U.S. Markets closed

Edited Transcript of VCT.PA earnings conference call or presentation 2-Aug-19 1:00pm GMT

Half Year 2019 Vicat SA Earnings Call

Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Vicat SA earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Hugues Chomel

Vicat SA - CFO

================================================================================

Conference Call Participants

================================================================================

* Arnaud Jacques Michel Pinatel

On Field Investment Research LLP - Founding Partner

* Brijesh Kumar Siya

HSBC, Research Division - Analyst

* Ebrahim Homani

CM-CIC Market Solutions, Research Division - Research Analyst

* Josep Pujal

Kepler Cheuvreux, Research Division - Head of Building Materials & Construction Sector

* Manish Beria

Societe Generale Cross Asset Research - Equity Analyst

* Sven Edelfelt

ODDO BHF Corporate & Markets, Research Division - Research Analyst

* Yves Brian Felix Bromehead

Exane BNP Paribas, Research Division - Analyst of Building Materials

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day and welcome to the Vicat Group First Half 2019 Results Call. Today's conference is being recorded.

And at this time, I'd like to turn the call over to Mr. Hugues Chomel, Vicat Group's CFO. Please go ahead, sir.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. I am Hugues Chomel, Chief Financial Officer of the Vicat Group. By my side is Stéphane Bisseuil, our Investor Relations Director. Together, we will be presenting to you our 2019 first half results.

Before we start -- before starting the presentation, please have a look at Slide 2, where you can read our disclaimer regarding the forward-looking statements that this presentation may contain. We also draw your attention to the pro forma basis presentation of the first half 2018 figure related to the application of IFRS 16. The 2018 pro forma data has been published on our website on April 29, 2019.

On Slide 3, you have the main points we will be addressing today, and I will begin with the highlights of the past semester on Slide 4. For the first semester of 2019, the Vicat Group recorded sales of EUR 1.3 billion, up 4.6% year-on-year due to the acquisition of Ciplan and the stable figure at constant scope and exchange rates on the back of solid performances in France, Asia and the United States.

This was also accomplished despite the disruptions caused by elections in a number of our key markets: India, Kazakhstan, Mali, Mauritania and Senegal. EBITDA was up 3.1%, and this excludes the nonrecurring settlement payment booked in United States in the first half of 2018. These results reflect a marked improvement in operational profitability given the number of unfavorable external factors that impacted this first half. On this basis, and given the more favorable base effect in the second half, especially in Turkey, the continued return of pricing power in all of our markets, except Egypt, and the expected decline in energy costs, Vicat Group expects a marked improvement in its EBITDA and an increase in net income over the full year.

Slide 6 presents our simplified income statement. The 2018 figures include a settlement payment of EUR 10.6 million in the United States, which impacts the comparison from 1 year to the other. Excluding this settlement payment, EBITDA grew by 3.4% this past semester, while consolidated EBIT was up 2.1%. Net income book share is essentially down due to the settlement payment effect and to the higher effective tax rate in the first half.

Slide 7 shows the bridge in EBITDA between the first half of 2018 and 2019. You can see the positive impact from higher selling prices in France, U.S., India, Kazakhstan, Turkey, Switzerland and Senegal, with a strong contribution from Concrete & Aggregates. You can also identify the increase in variable costs, essentially related to higher energy costs, plus 8%, largely derived from the inflation situation in Turkey. There was also a negative volume effect this semester with a strong decrease in Turkey and, to a lower extent, in India. The other bar chart corresponds to the settlement payment negative valuation.

Slide 8 shows the bridge EBITDA between first half of 2018 and 2019 and split by region. It presents the evolution and the impact of currency changes from 1 year to the other. It also highlights the steady performances in Europe and Africa and the strong increase in France, Asia, the Americas, excluding the settlement payment effects.

I will now be commenting the results by geographical region. I will begin with France on Slide 10. Business levels in France remain dynamic in the first half of 2019 against a positive macroeconomic and sector backdrop. They were supported by strong activity in the infrastructure, industrial and commercial markets, which offset a decline in the residential market. The positive context allowed the group to raise prices in all its main businesses. EBITDA margin and operational sales improved despite higher energy cost to 16.8% as opposed to 15.8% in the first half of 2018. In the Cement business, operational sales rose 4% in the first half. Improvement in sales was driven by a solid increase in average selling pricing. Volumes were stable year-on-year. With energy prices continuing to rise during the first half, EBITDA internally fell 1%.

