LafargeHolcim's (HCMLY) CEO Eric Olsen on Q1 2016 Results - Earnings Call Transcript

| About: LAFARGEHOLCIM LTD (HCMLY)

LafargeHolcim Ltd. (OTCPK:HCMLY) Q1 2016 Earnings Conference Call May 12, 2016 4:00 AM ET

Executives

Eric Olsen - Chief Executive Officer

Ron Wirahadiraksa - Chief Financial Officer

Analysts

Arnaud Lehmann - Bank of America Merrill Lynch

Robert Muir - Berenberg, Gossler & Co.

Yassine Touahri - Exane Ltd.

Robert Gardiner - J&E Davy

Elodie Rall - JPMorgan Securities

Mike Betts - Jefferies International Ltd.

Christian Korth - MainFirst Bank

Gregor Kuglitsch - UBS Ltd.

Josep Pujal - Kepler Cheuvreux

Christian Arnold - Bank Vontobel

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Q1 2016 Results Analyst Conference Call. I'm Celina, the Chorus Call operator. I would like to remind you that all participants are in a listen-only mode and the conference is being recorded. After a presentation, there will be a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand you over to Mr. Eric Olsen, CEO of LafargeHolcim. Please go ahead, sir.

Eric Olsen

Good morning to everyone on the call. Thanks for joining us today for our first quarter earnings call. I'm here with our CFO, Ron Wirahadiraksa, who will be commenting on our results in a few moments. It's a busy day for us here today in Zurich because we're holding our AGM this afternoon, so we're trying to fit a lot into the day.

So, let's get started. As you know, the first quarter is traditionally the smallest quarter in the year for us due to the seasonality in the Northern Hemisphere. This triggers some of the volatility from one year to another. This is amplified this year as in Q1 of 2015, which was the last quarter before the completion of the merger, was affected by some positive items in 2015 that Ron will cover in a minute.

First of all, let's focus on our underlying business performance in the first quarter, and why it gives me confidence that we are on track to deliver a sound performance and a year of solid progress towards our 2018 targets. To be precise, we are expecting to deliver at least a high single-digit like-for-like adjusted EBITDA growth in 2016.

Let me start by making a few points about our performance. First, the price environment is strengthening. We have driven a clear directional shift in pricing in Q1 2016. Although prices remain much lower than at the same quarter last year, two-thirds of our country has raised prices from Q4 to Q1, driving an average price increase of 2.1% quarter-on-quarter, excluding India. We will see the full benefits of this in future quarters, including in those markets where pricing has been difficult, such as Nigeria and India.

Secondly, synergies are on track and we are confident that we will deliver on our objective to exceed CHF 450 million for 2016. Ron, will pick this up in more detail in a moment.

Third, China, Indonesia and India turnarounds are underway, and we are starting to reap the benefits of the decisive cost initiatives we have put in place. China and Indonesia results stabilized in the first quarter and in India, we saw visible results of cost-cutting, notably coming from our fuel strategy.

Fourth, cash flow generation is strong. As you know, our key measure of success is cash flow. In the first quarter, operating free cash flow performance improved 19% versus Q1 last year as a result of our tight control on CapEx and working capital.

Fifth, we expect to deliver our CHF 3.5 billion divestment target for 2016 with more than a third already secured and assets currently under discussion for an amount that'll allow us to maximize value while ensuring certainty of execution of our program. As we continue to evaluate our portfolio, we fully expect our divestment program to extend into 2017.

And finally, all this is happening in a favorable environment where we see demand in our markets overall growing in all product lines. We see declining fuel prices, changing the fuel mix and lower energy prices helped us reduce our energy costs this quarter by more than 9% or CHF 65 million. And we will seek further opportunities to reduce energy costs in the coming quarters.

Before handing over to Ron, I want to make one final comment. We anticipated a difficult comparison with Q1 2015 and our actions on pricing, costs, synergies and CapEx spending were consistent with our plans. In fact, our results this quarter were fully on track with our own internal expectations. The first quarter is not indicative of our full-year results as we expect to see momentum building through the year. Consequently, we thought it would be helpful to share our expectation today that we will deliver at least a high single-digit like-for-like operating EBITDA growth in 2016.

With that, I will now hand over to Ron.

Ron Wirahadiraksa

Thank you, Eric, and good morning, everyone. Let me start with an overview of our key financial figures to explain how the group is currently performing. Just to be clear, the currency that I'm referring to throughout is in Swiss francs.

As Eric said, volumes rose across all our product lines compared with Q1 2015. We recorded like-for-like volume increases of 1.4% in cement, 1% in aggregate and 1.8% in ready-mix. Growth was predominantly driven by Asia Pacific, North America and Middle East Africa, with Latin America and Europe lagging behind.

Overall, net sales in Q1 were flat like-for-like compared to a year ago. This is mainly the result of the challenging pricing conditions in Nigeria, India and China throughout 2015 which impacted the year-on-year comparison. Looking at the price trend on a sequential quarter basis tells a different story as Q1 2016 price levels have been on average above the ones seen in Q4 2015.

Adjusted operating EBITDA declined by 17% like-for-like. In addition to the pricing impact on our EBITDA of CHF 169 million, there were CHF 85 million of positive items recorded in Q1 2015 that did not repeat in Q1 2016. These premerger housekeeping items include a sales tax credit of CHF 20 million in India and CHF 20 million in U.S. pension credits, with the balance dispersed across the regions and countries. Typical, for example, was the reversal of a provision for mining royalties in Ecuador or the reversal of provisions for maintenance where less money was spent than budgeted for. So, combining all these smaller items resulted in a noticeable overall impact. These positive items will not have an impact in future quarters.

