LAFARGEHOLCIM LTD ADR (OTCPK:HCMLY) Q4 2016 Results Earnings Conference Call March 2, 2017 7:00 AM ET
Eric Olsen - CEO
Ron Wirahadiraksa - CFO
Jean-Christophe Lefèvre-Moulenq - CM-CIC Market Solutions
Arnaud Lehmann - Bank of America Merrill Lynch
Yassine Touahri - Exane BNP Paribas
Robert Muir - Berenberg
Elodie Rall - JPMorgan
Manish Beria - Societe Generale
Robert Gardiner - Davy
Gregor Kuglitsch - UBS
John Fraser-Andrews - HSBC
So, good afternoon to everyone here in Zurich and to those on the webcast, and welcome to our Q4 and 2016 Full Year Results Presentation. Before I talk about the results, I'm sure that you're all aware of the other press release that we issued morning to respond to the allegations involving our operations in Syria.
The announcement covers the initial findings of the internal independent investigation. Compliance is of utmost importance to LafargeHolcim and there can be no comprise with the standards outlined in the company's code of conduct, whatever the operational challenges. The press release details all the information that we can share at this point. So, I do not plan to comment further on the matter today.
So, with this, I'd like to come back to the results presentation. We are presenting a strong set of results today. The momentum of earnings growth further accelerated in Q4, in line with our expectations. We achieved our guidance to grow our adjusted operating EBITDA by at least high single-digit on a like-for-like basis. In fact, it is up by almost 9% and our generation of free cash flow is significantly up as well.
This reflects the combination of an excellent execution on synergy delivery well ahead of target, a constant focus on prices and costs and the strength of our portfolio, which presents a unique potential for growth.
This is the result of all our teams working on a clear set of priorities and being fully focused on execution. And I would like to thank them all for their efforts in creating this excellent year 2016.
The Group has really hit its stride in 2016. We are executing on our strategy and we are now in a position to fully benefit from the potential of our portfolio of assets and the combined know-how and talent of our people.
For 2017, we expect to see continuing momentum. We expect a double-digit like-for-like growth in adjusted operating EBITDA and at least a 20% increase in earnings per share. I will go into more detail about some of these key drivers of that growth.
But first let me come back to a few headlines I see in our 2016 results that Ron will present in more detail in a few minutes. First, we have over-delivered on our synergy target with an additional CHF180 million generated in Q4. This brought the total synergies for the year to CHF638 million.
All levers contributed with notably an acceleration of our achievements and SG&A, operational excellence, and growth and innovation. And as we extract the value from the synergies, we have identified new opportunities for cost cutting in the coming years.
Second, our approach to pricing is delivering results. With prices up 1.1% sequentially in Q4 compared to Q3 and above Q4 2015 by 5%, increased pricing contributed close to CHF300 million improvement in Q4 EBITDA compared to Q4 2015.
We have been able to deliver sustained price increases and margin improvements in many markets with notable improvements in key countries like Nigeria, Egypt, and Mexico.
After several years losing ground against cost inflation, we are determined to catch-up and get our full share of the value we bring to our customers. Our approach is based on a rigorous market segmentation focusing on the highest margin segments, offering comprehensive solutions for our customers and getting closer to our customers. We want to increasingly leverage our high quality products and the added value that we bring to every project, thanks to the expertise of our people.
The third takeaway, the results of our actions on prices and costs are directly visible in margin expansion, which increased over 200 basis points for the year and over 600 basis points for the quarter on a like-for-like basis.
From a regional standpoint, I'd like to highlight the contribution of North America and Europe. The positive momentum in the U.S. market and decisive restructuring actions in Europe have delivered a significant portion of the EBITDA growth.
Given the scale of our operations in these two key regions, we are ideally positioned to continue to capture the ongoing recovery potential of these markets. In the U.S., where we are the number one cement producer, we are on a path to generate CHF1 billion adjusted operating EBITDA making it the largest contributor to the Group's EBITDA.
Together with Canada and Mexico in the coming years, we will generate CHF2 billion of EBITDA in these three countries. And in Europe we have generated CHF1.3 billion, which represents more than 20% of our EBITDA.
The fourth item to take away from these results and less positive take on our result is that we have experienced a decline in volume in 2016. Some of you have raised the question of whether this was principally linked to price increases. It is not. When looking closely at the volume evolution, the decline was largely due to a handful of specific situations.
In Q4, for example, our volumes were down 5% or 3.5 million tons, of which more than 3 million tons impact came from the following. The impact of the demonetization in India, which took place in the first month of November, less favorable weather conditions in the U.S., excess capacity in Malaysia and Indonesia, and a market slowdown in Egypt, following the significant currency devaluation in November.
Going into 2017, we expect our markets to grow 2% to 4% and we are confident in our ability to grow in line with our markets and increasingly benefit from the new capacities we have brought on stream. In 2016, for instance, we commissioned new or upgraded capacity in key markets such as the U.S., Nigeria, India, and Algeria. This will support our future growth.
The fifth takeaway, in 2016, we have demonstrated our ability to turnaround our businesses in the face of rapid and significant changes in the environment. You will see this with India and Nigeria, for instance. In times of volatility, this ability to adapt our business swiftly and effectively is a real strength.
I would also like to highlight that on our bottom-line, earnings grew strongly, particularly on the back of a significant reduction in financial expenses, which Ron will go into shortly, resulting in a full year recurring net income of close to CHF2 billion more than double the prior year.
Let me also mention the improvement in return on invested capital, which is up 80 basis points year-on-year. We still a further to go to achieve our goal of 300 basis points improvement, but the 2016 results are a great start to our 2018 goal.
And finally a key highlight for the year is cash generation. When we created this new company, one of our important commitments was to build a business model that would increase returns to shareholders.
We are committed to a strict capital allocation discipline and have tightly controlled CapEx and working capital. This resulted in doubling our operating free cash flow and in an excellent improvement of our retained cash flow to net debt ratio, which increased from 10% at the end of 2015 to over 20% at the end of 2016. It puts us in a position in 2017 less than two years after the merger to return excess cash to shareholders through buybacks and an increased dividend.
A word on our divestment program. Deals closed in 2016 delivered a net debt reduction of approximately CHF2.5 billion in 2016, including deal secured that will close in 2017 the impact of divestments on net debt should be around CHF4 billion. This represents total enterprise value of roughly CHF4.4 billion.
Now, before coming back to our general view on 2017, let me highlight a few key markets that's significantly impacted our 2016 performance and will drive our EBITDA growth in 2017.
I will cover the U.S., Europe, Nigeria, and India. Let's start with the U.S. People tend to forget, so let me remind you we are the number one cement player in the U.S. with over 20 million tons of capacity and a modernized and flexible asset base combined with an unrivaled logistics network. We also have strong positions in aggregates and ready-mix concrete.
We have been able to deliver strong and steady improvements in our margins in 2016 as a result of successful price increases across all product lines and delivery and cost savings, notably from synergy initiatives.
We have seen growing momentum in aggregates, asphalt, and ready-mix concrete. Profitability has doubled in North America over the last two years at our ACM operations. And in looking at 2017, we expect to continue to benefit from good pricing trends and to capture demand growth, thanks to the available capacity of 6 million tons in the U.S. and additional 2 million tons available across the border in Canada.
