Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Buzzi Unicem's first half 2020 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Pietro Buzzi, Managing Director of Buzzi Unicem. Please go ahead, sir.
Okay. Thank you so much. Welcome to everyone. I'm glad you're able to join us in this conference call. Today with me is Patrick Klein, our Group Treasurer, and also Lorenzo Coaloa, Investor Relations. We're here to try to outline, as quickly as possible, our first half results, and then, as was already announced, leave you the floor for the question that you may want to ask. I think that, generally speaking, we had a good first half. For sure, better than what we originally expected, or what we expected at least at the beginning of the pandemic, where things started to look much more complicated. This was due to a situation which was favorable, even inside the pandemic, for different reasons. Main reason was, I would say, the relatively strong trend in volumes. Volumes that in many areas, in many markets, were not strongly affected.
Were, yes, affected, but not strongly affected by the pandemic. I'm speaking about the U.S. primarily, because this is an area where actually the opposite occurred. We had, actually, an improvement in our sales volumes. The Central European market, particularly Germany, where the impact of the pandemic was very limited, and volumes stayed basically at the level of last year. In terms of volume, we suffer instead in other markets, but less important in a sense. Italy, for sure, was the market most affected due to the more stringent, let's say, lockdown measure during March and April. Meanwhile, in all other markets, construction activity or any way the manufacturing of cement continued to be considered essential and not required to come to a stop. It stayed relatively weak with the exception of Czech Republic, that was actually, again, stayed similar to Germany.
This was the first, let's say, favorable, let's call it, contribution to the overall results. The other favorable contribution was the trend in prices. Prices overall, mainly due to the very strong start to the year. A very strong first quarter. We had an opportunity to go up with the prices. In Europe, this was driven to a large extent also by the trend in the CO2 cost, which were rising or expected, anyway, to rise. This, okay, change later on with the general, let's say, market level. But initially, this was not the case. Generally speaking, the price trend in local currency, euro, has been favorable, and also did not turn, let's say, unfavorable after the pandemic, basically, when the market started to reopen in May and June.
Also, thanks to a relatively quick recovery in most of the markets, I would say, price level remain where it was before the lockdown or the restriction. One exception in the U.S., where prices were, yes, in a sense, originally expected to increase the beginning of March, beginning of April. This did not happen because we were, again, in the middle of the crisis, of the unemployment, of the loss of the GDP. A lot of uncertainty ahead of us, and we consider, let's say, wiser not to move the price. In that case, in the case of the U.S., as I said before, stable pricing, but favorable variance in volumes. This was, again, the third point, which has been helping significantly the result, is the trend in cost. I'm speaking about mainly, let's say, variable cost.
Some of the fixed cost also went down, not so significantly. Yes, variable cost, in particular, fuel, also electrical power, I would say fuel across all my electrical power, CO2 rights versus budget was significantly better. The combination of the three factors, the three elements that I just discussed, trending volumes, the trending prices, and trending, in main, energy cost, is what allowed us to achieve these results that are somehow, let's say, unexpected or, I would say, by far better than what we've been reading about at the opening of the pandemic. Net sales eventually are in line with last year. We have a very similar top-line result. Actually, slightly less if you consider the changes, not so significant, some change in scope of consolidation which occurred last year, let's say beginning of July, particularly in Italy.
The EBITDA better, is a very good result, let's say, + 8.3% like for like. EBITDA margin are up almost 200 points. Net debt lower than December 2019 due to the strong operating performance, but also due to some other extraordinary inflows that I will comment upon later that you may recall already because they were disclosed at the trading update by the end of March. Moving to the breakdown of cement volumes by country. We had negative signs in Italy, minus 12. It would be minus 15 like for like without the changes in scope of consolidation. This is significant, of course, but again, not as bad maybe as one could have imagined at the beginning of the lockdown period. Overall, we had not exactly a V-shaped recovery. It was a little more, let's say, U style.
Already in May, we noticed the market, let's say, picking up again, and June was better versus June last year. This is, I would say, a good sign also for the coming months, that the underlying market, let's say, is not below the level of 2019, except for the lost days due to the closure of the plant. A strong performance in U.S. overall, considering that we lost also significantly in the oil well category, which is not very significant within the U.S., but still represents in a normal year, about 5% of our sales. Also, we lost quite a bit during March and April, volumes, sales at PET in what we call our northeastern region. The Pennsylvania plant, which is the closest to New York. Pennsylvania State, one of the most affected by the pandemic.
The volume delivery shipped from this plant were down significantly in March and April. Fortunately, this area is not so important for us. The rest of the market areas were strong enough to more than offset, actually, completely this kind of impact. Germany, stable, let's say, very similar. Luxembourg, yes, suffer significantly during March, because Luxembourg is also quite exposed to the French market. France is one area where the construction activity was very restricted, let's say, during the second quarter. Also Luxembourg showed a good resiliency, let's say, following the reopening. We are only 4% below last year, and potentially, let's say, with the possibility to recover what was lost in the coming months. Czech Republic, almost unaffected. Poland, yes, down almost 10%.
Poland had one of the strongest performance in prices. This could also be one of the reason why we are not so well-positioned in terms of volume. There was also probably a marketing decision to be, let's say, very firm on the price. This might be adjusted later on during the year if the gap between, let's say, our performance and the market becomes too wide. Ukraine is suffering, not only for the COVID. There's -11, -12 volumes. Also because of new imports, significant import activity coming from Turkey and affecting particularly one of our plants, the southern plant. This had an impact both on prices, which basically did not move up, and on volume. Again, more reason to justify this kind of performance. Russia, quite affected by the COVID and by the oil price.