Also, the first quarter is generally the smallest and often most volatile in the year and, therefore, is not an accurate guide to the rest of the year. The performance actually was in line with our own expectations. Net income of minus CHF 47 million improved by CHF 22 million compared with Q1 results when excluding the divestment gain of CHF 432 million pre-tax arising from the divestment of assets to CEMEX and a minority shareholding in Siam City Cement, Thailand in Q1 2015.

Our operating free cash flow, which is cash flow from operating activities less CapEx, improved. This is a key performance indicator in our strategy. While still negative at minus CHF 618 million due to the seasonality of our business, it does represent an improvement of 19% over last year. Net debt at the end of Q1 stood at CHF 18 billion, which is an increase of CHF 775 million compared to the end of 2015. This pattern, again, is due to the seasonality of our business and was, therefore, fully expected. We expect net debt to be around CHF 13 billion by year-end 2016.

Looking at the regional distribution of our net sales and the adjusted operating EBITDA, we see that our businesses are well spread and that we have a diversified revenue and earnings mix. This allows us to not only benefit from every regional upswing, but also is a strong contributor to our steady generation of free cash flow. Group revenues were flat on a like-for-like basis and the nominal decline of 5.5% is, to a large extent, driven by the unfavorable development of many currencies against the Swiss franc.

Let me now dive into each region. In Asia Pacific, we saw substantially higher like-for-like volumes across all our business segments. While year-on-year prices are down 6.6%, we did see a sequential improvement quarter-on-quarter of about 1% with improvement in Indonesia and China.

In India, the volume development in Q1 versus a year ago was positive at 9.2%; however, pricing still lagged compared to a year ago. With our own pricing strategy and positive price trends recently seen in the north, we expect to see higher prices in the coming months.

In China, our ongoing focus on cost is bearing its first results. We have successfully renegotiated coal energy contract and increased the use of petcoke. These measures allowed us to more than offset the negative impact from lower market prices and to turn in a profitable quarter.

Margin improvement in Indonesia and Vietnam partially offset low profitability in Australia, where a number of larger projects including the Gorgon LNG project concluded in the quarter. In Europe, we saw encouraging volumes in some Eastern European markets like Serbia and Romania, and some resilience in Switzerland and France.

Overall, the market remained mixed with substantially lower results from Russia and Azerbaijan. We continue to address the situation in Russia given the reduced construction activity there. We are working on cost containment and streamlining our setup to align with the current demand situation. For example, we are mothballing our grinding activities at the Voskresensk plant.

Adjusted operating EBITDA was negatively impacted by the effect of lower comparable pricing versus Q1 2015 in many markets including France, Poland and Switzerland. Pricing amounted with CHF 35 million for the negative variant in the quarter. Additionally, we have CHF 9 million lower CO2 sales and the absence of the Q1 2015 positive items, which accounted for another CHF 23 million. Cash flow from operating activities improved, while total CapEx declined compared to a year ago.

Performance in Latin America was positive in many important markets like Central America, Argentina, Mexico and Colombia. However, the negative trend in Brazil and Ecuador more than offset this. Volumes were significantly down there year-on-year due to the political situation in Brazil and the massively reduced spending in Ecuador as a consequence of the persistently low oil price. Together, the volume impact and adjusted operating EBITDA from Brazil and Ecuador alone was a negative CHF 41 million. Adverse forex impact added another CHF 21 million of negative impact in the region.

In Mexico, we followed through on our pricing strategy. Price improvements of 13% year-on-year and volume growth of over 8% showed the robustness of this market. It's a trend that we expect to continue together with sure positive development in Argentina and Colombia. In Brazil, we will continue to optimize our prospects not least by the commissioning of our Barroso plant later this year.

The region, Middle East Africa, showed higher demand across several countries, especially Northern Africa. However, these positive trends were partly offset by lower volumes in sub-Saharan Africa. Nevertheless, volumes were up in all segments. The financial performance of the region as a whole was heavily affected by Nigeria and to a lesser extent Zambia which together had a negative impact on the adjusted operating EBITDA of CHF 80 million. The main reason was the competitive price pressure in Nigeria. Since late March, we have been able to raise prices again and we expect to improve our future performance.

In Egypt, we saw a positive pricing environment in the first quarter of the year on a sequential basis, as the recovery of demand for building materials we saw in Q4 2015 continued in Q1 2016. Despite some clinker production issues, Algeria posted an improved EBITDA versus last year and further positive trends were seen in Lebanon and Morocco. We reduced our CapEx in the quarter by CHF 8 million, but are nevertheless optimizing production to take advantage where the market is strong. We expect to start Biskra in Algeria during Q3 followed by UNICEM in Q4.

Not surprisingly, North America posted improved results on the back of ongoing higher demand and a stronger pricing environment. Like-for-like net sales rose 10%. ROI and price effects contributed CHF 38 million to adjusted operating EBITDA in the quarter. The pre-merger positive items relating to pension credits in Q1 2015 impacted the year-on-year comparison. North America remains also a strong contributor to the realization of the synergies.

In the first quarter of 2016, the U.S. and Canada delivered some CHF 20 million of merger-related synergies, part of the group's total of CHF 104 million. Cash flow from operating activities was CHF 20 million or 4.3% lower on a like-for-like basis, as we have been optimizing our production to take advantage of strong market conditions. And CapEx increased by CHF 25 million as we prepare Exshaw and Ravena to come on stream in the next 12 months.

I would now like to spend a few moments talking about the adjusted operating EBITDA bridge. The most significant variance can be explained by the very sharp negative impact of India, Nigeria, and China. These countries alone accounted for CHF 170 million of negative price variant in the quarter. And as I have already explained in the regional commentaries, we are taking decisive actions to improve the situations in these three countries. In addition and as explained at our Q4 meeting on March 17, we expect the forex headwind to persist in this first half of 2016 before slowly fading out.

