LafargeHolcim's (HCMLY) CEO Eric Olsen on Q2 2016 Results - Earnings Call Transcript

| About: LAFARGEHOLCIM LTD (HCMLY)

LafargeHolcim Ltd. (OTCPK:HCMLY) Q2 2016 Earnings Conference Call August 5, 2016 4:30 AM ET

Executives

Eric Olsen - Chief Executive Officer

Ron Wirahadiraksa - Chief Financial Officer

Analysts

Jean Moulenq - CM-CIC Securities

Yassine Touahri - Exane BNP Paribas

Robert Gardiner - J&E Davy

Elodie Rall - JPMorgan Securities

Mike Betts - Jefferies International Ltd.

Eric Lemarié - Bryan, Garnier & Co Ltd.

Martin Hüsler - Zürcher Kantonalbank

Gregor Kuglitsch - UBS Ltd.

John Messenger - Redburn

John Andrews - HSBC Bank

Nabil Ahmed - Barclays Capital

Operator

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

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

Eric Olsen

Good morning, everyone. And welcome to the LafargeHolcim Q2 analyst call. I'd like to start by saying that I'm encouraged by the Q2 results. We're seeing the benefit of our focus on improving profitability and we are on track to achieve the targets we set for 2016. I'm also pleased to report that with the announcements this week, we have already exceeded the divestment target for 2016 in just over seven months.

Thanks to excellent execution, we have created value for our shareholders, streamlining our portfolio and enabling us to maximize synergies in countries like China, India, and Morocco. Following the successful execution of our divestment program to-date, we are extending the program to CHF 5 billion. We expect to complete the remainder of this by the end of 2017.

In the second quarter, the adjusted operating EBITDA of CHF 1.7 billion is up 6% like-for-like on the same quarter last year. If we exclude Nigeria, where our operations had to deal with the effect of severe gas shortages, adjusted operating EBITDA would have been up 13% on a like-for-like basis.

Just a word on Nigeria, which faced a very specific situation this quarter. Alone, it accounted for a fall of CHF 96 million in adjusted operating EBITDA on a like-for-like basis, as our production was disrupted by gas shortages. It is important to note that our plans in the South rely mainly on gas. This prevented us from benefiting from the buoyant Nigerian market, which could have mitigated the impact of lower prices.

We are working full speed to fix the situation, and I expect our plants to be in a position to reduce their dependence on gas before the end of the year. And we see price increases happening as well. This will enable us to increase supply and capture growth. In October, we also expect to open the new line at our plant in Calabar, in the southeast of Nigeria, providing us with additional capacity to serve that part of the country.

Looking now more generally at our performance. The second quarter results clearly demonstrate the impact of our pricing strategy, which has driven a further 2% quarter-on-quarter increase in cement prices, building on the progress seen in the first quarter. Profitability has been boosted by a continuing focus on synergies, with savings of CHF 170 million delivered in Q2, versus CHF 104 million in the first quarter. This means that over 60% of the full-year 2016 target for incremental synergies of CHF 450 million has been secured in the first half.

We also benefited from lower energy costs. Energy savings were CHF 80 million in Q2 2016, up from CHF 60 million in Q1, as we continue to benefit from lower energy prices and an improved fuel mix. The combination of robust pricing, delivery of synergies and cost management has visibly improved profitability, delivering an adjusted operating EBITDA margin of 23.4%, up 210 basis points on the same quarter in 2015.

In the quarter, we have seen strong growth in markets like the Philippines, Mexico, U.S., Algeria and Lebanon. In addition, China's improving profitability demonstrates the impact of cost controls and more targeted marketing strategies.

I'd also like to highlight India, which is one of our success stories this quarter. We are really seeing a turnaround in our business in India as a result of sustained pricing improvements and delivery of synergies and cost containment measures. The reach and capability of our operations in India, even taking recent divestments into account, positions us well in an important market with huge potential. With visible results from our pricing strategy and synergies, we continue to target at least a high-single-digit like-for-like adjusting operating EBITDA growth in 2016.

The divestment program, along with our CapEx discipline, will de-leverage our balance sheet and demonstrate our commitment to maintaining solid investment-grade credit ratings. And improving operating results, combined with lower financial charges, drove a nearly 20% increase in adjusted net income for the first half.

As I just mentioned, with the announcements this week, we have now exceeded our CHF 3.5 billion divestment target for 2016. Proceeds of these divestments, along with our CapEx discipline, will drive a reduction in net debt at the year-end to around CHF 13 billion, down from CHF 18 billion at the end of the first half.

Now, before I hand over to Ron to discuss the details of the results, I want to mention the other announcement that was made this morning. This relates to changes in the executive team, which I am sure you have seen. As we embark on the next phase of our transformation, a phase centered on commercial transformation, it will be important to have the right people and skills in the executive team to lead the way. These appointments also reflect the changes that we have made to our portfolio, especially in Asia.

Two existing members of the Executive Committee will take on new responsibilities. Roland Köhler, currently responsible for the European region, will take on Australia and New Zealand and Trading, in addition to his current responsibilities. And Pascal Casanova, currently responsible for the Latin America region, will take responsibility for North America, including Mexico.

I'm very pleased that Martin Kriegner, head of our business in India, will add Southeast Asia to his responsibilities and join the Executive Committee. And Oliver Osswald, head of our business in Argentina, will also join the Executive Committee and will take responsibility for our business in Central and South America.

As a result of these changes, Ian Thackwray and Alain Bourguignon will step down from their roles effective from today. I'd like to thank Alain and Ian for their contribution towards building our new group and putting our synergies firmly on track. I wish them every success in their future endeavors.

And I'm happy to welcome Martin and Oliver as new members to the Executive Committee. And together with Pascal and Roland and the others, they bring a valuable collective experience in retail, commercial transformation and performance management.

Now, I'm going to hand over to Ron to take you through the detail of the results.

Ron Wirahadiraksa

Thank you, Eric, and good morning, everyone. Let me start with an overview of our key financial figures in Q2. I'm on slide 6 of the presentation. As Eric said, we successfully pursued our pricing strategy in Q2 and significantly improved our adjusted operating EBITDA margin. This strategy has notably paid off in India where we have delivered a clear turnaround year-to-date. At group level, we achieved a sequential quarter-on-quarter cement pricing improvement of 2.2% at constant forex and country mix.

