HeidelbergCement AG

XETRA:HEI

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standby. Welcome and thank you for joining the HeidelbergCement's Third Quarter 2021 Results Call. [Operator Instructions]And I would now like to turn the conference over to Christoph Beumelburg. Please go ahead.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you, Elliot. Good morning and good afternoon, everyone. Welcome to our analyst and investor call on the results of the first 9 months '21 for HeidelbergCement. With us today is Dominik von Achten; and, for the first time on this call,[Audio Gap]the voice of René Aldach; and [indiscernible] from the IR team. Dominik and René will go through some prepared remarks, which as usual, you can find also on our IR website. So without further ado, Dominik, over to you.

[Dominik von Achten, Chairman of Managing Board]

Chris, thanks a lot, and welcome to all of you on the call. Thanks for joining our Q3 update. We'll try to be quick in the presentation because you have all gotten the key slides. And then I think we should leave enough room for your questions. I think that's what René and I will do -- and obviously, a special welcome to René Aldach, our new CFO, as Chris was mentioning. Happy to have you on board.Key messages. The first 9 months -- I'm now on Page 2. 9 months, if you put it into perspective, I think it was good. We are clearly above prior year, that's fine. Q3 is obviously impacted by a very high comparison base, also by very high cost inflation. As indicated during the year, we said we are up for a couple of rough quarters if the energy costs will not come down. And here we are. I think in that respect, that's what we indicated, that's what, to some extent, has materialized. Let's also be very open. Are we 100% satisfied with Q3? No. The sky is always the limit. We will lead you through very transparently where we think we want to do better going forward. But I think, to put it also into perspective, the quarter is still the second highest in Heidelberg's history.We have launched on the back of that a business excellence program, not just to run another program. Yes, there is an operational reason there, but the main target is to really get going even steeper in -- on the pricing side, I'll come back to that in a minute.Net debt level, René will go through the details, I think that's fine. Portfolio optimization also continues. We will go through that in a minute. From our perspective, good -- very strong progress on the CCU/S sides. We did put the numbers here to it for the first time. And by the industry and all the outside growth things, this is a topic of after 2030, we strongly believe that this [indiscernible] can save up to 10 million tonnes of CO2 by 2030 already, and we'll take you through the details. And then obviously, we will also focus on digital revenues going forward that would come additionally to our existing revenues and results.Full year outlook. We confirmed on the EBITDA and EBIT sides. We raised it on the ROIC side, and we are very confident about that. We went from clearly above 8% to now above 9%. And the same is true for the leverage ratio, we said we're going to be at the lower end of the 1.5 to 1.2, and now we are saying we are going to come in below 1.5. René will take you through those details.If you go to Page 3, you'd see the operational performance down in terms of results. Also, to be fair, to balance things out, I think like-for-like revenues up 4%. I think that's going in the right direction. And then we have the EBIT performance that's also about 12%, 13% down. On the back of that also, the margins coming under pressure compared to prior year, still holding up on an okay level, but we'll come back to that when we talk about the business excellence program.Page 4. 9 months looks okay. Sales up like-for-like almost 9%. That's a significant increase. Okay, there were lockdowns last year so -- but it's going in the right direction. EBITDA, a nice development year-over-year, '19, '20, '21, up 8%. EBITDA margin keeping on the high level from last year at this point and operating EBIT going up 16% like-for-like. I think the 9 months result is, from our perspective, okay.Interesting then is the picture on Page 5 because it also gives you the indication from our perspective where the market -- where do we have -- also where do we see our operational performance. North America, I think demand is intact. Pricing, I think, is, from our perspective, also intact. We do see a good underlying demand in Q4 and also in 2022. Just talk to our colleague, Chris Ward, overall, I think these are moving absolutely in the right direction on the market side as well. It's also a little bit offering in the U.S. So on the U.S., I think that looks good. But you know that we are a net importer so that did hit us on the freight side, no doubt about this. Let's be very transparent about this. This put short-term pressure on us, especially in the Northeast, where we import volumes, and also it did on the West, where we import volumes. So in that respect, there was pressure coming from the freights. You know that the freights are on all-time high.Europe splits for us in Western Europe and Southern Europe on the one hand and then NEECA on the other hand. Overall, demand, again, is not the issue. WSE demand is absolutely fine. Good revenue growth despite a very strong comparison base also in Q3. But we have to also be very clear, we did face operation issues. And again, very transparent, we're talking about our plant in [indiscernible]. That's one where we made a major investment upgraded in terms of capacity, in terms of CO2 footprint. The upgrades came in COVID-related also a couple of months later. And then if you then come into the heavy season, the start-up is never easy. So that really has impacted Q2 partially, but also Q3. And it's not only the plant, you have all the secondary effects of additional distribution costs, [indiscernible] cost, all of that. Good news is, and I'll share that with you, on the month of October, significantly above the forecast October assumptions. The plant is running well, let's knock on wood. That seems to go in the right direction.Europe, on the NEECA side, very good volume development. Pricing is okay, but not so good as in other areas. We are on a high level, and there's also the political system in Eastern Europe, where they're trying to check a little bit what's happening with the basic industry. So I think in that respect, strong volume development overall, good development on EBITDA. I think for us, NEECA is -- remains a stronghold.APAC, to be very fair, that was the other problematic area for us in Q3 for a couple of reasons, COVID-driven lockdowns in countries like: Thailand; Malaysia; partially, Bangladesh; partially, Indonesia; India more in Q2, not so much in Q3, there was a [ catch-up effect, ] that was fine; and then also partially in Australia, as you know, in some of the big cities, where we have a significant business contribution. So this really put pressure on volumes EBITDA and obviously then also on pricing because on lockdowns, there is nothing -- there is then nothing to price. Overall, we expect a catch-up demand in Q4 and also into next year. So yes, Q3 was a problem. But the underlying demand, and I was just talking to our head in Indonesia a couple of hours ago. So overall, the demand goes in the right direction. Also COVID-wise, they seem to have the worst over.Africa, overall, an increasingly important region for us, very good volume growth. Pricing also okay. Very good recovery in Egypt. We are back in positive territory so that's really encouraging. One thing is also clear, in Africa also, nothing is perfect. So there is significant impact on the freight rates and also the demurrage costs. René was with the team in -- traveled in Africa a couple of weeks ago. Togo, the port is congested like hell. You wait with the ships 1 or 2 weeks, that costs you millions. So in that respect, there is some short-term issues in Africa, but that's something that will also go away eventually.Page 6. You see then, all in all, the development. I think volume is good. Our volume development in Q3 was not the problem. In fact, we turned that into revenues. I think that was fine. Price over cost from our perspective, obviously not satisfying. That's why we have started already beginning of this year to push on pricing, push on pricing. But if then the cost explodes like they have done with our forward buying pattern that we have, this is very difficult to manage in the very short term. We've always said that, and I think in that respect, this is somewhat the result. But there are also some other issues that will come, too, when you, I think, raise your questions. I will go to the price over cost in more detail.On the 9 months, Page 7, it looks a little bit better in terms of net volume development. That's obviously significant in the positive. And then the price over cost, you see already, this is only coming from Q3. The rest was -- the first half year was -- price over cost-wise is still okay.If you go to Page 8 and see a little bit the margin development, you see that in Q3, the margins were under pressure in all areas. And that's obviously driven by the cost development on energy costs, on freight costs, on raw material costs, on some maintenance costs. So I think there are numerous issues that add up to this, and again, René will go through the details together with me in a minute. If you then compare it and put it into perspective versus 2019, the situation looks more stable.On the 9-month picture on Page 9, the margin development, still fairly okay.Page 10. Portfolio optimization continues. No one should expect that this is ever done. We will continue to turn the portfolio over, and that means [indiscernible] a couple of divestments: West Coast, Spain, a couple of transactions; Kuwait, Greece, we've announced all of those. But also obviously, we are working also on the bolt-on acquisitions in those core markets where we really want to focus on. So this is -- just as an example, Australia, Northern Italy and also Tanzania, with the acquisition of Tanga Cement.With that, I would say, René, I hand over to you for the financial section, and then we'll come to your questions.

