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Edited Transcript of HEI.DE earnings conference call or presentation 16-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Heidelbergcement AG Earnings Call

Heidelberg Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Heidelbergcement AG earnings conference call or presentation Thursday, March 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernd Scheifele

HeidelbergCement AG - CEO, Chairman of the Managing Board

* Lorenz Naeger

HeidelbergCement AG - CFO

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Conference Call Participants

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* Robert Muir

Berenberg - Analyst

* Paul Roger

Exane BNP Paribas - Analyst

* John Fraser-Andrews

HSBC - Analyst

* Arnaud Lehmann

BofA Merrill Lynch - Analyst

* Rajesh Patki

JPMorgan - Analyst

* Gregor Kuglitsch

UBS - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the business year 2016 conference call. (Operator Instructions) I must advise you the conference is being recorded today, Thursday, March 16, 2017.

I would now like to hand the conference over to your CEO, Dr. Bernd Scheifele. Please go ahead, sir.

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

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Okay, hello to everybody. Good afternoon here from London. I welcome you to our call on our final 2016 figures and the outlook for 2017. I'm sitting here with Dr. Naeger, the CFO of the Company, Andreas Schaller, Head of our Investor and Communication Department and Ozan Kacar, the Head of the Investor Relations department.

As usual, I will lead you through the operational figures and markets, and Dr. Naeger will lead you through the financial figures with a clear focus on the pro forma figures and the consolidation impact of Italcementi.

If I start with chart 3, I think, as a summary, I think we had a good cash flow. Our cash flow from operations went up by 29%, and also free cash flow, meaning after maintenance CapEx, is significantly up, close to 40%. The adjusted earnings per share is up 23%. You have seen that we had one-offs of about EUR324 million. There are mainly three big items. We had obviously restructuring costs for Italcementi which were about EUR156 million or EUR159 million.

And then we were cautious and we were writing down the goodwill in Ukraine and the assets in Ukraine, in eastern Ukraine where we have the cement plant which is at the moment seized by the rebels, we have written down to zero. And we have also written down the goodwill in Congo and assets in a significant way. And furthermore, we had a ship accident in our Mibau venture. And this overall led to a one-time negative impact and it also includes the currency loss in Egypt due to the devaluation of the Egyptian pound.

The dividend proposal is to increase the dividend by 23% to EUR1.60. That's consistent with what we told you two years ago, that we want to have a progressive dividend and we want to reach by 2019 a payout ratio of 40%. The dividend increase is in line with the adjusted earnings per share increase and a little bit lower than the free cash flow generation.

On the Italcementi integration, I think we have good news. The synergies we have upgraded to EUR470 million. If you put that in context, that means about 11% of the turnover. That's a very high value. We are absolutely convinced that we will deliver on these synergies. I think we will -- as I told you earlier, we will do better.

We have earned again a premium on our cost of capital. Dr. Naeger will explain that a little bit more in detail. We have reached a ROIC of 7.2% against a WACC of 7%. And that even in the first year of the acquisition of Italcementi I think that shows our financial discipline and overall good performance.

On the outlook, if we look to the markets, I would say three categories in a nutshell. US is going to be strong; I think we'll discuss that later a little bit more in detail. We expect solid growth in our mature markets in Europe, Canada and Australia. Overall economic underlying trend is good. There are political risks but the underlying economics, especially also in Europe, are okay.

And in Asia and Africa, it's, in a way, mixed pictures. We have three markets where we see margin pressure. That is obviously Indonesia and this is Thailand. In Thailand, we have not increased the price yet. We hope that we can do that in April in order to offset the price decrease from last year. And then in Africa, it's mainly Ghana. The rest of the countries [in] Asia and Africa runs pretty well. We're going to focus on efficiency and especially strong cash flow generation. And we expect a volume improvement in all business lines, as we did this year, EBITDA growth mid to double-digit, leverage 2.5 or below.

Chart 4 gives you again an overview on what happened. I think I do not have to comment very much on that. The operating EBITDA went up by 5%. That's what we discussed in the trading statement call in February. And you see down there then the adjusted earnings per share, which is about 23%.

Chart 5 gives you the payout ratio for the dividend, and you see, since we went to the capital market in September 2009, we have step by step increased the payout of the dividend, and over the last seven years we had an increase in the payout of dividends of about 45% on a yearly basis. That shows that over the last seven years I think we have really tried to improve the returns to the shareholders.

Chart 6 gives you an overview over the last four years. You see by and large we have reached EBITDA growth of about, if you take the average, 6%, 7%. With all the ups and downs in the world economy, free cash flow is clearly more significant up. I expect this trend to continue because I think our finance costs will go down in a significant way this year and already next year. Earnings per share on an annual basis went up by 11%; dividend payments over the last five years it's about 38%. And then you see also the share price. If you take back five years, I think we have done pretty well -- we have clearly beaten the DAX and also the MSCI. In 2016, we have beaten the DAX third year in a row.

And chart 7 shows you the premium on cost of capital. It shows you the ROIC, which is at 7.2%, and the WACC which is 6.96%. And you see the invested capital went up a little bit compared to 2015.

On the synergies side, chart 8, we have upgraded the target. Originally we were at -- I think when we did the transaction it was EUR170 million and then we went up to EUR250 million, EUR400 million. Now we are at EUR470 million. The increase comes mainly from three areas. One part is coming from treasury and the other part is on SG&A. We're going to have -- we have more aggressive targets now in France and in Egypt than we originally anticipated. And the third comes from logistics or market synergies, especially from North America. And you see we have realized synergies about EUR155 million in 2016. We expect to do another EUR270 million into -- EUR175 million in 2017.

I think in 2016 we have done a good job. We have closed down the Bergamo headquarter of Italcementi. In the meantime, the management has moved out of the building, and they are sitting now all outside of Bergamo in the very modern i.lab building. We have also closed down the headquarters of Ciments Francais Holding in Paris, and we have also closed down our old CBR headquarter in Brussels and we are moving now to a very efficient and modern building close to the airport in Brussels in April.