The Concrete & Aggregates business increased its operational sales by 8% as growth was the result of an increase in concrete prices, and to a lesser extent, in aggregates. Volumes were stable in concrete, but rose in aggregates. EBITDA in this business was plus 54%, and EBITDA margin on operational sales was up 350 basis points. In the Other Product & Services business, operational sales rose 2.5%. EBITDA in this business fell 4% with progress in transport and construction chemical market.

Let us move to Slide 11. First half 2019 business levels in Europe, excluding France, continued the trends seen in late 2018. In Switzerland, consolidated sales fell 7%. EBITDA was down 6.5%, with stable EBITDA margin. In the Cement business, operational sales were stable. Volumes were stable in the first half of 2019, while average selling prices fell slightly due to adverse movements in the product and client mix. Even the higher production cost, EBITDA in the Cement business was stable.

In the Concrete & Aggregates business, operational sales moved 6% lower. EBITDA fell 4% with EBITDA margin improving, thanks to cost-cutting efforts in place since 2018 in this business. The Precast business operational sales fell 15% due to tough competition in consumer products and weaker business levels in the rail segment, due to delays in the start of construction project in the first half of 2019. EBITDA and Precast was down 42%, with EBITDA margin falling by 220 basis points. In Italy, consolidated sales rose 52%. The improvement resulted mainly from the inclusion of quick-setting cement sales in Italy. Selling prices posted a solid increase due to the evolution in the product mix, and EBITDA was stable year-on-year.

You may now turn to Slide 12, our performance in Americas. The Americas region was created after the acquisition of Ciplan in Brazil. Sales growth, on a reported basis, mainly reflects this positive scope effect, but also solid growth in the U.S. business in the first half of 2019 despite particularly poor weather conditions in California. The change in EBITDA takes into account the EUR 10.6 million settlement payment booked in the United States in the first half of 2018. Adjusted for that nonrecurring item, EBITDA in the U.S. rose 3.4%, and EBITDA margin was 15.2% versus 15.3% in the first half of 2018 despite higher energy cost and the impact of weather conditions on volumes.

In the United States, the macroeconomic and sector environment remained favorable. However, weather conditions were very challenging at the start of the year in California, causing Cement volumes across the region, as a whole, to fall.

However, concrete volumes rose slightly. With the market situation remaining conducive to pricing rise, the group achieved plus 4.2% rise in sales. In Cement business, operational sales were stable. Excluding the settlement payment, EBITDA was stable on a reported basis, and down 7.3% like-for-like. In the concrete business, operational sales advanced 6.4%, and EBITDA rose 49%, with EBITDA margin rising by 190 basis points.

In Brazil, the situation is improving gradually after several years of subdued macroeconomic environment. Sales generated since the Ciplan acquisition was completed on Jan 21, 2019, amounted to EUR 59 million with EBITDA of EUR 6 million. In the Cement business, operational sales were EUR 45 million. Volume and prices both rose relative to 2018. In the Concrete & Aggregates business, operational sales came to EUR 17 million. Sales volume also increased in this business. Selling prices rose in aggregate, but fell in concrete.

Let us move to Slide 13, on performance in Asia. The Asia region enjoyed a positive macroeconomic and sector environment in the first half of 2019, supported by dynamic local market. The group focused on raising selling prices in order to offset the sharp increase in the energy cost in recent years.

In India, the group posted sales of EUR 162 million, down 5.8%, where declines reflect the group strategy of focusing on raising prices. Volume fell by almost 16% to approximately 2.8 million tonnes. Selling prices rose sharply over the period as a whole. Despite the increase in production costs arising from energy cost inflation, EBITDA was EUR 36 million, up 53%, with EBITDA margin improving significantly to 22% compared with 13.5% during the first half of 2018.

