LafargeHolcim Ltd (LHN) Q3 FY22 Earnings Concall Transcript

LafargeHolcim Ltd  (SWX: LHN) Q3 FY22 Earnings Concall dated Oct. 28, 2022

Corporate Participants:

Swetlana Iodko — Head, Investor Relations

Jan Jenisch — Chief Executive Officer

Geraldine Picaud — Chief Financial Officer

Analysts:

Paul Roger — BNP Paribas — Analyst

Elodie Rall — J.P. Morgan — Analyst

Matthias Pfeifenberger — Deutsche Bank — Analyst

Arnaud Lehmann — Bank of America Merrill Lynch — Analyst

Gregor Kuglitsch — UBS — Analyst

Cedar Ekblom — Morgan Stanley — Analyst

Nabil Ahmed — Barclays — Analyst

Luis Prieto — Kepler Cheuvreux — Analyst

Lars Kjellberg — Credit Suisse — Analyst

Brijesh Siya — HSBC — Analyst

Tobias Woerner — Stifel — Analyst

Martin Huesler — ZKB — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Q3 2020 Results Conference Call. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Mrs. Swetlana Iodko, Head of Investor Relations. Please go ahead, madam.

Swetlana Iodko — Head, Investor Relations

Thank you, Sandra. Good morning, ladies and gentlemen, and welcome to Holcim Q3 trading update call. As usual, we start with the opening remarks by our CEO, Jan Jenischm following by more financial details by our CFO, Geraldine Picaud. Afterwards, we will take time for your questions. The call is limited for — to 1 hour and therefore, to give everybody the opportunity to ask a question, please limit yourself to two questions only.

Now without any further ado, I would like to hand over to our CEO. Jan, go ahead.

Jan Jenisch — Chief Executive Officer

Good morning, everyone, and thank you for joining. I’m very excited today to share a bit more background information on our excellent results and then also to have a good discussion with you. You have seen the results already. We are very happy that we continue the excellent momentum of the first half into the year, also for the third quarter, and again we’re achieving a new record for sales for operating profit. I think we couldn’t really ask for more.

What is more is that a big part of this success is based on our transformation of Holcim, transformation into the new fourth segment, Solutions & Products, which is now already showing significant results and result contribution. Also a successful transformation in the geography where we very fast expand in North America, which already makes 40% of our sales and even more on the profit side, and then also the sustainability profile has changed very positively. And I will speak about this in a minute.

So altogether, we are pleased we have good order books. We don’t see a decline in demand for Holcim also in the fourth quarter or the start of the year. So, we are confident to do the upgrades in the outlook, which we did, the upgrade on the net sales, upgrade on the EBIT, then of course the new exciting low level on the debt leverage. So, I’m very happy we could do that.

Let me just point out a bit on a couple of the slides. I would just like to comment on slide 5 where you see this high activity level we have on the transformation of the Company. With the first 9 months of the year we did 16 acquisitions and we did the two significant divestments of India and Brazil, so very remarkable how much each we have on the expansion of Solutions & Products. We’ve another six acquisitions to further strengthen our Roofing & Insulation systems, but also to enter here into [Indecipherable] and into safe systems.

On the other side, we did 10 so-called bolt-on acquisitions to further strengthen our business segments of Aggregates and Ready-Mix, and very happy to see that. And this will also be our focus for the future. We want to continue with this activity levels. We have our super strong balance sheet and cash position, and we will continue here to acquire and to transform Holcim here for Solutions & Products and also for the geographic focus.

You have seen on page seven you will see how we progress, so from originally 8% Solutions & Products we are now already at 25% in 2022 if you account for all the changes being made on a full-year basis. So we are, I would say, ahead of our target of 30% for 2025. So, I look forward to hopefully over-achieve the strategic target when it comes here for the expansion of Solutions & Products.

Most exciting for me is on slide eight, how this is already contributing. When you look at the four business segments, you see that a big part of our success is now based on solutions and products or is based on the growth. So the first 9 months, we had an EBIT growth of CHF390 million. And that’s a fantastic to see that how fast this segment became already our second segment in the Holcim group after our business segment of Cement, and this is, as you can see from the numbers, the reason why we have a growth in operating profit, even — despite the strength in Swiss francs we were able to have new records and this is due to this transformation, more solutions and products, but also more North America.

Talking about North America, we have on the next slide, number nine, this impressive geographic transformation of Holcim. You see the numbers, how we were based in five different regions back in 2019 before the pandemic and now through all the portfolio changes, now North America is 40% of our Company. Also, Europe has improved to 32%. And then our super strong foothold in Latin America makes this three rate — regions now more than 80% of Holcim, and this is what we want to see in the future here, to have these regions where we have strong market shares and excellent earnings profile, which you see on the next slide, number 10.

You see the earnings profile slightly over-proportional in North America, largely over-proportional in Latin America and also the same picture, these three regions now make more than 80% of our earnings. So, that’s very grades we could do this in such rather fast period of time, and I’m happy that we — our strategy works, also works already looking to the numbers.

On sustainability, a lot of excitement from new science-based framework for 1.5 degree scenario. I’m personally most excited about our green product range, ECOPact, ECOPlanet, with sales growth beyond our expectations. And we have included a new slide for you, slide number 12, where you see now that the decarbonization of Holcim but also the growth in Solutions & Products leads to a totally new sustainability profile of the Company where in this year we reduced our CO2 per dollar of sales by 30%. So, very impressive I think.

And I think with this background on transformation and a bit background on the results, I hand over to Geraldine who gives us more details on the result and performance.

