Hi everyone, and welcome to the H+H Q3 interim financial report for 2023. Today's call is being recorded. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there'll be a question and answer session. To ask a question, please press five star on your telephone keypad. I would then like to hand it over to your speakers. Please begin.
Good morning, and welcome to H+H conference call covering the first 9 months of 2023. My name is Niclas Bo Kristensen, responsible for investor relations and treasury. With me on this call is CEO Jörg Brinkmann and CFO Peter Klovgaard-Jørgensen . This morning, we published the interim financial report and related documents, including the presentation for this call on our investor relations website. During this call, our management team will present the financial report followed by a Q&A session. Please be aware that this call is being recorded and will be made available on our investor relations websites after its conclusion. Before handing the call over to Jörg and Peter, I would like to direct your attention to the disclaimer on page 2. During this call, the executive board might share forward-looking statements regarding various aspects of our business and company that go beyond historical facts.
These statements are built on current expectation and assumptions, hence they are exposed, exposed to certain risks and uncertainties. For more details about the risk factors, please see the annual report for 2022. And with that, I'll now turn the call over to Jörg.
Yeah, good morning to everyone participating in this call, and I will first provide a brief overview of the quarter's financial highlights. So please turn to page 4. Overall, our third quarter financial outcome is in line with our expectations. Sales volumes dropped by 27% compared to last year, as a consequence of homeowners having challenges to finance their new build projects. The higher interest rates and the absence of effective government support programs make it difficult, especially for first-time buyers, to realize their projects, impacting building activity. Despite this volume decline, we were able to deliver a positive free cash flow of DKK 54 million. This was driven by optimizing working capital. However, our financial leverage goes up as our rolling EBITDA performance is getting weaker. Accordingly, we are carefully managing our cash position, looking into stock decrease, restrictive CapEx spend, and potential sale of non-core assets.
Operationally, we are driving a group-wide business improvement program, and I'm happy to see first results in our financials. However, our performance is also impacted by higher energy costs resulting from gas hedges, which the company entered in summer 2022. These contracts are currently unfavorable to market prices, which increases production costs and impacts our earnings. As a consequence, we have shifted away from such long-term contracts, focusing more on short-term contracts aligned with commercial considerations. The reported EBITDA margin was 8% compared to 17% for the quarter. Adjusted for the unfavorable gas hedges, EBITDA before special items would be DKK 85 million, corresponding to a margin of 12%, which is demonstrating the effectiveness of our improvement measures. EBIT before special items amounted to DKK 13 million in Q3 2023, corresponding to an EBIT margin before special items of 2%.
Now I will provide an update on the market environment on page 5. As previously mentioned, very low building activity has resulted in decreased volumes across our markets. Our sales volumes for Q3 2023 have declined by 27% compared to the same period last year. Similarly, for the initial 9 months of 2023, the volumes have shown a 37% reduction compared to the corresponding period in the previous year. The situation is serious and to some extent worse than 2008 financial crisis. Permits have returned to 2008 levels, but interest rate changes has happened with unprecedented speed, affecting the affordability of mortgages and presenting huge challenges for homebuyers. The basic need for housing, however, remains strong on all our markets, but what is needed is meaningful government support programs, which we have seen very little of.
The only exception is Poland, where the government has launched the 2% Safe Credit loan program for first-time buyers in July 2023. Since then, we are observing mortgage inquiries increasing, which is an early positive sign. However, we need to get evidence that this effect is translating into higher sales volumes for our company. Looking into the competitive landscape, it is obvious that a market decline of approximately 40% leads to higher competition. Even though we have successfully maintained relatively stable prices throughout our markets, we have been observing some price adjustments in Poland, which is our highest competitive market. Also in Germany, we are faced with tougher price competition, mainly when it comes to bigger project offers. A positive sign in this regard, however, is that list price increases for the upcoming year in Germany have recently been announced.