As a result of our pricing strategy rollouts and challenging conditions in a few markets, we anticipated volume losses. Notably, our cement product line experienced a like-for-like decrease of 3% in Q2. As a result, net sales in Q2 were down 2.1% on a like-for-like basis compared to a year ago. Adjusted operating EBITDA increased by 6% like-for-like, which resulted in a year-on-year margin increase of 210 basis points to 23.4%. On the bottom line, our adjusted net income increased by 19.6%.

On the CapEx side, we continued to exercise strong discipline, with a 24.5% reduction on a like-for-like basis in the first half. As a result, and despite higher working capital, we improved our operating free cash flow in the first half by 26.4% like-for-like compared to last year.

We expect net financial debt to be down from CHF 18 billion at the end of Q2 to around CHF 13 billion by year-end 2016. The first half is a traditional peak within the year in net financial debt due to business seasonality. However, the de-leveraging effect related to the asset disposal program is expected to reduce net financial debt in the second half.

As a result of our diversified revenue and earnings mix, we are in a strong position, on slide 7, to benefit from local market dynamics. This means that when a country performance is deteriorating significantly, as was the case recently in Nigeria, the impact at group level is mitigated by the portfolio effect.

Group net sales were down 6.7% on a reported basis and 2.1% on a like-for-like basis, the difference resulting largely from an unfavorable forex impact, notably in Latin America and Middle East, Africa. Adjusted operating EBITDA of CHF 1.7 billion is up 6% like-for-like, as you have seen in our press release.

Let me now dive into each region. Slide 8, in Asia Pacific, adjusted operating EBITDA margin increased by 320 basis points to 20% in Q2. This was driven by an 18.4% like-for-like increase in operating EBITDA with flat like-for-like sales.

In India, our pricing strategy is paying off as prices have recovered from their Q4 2015 lows, notably in the north region. Prices overall were up 50 basis points year-on-year in Q2, and we entered the monsoon season with stronger pricing.

On the cost side, we have continued to benefit from lower fuel prices and from the fuel-mix optimization from coal to petcoke. Overall, we achieved 530 basis points improvement in adjusted operating EBITDA margin.

In China, our ongoing focus on cost has continued to deliver impressive results, while we are able to increase volumes by 1.8% in Q2. Production costs are still positively impacted by lower coal and power prices, while a higher usage of limestone instead of fly ash is impacting positively raw material cost. All-in-all, we improved the adjusted operating EBITDA margin by 10 percentage points.

In other markets, the business performance in Q2 was stronger year-on-year, notably in the Philippines and Vietnam, which is in contrast to Indonesia and Malaysia where overcapacity has led to price pressure.

Slide 9, in Europe, the adjusted operating EBITDA margin increased by 230 basis points to 23.2% in Q2. This was driven by an 8.3% like-for-like increase in operating EBITDA, with like-for-like net sales down 3.1%. We benefited from stable or slightly upwards construction trends in France, Germany, Switzerland, Belgium and Central/Eastern Europe, excluding Russia. In particular, we enjoyed double-digit volume growth in Germany, Poland and Switzerland.

This was in contrast to countries hit by political uncertainty, such as Spain, or that were impacted by the commodity-driven recession, such as Russia and Azerbaijan. We continue to optimize our asset base in a number of countries, such as Russia, Italy, Spain, France and Belgium, as we maintain our strong focus on cost reduction as a key performance driver.

Slide 10, in Latin America, adjusted operating EBITDA margin increased by 650 basis points to 30.8% in Q2. This was driven by a 16.6% like-for-like increase in operating EBITDA, with net sales down 5% on a like-for-like basis. Net sales were down 15.3% on a reported basis, impacted by currency depreciation.

In Mexico, we continue to successfully implement our pricing strategy, with positive price contribution to adjusted operating EBITDA offsetting more than twice the negative volume contribution in Q2. A similar strategy has been pursued in Argentina and in Colombia.

In Brazil, volumes were still significantly down year-on-year again to tough comparison base, while pricing pressure had most impact in northeast region. Brazil will remain a challenging market in the second half and we've taken a number of management measures to ensure that we can adapt rapidly to this environment.

In the Middle East, Africa, adjusted operating EBITDA margin decreased by 350 basis points to 30.4% in Q2, driven by a 17.6% like-for-like decrease in operating EBITDA, with net sales down 7% on a like-for-like basis. Net sales were down 11.8% on a reported basis, further impacted by currency depreciation.

The financial performance of the region as a whole was heavily affected by Nigeria, which had a negative like-for-like impact on the adjusted operating EBITDA of CHF 96 million.

Despite the price recovery initiated in Q1, our asset base was disproportionately impacted by gas shortages due to pipeline attacks. Significant currency depreciation also weighed on our cost base. Against these challenging headwinds, we expect to benefit in the second half from a new line ramping up, while we are also reducing the dependence on gas in our plants, which should produce positive effects in early 2017.

In other markets, the overall picture is mixed. Countries such as Algeria, Egypt, Lebanon and Morocco delivered strong contributions, driven by price increases, and in some cases, by volume increases. But this was not enough to offset declines in markets such as South Africa and Zambia. All-in-all, excluding the impact of Nigeria, adjusted operating EBITDA like-for-like growth for the region would have been positive at 8%.

In North America, adjusted operating EBITDA margin increased by 150 basis points to 25.6% in Q2, driven by a 6.6% like-for-like increase in operating EBITDA, with sales up 0.7% on a like-for-like basis. In the U.S., we continue to benefit from solid pricing trends in our markets, notably on the East Coast and in the Mississippi region. After a very strong Q1, which was partly driven by unfavorable weather conditions last year, we saw a normalization of demand patterns in Q2.

In Canada, the situation remains split between Eastern Canada, which delivered a slight increase in adjusted operating EBITDA, and Western Canada, which continued to suffer from the lower demand generated by a commodity-driven recession in Alberta and Saskatchewan, further amplified by the fires in Fort McMurray.

