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Executives

Jean-Jacques Gauthier - CFO

Analysts

Yassine Touahri - Exane BNP Paribas

Robert Gardiner - Davy

Yuri Serov - Morgan Stanley

Jean-Christophe Lefevre-Moulenq - CM-CIC Securities

Joseph Pujal - Kepler

Aynsley Lammin - Citigroup

Elodie Rall - JPMorgan

John Messenger - Redburn Europe Ltd.

John Fraser-Andrews - HSBC

Giuseppe Mapelli - Equita SIM

Mike Betts - Jefferies

Harry Goad - Credit Suisse

Robert Muir - Berenberg

LaFarge Coppee S.A. (OTC:LFGEF) Q2 2014 Earnings Conference Call July 25, 2014 3:30 AM ET

Operator

Good day, and welcome to the 2014 half-year results on Lafarge Group conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jean-Jacques Gauthier, CFO of Lafarge Group. Please go ahead.

Jean-Jacques Gauthier

Good morning, everyone, and thanks a lot for being with us today and for listening to our 2014 first-half results conference call.

In an environment that is improving progressively, including the first signs of recovery in Europe, we continued to progress in the second quarter. We remain focused on delivering on our commitments, supporting a solid organic growth for the first half of the year. And indeed as well, we have taken a further step towards the completion of our project to create LafargeHolcim, the most advanced group in the building materials industry.

Looking first at the results highlights, our results continued to improve steadily on a like-for-like basis and in a context of adverse exchange rates. Our EBITDA was up 9% in the second quarter, up 13% for the first half, supported by our cost-saving and innovation measures, which generated €165 million of EBITDA in the second quarter, including the contribution of our joint ventures. In total, we generated €290 million in the first half, on track with our full-year objective to deliver more than €600 million in the year.

These measures supported the organic growth of our EBITDA in the quarter and a solid improvement of our EBITDA margin, which increased 140 basis points in the second quarter.

It should be noted that after a very strong first quarter and with some specific impact in a few countries, like the early Ramadan, the current situation in Iraq or the World Cup in Brazil and winter timing effects, cement volume growth was more moderate in the second quarter. However, it has not affected our market expectations for the year.

Prices have been increased wherever possible to offset inflation and we will continue to do so. We are seeing positive trends, with cement prices up 2.2% versus the same quarter last year and up 1.4% on Q1 2014.

Our net income is up 2%, at €205 million in the second quarter, supported by the improvement of the results of our associates and joint ventures, notably in the United Kingdom, which benefited from the market recovery and the ramp up of synergies.

We continued to actively work towards our objective to reduce net debt and we have secured €1.1 billion of divestment proceeds since the beginning of the year. €423 million have been received in the first half, and the other secured divestments will be received in the second half of the year and indeed contribute to further reduce our debt. They include, notably, the disposal of our operations in Ecuador and more recently in Pakistan.

Besides these actions, we announced on July 7 a list of proposed divestments. This is an important step towards our planned merger to create LafargeHolcim and it represents a major part of the total assets we aim to divest.

As we have already said, we have received many indication of interest from a wide range of industrial and financial potential buyers and we will shortly engage them in discussion. For many of them this does present a unique opportunity to acquire such attractive assets, well-established, well-managed sites with highly skilled teams operating within an existing industrial network. It is indeed an important step and reaffirms that we are fully on track for a completion of the planned merger in H1 2015.

Let us now come back to our results, taking a quick look at the other key elements. As we do this, let me just remind you that all figures in the document have been restated for IFRS 11 unless specifically stated.

Cement volumes are up 4% like for like in the quarter, benefiting from higher export sales and our innovation actions, as well as from solid volume growth in North America after harsh weather in Q1 and the ramp up of our new plant in Rajasthan.

Pure aggregates and ready-mix volumes declined, mostly impacted by lower activity in France. These figures do not include the contribution of the UK, where, as you know, we have significant aggregate and ready-mix operations, which strongly improved, being up, respectively, 7% and 11% for the first half.

Group sales were up 3% like for like in the second quarter, up 6% in the first half, with some Q1, Q2 timing effects in a few countries, at €70 million net income in the first half, compared to €84 million last year. However, you need to keep in mind that Q1 2013 benefited from €45 million of net gains of -- on divestments. Excluding this impact, net income in the first half improved €30 million compared to 2013.

Net debt is at €10.1 billion at June 30, 2014, a reduction by €1.1 billion compared to last year and only €250 million above end December, a solid performance compared to previous first-half periods.

The free cash flow in the first half is negatively impacted by a €30 million financial interest coupon that was paid in Q3 last year, but in Q2 this year. Excluding this timing impact, free cash flow in the first half is almost stable, despite the adverse impact of foreign exchange rates on operating cash flows.

Let us now review shortly the performance of our different regions, starting with North America. In this region, our activity did partially recover after the severe winter. Cement volumes were up 6% overall, benefiting from a 9% volume growth in the United States.

In Canada, volume growth was more moderate as harsh winter conditions prevailed in the beginning of the quarter and market growth in Quebec has not materialized yet. The western part of the country continued, nevertheless, to show steady growth.