In Kazakhstan, consolidated sales moved at 18.4% higher, as the group redirected some of its volume to more favorable export market. Overall, volumes fell by almost 5%. However, average selling prices rose sharply in both the domestic and export markets. As a result, and despite a substantial increase in energy costs, EBITDA grew by 50% at EUR 13 million. The EBITDA margin improved significantly to 41% from 32% in the first half of 2018.

Please now move to Slide 14 for results in the Mediterranean region. In Turkey, sales came to EUR 57 million, down 23%. This sharp contraction in the business levels was due to the impact of the 2018 devaluation of the macroeconomic and sector environment. First half EBITDA was EUR 2 million, down from EUR 18 million in the first half of 2018.

In the Cement business, operational sales moved 24% lower. The sharp decline was caused by a fall in volumes of more than 39%, partly offset by a substantial increase in prices. As a result of these factors and a sharp increase in energy costs, EBITDA margin came in at 5.2%. Operational sales in the Concrete & Aggregates business fell 18% as volumes went down 32% in concrete and 34% in aggregate.

Selling prices rose substantially over the period as a whole in both Concrete & Aggregates. Against this backdrop, the group broke even at the EBITDA level in this first half of 2019.

In Egypt, consolidated sales came to EUR 18 million, up 12.6%, an increase that reflects a low base for comparison in the first quarter of last year. Sales remained weak against the background of tough sector environment and major logistical challenges. Volumes rose 18.6% and selling prices eroded with the competitive environment remaining under pressure by production of the Egyptian army new plant. The group recorded a loss of EUR 6 million at the EBITDA level.

Finally, on Slide 15, our performance in Africa. In this region, the macroeconomic and sector environment was positive. Housebuilding and ongoing public sector major work projects helped to boost growth in the sector. However, first half performance was affected by elections in Senegal and the government's decision to prevent price increase during the election period.

In the Cement business, sales fell 7.4% with a nearly 7% drop in cement volumes as a result of production constraint, while selling prices were almost unchanged. EBITDA fell 18.2%. In Senegal, consolidated sales in aggregates business was stable during the period. Price rise led to EBITDA rising by 21%.

On Slide 17, you have our financial position in terms of cash flow. Cash flow in the period came to EUR 173 million, down 1.3% at constant scope and exchange rates. The group capital expenditures came to EUR 108 million in the first half, up from EUR 94 million in the first half of 2018. It is expected to total around EUR 200 million in 2019 as a whole. Net financial investment was EUR 340 million, mainly related to the Ciplan acquisition in Brazil.

On Slide '18, you have the changes in our consolidated financial position. Net debt totaled EUR 1,465 million compared to EUR 1,112 million at June 30, 2018, under IFRS 16. At June 30, 2019, the group had a solid financial position with equity of EUR 2.5 billion compared with EUR 2.3 billion at 30th June last year on a restated basis.

The group's gearing was 59.5% at 30th June 2019, compared to 47.8% at 30th June 2018, while its leverage ratio rose to 2.95 from 2.32 at June 30, 2018.

Excluding IFRS 16, the reference still used for the calculation of covenants, gearing at the end of June 2019 is 14.9% (sic) [49.9%] compared to 38.3% at the end of June last year, and leverage is 2.8% compared to 2.0 last year. Bank covenants do not pose a threat to either the group financial position or its balance sheet liquidity. At 30th June 2019, Vicat complies with all financial ratios required by covenants in its borrowing arrangements.

Slide 20 concludes this presentation with our 2019 outlook, stating that the group expects a marked improvement in its EBITDA and an increase in net income over the full year. I'll remind you that this outlook is based on the following elements: The more favorable base effect in the second half, especially in Turkey; the continued return of pricing power in all our markets, except Egypt; the expected decline in energy costs. Finally, please note that our 2019 outlook by market is including in the first half result press release you can consult on our website at vicat.com.

So Derek, you can move on to questions, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll first go to Josep Pujal with Kepler.

