Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Buzzi Unicem full year 2018 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 everybody to our annual conference call, related to, let's say, the recent disclosure of our results of the year 2018. Some of the figures that we, let's say, published today were actually already issued beginning of February. Of course, the full results, balance sheet, and income statements were not, and we approved them today. If we look at year 2018, I think we can be fairly happy with the outcome, with our results. Actually, the year went through some up and down during the quarter. The final part was more positive than what we originally planned. Also, let's say, the overall outcome is, yes, not exactly as good as it was in 2017, but pretty close to it, which again, we consider a fair and satisfactory result.
Starting from the trend of the market, the cement volumes, we had positive, let's say, variance in most of our markets. In some of them, like Italy and in Germany particularly, this was mainly a consequence of the change in the scope of consolidation. In Italy, net of, let's say, the Villa contribution, which entered, let's say, the scope of consolidation last year at the beginning of July, so the difference in this year is six months difference, the first six months. Our sales were basically flat. The Italian domestic market did not perform. We did not see any significant improvement in the domestic demand, but we had also some additional export sales and additional clinker sales. Overall, and including the change in scope, we posted a 13%, let's say, improvement, which was, I would say, in line with our budget.
Looking at the other major markets like U.S. and Germany, U.S. was somewhat disappointing. We were not able to achieve the same, let's say, shipments as last year. This was also mentioned in the beginning of February and during the year. You know that the weather impact during the third quarter in particular was the main cause for such a shortfall versus last year. We came very close, but not, let's say, at the same level, approximately -1%. Germany, as I said, with the help of some scope changes, was performing pretty well, about 8% up in volumes and about 2% up like for like, let's say, by neutralizing the change in the scope of consolidation. The other, let's say, European markets, relatively speaking, particularly the Eastern European markets, were the strongest, let's say, in terms of relative variance.
I'm talking about Czech Republic and Poland, that enjoy also an economic, let's say, development and trend, which is definitely greater than average in the European Union. Good performance there. Ukraine, instead, quite below the previous year. We realized it also during the year, particularly also with the competition. Some issue that we faced during the year. We recovered partially in the last part of the year, but we were unable, let's say, to achieve results near to the previous year. We lost more than 10% there in volumes. Instead, the performance of Russia was quite good. Shipments up about 5%, and also good price performance overall, and improving results. The problem with Russia was mainly, as we will see later, with the exchange rate, not really with the underlying operations in ruble.
In terms of net sales revenue, considering the price trend, which was generally speaking, let's say, favorable. There was no real country showing a decline in the price level, at least in local currency. Maybe after translation into euro, countries like Russia, Mexico too, let's say, suffer from a flat or slightly declining price level. In local currency, the improvement was quite generalized and widespread. This translated into a total turnover, which was up by approximately EUR 67 million at the consolidated level, and the contribution came mainly from Italy, Germany. Again, these two European countries, like Czech Republic and Poland, performed well. Also, our operation in Luxembourg, in the Netherlands, improving.
We had a negative sign in the U.S., which was amplified, let's say, or caused mainly by the exchange rate, because U.S. operation in U.S. dollar perform at the same level of last year in terms of turnover, about 1% up. That is similar, but after foreign exchange impact, we had a decline of about EUR 41 million in our turnover there. The other critical market, as we mentioned before, was Ukraine. That again, was quite even if you look at the figures in local currency, but due to the negative impact from the foreign exchange trend, we went down about EUR 6 million, which means about 7% for this country. Russia performing quite well in ruble, + 13%. Unfortunately, again here, fairly meaningful, let's say, impact from the Forex, about EUR 23 million, and we end up with a level of turnover very, very similar to the previous year.
Moving to the EBITDA, let's say, by country. The positive performance was again quite widespread across our region and across our operation, with negative sign only coming from Ukraine and the U.S. Of course, the negative sign in the U.S., being the U.S. by far our greatest contributor to operating results in the last few years, negative sign is more significant. If you look at the pure, let's say, reported figure, is about in terms of, let's say, EBITDA. That is actually somewhat more, in terms of recurring figures, because the 2008 numbers include some non-recurring, let's say, profit coming from the disposal of assets, basically. Ukraine, we mentioned it already, minus EUR 9 million, quite significant again. In relative terms, not so much, if you look at the consolidated amount or reference, because of the relatively small, let's say, contribution coming from Ukraine.
Besides these two, the improvement was quite meaningful in Italy. Very large, if you look at the reported figure, because last year we suffer from significant material amount of non-recurring charges related to the antitrust fine. Also on a pure, let's say, recurring basis, the Italian market moved from a negative of about EUR 17 million last year to a positive of about EUR 6 million this year. It's also the first time after I think four or five years, or maybe even more, I don't recall exactly, where we have a positive recurring EBITDA in Italy. We've been working on this for a long time, and it's a good news to see eventually, even if it's a small figure, to see eventually the operating cash flow turning positive in Italy. Germany, good performance here, some non-recurring charges affecting the reported EBITDA.
They are associated mainly with the restructuring of the recent acquisition of Cybernews learning. Actually, the EUR 82 million reported improved to about EUR 86 million on a recurring basis versus around EUR 80 million last year. In relative terms, again Czech Republic and Poland were particularly strong. They're not contributing too much in absolute terms, their improvement was quite meaningful. The Polish one is a bit skewed to the positive in the sense that we had in Poland, again, a release of provision, which has improved the report of the EBITDA. In terms of recurring figures, the Polish EBITDA is EUR 26 million versus EUR 32 million, let's say, reported and versus EUR 24 million last year. The improvement is not as much, still quite satisfactory considering the overall trend. Meanwhile, in Czechia, we did not have any, let's say, recurring cost of our revenue.
The EUR 7 million improvement versus last year is fully operating. Russia, in EUR, we improved by about EUR 4 million, which is 9% up. Unfortunately, before exchange impact in this specific case is quite significant, EUR 6 million, we could've, let's say, gained an improvement of more than 20% like for like. Unfortunately, the trend of the ruble continued to be quite weak during the year. We had an average exchange rate well below the previous year. In total, the EUR 577 million reported goes down to EUR 568 million, let's say, EUR 568.5 million recurring, compares with the EUR 576 million recurring of last year. About EUR 8 million less. Actually, at the end of, let's say, September, our forecast was slightly less than that. As I said at the beginning, thanks to a fourth quarter better than expected, we were able to partially close, let's say, this gap.
If we look at the contribution from the different regions, it's clearly Italy improving, thanks to Zillo, also to some other, let's say, managerial action carried out during the last few years. Clearly, also to some price improvement, not so significant, yes, on the domestic market between EUR 2-EUR 3 improvement, which gave us some oxygen, let's say, versus a very low price level that the country was used to until two years ago. The U.S., that used to represent almost two-thirds of the consolidated EBITDA, are now down to EUR 57 million, still very significant. They lost some in terms of operating margin, we are somewhat below the previous two year. We can, I think, continue to be quite happy about the performance also with the possibility for this high level of profitability to continue in the coming year.