Next, on page six, I will provide an update on our efforts to effectively control our cost structure in light of the reduced demand. As a consequence of the market downturn, we are driving a group-wide business improvement program covering three important areas. Number 1, adjusting our capacity to ensure high plant network efficiency. Number 2, generating savings from procurement. And finally, number 3, adjusting our spend in SG&A costs. Let me talk about factory network efficiency. As a manufacturing company, the efficiency of our plant network continues to be a key focus area for us. We have, during the year, taken measures to consolidate plants and redirect production to larger plants, resulting in cost savings through economies of scale. Earlier in the year, we have announced the closing of 5 of our previous 32 plants.
The reason for a permanent closure was that these closures will not compromise our overall network capacity, as continuous improvement, including debottlenecking an existing plant, will allow for a more efficient supply in the future and better service for our customers. Meanwhile, all five plants are completely closed, and we are currently in the process to sell some of those properties as part of our cash management priorities. On top of reducing fixed costs in our plants, we are driving several procurement initiatives to improve our gross margins. We have therefore changed the procurement organization and announced a group procurement director, who, together with the region, drives our efforts in this field much more targeted. Increasing the coordination among our regional procurement allows us to harmonize, spend further, and drive savings. Finally, let's talk about SG&A.
While we are adjusting our SG&A spend in all regions to current market conditions, the biggest potential for SG&A savings is this in our CWE region. Historically, CWE has operated on higher SG&A percentage rates compared to UK and Poland. Reason for this is, that in the recent years, a number of acquisitions have been made in CWE, which haven't been fully integrated yet. That is why our focus is to centralize all functions into our new regional office in Düsseldorf and optimize and align processes across CWE through a newly implemented ERP system. Overall, I'm very pleased to see how focused the teams are executing our improvement program and how the first results are coming through. However, as we do not expect a short-term recovery of our markets, we have decided to even take further capacity out of our network.
Let me be a little bit more specific on page seven. As you can see from the map, we've identified another three AAC plants and one CSU plant, which we will temporarily close. In the UK, we will temporarily close one of our factories in Pollington and transfer the volume to our other factory on the same site. Also, our factory in Bowerhill will take over some of the volume, especially after completion of the upgrade project next year, which will add 20% more capacity to the network. With that approach, we will keep a very high efficiency in our network and at the same time, reduce our comparably high stock levels.
In Poland, one of three CSU factories in the south of the country will pause production by the end of the year, and supply will shift to other two nearby plants, which will then get sufficient capacity to run in an efficient mode. Finally, in Germany, one plant in northern Germany has been temporarily closed, with regional supply now will be handled by the two other plants in the area. Additionally, our factory in southern Germany has been temporarily closed for production. However, as southern Germany is an important strategic market to us, we will use the plant as a logistic hub for the region. Also, we will use the pause to continue optimizing the plant to run more efficient when the markets are recovering. These steps allows us to optimize the efficiency of the running plants.
The move will also allow us to reduce our stock levels in line with our cash management priorities and maintain a flexible approach to restarting production when market conditions improve. This concludes my remarks, and I will now turn the call over to Peter for an update on our financials.
Thank you, Jörg. I will take you through the financials for Q3 2023, starting with the revenue on page 8. Total revenue decreased by 24% to DKK 699 million for the quarter, compared to DKK 920 million last year. Organic growth was negative DKK 24 million in the quarter, compared to positive 13% last year. Organic growth across the group was driven by 27% lower volumes, offset by 3% price increases compared to Q3 last year. Prices have been relatively stable during the quarter, but on a slightly downward trend.... Revenue in the CWE region decreased by 26% to DKK 299 million, compared to DKK 406 million last year, mainly driven by lower sales volumes in both AAC and CSU, and overall stable pricing.