Geraldine Picaud — Chief Financial Officer

Thank you, Jan, and good morning, ladies and gentlemen. So, we’ll start with our Q3 net sales, which reached SHF8 billion, up 16.3% like-for-like compared to the same period last year. Cement, Aggregates and Ready-Mix recorded a like-for-like growth of 14% attributable to 16% price increase. The negative scope effect mainly comes from Russia and the divestment of India and Brazil, which were closed at the beginning of September. Solutions & Products recorded a huge growth of 46%, attributable to both like-for-like growth of the roofing business and the acquisition of Malarkey, PRB and order bolt-ons.

Let’s now move on to the 9-months net sales bridge. Over the 9 months, the like-for-like growth reached 13.9%, also driven by the outstanding performance of Elevate and the strong pricing on our Cement, Aggregates and Ready-Mix business. In total, the scope effect amounted to a net positive of SHF500 million as a consequence of the Group transformation. Effectively, on the one hand we have CHF1 billion of acquisitions in roofing and specialty building solutions like motors, and on the other hand we have CHF0.5 billion of divestments in Cement.

We delivered a record recurring EBIT of CHF1.6 billion for the quarter, with a strong like-for-like growth of plus 7.7%. The recurring EBIT of Cement, Aggregates and Ready-Mix decreased by CHF109 million, almost entirely due to the divestments. As in H1, we managed to achieve positive price over cost, reflecting our ability to offset inflation through strong pricing, successful sourcing strategies and cost discipline. The recurring EBIT of Solutions & Products grew by CHF134 million, boosted by the outstanding performance of Elevate.

The 9-months recurring EBIT waterfall shows the same trend as for the 3 months, with a positive price over cost in Cement, Aggregates and Ready-Mix. Our JV contributions have declined to enter the Chinese lockdowns. The outstanding performance of Elevate remains the number-one driver of our EBIT like-for-like growth this year. Again, this demonstrates that our new Solutions & Products business segments in which we invest is already our number-one growth engine.

Before getting into more detail, this slide — the slide 18 provides an overview of the regional performance. And all the regions grew in recurring EBIT except Asia-Pac, which was impacted by high inflation in India with limited ability to increase prices, and by the lockdowns in China.

So, let’s begin with North America. The region continued to deliver an outstanding performance in the quarter. Market dynamics remained very positive. Our traditional businesses benefited from strong market growth, excellent price momentum and continued positive market acceptance of our low-carbon building products. Led by the strong growth of our roofing business and the recent acquisitions, Solutions & Products have now reached 38% share of net sales in the region.

If we go next to Latin America, the region recorded another quarter of strong performance, with volume growth especially in Argentina, Colombia and El Salvador. The region achieved a positive price over cost, led by strong pricing. We maintain an excellent pipeline of infrastructure projects in the region and in Mexico in particular, including the new project refinery, Salina Cruz, on the Pacific Coast and an additional section of the Tulum [Phonetic] Airport. The region also advanced well with the expansion of ECOPact and ECOPlanet products. Significant investments were made in materials recycling, supporting further increase in the usage of alternative fuels.

Let’s now move on to Europe. The region delivered a resilient performance. We observed softer volumes on the back of project delays. Positive [Phonetic] price trend continued and helped to contain the cost inflation, enabling the region to achieve a positive price over cost. The region made further progress in our sustainability journey, with a significant increase in Green capex, driving the increase in materials recycled and the usage of alternative fuels.

Turning next to Middle-East and Africa, the region recorded another quarter of profitable growth. Price over cost was positive in the quarter, driven by strong pricing, especially in Egypt and in Nigeria. We saw robust market trend in Nigeria and in Algeria. Egypt had a successful turnaround with good volume growth and a successful price management. The region improved margin, another quarter of clear achievements against the backdrop of high inflation.

Let’s now move on to APAC. The region continued to be challenged by the inflationary environment. We saw a significant negative price over cost in Q3, as price increases were not enough to negate inflation. We further observed a softer level of demand in China, largely due to COVID lockdowns. The successful divestments of India marked another milestone in our portfolio transformation, in line with our strategy 2025, accelerating green growth.

Finally, this slide focuses on Solutions & Products where true momentum continued in Q3. Solutions & Products now represent 25% of the Group’s net sales on a pro-forma basis. In North America, we accelerated growth with the successful acquisition of SES Foam and Polymers Sealants North America, that broadening also in insulation, waterproofing and coatings, which are highly complementary to our roofing business.

In Europe, we acquired Cantillana, a leading specialty building solutions provider in Belgium, to complement the recent acquisitions of PRB, BTB and Izolbet. In Q3, Solutions & Products EBIT doubled compared to the prior year and our roofing business reached 20% EBIT margin, thanks to strong demand and improved raw material supply.

Let’s now go to our capital allocation strategy. As we just reviewed it, the Group transformation continues to be executed successfully and remains our key priority. Solutions & Products now represent 25% of the Group net sales on a pro forma basis. The debt leverage is far below our 2025 commitment of 1.5x. Therefore, we are delighted to announce the launch of the share buyback program, which will allow our shareholders to sharing our success. The program will start next month and run until May next year. Depending on-market conditions, we expect to buy back shares for a maximum amount of CHF2 billion.

With this, I hand over to Jan.

Jan Jenisch — Chief Executive Officer

Thank you, Geraldine. As this is a trading update, so we only go down to the EBIT. We like to give you a bit of more information on this one-time effect on profit and cash flow. You see this on slide 27 and we also have a good situation here. We’re going to have an overall significant positive impact on the net income driven by these very value-accretive divestments of Brazil and India, and so we have — we will have more than CHF1.5 billion of extraordinary profit and then we can balance off the resolution with the US Department of Justice, the fine, and then also we can balance off — a little bit of reduction we have from this divestments on the bottom line, so a good situation. Overall, we are obviously very cash-rich at the moment and we also have here significantly lower debt leverage of around 1x.

Brings me to the outlook, and again we have very good results and also now a very strong earnings profile. So, we are happy to upgrade the guidance here. On the net sales, we go from at least 10% growth to at least 12% growth. We believe the Group will reach CHF29 billion for the full year. On Solutions & Products, we also upgraded the outlook by another 10% growth from originally at least CHF5 billion of sales to above CHF5.5 billion.

