Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the HeidelbergCement Third Quarter 2021 Results Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Christoph Beumelburg. Please go ahead.
Thank you, Heidi. Good morning and good afternoon, everyone. Welcome to our analyst and investor call on the results of the first nine months, 2021 for HeidelbergCement. With us today is Dominik von Achten, and for the first time on this call, CFO René Aldach and Ollie from the IR team. Dominik and René will go through some prepared remarks, which as usual, you can find also on our IR website. Without further ado, Dominik, over to you.
Chris, thanks a lot, and welcome to all of you on the call. Thanks for joining our Q3 update. We try to be crisp in the presentation because you have all gotten the key slides, and then I think we should leave enough room for your questions. I think that's what René and I will do, and obviously a special welcome to René Aldach, our new CFO, as Chris was mentioning. Happy to have you on board, René. Key messages. We know the first nine months, I'm now on page two. Nine months, if you put it into perspective, I think was good. We are clearly above prior year. That's fine.
Q3 is obviously impacted by a very high comparison base, also by very high cost inflation. As indicated during the year, we said, you know, we are up for a couple of rough quarters if the energy costs will not come down, and here we are. I think in that respect, that's what we had indicated, and that's what to some extent has materialized. Guys, let's also be very open. Are we 100% satisfied with our—with the Q3? No. The sky is always the limit. We will lead you through very transparently where we think we want to do better going forward. But I think to put it also into perspective, the quarter is still the second-highest in Heidelberg's history.
We have launched on the back of that a business excellence program, not just to run another program. Yes, there is an operational piece in there, but the main target is to really get going even deeper in on the pricing side. I'll come back to that in a minute. Next level, René will go through the details. I think that's fine. Portfolio optimization also continues. We will go through that in a minute. From our perspective, good, very strong progress on the CCUS side. We did put the numbers here to it for the first time. While the industry and all the outside world thinks this is a topic of after 2030, we strongly believe that as a group, we can save up to 10 million tons.
10 million tons of CO2 by 2030 already, and we'll take you through the details. Obviously we'll also focus on digital revenues going forward that would come additionally to our existing revenues and results. For the outlook, we confirmed on the EBITDA and EBIT side. We raised it on the ROIC side, and we are very confident about that. We went from clearly above 8 to now above 9%, and the same is true for the leverage ratio. We said we're gonna be at the lower end of the 1.0-2.0, and now we are saying we are gonna come in below 1.5. René will take you through those details. If you go to page three, you see the operational performance down in terms of results.
To be fair, to balance things out, I think like for like revenues are up 4%. I think that's going in the right direction. Then we have the EBIT performance that's also about 12%, 13% down. On the back of that, also the margins coming under pressure compared to prior year, still holding up on an okay level, but we'll come back to that when we talk about the business excellence program. Page four. Nine months looks okay, huh? Sales up like for like almost 9%. That's a significant increase. Okay, there were lockdowns last year. It's going in the right direction. EBITDA with a nice development year-over-year, 2019, 2020, 2021, up 8%.
EBITDA margin keeping on the high level from last year at this point. Operating EBIT going up 16% like for like. I think the nine months result is from our perspective okay. Interesting then is the picture on page five, because it also gives you the indication from our perspective whether where the market is and where we have also where we see our operational performance. North America, I think demand is intact. Pricing, I think is from our perspective also intact. We do see here good underlying demand in Q4 and also in 2022. Just talked to our colleague, Chris Ward. Overall, I think things are moving absolutely in the right direction on the market side. Weather is also a little bit our friend in the U.S.
On the U.S., I think that looks good. You know that we are net importer, so that did hit us on the freight side. No doubt about this. Let's be very transparent about this. This puts short-term pressure on us, especially in the Northeast, where we import volumes, and also a bit on the West, where we import volumes. In that respect, there was pressure coming from the freight side. You know that the freights are on all-time high. Europe, split for us in Western Europe and Southern Europe on the one hand, and then NECA on the other hand. Overall demand again is not the issue. WSE demand is absolutely fine.
Good revenue growth despite a very strong comparable base also in Q3. We have to also be very clear, we did face operational issues. Again, very transparent, we're talking of our plant in Couvrot. That's one where we made a major investment to upgrade it in terms of capacity, in terms of CO2 footprint. The upgrades came in COVID-related also a couple of months later. Then if you come into the heavy season, the startup is never easy. That really has impacted Q2 partially, but also Q3. It's not only the plant, you know, you have all the secondary effects of additional distribution costs, shipping item costs, all of that.
Good news is, and I'll share that with you. Month of October significantly above the forecast October assumptions. The plant is running well. Let's knock on wood. That seems to go in the right direction. Europe, on the NECA side, very good volume development. Pricing is okay, but not so good as in other areas. We are on a high level, and there's also, you know, the political system in Eastern Europe, where they're trying to check a little bit what's happening with the basic industry. I think in that respect, strong volume development overall, good development also on EBITDA. As I think for us, NECA remains a stronghold.
APAC, to be very fair, that was the other problematic area for us in Q3, for a couple of reasons. COVID-driven lockdowns in countries like Thailand, Malaysia, partially Bangladesh, partially Indonesia, India more in Q2, not so much in Q3. There was a catch-up effect that was fine. Then also partially in Australia, as you know, in some of the big cities where we have a significant business contribution. This clearly put pressure on volumes, EBITDA and obviously then also on pricing because on lockdowns there's nothing, there is then nothing to price. Overall, we expect a catch-up demand in Q4 and also into next year. Yes, Q3 was a problem. But the underlying demand, and I was just talking to our head in Indonesia a couple of hours ago.
Overall the demand goes in the right direction. Also, COVID-wise, they seem to have the worst over. Africa overall, you know, an increasingly important region for us. Very good volume growth. Pricing also okay. Very good recovery now in Egypt. We are back in positive territory, so that's really encouraging. One thing is also clear, in Africa also nothing is perfect. There is significant impact on the freight rates and also the demurrage cost. You know, René was with the team in traveling Africa a couple of weeks ago. Togo, the port is congested like hell. You wait with the ships one or two weeks, that costs you EUR millions.