We are expecting growth of 1% to 3% next year in 2017 in the U.S. Beyond 2017; we expect further upside from government infrastructure spending. We saw an announcement this week of CHF1 trillion investment in infrastructure spending in the U.S. to be spent over the next five years.
And after hitting a low point in terms of cement consumption per capita back in 2010, we expect U.S. cement -- the U.S. cement market to break the 100 million tons threshold again in 2018, driven by new housing and infrastructure demand.
Turning now to Europe, the region performed extremely well despite difficult economic conditions, delayed infrastructure projects, and some political uncertainty. Our teams were focused on costs and did an excellent job at restructuring our network in many countries.
Ensuring our competitiveness in all geographies is our responsibility. In some cases, our teams have made tough decisions and implemented them in a responsible, yet decisive manner. These actions are visible in Europe's results.
The adjusted operating EBITDA margin in Europe was up 170 basis points for the full year despite reduced demand in several markets such as Spain, Russia, Romania, and Italy.
Now a word about the performance in the U.K., which continued to be strong despite the uncertainty brought by the Brexit process. The adjusted operating EBITDA margin was up by 340 basis points as a result of price increases that were achieved and sustained throughout the year and a tight focus on managing costs.
Our outlook for Europe is generally positive as most markets have now stabilized and some are starting to show signs of progressive improvement. For example, we expect to see improved demand in residential and infrastructure in markets such as the U.K. and Russia, as well as in France.
And after years of pricing pressure, Europe is a key region where we need to continue to rollout our pricing methodology and further leverage value-added solutions, including digital solutions.
Coming now to India, one of the most important markets for us and where we have two strong and well-established companies in ACC and Ambuja. India offers undisputed growth potential among large -- among our large emerging markets with a low cement consumption per capita at around 215 kilograms per person, a sustained population growth, fast urbanization, and an improving GDP per capita in the medium to long-term.
While our operations in India were affected by the unusually strong monsoon in the third quarter and demonetization in the fourth quarter of the year, we progressively increased our margins in 2016 by close to 200 basis points over the year.
And after a leadership change in February, we started executing our turnaround plan. We successfully introduce better pricing and reduced costs as a result of a change in the fuel mix, with increased use of petcoke and a focus on logistics to mitigate the impact of increased fuel costs.
The demonetization came as a surprise to everyone and impacted badly our Q4. We estimate that the impact at approximately CHF60 million that we partially offset through cost measures.
We proactively put in place alternative cashless payment solutions and now we see things improving. We expect the effects of demonetization to be negligible by the end of the first quarter.
In addition the recent Indian budget announcement, which increased government spending on infrastructure and housing will boost cement and concrete demand in the coming quarters.
Overall, for 2017, we are optimistic about the Indian market prospects and we expect the market to grow between 4% and 6% for the year. We also believe that we have more potential to come from continuous improvement in our product mix as we increasingly focus on value-added solutions, bringing more of our services and know-how to enhance our products.
We will also benefit in the future from incremental cement capacity totaling 2.5 million tons already commissioned in Jamul and Sindri. Overall, we expect India to be a significant contributor to EBITDA growth in 2017.
Turning now to Nigeria. I had the opportunity to visit Nigeria a few weeks ago. I can tell you that what our teams have done in Q4 is simply impressive their results demonstrate a critical ability to take swift and effective actions in the face of a very challenging external environment.
I am sure that many of you will recall that our business was significantly affected by interruption in gas supplies in 2016 and also by a lack of trucks and a ban on explosives in the Niger Delta for some weeks which stopped our quarrying activities.
Combined with strong competitive pressures, sharp devaluation of the Naira and a shortage of hard currency, Nigeria in 2016 can be seen as a perfect storm. Now with the change leadership team, we have defined a turnaround plan which addresses the issues in a very systematic way with measures to significantly improve our fuel flexibility, logistics and sourcing.
And the result was obvious in Q4, margin declines were reversed with adjusting -- adjusted operating EBITDA margins more than tripling in the quarter and we anticipate further strong margin improvement ahead, back to historical levels. Prices also improved significantly, with an increase of 40% in September.
For the coming months, we expect that Nigeria will remain a somewhat volatile market faced with currency devaluation risks and a softer demand in 2017. This is why we expect a roughly flat market in terms of volumes for the year, which represents a real slowdown in a country where consumption per capita remains well below 150 kg per capita. But we believe in the medium and long-term growth potential certainly in Nigeria.
However, in the short term, we expect better prices combined with the results of our turnaround plan to deliver strong results growth for Nigeria and we expect Nigeria to be one of our key recovery markets showing strong improvement in EBITDA growth for 2017. The main levers of this turnaround plan will be first around fuel flexibility, which plays an important role in reducing our dependency on gas and fuel oil.
Showing a great example and I personally witnessed it when I went and visited the plant, a great example of what is possible here Ewekoro plant ramped up from 0% alternative fuels to 40% in a period of two months in the fourth quarter of 2016, 0 to 40% in a period of two months burning largely biomass.
Secondly, we have increased clinker capacity with the start of a second kiln in Calabar which is in Southeast Nigeria with much lower production costs. And finally, we have improved the efficiency of our logistics operation and try as much as possible to reduce our exposure to the dollar by sourcing our costs locally as much as possible. All the markets that I just covered are key drivers for our expected growth in 2017 results.
At the regional level, we anticipate Asia Pacific and the Americas will continue to strive global cement demand, while Europe is expected to enjoy a modest recovery and Middle East Africa will remain largely stable. But just being in growing markets is not enough to secure success and as we've demonstrated in 2016, we had focused execution on our commitments and our self-help measures and positive momentum in our synergies and cost management give us confidence in our ability to continue with our cost savings.
As you know, we are engaged in a transformation journey focusing on four strategic pillars delivering on the strategy is what underpins our results momentum. And at the heart of our strategy is commercial transformation which enhances our ability to differentiate from others in the sector through new technology, product innovation and salesforce excellence. Our segmented approach to our customers managed by specialist teams enables us to develop channel and product solutions that help our customers to be successful while growing our business.
Meanwhile, costs and CapEx discipline continue to underpin everything that we do. Our focus on these areas includes many of the initiatives that I have outlined as well as our drive to continue to optimize our assets to capture future growth with less capital.
Now before I hand over to Ron, let me summarize how I expect our 2017 year to evolve. Our performance will be in part driven by an increase in overall to demand of between 2 and 4%. It will also benefit from the strong growth expected in a handful of key markets either resulting from inherent market momentum or through execution of our plans in recovery markets. These markets would include the U.S., some countries within Europe, India and Nigeria. And finally, our continued focus on pricing, cost management and synergies will continue to drive these results.
In 2017, we intend to deliver double-digit growth in our adjusted operating EBITDA and on like-for-like basis. On the bottom line, we expect recurring earnings per share to grow by more than 20%, showing the benefit of growing EBITDA, improved financial costs and reduce tax rate.