Oil price was significantly declining as opposed to the U.S., Russia. For us, the share of oil well cement in Russia is much more. It's about 20% of our sales. This category, let's say, of products, declined very significantly. The gray cement was not too bad overall, considering, again, the weight of the oil well cement sales in this country. We lost about 7% overall, including oil well cement of our sales. The main associates, Mexico and Brazil, performed fairly well. Mexico remained stable in terms of cement volumes versus last year, even though there was a moment where it seemed that we would be forced to shut down and close the plant. There was a public announcement by Cemex that was the case, stating that the plants were going to shut down temporarily for the, let's say, COVID measure.
Fortunately, a few days later, the government stated in reverse that some of the main infrastructural jobs should continue, so there was a need for cement, for building materials. Together with the structural job at the end, with the plants open, a lot of construction activity remain active, particularly in the bag cement category. We did not lose volumes. In Brazil, too, even if the pandemic is quite aggressive, the number of infection is quite high, the impact on construction activity has been quite limited, quite weak. We were able to move up with the volumes almost 8% in the first six months, quite a good performance there. Pricing, as I said before, in Europe, there was mostly most area an increase at the beginning of the year, with then, let's say, stability moving forward after the reopening, during May and June.
Russia had some price increases in the gray cement category, not in the oil well, where, of course, the decline in the demand is asking for a price reduction, which we need to somehow take care of if we want to keep our market share. Stable pricing in Ukraine in local currency. Increase in Poland, increase in Czech Republic. Stable in the U.S., with maybe a possibility to improve from June on. Slightly declining in Mexico, but we've been coming from, let's say, not a significant, but yes, an unfavorable trend in prices already since last year. They are now, let's say, stabilizing at four or 5% below what used to be the previous peak. In terms of FX changes, which is also an important variable when you translate, let's say, or when you look at the final EUR figures.
We still had a favorable impact, until June at least, from the dollar, which is by the most important currency for our group. We are comparing first half 2020 with 1.10 average versus 1.13 last year. This did have a favorable impact both on net sales and EBITDA. More worries for the ruble, which is strongly related, as you know, to the oil price. In the first half, the decline is not so significant, only 4% negative variance. If we look at the current level of the tax rate. This would make us worry, let's say, about the upcoming months, because it's currently much weaker than the average of the first half. Ukrainian currency still improving, let's say, if you compare first half versus first half. If you look at the current exchange affected by year-end, some weakening, but so far, at least, not so significant.
Czech and Poland, small decline, but these are anyway within the European system, so currencies that are moving much less. Mexican peso, definitely weaker, -10%, and Brazilian real, very much weaker. Strong devaluation there, which is, of course, impacting our results in EUR because in local currency, company perform pretty well. In EUR, we did not enjoy the same kind of performance due to the extremely steep and, let's say, quick devaluation of the Brazilian real. Looking at the sales revenue, again, by country, volume prices. We commented upon volume prices, and FX. Most of the countries are showing very similar results versus the first half of last year. Well, Germany is actually 5% up, but if you consider Central Europe, so including the Luxembourg, the Netherlands, et cetera, we get closer to what it was last year, this market area.
Same reasoning, let's say, for Eastern Europe as a whole, where we have some improvement in-- Well, actually, stable revenues in Czech Republic and some declines in the other regions, where the strongest is actually coming from Russia, but also because of the trend in exchange rate that I was mentioning before. We do have an improvement of about €35 million coming from the U.S. This is where, clearly, the most important benefit is coming from, is offsetting completely the decline we have in Italy of about EUR 33 million. The positive Forex impact from the dollar is about $15 million, and overall is EUR 11 million because of the devaluation, let's say, the worsening of the exchange rate in the market that I mentioned before, particularly in Russia.
Again, stable net sales in the first half and a small decline like-for-like due to some changes in scope in Italy and in Germany. Going to the operating results, operating cash flow. EBITDA, again, by country. Clearly, there is a significant decline in Italy, which is even more evident because of a different policy, let's say, a different attitude that we took this year versus last year. I mean, the fact that until last year, we had been selling excess CO2 rights or surplus CO2 rights from Italy to other countries within the ETS. Let's say, a wash, if you look at the consolidated results, but instead a positive for Italy. This was not realized, was not put in place this year. There is a difference of about EUR 15 million. We are missing, let's say, EUR 15 million operating income versus last year.
The decline was EUR 20 in total. Clearly, the lost days during the restricted activity period really had a significant impact on our results. Maybe, again, not as much as we originally expected, or we could have planned, thanks to the trend in prices, which was favorable, and thanks to the trend in cost, which was also quite favorable. U.S., strong performance. We improved approximately EUR 37 million. Two things to mention, or three. Also, U.S. enjoyed, particularly for fuel, quite significant favorable variance. Due to the complication, let's say, coming from the pandemic, we were forced, and we decided to postpone some of the major maintenance, let's say, programs that were scheduled for the first half.
Meanwhile, during the ordinary production day, daily production, the number of people actually working in the plant is very limited or very far away from one another. When there is a significant maintenance project to be carried out, they require maybe a team of 50, 60, or sometimes more people working very close to one another. This was going against, let's say, the safety policies introduced after the outbreak of the pandemic. This is something that we will have to do in a way or another later on during the year. In the meantime, it's been postponed. Also versus last year, we had a quite significant, approximately $26 million increase in our inventory. There was an inventory change of, favorable inventory change versus last year, $26 million.
You probably recall that last year, during May and June, we were unable to ship on the river, on the Mississippi River, either by barge or by rail from the most important plant, that is the largest plant, due to the high water level. We had, at the same time of the year in 2019, basically all our terminal network almost empty, let's say, with no availability of product. During the first half of 2020, fortunately, the water level remained normal. We were able to navigate, to transport, to move cement, let's say, across the country. We built up again, let's say, the inventory that is necessary to operate and to be able to ship, to serve our customer during the summer season.
