Good day to everyone. Welcome to ROCKWOOL A/S conference call regarding the results for the full year 2022. My name is Thomas Harder. I'm Director of Group Treasury & 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 full year and fourth quarter of 2022. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number 2, which is the forward-looking statement. Please be aware that this presentation contains uncertainties.
Now we can go to the next slide, which is slide number 3. Jens Birgersson, I'll now hand over the words to you.
Thank you, Thomas. Good morning, everyone. If you look at the full year, it was the third unusual year in a row we have had. When we look at the outcome, we are quite satisfied with that from Rockwool. EUR 3.9 billion top line, up 23%, EUR 400 million EBIT. If we set aside Ukraine and provision, 10.6% EBIT margin. Considering where we were at, slide 4, please, and we look into Q4, the background to that was a Q3, where we only had 6.2% EBIT margin and surging energy prices. When we looked at our forecast in Q3, our challenge was to get the balance between the price and the surge in energy prices.
Energy price did come down a little bit in Q4. We got successfully pricing up, and that gave us a top line of about EUR 1 billion or EUR 955 million and an EBIT of EUR 101, and more normalized EBIT margin around 10.5%. Obviously not up on the 12%, but considering the very extreme energy cost increases, and that we reached 12% if we set aside Ukraine and provision, we are happy with that. I suspect we haven't checked the numbers, but we probably haven't delivered more EBIT in Q4, actually, and definitely not for the full year.
What also happened in that quarter was that we saw how the construction market started to get impact as by the very high material prices, energy prices, interest rate, and the general macroeconomic, economic climate. While we had very good growth starting 2022, little bit less in Q2. In Q3 and Q4, we went into negative territory. While we were delivering that fourth quarter and the profitability, we pulled down our factory capacity. Actually, in Q4, we reduced about 500 jobs in manufacturing, and we pulled the capacity down to more normal levels. Remember, in Q2 and beginning of Q3, we were on extremely high capacity utilization. Should be said also that that reduction of 500 factory jobs, we have that kind of as part of our system, where we mix permanent employees with temporary employees.
It's something we can do. It's not easy, but relatively easy, and we have done it many times over the last years. Outcome was good, but again, we saw a slow down. When we spoke last, end of February, we were quite open with that we see that the wider construction industry, especially new build, started to decline. Not every market, obviously. At the same time, we saw Asia waking up, and we saw Canada and U.S. in a pattern where during the autumn, U.S. was down quite a lot and Canada started growing. That's switching between the different months.
If you go to slide five, full year sales, not much to say about that, but that for the year, the growth was driven by insulation, up 29%, more than EUR 3 billion sales. The majority of that growth comes out of improved price. Slide six. Looking into the quarter, most of the insulation or the insulation growth in that quarter is solely referring to price because we had volumes down and a slowdown. December was okay, not a disaster, not special in any way, but was an okay December, but that's always a low month. If you look into the system division, where the growth stepped up a little bit, we saw basically Rockfon, Europe, North America doing quite well, especially North America.
Rockpanel generally had a good year straight through, with good top line. Growth from negative growth early in the year, mainly driven by the situation in the U.S., came back to slight positive growth in Q3, in Q4, they were up on double-digit. I still would say that's too early to say whether we have turned a corner. At least we had now two quarters for quite a long time where we had growth in Grodan. Slide seven. If you look into the regional development in Western Europe, it was quite a uniform pattern with declining volumes, good, healthy price realization. We basically had growth across Western Europe, obviously less than Q3.
Eastern Europe did quite well in Q4, but Russia was down double-digit, not triple-digit, but double-digit. That took Eastern Europe and Russia down to 2%. North America, up single-digit around the 5% mark. There, during the autumn, we saw US quite stagnant or flattish, and Canada still moving forward quite well. Asia, very good development outside China, but China down some 20-30%, we expect that to continue a bit more. The Chinese economy and the construction market has not recovered. Again, the size of China in Rockwool should be perspective. We are small in China, it doesn't really make it have a big impact. Slide 8, energy pricing.
Q4 energy prices, if you take gas, we take electricity, we take coke, higher than last year, we experienced an easing compared to Q3. That was very welcome. In Q4, depending if you look on the forward price or the spot price, we would expect it to continue down for now slightly. Let's see what really happens as the quarter plays out. Slide 9, profitability. Nothing much to say about that. Basically, the margins came back in Q4 due to price compared to Q3, we are back on the same level that we were a year back. That was good progress. Price increases from the beginning of the year in most businesses has been around 25%-30%.
Year-on-year is a little bit more because Q4, one year back, we had slightly lower prices than we got to at the end of the year. Q4 profitability, same effect in the two businesses, a recovery back to a more normal level. It's basically due to price. Investments, we invested EUR 93 million, EUR 22 million into the sustainability investments. I come back soon to some of the results out of that. The big ones we are doing here is Flumroc in Switzerland, where we put in a green melter and electric melter. We also added some Grodan capacity in Canada and Rockwool capacity in Poland. We plan to continue investing not only in the green transition, but also in capacity and sustainability.
Whatever happens this year in the market in terms of turbulence and challenges, we remain positive about the outlook for Rockwool. We are not easing off or that's not the plan. We will continue to invest in new capacity. Q3 cash flow, no comments. Slide 12, no comments to that really other than saying that there is not an increase in overdue payments or anything like that. The slight difference you see in working capital, that's basically inflationary-driven. It's the value of the stock and not the amount of the stock. We have actually kept quite tight control of not building up too much stock when the volume drops. That has worked out. Slide 13, sustainability goal achievement.
