Good day to everyone. Welcome to the Rockwool A/S conference call regarding the results for the first quarter of 2023. 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 quarter of 2023. Afterwards, we'll 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 two, which is the forward-looking statement. Please be aware that this presentation contains uncertainties.
We can go to the next slide, which is slide number three. Jens Birgersson, I will now hand over the words to you.
Good morning, everyone. I'll try again now with the mic on. If you look at the last quarter, we are obviously not satisfied with how the market developed in several segments. We predicted it, and I will come back to some of the capacity adaptions we have done, so it was as we expected. What we are quite satisfied with is how we have now recovered margins after the price increases that we did last year. We have seen in the quarter that we have gotten a balance up all the way from the contribution margin and down to the EBIT margin. That's positive. Let's go to the next slide. Looking into our two different businesses and how the top line developed, last year, Q1 was an incredibly high comparable.
In terms of production, it's one of the best production quarters we have had in the history of Rockwool. We were a little bit surprised by how strong Q1 was last year. If we compare the sales versus that benchmark, 7% is not too bad because that's almost on par with the year before 2021, that was more of a normal quarter. If we compare the businesses, the Insulation business and the System Division business, we see that we reached a slight growth, +4% on System Division, and that was mainly driven by Grodan, mainly driven by Rockfon, that overall had a very good quarter. Some of the Grodan businesses had a good quarter. The other System Division businesses had a little bit tougher times.
On the Insulation business, apart from North America, parts of Asia, we basically saw a decline in most markets. There were exceptions, but generally it was a little bit slow quarter, a declining quarter. Move to the next slide, regional development, slide five. In Western Europe, to our surprise a little bit, United Kingdom came up and started to grow again. Mid last year or 3rd quarter, we saw the U.K. market slow down quite a lot. I don't know if it's the Sunak effect or what precisely caused it, but then when we entered this year, the market recovered, and we actually ended up in a situation where we have taken down a little bit too much capacity.
We delivered everything we produced in Q1, but we have seen a market that is back in growth territory. I think a big reason or one of the reasons for that is that non-combustible insulation is very sought after now in the UK, and the market is really shifting over. We also saw single-digit growth in France and in Spain, even double-digit growth. If you look at the rest of Europe, you basically saw a weaker top line than the previous year. Eastern Europe, and also some of the Nordic markets, if you take Denmark and Sweden, where you have quite a high content of residential in our top line, there we saw quite a dramatic decline. We are quite used to that in Eastern Europe.
When it booms, it booms, when it goes the other way, it stops very quickly, and it was quite broad-based in those markets. North America, US double-digit growth, Canada good growth, some markets in Asia good growth, China's moderately growing, I just want to remind you that less than 1% of our business is in China, it doesn't have a big effect on us. What happened actually in these markets? If we look at building permits, new building starts, et cetera. It's all down quite low. You see a big decline in building permits in Germany, also building starts the same pattern in, for example, Denmark, where residential constructions in single-family houses has come down to very low levels, and we feel that.
On the more industrial side, it varies per market, there are a fair amount of canceled or postponed projects. For example, in Poland, the project pipeline has probably halved in Q1. Again, that could change as we move into the year, but generally, I think the interest rate and the cost increases in building materials have started to impact the market. Let's go to slide six, profitability. We had the goal last year to kind of bridge the gap and get back to healthy contribution margins. We have taken a number of steps to do that. We still have inflation. Q1 versus Q1, we have on average per unit produced a higher cost than before, but now the prices have caught up.
We only did very, very moderate price increases in Q1, and that is an aggregate of the whole world. There were many markets where we didn't increase prices at all, then we had, like North America, some places in Asia and the UK, where the prices continue up. Overall, flat or a little bit increase in prices, but market by market, segment by segment, we have adjusted a fair, a fair amount. Looking at another contributor, we have reset the business. Our goal is to maintain market share, but to adapt the business to the current market sizes. If you compare quarter to quarter, you cannot see that in our press release because we show, kind of our own, contracted workers that we have, on permanent contracts.
In our report, you see a reduction of about 230 jobs quarter-to-quarter there. The real picture is that we have adjusted with about 800 jobs compared to Q1 last year, where we were on record output to now. That, as we have explained a couple of times, is because we have a high proportion of contingent workers with short-term contracts so that we can ramp up production in line with the season, and also like we had to do now to draw down capacity. Basically, we have reduced the manpower roughly the same percentage as the top line drop, decline. That has been done, and that safeguard that we didn't sit with too much under absorption when we had the lower revenue. Move on to slide seven.
I guess the interesting aspect here is the margin. Again, if you look at the diagram that Insulation has come back above, up in double-digit margin where we want it after a few quarters where we've been below 10%. Also the Systems Division has recovered, so that's good. It's, as I said, a combination of pricing and that the energy costs are down, I mean, that we have an overall better price balance. Investments. We continue with the green investments, and that's continuing. We are still stuck a little bit with the project in France. Just to explain how I expect that to play out. We haven't started to break ground.