[René S. Aldach, CFO & Member of the Managing Board]

Thanks, Dominik. Hello to everyone from my side for my first call. So what you can see here, from a free cash flow perspective, we are coming a little bit back to normalized levels on the last 12 months basis to EUR 1.7 billion. And as you know, we have the COPE program last year, where we have, let's say, saved EUR 1.3 billion of cash. And now we get a little bit of backswing in working capital, what we always said. And we had a tax relief due to corona last year, and obviously, we need to pay the taxes for last year in this year. So there's a little bit backswing coming. On the CapEx side, I have to say we are very disciplined on CapEx. So that's not the worry. It's just the working capital swing in taxes.And as you know, we have a strong focus on the shareholder value, and we have started the first tranche of the share buyback, and we have [ bought ] just EUR 220 million until last Friday, and we will continue the program until the first tranche is finished, and then we decide.We are very -- in a very comfortable leverage position, and we're able to reduce our net debt by EUR 0.8 billion. Now we are standing now at EUR 7.1 billion even though we came back to our regular dividend in this year and we have done the share buyback.We have received -- we've closed the U.S. West disposal, if you could have -- if you have read from [ Martin ] already, and we have received the proceeds in the first 2 days of October. So that will obviously help as well with our net debt at year-end, and that's why we have lowered the guidance below 1.5. You can do the math what that would be probably at year-end. And then due to the -- our strong balance sheet, we have decided to repurchase EUR 1 billion bond, which was due in 2023. We will do this in December '21. So these are the key financials.And now let's go to the next slide, that's Slide 12, to the business excellence program. And as Dominik outlined, obviously, we are not so happy with the price over cost performance in Q3. And obviously, the challenges in terms of energy cost will be there, especially for H1 next year. And it's not only energies, as well other costs for raw materials, freight, you name it. And obviously, we need to cover CO2-related costs.So therefore, we have proactively launched that program, and one part of the program is operational excellence. And you can split the EUR 150 million into 2 pieces: firstly, there's a piece, which is EUR 100 million, focusing on, let's say, plant performance. As Dominik mentioned, we had a plant in France in [indiscernible], which was not really running well. Obviously, we want to clearly catch that up next year. And we have identified 10 other plants, which were not running as expected, with significant impact on our result this year, which we have clear targets and result expectations for next year. So there, you come up with roughly EUR 100 million.And the other piece is EUR 50 million out of CapEx projects that we invest in how do we get alternative fuel rate up. We need to increase efficiency in the cement plants. We are investing a lot into maintenance. Yes, we want to see a clear return as well on those investments, and this will be targeted with around EUR 50 million.And Dominik, I'll hand over to you for the commercial side.

[Dominik von Achten, Chairman of Managing Board]