After the significant improvement of our financial ratios, we will continue to strengthen our balance sheet structure. We expect our leverage ratio defined by net debt to adjusted operating EBITDA to come down to around two times at the end of 2017, from close to 2.6 times at the end of 2016. We remain committed to a solid investment grade rating and will take all measures necessary to ensure its sustainability. Thereafter, we will return excess cash to shareholders delivering on another of our key commitments.
As we announced in last November, we plan to buy back shares for up to CHF1 billion over the next two years and will propose a dividend per share stepping up from CHF1.5 to CHF2 at the next AGM in May.
I will now hand over to Ron to take you through the regional results and analyze our performance in more detail. Thank you.
Thank you, Eric and good afternoon everyone. Let me start with an overview of our key figures for the quarter -- 2016 the fourth quarter and the full-year in 2016. In 2016, we did focus on execution and delivered on three key pillars; pricing, CapEx discipline and delivering on cost control. This resulted in a like-for-like adjusted operating EBITDA growth of 8.7% versus 2015 and operating free cash flow of CHF1.7 billion significant deleveraging and a strong growth in recurring EPS.
In Q4, we built on the strong momentum that we already saw in Q2 and Q3 of the year and we recorded a 30.5% like-for like growth in adjusted operating EBITDA that resulted in a margin improvement of around 600 basis points. In the quarter, volumes were down as a result of challenging conditions in a few markets and of specific situations like in India impacted by demonetization of bank notes and U.S. due to a tough comparison base.
As a result, net sales in Q4 were down 1.4% on a like-for-like basis and this was compared to one year ago. Our recurring net income improved significantly and reached CHF564 million compared with CHF78 million in the preceding year.
We continue to exercise strong CapEx discipline with investments of CHF400 million in Q4, in line with our plan with the bulk of the reduction coming from lower expansion CapEx. As a result of the 30.5% like-for-like adjusted operating EBITDA improvement and with reduced CapEx and lower net financial charges paid we significantly improved our operating free cash flow with an inflow of CHF1.3 billion in the quarter, almost doubling from the year before.
Deleveraging continues net financial debt stood at CHF14.7 billion at year-end 2016, this includes CHF2.5 billion of net debt impact linked to our divestment program and that was instead of the CHF3.5 billion that we guided for. The difference mainly reflects the foot closing of Vietnam and the divert cash-in of China at the end of 2016.
As a matter of fact I'm glad to also announce that the closing of Vietnam actually happens two days ago, meaning that we have already received CHF450 million that will contribute to our net financial debt reduction.
Let me start with the main drivers of our increase in adjusted operating EBITDA in the fourth quarter. Price increases have delivered a strong contribution of CHF288 million in Q4, reversing the negative contribution of CHF88 million in the first nine months of last year. The pricing contribution more than offset a negative volume variance of CHF212 million in Q4.
Another key performance driver has been significant cost improvement, thanks to acceleration in synergies delivery and ongoing cost discipline. More specifically, we delivered CHF181 million of synergies in Q4 on top of the CHF457 million recorded in the first nine months.
We have also delivered CHF142 million of ongoing net cost savings in Q4. This is beyond the synergies and it corresponds to around 2.5% of the quarterly cost base. The accelerated momentum in 2016 enabled us to deliver on our commitment of at least high single-digit growth in like-for-like adjusted operating EBITDA and resulted in an 8.7% like-for-like adjusted growth for the full year.
Results were also driven as set by the delivery of synergies that stood for the full year at CHF630 million well ahead of our initial target of CHF450 million for 2016. On the cost side for the full year, we benefited from CHF245 million of positive energy cost savings, out of which half corresponds to our performance actions.
In full year 2016, all regions grew their adjusted operating EBITDA on a like-for-like basis and this is despite some challenging markets circumstances, like for example, in Brazil, Indonesia, Malaysia, Nigeria in the first nine months and particular, India, in the latter part of the year.
In the fourth quarter, the evolution is even more marked with a strong growth in every region and a notable rebound of Middle East Africa on the back of a strong turnaround in Nigeria.
Let me now go through our Q4 performance in each region and I will start with North America, our largest contributor to the Group EBITDA. In North America adjusted operating EBITDA margin increased by around 430 basis points to 26% in Q4. This is a 9.3% like-for-like increase in EBITDA to be compared with sales down 8.8% on a like-for-like basis.
In the U.S., we continue to benefit from successful pricing improvement and ongoing cost saving initiatives. This was realized despite lower volumes on the back of a tough compare to due to exceptionally mild weather in Q4 of 2015. This was more specifically in the Northeast.
We continue to capture synergies through plant network optimization, manufacturing, and procurement, with renegotiation of post-merger purchasing contracts.
In Canada, we delivered a stable performance despite persistent challenging markets circumstances in Alberta and Saskatchewan. In Eastern Canada, Montreal's New Champlain Bridge project had a positive effect on volume and profitability, but the completion of other major infrastructure during 2016 led to an overall decline in aggregates volumes year-on-year.
In Europe, adjusted operating EBITDA margin achieved strong growth of over 300 basis points to 20.2% in Q4. This is a 17.7% like-for-like improvement in EBITDA compared with like-for-like sales that were virtually flat.
Currency depreciation, mostly in the U.K., accounted for the lower reported sales year-on-year. We demonstrated resilience of our business in Europe into the year characterized by slow economic growth, delayed infrastructure projects, and political uncertainty.
This context improvement in operating EBITDA is a clear result of disciplined cost management and restructuring. In particular, we manage to deliver operating EBITDA growth in France, while our operations in Spain demonstrated good resilience.
In the fourth quarter, we observed slightly better trends in several Eastern European countries, for example, in Russia. Let me highlight the strong contribution from the U.K., thanks to an upturn in cement and concrete volumes.
Despite cost headwinds relating to the weakened pound post the Brexit vote, adjusted operating EBITDA improved significantly due to strong margin focus, pricing, and customer differentiation as well as particular focus on cost management.
In Asia, the adjusted operating EBITDA margin increased by 370 basis points to 20.6% in Q4. This was driven by 13.4% like-for-like increase in EBITDA to be compared with like-for-like sales decreasing by 3.6%.
With a mixed economic picture across the region, we have delivered solid growth due to positive earnings contributions from markets such as the Philippines and India on the back of improved pricing, cost, and fuel mix.
In India, cement volumes were softer because of the short-term impact of the demonetization program that started in November and have mostly impacted rural areas in the North and East. Our operations which have a strong exposure to retail were impacted by this.
Savings in fuel and other variable costs coupled with the implementation of new marketing strategies offset the adverse effects in price and volume to drive a year-on-year increase in EBITDA in India.
Environment continued to be tough in Indonesia and Malaysia. In Indonesia, cost savings initiatives helped mitigate the decline pressure. In Australia, our consolidated business continued to suffer from high comparables after the end of the Gorgon gas project in the previous year.
Latin America, adjusted operating EBITDA margin increased by 570 basis points to 33.3% in Q4. This is a 20% like-for-like increase in EBITDA, while net sales were down 2.2% on a like-for-like.
Our efforts on costs and our consistent strategy on pricing helped to mitigate the effect of the ongoing economic crisis in Brazil and softer growth in several markets.
Our efforts on cost -- sorry, in Mexico, we focused on the most profitable segments and sub-markets, has enabled us to strongly grow profits despite the tough 2015 topline comparable base, which had benefited from large projects.