Back in 2016, before we had defined the science-based target, we set some sustainability goals up to 2030, we put in a halfway house goal. In most of the cases, we divided the goal 2030 by 2 and put it as a midterm goal. This slide represent of what we achieved on that. If you look at, for example, the CO2, this is not CO2 equivalent. This is just CO2 emitted per ton or per unit stone wool produce. We have managed to reduce that by 17% already since 2016. That's very good progress, it's quite far beyond the target we had.
I will say as we have moved along, we have learned quite a lot, and we have done quite a few technology developments that are helping us here. For example, if you look at 2022, we took our Marshall plant in Southern US from coal to gas, that also reduced the cost. We did the same in Poland, where we transitioned one big line from coal to gas. That was at a higher cost because gas, of course, went very expensive after we have done that. For the sake of CO2, we still did it. I remind you, for example, of what we did in Denmark, where we went to biogas, where we dropped CO2 emissions with almost 90%. Good progress on the CO2 intensity.
Reclaimed material, Rockcycle is the concept. We call it Rockcycle. We have now launched that in 19 countries. We had a goal to launch it in 15 by 2022. Generally, I would say that program has gone from strength to strength. There is quite a lot of enthusiasm about that for obvious reasons. Energy efficiency in our own offices. Since we don't have so many white-collar staff, it's not a massive impact on the environment. We have traditionally not been great at insulating our own buildings. We have done about 17 offices now. Typically the reduction is about 80% when we do it. We are on 39% reduction, well on track to achieve that goal.
We got a little bit delayed due to Corona because it was very hard to renovate offices. We do this office renovation with quite a deep engagement of our own staff. We lost almost a year during Corona. In spite of that, we are ahead of the plan. Part of the reason is that the energy savings are a bit better than we expected. Quite happy about that development. Water, this is almost a free good. Water doesn't cost very much anywhere, we have said we will reduce our water intensity. We are putting in closed loop system, rainwater collection, and all the rest. Most of these projects are in a way, I wouldn't say they're near to loss-making because water is so cheap still.
On the other hand, some of these projects have already helped us keep production running where notices come out that there's water shortage and all the rest. We become less and less dependent on the municipal waterline into our plants. Obviously, when a big consumer like we don't need to consume as much, it helps the community around us. The 14%, I'm very happy with that number. Landfill waste. Landfill waste, that is what we don't manage to get through production and recircular it in the systems. Any landfill from our factory sites, we have cut that by 50% so far. I think we should continue to get to 85% reduction. Obviously, we don't mind getting there before 2030. On, say, health and safety, we put that red.
Yes, the lost time incident ratio is down. Also other type of incidents are down. We had a fatality, we still mark that red. We had a fatality in Poland last year. Although the overall statistics has improved, it's overshadowed by that a person lost his life on one of our lines. We have analyzed that very carefully, and we are taking learnings from that. We also have, you know, very big machines, in this case, we have an employee that climbed into a machine that wasn't stopped. It shouldn't happen, we are taking a long and hard think about how can we ensure that no one climbs into one of these machines because it's obviously super dangerous.
Then a little bit after 2016, we committed to the science-based target. The science-based target, just to remind you of the differences, that's an absolute emission goal. It doesn't matter how much we grow, and it's also CO2 equivalent. If it's another gas, for example, pure CO2, you have a multiplier on it. You know all about that. We have set a goal to reduce Scope 1 and 2, so that's everything inside the factory fence plus the electricity with 38%. While we do this, we believe automatically a lot of the Scope 3, everything outside the fence will follow.
Basically, it doesn't look like much progress now, but if you go down and see what we are doing there, and the fact that we have been growing quite a lot, I'm quite happy with those 4%. We have also had the chance now to test some of the technologies. In terms of achieving this goal, basically every greenfield that we do now needs to come with more or less a zero CO2 emission footprint. We need to put absolutely emission-free technology or close to it in all the new build, and we need to convert the plants we have. The most recent one is Flumroc, where we have started a project to replace that melter.
It's quite a substantial project that's happening as we speak. That will drop the footprint because we feed the electric melter with green electricity. Another example that we're taking action, we did relocation of the factory in China. That wasn't really a relocation. We got a big grant from the Chinese government to move, almost EUR 40 million. While we moved, we then, of course, replaced all the equipment and put in electric melters. That has been done. When we look at the next greenfield, where we're waiting still for the building permit in France, obviously, we are putting in an electric melter that is running off green electricity. That will reduce the footprint compared to if we do a traditional plant. This work will have to continue.
Obviously, we will just stay on course with this, and you see the green part of the CapEx that will have to continue, and we'll probably talk, you know, I haven't announced specific figures, but it's not cheap. You need to replan for, you know, spending those EUR 100 million a year roughly and keep doing that for 10 years at least. It will take even longer than that before we're done. We are aiming for our sustainability goals, and I'm very happy with the technology we have in place now and the fact that we can make large-scale conversions. All good about that. We get to the outlook, I guess, the main focus of today among some of you.
We have said, we have flagged that we see the construction market go down, that is, it is impacted by interest, inflation and war in Ukraine and what have you. We have seen a softening. Therefore, we have put the range up to about, up to 10% drop from a very high level of the top line. Obviously, it's very hard to forecast. We have also allowed ourself, you know, to play a bit with price. Volume is down, price, to work this so that we roughly maintain market share in this downturn that we see now. It hasn't at all changed our optimistic outlook. We see Germany putting money to renovation now. There's a plan of EUR 13 billion in this year, not all insulation, obviously.
