Ladies and gentlemen, welcome to the LafargeHolcim Q3 2019 Trading Update conference call. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for question at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jan Jenisch, Chief Executive Officer. Please go ahead, sir.
Yes. Good morning, everyone, and thank you for joining our call on the Q3 trading update. I'm very excited to talk to you this morning, especially with the results, which I think are above our expectations. We have a continuation of not only the growth momentum, but also of the over-proportional increase in profitability. I think very good to see that volumes in Q3 were also good, even slightly ahead of the first half volumes. All our measures in pricing, in cost brought, I think, a very healthy result. Before we go in the details, we have then also on the financial discipline side, I think we make a lot of progress.
We don't have it in the trading update, I like to also confirm that we continue to make significant progress in the cash conversion and also in the deleveraging of our debt ratio and significantly strengthening our balance sheet. I'm very excited. Also, I was excited that we made some key steps forward in sustainability. We are among the first companies who have a dedicated Chief Sustainability Officer in the management team now with Magali Anderson, she has just started this month, that's good. We realize that we have to further accelerate here, not only our efforts, also our communication, that is what you can expect from us now going forward.
You saw maybe our media release, how we want to improve the carbon efficiency in Europe with investment program, and we have a very good action plan here to reduce the CO2 emissions by another 15% in the next three years. I think with this, I would hand over to Géraldine, who goes a little bit through volumes, region, and the results before I talk about the outlook, and then we all have our usual discussion, comments, and the Q&A.
Thank you, Jan. Good morning, ladies and gentlemen. We will now look at the drivers of Q3 sales and EBITDA that Jan mentioned at the beginning of our presentation. If we start with the volumes by segment on slide four, we can see that after a decline in Q2, Q3 returned back to positive growth, mainly thanks to our strong performance in North America. In North America, U.S. cement volumes growth has been driven by favorable weather and gained share on infrastructure projects. In Europe, cement volumes increase has been mainly driven by ongoing good demand in Eastern countries. In aggregates and ready-mix, the end of some big projects in France and in Poland impacted the comparison with previous year. In Asia Pacific, cement volumes are almost stable due to India's market softness. At the opposite, aggregate sales volumes were strong in China, benefiting from enforcement of mining regulation.
Latin America, cement volumes have been up by 4% like-for-like in average, driven especially by the strong performance in Brazil. In Middle East Africa, cement volumes were down by -1%, reflecting a contrasted performance between some difficult markets, such as Algeria, impacted by political instability, and on the contrary, strong market demand in several Middle East countries. If we now look at our bridge of the net sales in Q3, we incur the ForEx effect negative one of -CHF 283 million attributable to ARS, Zim dollar, EUR, GBP, and AUD. The scope impact mainly relates to the sale of Indonesia and Malaysia. Like-for-like growth was up 4.9%, driven by both volumes and price. The effect of price increase was close to 3% on the quarter.
If we now move on to our recurring EBITDA bridge on slide six, the like-for-like growth amounted to 6.4% for the Q3. It included a volume effect of CHF 55 million, representing 3% of growth, mainly coming from the U.S. The price over cost amounted to +CHF 63 million, demonstrating that on average, the price increases have more than offset the cost inflation. There was still an effect coming from our CHF 400 million of SG&A plan of CHF 14 million in Q3, which has flattened due to high base in Q3 2018, as anticipated. If you look at the same bridge over the nine months, volume effect is smaller. Price over cost mainly results from SG&A savings plan realized under the CHF 400 million savings plans, which had reached a significant amount, as promised, of CHF 213 million.
Let's now move on to our quarter and/or business line performance. You can see here that all business lines have recorded growth. Cement has recorded over-proportional growth in line with the global EBITDA trend. For aggregate and ready-mix, quarterly numbers are not representative. Some delay of raising in a few projects may create an unfair view of the situation. Therefore, we prefer to analyze the segment over the nine months. Let's move on to that analysis. You can see here that cement growth of 5.5% results mainly from volumes of 4.7% and price increase of 3.8%. Over the nine months, aggregate revenue growth recorded 3.1% of total growth, resulting primarily from flat volumes and price increase by 2.5%. Ready-mix net sales have been slightly positive, resulting from slightly declining volumes offset by a price increase of 1.1%. For both segments, we had over proportional recurring EBITDA growth.
