Heidelberg Materials AG

XMUN:HEI

Earnings Call Analysis

Heidelberg Materials' Strong H1 and Upbeat Outlook

Heidelberg Materials experienced a robust first half in 2023, with revenues growing by 5% and RCO surging by 18% like-for-like in the second quarter. Amid significant volume pressure, the company successfully enhanced its margins and demonstrated a positive price over cost ratio across all regions. In line with previous commitments, the company launched the third and final tranche of its €1 billion share buyback program. Heidelberg Materials also continued to advance its sustainability efforts, reporting a 2.4% reduction in CO2 emissions. Building on this strong performance, management has confidently revised the full-year outlook upward, projecting an RCO between €2.7 billion and €2.9 billion for 2023.

Firm Financials and Cash Flow Improvement

The company has demonstrated an enhanced cash flow, improving by approximately €150 million from the previous year, influenced by a positive effect from working capital change of €140 million. The year-to-date cash flow stands at minus €384 million, against the prior year's minus €531 million, demonstrating a solid rise in cash retention. The cash conversion rate has seen substantial growth to 37% over the last twelve months, up from last year's 21%. The company expresses confidence in reaching its announced targets by year's end, backed by a sturdy cash flow expected in H2.

Debt Levels and Environmental Commitment

The company has effectively managed its leverage, reporting a healthy level of 1.67%. This financial stability comes after considering factors such as free cash flow reduction, acquisitions, disposals, shareholder returns, and accounting for leasing. Environmentally, the company is making strides in reducing CO2 emissions, achieving a 2.4% reduction to just under 540 kilograms per ton of product and aiming for an ambitious industry-leading 400-kilogram target. A sizeable portion of the cement portfolio is now below the benchmark for sustainability, representing a conscious push for a greener portfolio.

Price and Cost Dynamics

The company delivered €520 million in cost savings during the first half of the year and is on track to maintain this positive trajectory for the second half. Crucially, the target of achieving a 22% margin by 2025 remains intact despite the pervasive inflationary climate. This points to a disciplined financial approach and a focus on maintaining margins amidst challenging economic conditions.

Balance Sheet Health and Capital Allocation

Management underscores the robustness of the balance sheet and cash generation capabilities, suggesting confidence in executing the third tranche of shareholder return via buybacks. The company is also seen evaluating further capital allocation opportunities, with potential expansionary activities signaled in Indonesia.

Energy Cost Stabilization and Working Capital Management

The tumult of volatile energy costs has subsided, with expectations for flatter costs as compared to the previous year. This is a relief after a 6.5% increase in cost inflation in the first six months, primarily due to energy prices. Moreover, there is an objective of zero cash outflow from working capital, which would mark a sharp turnaround from the previous year's €800 million outflow, aligning with a strategy aimed at cash preservation and operational efficiency.

Operational Improvements in the Pipeline

The company expects significant improvements in the second half of the year, particularly from the Mitchell plant, which is now performing at a more stable and efficient level. Management has indicated that this upturn in performance from such entities will be a considerable contributor to the margin improvement.

Strategic Focus on Organic Growth and Acquisitions

Committed to a strategy that hinges on organic growth, the company is positioning itself to benefit from making its cement business more attractive through de-carbonization and other innovative offerings such as 3D printing. The management's expectation is to supplement organic growth with acquisitions aimed at bolstering market positions in core markets.

Confident Outlook for 2023 and Pricing Stability

The management team expresses confidence in the company's performance for the remainder of 2023 and maintains a stable outlook for pricing, not expecting it to fall amidst competitive pressures in European markets. They also note a trend of customers valuing their decarbonized and value-driven product offerings.

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Heidelberg Materials Half Year Financial Report 2023. Throughout today’s recorded presentation, all participants will be in a listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Mr. Christoph Beumelburg. Please go ahead, sir.

[Christoph Beumelburg, Director, Group Communication and IR]

Thank you, operator, and welcome to our first half year results call. Great that you all here. It’s been a busy day for all of us, also for you with a lot of companies reporting. So -- we make it brief.

Without further ado, I hand over to Dominik and Rene, who is in the room here. Over to you, Dominik.

[Dominik von Achten, Chairman]

Chris, thanks a lot. Hello, everybody, on the call. Thanks for joining. I would suggest we go fairly quickly through the slides. You have seen the slides, and then we’ll get to your questions if you don’t mind.

So overall, for us, a strong operational performance in Q2 and also H1 of this 2023. Revenues up 5%, RCO up 18% like-for-like in Q2. Price over cost was positive despite significant volume pressure. We were able to increase the margins. So in that respect, all regions are well on their way. We have initiated the third tranche of our share buyback announced back in 2021. We always promised we’re going to go for €1 billion in 3 tranches, and here we go, we stick to our promise and start the last tranche of the share buyback program in these days, and we will conclude it at the latest by end of this year.

On the sustainability side, we make very good progress, 2.4% further reduction on CO2 emission, and I’ll come to some more details in a minute.

And then last but not least, drawing a line under all of this. We are very confident for the second half of the year. And that’s why we significantly upgraded our outlook to €2.7 billion to €2.9 billion RCO, for the full year of 2023.

If you then go to Page 4 of our presentation, you see the operational performance. And I think it’s fair to say the record -- it’s a record Q2 quarter for us in EBITDA and EBIT performance. So beyond €1.2 billion EBITDA and almost €1 billion EBIT for the second quarter, also like-for-like revenues were up 5%.

