Ladies and gentlemen, welcome to the LafargeHolcim Half Year Results 2019 Conference Call. I'm Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Jan Jensch, CEO and Mr.
Geraldine Bicco, CFO. Please go ahead.
Yes. Good morning, everyone. This is Jan. Thank you for joining the call. I'm very excited to talk to you about our strong first half of the year and also later to answer your questions or respond to your comments.
Let me give you an introduction of the key highlights before Geraldine will go into more details of the results. First of all, I'm very excited. We have such a strong half year. You will find throughout the entire profit and loss statement, we improved basically every number. We have now the 4th consecutive quarter where we have an overproportionate growth of EBITDA compared to net sales, and we are in good shape to continue with this speed.
I think on the growth side, we talked in the outlook a little bit about the markets. I think we're also going to see solid demand in the second half of the year. We had a small hiccup in Q2 due to different things or events, but I will address that later maybe in the outlook when we talk more specifically about the regions. Other than that, I'm happy we have all 4 business segments contributed to the growth, but also to the over proportional profitability increase. We accelerated our bolt on acquisitions.
We did 6 bolt ons in the first half of the year compared to 4 in the entire year of last year. That was very good. You also see then with aggregates and ready mix, we improved now where we continue our catch up to best demonstrate practice in both of these business segments. And I think that's very promising also for the years to come. I think the company is now fully set up to the new strategy, to the new operating model.
You will find that we have finished our SG and A cost saving program, as promised in time and also as promised in magnitude with CHF 400,000,000 of saving, which you also will find in our profit and loss statement. We have restructured the business at the headquarter, successfully closed down all the big legacy offices we had in Paris, but also in Zurich. So the company is really set up now to run with our strategy 2022. I'm very excited to see the improvements we made also below operating profit, some fantastic measures initiatives by our finance people with Cheryl Dean on top to reduce the interest paid, to reduce the other costs, and she will talk about that shortly. Very successful.
You see our net profit more than doubled, earnings per share more than doubled. And also in the cash flow, we pushed the right buttons and the cash flow has now started to improve significantly and we hear more about that later. On the debt, we nearly reduced the debt by €5,000,000,000 not only through divesting Southeast Asia, but also through more cash flow, some smart refinancing, some hybrid bond, but also some scrip dividends. So altogether, we are well ahead of our plan to deleverage and strengthen the balance sheet. I think with this, let's hear more details from Geraldine on the details of the results, and then I'm happy to come back with the outlook.
Thank you, Jan. Good morning, ladies and gentlemen. So we will now look into more details at the financial results. Before we review the numbers, I would like to clarify that all the KPIs presented here are before IFRS 16. The detailed impacts are presented in appendix, and I'm, of course, happy to answer any questions you may have on this accounting topic.
So the H1 2019 operating performance is very solid, which is reflected in the strong metrics that you can see on these slides, with Slide number 9. The net sales increased by 3.5% like for like, mainly driven by price increase. The recurring EBITDA improved by 10.8 percent like for like on the half year. This true number results from a good pricing monitoring and from the full achievement of a EUR 400,000,000 SG and A cost saving program. The earnings per share before impairment and divestment amounted to CHF1.3 per share, up 108% compared to H1 2018.
This growth is reflecting a good improvement of the cost below recurring EBITDA. And the free cash flow, as you can see, stood at CHF262,000,000, a large increase by CHF 735,000,000 from a negative CHF 473,000,000 in H1 2018. If we now move on to our performance per quarter, for the 4th consecutive quarter, the profitability has increased. This is in line with the objectives that we have set in our strategy 2022 and results from a good cost monitoring. After an excellent Q1, Q2 was a quarter of more limited sales growth with soft volume trend.
But it is also a quarter marked by a good pricing trend, good operational efficiency as well as the full delivery of our SG and A cost saving program. All these elements have resulted in a strong over proportional EBITDA growth in Q2 at 7.1% like for like. Let's now look at our volumes. If we look at the volumes like for like, in H1, Cement volumes have increased by 0.7% as a result of an increase by 4.6% in Q1 and a decline by minus 2.3% in Q2. This decline is partly attributable to less working days in H1 2019 than in 2018.
On a regional basis, cement volumes have been pushed by Europe, which recorded 5.5% increase like for like with Q2 a bit lower than Q1 in countries such as France, Germany and Russia. North America has reached 2.9%. That's reflective of the U. S. Trend.
In Latin America, volumes declined by minus 4.2%, primarily due to continued infrastructure project delays in Mexico. Middle East Africa was slightly negative at minus 0.5% as a result of contrasted situations. We saw positive trends in Nigeria and Algeria, while Egypt suffered from domestic oversupply. Asia Pacific lost minus 2.7% on the back of a negative trend in the Philippines and general elections in India. The aggregate volumes went down by minus 2.4%, largely attributable to a weak Q2 in European countries.
And ready mix volumes went down by 2%, driven by several countries, mainly the U. S. If I now move on to our net sales. On H1, net sales have overall declined by minus 1.6 percent to reach CHF 13,000,000,000. There is a negative scope effect of minus 2.3 percent following the closing of Indonesia and Malaysia transactions, slightly offset by positive impact of the bolt on acquisitions.
The ForEx is negative at minus 2.8%. This is mainly due to a weaker Argentinian peso, weaker euro and Indian rupiah, however, partly offset by a stronger U. S. Dollar. The like for like rates of 3.5% benefited from a good price increase across all segments.
We will review the regional and business line trends in the coming minutes. Let's now look at our recurring EBITDA. At recurring EBITDA level, the scope impact is limited to minus CHF 19,000,000. Out of this minus CHF 19,000,000, Indonesia accounts for minus CHF 33,000,000, reflecting the strong seasonality of Indonesian results. ForEx accounts for almost minus 3% due to the currencies I already mentioned.