On solutions and products, the strong recurring EBITDA growth is mainly driven by turnaround initiatives in Australia and positive market development in North America. Let's move on to the regions. On a regional basis, we recorded very strong results in some regions, especially Europe, which benefited from good market trends in several countries and recorded operational efficiencies. In North America, U.S. recorded an excellent growth, which had been partly offset by softer environment in Canada. Latin America had good growth, especially in Colombia, where also markets such as Mexico and Ecuador have been good. The good recovery of Iraq and Jordan, together with strict cost control measures, Middle East Africa suffered from Algeria's slow market and the low demand in Egypt. In Asia Pacific, sales growth has been limited to 0.6% with higher proportion at EBITDA growth, thanks to our cost measures and China good performance.
If we now start with North America, operations delivered a strong set of results in Q3, with net sales up 9.6% like-for-like, recurring EBITDA up 6.9% like-for-like. Our volume grew in all business segments, primarily driven by solid demand growth in the U.S. and Eastern Canada. This quarter, we experienced a catch-up in the U.S. after a weaker Q2 that had been impacted by weather issues. Canada West, on the other hand, softened a bit on the back of softer economic demand and environment in the prairies. Positive price momentum, although further supported performance improvement in the region. In Latin America now, our net sales were up 7% like-for-like, and our recurring EBITDA was up 3% like-for-like. Despite softer environments, notably in Mexico and Ecuador, our cement volume grew by 4% in the region. Volume growth was primarily coming from Brazil and Colombia.
Effective cost and price management across the region allowed us to mitigate challenges in key markets. In Europe now, with further continuation of momentum with good market demand in most countries, the region delivered another quarter of over proportional growth, with net sales up 5% like-for-like, and recurring EBITDA up 7.1% like-for-like. Cement volumes grew by 2% in the quarter. Aggregate and ready-mix have been temporarily impacted by completion of large infrastructure projects, which have not been replaced yet, and some ongoing uncertainty in the U.K. The effective price management improved operational efficiency and easing cost pressure further supported margin expansion in Europe. If we now move to Middle East Africa, we have been able to partially offset difficult trading environment in all key markets by good progress in turnaround initiatives. Our net sales are up 2.2% like-for-like, and our recurring EBITDA is down -6.6% like-for-like.
Our performance in Algeria, our biggest contributor in the region, has been impacted by persistent uncertainty in the country. Environment remained challenging in Egypt too and was a bit more competitive in Nigeria in the quarter. Performance further improved in South Africa as a result of all our effective restructuring initiatives, and it improved as well in Iraq on the back of increased cement demand. If we now turn to Asia Pacific, it again contributed strongly to the group's results. Net sales were up 0.6% like-for-like and recurring EBITDA up 17.6% like-for-like in Q3. Net sales growth has been impacted by softer cement demand in India and market slowdown in Australia. Cement volumes in India were slightly behind last year, impacted by exceptionally long monsoon.
However, good progress was made in cost savings and price management, resulting in significant margin expansion in the country. Our turnaround initiative in Australia more than offset the weakness of the local market and supported our margin expansion. China, again, positively contributed thanks to higher cement prices and aggregate business, which is gaining traction. With this, I now hand over to Jan.
Yes. Thank you, Géraldine. I think for the outlook, we are positive. We don't see a slowdown in our markets. We believe that we have a solid global market demand also for the fourth quarter, good order books, and especially in North America, we expect another good quarter in the volumes. Latin America, I think we have now a good turnaround in Q3. Europe, also good demand in the last quarter. Middle East, Africa, we have some challenges still to cope with, but here also the trend will be, I think, more positive. In Asia Pacific also, we believe we have a strong closing of the year. In total, we can fully confirm the targets for 2019 for the growth for the EBITDA, and we will overachieve our deleveraging target, and we will be well below two times net debt to recurring EBITDA.
We will do that even without closing of the Philippines, which is expected to take place the next couple of months, but we are not sure if it will be ready for this year or beginning of next. Then we will have a strong cash flow for 2019, and all this year from investments in both on acquisitions below CHF 2 billion. I think with this, I am happy to turn over to you and happy to have your comments and questions.
We will now begin the question and answer session. Anyone who wishes to ask a question should press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands up while asking questions. Analysts may ask only two questions. The first question comes from Elodie Rall, J.P. Morgan. Please go ahead.
Hi. Good morning, Jan and Géraldine. Okay, I have two questions. First of all, on Middle East, Africa, in Q3 trends seems to have deteriorated further from Q2, and the guidance is uniquely more cautious in the region. Can you give us a bit more color what has changed in Q3 versus Q2, and does it mean that we should no longer expect stable EBITDA this year for the region? Second, a question on capital allocation. You will be reducing net debt quite strongly this year with or without the Philippines, as you said. Can you give us a bit more color on your priorities in terms of capital allocation, and can you confirm that you will revert to a full cash dividend as soon as this year? Thanks.
