Ladies and gentlemen, welcome to the ROCKWOOL report of the first half year of 2022. Today, I'm pleased to present CEO Jens Birgersson, CFO Kim Junge Andersen, and IR Thomas Harder. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. As a reminder, this conference call is being recorded. I will now turn the presentation over to your host. Please begin.
This conference call regarding the results for the first half year of 2022. My name is Thomas Harder. I'm Director of Group Treasury and Investor Relations of ROCKWOOL A/S. Today, I'm pleased to present CEO Jens Birgersson and CFO Kim Junge Andersen. For the first part of this call, all participants will be in a listen-only mode. As a reminder, this conference call is being recorded. First, Jens Birgersson will go through our presentation and give you an update on the results for the first half year and second quarter of 2022. Afterwards, we'll be ready to answer all your good questions. Before I hand over to Jens Birgersson, I must ask you to notice slide number two, which is the forward-looking statement. Please be aware that this presentation contains uncertain-
Thank you, Thomas. Hello, everyone. It's Jens here. I assume you see slide three in front of you. Before we start with the numbers on the quarter and the half year, go through an update on our sustainability goals and the progress we do there. Starting at the top, generally, I would say we are progressing quite well. We are implementing the projects and moving forward with our technology development. Starting on the emission intensity, that's the CO2 emission per ton produced stone wool. We have obviously a Science-Based Target in absolute values, but we have this metric back from 2016 where we measured per ton produced.
We had a goal for 2022 of reducing this to 10%, and we reached a 16% reduction across the board in the group already last year. Satisfactory progress. The next goal in the top row, reclaim material, our goal was to reduce it by, or this is the Rockcycle offering. Countries where we offer to take back old product. There are many more countries who take back non-virgin material, but here's the matter of taking back and having a comprehensive solution, taking back our own product and put it back into production. We have the goal of exceeding 15 countries by the end of this year. We just launched Romania and Finland, and we are now, we have launched and we announced 17 countries already in 2021.
We are ahead of that goal also. Seeing on the right, this is the energy efficiency of our own offices measured in kWh per square meter. Here we wanted to drop 75% by 2030 and 35% by 2022. We have just completed the hangar in France. We are 19%. Before year-end, we need to reduce the run rate on 35%. I would say these projects go well. They progress well, but we lost a little bit of pace during Corona. My crew tell me that we're still gonna be meeting that goal. We might miss it a little bit or we might be a little bit ahead of it, but it's progressing well, and they're increasing the building renovations we do have the desired impact and more.
That's good. It looks like it's a bit of a gap so far. I'm not too worried about it because we've kind of developed a model for how to develop or renovate our offices. That's good. We have done it in a very involving approach. We've actually used our own management team to do quite a bit of the conceptual plan. Water consumption, saving fresh water. We get water very cheaply, I mean, for free almost everywhere. The UN said that with so many areas of the world running dry on drinking water, fresh water, we have an obligation to do that. We had a goal of 10% reduction by 2022, and we achieved 15% already in 2021.
We have our old goal is then 20% by 2030. We are progressing well on that and trying to do it in a way that it doesn't cost too much. Some of these projects are closed circuits in the factories, and they're actually quite expensive to make, but once you've done it, you basically have a closed loop system, so that's good. A lot of it is also housekeeping to make sure it's not leaked, and but we are generally careful with using water. Landfill waste goal in 2030, reducing by 85%, 40% by 2022. We hit 50%, 51% already last year, so that's just well. Safety, health, and wellbeing. This is Lost Time Injury Frequency ratio, so that's number of days per million man-hours.
We had quite a challenging year last year. When we started off after Corona, we started to ramp up, we have some ideas why that happened. It wasn't very bad. It's just that it didn't improve. This year has started well, and we see good improvements, and we hope to hang on to that. Should we say that from that safety LTI ratio of 3.2-3.5 that we have now, it's quite tough to get down, but we are working on it and it's progressive and as long as we don't have really serious incidents and fatalities, it feels a little bit better, but more work needed, but it is on a good level. I move to, please, show slide four, H1 first six months.
Top line just below EUR 2 billion or EUR 60 million below EUR 2 billion. Growth in local currency is 31%, and that's the majority of that is price, but it's also quite good volume growth in the first six months. It's double-digit volume growth, but the majority of the growth is price due to this cost inflation. The EBIT margin reached 12% for the six months, and I come back to that again when we get to the Q2 results. Free cash flow negative, mainly due to net working capital. With this growth, trade receivables go up, but also the inventory valuation go up. You see that in a couple of percentage points higher net working capital. It's also financial effect from the ruble loss impact there.