On the workforce, I think as we speak today we have about reduced already 2,000. The target is 2,550, but as I told you earlier, I think it's going to be more 3,000.

Focus area for this year will be France. We have started the social plan negotiation with the French unions. The target, overall target, is to reduce in headquarter functions around 200 FTE. We have not started any operations in the plants yet because we think it's better to wait for the result of the French election before we start social negotiations on plant level, because in France that can be a rather hot issue and we wanted not to disturb the social peace.

In Egypt, we are moving strongly on reducing the workforce. So, on the synergies I think we are pretty confident, and maybe I can point to one issue Dr. Naeger can explain more in detail. I think the EUR470 million includes only treasury synergies of about EUR60 million. We looked back in the Board meeting on Monday a little bit what were our original assumptions for Italcementi when we made the deal -- the plan, what were the plan. And then if we compare that, on the financial costs, for the Company for financing the purchase price and the debt of Italcementi, which was a total volume of about EUR6.8 billion or EUR7 billion, we are roughly EUR200 million below.

That means by and large, forget about all the fees and whatever, commitment fees of the banks. By and large, our interest financing is about 3% lower than anticipated, and obviously, we get a clear boost from the investment grade in November, because, as you know, once you are investment grade, the ECB can buy your bonds. And obviously, the difference between non-investment grade companies and investment-grade companies increased by that, and that's why we have very cheap financing.

Italcementi normally had about a cost of debt of about 5%, and obviously you have seen our latest bonds, we finance somewhere around 1% or 1.5% and that shows you the difference. And that obviously has a significant cash impact which you will see this year and the years to come.

The volume side I think we have already explained in the trading statement. I think that's all set.

Chart 10 shows you again the EBITDA performance in 2016, and then we showed again the chart on Western and Southern Europe. There was some irritation after the trading statement call because I think we were down in Q4 about EUR60 million or EUR70 million, and the question was whether there was any problem in the operational business.

I told you in the call there is no problem. It has to do with one-offs and with CO2 provisions, which had to be made, and with PPA adjustments and also that the booking between holding cost and operational cost was changed because the -- because to the consolidation of Italcementi and different accounting practice in Heidelberg compared to what was done in the past in Bergamo, and especially also for the central costs of Ciments Francais Holding in Paris.

If you do it like for like, operationally we were about up by EUR18 million. We had a mixed picture in Q4 in Europe. We had weak markets in Spain and also especially Italy, and Germany was weather related relatively down, France was stable, UK was okay. And that gives you a little bit the picture.

I think chart 12, I asked Ozan to put that in because I think it gives you a little bit an impression on what happened with the Italcementi assets in the second half. And what we have done here, we have compared the published second-half 2015 figures for the Italcementi assets with the results achieved starting the second half after closing July 1. And the overall message is that we see in the Italcementi operations a clear increase, a positive trend in EBITDA that goes more or less through all areas, except for Asia. And in Asia, it's Thailand where we had a price pressure coming from new capacity and undisciplined market behavior, whereas the rest is up.

And, in my opinion, you see here clearly two points. First of all, the rather drastic management change which we did on top management level in the countries has clearly paid off. Except for Greece and Bulgaria, we have put in always a new managing director. That was a considerable decision from my side in order to change the spirit of the Company very fast.

And you see also that the new management teams or the new leadership in the former Italcementi countries or assets is clearly buying into the HeidelbergCement management culture. It's also worthwhile that they all make their forecast for the second half for 2016 and also they reach, more or less, their working capital target. So we had a very high discipline from Italcementi side in order to reach the targets in 2016.

Chart 13 I think is important to understand the cash generation and the relationship between cash and EBITDA in our Company. The left chart shows you the EBITDA generation over a period of four years, and you see in 2013 Indocement contributed on EBITDA about 22%, US only 14%. That has changed now. The US is now at 26%, with an upward trend, and Indonesia is at 10% with a downward trend.

The key difference between Indonesia and US is in Indonesia we own 51%, and what you see in the cash flow statement is only the dividend, as cash what we received is the dividend. Whereas on Heidelberg in US we do not pay taxes because we have tax losses carried forward. We own it 100% and there's also no withholding tax. So obviously here we get more or less 100% from the EBITDA also as cash.

The same principle applies to Ghana where we have a participation of about 60%, 62%, and also in Thailand we have a joint venture with 55%. The message is in 2017 we expect a strong run in the US again with a strong cash generation, whereas we see maybe weaker developments in countries where we have only majority participations and where the impact on the cash generation is clearly lower. And there you see then the consequence on the right side that the free cash flow increased quite a bit.

Now chart 14 and 15 talks a little bit about the outlook. Let's talk about the US. I was last week -- on Thursday, Friday I spent two days in Dallas with our management. The reason was to prepare a little bit for the upcoming analyst call but also with a meeting in the West with the investors in the next days. And I think it was good timing because our team just came back from the largest construction trade fair in the US, from the Las Vegas CONEXPO, and obviously, that was a good opportunity to get a little bit what's the feedback from the market.

We had about -- attendance from our cement customers; 45% of our customer base was there. So I think it gives you quite a good view. And the overall messages in US, everybody expects a strong year; customers are very positive on 2017. I would say they are even bullish for 2018 and 2019. And that's what we see also in our volumes for January and February. They are up 7%, 8%. Also pricing in cement is already in February before the main price increases in April already up 7%; in aggregates, pricing is up 5%. And I think that's also underlined by the PCA who came out with a forecast yesterday who upgraded its forecast.