Sales were up 6% like for like in the quarter, supported by volume and price gains in the United States, where our price increases have been implemented across all product lines post the winter season. Cement prices in the United States were up 5% versus the second quarter of 2013.

Our EBITDA was impacted by an adverse €15 million exchange rate impact. Like for like, our EBITDA improved a solid €58 million compared to last year, reflecting two key factors; first, the operating leverage, thanks to improvement of volumes and ongoing cost reductions, and second factor, the impact of an €11 million positive one-off effect on pensions.

Looking now at Western Europe and knowing again that these figures do not include the UK, a country where we see strong growth in volumes in EBITDA and in margins. After a strong first quarter, supported by an easy comparable, sales were down 7% like for like in the second quarter and EBITDA was down 4%, mainly reflecting lower volumes in France, as anticipated.

Greece, on the contrary, continues to show signs of progressive improvement. And in Spain, although volumes continued to decline, early signs of stabilization start to be seen.

Margins for the region were up 60 basis points, despite lower volumes in all product lines, reflecting the success of our ongoing strong cost-cutting actions.

For Central and Eastern Europe, after a very strong first quarter, which benefited from generally mild weather, especially compared to last year, cement volumes in the second quarter were down 3%. This effect was largely offset by positive trends in aggregate and concrete in Poland, where our innovative integrated offers supported strong volume growth.

For the first half, which gives more relevant trends given the first-quarter, second-quarter weather impact in both 2013 and 2014, our cement volumes were up a solid 6%, notably thanks to a good level of new infrastructure projects in Poland and continuing growth in Russia. In the latter, in April, we successfully started our new plant in Ferzikovo, close to Moscow, and expect it to progressively contribute to EBITDA in the coming quarters.

Despite a scope impact reflecting the divestment of our operations in Ukraine, EBITDA improved 10% compared to last year, bolstered by higher aggregate and ready-mix activity and cost savings. Margins improved strongly, with a gain of 320 basis points at constant scope and exchange rates.

Turning now to the Middle East and Africa. After a strong performance in the first quarter, results continued to improve solidly in the second quarter, with EBITDA up 10% at constant scope and exchange rates. Volumes grew 2% in the quarter when excluding the volumes sold by our trading activities. This reflected contrasted trends and some timing effects.

In Algeria and in Nigeria, volumes were slightly down in the second quarter due to three factors; a particularly higher comparable in Q2 2013 following a relatively weak Q1 2013; second, some temporary production limitation; and third, the earlier start of Ramadan.

In Iraq, the underlying demand was very strong. Nevertheless, in June the security situation deteriorated in some parts of the country and impacted our ability to transport cement in the affected regions, although our northern plants could produce at full capacity. The situation resulted in a decline of our sales in June and a 2% contraction of volumes for the quarter. We estimate that the impact on EBITDA of the current situation was a negative €6 million in the second quarter.

However, these events and a soft market in South Africa were more than offset by the strong growth in Egypt as we progressively started to use pet coke after getting the permit from the authorities. We were immediately ready to use pet coke, and it already represented half of our fuel mix in June. Heavy fuel oil and alternative fuels have been the other two fuel sources, and at this time we no longer use gas. Our volumes in the quarter improved 22%.

Across the region, price increases to offset cost inflation and actions to promote innovative solutions were actively implemented. Our EBITDA margin continued to improve in the region and was up 90 basis points, underpinned by price increases, cost cutting, as well as the sale of more innovative products and solutions and despite higher clinker purchases, notably in Egypt, to complement domestic production.

In Latin America now, sales and EBITDA were impacted by adverse foreign exchange, the divestment of our operations in Honduras and the deconsolidation of our JV in Mexico last year. On a like-for-like basis, sales increased 1% and EBITDA was down 24%, impacted by a lower number of trading days due to Easter timing and to a number of non-working days during the soccer World Cup in Brazil, as well as by strong cost inflation. Prices, in the context of rising cost, have been increased, although not covering sharp cost inflation.

Turning now to Asia, here also exchange rates had a negative impact on our results, reflecting the devaluation of most of the Asian currencies against the euro in the third quarter last year. On a like-for-like basis, EBITDA declined 10%, mostly impacted by the difficulty to increase prices in Eastern India as the overall domestic market was affected by the general elections organized in April and May.

With the exception of India, price increases were implementing in a context of cost inflation, notably in Malaysia and in the Philippines. In the latter, the market started to improve in the second quarter, despite the unfavorable Easter timing, progressively recovering after the Yolanda typhoon last year.

Overall, our cost reduction and innovation actions mitigated the impact of the contraction of prices in Eastern India and significant cost inflation across the region.

Our new plant in Chhattisgarh in Rajasthan, which started successfully at the end of last year, continues to ramp up and contributed to higher volumes, although startup costs limited the contribution to EBITDA. It had a negative impact of 80 basis points on the margin of the region in the second quarter. This will indeed progressively improve over the next couple of quarters.

