Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Business Year 2018 conference call. At this time, all participants are in listen only mode. There will be a presentation followed by the question and answer session. If you wish to ask a question, you need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Thursday, 21st of March 2019. I would like to hand the conference over to your first speaker today, Dr. Bernhard Scheifele. Please go ahead, sir.
Okay. Hello to everybody. Good afternoon here from a very sunny Heidelberg. It's the first warm spring day, so it's an excellent day to sell cement and aggregates, at least here in Germany and I think in most parts of Western Europe. I sit together with Dr. Näger and our investor relation team with Mr. Schaller and with Ankatha and Mr. Jelito. As usual, I will lead you a little bit through the operational results. I will keep that very short because we have reported until the line of RCO already in our trading statement, and Dr. Näger will concentrate on the nitty-gritty details of our items below RCO. Chart three, overview. The revenue overall was up 8%, first time Heidelberg exceeds EUR 18 billion sales. So we had overall a very good and strong growth on the top line.
If you look to the EBITDA later, we are more or less flat if you take out Carroll Canyon and the Forex and the consolidation compared to last year. 2018, I think, was the most challenging year in the industry after the financial crisis. So we had a lot of headwinds from high energy cost inflation, exceptionally bad weather, partially at the beginning of the year in Europe and U.S., and then also in September again, very wet weather in the U.K., especially in the southeast in Texas. I think if you look to our Q4 numbers, we had overall a good run in Q4, especially our cost-price relationship has improved. Cash generation in Q4 was very strong, was close to EUR 1 billion. I think that was okay.
If you look to the final numbers, which are important to shareholders, earnings per share is up 25%, and that's why we want to increase dividends by about 11%. The cash conversion rate is at 42. I think this is, in our industry, a very good number. So Heidelberg could afford to increase dividends, at the same time invest significantly in the market position and also reducing bank debts by about EUR 350 million. That shows that we are at a very strong cash generation.
Portfolio optimization continued, I think with a good speed. We had overall about EUR 600 million disposals in 2018. We have already done into 2019, EUR 200 million. So we are confident that we can continue this trend into 2019 in order to reach our target, which we communicated to you of EUR 1.5 billion over the next three years. The outlook for 2019 is unchanged.
I think there was some confusion about the German term moderate. Under German definition, this means between 3% and 9% growth. There is no change. I think overall we had a good start in the year. I think we might talk about that later. If you look to chart four, and you look to the margins, the cement margin drop is mainly due to Indonesia and partially U.S. aggregates. If you eliminate Carroll Canyon, I think then the margin is okay. If we look to chart five operating EBITDA bridge, that's what you see, Forex down versus last year, EUR 130 million. Just to remind you, it's the third year in a row that we had a negative Forex impact over the last three years. Total impact is close to EUR 300 million. We expect to swing that back sooner or later.
Deconsolidation EUR 53 million. Then on the right side, you see the Carroll Canyon impact of about net EUR 61 million. What's interesting to see, and that is very consistent what we have seen from our competitors which have already published their results, that price cost component was negative, meaning the industry was not in a position by price increases to compensate the significant increase in energy costs. We had last year an increase, for example, if you take the Newcastle Index, average price was up 17%, oil was up by about 30%. For example, in Germany, electricity, which is a benchmark market for electricity in Western Europe, electricity was up by about 30%. Chart six shows you the key financial metrics. You see revenue. It's very solid revenue growth over the last three years. Earnings per share clearly up. Net debt continues to trend downwards.
Chart seven shows the cash conversion rate of 42%, I think, which is pretty strong. You see that working capital has increased by about EUR 107 million. That's a clear indication that we had, at least in some countries, relatively strong activities in December. We continue to earn a premium on our cost of capital. Yeah. You see that we are at 6.9%, 6.3%. The methodology for the WACC has not changed. The WACC goes down due to the Italcementi countries. Dr. Näger can explain that in more detail. We continue with the action plan, which we presented in November. Strict cost management. We want to save on SG&A about EUR 100 million. Margin improvement, we have started aggressive commercial action on pricing. That looks pretty promising this year. Cash generation remains high on the agenda.
We told you last year that we had introduced into AEM for the first time for our country managers free cash flow targets, that has obviously worked. I think part of the strong cash generation has also to do that the line management remuneration has been partially changed to free cash flow, we want to limit the gross CapEx to about EUR 700 million over the next two years. SG&A initiative has been launched. Out of the EUR 100 million we have budgeted, we see the savings of about EUR 53 million into 2019, out of which more than EUR 30 million come from overhead in countries.
We are well on our way. Portfolio optimization remains high on the agenda. The target is EUR 1.5 billion. For today, we have already done EUR 800 million, EUR 600 million last year, EUR 200 million this year. Three areas, non-core business, weak market positions and idle assets.
Idle assets come to a large extent also from the Italcementi transactions, where we acquire a lot of assets which are not necessary to run the business. We underline again that the disposals will have more or less no impact on EBITDA. You saw that from the disposals we did already this year. That was the reduction of the stake in Morocco and also Ukraine. There's practically zero impact on EBITDA, and we plan to do that. On the areas, I keep it very short. I jump shortly to North America and just limit my comments on two points per area. In North America, if you look now the year-to-date result, it's clearly down. EBITDA like for like was about 10%. Okay, there is Carroll Canyon we have to take out, so we're still slightly negative.
Positive highlights were from a volume growth, obviously Canada, including the region Oregon, meaning Seattle, Portland, Vancouver, where we had close to double-digit growth also in the South. Whereas we had negative growth in our region north of -2%, partially due to the market. The market there was down about 3%, and we lost a little bit share due to McInnis. From a result point of view, Canada was strongly up by around EUR 40 million, whereas the region north was down by about EUR 50 million, EUR 54 million. If you look to Western Southern Europe, weak result in the U.K. London market was weak. Our result was down by about EUR 45 million-EUR 46 million, and that was more than compensated by a strong run in Italy, Germany, and France, where all the results were up double digits. Northern Eastern Europe, we had a good development.
