay, last one, property. So last year property exhausted quarries was about 190, maybe 195 or 180. You check the number we Ozan Kacar. And year-to-date for September, the number is 72. We think we're going to do about 100, that's the number that Dr. Näger mentioned. And -- so that's where we are at the moment and that's always pending. So it could be more, that must be clear. But it could be also a little bit less, but I think the 100 is a very good number on average and we will see it. On the buyback, Mr. Gardiner, there are 2 issues. It's not about -- that much about deleverage. It's clear that deleveraging the company back to about EUR 7 billion remains a target, a management target for 2020. I agree, it gets more difficult. But with our action plan, I think if we do that successfully, reduce -- stay very disciplined on growth CapEx, be successful on an additional disposals, I can -- we can still hit the numbers. That's the first one because you have to see that also if you look to 2019, I think if you look below EBITDA, you will see that our finance cost will trend further down. We have a bond of about EUR 500 million running out expiring in December. It has an interest coupon of about 9.5%. So you see only from that measure it's again EUR 40 million or even more saving. So cash flow generation in the company should remain very solid. So for us, it's the cash situation. Do we have excess cash available? And the second point than is what's the share price? You know what I mean, this is the most important question. Share buyback makes sense for the company point of view if you believe that the intrinsic value of your share according to Warren Buffett is clearly higher than your actual share price. And it's a very different story when we had the Capital Market Day in Bergamo, our share price was around EUR 80, EUR 81. Now we talk about EUR 60, EUR 61 and it even went down to EUR 55, you know what I mean. So that's a total different story. And it is very clear that at a price of EUR 60, we regard HeidelbergCement shares as a very low risk, attractive investment opportunity. And we also want a clear, want to send a clear signal to the market that we understand their reasoning, and we are not principally opposed to it. We have followed the commercial logic, and we listen what the Capital Market is telling us, okay?

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Robert Gardiner, Davy, Research Division - Industrials Analyst [29]

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Great, yes.

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Operator [30]

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The next question comes from the line of Alain Gabriel.

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Alain Gabriel, Morgan Stanley - Analyst [31]

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Two questions from my side. First, on the disposal program and your plans to accelerate it. Many of your peers have also assets for sale. And one thing that we learnt is that it's getting the right price will take time. How much confidence or what gives you confidence that you'll be able to bring that process forward? That's one. And 2, on your EUR 100 million SG&A, can you confirm that this is net of inflation? And over what time period?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [32]

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On SG&A, it's net of inflation, whatever you mean by that. But it's going to be over 2 years. We start with 50 in 2019 and then another 50 in 2020, and we will update you in our result presentation for the full year in March. And as I said to you, it's only a first step. We will check and we need more time for that, where are other areas where we still see efficiency gains for the company. I mentioned real estate management, I mentioned purchasing. But I mentioned also digitalization. I think in the digitalization in our industry, there is significant upside on the cost and on the production reliability and also on maintenance repair. Disposals, you are right. There are assets for sale. But they are more in areas where we are not in a seller position. That's why we said we are opportunistic. That's why we started various projects, and opportunistic means we go then for projects, which offer us the best returns. But we are not going to sell below value, that's also clear. And we will be opportunistic. But we have clearly started new processes and are pushing and taking a broader view on our portfolio.

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Operator [33]

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Our next question comes from the line of Arnaud Lehmann.

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [34]

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I have 2 question, if I may. Firstly, when you speak about reducing your growth CapEx relative to the order rate of share buyback valuation. Could you, sorry, maybe it's stupid, but could you please explain what you mean by that? Does that mean like you need a return higher than your WACC or something equivalent? My second question is related to the U.S., I think it's probably about the third year in a row that you had some sort of weather disruption on your volume. I mean, it's you and it's obviously all of your competitor depending on the region. I appreciate that it did not happen in the same states in the same part of the U.S. But if we end up like every year having a long tough winter and then ongoing structural weather disruption in the summer from the hurricanes in the southern part of the U.S., is there anything you can do to somehow adjust your business model in the U.S., your logistic to try to take into account maybe recurring weather events?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [35]

