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Edited Transcript of HEI.DE earnings conference call or presentation 19-Feb-19 2:00pm GMT

Preliminary Q4 2018 HeidelbergCement AG Earnings Call

Heidelberg Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Heidelbergcement AG earnings conference call or presentation Tuesday, February 19, 2019 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

* Ozan Kacar

HeidelbergCement AG - Head of Investment Relations

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Conference Call Participants

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* Alain Gabriel

Morgan Stanley, Research Division - Equity Analyst

* 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 & Construction Research and Equity Research Analyst

* John Messenger

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

* 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

* Sven Edelfelt

ODDO BHF Corporate & Markets, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you all for standing by. Welcome to today's preliminary overview of Q4 and full year 2018. (Operator Instructions) I must advise also that this call is being recorded today, Tuesday, the 19th of February 2019.

And without any further delay, I would now like to hand over the call to your first speaker today, Dr. Bernd Scheifele. Thank you. Please go ahead.

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

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Hello, good afternoon to everybody. From Heidelberg, welcome to our trading statement for the full year numbers and Q4. I sit here together with Dr. Näger, CFO of the company, and the Investor Relations team with Mr. Schaller and Ozan Kacar.

Now let's go through the pages. I'll start with the chart with the overview.

You saw we had a good run in Q4, especially on the top line. For the full year, we reached sales of about more than EUR 18 billion, which shows that we are growing with our business model. And 2018 was a difficult year, high increase in energy cost in absolute terms, about EUR 100 million price-wise against last year.

We had very bad weather in the U.S. in Q1, but also in September in Q3, very much in Texas. And then we had lower asset gains than last year in the range of about EUR 60 million, which brought our operating EBITDA down. You see, in Q4, on the right side, we are down versus last year, about EUR 45 million. If you take out the Carroll Canyon gain, then we are up. Carroll Canyon was last year with an exceptional gain of about EUR 79 million.

Q4, overall, volume growth in cement was 2.4%. We had a good run mainly in Europe, Western Europe, Germany, U.K, Italy, also BeNe, but also Eastern Europe, Czech Republic. Poland was strong. And here, there was -- Africa was also good in Togo, Tanzania, Ghana. We had a mixed picture in North America, where the region West was very weak. California had the fire. So in Q4, volumes went down by about 12%, whereas Canada, including Washington, so that means for us, Seattle, Vancouver, Portland was up double-digit. That was a little bit the situation.

On the next page, Chart 4, we show you the bridge. And what it shows you is we are stable. If you exclude the lower asset gains from disposals, which are in total about EUR 61 million less than the year before, our normal run rate on a yearly basis is about EUR 100 million to EUR 150 million. And these are typically exhausted quarries. We had about, I think, 600 or 650 quarries globally. Typically, lifetime, it's about 30, 35 years. So we have a run rate of about 15 to 20 quarries, which go out on a yearly basis and where then we try to commercialize the real estate.

Another point I think, which is important, if you look a little bit long term back to the company is the ForEx impact. You see, we show a negative ForEx impact against 2017 of about EUR 130 million. This is the third year in a row where we had a significant hit on ForEx. The last year where we had a positive impact from ForEx was 2015. And over '16, '17 and 2018, on EBITDA, we lost in total around EUR 295 million. And last year, it was about EUR 130 million. And it is interesting to see that it's quite evenly split. So we lost about EUR 40 million against the U.S. dollar, EUR 15 million against the Aussie dollar, and then we lost about EUR 21 million in Indonesia and EUR 9 million in India.

So it's not all emerging markets. We lost also significantly against mature markets. Also, for example, in Canada, we also lost on RCOBD on ForEx about EUR 9 million. And we hope, at the management team, that maybe 2019, we are a little bit lucky over the ForEx. And normally, these things come back that we have maybe a positive swing on the ForEx side.

Chart 5 gives you a little bit an illustration of what happened during the year. You saw a very slow start in Q1. And then you see Q4, we had volume and price did overcompensate the cost increase. And that's what we see here.

Chart 6 shows you a little bit the EBITDA growth per region also in graphic form. We start with North America. North America, clearly, 2018 was overall a disappointing year. Various reasons, we come to that later. First of all, as a comparison base, 2017, we had very good figures. We had record figures in North America. We had outperformed the market. So it was difficult as a starting point, then we had bad weather in Q1 and also then later in September.