Bottom-line EBIT, we guided at the beginning of the year we will want to see a positive growth, now we are more specific and believe we will end up in that mid single digit EBIT growth for the full year.

Debt leverage, I mentioned, we’re going to be around 1x, this is even with share buyback. And very important here, the share buyback is not a change of our profitable growth strategy. It’s simply the fact that we have so much cash now from the divestment but also from our strong cash flow profile that we are happy now to continue with our attractive returns to shareholders. Nevertheless, even with the share buyback, we will continue with our acquisitions. We have already 16 acquisitions this year, so maybe we end up with 18 to 20 acquisitions, which is a new record. And we also plan next year to be very active here to even further strengthen this transformation of Holcim.

That’s it for the outlook. I’m now very excited to have your questions and comments please.

Questions and Answers:

 

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Paul Roger from BNP Paribas. Please go ahead.

Paul Roger — BNP Paribas — Analyst

Hey, good morning, Jan, Geraldine and team. Congratulations again on the results. So, I’ll have two then. I guess starting with the buyback, I mean obviously it’s quite substantial. It is basically 15% of the market cap if you were to annualize it. I’m just wondering to what extent that’s a one-off post the disposals, or could it be recurring?

And then second question, you obviously had a slightly positive price-cost spread in the traditional businesses last quarter. How do you expect that to look in Q4 or maybe next year, given the planned price increases and recent cost moves? Thank you.

Jan Jenisch — Chief Executive Officer

Hi, Paul, good morning. Yeah, look, for the buyback, I’m not sure if I fully got the question right. Again…

Paul Roger — BNP Paribas — Analyst

I was just wondering, Jan, whether it’s basically a one-off or whether it could be more of a recurring cost program.

Jan Jenisch — Chief Executive Officer

Okay. So look, I think our first priority is to make our profitable growth happen and you see now that we can show the results of the move to North America of the fast expansion in Solutions & Products. This will remain our number one priority. Nevertheless, I think our share price is on a very low level. So, I’m for a share price level below CHF50. I am personally very excited to buy back the share and then increase our profile also, earnings per share and so on. So, that’s I think very attractive and — but comes just probably with — that we have so much cash at the moment that we want to put this to work.

And so, we continue the acquisitions but also we can reserve now CHF2 billion to show the shareholders that we care about the returns for them, and that’s what we do. So, it’s one-time for now and let’s see how it turns out, Paul, but I am excited to do — to make both happened, actually. I think it’s great that we can do that.

Your question, price over cost, I think we are a very good position. Look, we have — originally we all thought that the quarter two will be the toughest quarter of the year because if you remember, last year, we still had significantly lower cost base from energy and other third-party, and so we thought that quarter two going to be a decisive quarter for us if we can make a new record year or not. And of course, we were successful in quarter two. And quarter three was then maybe even more challenging from that aspect, and we also made it, right. So, we had a high activity here to put forward the pricing, a bit of mitigation from energy and so on, but very happy to do that.

Now going forward, I think we’re super well positioned. We have our energy supply secured. We have the pricing on a level that we can even have another cost inflation coming in the fourth quarter or second or first months of next year. So, I believe we have very good position to have a positive price over cost going-forward. And I think — we don’t give guidance today for next year, but we are very positive for next year.

Paul Roger — BNP Paribas — Analyst

Perfect. Thank you very much.

Operator

The next question comes from Elodie Rall from J.P. Morgan. Please go ahead. Ms. Rall, your line is open.

Elodie Rall — J.P. Morgan — Analyst

Hi, good morning, Jan and Geraldine, and yes, congratulations on the results. Yes, can you hear me?

Jan Jenisch — Chief Executive Officer

Yes, Elodie.

Elodie Rall — J.P. Morgan — Analyst

Hello.

Jan Jenisch — Chief Executive Officer

I can hear you, Elodie.

Elodie Rall — J.P. Morgan — Analyst

Hello, can you hear me?

Jan Jenisch — Chief Executive Officer

Elodie, we can hear you.

Elodie Rall — J.P. Morgan — Analyst

Yes, can you hear me?

Jan Jenisch — Chief Executive Officer

Yes.

Operator

I think we will proceed to take the next question with Matthias Pfeifenberger from DB.

Elodie Rall — J.P. Morgan — Analyst

All right, sorry about that. Don’t know what happened.

Operator

Mr. Pfeifenberger, your line is open. Please proceed with your question.

Matthias Pfeifenberger — Deutsche Bank — Analyst

Okay, thanks a lot. Hi Geraldine and Jan, thanks for taking my questions. So the first one is on dividends. So you mentioned share buyback is a one-time, but then also you have special effects and net profit, so will those be accounted for in determining the payout, you know what I’m getting at, is there scope for a special dividend?

And then on the CO2 targets, obviously a lot of relief from the disposals. Will you set a new absolute per ton CO2 target as well? And how low could that be? Thanks a lot.

Jan Jenisch — Chief Executive Officer

Hey, Matthias, good morning. On the dividend, I think it’s bit early to answer the question precisely, but you know that we want to have attractive returns for the shareholders. I was personally very pleased the Board decided to increase the dividend last year from CHF2 to CHF2.2. And you know — and I hope we can continue with this trend. Also helping if you have a reduced number of shares that will already be a technical increase of the dividend, so too early to answer but I think we can have attractive continuation of the dividend policy.

On the CO2 target, so it’s important for us. We are fully committed to decarbonize the cementations to decarbonize the processes of Holcim, We made good progress there. At the same time now, we are shifting the portfolio to be the leading company in building materials with Solutions & Products already accounting for 25% of our net sales. So, we will now also. Include different KPIs. So, for today we show you the first time that CO2 per net sales, I think that’s an important also KPI for investors and that’s of course our target to lower the absolute CO2 of the Holcim group. So, we will continue now to also report this and show the progress we’re making.