Slide 13 and 14, I would now like to spend a few moments talking about the adjusted operating EBITDA bridge in Q2 and first half year-on-year. As a result of our pricing strategy, we have managed to reach an almost neutral price contribution of minus CHF 8 million in Q2, as opposed to the sharply negative contribution of minus CHF 116 million in Q1. We anticipated a negative volume contribution, which, at minus CHF 86 million in Q2, more than offsets the positive contribution registered in Q1.

The key performance driver has thus been the significant cost improvement following the acceleration of synergy delivery and ongoing cost discipline. More specifically, we delivered CHF 170 million of synergies in Q2 versus CHF 104 million in Q1.

In addition to CHF 27 million of synergies achieved through fuel-mix optimization, we delivered CHF 53 million savings on energy costs, driven by lower fuel prices. The contribution from lower energy cost was therefore CHF 60 million in Q1. At the end of the first half, we are therefore in a much more encouraging situation than at the end of Q1.

In the second half, we expect the pricing contribution to turn significantly positive, as we continue to implement sequential price increases. If cement prices were to remain in line with the level at the end of June, we estimate on current forecasted volumes that the pricing contribution to operating EBITDA could exceed CHF 170 million in the second half.

Synergies are well on track, and we expect to deliver at least our CHF 450 million target for the full year, after delivering CHF 274 million in the first half. In addition, we expect to deliver energy-related cost savings in the range of CHF 100 million in the second half, out of which CHF 20 million related to synergies and operational performance, after delivering CHF 140 million in the first half.

We expect forex to remain a headwind in the range of CHF 210 million for the full year. Following the execution of our divestment program, we expect the operating EBITDA impact to be in the range of CHF 140 million for the full year remaining. We still expect a total of CHF 400 million of merger, restructure and other one-off costs in 2016, after spending CHF 176 million in the first half.

Let's move to a focus on pricing trends on slide 15. After pricing improvement of 1.2% in Q1 2016 versus Q4 2015, we managed to accelerate this in Q2 to 2.2%, driven by pricing recovery in India and Nigeria, as well as continued strength in Mexico, U.S. and Egypt.

We now have higher prices versus year-end 2015 and close to 70% of our markets. All-in-all, prices are now close to stable year-on-year, and we expect to deliver further price improvements in the second half in countries like India, Mexico and the Philippines.

Slide 16, we have now secured over 60% of our full-year synergy target by delivering CHF 274 million in the first half. Progress was made across all synergy categories with operational optimization and best practices delivering about half of the synergies in Q2, followed by SG&A, procurement and growth and innovation. With these achievements, we are confident that we will deliver incremental synergies of more than CHF 450 million for the full-year 2016.

We've been able to post a substantial improvement of 26% in operating free cash flow in the first half compared to a year ago. The lower CapEx compared to 2015 has fully offset the higher need in net working capital, which in itself was mainly impacted by cash disbursements from merger, restructuring and other one-offs against provisions taken, and a slight decrease in the operating EBITDA contribution.

The year-on-year improvement then fully relates to a higher contribution of the other items, notably taking into account a significant reduction in net financial expenses and taxes paid, as well as higher non-cash items.

As a result of our liability management transactions and our refinancing activities in the first half of 2016, the average debt maturity has increased from 4.2 years at the end of 2015 to 4.9 years at the end of Q2. In addition, the average cost of debt has been further reduced to 4.7% at the end of June, compared to 5.1% at the end of December 2015.

Slides 18 and 19. Let me finish by looking at the development of our net financial debt. At CHF 18.1 billion, net financial debt at the end of Q2 was higher than at the year-end 2015 when it stood at CHF 17.3 billion, or flat compared to the end of March. But, again, this was expected due to seasonality. We still expect net financial debt to be around CHF 13 billion by year-end 2016, driven by our divestment program.

I now hand back to Eric.

Eric Olsen

Thanks, Ron. Since we have passed the midpoint of the year, I want to spend a moment on the outlook for 2016 that we first shared in March. In light of developments in selected countries during the first half, we now expect demand in our markets to grow between 1% to 3% for the full year. Based on the trends we see in pricing and synergies, our full-year expectations remain unchanged.

We are on track to deliver our 2016 target for CapEx, which is to be below CHF 2 billion. CapEx for Q2 is around CHF 450 million, a like-for-like reduction of almost 25% on Q2 2015. Our plan is to achieve incremental synergies of more than CHF 450 million in EBITDA. And here, we're making good progress as well. Synergies contributed CHF 170 million in Q2, making a total of CHF 273 million for the first half.

The successful implementation of our pricing strategy in the majority of our markets is encouraging as well. We will continue to focus on pricing in all our markets in the quarters to come. And the divestment program and significant CapEx reductions demonstrate our commitment to achieving our net debt year-end target of around CHF 13 billion.

I am confident that 2016 will continue to be a year of progress towards our 2018 targets. And I'm particularly encouraged by the success of our pricing strategy in the majority of our key markets. Getting our pricing right is the key to robust margins, along with delivering synergies and ongoing cost control measures. That's contributing to visible momentum on our margins and our earnings.

We continue to manage our operations and finances well. Reductions in CapEx expenditures and costs have improved free cash flow, our key measure of success. We're delivering on our commitments and we will continue to do so.

Thank you. And we'll now take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session.

[Operator Instructions]

The first question comes from Jean-Christophe Lefèvre-Moulenq from CM-CIC Market Solutions. Please go ahead.

Jean Moulenq

Yes. Good morning, everybody. Can I ask you two questions? First, Egypt, the global cement demand has been positive over the first half, but Lafarge posted a decline into yours and declining market share, probably close to 12.5% versus 14.3% last year year-to-date. What is happening is that strategic decision to [indiscernible] to the pricing and where do we stand to the general results of Egypt and EBITDA?

Second issue, which is Switzerland. We have also a strong and sharp decline in pricing. Did you implement measures to reverse this negative situation for the second half? And did you announce the price hikes in this region? Thank you very much.

Eric Olsen

Yeah. Thank you for your two questions. Yeah, and I think those are two good market examples where you see our focus is on our pricing and our margins. And we see good improvements on our pricing in Egypt overall and in Switzerland as well. And in both of those markets, we were able to drive good improvements in pricing on a year-on-year basis.