The trend has been favorable in Central and Eastern Europe, with the exception of Ukraine, but the other three countries where we operate, they all perform better. They represent about 32% of our, let's say, consolidated EBITDA versus 19% of revenues. If we look at the, let's say, EBITDA bridge for the full year, and based on the reported figures, the volumes impact was approximately EUR 46 million. The price effect, let's say, the variance was about EUR 100 million. This is before, let's say, foreign exchange effect, all before. And variable cost and fixed cost variance was in, for both categories, let's say unfavorable. More impact coming from the variable cost, particularly raw materials, fuel, less power and transportation. They all went up quite significantly.
In total, the negative variance was EUR 88 million, much more than what you could expect considering the additional, let's say, production and sales in proportion, let's say. So the cost inflation associated with particularly fuel, raw material, and logistic transportation was definitely much more than what you would expect associated with the unit, let's say, variable cost. Variable cost in general went up. The unfavorable impact coming from fixed cost was about EUR 32 million, so more under control, and also, I would say, more impacted by some, let's call it charges that are non-recurring. Typically, restructuring charges in Italy, restructuring charges in Germany, they accounted for about EUR 6 million-EUR 7 million. And we had also, instead, some higher maintenance cost, about EUR 9 million overall.
This was due to, in part, let's say, situation or markets where we have been suffering, or rather than suffering, working at quite higher capitalization level, typically in the U.S. And in the first part of the year, you probably recall that also the U.S. suffered from very cold weather, which affected also our maintenance plan and brought down some of the equipment that needed to go under a repair process, which was partly related also to the cold climate. Then, in terms of, let's call it other costs and revenues, we basically have a significant benefit within this category, which is coming from the, fortunately, lacking of the antitrust fine which we charged last year for about EUR 60 million. So this EUR 60 million favorable variance.
Inventory and other, let's say, is also going up, which is not necessarily a favorable thing in the sense that the working capital management, particularly of the inventory, has been as usual, let's say, followed carefully. But there was definitely, by year-end, a higher level of inventory than what we had last year. Also in the U.S., for example, when the market in September, October started to weaken due to weather, we decided to continue with the, let's say, regular production, so not to stop the kiln, which was, we think, overall a good idea. But translated into some higher, let's say, working capital absorption by year-end. And foreign exchange impact on the EBITDA in total was EUR 21 million negative foreign exchange impact. And that's it, basically. This translated into the total change from 577 Sorry, from 508 to 577 for the full year.
Looking the same bridge by region, Italy, U.S., Central and Eastern Europe. The largest part of the improvement is coming from Italy. We are talking about the report, the EBITDA again. We mentioned already the reason. We had a negative in the U.S. and a positive contribution both from Central and Eastern Europe. If we do not consider changes in scope, if we do not consider foreign exchange impact, the value of the EBITDA would have been EUR 599 instead of EUR 577. Again, the bridge by region from 2017 to 2018 is showing more than EUR 70 million improvement in Italy, about EUR 13 million unfavorable variance in U.S., EUR 16 million+ in Central Europe, and EUR 15 million+ in Eastern Europe.
The current EBITDA margin by country is showing an improvement in Czech Republic, which is moving from 25% to 26% approximately. It's showing an improvement in Russia, which is going back to 27%. It was at 25% last year. For the rest, there is an improvement in Italy, which is moving from a - 4% to a + 1%. Basically to 0%. For the rest, we have some really very minor variance in Germany, 13.7% versus 13.6%, basically flat. A decline of about three points in U.S. The peak in the U.S. was in 2017 with 33%, with 32% in 2016, and we are now down to 30%. Still the highest in the group except Mexico, not consolidated, which is higher. Yes, a loss of three points there.
For the group as a whole, we remain pretty flat if you look in the last two, three years. Flat to somewhat declining, because the total in 2016 was 20.6%, 20.5% in last year, 2017, and less than 20%, 19.8%, this year, 2018. The energy cost impact has been somehow offset, in a sense, by the higher price level. If you look at the ratio between fuel cost or power cost and revenues, there was a worsening for fuel cost, quite clear. In terms of, for example, of power cost, the proportion between what we spent in total and the revenues remain fairly flat. Our total energy bill, anyway, had an impact on the cost, as we mentioned already in the EBITDA, quite significant because we moved from EUR 312 million last year, 2017, to EUR 334 million this year.
This was the total impact of fuel and power in the cement business for the full year. If you consider the year 2016, which was the lowest in terms of energy bill, the difference is about almost EUR 50 million. Basically, EUR 50 million difference due to the rebound of energy factors, fuels, in particular. Going down to the lower part of the income statement, operating profit is clearly up versus last year. The main reason is, again, the non-recurring fine that we had in 2017 charged to the income statement, plus some improvements in the market trends and the profitability that we mentioned already for the EBITDA. We are up by about EUR 66 million in terms of EBIT, 12.2% versus 10% last year, affected by non-recurring charges.
Equity earnings from associates are slightly down due to the Mexican business which was performing well, or very well, let's say, as usual, but not as well as in the previous year. There was a foreign exchange impact on the results of the Mexican associates, which was somehow affecting also the equity valuation. We have a very positive variance, EUR 60 million+, 2017, 2018, in the so-called net finance cost line or row. This is coming mainly from, let's say, items that are kind of volatile. Mainly, the change that occurred in the valuation of the cash settlement option for the standing convertible bond. There, we had a positive, almost EUR 83 million. Last year, there was a positive of EUR 12 million, so it is a EUR 17 million, let's say, advantage or revenue there, which is actually, let's say, changing the sign.
What should normally be, let's say, a cost became a revenue in this case for the net finance cost. If you look at the pure net interest expense, there was also an improvement, but relatively minor. The difference between interest expense and interest income is EUR 37 million cost, let's say, interest cost, versus EUR 43 million in 2017. We had a EUR 5 million benefit on pure net interest expense, and the rest is coming from, let's say, non-cash item, like the fair value valuation of the derivative. Profit before tax is EUR 116 million up versus last year. Income tax expense, again, here, unusual profit, tax profit last year. You may recall the adjustment that we made to the fair tax liability. This was related to the introduction of the tax reform, the change in the tax law, and particularly tax rate in U.S.
This year, we enjoyed, overall, a lower tax rate thanks mainly to the cuts implemented that became effective in the U.S. starting from 2018. We have, of course, let's say, a tax charge of EUR 82 million versus EUR 45 profit last year. This tax expense is mainly cash. The tax profit that we had last year was mainly paper. We almost do not have any minority anymore, the net profit is very similar to the consolidated net profit or net profit attributable to the owners of the company. We completed during the year, the squeeze out of the minorities in Russia, which until last year was the most significant company with minority shares, and is now 100% owned starting from the second half of 2017. If you look at the, let's say, cash flow statement, which is also clearly a very important part of the overall results.
We had a decline in cash generated from operation of about EUR 50 million. This is mainly due to two reasons. As I mentioned before, a trend in working capital, which was somehow negative in a sense, absorbing more, let's say, more liquidity than in the previous year, which we believe should mostly, let's say, reverse during this year. The payment of, let's say, the monthly installments payment that we are making against the liability for the antitrust fine. This was weighing about EUR 25 million-EUR 26 million for the full year. Interest paid was very similar to last year. Income tax paid somewhat lower, about almost EUR 20 million lower versus last year. We go to the, let's say, main cash expenditure for 2018. EUR 215 million of, let's call it, industrial CapEx. Out of these, about EUR 31 million-EUR 32 million can fall into the so-called expansion category.
