Hello to everybody, and welcome to the ROCKWOOL A/S conference call regarding the first nine months of 2023. My name is Kim Andersen. I'm the CFO of ROCKWOOL A/S. Today, I'm pleased to present CEO Jens Birgersson. 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 nine months and the third quarter of 2023. Afterwards, we will be ready to answer all your questions. Before I hand over the word 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 slide 3, which is the next.
Jens Birgersson, I will now hand over the word to you.
Thank you, Kim. Thank you, Kim. Let's skip the year-to-date slide and move to slide 4, focus on the quarter. Good morning, everyone. Looking at this quarter, we had quite challenging market conditions, especially in Europe, particularly a few big markets. But the quarter came in quite well. So if you start with the top line, DKK 903 million, down 4%, and that slight reduction of the top line versus last year, which of course wasn't a super difficult comparable, but nevertheless, it also includes a five-week strike that we had in... We had a longer strike, but five weeks of it was in Q3. That has also impacted some of our sales in North America.
So I'm quite happy with the top line, and compared to the gap to the previous year, Q2 and Q3, certainly it was more leveled and not so dramatically down. Moving down to the EBIT, last year, we had the energy crisis and extreme high energy prices and also slowdown in the business, and that together put us down very in single digit margin. And it's good to see that we have doubled the EBIT this year, and we have reestablished a healthy Q3 margin. Going down to free cash flow. Here, the highlight is that, in spite of pulling down capacity, we did that during last autumn. I will come back to that a little bit more.
I mentioned it already, but we reduced capacity quite quickly during last autumn in anticipation on this new level of business, and at the same time, we have drawn down inventory. So I'm happy to see that the cash flow and the net working capital has come out as fine as it did in the quarter. Let's move to slide 6. From a growth perspective, we don't need to say much about this slide. Roughly 4% decline in both the systems business and insulation business. Slightly lower growth in systems, and that is primarily due to that the systems business have a delayed order cycle this year. We have a big order intake and delivery, big deliveries to be done in Q4, and that's a little bit later than normal.
Apart from that, both businesses have grown with roughly the same rate. Slide 7, the regional sales development, starting with Western Europe, down 9%. If we start with the highlights, because not everything was down. Spain and UK, double-digit up, so quite healthy business, have recovered well. France, flattish, a little bit positive. And then we have a lot of markets in Western Europe that are down quite a lot. So starting in the Nordics, Denmark, Sweden, Finland, somewhat, Norway, too, a little bit better, but big declines, you see a massive drop in building permits and housing starts. Moving south, Germany, down some 30%-40% on building starts and permits. And then if we go east into Poland, that's also quite negative.
So Germany, the Nordics, and the other countries, a little bit up and down. There are also some highlights in Eastern Europe, scattered. But in aggregate, if you look at Eastern Europe, some markets are down quite a lot, like Poland, while on average, it works out to flattish business. So you could say the steep decline on average has stopped a little bit, but it's very, very scattered. And Croatia growing, Romania has recovered, Hungary has stopped to shrink so fast. So very scattered picture. Then moving on to North America and Asia, there I would say there are a lot of positive signs. China, stable declining, but looking into, say, Thailand, Malaysia, India, good solid growth.
North America, Canada, and the US, both growing, and it should be said that, if we wouldn't have had the strike in Canada, in one of our factories, North America and Asia altogether would have been double-digit. So the business is back, and is looking quite good going forward also. Some of the strike will impact Q4 too. It's over now. It's over now, but it will have a limited impact on Q4. We move on to slide 8. When we look at that big improvement, the doubling of the EBIT and the big improvement of EBITDA, we need to remember that it's an easy comparable, because Q3 was really a bad quarter last year with the energy crisis.
That said, the margin we have reached, achieved now is quite healthy, and it's actually among our highest margin we have had, if you look historically. It's not the highest margin, but it's a high margin. And how could we achieve that in a market that is shrinking still? A couple of aspects. First of all, we have not done any stupid energy hedges, and the energy prices are down. We have also made a couple of deals on electricity, France, Norway, Spain, Romania, where we have kind of gotten energy deals that are much more favorable than before. So energy impact, we still see an underlying inflation. Then on the prices, we have outside Europe, we have continued to raise prices, and in Europe, we have basically balanced prices with market share and cost position, and done...
Managed to kind of keep them relatively stable. There are segments where we have lowered prices in certain market, but there are also segments where prices have been maintained or slightly increased. Depends a little bit what you compare with average last year or year end, et cetera. It has, has a lot of dynamics, but we have really, really worked a lot on price and volume and engaging with our customers. Then, you can also see, if you go into the P&L, that the, the cost control is not perfect.
We have not gone super dramatic in terms of cost reduction in relation to the volume reduction, but we have been on top of costs and a lot of the capacity reductions. We have reduced almost, and it's not all permanent employees, but almost 800 jobs that we did in the manufacturing last autumn. So we acted early, and we have a flexibility in the system, so that has been done, that has helped, but then we have generally been quite restrictive on cost, and we haven't gone extreme. We haven't reduced into the muscle of the company. Our strategy is to control cost, keep them as low as we can, not go overboard, and then try to navigate through also next year, and then hopefully the market will be back up after that.