The like for like growth of 10.8% is driven by various effects. Firstly, a negative volume effect by minus CHF48 1,000,000 due to unfavorable regional mix. Secondly, price over cost, which is positive by CHF 315,000,000 includes strong savings in our SG and A that we will detail later for CHF 200,000,000 approximately. Beyond this, the average price increase across all segments has more than offset the cost inflation. If we now move on to our business segments, the EBITDA has grown over proportionally on all business segments.
And on a regional view, North America, as you can see, has been impacted by bad weather and Mississippi flooding, but the impact was mitigated by good cost monitoring. Latin America recorded a good sales growth due to price increase, but a decline in EBITDA due to soft market, especially Mexico. Europe trend remained good with high EBITDA growth of 17% like for like after an excellent Q1 and good Q2, driven by cost efficiency and a favorable pricing. Middle East Africa is still challenging on several markets, but the situation is improving in several countries. The region achieved a positive EBITDA growth in Q2 by +1.9 percent.
Asia Pac registered a record growth of 17.4 percent like for like in recurring EBITDA. Let's start with North America. After an excellent start of the year in Q1, performance in Q2 has been impacted by weather. However, we managed to grow cement and aggregates volumes in Q2 in the U. S, which also further progressed on cost savings, and we recorded a good price momentum in North America.
Our Canadian operation did very well during H1. And all in all, the region recorded growth of net sales, 2.8% like for like and growth of a recurring EBITDA by 1% in H1. The strong order book and further pricing traction should support improvement in the second half of the year. Latin America region had a mixed first half. After a resilient Q1, the performance in Q2 has been more impacted by further Cement volumes drop, notably in Mexico and Ecuador.
Nevertheless, our net sales were up 3.1% like for like, supported by effective price management. And our recurring EBITDA was down 4.1% like for like following the market decline in Mexico since presidential elections in July last year and the cancellation of major infrastructure projects. At the opposite, Brazil and Colombia experienced a positive market trend with favorable volumes and price effects. Let's go to Europe. We delivered strong results in H1 supported by good market dynamics across the region.
Net sales up 7.2% like for like, recurring EBITDA up 17.1% like for like. After an exceptionally good Q1 and early start of construction activities, cement demand normalized in Q2. Additionally, volumes have been impacted by fewer working days. Successful price increases continue to support revenue growth in all countries and segments. The over proportional growth of recurring EBITDA delivered both in Q2 and H1 was further driven by improved operational efficiency and positive price momentum.
This resulted in recurring EBITDA margin improvement in all segments in Europe. If we go to Middle East Africa, we see that after a difficult 2018 and Q1 2019, Middle East Africa region delivered positive recurring EBITDA growth in the Q2 of 1.9 percent like for like. This is a result of our restructuring initiative and turnaround plans across the region. Performance is also stabilizing in Algeria, while Nigeria continued to contribute positively to the results. Segment demand in most countries is flat or slightly positive.
Our net sales were slightly up like for like in H1. Recurring EBITDA was down around 7% like for like, still impacted by the challenging Q1. In general, the region has bottomed out, and we have more confidence in the stabilization of the performance by year end. Let's now turn to Asia Pac, which continues to show solid profitability growth with our net sales up 2.1% like for like and our recurring EBITDA up 17.4% like for like in H1. The net sales growth has been impacted by softer demand in the Philippines, Australia and lower volumes in India.
Cement volumes in India reached prior year level, but have been affected by national elections. Recurring EBITDA growth was driven by good price development and good cost control across the region. To be noted, the cost savings in India, the higher profitability in Australia and the strong growth in China on the back of positive pricing. Let's now follow-up on the execution of our €400,000,000 SG and A cost saving plan, where we have, as announced, completed the program end of Q1 and have now the full benefit of the savings. The EUR 400,000,000 saving per year, measured at 2017 currency exchange rate, will reduce the SG and A cost base from CHF 2,700,000,000 in 2017 to CHF2.3 billion on a run rate basis.
The plan has consisted in the downsizing of the group and regional headquarters as far as optimizing country organizations. As we completed the program in Q1 this year, the full year impact of €400,000,000 will be effective in 2020. As of now, we already see a visible impact of €391,000,000 ahead of the EUR 300,000,000 we announced for the full year 2019. However, we are expecting this positive effect to flatten a bit in H2 twenty nineteen. As you may remember, we already had a strong contribution in H2 twenty eighteen.
Let's now look at our full P and L. EPS is up 108%. Q4 IFRS 16 impairment and divestments, corresponding to an increase of CHF 409,000,000 of the net income group share. This increase has been driven by the recurring EBITDA increase by 7.2% that we already commented or CHF 178,000,000. In low recurring EBITDA, the depreciation and amortization have decreased by CHF 86,000,000 following divestments in Southeast Asia.
Restructuring, litigation and other costs have strongly decreased by CHF229 1,000,000 due to high restructuring costs incurred in 2018 on the implementation of the CHF 400,000,000 SG and A Saving Plan. Our net financial expenses have improved by CHF126 1,000,000 mainly due to lower interest as expected following all our refinancing operations. In H1 2018, the financial expenses were also impacted by a negative ForEx. Effective tax rate of 27% is based on our assumption for this year. It's down from the 29 point 5% last year in June and down from the 27.7% for the full year of 2018.