They relate mainly to the, what we call the Merano phase II, so further improvements and adjustments, or addition to the Merano plant, which was, as you know, totally renovated about two years ago. We have also equity investment, much greater than last year, EUR 228 million. The two main items are this Erlensee acquisition in Germany for about EUR 45 million approximately. The purchase of the 50%, let's say, joint venture. We closed the agreement with Grupo Ricardo Brennand in Brazil, as you know, by the end of November, with a cash outlay of EUR 160 million approximately, which is included in the EUR 228 million. These two are making, let's say, by far the largest part of the so-called equity investment portion. Another significant cash outlay that we did not have last year and we had this year is the completion of the share buyback program.
This began more or less at the end of September, was completed by year-end, during the month of December, for a total cash outlay of EUR 119 million. Dividend payment was EUR 29 million last year. We received dividends from associates of about EUR 81 million. We had some disposal of fixed assets and investment greater than last year, EUR 45 million versus EUR 12 million. This was mainly related to the sale of our so-called package concrete business in the U.S. at the beginning of 2018 for approximately EUR 18 million. On the net financial position, there was a positive impact coming from the translation differences and the derivatives valuation that we commented already before. Also positive interest received versus last year, EUR 14 million versus EUR 10 million. A change in net debt of EUR 28 million.
Net debt increased by EUR 28 million after all this, let's say, the items, positive and negative, to a level of EUR 890 million, which compares to EUR 862 million in the previous year. In terms of financial condition, we still improved some, because the leverage, the debt to EBITDA, went down from 1.7x to 1.5x. Also, the debt equity ratio went down from 30% to 28%. I think that I did cover everything that I wanted to, at least officially, and probably it's time to give you the floor and to understand better what is your opinion and, of course, your question about these figures and the press release. I would like, please, the operator to open the Q&A session.
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 Sophia Savvantidou with Exane BNP Paribas. Please go ahead.
Thank you for taking my questions. I have three, if I may. The first one is regarding your outlook. Why is the group only expecting flats in the U.S. in 2019? If this is regarding any pricing competitiveness or any volume attrition that you might be seeing, and which regions, and also comment on products, if possible. Second question is the magnitude of price increases in Europe that the group expects, for example, in Italy and Poland. The third one is regarding your cost inflation expectations for 2019. If the group is hedged for fuel and power costs for next year, if you could also comment on that. Thank you.
Yes. Well, the U.S. market, our view is, as we mentioned, let's say, in the press release, positive. Let's just call it optimistic or cautiously optimistic about the trend on volume. Last year, the impact from the weather was very significant. Assuming that we have normal weather in the first quarter as opposed to very wet weather last year, just for this factor, this will be enough, let's say, to show a positive variance in terms of volume. Looking at the prices, so at the end of the result, the picture, yes, is a little more mixed. We see areas that are important for us, like the Northeast, the parts of the Texas market, particularly the Southeast, let's say the Houston market, where competition is very active. New players and new imports, let's say, imports that are coming into the market.
Some movements also occurring, maybe, in the ownership of the ready-mix player, which could also cause, let's say, a shift in the supplier with the need to maybe recover volume somewhere else. There are also some announcements which may not translate immediately into, let's say, additional capacity, but they give the sign or give an indication that everybody is trying, let's say to Correct. I mean, like we are, too, capitalize on the good market and try to sell more. This is, of course, somehow impacting on the price level in a sense that to assume a significant price improvement, in our opinion, particularly in the area that I mentioned, is not very likely, and they may represent something like 25%-30% of our sales in total. Also, the so-called River region is very competitive.
You have cement ready-mix players that have been importing cement from New Orleans all the way to Chicago. There are opening of new terminals. Nothing, again, wrong with it, but quite a competitive situation, so not easy, let's say, in our opinion, to see a significant price improvement overall. We believe that we will see some price improvements, not everywhere, and the magnitude still has to be somehow, let's say, clarified or somehow proven. Yes. The trend in our cost, we don't see an industry inflation as strong as we had last year. Some of our costs will continue to go up. Services, labor market is very tight. In some of our region, we have trouble really in finding people, typically logistics truck drivers are really becoming a scarce resource. Maybe fuel, they have come to, let's say, to a level which is not increasing anymore.
Our costs, for example, are still going up. This, I would say, describe it hopefully a little better, our view on the market, which remain positive, but with some cautiousness for the reasons that I just mentioned. Price increases in Italy, Poland, Europe in general, I would say here, in these markets, we are more confident, let's say, on the possibility to achieve and retain some price increases. Again, one of the main reason is the cost trend. Yes, we should be able to gain a higher price level, but we are facing higher costs. Typically, in the so-called ETS region, or Emissions Trading System region, for example, CO2 prices, what we know are more upfront in the south. We are not, let's say, buying actively CO2 rights.
If you look at, for example, the Polish market, let's say, in itself, yes, is requiring some CO2 rights to be able to fulfill, let's say, its production and sales level.
Those CO2 rights are bought internally?
Yes. For the moment, we are able to buy internally. At the end, this will be a cost for Poland. The profitability of Poland in itself is not likely to improve because cost and prices will more or less match. There will be a benefit in this case for Italy, which is in a surplus situation. Not forever, clearly, because this is going to change more significantly starting from next year. For the time being, in this case, the benefit is going mainly to the Italian market. This is also the reason why we mentioned, for Italy, the likelihood of being, let's say, definitely better than last year. It's not much due to increase in demand, very little. It's due to better pricing and, let's call it, other operating revenues coming from CO2 rights.
At the consolidated level, this will be a wash, actually. When you will look at the results for the group as a whole, this benefit, yes, it's there for Italy, but it will offset against the higher cost for Poland, Germany or Czech Republic, let's say. In the hedging for the fuel, we are usually six to seven months on average. We think that, let's say, from the peak of October, November last year, yes, there was some softening. Fortunately, we are talking about the fossil fuels. On the energy prices, there is really a big variance between countries, so it's difficult to give you a general trend. There are some countries where it's stable, some countries where it's increasing significantly, the power, I'm talking electrical power, and some other Well, declining, probably nowhere. Let's say, the picture is really mixed.
There, I think we will see still some kind of inflation, maybe, let's say, the game or the main strategy to offset the energy cost remains for us the, let's say, further use or additional use of alternative fuel, including biomasses or industrial waste. Everywhere we can or where we are allowed to, the trend is to improve as much as possible the so-called, how do you call it, the rate of-
Substitution
substitution rate with alternative fuel, which is already well underway in some countries, maybe not as much in others.
I see. Thank you.
You're welcome.
The next question is from Rajesh Patki with JPMorgan. Please go ahead.
Good afternoon. I've got three as well. First one is on net debt. Where do you expect it to end up this year, and what are the key moving parts? Second one is if you can share any details on the impact from IFRS 16 accounting changes. The last one is just a technical one. If you can confirm the guidance on stable EBITDA in the U.S., is that on reported figure or is that on the recurring figure as there is a $15 million one-off gain in 2018? Thank you.
