Ladies and gentlemen, thank you all for standing by, and welcome to today's interim financial report from January, September 2018. At this time, all participants are in a listen only mode. There will be a presentation followed by question and answer session at which time you. Ask their question. We are not going to allow not more than 2 questions to reach every participant.
I must advise you all that this conference is being recorded today, 1st day, 8th November, 2018. And now I'd like to hand the conference over to our first speaker today, Mr. Birg Seifel. Please go ahead, sir.
Hello. Good afternoon to everybody. We are calling here from Lamington. Thanks a lot for your free interest in our core fee earnings call, I sit together as usual with Doctor. Nager, CFO of the group and our Investor Relations team with Andrea Shutoff and Kasal.
I think before I talk about the Q3 developments in our markets, I think I should shortly address event, which was the real negative event in Q3, which was our profit warning mix of October, which came obviously as a surprise and which was obviously for myself and also for the company, a clear or a big disappointment because normally it's part of our corporate culture that we try very hard to deliver what we, promise. And let me address a couple of points.
The first question, if a question
is in the market, why hydro growth did a profit warning compared to other companies in the sector, quite a few, reduced their guidance even in a more significant way than we did, but that has only to do with German law. Sherman law is very strict. On that. And if we have a significant deviation compared to our guidance, then we have to act immediately. And the German Financial Authorities are now very sensitive on this issue because as you know, after the Volkswagen scandal, there was a big discussion in Germany where first line and top management informed the market in due time.
So we are under very close scrutiny and that's why we had from our perspective no choice then and could not wait until the Q3 earnings call and just reduced the guidance. That's why by law, we were kept to go that way. If you look to the reasons why we did the profit warning, there are 3 big issues. The first impact is the weather in the U. S.
And we come to that later. You saw and other companies also reported I think September was historically very bad ones in the U. S. Cement industry and especially in our core markets in Texas and in the region of East, we had very significant rainfall. And when I was on my trip around the world in October, I met our guys, I think, on the 10th October, but on the regional Northeast in Chicago and I had a video conference the towers and they came down with their forecast for the full year by about 1,000,000.
That's the first big point. The second point is in Europe, you see that especially strong in the region Western Southern Europe, in Q3, which is the summer period, July or September, in the last 4 years, electricity prices in Europe typically drop significantly because we have a lot of renewable energy available. This year, this was not the case, even the opposite electricity prices stay high or even went up. And that's for this reason in Europe overall, electricity costs versus our July forecast internal estimate went up for the full year by another 1000000 to 1000000. And the last point is that on the quarry sales, you know that according to our accounting rules, we report the sale of depleted quarries as part of the EBITDA because its part, and it's a significant part of the value chain of our aggregates business, how do you commercialize, exhaust the queries.
Last year, as you know, we had a big quarry sale in Q4, which was in San Diego, Carroll Canyon, which had an impact of about 1,000,000 and which brought the EBITDA from policies up for the full year to an around 119 And, we think this year we're going to end up at around 1,000,000. You might ask your question, say, yes, you're dividing your telephone July, very simple. And so we had a major quarry transaction and LOE signed in the Greater Seattle area. Close to the Boeing Roach in Everett, and here, the land developer for Vancouver walked away end of September when the stock market got very nervous about the cyclical in the U. S.
And we have now restarted the process for the steep piece of property and probably we will finalize that in 2019. That said on the call. If you look to our Q3 results, I think you see that there are some clear positive news. We have a strong organic growth with about those two 10% that shows you that our markets are solid and growing. You'll see also that free cash flow generation is very good.
The financial KPIs are moving in the right direction. Finance costs are down Texas of our own net debt is reduced and we earned again a premium on our cost of capital of about 10% message is clear, we're going to earn more money in 2018 than we in 2017 and we're going to continue to increase our dividend in 2019 in the 9th year in a row. Another TPI, which is for me, always very important is the productivity or the efficiency in the company, And if you look to our detailed quarterly report, you will see that our manpower is down compared to last year by about 1600 full time employees. If you take acquisition and disposals out, we have organically reduced manpower by 600 FTE. The workforce is around 60,000.
So we have a reduction of about minus 1% on workforce whereas volume Average are up in the 1st 9 months, 3.5%. So also productivity in the company clearly went up by about 4.5 or even to 5%. So core message, results are negative impactfully by weather in some of the markets. We had a clear spike in energy costs, yes? And the one off on the quality sale, the underlying business is okay.
We as a board, we as a board of the leaders sitting together after the profit warning and said, okay, what can we do? And that's why we have initiated an action plan, which focuses on Three areas and the overall message is CEO. It is a clear signal that obviously the top management listens carefully to the capital market, yes, we understand the concerns of the shareholders and it's also clear that we act accordingly. And it's also for us, obvious that at the current share price level to buy our own shares, is a very small value in that than doing acquisitions which are above that hurdle rate and which have higher risk to buy your stock, which you own and control yourself. The three points I mentioned, we want to accelerate our portfolio optimization yes, we have global divestment potentials now under review.
We will have an opportunistic approach So we cannot detail the countries or what we think we plan to do because we also need the good bios world, but we have initiated, we have started new actions and are confident that we can accelerate that. On operational excellence, We are starting and we have started already to implement a new efficiency program in a first step to focus on SG And A we commit to cut SG and A costs in the group over the next 2 years by about 1000000 And we will check then in a second step, whether we have other areas where we still have room for improvement and we will update you in March when we publish our final results where we are in that area. And the other one is we want to cut back our gross growth of gross CapEx to 1,000,000 by average for 2019 2020. And the global rate is share buyback valuation. And we will reconsider mix 2019 when we see how our measures are implemented going whether we have cash available to do a share buyback.
Message is also clear we try to put all levels. In order to improve margin and cash flow and also support a good investment rate rating. We also believe and are committed that our net debt target of our 2020 vision of 1,000,000,000 is now more ambitious, but it's still feasible. And with the three letters, which I just mentioned, I think we will try very hard to reach that target. If you go to the next chart, you'll see the overview of the financial figures I think you see on the right side, the revenues declined.
That's a pretty steep number. And then you see also the EBITDA margin, the problem on the EBITDA, it's not in aggregates. I think, we will at the end of the year in aggregates, we're going to be fine. Problem is the cement division and in the cement division, it's the energy piece of the business which is the major problem. If you look to our energy costs for the full year, they're going to be up only on pricing, not a volume, about 1,000,000 compared to last year.