The status today is that we have an approved operating and environmental permit that is comes from the state, and we have, in a way, an approved building permit, that is local. The building permit has a provision in it where it says that we need an approval to build on a site that we need a endangered species approval. The industrial area where we are building doesn't require that, but there is a dispute between the state and an NGO that we are not involved with, but they argue that the industrial area should require endangered species authorization. This is quite common in France, so this happen.
Over the next two months, we expect that that will be resolved, and that the state will win that legal dispute, because industrial areas normally don't have this, and this is an industrial area. What has been built there before didn't need it. Once that is cleared, the last obstacle in the building permit can also be cleared, and then, towards the autumn, we should start construction. That's the status on France. Free cash flow, slide nine. Normally, we build seasonal stock this time of the year. Last year, we didn't really manage that because we sold it all, because we had such a high demand, and that is the main reason why you see an improvement here in the cash flow in Q1 last year versus this year.
As expected, in Q1, when we build seasonal stock, we do draw, we tie up some cash in inventory. That's the main reason. Going to the outlook, top line, very dynamic construction market. We have seen, for example, ETICS in Germany start to grow, so external wall insulation due to subsidies. Overall, we see a quite depressed construction market in Europe. We haven't seen many signs of that, energy and energy efficiency stimuli and other measures take effect, and we have re-reflected that in our top-line guidance that up to 10% top-line decline. That's the best we can say today. Obviously, this is quite different in different countries. U.S., for example, is looking to have a very good year. Again, we have seen the bank challenges now lately in the U.S.
Will that come back and impact the economy to a wider extent? I was in the U.S earlier this week, the signals I pick up is that it's not gonna impact the economy to a big extent in the U.S. If that's the case, we believe that we could have a very good year in the U.S. Asia, we have seen some signs of China waking up, but maybe not as quickly as we expected. We had a couple of good months, now it's down again. We don't see the broad-based improvement, at least not in our business. Investments we have left unchanged.
On the EBIT, we have guided, reflecting that there are risks in the market, and we have also included EUR 27 million deduction in EBIT for the Ukraine, our donation to the Ukraine Reconstruction Fund. That's in there. Here in the autumn, we have some uncertainties on energy pricing, how the business cycle will go. It could be better than that if the market holds up or improves slightly. As usual, our goal is to be in the double-digit EBIT margin area. We simply, at this stage, don't have visibility into Q3 and Q4, and therefore, we have guided around 10%. Our goal is clearly to be in the double-digit territory. With that, I hand over for questions.
At this time, ladies and gentlemen, if you have a question for the speakers, please press star one on your touchtone phone. We will start with two questions per participant. Please respect that. We do have a question from Rémi Tiraud with HSBC. Please go ahead.
Hi. Good morning, gents. I'll go one by one. The first one is on guidance. Now we have seen the volume, if you can confirm what it was in Q1, my calculation was close to 30% decline. If you take that volume as an indication, given that it's going to you're talking about market hasn't improved as such, how does that impact your guidance in terms of margin, with pricing? If you can just give a little more comment about how the pricing is evolving?
In a nutshell, if you can, wrap it up saying, what's really the 13.5% margin you have done in Q1, what all the variables you see, to be deteriorating as you go, to reach your 10% target?
Was that your only question, or do you want me to answer that?
Yeah, if you can answer that one.
I, first of all, the last year in terms of volume, we had unusually high volume in Q1 as a percentage of the full year. The volume decline will kind of improve over the year if the market doesn't deteriorate, because we had a very unusual comparable in Q1. We should be catching up to that, and towards the end of the year, we might, you know, might even get into growth territory because we had a relatively weak Q4. Then it will be a timing issue, how long will this dip be, and will it get worse or not? You know, statistically, we have historically seen about 18 months of this, but there are so many things that are unusual there, so I don't know if that data is worth anything.
On the price, heavy reason is fundamentally inflation is still there. So even though our input cost in Q4 clearly per unit or per unit we purchase of everything, and there we go behind the coke, electricity, fleece, melt raw material, natural gas, pallets, PE films, other consumables, metals, you name it. Compared to Q4, most things have improved, but compared to last year, Q1 is still higher, not on the energy types. On energy, many of those have started to come down, but and stabilize. Overall, it's double-digit up more expensive. Our ambition going forward is as we see inflation develop, we want to keep that balance. At the same time, if with the lower market activity, we need to defend market volume, we have allowed a bit of room for that.
Depending on where it plays out, it's very hard to discuss a number for the whole business because the way the business looks now, for example, North America looks strong and inflation is, although it's a little bit lower, we never had the big energy price surge there. Even though inflation looks to be maybe 1% lower than last year, it continues up. We have already raised prices more in the U.S., and we have good volume. U.K., we see a similar pattern. Nothing is really getting cheaper in the U.K. It's a mix of things. It depends a little bit how the different market plays out. One should be careful to talk about the price for the overall business.