In the first quarter of this year, we recorded a negative forex effect of some CHF 43 million, and on net sales, the impact was around CHF 240 million. We also did not sell any CO2 credits, hence, another CFH 17 million of negative variance compared to last year. Merger, restructuring and other one-offs amounted for CHF 50 million in the quarter, and we continue to expect a total of CHF 400 million of such costs in 2016. The underlying performance of the group is encouraging, and let me use the next slide to further demonstrate this.

Starting with Q1 2015, we have plotted here the sequential cement price development for the group. After three quarters of declines in prices for cement across the group, we saw an improvement in the first quarter of 2016. While we still have some declining markets, we can say that in the majority of our markets, we do see our strategy paying off with increases in cement prices.

On a sequential basis from Q4 2015 to Q1 2016 and calculated at constant geographical mix effect, our cement prices increased by 1.2% for the group and by 2.1% if we exclude the still negative trend from India, our largest single country. As the construction season enters into full swing now, and based on price increases progressively put in place during the first quarter of 2016, we expect this to further improve in the coming quarters including India and Nigeria.

EBITDA synergies are a key deliverable in 2016 and progress was also made in the first quarter by delivering CHF 104 million. We are on track to deliver our full-year target of more than CHF 450 million of additional synergies this year. Good progress was made on cutting costs, for example, by optimizing our network where there was overlap adopting productivity best practices and eliminating overlap in administrative offices.

In the coming quarters, these synergies are expected to show their full impact on our P&L as we continue to reduce our cost base. Financing synergies in the quarter amounted to about CHF 20 million bringing the cumulative finance savings to around CHF 40 million. As we expected, our operating free cash flow showed its normal seasonality and remained negative in the first quarter of 2016. Nevertheless, we've been able to post an improvement of 19% compared to a year ago. Lower operating EBITDA was more than compensated by the positive contribution from better net working capital management and the lower need for CapEx compared to 2015.

Let me finish my part of this presentation by quickly looking at the development of our net financial debt. At CHF 18 billion, net debt was CHF 775 million higher than at the end of the year. But again and due to the seasonal nature of our business with negative cash flow from operating activities, this was expected. Lower CapEx than a year ago contained the impact to some extent. But the persistent forex headwind I mentioned earlier contributed to part of the rise in debt. We expect net debt to be around CHF 13 billion by year-end 2016.

Thank you and I will now hand back to Eric.

Eric Olsen

Thanks, Ron. I'd like now to go through our outlook for 2016 and summarize how we are directing our efforts to drive the performance of our new group. First, we confirm the view of our markets for 2016 that we gave you in March. Cement demand is improving and will head towards an overall growth in the markets where we operate of 2% to 4%.

Throughout the company, we are focusing on prices, costs, and opportunities. We are controlling CapEx by keeping a tight rein on expansion CapEx while spending what we need on maintenance to keep our business running as it should. I'm very happy with our continued progress on synergies, heading towards exceeding CHF450 million of incremental synergies this year. And as you just heard, net debt is within our parameters and we expect to finish the year at around CHF 13 billion. Finally, I already mentioned that we have seen a positive evolution of cement pricing quarter-on-quarter and we believe that this trend will continue in the coming quarters.

We are up and running and driving the transformation of our new group around the four strategic pillars that you see on this slide. As you know, this is a profound and fundamental shift of our business model towards value creation and cash return to shareholders.

First, we are in the process of a commercial transformation. One of the key elements of this is how we look at product pricing locally, nationally and globally. Beyond a strong managerial focus, we are deploying dedicated, qualified pricing managers into our markets. But responsibility for pricing does not end with them. We want our entire sales force to focus on capturing the value that we bring to every one of our customers' projects.

The second pillar is cost leadership. We see that beyond the synergies, our contingency plans on cost are making a bit difference. Ron mentioned China, where we have significantly reduced costs. And it is the same with the changes to the fuel mix in India. In Indonesia, leveraging both the start-up of our new Tuban plant and the integration of the two legacy networks, we are aggressively tackling our logistics cost and will increasingly benefit from these actions throughout the year. This does not mean that we are completely there yet.

In the first quarter, we had several countries with disappointing performance like Nigeria and Malaysia. In others, we could have done even better, like in the United States or Algeria. In these markets, we had production or logistics challenges that either limited our ability to benefit from the market growth fully or increased our cost of production. Our priority is to work on these countries where we have clear and sizable opportunities.

The third pillar is about running the group with an asset-light mindset. We are increasingly seeing scope to redeploy plant and equipment throughout the group. For example, in the U.S. where we are restarting previously mothballed kilns and leveraging our combined network of assets. Here, we are well placed to expand capacity with market growth without significant investment for the next several years.

The fourth pillar is sustainability. This is a critical part of our business model, bringing a significant differentiation potential. This is also an area where you have to look far ahead. This is why we have launched just last month our 2030 Plan. The plan sets out clear challenging but necessary goals for how we do business. One target, for example, is to produce 40% less CO2 per tonne of cement than we did in 1990 and help our customers avoid releasing 10 million tonnes of CO2 annually by using our innovations. The 2030 Plan is broad and deep and has far too much detail and scope to go into here. However, I encourage you all to go and look at the detail on our website.

To conclude, I would reaffirm what I told you earlier. Q1 is our smallest quarter and it was affected by year-on-year, by seasonality, pricing in some markets and some positive items in Q1 2015. That being said, looking at the underlying trend, I'm confident that 2016 will be a year of solid progress towards reaching our 2018 objectives. And we expect to deliver, at least, a high-single-digit like-for-like growth in adjusted operating EBITDA.