Before we move to the income statement, let's have a quick look at our figures including the contribution of our joint ventures. The contribution of our joint ventures to the operational performance is very positive, and when including them, EBITDA in the second quarter improved 11% like for like and EBITDA margin was up 160 basis points. This positive contribution of the JV to the Group's performance was driven by an improvement of our results in China and a solid performance in the UK.

In the latter, for the first six months of the year our cement, aggregate and ready-mix volumes were up, respectively, plus 5%, plus 7% and plus 11%, with price increases in all product lines, supported by a solid rebound in construction. Further bolstered by the ramp-up of the expected synergies, the UK results improved sharply. As a reminder, we expect more than £60 million synergies over three years.

Let us now move further down the income statement, for which I already mentioned the main trends. At €205 million, the net income grew for the second quarter, is slightly up compared to last year, reflecting better operational trends, but adverse exchange rates.

Coming to the cash flow highlight for the quarter now, cash flow from operations decreased in the quarter, notably impacted by the payment in the second quarter of 2014 of a €30 million annual financial interest coupon, which last year, in 2013, was paid in Q3 and not in Q2, also impacted by a €20 million adverse impact on cash tax, which reversed from the first quarter.

The traditional working capital outflow in the second quarter was limited, limited by our actions to further optimize our working capital. Nevertheless, as the working capital at the end of Q1 2014 was much better optimized than at the end of Q4 -- Q1 2013, the impact of the seasonality was more marked in the second quarter 2014. When expressed as a number of days of sales, our working capital need was reduced by 3 days compared to the end of Q2 2013.

At €67 million, sustaining capital expenditure continued to be strictly contained. We spent €138 million on development CapEx.

Overall, our net debt declined 10% compared to the end of June 2013, while the increase in the quarter versus Q1 reflects, as usual, the seasonality of our activity.

Turning now to the elements of the outlook for 2014. Based on the state of our markets in the second quarter, we have, as usually, adjusted our outlook market by market, although our global expectation remains unchanged from what we presented earlier this year. We confirm our expectation of an overall market growth between 2% to 5% in 2014.

Compared to 2013, this reflects a progressive recovery in the United States and continuing growth in emerging countries. At the same time, we start to see first signs of recovery in Europe, with resuming growth or stabilization in most of the European markets where we operate.

On a market-by-market basis, taking all this into account, we have upgraded Greece and Poland, where a more positive start of the year than initially expected calls for an upgrade of our full-year estimations. At the same time, in the other regions, we have slightly revised downwards the guidance for Canada, where the impact of the harsh winter is unlikely to be fully made up, and in Morocco and South Africa, where in the first half of the year markets have been running slightly behind our guidance.

In Iraq, the underlying demand is strong, but the situation has indeed to be watched closely. At this stage, it is still early to assess this impact. This is why we have not revised the guidance for this market.

We have not changed the other elements of our outlook. On energy, we continue to foresee a 2% increase, mainly driven by rising power prices in regulated markets.

We will deliver more than €600 million EBITDA including JVs from our performance and innovation measures in 2014, out of which €400 million from performance and €200 million from innovation.

Our cost of gross debt for the year should be around 6%, and our tax rate before one-off items is expected to be 31%.

Finally, our CapEx will be limited at €1.1 billion, including joint ventures. Selective divestment of non-strategic assets will continue.

To summarize, in an environment that is progressively improving but continues so far to be affected by adverse exchange rates, we remain focused on delivering on our objectives. It very much confirms the pertinence of the actions we have taken and the measures we have implemented over the last few years, year after year. We confirm our objective for this year and will successfully achieve our 2012 to 2015 cost-cutting and innovation plan one year early.

Beyond this, our view of our market for 2014 is also confirmed. And for H2, we do expect less impact from exchange rates and an increasingly visible reduction of our financial interests.

While continuing to deliver on our objectives, we have taken, in the second quarter, the significant step towards the completion of our planned merger to create LafargeHolcim, with the announcement of the proposed asset disposals. The level of interest we have seen is extremely high and continues to increase. Combined with the high quality of the assets, it justifies our strong confidence in the positive outcome of this process. At the same time, we continue our dialogue with the regulatory authorities.

As a result, our plan is fully on track and we confirm the timeline for completion of the planned merger in H1 2015. In the meantime, it is indeed business as usual at Lafarge and all our teams are fully focused on making this year a success for the Group and for all its stakeholders.

Thank you very much for listening. I am now ready to take questions, as usual. Please limit your questions to two at a time so that as many participants as possible have an opportunity to ask theirs.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Yassine Touahri of Exane. Please go ahead.

Yassine Touahri - Exane BNP Paribas

Yes. Good morning. Two questions then, the first question on Middle East and Africa. Volumes were a bit weak in the second quarter in Algeria and Nigeria, but trading conditions were very strong in Egypt. Do you expect the situation in these three countries to remain similar in H2?

And then a second question on H2 results, a little bit more general. How much do you expect foreign exchange and scope to impact EBITDA in H2 2014? And do you expect EBITDA organic growth could accelerate in H2 compared to the 13% achieved in H1?