In that respect, there is some short-term issues in Africa, but that's something that will also go away eventually. Page six. You see then all in all the development, I think volume is good. Our volume development in Q3 was not the problem. In fact, we turned that into revenues. I think that was fine. Price over cost from our perspective, obviously not satisfying. That's why we have started already beginning of this year to push on pricing. If then the cost explodes like they have done with our forward buying pattern that we have, this is very difficult to manage in the very short term.
We've always said that and I think in that respect, this is somewhat the result. There are also some other issues that we'll come to when you, I think, raise your questions, we'll go through the price over cost in more detail. On the nine-month page seven, it looks a little bit better in terms of net volume development. That's obviously significant in the positive. Then the price over cost you see already, this is only coming from Q3, the rest, the first half year, was price over cost-wise still okay. If you go to page eight and see a little bit the margin development, you see that in Q3 the margins were under pressure in all areas.
That's obviously driven by the cost development on energy costs, on freight costs, on raw material costs, on some maintenance costs. I think there are numerous issues that add up to this. René will go through the details together with me in a minute. If you then compare it and put it into perspective versus 2019, the situation looks more stable. On the nine-month picture on page nine, the margin development still fairly okay. Page 10, portfolio optimization continues. You know, no one should expect that this is ever done. We will continue to turn the portfolio over, and that means rather a couple of divestments. You know, West Coast, Spain, a couple of transactions, Kuwait, Greece, we've announced all of those.
Also obviously we are working also on the bolt-on acquisitions in those core markets where we really wanna focus on. This is, you know, just as an example, Australia, northern Italy, and also Tanzania with the acquisition of Tanga Cement. With that, I would say, René, I hand over to you for the financial section, and then we'll come to your questions.
Thanks, Dominik. Hello to everyone from my side for my first call. What you can see here from a free cash flow perspective, we are coming a little bit back to normalized levels on the last 12 months basis, EUR 1.7 billion. As you know, we have the COPE program last year, where we have, let's say, saved EUR 1.3 billion of cash. Now we get a little bit of backswing in working capital, what we always said. We had a tax relief due to Corona last year. Obviously we need to pay the taxes for last year in this year. There's a little bit of backswing coming. On the CapEx side, I have to say we are very disciplined on CapEx, so that's not the worry.
It's just the working capital swing in taxes. As you know, we have a strong focus on the shareholder value, and we have started the first tranche of the share buyback, and we have purchased for EUR 220 million as at last Friday, and we will continue the program until the first tranche is finished, and then we decide. We are in a very comfortable leverage position, and we're able to reduce our net debt by EUR 0.8 billion now. We are standing now at EUR 7.1 billion, even though we came back to our regular dividend in this year, and we have done the share buyback.
We've closed the U.S. West disposal, as you have read from Martin already, and we have received the proceeds in the first two days of October. That will obviously help as well with our net debt at year-end. That's why we have lowered the guidance below 1.5. You can do the math, but that would be probably at the end. Then due to our strong balance sheet, we have decided to repurchase a EUR 1 billion bond, which was due in 2023. We will do this in December 2021. These are the key financials. Now let's go to the next slide, that's slide 12, to the business excellence program.
As Dominik outlined, obviously, we are not so happy with the price over cost performance in Q3. Obviously the challenges in terms of energy costs will be there, especially for H1 next year. It's not only energy as well, other costs for raw materials, freight, you name it. Obviously we need to cover CO2-related costs. Therefore, we have proactively launched the program. One part of the program is operational excellence. You can split the EUR 150 million into two pieces. Firstly, there's the piece which is EUR 100 million, focusing on, let's say, plant performance. As Dominik mentioned, we had a plant in France, in Couvrot, which was not really running well. Obviously, we want to clearly catch that up next year.
We have identified 10 other plants which were not running as expected, with significant impact on our results this year, which we have set clear targets and result expectations for next year. So there you come up with roughly EUR 100 million. The other piece is EUR 50 million out of CapEx projects. We invest in how do we get alternative fuel rate up. We need to increase efficiency in the cement plants. We are investing a lot into maintenance. Yeah, we want to see a clear return as well on those investments, and this will be targeted with around EUR 50 million. Dominik, I hand over to you for the commercial side.
Yeah. Thanks, René . Obviously, the core essence of this program, it's not normal course of business. I think that's why we have a hefty focus on the commercial side. Because I've said it before, we have the clear mindset to change the pricing patterns, to change the pricing sequence, to also focus that we get a different product mix in terms of how do we serve the needs of our customers, also in light of the new CO2 reduced products that we have out there in the market. We've communicated that to you in earlier meetings. We obviously also focus on different customer segments.
The reason we do this, you know, I've been around the block for a while in this industry, the industry as a whole has not a great history in terms of being able to pass on cost increases. That's why we said that's the warranted need why we say, guys, we want to make damn sure that this is not just an announcement next year on commercial because, and nobody has been short on announcements. The question is, do you really and do we as Heidelberg Materials really get it to the bottom line? That's why we said we want a spotlight program for this. Minimum target of commercial EUR 350. The sky is the limit on this one.
It's absolutely clear this will be tracked month by month, and it will also be part of all of our MBOs. That's very clear. We really mean business here and wanna prove that we can change the historical pricing pattern that we also saw in HeidelbergCement once and for all. That's basically what this program is all about. If you go to page 13, turning to the transformational piece, you see the details of the projects that you already partially know from the past. We deliberately now put the volumes and also the timing in there. You can understand why we come to this 10 million tons of CO2 reduction by 2030.
That is, I think, a very strong message indeed, because one thing is clear. If you want to decarbonize clinker. If you want to decarbonize cement, there is no other solution in the magnitude of CCS and CCU, and that's why we go full speed on this. Absolutely, we'll come back, I'm sure, to your questions. It's clear that we do this in the clear focus to make a shareholder return on these things eventually. Yes, there is CapEx involved, but we will fight to the last minute to get as much funding for this as even possible. I think we have not done such a bad job on those projects that have already received funding.