I would say we are ready to lower prices in the segments where it's needed to make sure we secure our market share. At the core of the business, we have cut output to a level where we believe that kind of hits a constant market share. We have not been sitting on extra capacity that we don't think it's needed and try to push it into the market. We have made capacity adaptations, and those are the roughly 800 fewer jobs in the business compared to a year. I think we have a year where you need a lot of management attention to balance cost versus price versus market share and then get the capacity right. You navigate, and we're gonna do this by market, by country, by segment.
It's all hands on deck out in the businesses to do that. On the other hand, if I look at the challenge we had last year, where in Q3, I think we dipped down to 6% or 7% EBIT margin. If I look at the challenge we had last year to deliver sound profitability, the challenge was, in my mind, a lot bigger because there, if we would have made a mistake, we would have gone into a loss, you know, if we didn't increase prices last year with 30%. This year is more adaptation being on top of the market, each segment, and be very alert to the situation. Next question, Priyesh.
Thank you very much for. Just for the next one is on your pricing comment you made. Have you seen any prices already falling, or it's just that your expectation that things could probably will fall into that in June into second half?
Yeah. It's a mixed bag of things. You know, we have had, for example, very good success in large projects in Q1. There were fewer projects around, but the really large project we have successful, we have gotten almost all of them, and pricing was a bit lower. Since inflation was lower, the project pricing, it makes sense, you know. Prices is lower because inflation and costs are lower, and these are big projects. Then in the mid segment, if you go, for example, into Poland, Eastern Europe, there you have seen prices, and we have not taken so many projects in those segments, and we are assessing the situation now.
You can clearly see the pricing on EPS when EPS competing with us or peer and peer compete with us, maybe less of an issue there, prices have gone down in the market quite a lot. It varies by segment. Eastern Europe for sure, we have seen it, there are also other markets with certain segment where pricing has been lowered, with a certain logic because energy prices is down, we have a slightly different cost structure. Yes, we see prices go down. In Q1 due to the mix of countries we had, we see prices stable or slightly up on aggregate, there are several places and segments where prices are down.
Understood. Thank you very much.
Thank you, Priyesh.
We will take our next question from Casper Blom with Danske Bank. Please go ahead.
Thank you very much. I'd actually like to stick a little bit to the price discussion here. You mentioned that, Jens, you have seen certain areas where prices were down significantly. We also see that your local currency growth was hit much harder in Eastern Europe and Russia. If we start seeing that revenue decline spread into Western Europe, where as you also mentioned that building permits are down quite significantly, could we not start seeing prices coming down there? If volumes are, you know, really hit hard, a potential price war? Your thoughts on that discussion would be really interesting.
Yeah. I don't think I said. Did I say prices come down significantly?
Yeah, I think you said, EPS prices down quite a lot.
There's segments. First of all, we have a number of segments, and then we have different competitive positions. I think we don't see it as a good strategy to start a price war in a declining market, right? We have taken the approach, first of all, you know, Systems Division, system business can export from one factory into several market, and in a way that hedges us a bit. On the installation business, it's local for local. Our approach has clearly been, well, and is, you know, cut the capacity to the market size and then work within that and lower the price where you need to secure your volume. You know, you compete with different things in different markets.
What we see is there are also some segments growing, like the ETICS in Germany, which is a big segment, and there we don't see the same situation. It's not like insulation, all insulation. It's different segment, different competition, and it's gonna be a lot tougher in segments where we might be competing on a facade, stone wool against EPS, and the customer doesn't care about fire properties. That's gonna be tough, and we probably can't go all the way there to secure. We might lose a little bit, and then we secure a little bit more share in another segment. I don't see with the setup we have or our approach to business that in any way we would like to pursue a price war.
I don't wanna sit and just accept that others fill their factories, and we just sit there, and we do all the capacity adaptions in the market. I want to have our fair share, to be clear on that, right? It's a balance between how tough you are and et cetera, and every market has a different dynamic. Also a fair amount of markets are out of all of this. We don't have the issue. That's about as much as I can say. Otherwise, we need to.
Follow-up.
Sit and go into each market, and I don't really do that normally, so yeah. I can say one thing.
Follow-up.
Eastern Europe, we have seen it before. I mean, you remember years where we have had 1 quarter, but the volume goes away. It's a different dynamic in Eastern Europe. We see product pricing go down very quickly. When that happens, small contractors bidding for medium-sized project, and it is a different dynamics of that market compared to the French market. It's just different, all right?
Okay. just a follow-up then. I think the previous analyst on the call mentioned a volume decline of 30% in Q1. Is that a number that you can confirm?
Yeah, as you know, I never confirm volume and price. We don't do that breakdown of volume-price mix that some companies do because we feel it's competitive sensitive information. But I can confirm that versus the very, very high volume Q1 we had last year, it was in many respect a record because a low season quarter and super strong volumes and a higher proportion, we are down double digit on volumes, just to be clear on that. But I won't go into any details on exactly how much it is. But the comparable as we move forward on volumes will be improving. We had the relatively strong first half year last year compared to the second half year because the year was almost two different market conditions.