This was quite a significant change, which is actually, again, improving the operating EBITDA, but will be, to a good extent, let's say, reversed during the second half. Germany, strong performance too, 23% up, almost EUR 10 million up. Good pricing level and lower cost too. Similar to what we have been enjoying almost everywhere. Czechia, again, strong pricing, stable volumes, lower cost, also lower CO2 cost within the ETS. In Poland, mostly price effect because volume effect was negative, but also favorable variance for production cost. Even in Ukraine, we had a favorable variance for fuel, which was kind of unusual. Recently, we have also been running our plant using gas again. Gas is, during this period, cheaper than coal or coke, which is something that we did not enjoy since I think the last time we've been using gas was probably 10 years ago or so.
It's quite a strange situation, but again, favorable for the production cost. In Russia, the performance was, again, pretty stable in term of results. Russia did not have the same, or a less important, let's say, cost benefit versus other countries. Volume did not decline too and pricing was showing some kind of favorable variance. Going to the EBITDA bridge, EBITDA variance analysis. We move from EUR 298 to EUR 314 through this major, let's say, item or these major changes. Volume negative, as we mentioned already, by approximately EUR 48 million. Pricing is EUR 33, let's say, favorable. A large benefit coming from variable cost, in part, of course, related to the lower production level, but also, to a large extent, from lower input cost.
Raw material, for example, we spent EUR 5 million less, but this is mainly related to the production level, to the production activity, let's say. Fuel, instead, we spent more than EUR 33 million, so very significant amount. Power, also EUR 9 million. Transportation, which is also fuel related, another EUR 3 million advantage. Fixed cost, fairly stable. Labor cost, negative variance of EUR 2 million. Maintenance for the group as a whole, not for the U.S. in itself, as we discussed before, but let's say, a negative variance of EUR 2 million. Other revenues and costs, again, very similar to last year level. Other, let's say, general and factory overhead. A negative variance coming from the CO2 due to the fact that last year's CO2 was, again, a wash, as I mentioned before, so there was no CO2 cost within the group and also party, let's say, CO2 [parties].
This year, we have EUR 20 million coming, let's say, to be recognized as CO2 accrual, let's say, cost for the semester. This is leading us to the EUR 314 that I just mentioned before. In part of the income statement, so below, let's say, the EBITDA, showing profitability and also at the EBIT level because all depreciation and amortization is pretty ordinary. We did not have to account for any impairment, write down of assets. As a percentage of sale, EBIT is 12.2% this year versus 10.9%, let's say, 11% last year. It's 1.2 percentages point up. There is a stronger improvement at the equity earnings row, coming from the, let's say, extraordinary results of our associates or previous associates, let's say, Kosmos Cement Company in the U.S. You know that Kosmos sold all of its assets to Eagle Materials.
The closing transaction was at the beginning of March, if I recall correctly. Of course, there was a significant gain on this disposal, which translated again for us into equity earnings that are much higher versus last year. We have EUR 149 million versus EUR 34 million last year at ordinary conditions. This is, of course, extraordinary income. Finance costs are higher than last year, greater than last year by $26 million, but these are driven mainly by non-cash item, because if we look at the actual, let's say, net interest expense, meaning interest expense minus interest income, we have EUR 8 million for the period versus EUR 12.6 million, let's say, EUR 13 million last year. There's a decline caused by a small reduction in our cost of gross debt and, of course, an improvement in the net financial position.
Both things are, let's say, giving us an advantage in terms of net interest expense. There are other items, non-cash, as I said before, that are worsening, let's say, the net interest expense as a whole, let's say, including non-cash item. In particular, there is an adjustment we've been making of about EUR 50 million, more than EUR 50 million for derivatives valuation. This refers to the put and call option on the shares of the Brazilian, let's say, joint venture. You know we have an agreement there to either buy ourself or being, let's say, forced to buy the remaining 50% under the valuation of these derivative contracts. What played a significant role, negative, let's say, role was, as we mentioned before, the value of the Brazilian real.
The currency devaluation was reflected to the different value of the option, and the impact quite significant, about, as we said, €50 million. The prospects and the forecast in itself of the company are not worse than what we imagined, let's say, previously. Of course, they are functional currency, the Brazilian real, and when you translate it into EUR with the kind of devaluation that occurred during this period, the impact can be quite significant, and it was indeed. We had a profit before tax, of course, much better than last year for the extraordinary results that I mentioned before, even if net finance costs are greater. Income tax expense is rising, clearly because of the particularly the taxable profit on the sale of the Kosmos assets, and eventually, net profit is anyway EUR 82 million, greater than the previous period, 2019.
In terms of cash flow statement and trend in the net financial position, cash generated from operation was quite good. We are at EUR 2,056 million after working capital, let's say, adjustments, versus EUR 195 last year, which is 19% on revenues versus 13 of last year. Interest paid is similar. Income tax paid, they did benefit from some postponement, some delay introduced by the different governmental jurisdiction associated with the COVID-19 pandemic impact in the U.S. We've been able to postpone, and they were actually paid right after the cutoff, let's say, the closing of the June 30, some of the quarterly tax payments. This will, of course, will be reversed starting from July. In the meantime, we enjoyed, let's say, less tax paid due to the delay, decided again by the different governments.
Capital expenditures, too, they are lower than last year because we have EUR 108 cash out versus EUR 126. Clearly, at the beginning of the pandemic, the direction given by management, also to the various markets at [Sacyr], was to be extremely prudent and careful about capital spending and to, let's say, postpone as much as possible, due to the fact that we had no really visibility and no idea what could happen to, again, volumes, prices, and also cost. In the meantime, also after this set of results, we are not taking any more such an aggressive stance. We are, of course, trying to invest in the projects that have a greater priority or returns, but we don't think there should be such a strong restriction. We had it back in March, April.