We see France doing it, Italy doing it. There is a list of countries, but it's not happening very quickly. The cooling off of the new build market might help as it frees up labor. Mix of ability to respond on price and balance and capacity, price, and margin, that will impact that 10%. Just because we say down to 10%, it's not that -10% is the more likely. I'm just saying it's a very hard to predict year. We have seen already during the autumn, a slowdown. We had a record first half year last year. I think that those are the main reasons for that up to 10%. On the EBIT, we sit now with the situation that the energy prices are down.
They are lower in Q1. That's our prediction than in Q4. They are also lower. Potentially, they could be lower than Q1 2022. That's all good news. We see a risk in that when China wakes up again, that energy prices will increase. If China's economic activity stays as low as it is now, then the risk of that is smaller. Fundamentally, how long can China be on the extremely low economic activity level that we see now? Other impact on the margin would be that we have reduced capacity 500 jobs. We have reset the business on the current run rate. That's done. It was very quickly done, swiftly done.
On the white-collar side, we see a more moderate adaption to the downturn we see now. The reason for that is that fundamentally we wanna be ready for increased renovation rate and a market that gets into growth mode again. We can't exactly say where it is, but our position now is to be a little bit careful with overreacting to the downturn in our muscle, our engineering muscle. We will keep building and all the rest, and then when we have a volume drop, not fully adapt on it on every cost, but get ready for the upturn and keep investing.
On the investment side, as I said, EUR 400 million, keep it on that level, and the first greenfield that I see construction work start on is most likely the one in France in the coming 2-3 months or something like that. With that, I would like to hand over for questions.
Ladies and gentlemen, if you have a question for the speakers, please press star one. Please hold until we have the first question. We will start with two questions per participant. Please respect this. We have a question from Kristian Johansen with SEB. Please go ahead, sir.
Yes, thank you. Probably not so surprising, my first question is on your margin guidance. Can you maybe just clarify exactly these 8%-10% what the assumption on prices and energy costs are? Have you assumed your prices up or down year-on-year? The same on energy costs, is that assumed to be up or down in your guidance range?
Okay, I'm with you, Christian. At the moment, obviously, there are three impacts on the margin. It's the absorption, so to say the amount of absorption in the factories, depending on the volume, and then it's the price on the, and versus the energy prices. What we have assumed now is kind of a picture where we said that we match roughly the price effect and the energy effect, yeah? That we see an absorption impact. And then we don't have an accurate approach to when the price increase, if the energy price, if it increase, that will be late again.
We are not It's not our intention to dilute, you know, if energy prices go down, our product pricing will go down, but we see also that we have a certain homework to just give ourselves a little bit of room to protect market share if it's needed. At the moment, we sit with high or slightly increasing prices in January, but we need to balance this with the volumes and absorption. It's between there, but I would say energy price and price, they should go a little bit hand in hand. Obviously in some segment we do less, some regions it's less, but there is some price element there adjusting with the energy price.
Just to clarify, so what you're saying is the same gross margin assumed for 2023 as you had in 2022?
That's a hard one because we have so many different gross margins in 2020-
I mean, hi, Kristian, Kim here. Gross margin is assumed to go up a little bit. The thing is that, as Jens said, we are holding back a little on the white collar stuff. We will have you can say a more fixed cost balance than the volume would allow for.
Okay. It's primarily the negative operating leverage which takes your margin down year-on-year, that's what you're saying?
That's the idea, and then there could be a competitive effect if we get with this volume declines in selected market that we need to defend market share, and then I wanna have some strength for that in case that's needed.
Sure. That was actually just my other question here, because, I mean, what have you seen specifically which make you mention the need to defend market share so specifically? Have you already seen competitors be aggressive on prices?
I mean, there are so many competitive dimensions here. You have pricing now into plastic foams, certain segments. Some of the raw material prices going down that has been very high, so that might increase the competitive environment there. If you have a volume drop in some markets, you have some stone wool suppliers that then wanna keep capacity. I mean, we cut capacity immediately when we saw this and adapted it to what we feel is a good level. I mean, basically in every year we see a little bit of that all over the place. If the volumes go down, we certainly see it, and it can vary by segment.
For example, in the new build segment at the moment, single-family houses new build. Where it's not our main segment, but obviously the competition in there is tougher now because that is one of the main segments for glass wool, and they lose a lot of volume in some countries, and then it also rubs over on us. We see a mixed bag of that. I guess my approach would be to say we'll as always, we believe we should keep pricing sound in relation to the cost position and for the product we sell, but that we also will react when needed, and that's the approach. Yes, we see in some segments that it's happening, but it's hard also so early in the game to see exactly what the reason is.
For example, we have had years or in Poland, where without the market changing that much, destocking can impact two quarters. It takes a while to understand what actually happened on the end customer side, and we are in that process now. I'll give an example. In the U.S., there we had a couple of months last autumn, but we had very low business volumes. We just stuck to price because we were convinced the business volume was down, but that it was a destocking. We just stuck, and now the business is back up again, and we are doing further price increases because it was just a massive destocking that looked like a massive market decline. It wasn't as dramatic as one would judge by the production volume. We have this.
We just need to navigate through, and it's not one recipe everywhere. One thing is for sure, I will not sit with a high price and have a competitor that keep capacity up and just gonna take my volume, then I will respond. Okay?
Understood. I will jump back in line. Thank you so much.
We'll take our next question from Brijesh Kumar with HSBC. Please go ahead.