We've reached an inflection point on prices and our actions will gain momentum in the quarters to come. We are on track to exceed our 2016 synergy target, and we will fully deliver our divestment target. The turnaround of difficult countries like China, Indonesia and India is well underway. And our cash flow generation is strong. And we are operating in a favorable environment with sustained demand in all our product lines and lower energy costs.

We are implementing our strategic roadmap and we are committed to maximizing cash flow generation and applying a strict capital allocation discipline. This will result in a strong financial structure and significant cash returns to shareholders.

Thank you very much, and we will now take your questions. And as we do this, could you please be considerate and limit your questions to two at a time, so that as many of you as possible can get a chance to participate in the Q&A? Thank you very much.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mr. Arnaud Lehmann from Bank of America. Please go ahead.

Arnaud Lehmann

Thank you very much. Good morning, gentlemen. Arnaud Lehmann, Bank of America Merrill Lynch. Two questions then. Firstly, I think you mentioned price increases in India and Nigeria. I mean, obviously, we know year-on-year pricing is down in these two countries. So, could you please elaborate a little bit because in India we've seen higher volumes but lower prices in the first quarter? So, could you give us more details about when you think prices could stop to move up? And also in Nigeria, obviously, you're not really market leader. Have you seen your main competitor there moving prices higher? That's my first question.

And my second question if I may is related to Brazil. You mentioned obviously the new line in Barroso plant. Could you elaborate a little bit about the impact on your cost base and to which extent you believe this could partly offset the lower volumes in Brazil this year? Thank you.

Eric Olsen

Okay. Thanks, Arnaud, for the two questions. First of all on pricing overall and this is - what I'm going to say is also true for several markets where our price increases went in place progressively during the quarter. So, what you see in the Q1 results is a favorable trend in pricing compared to Q4. But the full effect of what we've done is not represented in the Q1 numbers. And that's true for Nigeria. And that's true for India specifically.

Whereas in India, what happened was in December, prices fell across India by, you could say roughly 10%. And our entry point into Q1 was a decline in that range. And prices more or less stayed there for the first two-third, January and February. And we started moving prices up in March. So, you have a part of the benefit in Q1. And we expect that trend to sustain over Q2. But the comparison, as you say, compared to Q1 2015 is - shows a sharp decline because the evolution in price in Q1 - just to remind you in 2015 what happened, price spiked up in India in Q1 2015, and then it started coming off in Q2. So, we ought to end up not too different overall on a year-on-year comparison in Q2 versus Q2 last year with the increase that we put through in March.

As for Nigeria, it's a little bit the same story, but it didn't - the prices didn't come down in Q2 and Q3 in Nigeria. They came down in Q3 in Nigeria, and they came down by in the range of 30%. And in March, similarly, we put through price increases in the range of $10 per tonne in Nigeria, and we will look to continue to increase. But even going through Q2, we will continue to have year-on-year - we would expect to have year-on-year decline. But it'll show favorable moment quarter-on-quarter during the year.

Arnaud Lehmann

Okay.

Eric Olsen

And the second question on Brazil. Barroso, yes. In fact, we're getting ready to have the ribbon-cutting ceremony there in a couple weeks. I'll actually be there for the ribbon-cutting ceremony. And yes...

Arnaud Lehmann

Lucky you.

Eric Olsen

...Barroso is going to - will lower our costs and it'll allow us to do networking optimization. So, I can't tell you that the market is strong in Brazil because it's not. And in fact, it's - I don't think we're at the end of the challenges from a demand standpoint in Brazil. That's clear. But what we have is we have a new low cost plant, Barroso, which will lower our costs and will allow us to do clever networking optimizations with other plants in Brazil. So, we still remain on what we've said, which is even though the year-on-year comparison in Brazil, for instance, is quite challenging from a price and a volume standpoint, with our cost reduction actions, we're still looking to have Brazil be a net year-on-year contributor to EBITDA for the group overall, partly linked to what you're saying on Barroso, the cost reduction in Barroso.

Arnaud Lehmann

All right. Very clear. Thank you very much. Fair enough.

Operator

The next question is from Mr. Robert Muir from Berenberg. Please go ahead.

Robert Muir

Yeah. Good morning, Eric. Good morning, Ron.

Eric Olsen

Good morning, Robert.

Robert Muir

I'm going to follow up on prices there. Could you - just on the 2.1% ex India, could you maybe substantiate this a bit more, maybe if you give us an indication of the sequential moves and maybe some of your top markets. I know you've already spoken about Nigeria and then India, but could you maybe give us a few others? And where were you at the exit of the quarter, not just the average?

And then, my second question would be what do you think is attainable kind of realistically year-on-year for pricing? I guess price mix wise it's down 3.4% in the first quarter. I think the comment made by Ron earlier on was that in Q1 you're above the average of last year although I may have that wrong. What do you anticipate for this year? Is it going to be maybe your consolidation going back to where you were or do you anticipate even being ahead? And then, if it's not too much, maybe how do you think about this with the cost inflation that's going on at the moment [indiscernible] sizable tailwind on [indiscernible]? Thanks very much.

Eric Olsen

Yeah. Okay. So, first of all, no, I don't think Ron said that we are at a similar level as last year. He shows on the chart in the presentation you can see - you see the evolution of price which fell in consecutive quarters Q2, Q3, Q4 last year, and turning it. And where we are, we've turned it and we've got favorable momentum quarter-on-quarter. But the endpoint you see is lower than where the starting point was there, which attributes to a big piece of the year-on-year comparison difference. But you've got price increases coming through in lots of markets. I'll let Ron speak in a second to the specifics of the different markets.