If you continue to slide 9, profitability per business segment, nothing really different there. Both systems and installation has recovered compared to last year, and the explanation is the same in both businesses, so I've already explained the reasons for that. Let's flip to slide 10, investments. We did invest in the quarter, DKK 90 million. The biggest one in the quarter, in terms of money, is the new paint line for our Rockpanel business. That's in the Netherlands. We are commissioning that now, and some of the impact why that CapEx is not higher is that we haven't really started the French project. So if you would have had the French project, that number should have been a little bit bigger, but still maintained.
We haven't taken a lot of action, consciously stopping CapEx. We continue with the green CapEx and the capacity expansion and the maintenance CapEx on a sensible level, but of course, there could be some capacity expansions now in Europe that we can delay a little bit. That said, the factory in France that has been delayed due to delayed approvals, slide 11, we have had some good progress on that, so we now have a court order that lifted the suspension on the work, the building permit. We still wait for a final ruling. We have an okay to start building, but it's on our own risk.
So we will wait until Q1, when we have the final ruling, but we have started some lighter construction work on site, putting up fence and during the pre, basic preparations. We at the moment feel quite confident that the final ruling will be executed in Q1. There is a challenge with the French legal system, that deadlines are not so clear, are not so defined, response times are not so defined. But anyhow, when you have this suspension, this temporary suspension, that you can start, they normally only give that when they feel very, very sure that the final ruling will be the same.
And when we look at the type of issues that are left now are smaller things like the color of the buildings, the height of one building that is still lower than the highest building, and also that counting the number of trees on the site. And we have enough trees, but there, there were some errors in the drawing. So smaller things, we are optimistic that that should be sorted out now during Q1, so we really can start. If we move to slide 12, the cash flow, you see almost a tripling of the cash flow.
So if you look at that DKK 120 million improvement, that is there, basically DKK 80 million of that comes from improved profits, improved earnings, and the rest come from net working capital reduction, and almost all of it is from lower inventories. And I'm happy about that, because when we drew down capacity, we have been very quick at making sure that we don't sit on too much stock. So that's the way we like to do it when we reduce output. Going on to slide 14, on the outlook, we have changed that a little bit. Now, the sales for the full year, maybe have two months plus to December.
I want to remind you that December is a wetter month, and it's also a month we don't know if it's going to snow or not, so we have done a median forecast compared to previous Decembers in our outlook. But if you look at that year-to-date, sales is lower than this number. You also see that we actually forecast that we're going to grow in Q4, which is a good news. On the EBIT, we have now guided at 14%. I would like to say that that guidance, with the assumptions we have, is that we build. Our best guess at the moment is, or our forecast is, we're going to hit 14%. But then there are risks.
We are at year-to-date, 14.3%, but we have the December in this quarter, plus that Q4 normally is a lower profit month than Q3, that is very high season. So with the December and two good months before that, we should land on 14. And what could make it bigger than 14, and what could make it smaller than 14? Basically, it's the normal plus/minus heavy snowfall that would shut down building sites in December, in the low December. The other risky aspect we always see when we have this, in a slow market environment, there could be countries that completely shut down construction for two or three or even four weeks in December. And depending, if that happens, we have seen it back in 2014 in Germany, I always use that example, and then everything comes to a stop.
But so that, those factors will then determine whether we are a little bit above 14, spot on 14, or a little bit below, but the forecast is 14, so I almost call this a forecast now. Then the investment, no, I've no comment to that. With that, I would like to hand over to questions.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Vijay Shiva with HSBC. Please go ahead.
Hi, gents. Good morning. I have two questions. The first one is on volume. Just, it's two parts. The first is a little clarification. You talked about volume being sequentially up in the last two quarters, and Q3 has been the highest. But when I see the absolute revenue, it's down versus Q2. Can just explain whether it's the what you call mix impact? And the second one, the supplementary to it, that when you say that the volumes are kind of in your in your raw statement, you talk about Europe remains weak. So should we assume or think that at this point in time, it looks like overall demand in Europe will be down next year? Then the second question is on pricing.
You said that the underlying inflation is still there, and so, what's the kind of magnitude of inflation you are seeing at this point in time? And in relation to that, whether you have announced any price increases starting first of January 2024. Thank you.
What, what, what was that last bit, Priyesh, after inflation?
I was asking whether you have announced any price increases starting first of January?
Okay. So let's start with the inflation question. So we basically see the main driver for inflation is the core inflation is still there. And I think there is still an inflation in all our geographies, although energy prices are down, but on a high level. But what I expect we will see during the spring is the salary inflation as the main one, because you still have this real wage gap that has happened in North America and US.
And part of the reason why we had that strike in one of our factories in the U.S. was that the auto workers went for a very big ask, and when the, one of our factories saw that, they went for the same, almost the same big ask, which we simply cannot afford in the business. So it took a while to agree on a level that we could live with in the business. So I think the inflation will still be there, and I don't think it will come away, although you see maybe slightly lower in the beginning of the year in Europe, and then it will catch speed when the salaries start to kick in, in March, April, May, whatever the cycle is in the companies.
Then on the volume, I'm not sure now if you look at nominal numbers or whether you look at the budget numbers, because we are down 4%, we are a little bit more down in volume. But actually, the volumes are stabilizing on roughly similar levels between the quarters, so that's what we see. But then, of course, we have this, when Grodan jumps into Q4, they are all different volumes per revenue. But on average in the business, you can see that we have had two relatively stable quarter with improved volumes and slight growth in Europe, in several markets. So volumes are improving, but it's much. And of course, in North America and Asia, it's a trend. It doesn't look to be interrupted.