And the confidence of the customers is driven by two facts. First of all, they think that the tax reform will come, which will obviously reduce the tax burden, and by that lead to better earnings and more cash flow for the US customers -- for the US companies. And secondly, they think the tax reform will also allow the big tech companies to repatriate their cash which is bunkered in Europe, and they expect then that a significant portion of that cash will be invested in fixed assets in US. These investments will, with a tax rate of maybe 20%, have a clearly better return than if the corporate tax rate is around 40%, which is the case at the moment.

So message, strong outlook on the US. We think volumes are going to be solid, pricing is going to be strong, so we think we have another good year in North America, and maybe 2018 and 2019 even stronger.

If you look to Europe, also in Europe we see clearly the consumer confidence, the business confidence in Europe has clearly improved. We had in 2016 in the Eurozone a growth rate of 1.7%. That compares with US 1.6%. That shows you Europe is not so bad. Maybe the perception in North America is different from what is the reality on the ground.

We expect good growth in Germany, Benelux. UK, in our opinion, will stay also firm. And also in Southern Europe, especially in France, we see stabilization of the market, and Spain comes back, Italy with a question mark.

In Eastern and Northern Europe, clear good news. Eastern Europe is coming back and Northern Europe, Norway, Sweden, strong markets in Sweden, I would say even a boom, due to residential needs due to the refugees. And also in the former Soviet Union countries, Kazakhstan, Ukraine, Russia, the market has -- is coming back. We see strong pricing in these countries, in Russia, Ukraine, Kazakhstan; we expect price increases between 10% and 15%, and have also positive pricing momentum in Eastern Europe.

And, as I said, in Africa and Asia, mixed picture.

That's it from my side and I hand over to Dr. Naeger on the financial results.

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Lorenz Naeger, HeidelbergCement AG - CFO [3]

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Yes, thank you very much, Dr. Scheifele. Good afternoon also from my side and good morning to US. I would like to lead you through the financial report where the presentation starts on page 25.

So what we have is a very successful integration of Italcementi also from a financial perspective. Just to remind you that we had quite successful negotiations with the European antitrust and the US antitrust where we were -- had only to do a very small number of compulsory disposals. In the beginning the expected figure was much -- the expected number of assets was significantly higher. But then I think we had -- we brought it down and we could sell these two assets, the one in Belgium and the other one in US, only one plant in Martinsburg, at pretty good prices and multiples.

We had to manage two IPOs, one in Italy, one in Morocco. In Italy, we were at the absolute minimum of the legal timing and were able to acquire all shares of Italcementi within a very small period of time. In Morocco, that was a very [thorough] process where finally we did buy I think five shares or something like that. So that's exactly what we wanted to have.

We then were able to wind down very fast the expensive heritage financing of Italcementi. This turned out to be a real asset which really contributes now and in the future to lower cost. Italcementi had a big bunch of early-maturing, quite expensive debt, roughly EUR1.5 billion we could wind down very quickly, and by that replace 5% to 6% interest by 0.5% to 1.5% interest.

Overall this led to fairly low transaction and integration costs, as you can see in our additional ordinary result. This was close to EUR160 million. In this industry, we have seen significantly higher costs in transactions of comparable size and type, also relative to the size of the transaction.

We show in the year improved financial metrics. The cash flow improved as we applied typical HeidelbergCement financial discipline, especially on CapEx and on working capital. On the operating cash flow in Italcementi at least before we had control we still have to work a lot. This was not really managed in Italcementi early and we see big potential here for the future.

We then had on HeidelbergCement heritage, a quite successful management of the pension obligations by decreasing the defined benefit obligation, and a pretty good return on our pension assets. I will outline later, we have 18% return on our pension assets this year.

The financial result improved, despite higher debt. And last but not least, our return on invested capital continued to increase to 7.2% at a WACC of 7%; I will also outline a little bit further.

All this quite good environment led then to an investment grade rating which we achieved in November 2016, which I think was overdue. And our target, of course, is to comfortably establish the Company inside the investment grade corridor.

If you then go to the income statement on slide 26, you more or less see what I have outlined. If I go to the lines below the result of current operations, we see the additional ordinary result which I will explain on the next page. Result from participation up 30%, as also our JVs are in good shape and have successfully developed.

The financial result, minus EUR490 million, improving EUR56 million from last year despite a higher debt stemming from the Italcementi acquisition of roughly EUR2 billion on average over the year. And as I outlined, we have been able to push that down and you see it here in the financial result.

Income taxes are in line with our expectations and on the same level as last year. Net result from discontinued operation, minus EUR3 million, and minorities minus EUR190 million, also on last year's level. So the Group share of profit as reported, EUR706 million compared to EUR800 million. If we adjust for the additional ordinary result, we are up 23% to EUR1,032 million.

On slide 27 you can see the split of the additional ordinary result, including Italcementi at EUR160 million. There are some asset and goodwill impairments. We had a bad accident with a ship in the Baltic Sea where a ship from us destroyed a high voltage cable in the sea with its anchor. EUR25 million is expected damage here.

And then we had the devaluation of the Egyptian pound. There were some questions earlier this morning on this. Suez Cement, our company in Egypt, had financial debt denominated in US dollars, mainly stemming from dividend obligations which they have to pay, which are in dollars, and also stemming from acquisition or from purchase of coal and spare parts, all denominated in dollars.

As long as the Egyptian currency was regulated there were no dollars in the country to be able to pay the dollar bills and so we had to keep the dollar debt as we were unable to pay it. And once the Egyptian pound devaluated, we need more pounds to serve this dollar debt. That's exactly what happened and that caused this devaluation loss of EUR47 million. That's the background of that; that's why we show it here in the additional ordinary result.

If we then move to the cash flow statement on slide 28, we can see that cash flow from operating activities had a very nice development, up EUR425 million to EUR1.9 billion, coming from EUR1.4 billion. Please note, in the line decrease in provisions through cash payments that there is a significant increase of EUR138 million to EUR383 million. This includes, to a large extent, payments from Italcementi for restructuring and for severance payments for employees.