Elodie, thank you for your questions. I think Middle East, Africa, thanks for picking this one as the first question, because I have to admit, we thought we bottom out a little bit earlier and as we previously communicated, and obviously market conditions in Nigeria, in Egypt, they have not improved. We have strong turnarounds in place, but the market is not really in our favor. Also other markets like Nigeria, it's not that pretty at the moment. Let's say, concretely to your question, I think will be now more difficult to have a stable EBITDA for the full year. I think this we probably will not be able to achieve. I would be very happy to see that for the fourth quarter. That's maybe our new forecast regarding Middle East, Africa.
Okay. Yeah, Elodie, on your second question about the capital allocation, we continue to allocate our capital to strategic CapEx. We continue to have capital allocated to any acquisitions that make sense with the financial discipline that we've already talked about several times. It's far too early to talk about dividends at this stage.
Okay.
The next question comes from Tobias Woerner, Morgan Stanley. Please go ahead.
Hi. Good morning, Géraldine, Jan. Thanks for taking the question. I have three, if I may. Maybe we can go through them one by one. The first one on the Americas region on both pricing and margins. Can you maybe give us a little bit more detail on what's happened in the region? Because firstly, if I look on the pricing side, I think it's 7% like-for-like revenue growth and volumes up 11% in cement, which seems like pricing has been a little bit slower. Is this correct, or are you still seeing the sort of three, 3.5% pricing that you saw in the first half? Then maybe related to that, you could also comment on the margins in North America, because I was a little bit surprised seeing them down despite really very strong top-line growth and also more favorable raw material environment.
Maybe it was a mixed effect, but can you maybe give us a little bit more detail on this?
Yes. North America, first, we were very excited to have almost a 10% growth in Q3. The first half of the year, we had a few hiccups in logistics, in flooding and so on. Very happy that the backlog we always reported really finally arrived in the books, and that's very positive. On the pricing, you will see we have a calculation with cement pricing, most importantly in the U.S., is up almost 2%, which is good. In the Q3, you realize that the profitability didn't fully follow the volume growth or the sales growth. That's just an effect because we were a bit surprised with the big jump in volumes, and we had a few extra costs in logistics to satisfy the customer demands. This is something we don't expect to happen in the fourth quarter.
Okay, that's very clear. The second one on cash conversion. You slightly changed the wording from continued improvement in the first half of 2019 to significantly higher cash conversion. Jan, you also mentioned earlier that you are very satisfied with the improvement. With that in mind, I wonder if there's a potential to hit the 40% cash conversion target potentially early.
I wish we can share more details, but Géraldine told me I cannot talk about it because it's a trading update. That's why I put it in my quote. She couldn't control my quote. I put in the quote that we have significant progress with cash conversion. You have seen that in the first half of the year, how much we are ahead of last year, and let me say, we see the same trend for Q3. All the measures we are making will come to a very positive year-end result. You will see we are in much better control of the net working capital. You also will see we have reduced the restructuring cost something significantly. I'm expecting really that finally all our improvements will hit the cash this year.
That's very clear. Then just the final one on Asia Pacific. Clearly, the performance was, I think, much better than what you were initially expecting, especially in China. We saw Holcim, I think 25% profit growth versus your initial guidance of no incremental growth contribution. With that in mind, are you also a little bit more optimistic on the fourth quarter given the trends we saw in Q3?
In Asia, we have an interesting development that our three main countries in Asia Pacific are India, of course, but China and Australia. We have for the third quarter in all three markets, there's no volume growth in the market, right? Even there's a slight decrease in Australia, and like China, India is flat. Nevertheless, we had very good programs in place, with a strong focus on pricing, of course, but also some restructuring in Australia. All of that is showing results, and this is why we have, I think, a 17% increase in operating profit in those markets. I think very well done from the teams. We told them for this year, we don't impress us with volume growth. We want to see a bottom line from you this year. I'm happy to see that that's coming through.
Can I just quickly follow up on this because you mentioned pricing. You had volumes roughly flat, and then you had, I think, 2.6% like-for-like net scope, which tells me there wasn't so much pricing in Q3. Is this correct?
China is on a high level. We just keep it. Australia is pricing difficult because the market is not there. We did it on the cost side. We had significant pricing in India.
Thank you very much.
The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. Just staying with Asia Pacific for a little while. India has been slow, and you called out in the second quarter, election-related sluggishness, and Q3 was monsoon. What can you tell us about the outlook for Q4 and in terms of new infrastructure and house building programs that is coming through? You mentioned in the prepared notes that aggregates and ready-mix wasn't 3% positive in the quarter. If you want to elaborate on that and the small decline we saw in aggregate margins, if that's just a blip on a continuation of an improvement that you're aiming for.