In the quarter, we achieved -27% organic growth and a -17% organic growth for the first nine months compared to last year in the CWE region. Revenue in the UK decreased by 24% to DKK 226 million, compared to DKK 296 million last year. This decline was driven by negative organic growth of 22%, due to decreased demand, offset by higher sales prices. Organic growth for the first nine months was -24%. Revenue in Poland decreased by 20% to DKK 174 million, compared to DKK 218 million in Q3 2022. Organic growth was -21%, driven by decreasing demand. Of the total revenue in the quarter, AAC and CSU constituted 74% and 26% respectively, in line with previous quarters. Moving now to a review of our quarterly earnings on page 9.
The earnings for the quarter are influenced by the significant decline in sales volumes across our operations, and our ongoing capacity adjustments have resulted in an increased incremental production cost. However, as also mentioned by Jörg, unfavorable gas contracts have led to increased energy costs. These contracts are currently unfavorable to market prices and have impacted our production cost in the quarter by DKK 32 million. Together, these factors are negatively impacting our margins. Gross profit amounted to DKK 138 million, compared to DKK 254 million last year, corresponding to gross margins of 20% and 28% respectively. The decrease in gross profit is driven by overhead costs spread over lower volumes and increased production costs, including energy expenses. EBITDA before special items amounted to DKK 53 million, compared to DKK 160 million last year, corresponding to EBITDA margins of 8% and 12% respectively.
Adjusted for the gas contract, EBITDA before special items in Q3 would be DKK 85 million, corresponding to a margin of 12% in line with the first two quarters of 2023. EBIT before special items amounted to DKK 13 million in the quarter, down from DKK 38 million last year, corresponding to an EBIT margin before special items of 2%. Again, adjusted for the gas contracts, EBIT before special items would be DKK 45 million, corresponding to a margin of 6%, actually being an improvement over the previous quarters. Next, please turn to page 10 for an update on special items and the gas impact. The business improvement program Jörg covered includes restructuring of production capacity and SG&A expenses, primarily in the CWE region, driven by further centralization of administrative functions and optimization of processes.
In the quarter, DKK 16 million of restructuring costs related to the cost savings programs have been recognized as special items, resulting in a total of DKK 71 million for the first nine months. Total restructuring cost for the year is expected around DKK 120 million. As previously mentioned, gas contracts entered into summer 2022 negatively impacts our earnings. There are two elements to that equation. Firstly, in addition, lower volumes have led to unused gas in the market for the quarter, resulted in financial losses classified as special items amounting to net DKK 14 million, as the fixed gas prices of the gas being sold off exceeds current market price. Total loss of unused gas year to date was DKK 36 million. Secondly, gas used in production impacts our energy cost and the cost of goods sold. In the quarter, DKK 32 million were recognized in expenses related to these contracts.
Based on the current market prices and current production volumes, we expect the impact to be around DKK 20 million for the fourth quarter of 2023. We have shifted away from such long-term contracts, focusing more on short-term contracts aligned with commercial considerations. Next, please turn to page 11 for an update on our cash flow and debt position. On 30th of September 2023, net interest-bearing debt totaled DKK 844 million, corresponding to a decrease of DKK 31 million in the quarter. The decrease was driven by positive operating cash flow from reduction in inventories, receivables, and payables. We are pleased to see this development. The company's financial gearing was 2.6 times net interest-bearing debt to EBITDA. Due to the lower EBITDA, we anticipate that the net debt to EBITDA ratio will exceed our long-term target in the near term.
The company's net interest bearing debt, excluding leasing, totaled around DKK 0.8 billion on thirtieth September, corresponding to an unused committed bank facility of around DKK 200 million. We are carefully managing our cash position with a particular focus around inventories, which we aim to reduce from around three months of sales to two months of sales. CapEx, where we already have reduced from more than DKK 200 million a year to around 150, and will continue to keep a reduced level. Finally, review idle land plots after plant closures. Next, please turn to page 12 for an update on our financial guidance. Based on the current market visibility, we narrow the previously communicated guidance ranges.