Total investment up from EUR1 billion to EUR4 billion. This is total Italcementi. EUR3 billion out of the EUR4 billion are directly linked to Italcementi, EUR1 billion is normal CapEx which you have during the year. And out of the EUR1 billion, normal CapEx, about EUR700 million, are stay in business.

Proceeds from fixed asset disposals and consolidation EUR800 million inflow. This includes EUR600 million cash in Italcementi and then the cash flow from investing activities of the discontinued operations, EUR900 million. This is the disposal of the Martinsburg plant and the CCB after the acquisition of Italcementi. So, overall, free cash flow in this definition minus EUR400 million.

If we put this in the chart, you can see it on slide 29, and there you can see we use a different definition for the free cash flow. There it includes not all CapEx but only the CapEx for growth and expansion. So the free cash flow is EUR1.3 billion. We have borrowings from EUR1.4 billion. We have then growth CapEx EUR2.3 billion net of the disposals and the consolidation of the Italcementi debt of EUR2.3 billion.

I mean that from the operational side free cash flow a very nice development, and we also expect the free cash flow to further develop.

If we look to the balance sheet, we have to note that that's all more or less Italcementi. The currency impact from between December 31, 2016, and same day 2015 was very small. The basket of the currency remains very stable. So all the differences you see in the change column are more or less Italcementi.

We have booked a preliminary PPA which includes goodwill of EUR1.7 billion out of the intangible of -- which increased by EUR1.9 billion. So out of this EUR1.7 billion is Italcementi. This is a preliminary figure; it may change a little bit until June 30, 2017, but I expect this change to be not very significant and it's relatively likely that the goodwill will reduce again a little bit.

Property, plant and equipment up EUR4 billion, Italcementi acquisition, and the same for all the other balance sheet positions. Same for also cash; increase stems from Italcementi.

The equity goes up by EUR1.9 billion. This is also mainly Italcementi. EUR700 million from the capital increase, as we exchanged 10.5 million shares of HeidelbergCement against share of Italcementi with the former owner, Italmobiliare, and then we accounted for the minority interest inside Italcementi Group for about EUR600 million.

Debt goes up, as reported. Provisions a little bit up, deferred taxes Italcementi and also the operating liability up EUR1.6 billion. Net we have an increase in the net debt of the Company of EUR3.7 billion.

Now let's look a little bit back to page 7 where we have outlined our return on invested capital and the WACC. We have achieved a return on invested capital of 7.2% and the WACC is 6.96%, slightly up, mainly due to an increase of the beta factor.

We have -- if you look at the capital, then you see that the capital increases from 2015 EUR21.5 billion to EUR23.6 billion. We have slightly changed the calculation mode here as we have calculated the invested capital as the average of the quarterly capital invested. So we have included two quarters, which is Q1 and Q2 2016, of heritage Heidelberg invested capital, and the second -- the two quarters of the second half-year, meaning Q3 and Q4, are including Italcementi.

Italcementi has increased the invested capital roughly by EUR5.5 billion out of the box after the disposals, and now half of this goes into this invested capital figure. So that's why it goes up by roughly a little bit more than EUR2 billion compared to previous year. So during the year 2017, we will see this to increase to a level of around EUR27 billion as a result of Italcementi is also only in for six months, we have a fair picture here.

And we believe that in the next year the WACC will a little bit go down as the average WACC of Italcementi is lower than the HeidelbergCement WACC and the ROIC we will see should be stable or also slightly going down. But I expect that we will continue to earn a premium on the cost of capital, and as the synergies kick in, this value gap could further increase and our contribution to value creation [could] increase.

Now let's go back to slide 31. I would like to talk a little bit about the pension obligation. Heidelberg has substantially decreased its pension obligations over the last five years. You see it on the green bars which are the calculation of the benefit -- defined benefit obligations at a constant interest rate. And you can see that the increase which you see from the balance sheet, which is shown in the gray bars, is only due to decrease in interest rates.

If you keep the interest rates stable, we have a nice decrease of EUR850 million net coming as the Company has continuously worked on the pension schemes and continuously replaced defined benefit obligations by defined contribution schemes and has closed many pension schemes for newcomers. So over time, this goes down.

The other side, the pension funds you see on page 32, there you can see that the plan assets have continuously increased from EUR3.8 billion in 2013 to EUR5 billion in 2016. This means we have a coverage rate of 85%, which is pretty good, especially in Germany, as German pension obligations are not covered by funds.

In our funds which we manage, we have achieved to again achieve a return of 18% in 2016, which we consider to be a good success. The reason is that these are more or less a maturity-matched zero bonds for our pension obligations, which increase value with decreasing interest rates.

So if the trend changes and interest rates would go up, then we expect our pension obligations to go down but also our pension fund values going down, and then we, of course, would have a negative return, so you should keep that in mind. But if we have all done all the financial engineering correctly, the gap between pension obligations and pension funds should continue to reduce.

Slide 33, net debt development, you can see that. We are currently on a leverage of 2.8, and I'm very confident that we will succeed to push that down into our target range of 1.5 to 2.5 by 2017.

Slide 34 shows the maturity profile, and I have put the coupon rate of the bonds in the bottom line, so you can see that from 2017 through 2020, quite expensive financing will go out of the balance sheet, and will be replaced by pretty cheap refinancing.

We have already paid back in January a bond of EUR1 billion at 8% interest rate and replaced the same by a 0.5% five-years bond, so alone this will reduce for 2017 our interest cost by more than EUR70 million, and that's a trend which will continue until 2020, and we expect every year to pay EUR100 million less per year for the coming years. That has a massive contribution to the net cash flow of the Company.

So that's it from my side. I think we are very well set up for the future. It's a very stable financing profile, great flexibility, and we'll see improved financial metrics in the near future. Thank you.

Dr. Scheifele, if you want to go to the outlook.

