Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Buzzi Unicem's first half 2019 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. Mr. Buzzi, you have the floor.
Yes. Thank you. Welcome to everyone. Nice to meet you by phone and to welcome you at this conference. We just closed and released the official, let's say, half yearly financial statements. I assume that all of you, or most of you at least, were able to go through the press release and take a look at the financial figures. I think that, in a nutshell, we consider ourselves, I would say, very happy about the outcome of the first half. We were expecting, overall, a strong first half, particularly after the first quarter, which was particularly favorable. We were able to confirm it also after a second quarter, which was somewhat more difficult, but fortunately not so difficult to offset the good trend that we enjoy in the first one.
If we look at the volumes, which is the first driver of revenues and eventually also of result, cement is up approximately 7%. Most of the large part, let's say, of the improvement came actually from the first quarter. In Q2, cement sales were basically stable, a little less than 1% after. We had also some country with volume reduction in Q2, like Poland, Luxembourg, Czechia. Also, Italy was slightly worse in Q2, slightly negative Q2 versus Q2, and U.S. also slightly negative. We continue to enjoy positive trend instead in Q2, in Ukraine, more than 20% up, Russia almost 10%, and also Germany about 2%. If you look at the overall results of the six months, cement volume is basically up everywhere, a bout 4% in Italy with slightly negative ready-mix sales.
About 3.4%, 3.5% in U.S., despite really significant problems associated with the flooding on the Mississippi River and the logistics issue related to that very difficult situation. In U.S. instead, we have a stronger trend for our ready-mix concrete, which is based mostly in Texas, so in regions that were not really affected by the flooding and have enjoyed some pent-up demand, which was coming from a difficult, let's say, September, October last year. After a difficult, let's say, final part of 2018, the demand started very well at the beginning of the year and continue like so also in the second quarter. Central Europe, overall strong Germany with some help from the scope changes. A little decline in Luxembourg, but not really meaningful because of the, let's call it, logistic management between Germany and Luxembourg.
In part, what is a decline in Luxembourg is actually translated into an improvement in Germany. Stable ready-mix sales in Germany, slightly up in the Netherlands, almost 3%. Eastern Europe overall quite strong, is well ahead of 2018, almost 13% up. Strongest country was Ukraine rebounding from a weak 2018. Also, Russia, 15% up. Poland, despite the negative second quarter, remained pretty strong overall in the six months. Czechia is at the same level as the previous year. The ready-mix business was weaker, let's say, in Eastern Europe, but not so meaningful in terms of percentage changes due to the relatively low volumes, particularly in Ukraine, where we had a negative, but offset, as I said, by very strong cement sales.
In, let's say, pricing trend, which is the second, let's say, driver of net sales. Good level, let's say, good improvement basically everywhere. We enjoy a price hike in Italy, which was quite significant. Also, in Germany, prices went up less than expected, not particularly meaningful, let's say, the price improvement in Germany. Anyway, we were able to achieve a favorable variance. Other countries like Russia and Ukraine also enjoyed, in local currency, a nice price improvement. Ukraine, as opposed to what has been happening for many, many years, posted also a favorable exchange rate variance. In addition to the local currency improvement, we also had a positive exchange rate effect, which was not the case for Russia, where the exchange rate remained slightly weaker than the previous year. Poland and Czechia are two countries that, as you know, are running close to full capacity.
The focus was, of course, to try to sell the capacity as much as possible, but also to, let's say, try to pass price improvements. In Poland and Czechia, by the way, not only in Eastern Europe, Ukraine and Russia had a similar trend. In Poland and Czechia in particular, considering the European Union, the cost of electric power went up quite significantly. These two countries are also purchasing CO2 rights because they are already short of CO2 rights. The cost increase is coming from the purchase of CO2 rights, and cost increase, looking at the production cost, mainly associated with the electrical power after some years of very favorable and soft, let's say, increases. In the U.S., the price improvement was not very meaningful. On a short- term basis, we are talking something less than $2 so far.
The reason is, I think, mainly the weighted average of our sales. The fact that anyway, we have some relatively important volumes in area where the price improvements are difficult to achieve this year due to stronger, fiercer, let's say, competition imports. We also have the feeling that somehow, in many areas, the price have reached some kind of import parity, where an effort, let's say, or an attempt to increase prices would translate into a greater import volumes into the market. Eventually, not necessarily good for the business. We did not speak yet about Mexico because, okay, it's not consolidated, but it's an important part of the business anyway, considering in particular the contribution, the equity earnings level.
Mexico is the only country within our system, let's say, where things have gone not bad, because the company continues to be quite profitable, and the margins are by far better than average. The trend, already starting from the second half of last year, has been unfavorable in terms of volumes and lately also somehow in terms of pricing. Nothing to be too worried about it, but yes, a trend that has turned somehow negative or more negative this year. Mexico, fortunately, had also some stronger, let's say, exchange rate. The pesos has been following more or less the trend of the dollar. Actually, in euro results, we suffer a little less. In pesos, we are suffering more.
One of the driver of our growth in the first half, after volume and pricing, was also the Forex [effect], which has turned positive after last year, where the dollar was weakening. This year, the dollar, which is the most important currency for our group, has been stronger and strengthening, let's say, in the first six months. We moved from an average of 121 last year to an average of 113 this year, almost 7% up. As I said, the other important currencies, the ruble, still somewhat weaker in the first half, - 2.5%, improving lately. Maybe for the full year, we will be able to reach more or less Forex-neutral. Let's say, if the ruble continues like it is now, let's say at the more recent level.
Surprisingly stronger, let's say Ukrainian hryvnia at +6% and no big changes in Czechia and Poland, a minor devaluation of the two currency. As I said, the stronger pesos is more or less at the level of the USD, more than 6% up. Overall, volume pricing forex took us to a level of net sales of EUR 1.518 billion for the first six months, which is 13.6% better than the previous year. We have several countries, most of them actually showing a double-digit increase, in some cases very high like, again, Ukraine, not particularly significant in absolute value, but relatively speaking, very strong. Russia more than 20% up. Few countries where the safe revenue is either flat or marginally down. I'm talking about the so-called Luxembourg, Netherlands group, which is flat, and the Czech Republic, Slovakia group of companies, which is -1% approximately.