But here in Europe, I think it's too early to conclude. I'd, I still think, at this stage, that's my assumption, but again, we're going to get to February before we're going to guide for next year. With what's going on in Germany, I still believe, there is more factors, so speaks, for Europe worsening than improving. So we could see a volume drop into next year, but I'm just saying that as one pessimistic scenario, because I, I have no proof that, that we have turned a quarter, although volumes in the last two months are a little bit promising. Okay?
Just, on the pricing, could you clarify that whether you have any announced any price increases?
We have done price increases, announced price increases in several markets where we have growth. So, but then generally, we haven't gone out with... You know, there are some countries in Europe where we have announced small price increases, but generally, we haven't done that yet. And then, obviously, in North America, Canada, Asia, you have a different dynamic. So not much announced yet, but for sure, there are several businesses that have announced, but not so much in Europe.
Okay, thank you.
I should say that UK has, for example, announced price increases, to give one example where we've done it.
The next question comes from the line of Kristian Tornoe with SEB. Please go ahead.
Yes, thank you. A couple of questions for me. I will do them one by one. So firstly, to your guidance, so the Q4 guidance. So if I take the growth rates, the decline of 45%, and then I apply the same gross-margin and fixed cost level in Q4 estimates as you just recorded for Q3, I get to a significantly higher EBIT margin than the 14% you're guiding for. So, is it correctly assumed that you are including a lower gross-margin and/or a higher fixed cost base in your Q4 estimates, and in that case, why?
Kristian, your logic is perfect for October and November, and then December is a month, you know, where we see everything between a break-even and up, and it's that happens every year. So your logic as such holds for two months, and then we have December, which is just a total different month in our business.
And when you say totally different, it means potentially much lower gross margin in December?
Yeah, yeah, yeah. You know, we can sit with some years with two weeks without production, you know. So when you stop the business, because we will not, depending on our inventory outlook, you know, making inventory doesn't really help us that much, but it makes a difference whether we shut down the factories because we feel we have the seasonal stock or whether we run it. And that decision, you know, we always need to navigate that. Some years you can have the market go down, so we could shut two weeks, but we still run because we want to run up some stock. And this is just highly erratic, and we need to really look at it and make the decisions in December when we see the weather and the market and the outlook and all the rest.
Understood. And then just specifically on the U.K. so you, you're sort of highlighting double-digit growth. Looking at the overall construction market, that's definitely not increasing by double digits. Quite on the contrary, so can you just elaborate a bit on, on your success in the U.K. and how sustainable?
Yeah. I think we were a bit taken by surprise. We drew down capacity in the U.K., and then when the market jumped back up, because the U.K. is not as bad, in general, as Germany and Poland and some other markets. So when we realized that the market was coming back or stabilizing much quicker than the others, we had a bit of a backlog, so we needed to ramp up the shifts, and that took us some time. So that left a bit of backlog on the sales. We had to work back and bring down the delivery times, and we are not quite through that yet. So that has meant we have, you know, basically as much as we produce, we could sell.
But generally in the U.K., I mean, U.K. is a big market, and now there are certain segments where people clearly want a non-combustible product. There are these replacement projects, there's the high buildings, hospitals, the school, where we see non-combustible being the way to go. And also in some segments where people say, "Better safe than sorry." I mean, the price difference is small to use another material. So we see a shift in sentiment that has really happened and seem now to be more ingrained. So I would say stone wool has gained in appreciation versus certain other products than the combustible ones in some segment. And as I see it, it now looks to be permanent.
Okay, quite interesting. And then my last question, you haven't really talked about renovation, so just your thoughts on demand within the renovation segment and whether you are any more optimistic or pessimistic for that outlook into 2024 compared to a few months ago?
Yeah, we look at this Energy Performance Building Directive that we believe is now watered down without largely the compulsory elements. Some of them have now been handed over, and you are empowering the local countries instead, which means it's not the same thing. So I think in the new year, we will see what really comes out of that. But what I see across Europe, I mean, I read somewhere that the EU is missing the CO2 reduction goal by 2030, with what? 50%. So instead of reducing, it's increasing. So what I...
Maybe I'm too pessimistic, but what I see with these wars going on and all the geopolitical tension, for me, it pretty much looks that there are very few politicians at the moment that worry about this, and therefore, yes, we see good progress in some countries, but overall it seems that it's moved lower down on the agenda. Now everyone is gearing up to go to COP28 again, and empty words, so nothing will happen. So I'm a little bit skeptical about the whole push and conviction from political level to put some serious money into that, to make it happen. That said, there are exceptions. We see France starting to move. Germany have a scheme or several schemes, but when we read it, we just maybe conclude it looks a bit complicated.
At least if I wanted to renovate my house, I wouldn't know what to do with that. So, I'm pessimistic. I think green has slipped and that we need to wait a bit more before we see someone really wake up on the green agenda again. And that's why I don't believe at the moment we see a broad-based green push on renovation. That said, if the economy goes even worse, then it would be quite smart by some of those governments to grab hold of it and get it started. Italy, you know, showed how it's done, and it can be done, but they need to do something and not just ignore it.
Understood. Thank you so much.
Thanks.
The next question comes from the line of George Speak with BNP Paribas, and please go ahead.