You see that on EBITDA, up 11.4%. Czech Republic was up, Poland more significantly up. Czech Republic and Poland all up double digits. Russia was better. Kazakhstan was better. Only Ukraine was weaker. In Asia Pacific, the result reduction is only due to Indonesia. Indocement was down in euro terms, about EUR 47 million, and that was, to a large extent, compensated by a good result development in China and also in Thailand. In Africa, I think we did a good job. The margins went up. The result is up like for like 4.7%. Weak spot was Turkey, which had, obviously, a very difficult second half. Also, our result in Israel was hit by the stop of one quarry due to end of license. Whereas result development in Tanzania, Morocco, and Egypt was all okay.
I think from group services, we had a very good year operating income, EUR 31 million. That was a new record. Also revenues were significantly up. I think that's it from the operational business, and I hand over to Dr. Meyer.
Good morning and good afternoon, ladies and gentlemen. I would like to lead you into the financial report, which starts off on slide 21 with a summary. This year, the headline was, there is a life beyond RCO or beyond operational results. We are a little bit weaker on the operational result, but with the view on the group share profit, we were able to overcompensate this in three major areas, which is, first of all, our additional ordinary result shifted from negative to positive and improved by EUR 241 million. Secondly, HeidelbergCement ensures good refinancing condition, and based on favorable refinancing terms, we were able to decrease and improve our financial results by more than EUR 50 million. Likewise, we benefited from tax rate decreases in many countries and tax expense decreased to EUR 460 million, and also cash tax payments Decrease.
Based on that, we achieved the group share profit to increase by 25%, and likewise also earnings per share increased by the same percentage. Also, we generated positive cash flow. We generally have a cash conversion from EBITDA to free cash flow of 42%, best value in the industry, and this allows us to finance our growth CapEx, to pay an increased dividend, and to pay down debt from our operational business. Both sides, capital and earnings, lead to a situation where we achieve a return on invested capital of 6.9%, 0.6 percentage points ahead of our average cost of capital. You can see this on slide 22 in the income statement that additional ordinary results moved from EUR -133 to EUR +108, contributing to the profitability.
Financial results improved from a cost of EUR 418 to EUR 367. The income taxes improved from EUR 579 to EUR 464, which leads us to a net result from continued operations of EUR 1.3 billion, compared to previously EUR 1.1 billion. This is the highest value in the history of HeidelbergCement from ongoing operations. Only in 2007 and 2008 we had higher results when we sold six businesses in preparation of the Hanson acquisition. If we look to slide 23, you can see a split up of the additional ordinary results. Notably here is that the restructuring expenses drastically reduced in 2017. These were mainly the restructuring costs for Italcementi. As you know, Italcementi integration is completed, and therefore we do not see any significant amount in restructuring expense.
On the other hand, from our disposal program and portfolio optimization program, we have quite a significant amount of gains, EUR 125 million, mainly coming from the sale of the German limestone bricks business and the U.S. white cement business. If we move to slide 24, you can see further improvement on our net financial results. This is mainly driven by reduced interest expense, and the reduced interest expense comes from the maturing of high interest bonds, which we issued after the financial crisis, and now we replace it with low cost bonds, and this reduces our financial expense. We do expect this development to continue in 2019, 2020 and 2021, as we have the last high yield bond maturing in 2020. Mid-term, we expect the cash out and the financial results to be in the range between EUR 250 and EUR 300 million.
Tax expense and tax cash payments continued to develop favorably, as you can see from slide 25. You know that I focus on cash tax payment and on current tax, but not on deferred tax, because deferred tax is very difficult to predict and to plan because it depends from a lot of external influences. You can see here on the chart in cash tax payments from HeidelbergCement, you can see that in the year 2009, during the financial crisis and in 2012, it reached an amount of 50% or higher, and since then it consistently trends down into a range of 20%-25%. That's exactly what we guided. There are two main drivers for a fairly favorable tax rate in HeidelbergCement.
The one is that we observe globally a reduction of income tax rates, the most significant being probably U.S., moving from 39 effective to 24 effective, which is 21 federal plus 3 percentage points of state tax. Also other countries like U.K. moved significantly down. U.K. goes from historically 27%-28% in 2008, now down to 18%, if I'm not mistaken. Eastern European countries are typically around 15%-20%, and also other countries like Canada have trend down. This is the one driver. The second driver is that HeidelbergCement in virtually all countries has a tax positive result. There are no losses which do not have a tax shield in the group, and that leads to a very even spread globally of profitability, which then makes the company benefit from this low tax rate environment.
We also expect this trend to continue and the tax rate to stabilize in the range of 20%-25%. As I previously stated, we come to the cash flow on slide 26. HeidelbergCement is a cash machine. We have a cash conversion rate of 42%, which is clearly ahead of the average of the industry and leading in the industry, at least on the multi-country, multi-business line level. You can see this on slide 26 on our cash flow statement. Cash flow from operating activities stays on the level of EUR 2 billion. We had a little increase in working capital by EUR 100 million because the Q4 was very strong. You can also see this in the balance sheet.
We were producing and selling high quantities of our products in the Q4, which then led to higher stocks and higher accounts receivable, because this high sales were backed up also by a favorable production environment. This contributed to a certain increase in the core working capital. We had, in 2018, high investment in our business. You can see it, EUR 1.7 billion, and this includes a significant part of growth CapEx, namely the two big acquisitions in the beginning of 2018, which was Cementir in Italy for market consolidation, with EUR 320 million and Fraser in Australia, a sand and aggregates business for EUR 200 million, and this drove up the investment compared to previous years. As a consequence of lower operational results, we compensated the lack of cash flow from that source by an acceleration and intensification of our disposal program.
We have successfully disposed of some non-core assets, non-core being defined, as Dr. Scheifele outlined, as being outside of cement, aggregates, ready-mix, and asphalt, or being in geographies that we do, in the long term, not expect to have a reasonable profitability or market position. We continue to intensify our program to dispose of idle assets, which mainly stem from the Italcementi environment. This led to a disposal in the range of EUR 600 million. As we have outlined earlier, we expect another EUR 500 million in 2019 and another EUR 400 million in 2020. Overall, we enjoy a very strong cash flow generation. This is depicted then on slide 27. You can see the horizontal green bar, EUR 1.3 billion free cash flow. That's what the company is able to generate from its existing business scope.