But overall, this is - and this is what we've said consistently over the last several months, this is one of our key drivers of value creation this year. And we would expect to be better in price evolution and cost inflation in the year. And based on the first quarter's evolution, and as I said, we only have a part of what we even did in Q1 actually represented in the Q1 results. It reinforces the confidence that we're on that track for the year. And maybe, Ron, maybe a couple of comments on the specific markets.

Ron Wirahadiraksa

Thanks, Eric. Yeah. So, what I did say at the beginning of my speech was that price levels in Q1 have been on average above the ones seen in Q4 of 2015. Just to make sure.

Robert Muir

Sorry. That was my mistake.

Ron Wirahadiraksa

No, no. It's okay. Yeah. We did see price increases in the brunt of our countries with couple of specific callouts in the U.S., very strong market. We've seen price increases in Canada, both East and West. In Mexico, where we altered our strategy of last year which was more volume-driven, we still got - we see, and as I've said, good price increases, 13%, and the volume uptick of 8%.

Robert Muir

Is that sequentially there?

Ron Wirahadiraksa

No, no. That is the year-on-year.

Robert Muir

Okay.

Ron Wirahadiraksa

Yeah. And then in Colombia, we had progressed from Q4 to Q1 in France, in Algeria and in Egypt. I do have to say that if you do the Q1 year-on-year compared with last year, we have to acknowledge that these three big markets regarding price volumes, it's India and China and Nigeria take almost CHF 170 million in price variance. So, I think our message is, sequentially, we've seen pricing getting better. I gave you the countries where we saw that happen. And we are expecting, and based on what Eric said, based on a somewhat later uptick in Q1 that these price increases started to take hold, a better result in Q2.

Robert Muir

Okay. Great. Thank you.

Ron Wirahadiraksa

Yeah.

Eric Olsen

Sure. Yeah. And maybe just to add on the whole kind of forward momentum on pricing, the way when we put in price increases, there's sometimes a delayed effect where ongoing contracts that are already in place, and it takes a couple of months for it to fully work through. And that's certainly true in markets like the U.S. and others, so we have good visibility on the forward trend of pricing, which is consistent with what Ron shared.

Robert Muir

So, the exit rate is above actually 0.1% then presumably by a reasonable amount?

Eric Olsen

Yeah. Yes.

Robert Muir

Okay. Great.

Operator

The next question comes from Yassine Touahri from Exane. Please go ahead.

Yassine Touahri

Yes. Hello. Good morning, gentlemen. My first question would be on your guidance for high-single-digit like-for-like EBITDA growth, from which do you exclude the one-off that you had last year? So should I think about the like-for-like growth from an EBITDA which excludes CHF 85 million of one-off and the CHF 17 million of CO2? And the next question as well, if I do that, it suggests that you're expecting like-for-like EBITDA growth of more than 10% in the next three quarter, is that right?

And my second question would be on the pricing again. Could you - I understand that you have an increase in prices in - sequentially in Q2 in India, Nigeria, U.S. Is there any other countries where you're expecting the situation to improve in Q2 versus Q1?

Eric Olsen

Yes. So, first, okay. So, two questions around the one-offs and how do we handle one-offs in the guidance, and second is where else do we have price increases coming in Q2 and where do we expect the impact to be. So, on the question on the one-offs, we're talking about adjusted like-for-like EBITDA and why? Because one is the one-offs were higher last year in 2015 than we would expect them to be in 2016 and what we want to do is get to speak to underlying business performance. So, the idea talking about adjusted EBITDA is to speak to about underlying EBITDA evolution holding aside the higher level of one-offs.

Yassine Touahri

So, for example, the base for 2015 you published an EBITDA of CHF 5.75 million. If I exclude the one-offs, the base is CHF 5.65 million. Should I consider the CHF 5.65 million as a base?

Eric Olsen

Yeah. Go.

Ron Wirahadiraksa

Are you sure?

Eric Olsen

Yeah.

Ron Wirahadiraksa

So, you're talking about - we don't see that the full part as one-off. So, we spoke about what we call positive items, and we called out specifically CHF 20 million for the sales tax credit in India, and for the U.S., we called out CHF 22 million in pension credits. Those two, we have adjusted out of the adjusted operating EBITDA in Q4, though the other ones are not to be seen as one-offs because they don't meet thresholds. We don't count them there. As I said, it's part a bit maybe of a pre-merger housekeeping, and therefore, within the ordinary realm of reassessing provisions, and I've outlined a few. So, I know that's not the case. So the compare is really CHF 5.751 million.

Yassine Touahri

Okay.

Ron Wirahadiraksa

Yeah.

Eric Olsen

And then your second question on pricing. So, you have the effect, the ongoing effect of increases that happened in March when there was a handful. You have the fact that a piece of the overall U.S. price increase ends up going through on April 1, not on January 1, and there's some markets within Europe where we're looking to selectively increase prices, in some markets in Asia as well such as the Philippines where we're looking to - we put in place pricing increases as well.

Yassine Touahri

And my question about the like-for-like organic growth in place for the three quarter, the three remaining quarter of the year, is it fair to understand that your guidance imply more than 10% like-for-like growth in EBITDA for the next three quarter on average?

Eric Olsen

That would be - that your math is correct.

Yassine Touahri

Okay. Thank you.

Operator

The next question comes from Mr. Robert Gardiner from Davy. Your line is open.

Robert Gardiner

Good morning. Thanks for taking my questions. Two for me. So, one, just back on the EBITDA bridge. So, you've highlighted the declines in price. Could you give us a bit more color on the declines in cost because it was negative CHF 145 million in the quarter with energy tailwinds I think of about CHF 65 million? So, a bit of color there just in terms of what's moving significantly in terms of your cost base there.