Okay. I think, yeah, India is an interesting thing. I think maybe the last 10 years, we haven't seen the Indian market stagnating in volumes for four to five months. Yeah. However, that's not a concern I have. For us, India is a long-term growth market. When you're in the market and the per capita consumption of cement is still around 200 kilos, and you see all that infrastructure, but also all the housing needs of this growing population. The market is in super shape, and I'm only concerned about the margins. We really have to bring the margins up, and we made the first big step this year. For the last two years, I was very unhappy. We grow the volume 7%, 8% or something, and then we don't get the pricing through, and we have some cost inflation from fuel.
This is now coming to a better picture this year. For us, for LafargeHolcim, I don't need volume growth in India. I have so much sales help now that we will have a good 2019 and a better 2020.The market is interesting to come to the macros. The market, we had a big debate the other day, what's going to happen. Our Indian leadership team is rather optimistic that there will be now a volume growth again in Q4. For me, let's see. We don't need volume growth in India for this year.
You had a question on ready-mix and aggregates. I'm not sure we really got the question clearly.
Well, you said on the quarter, the relatively soft performance wasn't representative, that one remark you made. I just wanted to query about the bit of a dip you have in aggregates margin specifically in the quarter, if that's just a temporary issue and you would resume the sort of margin expansion in that business.
No, we do expect margin expansion, of course, and on the nine months, which is the relevant period to look at it, because the magnitude of numbers is smaller than 10 months, if you will. You have to look at it in the nine months at the right phases. You see that we had overproportionate recurring EBITDA growth, and we are expanding on margins, and that should carry on.
Why again wasn't Q3 representative?
You have some timing effects on projects.
Got it.
That's that.
Okay. Thank you.
The next question comes from Arnaud Lehmann, Bank of America. Please go ahead.
Good morning. Arnaud Lehmann from Bank of America. Two questions, if I may. Firstly, regarding your announcement on Europe and the CHF 160 million of the extra CapEx to reduce CO2 emissions. I'm trying to understand how this fits with the upcoming Phase 4 of the European trading scheme, the 2021-2030 period, where you expected to reduce your emissions by 2.2% per annum. Are these CapEx needed to comply with the Phase 4, or are you already, let's say, in line with Phase 4, but you want to go further than that? That's my first question. My second question is around acquisition. I think you've been on the press call this morning talking about BASF Construction Chemicals. I think you were saying on the wires that it was good business, but you didn't want to overpay for it.
Would you mind repeating these comments for us, please? Thank you.
Thanks, Arnaud. I was just getting excited about the second question. The CO2, to be precise, we have business year 2019. We have enough CO2 certificates also for next year, and now we're trying to reach the next level. For 2021, we have a 15% lower certificate, what we received, and we get ready for that stage. We're very confident we have 35 plants in this European regulation scheme, and we now get ready to be also self-sufficient with the certificates in 2021 and ongoing from there. On the BASF. Also I was told that I cannot speak freely about it because we never made any press release. If we are interested, if we are in the process, if we stop the process. I try to answer your question a bit differently. I think BASF Construction Chemicals is a very good business.
It's in a very attractive market segment. The business is based on good technology, good brands, good market position. I think anyone who tries to maybe be in building materials should maybe have a look, right? At the same time, we have this financial discipline here at LafargeHolcim, and I think in the last two years, you have seen from refinancing to acquisitions to divestments, that we make deals that make sense for the company in a very brutal way. That's why you cannot always do what maybe is exciting in life. When I look at the process from the outside, I think BASF announced the divestment exactly a year ago, and nothing has happened so far. Maybe shows a bit complicated how things are. That's I'm not allowed to share any more details, but you have to make your own conclusions.
You can just expect one thing from us. We are financially disciplined in any deal, and that also applies to such deals.
Maybe just to follow up on that, not thinking about BASF specifically, but in general, I think historically the trend was for more of a separation between cement, ready-mix concrete companies from construction chemical businesses. It used to be integrated, and maybe it was disintegrated, if I may say. Do you think now it makes sense from a strategic standpoint to have in the same company a large ready-mix concrete business and a construction chemicals business?
I can imagine many things. I think when you look at the cement companies, maybe in the last decades, they were rather keen to have a pure play cement strategy. I think going into the future, you better be involved in innovation and developing the new generation of building materials. If that includes chemicals necessarily, I don't know. Maybe not. You need to get closer to the customer in the future. This is something we said in our strategy, that we want to be closer to the customer with solutions, with products, and many things are possible. Construction Chemicals is not a must. It's just one option you have, I think.