Below on the blue bar, you can see how the money is allocated. On the right-hand side, dividend, EUR 377 for the HeidelbergCement shareholder and EUR 188 paid to minority. You can see if you look left to compare it to 2016 and 2017, how we have increased the share which we pay to our shareholders over time and following our strategy to share more and more of our free cash flow with our shareholders. On the back of this, we reduced net debt by EUR 328 million. I mean, this is remarkable that we have a cash flow generation which allows us to pay full dividend, to fully develop our portfolio, and at the same time pay down debt. Slide 28 then shows you the balance sheet. Nothing specific here. You see a little bit increase in the intangible assets. That's the goodwill from Cementir and Fraser.
You secondly can see an increase in working capital. Receivables go up by EUR 388, inventories go up by EUR 154, and that's the consequence of the strong business activity and high production levels in the fourth quarter of 2018. Maybe on slide 29, the impact of IFRS 16 leases. You know in our business, we used to lease assets. If you look to the leased assets, this is predominantly yellow machines, which we use in our quarries, and therefore it's also predominantly in the aggregate business. It's to a smaller part in ready-mix, where we lease mixer trucks, and it's to a small extent in the cement business. As you know, IFRS 16 requires leases to be reclassified into depreciation and into interest rates, and by that, the leasing payments will be reclassified out of EBITDA into depreciation and into finance costs.
As a consequence, EBITDA will go up between EUR 250 million and EUR 300 million. On the upper side, sustaining CapEx will go up for more or less the same amount, EUR 260 million to EUR 320 million. Therefore, the free cash flow will not be impacted. There's just a shift from leasing payment into stay in business CapEx. On the other side, the balance sheet, you have to capitalize the discounted leasing payment. This will lead to an amount between EUR 1 billion and EUR 1.2 billion discounted leasing payment, which will be shown in the balance sheet as financial liability. Now, as a consequence of this, we have decided in the board to not continue leasing, especially for yellow machines, and to buy this equipment in future. That's why for us, the sustaining CapEx will then go up.
The reason is that we will not enjoy the benefit of a lighter balance sheet, which was until 2018 the case. Finance costs will decrease because our bank and debt capital market margins are lower than in the leasing contracts. We gain more control over our assets because we then can decide how long we want to run such yellow machines or whether we sell them off earlier. It gives us a higher degree of flexibility. That is why we are not going to continue with leasing, but go for direct purchase. Exception of that is company cars, which normally come in a package and office space. Office space does not make sense to buy everything. You only need the core assets in the office space, the remainder remains with normal leasing contracts.
That is what we expect as a consequence from IFRS 16, which will then roll into the balance sheet over 2019 and in the following years. Net debt EBITDA will go up by 0.1-0.2 out of the box, meaning in 2019, like for like compared to 2018. We will see over the coming years how that will develop. I think midterm net debt will go up due to this by EUR 0.5 billion once the newly acquired yellow trucks and yellow equipment will be written off over time. It takes 5 or 6 years before we will see steady state here. Slide 30. That of important pension provisions.
You can see that the pension obligation has been systematically managed over the last 5 years by closing down our pension schemes and by reducing the benefits from those schemes and moving from defined benefit to defined contribution schemes. We were able to substantially decrease our obligations out of that from 2013 of EUR 5.9 billion to 2018, EUR 4.8 billion. We achieved to reduce this by more than EUR 1 billion. That is a remarkable achievement in my eyes from a financial perspective. The 2 sides, meaning the results and the management of the assets results in the return on cost of capital. We achieved 6.9%, which is 0.6 percentage points above our WACC. We had some comments that our WACC appears to be low, I can confirm to you that the calculation is unchanged for more than 10 years.
We have not changed it and it is in a real comparable basis. The main reason for the reduction is the change in our portfolio. We have an increasing part of our assets in mature countries after the Italcementi acquisition. The beta factor is reduced significantly over the last 2 years and is down from roughly 1.3-0.8. That technically leads to decrease in our WACC. The second comment which I would like to make is on the invested capital. This is a 4-quarter average. You know that in our business the fourth quarter, end of December has a very low capital employed due to the stop of activities in December and just before Christmas time. Whereas in summer and spring the capital invested is significantly higher. This thing is roughly EUR 1.5 billion and we show in this chart the 4-quarter average.
I have seen that in the market some companies tend to show only the year-end value, which gives of course a higher return on capital and a much lower capital employed. You can also see the effect of our initiative for portfolio optimization and streamlining from 2017 to 2018. The capital employed decreases by more than EUR 500 million. That's significant. If we compare pre Italcementi, which was until 2015 to 2018 today, we have an increase in the capital employed of roughly EUR 4 billion, whereas Italcementi came onto the balance sheet with a total value of EUR 5.5 billion. We achieved to manage down by EUR 1.5 billion and this predominantly comes from the sale and streamlining of the Italcementi assets. That gives us finally a much lower invested capital for Italcementi assets compared to what we started initially with.
Slide 32, you see the dividend development over 10 years. 37% combined average growth rate. We now achieve our target range of 40% of our adjusted group net profit. By that, we have now reached the target range one year earlier than initially expected. I'm exhausted from the financial side, I would like to give back to Dr. Scheifele for the outlook.
On the outlook, Chart 34, on the volume, that's unchanged compared to February. We expect a growth in U.S. of about 3%. Expect stronger growth, especially in the summer market, Texas, Georgia, North Carolina, South Carolina. I think the markets are pretty strong. We see that the market in the North, Northeast, New York, Upstate New York, Boston, have been weaker, have been disappointing last year. We see clearly better signs this year, the first two months. The volumes are clearly there. The order book seems to be okay. We expect a good volume growth, especially in California. The California infrastructure program, which provides $5 billion additional U.S. dollars for infrastructure on a yearly basis, will have a clear impact. We see also Oregon, the whole Seattle-Portland market to be very strong. Europe, overall, growth between 1%-2%.
The first two and a half months look pretty good. That's partially weather-driven. France volumes are good. The Grand Paris project is progressing. Italy in the north is okay, 4%-5% up. Germany is okay. Eastern Europe remains strong, we expect another strong year, especially in Czech Republic, also in Poland and in Hungary. Russia, overall flattish. Turkey, obviously double-digit negative growth. India should have a good year. We would expect 7%-8%. Indonesia, our forecast was about 4%. That looks good at the moment. The first weeks of the year have been better than we expected. They have the election coming now in mid-April. Market has been okay, with a growth between 3%-5% in January, February. March is now a little bit slower. It's slightly negative, that's mainly due to the election. Australia, solid. In Sub-Sahara Africa, overall good growth.