A very strong first half year and a quite challenging second half year in terms of market volumes. If you look at last year from a market share perspective, we came out of that at about flat market share. Yeah.
Understood. Thank you, Jens.
Thank you.
We'll take our next question from Claus Almer with Nordea. Please go ahead, sir.
Thank you. Yeah, also a few questions from my side. Sorry about going back to these market shares and your strategy. In the report you're writing, you want to safeguard market shares, and that always looks good. But to what extent are you know, sticking to that statement if, for instance, as Casper asked, if the Eastern European decline will spread to other markets? Is it actually more important to get the market share then stay away and hoping for more stable pricing environment? That would be the first question.
What's important, market share or price? Is that the question?
Yeah.
Yeah. You never have that answer for a whole business. Obviously there could be segments where you don't really care. You don't wanna race down to the bottom, you lose a few projects, and when the business comes up, you have it back. On the other hand, there are businesses where if you let a competitor in, they never go away, and there you might go very hard on it. It all depends on the segment and your position. Then you have segments where you talk about non-combustible materials, where your competition is other stone wool players, and there you have a different competitive dynamics. I should also say that market share, there isn't like a master report where you see the market, you know, perfect.
We have a good feeling for it, so you navigate this, and then you make sure that the overall works out about right. That probably means you're a little bit up and down, compared to last year in almost every segment, some segment being much tougher. What doesn't make sense to hold them, you know, if you have 52 at EPS competitors in a segment, you might not wanna fight so hard there, and in another place you wanna fight. I'm not. I don't see it as. As I said, last year to me was a much bigger challenge. This requires many, many local decisions, and to stay close to the customers, and our team is quite good at that.
It's not easy, when volumes go down, but I feel confident that we're gonna navigate that.
Sure. That makes a lot of sense. You mentioned.
One comment, Claus, on the spreading. You know, Eastern Europeans spreading to Western Europe. Remember our factories and the nature of our product is the factory that sits in Eastern Europe doesn't really sell to France or the U.K. It's not a normal mechanism. You end up with, you know, a lower capacity in a factory in Eastern Europe, but now you're gonna sell stone wool from Sighetu Marmației to Paris. It's too far. It's a slightly different dynamics compared to if you have European-focused factories in the business where, you know, now the market here is not nice, so then you go further away, and everyone ships a business. It's a bit self-regulating due to the very bulky nature of the goods in the installation business.
Sure. I wasn't worried about the whole demand picture, but I hear what you're saying. You mentioned, Jens, that U.S. has had double-digit growth in Q1, and you also expect this year could actually be a good year. Can you separate, you know, let's call it your current market, you know, from the old factory and how much growth is coming from the new factory? In the old factory, is that also seeing a material volume decline, or is it actually across U.S. you're seeing sort of growth?
Yeah. Just recap what has happened. I go back to kind of the last two quarters' comments on North America. What we saw in Q3 and Q4 was a U.S., and slightly delayed also Canada, that went into quite a big volume decline. I mean, we're talking 40% drop-down in volumes, huh? That happened last autumn, we went month-to-month, we took down capacity. It didn't impact pricing in the market because the inflation was still there. I think our take was, this looks like we have at least a construction market recession because permits and all the rest was down. We saw the quite brutal interest rate hikes, people worried, huh? We thought, okay, U.S. will go into recession. That was our prediction.
When we now look at it, I don't think U.S. have recovered in every respect, but at least our business jumped up to the level we have before that decline. We went down in capacity, and then now in the beginning of this year, jumped up again, and now we are busy ramping up even more capacity. We have double-digit growth in the U.S., so that's nice. Yes, we see these banks break, you know, but I met a policymaker in the U.S. last week, and she said, "Well, when you do something like that with the interest rates, something will break. It's not a problem that a couple of banks break. You know, that's a small price to pay, and we sort it out." Those were her words, you know?
We certainly see it in the business. What we say now is we might not understand perfectly how all that works. Last week, I think people are when I was in the U.S. or this week and last week, that people are cautious but slightly more optimistic and believe that it might not be a record year, but it's sound business going on and that they kind of avoided the recession. Again, this can change any minute, but that's what we see. We haven't seen that just for a month or two. We have seen it since it started, and it looks to hold at this stage. That's where we stand.
Sure. I remember that you talked about restocking, last year. Maybe coming back to the first factory you have both, I guess, in Canada and the U.S.
Yeah, the factories. Yeah. Yeah. Yeah. There, it's quite simple. You know, you have the Eastern Seaboard. We have good loading, and we balance the factories and optimize logistics. That's basically how we do. The Toronto factories, the new factory is obviously excellently located to cover a lot of areas. We have pretty good loading on all of them, and the new factory is up and running. The semi-old or the newish factory in the south is running quite well, and the old factories in the north are running well. We kind of spread out the load. They're all running fine, and we still have capacity left to grow.
