Welcome to the H+H International Annual Report for 2022. For the first part of this call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. To ask a question, please press five star on your telephone keypad. This call is being recorded. I'll now turn the call over to your hosts. Please begin.
Good morning, welcome to H+H conference call and presentations for the annual report 2022. My name is Niclas Bo Kristensen, Head of Investor Relations and Treasury. Joining me on this morning's call is our CEO, Jörg Brinkmann, and our CFO, Peter Klovgaard-Jørgensen. Yesterday evening, the annual report and supporting documents were published and uploaded to our investor relations website. The presentation for this call followed this morning. During today's call, management will present the annual financial report. Afterwards, there will be a Q&A session. Please note that this conference call is being recorded and will be made available on our investor relations website after the call. Before handing over the call to Jörg and Peter, I would like to direct your attention to the disclaimer on page two.
During this call, executive board may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectation and assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ significantly. For further information about the risk factors, please see the annual report for 2022. With that, I will now turn over the call to Jörg.
Thank you, Niclas, and good morning to everyone participating in this call this morning. Today I will go over a few financial highlights from the year before and then moving on to an update on our sustainability efforts. Finally, I will provide an update for our core markets and our strategic priorities before Peter then will add additional color on the financial performance for the year and certainly our financial expectations for 2023. First, please turn to page three. 2022 was a record year for H+H, achieving the highest ever EBIT of DKK 455 million. We have delivered such result in a challenging market environment with high inflation and increased market uncertainty from second half on onwards. For me, the results demonstrate our strong and also sustainable business model.
In that sense, I would like to thank all our employees around our European markets for their commitment and great work in 2022. Let me walk you through the financial highlights. Organic growth amounted to 14% in line with our recent guidance. The result is mainly influenced by the continued implementation of sales price increases to counter the high inflationary pressures throughout the year. It was partly offset by lower sales volumes in the second half of 2022 as a result of lower new build activity in Poland and also our upgrade of the German Wittenborn factory. The gross margin of 28% and also EBIT margin of 13% is a clear proof point of our successful pass-through on inflationary costs. Our free cash flow of DKK 61 million, excluding acquisitions and divestments, illustrates the continued strong cash generation.
Finally, financial gearing remained low at 0.7x EBITDA, comfortably below our long-term financial target of 1x-2x EBITDA. Not only on the financials did we deliver great results, there's also good progress with regard to our sustainability journey we will see on page four. Yesterday, we released H+H sustainability report for 2022 on our company website. Towards 2030, it is our ambition to reduce our Scope 1 and 2 emissions by 46%. In 2022, we made a big step into that direction. We reduced our emissions by 8% year-on-year, which is 5% ahead of our long-term Science Based Targets initiative goals for 2022. This is mainly coming from better energy consumption and a mixed shift towards green electricity. Our long-term SBTi commitment serves as a North Star to become carbon neutral by 2050.
We are confident that this commitment will not only make an important contribution in the fight against climate change, but also add significant and sustainable long-term value to our business and to our shareholders. I'm very pleased to report that we in 2022 reduced our lost time incident frequency to 3.6, the lowest level ever achieved. Every accident is one too many, and we restlessly drive towards a true zero harm culture. Let me provide an update of the situation in our key markets, starting with the Central Western Europe region on page five. In the CWE region, 2022 started with high demand for our products.
In the second half of the year, however, high inflation, risk related to energy supply those days, and increasing interest rates led to higher market uncertainty, and as a result, the building activity slowed down for the remainder of the year. The number of building permits issued in Germany is decreasing by 13% year-on-year. Macroeconomic indicators point to unfavorable conditions for the housing market in 2023 as the country continues to face high inflation and interest rates, which drive an increasing trend of postponements and construction starts. Similar in the Nordic countries, demand was strong for most part of 2022, especially in detached housing market.