We also have the unrealized losses on the fact that we were supposed to have rubles for Russia in a loan structure and around March that wasn't possible to have anywhere. We had the corresponding amount at the time in euros because we couldn't hedge rubles anymore, and we couldn't have rubles anymore. That is also quite a substantial impact, although it's actually not a real cash impact, but it's recorded as such. Move to slide five. Q2 highlights. EUR 1 billion top line in the quarter. Very big quarter for us, obviously with the top line. 26% growth in local currencies and in Q2 we saw a change in the market, and it's a very, very modest volume growth and the vast majority of that 26% is price.
We are seeing this happen that we had quite a strong start of the year, and then we have seen the realities of the high energy prices, interest rates, the war in Ukraine, what's happening in the U.S., we start to see that impact volumes. Let me move on to EBIT margin. We did raise prices according to our plan. We had quite weak, weaker EBIT margin in Q1. Here in Q2, the price increases were bigger than the inflationary mainly the energy increases, which meant that we kind of managed to claw back some of the margins. Compared to Q1, we improved the margin to 1.9 percentage points, and we kind of have less dilution.
We compensated price more than inflationary pressures we have in Q2. We were pleased with that, but I will come back to the whole inflation or energy cost outlook and the pricing in a bit. If you then look at sales going down slide six. Slide six, Thomas. Again, about the majority is price. It's like two-thirds price, one-third volume in H1. Here you see in the insulation business, we saw strong business across the board, basically. You could see in the second quarter some markets that slowed down or stopped because of too much inventory or changes in the market. If you sum up the six months, it's just strong almost everywhere in the insulation business.
System solutions didn't have a good six months. Here you see a business like Rockpanel, very building related, having tremendously strong development. We also see how our vegetable business is doing good, but Grodan retail North America, very big comparable last year, and it's quite a big downturn on that business where there's not much going on at the moment, and that has a big impact. Lapinus Fibres, the piece into cars, it was growing. We're seeing some constraints on that business. That's down. Basically, you see that there are several of those businesses outside building that haven't done so great. Rockfon had flattish development in Europe and have had a negative development in the U.S. That's the picture. Not a great top line.
If you then go into Q2, so on slide seven, here, volume growth is less. Price, the price element of the top line is almost all of it. You see in particular systems that have a negative development in several businesses, although some of the businesses performed really well. Overall, again, Insulation doing well, majority of the top line is price. Move on to slide eight. Western Europe generally is strong. Germany, U.K., Italy, Norway did well, but it started difficult almost everywhere. Eastern Europe and Russia, tremendously strong Eastern Europe. In Russia, we see heavy inflation there too. We are running that now as we are the owners, so we are not allowed operational control if we are owner.
We do that to make sure our IP and Technology stays with ROCKWOOL and doesn't end up in the wrong hands. Obviously, there you see a volume slowdown as expected. It's a double-digit volume slowdown, but it's still a value growth due to inflation and price increases. I would say Eastern Europe is the really strong element here. Moving on to North America, Asia, and others. U.S. took a tumble in Q2. Still to see, we saw the interest rate increases. We saw quite high levels of stocks among the distributors. That went double-digit negative. Then Canada had a fantastic quarter with really high growth numbers. That kind of evened out. Asia, double-digit growth, very good development, and China still negative.
Our view on the U.S., we need to see another couple of quarters. We have had these stop-and-go quarters before, but I think with the quite drastic increases in interest rates and also some of the inflationary pressures, I would guess that residential new build will get impacted in the U.S. Move to slide nine. On this, I put there as a backdrop to our change of guidance. Basically, we had a price plan and somewhere towards the end of June, we felt it had stabilized a bit, and we went out with our price increases for Q3 and Q4. We have done most of Q3 already communicated, but we upped the targets a bit, and then we launched our Q4 increases.
That was put into play and seems to be progressing well, those price increases like the ones before. Then towards the end of June, especially into July, we then saw natural gas basically increase to two and a half times, and electricity almost doubled. That had a massive impact on our cost base. When I looked at that, I then concluded that what do we do now? Because we still have lead times in pricing. We basically run a quarter and a half, two quarters ahead. We wanna communicate, we can change some prices with short notice, but we have a rhythm to it. That rhythm is quicker than previous years, but it's not a commodity.
We don't price from week to week, you know, a few months out with six weeks notice before we change prices. I came to the conclusion that with that development, where we see now gas and electrical prices all over the place, I felt that now with these quite substantial increases we have in the market, because I don't really have a base for where this is gonna land. It might get worse, might get better, might stay on this level. I came to the conclusion that I cannot start to shift the prices again, and that would be more or less stick.