Jean-Jacques Gauthier

So, on Middle East and Africa first, we had indeed, as you mention some growth in the first half. If you look at our volume growth, it was 7% in cement on a like-for-like basis.

What we can say is that in Nigeria, Algeria and in Egypt, where we have seen, for Egypt, very strong volume growth, plus 22%, from a low level; in Algeria, more limited volumes; and in Nigeria too, what we have seen is that we did expect or we did incur some limited production limitation in these two countries. And the situation, when looking forward, will indeed be improving.

So you have to be careful at the Q2 or comparison also for some countries as if you take Algeria, for example, Q2 of last year was very strong on volumes, catching up after the strike experience at one of our plants in Q1 2013 in Algeria.

When we look ahead and when we look towards the second half of this year, we expect demand in these two countries to be very solid. We've had good news in a number of areas. Egypt is improving further. The situation, as you know, has been eased by an improvement of the energy situation, and the underlying trends for this country are, mid to long term, very strong. So we have started to see some recovery. So the situation going forward, second half should continue to improve in these three countries.

On the foreign exchange impact, we had a substantial foreign exchange impact in the first half, as previously stated. But when we look at the second half of the year we expect that this impact will normally quite significantly reduce.

In the first half we had a ForEx impact of about €86 million. The impact for the year should be less than €150 million. With regard to scope, the full-year impact should be around €85 million, from what we can see today.

Operator

We will now take our next question from Robert Gardiner of Davy.

Robert Gardiner - Davy

Good morning. Two questions from me. Can I just go back to Egypt there? And I know you have -- you've switched [pet] out there, the volume price environment is better, but can you give us some indication of margins in that market? Have you been able to pass on the input costs that you have to deal with? And how do you deal with the new price increases for power and fuel that have just been announced?

And secondly, just on the UK, maybe if you could give us some indication in terms of the deal you have just signed with Anglo American or you intend to sign with Anglo American. How does that change how you operate the JV over the next year, if at all? Thank you.

Jean-Jacques Gauthier

So the first question you had is on Egypt. What we can see for this country is that indeed we have experienced some rise in energy prices. However, the situation overall, including some shortage of cement in the country, is contributing to solid prices and price increases, which help obviously improve the margin situation. So as we look forward, and again, as already stated, the Egyptian situation should continue to improve, in a relatively high-cost environment.

With regard to the recent announcement for the UK, there is no reason, until the time where the LafargeHolcim merger will be completed, which is a condition precedent to us acquiring the share of Anglo American in our joint venture, there is no reason to have any change in the management of the joint venture. This company, this joint company is recovering strongly from last year, which was an intermediate year.

As I stated previously, synergies are rising. Everything which had to be done last year with restructuring, reorganization is now long behind us. And the company is also benefiting from a solid market environment.

So things are doing better, management is strong. And this obviously will contribute also for the second half for an improvement of our contribution of the United Kingdom.

Operator

We will now take our next question from Yuri Serov of Morgan Stanley. Please go ahead.

Yuri Serov - Morgan Stanley

Yes. Good morning. I have a general question first of all. I would like to ask you, given what you see in terms of your development of prices for cement and the costs, do you think that for the full year your price-to-cost balance is going to be positive this year?

And then secondly, I don't know that you would want to answer this question. This is related to the merger with Holcim. We didn't really discuss this much in previous conference calls, so I was wondering whether you could tell us, in achieving your synergies, what is the estimated cost that you're allowing for that and what is the profile of that cost, do you reckon? Thank you.

Jean-Jacques Gauthier

On the price-cost environment for the remainder of the year, as you know, our aim is constantly to offset fully the effect of cost increases by price increases. In most cases we are able to do that, but in a number of cases we are impacted by some very specific situations, which in the first half, for example, or in the second quarter in particular have not allowed us to fully offset the cost inflation by price inflation. If you look at the second quarter, as an example, we had a negative price-over-cost variance and a few other elements of minus €71 billion.

So it is to be taken into account, indeed, when you look at the evolution of the profitability of the Company. And this is why it is so important that we continue, and we do, to deliver and beat our objectives on cost reduction. So for the full year, we will aim at offsetting cost increases. Due to a few specific situations, we might not be able to fully offset this.

On the -- on your question related to LafargeHolcim, we had given an indication, which is indeed an initial idea, that implementation cost would amount to roughly €1 billion over two years, not over two calendar years, over 24 months, from the date of completion of the joint venture. This is based on some analysis, some benchmarks. Our goal will indeed to beat this number, to be below this number.

Yuri Serov - Morgan Stanley

Sorry, may I clarify, is that €1 billion cost or does that include CapEx as well?

Jean-Jacques Gauthier

No, that does include CapEx as well.

Yuri Serov - Morgan Stanley

And can you give us an idea as to the rough split between the two?

Jean-Jacques Gauthier

Not at this stage, but you will appreciate that in due time we'll give you some more information on this.

Operator

We will now take our next question from Jean-Christophe Lefevre-Moulenq of CM-CIC Securities. Please go ahead.