Matthias Pfeifenberger — Deutsche Bank — Analyst

Thank you.

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. Good morning, Jan Geraldine and Swetlana. My first question is regarding your fine in the US, [Technical Issues] all the comments. Can you confirm that beyond the $778 million fine, there are no other implications of your pleading guilty on the occasion in terms of being able to — for example, be for US public projects or — but also other lawsuits that could come from your decision to collect duty? That’s my first question.

Secondly, you announced a share buyback and obviously you haven’t done that since you joined as CEO, Jan, so that’s quite a big change. What does that tell us in terms of your M&A strategy? You’ve been very active with acquisitions in the last 2 years, 3 years. Does that mean that you’re now excluding a larger acquisition or are you still being opportunistic with M&A? Thank you.

Jan Jenisch — Chief Executive Officer

Arnaud, thank you. No, no, we are ready for anything coming. That’s clear. So, we have just — simply we have been quite successful with the divestments for very high multiples, $7.3 billion net cash-back plus the cash flow we generate. So, we simply think it’s wise now to use the money for this I would say almost limited share buyback. I’m happy to do that. I’m not a fan of capital increase or something. I think a company should always provide the capital for expansion, and we are just simply now in a position we have a lot of cash in the company.

It doesn’t change anything. I think we are super happy with a full pipeline of acquisitions. We have 16 already this year and we will continue with this, be assured. You see the math then with the new guidance on the debt leverage going down to one even with the share buyback, it just shows you we are in a very comfortable position here from the balance sheet, and this is why we took this decision. And I’m very satisfied with this.

On the fines, also here, it’s a significant fine, I’m not happy about the amount, but I’m very happy about the resolution because the resolution where The Department of Justice is confirming that the Holcim Company was not involved in this legacy transactions. There were no US employees or US operations involved in this misconduct, and most importantly they specifically confirm that Holcim has a state-of-the art compliant system. And this is why they didn’t ask us to have an independent monitor. So, we are not here under further investigations, instead they tell us we run the compliance in a state-of-the art fashion and this is why we don’t need to monitor going forward.

I’m very happy with the wording of the resolution and this also brings us then to your question of the collaterals. And of course this is very good news, so we don’t expect any collaterals from the customer side from public projects. We also had positive reaction I think from financial institutions. I don’t know if it’s — is the Moody report public?

Geraldine Picaud — Chief Financial Officer

Yes, it is.

Jan Jenisch — Chief Executive Officer

So, you can even read Moody’s even though this is now a plus the resolution, a plus for credit rating, because it takes away the uncertainty, and we have received a lot of this positive feedback. And again, I’m not happy about the amount of the fine, but I’m very satisfied with the resolution, That brings a closure to this Department of Justice inquiry and now we can continue what we do best, to grow the business and create a future for Holcim.

Arnaud Lehmann — Bank of America Merrill Lynch — Analyst

Very clear, thank you very much.

Operator

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

Gregor Kuglitsch — UBS — Analyst

Hi, good morning. Can you hear me?

Jan Jenisch — Chief Executive Officer

Hey, good morning Gregor.

Gregor Kuglitsch — UBS — Analyst

Thanks for taking my questions. I’ve got two please. So, the first one is on Solutions & Products, which obviously had a very strong first 9 months. I think as you said, the earnings doubled. So, I guess the question is how comfortable or how convinced are you that, that is sustainable? I don’t know whether there is something specific going on in flat roofing membrane in the US, supply, demand. If you could just tell us, do you think you can hold that?

And then the second question is — I think you’ve briefly mentioned it, but if I can just check, you were talking about that you’re already covered for energy. Did I understand that correctly? So, I guess what I’m getting at is I’m trying to figure out how much visibility you’ve got on the energy costs going into 2023, particularly I guess on power, but perhaps also more broadly? Thank you.

Jan Jenisch — Chief Executive Officer

Yes, thank you, Gregor. You know, Solutions & Products, I think we are just starting. If you look at the results now, they are impressive of course. We have this one slide in there, how much they contribute already and you mentioned we are doubling the profit. And honestly speaking, it’s just the start you have to — we started the roofing systems in April last year, so just 1.5 years ago, with the acquisition of Firestone from Bridgestone, and that went very successful. We had — the start was not that seamless. We had issues on the raw material side and a couple of hiccups. But then after we sorted out everything, it really runs very well. And now we smartly added on.

You know, we bought the Malarkey for residential roofing. We went into insulating foams with SES. Now, we bought an adhesive company from ITW. So honestly speaking, we’re just starting in Solutions & Products, and the results you see now, I’m not asking my people if the result is sustainable, I’m asking them how long do you need to double it, because it’s just the start and you can have — we have benchmarks even better performing on margin than us, The market is good. The order books are extremely — we are sold out at the moment. We’re sold out in 3 months, in 4 months.

So I — you know, I’m not even overly optimistic. I’m just saying, we’re just starting in Solutions & Products and we are happy about this fast progress in just 18 months but you should ask us for more, not for sustainability on the results.

On the energy side, I — that was obviously a very challenging situation for everyone, everyone globally in our sector or in other sectors. I’m proud our people made this happen for us. One thing is to have a positive price over cost, which obviously was very challenging. Another aspect is of course supply, sustainability, and also here we have secured safe energy supply also for the upcoming months for next year. I think on the cost side we have a very strong position now with the mitigation and the pricing we have in place. So as I said earlier, we are also expecting positive price over cost for the months or even for next year.

Gregor Kuglitsch — UBS — Analyst

Thank you.

Operator

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

Cedar Ekblom — Morgan Stanley — Analyst

Thanks very much. On costs, will you see lower sequential costs in the fourth quarter linked to energy, considering what’s happened in the spot market or is lower cost more of a tailwind to the 2023 margin?