In the last part of the year, building activity started to decline, and we are seeing a slowdown going into 2023 on the back of inflation and uncertainty. In 2022, a lot happened to strengthen our factory network. Part of this was the integration of the two acquisitions we made late 2021. The acquired AAC and CSU DOMAPOR factories in Northeast Germany had a very successful year with efficient production and high output. Our new AAC plant in Feuchtwangen in Southern Germany was successfully ramped up and is now ready to serve the market. Additionally, we also upgraded the AAC factory in Wittenborn, located in the northern part of Germany. The upgrade in Wittenborn resulted in temporary closing, which affected output in the second half of the year, but is now back in operations on a new level.
Our recent acquisitions and improvement projects have established a solid footprint across Germany, and we have taken considerable synergies from sales. However, further synergies are being worked on by more standardization and a higher utilization from independent plants towards the network of plants. That is also the reason why we have hired a new leader for our CWE region, who brings huge experience from bigger companies' operations. During the year, our sales team was focusing on negotiating sales price increases to offset the higher input costs, and we believe this to continue into 2023. Beyond that, we are also preparing for the lower demand in 2023 and adjust our capacity through using short time work where possible. Beyond that, we have initiated a cost savings program.
Despite the uncertainty going into 2023, we remain positive for the long term potential as there continues to be a structural undersupply of housing in Germany. Please turn to page six for an update on the U.K. market. During 2022, the private housing market showed resilience to challenging market conditions and maintained a high level of building activity. Generally, our British factories were running at near full capacity to service our customers and the very high demand. As a result, we focused on the delivery of core wall products, leaving certain market share to alternative solutions. As the market now softens, we will seek to regain this market share by restoring a widened product portfolio, especially in foundations.
With high inflation rising during 2022 and to be continued into 2023, we focus on offsetting the input cost increases through sales price increases in close dialogue with our customers. These are now being phased in over the coming months. Towards the end of the year, we did see market demand slowing down and house builders have reported decreasing sales rates in Q4. We will continue to be watchful of the situation in U.K. and are prepared for capacity adjustments where needed. As we remain positive on the long term fundamentals of the market, we continue to seek opportunities to further increase our capacity. That is why we continue with the capacity project in our Borough Green factory. The upgrade is expected to increase our capacity by approximately 10% and be completed in Q1 2024.
Please turn to page seven for an update on the Polish market. In the first part of the year, demand remained at a very high level, supported by a strong order backlog and undersupply of rental housing. This allowed for strong sales price dynamics being ahead of inflationary input costs in the first half of 2022. We've also invested into our network of plants in 2022 and have completed the work on our new CSU factory in Radom in the north of Poland. With a capacity of 60,000 cubic meters, it will serve the Polish Tri-City area around Gdańsk now with both high quality CSU and AAC from our existing plant in Radom. However, the war in Ukraine caused high uncertainty, which together with high inflation, has caused the market demand to soften.
This has led to a sharp decline in dwelling starts and building permits, which are down 28% and 13% respectively year-on-year in 2022. As a consequence, we have started to adjust production capacity by reducing weekend work and overtime. Actions towards shift reductions and temporary factory shutdowns are in place. Beyond that, the sales team is constantly adjusting our prices to pass on continued high inflation. Turning now to an update on our strategic outlook on page eight. 2023 will be challenging for our industry, no doubt. All markets in which we operate hold attractive long-term growth opportunities for us, supported by trends of the demographic profile, urbanization, and the political drive to secure affordable and sustainable housing. We remain strongly positioned to take advantage of these longer-term trends.
Following the successful consolidation of the German and also the Polish white-stone market, which has formed a solid platform for long-term growth and value creation, we will focus our efforts on optimizing and strengthening our production network. This will be done through standardization and move from independent plants to a network of plants. As a consequence, we will build a stronger market position and prepare ourselves for future organic growth. The addition of capacity through debottlenecking and also expansion of existing production facilities will also be within our strategic scope. Our latest investment project in Borough Green is a really good example for this. Finally, growth through acquisitions will still remain on our agenda, and we maintain a pipeline of potential acquisition targets.