And that that's what's hitting our Cement EBITDA margin. And then you see earnings per share down in the quarter down on the page 12% year to date, 19%. We stay committed that for the full year, we're going to keep our guidance that we will have a double digit increase in group share profit and earnings per share Chart 5 gives you a little bit of overview on the Q3 EBITDA and what you see is pricing is okay, not bad, but not enough to compare say the energy in a way, if you want, then we have net volume is up 78% and then you see costs are up by about 5, out of which about 65 or 70 are energy. Annex Child 3 shows you a little bit the history of this year. And here again, what I told you, we had the 3 drivers for the profit warnings, the increase in electricity and variable costs in Europe, yes?
Then harsh, whether you call U. S. Markets and then the lower gain from the asset sales from depleted queries. That's the core message. We had growth like for like in Q3, but it was obviously not enough to compensate to compensate a very slow staff in the year of Q1.
Chart 7 shows you the weather impact in the U. S, and this is not a chart made up by board that comes from the Portland Cement Association, the Emergent Cement Association, I think the white one is very important. It shows you that West South Central that's mainly Texas 20 percent down in the months of September and you see the regional East, mid Atlantic, yeah, Virginia, Maryland, well down 21%. That's for us a cold area. That's where we have our biggest cement plant in the U.
S. In the Lehigh Valley, that's Union Bridge, that's in Maryland, mid Atlantic, minus 19 6 New England, minus Midwest down 8% to 9.6%. And our North American business in this region, Texas and the region Northeast we do about 60% of our cement business and about 50% of our aggregate sales. And as you know, that September is probably the most important in our industry for some profit not only volume wise but profit wise, but it was clear that with that miss due to weather in September, it will be very difficult or impossible to hit the numbers. Now what you see now on what you see now on our next slide is the energy on the power side, what I told you in Europe, the 20,000,000 to 1,000,000 And you see now in Q3 electricity cost inflation for Heidelberg.
That's not the index. The index looks even worse for Heidelberg in Q3. If we start this day, you ask yourself, 53%, what's the problem? Felicia is a country running 100% for nuclear power. They have 7 power plants out of which 6 are down for the moment.
So their power in beta is short, yes, industry to also on October has not improved. You see France Germany is up only 17% for us because, we changed a little bit by hedging strategy during Q3. But just to give an example, and you can check that via Intimate, if you go to the late stage electricity stock exchange in Germany and you check what was the stock the spot price for electricity last summer in July, August tembook per megawatt hour, you will see the price was around per megawatt hour. This year, we had prices between 1000000 or 1000000 per megawatt hour, and that's mainly driven by the significant increase in CO2 price. And you see the same for Norway and Sweden.
And that has obviously created additional headwind for us yes, and we had not foreseen that end of July because our July forecast we do in based on the two numbers and then the 3 months period comes this July or the September. And finally, when we came to the end of Q3, it was still that we had a significant negative development on electricity pricing. Chartline talks a little bit about more in detail about our portfolio optimization and the acceleration. I think, we do this with a lot of attention. As you know, this year, we have already disposed for about 1,000,000 and disposing from about 1,000,000.
We have so with the German sampling business. We have sold white cement in the U. S. We have sold white cement in Egypt. We have sold policy stakes in in the Arabic Peninsula, we are out to sell Sri Lanka and whatever.
So we are on our way. We think this year we will have to dispose the proceeds of about 1,000,000. Operational excellence, we talked about that. That SG and A with 1,000,000 saving target. This number is not coming out of my guts.
It's based on a detailed study, which Doctor. Nagel had done already during the summer break on my we are over the SG And A development in Arbor Broad after the FELCementi acquisition over the last 4 years. And it came to the conclusion that we can cut 1,000,000 and the split up is we want to cut 1,000,000 on country level. We have about 60 or 67 countries in our portfolio and 35 will come on group overhead. That's mainly area hyper broadband area overhead.
In including area over there in Dallas and Singapore. We have already started to implement that. We are taking out in total 3 group functions, yes, and merge them together in order to streamline the organization and to delay. And we're also taking out 3 area functions. That's what we already have executed And we are confident that we're going to hit these number.
We see this as a first step we will check-in more detail where we have further efficiency improvements, potential in my opinion, the one area is digitalization. I think we can work smarter and efficient if we use really digitalization alone in the cement plant, but maybe also in the shared service center, etcetera. I think we have also upside in real estate management. We're very good in the technical part of real estate management, whatever, whether we are in the commercialization process already worked last. I would make a question mark.
We're going to study that. We have significant We have a very significant real estate portfolio and the 3rd point is also on purchasing. We have to make sure that with digitalization, We put all levels on processing. And this organization goes back to the year's 2005 when I changed joint title board. I think we have to review that typically, whether that's still best of class, what can be done.
And then on the CapEx, we discussed message is clear. Share buyback is the hurdle rate we cut into 350 for the next 2 years. It is clear that we might seated a little bit into 'nineteen because we have still some projects where we are more some we are committed, some we are halfway committed, but we will compensate that by a reduction beyond 350 in the year 2020. Okay. And then the good news is Indonesia, you see here our results development July, August, September, I think Indocement and Stephen Graseck published their 2, 3 results yesterday.
And the message is clear. We see in the numbers a clear turnaround in profitability in the months of September, September was after 41 months, the 1st months where the result was above last year and above our internal budget. And that's mainly driven by price increases, which we successfully executed starting end of June. And if you in June, the price level in Indonesia arrived at the historically lowest level for the last, whatever, 6, 7, 8 years. And from there, we have increased prices impact cement by about $6 or 13 percent, yes, and that's clearly visible now in the September figures.
If you look to the Q3 result of Indocement, you check that by Internet, you will see that the Q3 result on EBITDA level more than doubled compared Q2 and the EBITDA margin went up in Q3 by about 4.4% compared to Q2 saw so all also worthwhile noting that in the 1st 9 months, we gained market share by 0.3% for us, it was clear that we want to defend our core market position in Western Java and Chicago. We did not want to give up market share or to sell market share and I think this is a good and we expect a solid crew for in Indonesia finally. If you look to the group areas chart, what's the chart on the chart, chart 12, you see on the right side, Q3 see some clear improvement in profitability compared to the 9 venues, but it's clearly not enough to catch up. We are 9 venues like for like still down -1.6 percent, yes? And I explained to you the various factors in North America.