And then secondly, just back on, again, sorry to come back on guidance, you talked there about some of the once-off items. In terms of the scope impacts from this point or from the end of Q1, I assume that it's Morocco, it's Korea. Does it also include India, which I see you are holding as classified for sale? Thank you.

Eric Olsen

Okay. Thank you. So, the CHF 154 million (sic) [CHF 145 million] that you referred to on the bridge, in there is CHF 67 million of the one-offs. So, that was the first that I can tell you. Then, Europe, Argentina inflation in there, CHF 30 million, not as an excuse but as an explanation, just to do the bridge.

And then you have close to CHF 40 million on what we call good cost. So, for example, we imported more clinkers in Algeria, we have higher imported cement in the Philippines, so those are good markets. So we also have energy savings. Now, the energy savings in total of CHF 65 million. Of those, CHF 40 million are in the cost bridge that you see there and CHF 25 million is in the synergies, right? So, if you don't look at the overall inflation, then we still have 2.9% than underlying. We feel we are in a good track in reducing cost.

Robert Gardiner

Okay. Thank you.

Eric Olsen

You got it.

Robert Gardiner

Yeah. And just on the scope impact implied in your guidance, does it exclude Lafarge India?

Eric Olsen

Yes, yes, it does. But the guidance is like-for-like based on the last year on a scope basis overall. But it does exclude the Lafarge India.

Robert Gardiner

Okay. And just sorry to come back on the - I see half of the business or the 5 million tonnes was held for sale. So, do you have any update on the disposal process there? Are you back to divesting 5 million tonnes or it's still the full asset?

Eric Olsen

No, no. There's been lots of evolution over the last several months on that topic. So, what we're doing is we're selling all of the former Lafarge assets which is over 10 million tonnes in India, and there's a process underway as a part of - in the CCI order, the competition authority in India, to divest that, and we're well advanced in the process with many - high level of interest for those assets. So, that's something that we would expect to conclude in the second half of this year.

Robert Gardiner

Okay, great. Thank you very much.

Operator

The next question is from Mrs. Elodie Rall from JPMorgan. Please go ahead.

Elodie Rall

Hi, good morning.

Eric Olsen

Good morning.

Elodie Rall

So, two questions please. To come back on the guidance again, I think it's very clear what you're saying on prices, but can I ask what is your assumption on cost from Q1 onwards? I think petcoke is going up and how do you project into the guidance? And second, on Nigeria, you talked about prices, but what about volumes? Can you tell us why they're still negative at the moment when Dangote reported, I think, 45% volume increase? So what is happening there, please? Thank you.

Eric Olsen

Yeah. So, I'll start with Nigeria. Nigeria, our comparison is versus the Q1 2015 where our volume increased sharply because of some production problems that our main competitor was having in Q1 2015. So, the comparison versus 2016 naturally comes down because of the same production problems weren't there, which accounts for probably some of the percentage change that you're talking about.

But yeah, so - and Nigeria is - our plants continue to function well. We had logistics challenges from our logistics strike in the quarter, and we had some energy supply issues in some of our plants that we believe are behind us right now. Later in the year, we have additional capacity coming out as well in the year. Our plants are basically sold out, and we're selling what we can sell, what we can produce in Nigeria right now. And we'll be increasing our capacity later in the year.

Elodie Rall

Okay. So, the trend is already better in April and May then?

Eric Olsen

Yeah. Because that comparative trend you're talking about, I think, relates to a specific situation that was in place in Q1 2015, where we gained a tremendous amount of volume because of the situation in the country at that time. And I think you'll just see some of that reversing in the Q1 numbers.

Ron Wirahadiraksa

As to the bridge, as we have said, we expect volume to grow for this year 2% to 4%. Bear in mind that we also have some additional capacity ramping to address good markets, sold out markets, markets where we have good position and ramp additional capacity [indiscernible]. The price effect for the remainder of the year, we expect that to flip. As we've said very clearly in Q4, communications and the guidance that we gave there, the first half of 2016 is very challenging compared with the first half of 2015? So, the entry of this year in pricing was significantly down. So, we expect that to turn.

Forex, we expect, on average, we have some tailwind from forex because the second half, you'd look much better at prevailing rates, as we see them now, and then we expect also a positive overall cost effect, not the least driven by the remaining synergies. Out of the CHF 450 million, we did CHF 104 million. So, the brunt of it is still to come. That's how I would bridge to the guided at least high-single digits.

Elodie Rall

You talked about FX. Can you quantify what you view is on [indiscernible] for the full year if you take the current spot?

Ron Wirahadiraksa

Yes. So, the second half, I said there will be a positive effect. If you look currently, we expected it could be for the full year slightly negative. Okay?

Eric Olsen

Thank you for the question.

Operator

The next question comes from Mr. Mike Betts from Jefferies. Please go ahead.

Mike Betts

Thanks very much. My two questions please. The first one, Ron, you talked about the cost increases or whatever in Q1. Could you talk about the savings outside of the synergies, the cost savings you achieved in Q1 and some view as what that might be for the year. And particularly, I think you've increased - you're doing more cost saving in Europe, so maybe you could cover that as well.

And then the second question, I noticed there is a discontinued positive CHF 17 million at the next level. Could you explain what's in there? And I guess particularly to try and do a true comparison with the first quarter of last year, if those businesses would still be consolidated, what would have been their EBITDA contribution? Thank you.

Ron Wirahadiraksa

Yeah. On the last part, those are the two plants that we already had in discontinued operations in India. And so that explains that we haven't guided for what the income is related to that level, I believe, for the full year.