For the full year 2023, we now expect organic growth to be around -25%, compared to the previous guidance of -20% to -25%. Further, EBIT before special items is now expected to be in the range of DKK 30-80 million, compared to the previous guidance of DKK 30-100 million. Consequently, we anticipate a sales volume decrease of approximately 35% across our markets. Further, we expect foreign exchange rates, primarily the British pound, the euro, and the Polish zloty, to remain at mid-November levels. This concludes my prepared remarks, and I will now turn the call back to Jörg for closing statements.
Thank you, Peter, and before we take your questions, let me conclude with some final remarks on page 13. The levels of new build activities across our markets are extremely low, and almost 40% volume decline forces us to adjust our way of operating quickly. As the market situation remains challenging, we are driving our business improvement program around plant network efficiency, procurement, and SG&A savings, with tangible results coming through. However, higher energy costs from unfavorable gas hedges dating back to summer 2022 are also negatively impacting our earnings. We are not seeing a fast recovery of our markets. That is why we have initiated the next efficiency step and decided to temporarily close another 4 plants. We believe this is the right move to ensure high efficiency of our plant network while keeping a flexible approach for when the markets will come back.
Finally, we are carefully managing our cash position, which, next to a positive cash flow from operation, includes tight CapEx management, meaningful reduction of our stock levels, and also the potential sale of land of our closed plants. And with that, we are now ready to take your questions.
We will now start the question and answer session. If you do wish to ask a question, please press five star on your telephone keypad. If you wish to withdraw it, you may do so by pressing five star again. There will be a brief pause while questions are being registered. The first question will be from the line of Sebastian Grau from Nordea. Please go ahead. Your line will now be unmuted.
Good morning, all, Jörg, Peter, and Niclas. Thank you for taking my question. So I have a few. I'll just take them one by one. So firstly, you pause to say four factories here and continue to adjust the capacity. Could you maybe talk a bit around what are your competitors doing at this point, and what are you seeing, sort of, in terms of the overall competition picture and then pricing environment? I noticed that your ASP is slightly down quarter-over-quarter. So any comments here would be helpful.
I think what we are seeing in all markets, I mean, you know, we are looking to 40% volume decline, right? And as a consequence, everyone is adjusting, I'd say, in different ways. The way we have chosen is actually that we are not adjusting across the whole network, just by shifts reduction, but we are really trying to optimize the whole network. So that is why when you look into it, actually, we believe that we've closed these 5 plants permanently, plus the 4 plants temporarily. So we're taking 9 plants of originally 32 out, but that also allows us to gain high efficiency in the existing plants. So when you look at the network, there is still plants that we are running 24/7, which is the most ideal way to run and operate a plant.
So that is at least what we have chosen, and others are following their own capacity adjustments. But certainly everyone has to reduce the output of plants to the one or the other extent.
How about the pricing environment? Any comments here, also in light of the slightly lower ASP on the quarter here?
I think that is what we are describing, right? So when you, when you really look around the markets, I mean, we, we are on average, we are having higher prices than in 2022, which is, which is a good outcome. Given, given that these markets are going down so much, keeping higher price levels than in 2022, I think that is, is good and encouraging. But what also what is happening actually in a market that is going that way down, for sure, in price, the, the competition on price is increasing, right? So that's what, what Peter is also referring to. So we see a slight downward trend, but then the recent announcement of list price increases in Germany, that is a positive sign to bring that back on track.
Overall, I'd say given the situation where the industry is in with that volume decline, I think the price development is still on a good track, actually.
Okay.
And maybe just, maybe just to add on the average selling price that you are alluding to, there is an element of cost of country mixes in there, which you need to-
... Okay, okay, that's fair. Next on, I have a question on the hedges here. So hedges impacting production cost by DKK 32 million in the quarter, corresponding to, at least in my estimate, 4% or 5% margin, roughly speaking. Now, just to be clear here, how to read this, is it that the impact was, so to say, zero in Q2, and now in Q3, it is DKK 32 million? Is that how to read it?
That is essentially correct.
Okay.
So these gas contracts came into effect in during Q2. But because we have stock on the ground, it means that they do not materialize and crystallize through the PNL until Q3.