No. We are on the recurring. The idea is to be able to, let's say, recover, at least I hope more, but let's say to go back to a similar level on a recurring basis. So without the gain that was very significant this year for the U.S. As for IFRS 16, yes, we can anticipate what you will find on the full, let's say, on the notes, the full notes of the consolidated financial statements, is actually the impact is $90 million. It's about $90 million at the group level. So we will book, let's say, $90 million assets, right-of-use assets. On the liability side, an additional $90 million of leasing liabilities.
In terms of income statement, EBITDA, This doesn't need to be reconciled versus our outlook, because the outlook is based on the, let's call it, traditional way of booking the leases. If you wish, this is the kind of potential reserve at the EBITDA level. It's not changing, or changing very little when you go down to the net income. At the EBITDA level, we expect an increase of about EUR 24 million coming from the IFRS 16, let's say, calculation. As you know, for the rest, we will have different classification in terms of cash flow from financing activity versus operating activities. These are the main changes. EUR 90, let's say, in the balance sheet, EUR 24 EBITDA in the income statement. These are the two main changes. Net debt, Patrick is here. Maybe you can say something on that.
Yes. Net debt, of course, was in 2018, clearly impacted, as Pietro Buzzi mentioned, by quite significant CapEx or, let's say, investments and also the buyback of shares. This of course, adds up to more than EUR 500 million. Then we had an additional impact regarding the positive valuation of derivatives, which gave another EUR 90 million, kind of offsetting part of this impact. If you look at this and if you look at the overall outlook regarding EBITDA, we typically see in the cash flow a positive trend. Depending on what the CapEx level, ordinary CapEx plus expansion CapEx is, we expect that there is a minimum of a EUR 100 million reduction in a scenario where there is no extraordinary, let's say, spending.
This will be in line with what you may have seen also in the past years in a normalized cash flow statement.
Great. Thank you.
The next question is from Robert Gardiner with Davy. Please go ahead.
Good afternoon. I'll ask two, please. One, just to go back on your balance sheet debt use of cash. I see you're seeking authorization to buy back shares. Presumably after the AGM, you will look to be back in the market buying your own shares to satisfy the convertible that's coming due. I was just wondering what you think about that. Two, if I could just ask, you talk in your statement about a considerable improvement in profit in Italy. What kind of visibility do you have on the bankruptcy costs that you've had, the EUR 7.6 million that you had in 2018? Do they stop completely or what level of increase are we talking about in Italy? Thank you.
No, it's mentioned in the press release, I didn't mention it before, you're totally right. It's another reason why we are, let's say, on Italy, more optimistic than on other countries. Not optimistic in the sense of the way the country is going, the cement market is going. We don't see big improvement there. There are some other factors, we mentioned some of them, this is another one, that are clearly heading to the, let's say, positive in the sense of making the operating profitability likely looking better next year. Yes, we suffer bad debt receivable this year, but that loss was EUR 7.6 million in Italy. This four, five main, let's say, companies. I don't know how much you follow the construction market in Italy, but let's say big names like Grandi Lavori, Fincosit, Astaldi, CMC, Condotte.
Four let's say big names that all went into some kind of bankruptcy procedure. We decided to charge 100% let's say of our exposure, and then maybe, I don't know, 10 years from now, 15 years, we will get 10 or 15, I don't know. In the meantime, of course, it's much wiser just to consider zero. This should not repeat. There are no more construction company in Italy, almost. No, okay, there is Impregilo, which, okay, should be in a slightly better financial position, we will be very careful anyway to look for exposure versus let's say larger building and construction companies. Yes, this EUR 7.6 is not going to be there anymore. There will be maybe EUR 1 or EUR 1.5, but not EUR 7.6. Absolutely. On the share buyback. Yes, we think it is worth asking again for the approval.
This represents more or less the second half, let's say, of the convertible. We will see. There is no clear decision yet. It will depend, I think, mainly on how our stock is going to perform. If the stock performs very well, probably it would not make too much sense to go after it. If it instead remains somehow subdued, it could make sense.
Okay, thank you very much. Very helpful.
You're welcome.
The next question is from Giuseppe Mapelli with EQUITA. Please go ahead.
Yes, good afternoon. I have three question. The first one is on Italy. If you can give us an idea of the picture in terms of M&A and further consolidation that could appear in 2019. My second question is on your CapEx plan. Can you share with us what is your current level of maintenance CapEx, and if you have some need for revamping or if you have in mind some brownfield in some countries? My last question is on 2018 taxes, because they were, let's say, very low, I would say. If you can share with us what are the reason behind that? Leaving aside the comparison with 2017, because, let's say, we know that in 2017 there were some, I would say, paper taxes. On the other hand, what's your projection for 2019 if you consider 20%, 26%, 27% as a reasonable tax rate going forward?
Thank you.
Yeah, on the last one and on the taxes, we need to analyze a little better. At first, let's say, what I could say is that there are probably some of the non-cash item that are playing, let's say, positively in the result, do not have a tax effect. We have some positives that are not taxable. I think this should be the main reason, because I would say that our tax rate cannot be, let's say, much lower than what you mentioned. The ordinary tax rate should be very close to what you mentioned after the implementation, of course, of the tax reform in U.S. Which is anyway, the 21% is nominal, but I think we discussed it already previously.
When you take into consideration all the deduction and the changes that were introduced, we are not paying 21%, we are paying also in the U.S. something that is more 25%, 26%. Okay. I think this is the consolidated figures where you have a lot of, let's say, adjustments from the financial reporting to the tax reporting, so temporary adjustments that may revert in the future. Other, they do not revert. Anyway, I would stick to something that is more 25%, 26%. It makes a lot of sense. On the CapEx plan. Revamping, real revamping in a sense of something similar to what we have done, for example, in Merano. Maybe we have one case, which is the Korkino plant in Russia, the one we acquired in 2014. We decided to purchase existing equipment.
It's the new equipment, never already erected steel in its packaging, let's say. This equipment in Russia, this was coming. What is the famous location? Sibirsky. Was, let's say, idle in the Sibirsky plant, which is part of Sibirsky Cement Group. We found an agreement with them to purchase the equipment for a relatively small amount, about EUR 15 million. There is another-
Sorry, 50 or 15?
15. One Five.
Okay.
There is another five or six of transportation, to move all the equipment from Siberia, let's say, to Korkino. There will be the erection, which we are going to start, let's say gradually. Very gradually. We are not talking about revamping the kiln yet, let's say. Probably will come later, initially, we will start from the finished mill, finished grinding, let's say. This is a project of another probably EUR 15 million, let's say, for 2018. It's, let's say, engineering is underway. I don't think we will complete it by the end of 2019, it's underway, and can be considered a revamping, for sure, for the finished grinding and also in future for gradually, let's say, for the entire plant. For the rest, we have many projects that are, let's say, in between.
Typically, in U.S., all the distribution network needs to be. Not all, but let's say, some of the main distribution terminal needs some capital to increase the throughput, to increase efficiency, et cetera. We are, I would say, the range of our maintenance CapEx, which sometimes we call it maintenance and improvement, let's say, is more in the range of EUR 200, I think, this year. Plus some special project like Korkino, which can be considered a kind of revamping. For further consolidation in Italy, we will see. We mentioned it already several times. We don't think that the current structure of the market, even if it's become much less fragmented than it used to be, and it can be considered final. We still believe that there is, let's call it, an opportunity to somehow reshuffle, in a way or another, the existing assets.