That is always a challenge in the U.S, but we must never run into full capacity in the U.S, so we can't let the market grow. We will just keep expanding, but it's looking good at this moment. Again, anything can happen any moment. The fundamentals looks much better than, say, five months back.
That makes sense. Just the last question, again. The production or the revenue you did in Q1, you know, those products you were selling, how was the input cost? Was that hedged at a higher or lower level?
We don't-
Is that the same cost base next year in Q2?
Yeah. you're talking about the input cost,
Exactly.
Right. Yeah. We don't hedge an awful lot, but we have secured a bit of gas. We have a mechanism of coke or coke that goes, like, three months at a time. We have started to make deals on electricity. We made a 2-year deal in France. We have made a deal in Norway since we consume a lot for the electrical melters. We have secured good electricity pricing in France and Norway. It's kind of a mix of things, but the fact is still that the cost level per unit produced, I mean, if I equalize them to the same output, then the cost in Q1 is lower than Q4 because the energy is better, but the creeping inflation on most of the materials are there. We are still, you know, double-digit up from Q1 a year back.
I don't see, you know, that pallets and PE film and these things and metals will just drop now. That's not what we expect. Salaries, of course, the new salary increase is bigger than we had the previous year. That keeps rolling underneath, even though if you look at inflation curves, both the base inflation in North America and Europe has improved a little bit, but it's still there. Still there.
Yeah. That makes a lot of sense. Yes. Thank you so much.
Thanks.
We will take our next question from Christian Johansen with SEB. Please go ahead.
Yes. Thank you. My first question is on your marketing guidance. Jens, to get to the 10% EBIT margin, are you assuming the contribution margin to go down versus the Q1 level?
We have, you know, this guidance, I would say around 10. We clearly wanna be above 10, and we have made some allowances to that guidance for price reductions. We have made some allowances for that energy could jump up again, and we miss a little bit in the pricing because the difference. I mean, we did an effective job last year, even though Q3 was a horror quarter in terms of margin, but we got the price right. Here we factored in a little bit that if the energy price in gas, et cetera, even though we hedged a little bit more, would come up and the volumes in the market are... If something drastic happen, it will be bit more tricky to pass on the prices quickly, and we have lead time.
We factored in a couple of bad news like that, and then we landed on this. Our ambition for the year is that we wanna, of course, stay on the same gross margin or contribution margin, whichever one of you look, and keep it sound on that level. Also you have the other aspect that, if volumes At the moment, we have, you know, the 800 jobs out. That is an adaption of primarily production resources. We haven't touched the white-collar employees. You could say, you don't do your homework. We are slow on that here because we see that if the market comes back, I mean, it's challenging to hire people at this stage, you know, that might change.
We have been a little bit slower on that. There we should also say that if we need to go into capacity adjustments, reach it deeper into the manufacturing or deeper into the stone wool, that should also cost a little bit of money. We factored, factor a few of these things in on the negative side. Then we link that to uncertainty. That's a big reason. The goal is to maintain contribution margins straight through and have a sound business on that level. You know, we allowed ourselves to fail a little bit in case it would be needed.
That's quite clear. Thank you for that. My second question, you gave an update on the new factory in France. Obviously, this project has been delayed quite a bit. In one of your other comments, you also talked about you can't just ship from your Eastern European factories to France. How big a problem is this delay in France? Obviously you also report continued growth in France. If renovation really picks up in France, are we at risk of seeing you run out of capacity with this delay? How do you think about that?
Yeah. First of all, my observation is when you look at expanding, it, you know, we talk in Europe about bringing back manufacturing from China, put in region, for region, have more robust supply chains. Then you run into these type of things where it's very likely that you build a factory, like in Ranson in the US now, straight through those protests, people walked into the supermarket in the red Rockwool jackets and caps, and we never got the negative comments, but there was a lot of noise all the time. Here, the, we have noise, we have NGOs against the state because you have this culture that there always gonna be someone protesting, and that's frustrating. We can think about that if, you know, to meet the climate goals, we're gonna need manufacturers more in Europe.
It seems that at the moment, at least, every time we build outside an existing brownfield, we have this protest. In terms of problem for the business, If this downturn wouldn't have come, yeah, then this would have been a problem for us, right? Because those terms are missing on that delay, we wouldn't have been selling them, you know. If we would have had another growth year, you know, where we grow 10, 20% of volumes, that's tough, you know. At the moment with the, with the market decline, and improvements we make on other factories, we have started the Romania project, we have some other projects we do to increase outputs, we should be fine. It's based on that we basically can start to break ground here early autumn. Yeah.
It's not a big problem now, we really need to get going here in the autumn with this project. Otherwise, we need to, I think, consider a different plan. We have already land prepared in other places, and then we need to build something else in Europe or accelerate one of the other projects we have in the pipeline. When I look at it's an attempt by an NGO to put the requirement on an industrial zoned area to need an authorization for endangered species. Clear is this is just a flat field. There are no endangered species there. We have checked. If you get to that point, you're gonna be entangled in bureaucracy and approvals that takes years, and this site is not right.