This includes new geographies and potentially the expansion of our product offering around Partners in Wall Building. This concludes my remarks. I will now turn the call over to Peter for an update on our financial performance.
Good morning. I will now take you through the financials, starting with the revenue for Q4 of 2022 on page nine. Total revenue for the quarter increased by 11% to DKK 810 million, with an organic growth of 9%. In the Central Western Europe region, revenue amounted to DKK 369 million, compared to DKK 350 million in Q4 last year. Organic growth for the region was -2% as a result of lower sales volumes, partly offset by higher sales prices in both product segments. In the U.K., revenue was DKK 235 million, compared to DKK 192 million last year. Organic growth was 25%, driven by higher sales prices.
For Poland, revenue amounted to DKK 206 million for the quarter, compared to DKK 189 million last year. Organic growth in Poland was 12%, driven by higher sales prices in both product segments, partly offset by lower volumes as market was softening. Please turn to page 10 for a few comments on our earning margins for Q4. As previously mentioned, H+H faces an increase in inflationary pressure, which is adversely impacting earning margins. This effect in the quarter was primarily driven by three factors. Firstly, we've seen continued increases in prices on certain raw materials, mainly cement and lime. Second, we had a drop in sales volumes in Poland, leading to capacity adjustments at higher incremental production costs.
Finally, in the quarter, the Wittenborn factory in Germany was still in ramp-up, resulting in higher production costs combined with lower stock of products negatively impacting sales for the quarter. Together, these effects are impacting our margins negatively. Gross profit for the fourth quarter amounted to DKK 202 million, representing a decrease of 6% relative to last year. This corresponds to a gross margin of 25%, compared to 30% last year. The relatively lower gross margin year-on-year is mainly due to the higher production costs and, as mentioned, the slowdown in Poland. EBITDA before special items was DKK 111 million, compared to DKK 139 million last year, representing an EBITDA margin of 14%. Finally, EBIT before special items amounted to DKK 58 million, compared to DKK 94 million last year.
This corresponds to an EBIT margin of 7% versus 13% last year. Please turn to page 11 for a review of our full year earnings. Total revenue for the year increased by 19% to DKK 3.6 billion, with organic growth of 14%. The organic growth was mainly a result of the continued implementation of sales price increases to counter the strong inflationary pressure, offset by lower sales volume as a result of lower production output, primarily due to the plant upgrade of the Wittenborn factory and lower volumes in Poland. Revenue in Central Western Europe amounted to DKK 1.6 billion, compared to DKK 1.4 billion last year. Organic growth was 2%, driven by price increases in both product categories, offset by lower volumes, mainly driven by AAC in the second half of the year.
Revenue in the U.K. amounted to DKK 1 billion, compared to DKK 816 million last year, organic growth was negative, or positive by 18% due to higher sales prices offset by slightly lower volumes. Revenue in Poland was DKK 941 million, compared to DKK 737 million last year, driven by higher sales prices in both product categories, offset by lower volumes in the second half of the year. The graphs to the left show the quarterly sales illustrating the strong first half of the year and a softening in the second half compared to 2021. Please turn to page 12 for a review of our full year earnings. Gross profits for the full year 2022 increased by 13% to DKK 1 billion, compared to DKK 900 million last year.
This corresponds to a gross margin of 28%, compared to 30% last year. The gross margin was adversely impacted by increasing prices of raw materials and higher production costs, and a softening in the second half of the year. EBITDA before special items increased by 11% to DKK 657 million, compared to DKK 591 million last year, representing an EBITDA margin of 18%. The lower EBITDA margin before special items is a result of the increase in production costs while SG&A was stable. Finally, EBIT before special items increased by 12% to DKK 455 million, compared to DKK 408 million in 2021, representing the highest ever EBIT for H+H. This corresponds to an EBIT margin of 13% versus 14% last year.
