Heidelberg Materials AG (HEI) Earnings Call Transcript

Ladies and gentlemen, welcome to the Heidelberg Materials Half Year 2026 Results Conference Call. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christoph Beumelburg. Please go ahead.

Thank you, operator, and good morning, good afternoon, everyone, listening into our Q1 -- sorry, Q2 call, H1 call. We're here in the room with Dominik Von Achten, our CEO; Rene Aldach, CFO; and the IR team. Looking forward to your questions later on. But before we have some prepared remarks and without losing time, over to you, Dominik.

Thanks, Chris, and welcome, everybody, from my side, including then Rene Aldach, our CFO. Let me just go through the presentation that I think many of you have in front of you. In general, a strong quarter for us, and we are accelerating the growth. So a couple of good news to share. First of all, operational performance, 6% up on revenues and 4% up on RCO. I think that moves in the right direction. What is very important for us is to see that for more than 4 years, since Q1 2022, this is the first quarter with a positive volume impact, okay? I think that's 1 quarter, but I think that's very important to note from our side that this is since more than 4 years the first quarter with positive volume impact. We are accelerating also the inorganic growth with a couple of M&A transactions that either closed or have been done in the second quarter. So MAAS Australia will try to close during this year. AmeriTex in the U.S. has been signed and closed, a very important strategic acquisition in the fastest-growing concrete pipe provider in Texas. Akcansa, Turkey transaction has been closed end of June, very good strong platform for the Mediterranean, both for the Turkish local market, but also export hubs to Africa, U.S. and other parts of the world. Burnco, the transaction finally closed at the beginning of Q2. That's a strong market position in the Prairie market in Western Canada. Very important also is what we would call the self-help. So we really continue to work on all cylinders when it comes to pricing and surcharges, mitigating the effects that are absolutely there from the Iran situation that we have increasing energy prices along the full supply chain, and that's why we are working diligently on pricing and surcharges, and that work continues. As much as the work on our own cost position, especially the fixed cost side continues with the TAI program, Transformation Accelerator program, where we are now at EUR 440 million. So we're moving in the right direction. Third tranche of the share buyback, EUR 1.2 billion has been started and is running well, up to EUR 450 million. And then we've specified our outlook to the range of EUR 3.4 billion to EUR 3.65 billion. The ROIC will be slightly above 10% and the CO2 emissions will be around the previous year level. That's mainly due to the Akcansa acquisition in Turkey. With that, I turn to Page 3. You see the numbers, plus 7% like-for-like, plus 6% revenue. That's very good, strong growth on the top line. Operating EBITDA also moving in the right direction, like-for-like 4%, reported 3%. Operating margin more or less flat, slightly down. And then operating EBIT also up like-for-like 5% and reported 4%. So I think that's a good set of numbers for Q2. And that also gets on -- gets us well into the water for H1 with basically a flat performance year-over-year on the profit numbers and a slight growth on the top line. So in that respect, moving in the right direction. If you go to the Q2 profit, you see that things are shifting a little bit, which is important to see. One is the net volume effect increases. So that's good news. As I said, the volumes are coming back. Price over cost is around the 0 mark, slightly negative. We'll get into the details, I'm pretty sure, in your questions. And then we also see a scope effect coming from the acquisitions down the road. You will see more coming. So I think that moves in the right direction. H1, and you see when you flip the Page 6 and 5 back and forth, you see the difference there. Net volume impact in H1 was noticeably smaller. Price over cost was again around the 0 line. I think you see the shift, especially on the net volume side that is important to note. Then important for us to work on those 2 legs. As I said earlier, pricing, significant pushes around the globe. We've just finished our quarterly management meetings. So a significant push around the globe. The big focus continues to be Europe and North America when it both comes to top line price increases, but also surcharges. So that work continues as we speak. We'll go into the details when we go through the regions. And then on the right side, the Transformation Accelerator, the EUR 440 million, and we are very confident here that we will surpass the EUR 500 million saving target that we originally set. Then on Page 8, we go to Europe. You see here, I would say, a very good performance in Europe. Revenues up, EBITDA up, RCO up. And margins up on cement, slightly around the 0 line on aggregates in terms of changes and slightly up in the total region if you combine everything. So a resilient performance in Europe. Based on good pricing, energy surcharges are in place, and we are very focused on price over cost, which is positive in the region, that is very important to note. Then the volume development on the total group development is supported by also Europe. There are recovery signs in our sluggish markets around Germany, BeNe, France, U.K., but only very limited. The bigger increases now come from Scandinavia. I think the markets in Sweden and