Anyway, the postponement of some projects, when you start postponing, it's inevitable that you will be able to accomplish this number, same amount of projects within the year. We can expect, anyway, a reduction in capital expenditure for the full year. We had purchase of treasury share of EUR 7 million, dividend payments of EUR 32 million. We did receive dividend from associates. This has been the main, let's call it, inflow or the most significant inflow driving the additional improvement to the net financial position. Dividend from associates, EUR 172 million, of which EUR 145 million or so from Kosmos. Again, some disposal of investment, non, let's say, instrumental or not minor important, but anyway, EUR 10 million inflow. Negative impact from the translation differences and derivatives valuation of EUR 71 million. Other minor, let's say, changes, either positive or negative, leading to a change in net debt.
Reduction in net debt of EUR 183 million, which is very positive, let's say, very significant. We are now closing at end of period with a EUR 385 net debt figure versus EUR 819 at the end of last year. Okay. I think I've gone through most of the items. I hope that this has been helpful to you. I would like now to give back the, let's say, the microphone to the operator so that we may start the Q&A session. Thank you.
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Paul Roger of Exane. Please go ahead, sir.
Yeah. Good afternoon, everybody.
Of course.
Congratulations on the results. Yeah, I hope everyone's well.
Yeah. Well, not really everyone in the company, because like any company, I think we did have some cases, but fortunately, none of them required to be hospitalized or turn into something more serious. I would say in this respect, we've been lucky, or any way, we manage well.
That's good news. I'll just kick off with two questions then. The first one, the obvious one, I guess, is on the guidance. You've clearly mentioned a few things that reverse in the second half.
Yes.
Like the U.S. maintenance and U.S. inventory from last year.
Yes.
You're still implying, if I'm doing the math right, at the mid-range, you're still implying EBITDA will fall by about 15%.
Yes.
Really just trying to understand what assumptions you're making in that. If you're making, for example, any assumption about a second wave and how conservative it might be, and indeed, if there isn't a second wave, what might actually be deliverable this year?
Well, I would say for the Italian market, as you can read from our comment, we are not so negative, let's say. We think that, overall, the performance of June, when going forward, could be, let's say, repeated, and even though, let's say, at the end, we will close with a lower number. Not so bad, let's say, considering the situation and the fact that there will be probably no more, let's say, CO2 sales, again, from Italy to other markets. In the U.S., yes, we are very cautious and a bit concerned. We prefer to be very prudent about the next six months for two or three reasons. One is that, let's say, the volumes expected, and here we are, of course, relying on our managers, on our sales force, but also considering what the PCA is guiding for, let's say, some - 4% for the full year.
This would, let's say, reverse completely the trend of the first half. It's impossible, and we are taking basically this approach, relying on what side we are listening to what our customers are saying, of course, how our sales are going. On the other, also, we cannot ignore, let's say, what PCA is saying and the reasoning behind it, mostly related to the GDP decline and the unemployment, et cetera. Also, in the U.S., we see it difficult, let's say, not too easy to do the price improvement across the next six months. In addition to that, I mentioned two or three items that are not too small because, again, maintenance and storage changes will be partially reversed, but for some significant amounts. In Central Europe, we see the possibility to basically, let's say, repeat last year results, to go very close at the end.
In Eastern Europe, again, we are definitely more concerned. Not so much maybe about Czech Republic and Poland, but yes, let's say, Ukraine and Russia, we don't see really a way to be able to match last year results. We see markets somewhat under pressure and difficulties, let's say, to maintain the same trend of the first half. In addition to that, we have made some assumption, but this may turn also wrong or may be biased in a too favorable way on the exchange rate. Again, exchange rates have been favorable overall in the first half. We don't know exactly what, of course, what is going to happen in the next six months. If we look at the last two months, July and also beginning of August, the dollar, for example, which is very important for us for the overall result in Europe, is now weakening.
I don't know, Patrick, if you want to add something, but this is the reasoning behind our forecast.
It's merely the U.S., Ukraine, and Russia, by the sound of it.
Yeah.
In the U.S., just on the pricing comment, clearly, those price increases were delayed to June. Well, first of all, did you introduce things in June as well? Do you have a sense of what type of price increases have been able to stick by region?
We are trying. We have been trying to do something. We don't have, as usual, I mean, when you need Okay, one month has passed, but it's not enough, in our opinion, to understand whether the price increase, which is not very significant, but let's say a few dollars, will stick or not. Lately, we have seen some price activity, a negative one, because we have been, let's say, asked by our customer to match some other, let's call it, competitors in terms of pricing. It's still a bit early to understand whether we will be able to enjoy really a favorable price variance in the U.S. It's not impossible. If the market continues to perform, I think it will be possible. In this case, of course, the projections, the forecast may be too pessimistic.
I think it was correct on our side to try to give a guidance. The interval is large because, between five and 10, the difference can be many millions. Where we will end up, I don't know. Clearly, the U.S. will be the main driver, as it has been during the first half, in terms of potential benefit or, let's say, worsening. The only thing I can say is that next time we meet for the trading update, if things are going better, we will notify, we will inform the market. Right now, I think we have made quite an effort to understand where we could possibly end up, and the outcome, which is what was declared, seems very reasonable to us.
Yeah, that's great. Just one final question from me. I know Mexico obviously isn't consolidating your EBITDA.
Yeah
It is an important market for you. We hear from some others in the industry that there's another price rise going through roundabout now, and it's about 4%. Are you also putting a price rise through in Mexico, and do you think it could stick there?