For the -- on Page 5, if you see the full year, it’s even better. Operating EBITDA hit almost €1.8 billion and operating EBIT almost €1.2 billion, 38% up like-for-like to prior year. And you see also the comparison to 2021, which was a very -- which is a very strong comparison base. I think it shows you a little bit to put these numbers into perspective that I think it’s fair to say this was not a bad start into 2023.

Q2 operational performance on Page 6, you see also a driver for this. Clearly, there is a volume decrease, especially in those markets that are heavily exposed to residential, mainly the mature or developed markets but we stay very focused on managing both our [variable cost] and our fixed costs and obviously also getting the right value for our products. So the price of our cost [bar] remains very positive. That then leads to that significant increase of 18% like-for-like in the result. And it’s pretty much the same picture on Page 7 for H1.

If we then go to Page 8 into the regions, you see the details for North America. Also North America is up in RCO versus prior year and also slightly above a good 2021. So we are also in North America well on our way. I would say there is still some upside from our perspective for the second half. You know that we are ramping up our new plant in Mitchell, which we have switched over during Q2. And I would say, again, this plant is running well, and we are very confident that it will be fully on stream in the second half for this year.

Western & Southern Europe, I think, continues its good and strong performance nicely €214 million and [21%] RCO, then almost €250 million and now almost €320 million. So I think we are moving in the right direction in WSE. Also notably, the strong margin development, a significant step-up in RCO margin on the back of a good compensation of residential decline, but good infrastructure work, good industrial work. And again, all countries, and that’s important for us to contribute to this good results development.

If you then go to NEECA, NEECA is stabilizing on a very high level, around the €200 million mark for [RCO] margin, again above 20%. And that, I would say, not easy market development volumes are coming down in some markets. We have balanced very well the price cost and volume balance in all of the markets in NEECA, so we are very confident that also for the next half year, NEECA will perform on a high level.

APAC, you know that APAC has been a little bit of a disappointment for the last couple of years because the emerging markets did not really get going. Also, our Australian performance level was not exactly where we wanted it to be. I think we’ve really worked with the local teams on improvement. And you see here also the turnaround versus prior year. So significant RCO improvement versus last year, almost getting close to the level of 2021. Also margin is recovering. On the back of a stronger performance, especially in Indonesia, which is a very important market for us, you know, and also on a better performance in Australia, despite the fact that the housing market in Australia is pretty much underwater. A lot of construction -- housing companies also going belly up. So I think in that respect, Australia is performing on a very good level despite difficult market situations.

Other parts of Asia also stabilizing. India coming back from lower levels. China remains difficult, but the other markets, Thailand, Malaysia, Bangladesh, moving in the right direction. High hopes for APAC for the second half, I think there is -- the trend should be our friend in APAC.

Africa coming down a little bit on RCO in €level from past performances. But I think it’s fair to say that there is a significant currency impact in there. Some of the -- especially sub-Saharan currencies and the Egyptian pound is -- they are under devaluation pressure. I think things are stabilizing now in Q2, Q1 was very bad in that respect, but now we have a little bit of, a little bit of a stabilization. So in that respect, in local currency, the picture doesn’t look as bad. There is volume pressure in some markets, but overall, I think the management team in [indiscernible] is doing a very good job and stabilizing the margin around the 20% mark, and the RCO should also improve in the second half because we’re growing against a fairly weak comparison base in last 2 year’s second half.

With that, I would say, Rene, you take the financial side.

[René Aldach, CFO]

Thanks, Dominik. Hello, everyone, as well from my side. So let’s go to the financial slides. Revenue as Dominik has already discussed.

Clean earnings per share go up 16% to €3.64. This is excluding the additional ordinary result, I guess, it’s a good performance as well. We have, as you know, the share buyback contributes to lower number of shares. So that has affected as well. Net debt reduction, very solid free cash flow, we come to within a second, we reduced net debt by €100 million versus last year June and then share the return is around [€700 million], which is dividend to the mother company dividend to minorities plus share buybacks.

Let’s go to the next slide. That’s the full P&L. Let’s quickly go through below RCO. You have the additional ordinary result [indiscernible] €103 million versus prior year. Let’s talk to 2 main topics. Last year, as it is on the slide, we [indiscernible] part of our assets in Russia was €90 million. And this year, we had some book gains from financial asset sales. As you know, we have sold our joint venture part in Georgia. So [leaving] a positive effect of €40 million last year, minus [indiscernible], to plus €100 million. Financial results, you see last year, minus [€20 million], [indiscernible] minus €100 million, minus €20 million after 6 months for the company is very extraordinary low here. And here, we had a big one-off.

As you know, the interest rates went up steeply last year and discounting of provisions and gives you a positive effect of nearly €50 million last year, which we didn’t have this year, obviously. And then as you know, the interest rate environment has a little bit worsened. So our debt gets a little bit more expensive. And as you know, we’ve issued a bond in January where we had incurred a bit higher interest. So but still the number of months [indiscernible], I guess, is very healthy for the size of the company.

Then you go to income taxes, minus €66 million, you see above nearly €300 million increase of RCO. If you apply out the tax rate between 20%, 25%, that explains relatively easily the delta. And then discontinued operation last year with a one-off of €21 million due to discounting of provisions again. And this year, we put a provision for a potential liability in the out legacy Hanson business of €30 million, which expands the delta. So the earnings per share that adjusted without AR were 3.15 to 3.64.