For us, clearly, the drive continues to be how to, or find ways, let's say, to improve of maybe not all of them, but some of our plants or the most performing ones, or the ones that have higher efficiency, lower cost. I think that there will be some more to come. There's likely something more to come. We try to be involved. Clearly, we have an interest. Probably other companies are reasoning the same way. We hope that it's going to be, let's call it, further consolidation. Probably not in the number of the players, are the ones that exist now. We don't see a change in the number of players anymore, but maybe changes in the ownership of the assets, yes.
Okay, thank you.
The next question is from Arnaud Pinatel with On Field Investment Research. Please go ahead.
Good afternoon, gentlemen. It's Arnaud Pinatel from On Field Research. I would have three questions, if I may. I've not seen any outlook for Mexico in your press release. Could you share a little bit with us what you expect there? Because we are hearing from Cemex that they are pushing prices by 12% in January. On the other side, apparently, Lafarge and Holcim are not following. What is your position, and what is, in your view, the outlook for pricing and volume in 2019 in Mexico? My second question would be on Italy. We are all reading the newspaper, I guess we have seen that Italy is now joining the Chinese side with integrating the One Belt, One Road initiative.
I'm sure it's early days, but do you think it could, over time, help the consumption in Italy, and you could move back to something above the 20 million tons? tone or threshold, which we are seeing currently for Italy as a consumption. The last question is very simple. You have seen three months of 2019. Could you give us just a flavor of if the start of the year has been better than what you were expecting, or in line, or any comment from the U.S. and European side is welcome. Thank you very much.
Yeah, sure. Mexico, we usually do not include it. Not because it's not important, because clearly, it's a big part of the business, looking at the consolidated figures, since it's value and equity, we focus on this, let's say, intermediate result without talking about Mexico. On the other, in Mexico, I would say that first of all, this year 2018, I didn't mention it before, but was a bit weaker. Presidential election were causing some concern, particularly in the, let's say, investment decision by both domestic and maybe even more foreign players. Then some strange decision that I'm sure you're aware of, like stopping the new airport. We don't know if the decision will be reverted somehow or will not, but just to give you an idea of what's going on. This was clearly putting some of the construction projects on hold.
We lost some 4% or 5% in our volumes. Prices did not go down. Actually, we were able to keep our average prices up also because we focused very much on the so-called package bag portion of our sales, which is the higher in terms of pricing. Profitability went down some, and this is reflected in our, let's say, equity valuation. For next year, the so-called political uncertainty are not fully over. I think still what the President wants to do in terms of economic decision and how to, let's say, improve the industrial output of the country is not clear. It seems that the focus is more on other subject. You have been recently probably reading the story about Spain and their request for excuses, et cetera. It's focused on something that maybe his priority is not really the industrial output of the country.
The country is anyway growing some, in terms of GDP. Our budget is fairly flat in terms of volumes. We think after the 4%-5% loss of last year, we should be able to stay more or less flat. Pricing, not too optimistic. I think the attempt that was made at the beginning of the year was mainly to avoid the price reduction. Yes, there were price announcements, we didn't actually realize a specific price improvement so far. Maybe some other attempts will be made later in the year. If the market is stronger, it will be more likely to stick. If not, price level, no big change. We do not assume any significant changes this year. That's for Mexico.
Again, in local currency, before foreign exchange impact, we see results close to the ones of 2018, probably not better, unlikely to be better. Maybe somewhat down instead of somewhat up. Still, anyway, very satisfactory profitability level. No doubt. We're just coming down from a peak, and we are preserving a very high profitability level anyway. On the Italy and China, I don't know if this is enough to bring back Italy to 20 million tons of domestic market. Maybe. Anything that can somehow give some oxygen or some push to the economy, I think is welcome. I really don't know. We may discuss it in the association. It is kind of, let's say, projects, assuming that they will actually be executed, can somehow have an impact on the domestic consumption. I'm not too confident.
The trend.
Yeah, the initial trend. In a very short summary, I think we are in line with the outlook. January and February were maybe better than what we expected. March is a little less so. Overall, since March is also a bigger volumes due to, let's say, this past activity. Relative variances in January and February, percentage variances can be misleading because you're talking about smaller volumes. What we noticed for sure, for example, in the U.S., not everywhere, but in the U.S., yes, the so-called pent-up demand, which was coming from the difficulties. We faced in the last quarter, third and fourth quarter, due to weather, it seems to exist. Some of the jobs that were supposed to start or complete last year and did not, they are showing up. This does not mean that it will last for the full year.
I think we will be seeing in the U.S., more likely than not, a strong first half, not necessarily a strong second half. It is something we will be able to comment during the year.
Excellent. Thank you very much.
You're welcome.
The next question is from Alessandro Tortora with Mediobanca. Please go ahead.
Yes. Good afternoon. I have, let's say, three questions and one clarification. The clarification was on the CapEx level. If you can, again, share with us the level that you expect. From what I understood, it should be around EUR 200 million maintenance plus EUR 20 million-EUR 30 million, let's say, let's call it expansion or something like this.
Yeah. That is correct.
Is this right?
Yeah.
Okay, good. Starting with the three questions. The first one is on Italy. Can you, let's say, give us an idea of, first of all, the negative result, EBITDA result of the ready-mix, let's say, concrete, now separating with the cement for Italy. Also an indication probably of, let's say, your policy on the because it's already held by HeidelbergCement over some price increases announced. The second question is on the U.S. If you can also, in this case, give us an idea of any price announcement already made, because I remember that usually, it takes for you, let's say April, this is now the period during which you are going to apply these price increases.
The third question is on the guidance and also the assumption of the U.S. dollar-euro exchange rate, because if I understood well on the press release, you are telling us that you are assuming, let's say, a stable.
Yes.
Just a clarification also on this. Thanks.
We are on the same 118. We use for the budget 118 as for the average.
Of last year.
Yeah, the same exchange rate, actual exchange rate, average actual for the last year. Currently, we are a little better off, clearly. If it continues like so, we should have a benefit there in terms of the translation, let's say.
Okay.
Going back to the first question. The ready-mix country. Well, usually we do not disclose it. Also because it's very difficult. It can be somewhat difficult to understand or to establish, let's call it, the transfer pricing between the two entities. We try to do it in the most fair, let's call it fair price possible. It's not too easy because we don't have any other customer of this magnitude. If you had a third party customer of this magnitude, maybe you would be able to somehow get a better price. I think, in a way or another, the ready-mix is always a bit penalized. When we're talking, again, about the bad debt losses of last year, this was all on the ready-mix. Well, maybe a small part, maybe less than EUR 500,000 out of the EUR 7.6 million was on the cement.
Let's call it the bankruptcy procedure impact associated with the four major construction company was on the ready-mix. Clearly, internally we see cement running at about EUR 20 million EBITDA already.
Okay, this can give you an idea, we think we should look at the, let's say, entire result as a whole, because the two businesses are too much integrated. Again, there is a potential issue with the transfer price.
Okay. Probably you already answered well, okay, to my question. Thanks.
Yeah.
On the price increase in Italy, sorry?
Well, in Italy, I read some of the comments that were published after the HeidelbergCement conference call. They are very bullish. We don't see the possibility to get the same magnitude, the same differential, let's say. We are looking for something that should be similar to what we had this year, referring specifically to the domestic market, because then we have export. The average price may be different. Let's say, if you look purely at the domestic market, euro for euro.
