HeidelbergCement targets cash generation

This week the trend for divestments from the large multinationals was again demonstrated by LafargeHolcim's admission that it may seek a buyer for its operations in the Philippines, but it is not alone in trying to seek markets with higher returns. The selling hat is also being worn by HeidelbergCement, which held its Commerzbank German Investment Seminar 2019 in New York on 14 January. Dr Bernd Scheifele, Group CEO, gave a presentation update on the performance of the group in 2018 with strong direction that divestments were coming.

HeidelbergCement continues to exercise its business model for strong cash generation and margin improvement with continuous deleveraging and cost management. To help achieve this, the group is limiting capex growth to EUR700m over the next two years.

Cash boosting
HeidelbergCement is looking to reduce capex and announce more disposals to improve its cash position. By accelerating the disposals programme, HeidelbergCement should also lower complexity and risk. The company has already raised approximately EUR500m in 2018, selling US White cement, German sand, lime and brick and disposals in Saudi Arabia, Georgia, Syria and Ciment Québec in Canada, plus Tourah Cement property in Egypt.

Indonesia – still a top market for HeidelbergCement
Unlike LafargeHolcim, the company reports that its Indonesian market is turning positive. The 3Q18 marked a clear turnaround for the group in Indonesia and operating EBITDA recovered from a YoY loss of IDR150bn (US$10.65m) in July 2018, compared to July 2017, to a profit of IDR14bn in September 2018, compared with a year earlier. The group also initiated price increases in July 2018, driven by strong demand, with the same trend continuing in 2019 but expected to stabilise after PT Semen Indonesia's acquisition of LafargeHolcim Indonesia.

Europe – have energy costs peaked?
The group is also expects limited energy cost inflation in 2019 compared to the steep rises in 2018. Significant increases in electricity costs impacted clinker volumes and margins in Europe in 3Q18. In Norway, electricity cost inflation rose by 54 per cent compared to 3Q17 and in Benelux electrical costs rose by 53 per cent, while UK (20 per cent) and Germany (17 per cent) saw the lowest price rises.

EU CO₂ allowances
The EU's Emissions Trading Scheme (EU ETS) programme is coming into stronger focus for cement producers due to the tighening supply of CO₂ allowances. The prices of allowances had risen to EUR25/t by December 2018. This has been driven by the introduction of the Market Stability Reserve (MRS) from January 2019, which will reduce the amount of surplus CO₂ allowances in the market by operating a reserve. HeidelbergCement expects this to influence production and investment decisions going forward and could force capacity closure, market consolidation, limited exports and stronger pricing power.

Portfolio balance
Overall, HeidelbergCement remains a strong payer in the cement market, where it derives 50 per cent of group revenues, while ready-mix and asphalt account for 28 per cent and aggregates for 22 per cent. With the cement business split 54:46 between the developed and emerging markets, the geographical distribution of the cement business for the group is also well-balanced to reduce risk. However, the group will continue to target market positions of high demand and growth potential while divesting its non-core interests.

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