Last 14, Our result in Q3, if you look to the weather, I think it was okay, but it was clearly not enough to catch up. That's why I reached north and reached sales reduced their October forecast compared to July by about 1,000,000, driven by weather. Our result in Q3 is very strongly impacted by Canada, yeah, where we had strong markets in Vancouver, Seattle and Portland, which are really booming, which are growing double digit. Pricing overall is okay. We have clear price pressure in the region, New York and New England due to McInnis, their pricing is down by about 4 And we think we have a good outlook for the remainder of the year.
October was a good month in the U. S. For us. The order book is in good quality and good shape. So the outlook for U.
S. Is okay, but we are running now against the clock. You know what I mean? Thanksgiving is coming and the big question mark in the S and R business is always where after Thanksgiving, you restart the quarry. On operation or you just keep it closed and you save on costs.
Yeah. And that's why the year comes very fast now to an end. On the margin side, you see we had done well. I think Cementis, okay, aggregates the margin is up, the margin is up compared to last year, the reason there is a one off of a policy of our US20 million dollars, which is included in the cool 3 result, which is also visible on the margin. Western Southern Europe, you see also here that trend, the result trend is clearly improving.
EBITDA was still down 0.5%. We are improving against the weak first half, and we expect an acceleration of this trend in Q4 especially in UK, but also in France, Western Southern Europe supports the most for an increased variable costs we talked about electricity investment in Southern Europe due to our business mix in Spain and UK, we have a very a low clinker incorporation meaning we use a lot of slack. Yeah, slack prices have increased due to the increased CO2 prices that increases the input cost for us for the cement production in a significant way. And also in the UK in the asphalt business, we were hit very much by the increase of bitumen costs, which were for the full year, about 1,000,000, which is waiting on our and that's what you see then also in the margins. What we see if we come to north on an Eastern Europe, I think year.
Everything looks okay. Resights are up in the quarter, 12.7% over the 9 9.1%. We have a very strong performance in Poland and Czech Republic where volumes and prices is clearly up. We had a little bit weaker quarter in Sweden, but that's just the timing of our maintenance repair stop in our largest plant in sleetech. And we had a weak results, continued market pressure and weak results, especially in the grain, you see the margins, I think, are okay.
And the volumes are significantly up in Poland and Czech Republic significantly double digit. So we talk about numbers around 20% or more. So markets are very strong in Q3. Asia Pacific If you look to the right side, you see on EBITDA, we are only down 0.9% that comes only from Indonesia Indonesia in the quarter or in including ForEx was down again by about 1,000,000 that shows you the other countries in Asia, where Axya and especially China, was good. Thailand was good.
Australia was okay overall, and that's what you see also in the margin. The New Year via razor business, this asphalt business in Melbourne and recycling business is doing very well. And we expect a solid Q4 due to being the better pricing in Indonesia. Africa, Eastern Mediterranean, the figures which you look, you see EBITDA down minus 10.4%. You say, Hey, this is what's happening there, but you have to see the numbers are relatively small.
We talk about CHF 11,000,000 euro. If you look to year to date for the 1st 9 months, you're still up 6%. The markets are okay. The Tanzania and Ghana markets are strong. Egypt until September was okay.
October was more difficult because the Army started to supply more to the market that led to pricing pressure, yes? And the main deviation in the quarter comes that last year, we sold our fancy had called in downtown Cairo with there was a book gain of whatever about 1,000,000 or 1,000,000, or that makes the numbers move because the numbers are small. And then we had a license expiry in Israel for our important quarry, another one in the north. And the last one is obviously the market in Turkey is under pressure. Volumes in the quarter in cement were strong, especially in Egypt with about 9%, Ghana 9%, in Aggregates, you see volumes down 27.9%.
That's the quarry in the northern part of Israel. From trading, I think the result are okay. They are not so meaningful. I think there are always 2 key issues. One is about the clinker export prices that shows you a little bit about the growth demand and supplies situation.
And it is so that in Asia, clinker prices are clearly up by 4 to 6 U. S. Dollars you want to buy clinker now in Shanghai, it's up to $40 per tonne that shows you the underlying strong demand in Asia. And the second point is in Mediterranean due to the overall capacity and the fall in the Turkish market price are coming down to $30 or even below $30, yes? So we have a quite diverse development.
And the second point, and that's a the choke, China becomes now one of the largest cement importing countries in the world. We expect China to import next year about 11000000 or 12000000 tons because the Chinese government managed the market in a way that the prices are very high. And especially in the vehicle, we have at least players are importing our significantly, to China, okay? That's it from my side. And I hand over to Doctor.
Polado for answering.
Okay. Thank you, Doctor. Scheifele. Good afternoon everybody. Also from my side, I would like to lead you through the financial report and we start on page 20, there you can see the group share of profit is up earnings per share increase from $242,000,000 to $72,000,000.
So that's an off improvement in group net share of profit continues to improve. This is as mainly financial result and lower taxes overcompensate bigger than expected RCOBD. And you can see that the financial result in Q3 improves by roughly 1,000,000 So on a yearly basis, our finance cost goes down by 1,000,000 roughly as guided and the will continue. On the tax side, we see an improvement by 100 more than 1,000,000 This mainly comes from one of previous year where we did the provision for a pending tax audit cash flow is encouraging. We have a high cash conversion rate.
We have kept the free cash flow stable at 1,000,000,000 despite the comparable EBITDA going down. So we have created more free cash flow out of the out of the EBITDA compared to previous years. It shows that the quality of results, the quality of earnings are pretty good this year. We see a significant increase in working capital still at the end of September, which reflects the October and we expect a normalization of the working capital towards the year. And we have found a premium on cost capital.
Return on invested capital is 7.1 percent, last 12 months trailing, at the end of Q3, and at seeds our cost of capital, which is 6.3%. I will come back on that in detail on a later slide. Slide 21, then you can see the profit and loss statement. We have a little additional ordinary result minus 30 4, which comes from antitrust provision in Italy and some smaller restructuring. We see financial results improving as discussed.