Hello. Good morning, everyone. I will go back to that 8%-10% margin guidance again. And if you could explain to us what is changing between Q4 2022 to 2023 to suggest that 11.9% margin comes down to 8%-9%? Because I'm coming from a point that the residential end market was remarkably weak in Q4, and that possibly is improving as we speak. Not that it's coming back to the original level, but it's still down, but nevertheless, it's a sequential improvement. And if you could just give what's your volume adjustments within that by end market there.
Yeah. Brijesh, I don't give specific volumes, as you know, but I can give a flavor. I agree with you that the residential market came down in many markets. I mean, Denmark and Sweden being prime examples, but really stopped. That we saw. What I, what I've seen now is the project pipeline, where we look into, say, flat roofs. You have the example of, some of, you know, some of the data centers, projects canceled. You have a famous example here in Denmark. You have Amazon, where they had expansion plans, and they were not public in that respect, but we knew about them. You talk about 4.5 million square meter of projects, flat roofs that kind of are postponed or not happening or canceled.
Then you look into, say, if we take a country like Poland, has been an extreme high activity level. What we look into now in Q2 is just fewer projects. I would say you will see a bit of decline also in other segments happening because the economic outlook is uncertain, commercial business, non-residential business. Some of it, if you look into Eastern Europe and Russia, you see maybe Russia not improving either. It's not a huge effect, but it is a negative effect. I would say you can add a few more segments on top of the residential. On the project side, you know, projects needs to be completed, you need new projects to come.
I look at the pipeline and the start of new projects, and it looks to be lower.
What you are suggesting is that, the 15%-20% volume decline you had in Q4, that, is, residential is majorly in Q4. When we look into 2023, would you say that the residential will be down double digit and non-residential also?
I'm not sure I said 15%-20%, Brijesh. I think we'll have a mixed bag going forward of that you have a bit tougher competition on flat roof. You have a bit more capacity, and you have new projects not coming to the same extent because the economic outlook, it does not fit into the pipeline, and there's just less in the pipeline. I should say at the moment it's not, you know, still on a level where we have sound production, but we definitely see that it has come down. That's a short-term effect that we see now.
We then wanna bridge this into the next stage, which is where this labor capacity used for renovation, and that some countries will use renovation on the green agenda to provide a bit of stimuli or reach the goals that the EU now has mandated for the countries. That... I think we are talking about, I don't know if this is a gap year or gap half year or gap one and a half year, but there's some sort of gap we are looking at. Overall, little bit long term, you just take the next box in your spreadsheet or two boxes down your spreadsheet, I'm very confident about the growth.
Okay. Sorry to press on this. Would you say that your guidance for up to 10% is the most bearish you could have, and if anything, you could beat that?
You know, we always have the spirit of beating. You know, we look at each other in this team, and when you look at what we did between Q3 and Q4, in all the countries and price realization, that was well done. We know we are agile, and we know we can manage. Here, we are creating room to, you know. What's driven by the construction decline, whatever that number is, I'm fine with it, you know. I'm fine with that you have a decline, but I need to balance our muscle for the future here, if this is relatively short-lived, with capacity reductions. Sure, we will reduce also fixed cost overheads on that, but we will not go extreme on it because we are so optimistic about the future when this starts to grow again.
I think that's the main item that the market size will define how much it is. There are some short effect that an extreme peak in energy pricing, again, can lead to a challenging quarter for us. We need to keep in mind that if we have one of these 6% margin quarters again because the energy market explode, that can also be a case that we know because we have decided, again, we are hedging only a fraction because we haven't found one-year hedges. There are some countries where we have really good schemes in place, and we are much better positioned than last year. On aggregate, we see that it hasn't made sense again for us to hedge very much, and that means that we have that risk also.
We have been making a wide window so that we have covered most of them. As we move through the years, of course, we hope to improve the situation.
Okay. Okay, fine. I guess you answered my first question about 8%-10% margin versus 11.9% because you are along a margin for a 6% EBIT margin quarter as well.
Yeah.
Right?
Also to sum up, I mean, we go into Q1, it's 1 thing what happens in Q1. We are, in a way, in a good place in a market that is declining. The rest of the year is just incredibly hard to predict it. It's not like a 2%-3% year that we had before 2018 and 2017. It's another 1 of these turbulent years we have ahead, and we have reflected that in the outlook.
All right. Perfect. Thank you. I mean, I have long list of questions. I'll jump into the queue. Thank you very much.
Thank you.
We'll take our next question from Claus Almer with Nordea. Please go ahead.
Thank you. Also a few questions from my side. You said several times that you want to protect your market shares. If you look at the low end of your revenue growth guidance, does that imply a loss of market share or is stable market share? That would be the first question.
Stable market share.
Okay. As you said, foreign products are enjoying, you know, cost deflation. What would happen if they start to lower their prices? As you said in previous calls, there's a certain, you know, difference between stone wool and a foam where client will start to favor one technology over the other.
We have analyzed that. Actually, the vast majority of, for example, flat roof that we get, that has a fire component to it, non-combustibility component. It's not a direct competition. There are buildings where both can work, but the segment we play, most of that, the majority of that is with the fire component. It can vary between countries. You know, in Netherlands, no one cares about fire properties. Germany, they do. Denmark, they do, et cetera. It is a very scattered picture.
Just because raw material prices goes down on PIR and PUR doesn't mean that become crazy competition everywhere where it's just price of what. We are positioned differently, and we still adhere to that when we have the right product in the right segment, it should have a sound profit margin, and that's how we drive the business. I just created room in case we need it. This stable market share, you know, it's incredibly difficult to measure precise market share in all the segments we are in. Roughly speaking, that's the approach.
