HeidelbergCement's (HDELY) CEO Bernd Scheifele on Q2 2016 Results - Earnings Call Transcript

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HeidelbergCement AG (OTCPK:HDELY) Q2 2016 Earnings Conference Call July 29, 2016 8:00 AM ET

Executives

Bernd Scheifele - Chief Executive Officer

Lorenz Näger - Chief Financial Officer

Analysts

Robert Muir - Berenberg Bank

Rajesh Patki - J.P. Morgan

Robert Gardiner - Davy Group

Yassine Touahri - Exane BNP Paribas

Josep Pujal - Kepler Cheuvreux

Gregor Kuglitsch - UBS Investment Bank

Mike Betts - Jefferies Group

Nabil Ahmed - Barclays Investment Bank

John Messenger - Redburn Partners

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the half-year financial results call 2016. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, on Friday, July 29, 2016.

And I would now like to hand the conference over to Dr. Bernd Scheifele, CEO. Please go ahead, sir.

Bernd Scheifele

Hello to everybody. Good afternoon here from Heidelberg. Thanks a lot for your interest in our Q2 reporting. I’m sitting here together with Dr. Näger, CFO of THE Company; Andreas Schaller, Head of Investor Relations; and then also Ozan Kacar; and Mr. Schebesta, both Department Heads of our Investor Relation team.

Now we have sent out the figures, you have seen. I think, figures are pretty solid. We came in about 4% to 3% ahead of consensus. I think overall it was a good Q2, especially taking into account the problems [ph] we had in the markets politically; but also economically, namely Brexit, but also the situation in Turkey.

If you try to make some two or three conclusions on this and do we ask ourselves what are the main drivers, I think we have two issues. First of all, figures again underline the very good or excellent market position of Heidelberg with a mix of very attractive mature markets, highly vertically integrated on the one hand side and on the other a solid footprint also in emerging markets.

And this time, our result has been obviously boosted by a very good performance in North America. If you look to the first six months, our OI is up by about 45%. Our U.S. business is very close to a cash machine, yes. Operational leverage is close to 100%. We have seen also good market recovery in Northern Europe, namely Sweden, Norway, Denmark; but also Netherlands, Germany outperformed. And we also increased operating income in Northern Europe of about 30%, yes.

The second point is obviously our cost management is doing very well. We have kept costs very tight, obviously, also supported by decreasing energy costs and that finally led to a very significant operating leverage. It was for us the best second quarter since the Lehman crisis, but also the best first half-year since Lehman, so we are relatively confident, if nothing major happens that we will have a solid year 2016, as we forecasted at the beginning of the year.

If I turn to Chart 5, on the key financials, what you see for Q2 is first of all sales are up only 1.5%, yes, whereas operating income is up 11.2%. That shows the operating leverage. And if you ask yourself why sales increased so slow, yes. Then it is so that trading sales are down by about €60 million in Indonesia due to price pressure and negative volume growth. The sales are down by about €40 million, €45 million. And then, we had a hit on Forex of about €150 million. On the positive side, we had a positive consolidation impact by about €70 million.

And you see earnings per share are up 66% for the first-half year. Cash flow for the first half year up also €228 million.

Chart 6 shows the EBITDA, which I think it’s self-explanatory. The growth is driven by better volumes, better price and good cost management. Chart 7 gives you an overview on the group in the areas. And what you see, North America in the second quarter down 1%. Main driver is obviously Canada, where volumes were down 6%, 7% in the core are mainly driven by slow growth in Alberta. In the oil sands, volumes dropped in the cement market by about 15%. The rest of the U.S. was up.

In Western and Southern Europe, volumes are up 6%, namely Germany up 6%, UK up 2%, Netherlands plus 16%, yes. Market is coming back.

Asia Pacific volume is down 3%, namely China around 10% down in the cement, in a slightly growing market down 3%. Whereas, India was up 6%, 7% and Bangladesh I think was up between 15% to 20%.

North and Eastern Europe, Sweden always strong, Norway up 8%, Sweden 11%, Ukraine up 10%, Romania 10%; overall, solid growth. Also, Russia, the market is negative, but our sales were slightly up. Africa-Eastern Mediterranean Basin is minus 2%. It’s mainly driven by a weak development in Ghana, where the market is flat. Our growth was about minus 6%, 7%. We try to protect pricing margins. Tanzania, volumes were up. Western Africa and the other countries were also growing.

Chart 8 shows you the rolling EBITDA margin. It shows now over a period of two years, how we were capable to push EBITDA margin up. And if you compare, especially with one year ago, group EBITDA margin is up 1.2%, which is a very good development.

Chart 9 shows you the falling energy costs, yes. You see the red line at the bottom of the page, shows you the energy costs in absolute amount of euro and you see that they are coming down quite nicely, yes. But the main driver was coal, pet coke and also oil. Obviously, we have seen certain trend change in coal, pet coke price and also oil prices at the end of Q2. We think the impact for the full year will be very limited because we are covered by form of contracts for the remainder of the year.

On the Italcementi transaction, you saw our disclaimer at Page 2. I’m kept by the legal department not to comment on anything on Italcementi, because the tender offer document is now out and we will start the mandatory takeover bid in August, yes. So I ask for your understanding; what we can say as an update is, we have acquired the shares. Closing has taken place. We have sold the Belgium assets to Cementir at a price of €312 million. If you calculate that by capacity, it’s about US$1.49 per tonne. You know that we bought the Italcementi cement assets at an average price of about US$85 [ph].

U.S. assets, we think we will get binding bids in the first-half of August and we hope or are very confident to execute this transaction also on the latest in the first-half of September.

On the organization side, we have taken very clear personal decisions, except for one country. We have changed the Managing Director in all Italcementi countries, in order to send a very strong signal in the organization, but also in the markets that in future we’re going to manage according the Heidelberg way. Synergies stay at €400 million, no change. We are very confident that we’re going to hit this target.