Not yet, really. Latest news, I think we discussed it a week ago or so, we were still, let's say, trying not to lower prices. To stay where we are, which is basically what happened in the first half. There was limited decline, but in part, it was due also to mix. In general, we had price stability in the first half. It was, anyway, again, a good achievement considering that also in Mexico, the energy factors gave us some benefits. Results, considering the situation, are still very good in term of operating profitability, for sure. Okay, we know that our, let's say, Mexican associate is really cost efficient, so can weather very well also some, let's call it, lower prices or price decline. In this case, I would say that also in Mexico, we beated our internal expectation the first half.
That's great. Thank you very much.
You're welcome.
The next question is from Brijesh Siya of HSBC. Please go ahead.
Thank you. I have three, possibly. The first one is on, if you could quantify, what was your maintenance cost differential? Probably the absence of it boosted the EBITDA in H1 2020. If you could give that number. Can I confirm your inventory benefit was $26 million?
In U.S., yes.
Yeah.
$26 million. Anyway, okay. Yes.
Yeah. The second one is on fuel and electricity prices. If you could tell us what could the kind of magnitude of benefit you would expect for the full year 2020. On thirdly, if you could give us a little more flavor about how July trending setting up, especially in the U.S. and in Central Europe.
I didn't get the last question. Sorry.
July volume and price trends.
sorry. Yeah. Okay
in the market.
Well, maintenance. Because overall, as I mentioned before, if you look at total maintenance costs, they're not lower than last year in the first half. Also because, you know that the maintenance program occur for all plants the same time every year. They are typical. The significant maintenance cycle is more than one year. Okay. That said, Italy and U.S., I would say that approximately, we've been postponing some maybe EUR 8 million, maybe EUR 9 million. Something right like so. Which we should, yeah. We are planning toIf the safety condition allow it, to do it later, within year-end anyway. The second question was about the electricity cost. Well, electricity cost, I don't know. Do we have it detailed in here? Let me check. Yeah. Let's see.
Well, we do expect electricity to stay more or less at the level of the first half. To keep, let's say, the same advantage, to gain a similar advantage also in the second half. I don't have here the split between [CJ]. Sorry. Just a second. Total energy cost for first half 2020 was EUR 133 million. This refers to the cement operation. Last year, I don't recall. EUR 172. EUR 172 last year. This was the differential. Now, we can check closer if you're interested for the full year. I think a similar gap should follow, because at the moment, we've also been able to somehow secure a little bit more. Due to the low level, we decided to hedge a little longer than what we were used to.
At least for the base cost of energy, then the transportation or the, let's call it, if there is a significant pick up, a quick pick up in the oil price, or also the CO2 price, which is actually increasing, we may see, let's say, higher costs quicker than what we're planning, let's say, in the forecast. July and August, well, August just started, so there is no really feedback. July overall has been a month, I would say, in line with June, which means that, yes, in some markets, we did better than the year. Some other, the ones that are showing, let's say, more resiliency, that are stronger. Italy did better than last year in July. Some others are weaker, where we see, as I said before, more risk. Basically, the Eastern European markets. Yes.
Thank you.
You're welcome.
Next question is from Elodie Rall of JP Morgan. Please go ahead.
Hi. Good afternoon, and thanks for taking my questions. Can I just follow up on the U.S., and your more cautious view there at the moment?
Yeah.
If you could give us a little bit of more granularity about your expectations for the different sub-sectors, residential, non-residential, infrastructure. How do you see those evolving here? That would be my first question. My second question would be on CapEx and net debt. I was wondering if you could give us some color about the level of CapEx you're planning for this year.
Yes.
Where do you think you end up with net debt? Could you actually end up in a net cash position? Lastly, given leverage is definitely improving this year, what do you intend to do with regard to capital allocation going forward? Buybacks, expansion, what's your priority there? Thanks very much.
Yeah. The first question was?
On the different sub-sectors in the U.S.
Okay.
Where are you most cautious, more positive? What are you seeing at the moment?
Yeah, I know. I would say that we're seeing fairly stable to increasing trend in the residential. That overall is showing, let's say, a good stability. The non-residential is probably the weakest. Not so much the warehouses or deposits, Amazon, let's say, or, I don't know, data center, this kind of stuff is going. It's more the office buildings, hotels, et cetera. This portion of the demand, non-residential demand is clearly affected. On the public construction, yeah, we are starting to see some positive signs. Some larger projects that are coming to the, let's say, execution phase. This is also the portion of the demand that should probably become more important going forward. Also with the residential [steel at good].
If you know, again, if you look at the PCA projection in 2021, they are positive on residential, slightly negative non-residential, and slightly positive, let's say, on the public works. The CapEx spending for the full year, according to our last, let's say, projection and considering what I said before, some of the postponement that we will not recover, they were decided we would not recover by year-end, still should arrive around EUR 270. Last year, we had EUR 340.
The net financial position, considering what we have just said, let's say operating cash, CapEx, et cetera, should close at something that is EUR 250, more or less EUR 250, which is what we are assuming right now. For what to do with the capital allocation , I don't know. This require probably an entire conference. I don't know if you want to spend No, it's important, of course, but I don't know.
Probably, this is not so much the occasion. I think we have some good ideas, some plans that are viable and interesting for all the shareholders, and it's a nice problem to have. I think we can solve it, let's say, fairly well. Again, this should require, in my opinion, a separate presentation or much, much more time to be discussed.
Okay, understood. Okay, thanks very much.
You're welcome.
The next question is from Alessandro Tortora of Mediobanca. Please go ahead, sir.
Yes, hi. Good afternoon to everybody. I have three question, if I may. The first one is on, if you can come back as a clarification, you mentioned before the CapEx expected for this year is EUR 270 million, 270.