Egypt is going to be weak. If you look to our markets in Chart 35, we would expect a solid result improvement in North America. What we see in quite a couple of key states, state infrastructure spending is up. That's for example, in Pennsylvania, which is an important state for us. California, I mentioned. Texas is strong. Georgia is okay. Indiana is good. South Carolina, North Carolina states infrastructure spending is up. Oregon is strong. We would expect in U.S., cement price increases of about between $5 and $10, depending on the state, and aggregates also between $3 and $5. Europe overall is doing growth. I would expect slow growth, but growing. Pricing in Europe overall, what we see is going up. That it's one of the key targets for this year. For example, in Germany, we are now up maybe EUR 2 or EUR 2.50.
we are up by about 10%. Bag is flat.
We had assumed a certain drop of bagged cement price in the first half year due to the consolidation not being finished yet, then had assumed the price increase in bagged cement, I think, starting from first of July or first of August. At the moment, bagged cement price is stable. That's good news. Other good news is the coal price is clearly down. You know that Indonesia is one of the large coal consumers in our group, with about 2.6 million tons. The Newcastle Index is clearly down, so we have also support from lower energy costs. Finally, the Indonesian rupiah has clearly gained strength. It's much better performing against the U.S. dollar compared to last year. Last year, we lost about 10%. As most of you know, two-thirds of our cost base in Indonesia is dollar-based.
We had assumed a certain drop of bagged cement price in the first half year due to the consolidation not being finished yet, and then had assumed the price increase in bagged cement, starting from 1st of July or 1st of August. At the moment, bagged cement price is stable. That's good news. Other good news is the coal price is clearly down. You know that Indonesia is one of the large coal consumers in our group, with about 2.6 million tons. The Newcastle Index is clearly down, we have also support from lower energy costs. Finally, the Indonesian rupiah has clearly gained strength. It's much better performing against the US dollar compared to last year. Last year, we lost about 10%. As most of you know, two-thirds of our cost base in Indonesia is dollar-based.
If the currency is weakening, that hits us also on our operational results. Indonesia, at the moment, things look good. Australia is doing okay. The market, the residential sector is weak, especially in Sydney and Brisbane. However, the rich invest. Perth is coming back step by step. We gained some good projects in Perth with shopping centers, but also in the mining sector. Melbourne is strong, and also in Australia, obviously, the lower coal price helps us in Cement Australia, which is quite significant. The other point is the fuel, the diesel cost is down in Australia. At the moment, diesel in Australia is down by about AUD 0.10 per liter, and this gives us, against last year, for example, a saving of about AUD 7 million, because AUD 0.01 is about AUD 700,000.
That is quite significant because we run a big aggregates and ready-mix business over there. Africa, Egypt remains troublesome. The army has started to increase prices now. That's a surprise in a way. The market remains weak. Morocco is okay. The rest of Tanzania is okay. Weak currency in Ghana is a little bit an issue, whereas Tanzania, Burkina Faso, and whatever, is overall okay. That's the message. Maybe a last point is on the volume side, we think we are okay. Pricing at the moment, Europe, North America looks okay. Also Indonesia is okay. What I already said in February, energy should be our friend this year. We see clearly lower energy costs in coal. Even CO2 price in Europe is down, so electricity is cheaper than anticipated. We see diesel also down.
Compared to our budget, we assume that probably on the energy costs, we had an upside of about EUR 60 million as we speak today. That's it from us. Now obviously, we're happy to answer any questions you might have. Thanks very much.
We can start with the Q&A session, please.
Ladies and gentlemen, we will now begin a question and answer session. As a reminder, if you wish to ask a question, just press star one on your telephone and wait for your name to be announced. I would like to remind you that we just limit the questions to only two. If you want to cancel your request, just press the hash key. Once again, if you would like to ask a question, just press star one, if you want to cancel your request, just press the hash key. First question comes from the line of Paul Roger. Please ask your question.
Good afternoon, everybody. Thanks for taking the question. I'll just have a couple then. Maybe firstly start on European price increases. You very kindly quantified the magnitude. I guess the question really is, I think this is probably now the third or fourth year in a row where we're starting the year quite positively. Big increases had been announced. I think if you look at what's actually been achieved in recent years, maybe with the exception of a few markets like Italy, generally, it feels like they've been a little bit disappointing. The question is really, what is different in 2019? What sort of magnitude of those increases do you think will actually stick this year? The second question is on CO2.
You've recently announced, I think, a plan to basically close one of your plants in the Nordics, in Sweden, I think, but to leave the terminal open. My question is really to what extent is that decision linked to CO2 and whether it's a sign of things to come for HeidelbergCement as we approach phase 4 of the ETS?
Maybe I'll start with just alone with the CO2 issue. You know that we have this carbon new trading scheme starting in 2021, it is our assumption, the final points have not all been agreed yet, that the CO2 allocation will be reduced about 20%-25% for the whole industry, and that leads to a cost increase, cement cost production increase of about EUR 4, EUR 4.50 for us. However, we are long until end of 2022. That's the one point. It's still, if you take CO2 costs into account, then you have to watch very carefully what you do with your clinker production. That's why, for example, a relatively small and inefficient plant like Degerhamn, we have decided to close down capacity. I think there is one issue on the CO2 reform which has to be understood.
First of all, it was not possible to transfer CO2 rights in case of plant closures. That was difficult or not allowed. Secondly, you got all CO2 certificates if you were exceeding 51% of your clinker production target, then you got 100% CO2 rights. The new regulation is, in two ways, different. First of all, it allows the transfer of CO2 rights from one plant to the other in case of significant production changes, meaning in case of closure. Secondly, in future, you get only CO2 rights according to production and not to the 51, then you get everything. That will lead, in our opinion, to a clear capacity closure scenario.
