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Ladies and gentlemen, good morning. Welcome to the LafargeHolcim Q1 2018 Results Conference Call. I'm Cher, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to send over to Mrs. Alessandra Girolami, Head of IR. Please go ahead.
Good morning, everyone, and 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 Group CEO, Jan Jenisch; and our Group CFO, Géraldine Picaud. I would like to remind you that this is a 30-minute call, so I would kindly ask you to limit yourself to no more than one question per person. And I will now hand over to Jan Jenisch.
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 a 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 us 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, and we can fully confirm our target for 2018. Let's look at the markets a little bit. First, North America, again, we have -- for quite some time, the winter was much milder. We had very, very cold weather and snow storms, so you cannot really use concrete or cement on the construction site and that you see in the results that our sales are down, minus 3% in North America, and this in a market which we'll 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 the sales are down almost 2% due to the very strong winter in February and in March. And also here now, we are missing the EBITDA growth from this region. We are down 28% in EBITDA on Q2. This weather impact also needed 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 in Latin 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, first of all, Algeria, where, as anticipated, the slowing market demand together with the increase in cement capacity is 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 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. And here, South East 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 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%. Our CapEx will stay below CHF 2 billion.And then 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 4 segments: Cement, Aggregates, Ready-Mix Concrete and the new segment, Solutions & Products. We are on track for our CHF 400 million cost-saving 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 questions. Thank you.
[Operator Instructions] The first question is from Elodie Rall, JPMorgan.
I'll ask on divestment and -- if I may, for the first question. It says on the presentation that you have signed a 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?
Yes, thank you for the question. We have, for the divestment's timing -- so we have started the process, we are currently 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 CHF 2 billion. We have nothing signed yet. We have promised to sign by the first quarter 2019 in the magnitude of at least CHF 2 billion. So nothing to report today. But hopefully, in the coming months, we will see our first actions.
Next question is from Josep Pujal, Kepler Cheuvreux.
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 actual market demand at the moment. And we are, at the same time, elections coming up and more 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 tailwinds. So Middle East Africa, as you can see from the numbers, those were quite a challenge in Q1 and will be our main challenge for the full year.
Next question is from Robert Gardiner from Davy.
Just one quick one from me. Just -- I was wondering if you could give 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 first quarter and for the year going forward.
Yes, yes, yes. And 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, [ nothing to say ] 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 are positive to pull through, especially the mature markets are key for us to make price increases. 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.
Next question is from Nabil Ahmed from Barclays.
Actually, just one on the new capacity in Canada from a kind of 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 here, whether you would expect that to materialize in 2018.
Yes, thanks for the question. They have started 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 will have some significant growth this year in cement. So actually, I don't expect any negative thing from that [indiscernible] plant in the east of Canada. I think, even if they are able to ramp up their factory to more capacity, the market will absorb it.
Next question is from Philip Roseberg from Bernstein.
Just one quick question. Can you give us a little bit the progress you have made so far on the SG&A cost savings and also some of your spending 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. 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. And I think on the performance management, in general, it was very important. We have this new strategy of simplification and performance. And it start simply that we measure our management on a simple set of KPIs, so this is growth, EBITDA, this is cash conversion and return on invested capital. And here, we have implemented a single system for all our managers. We have appointed now profit and loss readers, 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 readers for Concrete, for Ready-Mix Concrete, for Aggregates and even significant for Solutions & Products. In fact, all we implemented beginning of the year was very important to me, that we have our start, early start of this. We have positive incentive systems 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.
Next question is from Gregor Kuglitsch from UBS.
I wanted 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 U.S. But obviously, you're obviously starting the year behind now from an EBITDA [ perspective ]. I just wanted 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 these were really the 2 regions. If 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 won't see this coming now from Q2 onwards, that we will see a very positive contribution from these 2 regions.
Next question is from Bernd Pomrehn, Vontobel.
One question regarding the operational level within 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 cost, which probably resulted in this EBITDA margin drop?
Bernd, I cannot give the details, but we have checked it. We have -- again, we have basically France and Germany, 2 of the main markets in Europe, we took some extra maintenance for some of the key factories, also to prepare for the growing volumes. So we are really in line. If you look at the EBITDA first quarter 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.
My question is, just if you could maybe clarify on your reporting. Obviously, it's relatively light. Today, we just published EBITDA by region. So is that, that you're going to only report 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 seasonally small quarter.
