Ladies and gentlemen, good morning. Welcome to the LafargeHolcings Q1 2018 Results Conference Call. I'm Sherry, the conference call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Alessandra Giorlami, Head of IR. Please go ahead.
Good morning, everyone, and thank you for joining the call this morning for our Q1 training updates. I'm Alessandra Giorani, Head of IR and joined by our group CEO, Jan Janish and our group CFO, Jarvin Pico. I would like to remind you that this is a 30 minute call, so I will kindly ask you to limit yourself to more than 1 person per person. And I will now hand over to Jan Menus.
Good morning, everyone, and welcome to our early call this morning. Very happy we have some time this morning to discuss a bit more information on the Q1 results. And I will try the next 5 to 10 minutes to give you a bit more information on our reporting this morning, and then we have time for your questions. I think we had a very good start to the year with the like for like sales up 3% despite the very strong impact of this very harsh winter conditions, especially in Europe and North America, which also then lead it to a missing operating profit from these regions. And therefore, our EBITDA is down by 7.7 percent.
Nevertheless, we are very confident with the demand we see in the markets, with the projects in construction, with our order books, we are very confident that 2018 will be a good year for us and we can fully confirm our targets for 2018. Let's look at the markets a little bit. 1st, North America. Again, we had for quite some time, the winter was much milder. We had very, very cold weather and snowstorms where you cannot really use concrete or cement on the construction sites.
And we see in the results that our sales are down minus 3% in North America and this in a market which will see a significant demand increase for the full year. The profit is positive, but of course, on a very, very low Q1 basis. We have a similar situation in Europe, where we are sales are down almost 2% due to the very strong wind in February and in March. And also here now, we are missing the EBITDA growth from this region. We are down 28% in EBITDA due to this weather impact.
Also, we did some extra maintenance in some key markets to prepare for the upcoming high season. Besides this, Europe is in a good position. We will see the best building material market since the financial crisis. We will have maybe one of the most satisfying growth will come from France. But also Germany, Eastern Europe, Spain and Italy are in a very good condition.
And we expect that the UK market will be more resilient in demand than most people anticipate. We have a good situation left in America, where we basically continued positive trends of 2017 with both top and bottom line growth, mostly driven by Mexico, Brazil and Argentina. We are here very confident also for the full year that this will be a strong growth driver for our 2018 results. In Middle East, this is a market where we have some headwinds in several markets. This, of course, is, 1st of all, Algeria, where, as anticipated to be slowing market demand, together with the increase in cement capacities leading to an unfavorable market environment.
We have our action plan in place. However, this will be a main challenge for the region in 2018. And also, other markets in Middle East, Africa are with some challenges, with some lazy demand here, especially in Q1. So you see overall, we have over 8% sales decline and also EBITDA decline in Middle East, Africa. In Asia Pacific, a good situation, especially in India and China.
We are very satisfied. Both markets will still increase in top and bottom line. We feel that here we are well prepared for the full year also regarding the pricing environment. And here, Southeast Asia remains a challenge for the year. We have our pricing challenges and demand challenges in Malaysia, Indonesia, Philippines should grow, but we'll be challenged with the pricing.
So again, overall, we are encouraged by the start of the year. Our full year expectations are confirmed, and we will achieve our targets, which we have set for the full year, which will be a net sales growth of 3% to 5% and an increase in EBITDA of at least 5%. CapEx will stay below €2,000,000,000 And then one of the main focus points for us is the execution of strategy 2022, where we have started the full speed to implement a better growth strategy for the company for all our core segments, cement, aggregates, Ready Mix Concrete and the new segment, Solutions and Products. We are on track for our $400,000,000 cost savings program And then also for the finance discipline, we have new measurements and new performance management in place. I think with this overview, I'm very happy to go into the questions.
I think for fairness reasons, maybe you limit yourself to one question so everyone has the opportunity to ask a question. Thank you.
We will now begin the question and answer session. The first question is from Enodia Ro, JPMorgan. Please go ahead.
Hi, good morning. I'll ask on divestment then, if I may, for the first question. It says on the presentation that you have signed the divestment. Is that correct? And if you did, then would you be able to give us a bit more color on what regions and markets and the expected impact on 2018 revenue and EBITDA?
Thank you very much.
Yes. Thank you for the question. We have for the divestments timing, so we have started the process. We are currently in 54 countries with cement plants, and these are too many to be supported by resources but also by CapEx. So we decided that we're going to trim our portfolio, and we will divest for at least €2,000,000,000 We have nothing signed yet.