If I now look at the free cash flow generation. Before IFRS 16, the free cash flow for the half year amounts to a positive CHF262 1,000,000, which is an improvement of CHF 734,000,000. And this is the combination of several effects. Firstly, the recurring EBITDA growth by CHF 178,000,000 already commented. Secondly, the change in the net working capital has been CHF230,000,000 better than last year due in particular to strict inventory monitoring.
Thirdly, the improvement of the net financial expenses paid by CHF 128 million is consistent with the P and L reduction of costs. Finally, cash tax has been lower than H1 2018 by CHF 216,000,000 due to onetime payments in 2018, favorable timing effect, but also thanks to global effective tax rate improvement. CapEx are still monitored on a disciplined way and stand slightly above 2018, where they were especially low. Let's now turn to our net debt. The net debt as at end of June amounted to CHF 11,300,000,000.
This is before IFRS 16, a decrease by CHF 2,200,000,000 since December 31, 2018. I remind you that the hybrid bonds amounting to CHF 760,000,000 are excluded from the net debt as classified under equity. The main points to be noted are the impact of the divestments. Firstly, CHF 1,100,000,000 for Indonesia in 2019 after CHF 400,000,000 were already accounted in 2018. Secondly, CHF 0.66 billion for Malaysia and Singapore.
Philippines transaction is not closed yet. Therefore, the impact on net debt is limited to the classification as held for sale of the local external debt that you can see on the chart for CHF 57 1,000,000. The success of this credit dividend has generated a cash saving by CHF 0.9 billion compared to a 100% cash payment. With this, I'm ending my explanation of the financial results, and I'm handing over to Jan.
Thank you, Geraldine. Let's
have a
look at the outlook. We are quite positive looking to the second half of the year. We think we're going to have good cement demand. In North America, we had we were not happy with the volumes in quarter 2, which simply came from the fact that we ship a lot of our cement over the river system, mostly the Mississippi and we could half of the second quarter couldn't use the rivers due to flooding. So, we have quite a backlog in orders.
We were not able to deliver as much cement as was demanded by the customer. So, we expect here a good second half of the year with full capability to deliver. We have in Latin America. This is a softer market. We have mostly Mexico with the typical political cycle we have there.
So we have softer demand, which we also expect going into the second half of the year. However, the effect for the group will be limited. As you can see in the half year result, we this will not hold us back for the group. But the markets we don't expect to come back to growth in the second half of the year. I think this is something we see for 2020.
In Europe, we also were not fully happy with the volumes in quarter 2. You see this mainly by the calendar days, but also by the heat wave towards the end of the quarter, where many construction projects couldn't commence as expected. We have here also good order books, solid demand from our big markets, Germany, France, but also very high demands from Eastern Europe and from South Europe. It's the only exception in the UK, where we have a light softening of the demand. Nevertheless, for Europe, we expect good volumes for the second half of the year.
We have in Middle East, Africa, we made the turnaround here in the Q2. So as promised, we reached the bottom somewhere in March, April. And now already, we show some growth in the Q2, and we expect this to continue into the second half of the year. We have done our homework with a couple of turnaround situations. The markets are challenging, but we have done the homework and we expect a positive contribution for Middle East Africa already second half of the year.
In Asia Pacific, we had a good situation in the first half of the year. From India to China, we had a big contribution to our results. We also see that going into the second half, especially also on the pricing side. We believe we are on good run rates and we see that we have a very solid second half of the year in Asia Pacific. Overall, there is a lot of talk of cooling down of certain industry segments.
I think most prominently, the automotive sector had quite a bad first half of the year with, I think, a reduction in production units around 5%, and this is affecting a lot of Connected Industrial segments. We don't see this coming to the construction sector at this point. We see that the demand and the projects for infrastructure, but also for residential housing are very much intact. And also considering our order books, we don't see here a slowdown in the second half of the year. When you look at our targets, we are, of course, after we have had proven that our strategy works, we are on very good run rates in basically from the cost side, but also from the pricing side.
So, we look forward to also very healthy results in the second half of the year. And therefore, we can fully confirm our guidance, which we have given for the sales growth of 3% to 5% and an EBITDA growth of at least 5% for the full year. When you look at our deleveraging target, where we said we want to be at least at 2 times or less net debt to EBITDA, you can see that we are already middle of the year below €12,000,000,000 net debt. So I would say we are well ahead of this target and confident to confirm this also for the closing of the year. On the cash conversion, you have seen the improvements of more than $700,000,000 in the first half.
So we expect this also to continue into the second half and that we can show some strong improvement in our cash conversion. CapEx in bolt on acquisitions, we said less than CHF2 1,000,000,000 and also here we are well on track to keep our promises. I think we're pleased. I'm very happy to turn over to you and Geraldine and me are excited to have your questions and comments.
The first question comes from Elodie Rall, JPMorgan. Please go ahead.
Hi, good morning and thank you, Jan and Javeen. So I'll have two questions, if I may. The first one on guidance. So I see that you're comfortably confirming that. But why not changing that?
I mean, your guidance is for at least 5% of EBITDA like for like growth for this year. You've already done 10.8%. So the bottom end of your guidance implies 2% like for like growth for H2. So I know comps get harder, but your comments seems to be rather positive for H2. So is it just to be conservative that you're keeping that 5% plus?
And the second question is on cost inflation. I think you had said energy costs were up 5% in Q1. What did you see in Q2? And what's your view for H2? Most peers are expecting a bigger tailwind in H2 versus H1 from lower energy costs.
So I wanted to see what your view is on that specifically. Thank you.
Hey, good morning, Elodie, and thank you for your question. It's a tricky one. You asked me to put the guidance up and then you asked me to have more tailwind from energy. But I think at this time of the year, I think we give quite a precise guidance on the deleveraging on the profit. And I think we do this to our best knowledge.