Okay. That makes sense. Then, you know, you said you expect or you fear that energy costs could go up again when China picks up. What about your hedging strategy? Have you started to hedge energy or are you still, you know, running on the spot market?
We have run... You know, obviously we are working on a strategy with PPAs, power purchase agreement. We have made some, for example, in France, the government came with a great approach, and we tied that up for two years. On gas, we don't like hedging with the way the market done, but we have done a fair amount to just make sure that if it goes crazy on gas, that we numb the feeling. Our analysis at the moment is that when we simulate different... For example, last autumn, we didn't hedge because our conclusion was it would have cost us maybe EUR 40 million in a quarter. It turned out that we were right on that.
It's still, the cost of a hedge with this one-year perspective, as we see it now, still comes with a very high risk premium. When we run hedging policies, you know, the last 10 years, and you go a little bit longer hedging policy, a rolling longer hedging policy, it seems that the market works. It's no difference in the cost, actually. You just have more stability. We haven't found that sweet spot yet, and therefore, we have largely left it, except for some gas, to just numb, because we see that if the gas goes crazy with China LNG, in the autumn we at least have numbed the effect of a portion of it.
Okay, that makes a lot of sense. Thank you so much.
Claus.
I'll take our next question from Yuri Serov with Redburn. Please go ahead.
Yes. Hi, can you hear me?
Hi, Yuri.
Yes. Hi. Listen, going back to your revenue guidance and the work, you know, people were questioning you about your price assumptions and from your answers, my feeling is that it's not really clear what price is gonna do next year. I presume that's minus 10%.
We can't, Yuri, we can't hear you on this side. You're breaking up.
hold on 1 sec. Can you hear me now?
Yeah, it's better, I think. You're helping, guys, too.
Yeah. I was saying that, there was questioning about the prices, the answer you were given suggests to me that you're not quite clear what is gonna happen to price. Let's assume that it's 0. That suggests to me that minus 10% revenue guidance, the majority of that you think is going to come from volume.
Yeah, I think it's fair assessment. I, we have, you know, I believe that there is a good chance that energy prices are lower this year than last year. You have the, you know, there might be other factors too, but you have the main one is the China effect, that they open up, and you have Asian pull on energy. That's the main one that we have allowed us a bit of room for. Fundamentally, I believe that if that doesn't happen, energy prices should be lower, and there we said we hope our goal is that we match pricing with energy costs somehow, and the rest is the absorption effect and maybe some competitive elements here and there. The absorption effect is the main one.
Yeah, I understand. Going back to what you just said, that you agree that the majority of -10 is from volume, to me that is quite extreme, because in previous conversations, you said that during the global financial crisis, your total drop in volumes was -10%. We are talking about a significantly milder re-recession now and, you know, most people are actually not even seeing a recession chance-
Yeah.
even in Europe. I'm just surprised that this is what you're assuming.
I think, I think they're different, you know, mild recession. We don't even have a recession in Denmark, but you have a super drastic negative impact on construction in Denmark. You're talking about some house suppliers. I have a friend who owns a house supplier, 1,000 houses a year. It's not Denmark, it's in Sweden, has sold 1 house in 6 months. Recession and GDP are linked to the construction market in certain segment. It's not the same levers. I agree with you. Let's hope for a mild recession, if any recession. You know, the German numbers now came up a little bit. I saw IMF even said Russia would be on flat this year. That might be the case. It could be worse.
In the construction market, I see something slightly different. How long that will be, it's hard to judge.
Well, that's still surprising because the global financial crisis was a construction-led recession, and we saw how huge the impact was, and you're effectively describing something similar now. I hear you. Listen, the other thing about prices and competition, you have hinted a few times that competition is acute, especially in some segments, but overall, it feels like a trace. Again, I remember previously when you were telling us about price evolution in 2022, you were expecting that from the beginning until the end of the year, the prices would go up by 35%. Today, you just said that they actually went up by 25%-30%. That means that in Q4, you couldn't really raise the prices. Can you just talk to us about that?
Yeah. Got it.
I mean, insulation is a good industry. The capacity utilization is quite good. I mean, it's fallen, but it's high.
Yeah. You.
The competition seems to be quite acute.
Yeah. I mean, Q4, we delivered all the price we wanted. Here is more a matter of comparison, Q4, 21 average versus end year. The price.
Average.
The end of the year last year, we had increased prices compared to the 1st of January with more than 30%, compared to the average of the end of the year before, it was 33%. This is semantics on how you do it because a quarter when you ramp, the average will be different to the endpoint. No. Price realization was not a problem in Q4, not at all. What I see now is that we have a situation where you have in some segment a volume drop of, you know, we're talking more than 10%. Single-family houses in Denmark, I'm still curious to see what happens in Q4, I predict it to be something like minus 70% or something like that, maybe even worse.
When you have that, plus you have distribution destocking, that's a, that's something different as opposed to steady, slightly growing market. I think you're mixing two modes, a transitionary mode with a more stable growing market. I... And we expect this more transient market condition to happen this year, and we saw it starting in Q4. We realized prices. We did it. Looking forward now, last year, once we got into midyear, we knew energy prices would be crazy, so it was relatively easy to take a decision 3 months forward. Now, will prices now go down and then up on energy, or what will it be? It is a less clear picture, so it's a different dynamics.
Okay. Can I just clarify? You just said that the average price went up by 33%. I presume this was an insulation.
No, I didn't.
Insulation rather-
Yeah. This is the danger with this when you put it, because I said the price compared to first of January to thirtieth of December, and you draw a curve between that. I don't explain how that curve goes. I didn't speak about averages.
