Ladies and gentlemen, good morning. Welcome to the LafargeHolcim Q1 2018 Results Conference Call. I'm Sherry, the conference call operator. I would like to remind you that all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to connect to an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Alessandra Girolami, Head of IR. Please go ahead.
Good morning, everyone. Thank you for joining the call this morning for our Q1 trading update. I'm Alessandra Girolami, Head of IR, and I'm joined by our CEO, Jan Jenisch, and our CFO, Géraldine Picaud. I would like to remind you that this is a 30-minute call. We kindly ask you to limit yourself to no more than one question per person. I will now hand over to Jan Jenisch.
Good morning, everyone. 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. I will try the next five to 10 minutes give you a bit more information on our reporting this morning. Then we have time for your questions. I think we had a very good start to the year with a like-for-like sales up 3% despite the very strong impact of these very harsh winter conditions, especially in Europe and North America, which also then leaded to missing operating profit from these regions, and therefore our EBITDA is down by 7.7%. Nevertheless, we are very confident with the demand we see in the markets, with the projects in construction.
With our order book, we are very confident that 2018 will be a good year for us. We can fully confirm our targets for 2018. Let's look at the markets a little bit. First, North America. Again, we had for quite some time, the winter was much milder. We had very cold weather and snowstorms. You cannot really use concrete or cement on the construction sites. We see in the results that our sales are down -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 low Q1 basis. We have a similar situation in Europe, where our sales are down almost 2% due to the very strong winter in February and in March.
Also here now we are missing the EBITDA growth from this region. We are down 28% in EBITDA due to this weather impact. We did some extra maintenance in some key markets to prepare for the upcoming high season. Besides this, Europe is in a good condition. 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 U.K. market will be more resilient in demand than most people anticipate. We have a good situation Latin America, where we basically continue the 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. Middle East, this is a market where we have some headwinds in several markets. This, of course, is first of all, Algeria. As anticipated, the 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. Also other markets in Middle East, Africa are with some challenges with some lazier demand here, especially in Q1. You see overall, we have over 8% sales decline and also a EBITDA decline in Middle East, Africa. Asia Pacific, a good situation, especially in India and China. We are very satisfied. Both markets with the increase in top and bottom line.
We feel that here we are well prepared for the full year also regarding the pricing environment. Here Southeast Asia remains a challenge for the year. We have our pricing challenges and demand challenges in Malaysia, while Indonesia, Philippines should grow but will be challenged with pricing. 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%-5% and an increase in EBITDA of at least 5%. Our CapEx will stay below $2 billion.
One of the main focus points for us is the execution of Strategy 2022, where we have started with full speed to implement a better growth strategy for the company for all our four segments: cement, aggregates, ready-mix concrete, and the new segment, solutions and products. We are on track for our CHF 400 million cost-saving program. Also for the finance discipline, we have new measurements, a 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 the question. Thank you.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands when asking a question. In order to question, press star and one at this time. The first question is from Elodie Rall, 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? 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.
Thank you for the question. We have started the process. We are currently in 54 countries with cement plants, and these are too many to be supported by resource, but also by CapEx. We decided that we're going to trim our portfolio, and we will divest for at least $2 billion. We have nothing signed yet. We have promised to sign by the first quarter 2019, in the magnitude of at least $2 billion. Nothing to report today, but hopefully in the coming months, we will see our first actions.
Okay, thanks.
Next question is from Josep Pujal , 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 are those countries and the nature of the, let's say, problems or the challenges, please? Thank you.
Yes. Thank you. 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. We are at the same time, elections coming up and over capacity of cement. The other market, we have some positive momentum in Egypt, on the bright side. Our other key markets, which are maybe Kenya, Iraq, Nigeria, Lebanon, they also didn't see a great Q1. We expect them to recover for the remaining of the year, also here there was no tailwind. 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.
Thank you.
Next question is from Robert Gardiner from Davy. Please go ahead.
Good morning. Just one quick one from me. 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. Just again, if you could give us some indication on pricing in the first quarter and for the year going forward. Thank you.
Yes. I mean, 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 first quarter, I would say energy cost inflation, not in the same magnitude as last year, but also significantly. We have our pricing in place. We can see a little bit, we will have most price increases will start from April onwards. We are positive to pull through, especially the mature markets are key for us to make price increases. 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.
Yeah, 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 East Canada and maybe north of the U.S. Whether if that's not the case yet, whether you would expect that to materialize in 2018.
Yeah, thanks for the question. They have started the operation quite a while ago, we don't see the impact really. The U.S. is a very big market, we have some significant growth this year in cement. Actually, I don't expect any negative thing from that McInnis 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 Philip Rosenberg from Bernstein. Please go ahead.
Yeah. Good morning, everyone. Just one quick question. Can you give us a little bit progress you have made so far on the SG&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? Thank you.
All right. Yeah. Thank you, Phil. For the CHF 400 million, 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 CHF 400 million 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. This starts simply that we measure our management on a simple set of KPIs. This is growth, EBITDA, this is cash conversion and return on invested capital. 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. We have for all key markets, profit and loss leaders for concrete, for ready-mix 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 our staff early start with this. We have also the incentive system are fully aligned. 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 it's obviously weather in Europe and the U.S., but obviously, you're obviously starting the year behind now from an EBITDA perspective. I 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. Thank you.
Yes. Thank you. I think our key contributors to this 5% growth is North America and Europe, and these were really the two regions hit by the weather. You see the result is minus 3% in North America and minus 2% in Europe. We cannot really have a 5% EBITDA growth. You will see this coming now from Q2 onwards, that we will see a very positive contribution from these two regions.