Norway have really rebounded quite a bit. And Italy and most parts of Eastern Europe stay strong. And obviously, for us, also importantly, the situation in Hungary has turned around. So we continue to climb back up in Hungary, which is an important joint venture that contributes also to the European results. And then the team is also doing an excellent job on fixed cost savings. You know that we have worked on our plant network in Europe, and we continue to see the lower cost base coming into the results as we speak. Then North America, I think a strong performance on the top line and also the bottom line. Top line up like-for-like 7% and reported 5%. Operating EBITDA, almost double digit like-for-like, plus 9% and 4% on reported. And RCO like-for-like double digit, plus 11% and reported 5%. EBITDA margins come and go in the quarters. That's -- we've seen this in the past. So cement down, aggregates up, total region basically flat. So that's the picture in North America. It's clear that there is good volume developments driven mainly also by a couple of very big projects, not so much a rebound in housing at this point. But it's also fair to say that there is inflationary cost pressure in the U.S. and that weighs on the margin development. We are continuing to work on pricing. We have announced July, August, September price increases. So I think we are continuing to move on the top line in North America to mitigate the underlying inflation. If we then go to Asia Pacific, Page 10, I would say a very mixed picture, very strong rebounding in Australia. The market is very resilient. The team does an excellent job there, good volume development. Pricing is moving in the right direction. Cost management is moving in the right direction. So overall, I'm very positive that we will see a good performance out of Australia also for the full year. Asia, I think, is probably one of the weakest link at this point when it comes to profit development. I think the volumes are actually moving in the right direction, but there is clear underlying inflation and cost pressure. And pricing is -- clearly has upside potential in our key markets, Indonesia and also in India, I would say, across the board in Asia, that's something that needs to rebound. Then if you go to Page 11, AMWA, I think, again, a very strong performance from AMWA top line growth, bottom line growth and look at the margin development. Margin now in AMWA cement more than 30%, another 300 basis points. I think, guys, this really moves in the right direction. The region is now almost at 28%. So very, very strong performance on the top line and also on the bottom line coming out of AMWA and that moves really in the right direction, good on AMWA. Then when we come to inorganic growth, I think the pipeline is absolutely intact, and we are executing the deals. The MAAS transaction I mentioned in Australia, we expect news in the coming weeks here, how this will close. So let's wait and see on this one would be an important contribution potentially also to this year's results or then at the latest to next year's results. We have already the contribution from AmeriTex, that deal is closed. The same is true for Akcansa as of July. So there is no impact in Q2, but there will be from Q3 going forward. Burnco did close at the beginning of Q2, and then things come and go. You know that we are actively not only acquiring, but also disposing those underperforming assets. And this is the reason why we have sold the position in Eastern Kazakhstan, Bukhtarma, very old plant, wet kiln, very difficult profitability and also in terms of CO2 footprint. So in that combination, we decided to exit during the quarter. The deal is signed and closed. So in that respect, that's it. Sustainability. There was a lot of discussion around the EU ETS. I think the water has been cleared to a large extent, the EU Commission has made their proposal how to proceed. We broadly support that proposal. And I think it sends a clear signal that the EU ETS is here to stay. And yes, there are some minor adjustments around the linear reduction factor of the benchmark more or less expected. And from our perspective, we can live with it. We may adjust here and there the one or the other investment. But overall, I think that moves in the right direction. We have set a completely different tone in terms of CO2 footprint in France with the opening of the new kiln in Airvault, reducing the CO2 footprint by nearly 30%, 3-0%. So that's a significant progress in the right direction. Let alone that this is also financially a very attractive investment. Advancing the technology on carbon capture at smaller scale in this point, but it's a completely new technology, Oxyfuel plant together with 3 competitors in a plant in Southern Germany. The plant is now up and running, capturing the first CO2. So we are moving also to advance the technology on carbon capture. And then last but not least, but importantly, when we talk about Dow Jones and FTSE, we are moving further ahead in the indices to underline our sustainability leadership. If you talk about that, you look at the performance of the KPIs that broadly move in the right direction. Alternative fuel rate up, clinker incorporation down, sustainability up and on the specific net CO2 emissions, it's flat, mainly also driven by whether we are exporting or importing clinker, whether we are growing in one area more than in the other. So let's wait for the full year. We are still confident that we will come in with a good performance also on the specific net CO2 emissions. That's it for me. And Rene, maybe you take the financial side.