Turning to page 13, you will see a bridge from EBITDA to free cash flow in 2022. After special items of DKK 42 million, which mainly relates to additional transport costs related to the factory upgrades in Germany and costs related to management changes, we reported EBITDA before special items of DKK 657 million, compared to DKK 591 million for 2021. Cash flow from operating activities amounted to DKK 316 million, mainly driven by higher EBITDA, which was offset by negative development in working capital due to an increase in stock of DKK 200 million, driven mainly in the last quarter. The CapEx for the year was net DKK 255 million, driven mainly by investments in Thin-Joint conversion in the U.K., upgrade of our Wittenborn factory in Germany, and the CSU factory in Radom, Poland.
This leads to a free cash flow of DKK 61 million for the year. On page 14, you will see the development in our net debt for the year. At the end of 2022, net debt totaled DKK 492 million, of which DKK 108 million relates to these liabilities. This compares to a total net debt of DKK 350 million at the end of 2021. The increase since beginning of the year is mainly a result of the with the recently concluded share buyback program, partly offset by free cash flow. The financial gearing ended at 0.7x EBITDA, below our target of 1x-2x EBITDA before special items. I'm also pleased to announce the signing of the new sustainability-linked finance agreement, providing us with extended financing on improved terms.
Please turn to page 15 for a brief comment on the conclusion of our share buyback program. The decision of the board of directors to initiate the share buyback program was supported by the continued strong earnings and free cash flow generation, which has resulted in a financial gearing comfortably below our long-term target. As of 3rd of January, 2023, a total of 1.1 million shares corresponding to 6.4% of the total share capital in H+H had been bought back under the program for a total purchase price of DKK 150 million. It is expected that any shares bought back under the program which are not used to meet obligations relating to the company share-based incentive programs will be proposed canceled at the annual general meeting in 2023.
For the time being, H+H expects to use the free cash flow to develop the existing business and pursue value-adding investments within the debt gearing indicated. Next, please turn to page 16 for a walkthrough of our financial expectations for the full year 2023. We expect organic growth for the year to be around 0%, and EBIT before special items is expected to be in the range of DKK 330 million-400 million. The financial outlook for 2023 is based on the assumption that sales volumes will decrease by 10%-15% in aggregate, mainly driven by Poland. The assumptions are based on a very slow start to the year, with expectation that volumes will pick up gradually over the year, combined with the slowdown seen in the second half of 2022.
Further cost increases in 2023 are expected and is expected to be passed on through sales price increases. Exchange rates primarily in the British pound, the euro, and the Polish Zloty will remain at end-February levels. This concludes my prepared remarks, I will now turn the call back to Jörg for closing statements.
Yeah. Thank you, Peter. Before we opening up for questions, let me conclude with a few final remarks. Number one, 2022 turned out to be the strongest ever financial year for H+H, and for me, clearly showing the performance of our business model. After 14 years of growing markets, 2023 will be a challenging year with lower demand and at the same time, high inflation and the need for further price adjustments. However, we see upsides in Germany and the United Kingdom to perform better than market. We are prepared to navigate through this new environment. Sales price increases are continuously being implemented, capacity adjustments are being executed where needed, and plans for cost-saving programs have been established. The start into 2023 was weak, with very low building activity in the new-build sector.
However, it is very early in the year, and we expect building activities to pick up. We will monitor this development very closely and adjust our execution plans wherever needed. This concludes my remarks, and we are now ready to take your questions.
Thank you. To ask a question, please press five star on your telephone keypad. To withdraw your question, please press five star again. We will have a brief pause while questions are being registered.
The first question will be from the line of Kristian Johansen from SEB. Please go ahead. Your line now will be unmuted.
Yes, thank you. Several questions from me. I'll just do them one by one. To start with, you state you're expecting activity to pick up gradually during 2023. Can you just elaborate a bit? What do you base this on?