Hmm. Why. So you say you got roughly DKK 20 million impact in Q4, and at least on my estimates, it, that cannot be solely due to volumes. I mean, that implies a roughly 3% margin impact. So could you maybe help just, yeah, enlighten me on this one here? What is the dynamic, and how do you get to the DKK 20 million in Q4?
The hedges are a number of underlying hedges for different prices, for different volumes over time, and therefore, you can't just spread it out on a linear basis. In general, the hedging policy at the time would be of a declining method, so you would hedge more in the beginning and less in the end. And therefore, you will see a decreasing impact overall, quarter by quarter.
Okay, okay. And how should we think of the impact going into 2024 and beyond? I see the note in the notes that these unfavorable hedges are running into 2026, as I recall it. So should we see an incremental less severe impact on margins in 2024, as we are seeing here in H2 2023, or what, how should we read this, yeah?
I think first of all, of course, this is compared to an underlying market price, and I think at this time it's extremely difficult to say what the market price will be going forward, and therefore, of course, it's also extremely difficult to put a firm number on that. And what we can say is that with the current market price that we have, I would assume a similar amount for 2024 in total, as we have recognized or expect to recognize in 2023.
Okay, so a total of DKK 50 million impact for 2024.
Under the strict assumption-
Yeah.
The strict assumption that market prices were at the level or will stay at the level as of 30th of September, which of course is in right now.
Yeah. Okay, that's fair. Okay, I will, I will jump back in the queue and see if anyone else has questions. Thank you.
Next question will be from the line of Peter Sehested from ABG. Please go ahead. Your line will be unmuted.
Yeah, thanks for taking my question. I have also a couple, and the first one is actually on the gas hedge. I sort of understand what you said here before, but I thought that the whole idea with, you know, selling off the unused gas was such that the impact on the cost of goods sold would sort of be neutralized, so to speak, because if the hedges were made in 2022, when you're operating with those costs right now, the year-on-year impact should sort of fade out, so to speak. So is it that you don't really can sell all those unused gas hedges, or how should we think of it? Because if you are still running at 2022 levels right now, then the impact in 2024 on a sort of basis should be neutral.
Maybe I start commenting on a general level, and then Peter can further elaborate, right? But what the company has done in summer 2022 is, as they were historically doing, is actually continuing their long-term hedging strategy. And at that time, in summer 2022, the company was hedging actually almost all of their production volume or energy for all of their production volume and at a higher price. So, I mean, what is happening now is that the production volume, and we were just talking about, mothballing one plant in UK, right? So, and that gas actually, that is hedged for, that is the unused part, right? And that is the one component.
And then the other part that we are still using for the two running plants, that is actually the price we are paying from these old contracts today is higher than what the market price actually would be today if we were buying on spot. And that is the two effects that you see hitting our earnings. Yeah, I don't know, maybe you can jump in here.
I think that's it. When we explained our guidance in August. Clearly, I mean, these gas impacts were known and was part of our guidance as well. So as such, there's no surprises in the impact on the EBIT for us, but it is as described before.
Okay, that's fair. I understand where you are going. So the commentary pertaining to going into a more, I mean, you had, we actually had the same discussion, you know, back in Q2. But when you're saying that you're going more spot, I think you said that back in Q2 as well. So when you guide for these DKK 50 million for 2024, is that including that you are going more spot, or are you basically saying that your spot policy will only enter into effect in 2026 when the unused gas hedges or, or the gas hedges are totally consumed?
No. So, so when we talk about the DKK 50 million potential impact for 2024, still, of course, highly uncertain, depending on the market pricing. We essentially are saying that is the impact of these unfavorable gas hedges. But as you're also correct to say, and what we also discussed around Q2, is that we have changed that hedging regime. So we come from an old regime where there was continuous strong demand, there was continuous price increases happening, and there was certainly a potential shortage of gas. And therefore, in that old regime, it made sense to do longer term hedging arrangements.