In Western and Southern Europe, I think we had a strong run, especially in Q4. We clearly improved in core markets like in U.K., but also Germany had a good run. France had a good run. And overall, EBITDA in Western and Southern Europe is up against last year, 1.1%. And the main problem in Western and Southern Europe was the slowdown in the U.K., where we lost on RCOBD level about EUR 40 million compared to last year, which was then compensated by positive result development namely in Italy, France and Germany.

NEECA had a very strong run, about 11% up, driven by strong results in Poland, Czech Republic and Northern Europe, which were all up double-digit.

APAC is down 4.4% but a very different development we had in the first half year still a very challenging and difficult year with Indocement, which turned clearly positive in Q3 or in September, the month of September, then also in Q4. We had a clear positive swing but, at the end of the day, on RCOBD, in Indonesia, we were still down about EUR 45 million against last year, which was, to a large extent, compensated by better results in China, better results in Thailand and also better results in Australia.

In Africa-Eastern Mediterranean, results are slightly up, driven by good results in Tanzania, Ghana, good result in Morocco, but also in Egypt.

Chart 7 shows you our main management target. Cost management, we have started the SG&A saving program, aggressive commercial excellence and disposal policy. And that we limit the growth CapEx to total EUR 700 million over the next 2 years.

Chart 8 shows you the SG&A initiative. Target is to get EUR 100 million. We are well on track. We have included in our operating plan 2019 savings of EUR 53 million, which we will get. So overhead costs are clearly coming down. And if you look to our SG&A in percentage of revenues, if you compare that now in 2019 for the plan, the plan is around 8.3%. So clearly, below 9%, which we think is a very competitive figure.

On the disposals, we are on track to deliver the EUR 1.5 billion, which we are targeting for 3 years. We have reached already EUR 600 million in 2018. We are well on track. And the impact on EBITDA is very limited because we typically want to get rid of underperforming assets, and we have a clear action plan on that.

Chart 11 gives you an overview on the regions. I think we go immediately then to the areas. And you see in Q4, North America was down, okay? If you take Carroll Canyon out, we are still down, driven mainly by weak volumes in the region West. And you see Western and Southern Europe clearly up compared to last year, driven by good result developments in Germany and U.K. And Northern and Eastern Europe, as I mentioned, good result development in Czechia and Poland, Sweden and Norway. And in Asia, as I said, Indonesia second half, clear turnaround; China, up; Thailand, up; and also Australia, up. That explains it.

If we look now to North America and we look to Q4, operating income, you see, we are down by about 34.5%, okay? You have to take out the onetime effect of Carroll Canyon. But anyway, Q4 in U.S. was not good, mainly 2 reasons. We had a footprint issue with the weather. We had heavy rain again in Texas. That was also reported by our competitors. We had early winter in the North, and then that has hit us. We had a very weak Q4 in Western -- in the region West in California, where we had the problems with the bush fire and whatever. So volumes in the Californian cement market were in Q4 down about 15%, very significantly down, which has hit us and which was compensated in Q4 by a strong region Canada and Washington, which was up by about 12% or 13%.

If you look to the margins, you see, in aggregates, margin is down, okay? You have to neutralize a little bit the Carroll Canyon effect. But obviously, the margin in aggregates, this year was clearly under pressure by the increased fuel cost. Fuel cost, by average, went up by about 25%, 26%, which has clearly impacted the margin. And in cement, you see the margin in Q4 is down. There is a destocking effect, lower volumes in the region West. And we had a problem in Vancouver because we had the gas explosion, the pipeline exploded in Vancouver. And we had to switch energy, which has impacted our result quite a bit.

If you look to Western and Southern Europe, Chart 13, you see Q4 is like-for-like up, 76%. There are no asset disposal gains or whatever. It's all operational. And we have rebuilt stock partially in France and also in U.K. And we had good operational performance in Germany, France, Italy. U.K., as I mentioned, is for the full year down by about EUR 40 million, driven by high energy price inflation, partially ForEx-driven, and also due to weaker markets volume-wise and competitive pricing, namely in ready-mix.

And if we move to Northern and Eastern Europe, that's the next chart, what you see here, the results, like-for-like, it's up in Q4, 26%; for the full year, 18%. All countries are up versus last year. We had a very good run, especially in Poland, but also Russia was okay. Czech Republic was okay. Hungary was strong. In Eastern Europe, we see a clear recovery driven also by residential because the buying power of the population is going up because all governments push very much for wage increases. Minimum wages are up. The salaries of the public sector are increased significantly, and that puts a huge pressure also on the private sector to get wages up. That's why the outlook for Eastern Europe also for this year, in our opinion, is pretty solid.