Obviously this then also needs to contribute to, you know, ESG ratings and also our reporting. We have significantly also with the arrival of Nicola, stepped up our efforts in this respect. Bear with us, we will do, obviously as a focused Capital Markets Day the first half of next year, in order to come back to you on this, specifically also on this topic. The first discussions I have there with Nicola absolutely go in the right direction. I'm very energized by what I see there. On page 15, you know, our own digitalization on HConnect, to bring also some transparency to you on, what we are doing and where do we see also the growth.
Why we are confident that digitalization eventually will come to our industry, is because we see already more than 18,000 monthly active users with a significant growth rate of 200%. That is steep in 12 countries. You know, we had the coverage out there for 25 of 75%. We are already now at 52%. That's up almost 20 percentage points. All basic functionalities of the product have been shipped to the 12 countries, and now it gets really interesting because we get into a real-time order management without any labor being involved. That's easier said than done, I tell you. If we pull this off, this is a significant benefit for our customers. Already now the customer feedback on the product is very strong.
We wanted to be very specific on the progress on our own digital side. Then obviously with all of this, I think we need to be mindful of the fact that, yes, we do digitalization also in our cement plants, and there are potentials that we do with our HProduce, no question. From our perspective, the clear better ground is the customer facing side, and that for us is more ready-mix than it is clinker and cement because we have a much larger reach, much larger customer base in that respect. It is clear that we need to really build on our strong local market position and our good technical and also management capabilities in ready-mix that we've developed over the years.
Let's not forget, going back to the old Hanson and Pioneer days, there is a huge ready-mix heart in our DNA. In that respect, I think we have a very good ground to stand on. HConnect makes this much more accessible at your fingertips basically, because we have this now real-time accessible, much different from the past. On that, the key idea is now obviously to create new revenue and realize potential. To give you a couple of specific ideas, you know, if you talk about, and that's also where it gets interesting when you combine digitalization and sustainability.
You know, with these new digital tools, with a combination of sensors in the plants, also on the job site, you can actually optimize the ready-mix mixes for CO2, reduce your CO2 footprint by quite a dimension. Obviously, you can then also come to additional services that we obviously also want to be paid for, like recipe optimization, if we offer this to others. The second idea on the efficiency side, where we strongly believe there is so much to gain on the interfaces and also on the labor intensity of our job sites and our delivery of the product.
That we already see from the product on the digital side that we have in place internally, that there is a huge lever once you get that version done, that transparent, you can really optimize instantly. You see, by the way, also the immediate effect because you have the real data transparency, and that set can also be built out through sharing and collaboration platforms. Personally, we strongly believe that this is a great place to jump on in ready-mix on the offline business, traditionally a fairly low margin business. Here we see some clear additional revenue potential and growth potential for the group going forward. Then on page 17, you see our guidance's, you know, we are gonna stick to our guidance on the operational performance.
We also stick to our guidance on net CapEx. We have upgraded and raised our guidance on ROIC. Clearly above 8% is now above 9%. I think that is a very, very strong message. You know, I remember that this is one of the arguments where everybody said this industry will never make more than 5%. We are now above 9%, guys. In that respect, I think we are very, very confident that we are on the right track there. That's, I know, for many of our investors a key point. Obviously, leverage. We want to be also, again, very transparent. We will come in below the 1.5. That's also why we upgraded the guidance in this respect.
I think with that, we leave it and go immediately to the questions.
Thanks, Dominik. We have a number of questioners on the line, so can I please ask everybody to stick with one question initially, and if we have time then we can do a second round. Operator, you wanna start the Q&A, please?
Ladies and gentlemen, at this time we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please hit the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please.
Thanks. The first question comes from Arnaud Lehmann from Bank of America. Sorry I made it difficult for you to choose your question, Arnaud.
Thank you very much. My two questions are the following. Hello Dominik, hello René, and hello to the IR team.
Hello, Arnaud. How are you?
On your business excellence program, I guess the basic question is, do you need it in 2022 based on presentation to offset and to set your margins? Or do you believe if you're able to successfully execute it, would that be enough to expand your margins? Related to that, you mentioned that you wanna change the way the business practice of the industry are moving. Do you need competitors to change their pricing strategy as well, or could it work if you just do it on your own? I'll stop there, I guess.
Yeah, Arnaud, thank you very much for your question. I think it's both on pricing, so we count it as one. So in that respect, do we need the full program for cost mitigation, or can we even expand our margins? Let's take one step after the other. For us, the first and clear minimum is that we mitigate fully the cost increase that we have seen, especially in Q3. So that's the first purpose of the exercise. Does this exclude, if the program goes well, Arnaud, that this also leads to margin expansion? One step after the other, as I said. Let's wait and see how it goes. On the second question, I ask for your understanding.
You know, what the competitors do, I cannot comment. For us, this is really also a key idea of the portfolio management, you know? That's why we wanna focus on those markets where we can shape our own destiny, you know? It doesn't help me if I'm number three, number four or at the weak market position in some markets. Sorry, those are the markets we will continue to exit, because there you don't have in our industry from my perspective, and that's a few other ways too, in my view, I don't have the pricing power I need. Wherever I can shape my own destiny, I will push ahead. In those markets where we are in a very strong market position, we already see this year.
That's the good news. That's the encouraging piece for us. We already see close to double digits realized price increases, you know, and it works. I would not sit here and tell you something you know, that we are sometimes a little conservative on these things. I would not sit here if I'm not confident that we can clearly pull it off. It is a step change, Arnaud, absolutely. We shape our own destiny at Heidelberg Materials, and we firmly believe we can.
That's very clear. Thank you very much.
Thanks, Arnaud. The next question comes from Paul Roger from Exane BNP Paribas.