Yes. Good morning. When we talk about a weak start into the year, it's certainly the January, February. This has to do with volume hangover from last year and really a weak start of building activities starting. We expect the building season to really start Literally now, and we're gonna see a stronger performance actually really starting now and then. If you look into our business, usually the second and third quarter, this is really the strongest quarter, and that is literally how this is built.
Certain pictures you referred to, is that more the seasonality or are you talking year-on-year development?
That is the general seasonality. I think a lot is also waiting for spring season to really see what will drive the market. I think overall, there's no question that we're looking into market declines across our footprint. All markets are indicating negative volume growth. However, in our markets in particular in U.K. and in CWE, we feel that we have some mitigating factors that will basically we will outperform that market decline. In the U.K. specifically, we have been specifically been exiting certain product types, which we believe that we can regain in the marketplace and thereby allowing us to increase market share.
Similarly in CWE, because of the factory upgrades we've been doing, we suffered a negative organic growth and volume growth during 2022, which also means that year-on-year, we do not expect the same drop. Therefore, we believe that we will be able to mitigate the market volume declines.
Understood. That was definitely more clear. Thank you. Then the next question. In terms of Poland, you say the 10% to 15% volume drop on a group level is primarily driven by Poland. I guess we're looking at at least 20% volume decline year-on-year in Poland. Yet, as I read your comments on the Polish market, you say you expect pricing to continue up. I mean, to me it sounds a bit optimistic that in Poland, which we know is quite sensitive on pricing when volume changes, that you expect to increase prices in such a substantial drop.
I mean, it's two2 elements of your question. Number one, is Poland the market that is suffering with it the most from this? Yes, it is. You are seeing this, I mean, we are talking about the construction starts of - 28% and then the permits of - 13%. It is certainly a market that will go down the most. That is what we expect. Is price increase difficult in such environment? Yes, it is. The key thing here is that we see inflation of our input cost, and we are very clear on passing that on to the marketplace. That has been the strategy last year, and we executed that successfully, but this is also the guidance for this year. Will it be more challenging?
Yes, it will.
Okay. So you go to the Polish market and continue to push up prices?
Yes.
Understood.
In line with inflation of input costs. That is very important.
Sure.
We are not saying we increase margins over volume losses. That's not what we are saying. What we are saying is that we pass on the inflation we get from input costs to the marketplace.
Sure. Understood. Just two other questions. First of all, in terms of investments, what CapEx level are you planning for in 2023?
Obviously in a time where you see declining markets, you're also a little bit more prudent on the investments. In the light of what is happening, we foresee CapEx slightly below 2022, with a potential of even further lowering CapEx if needed. Essentially saying that we have a resilience plan in place if needed, but the underlying assumption at this time is slightly below last year.
Understood. Just my last question. If I look at your inventory levels during 2022, it has increased fairly significantly. Can you just elaborate a bit on the background for this development?
You're absolutely right. overall, during the year, there's a negative cash flow on inventory of around DKK 200 million. it is the biggest majority, or the majority of that is in the last quarter. it's driven by both volumes, so more stock, more product on stock, but also higher value. obviously, as you go through an inflationary environment, we have during the course of last year seen higher production cost, and that feeds into the inventory.
Sure. Understood. great. I will stop here and jump back in line. Thank you.
Thank you, Kristian . The next question will be from the line of Sebastian Grave from Nordea . Please go ahead. Your line will be unmuted.
Hi, Jörg, Peter, and Niclas. Thank you for taking my question and also congratulations on the sale results. I also have a few questions, and I guess I'll just take them one by one. A follow-up on your guidance. I mean, fairly upbeat 2023 guidance, which basically, as I read it, boils down to you expecting to sort of retaining pricing power and being able to offset waning volumes. To what extent is this outlook backed by existing backlogs among your customers? That will be my first.