In Asia Pacific, Chart 15, you see Q4 was up versus last year. That's driven by Indonesia. We see clearly the recovery. For the full year, we are still down 5%. That's without ForEx. Obviously, that's about EUR 22 million and -- where we are down. And if you go to Indocement, I'm not sure they have published the figure, I think not yet.

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Ozan Kacar, HeidelbergCement AG - Head of Investment Relations [3]

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No they did not.

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

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Not yet. You will see there, RCOBD in euro terms is about down versus last year, EUR 45 million, EUR 46 million. And that was compensated by a clearly better result in China with about EUR 22 million. Australia was up and Thailand was also significantly better by EUR 8 million. So that has compensated to more by 50%, the -- still the downfall from Indonesia, which was coming from the first half year. Okay. That's Asia Pacific.

And then if we go to Africa, you'll see Q4 is more or less flattish. Like-for-like, result is up 3.7%. We had a good result improvement -- we had a result improvement in Ghana. Also, Morocco did well. We had a strong year in Tanzania and also in Egypt. Finally, we could harvest part of our efforts, which we have steadily reduced the personnel. In Egypt, we have reduced the personnel by 2,500. We had really run a major fitness program for our operations. That's why the result in a very difficult market in Egypt went up quite significantly.

Okay. And on trading, you see our result is year-to-date up slightly, 1.9%. That's Chart 17. We reached a record volume of about 30 million. The trend is unchanged. China becomes an interesting spot for importing clinker. There is interest in importing that cement. That's why clinker prices in Asia are high whereas in the Mediterranean, Q2, due to the crash in the Turkish market, clinker prices are clearly coming down. Okay, that's it.

A little bit on the outlook. You see a little bit global cement demand. Overall, we would expect this global cement market ex China to grow between 2.4% and 2.5%. We expect China to be more or less flattish. We see clearly a downturn in Turkey. Obviously, we see a clear downturn in Saudi Arabia. Iran is also clearly negative. Russia, flat. I think that's it.

Africa, growing. Europe, we see overall flattish or slow growth. Germany, flat on a high level. U.K., we would expect flat, then Eastern Europe, up 5%, 6%. Spain, we would expect 10%. North America, it depends very much on the region. We would expect the stronger growth in the region West due to the infrastructure program of California. We expect a solid market, especially in Texas, especially also Northern Texas, where we are a little bit... Mixed is more on the East Coast.

And if you look to the results, we would expect that we will see result improvement and margin improvement in 2019. Obviously, what do we expect? We would expect that I -- what I understand is that the consensus is on EBITDA about 5%, 5.5%. That's something -- that's a number which we feel for the moment pretty comfortable. I think that 2019 is for the company, for the industry, an easier year than last year. Last year, we had, as a comparative base 2017, which was very high. We had a very negative weather impact, and then we had rising energy costs.

And for us, what you see, we see Indonesia clearly turning positive. Also January result was clearly better than last year. We see the market at the moment in Indonesia in the first 2 months, as expected, slow or flattish. We see a very weak infrastructure bulk cement market due to the elections, pending elections. So infrastructure programs, some are really moving ahead. Bag cement, residential, is okay. Pricing in bag compared to last year is up 10% or 11%, bulk is more or less flat.

We see the one competitor who sold his business is still very aggressive, searching for volumes. But that's going to go over now. And on the cost side, we see coal clearly down. In January, Newcastle was down about $8 against last year. Last year, we had about USD 106 per ton. And generally, we had about USD 98. And the other point, which is very important, the ForEx, the Indonesian rupiah has gained during the year in January/February against the U.S. dollar. That's very important because you have to bear in mind that 2/3 of the cost in Indonesia are in dollars. So the exchange rate plays a good role. So I think we are, at the moment, doing okay.

In U.S., we think volume growth should be fine. What we see in the market, it's still early. The price sentiment is better than last year. That has to do also with the weather. Generally, it was relatively mild. Volumes were good. So that's then a good timing for price increases. So the sales force is still positive.

What you will see if the trend continues is a clear tailwind from energy costs. I've been traveling a lot in the first 6 or 7 weeks of the year. And what we see in our operations that energy is clearly going down. We had, as you know, energy cost of last year, it was in total maybe about EUR 2.1 billion for Heidelberg. If I look now forward to 2019, if the trend, the actual trend continues, I would see an upside on energy maybe against last year of about EUR 50 million.