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

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Okay. Let's just go back to the outlook, to the last two charts, chart 36 and 37. If you look a little bit to the cement demand globally, North America I think we discussed. I would also expect, like the PCA, about 3.5% growth. I would expect infrastructure to be relatively strong, due to the FAST Act, which comes now into the market, the infrastructure program Congress has already approved.

We see consumer confidence, net wealth per household, on a very high level in US. That's why we also expect residential to pick up and commercial. We would also expect that the weak markets of California and coastal Texas, mainly Houston, will come back in 2017, and the last point is when I was in Dallas, we were discussing always the issue of the oil industry, which is important for us in Houston but also in western Canada. The good news is that the fracking production in the US is up significantly, and as you know, that's why the oil price came down over the last days.

Just to give a figure, the number of oil rigs is up in North America by more than 100% per March, and we see already a clear increase in the oil well demand in our operations, in Texas Lehigh but also in western Canada and obviously that has a higher contribution margin.

UK, we see good infrastructure project. Our order book is good. We have the nuclear power plant. We have big projects here with the Thames Tideway in London and also the highway, Britain highway project of the British government, so UK should be all right. Europe, I talk modest recovery. Northern Europe, especially Norway, Sweden, Sweden we see very strong demand, with big tunnel projects also in Oslo and Stavanger, and Russia, Kazakhstan, Ukraine recovery, with double-digit price increases between 10% to 15%.

Africa overall is okay, except for the oil countries, where we still see significant economic weakness. That means Nigeria, Angola and Gabon and also South Africa.

And in Asia, China, we would say more or less flattish on volume, but pricing compared to last year, clearly up. Pricing now in China is about RMB230, RMB240 per tonne. That is clearly 20% up compared to last year. India, first two months, volumes were la, la, la, with the effect of the currency change of the government is still clearly visible in the economy. That will take time, because the Indians are not used to use in the local markets, to use bank accounts. Pricing in India at the moment, still flat.

Thailand, volumes okay. Price increase not implemented yet. Indonesia had weak two first months. For the first two months, market was again negative with minus 1%. It's the wet season now. It should dry out now in March, latest in April, and we keep our fingers crossed that then really the volumes have to kick in. Pricing continued, due to the market weakness, to be under pressure.

Cement, Australia, overall good. Volumes are good. Pricing in cement up AUD4, so that looks pretty good. And I think that's it a little bit. If you look on charts 37, we have commented more on our single markets. I think overall that is okay.

Maybe a comment on Africa, one of the core markets for us is Ghana -- in Ghana, the good news is that the government has now banned imports or has put a quota on cement imports. That limits the Chinese imports in a significant way, and Mr. Dangote is sending less trucks from Nigeria to Ghana, and we are strongly lobbying with the other local players that the unfair competition by subsidized exports from Nigeria is stopped in Ghana at the border, as it is already in Benin and Togo.

Okay, I think that's it, and obviously now we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question, from Berenberg, comes from the line of Robert Muir, and your line is open.

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Robert Muir, Berenberg - Analyst [2]

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Thanks very much. So two questions. First one, fairly boring, but just wanted to check on the synergies. In your pro forma bridge, you've got obviously the EUR155 million of benefit. I think at the Capital Markets Day, though, you were guiding for year-end run rates, and they correspond with the totals broadly that were shown today. So can I just confirm that the full EUR155 million should be in the numbers but also the subsequent EUR175 million in 2017 and the EUR140 million in 2018 is still a run rate? And if so, is there any guidance on the timing of these and therefore the absolute incremental benefit we should expect in 2017 and 2018 from synergies?

And then my second question, just looking across Europe, this is a broader question. Just with all the deals, and I think we've seen a consolidation event in Germany in the last couple of days as well, are you looking at a different landscape maybe across Europe? Could we see pricing power returning as it did in the US on relatively small volume gains? And with this in mind, are there any markets you would highlight in particular as interesting in that regard? Thanks very much.

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

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Okay, Mr. Muir, hello. On the synergies, you are totally right. We stick what we said. It's EUR155 million. It's EUR175 million and then it's for 2018, what's the number? But we stick to the numbers and we give you a more detailed update in the Q1. But on the synergies, as I repeatedly said, we have these synergies all now nailed down to a person, to a precise action plan, with milestones, with defined P&L savings, cash savings and implementation costs. And we run this in our system on a monthly basis, and so we are pretty confident that we will get this number.

And as I told you, if I looked at the finance costs, that number broadly will be higher, because we have also increased the targets, especially on SG&A in France and in Egypt, so let's wait and see. I think on the synergy side we will see the impact.

It's difficult I understand it for you though with the like for like and pro forma and what was realized -- it's also for us not easy, but that's if you integrate two big companies, but I can tell you only you will see the numbers. The numbers are clearly coming.

Now, on Europe, you are right. There was a move from Schwenk. They bought out the CRH which is obviously positive, because Schwenk is now the number two in Germany, and Schwenk and Heidelberg, they have -- both together have a market share in the countries of Germany -- let's say Bavaria -- Bavaria, Baden-Wurttemberg and also Frankfurt of more than 50% or 60%, so that should normally have a positive impact, because the problem with CRH plants was that they were not vertically integrated. They had no ready-mix, and they were a little bit on the standalone, so I think that's a movement.

Now, if you look around Europe, I would say for us obviously two markets are -- three markets are important. One is Italy. These markets need some more consolidation. I think you will hear the same message from Buzzi. I think we do not -- we can agree on that, and let's wait and see whether something can be improved during 2017. It's clearly on the strategic agenda of Heidelberg, and if I read the press releases of Buzzi, I think it's also on the agenda of Buzzi, so let's wait and see.

And in France, obviously, here the market has to recover. We are relatively confident on volume in France. For us, the point is that our vertical integration in ready-mix is relatively weak, and we have to improve that. And the other market then is Spain. In Spain, we still have a clear overcapacity, and also I think in Spain you will see more consolidation, maybe not by M&A but more by merging of players, because in Spain obviously the overcapacity is still significant.