We still have some price increases that are in progress, but overall, the turnover is simply too small to compensate another EUR 100 million or EUR 160 million of inflationary or energy costs that now came in. Therefore, we adjusted the EBIT margin in terms of 10%-12%. It should be said, for example, gas in Q4, 50% ahead. On the coal, we have coverage three to four months out. We go quarter by quarter, but it's what it is, and it's a balance between being, you know, serious about business and having a base-to-base pricing on. Now it's so erratic and volatile that I don't feel that it's not that we can do so much more on prices and still being credible with our customers. Move to slide 10.
You see, I guess the number that is interesting there is the EBIT increase of 18% in the quarter on the 25%-26% top line. Obviously, ideally, if you have a 26% top line, you would like to see 26% or more bottom line improvement. The fact that you see 18% there is because we managed to increase prices more than the absolute inflationary increase. So that was good progress. Still a bit to go, but even with these margins in absolute terms, it's a good profit in the quarter, but every time.
If you then move over to the margins, where you don't have the dilution effects, I would say that last year in Q2, we had an incredibly difficult comparable or a high comparable due to the growth in business, but had a very exceptional quarter. The 12.9% recovery from the 11% is quite a good one. We're on good track, but then as we said, the conditions changed very quickly. I would say in July, it really took off [audio distortion] June. To compare what the level in Q2 is, it's not too bad. Quite satisfied with that progress. Move on to slide 11. We go into the businesses. You see, again, when you look at the Systems division, the comparable, it was an extraordinarily strong quarter.
Maybe EUR 30 million would have been a more average comparable if you average out the quarters last year. That would, we say, a mixed effect. Very pleasing on the insulation business, how the energy price increases and the rest have been actually passed on quite well. We have improved EBIT margin compared to a year back. A year back, we had also quite high margins because we had a very low cost base after the corona, and now it's more volume and price that makes it. On the system division, lower volume, cost absorption effect, and also mix effect, the biggest effect on a comparable.
The 20.1% the year before is abnormally high, and the 10% we need to work up because that's too low for our business. Move on to slide 12. We have postponed some things, for example, the growth on lines, because now the demand is not as high. In North America, we have some investments in Canada. Apart from that, most of the investment that hasn't happened is because new projects are a little bit stuck in approvals. For example, the ones in France and the general low capacity utilization of the factories. We are very highly loaded, so we have to choose between delivering and doing some sustainability projects and other projects. Still in Q2, almost EUR 30 million into sustainability investments, we are progressing.
It's not like we sit around the table and say, "Let's cut CapEx." That's not what we do. This is more a natural outcome of the business situation. Move on to slide 13. Operating cash flow is not on here. It is down, and the story is basically that net working capital is up a bit, but then also this unrealized exchange rate loss is impacting on this cash flow. That's the majority of the decline, is due to that. In a way, a non-cash item impacting this. Moving on to guidance space. Compared to first half year, we see lower activity. Personally, I believe that the risk of recession both in North America and Europe is high now.
The U.S. have had two quarters with negative GDP growth, although employment numbers were good. Purchasing Managers' Index is declining. We see all the signs, but we are still shooting for 20%-25% top line growth. We expect lower business activity here during the autumn, slower, deteriorating. That said, new build slowing down, Fit for 55 EU or the energy efficiency initiatives laws, targets, et cetera, to meet the climate goals. They are still there. The money is behind it, so I see the decline as temporary. Then new build capacity will shift over to energy efficiency action. There is a lot of money put to that. Germany, for example, put a scheme in play now that is EUR 11 billion-EUR 13 billion a year, which are still going strong.
The EU targets, the binding targets are out, and the money is there. I think we'll see a relative shortage. On the EBIT, you know, EUR 100 million is substantial. Obviously, with your price inflationary, the kind of step up in energy costs, electricity, mainly electricity and gas, is considerably north of EUR 150 million or EUR 100 million in the remainder of the year. That impacts our margins. We are increasing prices compared to, say, the half-year mark between 10%. At the end of the year, you drop another 10% from what you pay for the average product. It continues to climb the rest of the year, so climbs up to another 10% as we progress through the year.
If this level of gas and electricity prices or even worse, we cannot adjust our pricing or we don't want to adjust our pricing up and down every month to our contracts and et cetera that way. We look at the investment level. It's not that we are slowing down investment except for responding well down where we hold back a bit because we have capacity, we don't need more. The rest is more natural reasons, approvals, challenges to execute the normal type of things. I will say a little bit exaggerated or these challenges have increased with the supply chain challenges, people worrying about if they can produce due to gas, approvals, et cetera. Things just go a little bit slower. Yeah, I think that's it. With that, I'll hand over for questions.
Ladies and gentlemen, if you have a question for the speakers, please press star one. Please hold until we have our first question. We will start with few questions per participant. Please respect this. Our first question will come from Cedar Ekblom with Morgan Stanley.