We have done that, and we think that in Europe, probably around 40 million tons of capacity will go away with a clear focus on the southern part of Europe, meaning Spain, Italy, France, where quite significant capacity closure can mid-term be expected. Obviously, we are watching that very carefully. On the long run, we believe the big players will benefit, because the market will further consolidate, and at the end of the day, the capacity closure will lead to a higher capacity utilization. In our industry, capacity utilization drives pricing. There will be maybe some short-term pain for some players, but in the long run, I think the big players will fare better. On the European pricing, I think we have seen some progress over the last years.
Maybe not as much as we had hoped for, but this year is in a way different for two reasons. First of all, the energy price hike last year was, for everybody, a shock, because we all could not compensate cost inflation with pricing. We want to recover margin. That's what you see in the market. In Europe, I think everybody has now understood the implication of high CO2 prices. That's why I think the pricing environment at the moment in Europe is, I think, very good. If you look to France, what I told you about France, that the triple net is up EUR 4.40. If I recall it well, over the last six, seven years in France, the price saw only one trend, going down. We see a clear trend change.
In Italy, when we bought Italcementi, I think the pricing was at EUR 55, EUR 56. Now we talk 70. Maybe you had hoped for 90, but I think 70 is already not too bad. We still want to go up another five next year, but we are on our way. Also Germany, that's why I mentioned the other first time about EUR 70. That is also significant. I am on pricing in Europe. I think CO2 is helping in that respect, and also the consolidation of the industry.
That's clear.
You are right. The year is still very young. I agree with that. Okay.
Okay. Thank you.
Don't worry.
We got another question, comes from the line of Phil Roseberg. Please ask your question.
Hi. Good afternoon, everyone. My two questions please, for Dr. Näger. The first one is about cash conversion rates. First time we see those numbers, I think. I would like to see they're best in the industry if we're comparing. Can you tell us what the cash conversion rate was, for instance, for last year, sorry, 2017 therefore, so we can compare to the 42. What is your target for that? Linked to that question therefore is, we had a free cash flow before growth, CapEx and disposals of about EUR 1.3 billion in 2018. I recall the sort of the Vision 2020 target, where I think you've said you're aiming for EUR 6 billion of cumulative free cash flow over the next three years. Can you give us comfort that with that slightly lower figure, we are still on target for that Vision 2020 target?
Very nice. A nice way of questioning. Cash conversion rate. The calculation is free cash flow after maintenance, either operating cash flow minus maintenance CapEx and same business CapEx over EBITDA or RCOBD as we call it. This rate is 42% in 2018 and was also 42% in 2017. If you go to slide 27, you can see previous year we had EUR 1,403 and if you divide to the EBITDA of EUR 3,297 EBITDA previous year, you get more or less the same figure if you exclude the
If you exclude the last figures after the comma. In 2016, it was in a similar area. We consistently have this figure. I now expect it to go up a little bit in 2019, maybe towards 45%, as tax payments and interest payments go down, we will not have an impact on free cash flow from the IFRS 16. That should remain in that range. You are right, we expected a higher free cash flow on Vision 2020 when we announced it two years ago. The two main impacts which have pushed us back on that is the exchange rate, where we lost an EBITDA EUR 300 million on an annual basis. Secondly, the development in Indonesia. We have expected stable result development for Indonesia, and we also lost equally EUR 250 in cash flow. That makes the main difference to the figure.
If you look to Vision 2020, it is so that the underlying targets, meaning our dividend policy, return cash to shareholders, disciplined CapEx policy, efficiency gains in the operational management, and also portfolio management, then we fully stick to the strategic elements. In order to outbalance the lower free cash flow, we then have focused more, and we have generated much more cash out of disposal of idle assets, of non-core businesses, and of non-sustainable market positions. If you look into year 2017, we started with that, with disposals of close to EUR 500. We reached EUR 600 million this year, clearly ahead of our expectation of roughly EUR 300 million. We will again have a good run from this in 2019. A good part of that, what was free cash flow before, we now can see in our portfolio program.
By the way, most of these assets stemmed from Italcementi. I would guess out of the total program of EUR 1.5 billion, EUR 1 billion is idle assets from Italcementi, which virtually we didn't pay for it because we didn't have it on the screen with our valuation. Nevertheless, we make the cash out of it, but it doesn't appear as a free cash flow, but it does appear in the growth CapEx net in our financial statement. I think we are well on track here. We do the best we can. I think this allows us still to achieve our target of a net debt of EUR 7 billion by end of 2020, based on pre-IFRS 16 accounting rules, because that's the benchmark. I think we are well on the way on the cash flow generation. No problem there.
Just to follow up very quickly on that. Does that imply that growth CapEx and disposals should even out over time?
In 2019, yes. In 2020 also probably, yeah. Yep.
Yes. Net number zero, Mr. Roseberg. That's the message.
Right. I've understood that.
With the high disposal side. High figure on the disposal. We are not inactive. We just work on the portfolio.
Perfect. Thank you.
Okay, thank you.
We got another question, comes from the line of Regis Patki. Please ask your question.
Thank you. Good afternoon, everyone. I've got two questions as well. First one is on energy costs. You mentioned in the call that you see a benefit of EUR 60 million this year. The annual report says energy costs will see a slight increase. If you can provide some color on the differing message here. The second one is on interest costs, where in the annual report, again, it says excluding IFRS 16 impact, you expect a slight decline in financial expenses. After incorporating IFRS 16, you expect slight to moderate increase. Can you please provide some color, as I think consensus is expecting a double-digit decline in the net financial expense in 2019? Thanks.
Also on energy. Hello. On energy, if you are along with the company, you know the number for last year was about EUR 2.1 billion energy costs all in. Where we stand, yeah. What we are seeing now out of which about EUR 900 million is only electricity, just to give an idea. We have about EUR 550 on coal. We had budgeted volume increase all in pricing maybe for EUR 260, so a slight increase. What I see now, my latest estimate is maybe 2019. Meaning we go down compared with plan EUR 60 million-EUR 70 million and would be flat versus last year or even slightly down versus last year. That's the message. Yeah?
Okay.