We have promised to sign by the Q1 2019 in the magnitude of at least €2,000,000,000 So nothing to report today. But hopefully, in the coming months, we will see our first actions.
Okay. Thanks.
Next question is from Naved Peugeot, Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Could you give us more detail on Middle East and Africa? You mentioned that other than Algeria, there were other countries where there were troubles. Could you tell us which of those countries and the nature of the, let's say, problems or the challenges, please?
Yes, yes. Thank you. So our main really key market is Algeria, which has been traditionally for us a very beneficial market. Here, we have a much lower market demand at the moment. And we are at the same time, electric is coming up and core capacity of cement.
The other market, we have some positive momentum in Egypt. So on the bright side, our other key markets, which are maybe Kenya, Iraq, Nigeria, Lebanon, they are also not didn't see a great Q1. We expect them to recover for the remaining of the year, but also here, there was no tailwind. So Middle East, Africa, as you can see from the numbers, was quite a challenge in Q1 and will be our main challenge for the full year.
Next question is from Robert Cardini from Davy.
Just one quick one for me. Just I was wondering if you could give us a sense of cost inflation in the business in 2018 and whether you expect to recover that through pricing. And just again, if you could give us some indication on pricing in the Q1 and for the year going forward.
Yes, yes, yes. And as you can see also from the oil price, energy cost is certainly something we have a strong mitigation actions here. We have, in the Q1, I would say, energy cost inflation, not in the same magnitude as last year, but also significantly. And we have our pricing in place. You can see a little bit, we will have most price increases will start from April onwards.
And we have positives to pull through, especially the mature markets are key for us to make a price increase. So you will see that in the U. S, Germany, in France, we are very positive that we are on track here for mitigating the cost increase.
Thanks very much.
Next question is from Nabil Ahmed from Barclays. Please go ahead.
Yes, good morning. Thanks for taking my question. I actually got one on the new capacity in Canada from a competitor. I was wondering if this had an impact at all on pricing in Canada and maybe north of the U. S?
And whether if that's not the case yet, whether you would expect that to materialize in 2018?
Yes. Thanks for the question. They have started the operation quite a while ago, and we don't see the impact really. I mean, the U. S, it's a very big market, and we'll have some significant growth this year in cement.
So actually, I don't expect any negative thing from that McEwen's plant in the East of Canada. I think even if they are able to ramp up the factory to more capacity, the market will absorb it.
Okay. Thank you.
Next question is from Philippe Rosenberg from Bernstein. Please go ahead.
Yes, good morning everyone. Just one quick question. Can you give us a little bit the progress you have made so far on the SG and A cost savings and also some of your turning around of underperforming activities in the other businesses? And also when we might actually get some numbers on those in order to track the progress?
All right. Yes. Thank you, Phil. For the €400,000,000, again, I can confirm we will complete the program this year. You have seen in March the announcement that we are closing down the sites in Miami and Singapore.
This is fully on track. They will be fully closed in June. We are reviewing other areas of the company and nothing no big announcement planned for today. But the €400,000,000 we will deliver down to the profit and loss. I think on the performance management in general, it was very important we have this new strategy of simplification and performance.
And this capital. And here, we have implemented a simple system for all our managers. We have appointed now profit and loss leaders not only for countries like in the past but also for our segments in the countries. So we have, for all key markets, profit and loss leaders for concrete, for ready mixed concrete, for aggregates and if it's significant, for solutions and products. This has all been implemented beginning of the year.
It was very important to me that we have a start, early start with this. We have positive incentive system are fully aligned. So my own incentive system on EBITDA, on free cash flow, we have the same targets for all the 200 senior leaders globally.
Thank you.
Next question is from Gregor Kuglitsch from UBS. Please go ahead.
Hi, good morning. I want to understand a little bit more the sort of ramp throughout the year because obviously you're starting the year down. I understand there's obviously weather in Europe and the U. S. But obviously, you're obviously starting a year behind now from an EBITDA perspective.
I do want to understand how you see your minimum 5% building up. Is it kind of an accelerating curve? Is that then a function of cost savings or comparators? I just want to understand what gives you the confidence that you'll be able to hit that minimum 5% organic EBITDA growth.
Yes. Thank you. I think our key contributors to this 5% growth is North America and Europe. And this is where we lead the 2 regions. Hit by the weather, you see the result of minus 3% in North America and minus 2% in Europe.
We cannot really have a 5% EBITDA growth. So you will see this coming now from Q2 onwards that we will see a very positive contribution from these two regions.