Jean-Christophe Lefevre-Moulenq - CM-CIC Securities

Yes. Good morning, Jean-Jacques. Bonjour. I have two questions. First, could we have more flavor on the US? On US, we have an impressive improvement of the EBITDA margin. Do we have an improvement of the price-cost situation? What is the situation of the variable cost in US? And did you recently announce further price hikes after the price hikes of March/April?

And second issue, a question on Greece. Greece, could you quantify the volume and price effect over the Q2 and also give us flavor on the EBITDA? EBITDA was negative numbers last year. Are we now in positive numbers this year? Thank you very much.

Jean-Jacques Gauthier

Thank you. On the US, the situation, as you described, is a very solid one. North America is continuing to show strong improvement as a combination of good volume trends and solid pricing trends.

We have experienced, as previously expected and announced, and you will remember from our previous calls, a solid operating leverage impact in the first half. And this solid operating leverage will indeed continue, continue for the remainder of the year and will continue beyond 2014 because we're still way below the level of profitability which we had a few years ago. So there is much more to come in this region of the world.

On -- your second question was on Greece and how things have been moving in the first half. Looking at volume trends, our first-half volume in Greece, up 12%, and in the second quarter they are up 3%. As a matter of fact, a number of public work in Greece have restarted, following some renegotiation with lenders at the end of 2013, and these projects are moving on. So we are starting to see that on the ground.

We are starting to see also some limited evolutions here or there on the residential. So early signs from a low level.

Let's not forget that Greece is at about 20% of where it used to be in terms of consumption, so we're talking small figures but still very reassuring and encouraging that we have now gone into the right direction in terms of growth.

You will appreciate that we do not, neither for Greece nor for others, give EBITDA indications by country; it would be too -- not only too precise, but too competitive. But what I can tell you is that the situation for this country is indeed benefiting solidly from the improvement in the environment. And the continuing efforts which have been done on the cost cutting would have been very strong, and which are continuing and which included a number of moves on existing assets, reduction of fixed cost, etc.

Jean-Christophe Lefevre-Moulenq - CM-CIC Securities

Just a follow-up question. Jean-Jacques, in US specifically, the variable costs are rising again or are still declining?

Jean-Jacques Gauthier

Variable cost evolution in the US, they are more or less stabilizing. This is -- we can talk probably about a modest increase.

Jean-Christophe Lefevre-Moulenq - CM-CIC Securities

Okay. Thank you.

Jean-Jacques Gauthier

By the way [Technical Difficulty] what I can tell you that we're back in positive territory, without giving you a specific figure. We're back on track progressively [Multiple Speakers].

Operator

We will now take our next question from Joseph Pujal of Kepler. Please go ahead.

Josep Pujal - Kepler

Yes, hello. So, I have one question on Iraq. Could you tell us which -- how many tons did you sold in 2013 to have an idea of the weight of that market, please?

Jean-Jacques Gauthier

Yes, I will come back to this in one second. Do you have a second question?

Josep Pujal - Kepler

Yes. Why not? On Egypt, is it possible to give a little bit more granularity in these -- about this margin improvement that you are mentioning in each one, can you quantify these a little bit better?

Jean-Jacques Gauthier

At this stage I would not like to give too much detail, again, on a country-by-country basis. We also have to take into account the fact that you have to look really at Egypt on a full-year basis. The trend should be positive and it's a bit too early to give more information.

On your question about volumes in Iraq. I'm still considering it. I think we have, globally, a capacity in Iraq, which is close to 6 million tons. I think it's at 5.8 million tons. And last year we had a fairly high level of utilization.

Operator

We will now take our next question from Aynsley Lammin of Citigroup. Please go ahead.

Aynsley Lammin - Citigroup

Thanks. Morning. Just on the US going back just on the infrastructure side. Are you seeing any kind of extra caution from state, given the uncertainty around the highway bill? And does that explain the kind of difference in aggregates, volumes being down versus the better performance in cement?

And second question, just wondered if, when you look at the organic improvement in EBITDA, €69 million, just wondering if you could break up the kind of price, cost, underlying cost inflation and effects there please. I think you mentioned there was a net price cost effect of 71, but if you could just give a bit more detail, that would be great.

Jean-Jacques Gauthier

Okay. So, your first question. I'd like to mention that, indeed, after some difficult start to the year in the US due to cold weather, we have and will see some strong [ones] for market recovery. Now, when you look at where this recovery comes from, this recovery is, in our view, going to be mainly fueled by the residential sector. This year, if you look at the latest expectation, strongly believe that cement consumption will accelerate this year in the US and beyond 2014.

On your question about infrastructure, it is possible that infrastructure may be impacted by recent budget and debt ceiling issues, but we believe that, again, the -- this impact will be modest, if any, as the global demand is driven primarily by the residential sector in terms of growth.

On the evolution of our EBITDA, what I think I will do, to give you a bit more flavor, is to give you information I have given you the last quarter, which is a bridge on how you go from the published EBITDA second quarter of 2013 to the published EBITDA of the second quarter of 2014. And in this way you will understand what are the various constituents of this evolution.