Yes. Thanks, Dominik. Hello, everyone, from my side. We are on Slide 15. Quickly the highlights from the financials of the first 6 months of the year. Our adjusted earnings per share, which means excluding AOR, are up 2% which shows you already highlights you that below RCO, the P&L is also in very good shape. And even on a reported basis, our earnings per share is up 7.5% or our net income of the group is up 7.5%. If we go to the cash flow, you see here last 12 months rolling is EUR 1.9 billion. It's down driven by working capital and CapEx, and I think we will go through the cash flow in a few minutes also year-to-date, and I explain you the details. The leverage is around 1.6, 1.7 for H1, similar to prior year. So no big movements over here. And then as part of our strategy, what we have always announced, we increased our M&A, let's say, ambitions, which you have seen in the first 6 months. Dominik has explained what we have done, and we hope to close, let's say, the MAAS acquisition also this year. And what we also promised is we increased the shareholder return. You see it also here, plus 13%, which is driven by higher share buyback plus higher dividend. Let's go on Slide 16. What I said, you see our AOR is EUR 50 million better than last year, which has also to do with revaluating our current Akcansa share because we have now changed from net equity account to consolidation, and then we need to revalue based on the purchase price we have done. So here, there's an accounting effect in there. And what you have read and Dominik has also alluded to, the Bukhtarma cement plant, as we've mentioned in our report, there will be an impairment coming of a material amount, but it's not cash relevant. So it's a cleanup of the past. So there's EUR 100 million impairment, it will be in the full year books, but again, noncash item. Financial result, I think very good, flat in that increasing interest environment, I think good result here also. And from the income tax perspective, you see here a EUR 40 million improvement, which is based on a, let's say, provision release of a tax case we have won, which is a good thing and is here also contributing to our increased net profit. Let's go then to Slide 17, the free cash flow. I think there are only 2 items I want to mention. Number one, the working capital you see here was minus EUR 99 million. And there's 2 things. There's EUR 60 million of this is timing of our trading business increased, let's say, the revenue and then the money will come back. We've discussed it with them 2 days ago. So there's no problem about the EUR 60 million of the EUR 100 million. And then the rest is inventory buildup. We had to have taken opportunistic approaches when coal was cheap during the quarter, we have probably bought more than we really need, but that will benefit us, obviously, from a cost perspective in H2 then compared to spot. Plus with all the price increases and surcharges, obviously, the receivables are going up. But the promise is it's clear target for us. There will be no cash outflow from working capital by end of the year. So the EUR 99 million should go away in terms of free cash flow impact from working capital. Again, net interest, I say that's probably -- I say that's flat. Tax is flat. And then you have one negative with CapEx net, minus EUR 115 million. And it's also mentioned here in the comments, 2 items contribute to this. First of all, this is a net number. We had EUR 44 million lower divestments. And you have to see here EUR 30 million higher CapEx spend for the CCS project in Padeswood. And here, I guess it's very important to note that it's -- the CapEx we spend to build that plant is shared with the U.K. government. And the part we have, let's say, financed on this, we will get this back during the first 5 years of operation of the plant, which is a very good thing because we do now the prefinancing that is a fact. But then when the plant is operating, we will get all the money back, which is, I guess, only a timing effect, and therefore, I'm very confident with our CapEx number. Our core business CapEx stays in the disciplined manner we've always said. Now the net debt bridge. I just say here, the CapEx -- sorry, the net debt went up EUR 500 million, driven by higher -- by EUR 760 million gross CapEx and 13% increase of our shareholder return, which is a good thing. And if you look at year-end, that depends on the MAAS acquisition, if that comes or not. But if you -- let's assume we don't do any acquisition in H2, which will not happen, we will be probably EUR 200 million -- EUR 150 million to EUR 200 million higher than it was last year, which tells you that the leverage should be around 1.5, excluding MAAS acquisition because RCOBD growth, our net debt grows slightly, so no problem on the leverage also. That's it from my side. Dominik, I hand over to you.

Yes. Thanks a lot. Final page then from me before we get into your questions and our answers. We have specified our guidance going down the road during the year. We try to narrow the range that we give you at the beginning. So we're now at EUR 3.4 billion to EUR 3.65 billion. The return on invested capital will slightly be above the 10%. CO2 emissions, as I mentioned earlier, will be around previous level, mainly driven by the fact that Akcansa comes with a higher CO2 footprint for now. So that's the one driver. And then CapEx net, EUR 1.2 billion to EUR 1.3 billion. This includes the Padeswood topic that Rene was just alluding to. So overall, I think if you put that also with cash conversion into the right dynamics and look at it over many years, I think we are moving in the right direction. And then leverage, as Rene alluded to, will be in line with the midterm target around 1.5x. And then it's clear we continue to increase our shareholder return with dividends and share buybacks. And I think you see here in the Q2, plus 13%. I think that's a very fair return to shareholders. So that's it from our side. We move to Q&A. Thanks.