And that's driven also, to a large extent, by freight rates. If you look to the freight rates at the moment, especially after Chinese New Year, you see freight rates come significantly down. And since coal and pet coke is transported a long way, freight rates are a very important cost factor. And at the same time, we see pet coke, coal and also bitumen come down. And also, the fuel price is clearly lower than last year. We don't see that increase -- we had an increase in U.S. of about 27%. We're not going to see that this year. So I would expect a clear tailwind from energy.

And you will see that in improved margins, mainly in asphalt, aggregates, but I think also in cement. The downside on energy is electricity. Electricity Europe is still increasing. But compared to last year, we are much, much more hedged for the full year than we did last year. So the risk of the exposure on price hikes in electricity is significantly reduced.

Pricing improvement is also going well at the moment, we see good price increases in Germany, namely, Poland, Bene, U.K. So overall, price sentiment, especially also in Europe, is pretty good.

So that's it from my side. Dr. Näger, from you, nothing to add?

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [5]

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No, thank you.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [6]

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That's it. Okay, then I would say we go for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Sven Edelfelt.

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [2]

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I had 2 questions from my side. I understood you recently met with Anhui Conch. So I'd like to understand whether you would like to exchange with us the kind of corporation you are looking for? Is it disposals? Is it JV? Or is it technology? And then I would like -- I would have another question on the Mediterranean Basin with the clinker surplus. Is that a threat or an opportunity for you given your trading position in Africa? And also regarding Italy maybe?

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

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Okay, thanks a lot. Also, I think it's part of my job description to meet the key global players. And Conch is undisputedly a key player. That's why I regularly meet with the Conch guys in order to have a cup of Chinese tea over what's happening in the world and what we could do together or not, and that's it. And that's always interesting. You always learn, and that's it. But I think there is nothing more I can say on that. The second point is, you are right. We have in the Mediterranean Basin clinker surplus, the Turkish market is really going down. With our trading organization, which is based in Bosporus, we try to help to manage the overall capacity in Turkey. And for our African units, that's an opportunity because clinker prices go down. On the other side, it's also clear that the export threat to Europe is also increased. That's correct. Okay, thank you.

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Operator [4]

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Our next question is from the line of Phil Roseberg.

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Philip Anthony Roseberg, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [5]

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Just a couple from me. The strong operating leverage that you saw in Q4 in West, South Europe and in Northeast -- North and Eastern Europe, how much of that do you -- could you sort of attribute to the price cost dynamic already? And can we sort of expect that trend, price cost, in those regions to carry through into Q1 and the rest of the year? And my second question is just on your portfolio optimization. From what I understand, you're divesting assets on the basis of their individual attractiveness, it seems. But what is your vision for the overall portfolio as a whole? And for instance, what do you think it should look like in terms of split, EM/DM, regions, activities over the next few years? What do you hope to achieve with this big project?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [6]

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Okay. Mr. Roseberg, on the operating leverage, it's a little bit -- I would say, you can expect the trend in Northern Europe to continue. I think that was a very solid trend. But we reached now, obviously, a very high level. So I would say, the upside potential in 2019 in Northern Europe, it's still there but not to the extent what we have realized in 2018 since we see a certain slowdown in the residential in Norway and Sweden, which we expect to materialize in the second half. We have big infrastructure projects also there. But with infrastructure, you would never know what's happening. In Western and Southern Europe, I would tell you that we had a good Q4. That's a little bit what we told you during the year that we had some problems on production, which were solved. And we have now a solid performance. We had also better pricing. So it is clear message for 2019. We expect further quite significant result improvement in Western/Southern Europe by better pricing and lower cost. That is for sure. But because you have to understand, if you have --- in a plant- a production problem, which happens in cement plants, like in steel plants, whatever, if you have more than 100 plants in the world. But if you have a production problem, you are not losing volumes. But you have to ship the stuff from far distant plants, and that brings your distribution costs quite significantly up. And that's what has hit the results in Western and Southern Europe in the first 6 and 9 months, mainly in the U.K., but also in France. And that's what we did not see then in Q4. So you're right, we would expect that recovery to continue unless the British go for full hard exit with a recession scenario, okay? But you are probably closer to me to judge that risk. The second one is on the portfolio, you are right. At the moment, we do not have a strategic vision where we see -- like the Bible -- our portfolio should be 70% mature market, 30% emerging markets. What we do at the moment, we could -- we just try to clean the portfolio from unattractive market positions or structurally underperforming assets. What we have not in mind that's different from peers that we would sell a fully fledged position like, for example, Indonesia or whatever. That's not our strategy. But we try to sell Sri Lanka, for example. And we have sold Ukraine. And there is maybe the other or a Central Asian country, whether we have it or not, does not really matter. That's a little bit the point on the portfolio strategy. Because overall, we believe maybe the markets see differently, we believe that the portfolio of Heidelberg is a very nice mix on geographies with North America about 30%, then about 40%, 45% in Europe. And the rest is then Asia and Africa. So we think we have a nice mix of stable, cash flow-stable markets and also exposure to emerging markets, which gives you growth. So we do not see a need for a radical portfolio restructuring.