And if you look at the contribution of both Switzerland and Egypt, the two markets you mentioned, they're both positively contributing to our year-on-year improvement. And you see the year-on-year improvement that we're demonstrating, both of those countries are strong improvements in the numbers. That's specifically on the volumes.

Ron, is there something specific on the volumes in Egypt that you'd like to comment on?

Ron Wirahadiraksa

No, I wouldn't. Sort of last year, maybe there's been a bit of a difficult compare in the first half. While in the second half, I believe, due to shortage of materials, it was down. So, that could be somewhat of an indication.

But we're very happy to what is also for Egypt the favorable results versus last year. It clearly indicates also that our price-over-volume strategy is working. Yeah?

Jean Moulenq

And just in Egypt, did you improve your energy mix in the first half year?

Eric Olsen

Yes. And cost improvement measures - as you recall, over the last couple of years, in Egypt, we've had conversion issues to convert over. And the final step of the conversion happened. So we've seen really a great performance out of Egypt. We've seen fixed costs coming down as our fixed industrial cost declined. We see our variable costs coming down as we implement our fuel conversion program in the final step of it in Egypt, and improving prices. So the turnaround is well underway in Egypt.

Jean Moulenq

Does that mean so conversion to coal instead of gas?

Eric Olsen

That's right. That's right.

Jean Moulenq

Excellent. Thank you.

Eric Olsen

Thank you.

Operator

The next question is from Mr. Yassine Touahri from Exane BNP Paribas. Please go ahead.

Yassine Touahri

Yes. Good morning, gentleman. So, two questions as well. My first question is on your disposal. I understand that you've sold a bit more than CHF 3.5 billion of assets that the impact on EBITDA is going to be CHF 140 million this year. Could you give us the total impact on EBITDA of those disposal, just to get a sense of what could be the scope impact next year? That would be my first question.

And then a second question, which is a little bit more long-term. I thought you achieved your CHF 5 billion disposal program next year. What will be your priority in terms for capital allocation? I guess another way to formulate this question would be, if you look at LafargeHolcim in 10 years, what would you like or hope to look like?

Eric Olsen

Well, why don't I take the second one and then I'll ask Ron to speak specifically to the scope impacts on the disposals. What we've said, and we stick with what we said and which is that the first priority is to get our debt ratios down to a range which is consistent with a solid investment-grade rating. So, that will be our first priority. And once we're there, we'll have a priority for returning value to shareholders through dividends and/or share buybacks. But the first priority is to get our debt ratios to where we are. And we said that last December, and we stay firmly committed to that strategy.

Broader term, we are in fantastic growth markets, and we have tremendous positions or growth positions. And over time, we will invest in those positions to be able to grow with those positions. We don't have an urgent need right now in 2016 and 2017 to launch a significant investment program. But, over time, we will invest in our business and to be able to grow and participate in the growth in our markets.

And then, as it relates to the scope of the disposals overall, why don't I pass that to Ron.

Ron Wirahadiraksa

Yes. So we've announced CHF 140 million for the remainder of the year, this based on the quarterly divestment execution schedule. On a full year, that would be about CHF 600 million. But CHF 100 million of that is already reported in discontinued operations. So, that would be CHF 500 million of an impact.

Yassine Touahri

But the impact for - I'm now trying to understand the discontinued operation. So, the impact this year will be CHF 140 million...

Ron Wirahadiraksa

Correct.

Yassine Touahri

...on EBITDA? And we should see an additional negative impact of approximately CHF 500 million in 2017.

Ron Wirahadiraksa

The 2017 full year is CHF 600 million.

Yassine Touahri

But does it...

Ron Wirahadiraksa

Yes.

Yassine Touahri

So, does it mean that the additional impact in 2017 will be CHF 460 million?

Ron Wirahadiraksa

No. So, if you model out the full year, it's just this CHF 600 million less adjusted operating EBITDA for the divested portfolio part.

Yassine Touahri

And this is already on top of the CHF 140 million that you're already including in 2016?

Ron Wirahadiraksa

No. Because CHF 140 million is following the execution schedule per quarter, what you would forego in this year.

Yassine Touahri

Yes.

Ron Wirahadiraksa

But if you model it out on a full-year basis, it is CHF 600 million.

Yassine Touahri

So is it fair to assume that this year you will have CHF 140 million, and next year you will have the remaining part, which is CHF 460 million?

Ron Wirahadiraksa

That's correct.

Yassine Touahri

Okay.

Ron Wirahadiraksa

If you want to look upon it that way, yes.

Yassine Touahri

Yeah. That's very clear. Thank you very much.

Eric Olsen

Thank you.

Operator

Your next question is from Mr. Robert Gardiner from Davy. Please go ahead.

Robert Gardiner

Good morning. Two questions for me. Can I just firstly go back on the previous question there about your CHF 600 million, the full-year impact? As I understand it, Lafarge India was treated as held for sale, was it not? So, is that not CHF 100 million that's not in the top-line results? You might just clarify that.

Likewise, I'm just wondering if you'd put a number on China for us in terms of EBITDA there. I can get to most of the other regions, but just wondering on that one.

And secondly then, just on the impact of lower energy cost and raw materials, I think you cited a number of CHF 80 million for Q2. Is that sustainable towards the second half of the year, or will that kind of energy benefit start to go away as we get towards year-end based on kind of spot prices? Thank you.

Ron Wirahadiraksa

So, on your first question, so what was already in discontinued operations were two plants of Lafarge India. So, that is CHF 100 million that you already don't see in this year's adjusted operating EBITDA. And that's why I split the CHF 600 million in CHF 100 million in discontinued operations for this year and CHF 500 million additional for the announced divestments, yeah, on a full-year basis.

Robert Gardiner

Yeah. That is fine.

Ron Wirahadiraksa

Yeah.

Robert Gardiner

Yeah.

Ron Wirahadiraksa

If you look at the energy costs, as I said for the second half, we expect CHF 100 million, and yes, in the first half it was CHF 140 million. So it is as you indicate. We do reckon with the fact that it's tapering off a little bit in the second half compared to the first half.

Robert Gardiner

Okay. That's very helpful. Thank you.

Operator

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

Elodie Rall

Hi. Good morning. Thanks for taking my questions. I got three, please. First of all, on the energy cost and the impact of the lower energy cost and to your mix in your H1 number. Do you mind confirming? I think you said Q2 was a tailwind of CHF 80 million as per a tailwind of CHF 40 million in Q1, which should make H1 impact of CHF 120 million.