Hey, Paul.
Hey, Paul.
Hey. Hi, hi team. Good afternoon. Thank you for taking the question. So it's obviously been a tricky quarter. Now, I was just comparing your results to some of the peers that have basically pre-reported. I think in a few divisions, and in particular Western Europe and indeed in Asia, it looks like Heidelberg has faced more margin pressure than some of the others. I wonder what explains that, and maybe you can give a bit more color, and in particular if there's anything company specific we should be aware of anywhere.
Yeah. Let me start, and then, René I think should just as a general remark. Well, thanks for your question, first of all. I think it's exactly the right one. As I was indicating for us, WSE and APAC were also if we compare it a little bit, life is absolute and life is relative. I fully agree with your assessment. There are a couple of reasons that René will share with you. One, I think to be fair, to mention upfront, both of them, especially WSE, go against a very high comparison base. I think we have to be a little bit fair. Also, if you look at it at the nine-month pattern, they are coming off two very strong quarters, especially when it comes to WSE.
You heard me say before, one quarter doesn't make a summer, but I think it's fair, and I don't wanna paint it rosy. I think this quarter alone, we cannot be satisfied with WSE and APAC, and René, maybe you should give some more details.
Thanks, Dominik.
Thanks, Paul, for your question. For WSE, I give you a little bit, few details. Yeah, as we said, we had a few production problems in France, and especially the associated cost with it, yeah. If you need to import some clinker to France, in these times where cost is high, that's a very expensive exercise. Obviously you've seen the energy in WSE or in Western Europe was exploding in Q3. Yes, that shows you a little bit that we were a little bit short in energy for that quarter. Obviously the CO2 in combination drives cost up like crazy in WSE.
In combination with t he highest quarter we have done last year, and the production problems that's the result for WSE. For APAC, as Dominik said, market with long and heavy lockdowns. There were significant volume declines in Malaysia and Thailand. As you know, Australia, Sydney, Melbourne, Adelaide were in lockdown, which is now over and we see markets clearly picking up. That's a little bit the volume side for APAC. Obviously as well, we have Indonesia, India with coal users or locally, where obviously coal went up dramatically as well. These are the two three reasons for APAC as well. I hope that answers your question.
It does. Thank you mate. Thank you, Dominik.
Thanks, Paul.
The next question comes from Sven Edelfelt from ODDO BHF.
Hey, Sven.
Yes. Hello. Good afternoon. Thank you for taking my question. I would like to come back on the Keystone Cement Plant acquisition in the U.S. that has been canceled. If I'm not mistaken, the idea were to use this plant and to close one of your other plant close by. I don't remember if it was the Nazareth or the Evansville facility. Can you maybe update on your plan there on the CapEx side, especially if you're planning some plant modernization?
Yeah. Sven, thanks for that question. I think that it's maybe not so easy for everybody to follow now because you need really the U.S. map in front of your eyes. So just to help everybody a little bit, from our plant set up in the Northeast, we have our Evansville plant. That's traditionally our plant. Then through the Italcementi acquisition, there was Nazareth. Then we have in close to Washington, D.C., we have Union Bridge. Then we have Glens Falls up in the north, and then we have to the west, Mitchell, and then a couple of other plants up in Indiana that came also through the Italcementi acquisition.
Now, to your question specifically, the one plant we would have closed down immediately is the Evansville plant. To answer your question, are we gonna upgrade the Evansville plant? No. The Evansville plant eventually will go. This will be made up by the Mitchell plant to some extent. We come from the northwest to serve the market. Nazareth has still some potential. I think that's one of the plants where we still, from René and my perspective, have also operational upside. We really need to push the performance of Nazareth. We can also come from the east with the Union Bridge. In that respect, and then obviously we have the import option coming into New York City.
In that respect, we will not be limited by growth. I think you've heard me say that before. You know, one thing is clinker expansion, but under the new regime of CO2, for us, cement and concrete expansion is the much more meaningful perspective. Yes, we were a little bit sad that this acquisition did not work. In hindsight, you know, we would have added significant clinker. I think there is an interesting play that we are working on to rather expand on the cement and concrete side, not so much on the clinker side.
Thank you very much.
Thanks for the question, Sven. The next one comes from Elodie Rall from JP Morgan.
Hey, Elodie.
Hello.
Hey. Hi, and welcome to René. I'll ask a question on price-cost and since no one asked yet. Obviously detail your inflation in Q3 with the price-cost per ton -EUR 176 million versus Q2 at EUR 66 million. You've taken some cost action to mitigate that. What can we expect into Q4? Could it be flat or already in your view between the cost action and the price increase? Does that mean that we could expect a like-for-like EBITDA for Q4 to be slightly or positive? Thank you.
Yeah. Let me start and then René chips in a little bit on the price over cost. I think first of all, maybe just to be sure, you know, for us, price over cost is based on net sales price. That means that the distribution cost is included there. For us with the big aggregate business, this goes very quickly that your distribution costs go up combined with the effects that René has described. The negative impact that you see here is based also on the fact that we pick the net sales price in that respect. Just to make sure that everybody understands the definition.
Absolutely, Elodie, as we said, the price over cost can be further improved into Q4, both on the pricing side and on the cost side. You know that the industry has no history in raising prices in October, November, but we have a couple of countries where this actually worked. I have one specific country in Europe in mind, where we have now until year-end raised the prices in the magnitude close to double-digit percentage points. And I think that is very encouraging to see. That will even happen, you know, October, November. We are fighting hard market by market, customer by customer to get this implemented. In that respect, yes, Elodie, we should see some additional pricing movement. Is this gonna fully compensate the cost in Q4?
No. This is mission impossible because the cost position, you know, where the commodity costs sit on energy, on and on freight. We are staying short in our forward buying. I think we'll come to that, but I think it's very important for you to understand. For us, you know, there is the difference between hedging and forward buying, and maybe that also was mixed up a little bit in the past. We don't do any financial hedges, you know. We don't risk or speculate on the capital market in terms of financial hedges. What we do is forward buying. It's no secret that we are very short in forward buying.