Thanks, Dominik. Operator, you want to start the Q&A, please?

[Operator Instructions]

All right. The first question comes from Benjamin Rada Martin from Goldman Sachs.

My 2 questions. My first today was on price cost. So it's worth noting price cost turned negative for the first time in a few years. We've obviously got a backdrop of transport and energy pressure. But do you expect this to turn positive as we go into the second half? And I guess, which regions in particular, do you expect to see sequential improvements in, if any? And then the second question would just be on carbon. And I guess your comments around EU ETS. We've seen more clarity around the structure of the system. Could you provide an update on when you expect some of the carbon costs to come through your European cement business when it comes to which years you expect to start incurring those costs?

Thank you, Ben. Maybe let me do the second one and then Rene does the price over cost one. So on the carbon costs, I think you saw the revision of the scheme. We are long until 2028 minimum. So I think that moves -- that's the answer to that question. Overall, comfortable for the next couple of years. But then obviously, we need to cover the increasing carbon costs.

Okay. Then let's talk about price over cost. Yes, you are right. The price over cost in the quarter was negative of minus EUR 19 million. But half of it, it comes from our, let's say, joint ventures, especially China. You know that China economy is pretty weak. So half of it comes from joint ventures. So then there's a remaining EUR 10 million. And to tell you, it's clearly not Europe. Europe is very positive for Q2, plus also for H1. So this is very good news. And then as Dominik alluded to it also, I think APAC, the pricing was not covering the higher variable costs. That's probably the answer to that one. And to your further question, how do we see this going forward? It's clear that the Iran war has a certain impact on, let's say, on a lot of companies, including us. And this we see in higher distribution costs, which we get, let's say, surcharged from our suppliers. And that is, if you look at the margins and our price over cost, this is the only one where we have margin dilution. So that means that our own efforts to increase price to cover variable fixed costs are very well intact because that covers our own cost, additional costs, especially from energy and inflation, we will cover by ourselves and just the ones from the suppliers, we need to push further. So we will still -- we are very confident with further price increases to come that we try to be positive in price over cost. You see it for H1. Even with H1, we are already plus EUR 2 million. And again, joint ventures is minus EUR 20 million. So take the joint ventures out, we are plus EUR 22 million for H1, and we are confident that we will be positive for the full year.

Next one comes from Citigroup, Ephrem Ravi.

Two questions from me as well. Firstly, on North America, you called out inflationary pressures. But if I look at the margin, aggregates margins are up about 2 percentage points. Cement margins are down about 3 percentage points. So can you pinpoint which are the cost inflationary pressures, especially in cement that is causing that big diversion in margins? And secondly, on Asia Pacific, very strong performance there. Any countries -- sorry, AMWA. Any countries in AMWA you would call out? Is it Egypt? Is it Turkey? Is it Morocco? Is it Sub-Saharan Africa, which is contributing to the strong growth over there?

Yes. Let me do those 2. And then, Rene, if you want to jump in, I think that's fine. I think North America, it's clear, as I said earlier, Ephrem, margins come and go. I think what is the reason for the good margin development in aggregates, it's mainly large projects. That's what I indicated. I think there are -- there is a lot of large project work in the U.S. And then it depends a little bit quarter-over-quarter how this balances out. And on cement, I think Rene has indicated that pricing, underlying inflation is significant. It's a very energy-intensive business, cement much more than aggregates. And then if pricing doesn't kick in as much as it probably should, then you see the margin squeeze. And I think that's -- we are on it. We are fighting in both dimensions, and we are very confident that we fix this in the second half. And then AMWA, to be honest, as I said, it's a portfolio approach, Ephrem. Things come and go in AMWA. There are countries in there that are really strong and then there are countries that are a little bit more weak in this quarter. But overall, again, quarter-over-quarter, year-over-year, AMWA is going in the right direction. Sub-Sahara is going well, especially if you go to the east side of the Sub-Sahara, the north side of Sub-Sahara is also going strong. And then we'll get Turkey coming into this picture also as we go into H2. So overall, we are confident for AMWA for a good performance for H2.

Next question comes from Julian Radlinger from UBS.