North - now, I come to the result by area. North America, Chart 13; what you see is on year-to-date, OI up 40.2%. You see also the cement margins came up quite significantly, close to 400 basis points. Aggregates margins are up of more than 500%, obviously, driven by a good volume, good pricing, about 3%, to 4% price increases and also very good cost efficiency.

In U.S. maybe two figures are important. First of all our pricing in U.S., gray cement is up around US$5, US$5.50. At the same time the cement production costs are down by about US$2, compared to last year, driven by lower fuel prices in electricity prices, yes, so overall outlook for the U.S. is okay.

In Canada, obviously Alberta remains difficult. The oil well volumes dropped again by another 50% in 2016. If you recall, originally we sold about 300,000 tonnes of oil well. In Western Canada it dropped last year to 150,000. Our forecast for this year was 120,000, but it will go down by another 60,000 tonnes, 70,000 tonnes; and we see the same development, if you want, in Houston.

On the other side, the BC and Washington are clearly moving very well which has a certain compensatory effect. We have executed also price increases in Canada by about US$6 to US$7, but not for oil well cement.

On Chart 14 you use then the margin development in the U.S. I think that’s also the message is very clear. Operating leverage about 100%, so I think a very good performance also if you look through the results published for North America from our peers so far.

Chart 15 shows you Western and Southern Europe. Also here you see if you look to half-year or Q2, you see EBITDA in the second quarter of about 10%; operating income like-for-like 18.6%; operating income like-for-like up 30%. Obviously, here in this region we have a major hit from the currency side due to the Brexit, British pound weakness, but operationally we had a good run.

As I said, Netherlands up volumes, 18%; result up; pricing up; Germany, also pricing in cement more or less flat, volumes up between 5% and 6%. Also in UK, cement volume is up about 2.5%. And you see also the operating leverage in Western and Southern Europe is very significant, yes. You see that our sales volumes even came down on a half-year basis by €19 million and the operating income is up €35 million. You see also here good cost management and a very good operational leverage.

Then on the UK Brexit I think there will be some questions about that. Obviously, we were all surprised by the vote of the British. And there was a first shock reaction, not only in the financial markets, also our UK management revised down their planning for 2016 in a very dramatic way. We went over the figures again last week and I yesterday afternoon had a call with our UK management on the order book. And now we are more confident that the impact at least in 2016 in the real markets of our business will be rather limited.

We have only one major project which was now postponed due to the Brexit. That’s the major apartment block in Canary Wharf. All other projects are continuing, especially also the decision of Hinkley nuclear power plant from EDF, but we also have the expansion project from Tata for Land Rover in Oxford is continuing there. We have a big project in Manchester and also the UK, the England highway program of the government will continue.

If you look to the Chart 17, Northern and Eastern Europe, also here you see a relatively stable development. What you see easily in Q2, OI up 17.3%, for the full half-year about 10%, driven by good development in Norway and Sweden, but also Ukraine is up the volume’s 10%. And for us, we had a run result whilst in Northern Europe, but also the more troubled problematic countries like Russia, Ukraine, Kazakhstan did far better than what we expected.

The result in Russia, compared to last year is stable, even with a Forex issue. In Ukraine and Kazakhstan, result is clearly up compared to last year, so overall, solid development.

On Chart 18, we give you a little bit of impression about the big infrastructure projects which we are seeing in Northern Europe where we had a very strong or even, say, dominant market position, especially around Stockholm but also in Oslo, mainly Oslo and Norway, Stavanger, we have huge infrastructure projects. If you look, for example, the Follo Line tunnel, that’s the largest cement contract we ever won in Norway. That’s about 300,000 tonnes about for the next three years. That’s a double rail track, 20 kilometer tunnel in Oslo, and it goes through the residential area of Oslo where you can go skiing, you see.

Norway is a very happy country. They have a lot of cash. So they spend a fortune in order to shorten the time to go to the skiing area by 10 minutes. They invest in the tunnel for 20 kilometers. I think the new Gotthard tunnel is about 45. It gives you an idea about the dimension of the site. I was on the site three weeks ago, very impressive, very nice and very profitable project for Heidelberg.

We are also very busy on the Stockholm Bypass. That’s also a 21 kilometer highway; three lanes, and a tunnel of about 18 kilometers in two tubes, also a huge project where we have got the first two contracts. And due to our strong market position in Stockholm, also on aggregates, that’s going to be a lot of work. And we have also Fehmarn Belt and Nord Stream which are still coming.

Then Asia-Pacific, if you go to Chart 19, you’ll see here operating income is down like-for-like, about 10% in the quarter or 12% in the first-half year. That’s more or less all Indonesia. In Indonesia, our result is down around - on OI level around €40 million. That’s mainly driven by lower volumes. We had a volume growth in cement of about minus 3% in the first-half year. The market did about plus 2.4%.

What’s the main reason? I think two reasons. First of all, the regional markets in Indonesia in the first-half developed very differently. Java, which is the main island, where we sell about 80% of our cement volumes, had a growth rate of zero, with Jakarta in minus 17%. Whereas the other islands like Sulawesi, East Indonesia and Sumatra had growth rates of about 15% to 20%.

The growth outside of Java is driven by big infrastructure projects which were launched by the government in order to improve the infrastructure, also outside Jakarta and Java.

The second point which supports this - what I said is that the bulk cement market grew about close to 7%, whereas bag cement which is typically our stronghold with our strong Tiga Roda brand grew only 1.7%. That shows you again that infrastructure outside Java and Jakarta was the main growth driver, where we could not participate due to our positioning in Java.