In Argentina, cement and concrete volumes decreased, mainly due to a slowdown in the residential construction and a decrease in public investment in infrastructure and housing. However, pricing and cost optimization initiatives resulted in a significant increase in adjusted operating EBITDA.
In Brazil, the persistently challenging operating environment impacted volumes across the three segments. This contributed to a significant fall in adjusted operating EBITDA for the full year. But reductions in fixed costs combined with divestments or mothballing of assets helped Group to decline in the fourth quarter.
In Middle East Africa, adjusted operating EBITDA margin increased by 1,600 basis points to 41.7% in Q4. This was around 90% like-for-like increase in EBITDA while net sales were up 6.1% on a like-for-like basis. Net sales were down 17.5% on a reported basis on the back of currency depreciation.
The financial performance of the region as a whole was boosted by Nigeria, which delivered successful business turnaround in the fourth quarter. We have seen strong execution of this turnaround plan measures to increase fuel flexibility, combined with price increases, drove a strong recovery in EBITDA in Q4 after suffering a sharp decline in cement volumes in Q2 and Q3. This followed the logistical challenges and the interruption of gas supplies related to militant group attacks on gas pipelines.
The new line commissioned in Calabar in Q4 2016 is ramping up and performing ahead of plan. In other markets, we saw strong contribution from Algeria supported by the start of the Biskra plant.
Overall progress in Egypt and Lebanon offset declines in South Africa and Zambia. I would like to highlight that in Egypt the teams continued to deliver a good performance in Q4 despite significant currency devaluation and declining volumes in a very much more difficult market.
Let us now most to pricing, where in 2016, we consistently delivered on sequential quarterly improvement. The sequential quarter-on-quarter price evolution was an increase of 1.1% in Q4, driven by pricing improvement in Nigeria, China, Middle East, and Mexico, which have more than offset declines in Brazil and Malaysia. All-in-all, in Q4 2016, we were at the level that was 5% above last year.
As you can see on this slide, we generate a significant earnings contribution from our joint ventures as equity accounted operations. We have also included here the debt. This will help you to model the valuation of Cement Australia and Morocco.
Please note that from Q1 2017 onwards, we plan to change our reporting for the contribution of our joint ventures. As their share of the net result will be separated from the rest of equity accounted entities and directly reflected in the operating EBITDA as we believe that this will better reflect the economic performance of our controlled and non-controlled operations.
You will find more restated Group numbers quarter-on-quarter in the appendix and we will, of course, provide you with a quarterly split per region once Morocco has published its full year results later this month.
We have delivered significantly ahead of our initial full year synergy targets of CHF450 million, by delivering CHF638 million in 2016. Overall, since the merger completion, we have delivered a cumulative CHF767 million of synergies.
Progress was made in all categories, with operational optimization delivering above initial target followed by SG&A procurement and growth and innovation. It is worth noting that we have already outperformed our initial target for operational optimization synergies of CHF200 million by 37%.
Let me focus a bit on as SG&A. When looking at like-for-like scope in 2015 versus 2016 and taking into account SG&A synergies through Q4 2016 of CHF189 million, we have already been able to take SG&A to sales down from 9.4% in 2015 to 8.5% in 2016.
And as we highlighted in our latest Capital Market Day, we have been streamlining our central cost structure in overlapping countries. As was the case, for example, in North America, where we combined our headquarters and reduced our IT spending.
We have also brought non-overlapping countries to best-in-class levels, transferring best practice between countries in Southeast Asia and Mexico, for example, thanks to internal benchmarking exercises.
In addition, we are rolling out business in IT shared service centers, for instance, in India. Significant progress has been made so far on the SG&A front and we believe that the recently identified cost savings program would enable us to reach our SG&A sales target of around 7% by 2018.
Let me now have a look at our one-off cost. In 2016, as expected our merger-related and other one-off costs were lower than in 2015. While merger-related costs were behind us, implementation costs amounted to CHF242 million in 2016 and other restructuring to CHF341 million.
Let me specify that these included additional restructuring cost of CHF120 million related to new initiatives mentioned at our Capital Market Day. For example, we have announced in September a corporate restructuring, which significantly impacts this amount. When comparing the cash impact of one-offs, it was down from CHF784 million in 2015 to CHF638 million in 2016.
We have been able to post a substantial improvement in recurring net income compared to a year ago from around CHF1 billion to close to CHF2 billion. One of the key sustainable drivers is a close to 30% reduction in our financial expenses driven by the work done on financing terms. Our effective tax rate also improved to 29%.
We have also significantly improved our operating free cash flow compared to a year ago. From a cash outflow of CHF50 million in 2015, we reported CHF1.7 billion in 2016. Lower CapEx and higher operating EBITDA contribution compared to 2015 have fully contributed to this improvement.
Additionally, our efforts on net working capital have translated into an improvement of around two days of sales compared to 2015.
Let's turn to CapEx. In 2016, we significantly reduced the global amount spent from CHF2.6 billion to slightly over CHF1.6 billion. The reduction is not related to maintenance CapEx, which is only slightly down from the CHF1.1 billion to CHF1 billion, but is most related to expansion CapEx, down CHF800 million as we leverage in priority our existing assets and pursue an asset-light strategy.
In 2016, North America concentrated close to a third of the total amount and was then followed by Middle East Africa and Asia Pacific which are both over 20% and then Europe below 20%, with Latin America around 5%.
Let me now focus on the conversion of our adjusted operating EBITDA into cash flow from operations. By reducing the level of one-off costs, net interest paid and operating working capital compared to 2015, we managed to increase the cash conversion ratio by 13 percentage points to 57% and this is closer to its 2014 level of 64%. Going forward, we intend to further improve this cash conversion ratio.
We significantly reduce our net debt in 2016 from CHF17.3 billion to CHF14.7 billion notably thanks to CHF2.5 million of deleveraging related to our divestments. The difference with our initial CHF15.3 billion guidance comes from the foot closing of Vietnam and China and the remaining being large linked to foreign exchange rate impact.
As a result of our refinancing activities last year, the average debt maturity has increased from 4.2 years at the end of 2015 to 5.9 years at the end of 2016. In addition, the average cost of debt has been further reduced from – sorry -- 24.8% at the end of '16 compared to 5.1 at the end of December 2015.
As a result of our improving adjusted operating EBITDA and efforts from refinancing. Our financial ratios have strongly improved. Our net financial debt over adjusted operating EBITDA ratio improved from a reported 3 times to 2.5 in 2016.
Our cash flow from operating activities to net financial debt increased from 14.8% in 2015 to 22.4% in 2016. We are committed to a solid investment grade rating and will continue to work on improving our ratios.
As we already presented you the main items of our 2017 guidance, let me simply reiterate that we expect to deliver strong growth in adjusted operating EBITDA in our recurring EPS and in our free cash flow and that we remain committed to returning an increased amount of cash to shareholders while remaining a solid investment grade rating.
Moreover, in order to drive our 2017 targets, we assume the following elements. Synergies in excess of CHF1 billion by the end of 2017 with an incremental amount of CHF400 million for 2017 alone. CapEx below CHF1.8 billion, an increase in energy prices of around 10% partially mitigated by cost initiatives measures and cost inflation excluding energy of around 3%, an average nominal interest rate on gross debt of around 4.7% and a normative tax rate below 28%.