I think if you look across the building sectors, then, both in the U.K. and in Germany, you actually still have a reasonable backlog. It's more construction staff that has been delayed as people are waiting to really commit to that backlog. Similar in Poland, we've seen drops in construction starts, but the permits levels are still above the completion levels in Poland. You can say that there is still an inherent order backlog waiting to be executed, basically across all three core markets. The reason that we're seeing very slow starts in the year is simply because the uncertainty on the inflation and general housing market, combined with interest rates, have slowed down the construction starts. The backlog in general within the construction sector and the residential new build is essentially still there.
Okay. Understood. Thank you. Maybe a bit of follow-up. On previous slowdowns, we I mean, we have seen discipline fade quite a lot. I mean, now we're seeing a quite significant slowdown across all your markets. Why is it that this time is different in terms of pricing discipline in the markets? I guess on your, on your sort of 10%- 15% volume decline, what are your assumptions in terms of market shares development across your end markets? Peter, you alluded to U.K., where you expect to sort of gain market share, but what about in Poland and Germany?
The former, it sounds like that you are set to at least lose some market share if you keep pushing up prices.
Sebastian, maybe this is a very general comment here, right? But this, you know, this volume price game, right? Especially you can discuss that in a normal inflation environment, right? But where we are in the markets we operate in, this is completely different, right? Because that inflation we are seeing, needs to be passed through to make sure the whole value chain is really working. That is why the price increases we are seeing here is more a need to pass on that inflation we're getting from our input cost, right? That it is really different market dynamics if you really compare market conditions like from former downturns, right? That is important. It's not about...
That is, as I said, that is not about, we are making better margins in a downturn, scenario, but it's really to pass on the cost effects we are getting from our suppliers through to the market. That is literally the principle. Peter, you wanna elaborate on that?
I think just to add, compared to previous downturns, all our markets are much more consolidated than they were, some 14 years ago. That also means that, nonetheless there should be a better pricing discipline across the players. That is also why we believe that, fundamentally speaking, we will have to pass on the cost increases. That doesn't mean that we in this forecast also not, include certain procurement initiatives to drive down or to mitigate these cost increases. Fundamentally speaking, cost increases will need to be passed on.
On your expectation of 10%- 15% volume decline, what are all your assumptions in term of market shares across markets? You mentioned U.K., but how about Germany and Poland?
In general, in Poland, we would like to defend our market position, but we also know that that is probably where pricing can be most difficult, given the competition. We have before been willing to lose a little bit of market share but maintain our pricing discipline, and that has really paid back previously. That is still the expectation. In terms of CWE, as mentioned, we expect to beat the market, which indicates that we expect to gain market share. Of course, it comes on the back of a 2022 where we undersupplied to our customers.
Okay. Thank you. Just my last question, and sorry it's a lot around pricing, but how much will you have to raise your prices from the current level, i.e. as of Q4, to offset sort of a 15% sales volume decline in 2023? maybe ask differently. Say you keep your ASP fixed at the current level, what is the sort of implied spillover effect into 2023, all else being equal?
You are absolutely right that, of course, during 2022, we also increased pricing, which we also went through before. There is quite a good spillover effect. We are still implementing price increases both in the beginning of the year and also expect to gradually increase pricing further in certain markets. It is a combination of spillover effects and new pricing being introduced.
Okay. Got it. Thank You so much, guys. Once again, congratulations.
Thank you.
Thanks.
Thank you, Sebastian. The next question will be from the line of Peter Sehested from ABG. Please go ahead. Your line will all be unmuted.
Thank you for taking my question. Many of them have actually been asked, so I will just go into a bit of modeling details. I wonder, given that price is such an important component in your guidance, I wonder if you could give us a little bit more about what you have realized across the markets, into, in Q4. Furthermore, what is the annual price impact for 2022? That is my first question. Thank you.