As you pointed out, it's a minimum target on the plus 5% on the EBITDA. So we don't see now a reason to be more precise. I think it's also a little bit up to you how you see the dynamics going forward. As you mentioned, nevertheless, for 5%, we still have to make a positive EBITDA contribution into the second half of the year. So I think I'm very comfortable with the guidance that we've coined and don't want to make it more precise at this point.
For the energy, I'm you're right. We see a lowering in energy prices. I think if you look at the crude oil, the pet coke or the coal prices, I think the spot pricing is maybe at this point 20% or a little bit over below last year's level. So of course, I'm asking my people to have a stronger tailwind here from energy. I think on power energy, you see a little bit of different scenario.
Here, we have rather some price increases. But overall, personally, we target to have more tailwind in the second half of the year compared to the first half. I'm not sure, Geraldine, do you give any closer information on this?
No. I think we all know that effectively power is being quite strong now. We have 7% increase in power on the opposite. When we look at solid fuel, we are also confident that there will be flat at least flat for second half, let's say. So yes, that should help us.
Okay. Thanks.
The next question comes from Josep Pujol, Kepler Cheuvreux. Please go ahead.
So good morning. 2 for me also. The first one is on an eventual leakage that you would expect from the disposals. You have disclosed having sold €4,200,000,000 sorry, €4,900,000,000 of EV in Southeast Asia. Do you think that you will be able to repatriate the totality of these announced?
Well, maybe you want to disclose what is equity, what is debt? And my second question is on the SG and A cost reductions you have delivered. Is there
more to come?
And if yes, maybe not under, I would say, precise program. But would you have an order of magnitude or any comment on that side? Thank you.
Yes. So maybe to start with your questions on the disposal. So you're right, we have signed a silent closed for most of its contractions for NAV of close to €5,000,000,000 As you know, we've already closed and cashed in Indonesia, Malaysia and Singapore. So the remaining one is effectively the Philippines that we're expecting for this year and to happen. That's correct.
So
the money is coming in. And I think you can see from the debt reduction of almost €5,000,000,000 in the first half, and this is without the Philippines, the finance department does a very good job here to work with a very high discipline and with very good results. On the SG and A, we have completed our program. It was very important to do this in a fast manner, also the closing down of the offices to have the people fully focusing on the business and not on the restructuring. So that is well done.
I think now going forward, I think we just had a press release 2 weeks ago regarding the future of our factories. We see quite some potential with further digitalization of our whole supply chain and also with predictive maintenance. We see quite some potential for the future. And however, we don't have at the moment we are not in a position at the moment to give any numbers or any targets. We have started this program now and shared it in the press release with you, and this is something we focus now very strongly on.
Thank you. Sorry. On the first question, the question was more on eventual, I would say, losses, yes, or frictions that you could have in some areas where it is more difficult to repatriate money or to and you get an extra tax on the proceeds or the dividends or things like that? Is there something to be commented on that area? Or we can consider that the EUR EUR 4,900,000,000 are, okay, net for you?
So first of all, the EUR 4,900,000,000, 100 percent basis is easy. So that's you have to take or share percentage of ownership, and you'll get to something closer to €4,000,000,000 As I mentioned, we have successfully closed actually Indonesia, Malaysia and Singapore. And if you look in detail to our P and L, you will see that we had no tax leakage at all. So we're very proud of having repatriated the net amount corresponding to what we've announced.
Excellent. Thank you.
The next question comes from Arnaud Pinatele on Field Investment Research. Please go ahead.
Yes, good morning and thank you for taking my question. Just to understand something on your acquisition policy because you mentioned during the last call that you will focus much more on bolt on accelerating the number of bolt on acquisition and you had no large acquisition in the pipeline. We have seen reports in the press that a partial thing could be interest by the BASF chemical construction assets. Just wanted to understand if there is any change in your strategy regarding acquisitions. The second question would be on clarification.
You mentioned that you are more confident on the performance of the Middle East, Africa by the end. I think it's a comment from Geraldine. Does it mean that you could do better than your previous guidance, which was about a stable EBITDA contribution for 2019? And my last question will be on India. We have seen also that after the strong pricing price increase implemented by the industry in H1, but the government is now investigating about this price increase.
So is there a risk to see a change in the pricing momentum in the second half of the year in India according to you?
Yes. Thank you for your questions. I think on the acquisitions, we as you said, the bolt on acquisitions, one of the drivers of our growth strategy, We did 6 of those bolt ons in the first half of the year compared to 4 for the full 2018. So you see, we do our homework, we work our target list and this is showing results. We will continue to do that.
For the larger acquisitions, I think we said we will be very financially disciplined. So we will not like in the past overpay acquisitions with higher multiples or something like this. And that's something we will continue to do. So you will not see like everything you see now from us, from the refinancing, from the debt restructuring, also from the M and A, we are very value disciplined and we are going to make sure we don't make any mistakes or overpay anything. For your specific question regarding BASF, I have also heard that BASF is divesting the construction chemicals.
I think it's a very credible, very sound business. But at this point, I have no further information or don't cannot provide any further comment on this. For Middle East, Africa, to your question, if I understand correctly, we still guide that we believe we're going to have a stable result for 2019. So including the decline we saw in the Q1, we believe that we're going to have EBITDA on the same level as last year or we can say at least the same level. That's our outlook.
We are quite positive. Our people have done a super job in the bigger markets of Algeria, of Nigeria, but also the smaller markets. They have really taken good care of the cost and also of the commercial initiatives. On India, I think I'm not worried about India for this year. We said we were not happy with the margins in the past 2 years and the cost inflation was bigger than the price inflation.