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Operator [7]

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Our next question is from the line of Robert Gardiner.

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Robert Gardiner, Davy, Research Division - Industrials Analyst [8]

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Two from my side, yes, please. Thanks for the numbers around the energy bill, the EUR 2.1 billion. Can you give us some indication of the split there between coal, pet coke, power? And how much you hedged for -- or have hedged for 2019? I know you mentioned you've hedged a lot of your electricity in Europe. And you mentioned also in the presentation, I think you mentioned a number of net debt around EUR 8.4 billion. I'm just wondering is that your year-end position. Or does that include the EUR 600 million disposals that -- announced -- I just wonder what the -- where that number comes from.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [9]

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Sorry, could you repeat the second question? Was that concerning to net debt? Or what was the question?

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Robert Gardiner, Davy, Research Division - Industrials Analyst [10]

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Yes. You have a net debt number in the presentation of EUR 8.4 billion. I'm just wondering is that the year-end position, or you're factoring in disposals agreed but not received.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [11]

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No. That is the year-end position for this year. That's the December -- 31st of December 2018 number. And the target for next year is that we reduce by another EUR 700 million. And to get the net debt down to 7.7, 7.6. And we think this is clearly feasible by accelerated disposals and, secondly, tight discipline on growth CapEx, as we announced, only EUR 700 million over the next 2 years. And cash generation in the company is very good. That's why we think we're going to hit this target, these are MBO targets for Dr. Näger and myself. And normally, we are the guys who try to hit our numbers.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [12]

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That's pre IFRS -- sorry.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [13]

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It's before leasing. And then on energy, just to give you an idea. So our energy bill is about EUR 2.1 billion for 2018. Out of which, more than EUR 900 million is electricity, and coal is about EUR 440 million and pet coke is about EUR 200 million. And then you have about EUR 100 million, EUR 120 million natural gas, and about EUR 280 million or EUR 300 million fuel as oil and diesel. And what we see is electricity is still going up, whereas coal, pet coke and diesel are clearly coming down. And that, together with lower freight rates, we think -- I just talked to our purchasing department yesterday afternoon a little bit because I thought that's interesting, we expect that at the moment, we have maybe an upside of about EUR 50 million that the energy bill overall should be in absolute terms lower than in 2018. The ones who follow the company for a long time, they know in 2017, the energy bill was about EUR 2 billion. EUR 1.966 billion is the number we published, and it went up this year to EUR 2.1 billion. And we would expect, if the trend continues after Chinese New Year, we think it could go down to EUR2.050 billion, which would be compared to 2017, 2018, a positive swing of EUR 150 million. Last year, energy increased by EUR 100 million. This year, we would expect EUR 50 million down. And that's why I would expect to have tailwinds from energy.

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Operator [14]

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Our next question is from the line of John Messenger.

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [15]

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Just, I think, actually 2 from me as well, if I could. Just on when we look at the group numbers, particularly the 2 developed divisions, North America and Western and Southern Europe, Dr. Scheifele, one of the big advantages, obviously, of the group overall is vertical integration, just to control the downstream and, obviously, unlock as much profit across the value chain. When you look at North America ready-mix and asphalt margins, clearly, there has been an asphalt issue in there. But that's 5% to 1.7%. And also, the other key market with vertical integration, Western and Southern Europe, where obviously, it's still losing money in ready-mix, not quite as much as last year. What are the ingredients? What is going to help you move those higher? And you've often highlighted the ready-mix price is kind of a critical point in terms of the health of these markets. Is it your own cost structures that are too costly to compare with some of the players? Or what needs to change to sort that out? And that it's quite a glaring gap in terms of just your performance and where, I guess, you'd like to be. And the second question. With just, obviously, Israel, is the removal of that mining license, is that something that's gone for good? Or is that something that you're looking to renegotiate, to bring more reserves on board? And with that one in mind, are there other small operations where you have short-life assets still remaining? Or is that a very unique situation?