And I think, I compute, that's about 6% tailwind given your full-year cost base of CHF 4 billion. That seems a bit low versus what other cement companies have reported so far of about a decline of 8% to 10%. Could you comment on that and give us your outlook for H2 on that precisely, please?

Second question on divestment. How should we think of the impact on divestments with regard to your synergies target? I think you said at the Capital Markets Day that about 30% of your synergies target are coming from Asia, which is where you seem to be selling most of - or you've been disposing most of your assets so far. Should we expect any impact then on synergies?

And lastly, a marginal question on your capacity or ability to raise prices further from here. How sustainable is that in a weak environment in terms of volumes, and especially if costs start to ramp up in H2? Thank you very much.

Eric Olsen

Okay. Well, thank you for the three questions. I'll ask Ron to come back to the first one on energy costs overall.

So, let's start with pricing, because I think it's a key part of what we've been saying and what we've been delivering on. We remain focused on our pricing. In fact, some of the price increases that you see in the second quarter results were made actually during the course of Q2, and in the month of May, in the month of June. So there's even ongoing benefit associated with pricing.

If we do nothing more than just keep pricing where it is right now, we should show in the range of CHF 190 million improvement year-on-year just in H2 alone, just leaving prices where they are. Whereas, we know we have price increases in a number of markets that we're putting through; in places like Nigeria and other countries in Latin America, and in Asia as well. So we remain confident on our ability to drive improvement in our prices and margins. And we believe we'll see that in the second half as well.

On your question on synergies, basically I think if I understand, your question is on the scope effect of the synergies. We wouldn't expect there to be a major impact. But for some of the countries that are divested, they had some level of synergy attached to it. But we wouldn't expect it to be a major impact on our overall synergy targets.

And then, Ron, maybe if you could come back to the question on energy, the sequential impact of energy costs?

Ron Wirahadiraksa

Yeah. So, as I said, in Q1, it was CHF 60 million of energy savings and it was CHF 80 million in Q2. Now, if you look at added breakdown, then about CHF 40 million of that is embedded in the synergies and the rest is from price decrease. Yeah. So, that's how we also reported in the bridge. But I gave you, of course, the full scope of the energy savings impact.

Elodie Rall

Okay. So, CHF 40 million of the cost savings on energy is in synergies?

Ron Wirahadiraksa

Yes. That is correct.

Elodie Rall

Okay. And can you give us the outlook for H2 on that?

Ron Wirahadiraksa

Yes. I gave you CHF 100 million, of which we expect CHF 20 million to be in synergies.

Elodie Rall

Okay. And can I just come back on the scope impact from the divestment. I think India itself was about 12% of your targeted synergies.

Eric Olsen

Yeah.

Elodie Rall

And that was maybe before you were planning to sell of the Lafarge portfolio?

Eric Olsen

Yeah. But we're confident that we're going to be able to hit our synergy targets, specifically for synergy. There's a lot of best practice and operational improvements that we're driving and you're seeing some of that benefit even in the first half results. And we expect that to be able to accelerate as well. So, specifically, India is not going to be an issue there.

Elodie Rall

Okay. Thank you.

Eric Olsen

Thank you.

Operator

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

Mike Betts

Thank you very much. My two questions. The first one is coming back to these divestments. Maybe I'm looking at it wrongly, so please correct me if I am. But CHF 3.5 billion raised and the CHF 600 million going out the EBITDA doesn't initially look a great multiple, but I'm probably looking at it wrong. So, please maybe explain to me.

And then, secondly, have you been able to quantify at all the Ramadan effect on volumes or on EBITDA? Because a fair chunk of your sales are in Muslim countries and I think there was a significant, like, 10 days extra of Ramadan in June. I mean, has that been a significant factor that would have depressed the second quarter? Thank you.

Eric Olsen

Okay. Thanks for the two questions, Mike. First of all, the so-called Ramadan effect. In the Q2 results, it roughly balances because you had a change of Easter in between last year and between the change in Ramadan and the change in Easter, and the calendar - the schedule roughly balances in Q2. So there's no noise associated with that in our volumes, so to speak. In Q3, it would be a moderately favorable effect, but I wouldn't exaggerate that.

Now, coming back to the divestments, each one of the divestments that we've secured so far from an economic and enterprise value standpoint, we've had very good multiples. Now, some of the comparison, when we boil that down and show what's the actual net debt impact, so you have the tax impact on some of those deals you have, the fact that some of them like in Morocco is more a restructuring of our holding in that country.

So, just to take the net debt impact and divide it by the scope of EBITDA, you miss some of the underlying restructuring of the deals, particularly in China and in Morocco. So, yeah, each one of the deals so far have been done on very good conditions, and we're pleased with that. And it's, in fact, reinforced our confidence on our overall program to extend it to CHF 5 billion by the end of 2017.

Mike Betts

So are you willing, Eric, to give kind of an average multiple that you've achieved on an apples-to-apples basis? What would you think would be the meaningful multiple?

Eric Olsen

Yeah. I'd rather not go out with that because that is - each deal is different in different circumstances and we still have many different situations under discussions. So I'd rather not discuss that. But I can say, each individual one, and you can see in our press releases when we announce it that the underlying value has been quite good.

Mike Betts

Understood. Thank you very much.

Eric Olsen

Thanks, Mike.

Operator

The next question comes from Mr. Eric Lemarié from Bryan, Garnier & Co.

Eric Lemarié

Yes. Good morning. I've got two questions. Please, first on India, volumes growth were apparently a bit weak in Q2 in India. You reported 9% volume growth in Q1, and then only 1.5% in H1. Is this due to specific reasons? For instance, I suspect your pricing strategy. Could you give us a bit of color on that? And then what's your view on the tax issue in India, this GST issue, do you think it could positively impact your day-to- day business in this country?

And I've got a second question on the change you mentioned this morning to the Executive Committee. I understand, in the press release, that basically the integration phase is over now. Could you confirm that? Could you confirm that you consider that today this is beyond you? And that you're ready for the next phase.