--------------------------------------------------------------------------------

Josep Pujal, Kepler Cheuvreux, Research Division - Head of Building Materials & Construction Sector [2]

--------------------------------------------------------------------------------

Three questions on my side, please. The first one is on the price/cost gap. You are more comfortable with energy costs going forward. Do you think that this price/cost gap, which was positive for you in H1, EUR 33 million, I calculate, this will widen in H2, do you think? Or do you think that the price increases, whether they're in terms of percentage compared to a different base effect, will vary negatively? That's my first question.

My second question is on Brazil. I was a little bit surprised by the margin. I find it a little bit low. Do you do the same reading? Or is it what you were expecting? And if you could help us with, I would say, a sort of forecast of margin for the full year, this would be very useful for us.

And my third question is on India. You have increased prices, I would say, by around 20%, if I'm not mistaken. I think that this is significantly more than peers, I would say, around 10%. Do you agree with this reading or no? In your regions, this is the kind of market price improvement that you have seen.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [3]

--------------------------------------------------------------------------------

Yes. First of all, on the price/cost dynamic, as we mentioned in the press release and in the presentation a few minutes back, we do expect the energy inflation to ease in the second half. And which we'll stick to guidance of full year, 5% inflation on energy costs. And we certainly expect the price dynamic to remain strong throughout the year. So to come back to your comments. No, we don't expect this gap to deteriorate. We would rather expect it to improve.

On Brazil, well, I'm sorry, but we don't disclose forecast on a country-by-country basis for margins, but I may share a few elements of analysis. First of all, you have to keep in mind that we did consolidate only a little more than 5 months instead of 6. So you would have a full year effect.

Secondly, the seasonality in this market is substantially weaker H1 compared to H2. So we would expect a better H2 in terms of activity. Furthermore, we see a positive evolution in prices as well as in plant performance. So we would expect an improvement in the -- a strong improvement in the EBITDA and pricing.

Lastly, on India, the figure on price increase we gave you is roughly correct as far as we are concerned. I will not comment about the ones of our competitors. You have -- speaking of prices in India, you have to keep in mind that they are quite volatile in terms of subregional markets and time. We, nevertheless, expect them to remain big. As capacity utilization is increasing gradually, we don't rule out, from time to time, weaknesses in some places or during the monsoon season.

Finally, we have communicated in the past, and you certainly have this in mind that we did commission last year our Mumbai terminal, which is sustaining our network -- our net prices in Mumbai -- in the Mumbai market. And this may account on some difference compared to others. It's not a market price difference, but an exports price difference.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

We'll next go to Yves Bromehead with Exane BNP Paribas.

--------------------------------------------------------------------------------

Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [5]

--------------------------------------------------------------------------------

Actually, if I can jump straight into that last question and the Mumbai terminal. Could you actually give us a sense of what were the savings of the lower logistics and stocking costs in the region? And sticking with India, I appreciate that the margin influence was substantial. Was there any impact from the delay in the monsoon period, maybe in the timing of some maintenance costs? And should that reverse in Q3? I guess, the question here is really to understand what level of margin we should expect in H2 versus H1 on a sequential basis?

My second question is on CapEx. Could you maybe help us to have an idea of whether or not we should stick with around EUR 180 million of CapEx in 2019, if that makes sense?

And lastly, in Senegal, if I understand correctly, there has been some sequential decline in volumes, probably because of the election. Could you comment on the situation now postelection in terms of both volumes of aggregates and also, please, selling prices, whether or not you have finally been able to increase prices in the region?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [6]

--------------------------------------------------------------------------------

Yes, Yves. So to start with your first question, I'm not able to share with you specific elements and the saving provided by this terminal, which is really a competitive issue in our open market, so sorry for that.

On the margins, there is no reason to see -- I mean, there's no specific element in this H1 margin. Actually, H1 did not beneficiate from price increase from day 1 since they were implemented somewhere in mid-February. On the contrary, you of course, know that we are entering the monsoon, and that traditionally, Q3 is somewhat weaker. But we certainly do not expect very different margin levels going forward.

For CapEx level, I think I mentioned in the presentation that we are expecting around EUR 200 million. Volumes in Senegal, well, there has been some slowdown in aggregates postelection, some projects were delayed. It is expected to pick up, so we still expect a good market in aggregate, especially about that one.