Pricing is also under pressure, especially also in bag cement due to competitive pressure. On the other side, we had a significant reduction on the cost side in energy costs, distribution costs, and also compared to January 2015 we have laid off maybe around 1,500 people in total.

India result is up. Volumes are up by about 5%. Bangladesh, I mentioned, volumes up 20%, result is also up. Australia, strong result, good volumes, mainly in the metropolitan areas of Sydney, Brisbane, Gold Coast, Melbourne, whereas the mining industry in Western Australia and Northern Queensland, yes, remains weak.

China, volumes clearly down by about 10% to 12% and pricing is also down between 14% and 15% and that explains the figures.

If you look to Africa, that’s Chart 21, you see like-for-like without currency impact the result is more or less flat. It’s minus 1.5% in Q2, minus 3% in the first-half year. Major impact comes for us from Ghana, where the market was weaker, what we expected. And on the other side also, Congo, in Congo we stopped production due to unfair importing from Angola. We had a longer fight with the government. Now, the imports are banned, and we are up and running and selling in Congo again.

Tanzania had good growth of about 6%, 7%. However, price pressure from Dangote. Togo had a good run. Turkey, Marmara region was very strong; sales, good pricing with about TRY140-TRY150 per tonne of cement, yes. Israel also had good result on a very high level.

Trading, Chart 22, that’s what I told you. You’ll see on the top-line, revenue down in the quarter by 61% and for the full-year 114%. That obviously has an impact on our Group line. And that has do with that the pricing for fuel for clinker and cement reduced significantly, which brought our trading sales down; whereas, on volumes we are more or less in line with last year, but the cheap prices for fuel in cement and clinker brought the top-line down.

That’s it, my report for operations, and I hand over to Dr. Näger to give you the details of the financial report. Thanks a lot.

Lorenz Näger

Okay, thank you. Good afternoon, ladies and gentlemen, also from my side. I will lead you through the financial details below operating income, and balance sheet, and cash flow statement. What you can see from our accounts is that, again we have a very stable and solid set of accounts, which continues the trends which we saw over the last 10, 12, 15 quarters.

First of all, good operational development as outlined by Dr. Scheifele, which is then supported by significant improvements on the items below OIBD and that leads to a significant increase in group share profit by 17% in the second quarter.

We then have - part of this is the expected further improvement in the financial expenses by €20 million. The deleveraging has continued and accelerated year over year. The net debt is down by €466 million and our leverage is well inside our strategic target of 2.5. Free cash flow is up supported by good operational cash flow, good working capital development, and low CapEx.

Italcementi acquisition was already outlined by Dr. Scheifele, so that there is nothing additional that I can contribute. You find then the income statement on Slide 25. Operating income as reported up by 8%. Additional ordinary result and result of participations are in line with previous year, nothing to report here.

Financial result is improving, €20 million down in the quarter, €60 million down in the half-year, and that’s a trend which we will see continuing despite financing charges, which come from Italcementi acquisition.

Income tax is inside our expectations. You know that in the first two quarters normally we have some movements up and down, but that will outbalance towards the end of the year.

Discontinued operations are now again back to the legacy Hanson asbestos and environmental claims from U.S., no business inside and minorities have increased from €51 million to €67 million in the quarter. First of all, it’s an additional company, which we have consolidated and which has significant minorities. This is the Nordic Precast company which we have consolidated. And Indocement has increased its net profit via improved tax position.

The cash flow statement on Slide 26 confirms the trends. The gross cash flow which comes directly from the EBITDA has improved by €87 million. We have continued to improve our working capital structure, which has contributed €45 million, so that the cash flow from operating activities has improved by €117 million in the quarter.

We have, as announced, reduced our investments in the quarter by €31 million, which then has an operating and free cash flow up for all investments of €340 million in the quarter. The dividend payments have reduced to €310 million. This is due to a shift inside the structure. As you know HeidelbergCement itself has significantly increased its dividend, but Indocement has decreased the dividend which goes to minority shareholders of Indocement in a significant way.

Slide 27 then shows the use of the free cash flow. First of all, we have to mention that the free cash flow here in the functional definition, meaning after maintenance CapEx, has significantly increased to €1.17 billion coming from €838 million last year, as comparable 12 months ending June 2015. So there’s a significant increase in our free cash flow generation.

And we have used this free cash flow as announced. We have reduced the gross cap and strategic CapEx. And we have increased the pay back of debt, which has reached €556 million in the last 12 months.

In the balance sheet, you can see only very little movement as shown on Page 28. The most significant change is the increase in cash of €1.35 billion. This is the money which we have refinanced for the Italcementi acquisition and which we will use to pay the outstanding minority shareholders in Italcementi who will hand in their shares during the MTO. So this position will be gone by end of September.

Correspondingly on the liabilities side, you see an increase in debt of €882 million, this represents our increased loan - sorry, increased bonds, which we have issued to the Capital Market in this quarter and the first quarter 2016.

Slide 29 then shows the decrease in our net debt, we are now at €5.9 billion and by that very well inside our strategic target of €2.5 billion.

Slide 30 shows the liquidity headroom, which includes what I have said earlier. Currently we have huge liquidity headroom of more than €3 billion, out of which we will use €2 billion to buy the outstanding Italcementi shares. And then, we will be back on our normal liquidity reserve of €1 billion, which exceeds our liabilities, our maturities over the next 12 months.

If you look to those maturities, it’s mainly two bonds which are maturing over the next 12 months. This is on August 15, now U.S. dollar bond from Hanson which is going to mature and a €1 billion bond which matures on January 31, 2017. If these two bonds are matured, our financial expense will again go down by roughly €70 million on an annualized basis. This will next year again contribute to a good cash flow generation.