So, then your other question was on the cost savings. Yeah, so with the analysis that I just before ago, we can of course not forget that we do have cost inflation because we're in a couple of emerging markets where inflation, particularly wage inflation, is still quite significant. So we've seen, let's say, average inflation rate in those countries adding up to about overall for us 2.9%. Nevertheless, we feel that in the reduction of cost outside the synergies, we're starting to make progress.

And the net of that you can't see that back yet, of course, we have to reckon also because this is an absolute cost bridge, there's such a thing as Argentina in the mix with CHF 30 million, and as I mentioned, the CHF 67 million of the positive items that came back in the cost bridge, so underlying we are improving our cost base. We haven't given the guidance number for the full year for that, but it's incorporated in the guidance given on the EBITDA extension.

Mike Betts

What was the number in Q1, Ron? Can you what the saving was in Q1 ex the synergies?

Ron Wirahadiraksa

Yes. So with the analytics, so on an underlying basis, I want to be very clear on that, it's about CHF 50 million.

Mike Betts

5-0. Okay. And then just going back to the deconsolidated in India, how is India treated? Is the whole of Lafarge India now treated as deconsolidated?

Ron Wirahadiraksa

No. It's for the two factories from the original deal. Those have been in discontinued operations. The reason why the whole Lafarge India is not in is because, as you know, we hit a snag that Eric said in the meantime has been resolved. So that didn't - was not eligible to qualify as such. So, it's just the two plants from the initial deal. Of course, moving into next quarter, we're likely going to put that in discontinued operations.

Eric Olsen

But it's the - Mike, just to reassure you on it, it's the vast majority of the EBITDA associated with those plants overall.

Mike Betts

Okay. Understood. Thank you very much.

Operator

The next question comes from Christian Korth from MainFirst. Please go ahead.

Christian Korth

Thank you very much and good morning. I have two questions please. The first one is on the U.S. market. You mentioned in the presentation that you plan to bring back some mothballed plants. Could you please remind us which ones you're talking about and a little bit about the rationale in the region surrounding this?

And secondly, on the Chinese Ministry of Transportation and National Development program who said that they expect to invest €630 billion over the next three years on 300 key transportation projects. Would you think that might have an impact on your business as well? Thank you very much.

Eric Olsen

Okay. Yes. So thanks for those two questions. So, let's start talking about the U.S. market and maybe just to preface, the U.S. market is one of the markets that will contribute significantly to our overall improvement year-on-year. And part of the reason why, for instance, we say that Q1 results aren't indicative of the year and why we're giving guidance on a year-on-year improvement is something like the North America.

If you take the overall North America results, year-on-year or in the quarter, they contributed basically no EBITDA because of the seasonality, and that's something that contributed CHF 1.2 billion last year and is probably the area that will incrementally improve the most year-on-year for us this year, to speak to why - where our confidence is in the guidance going forward.

On your specific question on where the incremental capacity is coming from, to bring up, you have kilns in Texas. We have in our Joppa plants in Southern Illinois, and we have plants in Pennsylvania in Whitehall, overall. In addition, we're upgrading two plants associated with environmental investments but which will improve productivity in Hagerstown and in Ada, Oklahoma. So, you've got, really, an ability to really leverage additionally our network in the U.S. to grow with existing demand.

We have - in addition to that, we have the ability to interface with our Canadian capacity and leverage our Canadian capacity to supply needs in the market. So, we feel we're uniquely positioned to follow our strong growth in the U.S. and serve our customers' needs through our existing assets.

Now, as for the China question and the announcements of a lot of additional spending, yes, I think that's a positive signal. The other signal and the thing that's going on in China is you have capacity reduction and consolidation and there will be and we expect that there will be reductions in capacity in China in coming - in over the next couple of years. And between sustaining demand through great initiatives like this announced by the Chinese government and having less environmentally-friendly capacity in the market coming out as environmental standards continue to be raised in China. We believe that the situation can steadily improve in coming years, though it's probably not something that will happen dramatically in the short term.

Christian Korth

Okay. Thank you very much for this. Just as a quick follow-up.

Eric Olsen

Yeah.

Christian Korth

What kind of additional, let's say, production capacity will this add to your North American business, roughly?

Eric Olsen

Let me get it. Well, we have - so, there's others things too. So, we have, let's see, Ron, what number do you have there?

Ron Wirahadiraksa

So, Ravena, 1.7 million tonnes actual.

Eric Olsen

In total, I would say, we have roughly in the range of 5 million tonnes to 6 million tonnes.

Ron Wirahadiraksa

Yeah.

Christian Korth

Okay. Thank you very much for your help.

Operator

We have a question from Mr. Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch

Hi. Good morning. Can I ask the first question on the sequential price move, which you've helpfully disclosed. Can you give us a sense as you see it today - I think you're halfway through the second quarter - what that number would be if we - best guess, is it 2% sequentially in Q2 over Q1, or is it similar to the first quarter of 1%? Just want to get a sense of the sequential move. I think you've given some color, but if you can give us some maybe a range of quantification would be helpful.

And then to the question of following up from Yassine's question where you've confirmed that you're looking for double-digit organic EBITDA growth from here. As you stand here today, would you say that is already achievable in the second quarter? That's the first sort of - I guess that those two are linked.

And then could I just confirm? Ron, you said a minor impact on FX. I just want to confirm that that is correct. I mean I was thinking more CHF 150 million to CHF 200 million, so I want to make sure that we're in the same page there. And then can you give us your best estimate of deconsolidation as you see it today? That would be helpful, too. Thank you.

Eric Olsen

Okay. So, maybe I'll take the question on pricing in Q2. So we gave - we shared where we expect to be at least for the year. We're not going to start giving quarterly guidance on that, though we would expect the sequential quarters to progressively be consistent with the overall year target. I would remind you that the year in 2015, as a result of foreign exchange and pricing in some markets, the sequential degradation between Q2, Q3 and Q4 will provide an increasingly easy compare in our results over the course of the year.