Hi, gentlemen. Thanks for taking my questions. I'll just take two. So we talked a bit about hedging of gas and electricity, but my understanding is you're still about 50% of your energy exposure is to coke and coal, which has risen sharply in Q2. Could you just, well, since Q2, so could you just give us a bit of an indication on how that's impacting your margins and pricing strategy into Q4 and into 2024? And then my second question was just trying to understand your comments on Eastern Europe, your opening remarks, you sounded quite cautious or quite bearish on the region, but, you know, top line growth in local currency is only -2%. So could you just help us square that up?
What's offsetting the weakness that you talked about in Poland? A bit more color there would be helpful.
Okay. I'll, I'm gonna give the hedging and that to Kim, but I can take the other question first. So, if you go into Poland and Eastern Europe, I'm just gonna look at my sheet. Basically, small countries doing better than big countries in Eastern Europe. That's the pattern we see. Looking into Poland, it's very typical with Poland. When you have a decline, first you have or at least we have seen it several times before. When you have a decline in the market sentiments, it totally stops the workout inventory and all the rest, they are overstocked. I think we are actually already through that, and then we have quarters that jump a little bit up, up, up and down.
But now we have seen Poland for a while be down on housing starts, and also in the commercial sector, maybe the commercial sector with the logistics center, the manufacturing and all that, some of those projects have just been delayed. My assumption at the moment is that that will continue for a while. Yes, Romania are back, they're insulating again. Hungary are around the zero, up and down, jumping a little bit between the quarter. But Poland, to me, it looks like those investments going into Poland are not there at the moment, and the building starts are not there, and raw material prices also impact the demand. Therefore, I think for now, my assumption is we stay on this lower capacity utilization and wait to see an improvement.
If that takes one quarter or five quarters, I just cannot tell. The steep decline from the current level, though, seems to have stopped at the moment, that I should say. Over to Kim on the end.
Yep, thank you. For the hedging part, as Jens said, we have entered into some of these direct operator contracts that has helped us quite a lot in France, Norway, Spain, and Romania on electricity. For the other countries, we have done more or less a 50% hedging for the second half of the year. That includes Q4 for both electricity and gas. So there, we are covered about half, and then we go to the market for the remaining part. On the coke, which is still our primary energy source, we have seen during the year small declining cost even though now coke prices are coming up a bit.
We did do a, you know, these coke prices are typically agreed each quarter, but we have long, long-term supply agreements in place. But these long-term supply agreements, in fact, it was time to renegotiate those here in the second half of this year. We have renegotiated this, and including those negotiation, we have already fixed the Q1 cost for coke next year at a lower cost than what we have seen in today's market. So for Q1 next year, we have still these long-term or not, two or three years long-term contract in France and Norway. We have hedged 50% of the electricity in other countries and 50% of the gas, and now we have a fixed price for our foundry coke for Q1.
That's as long as we have, we have gone. We haven't decided yet what to do for the remaining part of the year on the general consumption of gas and electricity.
Great. Thank you.
The next question comes from the line of Yuri Serov with Redburn Atlantic. Please go ahead.
Yes, good morning. Two questions, if I may. I'll ask them one by one. So the first one is the same that I asked you last time on the conference call at Q2. We are going through a recession year, big volume declines, and you are achieving a margin of 14% now, rather than 13% that you got it last time. Your long-term aspiration, as stated, is 13%. Surely, the results that we're seeing this year suggest that you should adjust it upwards. Don't you think?
It's a good question, Yuri, and I— Of course, we would like, considering how expensive new factories are to build, it would not be bad to have a higher margin, but it's so many aspects going forward, and whenever we have a massive change in a quarter or in a year, where we need to adjust capacity big up or down or something happening with energy prices, and— Then, margins will be impacted because we can't do it in zero time and at zero cost. The other aspect is that what will be important for next year and going forward is that we are in a volume level now where we certainly have reduced our capacity to match our market share.
If the volume now continue down, it's always hard to predict what the competitive environment will be. We need to balance these things, so I cannot—I mean, yes, this quarter comes out nice, but we came into it without having to restructure, change capacity, and we have done the price work. So too early for me to guide and say, this is a new level. We have recovered from last year's horror quarter, but we knew why it was a horror quarter. We had all this energy costs. So I'm not able, at this stage, to say what the normal level is. We stick to our old kind of ambition levels, and then, of course, we try to improve on that. But we haven't guided or committed to deliver on that level. Second question?
Okay. Well, listen, I suppose I'll come back to this in the future because we're talking about long term, and long term, this industry is going to be delivering growth, and competitive situation is a question mark, obviously, but, you know, I'm not asking about specifically next year or the year after. It's more-
Yeah
... ongoing, but I can understand where you're coming from.
Yeah. And, and, and, Yuri, you have a good point. I mean, if, if the green agenda gets going, and you get a bit of a pull in the market, so that you know that the next 10 years, we're gonna do all this renovation, it's less than 1% or whatever, and you need to do 3% or whatever now the EU goal will be for CO2, but it needs to triple or something like that. If that happens, of course, and we are reasonably good in that segment, then it's, of course, much easier to take actions and optimize and do the rest when you have an underlying pull in the market. Because traditionally, if you look over the last eight, nine years, we have been quite good at raising productivity in the business. We haven't really increased headcount.
We have, we are working on automating our factories. We work on a number of technologies that will, if we get a bit of growth into the system, we should be able to raise productivity, and because not all of, all of margin improvements in our world comes from price, it needs to come also from us becoming more competitive. But it's so much easier to do that if we don't have these margins jumping up and down 15%-20%, business markets jumping up 15%-20%, and we need to optimize the network all the time. So, a bit of peace and quiet and a calm growth in the business would make that a lot easier to firm in on a margin target.
