Elite stock: Wienerberger taps circular economy opportunity

• Exposure to population growth and urbanisation.
• Committed to 100% recycled or recyclable new products from the end of 2023.
• ‘There are numerous reasons for holding the company, stretching from the financial and the strategic to sustainability, which we incorporate into our investment approach.’ – Hugh Cuthbert, SVM

Among the more eye-catching developments at Wienerberger is its creation of a ‘circular’ brick.

No, this is not some kind of spherical building block that makes the construction of new houses all but impossible. It’s a part-recycled, fully recyclable, clay-based material that feels like a near-perfect example of the circular economy in action.

To produce its ‘ciclobrick’, Wienerberger has embraced the concept of ‘urban mining’, which involves reclaiming raw materials from demolition sites. As well as clay, a fifth of the ciclobrick is made up of ground ceramic residues sourced from sites by Dutch urban mining specialist New Horizon.

The company, which plans to further develop the process, has started to produce the brick from a site in the Netherlands and says that, once it has reached the end of its natural life in a building, it can be recycled and used again in new construction projects.

Heimo Scheuch, Wienerberger’s chief executive, says the only thing preventing the company from increasing the amount of recycled material in the ciclobrick more widely is availability. There are only so many demolition sites, and powdered brick is used in other ways – it’s laid on tennis courts and roads, for example.

Still, the idea feels pretty neat. And, given that Wienerberger is the world’s biggest producer of clay bricks, the prospect of the ciclobrick being rolled out over time across its global network seems instantly compelling from a number of points of view, including an environmental one.

The company and its history

Wienerberger’s ciclobrick contains 20% recycled material

Wienerberger was effectively founded in Austria in 1819, when civil engineer Alois Miesbach bought a few kilns and several plots of land in Wienerberg, close to Vienna, that were rich in clay reserves. The young Miesbach was convinced, rightly, that demand for bricks in Vienna would rise during the years ahead. Industrialisation and two world wars helped see to that.

It is unlikely Miesbach would have imagined how the group would look in its modern guise, however. Wienerberger has grown into one of the world’s biggest suppliers of building materials. It operates 215 production sites across 28 countries and employs 17,000 staff.

As well as clay blocks and facing bricks (used for building facades), the company makes clay roof tiles, clay and concrete paving, and plastic and ceramic pipes. It operates three business units – building solutions, piping solutions and North America – and targets its core markets of new builds, renovation and infrastructure.

Its latter-day emphasis on sustainability means that, among other things, it uses recycled raw materials in its plastics, has developed a flat-roof membrane completely made from recycled plastic, and backs research into developing recycled concrete and climate-friendly ways to make cement, which at present is highly carbon-intensive.

Investment case

Source: FactSet, adjusted earnings figures, data as of 10 Jun 2022

There are several ways of tackling Wienerberger as an investment proposition. The group is heavily tied to the world’s need for additional housing, which will only intensify as its population increases. It is also positively exposed to the desire of existing homeowners to repair, maintain and improve their properties as well as renovate existing and unused houses and flats.

Further, the group is locked into the global trend, increasingly spurred by legislation and regulation, to create energy-efficient and carbon-neutral ‘green buildings’, whether they be new-build projects or refits of existing properties.

In a similar vein, the company’s increased emphasis on reusing, recycling and the circular economy – and that it factors them into its growth strategy – should make it attractive to sustainably minded or ESG (environmental, social and governance) funds.

Added merits

Wienerberger comes with a few additional qualities. As part of its strategy, it actively pursues acquisitions, bringing in additional growth to complement its organic expansion, which has run at a respectable rate of about 6% a year for the past decade.

Last year, for example, the group spent €467m (£399m) on mergers and acquisitions, buying Meridian Brick in the US, FloPlast in the UK and Cork Plastics in Ireland.

At the same time, it aims to sharpen up its operational efficiency and has a target, set in 2020, of improving its earnings before interest, taxes, depreciation and amortisation (Ebitda) by €135 million by the end of 2023. The company’s Ebitda in 2021 came in at €708m, already a €125.3m improvement on the previous year’s earnings.

And last but by no means least, there is the company’s financial performance, which has been particularly strong. Last year, following a 2020 Covid slump, pre-tax profits jumped by 152% to €374.3m on an 18% rise in revenues to just shy of €4bn. 2021 profits were also up 19% on pre-Covid 2019 levels. And that was followed in the first quarter of this year by a 45% rise in revenues to nearly €1.2bn and a 240% surge in pre-tax profits to €135.3m.

Margins, efficiency and supply chain management have all improved materially, suggesting Wienerberger’s self-improvement programme is paying off.

‘There are numerous reasons for holding the company, stretching from the financial and the strategic to sustainability, which we incorporate into our investment approach,’ Hugh Cuthbert, European investment manager at SVM, tells Fix the Future.

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‘They make a lot of acquisitions, not big, transforming acquisitions, but a lot that are continually adding to the product base, so they are covering more and more the footprint of the residential and commercial markets they’re addressing,’ he says.

Elite holders

It is intriguing that none of the six elite managers who hold Wienerberger runs funds with an explicit ESG focus. It may be that, as fund managers, they are more convinced by the company’s business model and strategy than its sustainability bent.

It might also be the case, as with Cuthbert, that their commitment to ESG is embedded in their company analysis and forms just part of their decision-making process about whether or not to buy a specific share.

Either way, Cuthbert and Philipp Schweneke at DWS are the highest-conviction elite manager holders of Wienerberger shares. They have the company in more than one of their funds and both have it in the top third of their portfolio by ranking in at least one of them.

