Rockwool A/S (RKWBF) Q3 2023 Earnings Call Transcript

Rockwool A/S (OTCPK:RKWBF) Q3 2023 Earnings Call Transcript November 23, 2023 5:00 AM ET

Company Participants

Thomas Harder – Director, Group Treasury & IR

Jens Birgersson – President and CEO

Kim Andersen – CFO

Conference Call Participants

Brijesh Siya – HSBC

Kristian Tornoe – SEB

George Speak – BNP Paribas Exane

Yuri Serov – Redburn Atlantic

Yves Bromehead – Societe Generale

Claus Almer – Nordea

Yassine Touahri – On Field Research

Casper Blom – Danske Bank

Zaim Beekawa – J.P. Morgan

Kim Andersen

Hello to everybody, and welcome to the Rockwool A/S Conference Call regarding the First Nine Months of 2023.

My name is [Kim Andersen] (ph) and 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 two, 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.

Jens Birgersson

Thank you, Kim. Thank you, Kim. Let’s skip the year-to-date slide and move to Slide 4. Focus on the quarter. So good morning, everyone. Looking at this quarter, we had quite challenging market conditions in — especially in Europe, in particular, a few big markets. But the quarter came in quite well. So if you start with the top line, EUR903 million, down 4%. And that slight reduction of the top line versus last year, which, of course, wasn’t 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 GAAP to the previous year Q2 and Q3, certainly, it was more level than not so dramatically down.

Moving down to the EBIT. Last year, we had the energy crisis and extreme high energy prices and also a slowdown in the business, and that together put us down very — in single-digit margin. And it’s good to see that we have double the EBIT this year, and we have reestablished a healthy Q3 margin.

Going down to free cash flow. Here, the highlight is that we — 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 system business and insulation business. Slightly lower growth in systems, and that is primarily due to that the [Grodan] (ph) business had 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%. Here we — if you start with the highlights, because not everything was down. Spain, and U.K., 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, in some respect, 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. And there are also some highlights in Eastern Europe, [indiscernible] But on — in aggregate, if you look at Eastern Europe, some markets are down quite a lot like Poland, while on average, it works out a flattish business. So you could say the steep decline on average has stopped a little bit, but it’s very scattered. In 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 a lot of positive signs. China is stable declining, but looking into, say, Thailand, Malaysia, India, good solid growth. North America, Canada and the U.S., 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 digits. 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 achieved now is quite healthy, and it’s actually among our highest margin we have had if we look historically, it’s not the highest margin, but it’s a high margin. And how could we achieve that in the market that’s 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 are kind of got an 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 — manage to kind of keep them relatively stable. There are segments where we have lowered prices in certain markets, 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 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, but 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 in last autumn. So we acted early and we have the flexibility in the system. So that has been done, that does helped, but then we have generally being 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, EUR90 million. The biggest one in the quarter in terms of money is the new paint line for our rock panel 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 product, that number should have been a little bit bigger, but still maintain. And we haven’t done — 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 delay due to delayed approvals.

Slide 11. We have had some good progress on that. So we have now — we had 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 fans and just doing the 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 or 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 count in the number of trees on the site. And we have enough trees, but there were some errors in 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. And so, if you look at that EUR120 million improvement that is there, basically EUR80 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 and 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 red month, and it’s also a month. We don’t know if it’s going to snow or not. So we are very — we have done a medium forecast compared to previous December 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 — 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 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 risk aspect we all receive 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 for example, and then everything comes to a stop. But — so that — those factors we 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. And then the investment, no comment to that.

With that, I would like to hand over to questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Brijesh Siya with HSBC. Please go ahead.

Brijesh Siya

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 in the last two quarters and Q3 is been the highest. But when I see the absolute revenue, it’s down versus Q2, can you just explain if it’s a vertical mix impact? And the second one, or the supplement to it that when you say that the volumes are kind of in your a statement, you talked 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. So what’s the kind of magnitude of inflation you are seeing at this point in time? And in relates to that, whether you have announced any price increases starting 1st of January 2024? Thank you.

Jens Birgersson

What was that last bit Brijesh after inflation?

Brijesh Siya

I was asking whether you have announced any price increases starting 1st of January.

Jens Birgersson

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 we have — and 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 is the main one because you still have this real wage gap that has happened in North America and U.S. 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 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 within 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 we 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, whether you look at the budget numbers because we are down 4%, and 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 I — 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 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 that 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 have no proof that we have turned the quarter although volumes in the last two months are a little bit promising. Okay.

Brijesh Siya

Just on the pricing, could you clarify that whether you have announced any pricing increases.