So I think principally you are right. You will see I think more consolidation to come in the European market. Yes.

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Robert Muir, Berenberg - Analyst [4]

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Thank you.

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

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Okay.

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Operator [6]

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Thank you very much indeed. Now from Exane BNP Paribas, we now have a question from the line of Paul Roger. And your line is now open.

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Paul Roger, Exane BNP Paribas - Analyst [7]

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Good afternoon, everybody. So I'll just have two as well. Firstly, sorry to come back on this synergy figure, this EUR155 million that you booked in 2016, wonder if it's possible to give us a bit more detail in terms of the phasing of that EUR155 million and in particular whether it was all in the second half. And then also, if you can give us some detail by region, just to understand where that EUR155 million was actually impacting the P&L.

Then the second question is on Indonesia. We've just had Indocement reporting. Their Q4 margin fell to 27%. Is that a good guide for what you expect for 2017, or could it go even lower than that?

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Bernd Scheifele, HeidelbergCement AG - CEO, Chairman of the Managing Board [8]

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Okay, if you looked so -- if you look to the figures, it's about -- close to EUR39 million on SG&A, especially headquarter reduction in Bergamo and also in Paris, and we have in the cement operations -- we have about EUR71 million. That's mainly also due to energy optimization, reduced maintenance repair spending, lower clinker factor, etc., switching -- switching fuel mix in US, for example, from coal to gas or also in Egypt, from gas to coal. And then we have about EUR18 million in purchasing and about EUR10 million in logistics.

If you look to the countries, it's about Egypt, EUR25 million; France, also around EUR15 million to EUR20 million; Italy, about EUR17 million; India, EUR15 million. Kazakhstan, you saw that in the margin in north and Eastern Europe was significant from a low level, EUR11 million, and North America about EUR9 million. Morocco was also pretty strong, between EUR6 million to EUR10 million, and then we go smaller, Bulgaria, EUR3 million, increased EUR2 million, so it adds up. So it's split across the line.

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Paul Roger, Exane BNP Paribas - Analyst [9]

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And in terms of the actual phasing, this all relates to the second half, does it? There's nothing from before you consolidated Italcementi there?

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

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Yes. I would say I -- I look to Dr. Naeger. I would say so. I would say the synergies Q4, I do not know. What was it, EUR60 million to EUR70 million? That's our guess, so that's a little bit where we are in Q4, what we did in Q4.

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Paul Roger, Exane BNP Paribas - Analyst [11]

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Okay. Okay, yes. And then the second one is on the Indonesian margin.

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Bernd Scheifele, HeidelbergCement AG - CEO, Chairman of the Managing Board [12]

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Yes. The Indonesian margin, as you saw in Q4, where Q4 was very weak in Indonesia. The volumes did not come back as we expected, and margins were weak. I don't know, the 27%, is that now Indocement total or is it the cement division?

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Paul Roger, Exane BNP Paribas - Analyst [13]

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I believe that's the total that they just reported.

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

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I haven't seen it, and I think that's a figure you have to see, so 27%, 25% is by average for a cement company, if you take normalized market conditions, is not a crazy number in Indonesia. The problem at the moment is that we have overcapacity to the buildup, and the market I would say nearly typically for the cement industry, you build capacity when the market is strong. When the capacity is there, the market is flat or even negative. That's what we have at the moment.

That's why we have a little bit abnormal situation, and we really expect and hope that the market now, at least in the second quarter when the rainy season is off, that then the market comes back strongly in order to get a better capacity utilization and then also to a better price-volume relationship.

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Paul Roger, Exane BNP Paribas - Analyst [15]

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Okay. Yes, thank you.

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

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Thank you.

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Operator [17]

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Thank you very much indeed. Now, from HSBC, your next question comes from the line of John Fraser-Andrews. And your line is now open.

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John Fraser-Andrews, HSBC - Analyst [18]

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Thank you. My two questions are firstly in Indonesia, coming back to the margin pressure that you flagged and obviously just heard what you had to say there about overcapacity. But within that margin pressure, can you just flesh out how you see that and the extent of it, given you're expecting 5% volume growth, the cost savings with the new kiln line, and how that all marries in with that margin pressure?

And then secondly, in the US, the operational leverage, could you just give some indication as to what your spare capacity is, so the growth you're expecting in the country, how much of that will come through in terms of operational leverage?

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

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So now in Indonesia, I think I cannot tell you really more. We are now just the middle of March. I told you February the market was -- in January, the market was negative. In February, the market was slightly positive. The first two months, the market is -- Indonesia, total, still a minus (inaudible) and I think Jakarta the first two months was again minus 7%, minus 8%, which is very abnormal. That's really a crazy situation.

That's the one thing, and obviously if the market is lower than expected, you have additional capacity. The price pressure continued with pricing under pressure maybe compared to last year about 3% or 4%. That's the point.

On the other side, we have an increase in the coal cost in the country, but we could offset that increase by our P14, because we have significantly lower variable costs, so we could keep the other costs more or less flattish. And obviously, we have continued to reduce on fixed costs. The currency was relatively positive, because the Indonesian overall economy is relatively strong and also the macroeconomic figures, like the capital reserves, are strong. So the currency has helped us, especially on the dollar-denominated cost side.

And what was the other one? On the US, I would have to -- we have enough production capacity in order to produce especially with our Essroc plants, so we don't see any problem. I think our total sales volume for next year US is, what, 40 million tonnes, I would assume? And we still have surely spare capacity of at least 1 million or 1.5 million tonnes.

The good news about Essroc about the US is that the Essroc plants have clearly improved. We have finished the winter repair, no overspend on maintenance repair. The clinker production is clearly up compared to last year, about 120,000 tonnes, and in the first two months, the Essroc plants compared to last year are on a OI level up about $20 million. So we see a clear improving trend. That's why I'm already confident that we're going to have another strong year in the US.