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

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Yes. Mr. Messenger, as in Israel, that's very unique because in Israel, I don't know whether you know all land is more or less owned by the government. You cannot own a property in Israel. And they give you the license typically only for 2 or 3 years. So the license are always then renewed. That's the same practice, by the way, in Malaysia. It's very strange. Whereas in countries like U.K. or Australia or North America, you typically very often own the quarry, and then we have very long-term license as a permit. Whereas, in Israel, for example, in Malaysia, it's very short term. And what they did, they went out for public auction. And a guy won the license at a crazy price, where he has to pay a royalty like hell, so the profitability went down significantly. And what we did now in order to compensate that shortfall, I don't know whether you saw that, we have started now a cement business in Israel. We have started to import to Israel. We will import cement via our own terminal by about 1 million tonnes. So our overcapacity from Turkey, which we have, we will import to Israel, overcapacity from Turkey and also Greece. And we want to compensate the lower aggregates business by the new business line cement because we have about... captive supplies in Israel, we are a large RMC, of about 1.3 million tonnes of cement we consume. So that's a business which we will start, which we will see, which we'll gain. And we started importing our -- we opened our terminal, I think, last week, Friday. That's the situation in Israel.

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [17]

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Great.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [18]

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And the second one is on vertical integration. Vertical integration, obviously, we believe in our industry is something you cannot get around. I understand that the capital market does not like ready-mix because they say the return on capital is very low. But that's part of the business model. And never forget a saying from me that also emerging markets become mature markets. In mature markets, you need ready-mix. And if you are in aggregates, and cement and ready-mix, you have typically a very good market position. And if you look now to ready-mix and asphalt, the asphalt profitability is very much driven by the bitumen price. That goes up and down. So -- and last year, we were short. We had not covered our bitumen volumes, especially in the U.K. And that's why we had to pay significantly more for bitumen. And on ready-mix, obviously, it's about logistic efficiency, truck utilization and the other one is then, obviously, pricing and volume. And if you look to our both markets, North America, I have not checked it but by heart, I told you the results went down since we had in our Alberta operations in Edmonton and Calgary, the market was weak. There is overcapacity, and we had significant price pressure. And also in Houston, we had clearly price pressure. We are the market leader in ready-mix in Houston with our Campbell operation, and both ready-mix operations faced significant price pressure, and that's why the result went down. And in Western and Southern Europe, it's mainly U.K., where there was significant price pressure in ready-mix to a certain extent or to a significant extent also to the fault of Heidelberg because you know the story that we had lost market share in the U.K., especially in London. And I'm not paid for giving up market share in core markets like London. That's why we had to solve the market share problem, and that does -- that typically goes a little bit on the price side. And that's what you see in the numbers. That's why the numbers in Western and Southern Europe is heavily impacted by the U.K. Because in the U.K., our operation is about close to 4 million cubic meters. So it's a significant operation.

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [19]

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Can I just check in the U.K., are you today broadly -- because, obviously, you lost EUR 50 million of EBITDA last year or EUR 52 million, EUR 53 million because of the problems in the U.K. I think you mentioned EUR 40 million earlier. Was that a pure U.K. drop this year? So in other words, that's 2 years EUR 90 million down. So it's not a very profitable operation right now, is that fair? There's not a lot of EBITDA left.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [20]

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Yes. Yes, it has a lot of upside. It has a lot of upside, you're right.

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Operator [21]

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Our next question is from the line of Arnaud Lehman.

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [22]

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Two questions from me, please. Just a follow-up on the cost outlook for 2019. In your comments, you said on electricity, you are more hedged than last year. Can you explain a little bit what do you mean by being more hedged? Have you changed the way you contract with your utilities company? Or how do you get a better visibility? And maybe on that, if we were to see, let's say, C02 prices continue to increase, driving higher electricity cost, how are you better prepared today to give result compared to maybe a year ago when it was maybe more of a surprise? And my second question is more generally, you gave a fairly positive picture for 2019. What are for you the key risks for this year?