Okay, sounds good. The second question is about volumes, and specifically about the U.K. and the U.S. You already talked about the U.K. What I'm curious to hear from you is if you can give us your assessment as to by how much you are outperforming the overall market performance in installation in these two countries, in percentage points. In the U.K., in the U.K., you said that you have a growth of double digits. I mean, I suppose that the market and you said that you are outperforming the market, but I'm just curious by how much, and similar in the U.S.
I mean, I don't want to comment on details there, and I don't even bring the details, but obviously, but if you look in North America, in Canada, we more or less have the market, so our growth is just in line with the market, and it's not really growing as a proportion of the whole market, so it follows the market. And then in the U.S., we have now another factory that we are ramping up. We are not on full capacity yet. We still have capacity in the U.S., but stone wool share is a couple of percentage of the total insulation market, and there are gonna be a conversion so that we eat into it, but we're talking in relation to the overall market, that is huge.
When we move from 2- 2.5, to 3- 3.5, to 4, it's very, very little of the total market. And since the market is growing, it doesn't translate into less volume for the other materials. It's just that our share of the growth is proportionally a little bit bigger. So that keeps going on, and that means that we will need more capacity in the U.S. because I see we have the fundamentals in play. Now, we have capacity, but this will go on, and we will need to investing.
In the U.K., I can't really give a number on it, but it has been, I think, the last two, three years has been quite dramatic because there has been a complete shift in certain segments, and when U.K. move in a high-rises, semi-high-rises, school, et cetera, then, of course, we see quite a few tons of business. So, that's going on, and I think there is still reference projects, quite a few of them, where we are the only product. So this is not-
...either a normal market is something that happens now because you're fixing past mistakes. It's very hard to say in the market what, how much we are growing, but I wouldn't expect at the end that U.K. would be any different to our other markets, you know, maybe 40%-50% of the market will be stone wool, and we will get there, but now it's in a transition into that state. So slight gains, I would call it, but not super dramatic.
Thank you.
The next question comes from the line of Yves Bromehead with Société Générale. Please go ahead.
Hi, good morning, everyone. Thanks for taking my question. Just the first one. I'm really sorry, but I did not understand what you said in the U.S. You talked about five weeks of work. Was it maintenance CapEx, where you were down for five weeks?
No, no.
Is that what you said?
Yeah. Good morning, Yves. No, no, we had—when that autoworker strike started in, was it Detroit? We had a factory, one of our factories, in Canada, where a similar demand was made, and we cannot afford that. So we had altogether seven weeks strike, and five weeks of that hit the quarter. So if it wouldn't have been for that, we would have had a double-digit growth in the whole rest of the world segment. So we lost... We couldn't deliver. So now our challenge in North America is that we need to work down delivery times because we lost capacity on that, and that was not five weeks production in the whole business. It was one factory and one of the smaller ones. So that's what happened. So it wasn't maintenance at all.
It was a strike.
Okay. And maybe just coming back on the hedging. So just so I understand correctly, this year, you had only hedges in H2 for about 50%, but in H1, you were not hedged of 2023. Is that correct?
Yves, we had these direct operator contracts from France and Norway and the other countries running from the beginning of the year. So that was on electricity. And then in other markets, we didn't hedge on electricity for the first half, we only did for the second half, but on gas, we had a hedge, approximately it was 50%, running also in H1. But we did a renewal of that in the middle of the year for H2.
Okay. Just to confirm for next year, on gas, specifically, I understand what you said on coking coal, but on gas and coking coal, it's until Q1-
Yes.
not Q2.
Until Q1 only.
Okay. And are you looking to roll out your hedging strategy that you've put in place for almost the first time in 2023 for 2024, or are you-
We are-
Considering being spot for 2024?
We are evaluating that on a regular basis, so we don't have a fixed formula, but we simply sit down and take a look at the market dynamics in the energy market, and then we decide that almost, you know, quarter by quarter, what to do.
Okay. And last one on cost. On the coking coal, obviously, as it was said previously, this is increasing now, but the shipping costs are also increasing quite fast at the minute on certain Baltic Dry Indexes. How relevant are those logistic costs in the terms of what you buy forward one quarter on foundry coke?
They are not, they are not significant. So all of our foundry coke suppliers in Europe are, are European-based, and many of them... We have five major sort of suppliers, so they are quite regionally spread out. So, so logistic cost is not normally a, a big issue.
Your suppliers import from Australia, no?
No, no, they have quarries in Europe.
Okay.
Yeah.
Interesting. Thank you.
The next question comes from the line of Claus Almer with Nordea. Please go ahead.
Thank you. Yeah, also a few questions from my side. I will do them one by one. So Kim, sorry about coming back to this energy cost, but is it a little bit difficult to figure out what is the net effect, both for Q4 and, let's say, 2024, given what you see at the moment? So will energy cost in Q4 be up or down? And the same question goes for next year. That'll be the first.
Our energy spend for Q4 will more or less be unchanged at the price level as Q3.
Okay. And then, you know, based on sourcing and your contracts next year, how does that look like?
Q1 will similar, be quite similar to Q3. So there hasn't been a lot of dramatic move in the forward buying cost the last few quarters. But if you go-
So does that also... Sorry.
But if you go much further than just a quarter ahead, then the premium starts to become a bit more expensive, and that's why we do not entertain that. Yeah.
