LafargeHolcim Ltd (LHN) Q1 FY23 Earnings Concall Transcript

LafargeHolcim Ltd (NSE: LHN) Q1 FY23 earnings concall dated Apr. 21, 2023

Corporate Participants:

Benedicte Mayer — Investor Relations Officer

Jan Jenisch — Chief Executive Officer

Steffen Kindler — Chief Financial Officer

Analysts:

Paul Roger — Exane BNP Paribas — Analyst

Cedar Ekblom — Morgan Stanley — Analyst

Elodie Rall — JPMorgan — Analyst

Martin Huesler — ZKB — Analyst

Lars Kjellberg — Credit Suisse — Analyst

Yassine Touahri — On Field Investment Research — Analyst

Arnaud Lehmann — Bank of America Merrill Lynch — Analyst

Gregor Kuglitsch — UBS Investment Bank — Analyst

Luis Prieto — Kepler Cheuvreux — Analyst

Yuri Serov — Redburn — Analyst

Matthias Pfeifenberger — Deutsche Bank — Analyst

Tobias Woerner — Stifel — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Holcim Q1 2023 Trading Update Investor and Analyst Conference Call. I am Sandra, the Chorus Call operator. The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Benedicte Mayer, Investor Relations. Please go ahead, madam.

Benedicte Mayer — Investor Relations Officer

Thank you, Sandra, and good morning, everyone. A warm welcome to Holcim’s first quarter trading update.

I’m joined today by Jan Jenisch, our CEO and I’m also delighted to introduce you to our new CFO, Steffen Kindler, who has just joined the Group this month. As always, we will spend a few minutes reviewing the business and then we will be happy to take your questions.

I will now hand it over to you, Jan.

Jan Jenisch — Chief Executive Officer

Yeah. Benedicte, thank you, and good morning to everyone. Thank you for joining our call. Very happy to share our strong start to the year with you. We go a bit, you have received the presentation which is I think representing the story very well. Let me just go quickly over some of the slides and then Steffen will go more details on sales, EBIT, but also especially on the regional results before we come to the outlook for the year.

So first of all, I’m happy we have started the year really well. We have organic growth sales of plus 8% and then over-proportional on the EBIT side plus 12%. Very happy, everything plays out how we master this super-inflation with cost mitigation, but also with selling higher value product products, and also we have significant price increases in the markets. Here, I’m extremely happy that we do this in a very timely manner. We have now in that inflationary environment already for almost two years now, and I think at Holcim, we have done the pricing in a very proactive way so that our results are not suffering. On the contrary, they are improving the margins.

I’m very happy that our growth strategy also from the M&A side was very active in Q1. We closed 12 acquisitions already in three months time. Could add another five acquisitions in the buildup of our fourth business segment, Solutions & Products at a record fast closing of Duro-Last, fantastic acquisition, fully completing our technologies we need in the roofing market and we closed already that acquisition at the end of March, and that’s already fully now with Holcim from April onwards. We bought another roofing company, Flachdach Technology in Germany and also in Argentina and Mexico we could add here roofing companies here for a global rollout. So very happy how this is happening and you can expect more from us here also for 2023.

We have on the climate side, I think we made excellent progress on decarbonization. We just launched our Climate Report end of March, which will be subject to voting by the shareholders in 12 days’ time in our General Assembly. Excellent report shows how fast we are progressing now to decarbonize Holcim, but even more to decarbonize the way we are building which is also very appreciated by our customers and we moved here very fast.

Altogether, Q1 was I would say, within our expectations and gave us the confidence to upgrade the guidance for 2023 further and we have upgraded the organic sales growth guidance to above 6% and then corresponding over-proportional increase in EBIT with a growth of above 10%.

I think with this overview and the highlights, I’m very happy to hand over to Steffen and he will run us through sales EBIT and the regions.

Steffen Kindler — Chief Financial Officer

Yeah. Good morning, everybody. I’m excited to join Holcim and to join this call and I look forward to being part of this company and the very exciting journey that we’re on. I am equally happy to speak to you today and I look forward to working with you in the next few days, weeks, months, years and to share with you how Holcim develops financially and strategically.

Now let me walk you through a few slides on the current trading, building on what Jan has already presented. Net sales stood at CHF5.7 billion in the first quarter of 2023 and organic sales growth of 8% compared to the same period of last year. In absolute terms, Q1 net sales decreased by 11.1%. This is mainly due to the divestment of India, which is partially offset by our acquisitions in Solutions & Products. The currency impact was negative CHF306 million or minus 4.8%, and this is primarily stemmed from the Argentinean peso, the Egyptian pound, the euro, and British pound.

Moving to the EBIT, we delivered over-proportional organic EBIT growth of 12%, recurring EBIT growth to be precise, reflecting our strong portfolio. Again in Q1, we demonstrated our ability to organically expand our margins. Recurring EBIT in absolute Swiss francs declined by 19.7%, again impacted by the divestment of India and the negative currency effects.

When we look at the regional performance, you can see on this slide that we have a broad-based profitable growth which demonstrates the strength of our portfolio and our regional spread. Latin America, Europe, Asia, Middle East & Africa recorded strong organic growth in net sales and EBIT.

On the next slides, I will walk you through the regions in a bit more detail. Starting with North America. Market demand remains strong in cement, aggregates, and ready-mix in the USA and Canada. We are benefiting from our unique cement footprint, improved manufacturing performance, and excellent pricing across all markets, which resulted in the record first quarter for these businesses. EBIT in the quarter was impacted by the temporary destocking effect in our Roofing business which also compares to a high baseline in the first quarter of last year. We successfully closed the Duro-Last acquisition and two bolt-ons in Aggregates to put the region on the right trajectory for future growth, and we see strong order books and strong underlying demand in all business segments.