Yeah, EUR 270, EUR 275. Yeah.
Okay. Your idea is, considering the plus and minus that you mentioned before on the cash flow side to, let's say, be in the region of EUR 250 million by year-end, correct?
Correct.
Okay. The second question is on, if you can come back to the July trend, above all in the U.S., because clearly, unfortunately, we saw, let's say, some increasing cases from COVID-19 in the U.S., also in Texas.
Yes.
I would like to understand what is, let's say, the underlying trend in the U.S. in July, just to have an idea of how is going the situation for you?
Yeah.
The third question is on Italy. I remember that in the past, you mentioned the idea to basically deploy and use inventories and gradually start the production of your plant in Italy. Can you give us also an update on this side? For instance, if you still have some plants, I guess, in the south of Italy, basically still stopped and just using, let's say, their inventories. Thanks.
I did not fully understand the last question.
Okay. I try again, Mr. Pietro. It was related to the situation in Italy. If basically all your plants have restarted the production, okay, after the pandemic, after the lockdown?
With one exception, yes. The exception is the Testi plant, which is the one that was acquired last year from HeidelbergCement at this time of the year, well, beginning of July. Yeah, we are gradually using their clinker inventory to grind cement. This is part of the overall, let's call it, restructuring in Italy, which will involve, let's say, some further action to rationalize the production footprint. We continue to have, this is clear, some excess capacity, and we need to address it. Not too easy at this time, because you know that we are Also be some, how do you call it, social benefit. What is it? Layoff scheme. Layoff schemes during this period. We are not allowed really to act very quickly when you've been using some kind of unemployment support.
You cannot right away enter into a negotiation for a potential or future, let's say, off-boarding of the plant.
Okay.
In terms of the coronavirus cases, in general, in the last, let's say, two weeks, we have been better, also within the company. There was a moment when, for example, I was looking, back in beginning of July, particularly in Texas and particularly in the ready-mix operation, where you have more people, let's say, going around, because within the plant, as I said earlier, social distancing is quite easy, is quite normal. We did have ready-mix and drivers, et cetera. No, there was one case per day. Fortunately, again, nothing really serious for the persons infected. From an organizational standpoint, some difficulties due to the policy and the fact that you needed then to insulate also their colleagues, or the colleagues that have been closer or in contact with them. In the last two weeks, basically, nothing happening anymore.
We do not have any new infection within the group. It's worth mentioning that some states like Texas, Louisiana, Georgia, Tennessee, and Mississippi, that are very important for us, are preparing plans for second phase of lockdown. Let's say, they were caught by, let's call it, surprise in a sense, because initially pandemic was really strongly located in the North. They were caught by surprise when it started to become serious also, again, Florida. Well, not in Florida, but anyway, in the Southeast and Southwest region. These states are monitoring the number of infection, typically cases for 100,000 inhabitants. And if this figure, which I don't know exactly what it is, but let's say it goes beyond a certain level, they are ready to introduce a so-called lockdown second phase. Hopefully, this will not occur.
If we look at our own, let's say, company, things are much less critical, let's say, than two weeks ago. Nobody knows, of course.
Okay. Thanks. Sorry, the last question was on the assumption you made on the US dollar, let's say on your full year guidance, US dollar euro exchange rate. Thanks.
Yeah.
For the forecast, we used 1.12. Of course, it's now during the last weeks, the dollar has weakened quite significantly. This may change now in the next forecast. For the last forecast that we used, also for the outlook, we used 1.12.
Okay. Yes. Okay.
The next question is from Gregory Kulbersh of UBS. Please go ahead, sir.
Hi, good afternoon. Thank you for taking the questions. A couple of follow-ups, actually. Can I just come back to two points? The maintenance in the U.S., I didn't hear the numbers. If you could just repeat the benefit, that would be helpful. The second one is really on Brazil and the derivative situation. If you could just maybe summarize for us the position right now with the put and call in the Brazilian JV, what the cash out would be, what you've already put into your net debt, because obviously, I think you book derivative valuation into your net debt. If you could just give us a kind of overview of that. Did I hear correctly there, did you say it's a EUR 15 or EUR 50 impact on net financial expense?
No, it's 50.
50. Okay. Yeah. If you could just summarize basically.
Yeah
future cash out. Maybe let's leave it there, and then I'll have a couple of other questions.
Okay.
Otherwise, we'll leave it.
In the U.S. only, let the postponement of maintenance is about $5 million. If you consider U.S. and Italy, you go to what I said before, EUR 8 million-EUR 9 million possibly, or let's say, as a negative variance in the second half.
Okay. Sorry, you broke up literally when you said the number. Can you say again the number for U.S.?
$5 million in the U.S.
EUR 5 million. Yes. Thank you.
Considering also Italy, we go to eight, possibly nine, let's say.
Got it.
Total for the group.
Okay. Excellent. Thank you. On Brazil?
Yes.
The question was on the derivatives in Brazil.
Riccardo.
Basically, the main trigger here is the floor that is basically the valuation, the equity value of the company, which is a total of EUR 500 million. The half of it, because half was already acquired, is EUR 250 million, which is basically the floor for the calculation. Mainly due to the fact that the US dollar compared to the Brazilian real have significantly changed the ratio, therefore, the derivative has changed since the beginning of the year, and the impact is roughly $50 million. To answer your question regarding the cash out, in a scenario from 2022 onwards, where basically then the acquirer may desire to be paid out, the minimum value would be the EUR 250 million.
If the three-year average of the EBITDA, multiplied with a certain factor, is then higher than the EUR 250 million, then we would pay the higher amount, but the minimum is EUR 250 million.