Yes. Thanks, René. And then obviously, the core essence of this program, it's not normal course of business. I think that's why we have a hefty focus on the commercial side. Because I've said it before, we have the clear mindset to change the pricing patterns, to change the pricing sequence, to also focus that we get a different product mix in terms of how do we serve the needs of our customers, also in light of the new CO2-reduced products that we have out there in the market. We've communicated that to you in earlier meetings. And we obviously also focus on different customer segments.The reason we do this, and I've been around the block for a while in this industry, the industry as a whole has not a great history in terms of being able to pass on cost increases. And that's why we said there is -- that's the warranted need why we say, [ guys ] -- we want to make them sure that this is not just an announcement next year on commercial because nobody has been short on announcements. The question is, do you really -- do we at HeidelbergCement really get it to the bottom line. And that's why we said we want a spotlight program for this. Minimum target of commercial, EUR 350 million. The sky is the limit on this one. And it's absolutely clear this will be tracked month by month, and it will also be part of all of our MBOs. That's very clear. We really mean business here and want to prove that we can change the historical pricing pattern that we also saw in HeidelbergCement once and for all, and that's basically what this program is all about.Then if you go to Page 13, turning to the transformational piece. You see the details of the projects that you already partially note from the past. We deliberately now put the volumes and also the timing in there so you can understand why we come to this 10 million tonne of CO2 reduction by 2030. And that is, I think, a very strong message indeed. Because one thing is clear, if you want to decarbonize clinker, if you want to decarbonize cement, there is no other solution in the magnitude of CCS and CCU, and that's why we go full speed on this. And absolutely, we'll come back, I'm sure, to your questions. It's clear that we do this in the clear focus to make the shareholder return on these things eventually. So yes, there is CapEx involved. But we will fight to the last minute to get as much funding for this as even possible. And I think we have not done such a bad job on those projects that have already received funding.Obviously, this then also needs to contribute to ESG ratings and also our reporting. We have significantly also, with the arrival of Nicola, stepped up our efforts in this respect. And bear with us, we will do obviously a focused Capital Markets Day in the first half of next year in order to come back to you on this, specifically also on this topic. And the first discussions I have there with Nicola absolutely go in the right direction. So I'm very energized by what I see there.Then on Page 15, our own digitalization on HConnect, to bring also some transparency to you on what we are doing and where do we see also the growth. Why we are confident that digitalization eventually will come to our industry is because we see already more than 18,000 monthly active users with a significant growth rate of 200%. That is steep in 12 countries. We had the coverage out there for 25% -- or 75%. We already now at 52%, that's up almost 20 percentage points. All basic functionalities of the product have been shipped to the 12 countries, and now it gets really interesting because we get into a real-time order management without any labor being involved. That's easier said than done, I tell you. If we pull this off, this is a significant benefit for our customers. And already now, the customer feedback on the product is very strong. So we wanted to be very specific on the progress on our own digital side.And then obviously, with all of this, I think we need to be mindful of the fact that, yes, we do digitalization also in our cement plants, and there are potentials that we do with our HProduce, no question. But from our perspective, the clear better ground is the customer-facing side, and that for us is more ready-mixed than it is clinker and cement because we have a large -- much larger reach, much larger customer base in that respect. So it is clear that we need to really build on our strong local market positions and our good technical and also management capabilities ready-mixed that we've developed over the years. And let's not forget, going back to the old Hanson and Pioneer days, there is a huge ready-mix heart in our DNA. So in that respect, I think we have a very good ground to stand on. HConnect makes this much more accessible at [indiscernible] finger basically now because we have this now real-time accessible, much, much different from the past. And on that, the key idea is now obviously to create new revenue and result potential.To give you a couple of specific ideas, if you talk about -- and that's also where it gets interesting, when you combine digitalization and sustainability with these new digital tools, with a combination of sensors in the plants, also on the job site, you can actually optimize the ready-mixed mixes for CO2, reduce your CO2 footprint by quite a dimension. And obviously, you can then also come to additional services that we obviously also want to be paid for, like recipe optimization, if we offer this -- if we offer this to others.And then the second idea on the efficiency side, where we strongly believe there is so much to gain on the interfaces and also on the labor intensity of our job sites and our delivery of the product, that we already see from the product on the digital side that we have in place internally, that there is a huge lever once you get that done -- that transparent, you can really optimize instantly. And you see, by the way, also the immediate effect because you have the real data transparency, and that can also be built out through sharing and collaboration platforms. So personally, we strongly believe that this a great base to jump on in ready-mixed. On the off-line business, traditionally a fairly low-margin business, here, we see some clear additional revenue potential and growth potential for the group going forward.And then on Page 17, you see our guidances. We are going to maybe stick to our guidance on the operational performance. We also stick to our guidance on net CapEx. We have upgraded and raised our guidance on ROIC. So clearly above 8% is now above 9%. I think that is a very, very strong message. I remember that this is one of the arguments that everybody said this industry will never -- more than 5%. We are now above 9% guide. So in that respect, I think we are very, very confident that we are on the right track there. That's, I know, for many of our investors, a key point. And then obviously, leverage, we want to be also again very transparent, we will come in below the 1.5. So that's also why we upgraded the guidance in this respect.I think with that, we'll leave it and go immediately to the questions now.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks, Dominik. Thanks, René. We have a number of questioners on the line. [Operator Instructions] Operator, you want to start the Q&A, please?

[Operator]

[Operator Instructions]

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks. The first question comes from Arnaud Lehmann from Bank of America.

[Arnaud Lehmann]

So my 2 questions are the following. On your business excellence program, I guess, the basic question is, do you need it in 2022 based on cost inflation to offset and protect your margins? Or do you believe that you're able to successfully execute it, that be enough to expand your margin?And related to that, you mentioned that you want to change the way -- is the business practice of the industry are moving. Do you need competitors to change their pricing strategy as well? Or could it work if you just do it on your own? And I'll stop there.

[Dominik von Achten, Chairman of Managing Board]

Arnaud, thank you very much for your question. I think it's both on pricing. So we count it as one. So in that respect, do we need the full program for cost mitigation? Or can we even expand our margins? Let's take one step after the other. For us, the first and key minimum is that we mitigate the fully -- the cost increase that we have seen, especially in Q3. So that's the first purpose of the exercise. Does this exclude that if the program goes well, Arnaud, that this also leads to margin expansion? One step after the other, as I said. Let's wait and see how it goes.On the second question, I ask for your understanding. What the competitors do, I cannot comment. For us, this is really also a key idea of the portfolio management. That's why we want to focus on those markets where we can shape our own destiny. It doesn't help me if I'm #3, #4, we -- market position, so our market story. That -- those are the markets we will continue to exit because there, you don't have, in our industry, from my perspective, and that's [indiscernible], I don't have the pricing power I need. So wherever I can shape my own destiny, I will push ahead.And in those markets where we are in a very strong market position, we already see this year. So that's the good news. That's encouraging piece for us. We already see close to double-digit realized price increases. And it works. So I would not sit here and tell you something you know, that we are sometimes a little bit conservative on these things. But I would not sit here if I'm not confident that we can clearly pull it off. And it is a step change, Arnaud, absolutely. But we shape, in HeidelbergCement, our own destiny, and we firmly believe we can.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks, Arnaud. The next question comes from Paul Roger from Exane BNP Paribas.

[Paul Barry Roger]

So it's obviously been a tricky quarter. Now I was just comparing your results with some of the peers that have basically pre-reported, and I think in a few divisions, and in particular, Western Europe and indeed in Asia, it looks like Heidelberg has faced more margin pressure than some of the others. I wonder what explains that or maybe you can give a bit more color. I didn't think it was anything company-specific, [ which should be ] [indiscernible].