I think I'll pass this to Géraldine.
Yes, we will definitely give a full set of numbers twice a year, including, especially, free cash flow, [indiscernible] the balance sheet items. But we have no intention to give it on half year and full year. We don't intend to give any other information on the question.
Next question is from Paul Roger from Exane.
Are there any signs of stabilization in the different countries in South East Asia? Maybe you can comment a bit on the outlook for the key countries in that region.
Yes, 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. So -- but we'll see some positive pricing in Indonesia and also volume growth in Indonesia. We'd expect the same in the Philippines. And for Malaysia, it's a bit different because inter-market demand will probably not increase until 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.
Next question is from [indiscernible] John, Redburn.
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 faster is Argentina. Have your guys on the ground said back 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 Latin America of EBITDA that comes from Argentina?
Well, we are very happy to have a strong position in Argentina with 2 integrated cement plants this year, the full continuation of the very positive 2017. We are growing, also in Q1, at top and bottom line. So Argentina will be very strong, and we are very positive about the market development.
Next question is from Alain Gabriel, Morgan Stanley.
Jan, the 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 -- and Q1 was nevertheless a piece 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 whole [ peel ] of turnaround. I think we will reach the bottom here, maybe, middle of the year or something, and then we move somewhere. For some of the other markets, Kenya, Nigeria, Lebanon, I'm here more positive. I think the markets will stabilize, and we will have improving results throughout the year.
Next question is from Eric Lemarie, Bryan Garnier.
I've got just one on currencies. How would you explain the difference between the currency impact on the revenues and around the EBITDA levels. Much more -- it's much stronger around the EBITDA level, and I thought that currencies at that level are mostly a translation and not a transaction effect.
It's -- The currency impact, actually, is maybe [indiscernible] may be due to the emerging market currencies that impacted us, both in sales, and you see that in the Argentinian peso, the U.S. dollars and in Nigeria naira and also the Algerian dinar, which explains about the difference that you see between sales and EBITDA.
That was the last question.
We have more time. If anyone wants to ask extra questions, we have another 6, 7, 8 minutes.
The next question is from Gregor Kuglitsch, UBS.
I'll take the 8 minutes. That will be helpful, also. Maybe 2 questions. Can I ask on Aggregates and Ready-mix? I believe that you've been talking to people about potentially 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 it up? That's 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. Yes, so I think you rightly put that we have -- I mean, Cement is 60% of our sales and, of course, they're much all proportion or part of our profitability, and this will be key, and this has been managed also quite, 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-Mix and Solutions & Products. And here, as you rightly said, we have quite some potential. If you benchmark our results with other companies, you'll 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-mix Concrete. You need to have ongoing investments on your footprint. You have to have mobile plans. You have to have smart brownfield expansions of your quarries. But -- So a lot of small things to improve margins and growth. And investments are our low levels, so we encourage them now to go much more aggressive and to catch up not only the margin there but also the gap in growth because we are not growing in these segments, and this is not acceptable. So here, we are on track. We have started also bolt-on acquisitions, have to be a vital part of an Aggregate and a Ready-Mix strategy, and also, we encourage our leaders now to do this. We have the first run in the U.K. in February, announced a beautiful bolt-on acquisition, and you will see more of that in the future. And 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. I watched 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. 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.
Next question is from Martin Hüsler, ZKB.
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 that it 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 them on the downside. [indiscernible] talked about, this is -- we anticipated, of course, the situation in Algeria. And also South East Asia, we anticipated the difficulties we have in the markets in 2018. But overall, I think we have 80% very positive picture on the markets.
Last question is from Josep Pujal, Kepler Cheuvreux.
In 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?
Yes. And you are right, we have the top line was growing more than the bottom line in Latin America, while, I mean, this is overall still a good situation. It's, of course, in the wrong direction. This is true. We have some issues in some markets that 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 customers. So -- and you can see from this global 14% that we had won 2 plants, and we have some extra efforts we have to take on the supply chain, but we expect this to be finished for the remaining of the year.
Is this through capacity increases? Or...
We have such a small demand. [ I think ], basically, I can say, in Argentina, we are -- there is a -- having a shortage or maybe [indiscernible] too much demand, too little production. We have important [ clinker ], and that's the whole story. So we will adapt now the production to fully be locally ready for the customers. So I said that 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.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 Chorus Call, and thank you for participating in the conference. You [ must disconnect ] your lines. Goodbye.