That's great. Thank you very much.
The next question comes from Paul Roger from Exane BNP Paribas. Please go ahead.
Hi. Hello. This is actually Robert Whitworth on for Paul. I had a couple of questions. My first one was, margins were generally stronger than expected in most emerging markets. I thought your self-help was now completed. Could you just say a bit more about how margins were so resilient? Is this mostly about better price-cost dynamics, or is there actually more you're doing over and above the original CHF 400 million cost-cutting plan? Thank you.
Yes. Hi. We are constantly monitoring our cost, as we said. I think this is the discipline that now we've put on our cost. We also improve in terms of industrial efficiencies and operational efficiencies, so more on the variable part of our cost. All this effectively with good pricing drives the improvement of the margin that you're seeing.
Sorry, just one other one, if I may. Just on the group to allocation, is it likely to focus on bolt-ons sort of only in the coming years, or could we still expect a more transformative deal during your plan to 2022?
I think the bolt-ons for me, they have to be an ongoing part of our strategy execution. I'm happy we could start now doing that. I think for the future, if we can do around 10 bolt-ons every year, that's I think a good frequency for me. Then we are adding 1%, 1.5% growth to the company. These bolt-ons are very value-adding to us because we buy for reasonable valuation, and we have very significant synergies in those local markets. That's a little bit at core of our strategy. Bigger acquisitions, we will be very careful because historically, the big acquisitions have quite high multiples or high sales prices. Then compared to that, synergy realization tends to be rather lengthy and maybe less strong. We are very careful with big acquisitions. I think that's fair to say.
Thank you.
The next question comes from Jean-Christophe Lefèvre-Moulenq from Crédit Mutuel. Please go ahead.
Yes, good morning. I personally want to follow up a question regarding your debt, Middle East, Africa. Can we get some more flavor, notably on the volumes and pricing? Are volume in Egypt and Algeria up or down? Are pricing in both country up or down? In term of contribution, can we assume maybe a loss for Egypt, which is in a very tense situation? Many thanks.
Yeah. Unfortunately, both countries have a negative pricing in 2019. I think we have to confirm that. That's one of these challenging market conditions we have. In Egypt, we have probably the best operation compared to anyone else in Egypt. We have a very high quality, low cost quarry and one of the most efficient factories worldwide. I don't think we are going to run into a loss there. We are probably the most resilient from all market participants. In Algeria, we still have, I would say, good margins, however, under big pressure from these price decreases. We have this demand supply disbalance in these two markets, which I think we have to weather out, and there will be better times coming, but probably not in Q4.
Jean-Christophe, also follow-up question regarding the CO2 certificate. Today, you are in excess inventories, but what did you say about the 2021? Is it minus 15% in terms of new allocation or in terms of inventories?
I think, Jean-Christophe, the answer on CO2 is really that we're going to go beyond the reduction of lights. Actually, we are going to go beyond and improve sustainability in all our plants and anticipate that.
Okay.
Okay?
Many thanks.
The next question comes from Bernd Pomrehn from Deutsche Bank . Please go ahead.
Yes. Good morning, Géraldine. Good morning, Jan. Two questions, if I may. Firstly, could you kindly elaborate a bit on a high level how we should think about the development of the price over cost ratio in the quarters ahead, especially what do you see in terms of cost inflation? Secondly, you mentioned the completion of several large infrastructure projects. How does your pipeline look like for these large projects, especially maybe in France, U.K., and maybe also Mexico? Thank you.
Thank you. I think, Bernd, when we look at the demand, we have good order books, and you can see from Q3, I think we have to realize that while the world's economy, many industrial segments are under pressure now from automotive to other sectors, to chemicals, while maybe construction and building materials is one of the most resilient segments, and we see that in our business. We have no reason to believe that there will be something that we fall off the cliff. We have a good order book for Q4, and also we go quite confident into 2020 from a market perspective. Nothing spectacular or negative to report. Even in the U.K., you will be surprised, we have slightly positive volumes. It is not an easy market, but we are not negative in the U.K. We go quite confident here into the future.
With the price over cost, that's I think the one simple leadership message we have across all our countries, that's key for the people here also. You can imagine pricing. We have a better pricing this year than last year. At the same time, we have much less cost inflation, mainly coming from energy. When you see how the crude oil price had dropped, we have here also a positive situation, I would say.
Okay. Excellent. Thank you, Jan.
The next question comes from John Fraser-Andrews from HSBC. Please go ahead.