We will now leave the floor open to any questions you may have that Eric and I will be happy to answer.
Before we get started with the questions, I just like to cover one last point before we go to the questions. We are pleased certainly with a strong set of results that we've shared with you today reflecting the efforts of the teams across the world in all our business segments. We demonstrate the potential of the Group that we created when we brought together the two industry-leading companies in Lafarge and Holcim
We have said before that the integration is well behind us and we are focusing on transforming the company and delivering superior returns to shareholders. One outstanding decision that remains and it is one that I'm often asked about by some of you and many people inside and outside the company is a question whether we will invest a bunch of money in capital in changing the name of our company.
And we’ve taken our time to make a decision about this, because we understand the importance of brand and especially with the company that looking at commercial transformation is a central part of the strategy and we understand the value of these two legacy company brands. And we’ve come to decision to keep our name is LafargeHolcim.
We have two strong well-known and respected brands in Lafarge and Holcim and we do not want to lose the goodwill, trusts and value and attachment that our customers have with these two great highly valuable brands. We will therefore continue to operate in markets around the world under these two brands and we will continue to operate globally as LafargeHolcim.
Now, with that for the second time we open the floor to questions.
Q - Jean-Christophe Lefèvre-Moulenq
Jean-Christophe Lefèvre-Moulenq from CIC has three questions. Minor and two majors. So minor questions, you didn't mention the Greece, could we have an order of magnitude of the Greek volumes in the pricing effect in 2016? Secondly, in France apparently main cement market was but difficult in 2016 -- ready-mix concrete in France and for non-cement activities has ready-mix concrete and aggregates, the ready-mix concrete in France all major players are losing money is that a case of LafargeHolcim after three years of price decline, more or less 8% in France between the 2014 and 2016 if you look at ready-mix concrete price index.
So can we have more flavor on that and if possible recovery next year? And finally, Egypt. Egypt, we had good results, but if we look forward, we have difficult impact of currency devaluation and we have also big parts of cash costs paid in currencies -- in hard currency, how you manage this in 2017
Notably in LNG.
Okay, thank you for the three questions. Ron maybe you will take the first one on Greece. Let me just speak to Egypt. The Egypt team did a fantastic job delivering in Q4, if you look in our results there really they've done a tremendous job in fuel flexibility and increasing alternative fuel uses in the plant.
And yes, so there will be some challenges in the Egyptian market going forward, but we are confident in our ability to continue to maintain our margins and that's our focus is maintaining our margins in the country.
Now the devaluation certainly strongly affects the results as they translated into Swiss francs, but our ability to focus and maintain our margins is really our focus and there's through cost reductions and our focus on commercial differentiation.
Going to ready-mix concrete in France, we don't disclose specific profitability and but you're right profitability was down a bit in 2016 and in concrete in France, but France is one of those markets that we believe will show improvement in 2017 and beyond.
You've got favorable trends in residential and you've got all the associated work around the [indiscernible] project that, so we see we’re optimistic that following a more difficult year in 2016 that we have a better outlook in France going forward. And may be Ron comment on Greece pricing volume?
Yeah. Overall, we see for Greece a stable performance. We did manage to improve in pricing, but it was a bit offset by volume and mix.
And maybe just one other thing I wanted say about concrete in France, of course the year the trend has evolved as well and we see things trending favorably in France, so Q4 was actually better in concrete in France and we expect that the carry through into a good year in 2017.
Thank you for the question. We’ve to get to other -- we’ve 10 on the phone and may be Alessandra just as a matter of protocol, how do we alternate between questions on webcast, on the phone and questions in the room.
Take a few in the room -- and no offense happy to take your question.
Okay. Thank you. [indiscernible] from Bank Vontobel. When looking at your slides for the for the market outlook for 2017, it seems that you little bit more cautious for Asia especially in India, Indonesian and Philippines. Can you confirm that what do you see as the major risks in Asia in 2017? And then one question, second question please. I think you mentioned that you will reclassify the Group share of profit of joint ventures within EBIT
EBITDA. Is this already included in your guidance or will you also address to 2016 pick for that so?
So, I'll let Ron answer that question specifically. Let me speak to the question about Asian demand. And you have very different market situations in different countries. You have everything between a situation like the Philippines where we're expecting 5% to 7% gross and it's really a dynamic market performing well.
And then you have markets like Malaysia and Indonesia where we expect growth in 2017, but more moderate growth in the 1% to 3% range. Maybe it will be better, but that's our market expectation based on what we see in the market.
Now India. India, we see gross of 4% to 6%, which is a strong progression, but within that 4% to 6%, there's an interesting evolution, right, because the India started off like gangbusters last year. The first six months in India, I think, we were up over 10% the market in volume and then the second half of the year, you had a big impact of the monsoon in Q3 and then you had this whole demonetization situation in Q4.
So, taking all that together -- taking into the period that the Q1 will probably not show a strong overall growth in volumes compared to last year, because it started off very strong in volume terms. But over the -- overall course of the year, we expect it to be up 4% to 6% because this demand that was deferred from the demonetization, that demand is still there, it's just going to happen in Q -- the end of Q1, Q2, Q3, Q4. So, we're very bullish and optimistic about the prospects for India in 2017.
And maybe Ron the question around the change in the--
Yes, so as explained in my prepared remarks, we feel this better reflects the value that we get out joint ventures and the way we are managing them. It is included in the double-digit like-for-like adjusted EBITDA guidance that we have given.
Okay. Thank you.
Yes. Martin [Indiscernible]. Two questions. Can you tell us what would trigger the beginning of their share buyback program? And if you rather expected in this year or next year?
And then the second question, you showed some more synergies of CHF410 million expected for 2017, can you remind us on the one-offs that you expect for this year restructuring and implementation costs?
Okay. So, Ron you can take the second one. Let me talk about the trigger point for the share buyback. So, yes, as you mentioned, we announced that we would launch a CHF1 billion share buyback program over 2017 and 2018. And our intention would be to do commensurate proportion of that in 2017.
Now, how and when the timing of when we would actually begin that, we're not going to signal that in advance. That's -- that would be -- but in all those things are very -- there's a lot of disclosure around that. So, you'll have good visibility on when that is actually happening. But we won't telegraph in advance when that is intended. But we intend to do a fair portion of it in 2017.
And then Ron, maybe the synergies -- one-offs associated with the synergies?
Yes, so we guided for CHF300 million in one-offs in aggregates for 2017. So, you can say about two-thirds -- little under two-thirds of that is for realizing synergies. And this means we will stay within the CHF1.1 billion guidance that we've given.
Thank you for the questions. Maybe we'll go to one on the phone or mic.
From the phone is from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you. Good afternoon gentlemen.
Analyst from [Indiscernible]. Couple of questions from me. If I could come back on Middle East Africa in Q4, I think you explained quite well the situation in Nigeria. I just want to be sure there's no let's say one-off effect included in your authority EBITDA, in particular with the devaluation in Egypt, could there have been any potential gains related to energy cost or anything like that?