Oh, but that's to, if you're going to hedge?
Yeah, yeah.
Just meaning, if you don't hedge and just do the spot-
Yeah.
Then next year looks to be a flattish year-over-year. Is that the way to think about it?
That I do not know. I cannot foresee how the energy costs develop. I'm just telling you that we have only covered Q1, and then we just have to, you know, maneuver that quarter by quarter.
Oh, yeah, sorry. Because, I mean, if things are unchanged as is today, rest of 2024. So throughout 2024, we will see the same levels as we see today?
Yeah.
Will there then be any impact?
Yeah, then there will, because the energy costs have gone down slightly this year. So of course, if it continues at the present level, at least at the beginning of the year, there will be a small benefit.
Okay, thanks. And then my second question goes to the margins. You know, Jens, you mentioned that you told, I guess, the unions in Canada, you could not afford a price hike in the hourly rates, but at the same time, you're running at, you know, the best EBIT margin since 2007. And so it seems like you could afford a slightly higher hourly rate. And if I may add, and then second, last year, when you were discussing with your customers, when you introducing price hikes, then an important argument was that they could see Rockwool also facing a lot of headwinds. But I guess, looking at your numbers, that's not the case anymore.
Tell more about both on the salary, but also on your negotiations with your customers, how much under pressure are you to pass through some of these margins?
I think let's say the U.S. case. I mean, the ask from our employees in this factory in Canada was inspired by the auto workers, and that was a massive, massive, massive number. I mean, that would have been a big problem for the factory. So we have made an agreement that increases the salaries over three years, and that is that's what we see in the U.S. We see U.S. becoming, compared to the rest of the world, a very expensive place to manufacture. But okay, it's local for local, needs to be translated into pricing. So that happened, but the first ask was so big that we could- we couldn't take it in the business in that factory. It would have been...
We would have been non-competitive, even with an increased price level. So that, that was the case there, and we reached a settlement. Then you look at where does the EBIT come from? But what the story doesn't say is that, for example, last year, we've been extremely challenged in North America. We started up a factory. It cost us a lot of money. We have had an ongoing big challenge to get our Mississippi factory up and running in the South. Hasn't performed. We have been losing money on it. So a lot of the improvements here that you see, for example, in North America, is, is a big, big improvement, but a lot of that is because we've run the operations better and gotten our arms around production. We have managed to shift over some business to the new factory.
That one is running, and we're making money in all factories, and that's not just the pricing. So this bit that we have better margin is now, for example, that we never been so successful in the U.S. And, so when we, and when we then look at salary increase and this, that, yes, if we improve the business, almost double the profitability in the U.S. because we don't lose money in a factory that doesn't run, that has nothing to do with the price and the cost here. If we then look at the discussion with customers here, there are different segments.
There are distributors that don't mind that prices go up 1%, 2%, 3%, so they are there, of course, at the end level that have house construction companies that are under a lot of pressure because they sit between a contract, and there is probably also, from building material, impact on demand. And there, we just need to have a mature dialogue with them and discuss it, and it is the normal discussion where we... But it's not that what we earn more in the U.S. impact how we price in Europe. That, that's not how we link it, and it's not the cost to cost. And yes, we have lowered a lot of prices where we have to.
For example, we got a big order now, the Northvolt project in Germany, 300,000 square meter roof and 80,000 square meters of walls. That project we gotten, it was quite a tough competition to get it, and we got it. We get it at a higher price and competition because we have just-in-time deliveries, is we can execute that well. But, you know, there are also tough, tough pricing discussions, but that's just normal in the business and happens all the time. But the inflation is there, and the energy price level is still high compared to what it was a few years. But the good margin in Q3 is not only because of Europe. There is very good performance in Asia and North America.
Okay, that makes sense. If you just make a follow-up on a comment, Jens, you made earlier on, who knows what competitors will do if volumes will continue to decline? I'm just curious. I think that you have, you know, a certain number of competitors where volumes are starting to get to a more, you know, let's call it, critical point or level in their factories. So if it continues to decline, then it will really, you know, hurt the profitability and efficiency of the factories.
You-
Or it's a more general comment?
Yeah. I mean, with the type of declines we have seen in Germany, where 30%-40% down on new building starts, and they're running out of backlog in the housing sector. You, we all, we are used to always having some competitors miss a project, because the smaller you are, the less stability you have because of the law of large numbers. You're either overfull or empty, a project can determine. And a lot of our competitors are only active in the heavy segment. We also have the light, more distribution business, so we do both distribution and projects. And our project portion is probably smaller than many of the smaller ones. So we see this all the time, but there are also...
I think when you look at some of these big projects we have secured, we have gotten several projects this year, around 300,000 square meters. That also matters that you know you can't show the product after a supplier. It's not after a builder, it's not credible, because they also need to trust that you're gonna be there and deliver all of that. So we see the whole spectra, but this, of course, if the market from this level takes another 5%-10% dip next years, then we get into a very serious situation for European construction, and I just haven't lived through that in this industry. I saw what happened 2007, 2008. The volume drop this year has been same magnitude, right?
We have managed it, but what happens if there is another drop of 10%? You know, we, we'll do our best in that situation, and let's hope it doesn't happen. But I have never lived it, so I need to kind of, we need to, to navigate that and take it on. But our spirit would be in an inflationary environment that when it's on this level, you cannot, you cannot stay sustainable, trying to fight for extreme volumes and solve the problem, and the fundamental issue is that there is inflation still there.