When I look at it, there are already industrial activities on this site, in this area that didn't need this authorization, and the state argue that it's not needed. I'm quite hopeful that this will work out. What we maybe underestimated in this is that the French legal system probably have been impacted by Corona a little bit, but it doesn't have very fast response times. In some countries, you have a certain number of days to respond to something. Here, we have found that many things have taken a lot longer. Even simple things has taken a lot longer to get the court decision on. Now I feel we are coming towards the end, where we get to, you know, a final decision so that we can start.
Understood. Thank you so much.
Thank you, Christian.
We will take our next question from Yuri Serov with Redburn. Please go ahead.
Yes, good morning. Can I ask you about Russia? I understand that you are not managing that business closely, but obviously it's an important country for you, so you're paying attention as to what's going on? Why are the volumes falling so much in insulation in Russia? What explains that? I mean, if I look at other building materials, that's not happening.
Yeah. Very cold winter.
Okay. The volume declined double-digit volume declines for Insulation Russia.
Yeah. Yeah. You have the Russian economy is impacted by the sanctions, but to a lot smaller extent than people believed. I think we shouldn't go into the effect of the sanctions, but that's not the primary reason for that decline. The primary reason is that this winter was. Remember, this is also low season. The season starts after the winter is over. This season was a very cold winter, so the season hasn't started, and last year was the opposite. That's really the reason, the main reason. Of course, we will look at next quarter. Again, we are not managing it. We see the numbers and see what plays out.
Okay. The double-digit declines, you're expecting that to stop at some point.
Also remember, the whole of Eastern Europe has seen the. Eastern Europe is impacted negative.
You said that in Eastern Europe, at the beginning of your speech, you said Eastern Europe, you have a higher exposure to residential, and that was one of the big reasons why the hit was bigger. Is that the same in Russia?
I don't think higher exposure. Maybe I expressed it wrong. For example, if you look in Poland, a lot of these mid-size semi-industrial projects, you know, small factories, logistics center, warehouses, all of these activities. It's residentially impacted, but also these commercial projects have been impacted because of the uncertainty. If you look at the project pipeline for Q1, in some of these markets where you have commercial industrial projects, what's awarded in the quarter is down with plus/minus, but roughly 50%. Yeah.
The other thing that I wanted to ask you is about your Romania factory. You say that you announced it in February. I must have missed it, but can you just tell us a bit more what's going on? Is this going to be a full-fledged new factory for you?
Yeah. It's a brownfield, so we don't announce. We tend to announce greenfields in new markets. When we just expand with an extra line, we tend not to make big announcements.
Will it double capacity?
I talk about it, and I will share it. It's not secret, you know, what's the big deal? We're just expanding the capacity on the site we already have. Let's say if we were to build a factory in an entirely. Let's say we build a factory in Australia, we have no plans for that. Then we announce it because we feel it's significant change to what we are doing now. The rest is just adding capacity to meet, kind of, our growth projection, which is not a change of strategy as such.
Yeah, I understand that. You say new line. I mean, it doesn't mean that the capacity is gonna be doubled in Romania.
I couldn't hear that. Could someone help me? Well, could you repeat that question?
Can you hear me?
Maybe you would just repeat the question.
I'm saying-
because the line is not so clear.
Yeah. I'm saying, you say new line in Romania. Does that mean the capacity will be doubled or not?
More than doubled.
Okay. can I just ask 1 clarification? You said that your prices overall across the business in Q1 went up very slightly. I presume you mean sequentially, so I don't know, 1% or something like that, right?
I don't wanna go into the details of that. Obviously no big price increases. It's just that with a mix of things, relatively stable prices slightly up. Remember, we announced price increases for Q1 based on very different energy assumptions, and then we had we rolled back some of that because the cost situation was different, and in some countries we stuck to it. That the net of that is due to lead times in the process slight up, so not a big number.
Okay. Thank you.
All right. We'll take our next question from Arnaud Lehmann with Bank of America. Please go ahead.
Thank you very much. Good morning, gentlemen. My first question is regarding your donations to Ukraine. I think it was another EUR 13 million in the first quarter and more or less the same number in Q4. Have we reached now the upper end of what was approved by your shareholders for the donation? Do you expect more donations going forward?
That we have now in our forecast included all the approved money. That's done. We have reflected it in our forecast. We don't have any new board decisions on giving more. That's where we stand today.
Thank you for that. My second question is, Russia. It's been about a year since the conflict with Ukraine started. Do you still stand with your decision to stay in Russia? Are you still reviewing it? I guess, day-to-day, have you found that you can still operate in the country without, I don't know how to phrase it, but compromising yourself with either the local authorities or the Russian state? Do you think it's still worth all the, let's say, bad press that you're getting? Obviously you've been cleared from the investigation with the Danish Business Authority, but that created some negative headlines around the company and the brand.