And then, can you just give us a little bit of color on the free cash flow impact from the divestments? I know in the slides, it says that it’s a CHF400 million one-off impact. Is that on an annualized basis because that looks to be a bit lower than where that might have been 12 months ago, appreciating that the profitability of India has come down a lot, just to try and to understand what the free cash flow on a normalized basis for the remaining business is? Thank you.

Jan Jenisch — Chief Executive Officer

Hi Cedar, good morning. I’ll hand over the energy question to Geraldine in a moment. She loves to talk details about the monthly status and the quarter status. But on the cash flow, I also like to clarify, so — because we don’t have the cash flow in the third quarter reporting, that’s why we gave you this details before the outlook that we have this impact from the fine and the impact may be from some missing business from the divestments in the last 4 months of the year. So we think it’s going to be like a CHF1.21 billion adjustment. But this is a one-time effect and this is for the full year of 2022.

So, we are still guiding the cash-flow of CHF3 billion or CHF3 billion plus and then we are guiding now to have these two one-time effects from the cash flow, and let’s see. And I’m of course hoping that we can do better than that, but we have these one-time effects which will not influence next year, that’s also important to say. Even though second cash-flow impact we have from the divestments, we’re going to make that up of course with the other businesses, with the expansion you are seeing and now being a CHF29 billion company it’s also I think an all-time high for us. So you can deliver — you can expect from us that we will deliver on our cash flow conversion ratio also in 2023.

Geraldine Picaud — Chief Financial Officer

Right, and good morning Cedar. So on the energy, we are covered for Q4, mostly covered, so that’s all good for uncovered portion. Next year and end of this year we’re actually riding on the market correction, so all good from that standpoint. So, we feel that they’re going to be more tailwinds going into next year from that standpoint.

Cedar Ekblom — Morgan Stanley — Analyst

Thank you.

Operator

The next question comes from Nabil Ahmed from Barclays. Please go ahead.

Nabil Ahmed — Barclays — Analyst

Yes, good morning. Can you hear me?

Jan Jenisch — Chief Executive Officer

Yes, good morning.

Nabil Ahmed — Barclays — Analyst

Good morning. Thanks for taking my questions and congratulation for the good numbers. Actually, I had a question about China. It’s obviously been a very challenging year. How do you think about 2023 at this point? Is there a chance for volume and pricing rebound perhaps or that’s too early to tell? And also could you remind us, how do you think China sits from the strategic standpoint watching the domestic trading on very low multiples, but could you perhaps consider selling that business too at some point?

And the second one I guess is more a follow-up on the free cash flow question and more a clarification. When you talk about CHF3 billion free cash flow before DOJ resolution and divestment and then EUR400 million impact on free cash flow divestment, so should we think about CHF2.6 billion as the normalized starting point for free cash flow?

Jan Jenisch — Chief Executive Officer

Hey, good morning Nabil. You know, look, China is really — it’s a tough market this year. We all see that. They are the only market still in lockdown based — locked down to the rest of the world and even ongoing lockdowns in certain parts. Is just had a video call 2 weeks ago with one part of our business there and they just came out of a 3 weeks lockdown. So, they still have this ongoing lockdowns. They detect one Corona case and then they lockdown the areas. So this is — I think it’s pretty tough is.

And it’s — while we are so satisfied with the volumes in all our key markets, China is the market really still disrupted. We have lower volume, so it’s a bit like a wave depending on the lockdowns. So, we are impacted. It’s not a structural impact, the impact really is from these lockdowns. And now — you know, however, we are not depending on China really when you look at our results. So, for us we watch it and we have our big contribution comes from North America, Latin America and Europe.

But for China, if you’re interested, my personal opinion is this lockdown of the country will not be over this year. So, I expect this to go well into next year and — well into next year, maybe mid of the year or even in the second half before we get a normalized China from these COVID measures. So, that’s not an easy market to navigate in.

We are quite good — again it’s most impacted market for us. So we have — it’s one key markets where we have less profit. Even so the profit are still on a very good level in our case because we have some good pricing and some good efficiencies going on. But it’s a very tough market and I don’t see this will be resolved in the next 3 months.

Geraldine Picaud — Chief Financial Officer

Okay, on the free cash flow, Nabil, to clarify, so you remember, we guided to be above CHF3 billion of free cash flow. Of course, we have to adjust that with the one-time effect of the DOJ resolutions, which accounts for roughly CHF0.8 billion but we also had to correct it with the effect of the India — mainly the India divestment. This CHF400 million, that accounts for the month of Q3 and the 3 months in Q4, also of this free cash flow and it’s about the annual free cash flow because you have a strong seasonality in India.

But I think the important message that we want to convey with Jan is that the new basis is not CHF2.6 billion, it’s still CHF3 billion because we have done super acquisition with a strong cash conversion, as you know. So, that’s why we want to make it clear that it’s one-time because again, we are going to deliver CHF3 billion starting next year.

Nabil Ahmed — Barclays — Analyst

Looks great, thank you.

Operator

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

Luis Prieto — Kepler Cheuvreux — Analyst

Good morning. Thanks for taking my questions. The first one is, you obviously have grown more optimistic on ’22 at the end of the year, but could you orient us how you would expect demand to pan out in ’23 in the context of recessionary environment? Is there a scenario in which we should be worried about even pricing power?

And the second question is, you have stated in the past the premium pricing in green products is a fact and I think that’s clear. But could you update us on the latest developments in terms of client reception and most importantly, margin performance for ECO products versus traditional Cement and Concrete? Thank you.