So I think that most players in the industry have done the right thing and adjusted the pricing to the cost situation, which was especially negatively influenced by the currency and the imported energies. So I think it's a necessary step. I don't think we will have there's anything going against it. And we're going to see a good second half and a good 2020 from India. Thank you very much.
The next question comes from Tobias Ryman, Morgan Stanley. Please go ahead.
Hi, Geraldine and Jan, thanks for taking the question and congratulations to the strong results. 3 from my side, if I may. Firstly, on LATAM, clearly, the situation there remained difficult in the second quarter, which I believe was mainly driven by Mexico. Can you give us a bit of an outlook what to expect there in the second half? I guess, you have firstly a bit of an easier comp, but do you expect the situation to improve a little bit before?
So that's the first one. Secondly, I guess, this one is for Geraldine on the finance cost. I think we were all quite happy to see the progress there. And I personally believe we can continue to see the decline there given the pace of deleveraging and also the focus on cheaper refinancing. Can you give us a bit of an outlook how far you think finance costs can still decline from here?
And then the final one on the cash conversion was very strong in the first half. And I think the improvement you talked about it before was driven sort of half by working capital and the other half by combination of lower financing costs, lower tax and stronger EBITDA as well. Can you give us a bit of an outlook how sustainable this is? How we should think about the cash conversion going forward? For instance, will there be a catch up in working capital?
Thank you very much.
Thank you for the questions. I think on finance and cash conversion, we are just seeing the start of a new level. And I'm happy that Geraldine, I think, will go a bit into the details on these questions. On Latin America, long term, I'm always positive. Latin America has above average margins.
And what you have to always realize is that you have a volatility in Latin America, not only by the economy, also by the political situation and by the currencies. So we try to prepare ourselves for these 3 cycles, which can have quite microcycles depending on the elections, depending on various things. So Latin America, we have to be always prepared. And you see from the first half year that we had a volume decline of about 4%, but the profit decline was, let's say, only 8%. You see that our people are able to kind of mitigate the volume decline in a good fashion by cost and by pricing.
And this is what we're going to do going forward. Now for the second half of the year, we don't count for any recovery in Latin America. We believe that Mexico will bottom out in the second half of the year, but will not grow again. Brazil will have some recovery. But overall, we believe in our plans, we see the same second half as the first half for Latin America.
So we don't count on we don't need in our numbers a recovery. But we are quite positive for 2020 on Latin America that we go out of into a better cycle.
Okay. If I carry on with the financing expenses. So yes, you will certainly remember that I guided 100,000,000 improvement for the full year in March, last March. So we see here an improvement of €126,000,000 which is even better for 6 months. So that's great.
But as I mentioned, the improvement is also due to a negative product we had last year. So you can also note that for the full year, we will incur coupons on our hybrids that are actually recorded as dividends. But on the free cash flow, that will be fully recorded as a finance expense paid. So all in all, if I have to guide for the full year of financing expenses on the P and L, I would stick between CHF 130,000,000 to CHF 140,000,000. With the cash about the cash conversion and the improvement we made, I think, well, you're right.
We've done a lot of improvements. And on the working capital, this is the beginning. So we will continue and maintain this. Also, please bear in mind that with this restructuring, you have a timing effect. So you have some spending this year.
But I think the improvement is going to continue. As Jan said, we are now on another level, and we are going to continue to improve. And we maintain the objective of the 2022, which is to be at 40%.
That's fair to you. Thank you very much.
The next question comes from Arnaud Lehmann, Bank of America. Please go ahead.
Thank you. Good morning, Geraldine and Jan. Maybe 2.5 questions, if I may. The first one, just a follow-up on working capital, I guess, for us from the outside is a metric where we have slightly less visibility on how much improvement you can achieve. So are there any way to give us, let's say, some KPIs in terms of number of days for inventories, for receivables, where they are today, where they could go tomorrow
to assess
the potential improvement in working capital for in the medium term? My second question is around disposals. You've been very busy, obviously, in Asia Pacific this year. There were, let's say, press discussion in the past about potential trimming of assets of disposals in Middle East Africa. Where do you stand on this?
And lastly, on CO2 moving up in Europe, How does it impact your trading strategy? We heard yesterday from your competitor, we're starting to reduce some exports out of the Nordics. I believe you are historically exporting cement out of Greece. So do higher CO2 price has an influence on your export strategy outside of Europe? Thanks.
Yes, good morning and thank you for your question. I maybe start with the CO2. It's clear when you have a CO2 price above €20 or something exporting from Europe into non CO2 taxed countries is not a good idea. So we also, of course, have already done since the last 12 months, we have already corrected here some of the trading flows. This is not material for us.
This is something where you have to optimize the plant level, the European footprint level. We have 35 cement plants into that European CO2 trading scheme, and we have a precise road map and action plan on how to further reduce the CO2 footprint. We have for this year enough CO2 certificates, But of course, with the prices now, the CO2 prices on this level, we are very, how to say, encouraged to save as much as possible to benefit from the CO2 price, but also to meet the new targets, which will be in place in 2021. I think on the net working capital, maybe Geraldine has a bit more detail. From my side, just for me, it's important the overall target.
So we promised last year that we will go from 28% cash conversion on the EBITDA to at least 40% over the years to come and on a sustainable level. And we have, of course, a precise calculation, action plan, how to achieve this. You will obviously see, I think, a big improvement this year from us. We did not achieve the 40% this year, but we're going to make a step. And it's clear that we have an overall plan how to do it.
And net working capital, we have quite some potential to cover. Geraldine, do you want to
add more?