[Dominik von Achten, Chairman of Managing Board]

Let me start and then René, I think, should -- just as a general remark. Well, thanks for your question, first of all. I think it's exactly the right one. As I was indicating for us, WSE and APAC were -- also if we compare it a little bit in life is absolute and life is relative, I fully agree with your assessment. There are a couple of reasons that René will share with you. One, I think to be fair, to mention upfront, both of them, especially WSE, go against a very high comparison base. I think we have to be a little bit fair. And also, if you look at it at the 9 months pattern, they are coming off 2 very strong quarters, especially when it comes to WSE. So you heard me say before, one quarter doesn't make a summer, but I think it's fair, and I don't want to paint it rosy. I think this quarter alone, we cannot be satisfied with WSE and APAC. And René, maybe you should give some more details.

[René S. Aldach, CFO & Member of the Managing Board]

Thanks, Dominik. Thanks, Paul, for your question. For WSE, I'll give you a little bit few details. As we said, we had a few productions problems in France and especially the associated costs with it. Yes, if you need to import the clinker to France, in these times where cost is high, that's a very expensive exercise. And then, obviously, you've seen the energy in WSE or in Western Europe was exploding in Q3. And yes, that shows you -- it shows you a little bit that we were a little bit short in energy for that quarter. And obviously, the CO2 in combination drives cost up like crazy in WSE. And in combination with the highest quarter we have done last year and the production problems, that's the result for WSE.For APAC, as Dominik said, markets with long and heavy lockdowns have a very significant volume declines in Malaysia and Thailand. And then as you know, Australia, Sydney, Melbourne, Adelaide were in lockdown, which is now over, and we see markets really picking up. So that's a little bit the volume side for APAC. And then obviously as well with Indonesia, India, with coal users locally, obviously, coal went up dramatically as well. So these are the 2 -- 3 reasons for APAC as well. I hope that answers your question.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

The next question comes from Sven Edelfelt from ODDO BHF.

[Sven Edelfelt, Research Analyst]

I would like to come back on the Keystone cement plant acquisition in the U.S. that has been canceled. If I'm not mistaken, the idea were to use this plant and to close one of your other plant close by, I don't remember if it was the Nazareth or the Evansville facility. So can you maybe update on your plan there on the CapEx side, especially through planning some plant modernization?

[Dominik von Achten, Chairman of Managing Board]

Yes. Sven, thanks for that question. I think that it's maybe not so easy for everybody to follow now because you need really the U.S. map in front of your eyes. But to answer your -- so just to help everybody a little bit, from our plant setup in the Northeast, we have our Evansville plant. We have our -- that's originally our [indiscernible] plant. Then through the Italcementi acquisition, there was Nazareth. Then we have -- close to Washington, D.C., we have Union Bridge. Then we have Glens Falls up in the North, and then we have to the West, Mitchell, and then a couple of other plants up in Indiana that came also through the Italcementi acquisition.Now to your question specifically, the one plant we would have closed down immediately is the Evansville plant. But to answer your question, are we going to upgrade the Evansville plant? No. The Evansville plant eventually will go, and this will be made up by the Mitchell plant to some extent, so we come from the northwest to serve the market. Nazareth has still some potential. I think that's one of the plants where we still, from René and my perspective, have also operational upside. So there, we really need to push the performance of Nazareth.It can also come from the East with Union Bridge. So in that respect -- and then obviously, we have the import option coming into New York City. So in that respect, we will not be limited by growth. And I think, let's also -- you've heard me say that before, one thing is clinker expansion. But under the new regime of CO2 for us, cement and concrete expansion is the much more meaningful perspective. So yes, we were a little bit sad that this acquisition did not work. But hindsight, we would have added significant clinker. I think there is an interesting play that we are working on to rather expand on the cement and concrete side, not so much on the clinker expansion.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks for your question, Sven. The next one comes from Elodie Rall from JPMorgan.

[Elodie Rall, Research Analyst]

Welcome to René. I ask a question on price/cost, and since no one asked yet. So obviously, deterioration in Q3 with the price/cost spread at minus EUR 176 million versus Q2 at minus EUR 66 million. So you've taken some cost action to mitigate that. But what can we expect into Q4? Could it be flat or already in your view between the cost action and the price increase? And does that mean that we could expect a like-for-like EBITDA for Q4 to be slightly show positive?

[Dominik von Achten, Chairman of Managing Board]

Elodie, let me start, and then René, chip in a little bit on the price over cost. I think, first of all, maybe -- just to be sure, as -- for us, price over cost is based on net sales price. And that means that the distribution cost is included data. And for us, with the big aggregates business, this goes very quickly that your distribution costs go up, combined with the effects that René has described, So the negative impact that you see here is based also on the fact that we picked the net sales price in that respect. So just to make sure that everybody understands the definition.Now absolutely, Elodie, as we said, the price over cost was -- can be further improved into Q4, both on the pricing side and on the cost side. Now you know that the industry has no history in raising prices in October, November, but we have a couple of countries where this actually worked. I have one specific country in Europe in mind, where we have now until year-end, raised the prices in the magnitude close to double -- sorry, well double-digit percentage points, and I think that is very encouraging to see. That will even happen October, November. So we are fighting hard market by market, customer by customer to get this implemented. So in that respect, yes, Elodie, we should see some additional pricing movement.But is this going to fully compensate the cost in Q4? No. This is mission impossible because the cost position, you know how -- where the costs sit on energy, on -- and on freight. We are staying short in our forward buying. I think we'll come to that. But I think it's very important for you to understand. For us, there is a difference between hedging and forward buying, and maybe that also was mixed up a little bit in the past. We don't do any financial hedges. So we don't risk or speculate on the capital market in terms of financial hedges.What we do is forward buy. But it's no secret that we are very short in forward buying. And that's also, we say this very openly, for the last 10, 15 years, in summer, all of the commodity prices came down, and then we were able to follow that, our forward buying policy. This year, as you all know, this has not happened. Rather the opposite. And I think it's very clear [ and that ] we are clever. We have to be clear. We stay short. So one mistake we will not do is to now say, "Oh, coal was at EUR 275. Now it comes down to EUR 200. Let's buy for the next year." That's also nothing -- we work from doing stupid things. So in that respect, I think that's important for you to understand, Elodie. But René, do you have anything to add?