Okay. Thank you very much.
Next question is from Bernd Pommern from Torbjorn. Please go ahead.
Yes, good morning. One question regarding the operational leverage in Europe, just to understand it a little bit better. Obviously, sales held up reasonably well, while the EBITDA margin came down significantly. Can you quantify the extra maintenance costs, which probably resulted in this EBITDA margin drop?
Bernd, I cannot give the details, but we have checked it. We are confident. We are basically in France and Germany, 2 of the main markets in Europe. We took some extra maintenance for some of the key factories, also to be prepared for the growing volume. So we are really in line.
If you look at the EBITDA, Q1 in Europe, it's such a low level, the weakest quarter by far. So this should not be now extrapolated or something. We are here on track, and we will see already in Q2 much different figures.
Next question is from Arnaud Lehmann, Bank of America. Please go ahead.
Thank you. Good morning. My question is just if you could maybe clarify on your reporting. Obviously, it's relatively light today. You just published sales and EBITDA by region.
So is that that you're going to only report a full set of results twice a year? And I guess on this basis, could you still give us an update on trend in cash flow and debt? I appreciate this is a very small quarter.
I think I pass this to Geraldine.
Yes, good morning. Yes, Geraldine, I'll definitely give a full set of members twice a year, including especially to cash flow, debt and balance sheet items. That is our intention, to give it half year and full year. We don't intend to give any other information on a quarterly basis.
Okay. Thank you.
Next question from Paul Roger from Exane. Please go ahead.
Hi. Good morning, everybody.
Are there any signs of stabilization in the different countries in Southeast Asia? And maybe you can comment a bit on the outlook for the key countries in that region. Thank you.
Yes. We are mainly in markets, Philippines, Malaysia, Indonesia. I think in Indonesia, we have seen the bottom. I mean, the bottom is still making money. So but we will see some positive pricing in Indonesia and also volume growth in Indonesia.
We expect the same in the Philippines. And for Malaysia, it's a bit different because I think the market demand will probably not increase in 2018 and the prices are on a lower level. So while I'm confident for Indonesia and Philippines, maybe Malaysia, we will go through the bottom during 2018. Got it. Thank you.
Next question is from William Jones, Redburn. Please go ahead.
Hi, good morning. It's actually it's John Messenger, sorry, Redburn. Just one question, Jan, if I could. Obviously, the one country where things are moving quite fast is Argentina. Have your guys on the ground fed back any anything at this stage in terms of impacts?
Or how is the group thinking of Argentina now in the year? And in a broad term, am I right in thinking it's just around about 10% of loss in America is EBITDA that comes from Argentina?
Well, we're very happy to have a strong position in Argentina with 2 integrated cement plants. We see a full continuation of the very positive 2017. We are growing also in the Q1 at top and bottom line. So Argentina will be very strong and we're very positive about the market development.
Thank you.
Next question is from Alan Gabriela, Morgan Stanley. Please go ahead.
Yes, good morning gentlemen. I have one question from my side on your comments on Middle East and Africa. Is it fair to interpret what you commented there in terms of EBITDA progression for the year that we have seen the low in Q1? And if yes, what would be the moving parts for the improvement for the rest of the year for that division?
Yes. I think Middle East, Africa, we have of course, we have foreseen the challenges in Algeria and a few other markets. But it's in Q1, it was nevertheless a bit on the lower side of my expectations. So I think Algeria will remain on this level for the full year. We shouldn't have a shouldn't have the hope of turnaround.
I think we will reach the bottom here, maybe middle of the year or something, and then we move from there. For some of the other markets, Kenya, Nigeria, Lebanon, I'm here more positive. I think the markets here will stabilize, and we will have improving results throughout the year.
Thank
you. Next question is from Eric Le Maier, Bryan Garnier. Please go ahead.
I've got just one on currencies. How do you explain the difference between currency impact on the revenues and on the EBITDA level? It's much stronger on the EBITDA level than I thought that you won't see that the other is mostly a translation and not a transaction effect. Thank you.
Yes. Good morning. It's the currency impact actually is negative, mainly due to the emerging market currencies that impacted us both in the sales. And you see that in the Argentine peso, the U. S.
Covers and in Nigeria, naira and also the Algerian dinner, which explains a bit the difference that you see between sales and EBITDA.
Okay. Thank you.
That was the last question.
One more time. If anyone wants to ask extra questions, we have another 6, 7, 8 minutes.