Moving to Latin America. The region delivered another quarter of profitable organic growth, it’s the eleventh in a row. The good performance in this quarter is driven by Mexico, Colombia, and Argentina. We expanded the Solutions & Products business notably with acquisitions in Mexico and Argentina, plus organic expansions, that means capex, in Costa Rica and Colombia. Looking ahead, we see this very good trend to continue also because of the excellent pipeline in infrastructure projects in that region.

Moving to Europe. We see strong results across Europe based on excellent pricing and margin management. I’m happy to report the strong M&A momentum in Europe with a record seven transactions closed in the first quarter, ranging from construction demolition materials to thermoplastic roofs. Looking forward, we expect strong results to continue for the remainder of the year.

And last but definitely not least, Asia, Middle East & Africa, our newly combined region. Following the divestment of India, this region is reported as one. Over-proportional organic EBIT growth of the region is driven by excellent performance in Australia and good results in major countries of the Middle East and Africa. The recovery in China is progressing and we expect to see more of that in the second half of 2023.

I would say that was it for me for now for the regions and I would like to hand back to Jan.

Jan Jenisch — Chief Executive Officer

Thank you, Steffen. We come to the outlook. As I mentioned before, we are confident for the year. We believe we have positioned Holcim in the right spot. We’re going to be 40% of our group sales in North America this year. With over-proportional EBIT of over 40% for the group, we continued with the acquisition for Solutions & Products on-track to achieve 30% of sales in this segment by 2025. And I think most importantly for this year, we have the margin at the right spot. So we have a margin expansion this year and that’s why we are confident to also guide this for the full year that we will have an over-proportional growth in EBIT for the full year and very happy to, of course, confirm our free cash flow targets of around CHF3 billion and the further reduction of CO2 for the company.

I think with this, I’m very happy to hand over back to you for your questions and comments.

Questions and Answers:

Operator

The first question comes from Paul Roger from BNP Paribas. Please go ahead.

Paul Roger — Exane BNP Paribas — Analyst

Yeah. Good morning, team. Congratulations on the results. So I’ll have two questions, but maybe before I start can I just welcome Steffen to his first analyst call and obviously wish him good luck for his career at Holcim.

My first question then would be for you, Jan, and it’s on US roofing. You’ve obviously had some destocking in Q1, but you have previously said you expect EBIT to be up for the full year. Just wondered is that still your expectation?

And then, Steffen, maybe if you can just talk us through briefly how you’ve approached to the start of the new job and maybe your initial observations and if there’s anything you think you’d like to change?

Jan Jenisch — Chief Executive Officer

Hey, Paul. Good morning and thank you. Look, on the US roofing, we are not concerned. We have to understand that in the last two years, we had a disruption in roofing supply, not only for membranes, even insulation board, there was a shortage on plasticizer unit and there was a shortage even on fixation material and this all led to an over-stocking and not so much at the distributor, it happened at the contractor. So roofing companies basically were having bigger stocks to compensate potential disruptions and being able to deliver the jobs they promise to the customer. And now we have a normalization of this inventory levels and you can see that also at other companies in roofing which have commented on this. And as we are in the lowest seasonality at the moment, it’s a bit hurtful in percentage, but it doesn’t make me nervous for the full year because the order books in roofing systems in the US are very good and we expect to have a very successful year in roofing. We believe the de-stocking effect has already eased in March. We expect this to further ease in April and then when the season fully starts in May, we believe we are on track for a very successful year.

Steffen Kindler — Chief Financial Officer

And I will take the second question. Thanks, Paul for the warm welcome. I certainly feel privileged to be here with you guys in this group. What I’ve seen so far in those three weeks, well, look, I’ve already met many colleagues across the organization. I find a highly motivated passionate group of people for what we’re doing here. It is a mature and professional organization with exceptional results and a proven track record. Everybody is behind this growth strategy where we evolve the company and its portfolio also towards more sustainability. And while this evolution is taking place, everybody is dedicated to deliver results. I think this is an environment I have also known from my past role and where I hope I can contribute with my experience. And of course, everything I’ve seen in the accounts so far looks good.

Jan Jenisch — Chief Executive Officer

That’s reassuring. Thank you.

Operator

The next question comes from Cedar Ekblom from Morgan Stanley. Please go ahead.

Cedar Ekblom — Morgan Stanley — Analyst

Thanks very much. Hi everyone. I’ve got two follow-up questions on the roofing business, please. Could you give us a little bit of color in terms of your channels in that business? How much of it is a project-based business versus more of a distribution channel, just in terms of trying to understand how much visibility you actually have when you talk about strong order books going forward?

And then the second question on US roofing. You’re a relatively new entrant into that market, albeit buying established businesses. And Jan, we know that your agenda in US roofing is to grow the businesses that you acquire in a very strong way. Is that influencing your sort of commercial approach in that market? And here I’m wondering, how aggressive are you being in terms of trying to take share and wondering if that also has some implications to the competitive landscape for that business going forward. Thank you.

Jan Jenisch — Chief Executive Officer

Hey, good morning and yeah. No, thank you. Just to start with your second question, I think our entrance into the roofing systems is very positive and it’s a consolidation of the industry because if you see in the last 2.5 years, we acquired from Firestone to Malarkey now to Duro-Last, three iconic companies in the US and then we complemented this with a few smaller companies. So actually we are a driver of the consolidation in this very attractive market. So overall, this is I think super positive and super exciting. And I shared for the full year results, we shared the success of roofing where we already achieved 19% EBIT margin last year, which is not so bad and this is not the end of the game. We have just started, so you can expect an even bigger performance from us. Here in the first quarter alone, we made four more acquisitions in roofing. So we have just started and very excited here to continue and I think we are also a very positive contributor to the roofing market.

When you look overall, we are in the US market, in flat commercial roofing, we are already the second number two player in the market. And for overall roofing in this $40 billion market, we are already number three. So I’m very happy how the position we established, now we have a full range of technologies. Basically, we own all membrane technologies from PVC to EPDM to TPO, have a bit of bitumen, have a bit of metal. So I think we’ve done this really well and I’m not concerned at all. On the contrary, we’ve just started in roofing systems and I’m super happy about it.