Let’s go to the next slide, please. So our cash flow, you see that improved that the green line by €150 million roughly versus prior year. We have a positive effect from working capital of €140 million. And this, to be honest, should continue in the next 6 months. Yes, we should improve that materially versus prior year. Net interest I explained already. Taxes paid with a few one-offs in both years minus 314 as we have planned, it is out what we are expecting. So that’s not a surprise. And then you come to the CapEx where we are very disciplined nearly net on last year’s level. So our cash flow is minus €384 million versus minus €531 million. And what you see for me, interesting, important, the cash conversion rate last 12 months last year was 21%. Now we are up to 37% last 12 months, and we are confident to reach our announced targets by the end of the year because we expect a very solid cash flow in H2.

If we then go to [indiscernible], we can do about [indiscernible] a summary of the first tranche of the share buyback. And as Dominik said, we will start tomorrow with the third tranche amount €300 million and I guess then we have kept our promise and we finalized that program in Q4.

Next slide, that’s the net debt, let’s say, reconciliation for like this. You see the €100 million reduction, free cash flow reduction of €1.5 billion, then €500 million acquisitions, €330 million disposals and then the €700 million shareholder return, that is the 3 columns and then €514 million accounting leasing, that’s obviously FX impact on our cash and our debt and leasing additions that explains a little bit the whole net debt. And I think now with a leverage of 1.67%, which is a very healthy level already in June.

Dominik, I hand over to you for the sustainability part.

[Dominik von Achten, Chairman]

Thanks a lot, Rene. Let me take over, there’s a couple of slides on sustainability that it’s for us equally important to perform very well on our sustainability agenda. And I’m happy to say that the performance is clearly on track. Specific CO2 emissions are down by another 2.4% to just under 540 kilograms. So we are well on track for our target of 400 kilograms, which is, I think, the most ambitious one in the industry. And again, we are well on track to get there.

The same is true for alternative fuels. You see on the right side, almost 30% target of 45% is clearly in reach for 2030. And the same is true for clinker incorporation factor where we are now below 71%. Very good improvement of 1 percentage point. And again, the 68% from our perspective should be easily reached.

Sustainable revenues. We started to report on those. I think we need to take a step back here because you can say, hey, what does this really mean? This means that 40% of our total cement sales are below 550 kilograms per tonne. So 30% below the normal [cement] reference point. So we are trying to be very rigid what we are doing. I know there is a lot of branding going left and right in here everywhere, very intransparent from my perspective. We are -- we have decided that we’re going to introduce a very rigid framework, a very steep hurdle rate, just to be clear, our North American Portland limestone cement, don’t even hit this hurdle just to everybody is celebrating Portland limestone cement, which is a clear improvement in the U.S. over the past is clear, but it is not included in this 37.8%.

So this shows you a little bit that 40% of our portfolio, 40% of our cement portfolio is already below that threshold. So we are very focused to push the portfolio into a very sustainable area. And that’s not only true for cement. We’ll do the same on aggregates and also on ready-mix as we also continue to push our circular approach, especially in concrete and aggregates.

Last but not least, I think important progress for us in Germany on our decarbonization agenda. We are based in Germany. It was very clear for us that we want to be also the first one to fully decarbonize a cement plant in Germany, and that’s what we will do in GeZero in the middle of the country with full support of the local administration, the national administration and then also the EU now, the funding will be confirmed by year-end. We are targeting to reduce the -- to capture the full CO2 emission on Scope 1 of 700,000 tonnes of CO2. And we should be in operation by 2029, important flagship project in our home country and more to come, stay tuned on these things.

Okay. That’s it from our side. Chris, I hand back to you, and then we are looking forward to your questions.

[Christoph Beumelburg, Director, Group Communication and IR]

Thanks, Dominik. Thanks, Rene. We are now opening the line for questions. Operator, please start the process.

[Operator]

[Operator Instructions] Our first question comes from Elodie Rall, JP Morgan.

[Elodie Rall, JP Morgan]

I will have just a few. So very quickly on price cost, you delivered €520 million in H1. Can you tell us what you expect for H2?

Second, on the U.S. and the performance there. I was wondering if you could give us a bit more color. I mean you mentioned weakness in residential activity, but the volume decline there, I think, looks a bit worse than peers and maybe you can give us the actual volume decline. So is there something about your regional exposure that means performance was maybe impacted an more one-off?

And then lastly, if I can just ask about ‘25 target, your 2025 target of 2022 margin. Is this still your target given the higher inflation -- the higher pricing than at the time of the CMD when you issued that target? Or would you think things have changed for that target for ‘25?

[Dominik von Achten, Chairman]

Thanks, Elodie. Okay. Let me quickly go through those and then maybe Rene, you can ship it on price over cost, if you want. But from my seat, LOD price over cost, we are very confident that this will stay absolutely positive for the second half. That’s clearly what we are targeting, so no change in that respect. None, yes, from my perspective, I think there is a little bit of a one-off in 2 dimensions. You know that we have a little bit Northern twisted footprint and all of you have seen the flooding in New York and all of the -- some of the weather events. I think that’s one contributing factor. And the other one is the start-up of our Mitchell plant in the Midwest. The startup of these massive plants are never an easy exercise. I think the team has done and is doing an excellent job. We are well on track, but we -- it’s fair to say that we also had a couple of weeks delay as always in these big animals.