If we put it in perspective, you know, how. I won't go through all the arguments, but when we fundamentally look at the assets, the four factors we have in Russia, one of the arguments, I'm not saying it's the main argument, one of the arguments has been to take something that is state-of-the-art technology that would cost DKK 1 billion to build if you could build it, if you had our knowledge, you know. If you put that DKK 1 billion it would cost to build, they are there, they are absolutely top-class factories run with local people.
To get to a conclusion that is good to give that away for free, because divesting is basically giving it away for free or behave in a way that it got nationalized, and in a way ending up with some sort of competitor is per definition a competitor if someone else gets it, because it will keep running, because it's not dependent of imports. If you contrast that to, for example, Denmark's complete contribution, arms, aid, whatever, to Ukraine so far, that donation to Russia would dwarf the whatever has been given so far. My very rational approach to business is that I have a fiduciary duty to not do it, but I also have a moral obligation not to do it.
Once the dust has settled in the choice between creating that competitor and making a bigger gift to Russia than the whole of all companies in Denmark, including the Danish state, give to Ukraine, it just doesn't make sense to me. We stand by that, but we obviously review it. If you then look at the pain of it, if you look at that St. Gallen study, 93% of the companies in Europe that were active in Russia, they haven't changed. They do compliance with the sanctions. Those are my competitors. We are in a bucket with that is 93% of the companies in Europe.
If you speak to politicians, I mean, I met several politicians, and I said, "Do you demand that I do more than the EU sanctions?" They all say, "No, it's fine. That's what you should do like all other EU companies." That's exactly what we've done. We are actually in a group with the vast majority of other companies in Europe. That's where we stand, and that's our motivation, and we monitor that all the time. We are trying to prevent, so we're doing the least bad, prevent that it goes over as a gift or a 1 ruble divestment where we create a competitor, and in 10 years, it will come back and bite, you know, this company. That's where we stand.
If you look at the pain of it, there are two aspects to it. One is, you know, the 95+% of the business or 98% outside. There, this pain and debate is not there because companies do what we do. In Denmark, there are several hundreds of companies that do the same as we do, I would personally, if I was just doing a trading business export into Russia, I would for sure not do what I do here, because the logic is not the same. Remember, there are still three, four, five hundred companies in Denmark that are in the same situation to us, and then we have become the one that everyone talk about. When we look internationally where our business is, we don't get the criticism.
You could say it like this, that yes, I get criticized, Kim get criticized, but we still feel that we have an obligation to stick and being logical and rational in what we do. It's a debate in Denmark, and we need to acknowledge it, but we just need to accept that our rationale makes sense. It is in line with the vast majority of European companies, and we feel we are doing the right thing even though people criticize us here in Denmark.
Thank you very much.
We will take our next question from Yassine Touahri with On Field Investment Research. Please go ahead.
Yes. Maybe a question on the long-term outlook for Rockwool. You've got this directive in Europe that has been implemented. How do you see the impact on the European markets? I think that Europe wants the renovation rate to be doubled or more in the next 10 years. Do you think it's achievable? What would it mean for Rockwool in terms of size? Question is like, if I look Rockwool in Rockwool in 2030, how do you look at the business? Could you double in size?
Yeah.
in Europe?
Sure.
Then the second question is on the on hedging. I understand that you didn't hedge much for the second half of the year and for the third quarter. Is that correct? That's when we are modeling, we should assume that you will pay mostly the spot price for gas and electricity?
I will do the outlook, and then, Kim will do the hedging. On the outlook, I think we are blessed with a very good, you know, the macro, the macro so speaks for us. Then we have now a dip, a temporary dip in the market, and I've said it 1 million times that you cannot meet the climate goals without delivering on those EU goals, and reduce energy consumption, thus reducing CO2 equivalent emissions. Also when you do that, you speed up the transition, the greenification, because if you don't use energy, you can use the solar PV and the wind to replace other things and to make the whole grid green.
We have calculations where we've gone down to square meters, number of houses, how many energy classes, and the energy class definition vary by country, and we've run that for our markets in great detail. Then you have the EU goals, and there you have a upper envelope of something incredibly good for Rockwool. Of course, there are gonna be other insulation material incredibly good for them too. You have trends on top. For example, that circularity gonna increasingly come as a requirement, there you have the whole discussion about PFAS, forever chemicals, and are to be forbidden, and we don't have that. We have a circular product.
On top of that, you have the trend of PV roofs that you need PV solar panels on every flat roof and to be fire or non-combustible under really makes sense, an insurance company. A huge amount of macros that then gives a mind-boggling volume growth. The reality is that you are stepping into people's life. You need to fund this. It's not fun to do. You need workers. You need all the rest. There're gonna come in a whole lot of constraints on doing this, and probably also delays that we have seen because it's easier to push things in forward nowadays. If you're a politician, you wait. At some stage, it has to start. I think those macros are there.