There is a possibility. More, I doubt it. We'll see.
Okay.
On the U.S., for the moment, yes, there are price announcements that are very much differentiated according to the region. You go from 0, so no price announcement, or maybe actual reduction to fight, let's say, the imports or the new competition to maybe some area $6, $7 per short ton. Let's call it the average, the overall average, we are confident that something like, again, from $3-$4 should be achievable.
Okay. $3-$4, as you mentioned before, the idea for you is to have, let's say, price, cost spread, technically, let's say neutral.
Basically so, yes.
Okay.
Yeah.
Thanks. Just, let's say, follow up on Brazil. Clearly, you made this acquisition, let's say, this part, 50% of this joint venture.
[Non-English content ]
Yeah. Can you comment, let's say a bit more on that also?
We did not mention it in the press release because actually the impact on the income statement was really very, very minor. Just one month of equity evaluation. The closing for them of the year 2018, just a second, was actually very, very similar to the previous year.
Slightly better. They did slightly better. They're talking about BRL 2 million - BRL 3 million , really minor change. There is definitely also there some optimism, more optimism, let's say, for the coming year. There are two potential scenario, let's call it two budget scenario. One where they call it inertia in a sense of kind of a flat economy, no big impact coming from the reforms, et cetera, structural reforms, which needs approval from the Congress. Where they see 1%-2% increase in cement consumption.
Okay.
For the company, actually, it would be more, because we have secured some sales, so-called independent sales.
Okay.
We've been asked to supply, in one case, cement, in another, clinker, to a competitor, we have accepted to do so. For us, actually, it would be better. The other scenario, for the country as a whole is, again adjustment to primary deficit, economic reforms, et cetera, expenses reduction, which should give more market optimism and bring some 3%-4% increase in cement consumption for the year.
Okay.
In terms of results, again, we are not exactly matching the trend of the country. Q1, we can increase. Of course, we are starting again, slightly a bit misleading, because we are starting from a very low level. We can see some 30%-40% increase in the EBITDA. Absolutely.
30%-40%?
30%, 40%, yes.
Okay. Thanks.
Yeah.
Yes.
Still not where we would like to be, but there is time.
Well, step by step.
Yes.
Yes.
The next question is from Pierre Rousseau with Barclays. Please go ahead.
Yes, hello. Thank you for taking my question. There's been some changes on your debt structure this year, with some maturity. Next year, there will be the expiry of the equity linked bonds. I was wondering if you could comment around that, around the potential costs for 2019.
Yes, Patrick.
As you said, in the year 2018, we had basically one major change regarding one maturity of a straight bond of EUR 350 million in the second half of the year. We issued also another sweetener in US dollar, $135 million midyear. These were the main changes. There were some smaller maturities. Besides that, regarding 2019, we are looking at a year where we have, again, two major topics. One is, as you mentioned, the convertible bond that will mature in July. We have some bank loans maturing in the second half of the year, mainly US dollar maturities. Regarding the structure there.
We will see, of course, with the convertible, we have some flexibility already now due to the fact that we have our own shares acquired, but we have also a cash settlement option, there is full flexibility to be seen. We haven't yet decided on what will be the final scenario for the payback of this convertible. We have also quite still significant liquidity within the group. There is also some possibility to pay in cash to some extent. We have bank loans, as I said, in U.S. dollar that may be prolonged or let's say, newly issued because we also, from the balance sheet perspective, may make sense to have this exposure in U.S. dollar.
Regarding the cost, what was not yet visible actually in 2018, is the fact that this bond that matured in September relatively had a high coupon of more than 6%, 6.75%. This was, again, not visible because it's still just the last two months or three months of the year. You will see it, of course, in 2019, this is more than EUR 20 million interest expense for the year. On the other side, we have issued in 2017, but also the end of 2017, a Schuldschein of EUR 250 million and another one, as I said, in 2018. Both were basically pre-financing the redemption of the straight bond.
We had an additional interest expense in 2018, which you can see then in the interest expense that actually we were not really much better than the year before, but you will definitely see it in 2019 now, the full impact. Therefore, we expect that we will further be able to reduce the cost of funding in 2019. We will, of course, need to be seeing how the conditions are for potential new financing. There may be some new financing this year. We have not yet decided on the instrument. There are various instruments there. Still the cost of funding is quite decent, I would say, although there has been some volatility in the market.
Clearly, there may be an additional financing, overall should give us for the full year, clearly an additional buffer in terms of net result and in terms of net debt. That's our expectation for 2019.
Okay. Would you have an approximate estimation of the refinancing cost if you were to issue more debt in 2019?
You can look at publicly available curves. If you look at a total BBB- industrial company, and you look at a, whatever, seven-year maturity, you will be around a yield of 2%, maybe slightly lower, probably depending on, we see at our secondary curve still some illiquidity. Maybe it's not really an indicator, even below 2% maybe. Again, I think this is probably something that you can derive from the market.
Okay, understood. The last question, maybe a follow-up on balance sheet and the priorities in terms of cash allocation. You obviously have a little bit of margin of maneuver, but there will potentially be some M&A activity, potentially share buyback, potentially some maturities to repay. Where would you really see the priorities, if you were to choose between M&A, for instance, and the share buyback?
I think the share buyback, I would not consider it a priority in itself, but in the next, let's say, four, five months, also considering the upcoming maturity of the convertible, it could become. M&A is more something strategic, long term. It is not really in conflict. If you have the right, let's say, M&A opportunity, or you are working on a project that you consider, from a strategic standpoint, very high priority. It's a bit different view, in my opinion. They cannot be put on the same ground, on the same level. On the M&A, really, what we have done recently in Brazil isn't over yet because we have, okay, it's not visible, let's say, in our books due to accounting, let's call it, rules.
We do have a commitment coming up, which is perfectly, let's say, compatible with our financial situation, but not so small in it's going to be 2023, 2024. Usually our way of approaching this kind of, let's call it, acquisition project, is to be as much involved as possible. To avoid too much distraction. If you put on the table too many things, you risk not to follow properly what you have just acquired. At the time of the initial acquisition, this is the most important one, is where you really understand the people, the business, etc. You get acquainted with the country. Right now, there's not much focus on the same ambition on M&A. Different if you are talking about maybe, let's call it, bolt-on acquisition.
This is something different if you're talking about in countries where you already are, and you do have the opportunity. This is usually, we consider it very closely. We mentioned before, let's say, the Italian market, where if there is a possibility to further, let's say, to better position ourselves and to improve our capacity utilization, this is the project that, in our opinion, continues to have very high priority. We are not talking about very meaningful amounts. We are talking about something, financially speaking, much smaller than a potential deal in another country or an acquisition of an existing company somewhere else. We are talking about something. Again, they're not exactly on the same level. I don't know if I explain myself correctly.
Okay, understood. Thanks for the answers.
The next question is from Brijesh Siya with HSBC. Please go ahead.
Thank you. I have probably two questions. One is on the U.S. pricing. You did mention that the mix outlook with some markets, competitive pricing environment, some you can do some price increase. I just want to understand the detail, who are the players who are kind of there who are doing this discounting activity? Are you also involved, or are you also in some markets, pushing volume also, in a way, lowering price to make sure your volumes are moving up there? If you can give a little more flavor on that would be great.