So I've got -- I'll start maybe with -- I've got 2 questions. I'll start with the one first. So North America was really quite strong in Q2 and especially in aggregates where your margins went up quite substantially. I just wanted to check, is there anything -- there's nothing in there that was kind of specific that's just price and cost and operating -- sorry, price cost volume and operating leverage?

Nothing out of the ordinary that we need to know. Things come and go in aggregates. I think that's it. Nothing super material that needs to be noted.

Okay. My second question is a bit of a bigger picture one. So if we take a step back, you originally gave a full year guide of organic EBIT growth of something around, I think it was 7% or so. You're now down slightly in H1. Obviously we know the story, Q1, weather, et cetera, Q2 was better, but you're basically down slightly in H1. There are some international heavy-side companies with similar regional exposures that have done a little bit better. I think what investors would really love to understand here is what exactly drove this H1 underperformance versus your own expectations? And really big picture and when and how will this turn around? Is that something we should already see in the second half of the year? Or is it something that will take a little bit longer?

Yes, Julian, let's -- do you want to take the North America -- North America, I've already answered, that's fine. The EBIT, minus 7%, I'll go first and then Rene can jump in. I don't want to correct you, but I would say when is it going to turn around? I would say we are actually well on track. I think we don't underestimate, Julian, we said that the first quarter was below our expectations. That's fine. Nobody has doubted that, but it was a weather-related impact to a large extent. And we've always said there's nothing structurally going in the wrong direction. We are very confident that we will deliver the guidance that we are giving today. And so from our perspective, it can always be better, but there is nothing structurally that holds us back from operating on a very high level.

Just Julian, to add, yes, Q1 was below expectation. We all know this and admit this, but that was mainly driven by North America, and we said we will come back with North America. And you see, I guess, we don't need to hide with our Q2 numbers for North America. Top line good, margins good, aggregates result good. I think that was a very convincing result for Q2 for North America, what Dominic and I said in Q1 that North America was mainly weather related, and it's coming back, and it came back in Q2. And that's probably -- we are on track to deliver and we will hit our guidance what we have provided to you. And I guess it's -- we deliver what we promise.

Next question comes from Cedar Ekblom from Morgan Stanley.

So just can we go back to the North American market. Pricing in that region, I think, has been one of the negatives that we've heard from companies in the last 2 or 3 weeks. Most businesses are reporting that pricing is sort of flat in the quarter. Can you talk to us about the landscape in the U.S.? It is your single largest region. How we should think about the momentum on pricing as we move into the second half? Because I think that, that's important in terms of reaching the guide. And then the second question relates to your Asia Pac business. Another quarter, I would say, of subpar performance, not much organic growth there at EBITDA. It is a business where you doubled down on with your exposure in Indonesia. It is a business where you remain in your Indian asset. Can you talk to us about the pathway to that business actually delivering meaningful EBITDA growth and your view on its relevance in the portfolio?

Yes. Thanks, Cedar. Let me maybe do the first half of the first answer, and Rene chips in on the pricing, and then I'll give you the APAC answer. So on the pricing in North America, you're right, Cedar, it was below our expectation, mainly in cement, not so much in aggregates. And the reason I think is there is imports going into the U.S. I think that is slowing down now, but there is import pressure in the U.S. and the market structure has also changed a little bit. But overall, as I said, we are going to continue to be pushing prices on -- in the U.S., and we are positive for the pricing development going into H2 because, as I mentioned on the page earlier, Cedar, we are implementing price increases as we speak. And the management was very confident that this will also work. So in that respect, okay. Anything to add from your side there? Okay. Then on APAC, careful with APAC, I would really split into 2 parts. APAC for us includes Australia. So I think let's take Australia out because it is a very meaningful business, especially with the MAAS acquisition, we now get very significant in Australia. So in that respect, Australia is actually on a very good track, and that will drive the APAC performance forward. Then you have the remaining parts of APAC, which is basically Asia, and that also splits in a couple of maybe more sluggish markets that includes especially China, which is super sluggish, maybe also Hong Kong, as Rene was mentioned earlier. But I think what has changed to the positive, Cedar, to your point, India and Indonesia, at least on volumes are coming back now quite significantly. And we all know there is a lot of capacity in those markets. If there is no volume, then it's also difficult to move pricing. So my expectation is that, that part of Asia will come back, but it needs the volume to come up to then also move on pricing eventually. And from a portfolio perspective, there is no change to what we said. Indonesia is an important part of the group. India, we continue to develop, but it's going to be opportunistic. If at some point there is an exit trigger, we may think about this. But for the time being, we develop India. And just to be clear, we earn money in India. Yes.