Okay. Thank you. That's helpful. Thank you. Can you just, going back to trading in July, are you seeing volumes actually down in the U.S. or are they still growing? I believe you had a very strong end to the second quarter. I just want to understand your caution on the second half, whether it's more about the future or if it's something you're already seeing right now. Then the fourth question, which I think, because it's probably similar to the capital allocation question, probably you have a whole presentation on it, but can you just give us a sense in your ambitions as regards to carbon reduction and development of lower carbon intensive products, please?
situation for the whole industry. I think there was a presentation the company held some weeks ago, which is published on the website, I believe.
Yes.
If you could just maybe give us sort of your take on, I don't know, the 10-year target, maybe on the sort of pure CO2 reductions, and then maybe if you're doing anything as regards to kind of in broadening the product portfolio, I don't know, low carbon concrete, whatever else you've got in your planning, please.
July in general is supporting, let's say, I would say, the upper end of the range, let's say, in a sense that in July-- I'm talking about the final guidance. If you look at July only, overall was a positive month, let's say. It is supporting more, let's say, the -5 than the -10. I didn't mention it before, but of course, in the next few years, capital allocation or capital devoted to, let's call it, sustainability issues in general, will become definitely much more significant. Maybe not so quickly because the main, let's call it, need of capital is associated with the, let's call it, carbon capture and storage projects that will come sooner or later. It's a matter of identifying and testing the technologies and, of course, also knowing where to store the CO2 that you can capture.
Okay, in principle, this is something that will affect, in particular or initially, the European market, the European clients under the ETS scheme. Yes, will for sure require a significant amount of money. To be today in a very solid, let's say, financial position in the light of what is coming for, let's say, CO2 reduction and CO2 capture is a good. It's very reassuring, let's say. It's something that give us, let's say, a good feeling about the possibility to do something without leveraging too much the company. Yeah, for sure, it will come. We have already issued some targets. We are working on some new ones, which I think come out with the next sustainability report, more likely than not. Yeah, they will definitely require significant capital. Maybe not tomorrow, but the day after tomorrow.
Okay.
In the presentation-
Appreciate it. Thank you.
Maybe just to add, in the presentation, you may have seen on this matter, we have published a number of EUR 420 million for the target of 2022, which is also already realized, they are not just new CapEx, of course. This is for if the, let's say, the communication to the market, what we are doing now and have already done partly, and what is the target until 2022.
Can I have a follow-up? Are you doing a second I think that's key with Maryneal?
In part, yeah.
You've done this, yeah.
Maryneal is included, and it's the largest, yeah. It's the largest project until now.
Are you doing the next investment in Maryneal? I think that was the discussion last time we had this call. I think there was going to be a new line, correct me if I'm wrong.
No, not in Maryneal. Maryneal has been completed, been commissioned. No. The initial project is in San Antonio.
Sorry, San Antonio, yeah.
Yeah. We had a permit, and we are keeping, let's say, the permit alive, but no decision yet has been made. No final decision on actually building the entire new line. Yeah, we could do it. Let's say, there is, again, potentially a significant project and significant capital allocation if we go ahead, but no decisions been made yet. No final decision.
Okay. Thank you.
Welcome.
The next question is from Yassine Touahri of On Field Investment Research. Please go ahead.
Yes, good afternoon, gentlemen. Could you just help, please, reconfirm the positive impact of the inventory benefit that you had on EBITDA in the U.S. in H1? Was it $26 million on EBITDA, or was it on sales?
On EBITDA.
That would be my On EBITDA, it was $26 million.
Yes. Exactly.
We could have a negative impact of $26 million in the second half of the year in the U.S.
This year, we needed to, as I said before, to rebuild the inventory, by year-end, since we will the minimum inventory level last year was more or less at the end of June, went up during the second half. By the end of the year, it could be, I don't know, 10 maybe. It should be much less, but not totally reversed. The idea is to keep, let's say, the correct inventory level to be able to operate the terminal, in particular during the summer season.
There could be a EUR 15 million negative impact on EBITDA in the second part of the year.
Exactly, yeah.
The second question is that, could you quantify, you were mentioning that the month of July was good. Were the volume up in ready-mix concrete and cement in the U.S., and could you give us some specific number if you have some order of magnitude in the U.S.?
I would prefer not to, because we usually do not disclose in such detail.
Okay.
the volume trend. Yeah.
Was it up or down or stable?
Where?
In the U.S.
In U.S., it was slightly up, yes, versus last year.
The last question would be, again, on capital allocation. Is it fair to assume that, before committing large CapEx in, let's say, in Europe, you are waiting for a clearer regulatory environment in Europe and potentially a carbon tax on imports? After that, we could see a bigger CapEx that could be profitable. Is it fair to say that you're waiting? If, let's say, the regulatory environment is not conducive to do large CapEx, could you consider buyback, or are you looking at acquisitions?
Well, more than regulatory, it's really the testing and then the choice of the technology which would require some time. Because the largest or the newest, the largest projects beside what comes from the, let's say, ordinary maintenance and replacement project is associated with the carbon capture. We are involved in some testing. We have two or three lines of testing industrial. Some are already at the, let's call it, operating stage. Some other have been identified in terms of technology but need to be built. There is an engineering project, but there is no equipment installed yet. This is more than, I would say, more than regulatory is really to understand better what is the right way to go, which could also be different from one plant to another. It's not necessarily the same from one plant to another.
Of course, once you capture the CO2, where to take it or to store it is another issue. This is more a country or a European issue because it's not. You can maybe partially solve it by yourself, but not much when you involve the entire industry and not only the cement industry because carbon capture could be or, yeah, also other industry, I think, heavy industries are considering to reduce their CO2 footprint. On the rest, on the buyback and on the dividend, I think, yeah, we will continue to look carefully at our figure. Our results, They allow probably some more generosity on the dividend, I think could be expected. Why not? If there's not, again, significant, let's say, needs for other reason, it would make sense. We have always been quite conservative. We could increase the payouts, the possibility. M&A is more difficult.