Slide 31 then shows you the current maturity profile. It’s more or less €1 billion per year, except 2021 and 2022, where it’s €500 million and €670 million respectively. In principle that’s it from the financial side. That is as announced now the last balance sheet before the Italcementi acquisition. The Italcementi acquisition then in the third quarter will shake up all our accounts. We will try to get them right until end of the year, so that by December 31, 2016 we will be able to provide you with a solid basis where you can then read the development of the company in a clear way from Q1 2017.

Thank you very much for your attention. I give back to Dr. Scheifele for the outlook.

Bernd Scheifele

So the outlook, I keep that short. You see our outlook is unchanged, yes. On the cement market outlook, what we see is that the pressure in emerging market will continue throughout the year, so we expect a negative growth in Russia. China maybe flat depending on the region, South America down.

We see good growth in the U.S. continuing. Canada: Western Canada we see strong; Alberta negative. We hope to see continued growth in the UK, Germany; Netherlands, okay; Northern Europe, okay; Eastern Europe has reached bottom, is growing slowly; and we see mainly price pressure in Spain and Turkey, yes.

Africa continues to grow with about 4%, 5%. We see price pressure coming from local competitors and Chinese imports. And in Indonesia bright spot seems to be a little bit; India, which is recovering at a slow pace.

In Indonesia, we expect in the second-half an increase in demand after Ramadan, yes. And we will expect also that pressure on pricing will continue, maybe at a reduced speed due to increased volumes. I think that’s it from our side and now we’re open for questions which you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Robert Muir from Berenberg. Please ask your question.

Robert Muir

Yes, good afternoon. My first question on Indonesia, just wanted to be clear. You haven’t seen any effect from the new line in the prior quarter. And then, also have you decided what your strategy for the rollout of this line will be? For instance, how quickly will you roll it out and will it substitute for older production lines? I think it’s going to be a cost leader, but will that mean you’ll look at pricing as well?

And then secondly, just in terms of Africa, I think you mentioned on a prior call that landing [ph] clinker was available for about US$40 to US$45 per tonne. Is this the case or have prices fallen further? And the local competitors in this market are they multiple competitors or is it the one that we all know about? And then is it perhaps more temporary and just bagged cement being brought in maybe by wholesalers or are there investments going into clinker grinding? Thanks.

Bernd Scheifele

Yes, okay. On P14, P14 is now running, and we have not started full commercial production. But if I see it right, I think we have included in the forecast, clinker production of about 1.2 million tonnes for P14, meaning running at a relative good availability in the second-half, which should help us in the margin, because as you know, if I got it, it was about US$10 or US$12 per tonne cheaper production costs on before we - if we replace the less efficient kilns like P3 and P4, yes.

And, obviously in the second-half, we hope that the growth in Java will pick up and especially in Jakarta. As you know, a key problem is somewhere is this tax amnesty law, that’s why a lot of private investment has been kept back especially in Jakarta in commercial buildings. The law which provides now for a very low one-off tax free, if you repatriate your money from abroad which is about 0.5% or 1%, has been signed by Jokowi, yes.

But now somebody has filed a lawsuit to the constitutional court. But we hope that this settles now down and that then the private money will come back.

What we have seen is that since the parliament had passed the tax amnesty law and Jakowi signed it, that the currency has significantly stabilized against the dollar, yes, which is good for us, because it’s still very much a dollar cost-based economy. And we hope to see this now also in the volumes in the market.

And the second question was about Africa. You are right, at the moment the CIF price in West Africa is around let’s say, US$48 to US$50, CIF Accra or CIF Lome, yes. And if you compare that to last year it’s about US$9.50 down. You know what I mean, that’s what you see little bit on the margin side. On the one side where we import clinker we have competition by our friend Ildico-Tagota [ph] mainly and the other side a little bit by Chinese bag cement importers, yes; and on the other side our cost base came down also significantly.

As you know, we import to Africa. We used to import close to 4 million tonnes, after our Tabligbo clinker plant in Togo is running, we import maybe 2.7 million tonnes of clinker. And you see the price is about down US$9 to US$10, that’s a significant amount of money which we got, yes. And on the other side, we have a little bit price pressure or currency pressure in the markets where we sell. I think that’s a bit to manage.

Robert Muir

And can we say the Chinese bags, is that being pulled in by local players or is that the Chinese themselves pushing that into the market?

Bernd Scheifele

I explained it the last time the Chinese, the Chinese are not the better traders. They play better below the table than we do, because we don’t play below the table, yes, because otherwise we go straight into prison in Germany and that’s what we do not plan. So, typically case is Chinese trader is a good friend of the son of the President, the brother of the President or of the Harbor Director, yes. And then here you go and then they don’t pay taxes, no VAT, no import duties.

And in Congo to change the law in that respect, takes you one year. And now, hopefully, it doesn’t take us another year that the law in Congo is really executed. That’s why we stopped production, because it’s impossible. If they don’t pay VAT, if they don’t pay import duties, it’s all black, really how should we compete. That’s a little bit of a problem.

And, that’s a very spotty thing. We have it a little bit in Ghana. Now in Ghana there we lobbied very much with the Cement Association. There is now a law in parliament, which will put an absolute ceiling in tonnes on import of bag cement. How much bag cement can be imported on a yearly basis to the country. And for example in Tanzania, I said it at the last call, there’s a new President, which is very much anticorruption, and he put the guy from the tax office, and also the Director of the harbor of Dar es Salaam, they are both in jail, which were both closely connected to the former President and now the Chinese imports are down for the moment. You know what I mean, that’s Africa.

Robert Muir

Okay. That’s great. Thanks.

Bernd Scheifele

Thank you.

Operator

And your next question comes from the line of Rajesh Patki from J.P. Morgan. Please ask your question.

Rajesh Patki

Yes, thank you very much. Two questions. Firstly on cost inflation, can you provide your revised thoughts following the €60 million lower energy costs, on a trading 12-month basis that you reported? Do you expect that to move down further in Q3, or when do think the inflection point there is?