On a like- for- like basis, let's say cleaning up from the Forex impact and the scope, particularly Forex impact has been quite significant, almost EUR 38 million positive. The scope impact has been EUR 7 million positive. We moved down to + 10%, let's say like- for- like improvement for the six months, which is anyway a pretty good figure. The EBITDA is, let's say very favorable. The outcome of the first six months, again, for sure above our expectation, probably also the analyst expectation. This is driven in part by some items that are typically non-recurring. In particular this year, we have the first- time adoption of the IFRS 16 leasing, which is accounting for approximately EUR 12 million. This should be clean up to come to the, let's call it more meaningful figure.
Cleaning up the non-recurring items and in particular some non-recurring profit that we had also in the previous year. At the end, the improvement remains quite large because we have on a reported basis, EUR 61 million improvement and on a recurring basis, EUR 60 million. It's very, very similar actually, because last year, some of you may remember that the main, let's say non-recurring profit was associated with the disposal of a business in the U.S., the packaged concrete business in the U.S., giving approximately EUR 16 million, EUR 17 million of gain, non-recurring gain in the first half of 2018. To this achievement, all the countries have been contributing quite well. The main improvement comes in absolute terms and also relatively speaking from the Italian market.
Again, there's something to be mentioned here because we are showing an EBITDA of EUR 32 million, of which though EUR 15 million is coming from CO2 rights sales within the group. The same EUR 15 million that are, let's say part of the Italian EBITDA, have been charged in different proportions. Let's say in the half yearly report, you will find the detail country by country, have been charged, have been invoiced, let's say to Germany, Luxembourg, Czechia and Poland. The other European Union country. Let's say the real underlying improvement coming from volume prices and also cost management is about 32 - 15. What happened in Italy? I think we had in terms of volume, again, a relatively good first half. We did not expect really the country to recover. Instead, we were able to achieve some improvement in volume.
Pricing, I mention it, quite strong, stabilizing at, let's say, a normal level, I would say, for a European country with costs that are similar to the ones of Germany, France, or Spain. A much better outcome of the ready-mix business, which is now approaching, let's say, the slightly positive EBITDA level, which we did not have for many years in the recent past. Another item which was affecting more, let's say, the year as a whole, the 2018 as a whole, but still had an influence last year in the first half, which we do not have now, or we have to a much lower extent, is the bad debt losses that we suffer. There is also positive variance in this respect, much less the debt losses.
Clearly, it's not that the cost did not move up, because we did have anyway, some cost increases, electrical power, typically, fuel to some extent. This is an evidence of the advantage of the so-called, let's say, operating leverage. It's enough for the volumes to go up some 4% or 5%, like we had in some of the plants or overall in Italy in the first half, to offset or to reduce the unit cost, the unit production cost because fixed cost per cement produced were actually down, were basically stable in absolute terms, but down thanks to the higher production level.
This shows once more how important is it, or is going to be, to be able to improve the capacity utilization of our plants. That is something that we're still working on because we don't think that the current improvement in the market is going to last much. Even if it does, there are some plants that are still running a number of days, which is too little compared to the potential ones or to the available ones.
In U.S., we close with a figure which is in euro, exactly, let's say, the same as last year. It is slightly better, the recurring ones, because of the gain that I mentioned before in the first half of 2018. This, I think, is a fairly satisfactory performance, considering again, the trouble that we suffer, particularly during the month of June, and the additional cost that we had to bear, to be able to continue, let's say, shipping and somehow perform to the desire of the customers. U.S. is, together with Czechia, the only country where the EBITDA margin is going somewhat down. The profitability, let's say, is not as good as last year. What happened beside additional logistic costs that we had for, again, managing the flood situation, is a significant decrease in our stock.
We were actually somehow, if you wish, let's say, overstocked at the end of last year. Last year, the final quarter was not very strong, and in anticipation of a stronger demand in the first quarter, which actually occurred, we prepare ourselves with, let's say, higher than usual levels of, let's say, clinker and cement inventory. This overall was a good idea because we were able to, let's say, cope with the stronger pent-up demand of the first quarter and the climate, and the mild weather, et cetera, but o f course, translated this year into a significant de-stocking.
When you de-stock, when you decrease your inventory, clearly your fixed costs are counted, let's say, twice. This is the reason why stock and inventory decline of about more than EUR 20 million, between EUR 20 million and EUR 25 million, is affecting our margins, is affecting our profitability. To, let's say, move already forward looking in the second half, we think that it will be very unlikely to recover, let's say, the same stock level, inventory level that we had at the end of 2018. Fortunately, the demand is relatively stronger, so we need to produce, and we are fortunately selling what we are producing. To be able to come back to that level of stock will be, in our opinion, very challenging, also quite impossible, and may be not even desirable.
This kind of, let's say, additional cost that we are having in the first half is likely to stay also in the second half. In the other countries, there is nothing really major, I would say, to mention. Thanks to the good trend in volumes and prices. Overall, the profitability is increasing. The margins are somehow going up. It's not that the inflation has been particularly low or subdued. In some countries, as I mentioned before, we did have significant cost increases, particularly in power, less fuel, but t he volume, the prices, and the capacity utilization levels, so again, the unit production cost going down. All these factors together were able to offset the inflation and actually giving us a better margin.
Other significant, let's say, improvement in absolute terms are coming from Germany, which is EUR 17 million up on a reported basis, but is also anyway EUR 10 million up on a recurring basis, which is the most meaningful, let's say, the most significant. Poland appears to be down versus last year on a reported basis, but we did have last year, one non-recurring item profit, let's say, one non-recurring benefit. Again, on a recurring basis, it's actually up by about EUR 2.5 million. Strong performance in Ukraine, even though not so important or not so material for the group as a whole in absolute terms. Strong performance in Russia, too.
If we look at the split of our contribution, according to the four regions where we operate, 2018 versus 2019, we have Italy that is now representing about 11% of recurring EBITDA contribution. Quite a significant decline in the U.S. because the rest was going better. We already said, but we moved from 60% contribution to less than 50%, 49%. Central Europe is basically flat, and Eastern Europe is slightly declining. It used to be 24% of the total, is now 22%, not because the performance was negative, because there were other countries, in particular in Italy, gaining some ground.