Because obviously your performance there is quite impressive, so Nigeria is one driver. Is there anything going on in Egypt? That's my first question.
And my second question is related to -- well, you're not going to include the JVs in the EBITDA as you mentioned Ron, does that impact your net debt to EBITDA forecast, but also are you going to restate your 2017 -- 2018, sorry, targets? Or is it too small to really make a difference so it's kind of included in your 2018 targets?
Do you can want it?
Yes, the second -- you on the first on, so the second one as said in an earlier question, it's -- the joint ventures is included, so we will do double-digit like-for-like adjusted EBITDA growth in 2017 including or excluding the joint ventures. Therefore already saying it's not that large and we're not going to restate our targets for this.
On Egypt, actually the improvement in Egypt really comes from pricing and overall cost reduction and that includes the energy cost. So, the margin improvement is driven by that. We didn't have a one-off, you asked about that, we're not to hedging, because hedging on petcoke is simply not available and there's no cause of line in Egypt and gas usage is minimal. So, it's really performance-driven and I think it’s a great accomplishment by the Egyptian team.
Yes, and really the whole -- hats-off to the Middle East Africa team overall, because it's a CHF200 million improvement year-on-year in Q4 and its widespread the effort -- Algeria delivered well. Egypt delivered well. Nigeria delivered well. So, you had -- and you had countries like Lebanon that continued. So, you had a lot of excellent performance throughout the Q4 in Middle East Africa.
Okay. Thank you, Arnaud.
The next question from the phone is from Yassine Touahri from Exane BNP Paribas. Please go ahead.
Yes, good afternoon. Two questions. My first question would be on the global picture for the cement industry what we've seen over the past 10 years is that we've seen a period of fragmentation of many emerging markets and return there have upcoming in the pressure in many of the emerging markets.
When you look at the capacity addition in the next five years, do you see a slowdown in the pace of capacity addition, which would suggest that if volume are picking up, we could see margin already recovering? That would be my first question. And do you see a slowdown in this fragmentation process or do you think it will still be an issue?
And my second question is--
Yassine, just to clarify the question, it's on the energy markets are on the cement industry, your question?
On the emerging markets, we've seen the emerging markets--
In emerging markets?
In the emerging markets.
Okay, sorry. Okay. Thank you.
And the second question is coming back on the question of Arnaud on Middle East and Africa, I think the margin was above 40%, the EBITDA margin, probably the highest margin that we've seen in the past 10 years, actually in this --. Is it sustainable? Can you keep margin above 40% in Middle East and Africa for a long time?
And my question is could we see the higher -- could the margin come down little bit sequentially because you start to pay the energy price with weaker currency?
Okay. Yes, so let's go to the first question on the global emerging markets overall and how do we see it evolving. One of the things that you interestingly see in the cement industry is you see incrementally less capacity announcements overall in the industry today than you would've seen five, six, seven, years ago. It's for good reason. There's excess capacity in the industry.
So, my expectation is which is what's behind Yassine's question is that we would expect to see increasing in overall utilization rates because you've got continued global growth and you've got incrementally less cement capacity coming on stream.
I can't say there's no cement capacity coming on stream. There are some projects, but compared to where we were five or six years ago, there's a lot less incremental cement capacity coming on stream.
And our focus is on margins, but our focus is on margins through commercial differentiation and being excellent in our costs and being excellent in the way we sell our products.
I think there's a macro trend that is also favorable for our industry as demand continues to increase and incrementally overall global utilization rates. But that's not the main driver. That's a favorable trend. The main driver is our focus on costs for margins and our focus on pricing as we've talked about.
Maybe turning to the -- your question on the margins and in Middle East Africa. We went through a significant decline in margins in Nigeria. Nigeria is the big fish in the Middle East Africa results for us. It’s a very significant piece of it.
And our margins declined substantially and what you see is a partial recovery of those margins. But we expect to be able to get back to historical margin levels in Nigeria, which will add to that benefit.
And yes, like I said, this question -- the question before was about Egypt, yes, we need to remain focused on cost reductions and maintaining our margins in Egypt and that will be a challenge because there is some headwinds from energy costs, but I believe that we're going to be able to continue to maintain our margins in Egypt.
So, when I look at overall Middle East Africa, yes, there will be some countries that will go up a bit, some little down, but I think overall, I'm comfortable with our ability to maintain our margins. Thank you, Yassine for the questions.
--evaluation of the Nigerian currency and the Egyptian currency on your margin, or will we see it later?
Yassine sorry, I missed -- I got Nigerian currency, but I didn’t get the whole question. Could you restate it?
Egyptian and Nigerian currency assuming where we see the devaluation, have you seen the full impact of the devaluation on cost in the first quarter or will we see the full impact next year -- in 2017?
Well, you see the currency remains volatile topic and I think we're watching closely ongoing currency volatility, certainly in Nigeria. The interesting thing if you look at is given the strong increase in prices, we believe that we're going to be able to offset the effects of currency devaluation on the cost structure and the overall results and be able to maintain our earnings.
And look at how the price trend has evolved; there's already been a significant price increase that we put through in the first quarter of 2017. And so there's more than just the mechanical cost impact of currency devaluation. You also have what happens to your topline as well.
And that's why when I look at it and say I'm confident in our ability to bring our margins back to historical levels in Nigeria and that's our focus right now. Thanks Yassine.
The next question is from Robert Muir from Berenberg. Please go ahead.
Good afternoon everyone.
So, if you go back to Middle East, I just wanted to quickly ask how -- just get an idea in Egypt how -- what portion of your fuel have you moved into alternatives? And is that denominated in local currency? That's the first thing.
And I guess a more general question about Europe, I mean there has been a lot of asset exchange should we say in the last couple of years and sort of different geographical extents have opened up. When you look at Europe, do you see more potential for pricing power going forward and you do you see a better environment in terms of how the broader market is divided? Thanks.
Well, maybe Ron -- the first question on the fuel mix and impact I'll leave that you. Well, let me talk to European pricing and you can dig out the number to the extent. On European pricing, our prices in Europe, we demonstrated -- we increased our margins, for instance, in Q4 by 170 basis point. Europe delivered a good year in 2017 -- or 2016 excuse me, based on cost reductions and really rigorous discipline and cost reductions. But we didn't do it on the back of favorable price increases.
And that's an area that we need to continue to work on and we need to be able to better segment in different markets and that certainly with our commercial differentiation strategy, that's what our teams are absolutely focused on going forward. And with energy costs moving up, we would expect to be able to pass through those energy cost increases to our customers.
So, maybe Ron, on Egypt fuel mix?
Yes, so what we have seen is on the energy savings, a drop in the international petcoke prices. Also we've done more local sourcing versus international purchase. So, I don't have the exact number in the fuel mix right now, but there has been an effort to source much more locally and we've been successful in doing that.
Yes, the Egypt, I don't have the exact number of stuff ahead. Actually, a few years back, Egypt actually reported to me some very familiar with it. Egypt is probably about a quarter of our cost base is dollar-linked, so there's a big chunk which is which is EGP-linked.
And that's a real focus for us and not just in Egypt, but in many countries is making sure that as much as possible of our cost base is based in the local currency really and in the end of the day is based in the local currency of those countries. It's one of the best ways to build kind of a natural hedge into that element of risk in your margins in a country.