Eric Olsen

Yeah. So, thanks for your questions. So let me just start with the third one. So, yes, that's exactly what we're saying today. And I said both internally in our organization and externally, which is here one year in we're integrated and we are one company. And the key elements of the integration are complete and our synergy programs are well-identified and on track. And we've actually disbanded the integration team and transferred full responsibility to the operational management.

So we're turning the page on that phase and we're getting focused on delivering on our three-year target, and with a real focus on commercial transformation going forward. So, yes, the integration phase is behind us.

Eric Lemarié

Okay.

Eric Olsen

On India, two good questions and I'm happy to talk about them. So, first of all, India had a very, very robust start to the year, overall, in the cement industry, and it was probably higher than what we would have expected for the full year. So you did see some just normalization of growth rates. We expect India to be a good solid year-on-year growth, consistent with what we've said all along.

And we did push hard on price in the second quarter, and we did see some slight reduction in market share. It's not something that we expect to be sustained over time. But it is something that we made a priority of price-over-volume in the second quarter.

Eric Lemarié

Okay.

Eric Olsen

And then, on the GST, and I'm happy that you bring that up. This is a significant piece of news for India. And I really congratulate the Indian Government for driving this and making this happen. It's going to be great for India, I believe. And yes, it'll affect our business as well. And actually, I believe it'll have an impact on our margins. Now, it goes into effect in January of 2017. So it's another positive element driving our business in India.

Where if you just look at our margins in India, in the second quarter, we had over a 500-basis-point improvement in our margins in the second quarter. And it's not just price, it's also great cost improvement. So you've got underlying demand growth, we've got good favorable trends in pricing. We should have sustained demand growth. And I believe that the recent changes implemented regarding the GST will also not only help our business and our industry, but it'll help the overall economy. So, thank you for your question.

Eric Lemarié

Okay. Thank you.

Operator

The next question is from Mr. Josep Pujal from Kepler Cheuvreux. Please go ahead. Mr. Pujal, your line is open. Mr. Pujal, maybe you muted your line.

Eric Olsen

So, maybe we can come back to it. If he can go back in line, we can come back to his question. Go ahead on to the next one.

Operator

So the next question is from Mr. Martin Hüsler from Zürcher Kantonalbank. Please go ahead.

Martin Hüsler

Yes. Good morning. I have two questions. Maybe first coming back to the change in management. I was surprised when I read this morning that Ian and Alain will leave the company. Can you maybe still share some light on why they leave the company? And I know we shouldn't think in terms of Lafarge versus Holcim managers any more, but still we have now majority of managers are from Lafarge side. Maybe some words on that.

And second question is relating to your divestments. Can you remind us of your strategy? According to what rules are you going to divest in the future? Do you also take into perspective the longer-term outlook for a country or a production side, or is it rather opportunistic? Thank you.

Eric Olsen

Okay. Great. So, on the changes in management, there's two underlying reasons why we made the changes now. One is, as you see with all the different press releases recently on our divestments, we've substantially changed our footprint in Asia and simplified our structure between China and India and making selective divestments as well. So, one of these changes is to simplify also our management structure, and it reduces overall our management structure to align and take into account that.

And the second is why now is because we're closing the era of the integration process, which is behind us now. We're disbanding the integration team, and we are putting in place the team to drive a real commercial transformation going forward. And so bringing, in some respects, the next generation forward as well is a critical piece of that story as well.

And on our ExCo, in our company, we don't reason by what company people happen to work from in the past. We're LafargeHolcim and we're focused on driving our performance going forward. What I'm proud to say in my ExCo right now, I've got eight different nationalities in the ExCo: Swiss, French, U.S., and myself, Dutch, British, Moroccan, German and Austrian. So you've got a tremendously diverse set of executives with diverse experience, ready to drive things going forward. And I think we have an excellent team.

Regarding the divestments, as I mentioned last year, one of the first things that we did was we did a rigorous portfolio review in the second half of last year, looking at criteria in all of our countries, looking at criteria about our underlying strength of our position, the long-term potential in that market, what's the capital we have invested, the value and what's the potential value creation going forward. And coming out of that, we identified a number of divestment candidates. And we mentioned at the time that there would be CHF 3.5 billion of divestments and we committed to do that in 2016.

What you're seeing now is the results of that. You're seeing us delivering on what we committed to for the full year and just at over seven months. And the success that we had in the values received and the implementation speed that we have, now given the overall program, we see that by the end of 2017 that CHF 3.5 billion will probably be in the range of CHF 5 billion, and that's what we communicated today. But it all comes out of a very thoughtful and rigorous portfolio review of our existing portfolio of 90 countries.

Martin Hüsler

Okay. Thank you very much.

Eric Olsen

Thanks for your questions.

Operator

The next question comes from Mr. Gregor Kuglitsch from UBS.

Gregor Kuglitsch

Good morning. I've got a few questions. The first one is just on the 2018 target. I think, obviously after I think the number of divestments you've made and FX movements, I think it's a like-for-like target. So, as we stand here today, how would you adjust the CHF 8 billion and then the CHF 6 per share cash flow just from a today perspective? I understand it may change in the future if you sell more assets. That's the first question.

The second question is on capacity. I understand you took out some plants in Brazil, Russia, China, if there's more, please, it would be great if you could elaborate. Could you just give us a sense of sort of by country how much million tonnes you actually shot and whether that really kicked-in in the second quarter from an earnings perspective?

And then, the third question, sorry to come back on the management change. I guess the only thing that looks a little bit odd sitting from my side of the table is to have one person manage Europe and Australia, which obviously is not particularly adjacent from a geographical perspective. So can you give us a sense of what the logic there is and whether we should read into that? Obviously, there's been a number of press reports suggesting that you may divest that asset. Thank you.

Eric Olsen

Sure. Thanks for the three questions. I'm happy to clarify on each one of those. On the 2018 target, you're right. When we laid them out last December, we did it on a scope-neutral and an FX-neutral basis. And we intend to have a follow-up Capital Markets Day in November, and we will update those targets to take into account scope and foreign exchange in that Capital Markets Day, which I expect it'll be in November is our current planning, November 18.

So we're planning in November 18, reserve your calendars, but we'll come back to you on an update. And we'll have a bit more complete information on very precisely the scope adjustments and the foreign exchange adjustments. But we'll come back, and we'll update precisely what we said last year and the revised version to take into account scope and FX.