First, you have a negative ForEx and scope exchange, which is €82 million negative, out of which you have €56 million from foreign exchange and €26 million from scope. So, €825 million minus €82 million. Second, you have about a flat volume effect, considering that we have, in innovation, a number of volume effects. This flat volume effect excludes those volumes which come from our innovation. Third, you have the element which I was mentioning earlier. A negative price cost and some other factor delta, negative €71 million.

Cost cutting contributed to a plus €95 million improvement of the EBITDA in the quarter. Innovation contributed to €45 million, which gives at the end, €812 million. Now, obviously these numbers of cost cutting and innovation are excluding JVs. So short recap, €825 million minus €82 million ForEx and scope, minus €71 million delta price cost on others, plus €95 million cost cutting, plus €45 million innovation gives you the €812 million for the quarter.

Operator

We will now take our next question from Elodie Rall of JPMorgan. Please go ahead.

Elodie Rall - JPMorgan

Hi. Good morning, everyone. Two questions. The first one going back in the US. There's a gain of €11 million in Q2. Can you just remind us what that is? And also, I know we've talked about price increases but do you expect a second run of price increase, given the strong trend there in H2?

And second, I know I asked that last time, but could you give us the restated cost saving target for 2014, 2015 and 2016 adjusted for IFRS 11 please?

Jean-Jacques Gauthier

On your first question, we have, in the US, a one-off effect in the second quarter of plus €11 million, which is linked to our constant ability and desire to improve our cost base. We have, in this regard, modified some of the -- some of our pension plan in the US, which gives us a benefit in the second quarter of plus €11 million, which we can consider as exceptional.

Now, this being said, you should consider that we have, on the negative side, a number of smaller, €2 million, €3 million, €4 million impacts, which were experienced and which offset this plus €11 million. So, basically, we disclosed this one because it's a relatively substantial one in particular, as it is a position on the US. But we have a number of countries where we have, again, few, limited, €2 million, €3 million negative impact. And this is basically at consolidated level a wash, if I can say so.

On your question with regard to the targets excluding JVs. For 2014, if we exclude JVs, the cost cutting amounts to €370 million, innovation €250 million. And if we look forward to 2015 and 2016, for each of these years, the cost cutting is €300 million. So, €300 million 2015, €300 million 2016. And innovation is €200 million and €200 million. So it's a global of €1.1 billion excluding JVs.

Now, I mentioned -- I found out that I did not fully answer your previous question. You asked about a possible second price increase in the US. You know, it's very uncommon that you have two price increases in the US. We prefer to have a solid one as we had, and we had announced it early on. And therefore we do not expect, per se, a second price increase in the US. Now, here or there we may adapt locally, if there are any particular surcharges or whatever, but as a global trend, not expected.

Operator

We will now take our next question from John Messenger of Redburn Europe Limited. Please go ahead.

John Messenger - Redburn Europe Ltd.

Hi, Jean-Jacques. Two questions, if I could. The first one was just on the merger coming back and the €1 billion of synergies and savings talked about at the time of the announcement. Just in terms of how the world has moved on since then. Obviously July 7 disposals details obviously flagged very much of a one -- one operation from each player in Europe as the proposed structure going forward, with divestments. Has that impacted on the actual cost savings dynamics?

Because obviously there would appear, certainly sitting outside of the combination, less overlap in terms of industrial overlap for cost savings. And arguably, less ability to maybe move on pricing without the ability to cherry pick from each company's operations in those countries. So has anything shifted in terms of getting to a synergy number that you feel comfortable with, looking forward, given the responsibility for delivering the improvement on the deal?

The second question was just on the Group and the return on capital targets for next year. If we assume the Group broadly holds profitability for the rest of the year, then you'll still need around a €1 billion improvement in operating income next year, to get to a cost of capital return. Is that something, given what you see in the first six months of this year, that it's something that you feel comfortable with?

And can I just clarify and confirm whether the Group will have to stop depreciating on all of the countries were you are planning to divest, given the way the accounting worked for the Anglo JV? Just to understand if -- and can you confirm that that is definitely not part of getting that extra €1 billion of EBITA to make a cost of capital return?

Jean-Jacques Gauthier

I'll answer this one immediately, so I don't forget because it's a clear no. We will not stop depreciating, so there's absolutely no impact of those divestments.

Okay, now, moving back to your first question which is whether we should have any impact from the divestment announcement with regard to the synergies announced. Here, also, my answer is a very strong no. Absolutely not. It is not -- we are not talking, and I've said that since the beginning, about a restructuring deal. Our synergies as calculated did not expect any plant closure.

And with regard to the announcement as we made it, you can imagine that, when we announced this transaction, we had already a very advanced view on how the divestment package would look like. So, absolutely no downside effect. I would say on the contrary.

We will look at the two companies and you know that we have now started to engage into some work with regard to integration as well as with regard to divestment. We have an integration committee and a divestment committee. As we're starting to look a bit more further into this, I think that what I can tell you at this stage is that we're rather encouraged. So nothing is changing on this side. So, this was your question on the merger.

Now, on the return on capital employed for next year. We indeed aim at moving forward and will move forward in terms of increasing our profitability and in terms of increasing our return on capital employed. We have given you a target. It's a direction where we're going.