And secondly, do you plan to pass any more price increases in H2, as the cost benefits take into straightaway? Or should we expect H1 margin expansion to slow down in H2? Thank you.

Bernd Scheifele

Okay, what’s difficult to understand on the price increases, we will see price increases in some markets ongoing, typically, like Kazakhstan, Russia, Ukraine, where we have done further price increases, also in July and August. In U.S. we might go for another price increase in California, and also maybe in some parts of the South, Florida, but normally I think it’s not good corporate behavior once you got antitrust approval, and that you push up the price like hell, you know what I mean? So we’re going to play it a very conservatively, especially in the Esrock [ph] overlap regions in 2016, and we will have a look to 2017. So maybe some parts of the U.S., second price increase in some parts, especially in the eastern part, et cetera.

We will look a little bit in Indonesia, how our volumes develop. That’s a market where we have to react week by week. If the big projects start in Jakarta, the market will be very fast sold out, and then maybe we can go for a price increase. And we also have to watch the situation in India, typically after the monsoon September, October, we go again for price increase if the market kicks in.

Overall, I would expect that the margin expansion should flatten out now in Q3. It’s also clear that we cannot each quarter push margins by 500%, so I ask for your understanding, and because energy prices we expect to be rather stable.

And what was the first question? I have not understood that was for.

Rajesh Patki

Yes, I think it was cost inflation. On trailing 12-month basis, you had a €60 million benefit. How do you expect that to play out in H2?

Bernd Scheifele

On energy or what?

Rajesh Patki

Yes, yes.

Bernd Scheifele

Yes, we would expect that this to continue maybe at a reduced speed.

Rajesh Patki

Thank you very much.

Operator

And your next question comes from the line of Robert Gardiner from Davy. Please ask your question.

Robert Gardiner

Good afternoon. Thanks for taking my questions. So can I ask again, back on price, maybe you might give us a bit of flavor on price in Europe, East and West. Just in terms of you’ve had a very strong volume and performance in the second quarter, I’m just wondering, does that give you a bit more power when it comes to improving on price?

And likewise, just in terms of Indonesia, just to go back there, so you’ve given us the kind of the volume declines that you’ve seen there, might just give us an indication on price?

And again, you’ve said P14 will come online, or is coming online, have you taken down capacity in the meantime? Or at what stage do you do that? Thank you.

Bernd Scheifele

Okay, so in - you have to see on the pricing in Europe, we have seen price increases of about 3% in the UK. We have seen also a slight price increase, maybe about 1% in Belgium; in Germany it’s more or less flat. But you have to see in Europe, due to the low fuel costs and electricity costs, our production costs in cement are more or less €2 per tonne down.

And in a market, which is still characterized by a relatively low capacity utilization, if your input costs come down, then to go for a price increase of significance, it’s not that easy, as if you’re on the market in U.S., where we are in quite a few areas, in sold out position, you know what I mean? So that’s where we are.

We have seen positive price increase, obviously in Ukraine, where prices are up by about 21%. Also Kazakhstan 15%, Georgia 4%, Norway, I mentioned about 3%. And in Russia it’s also up by about 2%. So that’s a little bit of the pricing environment in Europe.

If you look to Indonesia, I think, I have been relatively clear, that the slow growth of Indocement is mainly a reflection of the different growth rates in the islands. And pricing was down roughly around 10%. At the same time, input costs were also more or less down 10%. We had a significant drop in coal price, electricity price, distribution costs. And obviously the cost base gets also supported at the moment by a relatively strong Indonesian rupiah. When we had the meeting with the Indonesians about 10 days ago, then we see that the Forex has clearly improved, compared to our budget assumptions, yes. It is now around 13,000 or 13,100, whereas we had a budgeted rate of close to 14,000 or more, and that obviously helps us also on the cost side.

We expect by actions in the market that we will be in line with market growth, or even better than in the second half. And then you will see also the impact of P14, it is clear that if P14 runs at full capacity, and the market is not really coming back, we might shutdown kiln capacity in Citeureup, which is more expensive on production costs than P14, that’s mainly P3 and P4. Okay?

Robert Gardiner

Okay, great. Yes, thank you very much.

Bernd Scheifele

And just to mention now on Indonesia, I don’t know whether Indocement [indiscernible] have already published their figures, I have not checked that, today also. So if you want to ask about market actions, you ask him directly, because I’m not a sales director for Indonesia and not yet, yes. But just to give you an idea, the EBITDA margin in cement is still in the first half year, about 34%. So you have to see, it is still on a very high level. It came down, I agree, by about 3 percentage points compared to last year. But in absolute terms, it’s still on a very, very high level. Okay, thank you.

Operator

And your next question comes from the line of Yassine Touahri from Exane BNP Paribas. Please ask your question.

Yassine Touahri

Yes, good afternoon. A question on the U.S., where we’ve seen some sign of weakness in the multifamily housing market, have you seen - are you concerned on the U.S. as well? We’ve seen that gas prices have started to increase. So do you think this could translate into energy cost inflation next year and slow down the pace of margin expansion?

And then my second question is a little bit more general. What are your priority as a management team at the moment, and where do you see your main challenges for the next 12 months?

Bernd Scheifele

So, family housing, what we see we discussed it in detail last week on Thursday. Thursday, Friday we were in Dallas, we discussed it in detail. I would say in U.S., we see the market is not booming that’s also clear but we see a steady development in housing in residential. We see housing starts, if I recall it well, are up now to 750,000 or 800,000 units, so we are still far away from the norm - as normalized levels seen €1.2 million, but it’s steadily improving.