On the visibility, we have very good visibility. As in roofing systems, we work very close with the contractor. We have some sort of contractor clubs to project specification we do together to the training. Not to forget, we are selling 80% of our roofing sales in system selling. So 80% of all the roofing we are doing is a specified buildup roofing systems, membrane, insulation, the whole installation kit, and with all the calculations on wind load and other aspects. So we are very, very close in this market to the end market. This is also why I can report today we have good order books, we have a good market situation for roofing in the US.

And last but not least is we do more than 70% of re-roofing in the US, which is a bespoke solutions. And then in for reroofing, we are even closer with the customer because reroofing you need a bespoke solution for the existing building and the existing situation on the roof compared to a new build where you basically have more like a general specification where more than one company can apply for the business.

Cedar, does that answer your question?

Cedar Ekblom — Morgan Stanley — Analyst

It does. Thanks for that color. Very helpful.

Operator

The next question comes from [Indecipherable] from Societe Generale. Please go ahead.

Unidentified Participant — — Analyst

Good morning. Thank you for taking my question. I’ll have two if I may. Just wanted to follow up again on the roofing. Maybe the first part of the question is when you’re referring to order book, are you referring to value or volume terms? And also wanted to sort of go into maybe the details of the type of customers that you serve. Are they typically large customers or small customers? And have you already seen any impact of sort of tightening financing standards in the US?

And second, a very quick question on the buyback. Could you maybe give some color as to whether or not we should expect any additional trench beyond May for the rest of 2023 to be announced? Thank you very much.

Jan Jenisch — Chief Executive Officer

Okay. Yeah, great. Let me just quickly on the share buyback, we are very happy. We announced, as you know, with the Q3 results that we’re going to do a share buyback for up to CHF2 billion. We have not provided an update now but I’m expecting that we’re going to use CHF2 billion up to the General Assembly in 10 days’ time. And that we’re going to buyback something around 6% of the outstanding shares. And then we have the proposal at the General Assembly to destroy the shares and reduce our share count by 6%. This is at the moment my expectation. So all running according to plan and will be I think an excellent increase of earnings per share, of course, as we then have a reduction of 6% of the outstanding shares. So I think this was very well planned and very well executed. And the final details you will receive I think in 12 days’ time when we have the General Assembly.

When we look at the roofing market in the US, and you were asking a little bit on the outlook I think, volumes and customers and so on. And I would not be — we are very confident on the outlook. And you have to see that in the last years, we were very busy to build logistics centers for Amazon and others. Now we are very busy to build data centers, also very much linked to all the digitalization of the economy and the consumer. And now we have this big Anti-inflation Act coming in where we have all this onshoring. So we see this already that we have a lot of industrial buildings, factory extensions, and so on. So we are very positive about the outlook in roofing for the US and for North America. Plenty of projects will come. We are in a good situation now and all the big bills, Anti-inflation Act, onshoring, and also the Infrastructure and Build Back Better plans they will just come into our order books and they will only come towards the end of this year. But then this will be a runway for the next eight to 10 years. So for the US, I think I’m very bullish for Holcim and I’m very happy that we have positioned Holcim here so strongly to benefit from these positive market trends.

Unidentified Participant — — Analyst

Thank you, Jan. But just to be clear, are you more exposed to the smaller nature of the projects or larger significant size type of projects in reroofing especially?

Jan Jenisch — Chief Executive Officer

Yeah. We do now all of the above, so we have basically the Firestone, our first acquisition, a little bit more than two years ago, was very focused to bid on larger projects. That’s a bit of their core competency. Now with Duro-Last, that’s more focused on smaller projects. They are extremely strong for smaller roofing. They are focused very much on reroofing. While we do 70% reroofing overall, Duro-Last is more in the 90% range. And they sell direct, they don’t sell through distribution, so they have their own contractor club which they serve which has a very, very resilient demand structure. So we have all of the above and as we now have built up a $4 billion roofing business, you can imagine, we have a very good footprint across all different types and sizes of projects.

Unidentified Participant — — Analyst

Thank you very much. Very helpful.

Operator

The next question comes from Elodie Rall from JPMorgan. Please go ahead.

Elodie Rall — JPMorgan — Analyst

Hi. Good morning, everyone, and welcome Steffen indeed. So moving away from maybe US roofing for a second. And I know you don’t disclose the split between price and volume anymore. But could you give us some color on the volume development by region? And if there was any surprise versus your expectation. And whether the upgrade to guidance was driven by better pricing and cost or by volume. And if I can push it beyond the CHF50 million organic growth that you reported, if you could give us some color between the split in price and volume, and whether you’re expecting cost inflation to ease in H2, so that should mean price/cost accelerating in terms of positive spread. Thank you.

Jan Jenisch — Chief Executive Officer

Good morning, Elodie. I’m very happy you asked the question because it’s important to me that you all understand that we will report the full transparency, especially going forward. Please we have the smallest quarter of the year, the Q1, where we already supply you with the margins and everything. And for us was important to show we are in good shape from growth and good shape in the margins and we will in the half year report, give you a lot more color. You will get the details on the four business segments and all of that. So be assured that we are not here cutting out information from you. It’s Q1, it’s a small quarter. And from the next quarter onwards, you will get the full information like you received also last year, in quarter three, especially and also for the full year results.

So having said that, I give you a bit more color, Elodie. So our guidance is actually based on confidence across many KPIs. So you mentioned volume versus price, very important. And first of all, I can share with you that we are positive price over cost, basically across all segments, across all key markets and that made us so confident to say you know that’s looking very good. At the same time, we have easing of the cost at the moment or not at the moment, it’s in November. We peaked in the third party cost in Q3 last year, then eased in quarter four, and further eased in Q1 this year. Nevertheless, consider that we had still a lower comparison base compared to last year. So the energy costs have eased a lot compared to Q3, but also Q4 but it was around 20% higher than Q1 last year. And the other costs, they are maybe 10%, 12% ahead of Q1. But obviously, we were able to overcompensate with the pricing. And that is very key and I’m very proud that our people in the markets were able to responsibly, but dynamically improve the pricing that brings us in this comfortable situation where price over cost is positive in all key markets for us.