As far as Cement volumes are concerned, there is a strong demand, and we will certainly do our best to serve the market. We mentioned that we had some production constraint specifically linked to 2 of our plants' major maintenance. We really focus to deliver as much as we can in H2.

Regarding prices, we certainly expect to be able to raise prices shortly. Government gave us signs that they understand it is needed by the sector, so we will certainly expect this comes soon.

--------------------------------------------------------------------------------

Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [7]

--------------------------------------------------------------------------------

Sorry, just on the latter, has prices actually increased in sequential basis in July on a...

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [8]

--------------------------------------------------------------------------------

Not yet.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

We'll next go to Arnaud Pinatel with On Field Investment.

--------------------------------------------------------------------------------

Arnaud Jacques Michel Pinatel, On Field Investment Research LLP - Founding Partner [10]

--------------------------------------------------------------------------------

So I would have a similar question. Just to follow-up on Senegal regarding the pricing. We have seen through your volumes in H1 being down 7%. So your product coming through in Q2, so your volumes went from being down, I think, in Q2 more than double digits. Dangote posted volumes up, if I remember well, 15% in Q2. So it looks -- on the paper you've lost market share in Senegal in the second quarter. So you're going to push prices if this is government (inaudible). But could you -- but the market is strong enough for you to get back the market share you have lost in the second quarter in Senegal? That would be my first question.

Second one is just to have a clarification on what you said on energy cost inflation. If I'm right, on the presentation, you're mentioning that in H1, your energy cost inflation was just 8%. You're guiding on 5% for the full year. It would imply that in H2, the energy cost inflation is close to 0%. We have seen a significant decrease in coal and copper price. So does it mean that your hedging policy will lead to significant price decrease in 2020 in your energy cost? And that we don't see anything before next year or am I missing something?

And my last question will be on the price. We have been positively surprised by the pricing of the ready-mix concrete and the strong pricing of the ready-mix concrete. So is there further room to increase the ready-mix concrete price in France in your view in H2 and in 2020?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [11]

--------------------------------------------------------------------------------

Yes. Thank you, Arnaud. On Senegal, I believe that everybody in this sector needs price increases, but did not happen for a very long time in this market, where we have had significant cost inflation through the year. So we believe that given the relatively strong market demand, there is room for price increase and volume growth. We don't look at market share on a quarterly basis. You have them because of fluctuations in plant stoppage and things like that. On a full year basis, we would expect to be around 50%, and we will certainly make sure all plants deliver as much as we can and still pushing price as needed.

I think that for energy, we -- I mean, you have understood our guidance perfectly well. You have to keep in mind that this cost inflation includes -- let's see, this is combustible plus electricity, so which, in some markets, cannot be hedged, as the case in Turkey and Egypt, for example. And so this is going through. So we may have a decrease in combustible, but inflation in electricity. And furthermore, this inflation encompass significant impact of Turkish devaluation, indirect inflation and local purchase of combustible, which is materializing through H2. And otherwise, we do enjoy already positive evolution in energy prices in our markets.

In France, well, indeed, there has been good price recovery for some time in ready-mix concrete after very difficult years after the prices. So this allowed to restore a more decent profitability level. At some point, we gave away some volumes to achieve this objective. We are now more -- in a more balanced approach to both take our share of market momentum in volumes and still have good prices. So if there room for it, we will push, but not giving away volumes.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

We'll next go to Sven Edelfelt with ODDO.

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

A few for me as well. I believe you had a production problem in Q2 in the clinker line in Senegal, so that could explain the market share loss, no? So what was the issue? Was it maintenance? And how did this impacted your EBITDA?

Second one is as well on Senegal. You're guiding for price increase in Senegal. To what extent does this cover the new tax on cement that has been announced by Macky Sall?

And the last one is on Turkey. I believe there is a number of distressed players in the industry. I believe some of them could very well fit with your existing footprint. So could we have an update on this topic please?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [14]

--------------------------------------------------------------------------------

In Senegal, as I mentioned a few minutes back, we had substantial maintenance on 2 of our kilns since the beginning of the year. And this, indeed, did trigger both reduction in clinker production as well as substantial maintenance costs, but have limited the evolution of EBITDA. So...