Gas prices, you are right, are a little bit moving upwards. But overall, we would say it is okay. We have some weak spots, obviously Alberta for us. We have a little bit a question mark on Houston. Houston was weak in the first half year, partially oil well cement. Oil well cement is again down also in Houston by about 50%.

We thought it would flatten out, but it’s similar to Alberta. So in Texas Lehigh our volumes are more or less flattish so we were successful in shifting the oil well cement to the normal gray cement. But obviously there is a cost on the margin to it because the oil well cement sells at a significantly higher price than the gray cement.

And maybe on the price side, we think price climate overall is okay. We see a little bit lack of discipline on imports from established players, mainly in the New York area and also in Houston and we will have to see how this develops.

What are my priorities? Second half, I would say Italcementi integration obviously is key, as I mentioned earlier in the call, we have changed all country management except for one country. I was a little bit involved in this that was a huge job, and now we’re going to make the integration work, and we’re going to make sure that we get the €400 million synergies in as fast as possible.

And we’ll see then and we’ll discuss that with you in detail in the Q3 call the beginning of November.

Yassine Touahri

Thank you very much.

Bernd Scheifele

Thank you.

Operator

And your next question comes from the line of Josep Pujal from Kepler. Please ask your question.

Josep Pujal

Yes, hello, gentlemen. Two questions from me. The first one is on the guidance, on energy costs. You put in the slide that you expect them flat to slightly lower. Given that they were down, probably double digit in H1, does it mean that from H2 they start to move up to get to that average flat to slightly lower? Am I misunderstanding something?

And the second question is on China exports, or imports that you see in some African countries. Do you see the same phenomenon in some Asian countries and which ones, if this is the case? Thank you.

Bernd Scheifele

Maybe on China, I know we see mainly China as a main exporter. We see them in Africa. We haven’t seen them really in U.S. at the West Coast, they are not active. We see them mainly in Africa then they do back haulage, mainly meaning they arrive with the ship of bag cement, the bag cement doesn’t pay any freight and with that ship they take back raw materials to China that’s what they do. And that’s what we have seen in Ghana, that’s what we have seen in Tanzania partially, that’s what we have seen in Congo in some Western African countries.

What we have not seen yet is really Iranian cement, because they are, at the moment it’s still difficult to do business with them, because they are restricted on bank financing.

Okay. And then on the energy I would agree with you that the energy guidance is maybe a little bit careful for the full year, this is a little bit a compromise between what our central purchasing unit is saying and what the countries are saying. And the countries, obviously, they are a bit sandbagging in order to protect their forecast or their bonus. And - but you have to see that in the second half, we run on stock level against energy which was already last year bought at a cheaper rate. Whereas in the first half year, we were running against energy costs, which were bought a year where the purchasing price was higher, and that’s why the margin improvement on paper in the first half year will be stronger than in the second half. That would be my guess.

Six months phasing, you know what I mean? That’s why the saving on energy on the book energy, we’re not going to pay more, but the saving compared to last year will be in the second half lower than in the first half.

Josep Pujal

I understand. And sorry, for the first half do you have a figure for energy cost decline? For the first half?

Bernd Scheifele

Around 9% maybe. 9%.

Josep Pujal

Thank you.

Operator

And your next question comes from the line of Gregor Kuglitsch from UBS. Please ask your question.

Gregor Kuglitsch

Good afternoon. I’ve got two questions, please. One is on Italcementi, I understand you can’t say too much, but perhaps you can give us a little bit of an impression. I think you’ve owned the business now for a month, in terms of what you’ve found, what kind of opportunities perhaps have thrown themselves up? And perhaps also from a portfolio perspective, whether you intend to do any more rightsizing perhaps get rid of countries in the portfolio that you acquired? That’s the first one.

And the second question is can you give us an updated view of where you think your debt will land toward the end of the year? And what kind of pro forma leverage that would imply for the business as a whole? Thank you.

Bernd Scheifele

Mr. Kuglitsch, I have already had Dr. Näger with the red flag sitting beside me, because he is now in the almighty board of Italcementi listed company in Milan. And he has nominated a lawyer being the President, yes. A lawyer is a friend of mine from law school in U.S., and he has also sent me a very strong warning letter, not to say anything. That’s why I only can tell you the food is great, especially also in Sicily and Slovenia, the wine is even better. And local purchasing is always cheaper than to buy the stuff in Germany. So it has been a great first month on that level. And for the debt, I hand over to Dr. Näger. Thank you.

Lorenz Näger

I think that was the best answer which Dr. Scheifele can give. I have sent him at least three letters that he should exactly not answer those questions. So please understand the MTO is open or it will be open, the offering document is out, and sorry for that, but we just cannot do it without creating a lot of problem. And this would also not help you.

If it comes to the cash flow situation, I would say, if you compare to our presentation, when we signed the contract with Italmobiliare to acquire Italcementi, we are very well on track. The equity contribution of the - selloff the business is exactly in line with our plans.

The disposals are well on track. We will achieve or maybe slightly exceed the €1 billion which we have announced. Operating cash flow of HeidelbergCement is okay, but Italcementi is a bit low. Then we have the saving in our working capital and CapEx. That is more or less underway. And then there is one position, which we have really underestimated and those are the one-off payments and the restructuring cost in Italcementi and in the whole merger. So that will be higher than expected. That’s more or less what I can say.

So operationally HeidelbergCement and all the major components are well under way. But we will exceed our expectations on the one-off cost. And where it comes out in CapEx and working capital that’s for us very difficult to predict for Italcementi, because we just don’t know the dynamics in this business, but we will be optimistic that we get a very reasonable figure by end of the year on a like-for-like basis.

Gregor Kuglitsch

You’re confident below €9 billion. Yes?

Lorenz Näger

I cannot confirm a figure unfortunately.

Gregor Kuglitsch

Okay, fair enough. Thank you very much.