So I would see in the -- for the second half, particularly upside potential in that part -- around the new plant in Mitchell, and that then also should close maybe the volume gap that you have indicated. So from my perspective, well spotted LOD, I think you know the business very well. So in that respect, I think that’s answered.

And clear, yes, to your third question, absolutely, the target sticks, 22% margin by 2025 that remains the target. Do you have anything to add on price over cost, Rene?

[René Aldach, CFO]

As Dominik said, price over cost should be healthy as well for the next 6 months. Obviously, the price data to prior year reduces a little bit because we’ve increased the pricing last year already, let’s say, big time in the second half. But then on the contrary, you have the energy cost relief, which in Q3 was skyrocketing. So I guess the trend should continue.

[Christoph Beumelburg, Director, Group Communication and IR]

Okay. Thanks, Elodie. We have a lot of people on the line asking questions, so please restrict your questions to 2 at a time. Next question comes from Paul Roger.

[Paul Roger, Exane BNP Paribas]

Yes, okay, I’ll keep it to 2 then. The first one is on capital allocation. Clearly, the balance sheet is healthy. Cash generation is healthy. Doesn’t look like you’ve got any obvious demand on your capital in terms of big M&A or anything. So I guess the question is, well, should we expect more buybacks once the third tranche is completed? And then secondly, on Indonesia, a market where you used to talk about a lot, maybe a bit less so these days. It does sound like profitability is turning the corner. So my question really is how significant you think the recovery potential could be? I think from why it generates about €550 million maybe in 2012 or something like that. Could it ever go back to that, for instance?

[Dominik von Achten, Chairman]

Okay. Thanks. Let me -- Paul, for your questions. Let me maybe answer the first one and then Rene can also answer maybe from his perspective because he is also -- he’s also part of the Indocement Board.

So I think -- let me -- on the capital allocation, Paul, I understand your impatience. We are all impatient but let’s do one step after the other. Let’s -- I mean, first, I go a couple of years back and everybody said, you never do a share buyback. Then the next argument was I -- you will never do all the 3 tranches because you’re going to stop halfway and find a good argument bla bla bla.

So I think Paul for us, we want to deliver on what we promised. We promised the €1 billion and here we are, we are going to do the third tranche and then let’s see how it goes. When it comes to capital allocation overall, I think it’s clear that we -- we have done a lot of organic stuff, Mitchell is one example. [Avallon] in France is the other one that are under construction. But we always said that M&A is going to continue to be on our radar schemes, small, mid, bigger size. No multibillion 20 country exercise that we always excluded and that stays that way but it’s clear that M&A remains a possibility for us also going forward.

On Indonesia, you’re right, Indonesia went through a couple of years of not so easy days. But we are very confident that Indonesia will bounce back. The country is in a healthy position. Our management team is very strong. We continue to work on our footprint. We have a couple of good ideas also on Indonesia in the pipeline. So it’s our clear target to continue that stronghold and the market is very consolidated. As you know, we have been operating in that market for more than 20 years now. So in that respect, we know very well how to manage it. And to answer your question, we believe there is a significant upside in Indonesia down the road. But maybe you want to add to.

[René Aldach, CFO]

Nothing to be added on [indiscernible]. In its amend does it really go back to the [400], whatever that is in ‘12, I can’t tell you. But what I can tell you is we have a very good management team with a superb market position, to be honest, and we see in the first 6 months, it’s recovering. So I guess it’s on the right track.

[Christoph Beumelburg, Director, Group Communication and IR]

Next one comes from Gregor Kuglitsch from UBS.

[Gregor Kuglitsch, UBS]

A couple of questions, please. So maybe a sort of 2-part questions. So the first one is, could you just actually tell us what your energy cost did in the first half? And today, from today’s perspective, what you think you will do in the second half, sort of, I guess, on a year-over-year basis?

And then similarly, on price, and I know that you don’t report volumes anymore, but what was actually a realized price, I guess, maybe cement aggregates or something like that for the half? And I guess, similarly, assuming kind of your hold pricing, what do you think the half 2 year-over-year is? So we can get a bit of a sense on price cost.

So I’m going to sneak a sort of 2.5 on it and then the working capital. Did you say you expect an inflow or less of an outflow last compared to last year? Just so we understand what you’re saying on working capital.

[Dominik von Achten, Chairman]

Thanks for your question. Maybe let me start. So to give Rene the chance to get to your 2.9 questions. So -- on the -- maybe I’ll start with the energy cost and Rene should then give you the details because he’s obviously also sitting over the energy buying department. From my perspective, and that’s, I think, important for everybody to understand, and that’s also something we keep telling our customers, everybody thinks that the energy prices are back to the old days in terms of pre-crisis level. That is not the case, guys.

On a price basis, price only, take volume out, but price based only, we had half year over half year an increase in pricing. So I think 3% or 4% or even 6% increase in pricing on energy. And so I think in that respect, it’s not like we are back to all days and also the forwards for the next -- for the next quarters of Q4 and Q1 next year are still on electricity, just to give you one example.