Not impossible, but more difficult. I don't think it would be inclined to really, unless it is strategic or let's say, highly financially sound, to open a totally new market or geographic region. There are many things that you can do, smaller size, typically bolt on in the regions where we are already. This is something we are always looking at very carefully. Something has been maturing. Already last year, the acquisition for Italcementi is an example. The ready-mix acquisition we made in Germany is another example. These kind of projects are, I don't want to say, on the table every day. They are coming up, and they will be followed very closely to strengthen as much as possible our, let's say, position and performance in the market where we are already.
Just to come back on carbon capture. Isn't it fair to assume that in order for the investment on carbon capture to be profitable, you would need to increase cement prices quite substantially, and that it is difficult to do that without a carbon tax on imports, so that to a certain extent, the carbon capture investment depend on the carbon tax on imports?
No. When you were talking about regulatory, let's say, environment, I was not thinking about the border tax adjustment or whatever. Yeah, of course, this can be an important variable, important factor in taking a decision. In this respect, you're right. I think what will be driving more the profitability or the return of the carbon capture project is actually the CO2 cost, more than that. With the CO2 cost rising above a certain level, and due to the fact that CO2 rights are becoming, or will become more and more short due to the mechanism, this will be the main trigger.
No, thank you. Thank you very much.
Yeah.
The next question is from Cedar Ekblom of Morgan Stanley. Please go ahead.
Thanks. I've got two questions. Firstly, on the buyback. In the first half, you repurchased about EUR 7 million.
Yes
of treasury shares.
Yes.
How do we take that in the context of the 7 million shares that you're looking to buy back over the next 18 months? It seems like that's quite a small number.
Yeah, indeed.
Should we assume that that EUR 7 million number for total treasury share repurchases is more aspirational, or is there potential that you actually ramp up your buyback program from here?
Well, at the moment, yeah, it's a little more, let's call it aspirational, because this was decided, as you all recall, when we approved the financial statements, or at the moment when things were looking overall for the GDP, for the industry, and also for the company, how could I say, not very negative, but let's say, an outlook which we forecasted much weaker than what we have been experiencing now in the first six months. Our position there, also the explanation to the board, which was a little bit reluctant to, let's say, approve a buyback in such a moment, because clearly, the direction was to preserve, let's say, cash as much as possible. The decision taken by the board was to impose, "Yes, okay, we can do it. We have a strong financial position.
We can do it. We set some price limits, maximum price limits. Unfortunately for the buyback, we've been reaching. We are beyond, let's say, the price that was set by the board at that time. We are open, let's say, to continue, but it will depend on the market trends.
Okay. I'm interested you say that, because in all honesty, your EBITDA performance in the first half was actually very strong and rose year on year. I'm surprised that you're not pursuing the buyback as much as you'd expected you would. Considering that actually cash flow generation was very, very strong. Anyway.
Yeah, but when it was decided again, maybe it was not presented in the right way, but, no, I think it was. Again, it was easy to convince everyone that this was the right thing to do. It was considered a little more, if you wish, opportunistic than really something that we wanted to commit at all cost, or at any cost.
Okay. I've just got a question on the decision to stop selling the CO2 rights from Italy to other parts of the business, which are short credits. Can we assume that the decision to do that was simply because we had a correction in CO2 prices in the first half in the market, there was an opportunistic chance to pick up credits at a lower price?
Yes.
Should we assume that basically the question is, going forward, if you had a rally in CO2 pricing, you would be willing to reinstate the selling of credits from Italy to other parts of the group, even if it's net neutral at a group level?
Well, we could do it. As you were mentioning, again, in a opportunistic, let's call it, way, we decided to invest quite significantly at the beginning of the year when the price was around 18, 20, I don't recall exactly. We bought also some at the lower level.
Even at 15.
Yeah. Some of them were, some rights were bought at the lower level. We secure, let's say, a certain amount of rights at a good price, let's say, which was more or less corresponding. Actually, a little bit more, to the need of the group for this year. We are keeping, let's say, the surplus, the Italian surplus for Italy itself. Of course, starting from next year, everything is going to change. Everyone will be short. Every market will be short, actually, including Italy. At this point, I believe that each market will take care of itself. This is the idea. Italy will start to, let's say, deplete its CO2 inventory going forward. I don't know, Patrick, if you want to add something.
What was the cost for CO2 in the first half, and which divisions was it recorded in?
The cost was basically EUR 20 per ton of CO2.
Average.
Average, yes.
In euro amounts, was it EUR 10 million?
No, it was 12.5. 12.5 approximately.
No, no.
No, but this is the entire purchase. You're asking the accrual, let's say. You're asking not what we paid to purchase the CO2 rights.
No. What did you pay to purchase the CO2 rights in H1?
Okay.
In which division was that a cost?
Yeah, no, it was not a full cost, entirely cost, because in part, we still have in our stock, let's say, in our inventory of CO2 rights. What we paid to buy was EUR 28, correct?
Yes.
28.3 million for 1.475, almost 1.5 million tons of CO2.
That was realized as an operating cost in which division?
No.
No.
No, no, no. In part, it's going completely to the inventory, and then we accrue what is the estimate.
That's fine.
for the full year. The estimate, sorry, not the estimate for the full year, the estimate for the first six months. The accrual is about EUR 13 million, more or less.
Perfect. Okay. That makes sense.
Yeah.
Okay. Thank you.
You're welcome.
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