We see income tax improving and we see pretty stable discontinued operations and minorities. So per balanced future of profit at 1,000,000 and 12% up compared to last year. Then on the cash flow statement, as I mentioned earlier, we see a high change in working capital, a high increase in investment in working capital I would expect this to come down towards year end. If you look to the CapEx, we see that the sustaining CapEx is about SEK370 1,000,000. And same level as previous year, whereas the gross CapEx is SEK844,000,000 you know, we have invested 1,000,000 earlier this year in January, in Italy market consolidation mainly with the acquisition of German Tier and the buildup of Ashford Business on the East Coast in in Australia.
So after that, 2 acquisitions, so that's roughly 1,000,000 gross CapEx has very much normalized And as Doctor. Scheifele said, we have now increased the hurdle rate to the level of the expected return from a share buyback And this will bring down gross CapEx even further from now on. If you look to the proceeds from a fixed asset disposal, 169 until end of September. Also, here we are well on track to reach our 3 year target of 1,000,000,000 to 1,000,000,000, and we will see further disposals toward the end of the year and also early 2019. So basically on the cash flow side, we are well underway and we will continue to generate cash flow from that.
If you look to the functional chart, slide 23, you can see again what I mentioned earlier, the company is able to finance its closed CapEx and its dividends from the free cash flow, and on top of that, pay down debt now down to SEK 9,500,000,000. At the end of September. Slide 24 shows the balance sheet see very little movement there. What you can see is a significant increase in the accounts receivable. As I have said, a buildup of working capital due to strong business activity by end of Q3.
Then on Slide 25, I put the return on invested capital and I have given to you on the right hand side quite another of detail on our, on our WACC because there have been some questions from the capital market, how our WACC is calculated. The WACC calculation is unchanged for more than 10 years now, and you can see the improvement in the VAT mainly comes from external factors like the risk free interest rate, which went down from maintenance 0.3% down to 1.1%. And, mainly the better factor. This has probably the highest influence on that, which is EUR0.83 coming from 0.94 compared to the volatility of the Heidelberg dementia over the last time was lower than the volatility of our benchmark. So that leads to visible reduction in direct and that allows us to earn or even pick up margin on the WACC.
Also tax rate down, that has a little bit smaller impact and comes, as I said, that overall, our tax rate goes down
in the group.
What brings the back also to a lower level is that roughly 80% of our assets are in mature countries with the back below 5%, only 20% of our capital employed is in emerging market with significantly higher back rates. I mean, that's it from, the finance side, and I would like
to get back to Doctor. Scheifele Okay. For the unsubscribe, keeps that short revised outlook. You have seen that, yes, Doctor. Meghan thing that the expansion CapEx this year is, high on to me through the, 2 acquisitions at the beginning of the year.
Energy costs, we are now guiding higher more to the low double digit. So it's going to be close to probably close to 10%. And then we have a large chart on CO2. You have seen that CO2 prices went up significantly and that drives power prices that size slag prices. And you see that as, finally, as an opportunity for Heidelberg, for various reasons.
First of all, we are the ones who are long on CO2, right? They are not all players in Europe long, yeah, to our understanding. So we are long, and we are covered until beginning of 2020. Screening. So it's not an imminent problem for us.
And secondly, we believe that the ICO2 price and the new trading period will drive consolidation in the markets because there are quite a few markets where the government granted excessive CO2 rights to the Cement players. This is our Uber in the Ukraine period, and that meaning getting from selling CO2 rights from a cash perspective will no longer be a business model, and you will see capacity closure. And by then, also increase utilization rate. And finally, I think, such a tight environmental regulation as in a lot of industries is not good for the small players. The big ones going to make it, and it will drive consolidation and by consolidation finally pricing power.
Okay. That's it. From our side, and we're happy now to answer any questions you might have. I'll hand over to Mr. Falam out to that.
Yes, ready for the Q And A session, please. Thank you.
And our first question is from the line of Paul Roger. Your line is now open. Please ask your question.
Hi, good afternoon, everyone. So just two questions then. Firstly, maybe going on to the margins in Europe. Could you help us understand why the margin pressure was bigger in Southwest year of the Northeast and really I asked that because it looks like both of them have very good growth, and fair similar sort of cost inflation. So just wondering if there's a a market reason, I mean, maybe the pricing was weaker in UK or Germany or something like that.
And then the second one is on Indonesia. I think you mentioned on the second quarter call that you might be interested in in buying some assets in the country. Clearly, now you're talking about buybacks versus M and A. Should we interpret that to mean you're less interested in buying assets in Italy at this stage?
Mr. Roger Salone, number 2nd question first, the answer is yes, that you are spot on. And the second mind is on is Southern Europe and Northern Europe. You're right. There's one thing, and we mentioned that, because we try to we said that we lost last year, we lost market share.
We are underperforming the market. In U. K, we rearranged the manner We are back in the markets. We were growing volumes in our business lines. So our volumes are back in the UK, but we have we had to buy back a little bit in the market.
So our pricing, especially in UK, was relatively weak. And that covers with high input costs obviously led to a pressure on margin. The top focus in the UK is obviously now to get pricing up. And if you take a look, 2019. And I talked to our guys yesterday evening to prepare, for the call, and with the investors meeting is that we plan double price increases in the UK across all business lines.
So, we plan to increase in ready mix by about £7 per, a cubic meter in asphalt, £8, aggregates 2.5 and in cement, £4.4. The net is only 5% But this means significant price increase in order to regain margin has now high on the agenda. And on the other side, it may high. You know what I mean? With all respect, the competition in Norway in Sweden is a bit different than in player on this year because we are the only one who signed this interest.
And secondly, in makeup, we include very strong performing countries like Poland and Czech Republic, where I mentioned that volumes are up significantly double digit. We had very good cost control, yes? And here also, the results came up very nicely, and that obviously helps to drive the results, to Nika. And also to make one comment, I saw that, obviously, we follow our competitors, competitors and competition is always good. If you, some competitors report on Europe only in one bucket.
We have separated in East West Or Invest South and in north in you put that as a Europoort together and then you compare it with our large European player, then you will see that our EPCR development is just spot on where they are. So, we have separated it. We had a weaker power in U. K. And also partially in India.
So it's not in France, but we have good open parts. So if you put that together overall, Europe is, I think, up to, to make a 4% overall. 4.4%, 4.4%
on EBITDA. If you look
at a combined no 4.64 points are 4.4. And then the competitors from the south of Germany are 4.4.4. So we've launched a number, so we are very self critical. And, so, but if you're looking together, I think we are overall in something. Okay, thanks a lot.