In Europe, in Germany, they are still in the €130, €140, €150 per megawatt hour. So it’s not like the energy prices are collecting. Rene will give you a little bit the split how it works between H1 and H2.

On the realized pricing as for your understanding, Gregor, this is a competitive sensitive information. So I can’t go into any details around pricing. It is clear that the pricing is compensating fully the cost inflation on the variable and fixed cost side. That for us is the core point. And that is also clear that then the pricing needs to be in a very significant way up. Otherwise, you won’t get to that performance, and there are markets where pricing is really significantly up in a very healthy double-digit wage. So and we continue to stay very focused on getting the right value of our products. There is no -- as you all know, there is no global pricing. But market by market, we continue to develop value for our products, and that needs to turn into both good margins and then obviously also good revenues.

[René Aldach, CFO]

Gregor, let’s talk about energy. For the first 6 months, as Dominik said, cost inflation, yes. I’m now talking cost inflation is up 6.5%, yes. And obviously, when we have a positive volume effect because we are selling less and we have less cost, clearly and then the currency as well. So reported energy is down. Cost inflation is up 6.5%. For the full year, obviously, we have upgraded our guidance. As you have seen, we have good results. The energy costs are, let’s say, not as volatile as they have been last year. So we will -- we are expecting quarter pace is obviously lower than last year, but that has lower volumes, that has a currency impact. But as well, from a cost inflation perspective, we see this maybe flat versus last year, maybe a little bit better. So let’s see how that goes. I guess that answers that question.

And then working capital, Yes, Gregor, my clear target is no cash outflow from working capital. That is clearly the target for every country we have in the group. If we have now a few hundred million inflow, let’s wait and see. Yes, surely, we will not have the inflow like we had outflow last €800 million, that is probably that will not happen because the cost base is still high, yes. So we try to target here neutral or a little bit cash inflow, and that would be, I think, a very good improvement.

[Christoph Beumelburg, Director, Group Communication and IR]

Next question comes from in Yassine Touahri from On Field.

[Yassine Touahri, On Field]

Just a couple of questions. First, on the U.S. margin, which were, I think, a little bit disappointing compared to the big increase experienced by your peers. I understand that it’s the Mitchell ramp-up that had a bit of an impact. Is it something which is a one-off? Could we -- and if it’s -- if you have one-off costs, is it something that you could quantify? And also, would you expect the situation to resolve in H2 or in 2024? My first question. And then my second question is just a clarification on your comment about cost inflation. So you suggested that cost inflation is up 6.5% in and that the full year, it would be stable or a little bit lower. Does it mean that you’re expecting cost deflation in H2?

[Dominik von Achten, Chairman]

Yes, let me take the first question, then Rene will take the second one. Answer to your question, yes, clearly, Mitchell is a one-off, is ramping up. It’s already performing in the month of July on a much higher and more stable basis. So I think, clearly, we expect a significant improvement H2 over H1 from Mitchell. So that’s also why we are very positive on our non performance for the second half.

[Yassine Touahri, On Field]

Sorry, on this, I think in the past, you quantified the cost saving that you could generate with your mutual plants? Is it something that you could remind us?

[Dominik von Achten, Chairman]

No, it’s everything. I think there is a -- as I said, with the question to LOD, there is a volume impact because we didn’t get to the production performance that we wanted to in all days. Again, it’s more a traction of being stable in these new plants. And again, there’s nothing that wakes me up at night because it’s clear that this would happen, and it’s completely normal and quite frank to be just very clear. Even with this performance, much better than an average ramp-up of a plant of that magnitude. We’ve done a couple of these projects over the years. So I’m not losing any sleep over that, but the good news is it’s better in H2 than it is H1. So the effect basically comes from more volume output. And you know that for us, that is local volume in the U.S., and that always comes with higher margins because the more you go then out to the East Coast, we need to compensate that with imports, and that, in the end, will then help our local performance and also our local margins. But we won’t put a specific number to that.

[Yassine Touahri, On Field]

I have in mind that the new plant could have a cost efficiency is going to be more efficient than the previous operation. So I have in mind that it may be like 20% -- the cost may be like 20%, 30% lower and that you could get savings once the plan is fully operational of something like $20 million, $30 million? Is it something that is still realistic?

[Dominik von Achten, Chairman]

This is -- guys, I have to ask you if this is a competitive sensitive situation. We were competitive market in the U.S., and we cannot comment on our cost position out of a single plant. I ask for your understanding, we made the clear statement in our Beyond 2020 strategy that on average in the group, we wanted to improve by 300 basis points. And in North America, we wanted to increase by 500 basis points. And we also said that one of the main contributors to that is the Mitchell plant. And now you need to triangulate and try to do your work on that one. But from my perspective, Mitchell is going to be one significant contribution to that margin step up.

[René Aldach, CFO]

Yassine, your question regarding cost inflation. I was talking about 6.5% cost inflation on only energy in the first 6 months, not on our total cost base, obviously. And you are right. I’m expecting cost inflation, let’s say, decrease or let’s say, deflation for the second half of the year regarding energy.

[Yassine Touahri, On Field]

And with a relatively stable energy in the full year, so it suggests like some high single-digit energy deflation in the second part of the year. Is that correct?

[René Aldach, CFO]

Yes.

[Christoph Beumelburg, Director, Group Communication and IR]

Next is Tobias Woerner from Stifel.