So, a lot of times countries aren't necessarily focused on negotiating the best deal possible in U.S. dollar terms, but making sure also that our cost base is well linked to the local currency where we're in -- where we're operating. So, thank you, Robert for those questions. Next?
The next question is from Elodie Rall from JPMorgan. Please go ahead.
Hi, good afternoon everyone.
I have three questions if I may. The first would be on cash reconciliation and net debt for 2016. So, you came up CHF14.7 billion of net debt, you should have been at CHF13.7 billion should you -- if all the disposal had been done, if I understand correctly, so I think there is a shortfall of CHF300 million to CHF400 million invest [Indiscernible] station. You said part of that comes from FX, but when we look at working capital, it looks to be CHF694 million outflow from your annual report. So, just wanted to try to reconcile that there was not one-off in there that we were missing, because I don't think CHF300 million or CHF400 million is necessarily attributable to FX? So, at least I can get there.
My second question would be on cost in Q4, if you could just repeat what was in that Q4 cost I think of CHF142 million, did you put -- did you actually tonight all the CHF200 million of cost savings that you were expecting your Investor Day? And what was the remaining cost inflation in energy please?
And then just lastly on Nigeria, you made very clear presentation, I was just trying to understand the volume evolution for your Group specifically, I mean it looks like the market was 11% in 2016, but volumes were down 1%, just trying to understand that? Thank you.
Sure. Yes, thank you very much for the questions. Let me take the Nigeria question first and Ton if you could take the first two. No, you're right, the market was up 11%, our volumes were down 15% and that's due to your many of the things that we talked about in Q2 and Q3 where our plants were held back in ability to produce because of shortage of gas supplies.
Our plants were dependent on gas and we hadn't put in place the fuel flexibility initiatives that we did. And that's why when I was giving -- citing the example of our Ewekoro plant and the fact that they were able to ramp up from 0 to 40% alternative fuel usage in a span of two months in the second half of the year, it's really a remarkable performance. But it's also hugely valuable performance in what they what they did.
So, yes it's absolutely true, your numbers and it's due to production limitations in our operations largely. And we would expect to be able to recover our volumes as the market recovers as well. And then--
On the net financial debt, we guided you for a number of around CHF13.3 billion. So, in that number was CHF3.5 billion for divestments. That number became CHF2.5 billion with, of course, the additional reporting on the deal in Vietnam having been concluded two days ago. And the rest is mainly related to the ForEx on the back of the Egyptian pound and the dollar and the euro to a certain extent to the Swiss franc.
So, although there's no reconciliation issue. You have not missed anything, you asked about the CHF152 million versus CHF694 million, the CHF152 million is what we call the operating working capital, so that party is purely related to inventories and receivables and payables and does not includes the changes in the and provisions that have seen that is included in the CHF694 million. So that reconciles today.
And you've asked about CHF142 million? That includes our ongoing cost down now including that is little bit energy impact and this was at the non-synergistic part. There is the synergy part in energy in the quarter.
And in fact, if you would take out the inflation impact on the remaining cost base, the actual cost performance is actually quite good in Q4 and that the fix also very favorable variance that you have seen.
Sure, thank you. Thank you and if the reconciliations I am clear Alessandra and the IR team can certainly help you with the mechanics of the reconciliation.
Any other questions in the room and no more online. Okay.
The next question is from Manish Beria from Societe Generale. Please go ahead.
Hi, there. I have two questions. First is your CapEx, so you have done CHF1.7 billion, while your depreciation is CHF2.4 billion, so is it just a timing issue and there will be a catch-up with a depreciation charge at some point in time? Second one is very easy one. So the definition recurring net income, does it deducts the minority income or it doesn’t deduct it? Thank you.
Okay. So maybe I didn't catch fully if you could go restate the first question I didn't -- I didn't fully get, I know it was on CapEx and our CapEx was CHF1.63 billion down from CHF2.6 billion a year before, but you said CHF2.5 billion I wasn't sure I got exactly your questions, sorry if you could just restate it?
Yes. So there is a significant gap between the CapEx that you are doing currently and the depreciation charges that you book in P&L
Controlling depreciation, okay, sorry about that I didn’t -- yeah, sure. Let me take that and then Ron on the net income question I will pass to you. Absolutely, our depreciation is CHF2.4 billion some of that represents the writing up of our assets that we did at the point of the merger in the purchase price allocation process.
But look we've invested substantially in these assets over the last 10 years and we told you and we've been very clear with our strategy is to generate cash flow out of these assets, investments been made for last 10 years.
So sure we’re going to make some small investments along the way, but we’re passing to a different phase from in leverage and sweat and generate value out of this investment that’s been made for the last 10 years and that's our focus right now.
So it's a natural outcome of that, that our level of investment would be our CapEx investment would be substantially under our ongoing depreciation level during this phase.
Yes, you asked what elements we excluded. No, we don't exclude the minorities because these are the part of the recurring net income. Did you exclude the merger related one offs? We have early repayment of bonds as we reported on the gains on disposals and impairments of assets as you know there was not so large impairment on mainly Singapore that we have disclosed and that’s the difference, so no minorities are included. And exactly to show what is the true recurring power of LafargeHolcim in terms of net income.
Great. Thank you for the questions. Okay.
But why don’t you deduct the minority income from the recurring net income because this is a kind of cost for you, I mean?
No, it's part of our activity that’s what we report on so I wasn't -- is not a real rationale, it’s something that we have in our portfolio we won it and it’s coming back, it’s not to be seen as the character of the more one offs type if you will.
Okay. Thank you.
Thank you. Great. Next question.
The next question is from Robert Gardiner from Davy. Please go ahead.
Good afternoon. Robert Gardiner from Davy here. Just two quick ones from me as well. Sorry to go back on the JVs that you're adding back from Jan 1, but I just wanted to understand you're proportionally consolidating or adding back net income and how does that compare then with the scope change for 2017 with CHF330 million that we have to take at Morocco specifically.
And just secondly I just wanted to go back on the U.S. then obviously strong performance in the United States, you had talked previously about $20 per ton price increase, I'm just wondering what kind of progress you're seeing there? What your outlook is there? Thank you.
Sure. Ron, you want to start with the JV question and then I'll--
Yes, JVs are equity accounted for so the net income -- proportional net income assets and we will add that part of joint ventures from Q1 of this year to our operating EBITDA. And as I said in my prepared remarks that is to better reflect the way we run these joint ventures with co-running it and co-owing it.
And it does not lead to a reset of 2018 targets and the double-digit guidance that we gave is either including or excluding its double-digits improvements in adjusted operating EBITDA for 2017.
And as for your question around pricing in the U.S., yes, we did announce as you said a $20 a ton and I actually mention that I believe in the Capital Markets Day meeting we had in November. We don't give us specific guidance on how it's likely to evolve. What we expect is to end up with a price increase substantially above inflation in the U.S. It's just a matter of how much and we watch that.
I can give you a by comparison kind of what happened in 2016 where we had announced a $15 increase a ton in 2015. And in the end of the day, we probably ended up with somewhere around a little under half of that in our 2016 results and I'm not saying that's what the way 2017 will play out, but it's one data point to consider.