Okay. That makes a lot of sense, and thank you so much, Jens. And yeah, well done so far in a very difficult year.
Thank you. Thank you, Claus.
The next question comes from the line of Yassine Touahri with On Field Research. Please go ahead.
Yes, good morning. A few questions. Firstly, on the pricing dynamics and the competition, when you look at what happened in 2009, 2010, we saw some pricing pressure. As you said, the volume decline is similar today, but pricing is, well, holding. What has changed? Is it because there is more consolidation? Is it because you've got Saint-Gobain and Kingspan now from yourselves that are a big part of the market? Is it a realization that you need to really focus on pricing? That would be my first question.
The second question is, we see a lot of your competitors focusing on solution, like not only selling mineral wool, but selling insulation combined with accessories, insulation combined with plasterboard or with roofing membrane. And to shift away from the discussion about commodity insulation and to look at selling a system and solving the problems of their clients-
Mm.
Where do you stand on that? Where do you see ROCKWOOL moving in the next 5-10 years?
Yeah.
Could you add some other accessories, some other complementary products? And then, my third question is on the non-residential activity. So what we've seen this year is we've seen a big drop in housing, but non-residential is holding a little bit better. But do you see a risk? Do you see a risk that non-residential could be a bit more difficult next year in a context where some of the projects that were built this year are not renewed?
Okay. See, you remind me of the questions. I have the area on the price, we have the solution, and then you have non-residential, right? I see now. Yeah. Yeah, so on the pricing, 2009, 2010, you know, I wasn't here. I worked in distribution in other industries. I can only say what we did in this company. When I came here, there wasn't pricing structures, there wasn't a pricing drum beat, there weren't clear rules, there weren't clear gaps between the biggest customer and the smaller.
So from day 1, we started to work through and have a structured approach to pricing, and we are very, very disciplined today in how we do pricing and how often we do price changes, and how the contracts looks, the bonus schemes, and all the rest. So I can at least say, and I don't know what has changed with the other companies, but in our company, between 2009 and 2010, there was a belief that you had to choose between price and volume, and that was the choice you had. And I, I don't believe in that, and I don't believe that, stone wool is a commodity. I don't believe that. I think you can have a high-quality product, and that you can have a premium as the market leader.
And the other thing, compared to 2009, 2010, is that if you look from 2014 to, say, 2022, the last semi-normal year, full year, now 2023 is not done yet. We have more or less grown the company from what? DKK 2.2 billion to now DKK 3.6, DKK 3.7, a bit more last year. Without added headcount, we, we have lift productivity, improve competitiveness. So it's not that all the improvement in margin comes from price, is big effort in cost reduction and productivity improvements, and we need to continue that. So not only price, people, you know, some customers say it's only price, but when you look at the productivity, we do 40%-50% more per employee today than we did 8-9 years back.
So that is a factor. Then we go into solutions, and I have in previous businesses, and it's many years now, because I've been here a long time. But I've been in solutions, I've been in products, I've been in services, I've been in software. I've been in these different businesses, and I think solutions is a word that people use in a very sloppy way, because no one ever bothers to define it. They say solution, and solution sounds complicated, so we earn money. My observation is if you wanna do solutions where you take a system guarantee and you coordinate a lot of things, and you end up with a performance guarantee for the combination of, and the work to put the different pieces together, I think you need to be incredibly skilled to earn money consistently.
It's one thing to earn money one or two years, but if you look, you know, the bigger the products and the solutions get, if you have a system guarantee, the more the risk that you blow the whole equity in one year or one solution doesn't work. So when it comes to solution, now we stay very close to the core of the stone wool, the volcanic, and we specialize in that. That has been our strategy. But I think solutions can be a good thing if you have a collection of products that fit together, like we do, for so HVAC in Germany, we have the hangers, the clips.
That's fine, but we will, as a company, not be super keen to believe that we can be super good at doing kind of more turnkey or system guarantee products, where we combine everything and that that will help. Then we'd rather stay very close to have all the small products really productified. But yes, they can fit into the same application. So that's where I stand on that. Then on non-residential, I think that there are some sectors, like in the U.S., we see the nearshoring manufacturing, the manufacturing sector. I mean, big boxes to put factories or whatever, growing with 20%. We might have seen some of that in Europe, but I think you're gonna see more project delays if the recession deepens.
It's back to that, and it may be not fair to put all of that on Germany, but it's more the underlying the economic cycle. If Germany goes into deep recession and the others follow, then I think the non-residential segment will be more threatened, because I see more nearshoring going on in the U.S. than I see here in Europe. Okay.
I think my question on non-residential was more about the length of the project. Usually it takes, like, 18 months to build a factory or offices. And my concern is that maybe in 2023, you were working on non-residential projects that were started before the jump in interest costs and the drop in construction costs. Is there a risk that we see a big, an abrupt slowdown because there is no new order in activity because interest rates are too high and construction costs are too high, and that we could see the bulk of the decline in non-residential next year? That's my question.
Yeah, my pessimistic without doing an outlook is that I think maybe the market next year has the potential to get worse, but that's not what I've seen now. But you know, and I stay on the pessimistic side, but you know, in theory, we need to do a deeper analysis of the project. But remember, not all of our business is project business. That's one portion of it. So you know, if renovation were to start a little bit, that would quickly override that business. So, yeah, I cannot comment whether that would be up or down and... But the potential is there for sure. We are running out of time, right?