What clearly also, especially the second half of last year and what has also happened this year, has clearly shown that the time is not for having such a link between your energy hedges and your commercial strategy. So therefore, going forward, we are looking into a much shorter forward hedge profiles, if any. And it's really depending on the commercial strategies, market by market.
Okay, I just want to get this completely straight. I mean, you've covered sort of the volumes back in 2022. Those volumes are substantially higher than we are seeing right now. In fact, they could probably cover at least four years, next year's full production, so to speak, depending on how far, and so if you hedge until 2026. So I'm just trying to get to how, the spot impacts if you're buying spot, if any, how that actually impacts your, your current production cost? How you think about it?
What you should bear in mind is that we've never had a policy of hedging 100% for three years. But the policy was to, on the shorter term, do more or less 100% and then gradually reduce the hedging profile over the period. So as previously explained as well, we do have this unused gas part as part of our special items, and we expect to have that for another two quarters of roughly the same level, depending on market price. And then we are effectively out of the unused gas component. Of course, all depending on market development.
Perfect. That last comment made perfectly sense, so thank you very much. And then just have a couple of another housekeeping questions. In terms of restructuring costs, how much should we expect in Q4? And the last question I have is on the positive impact for pricing that you report in the mentioned in the report. Could you just give us a ballpark figure? Is it, you know, high or low single digits numbers for those respective regions that you mentioned in the report? Thank you. And I'll jump back in the queue.
So for restructuring, what we have incurred year to date is DKK 71 million, and what we guide towards is a total of DKK 120 million, including these mothballing and SG&A. So yeah, when we add that together, we're looking at incurring or accruing additional DKK 50 million in the fourth quarter. In terms of pricing, then, I would say it's more of the single digit than it is double-digit numbers.
Okay. And just to get everything completely straight, the DKK 50 million you just hinted to in structuring costs, that is the same line as the DKK 60 million--DKK 16 million that you report in the quarter. So that's the same line we're talking about, right?
That is correct.
Perfect. Thank you.
Next question will be from the line of Kristian Johansen from SEB. Please go ahead, your line will be unmuted.
Yes, thank you. So, question for me, just firstly, a clarification. Could you set the unused gas impact was going to continue for another two quarters, so?
... Should we expect, I mean, the DKK 14 million you report for Q3, sort of a similar level in Q4 and Q1? Is that what you're saying?
All depending on the underlying market price, but given the same circumstances, then approximately that level, which is in line with what we also said last quarter.
Okay. And by Q2 next year, there shouldn't be any, assuming current market pricing.
So assuming all depending on the production volumes, which of course is dependent on the market drivers. But if we previously said that what we more or less plan for is a similar volume level going into 2024 as what we've seen in 2023. And under that assumption, then yes, the unused element would go away.
Okay. That's, that's very clear. Then to the factory closure you announced here. I know that the factory in the northern part of Germany seems to be the Wittenborn factory, which you recently made significant investments into. So can you just elaborate a bit on your considerations for that exact factory to be closed?
Yeah, you are right. Actually, you know, in Wittenborn, on the same plot, there's two factories we are operating. So that is actually, that is also one of the reasons why we are taking one plant out. And then when you look at the capabilities of these two plants we are operating in that area, they are, they're actually producing different type of products. So the, the plant we are keep up running is the major plant supplying our business in Nordics. And there's different products this plant can do compared to the other plant, and that is also part of the decision making, why we are keeping that plant up and running and are closing the other one.
Okay, that makes sense. And along this line, again, on your restructuring measures, what should we assume this will drive in terms of savings? So SG&A costs before special items in 2024, all things equal, how much lower will that be as a consequence of your restructuring measures?
Good question. However, we're not really in a position where we go in and guide on 2024. I would say that the remaining DKK 50 million that we are incurring for the rest of the year is a mix between these mothballing activities and our SG&A. Across the board, all our restructuring activities are having less than one year payback. So of course, some of them were started earlier this year, and thereby, you know, is more or less fully paid back. Some will have a carryover effect into next year. But at the same time, when it comes to the production cost, in particular, a lot of this is, of course, to drive further efficiency.