Thanks, gentlemen. Two questions from me. Obviously we have been or you've been surprised by the level of energy cost inflation, as we roll into the second half of the year. Is there anything that you're doing on your pricing or sourcing of energy costs? I know that some peers out there in the industry tend to look to secure energy under longer term contracts to have a little bit more visibility on that cost line. I know that that's not really been something that you guys have done in the past, but are you changing your thought process around that?
Yeah.
The second question is on the top line.
No, I'll take.
Sorry, go ahead and then I'll ask my second question.
No, no, go ahead. Next question.
On the top line guidance, you maintain that, but you are talking about incremental price increases coming through in the second half. Would it be fair to say that your outlook on volumes has actually deteriorated? While you've seen an increase in your pricing outcome, you're actually expecting to give that back, in lower volumes. If that's the case, can you talk about which regions you've seen the greatest change in the volume trends as we move into the second half? Thank you.
I would. Okay, let's start with the first one. We have had, I don't know, 40 years, 50 years, whatever, forever, this quite short hedging, you know. If you hedge, we hedge a quarter, then it makes sense, pre-buy. Coke, for example, we have a frame agreement and then we negotiate quarter by quarter according to some rules. Generally, we run short. Here sometimes also we've taken hedges when it's really obvious that it's a good one. We haven't had any strategy where we try to disconnect from the market forces with, you know, power purchasing agreement or anything like that. The spirit since about June has been then we can find a sensible hedge.
We have done it, but quite frankly, even during the spring we benefited by not hedging because the spot market was better. We haven't gotten around it. I don't think we can solve this with hedging. You know, that's not possible. We need to take a bigger grip around that and have a look at the way we source in particular electricity and gas. That's the homework we have to look into a different strategy on that. We are not done with that work, but we are working on it to see how we can get a bit less exposed from this when you have volatile times like this. That's the homework and yes, we are looking at it.
On the top line, yes, we predicted actually from the beginning of the year, quite low top line growth. Yeah. We have never seen this year as a double-digit top line growth, but low single digit volume growth. It's correct that we keep raising the prices and we expect volumes to go down. I'm not saying that volume's going down only because of price. I think we see a real impact into the market due to what's going on. It's recession, people getting uncertain. Building material generally has gone up, so projects are canceled, postponed, and there is a lot of uncertainty in the market, and you also see lower activity. I think we will see that progress as we move through the year.
Thank you. Our next question will come from Kristian Johansen with SEB.
Yes. Thank you. I have two questions as well. First one, just some clarification on pricing if I understand correctly. It sounds like you sort of reached a point where you feel you cannot continue to increase prices. Is that how we should interpret this? I mean, if inflation stays at this level, are you not gonna be able to raise prices further next year?
No, I'm not saying that. I mean, compared to the beginning of the year, say Q4, to where we're gonna land at the end of the year, we're gonna be up about 35% or so, right? What I feel is that within the scope where we were a bit on the back foot from Q1 into Q2 because inflation happens, so we're always gonna lag. With our energy policy or the way we buy energy, we're always gonna lag on this side when it ramps up. Here, what has happened is that we have already launched our price increases.
I mean, we are into Q3 now, and we had already launched the increase for Q4, and I don't feel with the increase we have launched that we cannot come back two weeks after that or three weeks after that and do another one for the same period. That's what's happened. Okay. Yeah. Okay. Does that answer your question?
No, it does. I guess my follow-up would be, so even in a market where it's increasingly likely volumes will go down, you still see possibility to continue to increase pricing when you do your pricing?
Yeah. I think it would be very dangerous, a very dangerous strategy if the volumes goes down in the market overall and we head into some sort of recession, and then the renovation will kick in, I don't know how many months after, but we have fairly big demand that needs to be fulfilled. I probably will say that my strategy would be to try to keep the margins whole and try to protect that, and then take a bit of a beating on volume because really with this cost level, you need the price level to stay up because the cost level is extremely inflated. It's not that it's our cost in the company or things we can control. It's really these energy costs.
That's very clear. My second question, given the margin pressure you are seeing, have you considered to take any actions on your fixed costs?
I mean, obviously on the one hand, we need to keep expanding the business. We need more capacity. Even if there is a dip now, we need more capacity because we have been so incredibly low the last one and a half year. We need more capacity and we need engineers, so we need that. On the fixed cost, we have a very good team. In most markets we have our arms around attrition quite well, even though it's up a bit. How we look at it is, I guess the really core things we keep adding excellent resources. Generally over the company, we are more restrictive. I mean, it's much more restrictive on hiring, and you have attrition in the company, so that means you're working on fixed costs.