Two more.
We have two more. We will, I understand that some people have to leave, but we have two more people with questions. We will take those. So try to keep it a bit brief, and I try to be a bit quicker.
The next question comes from the line of Casper Blom with Danske Bank. Please go ahead.
Thanks a lot. Yeah, of course, a lot of questions have been raised already, but Jens, I was just hoping if you can give an update to your position on your Russian business. A week or two ago, you were put on this list, being called a war sponsor, and I don't wanna go into a discussion of whether or not that's right or wrong, but merely if you could elaborate a little bit on, you know, potential commercial impact that could have had on your business. I noticed on one of the slides you highlighted Ukraine actually as a good market for you here in Q3. Is there a risk of this having a commercial impact on you? Thank you.
Yeah. So far, we haven't had the commercial impact on any of this. And if you go back to the Russian situation, there have been some examples here in Denmark, where, you know, leaving or staying, the alternative doesn't really exist of leaving anymore. But we have been clear, protect the IP, keep control of our factories, even as a passive ownership, and receive our normal dividends rather than leaving 4-5 times more behind.
So that strategy stays, and I hope you realize that we are quite convinced that we are willing to take quite a lot of criticism, doing what we believe is the right thing to do, rather than taking an easy decision and do what we believe is the wrong thing, to hand over all assets and leave more money, and our IP, and know-how, and all the expertise we have built up, you know, of these very good factories in Russia. So we are very committed to that, and we take it. Then, if we look into that situation, I saw now that just today, another big building material company came on the list today. They are listed in a lot of places, and this one, Ukraine, yes, we are growing. We are growing, and we have a humanitarian effort there.
We would like to continue that in Ukraine. This list doesn't have a legal implication, but something could happen in Ukraine. But so we have asked those questions to that, NACP, department there. So we have asked the questions, but obviously, it's all fresh, we need to see what happens, whether we'll be allowed to continue with the humanitarian effort. We have been told that the business can continue, but again, we need to check it. We haven't seen any signs. But I should say that so far, we have not seen an impact, and then a lot of this discussion has been, a Danish one. It has been here in Denmark. We haven't seen anything outside Denmark. So at the moment, you know, I don't wanna sound overconfident.
I also said that, you know, we do the best of the situation, and, and that's where we are, but we haven't seen an impact. And I think the quarter, again, maybe underlines that the business is running quite well.
Okay, thanks for that update. My second question is just maybe if you could elaborate a little bit on the European situation. Right now, we see that markets are tough in Northern and Eastern Europe in general, and better in Southern Europe, or at least more resilient. Do you see a risk of the issues in the north spreading towards the south?
Yeah, I think you heard that I talked about France, Great Britain, Spain, and then if you move east, Romania, Croatia are doing quite well, and then the Nordics and Germany, and then eastward, the big Eastern European countries to the west. So I think it comes down to this general, very negative sentiment with the PMI around 40 in Germany, whether our old rule, and I don't know if it's true, but you know, if you read The Economist, they will say: "If Germany stops, Europe will stop eventually." Is that the case? That's as much intelligence I have to that. Leave it out there as a risk, and you are right, Southern Europe and is doing better. The Med is doing better. That's what we see.
The further north you come, the worse it is, the further east you come, on average, it's getting worse. Okay.
Okay, thanks a lot, and just to repeat, Claus, well done so far. Quite impressive.
Thanks a lot. Thanks. Last questions-
The last question for today comes from the line of [Simon Bikawa] with JP Morgan. Please go ahead.
Morning, Jens. Thanks for taking my question. Just coming back to pricing, you mentioned, you know, safeguarding market share in the press release. What needs to happen in order for you to think about price decreases? And then secondly, I appreciate the more pessimistic view on Europe for next year. Can you talk a bit more about your early expectations on North America, please? Thank you.
Oh, sorry, sorry, I went offline here. So Simon, we have reduced prices in some segments, and we have increased them in other segments, so it's a whole collection. We have many, many applications, and so it's a mix of things. So I would say, the net-- You see the total, that is, being relatively stable, but there are quite a few segments where the price is down a bit, and there are some segments up. So it's an active price management across the different application and countries. So for example, if you look at that big order I mentioned, the price level of that order is lower than it was if we would have tried to take that, you know, two years back, you know? But we have a different situation. So there has been some of that.
Prices on products in Poland are down, okay? They're down. In flat roof business is lower pricing, other segments not. So it's a mix. And then we go to the sentiments for Europe. We covered that. For the U.S. and Canada at the moment, the only fear we would have in the U.S. at the moment is this whole debt story, something happens, the whole places crash, and that's it. But we haven't seen any of that. We saw that dip, they took out inventory, and then we have had a very good business. Our challenge now is actually to work back the backlog, the delivery time, because due to the strike, we have too long delivery time, so we see the opposite.
So at the moment, our outlook for next year is a single-digit growth in North America, or something like that, and that's the base assumption. And we don't see anything apart from if some macro story come in again and change it overnight, and that could happen, but it's not in our plan.
Okay.
All right, thank you.
Okay, thank you, Simon.
Ladies and gentlemen, this concludes the Q&A session. I'll head back to the host for any closing comments.
Thank you very much, and thank you very much for everybody for the very good and interesting questions. I know that there were a few of you who were still on the question list. Of course, you're welcome to give me a call afterwards. And with this, we close the session for today and wish you a pleasant day.