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

I'm sorry. Was it unexpected maintenance?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [16]

--------------------------------------------------------------------------------

No, it is planned maintenance. The magnitude of which was somewhat larger than expected.

In terms of prices, our understanding is that the authorities want to implement a new tax to fund social dwelling, and this would come on top of an increase needed by the profession. But the revised load for budget midyear did not include this tax.

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

So presumably, it could happen next year? Or it's simply for H2.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [18]

--------------------------------------------------------------------------------

I'm not the one to decide. Regarding the Turkish market situation, surely, the situation is -- must be harmful for all players, but supporting positive trend on our price increases. As mentioned before, the Ciplan acquisition, the immediate objective in terms of growth. So we don't expect to do material acquisition coming forward.

At the same time, we just took a substantial stake in a project (inaudible), a flagship project, where -- which this will wind down near the (inaudible) market. So it's more an additional to cover our local coverage, but it's not a major acquisition, and we don't expect to do any.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We'll next go to Manish Beria with Societe Generale.

--------------------------------------------------------------------------------

Manish Beria, Societe Generale Cross Asset Research - Equity Analyst [20]

--------------------------------------------------------------------------------

Yes. So I have 2 questions. So firstly is on India. So there had been lot of talk about the recent slowdown basically in the economies, where everybody is cutting the stated forecast rate and things like that. So you are down the second quarter, but I wanted to see, I mean, if you are seeing any touch of a slowdown in July or something like that.

The second is on Turkey and Egypt. So obviously, you are still making losses in the Egypt, I mean, some EUR 6 million negative EBITDA in the first half. So what should we expect, I mean, in the second half? Should be breakeven very soon? Or this is something for the next year?

And also, in the Turkey, I mean, some -- obviously, the energy costs and things like that will keep on impacting, but should we see some improvement in the second half versus the first half? And maybe lastly, the working capital, I mean, I see a negative of EUR 139 million in the working capital investment versus EUR 61 million last year. So can you just highlight, I mean, what went -- why the working capital investment was so high this first half?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [21]

--------------------------------------------------------------------------------

Okay. On India, of course, there has been many movements, and especially we are experiencing at the moment postelection perturbation or disruptions in the market, but this is not something unexpected now in Q3, with traditionally lower volumes. Nevertheless, we don't see that has a substantial trend. We believe that, globally, the results of the election will be supportive for the business going forward, but we don't rule out some slowdown in Q3, but nothing beyond the traditional trend.

In Egypt, we'll see, we don't expect a quick turnaround of the situation. We see signs that authorities acknowledge that the situation of the market is not normal. They claim they are willing to fix the situation created by the army pressure on the market. So hopefully this will materialize. We don't integrate that in our year-end forecast. Nevertheless, we believe that there should be a gradual improvement next year.

Regarding Turkey, we probably are at a low point in terms of volume. We don't see a very quick recovery and would expect the recovery to materialize gradually through 2020. At the same time, the price increase, the cumulative effect of price increase is coming through and is helping to cover the cost inflation. You have to keep in mind as well that the base of comparison is -- will be a lot easier in H2, but since this downward movement was very strong last year in H2. Moreover, you are -- we are able, at this level of activity, to optimize our production tool with the best -- the most efficient kilns, maximize the usage of strategic fuels, which will help us to optimize the margin.

Regarding your last question on working capital, indeed, your reading is correct. We had EUR 140 million increase in H1, which reflects the traditional increase of working capital, but is somewhat more important, but we are experiencing usually. This is the result of the addition of quite a few local situations in different places for different reasons, and we certainly aim to come back to a normalized trend by year-end.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

We'll next go to Homani, Ebrahim with CM-CIC.

--------------------------------------------------------------------------------

Ebrahim Homani, CM-CIC Market Solutions, Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

I have the question regarding the evolution of volumes and price in Egypt and Turkey for the whole year 2019.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [24]

--------------------------------------------------------------------------------

Well, we don't give a detailed guidance on volume and prices, and had mentioned, we don't -- as mentioned previously, we don't see substantial price trends in volumes on those markets this year. We certainly expect the price increase trend to continue in Turkey. We don't see that happening in Egypt unless the authorities decide to act on the military pressure on the market.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(Operator Instructions) We'll next go to Brijesh Siya with HSBC.