The second part of the confidence and other volumes or the demands in the market. And I’ll give you a bit of color here, Elodie. Again it’s Q1, but nevertheless. So we have very good demand in the Americas. So we have, especially in the traditional segments, cement, aggregates, ready-mix, we have a volume growth between 3% to 7% in North America. And in Latin America, a growth between 1% and 8% on the volumes only and that makes us of course very confident. We then also have very good order books, both in the US, in Canada, but also in Latin America, where we have several big contracts for large infrastructure projects. So all good.

We have in Europe a bit of a different situation. Europe has the big burden from the Ukraine war specifically where you have this huge cost inflation on energy on others, and we have this big burden of the European Green Deal which puts especially export companies into difficult situations. We handle this very well. My estimate for the first quarter, but also for last year that maybe building materials as a whole has softer volumes of 5%, 6%, or 7%. We managed this very well. You have seen the numbers, we are up 8% in sales in Europe and the margin has increased very substantially against last year because we were able to have very significant price increases. But also remember that we are at the forefront to introduce all these sustainable products for the customer. Most notably, our ECOPact, our new global brand for low-carbon concrete solutions. Our CECA Holcim ECOPlanet, our more than 30% reduce CO2 on the cement. And this year, we launched at the BAU in Munich, we launched the ECOCycle which will be our fundamental brand logo for making circular construction a reality in all metropolitan areas. And all those three brands and the products behind enable us to improve margins significantly.

Is that a good answer, Elodie?

Elodie Rall — JPMorgan — Analyst

Very good indeed. Thank you.

Operator

The next question comes from Martin Huesler from ZKB. Please go ahead.

Martin Huesler — ZKB — Analyst

Yes, good morning. Thank you for my questions. And first of all congratulations to this really excellent start to the year. I have a question on your plans for the CC US project capex of roughly CHF2 billion until the end of, I think, this decade. What does this mean for your overall capex or your annual capex? Should we expect this to increase? This is the first question.

Jan Jenisch — Chief Executive Officer

Martin, excellent. Thank you. We are very happy that we have a very substantial investment plan. You remember we have started to report the green capex which last year out of CHF1.4 billion capex has already been more than CHF400 million and we believe that the CHF2 billion we now plan for the carbon capture is within those CHF1.4 billion. And you remember we have started to set this CHF1.4 billion capex guidance we established at around, I think, four years ago and we have substantially lowered the unit costs for capex at Holcim. We had a big potential back then to lower and systemize the capex, use more standardized solution, and we could decrease the capex significantly and the CHF1.4 billion, they come in I think now in a good level. For the first time last year, we were below 5% of capex in relation to net sales. I’m very proud of that. And it will stay in that range. So don’t expect us now to start with capex which goes beyond. I think the company is positioned now to decarbonize within this CHF1.4 billion envelope and also consider that our portfolio focus on North America in Solutions & Products is also connected with less capital-intensive businesses like the roofing systems and that all helps us to stay within the CHF1.4 billion. So very happy.

And lastly, also consider that the investments in sustainability have super high returns and you can already get a taste from the margin increase in Europe. And we talked about this, I think, a few weeks ago that this decarbonization in Europe has a huge incentive system with the carbon credits and costs for around EUR100 per CO2 tonne. This helps Holcim here to benefit as we decarbonize the fastest and are able to then generate here significant margin increase.

Martin Huesler — ZKB — Analyst

Thank you. That’s super helpful. I have a second question on — you elaborated on the roof market in the US are more on the commercial side. What about Malarkey? What’s the development in more residential where I think the numbers don’t look that good, the macro outlook? What’s your view here?

Jan Jenisch — Chief Executive Officer

Well, good. Yeah. We are very happy with Malarkey. Look, we bought a fantastic company. They do 90% reroofing because they have an advanced shingle system which is polymer modified. So it’s much more lasting and has a much more higher weather resistance, so very happy with the company. We have huge potential. You have to imagine that the Malarkey company currently is only participating in 40% of the markets in the US. It’s a bit focused on the west side from manufacturing Portland, Oklahoma City, up to LA. So very good markets, but huge potential for Malarkey, very focused on reroofing.

And comment maybe on residential. You know, we had a lot of use on with the interest rate hikes that this will put the residential market in the US in a crisis, but I have seen now that people anticipate here much better market situation for this year and the coming years as huge housing needs enter and we expect this not to be a crisis scenario for Holcim.

Martin Huesler — ZKB — Analyst

Okay. Thanks a lot.

Operator

The next question comes from Lars Kjellberg from Credit Suisse. Please go ahead.

Lars Kjellberg — Credit Suisse — Analyst

Thank you. Just a couple of follow-ups. When you are talking about the high-value solutions in Europe has been a meaningful part of the margin progression. Can you provide a bit more color on what that really refers to, I mean you mentioned ECOPlanet [Indecipherable] new recycling products, but how much of that is now your revenue base and how we should see that progressing going forward? And also, I mean in the past you’ve commented a very strong growth in India which you, of course, no longer active in, but how is this sort of package of high-value solutions developing in other geographies outside Europe? And does it come on the same premiums there?

And I guess the other question I just had is how should we think about incremental revenues from your 12 acquisitions that you’ve done during the first quarter for the balance of the year. Thank you.