The next question, Hendrik Gorgaklis, UBS. Please go ahead.
Hello. I'll take the 8 minute. Nobody else wants them. Maybe two questions. So can I ask on Aggregates and Ready Mix?
I believe that you've been talking to people about potentially an improvement or relative gap of 400 to 500 basis points in terms of margin performance.
Is that indeed what you think the underperformance is? And how quickly do you
think you can catch that up is the first question. The second question is, is there anything you'd like to comment with regards to the ongoing investigation in Syria? Is there any update that you would like to give to the market?
Thanks. So I think you rightly put that we have I mean, cement is 60% of our sales and, of course, a much over proportional part of our profitability, and this will be key. And this has been managed also quite well in recent years. But we want to now enable the company to also focus on the other 40% of sales, which is aggregates, ready made and solutions and products. And here, you like we said, we have quite some potential.
If you benchmark our results with other companies, you realize that there is a margin gap, and we have motivated our people now to take up the challenge to close these gaps. As one first step, we have assigned leaders for these segments. I personally strongly believe a ready mix concrete leader in a country is a different person than a cement leader. And so we took this into reality. And also now, we allow them to have develop a growth strategy, which really includes some smaller investments you need for aggregates and ready mixed concrete.
You need to have ongoing investments on your footprint. You have to have mobile plants. You have to have smart brownfield extensions of your quarries. And so a lot of small things to improve margins and growth. And investments are low levels, so we encourage them now to go much more aggressive and to catch up not only the margin gap, but also the gap in growth because we're not growing in this segment, and this is not acceptable.
So here we are on track. We have started also bolt on acquisitions after the year, a vital part of an aggregate and a ready mix strategy. And also here, we encourage our leaders now do this. We have the first one in the UK in February announced a beautiful Holden acquisition, and we will see more of that in the future. On Syria, I have nothing new to report.
I think, as I said before, I'm the most interested person that the truth comes out in the court proceeding, Whoever did these very regrettable things which happened, I want this all to come out so we can finally close the chapter. But today, there's nothing really new. The investigation goes on. The company is not part of the investigation as of now. So we don't get all the documents or all the in between results.
So I have nothing new to report, and I hope we can close the chapter soon.
Thank you very
much. Next question is from Martin Hissler, Societe. Please go ahead.
Yes, good morning. I have one question to your outlook, which is basically the same than in March. I was just wondering, generally, which markets would you say improved more than you were expecting in March? And which markets turned worse than you were expecting in March?
Well, that's a good question. I think this is just 2 months ago. I think rather than now looking at a little bit ups or downs in the markets, I'm happy that we can confirm the positive trends or the positive market demand, which we indicated for North America, for Latin America, for the main markets in Europe, for India, China. So I'm happy that this all materializes. And we saw that even, again, while affected by the cold winter, we see it from the order books, from the construction projects that we can look confident for this demand.
We have seen then on the downside, Middle East, as Vasari talked about, this is we anticipated, of course, the situation in Algeria. And also, Southeast Asia, we anticipated the difficulties we have in the market in 2018. But overall, I think we have 80% very positive picture on the markets.
Last question is from Yves De Poujan, Kepler Cheuvreux. Please go ahead.
Yes, hello. On Latin America, please, could you give us some explanations about the evolution of the EBITDA margin, which deteriorates despite the excellent top line growth? Is it linked to a given country or a few countries? Or is there something exceptional? Can you depend this,
please? Yes. You're right. We have the top line was growing more than the bottom line in Latin America. Mean, this is overall still a good situation, it's, of course, in the wrong direction.
This is due. We have some issues in some markets where we were actually running out of capacity. So it's actually a positive problem we have. So we have some extra supply issues to service the customer. So and you can see from this growth of 14%.
So we had 1, 2 plants where we had some extra efforts we have to take on the supply chain, but we expect this to be finished for the remaining of the year.
Let's see through capacity increases?
Or We have just a small demand. Basically, I can say it's in Argentina, where we were having a shortage or maybe a wrong plant, too much demand, too little production. We have to import some clinker, and that's the whole story. So we will adapt now the production to fully be locally ready for the customer. So I said it is a good problem to have, but you are right.
Of course, the picture looks a bit odd for the Q1, but you will see a different one for the remaining of the year.
Thank you.
Good. I think we are at 8:30. Thank you so much for joining, and wish you a good day.
Ladies and gentlemen, the conference is now over. Thank you for choosing CarsCall, and thank you for participating in the conference. You may disconnect your lines. Goodbye.