It is too early at this stage for me to tell you whether I can completely confirm this target. But, indeed, we are getting there relatively rapidly, normally, as the situation continues to improve in a number of areas. And it definitely is a level which we will achieve within a very reasonable period of time.

John Messenger - Redburn Europe Ltd.

Thank you very much. And just on that depreciation point, because there is uncertainty, I think, from the other side as to whether you will or you will not. But how is -- is it just because there isn't a clear identified buyer and therefore when you have got a buyer targeted we will have to stop, or we'll have to start thinking around all the numbers? Because clearly, it will have an impact. It shouldn't have an impact on the fundamentals but in terms of what you will report, Jean-Jacques, it starts to mess around with the numbers?

Jean-Jacques Gauthier

No, it's more a very clear and specific accounting issues. As you know, those questions are extremely regulated by accounting. IFRS 5 criteria, which is the IFRS regulation, which applies to this kind of combination are clearly not met. So that there is absolutely not a possibility that we would go and stop depreciation. So, there is no doubt about that.

John Messenger - Redburn Europe Ltd.

Thank you.

Jean-Jacques Gauthier

IFRS 5, if you want to contemplate, is an interesting reading.

John Messenger - Redburn Europe Ltd.

Okay. It's a tough one.

Operator

We will now take our next question from John Fraser-Andrews of HSBC. Please go ahead.

John Fraser-Andrews - HSBC

Good morning, Jean-Jacques. The first question is around the price-cost moving forward in the second half, because it seems you've had nearly a 3% sequential price rise in the first half. And could you remind me what the price -- cement price movement was in Q3 last year? So we can think as to how that price movement is looking for the second half? I recall some big price falls in Nigeria and Iraq. And perhaps then you can relate the price movement, the composite price movement, to the underlying level of cost inflation? That's the first question.

The second question is in Iraq. Could we have a bit more detail, please, on the price fall? Whether that is across Iraq or whether that's in your northern operations within that region and your sales down into Baghdad, where the problem might lie? Thank you.

Jean-Jacques Gauthier

Let me start with the second question, on Iraq. We are monitoring the situation in Iraq very closely and the first thing I'd like to say is that we give top priority to the safety of our employees.

We have two situations in Iraq. We have our plants in the north, which are obviously the bulk of our industrial operations in this country. They're located in Kurdistan and they continue to produce. The only point which impacts those plants is that sales have been more limited recently, given disrupted transportation in the country.

With regard to the south of the country, we have reduced the activity of our plant. We have a plant in Karbala, which has been reduced to a minimum since the beginning of Ramadan, which is, in any event, a period of low sales. If you look at Iraq's total, Lafarge has 3,000 employees in this country, 5.8 million tons of capacity.

The pricing trends, which have been visible in the first half, are largely related to the situation in the north, where you still have a number of imports impacting the pricing environment. As things start to settle down, and let's remember Iraq is an important country anyway, the situation with regard to pricing should start progressively easing. But we're not yet there. So at this time, what we do in this country is, we continue to work very strongly on our cost base, as much as we can, to limit the negative delta price cost.

So on your first question, which related to the price-cost evolution, maybe, could you shortly rephrase, because it was a long question, if you don't mind, shortly rephrase your first question?

John Fraser-Andrews - HSBC

Sure. The observation is that your cement prices globally are up 2.9%, June 2014 on December 2013. So the question was could you remind me of the price movement in Q3 last year. I wonder if it dipped slightly or if it was stable. So I'm just then trying to relate what the global cement price increase is, moving into half two, against the current run rate of global inflation, cost inflation, which I'd appreciate an update on.

Jean-Jacques Gauthier

Now, sequentially, when you look at the sequential price increases for cement last year, they were flat. There were no price increases between Q2 and Q3. Neither from Q3 to Q4. So that has not impacted the situation.

John Fraser-Andrews - HSBC

So that means you're carrying a run rate of nearly 3% price increase into the second half, given what's happened in Q1 and Q2. And how does that relate to the global cost inflation that has been running at 3.5%, 4%? Is it still running at that level and therefore that's the equation between the two factors?

Jean-Jacques Gauthier

The global equation in terms of cost inflation, we are still above 3.5%. Actually, close to 3.8%. Where, with regard to our price increase we are not exactly at 3%, we're closer to 2.5% run rate.

John Fraser-Andrews - HSBC

Right. Moving into the second half?

Jean-Jacques Gauthier

Yes. Absolutely. Okay?

John Fraser-Andrews - HSBC

Yes. Thank you. Thanks, Jean-Jacques.

Operator

We will not take our next question from Giuseppe Mapelli of Equita SIM. Please go ahead.

Giuseppe Mapelli - Equita SIM

Yes, good morning. I have just one question. Can you give us an idea if there will be an update of the disposal list? Because I was quite surprised not to see Morocco in that list. Thank you.