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So Mr. Lehmann, I'm responsible for a lot of things. But for me to manage the weather is a problem. I agree and to change my business model. It's also -- it's -- I haven't thought about that. And I fully agree with you that the weather was, this year, extremely not our friend. It was a lousy Q1, especially in the region of East, we had long winter, I am somebody who travels regularly to the U.S. We had still snowing in the Northeast in the second half of April. When I made my Q1 results performance meeting with the U.S. management, second half of April, and I talked to our -- Dennis Dolan and he's the Vice President for Region East, a very experienced guy. He said, Dr. Scheifele, what do you want? It's still snowing. I mean, I tell you this a quote and we had a very bad weather. And we had this shitty rain in September. And just to make the long story short, I was on the 10th of October, I think it was in Chicago, I was visiting our largest quarry in Fulton, we could not leave the bloody quarry because it was raining like in the monsoon in Indonesia and India. So we had extreme wet weather and that's the problem, and we were not alone, you know, we put it into the profit warning. We were the first to tell you, but all other guys, which came out told you all the weather wasn't perfect. Whether we can change the business model, I have to think it over. I'm concerned we cannot. And on the growth CapEx, and we have to see, let's be fair on that, 2 issues. This industry is weather sensitive and due to the climate change, weather gets more extreme, which reduces the predictability for us. That must be very clear because normally, winter get warmer and longer and whatever. That changes the shipping patterns, whether we like it or not. If we are lucky in the U.S., we had, last year, a very early winter in December, I don't know, maybe it's sunny and warm until Christmas. And then we have other numbers again to tell you in February. You know what I mean? I don't know. The weather gets more extreme and that reduces the predictability for us. And that must very clear. And the second point is due to the whole CO2 and climate discussion, the peaks on the energy prices here are also much more than they used to be. And as I explained to Mr. Phil Roseberg, the energy pricing is always difficult to predict and it is a question whether you go long or short. And you might be right or wrong whatever way you go. So that's the problem. Then -- and that has changed a little bit maybe to the other times. On the growth CapEx, no, I'm not an accountant. For me, the message is very simple. Heidelberg is valued at the stock exchange at the moment is 7.1 or 7.5 or 7 point whatever EBITDA multiple. And the capital markets tells me, Scheifele, if your company is 7.5, you should not make an acquisition in a crazy country with higher risks for 9x EBITDA. You know what I mean? That's the message, very simple for me. And I have understood that message, and I accept the argument. So that's the hurdle.

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Operator [36]

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The next question comes from the line of John Messenger.

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [37]

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Can I just come back, Mike Betts earlier asked about CapEx and I'm not sure, maybe he was thinking the same on Slide 27. Can we just understand there, obviously, you've reduced EUR 100 million of your maintenance number for the year. But the expansion CapEx, which I think is all about physical CapEx rather acquisitions is going up by 300. Behind that, if they are -- I'm thinking here maybe in France where you obviously talked about a master plan and you had production difficulties. Have you accelerated some spend in some part of the portfolio? Because I'm just looking at that 300 extra. Arguably, it's 150 less in the next 2 years. So I'm just wondering whether you should be more aggressive on reducing your expansion in CapEx than you've highlighted? And the second question was just on hedging again, and apologies to come back to it. But when we look at what has happened over the last 12 months, are hedging decisions, Dr. Scheifele, taken in each individual company? Or is the group having a stated strategy and you've adjusted that in any way? Where does responsibility lie? Is it a global level where you set these decisions? Or is it down at the local level? And are there reasons why that might change looking at 2019 or how you may approach that hedging kind of decision-making?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [38]