During the course of last year, 2022, we did implement price increases gradually over the year. The biggest chunk of price increases were as traditionally in the beginning of the year, with a phasing in over Q1, beginning Q2, and then another round in the beginning of Q3, with a phasing in effect of that. There were not significant new price increases implemented in Q4. Therefore the assumption here is that the price increases announced to the market in the beginning of Q1 2023, is then also being phased in as normal during the course of Q2.
Okay. Just a follow-up.
Q1, sorry.
Okay. Just a follow-up on price. Are you giving rebates to certain-
Yes, we do.
Okay. Thank you.
This is part of the business, it's part of the business model.
Yeah. Great stuff. In your quarterly reports, you have provided us with the volume developments, realized volume development. I wonder if you could provide us with the volume, total volume, development in 2022.
Please let us follow up on that and get back to the analyst teams.
My final question for now would probably be around the markets and sort of the different dynamics, because you're referring to completions and starts and permits, and it appears given that they are all down across markets, but Poland is particularly tough. And we're also seeing some of the U.K. developers reporting a very or a significant drop in reservation rates and also lower completions during the fiscal 2023's first half of the year. Could you just give a bit of flavor how the differences are between the markets in terms of your realized volumes versus what we are observing in terms of permits and completions and starts, et cetera?
Yeah, sure. Starting in the U.K., for sure this house builder reporting, we are following this is really a good indicator, right? What we've seen is that reservation rates are down, all the same of all the house builders is that is also for them early start in the year, they are watching that spring season very closely. Same do we. Then going over to Germany, you know, these building permits, this is a good indication for us. Certainly not one on one our volume assumption as we see these different upsides from the plant loaders in last year. Certainly the permit is giving a good indication.
Certainly we're also in Germany, there are some house builders we're delivering. They're not as big as those in U.K., but also they have a good insight for us. Poland, coming to that, and we talked about that, it is the market that is most volatile. It was also the market where we were seeing volumes decreasing already end of 2022. The reaction in Poland is has been very fast actually, and it's the market that is expected to go down, the most. It's also where we have started to adjust capacity already end of 2022.
I think also it's clear that with these market conditions, of course, as you have mentioned, we already have made certain adjustments. In our, currently we're also executing further restructurings, of, and adjustments of our production capacity, specifically in the Polish markets, but also have a plan for CW in particular and potentially U.K. Clearly, as part of these market developments, we are also restructuring our production capacity according to that.
Okay. Because in the previous comments with regard to the sort of volume resilience in some markets, you sort of highlighted the strong backlogs, and I also believe that you mentioned that the backlog in principle was also strong in Poland. I'm just trying to sort of, you know, get a sense for what are the underlying dynamics and what makes you referring to strong backlogs when talking about volume resilience, but then you have this fall off in Poland, despite the fact that it also appears to be a strong backlog there.
I think the question came from whether we saw backlogs and what we saw across our markets. Poland is not the ones that have the most backlog generation as such. Much of the sales is done through merchants, so the visibility in the market is lower. If you look at a more higher level, then in general, the permits have been exceeding the completion levels for quite a number of years, which means that nonetheless, there is an inherent construction backlog within the Polish building sector. There's not the same visibility and transparency to see specifically backlogs for individual customers, nor merchants.
Okay. I just have a follow-up question on the cash flow. I would like in terms of the working capital, do you expect as weak as working capital in 2023, or do you expect to wind down some of those?
I think, to be honest, that is still a little uncertain. Naturally there's multiple factors going into that. One is will we continue to see increasing input costs, then of course there will be a value impact of that. If that should settle down a bit then there will be more, you know, then it will not be the same contributing factor. When you look at the volumes, it will really be a mix between sales volume developments and our capacity adjustments. Of course, as usual, we stay fairly agile in our operating model and business model, which also means that we have made capacity adjustments, and we are certainly ready to make more, but it really also depends on how the market specifically develops.
At this point, it's a little bit difficult to predict exactly how that stock development will be during the year.
Okay. Thank you very much.
Thank you, Peter. The next question will be a follow-up from Kristian from SEB. Please go ahead. Your line will be unmuted.