[René S. Aldach, CFO & Member of the Managing Board]

No. [indiscernible]

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

The next question comes from Cedar Ekblom from Morgan Stanley.

[Cedar Ekblom, Executive Director & Equity Analyst]

I've just got a question on the commercial improvement that you're targeting next year, the EUR 350 million. I'm a little bit confused on the communication here because if I look at that EUR 350 million, it's only about 2% of 2021 revenues, there and thereabout. And I know that the top end is open and that you could save or improve by more than that. But why are we even putting a number on this, right? Like I get the point on the cost cutting, put a number out there, talk to your teams about what they need to do more efficiently. But on the commercial side of things, why is there a number being put on this? Why aren't you just looking at what's happening on the cost side and saying we need to keep our margins flat at best and just looking at the commercial discussion in total rather than trying to isolate a specific amount associated with new initiatives?I just -- I don't understand what the approach is internally. Why don't you just say to your guys, "Costs are going up. You need to push pricing to offset it at a minimum" instead of putting numbers around it? Because obviously, the cost side continues to be variable, right? That EUR 350 million number might need to be a lot higher. So just explain to me how the local guys or commercial people are actually being incentivized, guided, et cetera, to deal with what costs are happening, please.

[Dominik von Achten, Chairman of Managing Board]

Yes. I think Cedar, this is EUR 100 million -- your question or the EUR 1 billion question, I think you're right. And I think it's a very fair question. And indeed, we have also wrestled here internally. I'd say that it's very transparently how do we do this. We've discussed this for quite some weeks internally. We've been pushing pricing already at the beginning of the year. So it's not like we need this program. But we -- from our perspective, as a company also, we have a strong record to do operational efficiency programs and deliver on them.But -- and I say this also very self-critically, the industry, in general, and also HeidelbergCement has not a history of price increases in the magnitude of 5%, 10%, 15%. Let's face reality. We sit here -- and where other industries come up with price increases, 20%, 30%, 40%, 50%, 60%, and everybody says, "Yay, that's great. How did you do that?" And that's the reason also, Cedar, very specifically why we raised this program, both internally and externally. Because we need to set the clear message, also internally, to say, "Guys, the past behavior of 5, 10, 15 years of 2%, 3% price increase must and will be over. You will feel it also in your pocket if we don't get this done." We've done the portfolio mentioned. We are in the market position to get it done. So it's -- we need a clear step change and also a mindset shift.I'd say this also in our own guys on our customer base to be willing and able on the customer side to accept price increases of double-digit percentages, and the same is true for us internally, to have the trust that we can pull this off. And in the end, Cedar, it's all about delivery. The announcement has never been a problem for us. The realization is key. And that's also why we raised the specific program. You are right, it's the first time for HeidelbergCement that we put that focus on commercial. But we feel this is in the last 10, 15, 20 years, probably the biggest cost explosion that we had, and we now need to make sure, together with the CO2 topic, that we once and for all change the pricing behavior.And how do we do this? We obviously fundamentally train the teams locally. We give them all the arguments that we believe are important. They continue to have all very good arguments. We help them also with educating the customers why we need that change; why the product has a different profile now; why, down the road, we need the investments to do -- to decarbonize the industry. So there are a lot of arguments. And to be fair, Cedar, the -- in many markets, we get very encouraging feedback that also our customers understand that we need to move.So I'm confident that we can pull this off. We start with a number of EUR 350 million. Where we then end up? Let's wait and see. If you do the math that you are doing, I agree with you, you could argue, that may be a little bit conservative. Are we only announcing a price increase to stay in your math of 4%? No. The announcements in the specific markets are massively higher than 4%.

[Cedar Ekblom, Executive Director & Equity Analyst]

Yes. Okay. I get it. I mean it's just a bit confusing because if cost [ inflation ] [indiscernible]

[Dominik von Achten, Chairman of Managing Board]

No. It's fine. It's a fair question.

[Cedar Ekblom, Executive Director & Equity Analyst]

Yes. I mean EUR 350 million is not going to be enough if cost inflation continues. I understand why you say to the team, "Keep your margins flat at a minimum" instead of putting numbers around it. I understand that you're trying to change the pricing [ discovery. ] And...

[Dominik von Achten, Chairman of Managing Board]

Yes. [indiscernible]

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

The next question comes from Kepler Cheuvreux, Luis Prieto.

[Luis Prieto, Head of Construction and Building Materials]

If I understood correctly, you mentioned that in some geographies, you're already encountering pricing pushback from public authorities. Could you provide some visibility on what geographies we're talking about? I think you mentioned Eastern Europe. But is there any other geography we should be concerned about? And in what form is that pushback? Is it regulatory? Or is it just indication not have increased prices?

[Dominik von Achten, Chairman of Managing Board]

Yes. This is only in very selected markets. I made the comments only in Eastern Europe. That's a little bit -- some governments, they are in an insight with the EU. I don't have to tell you. You follow that also in essence. And there, you have some political arguments. Sometimes if we try to raise prices in a certain magnitude, then you get a reaction from the nationalistic government to some extent. But that's a very, very low number of selected countries. This is not a major issue because in free markets -- that's the free market.And it's more on us. I don't want to blame anything on the governments. It's on us to make sure that we deliver these price increases. This is only a very, very small number of countries, less than one hand of fingers. So in that respect, we should not overestimate that. This should not prevent us from delivering the program.

[Luis Prieto, Head of Construction and Building Materials]

So you think there's no risk that this spreads to other major markets in other regions?

[Dominik von Achten, Chairman of Managing Board]

No, we don't.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Next line is Robert Gardiner from Davy.

[Robert Gardiner, Industrials Analyst]

So I want to just ask on freight and logistics costs. So it's easy enough, just to some degree, to track energy costs in the business. But logistics are a little bit more difficult. So I was wondering if you could give us maybe the scale of the cost inflation you're facing in freight and also communication of where you're importing and where that cost escalated rapidly in Q3. You mentioned France already. Africa is obviously one. Is the U.S. a problem in terms of landed cost of clinker? Any color on that would be great.