Gregor Kuglitsch

Okay.

Eric Olsen

On your second question is on capacity. And what really doesn't drive us is capacity. It's the fixed costs underlying and supporting the capacity. And it's those fixed industrial costs. So, yes, we've got actions on our fixed costs underway in a lot of these countries. And you're right, you mentioned Russia. So, yes, there's a plant just outside of Moscow called Voskresensk, that we shut the kiln operations down, but we still continue to grind cement because it's the most efficient way to serve the Moscow market from that plant. But it allowed us to take a significant amount of fixed costs out.

We don't disclose fixed cost reductions by country, but we have in several European countries and in Brazil and in China. In our most challenging markets, when I see a decline in demand, what I'm going after more right away is our fixed industrial costs in those markets. It's the way. And we need to be thinking of finding a way to variabilize them, so we can adjust our fixed cost structure to adjust to the demand environment, and that's our mindset. But we're not really driven by driving our business by capacity or capacity utilization. I don't think it's the right metric. The right metric is really fixed costs and variabilizing our fixed costs.

And then the third question was about the management change. Yes, I'm aware that Australia is not adjacent to Europe. But it is a mature market that looks a lot more - it resembles very much the European markets, actually. And the integration between Australia and the rest of the Asian markets, they're in the same hemisphere, but they're structured very differently and there's very little or no product flows between the two.

So this move is not in any way, shape or form a signal or a precursor to some other announcement regarding Australia. It's just simply aligning markets of similar nature in the same basket, as I simplify my management structure.

Gregor Kuglitsch

Thank you very much.

Eric Olsen

Thanks for the question.

Operator

The next question comes from Mr. John Messenger from Redburn. Please go ahead.

John Messenger

Hi. Good morning. Two from me, if I could.

Eric, just on the first one, obviously, you guided to somewhere between CHF 170 million and CHF 190 million of pricing benefit at current prices for the second half. Can I just ask, though, in terms of your volume presumption behind that, will you look at the 3% kind of in the second quarter and looking at the rest of the year?

And clearly, there were impacts like Nigeria that would hit the volume there, particularly in the second quarter. But are your kind of internal management assumptions looking for flat volumes against the better pricing that you're looking for? Or are you assuming volumes for yourselves rather than the global guidance are still somewhat down, given the pricing push that you're making? That was the first question.

The second one was just around the divestments. Can I just check on the position in Morocco? Can we just understand, because it came up earlier on the divestment and valuation and the multiple, but what has actually happened in Morocco, just for us all to understand? Is that now a profit-after-tax contribution that moves into the P&L from EBITDA?

And the three countries that are mentioned in the back of the reported accounts in terms of being transferred, the African countries. Could we just understand which those three are and what sort of impact they may have? I assume they also dropped out of EBITDA. Are they in your guidance of the CHF 140 million for this year, or would they be incremental on the assumption those deals go ahead? Thank you.

Eric Olsen

Okay. So we'll start on price, which is my favorite topic, John, as you probably know. Yeah. So we're - just coming back to the story, so we had sequential quarter-on-quarter declines over the course of 2015, as you well know. And we committed to and we delivered on changing that trend in Q1 and with a 1.2% improvement quarter-on-quarter in Q1. And now in Q2, it's 2.2%.

And there is a piece of our volume decline, which is related to a small piece of market share loss in markets like India. But if you look at over time, we don't expect that that will be a sustainable impact. And we're confident that we will be able to continue to improve our pricing.

When I say in the second half of the year that we expect something in the range of CHF 170 million to CHF 190 million, if we just stay where we are and we don't make any improvements from where we are, that's a number we can calculate very easily and factually. And it's a big number because we saw that price fell during the second half of the year in places like Nigeria. India saw sharp declines and we saw declines in China as well.

And the comparison is a favorable comparison for us as we look to the second half. So, when I look in the second half, I see favorable pricing trends as we continue to have good pricing evolutions in North America, including Mexico, especially where we could expect to see some ongoing improvement. We see even pricing improvements in Brazil. We see pricing improvements ongoing in India, and we'll remain focused on driving improvements. And even the anticipation of the GST, as the questionnaire before had said, is a favorable element. So we see a number of markets. And in Nigeria as well, we would expect to steadily continue to recover our pricing in Nigeria and that has been a favorable trend. And we would expect that as well.

So we have a number of markets even over the second half of this year, which isn't traditionally the price increase phase of the year that we would continue to be able to show improvement, as even some of the price increases we made during Q2 are fully reflected in the Q3 numbers.

Now, maybe coming back to Morocco, I'll maybe let Ron talk to some of the specifics. But I can give you the high-level message out of Morocco is, in the three African countries that are being - that are now included in the deal, and they are included in the CHF 140 million that Ron mentioned earlier, but the three countries, as you know, are Ivory Coast, Guinea and Cameroon. And their part - and the debt associated with them is also deconsolidated. And that's all put together into the net debt impact coming out.

So there's three effects from the Morocco transaction. There's the deconsolidation of the debt associated with those three countries. There's the upstreaming of some significant dividend payments from the entity. And there's the sale of the shares in Holcim Morocco to the joint venture in Morocco, and the combined effects of those three. And the trouble in looking at it is trying to look and say what's the multiple out of that. It's not the right way to look at it. It's really a restructuring of those operations which has, really, a favorable net debt impact on us.

So maybe, Ron, I don't know if there's anything you wanted to complement to that.

Ron Wirahadiraksa

Yeah. So I think the question was also how this is specifically constructed, if I understood it well. So, Holcim Morocco has merged into Lafarge Ciments on July 4. That is what happened. And the surviving entity, Lafarge Ciments, was renamed to LafargeHolcim Morocco. That remains a publicly-listed company with a free float of 35.3%. And the remaining part is owned by Lafarge Maroc. And Lafarge Maroc, in turn, is owned 50% by the LafargeHolcim Group and 50% by our joint venture partner there, SNI. That is the structure.

John Messenger

And sorry, just to confirm going forward, so it's no longer Morocco is totally out of the EBITDA, or are you recognizing it and then having a minority interest against it [indiscernible]?