[Tobias Woerner, Stifel]

Just a question on CCUS or CCS. I mean, last year in the Capital Markets Day, you talked about 7 projects costing you CapEx-wise or implying CapEx-wise, about €1.5 billion by 2030. My last count of CCUS projects, it was 12, but correct me if I’m wrong. What does that mean for CapEx on that basis going forward? And also, what does it mean with regard to your target of 10 million tonnes of CO2 captured by 2030?

[Dominik von Achten, Chairman]

Tobias, let me make a first comment, then maybe Rene answers. There seems to be a little bit of a competition in the industry who has the most projects. We are not part of that competition.

[Christoph Beumelburg, Director, Group Communication and IR]

Maybe, Tobias, can you mute please [indiscernible] unmute.

[Dominik von Achten, Chairman]

That’s much better. So there seems to be we have a competition where the most projects in the industry. We’re not competing in that competition. We are very focused on getting things done next year in Brevik is the first one online. We stick to exactly what we have said, €1.5 billion for the projects that we have announced until 2030. Let’s deliver on this. For us, it’s all about delivery and quick implementation, large scale implementation, and that’s what our focus is for us, the number of projects is irrelevant. So we have made these very specific.

Will there be movement within these projects? Yes, absolutely. That’s why we have a couple more than also at the starting line because we want to make sure that we deliver our targets but for us, as I said, the number of projects is irrelevant. The key is what we bring to how many of these projects do we make happen in order to contribute to the 10 million tonne emission reduction cumulative by 2030. And for the time being, we speak exactly with this target.

[Tobias Woerner, Stifel]

Second question, if I may. When you look at your bridge on the RCO side, the volume impact seems to get or has gotten worse. Do you think that should be stabilizing into the second half?

[Dominik von Achten, Chairman]

I think, Tobias, there is no global answer on this because this is a market-by-market -- this is a market-by-market view. I think there are quite a few markets where there is volume decline, especially in residential. That’s what impact mainly the mature markets. And we do see in some market stabilization on these volume declines, again, then it’s a year-over-year compensation. So we also go against the lower base over time. But there are markets also where there is additional decline. I think -- it’s clear that in residential, in the mature markets, there is a significant reduction.

And I would foresee from our perspective, at least a stabilization at a point when the interest rate hikes are coming to an end. You see a little bit the U.S. the Fed latest increase indicated that they are coming towards a peak in terms of rate hike, in the EU, I think there is still a way to go. But as soon as we get to that peak point, then I think the confidence will come back also on the financing side and the consumer side and also to also drive up residential. You see the first indication here and there in the U.S. already in some markets.

So from my perspective, is the worst behind us, difficult to say. But I would say we are closer to the tipping point than we were maybe last year at this time. So that’s where I would see light at the end of the tunnel on residential.

[Christoph Beumelburg, Director, Group Communication and IR]

Next question is from Brijesh Siya from HSBC.

[Brijesh Siya, HSBC]

I have 2 as well. So starting with -- if you can just give little FX impact, which you are assuming in the [2.7 to 2.9] of recurring operating income? Then the second question is more about the growth prospects. With how things are going with the cement market and you are not providing volume? Clearly, you are going for value. So how should we look in the medium term when you look at Heidelberg top line growth, what should we focus on? Are you kind of committed to a low single, mid-single-digit like-for-like growth, that’s what you would like to do either itself rather pricing more and a differentiating product?

[Dominik von Achten, Chairman]

Thanks a lot. Maybe I’ll leave the first one. Do you want to do the first one.

[René Aldach, CFO]

Yes. In the guidance, we have an FX down [indiscernible] number included versus last year, roughly €100 million negative impact of FX is included in that number already.

[Dominik von Achten, Chairman]

Okay. And then on the second one, Brijesh, I think on the growth prospects. What I -- what’s interesting for me to understand is that the cement labors are coming back. I think the cement seems to become an interesting business again. And that is actually spot on with our strategy because we -- even when nobody loved it, 2 years ago, we said, "Hey, guys, we’re going to hold the line and want to stay in this business big time and really focus on making the decarbonization happen." And that for us is also the growth prospect because that will drive value. That’s also why we always said volumes for us irrelevant.

For us, the value in the end that we drive for our customers is key, and we are more confident than ever that this will be able -- that we will be able to do this organically to drive value as we decarbonize our products, this will drive additional value for our customers in cement, in aggregates in concrete and its recycling. So I think in that respect, we will churn the product in the cycle and with that, we see a very fundamental organic growth options going forward, and then we’ll top that up with acquisitions. As I said earlier, we’ll continue to do bolt-on acquisitions, small, medium, large in that respect to improve our market positions in the core markets that we are operating in. We will stay very disciplined around that, but that’s clearly the target, and that is a fantastic growth driver for us going forward. We feel very comfortable with that sweet spot.

[Brijesh Siya, HSBC]

Sorry. Dominik, I just -- so if I understood correctly, it’s more of a market sale gain and you’re kind of projecting that smaller with weaker investments, it will kind of eventually go out of the market?

[Dominik von Achten, Chairman]

Not so much about market share. This is, again, volume market share. So for us, we want to convince the customers in each market that we have the best decarbonized products on the heavy side of things. And I’m absolutely sure that with that we drive value and additional opportunities with new customers, new products, for existing customers. That’s where the value sits. I’m not so hung up about market share up and down 1% or 2%.