And we're confident overall we're in a favorable pricing environment, but we won't give specific guidance on how that'll all work out in the U.S. Thank you.
Okay. So, Alessandra says we still have a few questions.
The next question is from Joseph [Indiscernible] from Kepler. Please go ahead.
Yes, good morning. So, two questions for me. The first one is to understand your 2017 EBITDA guidance; does it assume that the price increases will fully offset the cost inflation?
And my second one is on Q4; could you tell us how much did contributed Nigeria to the EBITDA evolution? Thank you.
Wait how much -- sorry, just if you could restate the Q4 question? I'm sorry I missed that.
No, so the second one? Correct?
Yes, the second question.
Okay. So, Nigeria?
Yes, how much did it contributed? So, what was the swing of EBITDA of Nigeria between Q4 2015 in Q4 2016?
Okay. Well, we don't publish individual country EBITDA numbers. However, in the case of Nigeria, it’s a publicly traded company, so you can go through. But we don't give out specific EBITDA evolutions.
But I can tell you that in the improvement that you see in the Middle East Africa results, Nigeria is a big piece of it, but it's not by far the only piece of it. Algeria performed well, Egypt performed well as well, but we don't give out specific EBITDA evolutions.
Now, on your question on the guidance for 2017. What I can say is we're confident and we're coming out and we're committing what we say is we're going to have a double-digit like-for-like adjusted operating EBITDA increase. And certainly when we commit to something, we deliver it. And I hope that's what the market understands and what you all understand right now. And what we're focused on to do that certainly is pricing increases.
We're looking to offset any energy inflation with cost savings and also we have the last bit of synergies as well. We have CHF400 million of synergies coming in. So, between the -- what we expect to be able to do in pricing, what we expect to be able to do in synergies and other cost savings, we're confident and that we're going to be able to show improved margin evolution in the year and that's part of being able to deliver a double-digit like-for-like operating EBITDA improvement.
But like I was saying in a many time, we talked about 2018 targets following our Capital Markets Day and how and what's the path to those 2018 targets. The way I look at it is I've got many paths to there and I need to have many paths. I focus on pricing, I'm focusing on costs, I'm focusing on growth and leveraging our available capacity. And it's working on each one of those levers at the same time and I'm not sure I would isolate one and say okay this is what our guidance on this micro piece of a lever. It's a portfolio of different levers to be able to get us there and that's true for 2018 targets, but it's also for this guidance that we shared with you today in 2017. Thank you. All right, next question.
The next question is from Gregor Kuglitsch from UBS. Please go ahead.
Good morning or afternoon by now.
Can I ask a few questions? Just maybe go back on the double-digit growth guidance. I'm not sure if you would agree, but I think if you do the math in your target by 2018, you need around 15% annual EBITDA growth for this year 2017 and 2018 to sort of broadly get to the seven on a like-for-like basis. Do you think you'll be close to that -- for the average run rate? First question.
Second question is maybe Ron you can help us out in terms of the remaining cash costs relating to the merger, if you can give us guide -- I think you guided on P&L, just give us a sense on the cash cost.
And then the final question is perhaps you can help us as best as you can see it today, what do you think the FX impact is on your EBITDA, obviously, assuming spot price? Thank you.
So, Ron, why don't we start, you can answer Gregor's second and third question and then I'll come back to the guidance.
Yes, so prevailing rates we expect for 2017 to be around CHF200 million impact negative of ForEx on our adjusted operating EBITDA as I said this on the back of exchange rates that are prevailing today.
The cash cost of the merger -- there was about a cash cost of CHF600 million in the 2016 and we expect that to significantly reduce in 2017. It will be more in the area of CHF300 plus million. So, it's getting very close to the P&L amount.
And on the guidance, Gregor, the -- what we're saying is double-digit that's what we're committing to and that's what we're -- and I don't want to get any more specific on what -- how much in double-digit that is, but we're working confident -- absolutely confident in our ability to deliver double-digit improvement and adjusted operating EBITDA.
And we remain confident based on our business plans and our ability to deliver 2018 as well. Now what the breakdown is going to be in 2017 and 2018 that I'm not prepared to give that specific, but what I can tell you is we're confident 2018 and we're confident in double-digit improvement in 2017. Thanks for the question.
And maybe one more, we're running short of time here. Alessandra okay.
The next question is from Andrew Fraser from HSBC. Please go ahead.
Thank you. It's John Fraser-Andrews actually. Good morning everybody.
Hi John. I was able to translate it. I knew it.
Good. My two questions are firstly on cost inflation. I just want to dig into that CHF142 million in the Bridge. Could you say what the underlying rate of cost inflation that you counted so -- to produce a positive number? You obviously overcame a negative number to start with. So, could you say what that was across the Group?
And whether in the plus CHF142 million, there was any benefit from prior closures, you've mentioned Brazil was prompted and anywhere else in there?
And then secondly on prices, you discussed the U.S., but are there any other in the significant recoveries you're expecting in Nigeria, India, I believe there's already been a decent price rise in Nigeria announced by your competitive there.
Are there any other significant prices that you can talk to in those big countries? And is there anything more to say than you're putting prices up everywhere to counts energy inflation?
Yes, okay. Why don't I -- I'll take pricing points and even though they are linked to inflation and then Ron you take the inflation part of the question.
Yes, I wouldn’t characterize as it we're just putting prices up everywhere us what the message was. But we're certainly focused on prices everywhere. That's true. And it is true that we've increase prices in Nigeria as I mentioned that in the course of Q1, which will also contribute to the recovery of margins for us in Q1.
And another key area of focus on pricing is in India and India made great progress, if you recall the evolution, John, in the end of 2015, something November-December, we had a very sharp decline in pricing. So, starting point in 2016 was very low and the team did a very good job during the course of the year in 2016 to improve prices and then as demonetization happened, in the beginning of November, we had a sharp decline in pricing.
So, the starting point didn't go anywhere near where did at the beginning of 2016, but there is room for improvement certainly and we see prices trending favorably in India in 2017 as well.
And I would expect as there was a question earlier, we talked about the Europe and we're optimistic to have a better pricing environment in 2017 than in 2016. So, -- and we've had a price increase in other countries in Latin America as well. So, there -- it's not just isolated to the U.S. and Nigeria, there's several countries where we see things improving from a pricing standpoint. Thank you for the question John.
Yes, while inflation in Q4, the cost inflation was a 3.3% including energy and 3.4% excluding energy and that was slightly above Q3. So, over the full year, it was 2.2% including energy and 3.3% excluding energy that shows you that already Q4, we saw that the energy started to rise, though it was still slightly favorable for the average number.
For 2017 as already stated in the prepared remarks, we have 3% inflation dialed in in our cost base excluding energy and 10% for energy cost and these energy costs we intend to offsets with taking more energy-efficient measures, more alternative fuel, and for the rest offset it with the pricing as Eric earlier said.
A - Eric Olsen
All right. Well we'll stop there, its 2:30. It was certainly a pleasure to exchange with you and it was a pleasure to exchange and share with you our 2016 results. We're happy with it and we look forward to exchanging with you in the beginning of May on our Q1 results. So, thank you very much.
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