[René S. Aldach, CFO & Member of the Managing Board]

Okay. Thanks, Robert. I will take that question. And let's talk about import and freight first, yes? On a quarterly basis, Q3 over Q3, our freight cost -- pricing basis for freight went up probably EUR 20 million, yes, which is a significant amount. And in addition, what you have to consider is we had high demurrage costs, especially in Africa. As Dominik said, a lot of port congestions in Ghana and in Togo. That added probably another EUR 10 million. So you're talking EUR 30 million from that end.And then obviously, you have your first remark about logistics, yes? We have a significant impact on logistic costs in the quarter versus last year, which was around EUR 390 million, due to the issues we faced in our plants, where we need to ship product here and there. Freight costs went up. [ Through ] cost went up for the freight and stuff. So that at least are the 2 answers to your questions.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you. The next question comes from Matthias Pfeifenberger from Deutsche Bank.

[Matthias Pfeifenberger, Research Analyst]

One question from my side. So obviously, you named a lot of the reasons for the negative price/cost, and we saw a positive price/cost from one of your main competitors. And I recall your retired CFO and seeing that. Obviously, you're waiting a bit over summer what the prices will do and then load up on the forward purchases. And today, you're accentuating the fact that you're still short versus your total refund. So have you maybe hesitated a bit by like you bought last year? Did you buy less, and hence, you kind of incurred the whole spike in the energy prices in the third quarter?And what's your position on that going forward? Will that be more consistent? Also was it -- by the way, I think there was a CFO change, so maybe that has played into it? So a bit more color there on the energy side. And maybe also you could quantify the effect on the quarter, like [indiscernible].

[Dominik von Achten, Chairman of Managing Board]

Yes. Let me do the first and then qualification of any [indiscernible] because you're right, indirectly also ask -- or directly ask the question around the CFO. Now to be very clear, we have, up until now, not changed our forward buying policy. So we have corridors that we walk in, and we have always shared that with you. It's mainly going 1 year out. So we are not on 3-, 4-, 5-year corridors. And that was always the case, and that has not changed.When we talk about staying short versus staying long, it means we are going at the high -- we are at the higher end of the corridor, almost -- we lock on basically within that 1 year, [ and ] we are on the lower end. May there be an effect that because of the energy costs not coming down now in the summer that this policy has reacted differently to the past, making -- that could be a small effect or an effect in Q3.But was there any deliberate change on that policy because of the CFO change? No. Clearly not. That's not the case. But we also feel our responsibility that we don't -- there is no need to get into any hectic decision on these things. This is a volatile situation for the industry, and the one thing we're not going to do is now lock in and change our policy on these deviated levels now, definitely not what we will do. Maybe, René, you give some color on the impact in Q3.

[René S. Aldach, CFO & Member of the Managing Board]

Yes. So for Q3, the price inflation for energy is around EUR 130 million, which is 37% up versus the last quarter. And for the first 9 months, it was [ EUR 70 million ] for [indiscernible] cement, which is 17% up versus last year. So those are the numbers [indiscernible].

[Dominik von Achten, Chairman of Managing Board]

The majority is [ sitting ] in Q3.

[Matthias Pfeifenberger, Research Analyst]

Everything comes from the last Q3.

[Dominik von Achten, Chairman of Managing Board]

Yes.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Next question comes from Harry Goad from Berenberg.

[Harry Goad, Analyst]

I got a question on buyback, actually. If I look at what you've done or you announced today, the sort of EUR 217 million, that very roughly looks at a run rate of about EUR 70 million a month. Now I'd say things can change, if I extrapolated that every year, that's sort of close to EUR 850 million in a year. So very rough maths, but it sort of looks like at the current run rate, you'll be doing nearly the EUR 4 billion by the end of next year. Is there any reason to think that, that logic is wrong?

[Dominik von Achten, Chairman of Managing Board]

We have -- as René was saying earlier, we have announced we're going to do this in 3 tranches, each around EUR 300 million, EUR 350 million. Now Harry, to your point, again, one step after the other. I know we are all impatient, and we all want [indiscernible] is done, but we take one step after the other. So let's get this first tranche done, also be fair to us and also specifically to René. For us, [ by the way, ] this is the first time ever we do the share buybacks. There have been some discussions around treasury shares and everything back and forth. So let us do this first tranche first, then let's analyze how it went. Let's see whether we pick the right partner to do it, how it will execute it, what's the impact of it, what can we learn from it, and then we take the decision on when the next tranche will come. But we did keep the corridor open, the latest we will have executed all 3 tranches. So that's -- so you cannot do the full math.There is no -- because also the -- I understand the way the bank operated, they take advantage of certain share price levels. So there are months where we are much higher, and then there are months we are much lower. So I think it's very difficult to do the math that you were indicating.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks, Harry. Next one is Yassine Touahri from On Field.

[Yassine Touahri, Founding Partner]

So just a question on the price/cost. On the cost side, could you give us a little bit the amount of cement and clinker that you are importing in the U.S. and the U.K., maybe excluding the Californian assets? And on the -- because we see such a big increase in freight rate, do you have -- have you made the calculation of how much price increase in 2022 will be visible just based on what you have already announced throughout 2021? So let's say, like if you're not doing anything, what would be the price effect on 2022, assuming that the price increase that you have already implemented are sticking?

[Dominik von Achten, Chairman of Managing Board]

Okay. Let me start, and then René jumps in on the -- Yassine, first of all, thanks a lot. I think on the freight side, René was sharing the figures. I think that's fine. In the U.K., you mentioned the U.K., we are not big importers in the U.K. That's not -- we have 3 very well-performing plants right now in the U.K. So the U.K. for us is not a big import.In -- obviously, in North America, that's different. It was always clear that we are -- we have a significant amount of imports into the North America -- in North America. And that is true for the West, but it's also true for the Northeast, mainly through our import terminal in New York City and in Pennsylvania and also in the south, in Houston and other small places. So I think those for us are the freight pieces outside of Africa.Because as René was mentioning to you, part -- obviously, the freight impact in Africa is quite significant because we are importing -- pick up in large volumes into Africa. By far, just to give you the magnitude, by far the biggest amount. So in terms of impact that René was giving to you, 50% of that or more comes out of the African business. So yes, we are enjoying a very strong African business, but in a freight scenario, where freights go through the roof to historical highs -- obviously, these are short term in Africa, but this is nothing that's sustainable. That will also readjust itself over time.