Your next question comes from the line of Mike Metz. The first one
maybe I just need a bit more explanation if you wouldn't mind. On this expansion CapEx, on the slide this time, it shows 1000000 in 2018. The slide back in July, it showed 1,000,000, the 1000000 doesn't seem to be to do with the acquisitions, but correct me if I'm wrong, and maybe just explain if you could a little bit more on that. And then the second question and maybe it's too early to ask you detail, but you know, it's great announcing these big price increases, but how do you make sure that they get delivered on one of the slides it talks to about an aggressive commercial excellence initiative. Could you give us some clues as to what that entails?
I think, Mr. Bexcello, the first one is a technical evaluable of the pricing side, Mr. Bex, and you are, you'll follow the industry for a long time. It is always difficult for this industry if you have a significant short term price increase in energy prices to translate back immediately, transfer back to our customers in an industry, which, for example, in Europe and also in emerging markets has low capacity utilization. This is stiffer but we have typically a tight effect where we then get the wake up call, get pressure from the capital market, and then we push very hard.
And that's what you what we see now. And how I read the market is, for example, in the UK, what I see in Germany, what I see in the U. S, there's a clear push in the market to recover lost margins due to the significant inflationary cost brand talk. And we train our sales force globally now very much on price increases and, we have very clear targets to do better. And due to the CO2 is in Europe, which is a problem, which is a bigger problem for some players than for us because some players are not longer.
I think the need and the must to increase prices, yes? If you look to these electricity prices, yes, others have also similar issues, yes, depending a little bit whether we are short or 1,000,000, very severe pressure to move on prices because otherwise, you will never get the margin back. And that's why I'm, I think we will see We will see movements, for example, in Germany, we are out now with plus freight, freight cost increase. And I think in Germany, we should get less at least $5 a fifty-fifty or whatever because even the private smaller players are out with price increases of or more because they have the same issue with the electricity like we had in Huddlberg and a similar issue I see also in the U. S.
Okay. And your technical question, you will go to slide 23, as I see, on the right top here, you have the 544 net growth CapEx. So that is in that figure, including including the, interactive disposals. And you have to note this is the last 12 month figure. So it includes the Q4 2017 to make it comparable quarter over quarter.
So in Q4 2017, as you know, we had an extraordinarily high figure on disposals, which roughly CHF 130,000,000, CHF140 1,000,000, yes? And now if we go forward in Q4 2018, you will not see this CHF 130,000,000 So if you add up the SEK 130,000,000 to the SEK 54,000,000, you end up SEK 680,000,000 roughly and that's the guidance SEK 700,000,000 rounded.
The next question comes from the line of Phil Rosenberg.
The first one is on the action plans, the accelerated portfolio optimization. Can you give us a little bit more detail of what has changed since the since you announced this sort of the Capital Markets Day? In other words, is the target still the 1 to 1 1,000,000,000 from now to 2020? And what are the criteria for these divestments The second question is just on the price cost. I see in Q3, the price cost is still not in balance.
How are the trends in costs going forward at the moment in your view? And when can we expect that price cost will become in balance overall for the group.
Yes. Okay. On the Mr. Russel, on the portfolio, we are As I said, the profit warming was a disappointment and was a long call also within the company. And I took that very positively.
You had always make us a part out of a company, you have to make an opportunity, you have to turn into an opportunity. That's why I said, now we take clear actions, and, the exceptions in the company to take also tough actions, for example, on SG And A, which clearly now they are, and that's why we said also we have to spend our view on the portfolio, whether we can do more in order to streamline the portfolio more aggressively what we originally thought. And secondly, we want to accelerate, yes? And we talk about countries, and it's also clear there are some countries in the world, which we believe are very important, are very attractive, which are absolutely core. And then there are countries.
If you look from a German point of view, which are a little bit far east of from Germany moving bar close to Russia and then going even beyond Russia to Central Asia where we think maybe every year they are or not. It's not a mass and also in Africa, there are sub countries where you can make a question mark. Thirdly, it's also So we have a lot of we have quite a few public listed companies in our portfolio where we have maturity holding and where we do not want to give out the majority, but whether you need to own 75% or 80% or only 51 and that's something, for example, which you can debate. As I told you, we are opportunistic. So we're not going to sell below value.
We look two areas where we have a good bias world, where prices and profitability is at the moment on a higher level and where we can do a good deal for the company, yes? And we will upgrade you or update you regularly on on that. And what was the second on the price cost balance? On the price cost balance, you are totally right, that's the problem. The 165, I'm on Chart 5 now.
And what I told you at the beginning with the productivity is the clear message If you look to the price cost balance to high level and to another big European player, then you see, they are at a position with Embras. So that'll be high higher of 1000 people more. That drives the cost stuff. The answer is not here. We are still very efficient.
So productivity, my calculation is up 4.5%, which is a good number. The problem is the variable costs, meaning the, especially the energy that's higher mentioned, which the pricing in energy, the 100,000,000 in energy. And that here, we are, we are at the moment, how we read the numbers we are due to our hedging policy, yes, we are worse off than companies who took a lot more longer position in 18 on energy because I told you at the beginning, our electricity our energy price inflation compared to last year and plan is up in the forecast $100,000,000. If we had forward by forward contracts, covered all potential energy costs, which we can cover in the company, our energy build and forecast for this year be more than $100,000,000,000. You know what I mean?
So the price cost inflation in our here this year plays very much on your hedging strategy when you wear more longer hedged. Obviously, you had lower prices, where if you wear a mile shorter hedged, then you have higher prices. And our budget on energy is always based on the forward prices for next year because I'm not a code or electricity expert our budget in November is always for the is what is the forward price for next year. And then we have a bonus image flows over quarter by quarter, which tends to be a little bit short, which is bad if prices go up, but which is good if prices go down. You know what I mean?
And that's what you see on the energy cost inflation. So my answer is, I think we're going to review our hedging strategy for next year. Obviously, I think, and we will see, and we should see a clearly better point next year. Okay. Is that from the
beginning of next year? I mean, is that just a factor of Beginning,
beginning next year and we CEO or so Mr. Roseberg, cold price, for example, or the Newcastle index for Asia, which is a big issue for us, has stayed around spot around 108, 110. When we made the budget last year, second half of November in Asia and Singapore, you can check that again, what I'll tell you. The new castle for a forward contract for coal in Asia was about 85, 86 per tonne. That was our budget assumption.