Yes, thank you. Just two follow-ups here. Special item costs, do you expect any of that in 2023?
As mentioned, we are planning to do further capacity adjustments and therefore, there will be some restructuring planned in that. We do expect some special items. Exactly the size of that will again depend on how the markets develop and how sort of severe we will be adjusting our capacity. I would say for an initial estimation of that, and maybe on the prudent side, I would assume same level roughly as 2022 with these market developments that we are forecasting here.
Understood. The second follow-up here is on your other operating income, which is fairly high in Q4. I can see that you are reversing a lot of the provision related to settle of the land in previous years of DKK 10 million. First of all, can you confirm that that reversal is in Q4? Maybe secondly, elaborate on the background of this reversal.
it's really very well spotted. we do have an income of DKK 10 million in 2022 numbers. It does relate to a sale of land that we did some years ago. I can't quite recall. It is before my time, so I would assume it's in 2018 or maybe even sooner than where we sold a land plot in Poland and had a receivable as a result of that. During the previous years, we have taken a provision against that, but we now have the court deciding on this receivable, and therefore we have dissolved the provision.
All right. That's booked in the fourth quarter?
It's booked in the fourth quarter, yes.
Excellent. Thank you. That's all for me.
Thank you, Kristian . The next question is a follow-up from Peter from ABG. Please go ahead. Your line will be unmuted.
Yes, thank you. My follow-up, again, is on pricing and, how do you think about input prices? You basically, rhetoric is that they're going up, but with natural gas prices, you know, dropping significantly, electricity prices as well, and we also hear from some of those manufacturers who are highly dependent on these two input costs that they expect their prices to come down as they are faced with tough questions from their customers as to why prices should maintain high, given that the input costs are off the cliff, since 2022. What is your perspective on that?
Overall, as you know, the key components of our input cost is related to minerals, so cement and lime. As such, there is still a strong demand for such type products, also driven by infrastructure projects, et cetera. You're absolutely right that the energy costs are coming down, but we are yet to see that impacting our raw material pricing. On the contrary, we are still being led by the continued price increases on these, and that is what we included in the forecast. Specifically around energy, we typically have a tradition for hedging forward on our energy, really in order to also have a good gauge on our price increases in the markets.
We follow the same principle in 2022, which means that we are fairly hedged, particularly on gas, during 2023, which gives us a stable outlook on the cost side, but it also means that our average energy costs is likely to be higher than the 2022 average. Having said that, these increases then clearly, as we are quite direct in our rhetoric around passing on input costs, it also means that we, of course, are taking initiatives to address these input costs on our key suppliers via procurement initiatives, which have been ongoing, but of course, get even more important in a scenario like this with lowering sales demands.
In general, we are launching procurement initiatives, and the success of those will of course also have an impact on our pass-through to the markets.
In essence what Peter is really describing here, and that is the guiding principle of our company, is that pass-through exercise, right? This has the two angles. The one is the price increase as a consequence of the input cost. Then for sure, if market conditions change now and I mean, the energy is literally driving it, right? That is for sure then also working on the cost side, with the same target to manage that pass-through from both angles actually. That is exactly the exercise we are doing here in our company.
Okay. Given that the, you know, hedging could be potentially crucial if, let's say, if the competition changes, et cetera, et cetera, could you just remind us about your hedging policy. Are you fully hedged or is that on a three or six months, rolling basis? How does that work at the moment?
On our gas, we are pretty much hedged throughout 2023, whereas on coal, we are not hedged, and is mainly used in the spot market.
All right. Yeah, that's it. Thank you very much.
Thank you, Peter. As there are no more questions.
That's right.
I'll hand it back to the speakers for any closing remarks.
Shall we say the same?
Thank you.
Hey, guys. Thanks for taking your time this morning to dial in to this call, and we are looking forward to see you in one or the other event within the next days and to further go into that discussion. Thank you. Have a great day. Bye-bye.