So even though that there is a positive payback, be careful in just adding all the numbers together, because you really need to tie in increased effectiveness and not only adjusting the cost base.
So, what you're saying is that part of the restructuring will benefit your cost of goods sold, and part will benefit the SG&A line. But, obviously, what I'm looking for is not guidance on next year. It's really what the financial impact of these DKK 120 million in restructuring costs is. So, I mean, if you say one year payback, the effect should be roughly the same level. So, that all in all, as a cost of goods sold, and SG&A will save you DKK 120 million, but that you have already incurred part of this through 2023. So it's not the delta. Is that how I should understand what you're saying?
That is exactly correct.
And how much have you then incurred or expect to incur in 2023?
Of course, you have our quarterly reports, and you can see roughly how much we've incurred quarter by quarter. So there was a rather big bulk in Q2, which was happening in the beginning of the quarter when we shut down the five initial factories. Then we had a smaller portion here during Q3, and then another DKK 50 million in Q4, and then you can probably add out the numbers.
Yeah, but that's the cost. I'm talking about the savings.
And I agree, but with a payback of less than one year, then... more or less there.
Okay, understand. Not easy to put into a spreadsheet, but, I guess, I'll have to do.
Yeah, I think.
Then, just another clarification on the comments about list price increases in Germany. Just to be clear, who are raising list prices? Is it yourself who have raised list price, or is it also your competitors, or? Just a bit unsure exactly who you're referring to.
... It's across, it's across the market that we've published list prices being effective first of January. First February, sorry. And then, competitors are out different timing, but we see it across the markets.
Okay. Thanks, thanks for clearing. And then just my last question here, you repeat that you do not expect to breach any covenants in 2023. But obviously you also illustrate how your financial leverage now is going up, given the decline in the runway of EBITDA. So, I mean, can you make the same comment for 2024 without expecting any market improvement?
So of course, we already now work with different scenarios going into 2024, some more proven than others, as you would normally expect. And we are in a full dialogue with our bank around that. They are aware of these and up to speed, and we do not foresee covenant issues based on that.
So, so you don't expect any covenant breaches in 2024, as things are looking now?
Based on our various scenarios, that would be correct.
Okay, got you. Excellent. That was all for me. Thank you.
Next question will be from the line of Alexander Borreskov from Carnegie. Please go ahead. Your line is now unmuted.
Yes, thank you for taking my call. Just circling back on the mothballing of the four factories. Could you maybe put a few words on how much capacity does that take out of your network? Given that three of the factories are air-cured, which tend to be a bit larger than the CSU factory. Should we expect sort of 15%-20% temporary capacity reduction? And once you see the markets start to improve, how long will it take you to get these factories up and running again? What will you do with the factory employees? Will some of them be moved to other factories, or what's sort of the thoughts here on that?
Yeah. So, when you look at the measures we have taken throughout the year, so in total, we're talking 9 plants, right? And that 9 plants roughly corresponds to capacity of 20%-25% of our of our network capacity, right? And if you want a number on that, it's literally half-half, actually. So half comes from the first set, and then the second half now from the from the new set of the mothball of the plants. So that is what the capacity effect is. And then your your next question is, what does it take actually to get these plants up and running? Really depends a little bit on which plant and which location.
If you think about the one plant we are closing in England, there is, there's actually two plants on the same site, right? That means there is people on the ground actually knowing how to operate that plant. So that is a rather quick route actually to bring that back into the market. So there's maintenance people, plant management, all that. So we can really leverage the resources we have on ground. Same actually for the Northern Germany, Wittenborn factory, so we can bring them back to speed quite quickly actually. To give you a little bit of timing, I'd say it's requiring something between 3 and 6 months to bring them back in operation.