For me, again, share of wallet in each customer and new customer bases on these new products, new decarbonized products, that is, for us, the sweet spot. And there, we feel very comfortable and we see some nice traction, and we’ll continue to build on that.

[Christoph Beumelburg, Director, Group Communication and IR]

Next question is from David O’Brien from Goodbody.

[David O’Brien, Goodbody]

Firstly, on Europe, I wonder, could you quantify your volume performance across the 2 European divisions against that weaker volume backdrop? Maybe give us some color on how pricing has evolved or any competitive pressures as they’ve arisen through the period. And final -- kind of add-on to that, I guess, more generally across your global operations as the volume backdrop has been a little more challenging as your customers get impacted by costs across the board. Have you seen any meaningful shift in the appetite for products with enhanced sustainability versus the more traditional products within your portfolio?

[Dominik von Achten, Chairman]

David. Okay. Let me start with the volumes in Europe. We said that overall, the volumes are down high single digits, very low double digits. That’s a little bit the picture in total Europe and that’s very much driven -- a very different segment by segment, very much driven by residential that in some markets is even down 20% as a market, not necessarily for us, but in residential, you see declines in some European markets in that magnitude. And that’s clearly impacting the volume side of things in our strong markets in Europe. But on the flip side, I think we’ve been able to convince customers that again, this is not a volume game, but this is a value game.

And that obviously is contributing or driven also by our increased product offering on partly decarbonized products. You saw the discussions around 3D printing. All of these value-enhancing applications do find more and more demand and I think in some markets, it’s even the case, the demand outstrips supply. And that obviously then also helps to convince customers to get to dedicate the right value to these products.

So in Europe, I think there is an interesting dynamic and obviously, everybody knows the CO2 certificates issue is out there. We are long in CO2 certificates but we always said very transparently, we’re not going to subsidize the market by giving away free amounts. We want to do the investments going forward. We will decarbonize our products and then make this a competitive advantage for Heidelberg Materials down the road in Europe, and I think that’s for us the focus.

[Christoph Beumelburg, Director, Group Communication and IR]

Next question comes from Yves Bromehead from SocGen.

[Yves Bromehead, SocGen]

Just, sorry, a quick one, circling back to everything you’ve been saying, I think, correct me if I’m wrong, but you expect your energy costs to be down in H2. Your pricing is still quite strong, and we’ve seen some further price hike in the U.S. You’ve got an easier base in the volume side. So putting it all together, it’s quite easy to get apart of your guidance, and I think consensus is already there anyway. So just wanted to understand what has made you not go above sort of the 2.9% towards the 3% up? Is there anything holding you back at the moment that you want contribution of in the third and fourth quarter?

[Dominik von Achten, Chairman]

If we are -- I’m at least long enough in the industry. So Rene also within the company, we know I’ve been running marathons and you need to get to the finish line, whether it’s a half marathon or whether it’s a marathon and that’s exactly how we see it. The year has -- at least in our calendar 12 months, 365 days, we are halfway down the road. We feel very, very comfortable with the guidance we have put out. You have made the triangulation between the different drivers of that guidance. But the year is long, so bear with us, but we are very confident on being able to deliver on that guidance. And I think -- you see a very confident management team in order to get well to the finish line in 2023.

[Yves Bromehead, SocGen]

Just on Europe, I just wanted to have your view. I mean you’re essentially saying like most of your competitors that prices are not coming down and you’re not seeing any signs. However, may I just push you on this and just ask, are your clients with the volume decline that you’re seeing being more strict about sort of the prices they’re prepared to pay and are they sort of more trying to get discounts and rebates by ordering certain volumes that are larger than what you’ve seen? Or is there any sort of sense whereby there is some discounts that are appearing even though it’s not meaningful?

[Dominik von Achten, Chairman]

Yves, from our perspective, again, it’s a sensitive topic. That’s why I’m just giving you a broad answer. But from our perspective, there is a different cost base than pre-crisis level. I gave you all the input factors of energy, higher fixed cost, CO2 certificate cost where we feel that we target to continue to drive value for our customers, but then also ask for that value. We do not see in a broad range declines or rebates. And you can ask yourself, but from my perspective, if there is no single house to be built out there, why should -- even if you lower the price by 20%, if nobody wants to build a house, then why should -- whether you are 100% or 120% for it won’t make a difference. If there is no demand, why should I lower my price? That’s the way I think about it. But I can’t comment for the competition, how they want to do this and how they are doing this, that’s not transparent to us. So it’s not what we can manage and what we want to manage. We sweep in front of our own house, and we continue to drive value for our customers and ask them also to be rewarded for that.

[Christoph Beumelburg, Director, Group Communication and IR]

Getting to the finish line, 3 more questions on the line. The next one comes from Ravi Ephrem from Citigroup.

[Ephrem Ravi, Citigroup]

Most questions have been answered. Just one remaining. Given the very strong macro environment in the U.S. for the next 3 to 4 years, are you thinking about importing more cement into the U.S. from your underutilized operations in Africa and the Middle East? If that’s the case, are you also in plan to increase your terminal capacities? And is there any CapEx that’s been allocated to that?

[Dominik von Achten, Chairman]

You know that we are a net importer and have been a net importer for many years. That’s been a strength of Heidelberg Materials over the years because it’s easier for us to breathe in up and down cycles. But it’s also clear, and that was one of the reasons to do the Mitchell investment that it is the most profitable strategy for us to have as much local production as even possible. So for us, it’s key that we continue to push our local capacity.