As it relates to pricing just several of the price increases that we made in the first quarter happened during the first quarter and even in the month of March. And if you look at the trend line that Ron shared earlier, we would expect that trend line to continue, and we would expect to be able to show continued improvement along those lines in Q2. And if you look at it relative to where we were the year before, it's a reasonable expectation.

Gregor Kuglitsch

Thank you. And with regards to the EBITDA progression or is that too much to ask?

Eric Olsen

The EBITDA progression in Q2?

Gregor Kuglitsch

Well, broadly. I mean do you think it could already be doing the run rate that you were talking about, north of 10% or do you think there is still a comp issue to deal with?

Eric Olsen

Well, if you do - as Yassine's question earlier was given what our guidance was for the year, which takes into account the numbers that we're sharing today, you can deduct from that what we would expect for the remaining nine months of the year. We're not going to give specific Q2 guidance however.

Gregor Kuglitsch

Okay. Thank you. Thanks so much.

Operator

The next question's from Mr. Josep Pujal from Kepler. Please go ahead.

Josep Pujal

Yes. Good morning. So, two question on guidance. Does it take into account an upgraded price for energy because energy prices, I guess, that they've been going up in the recent months. So, I wanted just to check that your full-year EBITDA guidance is based on a very updated assumption for your energy costs.

My second question is on these new price increases that you were expecting after Q1. You mentioned a few markets like India. I understood Nigeria, too. Could you give a complete answer on that, what has been already passed in? Thank you.

Eric Olsen

Okay. So, your question on does it take into account the energy environment, yes, it does. It takes into account our reading of how our energy costs will evolve over the course of the year. And as per specifics on pricing, we typically don't get very specific on market pricing. But there are increases that we've made, and as I mentioned in India and Nigeria, even though the year-on-year comparison remains lower than the year before, sequentially, we're improving. You've got an attractive pricing environment in the U.S., which was partially implemented in Q1 and will be fully implemented in Q2 and in some markets in Latin America as well. You've got attractive pricing. But we typically try not to get too explicit on market-by-market pricing.

Josep Pujal

Okay. Thank you.

Eric Olsen

Thanks.

Operator

The last question comes from Mr. Christian Arnold from Bank Vontobel. Please go ahead.

Christian Arnold

Yes. Good morning, gentlemen. I would like to come back on the guidance for the EBITDA [indiscernible] pro forma, EBITDA last year was CHF 5.751 million (sic) [billion], and if I understood you correctly, Ron, we would have to deduct the positive India effect and the positive U.S. effect of CHF 20 million and CHF 22 million (sic) [CHF 20 million] to have a proper starting point, and could you confirm that?

Ron Wirahadiraksa

Yes.

Christian Arnold

And then maybe, in addition, could you give us guidance about the effect of the transactions in Morocco and South Korea you announced earlier this year. I believe these two countries has also contributed to the CHF 5.751 million (sic) [billion]. So, what would we have to deduct for these two countries? That would be my first question.

And the second question then is on Latin America. I've seen on slide 32, you were somewhat declining your expectations for Latin America for cement market development from minus 2% to minus 4%, now new to minus 3% to minus 5%. However, on slide 33, looking at the different countries, here, we still have the minus 2% to minus 4%. So, I wonder for which countries you actually became more cautious in Latin America? Thank you very much.

Eric Olsen

All right. Well, let me take that question and then, Ron, you can address the scope question. In Latin America, we continue to be cautious about demand in Brazil and in Ecuador, there's a challenging situation both economic and the challenges from the tragedy that happened also with the earthquake not so long ago. So, we're cautious about demand in those two countries. However, places like Mexico, we're optimistic about and Colombia as well.

Ron Wirahadiraksa

So, on the scope question, yes. We'll do it on the guidance given on a like-for-like basis. That means India will be taken out of the scope for 2015 and 2016.

Christian Arnold

Yes. That's India. What about South Korea? What about Morocco? How much do we have to deduct for that?

Ron Wirahadiraksa

I don't think we've given out that number but it will be of course deconsolidated.

Christian Arnold

Exactly. But could you give us a rough guidance here? I mean as well how much we have to deduct the base of the CHF 5.751 billion?

Eric Olsen

Yeah. We can come back on that in updating our targets in Q1. We haven't come out with revised. But the key point is the guidance is like-for-like, so whether with South Korea, South Korea made approximately CHF 50 million of EBITDA last year in that range, for instance, but that doesn't affect whether the increase is - it's included or not. We're committing to a like-for-like scope equivalent increase overall.

Christian Arnold

Got you. Yeah. South Korea that was 5-0 or 1-5? Sorry.

Eric Olsen

A little under CHF 50 million.

Christian Arnold

Okay. And the CHF 20 million tax benefits from India and the €22 million (sic) [CHF 20 million] positive impact from the pension, you would have to reduce the 2015 numbers, right?

Ron Wirahadiraksa

No, as I said....

Christian Arnold

No?

Ron Wirahadiraksa

No, no, no. As I said, we have taken the results...

Christian Arnold

Okay.

Ron Wirahadiraksa

...of the operating EBITDA in Q4, so that that's completely comparable.

Christian Arnold

Thank you very much.

Ron Wirahadiraksa

And the other CHF 45 million don't qualify as such. Yeah.

Christian Arnold

Thank you.

Eric Olsen

All right. Well, we thank you very much for your participation in the call and your questions and we look forward to over the next quarter - the next quarter call, but possibly over the next quarter to have different exchanges with you. So, thank you very much for your participation on the call.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Good-bye.

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