Yes, I can just add a bit of color on the performance of this H1 working capital. We gained in terms of numbers of days. In the inventory, we gained 2 days less receivables June to June, so comparing same period. And actually, we are getting better on receivables as well. So it's a lot of efforts, and the organization is really moving towards it.
It's completely mobilized to increase and improve this working capital?
Your question on disposals, let me say we are very obviously, we are very happy to have such, how to say, limited scope exit in Southeast Asia with mainly the 3 countries, Indonesia, Malaysia, Philippines. And to exit for such evaluation, I think we are very happy. And you see now from our balance sheet that we are now in a very good position to have a full freedom of action and have delivered the strength and balance sheet what we promised. At this point, we have no further information to share on potential disposals. Just fair to say that we only dispose 3 countries.
Sometimes I don't know who gives the information people talk about. We are selling, selling. It's actually not the case. You made a very focused approach to achieve the maximum impact with, let's say, the least assets to give in.
That's great. Thank you very much.
The next question comes from Robert Gardiner, Davy. Please go ahead.
Good morning. Two quick ones for me. 1, I just wonder if you could I just wonder how you think about the profit trend like for like in Asia Pacific in the second half of the year, just as the comparison base in China becomes a little bit more challenging and given updated commentary around Australia, which appears to be softening? And one quick one for Geraldine then on the restructuring and litigation costs, dollars 71,000,000 in H1. Just wondering where you see that for the full year.
Thank you. Thank you. I think Asia Pacific, Geraldine. And so I think you have a good observation that obviously, I mean, China has been very beneficial for us. We also did a great job there.
We went into deal cycle. We went into aggregates. Have some of the most efficient plants in China. And together with the strong pricing increase, we have achieved very good results, still contributing a lot to the half year result. We're also going to have a positive contribution in the second half from China.
As you well observed, it will be probably not in the same high magnitude as maybe the last 18 months, but it will be a positive one. In Australia, the market is maybe going a little bit soft in some of the segments. Nevertheless, we have quite some potential on efficiency. So we see a contribution from Pacific also in the second half. And then to round Asia up, we see a strong contribution from India into our Asia Pacific results for the second half, bigger than for the first half.
And to answer your question on the restructuring and litigation and others line that effectively amounts to CHF 71,000,000 for this H1 compared to CHF300,000,000 last year. You're right, mainly for this H1 coming from the restructuring. So that was the end of the 400 SG and A program. We said it's completed end of Q1. So you're right.
We should not expect a big amount for H2. I would guide around €100,000,000 actually for the full year. So having in mind that the €30,000,000 that I'm talking about that could potentially come would be related to the divestments that we have made in order to reorganize our group following these divestments. But we don't see the restructuring going above €100,000,000 for the full year. Litigation, of course, we don't guide on that.
So all in all, if you're very conservative, you could put €200,000,000 But there's no specific guidance to do on litigation. So restructuring cost, no more than €100,000,000
Okay, very clear. Thank you.
The next question comes from Gregor Kuglitsch, UBS. Please go ahead.
Hi, good morning. I have three questions. So the first one is just sort of mid term strategy. So you disposed off Southeast Asia Cement. I think you've talked before about more downstream product and solutions.
So I guess the question is maybe not so much on this year, but perhaps over the next 3, 4 or 5 years, how you see the mix of the business shifting? And to achieve that, do you think you need to do a larger transaction? Obviously, BASF is being in the press, but I suspect there's many other things you could do. It's not necessarily constrained to that one. The second question is just on coming back to CO2.
And can you just remind us your position as you go into Phase 4 in 2021? And how you see the impact on the industry? I appreciate it's a little bit difficult to tell given the absence of specific tariffs or import tariffs, I guess, like import carbon import tax. But if you could just give us your view how that would impact the European cement industry? And then one quick one on cash.
So I think the cash flow in the first half was indeed quite impressive. You mentioned a few timing points. If you kind of have to summarize of the €700,000,000 improvement, how much you think is kind of timing and how much is sort of underlying? And perhaps you've done the exercise on things like working cap restructuring, financial expense, whatever it is or tax, just so we can get a feel for the underlying improvement that we can extrapolate? Thank you.
Thank you for the question. Yes, I think mid long term, I think our strategy, we have just started the strategy March last year. I'm happy we are it's well now implemented in the company. It was consisting of various aspects from basically a new operating model, focus more on the countries again, taking management layers out. We have done a lot of things.
And we also discovered that we have a lot of potential to capture beyond cement. So you see our ways to catch up the performance in aggregates and ready mixed concrete. And this is something which excites me very much. We have improved last year. You see now in the half year, we will see another strong improvement in this year.
And I think this is something which will continue to excite us to become more of a concrete company, more of an aggregate company, and that's something very exciting that will continue. Going forward, we have also our 4th segment, Solutions and Products, we also will grow that segment. So if you put it all together, it's clear we have sold Southeast Asia, which is an emerging market, cement play, and we do the bolt on acquisitions downstream in the mature market. So you see a little bit where we are going. However, consider that we are fully financially disciplined.
So on the one hand, we have a lot of potential to significantly improve the operations as it is today. And then secondly, we want to move more downstream and maybe a bit more into mature markets. And this you will also see from us, but not for any price. We will do that step by step, fully financially disciplined and we will continue like this. On the CO2, so again, it's a big for the industry, I think it's like everything, it's a race.
We have to run a bit faster than the competition and we will be successful. I think whatever they decide going forward with CO2 or the fragmentation or regulation or something, I think basically it will be good for the industry. It will be especially good for the pricing. It will be good for new product introduction. I'm a little bit excited to go into that phase.
