A new focus for HeidelbergCement
HeidelbergCement's 2020 Capital Markets Day – 'Beyond 2020' set out many ambitious forward targets for the global building materials company as it looks to strengthen its core portfolio and embrace the megatrends of increasing urbanisation, digitalisation and a shift towards a low-carbon future. In a bold move, it has brought forward some of its key targets for carbon reduction by five years. A simplified organisational structure will also see one global function per board member.
'Beyond 2020'
'Beyond 2020' is the framework for HeidelbergCement's new strategy for growth, consisting of business excellence, portfolio management, people and organisation, sustainability and digital transformation. In the sectors of cement aggregates and ready-mix/asphalt, HeidlebergCement will look to create above 300 basis points EBITDA margin improvement from 2019 across its portfolio. A business excellence plan will see the company grow by assessing portfolio management in a group and country-level, organic acquisitions, margin improvements, masterplan execution in the modification of major assets and digital transformation. These drivers will enable HeidelbergCement to achieve the 300 basis point improvements it seeks versus 2019.
Asset portfolio optimisation
To this end, the group is making a significant shift to look at divesting core assets which cannot make a return on invested capital (ROIC) of eight per cent per annum. The core business will be in markets where HeidelbergCement has strong and defendable market presence and where financial returns exceed the cost of capital over the cycle. The watch list will include assets that are given approximately two years to see if they can improve to focus positions, or if not, they can be divested to reallocate capital elsewhere.
On the other hand, the company is ready to expand in its focus markets. Approximately EUR1.2bn capex net investment will be made per annum and growth will be targeted in focus markets only if the leverage commitment and dividend to shareholders are not at risk. Bolt-on acquisitions will be made in focus markets and vertical integration will be targeted if it helps the cement and aggregates businesses in their markets. Acquisitions will have to meet the ROIC criteria, while also fitting with the company’s new CO2 reduction targets of 525kg/t CO2 by 2025 and 500kg/t CO2 by 2030.
CIC Market Solutions comments that there are several possibilities for disposals from HeidelbergCement group – in Indonesia, Egypt, Spain and potentially one plant in Italy, but these have not been confirmed by HeidelbergCement.
Digital transformation
The digital transformation is enabling HeidelbergCement to make a step-change in business excellence. "We aim to be the first industrial tech company in the sector," said Dr Von Achten. HConnect is designed to offer an ‘end-to-end’ digital experience for customers and will build additional revenues as well as reduced logistics and back-office work.
The digital transformation will be organised around the three pillars of HConnect, HProduce and HService. HeidelbergCement will target more than 75 per cent of sales volume to be made through HConnect, while manufacturing efficiency gains will be brought through HProduce working with big data and HService solutions. Currently, 20 per cent of sales volume is met with digital applications.
HConnect will go fully live to customers at the end of 2020. It will be important for reducing material waste, solving recycling issues in urban sites and for reducing the number of diverted trucks. A pilot project in Australia over the last six months has already seen AUD20m (US$14.6m) in additional revenues achieved, a 10 per cent reduction in call volumes from onsite users and significant sales representative time savings. Meanwhile, HProduce will offer real-time insights and advanced analytics optimisers to reduce energy costs and maintenance costs while allowing higher throughput. HService will provide shared service centre efficiency and lower service costs.
Finance
Lorenz Naeger, HeidelbergCement CFO, explained the need for the group to focus on efficient cash generation and allocation. The group will operate with a leverage ratio target of between 2.0x-1.5x by the end of 2020. As well as setting a ROIC or eight per cent, he said HeidelbergCement would have a cash conversion rate of 45 per cent and would look to obtain a BBB flat financial rating from analysts. Country-level transformation plans are being devised to underpin the ROIC target.
Carbon reduction is key
The unifying theme of the strategy is the commitment to carbon reduction. New CO2 targets have been set and there will be a roadmap from the bottom up for every country and an expanded low-carbon portfolio to meet the aim of being carbon neutral by 2050 at the latest.