So I think if you look to the US operational leverage, you see our numbers in euro. We have done last year on the full year in North America an improvement of about EUR120 million. You have to deduct about a negative result development in western Canada, which we will not have this year, which was about EUR35 million. It was about CAD40 million, so we did about EUR150 million more on OI in US.

There is no reason that we should not do the same increase again, and since we are ambitious company, we obviously target even for a higher increase, and that's why on the US we are pretty confident. Okay?

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John Fraser-Andrews, HSBC - Analyst [20]

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Thank you.

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Operator [21]

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Thank you very much indeed, sir. Now, from Bank of America Merrill Lynch, you now have a question from Arnaud Lehmann, and your line is now open, sir.

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Arnaud Lehmann, BofA Merrill Lynch - Analyst [22]

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Thank you very much. Good afternoon. My first question is regarding your 2017 full-year guidance. I believe back in February, when you had the preliminary results, I think on the conference call you were talking about mid-single-digit organic growth in EBITDA, and obviously today you're talking mid-single to double digit, so is there -- are you just being more precise or are things kind of changed or improved in the last months to make you a bit more confident about the outlook for 2017? That's my first question.

My second question is I'm just doing a quick calculation based on your pro forma EBITDA, the EUR3.2 billion, and then if I just take your guidance, let's call it 8% growth, that's getting somewhere between EUR3.4 billion and EUR3.5 billion, and you're also telling us you're going to be at 2.5 times net debt to EBITDA, so that will get us to about EUR8.6 billion of net debt, which would be about EUR400 million reduction year on year.

Is that wrong or because I'm assuming you're hoping to reduce your debt by a bit more than EUR400 million this year.

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

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Okay, maybe I start with the outlook, Mr. Lehmann. You are right, we have been -- you know what, at the beginning of the year in February -- in January and February, when it's snowing in Europe and US, I'm also a bit careful because who knows the market now? I was traveling the last two weeks or three weeks in our operations to get a better feeling, and what you see is clearly what I told you, is that the pricing outlook in general, if we leave out maybe Indonesia and Ghana, where we have still a price pressure, it's the clear message that price-wise, I think we are maybe better on our way than what I anticipated, because I am relatively careful in the markets. You never know what's happening.

So in the US, we are clearly -- after my meeting with our sales guys, I think in the US we should get normally, if things go well, by average about $8. We will even get in North California maybe $10. In Midwest, we would expect $10 to $12 or $12, and also in the South, Georgia, Alabama, we think we will get $12. So in the US on pricing, I'm clearly optimistic. The same for Canada with [$6] in BC.

Also in Europe, you have to see, sorry, in France in the last two or three years, the price went every year down EUR2. Now we have -- we see in France until February price increase EUR0.80 per tonne. It's not a miracle, but I tell you, it's a trend change. And in Italy, prices are up.

We hope to get in Italy maybe EUR4, EUR4.50. That would be already an achievement, so we're a little bit -- Benelux, pricing is also up by about [EUR1.20]. UK is up by GBP1.50. And in Russia, Kazakhstan, Ukraine, pricing clearly above double digit, 10%, 15%. Poland is up, Czech Republic is up, Egypt is up, Morocco is up, so on the price side, there is momentum, and that's why we are a little bit -- we are a little bit let's say if you want to say -- we are more optimistic than maybe in February. That's the key message, and at the same time, if you look at the coal price, you saw that the coal forwards came down. So at the moment, also on the energy, now with the oil price, this is also not bad for us if the oil price drops.

So at the moment, I would say things are overall by and large moving in the right direction. Okay?

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Arnaud Lehmann, BofA Merrill Lynch - Analyst [24]

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Okay.

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

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Then you asked Dr. Naeger the question on what was it?

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Lorenz Naeger, HeidelbergCement AG - CFO [26]

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Yes, yes, if you calculate, I mean the net debt, I said we would like to push it clearly into our target range between EUR1.5 billion and EUR2.5 billion, and we printed that we want to bring it to and below EUR2.5 billion, so I think the net debt figure which you mentioned, the EUR8.6 billion, is a very conservative figure. Our ambitions are clearly higher than that, and then we have to look at the balance with the EBITDA figure, and then we see where we land by the end of the year.

But it's still a long way to go, and I think we will achieve a decent net debt figure, and then the EBITDA you know is just powered by US, etc., and so we are optimistic to achieve that goal.

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Arnaud Lehmann, BofA Merrill Lynch - Analyst [27]

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All right, thank you very much.

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

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Okay.

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Operator [29]

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Thank you very much, sir. Now, from UBS, your next question comes from the line of Gregor Kuglitsch, and your line is now open, sir.

Oh, he's just disconnected. I beg your pardon. He just disconnected from the call there. I'm so sorry. Would you like me to move to the next question?

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Unidentified Company Representative [30]

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Yes, please.

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Operator [31]

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Thank you, and that's from JPMorgan, and it comes from the line of Rajesh Patki, and your line is now open.

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Rajesh Patki, JPMorgan - Analyst [32]

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Yes, good afternoon. Thank you very much. I have two questions. First one is on the guidance. I just wanted to understand whether the guidance includes any positive impact from the one-off items that you have mentioned on the slide 11, the presentation.

And the second question is a quick two-part question. What's the average interest rate that you'll be expecting for 2017, and in terms of additional ordinary reserve for 2017, what do you expect there? Is there any restructuring charges similar to 2016? Thanks.

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Bernd Scheifele, HeidelbergCement AG - CEO, Chairman of the Managing Board [33]

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No. On the first question, though, we have not planned -- the guidance does not include any CO2 gains or whatever, currency and PPA bookings. So it's operational guidance. And what was the other one?

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Lorenz Naeger, HeidelbergCement AG - CFO [34]

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The average interest rate should go down to a range of 3.5% to 4% over the whole debt, but that includes in all finance fees and amortization on you notice capitalized fees, etc., etc. It should be in that range.