Jan Jenisch — Chief Executive Officer

All right. Hey Lars, good morning and thank you. I’m super excited about our sustainable solutions. We have one slide in the presentation, I think it’s slide five where we talk about accelerating the climate action. And you see on the right side, my personal favorite is the branding. So we just launched ECOCycle at the big construction Fair in Munich this week. This is going to be a super big part of our future. We’re already the biggest recycler of construction and demolition materials. Last year, we recycled 6.8 million tons, which is more than 1,000 full truckloads every single day brought to our recycling centers being recycled, upcycled, and reused as raw materials for cement, reused as a mineral for cement, and of course, reused as an aggregate for road construction and also into concrete. This is super exciting. It’s super high value and this will be a big part of Holcim’s future to make this happen. You see then the two brands, we gave a bit of a taste. ECOPact is already 16% of our entire ready-mix concrete sales in the first quarter of 2023. And you can estimate that this has even a bigger part in Europe, right, because Europe was — their core was to develop of ECOPact and here we have significant blockbuster sales here with ECOPack and we are sold out. We are doing everything to further scale up here our supply chain here to make ECOPact available for every customer and that’s super successful.

We have ECOPlanet for cement, which has started about a year later, but it’s also very promising. We don’t have a number here, but this is also already around 10% of cement sales, so very successful. And here most exciting is that we have launched this first cement in Switzerland, which already contains 20% construction/demolition materials and this will be rolled out now in Europe. European Union gives us the approval here to change the building codes this year, and then this will be rolled out in France, in Germany, in Austria, in Italy, in the UK, in all our key markets and will be again a big part of our future. You saw the site comment, we have the first — I think we are the first company who has now two lines of calcined clay production, one in France, one in Mexico.

Just addressing a little bit your second question. How does this work for other regions. I very much like that the European Union has the most developed incentive scheme for decarbonization, pushing us here to accelerate, but we can take that technology to the other markets, Latin America, the ECOPact and ECOPlanet brand is very, very strong, and also in the US, we introduced now. As you go through our annual report, there are a couple of customer reports from Amazon and other companies and they all go for ECOPact and ECOPlanet for their building needs.

So very exciting Lars, and this is going to be a huge part here for Holcim, and I’m really happy we launched also this branding at the right time about three years ago to make this our roadmap and to take the customer here on this journey of decarbonization.

Lars Kjellberg — Credit Suisse — Analyst

And just a quick follow-up on that. Do you command the same premiums in the other markets outside Europe or there is less focus on — otherwise on carbon reduction.

Jan Jenisch — Chief Executive Officer

Of course, Lars, you know I like to make money and we make sure that those premium products and premium solutions, they have a new dimension for the customer. So we are now able to make sustainability a new customer dimension, a new unique selling proposition, and of course, there is a premium in price. Now, we do this I think very responsibly and smart. We don’t have a premium of 100% or something. Because if you do that, you will stay in the niche for those products. We have a responsible smaller margin gain to make sure that these products become our blockbuster volume products and that is our goal that our whole range will be ECOPlanet, ECOPact, and will be based on ECOCycle technology.

Lars Kjellberg — Credit Suisse — Analyst

And a point on incremental revenue from M&A, if you can comment that will be helpful.

Jan Jenisch — Chief Executive Officer

Okay. So first of all, Lars, I’m very happy that we were able to close 12 deals in the first quarter. We have not provided the information. We know that the Duro-Last business is a $600 million business, and we have now still nine months of sales and we have the high season sales. So you can estimate the Duro-Last alone will contribute close to $0.5 billion in revenue for us. And then the other acquisitions, I don’t have the right number but we are going to see a couple of hundred million I think from those acquisitions over the next nine months for this year.

Lars Kjellberg — Credit Suisse — Analyst

Thank you very much.

Operator

The next question comes from Yassine Touahri On Field Investment Research. Please go ahead.

Yassine Touahri — On Field Investment Research — Analyst

Yes. Good morning. So couple of questions. First on your carbon — on your CHF2 billion investments in mature technologies. I understand that when you’re reducing carbon in Europe, you will make a savings because of the high cost of the carbon allowance. I understand that in the US, there is also a tax credit. But the question is, how do you assess the hold down on those CHF2 billion investments. And do you think you can achieve like the 10% return on invested capital on this CHF2 billion investment in carbon capture? That would be my first question.

And then the second question is again on US roofing. When you look at the second part of the year or June or H2 after the destocking is finished, do you expect volume to be up in the second part of the year? And also how confident are you in your ability to improve the material margin because I understand that the chemical costs are declining. How confident are you in your ability to keep this whole material deflation in roofing in the US?

Jan Jenisch — Chief Executive Officer

Thank you. I’ll start with your last question and are confident. We have also a positive price over cost in roofing systems for the first quarter. And usually, when the cost input declines, we are able to have less pressure on our own sales prices. So normally, we have a margin expansion in times where the input costs were lower. The last two years, we made the opposite happen, with this hyper inflation, nevertheless, we had a margin expansion. So we’re very confident that we’re going to have a good situation for Holcim overall, but even for each of our four business segments, you will see a margin expansion for 2023.

On the volume side, I comment the roofing before. We have good order books. After the stock rebalance will be done, we expect good markets and let’s see how the second half goes. But obviously, we have another roofing acquisition in Q1 this year, we are very excited to bring this all here at work or to work.

On the capex, I was never more positive on green capex than today, because we see that all the investments we have done to make circular construction a reality, so all the recycling centers we put in place to take back construction/demolition materials and to recycle it, that’s all highly profitable and highly growth products and solutions. So with very short payback terms and this is all positive. You asked specifically, the carbon capture projects will be high return for us. You have seen, we even received very high subsidies. The European Union Innovation Fund will give us more than EUR300 million to finance the projects in Poland and the project in Germany. And even besides the subsidy, the project will be very profitable because we are saving a lot of CO2-related costs. And at the same time, we will be able to sell the product at a premium because it will be decarbonized building materials product. So we are extremely positive. We are catching up, we have also very concrete projects in US and Canada, and we will also get big support from the governments there in terms of tax credits but basically subsidies, but also in terms of making the carbon capture utilization or storage work to help us with building pipelines to storage facilities or helping us to build up utilization centers. So very optimistic, and we will give you more data and information as we move on with the projects, but I’m extremely positive that these projects will be high return projects for Holcim.

Yassine Touahri — On Field Investment Research — Analyst

Thank you so much.