The business report has been written in February, and my latest update comes from Monday when I had a meeting with our energy guys, because in order to prepare for your calls and meeting with the investors, I just want to have a good
Updated information on one of my key cost models, and that is energy, which
Okay. On the finance cost, to your question, as I say, we think that the interest cost from our external financing will go down. Roughly on a rate between EUR 30 million-EUR 40 million per year for the years 2019, 2021, always compared with the previous year. This then will be a little bit diluted by the IFRS 16 interest. That is not an interest to be paid. It is a calculation. It depends very much on the calculation method. We really have an estimate on that. Based on that, we expect the overall financial result as reported there to be fairly stable, may vary because there's a relatively high degree of uncertainty in the calculation of this leasing interest or however you call this, because this is a very artificial figure.
Okay, that's clear. Thank you.
Yeah. It is only accounting. This is pure accounting, no cash item. We know our payout for our leasing rates. Whether you reclassify this payment as depreciation, okay, you would see it's a bit arbitrary and this depends on external factors, which we cannot predict. It's a bit strange, this IFRS 16. Okay.
We got another question. Comes from the line of Alain Gabriel. Please ask your question.
Yes. Good afternoon, gentlemen. Two questions from my side. Firstly, on the electricity exposure, can you remind us what your hedging policy is, given that we've seen a big spike in electricity prices in the second half of last year? How quickly do you think that should hit the P&L? The second question is on your capital recycling. Do you mind sharing with us how your thinking is evolving on where the capital is going of the asset that you're selling? Part of it will be going towards deleveraging. Which areas or segments or products are you becoming more interested in? Thank you.
No, on the capital allocation, it is clear, as we discussed with Mr. Roseberg, we have a free cash flow after maintenance, sustaining CapEx of about EUR 1.3 billion this year, last year, EUR 1.4 billion. We're going to continue to pay dividends. We paid overall dividends last year, EUR 550 million. That will continue to go up a little bit. Last year we spent net CapEx, gross CapEx, EUR 500 million. That was a big gross number of more than EUR 1.3 billion, which came down due to high disposals, what Dr. Näger explained. What we said to Mr. Roseberg, this number should go direction zero, and that would leave the bank finance and the bank debt going down. It's very simple. EUR 500 million, you can see the deleveraging from paying down was about EUR 240 million. If the assumption would be zero, then that would be EUR 700 million.
Our net debt at the moment is EUR 8,350. If you go down EUR 700 million, it would be EUR 76. Next year, the same story again, then we are at EUR 7 billion. I'm not an accountant, but it's very simple. The government must just be done. This is simple. If we have capital, if we talk about gross CapEx, it's what we said. It's not empire building. It's built on acquisition in existing markets where synergies are the value driver because we think the company and the management team has a clear record on integrating companies and businesses, and that's what we are looking for. It's not about going or dreaming about South America, to be clear. What was the other one? Energy. The hedging policy is known. On the energy side, the message is very simple.
I'm personally convinced that you will see a clear improvement in the margin development, especially in Q2, because at the moment, we are still stuck in our plants with relatively highly paid coal and pet coke and also relatively high hedge electricity prices. Obviously, we have then taken coverage now for the remainder of the year, also on electricity, especially in Europe, which is clearly below our budgeted numbers. You will see the margin expansion driven by lower energy costs and better pricing, especially in Q2. There you should see a significant impact, because most of the price increases in our industry, especially in North America, they start from 1st of April. In Europe, for example, Germany, we have done 1st of January. Poland is 1st of January. It depends a little. Italy, we have done 1st of January instead of 1st of March.
The same in the EU apply already since January. Normally, that was always 1st of March. In some countries, we have moved earlier. The main impact comes typically when the season starts, 1st of April. Okay. Any next question? No questions anymore.
No.
Sir, we got another question. Comes from the line of Robert Gardiner. Please ask your question.
Morning. Thanks for taking the call. I follow the energy question with one maybe on transport and freight. Similarly, a large bill, about EUR 1.9 billion in 2018. With freight rates on the floor, U.S. dollar moving in your favor. I'm just wondering, are there any potential tailwinds there? Secondly, I might just go back on Australia, you mentioned weaker ready-mix on the Gold Coast. Is that what's driving potential of cement price fights down there between Boral and Wagners? Is that a function of a weaker construction market or are prices declining there? Thanks.
Can I just say, to GV, Freight, you are right. Freight is also our friend. Freight rates are clearly coming down, and freight plays an important role as part of energy. That's what I mentioned also for Asia. That's why in Asia, energy is clearly coming down because freight rates are also down. That's why I said at the beginning, head of PC should be our friend, because first of all, coal, pet coke is coming down and also freight is coming down, so that should be helpful. You're totally right. Then the question on Australia was what you say, what I'm informed, I think Cement Australia price increase is up AUD 3 to AUD 4. AUD 4, that's what I know.
We have a certain market weakness, you are right, in Brisbane, especially on the Sunshine Coast area. Brisbane has been a little bit overbuilt. The market is slowing down. At the same time, we have new competitors coming in, coming into the ready-mix. We have also two independent ready-mix players in Brisbane opening a cement terminal, which starts, I think, 1st of July. That's only one market. In Sydney, we see also residential clearly slowing. However, we have big infrastructure projects in Sydney. Sydney is building a new airport where we got a big job. Sydney is building a huge turnpike around the city where we have works which we are already supplying. We think that for the full year infrastructure in Sydney will compensate the weaker residential market and the infrastructure work is very well priced.
I personally was in Australia four weeks ago when I was on the site at the airport, but also at the turnpike, and that looks pretty good. Actually it's very difficult. I know Australia, because always area after area has a very different drivers to the market. Okay?
Yeah. Great. Thank you.
Thank you.
We get another question, comes from the line of Arnaud Lehmann. Please ask your question.
Thank you. Good afternoon, gentlemen. Two questions, if I may. Firstly, just regarding a comment you made about the start of the year being strong. Could you maybe define that a little bit? Is it better than the moderate growth that you mentioned in the annual report? Are you already ahead of your full year guidance? That's my first question. The second question is regarding Italy. You have a medium-term objective to get back to EUR 150 million of EBITDA. Do you think it's achievable for 2019, or should we wait for next year with further increase in prices? Thank you.