If we look at the [EBITDA] , let's say, bridge on a reported basis, the positive effects are coming from volume, about EUR 62 million. Price is about EUR 57 million, IFRS 16 is EUR 12 million, and Forex EUR 9 million. The negatives are mainly related to variable cost and/or, let's say, inventory changes, as I said before, where the logistic has become definitely more costly. Transportation in general, we have EUR 26 million higher, greater cost versus last year. Power, as I said, about EUR 12 million additional cost. Fuel is EUR 6 million, which is in line more or less with the greater production level. Not really a sign of strong inflation in this respect.
Fixed cost, driven mainly by exchange rate and scope, are moving slightly. We have EUR 4 million negative variance. We are missing some benefits, again, non-recurring, on the so-called other revenues and cost. In particular, we have lower gains on disposal of property, plant, and equipment, so EUR 20 million less overall. Partly offset by lower cost within the so-called general and administrative function. Other revenues and costs are, let's say, worsening versus last year of about EUR 6.5 million, but the recurring or operating portion of it is actually favorable. This take us from the 2027 to the 2080, what is it? 2088, exactly. Almost 2089 for the first half 2019.
Moving down to the lower part of the income statement. Depreciation and amortization is obviously affected by IFRS 16 adoption. The amount is very similar to the EBITDA impact, a little less. The EUR 12.3 we have at the EBITDA level is EUR 11.6 additional depreciation for IFRS 16, they're quite close. This takes the operating profit to EUR 165 million versus EUR 123 million of last year. EUR 42 million additional in absolute terms, + 34%, so quite strong. In terms of margins, we are at almost 11% versus 9.2% last year. Again, almost 200 basis points improvement, which is quite satisfactory. Equity earnings are declining some. This is mainly associated with the Mexican performance that I mentioned before. By far, the biggest contributor in the equity earnings, line is the item, is the Mexican joint venture.
We have also some, let's say, worsening in the net finance cost, which last year, from a pure accounting standpoint, we had a net interest cost of EUR 4.4 million, and this year is EUR 29 million. Again, this requires some comments because the pure net interest expense has been naturally showing a favorable variance of about EUR 8.2 million. Because the interest expense minus interest income was EUR 12.5 million this year versus EUR 20.7 million last year. You probably remember that we had anyway some overlapping last year between refinancing and repayment of bonds, so there's some kind of negative carry. At the end of September, we've been repaying a bond, which was relatively costly at 6.25%, if I recall correctly, interest rate.
As opposed to the pure net interest expense, we have some negatives in the items that are more volatile or most of them are not really financially cash item, like the Forex gains and losses. Last year, we had Forex gains of EUR 3.7 million. This year's Forex losses of EUR 5.6 million. The derivatives valuation so far, we are still affected, I think for the last time, because by year-end, everything will be repaid or anyway, will go away. We're still affected by the fair value changes of the convertible bond, the cash settlement option, which is playing negatively this year. The amount is EUR 3.4 million. Last year instead, when the share price was declining, we had a benefit of EUR 17.6 million, so quite a large difference between these two items if you look at the differential.
Overall, that's why the net finance costs are worsening, are looking worse, but in reality, they're not really worsening. W e are not concerned because what we can manage, what we can monitor is actually the net interest expense, and this has been improving. Let me briefly turn over to Patrick, which I did not agree before. I didn't say that, but you know already, but together with me is Patrick Klein and Agostino Pieressa. You can give us some comment on the cash flow statement, please, Patrick, go ahead.
Yes. Hello from my side as well, everyone. Coming to the consolidated cash flow statement, which is the origin, we can overall state, if we look at the development, basically of the net financial position compared to last year, we can also see overall that we have a change in net debt positively of EUR 71.5 million in the first half year of 2019. Compared to a negative impact in the first half year 2018 of EUR 31.6 million. Basically, where does this positive impact come from? Clearly, we do have a better cash generated from operations here. We have just been talking about the EBITDA. This is clearly also reflected in the cash generated. We have also a stable income tax on the other side.
The interest paid is, well, we have just talked about the interest situation, so Pietro has mentioned that we actually bettering here in the consolidated cash flow. There are also some, let's say, If we compare first half year of 2018 to first half year of 2019, there are some effects that are kind of delayed, because we had a new financing in 2018, in the second half, which is being paid, but this basically was used to also refund some activities. There are other effects that are not purely financial debt in the interest payment. Overall, our interest payment is actually decreasing, although it is not clearly shown now here in the statement itself. It does not have a significant effect or impact on the full year net debt.
The capital expenditures have increased compared to the first half year of 2018, as well as the equity. We have equity investments that, in 2018, have been higher compared to 2019. Overall, if you look at both positions together, we are actually slightly lower than 2018. We have main contribution is clearly the repayment of the convertible bond, which is basically reducing our debt because of the conversion. On the other side, we have a partial offset by the IFRS 16 financial liabilities that have an impact of EUR 93.7 million. These are the main impacts. Of course, we have some dividends, but these are relatively stable. Other smaller impacts that do not really impact heavily the financial position.
Overall, the net financial position has a significant improvement here, although we have also some significant spendings, this is also reflected in the net financial position that we can see here. It is supposed to continue due to the interest impact and some other impacts that we see also in the month of July. The composition of the net debt has not changed very much, but there is clearly some new dollar financing. We have 18% of dollar and 82% of EUR debt at present in the gross debt breakdown, and 72% long and 28% short-term debt. The fixed portion is 88% and floating 12%. Overall, the gross debt is still relatively stable after the big reduction that we had in the end of 2018, when we reversed the bond of EUR 350 million.
Yeah. The ratio are also improving. The overall, the leverage is still improving, which is good. Allow us a little more, of course, flexibility if necessary. One day after the end of the semester, we executed, let's say, we closed the deal to purchase the [Testi Cementi] assets, the two grinding centers and the full cycle plant in Tuscany. More or less, starting from, like you were mentioning, July, of course, this has been approximately a EUR 80 million cash outlay. We've been using right away, in a sense, the improvement that we were able to achieve in the first half, but of course, this is money invested that we think, not immediately, and over time, it will take some time, but will come back into, let's say, better performance of the Italian operation, more stability in the volume and in the prices.