Like, you know, I just wanted to.
Yeah.
figure out what the volume did in 2022 overall. Was it like -3%, -4%?
No, I don't respond to that because we mix volumes in all segment. We don't give that.
Okay. Can I just ask one last question about your margin? Previously, you were saying that your aspiration for the long-term margin is 13%. Is that still?
Yeah.
-aspiration?
Absolutely.
Okay. Thank you.
We'll take our next question from Casper Blom with Danske Bank. Please go ahead.
Thank you very much. I would like to ask another question. You announced or said yesterday that you sort of still intend to build the factory in France. First of all, hoping you could just give an update on the timeline there. Secondly, should we also expect additional factories on top of that? I mean, you didn't really get about building what you wanted to build last year. That's my first question. Thank you.
On France, where it stands now is that the legal case where the central government and the local municipality was involved, that's settled, and the verdict is very clear. Now is the time of issuing the building permit, and the uncertainty of issuing that building permit is that the French legal system doesn't have defined response times. You should do it in a reasonable time. We don't know exactly what that reasonable time is, but we predict that it's gonna be towards the end of Q1 or first half of Q3, and then we start building. That's France, and that's where it stands. The timeline for that will be, we will of course see if we can shorten the delivery of that, but if you start in 2023, 2024, 2025, you hope to be ready.
We'll come back with a timeline. Obviously, we have worked, we continue to work on the engineering on the plant and all the rest, but we need to reassess the timeline when we have the building permit in hand. The environmental permit we have already, so that's clear. The air permit, all of that is in place. In terms of other factories, I haven't announced any other factory projects, but there will be other factory projects because I'm confident in the demand for stone wool. We talk about the transient kind of intermediate, low or slightly lower downturn of construction.
Maybe that's not a bad thing to get renovation started. We will come with more factory projects. Obviously, now we have a little bit more time due to the market contraction. We still wanna do it. It's still gonna be needed, and we will not miss this slowdown to push forward. When you look at some of the absorption issues we have, we wanna keep our engineering capacity and keep working through this. Some of that is reflected in our, you know, margin numbers. The other thing we do, for example, we use the time now is that we're putting solar panels in quite a few places. We have engineering for that. We keep investing in that.
Yes, we're gonna come with greenification, and we're gonna come with more new builds.
Okay. Just to make sure I understand correctly, let's say that you announced another factory here during 2023, that would not be included in the EUR 400 million CapEx guidance. Is that correct?
Yeah, it's included. We have included it. The reason is when you start the project, you have, you need to buy a piece of land, right? You need to do a whole lot of engineering to get an air permit or environmental permit. You need to do, in most places, a lot of engineering to get the building permit. It varies a little bit, and you do a whole lot of other things. Of course, it's not the main equipment spend that comes in the first year. It's more engineering hours. It's expensive, but it's not near placing equipment orders for EUR 80 million. Therefore, it doesn't really impact the forecast. We have allowed for those projects in our forecast, the EUR 400 million.
Okay. Understood. Just as a, as a follow-up to all of the many questions regarding prices, I mean, you've kinda talked about the competitive dynamics here, you know, the glass wool and foam producers. What is happening on the customer side right now? Are you getting calls from customers that, you know, start complaining about their volumes and say, "Listen, Jens, I can see the energy price is down. You, you need to lower the price or roll back the price increases that you did last year"? Is that starting to happen already?
Yeah. I mean, it happened the whole last year. Our focus last year was that we tried to have a very open dialogue about the cost with our customer. I mean, it's not an open book, but we tried to say, "We believe this happening on energy prices." I guess our result in Q3 underlined that we were not doing this just for the fun of it was a need. When we look at our net promoter score from our customer in insulation, for example, it actually increased last year. We did it with a really open intent on the sell, and it was reality, and they suffered, and there were other materials that went up much more than we did.
We do that, now you have the other situation that energy prices come down, and then people ask for lower prices. There again, we're gonna have a dialogue with them, and we need to understand the situation, and then we need to weed out also market declines that are distribution, destocking from real, and then set it on that level. You have that discussion, but you know, that discussion is there all the time, every year. You're always gonna talk about that with your customers, so it's nothing unusual in it.
Cool. Thank you very much.
[uncertain].
We'll take our next question from Cedar Ekblom with Morgan Stanley. Please go ahead.
Thanks very much. Good morning, gentlemen. I have a couple of follow-up questions. The first one's quite simple. Could you just confirm what your rollover pricing is at the start of 23? If the price increases that you spoke about at the Q3 results of the 7%-10% incremental price increase from Jan have been successful? The reason why I'm asking this is this obviously gives us the starting point to then think about where prices might go as we move through 23 and, you know, this discussions on market share. That's the first question. I don't know if I should give you the rest or if you just wanna answer that one as a starting point.
The price increases we talked about in Q4 when we discussed Q3, that happened. Okay? The rollover prices, what, 10-15%, but it varies by region and et cetera. Prices going forward, I think, is very much dependent. We launched price increases for Q1, but if the energy prices go down, we will not be needing that in every market, and again, it varies by market. I think the energy and generally, general inflation will rule how much we do, and to some extent also a competitive environment. That's where we stand, and it's very hard to give any numbers to that.
These are linked together. We need to navigate it, but without sitting and saying, "All these assumptions for every month on this is the pricing strategy." Our approach to it is, you know, to look at it now quite frequently and manage it by market and really try to understand what's going on. It's hard to put it in, and we never do it anyhow in just a percentage point up and down. We need to weigh the whole picture. Yeah.