‘From the top down, I like the fact it is a clear provider of the products we will require to keep on housing ourselves in the years to come,’ says Cuthbert.

‘That might sound simplistic, but as long as it adapts to innovation, it’s never going to go away.

‘It ticks that box of manufacturing and supplying those products that will contribute to that theme. But, really importantly, it also has a management that appears to have a strategy in place to adapt to whatever that underlying environment may throw at them.’

Fixing the future?

Wienerber’s pipes being transported by water

Is Wienerberger fixing the future, then? Well, it is notable that the Fix the Future database assigns three thematic categories to the company: climate defence, low-impact products and production, and migration and relocation. The first two come under environmental and climate change and the third is part of the social and demographic change megatrend.

To the extent that its clay bricks, tiles and pipes will shortly be either recycled or reusable, the company does limit its impact on the planet, and the way it serves energy-efficient buildings and infrastructure contributes positively to defending it. In terms of migration and relocation, its building materials can be seen as catering to a growing, mobile and urbanising population.

In many ways, then, Wienerberger ticks all the right boxes. Yet there are niggles. It could be argued that the company could use more recycled materials in its bricks and pipes, indeed that it could put greater emphasis on making its entire product base recycled rather than just reusable.

And then there is its corporate language which, particularly in terms of sustainability, is often hard to decipher. It is by no means clear in its literature, for example, whether its target of cutting its carbon dioxide emissions by 15% by the end of 2023 refers to absolute emissions or to emissions intensity (emissions relative to the number of products it has ready for sale).

This is no small piece of semantics. Because Wienerberger is a growing business, it may well be reducing the emissions level of each brick, tile or pipe (which fell by 8% last year), but its overall emissions could still be rising (as they did last year, by 0.4%).

Speaking to Fix the Future, Scheuch acknowledges some of these points. However, he argues that it is best to begin with making all Wienerberger products recyclable and then introducing recycled elements when possible. On the emissions target, he says it is important to demonstrate the sustainability of the company’s production methods, and he doesn’t want to use an absolute target that impedes the business’s growth.

He also notes that the average lifespan of a brick is at least 100 years, perhaps 200, so its carbon footprint, particularly if it is produced in an energy-efficient way, can be environmentally extremely positive.

‘When we talk about sustainability, we see the whole impact of the product on the planet: on water, on energy, on the air and also on people’s quality of life. The indoor quality of people like you and me, who live and work in their houses, is very important for their health. That’s why we need also to contribute here actively and positively,’ Scheuch says. 

Building blocks

Standing back, and given Wienerberger’s overarching dedication to achieving sustainability, the positive elements of its business and approach heavily outweigh the negatives.

SVM’s Cuthbert says he also likes the way the company has embedded sustainability into the remuneration packages of senior management – a third of the top team’s long-term bonuses are linked to ESG criteria.

‘Forget doing good, forget the altruistic side of things, one thing that does tend to drive corporate leaders is their wallets. Therefore, it does give me some comfort that, regardless of how much they are doing right now, they will want to address these issues going forward.’

There are obvious developments that have complicated life for Wienerberger, including the rising cost of raw materials, supply chain disruptions, higher energy prices and shortages of labour. With Russia’s attack on Ukraine continuing, and Covid-19 still a global pandemic, it is unclear how long these will last.

With its efficiency drive, steady run of acquisitions and strong management, underpinned by its focus on the climate, the company looks to have put itself in a solid position to endure the future, perhaps even help fix it.

Talking to the chief

Heimo Scheuch has been chief executive of Wienerberger since 2009.

When he took charge of the company its strategy and operating model were driven by expansion, achieved by maximising its output and the relentless pursuit of acquisitions.

The brickmaker had been propelled forward by a strong period of growth in the EU as countries in Eastern Europe became members of the euro bloc and the residential housing market was in full swing.

‘Management was geared towards this, and investors were expecting super growth rates year on year, by spending money and making capital increases, and not so much focusing on return on capital employed,’ Scheuch says.

Bricks and bakeries

He compares the company to a bakery in Budapest at the time that would open at 7am and be sold out of bread and cakes by 7.15am – it had no need to think about marketing, communication or public relations. ‘It was a demand-driven market,’ he says.

But Scheuch, a former lawyer and investment banker, knew that the gold rush wouldn’t last. The world was reeling from the collapse of Lehman Brothers in the US and the onset of the global financial crisis; the housing market was going into seizure.

The new boss, who had been with the business in a variety of roles since 1996, embarked on a radical restructuring, shutting sites, laying off thousands of staff and replacing the majority of its sales and management team.

Reshaping strategy and resilience

Over time, he reshaped Wienerberger from a company with a compact set of products aimed at a single market to a much more diversified supplier of multiple products, including pipes, panels and insulation, targeting new-build properties, renovation and infrastructure.

As well as trying to sell to builders merchants, Scheuch began to target other end customers, such as property developers and investors, as well as the builders and roofers who would actually use its kit. Rather than volume, Scheuch chose to concentrate on value.

‘We entered a phase of the complete new positioning of the company, with respect to end markets, products and also people. This is something that has to be stressed in this context because you need the right management to do so,’ he says.

The strategic and cultural shift, which in some cases involved replacing 70% of the sales forces, was undertaken market by market in a process that tended to take between three and five years and which, in some countries, is still in progress.

Scheuch, who has also made the sales process highly digitised, highlights that Wienerberger’s sales force is also preselling its products, usually between three and six months ahead. This helps with planning and costs.

Transforming Wienerger has made it far more strategically and financially resilient, he says. But creating higher-value and more sustainable products has substantially driven up revenues, profits and margins.