Good morning. My two questions. First one, please. The pace of cost reductions and turnarounds are clearly having a big impact in your emerging regions. Could you give a comment on how the pace of that looks going forward? How does it compare? I realize you don't deliver numbers on cost-saving targets, but how does the pace of activity of cost reductions and turnarounds compare going forward 2020 with 2019? The second question, in the solutions and products, you clearly had a very strong increase in EBITDA over the nine months of quite a small rise in sales. What's going on there, and are you planning now to boost the sales once it seems you've got the profitability in order?
I can start with the first question on the cost reduction. You know our cost-saving plan is completed. It's been completed end of Q1. We have some cash impacts due to a restructuring of such program this year. On a cost standpoint, this is completed. Now we have a lot, as I mentioned, measures that are really helping us in effectively regions such as MEA and regions such as LatAm, which consist of improving operating costs permanently, or variable costs. We are, as Jan mentioned, also helped by a lower energy inflation.
On the solutions products, thank you for noticing. We want to develop that segment, like we said last year in the new strategy, and we have quite some exciting businesses in concrete products, in mortars, in asphalt, and we have some strong plans. We also have some efficiency issues there, namely in Australia, and this we have successfully tackled, and this is why you see now that the margin has improved there so significantly in 2019. We bring the business in order, and then we want to grow here preferably ahead of the other segments.
Thank you for those answers. Can I just follow up on the cost reduction? Are these costs being reduced to react to markets, or is this part of a program that you've identified? My specific question was, how does the cost reduction pipeline, if we can put it that way, look for 2020 versus 2019?
Yeah. We don't guide. Be assured that we have program in place to follow all our cost buckets, variable and fixed.
Thank you.
The next question comes from John Messenger from Redburn Europe. Please go ahead.
Hi. Good morning, Jan, Géraldine. Two if I could as well, please, from me. The first one was, and sorry to come back to Jan, but more as a generality in terms of M&A activity. Can I just ask in relation to hurdles for things like BASF and any other larger deals, would it be fair when we're sitting on our side of the fence to assume that that 2022 target of making at least an 8% return post-tax on everything you buy, given that's three years from here, is that a key non-negotiable line, I guess, that would apply for some of the larger deals? You mentioned earlier, they obviously can come with rather higher price tags, synergies can be more sticky and longer to unlock. Is that 8% hurdle effectively something that we can use to judge?
I take away from your comments that possibly if BASF came back at a sensible price or a different price, maybe it wouldn't be ruled out. Just as a generality, but that's just where I'm coming from. The second question was just on the last quarter of the year, are there any particular factors that we should all be bearing in mind in terms of, obviously, the guidance has remained as it is for the year. You're up 9% year to date. If we just understand, obviously, comparatives are one issue, but were there some one-offs last year that we all need to bear in mind in terms of extrapolating what the full year should hold for us in terms of EBITDA growth? Thank you.
Yeah. I think on the M&A front, you really have to be disciplined. Every deal we do, if it's buying or selling, we're sitting together, and we make our walk-away prices both ways. Only this way, because otherwise people get excited or something. It's good to be excited, but when it comes to deals, it has to come down to a disciplined valuation. That's what we're doing. You talked about this 8% return on invested capital target for 2022. That's non-negotiable. That's a minimum target for us. We will either achieve this early or get above it.
Thank you.
On your question about Q4, I think we are positive, as Jan said. Of course, we don't change our guidance.
I suppose I was just digging slightly there, Géraldine, in that I think last year there were some quite useful one-off gains in the fourth quarter in terms of things like pensions. Is that something that doesn't repeat, so we just need to think about how we temper our views on what should be delivered for the Q4?
Yeah, sure. We've factored that in. We are very confident about Q4, and that's something we are effectively taking into account, John.
The next question comes from Josep Pujal from Kepler Cheuvreux . Please go ahead.
Yes, hello. Two for me, please. The first one is on the price increases that you are expecting for next year. I guess that the negotiations will start in a few weeks. Do you think that you can achieve the same kind of price increase for 2020 than you got for 2019, given that the inflation environment is very different today? My second question is on this 15% target reduction on emissions for the next three years in Europe. This achievement yearly target of 15% over three years, how does it compare to the last three years? Thank you.
Okay. Yeah. Good question. On CO2, we made a little progress in recent years. We made a big jump from the 1990s, when we shut down all the wet processes and so on. We reduced the CO2 by, I think, 25%, something like that. In recent years, we didn't move that much, and the reason is, well, maybe we had an improvement of 1% or 2% per year, so not nothing. The reason is that the CO2 pricing was not really supportive. When the pricing was at EUR 6, EUR 7, EUR 8 a ton, that doesn't really motivate you to do more. Now we have a different picture, and this is why we made now the new program to significantly improve. We have a lot in the pipeline to do that.