Also, clearly through the synergies that we can make between the new entities and the existing one, a higher capacity utilization level, which, as mentioned before, is really what counts the most for the financial performance eventually, of the country, of our business in general. I think we can turn over the line to the operator and get ready to listen to your question. Thank you for listening so far.
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 yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Paul Roger from Exane BNP Paribas. Please go ahead.
Yeah. Good afternoon, sir. It's actually Paul Roger from Exane BNP.
Yeah.
Hi there. Good afternoon. I've got three questions, actually, if I may. If we can start off with just talking a bit about the guidance. Obviously, you're increasing it. You're now expecting 10% recurring EBITDA growth. On my maths, I think that sort of implies a flat second half organically. I guess the question, it just looks super conservative. Obviously, you've got an easy base in Q3. I guess the price cost dynamic is getting better as well. What I'm just trying to understand is, are you really thinking you'll do a lot better than that and you're just holding back? Is there something more specific that maybe we should be aware of? That's the first question. The second question is on Italian pricing.
Yes.
Sorry. Do you want me to ask all three or wait?
Well, we can start from the first one, yeah.
Okay.
Of course, what we do usually, like any company, is to rerun the numbers, look at what we have achieved, and update the forecast for the second part of the year. You're basically right, in a sense that if we make the 10%, we wrote 10%, I hope it can be 11, but it could be also nine, I don't know. Let's say around 10%, this will translate into very small improvement in the second half versus this. There are no really trouble ahead. For example, in Italy, the price effect will not improve in the second half, the price variance. This is one point. We are a little concerned about the volume. We don't think we will be able to keep the same, let's call it, positive differential in the second half.
In the U.S., I mentioned already before, we think that the price momentum is not too good. It's good, but not too good, at least to where we are. We did have already, in the books, some additional cost related with the flooding, and particularly the inventory decline, which, as I said, is going to stay. We don't see really any significant advantage on the variable cost. I read several comments by the analyst, maybe we live in a different world, I don't know. We don't see really, let's say, a tailwind coming from the fuel and power cost. As I said before, we are basically even with last year. No real tailwind. In the other countries, including also, let's say, Germany, it would be difficult, in our opinion, to get further benefits, let's say, going further.
Other two example, for example, Poland and Czechia are already running at full capacity. What we have done in the first quarter was particularly strong, particularly high, but we cannot continue the same pace for the full year. If we continue the same pace for the full year, we would be well above, let's say, the capacity available. We can focus maybe a little bit more on pricing, of course. This can help. These are two countries also where the energy cost inflation, particularly the power, is pretty high, and the CO2 rights are somehow, let's say, also weighing on cost.
De-stocking effect .
Yeah. During the second half, the de-stocking effect will be diluted significantly, of course, versus the first half, where we have only two months. I don't know. Again, this is what our, let's call it, forecast is telling us. Could be too conservative. I hope so. I think that we are pretty likely to achieve what we have said. Let's say, the 10%. If anything goes right, the performance could be better. I, anyway, I would, let's say, rule out completely the same kind of performance for the second half that we had in the first one. It's not that we will finish the year with 20+%.
Yeah.
This is, we think, impossible overall.
Okay. Well, maybe my second question, actually. I'll just follow up on a few of the specifics that you mentioned. Maybe if we talk about Italian cement pricing first. Are you basically saying that we are now at the right level, and therefore, we probably shouldn't expect any more increases in the second half or indeed into 2020?
Yeah.
My understanding was actually the cost base, the cash cost base, in Italy was actually still relatively high compared to some other countries.
If you talk about fuel and power, you're probably right. We tend to be somehow, let's say, at a higher level, mainly because we are not able to use as much alternative fuel as other countries that they are doing. Again, not for technical reason, for administrative reason, permit reason, but let's say this is one of the issue. Power, lately, we had some benefits. Last year, in particular, with the introduction of the new norm for energy intensive industry, we had a quite significant reduction. With the CO2 going up, it changed, but not as much. In power today, we are not so bad compared to other countries.
In terms of raw pricing, I think that if you look at the pure domestic price, I think we have achieved a good level right now. Yes, short term, we don't see any possibility to get that. Longer term, we will see. Of course, it will depend to some extent, large extent, from the cost. In our mix, of course, there is also clinker sales, and there are export sales that are somehow driving down, let's say, the average price. If you look at the pure average price, maybe you could say it's still not satisfactory. The domestic price right now, I think, can be considered a fairly good price.
Clearly, if you compare with the prices of the U.S., you're missing maybe 30%, but the U.S. have also other costs, a lot of logistics, a lot of transportation, and margins are at the peak. Comparing with more similar countries, like Germany, Spain, France is a little different. I could say that the domestic price level today in Italy is not at a level that can be considered unsatisfactory. I would consider it satisfactory.
Okay. Yeah, that's clear. My third and final question will actually be on the U.S. cement pricing. You're talking about sort of 2% this year. You've mentioned import parity as well. Are we really just talking about pressures in the Northeast, and obviously McInnis is now quite well known, or are there other areas on the water that imports are a problem as well? What price momentum, actually, incidentally, are you seeing on the Mississippi and in Texas? Presumably that's a bit better than that 2%, is it?
In Texas, we did not have any, again, it could be more specific maybe to our business. You know that there have been recently some changes, some also exchanges of assets in the ready-mix. We lost some of our ready-mix customer due to, let's say, really change of ownership. The fact that what used to be an independent or partially independent customer, is now part of a cement group. We had also to recover somehow our volumes, looking for other sources, let's say, of business. This translated into a price trend, which was not really so good in terms of improvement. In the Houston market, which is also important for us, the number of initiatives related to, let's say, cement imports are always increasing. They're not so meaningful in terms of volumes. They're not really affecting so much our volumes.
In terms of pricing, yes, locally, they can have an impact. In the River region, we are in a market that is not particularly strong in terms of volume. By far, the two best performers, at least for us, are the Southwest and the Southeast. Let's say Texas and the Atlanta, Tennessee, Chattanooga, let's say, region. The River region, let's say, along the Mississippi River, markets are performing fine, but only slightly up. This, again, makes it difficult for the prices to really show a significant improvement. You do have some big U.S. ready-mix operator, which are, obviously, from their standpoint, always looking for better deals. You have the ready-mix operator in Chicago, which has been importing cement, unloading in New Orleans, and moving up all the way to Chicago.