Now, careful. We are called Materials. We are not called Heidelberg Cement anymore. That’s why, yes, Mitchell is a traditional cement plant. But I’ve been telling you in the calls before, we made this acquisition [indiscernible] for. We’ve done a significant investment for a slag business in Florida. So we are focused on cementitious materials and not on cement and clinker only. And I think it’s important for you to understand that for us, that’s the total cake and with the investment into [CIFA], with the investment into the slag terminal, I think there, we also increased our capacity versus the past which helps significantly our CO2 footprint, which reduces our import needs into the U.S., which improves our margin, and that’s why we gave the target of 400 to 500 basis points improvement by 2025. And that’s -- we are well on track to get there.

[Christoph Beumelburg, Director, Group Communication and IR]

Next question from Jean-Christophe Lefèvre-Moulenq from CIC.

[Jean-Christophe Lefèvre-Moulenq, CIC]

Just a question on pricing. Could you -- as you quantified the volume effect in Europe, maybe could you -- give you -- give us an order of magnitude the pricing effect in the Heidelberg Materials first?

Secondly, the good pricing in 2023 is mainly the price rollover effect of the hikes implemented in November, roughly €30 per tonne in Germany, €20 in France, can this rollover effect last over the second half? You mentioned no rebate, no decline. Can you confirm once again, as some rumors are spreading in Europe of some price concessions? Many thanks.

[Dominik von Achten, Chairman]

Christophe, from our perspective, as with every action last not forever. But from our perspective, the pricing is -- we are confident that we will also in the second half continue to enjoy a good price over cost situation. And again, for competitive reasons, I ask for your understanding that I cannot comment on any pricing strategies. Again, they are different market by market, customer by customer and product by product. So you continue, I think it’s also important for you guys to understand. You’ve got to continue to see a much larger variety of products, also of pricing patterns from our perspective, this [flat] out pricing for one commodity product. From my perspective, I’ve said that before, will come to an end. And so our company is already done. So we very much focus on specific customer applications, specific geography, specific opportunities to create a differentiating product base. And that’s why there is not one flat out pricing answer. And again, for competitive reason, I can’t give you any specific percentages for specific markets.

[Christoph Beumelburg, Director, Group Communication and IR]

The last question, 1 or 2 questions comes from Arnaud Lehmann from Bank of America.

[Arnaud Lehmann, Bank of America]

I have 2, if I may. Hopefully, they will be quick. Talking about capacity in Europe, have you seen any capacity closure? Are you considering some capacity closure, I guess, as a way to improve utilization rates, pricing power and maybe reduce CO2 emissions to shut down the least efficient plant? That’s my first question. And my second question is on Brevik carbon capture. Do you have an updated forecast for the opening? Is it more like Q1 ‘24 or Q4 ‘24? And would you mind sharing with us the successes and challenges? Is everything on track? Have you had difficulties -- technical difficulties to get things going? Or everything is like you want it to be?

[Dominik von Achten, Chairman]

Thanks. Happy to answer your 2 questions. On the capacity closures in Europe, I can only discuss -- I cannot tell you what the industry is doing, but I don’t have the transparency on that. For us, I think it’s a constant task to manage our fixed cost base, and that is also true for every asset we run, be it in cement, in clinker, in aggregates or in ready-mix. And as the volumes decline in some markets, obviously, we need to review and constantly do so, review our asset base, whether we permanently or just as interim mothball a ready-mix plant and aggregates plant part of a cement plant or a full cement plant.

That exercise is ongoing. It is not a widespread effect of that. But are we taking out capacity here or there where possible on parts of plants, absolutely because that’s for us a very prudent management cycle to do this as volumes come down to be very prudent on our fixed cost and variable cost management, and that obviously has to do also with overtime of the assets.

When it comes to Brevik, the ramp-up of Brevik will be more towards the end of 2024. There was also always the target second half of ‘24. It is a mega project. That’s clear. You know that mega projects have their chances and choice. I think we don’t forget, this has always been affected. Nobody talks about this. We think this is this run through COVID and everything. So I think we are not short of challenges in that respect, but that’s what we have paid for. We try to mitigate the challenges in this super complex projects as good as we can.

Is there unplanned things happening? Absolutely. Like in every project, there are things going? Yes, absolutely. So bear with us, we still have now more than a year to go. It’s a little bit early days. We are very diligent on doing our very best to get to that -- to the 2024 line. And for now, that’s the target. So let’s wait and see. But we are very confident that we will be mind boggling project for the industry. But again, this is the one and only global project of that scale. And that I think for me also, I think, to be very open, whether it comes 3 earlier or 3 days afterwards, this is not the topic, but it’s not like there is a 3-year delay on this project. Just to be very clear.

[Christoph Beumelburg, Director, Group Communication and IR]

Okay. I think that concludes our call. Just a reminder that we will be on the road in September also attending some conferences and we have moved our Q3 released at 1 day forward. So we are now releasing our numbers on November 2 instead of November 3 in case you haven’t noticed.

With that, thanks for dialing in. Goodbye.

[Dominik von Achten, Chairman]

Thanks, guys. Thank you everyone.

[Operator]

The conference is now concluded. And you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.