Thank you. That's very clear. Maybe one more question on net working capital. So you underline working on your cash position, and inventories improved a little bit here in Q3. But given that you're now mothballing factories and will sell off, I assume some of the inventory in those factories. Well, first of all, what level of underlying improvement do you expect to achieve in inventories and in net working capital? And how fast can you get that done, given current market conditions?
So just to start with the last part, if we really wanted to reduce inventories, we could do it extremely quickly, but it would come with a very high cost. So what we're trying to do is actually managing the inventories down. And of course, these mothballing initiatives that we're doing is also enforcing that. So we are currently having around three months of sales in our stock levels, more or less, and our aim is to get down to two months of current sales. And then you can say over time, maybe that's then around one to two months, depending on the sales volume. But with the current demand that we're seeing, our aim is to get to around two months.
In terms of numbers, that would be more or less around DKK 100 million-DKK 150 million in inventories reductions, but of course, over a period of time, given that we want to manage it down.
Right. Thank you. That was all for me.
Next question will be a follow-up from the line of Sebastian from Nordea. Please go ahead. You'll now be unmuted.
Hi, guys. So thank you for taking my question again here. So, usually Q4 is negative cash flow. Will it be the same this time around?
Of course, a lot of that, to be honest, is of course depending on the market situation. With the current items, you are right, that then we expect to follow the normal seasonality. There will be a slight pickup in the inventory towards the end.
Okay. And, getting back to your comment, Peter, on sort of your main scenario for 2024, which implies no covenant breach at this point. So what is the assumption, sort of the market development assumption, on that scenario? Just, does it imply a sort of a sequential improvement in market wall volumes or what is put into that comment?
Like any other company, we operate with various scenarios. Some would be more proven than others. That is also the way we operate.
Okay. Okay. And then just on your focus on preserving cash here. So you say you're trying to optimizing working capital, limiting CapEx, and then you had this comment of sale of non-core assets. So what is in that bucket, so to say, and what could be the potential impact from selling these non-core assets? Could you help me elaborate here?
Yeah, it's basically, it's basically land. You know, we are closing these five plants permanently, so we are looking into opportunities actually to sell them off. Really depends on the location, how close they are to bigger cities, some have value, some not. So we are investigating that, as part of cash management priorities.
We've really also done it in the past, to be honest. So over the last couple of years, we've been divesting certain land plots in Poland, for example. So it's the similar exercise.
But you're not giving a number on sort of the potential impact here?
Not at this point. There are still, of course, uncertainty related to it, so that would be too premature.
Okay. Okay, thank you. That was all for me.
Next question will be a follow-up, too, from the line of Peter from ABG. Please go ahead, your line now be unmuted.
Yes, thank you for taking my follow-ups. Just to take the first one, it's basically in line with the prior question to get sort of a preview into what you're expecting for 2024. And my angle on that question would be that your temporary capacity adjustments at least suggest that you expect a negative volume decline again in 2024. So that was number one. Number two, pertaining to cost of goods sold, even adjusted for the DKK 32 million that you so kindly provide here. The decline in COGS is still not as fast as the declining in volume. So what is underlying driving manufacturing costs there? Thank you.
So, Peter, we can tell you a deep dive into the Excel sheet there. I think overall, what we've said previously and what we also have reiterated this time, is that our normal, when we talk about our capacity adjustments, what we are aiming towards is similar sales volume levels as what we've seen in 2023. So I guess a way of putting that is probably that that is a base case, nonetheless, but there are huge uncertainties around 2024, and it's really too early to say anything specifically, and that's of course also why we are, we're not out with a guidance for next year. Similarly, the pricing components for next year is also highly uncertain. So it's really difficult to gauge at this point.
When we are ready with our guidance for 2024, we will of course issue that as normal.
As there are no more questions, I will hand it back to the speakers for any closing remarks.
Yeah, thank you for participating in this call this morning, the interest in our company. Looking forward to see one or the other during the next days, and have a nice weekend. Thank you. Bye-bye.