Things like travel and other things, we are 25% or more below the year before corona. There we just hold on to the new travel pattern. Yes, we'll start to manage fixed costs already and preparing for that you will have a period that is a little bit tougher. We don't wanna replace that by the inflation mark.
Thank you. Our next question will come from Brijesh Kumar Siya with HSBC. Please go ahead.
Hi. Good afternoon. The first one is on gas situation. You have, and the prices have kind of obviously moved up since July as well, and as we look at the overall European energy prices up 20%, does that mean that gives additional risk to your 10%-12% EBIT margin guidance for this year? A supplementary to that,
It's a energy-
Yeah. Sorry, carry on.
Brijesh, come again. Sorry. Perhaps I answered that. Just repeat the question to make sure I understand.
No, the question is, the energy prices since the end of July on average has moved up 20% in August. Now, considering that you are saying that you are not going to raise the prices for Q4, which you have already communicated at the end of June. That means, are we looking at a margin more like for the full year at 10% rather than upper end of the range?
I see it like this. You know, I'm just, you know, we are quite good. We have been reasonably good at pricing and executing them, reasonably good at running the business, in difficult circumstances and also ramp up capacity. What I see is that when you have these super erratic processes where geopolitics come in and can change just between one month to the next, one energy type with EUR 20 million run rate, and yes, we have a little bit more hedging, so therefore I increased the span to 10%-12% to reflect that, there is.
The biggest element in what's happening now, obviously, we're gonna have some volume impact of this, but the big issue why we have that variance, that's the energy prices that jumps up factor to factor one and a half, factor one. This is the variability we see. Therefore, I wanna tell you that it could be 10%, it could be 11%, it could be 12%. It depends how these energy prices move.
Okay. Understood. My second question is likely on the longer term basis. Now, the energy prices are in a different league altogether, including gas. As I understand with your SBTi-based target to 2034, you are more banking on shifting your coke-based plants to gas. But with this kind of prices, suddenly it's not viable now to move to gas and with your electric melter technology still evolving, are you finding a way to count how to move to electric or fast track or any other kind of strategy which you are kind of going to adopt to?
I mean, the main strategy, Brijesh, is to move to electricity. The gas solution is a selective one. The really important question is the electrical market. Now you see a world of kind of back to black fuels and people ignoring. I mean, you talk about starting up coal-fired plants in Germany now. For reasons I don't understand, Germany will still stick to shutting down the three nuclear plants at the end of the year instead of sitting down and say, "Let's extend them for a year." It's gonna be very important, the electrical price for that strategy. On the gas, I mean, I've been in gas-heavy businesses before. The mining business I ran multiple times.
My experience with gas is that gas prices normally sort themselves out. They are volatile for a bit, but at the end the gas is there. Our main strategy is not gas. Our main strategy is electricity, so that's the key question. That we need to work on. There you have our purchasing agreement, trying to move away from market, more long-term deals, because what we actually know quite well when we wanna do it, and we know roughly our demand plus minus quite well. This is the key strategy. I will still say we haven't, because when energy prices in electricity, but some of it is very elastic, some of it is found within demand. Having said that, okay, we're not gonna do the electrical transition. We're gonna stay on coal. That's not what we are saying. We're still holding on to our strategy.
Of course, we need to make a check how we can somehow, if we can find a way to get out of these spikes. If electricity pricing doesn't become reasonable, I would say the whole climate action agenda is not working all of Europe. Somehow that needs to be fixed.
Okay. Sorry, my question was more around whether you have the technology now to kind of retrofit your existing melters with electric, electrical connections?
It's a little bit. We are working on it. I've hinted that we are making good progress. I would say we have done some really good trials with that. I wanna prove it a little bit more, but I wanna have several technologies. That's as much as I will say today. We have a plan, but we still have some more proof points. I keep repeating what I've said, and we will do that for. My ambition is to find some good solutions there.
Thank you. Our next question will come from Claus Almer with Nordea. Please go ahead.
Thank you. Yeah, also a few questions from my side, and we'll do them one by one. Jens, in the past, you've been really good in optimizing or timing your CapEx spend, and you said you need to add new capacity given the very high utilization rate you have at the moment. What about the maintenance and sustainability linked CapEx? Will you be more cautious on those investments in a possible recession scenario? That will be the first one.
Yeah. I would probably say that if you analyze the couple of downturns, but you also see now signs of steel prices maybe easing a bit, if you get a little bit more unemployment. If you look at the financial crisis, we had a decline for 18 months, and then it started to grow. There you had the default on housing that triggered it. All earlier kind of downturns have been shorter for us. I would probably say that good management would be to keep doing it so that we can keep an even a smooth run rate and maybe get the rate with some of them a bit cheaper.