Mr. Lehmann, in Italy, miracles take also a little bit of time. I know a lot of people have been very critical about the Italcementi acquisition and whatever, I told them we need a bit of time. We are about now to consolidate the market. There are still some one or two pending smaller deals, though, with the other two big players, which should come through in the very foreseeable future. I think our EBITDA in Italy last year was about EUR 70 million-EUR 75 million. We want to go up again. We are on our way. I think the mid-term target for Mr. Callieri, who is our country manager, was 2020 or whatever, or 2019. We are on our way. He will probably hit his bonus, that is the message. Italy last year, like-for-like, was up by about EUR 25 million.
Now we have the full year synergy effect of Cementir in, we are on our way. I am not going to speculate about March now. I think you should expect a solid Q1, meaning Q1 should be result-wise above last year. Let us wait, the match is not over yet. What we only see at the moment, I think we do not see any major problem coming up in the core markets.
Thank you very much.
Okay.
We got another question, comes from the line of Jen Messenger. Please ask your question.
Hi. Good afternoon. Two, if I could, please. Maybe the first to Dr. Scheifele. Just on the slide on the outlook, Dr. Scheifele, you talk about the U.S. and I think a solid result expected, whereas places like Europe, it's about solid growth. Can I just ask, when you look at the North America business, should we take anything from that in terms of, there has been industry talk about pricing in cement maybe not moving an awful lot this year because of part of the currency making it more attractive for imports, partly obviously for yourself and McInnis and that accelerating pressure at the back end of last year, is that a determinant in terms of what may put pressure on this year?
Just a little bit of a feel as to whether we should be taking a more cautious view on the U.S. or is that completely the wrong kind of message to take? Within that U.S. guidance, obviously 2017 had Carroll Canyon. Is there anything in the pipeline that is going to blow the numbers around this year in terms of sizable disposals that may come through? Is that in or outside of your guidance right now? The second question for Dr. Näger. I just wanted to come back on this free cash flow point, because I think you described it as best in the industry. If I just take your CapEx, the pure spend on expansion out, you're down at about 22 free cash flow conversion, which sounds unbelievable because LafargeHolcim around the 28 mark.
When we look behind that, the biggest thing that you could probably change is the cash spend on provisions, which I thought would have come down as the cement restructuring kind of washes through the system. You're still implying about EUR 324 million there. Is that a number that is embedded, or should that number drop? Is it really asbestos and all the other things that continue and will continue to be a cash flow drain? Just so we can understand a little bit what are the other big levers behind that free cash flow conversion. Thank you.
Hello, Mr. Messenger. On the U.S., there will be some real estate transactions in the U.S. We have not all budgeted, but I think probably this year, not a transaction from a P&L impact of the size of Carroll Canyon might be different from a cash impact. As you recall, you are a close follower of the industry, we bought the assets of Cemex in Seattle, which are performing very nicely. There we bought also two or three, more or less close to being exhausted quarries, which are now on the pipeline to sell and which are in the Redmond region. Redmond is Microsoft, so that's a booming area. There we are about to turn the one or other property from commercial to residential, and that's going to be a significant double-digit dollar issue.
This has a relatively high book value, the transaction amount might be close to the amount for Carroll Canyon, but it's not the P&L impact. That's what I'm telling you. Cash-wise, we still have some nice pieces of property, especially in the whole Seattle, Redmond area, we have excess property, which we try to bring to the market over the next two years. On the U.S. market, I think, as you know U.S. pretty well, it's a very regional issue. The most difficult to understand is the Region North. That has to do with McInnis, and that has to do that also one of our competitors in Europe has expanded and modernized its plant in upstate New York at the Hudson River, and there seems to be still some capacity not utilized.
That's what we see. That's why the pricing in that area differs very much. If we start with the bad news, if you look to New York, for example, in New York, New York Metro prices are at the moment about $92, $93. If you recall what I told you one or two years ago, we were at around $100, $102. Pricing went down $8. Our assumption is that we will keep that pricing around that level, but there will be no price increase in the region down New York, Boston, Northeast region because McInnis is still around, and I think they still have a capacity about $1 million to sell. They have 2 million tons capacity.
Our market intelligence tells us they sold about 400,000, 500,000 in the Canadian market, and they sold about 500,000 along the East Coast, they have still 1 million to go. It was helpful that they had some production problems in February, which was published. Let's wait and see. Whereas if I look now to Mid-Atlantic, I move south, that's Baltimore, Washington, Virginia. We think we will get a price increase of about $4-$5. Pricing should-- It's at the moment $105, $106, we expect it to be $109, $1010. If we go to the Midwest, if we talk about Indiana, Ohio, or also Minneapolis and whatever, there we expect price increases between $5-$6. Pricing should end up in this region. That you get a feeling about the difference. It's the same way. It's about $125, $126. Just that.
This region really has a huge variety. If you look to the Lake Ontario, pricing should, due to McInnis again, be flat. In Ontario, Greater Toronto, we price maybe about $104. Flat. That's why in the Region North, average price increase, Mr. Messenger, may be $1, $1.50 as last year. Whereas the years before, if you go back to the notes, you will see I told you $4-$5, that's not possible because we have the impact of McInnis. If we go to the South, Texas and whatever, we think we will see a solid pricing between $5-$8 and we are also pretty confident on California that we will get about $8-$10 in California, especially Los Angeles market is sold out.
Typically in L.A., we always had overcapacity, so we expect now the L.A. price to go beyond $ 100, and San Francisco should go to $ 110, $ 115. As I told you, it varies very much per region. In Florida, North Carolina, South Carolina, Alabama, we would expect $5 to $ 8.
Fantastic. Thank you for the clarification.
Another message is, at the moment, we do not see new import activities, no new terminal being built. The only terminal which is being built, I think at the moment is by Oax Import in the Houston market, where they build one, but otherwise there is no new terminal activity. I was in the U.S. two weeks ago, and obviously we discussed the whole import situation on the region East Coast, but also especially Houston. At the moment, import activity, especially also in California, is quiet.
Fantastic. Thank you.
Thank you.
Okay.
Okay. I'm sorry, sir. Okay, sir, we got another question.