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

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Okay. So the risk is surely, I would say, is the Brexit scenario in U.K. That's the point. Then another risk, I would see, is also how this U.S./China trade war works out. We hope -- or we believe that this will -- they will settle this case. And then we have obviously, in Indonesia, the question is election. Jokowi in June, how does the market then develops. And we also believe that Jokowi will win, and it will work out well. I think the risks are typically in the industry now today are more political risks than pure market risks. That's at the moment a little bit a problem because the public tensions are very high, and that has obviously an impact on our industry. And on the energy, Mr. Lehmann, it's very simple. We have increased forward buying. You know what I mean. So maybe just as an example, maybe last year that time, we were covered in Europe for electricity for Q2. That's also May through June -- or April through June. Maybe we had covered only 20% of our -- and now we are covered 50% to 60%. And we are also covered to 40%, 50% in Q3. So we increased the forward buying perspective because we believe that the CO2 price in Europe has rather a tendency to go up than to go down. And that's why against increasing electricity price, we are better hedged than last year, okay? Thank you.

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Operator [24]

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Our next question is from the line of Gregor Kuglitsch.

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [25]

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So my question is on cash flow. I know that, obviously, you'll only give us the debt number. Can you just give us a broad sense from memory of your capital markets day, you were looking at sort of achieving perhaps a run rate of EUR 2 billion of free cash flow. I want to understand, I suppose, 2 things. One, broadly, where you think you were in '18? I appreciate that you're not producing these numbers today, but kind of a ballpark figure and how you see that trending in '19. And perhaps if you can -- anything you care to elaborate on that side? And then I think late last year, in this call, Dr. Scheifele, I think you did comment kind of a broad EBITDA expectation. I think, at the time, it was mid-single digit. Is that something you're prepared to communicate on today? Or shall we -- are we going to have to wait until March?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [26]

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Yes. Mr. Kuglitsch, I've already said on the outlook on my chart, obviously, Chart 20, I said the consensus at the moment is, I think, 5.5%. That's what I'm told. And that is not something which keeps me awake at night. So I think that's a number we can hit, and that's supported, what I said on our Chart 20, that we see Indonesia positive. We expect U.S. to be solid. We see good pricing in Europe overall. And then we see a tailwind from energy, and that should overall, if you take this all into account, that should work. And then on cash flow, that's a number I have difficulties always to understand, I hand that over to Dr. Näger.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [27]

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Dr. Scheifele, you're kidding again. So -- but I cannot tell you the free cash flow today because that's just not ready for communication. What I can tell you is that we had a good -- as you always -- also can see from the net debt figure that we had a good free cash flow, but also cash flow in general this year, which was based on better or lower interest payments, lower tax payments, good proceeds from disposals, okay? On the other hand, we had a high growth CapEx. But this year again, we were able to deleverage. Also, we paid full dividend, and we had a full growth CapEx program. So I mean, our cash conversion is excellent and towards the end of the year, we had a very good run in that respect. Looking forward, I would expect that this trend goes on. We, as Dr. Scheifele has said, had headwinds also at that level from ForEx that may change this year, we do not know. But we expect better EBITDA. We expect lower interest payments. We expect lower taxes. We expect a continuation of our disposal program on plan or, as of 2018, even a little bit ahead of plan. So that will give us again a cash flow, free cash flow, which allows us to pay for dividends, to make the growth CapEx we need to make in the framework we have announced and still to deleverage and to accelerate deleveraging in 2019. That's what I can say. So I would say we are well on track.

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Operator [28]

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Our next question is from the line of Alain Gabriel.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [29]

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Two questions from my side. Firstly, on the U.S. Are you able to quantify the impact of the infrequent events, such as the fire and the floods and the gas explosion in 2018, just to help us with the profit bridge for North America into 2019? And the second question is on Egypt. Are you able to elaborate a bit more on your comments on the market dynamics there with the ramp-up of the army plant? And how do you think of -- a high-level thoughts on your capital deployed in Egypt? Are you happy with it? Do you want to do something about it? And can you do something about it?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [30]

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Yes. So first of all, if we take first Egypt, I would say interesting country. The first problem is that the market last year was overall down 5%. The Army started with their operation mainly in the second half. And especially, Q4 was very difficult because they were trying to dump volumes on the market. At the moment, the capacity utilization of the Beni Suef plant in the south of Cairo is maybe 20%. And the Army has to pay back on a yearly basis to Sinoma EUR 90 million cash. That is interest on the investment and also principal. And we will have to see how that will impact the pricing behavior of the Army now in 2019. We would expect the market to be flat in 2019. Infrastructure is okay. So the new Cairo City is being built. But the private sector is down because inflation is still very high. Interest rates are high, so that's not good for the private sector. Our 3 plants, Suez, Kattameya and Helwan are very well-positioned. So logistically, to the greater Cairo area, I think we have the best positions in the market. We have reduced cost significantly from Italcementi. As I said earlier, we have sent home 2,500 people. And we have switched now all plants from gas to coal. So we run a relatively good business over there. And -- but the outlook for Egypt overall remains challenging. If you look to our balance sheet, you have to see that I think -- Dr. Näger, what's the capital investment in Egypt for us? Very low.