That also, we say this very openly, you know, for the last 10, 15 years, in summer, all of the commodity prices came down and then, you know, we were able to follow that, our forward buying policy. This year, as you all know, this has not happened, rather the opposite. I think it's very clear in hindsight we are clever. We have to be clear, we stay short. The one mistake we will not do is to now say, "Oh, you know, coal was at EUR 275, now it comes down to EUR 200. Let's buy for the next year." That's also nothing. You know, we avoid doing stupid things. In that respect, I think that's important for you to understand, Elodie. René, do you have anything to add?
No, as Dominik just said everything.
Okay.
The next question comes from Cedar Ekblom from Morgan Stanley.
Cedar, hello.
Hello, Cedar.
Hello, Dominik. Hi, René. Thanks very much. I've just got a question on the commercial improvement that you're targeting next year, the EUR 350 million. I'm a little bit confused on the communication here, because if I look at that EUR 350 million, it's only about 2% of 2021 revenues thereabouts. I know that the top end is open and that you could save or improve by more than that. Why are we even putting a number on this, right? Like, I get the point on the cost-cutting, put a number out there, talk to your teams about what they need to do more efficiently. On the commercial side of things, why is there a number being put on this?
Why aren't you just looking at what's happening on the cost side and saying, we need to keep our margins flat at best, and just looking at the commercial discussion in total rather than trying to isolate the specific amount associated with new initiatives?
Yeah.
I just, I don't understand what the approach is internally. Why don't you just say to your guys, costs are going up, we need to push pricing to offset it at a minimum instead of putting numbers around it, because obviously the cost side continues to be variable, right? That 350 number might need to be a lot higher. Just explain to me how the local guys, commercial people are actually being incentivized, guided, et cetera, to deal with what costs are happening, please. Thank you.
Yeah. I think, Cedar, this is a EUR 100 million euro question or the EUR 1 billion euro question. I think, you are right, and I think it's a very fair question. Indeed, we have also wrestled here internally. I say this very transparently, how do we do this? You know, we've discussed this for quite some weeks. Internally, we've been pushing pricing already the beginning of the year, so it's not like we need this program. But we, from our perspective, you know, as a company also, we have a strong record to do operational efficiency programs and deliver on them.
I say this also very self-critically, you know, the industry in general and also Heidelberg Materials has not a history of price increases in the magnitude of five, 10, 15%. Let's face reality. We sit here, and where other industries, you know, come up with price increases 20%, 30%, 40%, 50%, 60%, and everybody says, "Yay, that's great. How did you do that?" That's the reason also, Cedar, very specifically why we raised this program, both internally and externally, because we need to set the clear message also internally to say, "Guys, the past behavior of five, 10, 15 years of 2% or 3% price increase must and will be over. You will feel it also in your pocket if we don't get this done." We've done the portfolio mention.
We are in the market position to get it done. We need a clear step change and also a mindset shift. I say this also in our own guys, on our customer base, to be willing and able on the customer side to accept price increases of double-digit percentages, and the same is true for us internally to have the trust that we can pull this off. In the end, Cedar, it's all about delivery. You know, the announcement has never been a problem for us. The realization is key, and that's also why we raised this specific program. You are right, it's the first time for HeidelbergCement that we put that focus on commercial, but we feel this is in the last 10, 15, 20 years, probably the biggest cost explosion that we had.
We now need to make sure, together with the CO2 topic, that we once and for all change the pricing behavior. How do we do this? We obviously fundamentally train the teams locally. We give them all the arguments that we believe are important. They continue to have own very good arguments. We help them also with educating the customers, why we need that change, why the product has a different profile now, why down the road we need the investments to decarbonize the industry. There are a lot of arguments. To be fair, Cedar, in many markets, we get very encouraging feedback that also our customers understand that we need to move. I'm confident that we can pull this off.
We start with a number of 350, where we then end up, let's wait and see. If you do the math that you are doing, I agree with you. You could argue that's maybe a little bit conservative. Are we only announcing a price increase to stay in your math of 4%? No. The announcements in the specific markets are massively higher than 4%.
Yeah. Okay. I get it. I mean, it's just a bit confusing because if cost
No, it's fine. It's very fair question.
Yeah. I mean, EUR 350 is not gonna be enough if cost inflation continues.
Agreed.
I just don't understand why you say to the team, "Keep your margins flat at a minimum instead of putting numbers around it." I understand that, you know, you're trying to change the pricing, you know, discovery and.
Yeah, fair point, Cedar.
It's just very confusing. Anyway, thank you very much.
Thanks.
The next question comes from Kepler Cheuvreux, Luis Prieto.
Good afternoon. Thanks a lot for taking my question. If I understood correctly, you mentioned that in some geographies you're already encountering pricing pushback from public authorities. Could you provide some visibility on what geographies we're talking about? I think you mentioned Eastern Europe, but is there any other geography we should be concerned about? And in what form is that pushback? Is it regulatory or is this just an indication not to increase prices? Thanks a lot.
Yeah, this is only very selected markets. I made the comments only in Eastern Europe. That's a little bit some governments, they are in a fight with the EU. I don't have to tell you follow that. Also, in essence, there you have some political arguments. Sometimes if we try to raise prices in a certain magnitude, then you get a reaction from the nationalistic government, to some extent. But that's a very low number of selected countries. This is not a major issue because in free markets that's the free market. It's more on us. I don't want to blame anything on the government.
It's on us to make sure that we deliver these price increases. This is only a very small number of countries, less than one hand of fingers. In that respect, we should not overestimate that. This should not prevent us from delivering the program, you know?
You think there's no risk that this spreads to other emerging markets in other regions?
No, we don't see that.
Very localized. Okay. Okay.
Yeah.
Excellent. Thank you.
Next in line is Robert Gardner from Davy.