Great. Thank you very much.
Next question is from Bernd Pomrehn from Deutsche Bank. 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? Thank you.
Bernd, I cannot give the details, but we have checked it. We are confident. We are basically in France and Germany, the two 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. We are really in line. If you look at the EBITDA first quarter in Europe it is such a low level, the weakest quarter by far. This should not be now extrapolated or something. We are here on track, and we will see already in Q2 much different figures.
Okay, excellent. Thank you, Jan.
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. Is it 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 trends in cash flow and debt? I appreciate this is a very small quarter.
I think I pass this to Géraldine.
Yes, good morning. Yes, we'll definitely give a full set of numbers twice a year, including especially the 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? Maybe you can comment a bit on the outlook for the key countries in that region. Thank you.
Yeah, we are mainly in these markets, Philippines, Malaysia, Indonesia. I think in Indonesia, we have seen the bottom. I mean, the bottom is still making money. We will see some positive pricing in Indonesia and also volume growth in Indonesia. We expect the same in the Philippines. 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. While I'm confident for Indonesia and Philippines, maybe Malaysia we will go through the bottom during 2018.
Bye-bye. Thank you.
Next question is on Will Jones, Redburn. Please go ahead.
Hi. Good morning. It's actually John Messenger, sorry, at 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 anything at this stage in terms of impacts? How is the group thinking of Argentina now in the year? In a broad term, am I right in thinking it's just around about 10% of Latin America is the EBITDA that comes from Argentina? Thank you.
Well, we are very happy to have a strong position in Argentina with two 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. Argentina will be very strong, and we're very positive about the market development.
Thank you.
Next question is from Alain Gabriel, Morgan Stanley. Please go ahead.
Yes, good morning, gentlemen. Jan, the one question from my side on your comments on Middle East and Africa. Is it fair to interpret what you've commented there in terms of EBITDA progression for the year that we have seen the low in Q1? If yes, what would be the moving parts for the improvement for the rest of the year for that division? Thank you.
Yes. I think Middle East, Africa, we have foreseen the challenges in Algeria and a few other markets, but I think Q1 was nevertheless a bit on the lower side of my expectations. I think Algeria will remain on this level for the full year. We shouldn't have the hope here of a 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 Berrigaud, Bryan, Garnier. Please go ahead.
Yes. Good morning. Thanks for taking my question. I've got just one on currencies. How do you explain the difference between the currency impact on the revenues and on the EBITDA level? It's much stronger on the EBITDA level than I thought. Currency that level is more mostly a translation and not a transaction effect. Thank you.
Yes. Good morning. The currency impact actually is negative, mainly due to the emerging market currencies that impacted us both in the sales. You see that in the Argentine peso, the US dollar, the Nigerian naira and also the Algerian dinar, which explains a bit the difference that you see between sales and EBITDA.
Okay. Yes. Thank you.
That was the last question.
We have more time if anyone wants to ask extra questions. We have another six, seven, eight minutes.
The next question is from Gregor Kuglitsch, UBS. Please go ahead.
I'll take the eight minutes if nobody else wants them. Maybe two questions. 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 4-500 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? That's the first question. The second question 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? Thank you.
Thanks. I think you rightly put that 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. We want to now enable the company to also focus on the other 40% of sales, which is aggregates ready-mix. Solutions and products. Here, you rightly 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, we took this into reality.
Also now we allow them to develop a growth strategy, which really includes some smaller investments you need for aggregates and ready-mix 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 it's a lot of small things to improve margins and growth. Investments are our low levels. 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 these segments, and this is not acceptable. Here we are on track. We have started also bolt-on acquisitions, have to be a vital part of an aggregates and a ready-mix strategy. Also we encourage our leaders now to do this.
We have the first one in the U.K. in February announced, a beautiful bolt-on acquisition. You will see more of that in the future. From 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. Today there's nothing really new. The investigation goes on. The company is not part of the investigation as of now, we don't get all the documents or all the in-between results. I have nothing new to report, and I hope we can close the chapter soon.
Thank you very much.
Next question is from Martin Hüsler, ZKB. 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? Which markets turned worse than you were expecting in March?
Oh, that's a good question. I think that this is just two months ago. I think rather than now looking at a little bit ups or downs in the markets, I am happy that we can confirm the positive trend or the positive market demand, which we indicated for North America, for Latin America, for the main markets in Europe, for India, China. I am happy that this all materializes. 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 on the downside, at least as Touahri talked about, we anticipated, of course, the situation Algeria and also Southeast Asia. We anticipated the difficulties we have in the markets in 2018. Overall, I think we have 80% very positive picture on the markets.
Okay, thank you.
Last question is from Josep Pujal , 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 detail this, please?
Oh, that. Yeah. You're right. We had the top line was growing more than the bottom line in Latin America. Why? This is overall still a good situation. It's of course in the wrong direction. We have some issues in some markets where we were actually running out of capacity. It's actually a positive problem we have. We have some extra supply issues to service the customer. As you can see from this growth of 14%, we had one, two plants where we had some extra efforts we had to take on the supply chain, but we expect this to be finished for the remaining of the year.
Through capacity increases or?
We have just a small demand hiccup, basically, I can say it's in Argentina, where we were having a shortage or maybe a wrong plan, too much demand, too little production. We had to import some clinker, and that's the whole story. We will adapt now the production to fully be locally ready for the customer. I say this is a good problem to have, but you are right, of course, the picture looks a bit odd for the first quarter, but you will see a different one for the remaining of the year.
Thank you.
Good. I think we are at 8:30 A.M. Thank you so much for joining, and wish you a good day.
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