It's just we need a certain CO2 price to be incentivized to do that, and that's what we're going to do. On the pricing, we don't give a guidance today on the pricing, but as you are asking, the focus on pricing in the company has significantly increased, and we will see. I think we have quite a good pricing environment for next year. Our teams are preparing the pricing. We just had a call this morning to review and remind everyone that now is the time to prepare for 2020 pricing, and that's the number 1 priority for all markets.
Thank you.
The next question comes from Gregor Kuglitsch from UBS. Please go ahead.
Hi. Good morning. A couple of questions from me. I would appreciate if you could update us on the net debt, what you think we kind of end up with. I appreciate the Philippines is kind of a variable. Perhaps let's assume it doesn't happen this year. I think you had given a guidance before of CHF 10 billion. I think it's a little bit out of date. If you could just refresh that for us, I think that would be quite helpful. The second question is on Latin America, just so we get a sense of the performance. We just thought it was very strong actually, considering what some of your peers have reported, particularly in Mexico, but also some of the Central American countries.
Could you elaborate if you think you can sustain that going forward, or if we should expect somewhat softer trends considering some of the data we've been seeing? Thank you.
All right. Thank you. Thank you, Gregor. I'll start with the first question, and then at that, effectively, we gave you the guidance of CHF 10 billion. I think the CHF 10 billion, you'll be probably disappointed, but I'm going to keep that guidance. It's a CHF 10 billion without the Philippines, without receiving the Philippines and pre-IFRS 16 will be effectively around CHF 10 billion and significantly below the 2 times leverage, which was also our guidance. I think it's quite good. If I now go to your question about LatAm, you're right, we really increased our profitability and we expect that to carry on.
Maybe if I can add for Latin America. I'm glad we have now We had four quarters of a soft decline. Now you can see also in the key markets, future is changing. We have the most prominent in Mexico, where the new president came. Usually in Latin America, you have a period of 12, 15, 18 months, when a new party comes into power, where there's a slowdown in the projects until they are properly selected and reorganized and everything. We believe this is happening now. Our people are rather optimistic now with the trends, with maybe Brazil being the biggest challenge for us in terms of market price. That's not good. For the other markets, we are a bit more confident going forward.
Thank you very much.
The next question comes from Yassine Touahri from LafargeHolcim. Please go ahead.
Yes. Good morning. Yassine Touahri from ODDO BHF Investment Research. A couple of questions. First, you talked about the next generation of product and investment in innovative products and solutions. Could you tell us within your portfolio, which kind of products do you like and want to develop? Could you tell us which kind of new next generation products could you look at outside of your current portfolio? My second question would be on innovative process. You issued a couple of press release on digitalization with some cost reduction potential and some press release as well on digital capture. Could you quantify the impact of digitalization and digital capture on your selling program, on your cost and CapEx?
Okay. The first one, innovation is clear. I think concrete or cement, for me, cementitious product are the most sustainable building products. They are affordable. They have a huge range of design opportunities. They are the longest-lasting, the strongest, and they can be fully recycled. However, now with the CO2 challenge we all have, we have to develop now the next generation of lower CO2 cement, but especially also lower CO2 concrete. This is something where we invest now heavily to come out with the next generation of products which we want to introduce into the market. On the digital, we don't have a mathematics today on this. We are in the fortunate position that our business is not for Amazon or for Uber.
We can take in the advantages of the digitalization, and we have now our projects to fully digitalize the factories from the quarries to distributing the cement. On the one side, we have quite a potential for efficiency increase to basically get big data, so have everywhere sensors from temperature, vibration, noise, filling levels, and then transfer that into a meaningful data operation of our whole supply chain. Plus the customer side, where we make big efforts now to digitalize the interface to the customer, and that's a big potential for us because you can imagine that on an average working day, we have more than 100,000 full truckloads delivered to the customer.
You can imagine if you are able now to optimize this interface with the customer for better timing, but also better cost, better loading, better planning of the routes and all of that, there's quite a big potential for us. We don't quantify that at this point in time, but we have a big action plan and many projects in the pipeline.
Carbon capture?
Karl, that's something we elaborate and we follow, let's see where that gets to. There's some interesting projects to catch our CO2 and transfer it into fuel, for example. We are working on that, too.
Thank you very much.
The next question comes from Didier Werner from MainFirst. Please go ahead.