--------------------------------------------------------------------------------

Brijesh Kumar Siya, HSBC, Research Division - Analyst [26]

--------------------------------------------------------------------------------

I have 2 questions, if I may. So first is on EBITDA. So things are, obviously, not as expected. There's a significant cost impact as well as pricing pressure. And the expectation of some improvement in second half is also gone. Now what are the mitigating plans from your side? Are you thinking more towards continuing the operation at a lower level? Or you are thinking of probably not worrying for some time and see whether there is an improvement and probably come back to the market at an appropriate time. Just want to understand your strategy at this time given that it's been a drag for quite some time now.

Now coming to the next one is on U.S. So California was a -- rain certainly impacted 5 months of the year already, and that had an impact on your volume. Now are you seeing kind of a pent-up demand there? Have you already experienced pickup in June? And what are the kind of trends currently you're seeing in July -- in the month of July? That there was a significant demand coming back to the market and you're confident that you will recover some of those volume, which you lost in that period.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [27]

--------------------------------------------------------------------------------

Regarding Egypt, we are, obviously, already operating at a relatively low level in the plant. We are about 30% of plant capacity at this moment. So since we have 2 kilns, we are able to operate them one by one and to have optimized stoppages and so on. We need to be able to implement large maintenance campaign. This is not possible for the time being considering the security constraint and logistical constraint we are still facing in this area. So this would be a trigger to a major improvement in the technical performances, but we don't plan to go below the current level. We will wait to push volumes for prices to cover somewhat.

In the U.S., indeed, we have lost volumes in the first half because of the weather condition. We don't see -- we have not seen a decrease in the demand. It was a constraint on the deliveries. The underlying demand, especially in downtown Los Angeles, is strong. Our customer backlog are full, and we have ourselves a good backlog in ready-mix concrete. So we certainly are working hard to push volumes and to recover any term that was lost in H1.

Reminding you that we did commission last fall our Vernon plant in downtown Los Angeles. It is a very powerful and efficient tool, and the -- it's first result, when it was able to deliver, are promising. So we're very confident to deliver those cubic meter in this country. So we don't see a problem on the demand side, and we expect volume to recover.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And gentlemen, we'll take a follow-up question from Sven Edelfelt with ODDO.

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Yes. Sorry, just a very quick one. You mentioned some delayed rail project in Switzerland. Does that mean your Precast business is back to growth? Or see the need for restructuring?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [30]

--------------------------------------------------------------------------------

Yes. Our rail business is delivering products to the Swiss national railway. And there has been a delay in their maintenance program that was pushed back for a couple -- a few weeks. And -- but we have been producing quite high, and we have high level of inventories. We are really planning to deliver this because the demand is there. So it's a question of timing, not of demand. So we -- whether we will be able to capture all of it in H2 or not is not yet clear since it is not fully in our hands. But we are certainly able to deliver it, and we should be able to recover in the rail segment, which is only part of the Precast business.

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Okay. On the rest of Africa, the business is doing okay? Or is it as usual, very difficult?

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [32]

--------------------------------------------------------------------------------

I'm not sure I would agree with the term "usual". It was the case last year.

--------------------------------------------------------------------------------

Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Yes. (inaudible) I think.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [34]

--------------------------------------------------------------------------------

Nevertheless, it is still difficult. Competitive on price, but okay on volume.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And gentlemen, we have no further questions in the queue at this time. I'd like to turn the conference back over to Mr. Chomel for any additional or closing remarks.

--------------------------------------------------------------------------------

Hugues Chomel, Vicat SA - CFO [36]

--------------------------------------------------------------------------------

Okay. This concludes our call for today. I'd like to thank you all for your interest in Vicat, and wish you happy holidays to (inaudible) Q1 and (foreign language) for Q3 communication.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Thank you. And ladies and gentlemen, again, that does conclude today's call. We thank you for your participation. You may now disconnect.