Operator

The next question comes from Arnaud Lehmann from Bank of America. Please go ahead.

Arnaud Lehmann — Bank of America Merrill Lynch — Analyst

Thank you very much. Hello, Jan, Steffen, and Benedicte. My first question is on Asia, Middle East & Africa. There is an improvement there and I think it’s welcome after a slightly more challenging 2022 in Asia. However, the China contribution is still down in the first quarter relative to last year. Could you give us a little bit of color on China? Is there any impact of the reopening there expected for the coming quarters?

And my second question is on the CEO transition process. Could you give us an update. I think there were some comments this morning from the [Indecipherable] presentation if you don’t mind reiterating them here.

Jan Jenisch — Chief Executive Officer

Yes. Good morning, Arnaud. No, we are all on track. Look, I’m very happy. We have a great leadership team at Holcim. You met everyone. You know we have super P&L leaders, five strong P&L leaders. We have now Steffen joining us as the new CFO. So we have a very good leadership team. You see the speed of execution we are having with 12 transactions in just three months and with a very positive profitable growth, the achievements. So very happy with the team. I’m also very happy that the board has the courage to decide that the team continue for another year plus or so. And we will I think find the succession of the CEO position would come from within Holcim and we will announce that, let’s say, as we said within the next 12 months or maybe beginning of next year, and this will be, I think, a very positive continuation of the executive team here at Holcim.

On your question of Asia, Middle East, Africa and China. Thank you for your comment. We are quite happy that also here we have a positive price over cost. We have a good organic development of the business. We have in China to give you a bit more information. I think we wrote something like recovery in China is progressing and China was still heavily disrupted last year with all different lockdowns from the pandemic and my personal estimation is that maybe building materials or construction market was down 5% to 10% in 2022 and this year, we expect a recovery. Recovery will not be super strong, so they have reopened the country. I think in the first quarter, we are around the level of last year first quarter and now I expect for the next nine months to have a positive development in construction, maybe 4%, 5% in volume, something like that.

Arnaud Lehmann — Bank of America Merrill Lynch — Analyst

Thank you very much.

Operator

The next question comes from Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch — UBS Investment Bank — Analyst

Hi, good morning. Thank you for taking my questions. Can I go back maybe a couple of questions on the sort of cost and so on. So firstly, can you tell us what you now think energy costs will do after the sort of 20% of the first quarter. Could you help us break down also in the first quarter the volume price of the organic growth rate, which I think was 8% sort of the headline level. And then similarly, within your over plus 6 I think that you’re now guiding, what are you thinking on pricing and volumes within that? Obviously, it’s changed around, there was a range now. So that would be sort of maybe, I don’t know, I think it’s a two-part question I guess.

And then secondly, a more strategic one. Is there anything you can tell us what you’d like to do on divestments? Obviously, you’ve done India last year, that’s now some time ago. Should we be thinking about anything coming up on the sort of perhaps more substantial divestment side? Thank you.

Jan Jenisch — Chief Executive Officer

Hey Gregor, good morning. Look, maybe on the divestment side, I think we have done — I would say on the geographic profile of the company, we are 80% done. We have repositioned Holcim now strongly into North America. It will be this year 40% of group sales in North America, above 40% of EBIT in North America, plus we have our very strong Latin America business, 10% of group sales this year but EBIT may be rather closer to 20% of group EBIT. So we’re going to have a very strong and developing Americas business. And then the other leg of us is, of course, our European business.

Then we are 80% done. We are very happy with these three strong pillars. We have very attractive markets also in Asia, Middle East and Africa, a very successful business in Australia. I would say, a very smart attractive participation we are seeing in China and then we have very, very good other selected markets. You can expect from us there will be one or other market where maybe we have owners which are better to run those markets. So you can expect a few divestments from us going here also into the future, but nothing to announce at this point in time.

A bit more background, so volumes, pricing, cost, that’s a great question, Gregor. I would like to leave it in Q1, we have some more general statements because the development is quite diverse. So we have I shared already, Elodie had a bit of a question in that direction that we have very good demand in the Americas, not only good pricing we also have volume growth in the Americas and I shared that with you earlier that in North America in Q1, volumes are up somehow between 3% to 7% based on the different business segments and then plus the pricing, bringing us to a very, very good situation outlook for the year. Same situation in Latin America. And then in Europe, we have a different picture because the markets in Europe have been softer since May last year and we are super prepared for the situation with the super increase in margins. So for now, I would not like to go any more details with this. Let’s discuss in the half year reporting, we will give you a lot more data on this one. But for now, it’s just we are very happy how volumes, pricing are developing.

And similar positive on the cost side. Q1 was still for us a tough comparison base. I shared before that the energy costs were still up 20% in Q1, because in Q1 last year, we still had comparably much lower base before we totally peaked in the quarter three. My expectation is that the energy costs, especially in comparison to last year will further ease and we are going to have a very good situation in the second half of the year. But don’t forget, we also going to have a strong second quarter this year because we have done our homework on the pricing side, and I have little worries about the cost inflation for this year.

Gregor Kuglitsch — UBS Investment Bank — Analyst

Okay. Do you think the energy costs could be down this year or too early to call.

Jan Jenisch — Chief Executive Officer

Now they came significantly down. I mean starting in November, they came significantly down. And if this continues, we’re going to have much lower energy costs for the remaining months of 2023.

Gregor Kuglitsch — UBS Investment Bank — Analyst

Thank you.

Operator

The next question is from Luis Prieto from Kepler Cheuvreux. Please go ahead.

Luis Prieto — Kepler Cheuvreux — Analyst

Good morning, everyone. Thanks a million for answering my questions. I have two. The first one is despite the upgraded operating earnings guidance that you have provided, you have not changed the wording of your free cash flow target. Does this mean the cash conversion could be lower than you initially expected a few months back?

And the second question is following up on the pipeline of acquisitions in Solutions & Products, if my calculations are correct, you would have spend an excess of CHF7 billion, and you seem to be well on track to your ’25 target. So can we now talk about a more stable or normalized annual live site acquisition spend versus a significant spend previously? Thank you.