Afternoon, all. Thanks very much for taking my question. I want to just ask on freight and logistics costs. It's easy enough, to some degree, to track energy costs in the business, but logistics are a little bit more difficult. I was wondering if you could give us maybe the scale of the cost inflation you're facing in freight, and also some indication of where you're importing, and where that cost escalated rapidly in Q3. You mentioned France already. Africa is obviously one. Is the U.S. a problem in terms of landed cost of clinker? Any color on that would be great. Thanks.
Okay. Thanks, Robert. I will take that question. Let's talk about import and freight first. Yeah. On a quarterly basis, Q3 over Q3, our freight costs on a pricing basis for freight too went up probably EUR 20 million, yeah, which is a significant amount. In addition, what you have to consider is we had high demurrage costs especially in Africa. As Dominik said, a lot of port congestions in Ghana and in Togo. That added probably another EUR 10 million. So you're talking EUR 30 million from that end. Then obviously you have your first remark about logistics. Yeah.
We have a significant impact on logistics costs in the quarter versus last year, which was around as well EUR 90 million due to the issues we faced in our plants, where we need to ship product here and there. Freight costs went up. Fuel costs went up for the freight and stuff. These are the two answers to your questions.
Thank you. The next question comes from Matthias Pfeifenberger from Deutsche Bank.
Hi, Matthias.
Yeah. Good afternoon, gents. One question from my side. Obviously you named a lot of the reasons for negative price cost, and we saw a positive price cost from one of your main competitors. I recall your retired CFO saying that obviously you're waiting a bit over summer what the prices will do and then load up on the forward purchases. Today you're accentuating the fact that you are still short versus your total requirements. Have you maybe hesitated a bit to buy like you bought last year? Did you buy less and hence you kind of incurred the whole spike in the energy prices in the third quarter? What's your position on that going forward? Will it be more consistent?
By the way, I think there was a CFO change, so maybe that has played into it. A bit more color there on the energy side, and maybe also you could quantify the effect on the quarter, like how it's impacted things.
Yeah. Let me do the first and then quantification. René can jump in because you indirectly also ask or directly ask the question around the CFO. Now, to be very clear, we have up until now not changed our forward buying policy. We have corridors that we lock in, and you know, we have always shared that with you. It's mainly going one year out, so we are not on three, four, five-year corridors. That was always the case, and that has not changed.
When we talk about staying short versus staying long, it means we are at the higher end of the corridor, so how much we lock in, basically, and then within that one year and we are on the lower end. May there be an effect that because of the energy costs not coming down now in the summer, that this policy has reacted differently to the past? Maybe. That could be a small effect or an effect in Q3. Was there any deliberate change on that policy because of the CFO change? No, clearly not. That's not the case.
We also, you know, we also feel our responsibility that we don't, you know, there is no need to get into any hectic decision on these things. This is a volatile situation for the industry, and the one thing we are not gonna do is now lock in and change our policy on the, on the deviated levels now. That's really not what we will do. On that maybe, René , you give some some color on the, on the impact in Q3.
For Q3, the price inflation for energy was around EUR 130 million, which is 37% up versus last quarter. For the first nine months, it was under EUR 70 million. As for the business units and M&A, which is 17% up versus last year.
Okay.
Those are the numbers.
It's either majority two, three, yeah.
Yeah.
Yeah.
Everything comes out of two, three. Yep.
Yeah. Thank you. Appreciate that. Thanks a lot.
Welcome.
Next question comes from Harry Goad from Berenberg.
Yeah. Good afternoon, everybody, and thanks for taking my question. I've got a question on buyback actually. If I look at what you've done, or you announced today, the sort of EUR 217 million, that very roughly looks at a run rate of about EUR 70 million a month. Now, I take things can change, but if I extrapolated that every year, that's sort of close to EUR 850 million in a year. Very rough math, but it sort of looks like at the current run rate, you'll be doing nearly the EUR 4 billion by the end of next year. Is there any reason to think that logic is wrong?
You know, we have as René was saying earlier, you know, we have announced we're gonna do this in three tranches, each around EUR 300 million-EUR 350 million. Now, Harry, to your point, again, one step after the other. I know we are all impatient and we all wanna get things done, but we take one step after the other. Let's get this first tranche done. Let's also be fair to us and also specifically to René. You know, for us, HeidelbergCement, this is the first time ever we do the share buybacks. There have been some discussions around treasury shares and everything, back and forth. Let us do this first tranche first, then let's analyze how it went.
Let's see whether we picked the right partner to do it, how it was executed, what's the impact of it, you know, what can we learn from it, and then we take the decision on when the next tranche will come. We did give the corridor when the latest we will have executed all three tranches. You cannot do the full math. There is no automatism because I understand the way the banks operate it. They take advantage of certain share price levels. There are months where we are much higher, and then there are months we are much lower. I think it's very difficult to do the math that you were indicating.
Yeah. Okay. Thanks.
Okay. Thanks.
Thanks, Harry. Next one is Yassine Touahri from On Field.
Hey, Yassine.
Hi, Yassine.
Hello. Good afternoon. Just a question on the price over cost. On the cost side, could you give us a little bit the amount of cement and clinker that you are importing in the U.S. and the U.K., maybe excluding the Californian assets? Because we see such a big increase in freight rate, do you have. Have you made the calculation of how much price increase in 2022 will be visible just based on what you have already announced throughout 2021? Let's say, like, if you're not doing anything, what will be the price effect on 2022, assuming that price increase that you have already implemented are sticking?
Okay, let me start and then René comes in on the Yassine's. First of all, thanks a lot. I think on the freight side, René was sharing the figures. I think that's fine. In the U.K., you mentioned the U.K., we are not big importers in the U.K. You know, we have three very well-performing plants right now in the U.K. The U.K. for us is not a big import.