That was the budget assumptions for Indonesia for Thailand and for the coal in India, which we buy terminally. And it's also, by the way, the index for China because in China rebar also partially externally. And, okay, we spot price, the year to date spot price on Newcastle, if you go now, is about $108,000,000, dollars, $110 per tonne. That was about it stayed there, but it went up during the 1st 6 or 8 months. The new castle went up like that.
That's the problem. And that shows that is shown on the cost price relationship, which you write from here as mentioned. It's not a fixed cost problem. It's an energy problem. And the key question is how long and how short have you been in your Edge energy hedging strategy.
And that plays this year around a triple digit €1,000,000. That's it. The next question
comes from the line of Arnold Binatel.
Just to follow-up on pricing in Europe from next year because, obviously, what you are, telling us is, a very ambitious much price increase, and we understand it looking at the cost inflation we are flagging too. I understand that the tier 2 issue is, is impacting know, Northern Neerds, the Nordics, Germany, Poland, and a lot of countries. Could you also give us, a bit more visibility on what you are going to do initially? And if you are facing the same type of situation on the Italian market and perhaps so frankly, my my second question, where we need to speak to if I'm right. Would be on the CapEx.
During your Capital Market Day, I think you mentioned that you to the, you know, rebuild, you know, plants in Netherlands. It shows the wet professors to rebuild the dry professors Just wanted to understand if your new CapEx envelope, you are, within to achieve this, brownfield product.
Yes. Mr. Pinah, to your last question, what did you mention upgrade cement plant from wet to dry in the
in the U. S, if I'm wrong? The market there, you said we do want to modernize your plants because you still have wet processes. And, I just wanted to know if the new CapEx environment?
We have not, Mr. Benoit, we have not checked that in detail, but anyway, the costs for McInnis would be partially there will be nothing into 'nineteen, yes? And there will only $10,000,000 for permitting or whatever, because we are applying for the air permit at the moment. And there will be some costs in 2020. If you would start immediately and then it would become more on 2021.
So I think principally we would stick to that, but we have to do that again. On pricing in Europe, On Italy, I think just to update you on Italy where we are. In Italy, at the moment, yes, in Italy, at the moment, we are in September at a price of about per ton, which is about per ton up compared to last year. The target is now to keep that price at that level, yeah, because not really 3% to Q4 is dropped. At the moment, it looks okay.
And if we keep the September price until December, then we would be in December about better than last year as a starting point for the new year. The price increase announcement for Italy is about per tonne I think, with our competitors initially in rural, we're relatively confident that we will get 5.
And for France,
for a price increase net of about that would be the first significant in France But what I see from the market, yes, what you saw in our members on electricity, ATF is also charging the other guys, so electricity in France is up and that is a major issue. So, we think price increases in France it depends a little bit how much, how much reaction is needed in order to stop the new command or star offering similarly. The other one from ECCOT will not come in next year. So that will come in good terms and will come only in 2021. So that's it.
Thank you. Our next question comes from the line of Robert Gardiner.
Good afternoon. It's Fumizio, good afternoon. 2 for me, please. Can I ask maybe just on the buyback? What kind of criteria do you need to see in mid 2019 to engage buyback?
Do you think you'd be back close to your leverage targets by then allows the buyback again? Or or I'm just wondering what's the fix of the, like, the more confident to get into that kind of 2 and a half x or 7,000,000,000 that you talked about before. And secondly then, if I could just ask on the property numbers. So you mentioned the $20,000,000 gain in Q3 in the United States. Could you give me maybe three numbers?
So long, your total property sales for 'seventeen, your total property sales in the 9 month 'eighteen, May it again, please?
Thank you. So the last year, probably exhausted growth was about well underlying maybe even then on 95,000,000,000,000,000,000,000,000 dollars, $185,000,000,000. And year to date, the mobile number is $72,000,000, we think we're going to
do about 100. That's the most of the
matter mentioned, and, so that's very deep. Are at the moment, and that's always thinking. So, it could be more, but I must be the owner, but it could be also a little bit guess, but I think the and we will on the buyback, Mr. Gardemore, there are 2 issues. It's not about that much about deleveraging.
It's clear that deleveraging the company back to about 1,000,000,000 remains a target, a management target for 2020. I degree, it's getting more difficult, but with our action plan, I think if we do that successfully, reduce, stay very disciplined on gross CapEx, be successful on additional disposals, I can, we can still hit the numbers, yes? That's the first one. Yes, because you have to see that also if you look to 290, I think, if you look below EBITDA, You will see that our finance costs will strengthen both our own. We have a bond of about 1,000,000 running out expiring in December.
He has an interest pull up about 9.5% yet. So you see or only from that measure, it's again, 40,000,000 or even more saving. So cash flow generation in the company should remain very solid. So for us, it's the cash situation. Do we have excess cash available And the second point then is what's the share price.
You know what I mean? Because this is the most important question. Share buyback makes sense from company point of view if you believe that your the intrinsic value of your share, according to Ball And Buffet, is clearly higher than your actual share price And it's a very different story when we had the Capital Market Day, furthermore, our share, right, was around 80, 81. And now we talk about 6061 and even went down up to 55. You know what I mean?
So that's a total different story. And it is very clear that at a price of 60, we regard hydrobox cement shells as a very low risk, effective investment opportunity. And we also want to feel once send a clear signal to the market that we understand their reasoning, and we are principally opposed to it, we are following the commercial and we listen what the capital market is telling us. Okay?
Thank you. The next question comes from the line of Harvey. The the other line is now Please ask your question.
Yes, good afternoon, gentlemen. Two questions from my side. First on the disposal program and your cash accelerated. Many of your peers have also assets for sale. And one thing that we learned is that it's getting the right price will take time.
How much confidence or what gives you confidence that you'll be able to bring that process forward. That's 1. And 2 on your SEK 100,000,000 SG and A, can you confirm that this is net of inflation? And over what time period? Thank you.
On SG and A, it's net of inflation, what do you mean by that? But it's going to be over 2 years. We start with 50 to 19 and then another 50 in 2020. And we will update you in our result presentation for the full year in March. And as I said to you, it's only a first step we will check, and we need more time for that, where our other areas where we still see a efficiency gains for the company.
I mentioned, real estate management. I mentioned purchasing, but I mentioned also digitalization. I think in the utilization in our industry. There is a significant upside on the cost and on the production reliability and also on maintenance repair disposals. You are right, yes?