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [31]

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It's very low. From the PP -- in the PPA, we were properly considering the difficult market situation in Egypt. So our capital employed in Egypt is a low triple digit million figure. So it's a very reasonable valuation. And from there, from that perspective, we have no risk of an impairment or something like that. But the question is not so much on the financial figures, the question is whether we want to keep 11 million tonnes of capacity in Egypt forever, that's under discussion.

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

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Yes. And we own in the Egyptian business only 53% or 56%. So it's not 100% of EBITDA...

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Lorenz Näger, HeidelbergCement AG - CFO, Head of Finance, Accounting, Controlling, IT & Logistics and Managing Board Member [33]

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What hampers the restructuring on a total Egypt level is that the corporate structure inherited from Italcementi is very complex with 3 stock-quoted companies -- we still have to do some work in that respect.

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [34]

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Okay. And then U.S. impact, we have not -- I would see, if you look to our U.S. business like-for-like last year, it's down by -- against last year, if you take ForEx out, maybe about EUR 60 million. And that comes all from, more or less, region North. And I would see the impact of the weather in Texas and region North, at least in the area of this number, probably the numbers higher-- we have not run a calculation on that. But it's clear, we had a major hit in the region North, but also in the South, where we had in September a very bad weather and then also in December again. So I would expect the whole hit from this is probably EUR 60 million to EUR 80 million.

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Operator [35]

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The last question is from the line of Rajesh Patki.

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Rajesh Patki, JP Morgan Chase & Co, Research Division - Analyst [36]

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Two questions from me. First one is on Australia. We're hearing some -- about some delays in road construction projects. So I just wanted to get your thoughts on how you're seeing the trends for each end market in Australia. And second one is now that the Holcim Indonesia transaction has closed, are you seeing any changes in the pricing environment? And how do you see pricing in Indonesia evolve through this year?

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Bernd Scheifele, HeidelbergCement AG - Chairman of Managing Board & CEO [37]

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Okay. Indonesia, I just told you that one competitor was still very much looking for volumes in January and February, but that should ease now. We kept our market share. Our expect -- our budgeting is that we keep the pricing in the first half year flat on the current level, which is an increase against last year because last year, first half year price was still dropping of about 10%, 11%. That's what we mentioned in the bag cement. And then we will see after reelection of Jokowi in June whether we can do some price increases in the second half. That's a little bit our game plan for the moment. Overall, we expect the Indonesian market next year -- or this year to grow about 4%. We expect the slow growth in the first half year due to elections, what's happening. We would expect then a recovery in the second half. We think that's fine. Australia, in Australia, the situation is so that we see a slowdown in residential, especially in the multi-residential sector, clearly, in Brisbane and also in Sydney and also in Melbourne. In Sydney and Melbourne, that's compensated, especially in Sydney, by large infrastructure projects. So we guided on -- whether you know Sydney, that they put up a second airport in Sydney where we have significant work. We have significant work on this new westbound Highway around Sydney and also on the northbound. I was there about 4 weeks ago. I visited the site. These are huge construction sites, with lots of tunnels and whatever. So in Sydney, we expect the infrastructure work, which we already -- on which we are working to compensate the slowdown in residential. In Melbourne, we have a good commercial market that should work. Perth, Western Australia, what we see is the mining industry, the mining business is coming back step-by-step. We just won a big lithium project in South of Perth. And we see also more activity in the mining sector North, whereas Perth, it develops, still remains relatively slow. But we've got 2 big shopping centers in Perth. So we expect our Western Australian business to be clearly up versus last year. The critical market, the most difficult one is Brisbane. Brisbane residential is down, and we have new competition from ready-mix. We have independents setting up a new business. The exports, Wagners, the guy who was running a cement terminals, reentered now ready-mix. And we see also new cement terminals are being up -- built, which comes in the market in the second half. So Brisbane will be challenging for the rest of the country, and we think we are in good shape.

Okay. That's it from our side. Thanks a lot for your interest. Hope to see some of you either in March on our trip or then -- in May. Thanks a lot. Have a good afternoon. Okay, thank you.

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Operator [38]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.