Obviously in North America that's different. It was also always clear that we have a significant amount of imports into North America, and that is true for the West, but it's also true for the Northeast, maybe through our import terminal in New York City and in Pennsylvania and also in the South, in Houston and other small places. I think those for us are the freight pieces outside of Africa, because René was mentioning to you, plus obviously the freight impact in Africa is quite significant. Of course, we are importing clinker in large volumes into Africa.
It's by far, just to give you the magnitude, by far the biggest amount. In terms of impact that René was giving to you, 50% of it or more comes out of the African business. Yes, we are enjoying a very strong African business, but in a freight scenario where freights go through the roof, through the historic highs, and obviously it's a short term in Africa, but this is nothing that's sustainable. That will also readjust itself over time.
When you're mentioning 50%, do you have an order of magnitude of the volume in million tons of clinker and cement? Is it like 4 or 5 million tons, a good approximation of the total that you're importing?
The total volume, I think it is a little bit below that. I don't have the numbers immediately in my head, but it's clearly lower single-digit million volumes. It's not like this is. It's significant if you had freight cost increases, but like this, but it's. But let us check the figures, and we'll come back to you, okay?
Thank you very much.
Thanks, Yassine. The next question comes from Nabil Ahmed from Barclays.
Hey, Nabil.
Hey, good afternoon. Thanks for taking my questions. I actually got two, sorry for that. The second one I promise is very short and very easy to answer. So assuming you are successful with price hike to cover cost inflation next year, where are normalized margins? I mean, broadly speaking, you're back to 2019 margins in Q3. Is that how we should think about the company profitability going forward? Also, I was wondering if you could give us some idea in terms of revenues and EBITDA contribution from the U.S. West operations you just disposed.
Let me take the first one, René, then that's the second. You know, Nabil, it's volatile times, no question. We had very, very strong market development by last year. I think, you know, you saw our targets that we gave out at the capital markets, 300 basis points increase until 2025. I know everybody was already celebrating, and I always said, "Guys, we are in the long run here." You know, one quarter positive side does not make one summer. Can we take the margin jump last year, middle of the year as sustainable and God-given? No. But are we clearly trying to expand our margins from the 2019 level? Absolutely.
You know, the fact that we are now going back to 2019 level is nothing that we celebrate. It's clearly not good enough. We stick to our guidance and target that we wanna structurally improve the profitability of the company. We are well on our way. There are bumps in the road for a couple of quarters. That's what I indicated very early this year. There will be maybe for a couple of quarters to come. I think, you know, we are there to improve the margin structurally 300 basis points or more, and that remains our clear target.
Nabil, to your second question, the U.S. West impact on our numbers. Year-to-date September, U.S. West, is around revenue, around EUR 580 million, and also EBITDA around EUR 75 million.
Euro, huh?
Euro.
That's a year-to-date number. That's not a full year number.
That's a year to date September.
Okay.
Because we are not owning this anymore.
Right. Okay. Thanks. That's clear.
Thank you. Looks like we're gonna be on time today. We have three more questioners in the line. The next question comes from Yuri Serov from Redburn.
Yes. Hi. Just going back to your commercial push, if I may. You're planning to increase prices. You're talking about double-digit increases, although the target only suggests 2% increase. Nonetheless, you're trying to push the prices. We've been around this industry for long enough, and we know that it often happens that prices go up and customers start looking for alternatives. The companies who try to push the prices ahead of the competitors often have to sacrifice the volumes. What's your thinking on that? How much are you prepared to sacrifice the volumes? At what point will you say, "Okay, well, that's too much, and we should not push the prices anymore. We'll stop doing that.
Yeah. I think it's a very fair question. It's always, I would argue, not only in our company, not only in our industry, it's everywhere. You have a correlation between pricing and volumes. I think that's the normal situation. That brings me back to the earlier point where I think the portfolio management comes in. Personally, I think in our industry, the question of your own market position has a significant impact on your pricing power, regardless of the competition. That's why I'm so adamant about the fact that you know own market position is everything. Obviously, does the market consolidation or the market structure also play a role eventually? Maybe.
If you start from a bad own market position, your pricing power is very limited. The start of this whole discussion was an exercise that we need to continue to do in order to improve our local market positions. I'm not talking about market position Germany. I'm talking about the market position around Frankfurt, Stuttgart, Munich, and to make sure that we have good market positions because you know very well that the product doesn't travel much. Now, if you wanna push prices in a significant way, do you at some point also need to sacrifice or run the risk that there is volume decline?
Yes, maybe, but I would say for now, the volume development on our side is good, so let's wait and see how this develops. We will obviously watch that very carefully. I have full trust in our local management that they can strike the right balance. They have understood that there is a correlation between pricing and volumes. I think to be also clear, Yuri, you know, if you wanna move prices in a significant way, you also have to be bold a little bit. We clearly need our customers with us to understand why we do this.
As I said, we have good indications that also our customers, to a large extent, understand why there is now a need for a structural price change.
Wait, just to check. I'm not expecting that you will give us numerical indications, but I just wonder, when you tell your people, "Go and push the prices and, you know, use your market position and understand how to best engage the customer." Are you giving them the guidance as to, you know, if it impacts your volumes by this much, you stop? Or will it
No.
Avoid panic decision-making, you will have to watch market by market and decide as things evolve.
Absolutely. I think to give a global message on this, we don't do because we know that the markets are so different, A and B. You know, we know that hopefully we have people on the payroll who are much smarter than René and myself in managing their local markets. They know them very well. We have all the trust in the world that they will do the right things. That's why we raised the program.
We wanted to make it very clear that they have the full backing from the group to say, "Guys, now is the time to also ask customers for a significantly higher increase than they have done in the past." That's where we want to close the ranks and make sure that everybody understands that this is the target. In terms of execution, we have all the trust in the world that our local management will do a great job on this.
Thanks, Yuri. The next question comes from Gregor Kuglitsch from UBS.
Hey, Gregor.
Hi, can you hear me?
Yeah, very well.
Excellent. Maybe I'm gonna be cheeky too, 'cause it doesn't sound like we're gonna be in for round two. I'm gonna ask a couple questions then. The first one, can you just-
Absolutely not.