Jan Jenisch — Chief Executive Officer

Good morning, Luis. So, I mean today we will not give a precise guidance for 2023, but nevertheless I shared with you, we have good order books. Yes, even for our regions, Latin America and North America the growth in Q3 is above the growth in the first half of the year. So — and this is also how our order books look like. I know a lot of people talk about potential recession and so on, but we — at Holcim we have to focus on what we see with our customers, and that looks good in Latin America and in North America

In Europe, we have a softening, You can also see that in our numbers. So, we’re going to — we have a demand decline of around 5% in Europe and this is already for the past 4 months. So, we see that softening. It’s not a frightening softening because we nevertheless have good pricing and good cost position in place in Europe. So — and we don’t see a further softening from there. So, what we see for the coming months including the start of next year, we are quite confident from the demand and we are of course confident also from our margins.

Keep in mind, if we have a further slowdown in markets, this normally comes also with decreasing cost in this third-party cost, and then will be rather margin accretive.

On the premium pricing, your second question, we are very satisfied. I think we have one slide where we share how fast we are growing with this first global range in green concrete, ECOPact. That already makes a significant amount of our concrete sales now and I think we gave a target of 25% of entire concrete sales by 2025. It looks like we’re going to reach that already — maybe already next year. So, we’re going to be early with this strategic target, and the pricing or the margin is good.

I’d also keep in mind, we get some positive margin effect, but we want to make this decarbonized product our volume product. So, I think it’s important to decarbonize construction, to decarbonize the way we built. We want to see the volume products going that way. That’s why we don’t put them in a niche and ask for double the price. You will see these products maybe positioned for 5% premium or 10% premium, and that’s how we position them to make them really our blockbuster products and not let them stay in the niche.

Luis Prieto — Kepler Cheuvreux — Analyst

Excellent. Thank you very much.

Operator

The next question comes from Rall Elodie from J.P. Morgan. Please go ahead.

Jan Jenisch — Chief Executive Officer

Elodie, can you hear us?

Elodie Rall — J.P. Morgan — Analyst

Hi, good morning. Can you hear me?

Jan Jenisch — Chief Executive Officer

Yes.

Elodie Rall — J.P. Morgan — Analyst

And you, can you hear me?

Jan Jenisch — Chief Executive Officer

Elodie, we hear you very well.

Elodie Rall — J.P. Morgan — Analyst

Alright, sorry about that.

Jan Jenisch — Chief Executive Officer

No problem.

Elodie Rall — J.P. Morgan — Analyst

So my first question, I can come back, margin expectation — great, so my first question is on margin expectations into ’23. I mean, I know you’re not going to comment in detail, but is it fair to say that given you have issued positive commentary on price-cost and on demand and given you’ve divested emerging markets where margins have been under pressure this year on cost inflation and increased rotation into businesses with stronger pricing power, is it fair to say that from here we could expect margin to have troughed in ’22 and to increase from here? That’s my first question.

And second question, I heard the mandate of your Chairman is coming to an end. I think if you could remind us when that is happening and what are the internal thoughts about his succession in NewCo? Thanks a lot.

Jan Jenisch — Chief Executive Officer

Yeah, Elodie, maybe I’ll take the last question first. We have — as you know, we have a very good I think leadership team and also we have a very good Board of Directors and there is no decision being made. I think we will communicate maybe end of February or in March on the new composition or who will be for election. But you can expect that we will have a good continuation and we will make sure we have a strong Board of Directors, and nothing else I can comment at this point in time.

On the margin, you have a tricky question here for me. I would say maybe differently that we have good drivers in place for next year. We talked about the energy situation where we are satisfied with securing and the supply but also securing the right margin level, cost level for us. You have seen now that we expand into the high margin Solutions & Products, the high-margin North American business.

So, I think we’re in a good position for next year and — but as of today, let’s just assume the margin will be good next year. And I’d say not to — I don’t want to speculate more but I think we have this transformation you see from us now is very supportive of obviously strong results. We have seen that in quarter three now and I expect this to continue.

Operator

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

Lars Kjellberg — Credit Suisse — Analyst

Thank you. I just have one question left. The strong growth you’re seeing in [Phonetic] Solution & Products, and I guess you called out the business becoming the main growth engine for the Company. So how should we, think about this? How does it make you this is a better business in terms of returns growth and especially then considering where we are now in terms of the resilience in the business cycle? If you have any sort of big-pictures how we should think about this as we transition through the transformation phase and your R&D changing the portfolio, again in terms of returns growth, opportunities and cyclicality?

Jan Jenisch — Chief Executive Officer

Good morning, Lars, that’s what we try to do. We believe that Solutions & Products is a fantastic, complementary segment for the traditional building materials we are doing. And as you mentioned, we have even I think a slide in our presentation, I think it’s page six, where we talk about why this is attractive for us. And it’s — these are segments we have chosen which have excellent branding, good pricing power, we have innovation. For me, maybe the single most important part is that we have this resilient and growing demand from repair and refurbishment.

So, the Solutions & Products businesses we acquired, they have between 50% to 80% of the sales is in repair and refurbishment and this is a very resilient part, we have a large number of craftsmen customer, of contractors — of specialized contractors like Rufus and they have a very resilient demand, and this would — you know, if you have a negative or a recessive cycle, usually in those segments you walk through. And that’s a great addition to our traditional building materials who are more exposed to new-build and then we’re adding now this repair and refurbishment segment that’s — I think that’s a super fit for us. And then based on the innovation and all the installation you have to do, all these energy concepts for solar roofs and green roofs, this of course helps us to increase the value or the sales per square meter per building. And we have a super increased value proposition for the customers, so that’s super exciting. And in addition to these high returns, we have a low capital intensity. That business has maybe — needs 2% to 3% of investment on sales for a year. So, that also makes us look very good when it comes to return on invested capital or — and such numbers.

So, we’re very excited and I think it’s super complementary to what we have been doing in the past and that’s great, and we can now even talk more all these building standards now, because obviously we have to build more for the growing world population and the urbanization. But beyond that, we have to build much better. We have to build sustainable now with local building materials and we have to build now energy-efficient buildings, which are renovate — which are insulated, have proper roofing, and all this will trigger a huge demand in repair and refurbishment.