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Okay. So Mr. Messenger, hi. On CapEx, Dr. Näger will come back. There is no acceleration on investments in France or whatever. So no, I think we have seen confusion maybe on the numbers. On hedging, Mr. Messenger, that's a very fair and valid question. The principle of Heidelberg is very simple. I have asked a couple of years ago to Dr. Näger to come up with a hedging policy for the group, and I told him look to the airline industry because this is a business if you are wrong on kerosene management, you get out of that, you get out of business. And what we do is very similar what airlines do. So we have a clear hedging policy, which is a group guideline. And this allows -- and the decision is with the Country Managing Director, but he has a guideline within he has to stick. And for the next quarter, maybe as an example, he can cover by forward even 100%, he can. For the next quarter, the second quarter, he can cover by forward maybe 50%, for the third quarter, 25%. And for quarter number 4, 0. Just as an example, might differ a little bit, but that's the principle. If he wants to exceed the hedging, he talks to his area Vorstand and they go to Dr. Näger because he's the guy. If they agree, then they can go forward 100% for the full year because maybe they got a crazy electricity contract in Canada, in Edmonton, we did that 2 years ago where we had a very cheap exceptional offer. And then with Edmonton Power, we agreed on, we did a forward for the full year and Dr. Nager agreed and the Vorstand member agreed. If these 2 guys do not agree, this comes on my table and then I have to decide. That's how it works. And our hedging policy, which I described to you very shortly is obviously relatively short. So we believe our energy pricing in the group should be not too far away from the real market price in energy because if you get it wrong and this is an energy sensible business, you can be out of business. You are no longer competitive. Whereas if you first try -- first target is to give security to your guidance, to your board and to your stock exchange, then you have a tendency to hedge much longer because then you have a basis for calculation, you understand what I mean? So you say in asphalt, for example, I have a price increase of 4%, I have a hedge on bitumen price for the full year of 3%, I will do my budget. If the bitumen price goes up 10%, well done. If the bitumen price goes down by 10%, not well done, but you still do your budget. You know what I mean? That's what we talked about. And since we are relatively short, right or wrong this year, we are obviously more exposed to strong energy price increases than peers, which are maybe longer and who have hedged maybe bitumen in U.K. for the full year. Just to be very pragmatic, you know U.K. and Mr. Roseberg knows U.K. If we had hedged our full bitumen volumes in U.K. this year, for 2018, our asphalt division would have produced a 10 million pound better result. And then we talk about results in Western/Southern Europe. You understand what I mean?

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [39]

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Understood, yes.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [40]

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So on comments on CapEx.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [41]

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Maybe I want to comment on this energy. So we have a bracket for each country and for each type of energy. And the country can decide inside these brackets, inside the upper and lower limits what they do. And I have checked it, they are pretty much on the upper side currently. So they have done that right and we had roughly 25 exemption requests this year and except 1 or 2, we have -- for longer hedging. And we have approved all of them, almost all of them except 1 or 2. So I mean, that's the right thing. We have benefited in 2015 and '16 from this. And I do not intend, I do not believe that we should change this policy now because gradually, there is what we see is a plateau on energy price, or even the criteria decreased. So I think the underlying strategy is okay. And I do not think that we should change the strategy. We may give guidance during the budget meeting whether they should go more in the upper limit or the lower limit of the range. But that's their discretion then. So that's how we operate that, yes?

And on the CapEx, I will come back on you that, that seems to be a misunderstanding or error in the Q2 figure because it was clear, the spending, the EUR 500 million were in January for Italy and...

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [42]

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Fraser.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [43]

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And Fraser in Australia. And the figures should have been EUR 700 million the whole year. That seems to be an error. But I have to check it and I will come back on you.

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Operator [44]

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The next question comes from the line of Gregor Kuglitsch.