Lorenz Näger

Yes.

Bernd Scheifele

I think it’s fair to say, we work very hard to reach the excellent numbers, which we communicated at this famous Capital Market Day. So that’s what we are paid for that’s part of our MBO of Dr. Näger and myself, that we get the steps and the EBITDA in a certain relationship. And the figure is around what was communicated at the Capital Market, and that’s how we’ll manage the case obviously.

Gregor Kuglitsch

Okay. I appreciate it. Thank you. Goodbye.

Operator

And your next question comes from the line of Mike Betts from Jefferies. Please ask your question.

Mike Betts

Yes, thank you very much. My two questions; firstly, I think you said North American aggregate prices were up 3% to 4%. Could you give a number for the U.S.? And also could you talk about any significant second half increases that you might be contemplating, whether you are at all?

And then, secondly on Australia. The volumes seem to be good when I look at Slide 36, but pricing trends generally aren’t, they’re down in two of the three products. Could you maybe explain, what’s going on in the pricing in Australia? Thank you.

Lorenz Näger

Yes, on Australia. First of all on North America, if you look to U.S., about the volumes in U.S. alone are about 9% up and pricing is about 4% up due to the slowdown in Alberta, obviously which is significant aggregates operation for us that has a negative impact on us. And we believe that is fine. We had seen very strong pricing especially in the Bay area, where we are up US$1, US$1.60. And also in LA, California historically has been very slow and low on price increases. That’s why we went for significant increases in San Diego, LA and San Francisco. Finally that’s up.

And in Texas, we have again increased by about 7%. Last year, we were more than US$1. In Pennsylvania it’s about US$0.40. And then we have Illinois, Indiana, Chicago being a big market for us, it’s about US$0.50.

I haven’t seen, I think, Vulcan and Martin Marietta are not out yet, so we obviously benchmark ourselves. We believe that our margin development overall is pretty competitive. It’s up in the U.S. only compared to last year about 585 basis points, which is not too bad. So let’s wait and see.

Now on Australia, in Australia if you look to the market, Mr. Betts, it is very simple as I said. Sidney, Brisbane, metropolitan area are very strong. Gold Coast, Brisbane also very strong. In the south, Adelaide, okay, Melbourne, metropolitan area pretty good.

And in the western region, that’s Perth and then it’s in the Northern Queensland. All what has to do with mining is very weak, and where we are even working with the hard time contingency plan. And pricing seems to be down. I don’t know, you refer probably to cement or to whatever, you have to see there is a product mix - there’s a regional impact. You have to see the nice thing with mining is that everything is short, so you get excessive pricing.

So for example, we might sell, I would say the concrete in Melbourne, probably is at AU$1.50, AU$1.60 per cubic meter. The same concrete delivered in Northern, Western Australia might sell at AU$400. What I mean - so the pricing differs regionally very much that has a negative impact, whereas we’ve got overall a very good price increase of about AU$5 in Sydney, which is the main market for us, and we got also about AU$5 in Brisbane, and we got about AU$1 or AU$2 in Melbourne, whereas in Perth we got about AU$1 or AU$2. So the pricing is more related to mix than to market pressure.

Mike Betts

Okay. And just one follow-up, if I could on the U.S. margin, you talked about 580 basis points. Was that purely aggregates or was that the U.S. business as a whole?

Lorenz Näger

Yes, it’s U.S. aggregates only.

Mike Betts

Thank you very much.

Lorenz Näger

It’s an EBITDA margin of about, according to our calculations. You can go to your sample [ph]. Probably that’s about close to 29%.

Mike Betts

Thank you very much indeed.

Lorenz Näger

That’s about above our target, above historical peaks must be also clear. The same is true for U.S., if you look to U.S., cement margins are also above the level what we had reached last time in 2006. And on pricing in U.S., we are at about US$100 per tonne, US$105 per tonne, whereas in the peak time in 2006, if I recall it well, it was about maybe US$120, US$125. So we still have on the price side in the U.S. about US$20, US$25 to go, which sounds, if the market continues, good for operating leverage in 2017.

Mike Betts

That’s great, thank you.

Lorenz Näger

Thank you.

Operator

And your next question comes from the line of Nabil Ahmed from Barclays. Please ask your question.

Nabil Ahmed

Yes, good afternoon. Two questions for me. The first one is a point on detail on the minorities in the P&L, given that the net profit Indocement are slightly down. I was wondering, what drove the increase in Q2 2016 versus Q2 2015. If you could update a little bit on the different moving parts here?

And the second question, I guess, is on Indonesia. Assuming the market doesn’t pick up as much as you would expect in H2 and you’re finally moving to the scenario where you’re shutting down capacity and replacing your more cost effective P14 production. How easy is it to shut down capacity, what will be the incremental costs related to that? I’m trying to gauge what will be the impact of switching from one plant to another on the operational cost line?

Bernd Scheifele

Really there’s no cost, because I don’t know, Mr. Ahmed, if you’re familiar with our situation. We run our largest plant, in Citeureup, that’s a suburb of Jakarta where we have now a capacity of 18 million tonnes. And we’ve got about - what is it we’ve got now on nine kilns running there, not 10 even, 10 kilns running.

And, if the market slows down, we just switch off the most inefficient kilns and continue to run with the high efficient kilns which are typically P8, P11, and here now P14. P8 and P11 also produce more than 2 million tonnes of cement; P11 does about 4 million, so you get in our figure. These are the big - with these three kilns we can already do more than 8.5 million. So there is no additional cost related to that.

And to Indonesia, maybe one thing, if you go back to our figures, and I checked that we discussed it with the Indonesian management about 10 years ago, you have to see that in Indonesia always the second half is the stronger one, and is the most important one.