We see this now in Europe. The first market going strong for this is the French market where we even have a law how you have to insulate, how you have to change the energy sources for your housing to be able to rent it out or something, and that’s now super roadmap for us to go there. I’m very happy about it. So, we pick really the right segments. And you have on slide six a bit of the taste of why we selected these segments and why they are so attractive.

Lars Kjellberg — Credit Suisse — Analyst

A very quick follow-up, this also reflects the resilience in the order books you talk about because what we can see from the outside, of course there’s a lot of negativity going into both commercial and house building but again, repair and refurbishment, is that coming through and is that the point of calling out a good order book, is that the way to think about it?

Jan Jenisch — Chief Executive Officer

Yeah, Lars, it’s great, you have to — a lot of people talk about North America. You have seen even our double-digit growth has even accelerated in Q3 because we are not depending on a single segment in the US market and lot of people talk now about the slowdown in the classic residential housing or permits and so on. Also here, you have to get first a long-term picture that the build rates are too — are still too low in the US residential.

Nevertheless, rising interest, rising cost could be a slowdown. For us, that’s not really decisive because we are big in infrastructure, we are big in the cities with the high rises. And then, even for residential, in residential we actually do at the moment — 90% of our business is repair and refurbishment. so we only do 10% of re-roofing — of roofing, new in residential — 90% is re-roofing and that’s a super exciting market. And unfortunately, the weather impacts in the US make this a big growth market and we have special products with more high-performance roofing solutions for residential. So, they’re really sought after and this is the reason why they’re selected for re-roofing. And so, we are less worried about the potential slowdown in new-builds for residential.

Lars Kjellberg — Credit Suisse — Analyst

Okay, thank you.

Operator

The next question comes from Siya Brijesh from HSBC. Please go ahead.

Brijesh Siya — HSBC — Analyst

Hi, good morning. I have two questions as well. The first one is on Europe. The 6% volume fall you had in Q3, could you split that into end-market, how that is looking into residential and on listening to maybe — and into Infra?

And the second question is more about the Solutions & Products. You answered previously saying that Solutions & Products is kind of complementary to the heavy-side business you have. My question is more about the structure you have put it together and keeping Solutions & Products as separate. So when we look at North America, would Solutions & Products be — have a separate head who will be reporting to North America regional head? Also, how do — is it not right to have a country structure rather — or regional structure rather than have product separately?

Jan Jenisch — Chief Executive Officer

Hey, Brijesh, good morning. Thank you. I’ll start with the second question. We have a lot of synergies, especially going forward, so our ideas in the future we want to make a sustainable building happen from the roof to the equal ECOPact concrete solution being used. So, we have a big potential for cross-selling of complementary solutions for sustainable housing, sustainable building and sustainable infrastructure. While this is so, we have very high growth at the moment.

So we do first things first at the moment and we have a separate leadership for Solutions & Products to make sure to make it happen. And we talked earlier that we just started to build that up, the roofing systems, 18 months ago. So, you can imagine, we are — our people have a lot to do to integrate, proper setup the business, and handling this growth right. You can imagine how much more at the moment we need to produce, we need to make happen. And we have a lot of synergies also from these different products and solutions businesses we acquired, right.

So, we have so many synergies and we focus a bit on first things first. So, that’s why the ultimate goal to make a full sustainable building happened with all our solutions. That’s something I look-forward to the future. And at the moment, we need to make sure we have proper leadership P&L on these segments.

Your first question is a bit tricky just to answer because we don’t give the split now on end markets. So, is it roofing. Is it infrastructure, is it residential. Maybe for your benefit, I can just report a bit what we see on the volumes in general. And. I start with the Americas where we have even an increase in-demand. If you look at the Q3 sales volumes compared to first-half volumes, you see that even we had a strong growth first half of the year. It further accelerated and at the moment we have no reason to expect lower volumes in Q4 because we have very good order books here and we believe this will also go into next year.

We have then the troubled markets we talked about, troubled markets in China. There we have disrupted, the volumes are down 10% or 15% or something, not because of structural demand issues but because simply the lockdowns which make it very — more challenging to have construction work going on. This is a temporary thing in our view. But nevertheless, I said earlier, this will maybe last well into 2023. It’s not so decisive for us.

We have then the European market. Here, we talked about — we have a slowdown in volumes for many reasons, for the reasons of cost inflation. We have here of course the biggest impact on the geopolitical and on the energy crisis situation we have, and we also have scarce resources in construction, on the labor market and so on. So, I’m not super pessimistic about Europe. I think that will be 5% volume drop. I don’t think this will be better next year but I don’t think it will be much worse, so which gives us a very good base to work with because we have so much excitement to add on top of our product ranges, with our Solutions & Products business expanding. So even in Europe, I don’t have a negative outlook for Holcim. This is a bit what I can share today on the volumes. Maybe next time we can talk more detailed on various segments of the markets.

Brijesh Siya — HSBC — Analyst

Thank you very much.

Operator

The next question comes from Tobias Woerner from Stifel. Please go ahead.

Tobias Woerner — Stifel — Analyst

Yes, good morning, Geraldine, Jan and team. Thanks for taking my questions, two as before. Number one, you mentioned your M&A pipeline and we’ve also got a very strong net-debt-to-EBITDA position now. If you were to find the right deal sizable, where would you be willing to go to in terms of net-debt-to-EBITDA? That’s the first question.

And the second question relates again to your Solutions & Products division where you’ve seen a real strong improvement in underlying margins or recurring EBIT margin. And you also alluded to the fact that you want to double this, not the margin but double the results there. But the question here really relates to your heritage businesses in that division. Won’t these hold you back and would you consider selling some of those, while at the same time, can you give us a sense of what the potential could be in terms of the recurring EBIT margin? Thank you.