Well-
Probably the second one. Sorry. Go ahead. Okay.
No, talking about the competitor is always kind of difficult. Again, you start from the ready-mix market, actually, it's where most of the end users of cement is in the U.S. If you have area in the ready-mix market where prices are under pressure, because maybe there is some cheaper imports, or maybe there is someone that is an independent too, that is willing to gain some market share, you need to react. Then you're not talking about specific, let's say, cement competitors. I think, all the big competitors in the U.S. are giving, when you read the press release, when you listen to the conference call, et cetera, giving a kind of bullish picture on the U.S. Which is good, and which we share, generally speaking, talking about the trend of the market. Is also translating into some pressure inevitably down the organizational chain.
If the boss says that we absolutely have to improve our prices $5 or $6 or $7, message is going down the chain. Sometimes, along the chain, the message is arriving, but is not necessarily coming to a successful outcome, because it depends. Everybody's there not to lose market. Everybody's there possibly to gain some. Since the market is not stable by definition, you will always have some, let's say, loser or winners. The loser one year, they do try to be the winners the following year. You will be confronted, let's say, with a tougher competition on some of your customers.
It's really difficult to say there's one player that is definitely more aggressive than another that is not doing anything. I think anyone is moving, including ourselves, as a minimum, to keep your positioning, not to lose customer, to possibly increase some. The area where, let's say, the imports are more aggressive, this is clearly where the change in the customer base is more significant. Usually, a change in the customer base entails some price reduction.
Okay. Any of the multinationals who are kind of involved in this price discounting, or is it more related to a particular market? It's more like, I'm trying to understand.
No, Martin is one of the players that, well, he's publicly traded, so they made some official statements where they want to double their results within, I don't know, three or four years. Again, this kind of message, if the market is booming, and it's growing 10%, 15% per year is one thing, but the market is okay. We're not complaining about the U.S. market, but it is not booming. It's moving up maybe 2%, maybe 3%. To really achieve, to double your results within three, four years, means to gain market share, let's say, or to sell more than what the market is giving you naturally. This is not very realistic, in my opinion, because eventually, you will face some price competition. The competitors, including ourselves, they won't let you do exactly what you want.
If you do it differently, if you achieve it differently through acquisition or maybe I'm talking specifically about the cement market, cement and readymix in some area. Martin Marietta, for example, has a very large aggregate business. Maybe in the aggregate business, it will be easier for them to double the result. If you're talking about the cement and readymix market, I'm a little bit skeptical.
Okay, got it. Thank you.
You're welcome.
The next question is from Stephanie Avery with Aberdeen Standard Investments. Please go ahead.
Hi. Thank you very much for the call just now. I just had a question in terms of your balance sheet. Could you remind me on your internal net debt EBITDA targets, whether you view your target leverage in terms like a through cycle target? Also, secondly, on where you look at your investment grade rating in relation to your other capital and cash allocation priorities.
I think investment grade rating has been, fortunately, the outcome was positive last year. There has been a very significant effort on our side to make sure that S&P, in this case, was able to understand the way we were managing the business, our strategy in terms of, let's say, financial goals. We are clearly very committed in maintaining this level. I hope even improving. Why not? I would be very happy to be able to achieve the BBB flat if possible. I think anything we do about cash allocation must be somehow confronted, let's say, with the BBB- or BBB flat standard. I don't think we are not likely to do something, if this could affect the, let's say, the investment grade rating.
The net debt to EBITDA target, yes, it does exist, is a kind of through the cycle like you're mentioning. We mention it also now in our, let's say, financial statements. We say that on a long time horizon, should be, let's say, no more than two, which means that you could go to 2.5 or three if necessary, but with the clear target or plan to reduce it back to 1.5 in a relatively short time. Okay, this is a guideline. I think it's compatible with the investment grade rating. Right now, we are below, actually the next year, probably we will continue to be below. We don't see a reason why to go beyond, let's say, 2x .
We would not dislike to go even lower, to really exceed the target, go beyond it, there must be a very good reason, it should be a project or a decision that anyway does not affect the, let's call it, the investment grade standard or rating. This is the way we are approaching this specific point.
Thank you very much. That's very helpful.
You're welcome.
The next question is from Mike Betts with Database Jefferies . Please go ahead.
Thank you very much. Just two brief questions for me, hi, if you could. You've talked about the average price change in Italy for cement of EUR 2- EUR 3 in 2018.
Yes.
Could I ask how the year-end price compared with the start of the year? Presumably, it went up more than that, 2-3 start to end of the year? That's my first question. Then my second question onto this IFRS 16, I guess two-part question.
Yes.
The EUR 24 million of additional EBITDA
Yes
how can we spread that for modeling between the countries? Can we do it just the same percentage to each of them, or is it particularly distorted to Europe, to developed countries or anything like that? Also, the EUR 24, when we get to net income, I presume there is no change. If we assume that sort of EUR 18 goes to depreciation and EUR 6 goes to finance cost, is that reasonable?
Yes. This is reasonable. About the split, okay, clearly, for example, the largest portion of lease, and Patrick could correct me, in terms of magnitude, you may be more precise, but it is definitely in the U.S. Why? Because it refers to, for example, railcar wagons for the distribution of cement, barges, again, for distribution of cement. This is by far the main portion. In Italy and in Germany, we have some land, some buildings, let's say. In terms of equipment, very, very little. What else? Yeah, we have some, sometimes, how do you call it? We are leasing some businesses, what we call I don't know. I think you translate it into We are leasing, for example, some ready-mix operation, let's say, from someone else. Yeah. Patrick, maybe you can be more precise.
Yeah. I think in terms of what you'll probably see, roughly one-third is, let's say, Germany, Italy, and Czech Republic, and partly also Russia and Ukraine, and 2/3 are U.S.
Excellent. Thank you.
On the domestic price, it's actually not very different. If we look at the end of 2017 versus end of Let me see. Yeah. It's not very different. It's a bit more, maybe four instead of three, but very slight difference. Very similar.
I think in the past, the Italian price had tended to come off quite sharply at the end of the year. Is that a correct memory from me? If so, did that happen again therefore in 2018?
No. Fortunately, it did not. No. The price increase last year, if I recall correctly, was pretty much at the beginning of the year. Maybe February. Not January, but let's say February, it stayed. Yeah, okay, some changes due to mix maybe, or due to some adjustment, but we did not really face any decline going forward. Hopefully the same is going to happen this year, hopefully.
Excellent. Thank you very much.
Yeah. We'll see each other soon. Bye-bye.
The next question is from Gregor Kuglitsch with UBS. Please go ahead.
Hi. Good afternoon. I've got three questions as well, please. Firstly, on coming back to the ETS, can you remind us what kind of bank you've got in terms of allowances? Then how you are planning for the next phase. Are you preparing for any changes in, I think, your capacity? Perhaps in that context, are you seeing any changes specifically on the Italian market in that regard? That's question one. Question two is, can you remind us of your dividend payout policy? Obviously, there's a very modest increase. Then related to that, whether you have given any further thought about simplifying the share structure between the saving shares and the ordinary shares, or whether that's just not a discussion at all at this point in time.