You have this kind of situation that makes it somehow difficult in the Midwest to really achieve a strong improvement. Okay in Texas, okay in the Southeast. Houston, kind of difficult. Yes, the Northeast, kind of difficult.
Thank you very much.
The next question is from Tobias Weimann with Morgan Stanley. Please go ahead.
Hello. Thank you very much for taking the questions. I have three as well. Maybe we can go through them one by one.
Yes.
The first one, again, following up on the raw materials impact for the second half. You talked about this earlier, but can you give us a little bit more detail? Clearly, if we look at the prices for coal and petcoke, those are down quite significantly, I think 20%-30% versus 2018. What are we missing there? Why are you not seeing any deflation in raw materials? That's my first question.
Again, I don't know. I can tell you what is in our figures. Just a second, I will open again. Each country would require a specific comment, because it is very difficult, really, to generalize. If you want to make a longer story short, I would say that looking at fuels, in general, we have it fairly flat. If you look at the EUR, let's say EUR ton or EUR Gcal of consumption, first half 2019, versus first half 2018, in general, we have a fairly flat in price trend. With the exception, because I think it's worth mentioning, of countries like Ukraine and Russia, for example, where instead prices went up, fuel prices went up quite significantly.
For the second half, actually, again, looking at our figures, we see full year i ncluding the second half and taking into consideration also what happened in the first half, some minor decline is possible in some of the countries. Again, to generalize it is a little difficult, but it's true that the trend should be slightly better, again, with the exception of Russia and Ukraine. We are talking about very little, let's say, favorable variances. Nothing really meaningful. On power, a general comment is more difficult to make, as I said before, because you have countries where power costs went up quite significantly, and countries where it tends to be flat. The countries where power costs were trending, let's say, higher, are mainly the ones in the European Union.
It is more related with the trend of the CO2 rights, which started to become very steep in terms of increase last year, in September, October, and currently, not with the same momentum, but it is still going up. Again, we don't see really a great benefit. There is no strong inflation, and fortunately, as I said before, in the countries where this kind of cost were rising more significantly, also prices went up in a nice way. To see really a clear benefit coming from these two items, in our case, I would not consider that as a clear benefit going forward.
Okay. Thank you for the answer. The second question, you talked earlier about the impact from de-stocking in the U.S. during H2. Can you explain why we have this effect? Because I would assume that production should be going on normal in the second half, and I guess, in fact, you would probably catch up a few of the volumes which you have lost in the second quarter due to the Mississippi floods.
As I said before, we were too high. The level was too high. It was very high at the end of 2018. We started to use mainly the clinker, because this is something, cement, you cannot really have too many days of inventory. The clinker inventory, yes. We decided to keep production going, last year also during, let's say, the weaker months, to prepare for the first quarter. From then on, we were actually using the stock during the winter maintenance, during the winter outages. From then on, we are basically producing what we can sell. We do not expect, really, to be able to rebuild the stock.
As I said before, maybe this would not also be so preferable or the right thing to do. As long as we can keep this level of stock, even if it's a little tight right now in some of the plants, from a working capital standpoint, it's anyway better. Assuming that the demand remains quite robust, we don't think we will be able to replenish, let's say, our inventory. Only if the volumes are going down, like it happened in the last four months of last year.
Okay. The last question I had, I think you talked about this on the call last quarter. The convertible is now out of the way. Can you give us any news whether you still consider to simplify the share structure? Maybe you could also explain, if you would do this, how the mechanics would work? How would you ensure that the family would still remain in control? Thank you.
There is nothing really going on in this respect. Yes. I mean, what is going on is the repayment of the bond, partly with treasury shares and partly with the so-called alternative cash amount. For the rest, no, we have no plan to change the capital structure.
Okay. Thank you very much. That was all my questions. Thank you.
The next question is from Rajesh Patki with JP Morgan. Please go ahead.
Yes. Good afternoon, everyone. I had two questions as well. For the second half of the year, you said your guidance is based on conservative assumptions, and you mentioned some of the concerns in response to one of the earlier questions. My question is, do you expect the results in any of your markets to decline in the second half year-on-year? The second question is if you can provide an update on the expectations for CapEx and where you expect the net debt to end up at the year-end. Thank you.
Yes. Well, markets really to decline, let me see, because the second half is usually, I mean, in most of the market is usually stronger than the first one. I don't have here in front of me really all the figures, but, if you wish, as I mentioned it before, the Italian performance is not expected at the same level of the first half. The United States quite similar versus, let's say, last year. Let's say, to end up with something that is very close. Germany, yes, will be somehow declining, but this is a more scope change effect. Let's say that Poland and Czechia, we mentioned it also in the press release, will close with a slight increase, which is, in the case of Czechia, actually better than what we did in the first half.
Ukraine, the performance in Ukraine should be, in a sense, let's say, not as good as in the first half, but we're closing the year with a clear improvement. I think that maybe the two countries where we are a little more careful are also due to the strong performance of the first half, are Italy and Germany. These are the two that are more likely probably to show a slower pace.
Okay.
Yeah. Sorry. Patrick, is net debt, you want to say something, Patrick? Yes.
Yes. I think we can confirm that typically what you can see, especially when you're going through some spending, such as Pietro mentioned before, that we have the EUR 80 million for the three plants in Italy this year. Of course, we are getting some other spendings. We have also the alternative cash amount spending, so the repayment, and we have CapEx programs.
Overall, what we can see is almost in line with what we also expect in a relatively, I would say, normalized situation where we have more than EUR 100 million kind of change in net debt in a year. This is something we would expect is also the case for 2019. This reflects already the mentioned effective, basically, CapEx program that is probably including equity investment similar to last year's level. Of course, result-wise, the indications that Pietro made before are already included in this forecast. Basically, a reduction that is slightly above EUR 100 million of net debt in 2019.
Okay. Thank you.
The next question is from Mike Betts with Data Based Analysis. Please go ahead.
Thank you very much. I had three questions, if I could.
Yes.
First one on Germany. The performance was extremely strong, and I'd just like a bit more of an explanation, if you could. I mean, EBITDA recurring was up, I think, EUR 10 million, yet it had an additional EUR 8 million of carbon charges. I know the acquisition contributed an additional four months.