[Yassine Touahri, Founding Partner]

When you're mentioning 50%, have you -- do you have an order of magnitude of the volume in million tonnes of clinker and cements? Is it like 4 million, 5 million tonne a good approximation of the total that you're importing?

[Dominik von Achten, Chairman of Managing Board]

The total volume, I'm not -- I think it's a little bit below that. I don't have the numbers immediately on my head. But it's clearly single -- lower single-digit million volumes. It's not like this is -- it's significant if you had freight cost increases but -- like this. But it's -- I would -- but let us seek the figures, and we will come back to you, okay?

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thanks, Yassine. The next question comes from Nabil Ahmed from Barclays.

[Nabil Ahmed]

I actually got 2. Sorry for that. But the second one, I promise you, is very short and very, very, very easy to answer. So assuming you are successful with price hikes to cover cost inflation next year, where are normalized margins? I mean broadly speaking, your back to 2019 margins in Q3. Is that how we should think about the company profitability going forward? And also, I was wondering if you could give us some idea in terms of revenues and EBITDA contribution from the U.S. West operations you just disclosed.

[Dominik von Achten, Chairman of Managing Board]

Yes. Let me take the first, and René then does the second. Nabil, it's volatile time, no question. We had very, very strong margin development by last year. So I think you saw our targets that we gave out at the Capital Markets, 300 basis points increase until 2025. I know everybody was already celebrating. And I always said, guys, we are in the long run here. The one quarter positive side does not make one summer.So can we take the margin jump last year, middle of the year as [ safe and continuing? ] No. But are we clearly trying to expand our margins from the 2019 level? Absolutely. The fact that we are now going back to 2019 level is nothing that we celebrate. It's clearly not good enough. We stick to our guidance and target that we want to structurally improve the profitability of the company. We are well on our way. There are bumps in the road for a couple of quarters. That's what I indicated very early in this year, and there may -- there will be maybe for a couple of quarters to come. But I think we are there to improve the margin structurally 300 basis points or more, and that remains our clear target.

[René S. Aldach, CFO & Member of the Managing Board]

So Nabil, to your second question, the U.S. West impact on our numbers. So year-to-date, September, U.S. West is around -- revenue around EUR 580 million, and after OBD, around EUR 75 million.

[Dominik von Achten, Chairman of Managing Board]

Euro. Euro.

[Nabil Ahmed]

And that's a year-to-date number? That's not -- that's on a full year number, right?

[René S. Aldach, CFO & Member of the Managing Board]

That's a year-to-date September because obviously, we are not owning this anymore.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you. It looks like we're going to be on time today. We have 3 more questioners in the line. The next question comes from Yuri Serov from Redburn.

[Yuri Serov, Research Analyst]

Just going back to your commercial push, if I may. You're planning to increase prices, you're talking about double-digit increases, although mid-target on this suggests 2% increase. But nonetheless, you're trying to push the prices. We've been around this industry long enough, and we know that it often happens that prices go up and customers start looking for alternatives. And the companies who try to push the prices ahead of the competitors often have to sacrifice the volumes. What's your thinking on that? How much are you prepared to sacrifice the volumes? At what point will you say, okay, well, that's too much and we should not push the prices anymore, and we'll stop doing that?

[Dominik von Achten, Chairman of Managing Board]

Yes. I think it's a very fair question. It's always -- I would argue not only in our company, not only in our industries. Everywhere, you have a correlation between pricing and volumes. I think that's the normal situation. And that brings me back to the earlier point, where I think the portfolio management comes in. Personally, I think, in our industry, the question of your owned market position has a significant impact on your pricing power regardless of the competition.And that's why I'm so adamant about the fact that -- owned market position is everything -- obviously, does the market consolidation or the market structure also play a role eventually? Maybe. But if you start from a bad owned market position, your pricing power very limited. So the start of this whole discussion was [indiscernible] exercise that we need to continue to do in order to improve our local market positions. And I'm not talking about market position in Germany, I'm talking about the market position around Frankfurt, Stuttgart, Munich, and to make sure that we have good market positions because you know very well that the product doesn't travel much.Now if you want to push prices in a significant way, do you at some point also need to sacrifice or run the risk that there is volume decline? Yes, maybe. But I would say for now, the volume development on our side is good. So let's wait and see how this develops. We will obviously watch that very carefully. But I have full trust in our local management that they can strike the right balance. They understood that there is a correlation between pricing and volumes.But I think to be also clear, Yuri, if you want to move prices in a significant way, you also have to be both a little bit and we clearly need our customers with us to understand why we do this. And as I said, we have good indications that also our customers, to a large extent, understand why there is now a need for a structural price change.

[Yuri Serov, Research Analyst]

But just to check, and I'm not expecting that you will give us numerical indications. But I just wonder, when you tell your people you're going to push the prices and use your market position and understand how to best engage the customers, are you giving them the guidance as to if it impacts your volumes by this much new stock? Or will it be panic decision-making, you have to launch market by market and decide as things evolve?

[Dominik von Achten, Chairman of Managing Board]

Absolutely. I think to give a global message on this, we don't do because we know that the markets are so different, a; and b, we know that, hopefully, we have people on the payroll who are much smarter than René and myself in managing their local markets. They know them very well. So we have all the trust in the world that they will do the right things. But we, and that's why we raised the program. We wanted to make it very clear that they have the full backing from the group to say, "Guys, now is the time to also ask the customers for a significantly higher increase," as they have done in the past. That's where we wanted to close the ranks and make sure that everybody understands that this is the target. But in terms of execution, we have all the trust in the world that our local management will do a great job on this.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you, Yuri. The next question comes from Gregor Kuglitsch from UBS.

[Gregor Kuglitsch]

So maybe I'm going to be cheeky, too, because it doesn't sound like we're going to be in for round 2. So I'm going to ask a couple of questions then. So the first one, could you just...