The second question goes to the pricing, and I know there's been a lot of questions already about this. One thing maybe that stands out is the expanding margin in Q2 in the insulation business, i.e., as you also said, you are raising prices more than cost inflation. As I recall in the past, you said not to repeat the financial crisis, and I know the price increases at that time was significantly more than this year. Nevertheless, you have raised prices more than cost inflation in a maybe slightly difficult starting environment. Isn't it a dangerous journey you have started by this?
Yeah. Let's say it like this. If you go into this and you raise, let's say inflation is 10% and we raise prices with 10%, the margins will stay the same, right? We haven't managed to do that. We have raised as a percentage prices less than the cost inflation we have seen. Due to the way the P&L is structured, our goal is of course that if you have steady inflation, we would like to maintain our profit margin. Now we haven't managed that. We guide 10%-12% because it's so extreme, and it's the timing. I would say we are somewhere in between. To be honest, the percentage increase of our price is less than the percentage increase of the cost.
Okay. This hedging you mentioned, you have started to do, when was that? Was that in July or here at the very high level in August?
Yeah. Come again, Claus.
Yeah, sorry. You said you started hedging-
It started in June, then we used that as a basis for our Q3 and Q4 pricing. It looked sustainable. It even started to decline a bit, and then it started to spike again according to that chart. You had the tightening there, and then it eased off, and it looked like the assumptions would hold, and then it just went crazy. In July, primarily end of June into July, it just skyrocketed.
Okay.
Thank you. Our next question will come from Yuri Serov with Redburn. Please go ahead.
Yeah. Hi. Good afternoon. I have one big question with a few branches from it, I suppose. Looking at your prices and your pricing strategy, you're trying to be kind to your customers. You're trying not to jack their prices up too much and make their life more difficult, the customers are supposed to pay you back somehow. I'm thinking, you know-
Yeah.
In the future, how will you
Yeah.
this strategy? Let me just speak and give you two illustrations that I'm thinking about. I mean, one possibility is that next year, let's suppose costs go down, but your customers will not push you to reduce the prices because you were good to them this year, and you will be able to get a better margin. Or alternatively, because you're behaving this way, you will be able to get more volume from your competitors and your volumes will perform better than the market, because the customers are willing to give you more volume.
I-
What do you think?
Yeah. I mean, first of all, we have been able to deliver and we have shortened delivery times, so we've really fought to make sure we don't stop projects. In that term, we have been good to them. Obviously, when you raise prices 35% in a year, it's very few purchasing managers will say you have been good. So I don't think we have plus points in that. What we do here is that we've been very clear that it's well-founded. We are not exploiting the situation, and this announcement we do here will show that.
It's not that the issue is that we have launched the prices for Q3 and Q4, and that's what we said, this is the price you're gonna have, and then to step back from your word and then come back again two, three weeks after and say, "Now it's this," it's just not the way we work with our customers. I would say that's it. Then in Q1 next year, we haven't commented that first we need to understand what is the basis for this. So probably what we try to do with our customers say, "Look, it's probably better for everyone that we wait and see how crazy will this get before we get into pricing for Q1."
Yeah, I understand.
No, no.
What sort of reciprocity do you expect from your customers? I mean, you are not exploiting the situation and you hope that they will appreciate it, I presume.
I don't really need to hold. I mean, they wanna earn money and I'm sure that, but we wanna, you know, have a good market price, and obviously with our investments, we need to keep margins up. It's not a problem for the business if we make 10% EBIT margin, but I mean, I like to get back to the 13%, so that we have a good basis for investments and more capacity, and that's what we tell our customers because we are asset-intensive. Then if costs go down, the back end, if you have a bit more profit than is. I mean, it's purely contractual. We have the prices set and then maybe the costs go down quickly.
If you change the way we buy energy, you might not have that effect. I don't think that will be much of a discussion. The main challenge we have now, if I look at pricing, is of course the ramp up in costs, energy costs is happening now, and the prices are gradually improving, so Q3 is gonna be a tough quarter. That's probably my main focus, to make the best out of Q3. Then Q1 next year, but I hope we have a little bit more stable energy market, so we know a little bit more how to price.
Okay. Can I ask you, what are your competitors doing? Are they following the same strategy or are they actually more aggressively increasing prices?
It varies. You have some people that have probably had a different policy for energy prices, and they have been very well off in this situation, and then there are others that are doing similar to us. You basically see that the policy, the underlying policy you have, I mean, one would have said, "Okay, everyone price market minus." In reality, when you have this type of volatility on the cost base, you see that the ones that had a different policy on energy and set a lower hedged energy, they go with a bit lower price. That's what I see. Then I see some competitors that are in the same situation as us, and they really push price.
If the volumes go down generally in the market, which we predict they will do for a while now, then of course all different variables will happen. Yeah.