Yes, I want to give the final answer here to the cash flow question. If I refer to the economic analysis of the cash flow, I refer to slide 27. There we have a free cash flow definition, which is commonly used in industry, which is the operating cash flow minus stay in business CapEx, which is equal to maintenance CapEx. This gives you the cash flow or the amount of cash which the company is generating if it stays in its existing business scope, without consolidation, deconsolidation. Here we have generated a free cash flow of EUR 1.296 billion against an EBITDA of EUR 3,074, which is this 42.2%, which we are talking about. Previous year was 42.6%, and 2016, as far as I can see, was also in the range of 42%. This is a pretty stable figure.
Cemex uses exactly the same definition. Lafarge in the past has used the same definition. Now they have changed and give a free cash flow figure, which also includes growth CapEx into fixed assets, but not M&A. They have a slightly different message. If you look in their business report on page 250, you can calculate exactly the same figures as we have, they get a cash conversion of EUR 320 million. If you look to the figure cash flow decrease in provision to cash payments on page 26, which sometimes is a question, we show this as an explicit figure. The increase in provision during the business year comes inside the RCOBD of EUR 125 million, and typically in the additional ordinary results, another EUR 100 million to EUR 125 million per year. The remainder comes in discontinued operations or in OCI.
That's how the mechanics work. If I look to the competitor accounts, this figure appears in their working capital. I found that a bit strange, but that as it is, they show it as change of working capital. I do not want to comment on the other companies, but that's one of the reasons why LafargeHolcim has such a high, what they call change in working capital, but the EUR 700 million they show there, they include roughly CHF 500 million of payout from provision for restructuring costs. Then it makes it very consistent. The presentation as I showed on slide 27 is a very valid and economically very sound provision.
Then you can look into our accounts, and you can then split the growth CapEx net, the EUR 501, into our disposals, which is close to EUR 600 and the gross growth strategic CapEx, which is roughly EUR 1.1 billion, then it gives you a fully consistent figure. If you need more information about that, just call in Mr. Castro or Mr. Jelito. They can give you each and every detail on this figure. I think our statement is very sound. Okay. Thank you.
Sir, we got another question. Comes from the line of Arnaud Pinatel. Please ask your question.
Yes. Good afternoon, gentlemen. It's Arnaud Pinatel from On Field Research. I would have a question of India. When I look at the recent news flow we heard on pricing, it looks like the industry is pushing price quite significantly in the south and in the central region of India. If I'm right, you are extremely well-positioned because these two regions are the largest for HeidelbergCement. Could you please update us on the reason why India is pushing such prices and if we can be relatively optimistic for margin expansion in this country in 2019?
Okay, Mr. Pinatel. Hello. As you know, India, again, the market is very regional. The south in India has two aspects which are different. One is positive, one is negative. The positive one, there's a lot of limestone. That's the big reserve position in India for limestone. The negative is when there's too much cement capacity due to the limestone. We have a capacity utilization in India, in the south, which is typically very low, which leads from time to time to kind of price fights. That's what happened last year. That's why if you look to the results of the Indian cement players, which are all published, you put them together in some baskets according to their footprint, you will see the southern companies had lousy numbers.
Whereas the companies which were more in the center or the south, like the former old HeidelbergCement operations, they had pretty good numbers. What we see now, there seems to be some rationality back to the south. You're totally correctly informed. What we see now, also in our numbers, we see clear result improvements driven by significant price improvements in southern India. Just to give you an idea, in the north and in central India last year, the pricing was maybe about INR 3,350 per ton, whereas in the south price was maybe INR 2,800 per ton. That gives you about the difference. Now the south is trying to catch up. We will have our current discussions with them in the first half of April, then we will see where this goes.
Thank you very much.
Thank you.
Sir, your last question comes from the line of Gregor Kukic. Please ask your question.
Thank you for squeezing me in. I have a question just on the net debt, because obviously you've commented on the pre IFRS 16, but the reality is we are now with IFRS 16, and obviously you're changing your CapEx a little bit. Can you just give us your target for 2019 and 2020 as you will actually report it, so including IFRS 16 please on net debt? Then a final maybe follow-up question on your EBITDA guidance, which I think there isn't actually one, if I'm not mistaken. Just to be crystal clear, when you're talking 3%-9%, that is also in reference to EBITDA, and I presume on a like for like basis, just as a point of clarification. If you sit here today, I think on the last call 6 weeks ago or so, you were saying you're comfortable with 5.5.
Would you say your confidence increased or decreased, competitive or perhaps it's unchanged? Thank you.
Mr. Kukic. First of all, it's like for like, it's clear I do not see the increase of EBITDA due to IFRS. Whatever the number is, I think it's EUR 200 million, EUR 250 million. We do not regard this as a management performance, so I will not get any bonus on that. It's obviously like for like. Secondly, today the sun is out. Today I'm a little bit more optimistic maybe than in the gray time of February. I think that's a little bit the message from the call. What I have tried to make clear on pricing, I think I was very detailed on energy, volume for the time being, also partially weather-related is okay.
In our major markets in North America, in Europe and especially also in Asia, at the moment we see that our budgets which we have put together looks feasible and compared to last year, we have clearly tailwind from energy and I think also from pricing, especially also in Europe.
Thank you.
Okay.
When it comes to net debt, you can run the figures. I think we have tried to go down on a like-for-like basis without IFRS 16 from the current EUR 8.35 down to whatever, EUR 7.6 something, EUR 7.6 billion-EUR 7.7 billion. It will go up with IFRS 16 by EUR 1 billion roughly by end of the year. We have to see how this going to develop because as I said, we switch from leasing to ownership to direct equity purchase of such assets. This will again then influence the balance sheet. That's very difficult to predict. We will come out with the new guidance as soon as we know how the figure will develop from there. It depends on the time of the useful life of such assets. Yeah.
We currently do not know at what point on time we would sell such yellow machines if we have them in direct ownership as compared to an obligation to return them to the lessee in a leasing arrangement. That's a bit the point, that gives a certain uncertainty in this figure. Yeah. You have this IFRS 16, you know I don't like it very much because it again depends on the discount rate for those things. That may fluctuate a major amount depending on the macroeconomic environment. For me, that's not very helpful information. You say we have to live with it. You are definitely right in that respect. Whether it makes a lot of sense or not is a different question.
Okay. Thank you very much for the interest in our numbers. Thanks a lot. We're going to see some of you in the next days. Thanks a lot. Bye bye.
That concludes our conference for today. Thank you for participating. You may now all disconnect.