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Absolutely not.

[Gregor Kuglitsch]

So I'm looking at your slide on the carbon capture, and obviously, we've known about Brevik, we've known about some of the others. Now that you're kind of closer to the point of implementation, can you just give us a sense of the costs? So essentially the sort of cost of abatement, I don't know if there's sort of a single figure or number that you've got in mind, and maybe it varies by the 4 projects. That would be sort of my first question.And the second question is, and maybe rounding it all up a little bit. I mean you say, I think, in your outlook statement, you expect a good Q4. I don't know if you care to elaborate on that. But more broadly, do you have any kind of comfort or do you simply say it's too early to say that you can hold next year's EBIT or hold EBITDA next year at the very least? So flat EBITDA? Or do you think it's too early to call that?

[Dominik von Achten, Chairman of Managing Board]

Gregor, let me briefly start, and René should jump in especially on the Q4 and also on the '22, although '22, we can do this very short [ or two. ] The CCU/S costs, you're right, Gregor, we have advanced quite substantially. That's why we know the timing a little bit, and we know the volumes. But we know not for our projects yet the exact costs either in CapEx nor in OpEx because you know that these projects go to a very rigid pre-feasibility and feasibility study in order to make sure that we don't miss anything. And also, let's be realistic. We want to also realize a learning curve, all of these projects.So what I don't want to do is, if I run around now with the knowledge in the group and say, "Can you please put a number on this?" [ and ] this number will be too high. Because we cannot implement learning from one project to the other. So we now learn hopefully very quickly in Brevik, come up -- flying out to Brevik tonight right after this call with our head of state. So we'll move in that respect, and that will come to fruition in '24. We are very confident that we can pull this off together with our partners, and that will be, as you all know, by far, the first project in a meaningful.And from there, we do this also to learn for the other projects. So I'm refraining deliberately a little bit from locking into high numbers because then you don't get them down anymore. So bear with us, we will bring some more clarity to this in the Capital Market Day that we announced for next -- for the first half of next year. But this was, I think, the first step to show that we really want to target a massive CO2 reduction before and until 2030.Now on the Q4 and '22. Maybe just very simply, '22, no comment at this point because, sorry, we don't even have finalized our operating plan. René and I for the next 3 weeks, 3.5 weeks will go through all the QMMs and the operating plan for next year. So bear with us, and I ask for your understanding that we are not shooting from the hip on expectation of '22. The one thing we can say, the demand side is intact [indiscernible] at this point, any significant bumps in the road on the demand. And so I think that's good.And on Q4, it's true what we said earlier. We confirmed our guidance. Is it without any risk? As all everything in life, COVID-19, winter hits early, energy costs do another crazy loop. Nothing is without risk, but we fight to the last minute to really get to that guidance in all dimensions. And I said earlier, are we facing still cost challenges? Yes. Are we addressing them by the minute? Absolutely. Do we see the first price effects? Yes. But do we get to a positive price over cost in Q4? No. So in that respect, I think that's the best estimate we can give to you.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you. There are 2 more questions. Now next one from Stephan Bonhage from Bankhaus Metzler.

[Stephan Bonhage, Research Analyst]

Maybe you can share a little bit your view on the free cash flow development in the coming quarter, considering the deep increase in cost. Are you confident that you can keep the cash conversion rate above 30%, which would be in line with your 45% target? And if yes, what would be from your point of view, currently the best use for that cash? Even more debt reduction, accelerating the share buyback or acquisitions? Maybe you can give a little bit light on that topic.

[René S. Aldach, CFO & Member of the Managing Board]

Okay. Thanks for your questions. On free cash flow, obviously, it's difficult to predict now the Q4, yes? But we still -- we'll have a good free cash flow conversion, yes? We will reach our targets, what we have announced for free cash flow conversion that we are pretty confident to achieve.And your second question, what do we do with the cash here. We will -- after [ a year, ] when we know our numbers, we will see what we do. What we have announced, what you see, we will pay the bond back in December. That's EUR 1 billion, let's say, gross debt reduction, yes? And then what we said, we will evaluate every options. Clearly as well, we want to grow the company still, yes? Everything is on the table. And then we come with specific targets, what we want to do the next year.

[Dominik von Achten, Chairman of Managing Board]

Yes. Stephan, we still -- in that respect, we stick to what we have announced together in 2020, and that's what René was saying. We stick to our capital allocation. You know this famous waterfall, and I think we've ticked many boxes in that waterfall. We've also said that our CapEx will be within our guidance. So in that respect -- and then we have the share buyback that we have already embarked on. And then we have a couple of bolt-on acquisitions that we have in the pipeline in our -- absolutely with -- in line what we communicated in the framework of beyond 2020. That is still valid.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Okay. Christian Korth from HSBC, you can ask the last question today.

[Christian Korth, Analyst]

I have one question on the U.K. And I just wanted to ask if you could maybe describe a little bit how the business is developing there, things such as volume growth in the third quarter, price over cost development. And there's obviously a lot of news flow on things like driver shortages and potentially shortage of materials. I just wanted to ask how you're coping with these challenges right now.

[Dominik von Achten, Chairman of Managing Board]

Yes. Christian, I would argue, the challenges in the U.K. are there. That's clear. The things that you are -- that you read in the papers are valid, that's clear. But I have to give kudos to our local management. They are doing from our perspective, an excellent job and to -- just not to be too specific, but I would argue, above average of the group at this point. That's true for managing the cost and also realizing the prices. So I think in that respect, we are on the right track in the U.K.Thanks, Christian. Thank you. Thanks, everybody.

[Christoph Beumelburg, Head of Group Communication & Investor Relations]

Thank you. And this just gives me the opportunity to highlight a couple of conferences that we will be attending on the 9th of November, that's next week, the UBS European Virtual Conference. We're there at a fireside chat. Then we are at the Carbonomics conference of Goldman Sachs on the 16th of November then the Bank of America conference on the 30th and the Golden Sachs Conference on the 1st of December. And then the 2nd of December, we [ wrap up the stage, ] Societe General Preview -- Review Conference. So hope to see you all around, and we stick around as IR team for your questions. Thank you very much. Have a great day.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.