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building and Construction Research, and Equity Research Analyst [45]

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So my question is on the net debt. If you can, I think you said you are going to be above 2.5x. If you could just kind of give us maybe a bit of a range, where you think you end up for the year, just kind of EUR 8.6 billion, EUR 8.7 billion, something in that region. That's question number one. And then question #2, just to come back on the situation in Indonesia. I'm sure you've benchmarked your EBITDA margins with your peers. I think historically, it used to be 10 percentage points higher than your 2 other peers, at least the ones that we can see. And if I look at the last 2 quarters, it appears you're 10 percentage points lower. So I want to understand what's going on? And whether you agree with that analysis? And whether you think there's anything specific that explains that gap, perhaps it is also to do with hedging and coal pricing and things like that. But any views you have and whether that should converge back to normality?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [46]

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Mr. Kuglitsch, on the Indonesian results, obviously, I know the Q2. I saw Q3 yesterday only shortly when I worked -- was preparing the afternoon for our call today and meeting in the investor side. I had a short check with Christian Kartawijaya. I think he has his phone conference on his results today, this morning. And I know, obviously, since we are very competitive company, obviously, I know the numbers from Semen Gresik. First question -- the first point is that's why I made the point in the call. Heidelberg is not for the short term, you know what I mean? We want to keep our market position. And in this industry, especially if there's price pressure, if you sell market share, then you get better result short term is a possibility. And just to make it short, if you look to the core competitors of Semen Gresik, they lost market share in the first 9 months, 1.5%, we increased at 0.3%, that's obviously a reflection of the price point on that. And we stopped, that was a conscious decision from us that we said our management, no further erosion of the market position because we want to keep our core market position in western Java and in Jakarta, and especially in Western Java and Jakarta, we even increased our market share. If you go back to the Indonesian guys, they just tell you. So we kept our above 40% in Jakarta because that's the value for the company. And if we give that up, what I mean then, in 5 years, we have no longer a defendable position in Indonesia and that's not what I'm paid for. The second point is, obviously, Semen Gresik, they have lower transport cost than us because they are more spread over the country. And transport cost in Indonesia played always a big role and play even a bigger role now because the Indonesian rupiah weakened significantly against the dollar. That's why transport costs, oil and gas went up significantly and that has over proportionally hit us. But if you look to what is important for us, if you look to cash cost per tonne produced, we are clearly the lowest cash cost producer in the country, and we have an advantage against Semen Gresik of about 10%. There is an analyst report on this out this afternoon, if you don't have it, I'm happy to send you that, okay?

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [47]

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Okay. And the question on net debt, I think you are pretty close to our expectation, provided normal FX development, normal winter and therefore normal winter, that means normal working capital. If that comes back, I mean, we have -- we are very much in line on cash flow generation, with each single item except, of course, EBITDA. Year-to-date EBITDA is EUR 180 million below reported reported, so absolute values. And that's what's missing in the cash flow as well. So you are right, 8.6 appears to be a realistic target in this very moment. Okay, last question. Who is the final one?

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Operator [48]

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Last question for this call will be Rajesh Patki.

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Rajesh Patki, JP Morgan Chase & Co, Research Division - Analyst [49]

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My 2 questions are, first one is given the trends this year and the vision to profit expectations, do you feel any of the medium-term targets that you set at the Capital Markets Day also need to be reset? And the second one is in quarry sales. Given that you could not complete planned quarry sales this year, do you expect quarry sales to accelerate in the next year compared to 2018?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [50]

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Okay. As I said, we're going do an update on the midterm targets mid of the year because we want to wait now for our final results in order to have a clear basis also on net debt and cash flow. And we will update them on the targets in mid-2019. The message is clear. We have to reduce adjust our EBITDA target at the lower starting point. But on the other targets, especially what we see on the net debt target, we stay committed, but we will update that in mid-2019. On the quarry sales, we have to do the budget round, which starts now next week, then we have an overview over the group. But obviously, we have still -- we have a significant real estate portfolio, and that will continue to be a continuous stream of income. And you have to see that 2017, the EUR 180 million or EUR 190 million was an exceptional year, which was driven by the Carroll Canyon. Whereas this year's number is around EUR 100 million. The year 2016, I think it was EUR 75 million, you know what I mean? So that's why we would expect for next year a level around EUR 90 million, plus/minus, EUR 50 million. That would be, as we speak, my normal -- our normal level, okay?

Okay. Thanks a lot for your interest. Thanks a lot.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [51]

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Have a nice day. Bye-bye.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [52]

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Bye-bye.