Yes.
What I'm trying to understand is, was the improvement driven in Germany by the acquisition, by the additional volumes? Because they didn't seem to be much on pricing or was the cost down significantly? Maybe just a bit more explanation for that. Also, why you expect it to be less in the second half. Is that just the acquisition effect? That's my first question.
No. Yes and no. Essentially, yes, we started to move some of the production and sales, even if the Seibel plant is still running, will still be running until the end of September, more or less. The contribution coming from this specific, let's say, scope change was not so significant. Again, I think there was a quite good cost control. Let me check briefly, if we had some significant, let's say, savings. It's coming. Yeah, the performance is coming basically from the cement division. A little bit also from the concrete division, but let's say, adjusted year-over-year, around EUR 10 million coming from cement division. Let's see. The volume, let's say sales volume impact was around EUR 6 million positive in Germany. The pricing was about EUR 16 million positive.
In terms of cost, we had almost Well, the positive in this case, yes, a positive variance for fuel, about EUR 4 million flat power cost. In terms of inventory changes, not much going on there. Personnel, slightly negative, but nothing really significant. On the repair and maintenance, flat versus last year. I think overall, a good performance, in terms of plant operation and also managing, let's say, fixed cost. I don't know if I'm missing something. I hope not, but I think.
The volumes.
Yeah, the volumes. Yeah, we mentioned, the sales and volume mix is about six positive. The price is about 15 positive. Yes, this on a cost situation, which has been either favorable or just slightly negative.
Understood. That's great. Thank you. My second question is on the acquisition in Italy.
Yes.
Could you tell us firstly how much capacity in million tons a year you've acquired? Do you intend to retain all of that, or is the plan to close some of it down and to rationalize your production? Have you quantified anywhere or given out the synergies that you're expecting?
Yeah, we did. Well, capacity is not really so meaningful because, the two grinding centers, potentially, they might have one plus the other, maybe 400,000 tons of capacity, and another 500,000, 600,000 could come from the full cycle, let's say, plant in Tuscany. I think we have to look mainly at what these three entities or three facilities were selling, which is in the range of 400,000 tons, more or less, per year. The idea is absolutely to, as soon as possible, there are some constraints, in part also related to the ETS, the CO2 allowance, et cetera, particularly for the full cycle plant, which does not suggest to just close the plant right away. In perspective, the idea is to be able to achieve the same volume, to reach the same customer from our existing location.
One of them, the so-called Borgo San Dalmazzo, is really across the street from the Robilante plant. This is already in the process of being shut down, this kind of center. The other one in Arquata, there are some reason associated with their product mix, which force us, in a sense, to maintain it alive for some time, maybe one year, maybe 18 months. On the full cycle plant, to move it as quickly as possible to a grinding center is our idea, and to supply, let's say, clinker from, in this case, specifically from Guidonia, which is the Rome plant, that has plenty of capacity available.
Synergy, we think that on a yearly basis, once we are fully restructured, so using entirely our capacity and better, and reducing the number of open facilities. The reducing also the fixed cost could be EUR 11 million, EUR 12 million, maybe best case, EUR 13 million per year. This is the idea.
Thank you very much. My final question was just returning to the U.S. and the weather difficulties and logistical differences and difficulties in the first half. Were you able to quantify what the additional cost might have been with all of that stuff?
Yes, we did. It's still somehow, let's say, not fully done, because once the river was reopened, actually, the pipeline of load, let's say, train and barges to be loaded is quite long. It will take at least one month to come back to a normal situation. We think that we lost approximately more than 100,000 tons of sales, and additional logistic costs between $5 million and $7 million in this case.
That will continue a bit in the third quarter by the sound of it.
Say it again.
That will continue a little bit in the third quarter?
Yes, because we are not over. If the season goes well, like we hope, July was a good month, let's say, more or less the level of last year, to be able to really rebuild the so-called peripheral inventory. What we have in the 30, 40 terminals that are connected to the river system or the rail system, it will take at least one more month with, yes, additional cost and maybe in some cases, use of trucks instead of lower cost transportation means.
Understood. That's great. Thank you very much.
The next question is from Yassine Touahri with On Field Investment Research. Please go ahead.
Yes, good afternoon, gentlemen. A few questions from me. My first question would be on the U.S. and then energy. Could you tell us how much of your fuel comes from petcoke in the U.S.?
Comes from petcoke?
Petcoke.
Just a second, we will check it. I can tell you that we have about 25%-26% of waste-derived fuel, so it cannot be more than 75%. Let's see. Where is the column? U.S. petcoke. We have some gas, and we have some coal also in the U.S. If we take together, yeah, petcoke is about 50%, but there is also another, how much is that? 19%, another 20% of coal, which can be somehow considered similar in terms of trends and costs.
If you look at petcoke prices, the petcoke prices have declined from a level which was close to EUR 100 last summer to a level which is closer to EUR 60 today. It's like EUR 40 decline. Have you seen already part of the decline in your costs?
No, I mentioned it before. If you look at the EUR, let's say, Gcal trend in dollars in the first half, let me check it again just to make sure. U.S. Yeah, we are very similar level versus last year. No, we haven't seen it. This includes all the fuels, of course. It's the mix of the entire fuels, which is not only petcoke. One thing that is worth mentioning about the U.S. petcoke in particular is that, as opposed to Italy or Mexico, they typically refer to the so-called index. All our petcoke purchases refer to that index, which is probably the one you have in mind. In U.S., we buy directly from the refineries.
From the closest refinery, we have the direct contact, so there's no impact from the, let's say, freight cost or shipping cost, I mean, o cean freight. Th e petcoke is moved either by rail or by truck to the plant directly from the refinery. It also depends very much on what that specific refinery is doing. If it's producing, if it is not producing, if it's willing to, let's say, get rid of more or has the necessity to get rid of more petcoke than usual. It's not so much linked to the international price, not necessarily.
Okay. Maybe another question on the Eastern Europe. You're telling us that your plants are sold out or close to being sold out in Poland, in Czech Republic.
Yes.
If you look at the medium term, what would be your strategy if the volume continue to increase a little bit in the next three, four years? Would you consider importing in those countries? Would you consider some development making some investments? How do you see the medium term in those countries in terms of your footprint?