There are assets for sale, but they are more in areas where we are not in a seller position. That's why we said we are opportunistic. That's why we started various project. And opportunistic means we go then for the projects, which offer us the best returns, but we're not going to sell below value. That's also PO, and we will be optimistic, but we have really started new processes and up pushing and taking a broader view on our portfolio.
Thank
you. Our next question comes from the line of Arnold Lehman.
Thank you. Good afternoon, gentlemen. I have two questions, if I may. I mean, firstly, when you speak about reducing your gross CapEx, relative to the overall rate of share buyback valuation? Could you, sorry, maybe it's stupid, but could you peel what you mean by that, does that mean like you either return higher than your VAT or something equivalent?
My good question is related to the U. S, I think it's probably the 3rd year in a row that you've had some sort of weather disruption on your volumes. I mean, it's you and obviously all of your competitors in the region.
I appreciate that not only have happened
in the same states and the same parts of the U. S. But if we end up like every year having a long tough winter and then ongoing structural weather disruption in the summer from the hurricanes in the southern part of the U. S. Is there anything you can do to somehow just your oil business model in the U.
S. Are you logistic to try to take into account, maybe securing weather events?
So, Mr. Levin, I'm responsible for a lot of things, but for me to manage weather is a problem. Yeah. I agree and to change my business model. It's also, it's I haven't thought about that.
And I fully agree with you that the weather was this year, extremely not our trend. It was a lousy Q1, especially in the region. We had some, like, a few travel struggle to U. S. We had still snowing in the Northeast in the second half of April.
When I made my Q1 result performance meeting with the U. S. Management second half of April and I talked, to our, Benny Stone, and he's the vice president for reaching north. He's a very experienced guy you said Doctor. Scheifele, what do you want?
It's still snowing. You know what I mean? I tell you this is a quote, and we had a
very bad weather. And then
we had this shitty actually rain in, in, in September. And just to make a long story short, I was on 10th October, I think it was was in Chicago. I was visiting our largest brewery in Fortum. We could not leave the planet quarry because it was raining light in the monsoon in Indonesia and India we had extreme wet weather. And, that's a problem and we were not alone.
You know, I mean, we put it in the profit warning, we are the first to tell you, but all our guys came out toward you or the weather was a problem. But whether we change the business model, I have to think, you know, I'm concerned we cannot. And on the gross on the gross CapEx, and we have to see, let's be fair on that. Two issues, sir. This industry is weather sensitive.
And due to the climate change, weather gets more extreme, which we use is the predictability for us. So it must be very clear, yes, because normally, when to get warmer, and longer and whatever that changes the shipping patterns, whether we like it or not. If we are lucky in the U. S, we had last year a very early winter in December. I don't know.
Maybe it's sunny and warm until Christmas. And then we have other members again to tell you in February. You know what I don't know, the weather gets more extreme and that reduces the predictability for us. I don't think that might be very clear. And the second point is due to the old CO2 and climate discussion, the speaks on the energy prices are also my more than they used to be.
And as I explained, though, Mr. Phil Wooster, you know, the energy pricing is always difficult to predict. It's the question whether you go long or short. And you might be right or wrong, whatever way you go. So that's the problem.
And we and that has changed a little bit maybe to the other times. On the gross CapEx, you know, I'm not a I'm not an accountant for me. The message is very simple. The hydrocorte is noted that the Stock Exchange at the moment is 7.105.5 or 7. Whatever EBIT they are, multiple, yes, and the capital market tells me, if your company is 7.5, you should not make an acquisition in a crazy country with high risk for 9 times EBITDA.
You know what I mean? That's the message very simple for me. And I have understood that message and I accept the RTM So that's the whole.
Thank you. The next question comes from the line of John Messenger.
Hi, good afternoon. Can I just come back to Mike Betts earlier asked about Pemex? And I'm not sure maybe he was thinking the same one, but on Slide 27, Can we just understand there? Obviously, you've reduced 1,000,000 of your maintenance number for the year, but the expansion CapEx I think is all about physical CapEx rather than acquisitions has gone up by 1,000,000. Behind that, is there, I'm thinking here maybe in France where your talked about a master plan and you've had production difficulties.
Have you accelerated some spend in some parts of the portfolio? Because I'm just looking at that and 300 extra, you know, arguably it's 150 less in the next 2 years. So I'm just wondering whether you should be more aggressive on reducing your expansionary CapEx than you've highlighted? And the second question was just on hedging again. And apologies to come back to it.
But when we look at what has happened over the last 12 months, are hedging decisions Doctor. Schafer taken in each individual company? Or is the group having a stated strategy and you've adjusted that in any way? Where does responsibility lie? Is it a global level where you say these decisions or is it down at the local level?
And are there reasons why that might change looking at 2019 or how may approach that hedging kind of decision making?
Is no acceleration on investments in France or whatever. So, no, I think we have some confusion maybe on the on Hetching, Mr. Residential, that's a very fair and valid question.
The principle in Hollywood history seems
I have asked a couple of years ago, Doctor. Nagerholm, to come up with a hedging policy for the group, and I told him, look to the airline industry because this is a business, if you are wrong on carotene management, you get out of business, yes? And what we do is very similar to what airlines 2. So we have a clear hedging policy, which is a group guideline, and this allows and the The decision is with the country Managing Director, but he has a guideline, giving me he has to stick. And for the next quarter, maybe as an example, he can cover by fault, even 100%, yes?
He can? For the next quarter, the 2nd quarter, he can cover by fault, maybe 50% for the third quarter 'twenty five and for quarter number 4.0. So just as an example, it might differ a little bit from it, but that's the principle, yes, if it wants to exceed the hedge He talks to his area, fortunate, and they go to Doctor. Lager because he's the guy. If they agree, then they can go 4 100% for the full year, because maybe they got a crazy electricity contract in Canada, in Aetna We did that 2 years ago, where we had a very cheap exceptional offer.
And then with Edmonton Power, we agreed on a did a follow-up for the full year and Doctor. Lager agreed and the Forsland Member agreement. If these two guys do not agree, this comes on my table, and then I have to decide That's how it works. And our hedging policy, which I described to you very shortly, is obviously relatively short So we believe our energy pricing in the group should be not too far away from the real market pricing in energy if you get it wrong and this is an energy intensive business, you can be out of business. You are no longer competitive, whereas if you first try first target is to give security to your guidance, to your goals and to your stock exchange.