I'm looking at your slides and the carbon capture, and obviously we've known about Brevik, we've known about some of the others. Now that we're closer to the point of implementation, can you just give us a sense of the costs, so essentially the sort of cost of abatement? I don't know if there's a single figure number that you've got in mind, and maybe it varies by the four projects. That would be sort of my first question. The second question is, maybe rounding it all up a little bit, I mean, you say, I think in your outlook statement, you expect a good Q4. I don't know if you care to elaborate on that.
More broadly, do you have any kind of comfort or do you simply say it's too early to say that you can hold next year's EBIT or hold EBITDA next year at the very least, so flat EBITDA? Or do you think it's too early to call that? Thank you.
Yeah, Gregor, let me briefly start, and René should jump in, especially on the Q4 and also on the 2022. Although 2022 we can do very short as to the CCUS costs. You are right, Gregor. We have advanced quite substantially. That's why we know the timing a little bit, and we know the volumes. But we know not for our projects yet the exact cost, neither in CapEx nor in OpEx, because you know that these projects go through a very rigid pre-feasibility and feasibility study in order to make sure that we don't miss anything. Also, let's be realistic, we want to also realize a learning curve all of these projects.
What I don't wanna do is, you know, if I run around now with the knowledge in the group and say, "Can you please put a number on this?" I tell you this number will be too high because we cannot implement learning from one projects to the other. We now learn hopefully very quickly in Brevik. I'm flying out to Brevik tonight right after this call with our head of site. We'll move in that respect, and that will come to fruition in 2024. We are very confident that we can pull this off together with our partners, and that will be, as you all know, by far the first project in a meaningful.
From there, you know, we do this also to learn for the other projects. I'm refraining deliberately a little bit from locking into high numbers because then you don't get them down anymore. Bear with us. We will bring some more clarity to this in the Capital Markets Day that we announced for the first half of next year. This was, I think, the first step to show that we really wanna target a massive CO2 reduction before and until 2030. Now on the Q4 and the 2022, maybe just very simply, 2022, no comment at this point because sorry, we don't even have finalized our operating plan.
René and I for the next three weeks or three and a half weeks will go through all the QMFs and the operating plan for next year. Bear with us, and I ask for your understanding that we are not shooting from the hip on the expectation of 2022. The one thing we can say, the demand side is intact. I don't see at this point any significant bumps in the road on the demand. I think that's good. On Q4, you know, it's true what we said earlier. We confirmed our guidance. Is it without any risk? As everything in life, you know, COVID-19, winter hits early, energy costs do another crazy loop.
Nothing is without risks, but we fight to the last minute to really get to that guidance in all dimensions. I said earlier, are we facing still cost challenges? Yes. Are we addressing them by the minute? Absolutely. Do we see the first price effects? Yes. But do we get to a positive price over cost Q4? No. In that respect, I think that's the best estimate we can give to you.
Okay. Thank you very much.
Welcome.
Thank you. There are two more questions now. Next one from Stephan Bonhage from Bankhaus Metzler.
Hi, good afternoon from my side. Thanks for taking-
Hi, Stephan.
- my questions. Maybe you can share a little bit your view on the free cash flow development in the coming quarter, considering the steep increase in costs. Are you confident that you can keep the cash conversion rate above 30%, which would be in line with your 45% target? If yes, what would be, from your point of view, currently the best use for that cash, even more debt reduction, accelerating the share buyback or acquisitions? Maybe you can shed a little light on that topic.
Okay. Thanks for your question. On free cash flow, obviously, it's difficult to predict now the Q4, but we still will have a good free cash flow conversion. We will reach our targets what we have announced for free cash flow conversion, and that we are pretty confident to achieve. Your second question, what do we do with the cash? We will after years, and we know our numbers, we will see what we do. What we have announced, what you see, we will pay the bond back in December. That's EUR 1 billion. That's a gross debt reduction. Then, what we said, we will evaluate every options clearly, as well.
We want to grow the company still, yeah. Everything is on the table. We come to specific targets, what we wanna do next year.
Yeah, Stephan, in that respect, you know, we stick to what we have announced together in Beyond 2020. That's what René was saying. You know, we stick to our capital allocation. You know this famous waterfall. I think we tick many boxes in that waterfall. We've also said that our CapEx will be within our guidance. In that respect, you know, and then we have the share buyback that we have already embarked on, and then we have a couple of bolt-on acquisitions that we have in the pipeline. It's absolutely in line with what we communicated in the strategic framework of beyond 2020, that is still valid.
Okay. Great. Thanks.
Okay. Christian Koot from HSBC, you can ask the last question today.
Hey, Christian.
Thank you very much. What an honor. Good afternoon. I have one question on the U.K., and I just wanted to ask if you could maybe describe a little bit how the business is developing there, things such as volume growth in the third quarter, price over cost development, and there's obviously a lot of news flow on things like driver shortages and potential shortage of materials. I just wanted to ask, how you're coping with these challenges right now. Thank you very much.
Yeah. Christian, I would argue the challenges in the U.K. are there. That's clear. The things that you read in the papers are valid. That's clear. I have to give kudos to our local management. They are doing, from our perspective, an excellent job. Just not to be too specific, but I would argue above average of the group at this point. That's true for managing the cost and also realizing the prices. I think in that respect we are on the right track in the U.K.
Great. Thank you very much, and safe travels.
Thanks, Christian. Thank you. Thanks, everybody.
Thank you. This just gives me the opportunity to highlight a couple of conferences that we will be attending on the November 9th. That's next week, the UBS European Virtual Conference. We are there at a fireside chat. Then we are at the Carbonomics Conference of Goldman Sachs on the November 16th, then the Bank of America conference on the thirtieth and the Goldman Sachs conference on the December 1st. The second of December, we round up with the Société Générale preview review conference. Hope to see you all around. We stick around as IR team for your questions. Thank you very much. Have a great day.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Bye.