Jan Jenisch — Chief Executive Officer

Okay. Look, to the last question first. I mean we have just started last three years to make M&A a big part of our growth strategy at Holcim, and it’s a two-fold strategy. One is expansion and development of Solutions & Products. We had another five acquisitions in the first quarter. And then also the very high synergistic and high-value acquisitions, the bolt-on ones where we buy traditional family businesses in local metropolitan areas to strengthen the Aggregates and the Ready Mix Concrete business where we also made seven transactions in the first quarter. So my personal estimate is that we’re going to see more than 30 transactions in M&A at Holcim for the full year. So this will remain a big part of the whole strategy. Now, I cannot give you exact numbers now how much capital we will spend on that. This depends largely on the opportunities, the valuations. I think we have proven in the last three years that we do M&A very well, very valuation driven that we are able to execute the synergies, very fast. We gave some examples at the full year results, how fast we improved profitability in Solutions & Products and in particularly, in roofing systems and you can expect all of that, that we keep fully disciplined on the valuation M&A. I cannot give you at this point in time a more exact capital allocation split and we can talk about this maybe later this year.

On the free cash flow, that’s a good point. I’m looking at Steffen and I pass this message over to Steffen that he should make more than CHF3 billion in free cash flow. I hope you see that we wanted to give the free cash flow guidance. We just want to give comfort to everyone that the CHF3 billion free cash flow is the new run rate at Holcim. You remember times in the past where we were not able to achieve sufficient free cash flows. And now for the fourth year, we have shown this sustainable free cash flow. So this is just an indication that the free cash flow will be not only a top KPI, but we will deliver CHF3 billion, and I give this over now to Steffen to achieve more than CHF3 billion.

Steffen Kindler — Chief Financial Officer

Thanks, Jan. Yeah, exactly. The guidance is also around CHF3 billion, it’s a good catch. Of course, that free cash flow is the variable for the conversion rate. So the guidance is around CHF3 billion. We didn’t up the guidance at this point in order to also to keep some flexibility here for the business and to keep some firepower, but we are currently optimistic to make this number I would say.

Luis Prieto — Kepler Cheuvreux — Analyst

Super clear. Thanks again.

Operator

The next question comes from Yuri Serov from Redburn. Please go ahead.

Yuri Serov — Redburn — Analyst

Yes. Hi, good morning. My first question is, can I talk to you about CO2 permits, please? We haven’t spoken about it for a while. Can you just remind us how much you still have left, until what time can you continue using what you have in the bank? Maybe you can give us the year when they’re going to run out. Previously, we’re talking ’24, ’25. I don’t know what it’s now [Indecipherable] I’m just talking about the current regime.

And the other thing is, what are you doing with them now? I mean how are you — are you using the permits entirely or do you still buy additional permits. Thanks.

Jan Jenisch — Chief Executive Officer

All right. Great question. And look, we have some permits in the bank, but we are short on CO2 certificates. And in fact, the whole market is short and this is why the CO2 certificate prices up to EUR100 per ton because everyone is short, everyone needs to buy. And even you have some in the bank, it’s an asset, you cannot just waste it basically free of charge. And this is one big driver and we’ve talked about this at the full year results. We had a good discussion on how the CO2 incentive system in Europe is now reshaping the building materials industry by making decarbonization a number one priority. And my target is to be fast in decarbonization than others to be needing less CO2 certificates and benefiting from the very significant price increase for building material products and solutions because of this increase in CO2 costs. And everyone is short. You see this a lot of especially smaller companies, they sometimes seem to have less ability to decarbonize and they are very much hit by the CO2 cost. In Holcim, we have done not only the homework, we have accelerated the decarbonization. You can see that the big part of our margin expansion in Europe is actually driven by this new CO2 framework.

Yuri Serov — Redburn — Analyst

Okay. But can I just clarify? You say that you have some permits in the bank. But on the other hand, you are short. I just cannot connect those two statements. What does that mean?

Jan Jenisch — Chief Executive Officer

Some people argue that if I have some CO2 certificates in my balance sheet or something, they believe that’s a free CO2 certificate, but it’s not, it’s valued, it’s an asset, right? So basically important is how is your run rate for the certificates and everyone is short on certificates. This is why this incentive scheme is now working so extremely well and that’s why certificates five years ago were at EUR7 per ton and they went up with three, 3.5 years ago, they went up to EUR20, and EUR20 was a trigger point for us where acceleration in decarbonization became high return and we started a lot of investment projects in Europe to decarbonize faster and they went up to EUR100 and all the projects we kicked off with a return at EUR20, suddenly the return became 2, 3 times higher and faster. And this is a bit of mechanics which I’m a big supporter because it’s a market-driven incentive system and it rewards the company decarbonizing the fastest.

Yuri Serov — Redburn — Analyst

Okay. So what I’m hearing from you is that you do have some permits in the bank, but you’re still buying them in the market, right?

Jan Jenisch — Chief Executive Officer

Yes, absolutely.

Yuri Serov — Redburn — Analyst

Okay, fine. And another question, which is obviously related is about pricing. I mean, prices have been strong in Europe, volumes are down, price is up, which is a very unusual situation, CO2 is a factor. What’s the outlook? I mean we hear about price falls in other building materials industry, steel is down significantly. It has been going up, but still down year-on-year. So how much longer than the strength in cement prices last?

Jan Jenisch — Chief Executive Officer

Look, at Holcim, we have just increased the cement price if you want to know specifically cement price. We have increased the cement price significantly in all key markets. So from European markets to US to Latin America, and they are all holding. They are all holding based on the principle that in Europe, it’s now a decarbonization game. Decarbonization not only imposes extra CO2 costs for a lot of players as everyone is short. At the same time, it’s limiting the volumes of the production factories because usually, you get the maximum of certificates at around 80% of capacity utilization, which means no one wants to produce more than 80% of capacity, which is another driver of the pricing in the market. So it’s all good. I can just tell you from the Holcim side, we have this very good margin situation already in Q1 and we expect this to be rather more expanding throughout the year as the cost will further ease, my pricing will fully stick for the year.