Jean-Jacques Gauthier

We have indicated that the divestments announced are representing the bulk, or the majority, of the divestment, which will be dealt with as part of the LafargeHolcim merger. We have also stated that, if needed, both groups will continue to consider whether divestments will be -- additional divestment will be necessary in respect to where there might be overlaps, or depending on regulatory requirements.

So I will not comment on any particular other situation. But we have clearly stated that there could be, here or there, some specific situation which -- where we might consider additional divestments. Implying, to be very clear, that it's likely that there will be a few more.

Operator

We will now take our next from Mike Betts of Jefferies. Please go ahead.

Mike Betts - Jefferies

Yes, thanks very much. Yes, please, Jean-Jacques. My first question is on Brazil. There seemed to be quite a slowdown in volumes in Q2. Could you quantify that? And then, secondly, volumes are pretty flat the half year but the forecast is still 2% to 5% growth for the year. Why the confidence that it's going to bounce back in the second half?

And then my second question, on the scope, I think you indicated an 80 to 85 hit this year, if I got my numbers right. Does that assume any contribution from Ecuador and Pakistan? Are they in that number? Thank you.

Jean-Jacques Gauthier

Starting with your second question. This does not include a contribution of either Ecuador or Pakistan, which we'll disclose later in the year. So, this impact, if any, will be more in 2015.

Mike Betts - Jefferies

Okay.

Jean-Jacques Gauthier

On Brazil, the Brazilian economy, despite slowing down a little, remains a big economy. So that, for us, is an indication that demand should, looking forward, continue to be reasonably solid, whilst impacted by post-soccer events.

If I look at the Brazilian volumes in the second quarter, they have been down at 5%. But you have to keep in mind that this quarter was impacted, indeed, by the games pre-activity and a number of lower -- number lower of days. So clearly, not completely reflecting what you should see normally.

We believe that our expectation of growth for the market of 2% to 5% remains valid. Now, the reason why we give a range is that sometimes you are at the upper end of the range and sometimes you are at the lower end of the range. So, it's more likely, at this time that we will be at the very low end of the range.

Operator

We will now take our next question from Harry Goad of Credit Suisse. Please go ahead.

Harry Goad - Credit Suisse

Yes, good morning. It's Harry from Credit Suisse. One question from the numbers you've given on the JVs please and apologies if this is a stupid question but looking at the EBITDA contribution, Q2, €11 million, if I then look down to the pretax contribution income from JV and associates of €41 million, just implies -- is it right to conclude the JV business is very heavy on depreciation and finance charges? Is that the right conclusion to be coming to there?

Jean-Jacques Gauthier

Do you have a second question?

Harry Goad - Credit Suisse

No. Just the one question, please.

Jean-Jacques Gauthier

We had some finance charges in China, which you indeed need to take into account, plus impact of minorities in Morocco. I suppose those are some of the two key JVs that we are taking into account. We can give you separately some more detail if you wish.

Operator

We will now take our last question from Robert Muir of Berenberg. Please go ahead.

Robert Muir - Berenberg

Yes, good morning, Jean-Jacques. I just have a question really about -- more about the merger process in terms of divestments. And I just wanted to confirm, do you plan to divest assets before you get approval in Europe, given the risks, on July 7? Or will the divestment have to occur after the approval? And then in terms of, presumably, if it's before, you want to secure commitments and interest from parties that want to acquire these assets, will there be any cost if the deal doesn't go ahead?

Then my second question is more about how also in Europe on the prices of deals. How -- is there any considerations from any interested parties about the ongoing antitrust investigation and has that been a factor in conversations? I was thinking more about potentially enquiries from who are not already present in Europe? Thanks.

Jean-Jacques Gauthier

All divestments in Europe, which we have been working on, which have been identified and announced, will be negotiated and signed subject to the approval of the Brussels antitrust authorities. In other words, if that was not to come, then the divestment would not take place.

Now, this being said, let's be very clear on a few things here. We consider that we are, on this process, very much on track with all our plans and all our expectations. We will soon, as soon as next week, start to have some information exchanges from our bankers to potential acquirers. So, starting very soon.

We will, in order to choose the buyers which should be retained, look in particular at three very important criteria. Speed, number one. Value and value creation, number two. Certainty of execution, number three. You know that we've had many, many marks of interest. A number of them for a global package and a number of them for individual assets. So, really, this divestment process is more than on track, we're confident and we are also confident that the timeline which we have set will be respected.

Discussions with antitrust authorities are going on in a constructive way and we do not expect that the discussion would put some difficulties on the expected timing. So, everything is on track. Indeed, as you can imagine, there are some costs associated to these works as in any divestment, by the way. But as a short summary, we're on track, we're moving forward swiftly and we'll start more specifically to discuss with the potential buyers very shortly.

Robert Muir - Berenberg

Okay. Got it.

Jean-Jacques Gauthier

At this stage I want to thank you a lot for your presence, for your interest in Lafarge and in Lafarge Holcim and I look forward to talk to you very soon, as we announce our third quarter results. Thank you very much. And for those of you who take a few days' vacation, have a very nice vacation. Thanks a lot.

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Source: LaFarge Coppee (LFGEF) Q2 2014 Results - Earnings Call Transcript

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