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Rajesh Patki, JPMorgan - Analyst [35]

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Just following up on the first question there, I was referring more about to the change in inventories and weather in Germany. Do you expect that to reverse or --

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Bernd Scheifele, HeidelbergCement AG - CEO, Chairman of the Managing Board [36]

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Sorry. I cannot predict the future. Otherwise, I would not run Heidelberg. I would just stock market -- weather is for us a big item. In our industry, weather is key. In the first quarter, weather is important. Do you have a warm winter, do you have a harsh winter and whatever? What is the flooding doing in the monsoon countries like Indonesia and India? And then the Q4 is again a weather -- the question is when does the winter come in, and that has a play on our inventories.

And in Germany, we had last year no winter at all in Europe, and this year, the winter came in end of November, so December did not take place. And the year before, we were producing until Christmas. And also in Europe, just to give you a hint for the Q1 here, Europe had a normal winter, especially in Eastern Europe, Poland, Ukraine, Romania, Czech Republic, Germany. They're covered by snow in February. That was last year not the case.

US is relatively mild. US weather is relatively okay, so you're going to see also in our Q1 results that obviously in Europe we have a winter impact, and that I cannot predict. Okay?

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Rajesh Patki, JPMorgan - Analyst [37]

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Thank you.

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

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Okay, last question?

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Operator [39]

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And the last question, sir, comes from UBS, from Gregor Kuglitsch, and your line is open, sir.

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Gregor Kuglitsch, UBS - Analyst [40]

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Hello.

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Unidentified Company Representative [41]

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Hello.

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Gregor Kuglitsch, UBS - Analyst [42]

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Hi. So I've got two questions as well. So the first one is on your guidance. So I think if I look at your EUR175 million of EBITDA growth from synergies, you already get to 5%, so you're guiding to mid to double-digit EBITDA growth. So I guess the question really is, you talked very positively about pricing. You talked very positively about the US. I understand there's a little bit of pressure in Indonesia and Ghana, but is that really what you're saying, that those two markets are really moving down significantly, just so we can square the different elements of the guidance?

And the second question is a simple one on tax. I think you're actually guiding to a pretty low cash tax or tax rate of 25%. Is that what you think is a sustainable cash tax for the business, now that you've assessed Italcementi more after having six months of ownership? Thank you.

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Bernd Scheifele, HeidelbergCement AG - CEO, Chairman of the Managing Board [43]

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Okay, so I think your statement is correct here on the guidance. We have the synergies. That's clear. And then I think we have discussed in detail the markets. We expect US to be okay. I expect Western and Southern Europe to be also fine. I would expect NEECA -- that is for us Northern Europe, Eastern Europe, strong. That I see already in the first two months. They are strong markets, especially Norway, Sweden, which is important for us, high margins, high cash generation.

Then we come to Africa. Africa is the -- we're going to be better in Egypt. We're going to have a good year in Morocco, and I think there is a question mark behind Ghana. That depends very much on Dangote, how he plays. Tanzania should be all right, but overall, Turkey also, the market is okay. It's more a currency issue, and in Asia, the hot spot is Indonesia. I would expect India to be stable and go up.

China, pricing is up. Bangladesh looks okay. Australia should have another good year, so it's a little bit from our side, from our portfolio, we look a little bit to Indonesia and Ghana, but here again Mr. Kuglitsch, we talk about EBITDA. And there is -- in a capital-intense industry, there is a lot of life below EBITDA, and those businesses we own 51% or 60%, and on the cash side, we see only the dividend, whereas obviously from a cash-generating point of view, strong markets in US, in Ukraine, Northern Europe are for us very important. Because here we typically have very low tax rates, like in Norway or Sweden, or we don't pay taxes, like in the UK and in US. So that's where the cash generation comes from, and that's why we're pretty -- let's say on the cash generation we are pretty bullish.

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Gregor Kuglitsch, UBS - Analyst [44]

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Okay, thank you very much.

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Lorenz Naeger, HeidelbergCement AG - CFO [45]

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Okay, on the tax side, I am not a big believer in deferred tax, so I prefer to look at actual tax, so even more on cash tax. And if we look on cash tax, we have two major impacts. The one is until previous year, I would say, Italcementi until 2015, Indocement was the biggest taxpayer in HeidelbergCement Group. Unfortunately, this profitability goes down, and secondly, we have participated in an asset revaluation scheme, where we have increased the value of our fixed assets and now start to depreciate tax-wise from a higher tax base. This should significantly reduce the taxes paid. In Indocement deferred tax are something completely different.

The second point is US, we still expect US to increase profitability, as you know from Dr. Scheifele. And we have still massive carry-forward losses from the financial crisis in US, so the increased profitability in US goes against profit carry-forward loss, and therefore we will not pay any taxes there.

So for the time being, Indonesia, lower tax and in US, no tax on pretty high profits, so that should keep the cash tax rate at the 25% I am guiding. But okay, we will see what the future brings, but that is currently our expectation.

In Italcementi, we still have to learn who is the real taxpayer like Morocco, with a pretty low tax rate, 10% if I'm not mistaken. Egypt does not pay. Italy does not pay. France is a high-tax country, which came in our Group, so we have to see how the structure will continue, but our current planning is that we stay with 25% cash tax ratio.

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Gregor Kuglitsch, UBS - Analyst [46]

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Thank you very much.

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Lorenz Naeger, HeidelbergCement AG - CFO [47]

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Yes.

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Unidentified Company Representative [48]

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Okay, that's all.

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Lorenz Naeger, HeidelbergCement AG - CFO [49]

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That's it. Thank you very much.

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

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Thanks a lot for your interest. Have a good afternoon. Thank you. Bye-bye.

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Operator [51]

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Thank you to our speakers today. That does conclude the conference. Thank you all for participating. You may now disconnect.