Okay. That makes sense. The second question is a very simple one. You talk about the risks of, prices falling in the market and your intent to defend market share, which makes a lot of sense. Are you actually seeing any prices going down today? I mean, it doesn't sound like you're cutting your prices right now. I know you flag risks in the future, which make a lot of sense, but you're not cutting prices, is my take.
Yeah.
I don't hear from any competitors that they're actually cutting prices yet.
Yeah, but I...
I just wanted to get a sense for the feeling on the ground today.
Yeah, but the...
Taking into account obviously the risks on the more medium term.
I give an example. We won an order for 300,000 square meter, a big factory. That price, we went down on price to get that due to energy costs and all the rest, and we still got the price that was 20% above the second highest bidder, and they bid an incredibly low price, but we got the order. You have those effects in markets where, for example, Poland, we see a much thinner pipeline. You need to choose what project you take, and then we typically have a premium, and we adapt a bit, and it's a different energy situation now than it was in the previous quarter. We do...
We do that altogether, but overall, you see, of course, much higher price level than we had this quarter last year. It's not like we sit and just lower prices all over. This is done with thinking of cost and what orders we want. Then it's very different also in distribution, the diffuse sales and projects. We just need to weigh this, and it's too early in the year to say exactly where that will land, but it's not that we have gone out and said we lower all prices 10%. Definitely not. Energy prices are still very, very high, and we should separate, you know, try to make sure we have underlying gross margin in the business, and that's our goal.
Okay. I'll take that as in some markets and in some products, prices in, say, January and February are lower than they were in November, December, but on balance though, that's the backdrop.
In some markets it's higher. We
Okay.
Always have that. I mean, it's a fluid thing, but the price quality is high, but there are gonna be segments, obviously, if we have a product in the residential market now, general building insulation, there we have to lower price to keep our share than a different situation in another segment. Yeah.
Okay.
Okay.
Okay. Just on gross margins, in the last 2 years, 2021, 2022, there's been more than 1,000 basis points of gross margin compression. I understand the points that you're making on being focused on market share and wanting to match price and cost development. Why are we not actually thinking about trying to recapture gross margins, right? Effectively, if you're saying we wanna match price and cost, you're basically saying we're not gonna try and increase the gross margin, which I find surprising, considering the level of gross margin compression in the last years.
Yeah.
The windfall that we're now seeing from an energy company. I would assume that the whole industry has seen a lot of gross margin compression in the last years.
Yeah.
That the whole industry is hoping to see gross margins improve. I'm just trying to square your comments.
Yeah.
The broader industry backdrop, which has been tricky.
Yeah.
Why not try and see gross margin improve?
Yeah. I think We absolutely wanna keep the gross margin percentage and improve it. Okay? What you had, what you have now, was that you have this extreme inflation where it turned, you know, if you had your energy cost increase with 60% in a quarter, and you need to increase the top line with 60%, and if you wanna increase the gross margin, you need to do increase the price with maybe 70%. With that extreme dynamics we had, in 2024, I mean, we lost masses of gross margin because we couldn't react quick enough, and then towards the end of the year, we had gotten it back up to at least a reasonable level.
The gross margin issue we need to sort out, but then we have, and ideally, we need to improve it because we are investing in engineering, digital and green technologies. Our goal is to get the gross margin back and get that back, what you mentioned, and also improve it so that we can finance, and get back to now 30% EBIT margin and have a business where we can finance those investments we do in green technologies, et cetera. You and I have no different view on that. I don't have a different view to what you want me to have, I'm pretty sure.
Ian, just to push you on that, why are you saying you want to match cost and price? I mean, that's.
By match. No, no. That's obviously not, you know, if the cost goes out 20 and that the price needs to go up 20. No, it's still in the spirit of the gross margin, of course. To maintain the gross margin or improve it. Yeah, always.
Okay. Sorry, just one last one. Should you have higher EBIT margins in Q1, because you've got the benefits of all that I mean, sequentially versus Q4, you've got the benefits of all that rollover pricing. I know you flagged the risk of pricing as we move into the rest of the year, ultimately Q1 should still have pretty good pricing. I know volumes will be really weak, you've also got quite a big tailwind on energy costs. How do we think about the Q1 margins sequentially, please? Thanks.
We typically, you know, I'm not gonna guide, we are still fresh in the quarter, but it's not uncommon that we have good margins in Q1.
Okay. Thanks so much. Appreciate the time.
Thank you, Cedar.
We'll move next to Justine Dowari with On Field Investment Research. Please go ahead.
Yes. I would have a question again on the, on your midterm target. Your gross margin was closer to 50% in the past 5 years. Is it fair to assume that you want to go back to this level? Would you try to achieve a margin of like 13% or more than 13% medium term? That would be my first question.
I, you know, we don't guide for that. If you look at it, if you start to really, you're talking EBIT margin. I mean, if we need to grow more, EBIT will be impacted on the depreciation, and we have been quite firm on that. Let's say one year we build three new plants, and we add all that depreciation, maybe then we need to start to talk EBITDA margins and see what's happening there, because EBIT margin can be impacted by some of these non-cash effects. We haven't done anything really drastic there, so 13%. I would say the spirit is that we are absolutely fine at 13% and growing, and we wanna grow.
We have had 5%, 6% CAGR for 80 years. Now and then we have this dip. With pure organic growth is pretty hard, you know, on average to get above that. That really requires we build a lot of factories. I don't mind a higher EBIT margin at all. It's just that when you start to grow more and you build more factories, and when you build them, you don't fill them up, experience is that it's hard to keep. You know, you could have a really good year with a really good EBIT margin, but if you keep building all the time, I think that 12%-13% is a pretty okay level to be at, provided you grow.