What has been really booming and increased significantly, and is also by far bigger in terms of total market, is Poland. You're comparing a country that has, I don't know, this year could be 17, 18 million tons of cement consumption versus a country like Czechia, that has four or five. In Poland, actually, no, the idea of increasing capacity, we can optimize, but we don't think it would make sense to increase capacity. We are probably at the point where the country could turn more negative. Hopefully not too much, but let's say, kind of a peak situation, which we try, let's say, to manage at best, in part with the prices, in part with as much effectiveness in production as we can.
Importing, in theory, if really the country would stabilize at a level which absorbs totally our capacity, maybe something from Germany could be transferred, but I don't think it would be so cost effective. Could be thought. We could think about it maybe by train, but probably not so cost effective. Same thing in Czech Republic. Where Czech Republic has been partly also supplying Poland in the northern. We have some ready-mix plants in the northern part of Poland, which have been supplied by Czechia.
In Czechia, in theory, one thing that could be imagined, or at least, we have a very large vertical integration as opposed to Poland, where the vertical integration is relatively small. You could also, in a sense, purchase cement from competitors for your ready-mix. In this case, have more cement available for the third-party market. Usually we don't like to do that because it is also a matter of quality, procedure, et cetera. We would not really like it but could be an idea.
My last question would be on Italy. At the beginning of the year, you suggested that imports from Algeria or maybe Turkey could cap prices. For the time being, we've seen prices moving in the right direction. Could you give us an update on this? Do you still see this as a threat on the Italian market?
You mean more exports from these countries?
No. You mentioned earlier in the year that you could see imports in Italy from Algeria and Turkey. Yeah, would you see more exports from these countries?
More from Algeria, of course, in perspective, due to the additional capacity that has been put in place and more is coming, could be a threat. They are not really very well organized today. They're lacking really a lot of infrastructure. What they have been doing is very limited compared to the potential. They need to go through a step of, let's say, of putting together the necessary infrastructure, which I think it will take quite a long time. Maybe Egypt's more aggressive. The bigger threat is coming, for sure, from Turkey, where the infrastructure is there. The capability, let's say, of the producer of the country to sell cement is really strong. We have been seeing some in Sicily, some in southern Italy. There are already some terminals, let's say, operating, and importing either clinker or cement. It's nothing really new.
The major or the potential bigger threat, will come, I think, with the next phase of the emission trading scheme. The fact that the cost of CO2 will probably be greater, we will not have the famous rule of the 50%. This will make some of our sales, let's say, to the export market or to the domestic market at a relatively low price, much less interesting. If you have to buy CO2 to produce, probably you are not so competitive versus a Turkish producer that has not cost for CO2 rights.
What would be your strategy in this scenario?
Probably to produce and sell. Okay. Let's say, to produce first what we can do with the future CO2 free allowances. What corresponds to the level of CO2 free allowances should also be produced. From then on, try to increase prices if possible. Pay for the CO2 cost through additional prices. If not possible, because the imports are, let's say, more competitive and will jump on this, let's say, higher price level. Maybe, like you were saying before, import ourselves. Instead of, let's say, facing direct competition, trying to, let's say, offset it through an import terminal or an importing facility. This could be an idea.
Thank you very much.
The next question is from Alessandro Tortora with Mediobanca. Please go ahead.
Yes. Hi. Good afternoon to everybody. I have four or five questions, if I may. The first one is on the U.S., if you can, sorry, share with us.
Yeah.
the trend in July. Volume, let's say, trend in July, now after, as you mentioned before, Mississippi in June.
Yes.
The second question is on Italy.
Yes.
I don't understand what's your assumption of ready-mix business, now, if you are targeting a break-even this year in the ready-mix? Sorry, the third question is on the tax side, I saw some, let's say, good number on the tax rate. Are you, for instance, maybe exploiting some tax losses maybe you have in Italy, given that now Italy is printing good numbers? The last question is on the guidance. Can you also give us your assumption on the effects, let's say, U.S. dollar, for instance, the main one on the effects for this guidance you provide? Thanks.
Sure. July volumes, I mentioned it before, we are at the level of last year, so v ery similar. They've been, actually, slightly better. July has been slightly better than July 2018 in the U.S. overall, with, again, some regional differences, clearly regional differences, but overall, we are slightly better. EBITDA RMC, well, this is the first step. Coming from, let's say, a period of heavy EBITDA losses in RMC, yes, the first step, let's say, for this year, would be to achieve, let's say, the zero level. From then on, we'll try to do better, of course. Let's say, the initial step, the first step, would be this one. I don't know if we will be able to achieve it, really. Maybe yes, maybe not. If we don't, we should be very close to it, let's say.
Okay.
Deferred. Yes, deferred taxes, there is some impact coming, yes, from the calculation. Because compared to what we have in the balance sheet, actually, the amount of potential carry forward, tax loss carry forward, is much bigger because it has been gradually impaired, let's say. Maybe this year, we will change some, based on the following five-year plan, which until now or until, let's say, two years ago, was not so optimistic. We did not recognize part of the deferred tax assets on tax loss carry forward. There is some of this and also this was already last year, actually, the lower tax rate in the U.S. is coming up.
We have also a better mix profitability from Ukraine and Russia, where the tax rate is lower. They are bringing some additional, how do you call it? Tax income, versus, for example, Poland and Czechia, where the tax income has been fairly stable this year so far, at least, and also probably for the full year. Effects, Patrick, do you have it in your front view?
For the forecast 2019, now we use 114. For the ruble, we use RUB 75 per EUR, and UAH 32 per EUR in Ukraine. These are the main currencies here.
Yeah.
Sorry, I didn't catch. On the US dollar for the full year, which level you are assuming for US dollar/euro?
Average 114.
Okay, 114. Sorry, Mr. Pietro, I didn't catch. Okay, understood for the tax rate for the first half which is, let's say, quite good. Can you help us, let's say, to put a number for the full year on an indication, okay, for tax rate?
How much do we have? For the first half, we are what? 30%. Is that 30%? Less? I don't remember.
Less 20.
How much? We have to check.
It's 21.
Twenty-one.
First half.
Twenty-one.