Then you have a tendency to hedge much longer because then you have a basis for calculation. You understand what I mean? So you say In asphalt, for example, I have a price increase of 4%. I have a hedge on bitumen price for the full year of 3%. I will do my much.
If the bitumen price goes up 10%, well done, if the bitumen price goes down by 10%, not well done, but you still do your much what I mean, that's more important to talk about. And since we are relatively short, like along this year, we are be more exposed to strong energy price increases than peers, which are maybe longer and who have had may be bit human in U. K. For the full year. Just to be very pragmatic, you know U.
K. And Mr. Loewsstad knows U. K. If we had had our full bit tumor volumes in UK this year for 2018, our asphalt division would have produced a GBP 10,000,000 better results.
And then we talk about results in Western Southern Europe. Do you understand what I mean? I want to comment on this
energy. So we have a bracket for each country and for each type of energy here. And the country can decide inside these brackets, inside the upward level limits what they do And, I have checked it. They are pretty much on the upper side currently. So then I found that right.
And you had roughly 25 exemption requests this year. And except 1 or 2, we have, for longer hedging here, and we have almost all of them, almost all of them, except 1 or 2. So I mean, that's the right thing. We have benefited in 2015 2016 from this. And I do not intend or do not believe that we should change this policy now because correctly, Terry, what we see is a plateau on energy price or even gradually a decrease.
So, I think the underlying strategies, okay? And I do not think that we should change the strategy. We may give guidance during the budget meeting whether they go more on the upper limit or the lower limit of the range, but that's their discretion then. So that's how we operate that, yes? And on the On the CapEx, I will come back on you that seems to be a misunderstanding or in the Q2 in the Q2 figure because it was clear the spending, the 500,000,000 rand January for Italy and pricing in Australia and the figure should have been 700 the whole year seems to be in a row here, but I have to check it and I will come back on you.
Thank you. The next question comes from the line of Gregor Kuglitsch.
Thank you very much for taking my question. So my question is on the net debt. If you can, I think you said you're going to be above 2.5 times if you could just kind of give us maybe a bit of a range where you think you end up for the year? Is it kind of 1,000,000,000 dollars, $8,700,000,000 something in that in that region? That's question number 1.
And then question number 2, just to come back on the situation in Indonesia. I'm sure you've benchmark your EBITDA margins with your peers. I think historically used to be 10 percentage points higher than your 2 other peers, at least the ones that we can see. And if I look at the last two quarters, it appears you're 10 percentage points lower. I want to understand what's going on and whether you agree with that analysis and whether you think there's anything specific that into that gap, perhaps it is also to do with hedging and co pricing and things like that, but any views you have and whether that should converge back to normality?
Mr. Gubits, on the, on the Indonesian results, obviously, I know the Q2. I saw Q3 we yesterday only shortly when I was preparing in the afternoon for our call today and meeting the as I had a short chat with Christian Kalachi Wai. I think he had his phone conference on his results today this morning. And I know, obviously, since we are a very competitive company, obviously, I know their numbers from the same and greasy.
First point that's why I make the point in the call. Huddlborough is not for the short term. You know what I mean? We want to keep our market position. And in this industry, especially if there is price pressure, if you sell market share then to get better results term is a possibility.
And just to make it short, if you look to the core competitors in Macrisick, they lost market share in the 9 months, 1.5%. We increased 0.3%. There's obviously a reflection on the price point on that, yes? And we stopped. That was a was a conscious decision from us that we set our management, no further erosion of the market position because we want to keep our core market station in Western Java and Chicago and especially in Western Java and Chicago, we even increased our manager.
If you go back to the Indonesian guys, they do tell you. So we kept our above 40% in Chakaaba because that's the value for the company. And if we give that up, what I mean? Then in 5 years, we have no longer a defendant to position in Indonesia, and that's what I'm paid for. And the second point is, obviously, Sam and Gracy, they have lower transport costs than us because they are more spread over the country and transport costs in Indonesia played, played always a big role and played even a bigger role now because the Indonesian loop weakened significantly against the door.
That's why transport cost oil and gas went up significantly, and that has overproportionally hit us. But if you look to what is important for us. If you look to cash cost per ton produced, we are clearly the lowest cash cost producer in the country, and we have an advantage against synergistic of about 10%. There is an analyst report on this out. This afternoon, if you don't have it, I'm happy to send you that.
Okay. Thanks a lot.
Yes. Okay, Helene, a question on net debt. I think you are pretty close to our expectation provided normal FX development, normal winter, and therefore, the normal winter, that means normal in capital. If that comes back, I mean, we have we are very much in line on cash flow generation. Which each single item, except, of course, EBITDA year to date, EBITDA is 1,000,000 below reported reports at the absolute values And that's what's missing in the cash flow as well.
So you are right. 8.6% appears to be a realistic target in this very moment.
Thank you. Okay. Last question, who's the final one?
For this call will be. Good afternoon, everyone. My two questions are, first one is given the trends this year and division to profit expectations, do you feel any of the medium term targets that you've set at the Capital Markets Day also need to be reset? And the second one is in quarry sales given that you could not complete the planned quarry sales this year. You had expect core sales to accelerate in the next year compared to 2018?
Okay. Hi. As I said, we're going to do an update on the midterm targets, mid of the year, yes? Because we want to wait now for our final results in order to have a clear basis, also a net debt and cash flow, and we will update them on the targets in mid-twenty 19. The message is clear.
We have to, we have to reduce adjust our year EBITDA targets because we have a lower starting point. But from the other targets, especially what we see on the net debt target, we stay committed, but we will update that in mid-twenty 19. On the Kory sales, we have do the budget round, which starts now next week, then we have an overview over the group, yes, but obviously, we have still, we have a significant real estate portfolio and that will continue to be a continuous stream of income. And you have to see that 2017, the 180 190,000,000 was an exceptional year, which was driven by, by the Carroll Canyon whereas this year's number is around 100,000,000 the year 2016. I think it was 75,000,000.
You know what I mean? So, that's why we would back from next year, a level around 1,000,000 plus minus 1,000,000. That would be, as we speak, my, my normal, our normal level, okay? Great. Thank you.
Okay. Thanks a lot for your interest. Thanks a lot.