There are people who are actually pushing prices more aggressively?
There are some pushing prices a lot, and there are some doing less. Whenever you have an inflection point when things change, you're gonna see a whole array of things, and we kind of be quite stable. Some of this is also low volumes because we need to be relatively steady in what we do. We can't jump up and down all over the place.
Okay. All right. Thank you for that. Just one, the second question, on the U.S. Did you say that volumes were down double digits? I'm really surprised to hear that.
Yeah. Yeah.
All the peers.
Yeah. Yeah.
Can I finish, please? All the peers, other building materials companies are all telling us how strong the U.S. market is, and then suddenly you say that it's such a big drop.
We have definite competitors who see the same thing. It's still gonna be great job for the construction market. If you read through some of the other materials that's going to similar segments to us, you definitely see that Q2, Q3 is soft on volume. It's been a tremendously strong market. Here I will say in the U.S., all of a sudden these things happen, stock adjustment or poor demand, we see the same thing. It happens. Then the question is, how will the market go? Will the U.S. step into more of a recession, or not? I guess they will, but due to the interest rates, but you know, we are not to say what will happen.
The U.S. have a climate package, that should also be said, and they are spreading money around, so that might compensate. This now was more stock adjustment of the stock in the distribution channels and all over was quite high, and they kind of said, "Let's work this one." I happen to be much on the climate, but there are many people that say I'm wrong on that.
Okay. You say stock in the distribution channel. If you look beyond that, is the weakness coming? I mean, we know about residential. What about non-residential markets? That's weak, too.
Sorry to jump in here, Jens and Yuri, but we have to go to the next analyst. Thank you for two questions, Yuri. Please present the next.
Thank you. Our next question will come from Arnaud Lehmann with Bank of America. Please go ahead.
Thank you very much. Good afternoon, gentlemen. Two questions on my side. The first one is, could you please provide an update on your operations in Russia? Have you seen a meaningful decline there, and are you still happy with your decision earlier in the year to keep the business in scope? My second question is more of a kind of more general outlook question on the European demand. You mentioned there is a macro slowdown, the risk of recession that are gonna. The same time, the reasons for this recession is higher energy price, and that gives an incentive for household to invest in energy efficiency. How do you balance the downside risk from the macro to the upside risk from energy efficiency of European houses? Thank you.
Good, good questions, Arnaud . On Russia, you know, I get three, four letters a week from people that wanna take over the plants. I get much more push from Russian investors that wanna have our assets for ruble, too. We are now, due to sanctions, you know, we are owners of the business. We are not in operational control. I'm satisfied with that because if you look at the difference with many, many others, they say they're gonna divest, they're gonna do this and that, but fundamentally, they are in the same situation. What we have is that these four factories we have in Russia, they are top-notch world-class, proprietary IP, and I don't want it to fall in any other hands. That goal is met. The market has declined.
The market has not declined as much as the EU maybe think it has, but it's double-digit decline in volumes. You know, the factories, as I said, are self-sufficient. They run local for local people running it. I'm still very convinced that if we in any way would back out so that those factories just run and have a great and most formidable competitor there is in stone wool will be clearly, I believe. Those assumptions are intact. It doesn't mean that I believe we will have great business in Russia. I notice, of course, that now China and India are taking all the oil Russia is selling. You know, how bad will it be in Russia? Don't know. Probably not as bad as they hope. Again, it's not the main strategy for us.
We are not investing in Russia. We are protecting our IP, and some royalty and dividends would come out of that we can use elsewhere. But it's not, you know, obviously not the main strategy other than protecting our intellectual property and make sure that more money falls in the hands of the wrong people. Okay, on the macro slowdown, personally, I think this whole trend back to black just to get energy, that's really bad for the climate change. Starting coal-fired plants and panic investments to keep running, that will have the detrimental effect on obviously the climate change and counteraction.
I would say that, for the sake of energy efficiency, the downturn with lower new build volume shifting over the people to renovation and the Fit for 55 is a good thing, and there will be a bit of a time delay, but it's a very, very good thing for us if that happens. I would say a recession would trigger even more of that is, an incentive, a stimulus to increase renovation, but it's also absolutely necessary step to meet some of these climate goals that
I'm actually not worried about the recession. Of course, we'd like to run business without the recession, but I think it's actually a good thing for our business on the medium term.
Thank you very much.
Thank you. Our next question will come from Yves Bromehead with Exane BNP Paribas. Please go ahead.
Good afternoon. Thank you for taking my questions. Two follow up. Number one, I wanted to come back on the inventory situation. I think you've mentioned stock and inventories in the U.S. Can I ask a similar question in Europe? What's the stock and inventory level at the wholesaler channel? Are you seeing any risk here of de-stocking? How should we think about that? And then second question.