Yuri Serov — Redburn — Analyst

Okay. Thank you.

Operator

The next question comes from Matthias Pfeifenberger from Deutsche Bank. Please go ahead.

Matthias Pfeifenberger — Deutsche Bank — Analyst

Yes, thanks for taking my question. One left actually on the M&A, on boosting M&A. I accept the strategy in roofing expanding that further, but in the rest of the business also very sizable number of deals. Are they getting quite diverse? I read about metal distribution being attached to your distribution network. How do you actually manage the speed and high number of deals? Is there a lot of time to due diligence and is there a risk to get to scale that or to diverse in terms of M&A selection? Thanks.

Jan Jenisch — Chief Executive Officer

Great question. Look, if you want to do an M&A part of your strategy like we have it now and my share that I expect maybe a bit more than 30 transactions this year, you have to have the proper process, systems, and tools in place, which we have. So we have a very strict valuation modeling, how we evaluate the businesses based on discounted cash flow. We do this one version as a standalone version, the second one is the integrated version with the synergies and the model is the same for every single project. And then we are very good to include the countries, especially in the bolt-on acquisitions and they have learned over the last three, four years how to handle M&A and the tools are in place and this is what enables us here to make such a large number of transactions.

If you recall, when we started the M&A is part of the strategy I think in 2018. In the first year, we had four bolt-on acquisitions, four. And then the following year, it was maybe eight or something. So it was a big learning across Holcim and all based by a strict process-driven and tool-driven system based on discounted cash flow valuation. And obviously, we do this very well. And to complete the picture, the integrated version of the discounted cash flow is the business plan for the acquisition. So the people who are responsible to run the acquisition have a very challenging business plan. And then of course, we review the progress and the performance also here very intensely. And I’m very happy, we have this and that’s why this will be in our value contributing part of our strategy going forward.

Matthias Pfeifenberger — Deutsche Bank — Analyst

Okay. Thanks.

Operator

The last question for today’s call comes from Tobias Woerner from Stifel. Please go ahead.

Tobias Woerner — Stifel — Analyst

Yes. Good morning, Jan, Steffen and team. Thanks for taking — my question is really just follow-up questions here from my side. When you look at the M&A, you’ve obviously done huge strides in the US or North America. Your pipeline looks good, it seems to me. But in Europe in terms of Solutions & Products, development is still not as progressed as North America to an extent. What do you see the picture to be there? Do you feel that there will be more opportunities coming up?

Jan Jenisch — Chief Executive Officer

Hi, Tobias. No, great question. And yes. Now look, first of all, I’m very happy that we could make this inroad in the US, which is the single most attractive market for Holcim and we did two things at the same time. We made this fast inroad in the roofing systems and at the same time, we made this big shift in geographic focus on North America. So I think this was really very well done. And now, you are mentioning we have also potential in Europe and potential in Latin America and you see that a bit from the transactions we did in the first quarter that we actually bought here the first significant roofing company in Germany, the Flachdach Technology Group, a very good company, which will be a new growth platform for us in Europe and also we bought two roofing businesses here in Latin America, in Mexico, and Argentina to also further roll-out our roofing systems in these very attractive markets.

Tobias Woerner — Stifel — Analyst

Okay. And then if I may follow-up on the divestment side of the equation. You mentioned earlier scenarios. How should we see it in terms of timing? Obviously, M&A, you can’t time perfectly. But for you, is this a near-term or is it a mid-term situation, is it six to 12 months or 12 to 24 months. What you’re looking at in terms of finalizing your rounding out of the portfolio?

Jan Jenisch — Chief Executive Officer

I think, Tobias, the time pressure on divestment is not there for us. I mean we made such value accretive divestments with India and Brazil before with Indonesia and Malaysia, where we are selling or divesting very low return companies at super high multiples. And as you know, we brought us to the ever strongest balance sheet with even debt leverage below 1 time with — we had a cash of around CHF10 billion at the end of the year in the bank. So I think we have done this so well and gives us now all the freedom for capital allocation, gives us the money to invest into the decarbonization, gives us the money to make further M&A transactions. Then on the sideline, we can make very attractive share buybacks. So we have done I think on the divestment side, we have done the value accretive part which we wanted to do, and now we have no time pressure and we can carefully evaluate what some of the emerging markets may be a better off with a different owner.

Tobias Woerner — Stifel — Analyst

Okay, understood. And then just one last confirmation, if I may. I was really pleased to hear that you’re going to give us more information in the half year again. And I think you alluded to the fact that it will be in line with the previous year’s disclosures, i.e. price cost volumes, as noted in the full year report, there was also no mentioning of capacities and so on and so forth. Is that what we should expect or what should we expect?

Jan Jenisch — Chief Executive Officer

No. Look Tobias, I think we always are very transparent. We have a lot of additional reporting on the roofing systems, what type of characteristics we look for. We give you a lot of information on roofing, what is reroofing and what is system selling, all of that. So you can expect a lot more and I just wanted to — it was important for me to share that with you today that with Q1, it makes no sense to go too much in the details because of the seasonality. But for the half year report, please expect all information you need to develop a proper opinion on the future of Holcim.

Tobias Woerner — Stifel — Analyst

Thank you very much. Much appreciated.

Jan Jenisch — Chief Executive Officer

Thank you. I’m very excited to have all your interest today. I wish you good rising in your reports and very much appreciate also all your attendance at our analyst dinner in London and I hope we can repeat this very soon. It was a great day we spent together and I hope we can reconnect in person very soon and discuss all these exciting opportunities Holcim has in the building materials world and how we expand and how we decarbonize, and look very much forward to meet you all in person very soon. Thank you very much. Have a good Friday.

Operator

[Operator Closing Remarks]