My approach to it is that, yes, we have done the calculations, and yes, we will need a lot more factories, but at the moment, we kind of turn that around and say that we have two jobs to do on capacity. Rather than me giving our 10-year guidance what the size is of Rockwool, when this gets started, maybe Kim and I will go out and give a number. I don't feel we should go out and give a number before we've seen that this gets real traction, and until we've seen what the constraints are in labor market, maybe we get more efficient at doing this and all the rest. The homework as I see it, I do now, is on the one hand, we keep knocking off these greenifications of existing plants, like the project we do in Switzerland, very expensive.
We have the technology, we keep doing that to get the greener footprint towards the Science Based Targets. On the other side, we build factories also in a downturn, like we do in Romania. We hope to start now in France, and we have some other sites that we have planned. We keep building, so we stay ahead of the capacity game. Then we can accelerate that when we see the real thing. I don't give a 10-year guidance because I would like to see some more traction. If all of this happens, then of course there is a tremendous top line for Rockwool, where the constraint is how many factories we can cope building, right? Often something else will break along the way in the value chain. We've seen that in every little small bit we all try to buy privately.
There's always some constraint, and there will be constraints, so we need to understand that better before we say exactly what the number is. Does that make sense?
Yeah, it makes a lot of sense. The question would be just can you do something to address some of those constraints, for example, on the labor, would you consider investing to prefabricated modules or invest in the training of a roofer or insulation companies?
Yeah.
Is there something that you can do to address those constraints?
We do training. We are promoting that people that, you know, politicians realize that we don't need all the people from universities that have studied things that will not be needed in the future. That debate, I think is going, but it's going slowly. Yes, we do work on that, but I can't say that we have any results to show on that. We are working on it. I guess a lot of other companies do too.
The other question, I think on hedging, which is more short-term.
Yeah. I'll just take that. I just want to repeat again what Jens said before. We have two markets where we have green factories, i.e., melters that are using electricity, Norway and France. Here we have this year entered into sort of, in France, it's a 2-year, in Norway, 3-year agreements with attractive cost of sourcing electricity. So that at least for me, was a good sort of hedge we did that also helps us midterm. We have also decided this year, now prices have come down. Premiums on forward contracts are also more reasonable. We have in Europe decided to cover 50% of the gas consumption for the remaining part of the year.
Those are the two sort of major hedge areas we have done. We are still in talks, as we have mentioned before, more long-term, still in talks with, especially on the electricity side, how we secure long-term competitive electricity sourcing to some of our future sites that will be running on green green electricity.
Maybe a very last question. Have you seen the bulk of the impact of the drop in residential leading indicator? Is it still to come in the second part of the year or next year?
Hard to say. It varies. For example, the Danish market is down to a very, very low level. In some other markets, you've seen building permits go down and building starts. I think you're gonna. I don't have a simple answer to that, but I think you will see some market worsening and then other markets improving. I can't sum it up in a simple, we've seen the worst or not. Our normally pessimistic approach is that or realistic is that we factor in that if we get a little bit worse until we really see it turning up, we don't speculate too much because there can also be quite a disconnect between building starts and building permits and all the rest to the real market.
It's very hard to predict.
Thank you so much.
All right. We will take our final question from Zain Laika with JPMorgan. Go ahead.
Morning, Jens. Thanks for taking my questions. Two from me. The first, just to come back on hedging. I appreciate you sort of mentioned, gave some detail that you've covered 50% of your gas consumption. Can you provide some details at the level at which you've hedged compared to the current spot rates? My second question is, you pointed out France and Spain seeing some growth. Really what's driving this? Is it better impact from energy efficiency regulation in these regions compared to others? Thank you.
Zaim, I will not give you the details of the hedge, but obviously when you do the hedging, there's always a premium to pay compared to the spot rate. That's what prevented us last year from entering into these short-term hedges because it was simply prohibitive, expensive to do. I think the reason why we decided to do it this year is that the scale of that premium came down to a reasonable amount. I think we are comfortable with the hedges we have done in gas this year, also taking the fact that we are still operating still with a 50% spot market. We still have a little bit of, you know, in case the prices go further down, we still have some upsides.
The premium was not privileged too high, so that's why we decided to enter to the hedges for this year.
On the markets, It's just a quarter, but my reflection on France is normally when the market turns south, the French government are quite good at incentives to get it going. We saw it during the Lehman Brothers decline. France kind of didn't drop as much, and it started to grow quicker. In France, the market has been supported by incentives and the efficiency metric, measures, et cetera. In Spain, what we see is a lot of PV roof projects, really a lot of it. That's the main driver that we see at the moment in Spain.
Great. Thanks, both.
All right. There are no further questions at this time. I'll turn the call back over to the host for closing remarks.
Thank you. Jens Kim and I, Thomas, 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. If you have further questions, please feel free to reach out to me. You know my contact details, or you may find them in the investor section on our corporate website. Have a great day