Yeah.
Yeah, second question. Sorry.
Do you want to answer that now? Okay. Tell me the next question also.
Okay. The second question is on the economics of the electric kilns. You've given a bit of color on your views, but in light of what's happening, could you actually decide to completely postpone some of your investments on greenfields, especially in France and in Sweden? Has that actually changed your way of thinking about the returns you can generate on the French plant and also Sweden? Thank you very much.
Okay, thanks. The stock and inventory, the favorite way we look at it, when you see a slowdown in construction market, there's gonna be some stock and inventory. I guess the severity traditionally has been U.S. always very extreme when it happens. They go very low very quickly, and they just stop. We have seen that happen in Eastern Europe in previous corrections. We haven't seen any of that so far, but this is very strong, and we can expect to see some in the rest of Europe, outside Eastern Europe. It could happen anywhere if the end user or the construction activity goes down. It could happen. That uncertainty is there.
It's kind of similar to say people worry about recession or the skill crisis then we're gonna see it. My expectation is that the combination of both is a fair bit of that involved. Then the electricity. I mean, you have a couple of ways you can reduce CO2 footprint with gas. You can do it excellently with biogas, like we did in Denmark, but natural gas is better, but it's not the end game. You need electricity and completely green electricity. I would say you need to understand this a little bit better. We know though that when this downturn, if it happens, we need more capacity to deliver on the Fit for 55. We want to expand, and we haven't yet changed in any way our strategy to go for electricity.
We will have a think about the pace we do it, you know. Because if you look, for example, in Germany at the moment, if you run an electrical melter, then you have the choice between running on coke and electricity, it's a massive cost difference. Two years back, it wasn't a massive cost difference, but now it is. Electricity price is obviously huge cost impact. We need to think about that, but again, I don't have a comprehensive plan, but we slow everything down. To meet our climate targets, we need to do a whole lot of transition, and we need green electricity, obviously, to drive it, otherwise it doesn't do any good.
Rough plan continues, but there could be some adjustments obviously, because we are in a slightly different situation, both on the energy pricing and market condition.
You won't expect to delay or cancel France and Sweden. Is that correct? Just to confirm that.
No, I mean, the France factory is an approval issue to get going with that one. I don't wanna delay that one, but at the moment it's a matter of getting an approval we are waiting for.
Okay.
Getting the building permit.
All right. Thank you very much, Jens.
Thanks.
Thank you. Our next question will come from Manish Beria with Société Générale. Your line is open.
Hi there. You said, electricity cost, maybe natural gas also. Can you tell us, in the second half how much of your natural gas as well as, electricity is hedged? This is the number one question. My second question will be, in your guidance, what are you building, for the volumes, for the cost of goods to get the distribution cost inflation in the second half?
Yeah. Okay. Just to be clear on the gas hedge, you know, in Europe we have 50%, 100% electricity. [Grodan] doesn't have a hedge for Q4. On the volume, we have obviously built in a softer volume scenario in our outlook. Yeah.
How much inflation you have?
Uh, there-
Raw material as well as.
There are-
The description.
If you look at my quote I say in excess of EUR 100 million, but obviously we're also doing price. We have put a fairly big number in there, but if you look on Monday and you would keep those prices, the number would be too small. We have seen these prices go up and down. It's just so erratic, and therefore, I put a bigger span on the 10%-12% because, you know, you're talking another EUR 50 million and you're dealing with the percentage point margin. On EUR 50 million in this game now with what's happening even though we are hedged on many of these things, not most of it, will have big impacts on therefore the spread.
We just have to monitor because I simply obviously we have assumptions, but we simply don't know. We can't predict per se.
Okay. Thank you.
Thank you, Manish. I think that's the last question. Or do we have one more?
There was one more slipped through the filter.
Yes, we do have one question.
Okay.
From Elodie Rall with JPMorgan.
Okay. Please go ahead. Ron?
Ron, your line is open. Please make sure you're unmuted.
Otherwise, let's go to final remarks.
Yes, please, Thomas.
Yeah.
Okay.
Yes.
Sorry, Ron. We can't hear you. Thomas, you can still close this off then.
Yes.
Maybe Ron can.
We'll pick up with him after.
Yeah. We'll pick that up with you, Ron, and answer your question. We can't hear your question, so we'll reach out to you.
Thank you. Ladies and gentlemen, we would like to thank you, thank the equity analysts for all your good questions and the audience for listening in on today's call. We appreciate your interest in ROCKWOOL A/S. If you have any further questions, please feel free to reach out to me, Thomas Harder. You know my contact details, or you may find them in the investor section on the corporate website. Jens, Kim and I thank you for joining today's earnings call. Have a great day.