If you look a little bit more short term, we have in the new scheme in 2021, we want we have a plan to reduce our CO2 footprint by around 15%. And as I mentioned before, we have a strong road map and action plan how to get there. And this is very exciting because it will create a lot of value for the company and going forward. Geraldine, do you want to excite us with the cash?
Yes. We had a strong cash flow free cash flow generation from the business that you've noted. And if we look at what is a bit more timing, we could maybe round it between CHF 150,000,000 to CHF 200,000,000 more on CHF 150,000,000. That is timing or effects that we're not ready to rate in H2, coming from the tax, especially, and the financing expenses.
Got it. Thank you very much.
The next question comes from Sven Eelfeld, ODDO. Please go ahead.
Yes, thanks. Good morning. 2 for me. In the U. S, Oregon lawmakers are working on a cap on trade program that would result in charging companies for CO2 emission?
I know you are not in Oregon, but to what extent do you believe other state could follow and pass such a law? And do you believe it's a threat for the industry on LafargeHolcim? And the second one, just could we have a guidance for ForEx at the current spot rate on a full year basis?
On Oregon, I mean, we see now I think we have the strictest Tier 2 regulation we have as it stands in Europe. We have a bit of regulation in Canada. And actually, let's not forget that China has really cleaned up the cement industry and has taken out a lot of no efficient production lines very successfully. And in both cases, what we experience usually is that we get an improvement in pricing and we get an improvement for the industry leader. This happened in Canada.
This happened in China. So I'm not really worried about regulation. We just need to work fast enough to adapt the company to the relation, and we will see rather a positive effect. I say that for Europe, but also if Oregon goes with a CO2 tax. I think it's not a bad thing for the industry.
If you do this right, you have increasing prices and you can have much more value added and differentiated products in cement and in concrete going forward.
And on the ForEx that you're asking, we don't have a crystal ball about ForEx. So
we don't know and
we are always reluctant to guide on that. But if we were continuing with the same trend, we would say around minus €200,000,000 minus €150,000,000 to 1 minus €200,000,000 around these territories.
Very clear. Thank you very much.
The next question comes from Paul Roger, Exane BNP Paribas. Please go ahead.
Hi, good morning everyone. Congratulations also on the results. So just a few questions. So firstly on the U. S, has there been any change in your pricing strategy this year?
And what magnitude of increases do you expect in Aggregates and Cement? And then also just coming back to Asia, obviously, you pre report China, ACC and Ambuja. If we take those out, it looks like the rest of it has had a significant jump and presumably that is Australia. So can you maybe say a bit more about what you're doing in Australia? And when we think about the full year and the Asian margin, that increased by about 300 basis points in the first half excluding JVs.
Is it possible to do something similar in the second half as well? Thank you.
All right. Let me start with Asia. I'm not sure on the because we are reporting maybe Geraldine can answer that in more detail with the margin jump. I think as I reported before, we have in Australia, we have quite some potential. We were not happy with the margins in Australia.
We have a very solid business there focusing on ready mixed concrete, on aggregates, but also on products. Solutions and products is a big segment. And we have some restructuring, which we initiated last year. And we see now the positive results. In Australia.
We also had the leadership change. And so we expect Australia to also have a good contribution to our operating profit growth in the second half of the year and going forward, even so the market seems to be a little bit softer. On China, India, I think I commented before, we had of course, we had a super improvement in China for various reasons that will of course, if the last year comparison getting tougher, that will be on a smaller level for the second half of the year. But we believe that India will kick in to close that gap. And you can you want to comment on the margin with 300,000,000 is that coming from the
Yes. I think you said it, that we had a very strong profitability increase in Australia, as you noted, Paul, and this is driven by the turnaround of the solution and product business. We've truly achieved, as Jan mentioned, and the rest of Asia is doing extremely well.
On your question for the U. S, we for the volumes, we are positive. Yes, a bit sorry about the flooding and the disruption our supply chain in Q2. Nevertheless, the market is intact and we have good order books. On the pricing, we see much better pricing this year in the U.
S. Compared to last year. I don't know, Kjali, did you give a guidance on the pricing?
Not really, but that was more than offsetting the inflation of U3. That's what we can say.
Yes. The reason I was asking that is, I mean, one of your competitors yesterday was talking about $1.50 on cement, which was probably a little bit light compared to what we expected. And there were certain issues specifically in the Northeast, which I appreciate you are there as well and then you have the Mississippi. Is that completely do you see something completely different from that or
or that's not part?
I don't
know who does. I think $150 from the low side. I think when I talk to the people, I think we have a discussion usually about $3 to $5 per ton. And in the Northeast, it's a little bit softer for reasons known. However, I think it's a bit exaggerated, the Northeast, because the market is good and we have a little bit of extra capacity, which went on the market, but I think that's developed.
So overall, the U. S. Should be strong and you should see it when you look at our volumes and the sales in U. S. Dollar, I think you already for the first half, you will see some pricing.
Right. Thank you.
The next question comes from John Fraser Andrews, HSBC. Please go ahead.
Thank you and good morning. 2 for me, please. First one in the margins in Aggregates and Concrete, the improvement. I'm assuming that the Aggregates increased quite slightly in the first half was held back by the volume decline. So absent that, do you think after the big increase last year that perhaps by the end of this year or even into next year, you might be where you want to be on aggregate margin.
Concrete margin looks have made a good progress. So perhaps if you could give a time scale on that as well. And then the second question, Jan, you mentioned in the Middle East, Africa, stabilization by the year end. I'm assuming then that in Q3, there's still possibly some negative impact in Algeria and Egypt. And perhaps you could just elaborate on how that plays out?
Thank you.