The EBITDA discussion we can do some other time, because there you might wanna step up a little bit over time. We do a lot of investment at the moment in marketing, digital development. We are not holding back on any of that, and that needs to be financed, and it needs to come from the gross margin.
On the competitive landscape, for example, we understand that Saint-Gobain, they will probably face a higher energy price in 2023, because they were hedged last year. When we look at Etex, they just make a big acquisition in glass wool, and they probably have to repay the debt, so they probably need to generate cash. Do you see those big player, which I understand probably like, represents more than 60%-70% of the capacity, do you see those big player being disciplined on price and trying to hold prices? Or do you see also like the large player being a little bit more nervous and trying to underbid on project?
I don't wanna comment that now. I think the bigger you are, the more important that you have a steady cash flow to finance a big operation. You can't swing it around up and down. Commenting individual players, I don't wanna do that. If you wanna run a sound big business, of course you cannot drive. As a market leader, I can speak for ourselves. I mean, it's obviously we need to have an acceptable price level and generate cash all the time to feed our growth. That's our view on it.
The last question on the energy price? Just energy price are relatively low today. You mentioned that you hedged a little bit. Could you mention, like, what percentage of your gas and power bill is hedged in 2023? Just give us a rough order of magnitude?
Let's say it like this. Our total energy we do, very little is hedged. The specific hedge with, you know, Europe is one thing, U.S. one thing, Asia one thing. I don't wanna venture into that because I'll probably give you the wrong number when you put it as a global number. We have hedged a bit in Europe to make sure that we make ourselves a little bit more resilient. We came to the conclusion that, and I wanna emphasize that for our energy types, we came to the conclusion that we couldn't find a good hedge, you know, 80% or 50% of all our energy in Europe. We couldn't find a good point. So far, that has proven wrong, right.
Of course, if China steps in at the end of the year, we might sit and say we wish we had that hedge. Up to now, I just feel every time we look at it seems expensive to hedge. That's as much as I would like to share about that. It's pretty insignificant what we have hedged, I would express it that way.
Thank you.
We will take our last question from Saim Sikander with JP Morgan. Please go ahead.
Morning, Jens. My first question is just a clarification. You sort of mentioned the majority of the guidance is on volumes of 10%, which kind of implies flat pricing, and that was compared to kind of the previous commentary on pricing being around 15% on the carryover. That implies some quite strong cuts. I'm getting a sense that's not exactly what you're saying, so what am I missing there? The second question is, you know, Rockwool seems to always have a pricing premium compared to the competitors. Do you think that the volume decline that you face will be more pronounced as spending comes under pressure? Thank you.
I, so first of all, we have allowed for a bit of price reduction in the outlook, you know. I say it's up to 10% decline. Let's assume we work in the... We have allow, you know, we do... It's not like it's one calculation, and we get to the guidance. We play around with the numbers, and we said, "Okay, within this, we can navigate." It means that the numbers are not always matched. It's like different streams. What I've said on price is that depending on the energy price and the inflation, it may well be absolutely that the prices are lower during this year than at the beginning of the year, and that's fine as long as we can protect fundamental gross margin.
If energy prices keep going down, and we don't get the spike at the end of the year, we are fine with lower prices because our goal is not to just sit stuck on that and then see energy prices go down EUR 200 million and not share any of that, you know. The market won't allow it because either will go down. Of course we don't, you know. We have allowed in the calculation price, but we haven't allowed a massive dilution of profitability with price. That's that part. Then, if we then have a, you know, 10%-20% volume drop in the market in, that is then the bigger effect on the bottom line, and that's the link.
The fact that if we, you know, we don't hire any people in the offices to, on the white-collar side. On the blue-collar side, we adapt to the capacity that we deliver, that we have to, and that's the vast majority or two-thirds or something more of our employees are obviously in the factories. We have deep manufacturing. Then on the office side, the white-collar side, since we're gonna do engineering of new plants, these green investments, all the rest, we have said that we don't wanna make a cut exactly with the volume decline temporarily in the construction market. You pay a little price for that, and that's reflected in the outlook. Okay? Then you could argue, okay, that's bad management.
If you, like I and our team, believe that the green agenda will come up, it will work, it will kick in, then it's better to bridge because we have a really good crew in this company that knows a lot about stone wool. We don't wanna damage that muscle. Of course, if we sit in one year's time, and the business is down 20% in volume, and it's look, is looking to be stuck there, we haven't seen that in the history of construction. Let's assume that's the case, then, of course, we have to look into the fixed cost and do something deeper. We have never seen that in the history of the company, and one of the lessons was maybe that sometimes it's better to be more measured in those situations.
We saw it during Corona. I would say that second quarter we had, we probably took a bit too much cost out in that one, than we should have, but we did. Here we see so many macro speaking for us that we need to be a little bit cool in this one. Does that make sense?
Yes, that makes sense. Thank you.
Saim.
Ladies and gentlemen, we will now close the Q&A session. I will now turn the call over to your host for final remarks. Please begin.
Thank you. Jens, Kim, and I, Thomas Harder, thank you for joining today's earnings call. We would like to thank you for all your good questions and the audience for listening in on today's call. We appreciate your interest in Rockwool A/S. Please be informed that on the second March, the Rockwool Group will hold the next investor conference call dedicated to ESG topics. If you have further questions, please feel free to reach out to me. You know my contact details, or you may find them on the investor section on our corporate website. Have a great day.