No, it's much less. Yes, we have a budget, but to trust it really for the tax rate, I don't know. I don't know. Until profit before tax, I think we can make a good assumption, a good guess. I don't know.
It depends on the five-year planning as well.
It depends on that really, because something that you actually can change, or you can have more positive deferred taxes by year-end according to the calculation.
Generally, if you want to be on the safe side, use 25. Otherwise, keep it at 20. Okay. No.
I don't, how you say, I'm not taking the responsibility.
No problem. Only because we had, let's say, these good results, okay, on the fiscal side, therefore, I don't know if there are something, let's say, specific or one-off. For instance, as you said before, it's a matter of mix, okay, helping you, okay, to keep this tax rate so low?
Yeah.
[Foreign language]. Thanks. [Foreign language].
The next question is from Gregor Kuglitsch with UBS. Please go ahead.
Hi. A few questions. Sorry, it's getting late. Just briefly on acquisitions. You've just done EUR 80 million deal in Italy, I guess, to sort out.
Yes.
The market. I think you gave us an EBITDA, which at run rate implies kind of 6-7x.
Yes.
I guess the question I've got is, your own stock trades on 5.5, 6, something like that, in terms of EBITDA multiple. How do you justify acquisitions that are much higher than that multiple? I understand in Italy there's a network effect and you're fixing the market, but more philosophically, how does that kind of work for you internally? Or you don't really consider your own stock in that context?
Financially speaking, you're probably right. It is difficult to find or there's no clear evidence of this justification. Again, in this specific case of Italy, we felt that we have the impression that if we want to stay in this country, and I think we want to stay for several reasons that sometimes go beyond also the pure business reason. We cannot just stay like this forever. We need to do something. We need to bring the country operation to a level that is profitable, of course, and also sustainable more than what we've been able to do until now. We realized that with the existing assets, we could not achieve that sustainable and profitable level in the long run.
Again, it was somehow a matter of, do we want to achieve this level? Which way we can do it, we can achieve it or not? The answer was yes. Probably, could have we spent less than what we have spent? Difficult to tell, because like any transaction, of course, you try to deal at best with your counterpart. I think we did okay. At the end, really, I think the price was important. It's not that we did not discuss it, and we tried to lower it as much as possible. The philosophy, if you wish, behind it, was really what do we want to do with the Italian business? Do we want to leave it as it is and continue in a satisfactory way, or try to fix it, at the lowest possible cost?
Maybe not necessarily this I hope this would not imply further capital, let's say, outlay, but even after this acquisition, we cannot consider our Italian operation fully sustainable in the long run. There's still something to be done. Probably, it will be more internal, let's say, than external. We have still to do something. This is the main justification, if you wish, on my issue.
That makes sense.
Yeah.
Maybe coming back to CO2. I think in the first half, you kind of sold, I think, if I recall correctly, EUR 15 million.
Yes.
Of certificates internally, and I guess if we extrapolate that for the year, maybe it's going to be EUR 30 million or something like that.
Exactly.
Obviously next year, maybe it's still the same, but so what happens in 2021? Does it basically become an instance where the cost in Germany is not going to disappear, it's still going to be there.
Yeah.
In Italy, the income disappears because you don't have the excess, so then you'll have a EUR 30 million drop in profit, basically? Unless you're able to recover it on price or?
Our inventory still allow us to carry on for maybe two years. We'll see. Two years and a half after 2021, we will see.
Okay. 2021, you're covered.
Yeah.
5 million tons.
5 million tons, approximately.
You have something like now, maybe every year, a little more.
Yes.
More than 1 million tons now, so maybe less than five years. Yeah.
Okay, it's not immediate, but of course, it will change, because the free allowances will be adjusted to the most recent average production. This is particularly negative for Italy. Not so much for the other countries where we are running at high- capacity utilization level. We were speaking about Poland and Czech before, they will enjoy an amount of, or quantity, let's say, of free allowances, which will be very close to the full capacity utilization. The trouble, if you wish, is mainly Italian, where we are, yes, trying. This is one of the efforts also related with the recent acquisition to improve the capacity utilization, but we will for sure receive lower free allowance.
Then, from then on, as I mentioned before, this is a situation which affects the entire industry. It's an issue not only for ourselves, but for the entire industry. I think, two direction. One, to lower your CO2 footprint as much as possible, but this is quite difficult in our industry. Maybe you can improve with a plan, I mean, 5%, best case, I don't know. If you have time, maybe we can lower 10%, but more is going to be very difficult unless you really change completely your production process or you introduce some kind of carbon capture, let's say, equipment. This is on one side. On the other, probably transfer part of the additional cost to the customers if possible.
If this will make the Italian market too attractive for the importers or for the exporters, I mentioned before, you would probably have to somehow either lower your production level, possibly keep your sales level, maybe become partly an importer, maybe I mean, these are something that we have to start working on it and understand what could be best. Yes, it's a new, I mean, the 2021 date. It's really a new year. It will also trigger some capacity closure, which has not happened so far because of the famous 50% rule. Which in a sense is positive because there's been recently too much, let's call it, sales, driven just by the CO2 allowances goal. By the goal to achieve the full allowances.
I think it would be beneficial overall for the industry in the sense of restructuring the capacity, more costly for the customer, I think this is inevitable.
Okay. Final question, just to come back on the debt. I see in the last few years, generally in the second half, you generate something like EUR 200 million of free cash flow. Obviously, you're spending EUR 80 million on the plant.
Exactly, yes.
I was thinking, your comment earlier, I think it was from Patrick, suggesting that the whole year we'll have EUR 100 million debt reduction, but you already had nearly EUR 100 million in the first half. Obviously, I understand there were some other moving parts, but starting from the first half. The EUR 100 million is year-over-year, or is it from the first half? It just sounds low, because you basically already delivered that in the first half.
No, the EUR 100 million or more than EUR 100 million, but not much more than EUR 100 million, is if we compare the net financial position as of 1st of January, 2019, with the 31st December 2019. That's what I'm talking about. Basically, a total year reduction in net debt. Considering all the effects, full year effects, that we can forecast.
Okay. Thank you.
There are no more questions registered at this time.
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I do.
Right away for vacation. Anyway, no, we remain available. Please touch base with our investor relations if you need anything else. Thanks again and goodbye.
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