Okay. Thank you. Maybe I start with the Middle East Africa. So we already showed a positive result in the Q2 for Middle East Africa, and we expect this to continue for Q3 and Q4. So we don't believe that the results will go backwards in Q3.
We think we have bottomed out, done the homework. Algeria has nicely stabilized. Nigeria is running. All the smaller countries are in good shape. Egypt is, to be honest, the comparison base is so low.
There's not much to decline from where we are. So Middle East, Africa, we are in good shape and we are very confident for the second half and for the full year guidance we gave. When we look at the aggregates, I think your comment is clear that we were missing a bit the volumes for a few reasons. That's a pity. But nevertheless, even with this, we could improve the margins further.
When we started to launch the program in 2017 to catch up the margins, we were at 19% percent EBITDA margins in aggregates. And then we improved to above 21% in 2018. And where's the end to this? So if you benchmark and we have looked at the business, there's no structural reason why I should have a lower margin than any other major competitor. So now you can make the math Does that bring me to 25% EBITDA margin or maybe to 30%, but it has to be in that range.
So I think you will see from us this year, hopefully, better volumes in the second half so that we can make another 200 bps jump for the margins and then also the year to come. So I think we have just started to recover or to close the gap to best performance in aggregates. Same for ready mix, of course. Ready mixed on the one hand, it's very beautiful. It's very low capital intensity.
We have already with the improved performance in some of the top countries, we have already a return on invested capital, which is 2,040, in some cases, 100%. So we have a very confident we don't need a double digit EBITDA margin to be very capital friendly in ready mix. And you will see also here the next improvements coming. Thank you.
The next question comes from Bernd Fromren, Vontobel. Please go ahead.
Good morning, Geraldine. Good morning, Jan. One question left, please. You completed your SG and A cost savings program ahead of schedule. Is there now more to come?
Do you expect to launch another cost savings program? Or is it now rather the right time to reinvest again in growth? Thank you. Yes. Thank you, Bernd, for the question.
I think it's important when you make restructuring to make it fast and to make it in one shot. So with SG and A, we have exactly done that. We were cutting the cost by more than 20%. And this in a very, very short period of time, you followed all the office closing. So on corporate, we did quite a reset.
But also in the countries, we ask for quite a lot. But now we run this very disciplined. So we're not going to rehire now. We run it very disciplined, but we don't make the next exercise for SG and A. We want to focus on growing the business and that's key.
On the cost side, I think we have potential to further improve the cost in the factories, especially through digitalization, through predictive maintenance. I think we have quite a potential to gain here from further cost improvements. But SG and A is done for the moment, yes. Okay, excellent. Thank you, Jan.
The next question comes from Yassine Tuhari on Field Investment. Please go ahead.
Good morning, gentlemen. Just a quick question on your capital allocation strategy. Could you give us a bit more color on what you see in terms of precast concrete, ready concrete, chemical additives or value added products? How would you like to the group to be positioned in the next 5 years?
Capital allocation, you said?
Yes. Well, the capital allocation, I think, for the moment, it's been clear that we're deleveraging. That was the big priority that we have achieved and even overachieved, if I may say. So we will turn now to continue our strategy 2022, which comprises of growth. So as we said, we'll continue the bolt on acquisitions and continue to develop our business.
And is there any specific products that you would be looking at? You mentioned you would make a little bit more effort in the vertical integration in developed market. Is it a fair assumption that this might be the area where you would be looking to develop the group?
Yes. I think we talked about this before a little bit. I think when you see our actions, we do now 6 fold on acquisitions in the first half. They are all in mature markets. They are all focused on aggregates and ready mix, but also on solutions and products.
And on the same side, we divested Southeast Asia, which is an emerging market and a cement market. So you see a bit where the group is directing towards. Nevertheless, also in 10 years, it will be a major cement player. We shouldn't be wrong about this. But this is, at the moment, where we steer the company towards, but in small steps and also to say again, very financially disciplined.
We buy low, we sell high.
The last question comes from Tobias Werner, MainFirst. Please go ahead.
Yes. Good morning, everybody. Two questions from my side. Number 1, just to get a little bit of a better sense on solutions and products. And more specifically, the question there is building chemicals.
Do you see this as a fit? And if so, why? And then the second question is relating to your minority structures. You had 15 listed subsidiaries, you now have 12. As a matter of fact, a lot of the cash generated fits in some of them, in particular in Asia.
What are you going to do about capturing and controlling that cash fully in the future? You've done a good move with Lafarge Africa. Could we expect further such moves in the future? Thank you. Yes.
I think let me take the question on solutions and products. I mean, again, we are excited to be closer to the customer to develop the next generation of building materials, which will be certainly will be the next generation of concrete products, concrete mixes. We already have a business. Partly, we have some water sales in some countries. So we are active in the field, which is, let's say, close to a construction chemical company.
It doesn't mean now we are buying the BSS business. That just means this is all segments where we are active and which are obviously attractive segments of the market. Other than this, we have no new information or no really comment to make at this point.
And on your question about the listed subsidiaries, you're right. The group is fairly complex with these listed subsidiaries. So we have undertaken to simplify it. And you've noted that we've already simplified it quite a lot. We're not talking about each dividend anyhow, so that's not really a big matter.
We are restructuring all, you've seen it and noted it rightfully, for La Parge Africa. Of course, there's more to come. This is a permanent job that we're doing to simplify, to make sure we get the value accretion each time we are looking at the capital structure of 1 of our subsidiaries. So that's permanent job, and there's more to come.
There's no more question at this point. I'd like to thank you for attending the call, and I wish you a very good analysis and writing. And I very much look forward to meet you in person in the very near future. Thank you very much, and goodbye.
Ladies and gentlemen, the