Yes, good morning. Two questions, if I may. Firstly, having done the benchmarking exercise with your Indian peers, UltraTech and Shree Cement, it seems that you're lagging somewhat behind, and that there could be some cash to give you an idea in terms of EBITDA margins. UltraTech improved up to 20% in EUR, 16.7% in Ambuja. Your ton EBITDA is probably 20% below, 20%-25% below what UltraTech's is. Why do you think that is, and what are you doing to catch up here? That's the first question. The second question is a more general one, but I think an important one. I'm pleased you made Magali, your Chief Sustainability Officer, with her mandate. I think health and safety is a very important hallmark of a best-in-class industrial, but also commodities company.
On that note, will you, in future, publish what you did in the Capital Markets Day, the health and safety KPIs such as on-site fatalities and LTIFRs? Because I think seeing that on a monthly basis would give us a sense and also drive the company forward.
Thank you. We realize that we are having a lot in the pipeline in sustainability. We can accelerate that, but at the same time, we realize that our communication is not good at all in sustainability. The mandate of Magali is clearly accelerate our actions and at the same time, very much improve the communication and engagement with all these increasingly important stakeholders like NGOs, but government agencies and so on. You can expect from us that we will have now a much more intense frequency of both actions and communication and engagement. On India, you are correct. We are not happy with this performance gap to UltraTech, which for me is always a great opportunity, is a great potential. We have our people. They are highly motivated to close the performance gap.
There's a couple of things there. We have some efficiency potential in the factories. We have some pricing potential in the markets, and all that has to come together, and we want to close that gap.
Thank you very much. I mean, as a matter of feedback, I understand that you, as a group in India, leak quite a bit of pricing through your distribution network.
Thank you. I'm happy to sit together with you and the Indian team and go into the details.
I'd love to do that. Thank you.
The next question comes from Remo Rosenau from Helvetische Bank. Please go ahead.
Yeah. Thank you. Hi, Géraldine. Hi, Jan. Just one question left for me. On the bolt-on acquisition side, you mentioned to go for around 10 bolt-on deals per year, more or less, if I'm not mistaken. However, this year, you are so far at around six deals, if that is correct. Is that due to the fact that you were busy looking at other things which caused your focus to shift a bit, or should we still expect a few more deals in the last two months of this year?
Remo, it's both, actually. We just started last year to do the bolt-on strategy. For the bolt-on strategy, it comes from the country. We introduced an easy process, our criteria, how to do the valuation. The countries have to start doing, approaching the targets, filling up the pipeline, and this is all happening. The plan is maybe we can't make the 10 this year, but that would be my target to have 10 per year. If not this year, maybe next year we will come into that level of deals.
Okay. Fair enough. Thank you.
The last question for today is from Ahmed Nabil from Barclays. Please go ahead.
Good morning. Thanks for focusing my questions. I actually got 2. First one on India. I think that there's been corporate tax reductions that have been announced over there, as well as the waiving of some fresh surcharges. I was wondering if you made a calculation of how much benefits you would expect from those, and whether this is the reason behind your increased optimism on cash conversion, or if there's something else we should think about. The second question, I'm sorry to come back on the CO2, because that is an important topic. Could you let us know in practical terms what exactly you're going to spend that CHF 160 million on? Is it additional equipment you're putting in the plants? Does it include some capacity shutdown, maybe in some countries and in plants where you got a lower capacity utilization rate?
Also that 15% reduction, does it include some of the 35 installation you were mentioning in Europe being permanent? Thank you.
All right. I take the last one on CO2, Géraldine, and then Géraldine will go into the tax situation in India. Yes, 160, we do have a lot of potential for our waste recycling, so what we call Geocycle. Most of the investment is for using more alternative fuel in our factories. Despite that, we also have some investments into the production process, like the heat recovery or something. We're going to optimize every plant. The biggest investment is used for the Geocycle, so to use more or recycle more waste in our production process, which has proven to be very attractive for the recent years, and we want to go now on the next level.
Sorry, go ahead.
No, go ahead.
At this point, there's no intention to shut down capacity in Europe?
No, you see the demand is very healthy in Europe, so we have 35 plants in this regulatory region of the European Union. At the moment, we have a good demand. There's no plans for any shutting down any capacity. There's no need for it. We are running at a very good capacity utilization in Europe, and this continues into next year.
Yes. On your question about Indian tax, you're right. The finance minister of India announced a reduction in the corporate tax rate from 35% to 20%. That also may result into an elimination of certain incentives. We have to make a little computation. Let me tell you that when we speak about 27% of ETR, this captures effectively all of India tax reduction in it, and it effectively helps in terms of cash conversion optimization.
Good. I think at this point, we have no more questions. If that's the case, I thank you again very much for joining the call, and I very much look forward to seeing all of you in person in the near future. Thank you very much, and have a good Friday. Thank you, and bye-bye.
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