Finally, you've been focused on M&A-wise, mostly on cement as far as I can tell, Brazil, Seibel, and Zillo. Others in the industry are focusing more on vertical integration, particularly ready-mix. Want to get your thoughts as to why you are not pursuing that route, or whether that's just how things fell in the last couple of years and may change in the future. Thank you.
ETS is a big subject. Clearly something that will have much more influence on the strategy, on the production structure, and also on the cost, on the economics, particularly starting from the next year, from the so-called fourth phase. Right now, yes, we are still able to offset basically this. Not exactly going like so, but basically the surplus of the Italian allowances matches the deficit of the other ETS country in our portfolio. Starting from last year, this is not exactly the case anymore because due to the reduction factor, which is the 1.7 per year, we already decreased some our stock. The stock we can carry forward, we can move to the following phase. Following phase, internal allowances will be much less available because the principles about the way allowances will be granted is different.
Not everything is totally clear yet. We're still missing, for example, the famous benchmark. It will depend on the benchmark, but the trend I mean, it depends on which CO2 price you are assuming in your long-term plans, in your projections. If CO2 price remains around where it is now, 20, 21, 22 or below, it could still make sense. It depends, of course, on how much you can transfer down to the customer in terms of prices. It could still make sense to produce and sell a part of your capacity by CO2 rights. If the CO2 price goes to 30, it is very likely that you will be in an economic balance, selling products beyond your free allowances.
You would be able to be competitive and to sell products for what the allowances will do for the corresponding production of your allowances given for free and beyond, it will be extremely difficult. This will for sure, we think, especially in Italy, because there's a difference between countries that are maybe inside Europe, where they're much more protected from import versus Italy, where instead the imports from non-ETS countries like Turkey, North Africa, mainly these two, Turkey, Egypt, maybe tomorrow Algeria could come easily. In this case, if you continue to raise the prices to offset your CO2 costs, you may see some very tough competition or the impossibility to compete against countries like the one I mentioned with no ETS limitation.
In countries that are inside Europe, inside let's say, Continental Europe, much less, in a sense that probably you will be able to transfer, let's say, your additional CO2 cost down to the customer level. Cement will cost more, will not necessarily be more profitable. You will have higher cost in terms of CO2, but you should be able to, let's say, fully sell your production or fully fulfill the demand of a certain market. Not necessarily in a country like Italy, where you may be forced to, at a certain point, reduce your production below your capacity or your theoretical capacity just because CO2 cost would put you out of the market. I don't know if this is.
Okay. You haven't looked at shutting any clinker capacity?
Well, we may come to this decision. It depends on the CO2 price and on how fierce, let's say, the competition is going to be. Exporter, theoretically, in theory, it is easy. In practice, it's not too easy because you need to, at the terminal, you need to guarantee to the customer a certain consistency of your product, of your shipments. If for some reason the ship does not arrive, the customer gets mad. In theory, yes, it's possible. In practice, not necessarily. We may become ourselves, in theory, importers of cement in some situation. Instead of producing beyond a certain level or beyond a certain CO2 price, it could make sense for a country like Italy, maybe, yes, to shut down the clinker capacity and just grind.
Okay.
It's not something that we are planning now, let's say. We have to see, first of all, the benchmark, the quantity of the allowance that we would be granted for free. There could still be also some decision by the European Union to somehow tax the imports coming from, let's say, non-ETS countries. It's an open, really matter of how much Europe would like to penalize, in a sense, its industry, considering that at the end, the CO2 that will go out in the atmosphere is exactly the same or maybe even worse. Because if you consider maybe Algeria is not necessarily as efficient as it is Italy or other countries. It depends on how much the principle of being leaders and first in environmental policy, both on top or against the existing European industry.
If you prefer to give an advantage to someone else, but again, in terms of CO2 emission, this is not going to change. Actually, it's about the same, maybe to get even worse, because you have the transportation from Turkey, for example, by ship to Italy instead of producing locally. If the principle is that Europe has to set, let's say, the very high goals, let's say, or extremely to be the leader, let's say, in CO2 reduction, we may come to a point where the clinker capacity, yes, should not be here anymore, without no improvement for the environment as a whole. It can happen.
Okay. Do you have a bank, an unrealized bank of credits or not?
Yeah. This is public, you can see it per client. We have overall now, without the allocation of 2019, we are above five million tons now, 5.7 at last situation. Has to be the redemption of the rights for 2018 as the allocation for 2019 will be coming out in the next two months.
Okay. Thank you.
Very quickly on the dividend policy. Yes, of course, this is what the decision that was taken by the board today is, let's say, below the potential dividend of the company with this result in theory. In practice, we could distribute more. The decision was taken mainly because there was, anyway, quite a significant cash outlay last year, directly to the shareholder, in a different way to the share buyback. It's not exactly the same as the dividend, but anyway, was a significant amount of money that was, let's say, going in the hands of the shareholders. This was one point that we discussed. Then we have some, we mentioned it before, some upcoming maturity for, let's say, to renovate the indebtedness once it is converted, which may require, again, some If you go for the cash settlement, significant amount of money to be paid out.
We can refinance partially, or we may decide to use, like Patrick was saying before, partly cash, partly refinance. There is some, let's say, series of payment coming up this year, which are not so small. At the end, you have to consider that anyway, even if the group from a consolidated standpoint is showing a certain, let's call it amount of liquidity, profitability, et cetera, the company that is actually paying the dividend, the legal entity that is actually paying the dividend, is the Italian one, where the profitability and the recent result has always been negative. We cannot forget completely, just look at the consolidated, let's say, figures, and consider a dividend policy based on the consolidated figures. We need to take into account necessarily what the legal entity that pays the dividend is doing, and its separate, let's say, financial position.
If Italy improves, likely we were mentioning before, the dividend will improve. I think it's quite obvious that we would like to improve it. On the savings, I think you're right. It's not a project on the table. On the MMA ready-mix, what can I say? Yes, maybe we are not reasoning the same way as some other competitors are. We tend to avoid further, let's say, investment, further acquisition, or expansion in the ready-mix sector. We think that where we have it, okay, we can keep it. We try to manage it the best. In Italy, actually, we decided to downsize eventually. In some regions, we decided to exit. It was a very particular case with significant losses. Anyway, it's going into the opposite direction of becoming bigger in the ready-mix. It's very specific to the local situation.
If tomorrow, in a market where we operate, we have a big customer that decides to sell its business, this is the typical case where you have to consider very carefully whether to buy, to acquire it or let him go in the hands of someone else. I think there will be, also in the future, more cases of this kind. Potential further investment into ready-mix may occur, but it will be typically defensive. Just to be able to not to lose a certain customer, particularly if it's important, particularly if it's close to your plant, et cetera. As a strategy in itself, just go out and buy ready-mix? No.
Okay. Thank you. Very clear.
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Okay. Thanks. I don't know how many people are left because the conversation went on for quite a long time. I'm glad, actually, we're here for this, it means that there is the interest, and that is important, and it's giving us really the opportunity to somehow open a little more, and inform as much as possible. Thanks for listening, and I think as usual, Agostino, our relation is available for any additional info. There will be some, I think, opportunity to meet you in investors' meeting, road show. We will see. For the time being, thanks again, and so long.
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