For two reasons; first of all, there’s no rainy season as typically as in Q1, and secondly, Ramadan is over. This year, Ramadan stopped very early, in middle of July, so the run to Christmas is extremely long, and normally this is now on the dry season and that’s why we would expect, what we would call, a long and, hopefully, strong run to the end of the year. Because a year-ago, Ramadan, for example, stopped end of August, so the run-up to the end of the year was much shorter.

And what we see already our daily sale volumes in July in Indonesia are clearly up, compared to the first half year, so let’s wait and see. But normally second half is clearly much stronger, if you compare the last figures or ask if you’ll Christian [ph] later today and if he makes [indiscernible] message. And we have a long run up to the end of the year due to early Ramadan, and we keep our fingers crossed.

Okay, and Dr. Näger will answer on the minorities.

Lorenz Näger

Yes. The minorities, there are three main components in which price is up, which is the first consolidation of our joint venture in Northern Europe, on Nordic Precast where we have a controlling majority but a significant minority stake. This has contributed €4 million to the difference.

The second is our white cement joint venture which we have in the U.S., where we have a 49% minority stake, this contributes €3.5 million. And last but not least, Indocement, net profit has increased, or the minority share of profit has increased by €2 million. And the increase of the net profit in Indocement is mainly driven by a tax benefit in the range of €20 million which we have generated in Indonesia.

So those are the three components which add up to close to €14 million in Heidelberg share minorities in our P&L.

Nabil Ahmed

Right. So, when you mentioned the €4 million, the €3.5 million and the €2 million, that’s in Q2, that’s not year to date?

Lorenz Näger

Year to date.

Nabil Ahmed

That’s year to date?

Lorenz Näger

First half year minorities is - hang on. This year it’s €108 million, last year €94 million, difference is €14 million. €4 million is Nordic Precast Group, €3.5 million white cement U.S., €2 million Indocement, so that’s roughly €10 million, and €4 million are smaller ones.

Nabil Ahmed

Okay. That’s helpful. Thank you.

Lorenz Näger

Yes, thanks.

Bernd Scheifele

We take a question now, please.

Operator

Thank you. And your last question comes from the line of John Messenger from Redburn Europe. Please go ahead.

John Messenger

Hi, good afternoon. Two as well if I could. One was just, and maybe you can’t answer this, but you may have put a number out there, Dr. Scheifele, in terms of you mentioned before the costs in terms of the integration of Italcementi in the one-offs. Have you, and I’m trying to remember, I’m not sure you have, but is there a number that you’ve put out there at least in terms of the original view you had, or the scale of that increase? And I assume this is around redundancies. And I’d be interested, which guy survived in terms of the country management team?

Second question was just on Indonesia, and you’ve already highlighted the differentials between bagged and bulk, but I wonder could you just flesh out what is the - is there a change of strategy there? I believe there has been some kind of talk around a potential new brand to compete at the lower pricing end. Is that something that’s being proceeded on? Or is that something that’s kind of being held in abeyance? Thank you.

Bernd Scheifele

Okay. On Indonesia, you are right. But that you should then go to our Indonesian management. I think they - or had they made the call already? I don’t know. They might do it on Monday. There is an idea that we will bring in a second brand, which will fight at the lower end of the market in order to make life for our new competitors a little bit more difficult than it was at the moment maybe, yes. Because it’s also clear that in Java, we have the best, by far the best cost position on landed costs to market.

And if they want to fight at the low end, then we can also fight on the low end on with a different branding. But that’s a very local issue we have discussed in detail. And I’m sure [indiscernible] and his Sales Director are happy to answer any questions about that.

John Messenger

Okay.

Bernd Scheifele

And the new brand will start in September 1, and that’s why I made the remark early on the call that we want to do market growth, or even a little bit better, in the second half, yes. Then obviously with our low-cost production of P14 we are in a position also to be very competitive on the lower end.

And the one country we did not change is the Bulgaria, Greece, connection, some of the most important ones in the portfolio of Italcementi. And on the first question, I’m sorry, I don’t say anything. You know there is a general rule from all our acquisitions [indiscernible] can you give that.

Normally, what you say is synergies, one-off costs equal synergies. But that’s a general rule that does not apply. But that’s normally the rule of the game. And that seems to be the experience from other transactions in our industries. But we’re not going to say anything more.

John Messenger

And, Dr. Scheifele, sorry, just following up. In terms of the management changes in Italcementi, have effectively you put in Heidelberg people into all of those roles? Or is it a case of some people sitting underneath existing Italcementi people who’ve been brought up. Just to understand if this is a wholesale change.

Bernd Scheifele

A mixture of those. Heidelberg has a very peculiar corporate philosophy. And one thing is, first of all, we believe it’s a local business. That’s why I believe in local management and in local branding. That’s why Indonesia is run by an Indonesian with an Indonesian brand, not by a German under HeidelbergCement flag. And there are other players in the industry, who believe that is wrong. We believe in it. And Italcementi also had typically Italian passports all over the place.

And we just believe that in India, the Indians are the best to position to do business and not somebody from, I don’t know, Rome, Sicily or Slovenia, which has nothing to do with it that’s just the principle. This was one principle.

And second point, you are right. It’s a mixture in the overlap countries. Obviously we have sent in our guys, which have a strong record in getting things done and executing. So we have played the safe cards. So that’s, for example, in India the case. That’s in Kazakhstan the case, that’s also in North America the case, so no risk. Whereas in other markets, typically where we are not as familiar, like for example in Morocco, or also in Italy and in Egypt, we brought in partially, people from Italcementi, and partially marketing side was typically from the less compatible in the market.

John Messenger

Fantastic. Thank you.

Bernd Scheifele

That’s it. Okay, thanks a lot. If you have a summer rest, have a great vacation. And hope to see you then in September. Thanks a lot for your interest. Bye-bye.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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