Jan Jenisch — Chief Executive Officer

Yeah, Tobias, on your first question, I didn’t fully understand the acquisition. What was the question on what I would consider something…

Tobias Woerner — Stifel — Analyst

What you would consider as sort of the ceiling where you would want to see your net-debt-to-EBITDA go to in case you made a larger acquisition?

Jan Jenisch — Chief Executive Officer

All right, okay, thank you, Tobias. Look, obviously, Holcim never had a stronger balance sheet than at the moment. And I think I was always clear that I like it this way because simply to have entrepreneurial freedom to act when the opportunity comes is very important. And if you have a — let’s say, a net-debt ratio of 2x, I think this is too high clearly for a company like us. So, we guided then already in the strategy that we believe 1.5x, that’s our target for Strategy 2025. Now we had 1x, so obviously we have a nice headroom, also considering the ongoing strong cash flow generation.

So, we feel in a very comfortable position to make any deal which makes sense for us. We will continue with our activity and M&A. You can expect from us to be value disciplined. I think we have shown that in the past that we divest for good multiples and we buy for reasonable multiples, and they can expect that. But don’t expect a low activity level. We are excited to continue to transform for a stronger Holcim.

And on the debt level, as I mentioned, we — think we are now at a very strong balance sheet and I’m very happy about it, very happy about it. And the guide 1.5x, that gives us already a bit of a margin there and then the cash flow is coming in next year again. So — yeah, so we are — that’s my answer I think on the debt, on the capital structure.

And then on the Solutions & Products, you have to see that we have very nice roadmaps for all our products. So, we are very excited for — to decarbonize the cementitious products. We are very excited to have some of the concrete products, which are part of Solutions & Products. They have huge potential going forward for modular building elements and so on. So, you can expect from us that we will take all these organic growth opportunities very — with strong focus.

And when we divest, we divest a country, we don’t divest segments. And this is something you can expect from us. We will not divest product lines of something we are very satisfied with the four business segments, Cement, Aggregates, Ready-Mix Concrete, and then the new Solutions & Products. And we want you — we believe we have great growth opportunity in all those segments.

Tobias Woerner — Stifel — Analyst

Thank you.

Operator

The last question for today’s call comes from Martin Huesler from ZKB. Please go ahead.

Martin Huesler — ZKB — Analyst

Yes, good morning everyone. Thank you for taking my two questions. First of all, to the announcement of your organizational changes, can you maybe just elaborate a bit? Miljan is now taking over operational excellence with a main focus, if I understand, this unsustainability, decarbonization as well. How does this really differ from Magali’s task? That’s the first question. Maybe I’ll take the second one afterwards.

Jan Jenisch — Chief Executive Officer

Super, Martin, good morning, and thank you for pointing that out. So, I think first of all I’m always happy to adapt the organization at the right time. And when you look at the geographic focus we have now, it makes total sense to combine Asia and Middle-East, Africa. Both regions are now together less than 20%. And nevertheless, we have very significant countries in there and significant assets, so the ask, Martin, now to focus on these countries, Middle-East, Africa and Asia, where we have similar lifecycles in construction and similar challenges, so I think it is going to be very good for us to further develop.

At the same time, we see that decarbonization has the fastest pace in Europe and we have — in Switzerland alone we have a 100-plus engineers working on the decarbonization. So, we are asking now that we want to accelerate the decarbonization site-by-site. And you see we have more than 2,300 production sites at Holcim and we need to decarbonize each of them. So, Miljan and all these engineers now, they have the task to accelerate the decarbonization of individual sites and also digitalize them, we call it plans of tomorrow. We’re going to have from autonomous electric trucks to automization to robots.

So, there’s a whole range of new technology you want to apply for the plant. So, it goes beyond decarbonization. And this is the new task now, and we’re very happy we can focus the approach on Europe where we have the most advanced technologies in place. And we need more of those technologies, so that’s why the combined Europe leadership together with this operational excellence.

Martin Huesler — ZKB — Analyst

Okay, so not really an overlap with the Head of Sustainability’s job?

Jan Jenisch — Chief Executive Officer

No, it’s not an overlap, Martin.

Martin Huesler — ZKB — Analyst

Okay, good. Then the second one, maybe if I look at Latin America and I look at the volume trends and — I mean Cement roughly plus 1%, however Aggregates, Ready-Mix up 20% or even 30% and more. What’s really the different — difference behind that development?

Jan Jenisch — Chief Executive Officer

Yes, Martin, that’s I think well observed. We have — especially in those markets, we have a big push for this new product ranges. ECOPact I think is — we have the highest ECOPact sales ratio already in Latin America and this is something they are now focusing very hard on to make the shift towards more value-added products. So, that’s why you see here a higher growth in Ready-Mix, a higher-growth in Aggregates. And this is also due to our focus and also the investments we have been making.

Martin Huesler — ZKB — Analyst

Okay.

Jan Jenisch — Chief Executive Officer

[Speech Overlap] give you many examples we have. In Aggregates, we have greater opportunities for even — for greenfield, for new quarries like in Mexico and we have other areas where we also could make quarry expansions. But — and then especially on the ECOPact in concrete, that’s a new best seller for us in the Latin American markets. So, you can expect more to come here from us.

Martin Huesler — ZKB — Analyst

Thanks a lot.

Jan Jenisch — Chief Executive Officer

Super. Hey, thank you so much. I think we’re already 10 minutes or something late. Sorry for this. But nevertheless, thank you so much for your feedback and for the good discussion. I really hope we see each other as soon in person, latest for the full-year results or something, because we have enough telephone conversations I think in the last pandemic times. So, I very much look forward to see you all on a road show or at an event very soon. Until then, all the best and have a nice weekend.

Operator

[Operator Closing Remarks]