Eric Olsen

So, yeah, it'll be - Morocco will not be part of the consolidated EBITDA, but we're going to find or we're going to be communicating in a way where we show the visible evolution of our 50%-50% entities starting in Q3, because it's an event that happened at the beginning of Q3. So it'll affect our results fully in Q3.

John Messenger

Thank you very much.

Eric Olsen

Thanks, John.

Operator

The next question is from Mr. John-Fraser Andrews from HSBC. Please go ahead.

John Andrews

Thank you, and good morning. My question's firstly on price-cost equation. If I look at the CHF 23 million increase in costs, and even if I add back the CHF 100 million in energy saving, the cost inflation I calculated is just under 2%. I appreciate there are cost savings in that, but can you sort of give an indication of where you think underlying cost inflation is before your cost savings, and that's obviously before the merger savings as well?

And can you relate that to the price growth? So the number you've given this morning, the CHF 170 million to CHF 190 million at current prices, where would that lead to for a run rate of cement price inflation in the second half? And how does that compare to cost? That's the first question.

The second question is, in Nigeria, you've indicated that you're working on moving away from gas by the end of the year. That being the case, can you give an indication on how you see profitability in the second half, perhaps Q3, Q4, as you move through that situation? Thank you.

Eric Olsen

John, yeah. Okay. Thanks. I'll take the second part of that, and then I'll ask Ron to comment on the price-cost equation.

So, really if you just look at the Nigerian situations, you've got a number of factors coming together on a year-on-year comparison. One is price is lower in Nigeria because of significant declines that happened late in Q3 of 2015 in the results. And we've steadily been improving pricing and to the point where, as we get towards the end of Q3, we're going to be year-on-year higher in prices we would expect than the year before. So, price would actually be favorable as we move towards the latter part of Q3.

In terms of the production issues relating to gas supply, some of it depends on the speed with which the gas supply is restored in Nigeria. So we're hopeful that that will happen. But, in the meantime, we're rapidly moving to convert to be able to use coal and petcoke in our plants. And we would expect that to be substantially complete in the range - during Q4, such that by the end of the year we're really in a position where Nigeria should be back on a trend line of its traditional level of profitability, with steady improvement in that direction in Q3 and in Q4 going forward. But with more of that turnaround more focused on Q4 than Q3, obviously, as we start to make the fuel conversions.

And then maybe, Ron, I guess you could comment on costs and inflation.

Ron Wirahadiraksa

Yeah. So you pointed to the CHF 23 million of cost and others. If you look at - you take out the energy impact that is embedded in the costs and not the part in the synergies, when you take out the costs for some of the other business that we're running on asphalt, for example, then you apply the 3% inflation, that is what we see in our cost, then actually we have been on a comparable underlying basis able to bring costs down further. So, that works. So the 3% cost inflation doesn't fully hit because it's offset by other non-synergy cost saving measures.

You asked how does it relate to the pricing, because you only counted the CHF 170 million to CHF 90 million, but that is if prices would stay the same as they had been at Q2 and at constant forex and country mix. But on a like-for-like basis, we intend to increase prices further, as we have communicated. So, that will help offset the inflation impact other than the parts that we're already using as offsets to inflation, which is the cost initiatives excluding inflation. Yeah.

John Andrews

Well, what's the horizon of that price inflation in Half 2 at the current level of pricing year-on-year? Obviously, the base gets easier in Half 2. So how are you looking in terms of price inflation at current levels?

Ron Wirahadiraksa

So, if you look at Half 2, what I said the CHF 170 million to CHF 190 million is the part if prices would stay the same. We are intending to increase prices further. And of course, we will report back on that once the quarter is finished. But within our pricing-over-volume strategy, that's a key imperative that we're following.

So we're not ready to communicate towards the exact number of the outlook. But this, our ongoing price increase strategy combines with the fact that we already have at constant assumptions, as we have said, a large part of that in the back, so to speak, gives us confidence on the guidance that we've given for the full-year EBITDA being at least high-single-digit on a like-for-like basis above last year.

John Andrews

Thank you.

Eric Olsen

Great. Thanks for the question. And we'll take one last question.

Operator

The last question comes from Mr. Nabil Ahmed from Barclays.

Nabil Ahmed

Hey. Good morning, gentlemen. Two questions for me. First one on the working capital in Q2 and H1, which is actually - I mean the change in working capital is CHF 300 million higher in a context where your revenues aren't coming down. Could you please clarify what's going on there? And if you have a guidance for the remainder of the year, that would be useful as well.

Second, on the balance sheet. I mean, you mentioned this guidance of CHF 13 billion of net debt by year-end. It looks from what you're saying that you seems to be pretty happy to have delivered on the disposals and there's nothing really imminent coming up. Would you share with us what's your target financial structure in terms of cash flow multiple or EBITDA multiple, and if you are happy with the CHF 13 billion? In other words, beyond being proactive and opportunistic, do we have to expect further disposals into next year?

Eric Olsen

Yes. So, to start with the latter, the CHF 13 billion is the target. And as you know, our primordial objective is to become comfortable solid investment-grade rated. That starts at an RCF to net financial debt rating agent definitions of 20%, but we want to be above that of course, or a net debt to EBITDA multiple of 3.5 times.

So, we feel that with this, we are in that bracket. Our ambition is to remain solid investment-grade rated. So we want to extend it further and make sure that our financial structure meets the criteria for the solid investment-grade rating throughout the cycle, because that is the ambition.

You asked about the working capital. The working capital increase of CHF 300 million, that's mainly driven by the fact that we have - and you saw it in the cash flow statement, that we have the disbursements on the provisions that we took last year for one-offs in terms of merger and merger implementation cost. So this is now what we're disbursing on. I know that also this year we have some costs, but this is the net effect of it. So we expect that throughout the year this will come down.

Eric Olsen

Okay. Well, thank you. I'll close the call there. I'd just like to thank you all for your participation and your questions. We appreciate that. We look forward to seeing and exchanging with you on November 4 as we release our Q3 results. And then, as I mentioned earlier in the call, you just mark on your calendars November 18, and we'll be following up with a formal invitation on that. So we'll look forward to updating our plans and our targets with you all on November 18.

So, thank you very much for your participation and we look forward to exchanging with you soon. Take care.

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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