Jens Birgersson

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 — 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 different dynamics. So not much announced yet. But for sure, there are several businesses that have announced, but not so much in Europe.

Brijesh Siya

All right. Thank you,

Jens Birgersson

I should say that U.K. has, for example, announced price increases to give one example that we’ve done it.

Operator

The next question comes from the line of Kristian Tornoe with SEB. Please go ahead.

Kristian Tornoe

Yes. Thank you. A couple of questions for me. I will do them one by one. So firstly, to your guidance — for the Q4 guidance. So if I take the growth range, the decline of 4% to 5%. And then I apply the same gross margin and fixed cost level in Q4 estimates, as we just reported for Q3, I get to a significantly higher EBIT margin than the [4%, 3%] (ph) that you are guiding for — so is it correctly assumed you are including a lower gross margin and/or a higher fixed cost base in your Q4 estimates and in that case, why?

Jens Birgersson

Kristian, your logic is perfect for October and November. And then December is a month where we see everything between a breakeven and up, and 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.

Kristian Tornoe

And when you say totally different, it means potentially much lower gross margin in December?

Jens Birgersson

Yes, yes. We can sit with some years with two weeks without production. So when you stop the business because we will not — depending on our inventory outlook, 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 — we always need to navigate that. Some years, you can have the market go down, so we could short 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.

Kristian Tornoe

Understood. And then just specifically on the U.K. So 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 your success in the U.K. and how sustainable?

Jens Birgersson

Yes. I think we were a bit taken by surprise. We drew down capacity in the U.K. And then brand and the market jumped back up because the U.K. is not as bad as in general, as Germany and Poland and some other markets. So when we then 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 items. And we are not quite through that yet. So that has meant we have 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 noncombustible product. There is replacement projects, it’s the high buildings, hospitals and schools, where we see noncombustible 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 will say Stone wool has gained in appreciation versus certain other products, the combustible one’s in some segment. And as I see it, it now looks to be permanent.

Kristian Tornoe

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 so that looks into 2024 compared to a few months ago.

Jens Birgersson

Yes, 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 to that. But what I see across Europe, I mean, I read somewhere that the EU is missing, the CO2 reduction goal by 2030 with about 50%. So instead of reducing, it’s increasing. So what I — and 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 sceptical 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 want 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 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 to start it. Italy showed how it’s done, and it can be done, but they need to do something and not just ignore it.

Kristian Johansen

Great. Understood. Thank you so much.

Jens Birgersson

Thanks.

Operator

The next question comes from the line of George Speak with BNP Paribas Exane. Please go ahead.

George Speak

Hi, gentlemen. Thanks for taking my question. I’ll just take two. So we talked a bit about hedging of gas and electricity, but my understanding is just still about 50% of your energy exposure to coking coal, which has risen sharply in Q2. So could you just — 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 barish on the region, but top line currency growth in — sorry, top line growth in local currency is only minus 2%. So can 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.

Jens Birgersson

Okay. I’m going to give the hedging on that to Kim, but I can take the other question first. So if you go into Poland and Eastern Europe, I was going to look at my sheet. Basically, small countries doing better than big countries in Eastern Europe. That’s the pattern we see. And looking into Poland, it’s very typical with Poland. When you have a decline, first, you have — at least we have seen it several times before. When you have a decline in the market sentiment, 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 and down. And — but now we have seen Poland for a while bid 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. And I — my assumption at the moment is that, that would continue for a while, then yes, Romania are back the insulating again, Hungary are around the CRO 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 the raw material prices also impacted demand. And therefore, I think for now, my assumption is, we stay on this lower capacity utilization and wait to see an improvement. And 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 [indiscernible].

Kim Andersen

Yes. Thank you. For the hedging part, as Jens said, we had — this year, 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. 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 a small declining cost, even though now coke prices are coming up a bit. We did do — these coke prices typically agreed each quarter, but we have long-term supply agreements in place. But these long-term supply agreements, in fact, there was time to renegotiate those here in the second half of this year.

And we have been negotiated this. And including those negotiations, 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 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.

George Speak

Right. Thank you.

Operator

The next question comes from the line of Yuri Serov with Redburn Atlantic. Please go ahead.

Yuri Serov

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’re achieving a margin of 14% now rather than 13% that you guided last time. Your long-term aspiration as stated is 13%, surely the results that we’re seeing this year suggest that you further adjust it upwards. Don’t you think?

Jens Birgersson

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 a 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 on 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, and 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?

Yuri Serov

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 I’m not asking about specifically next year or the year after. It’s more ongoing, but I can understand where you’re coming from.

Jens Birgersson

And Yuri, you have a good point. I mean 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 going to do all this renovation, it’s less than 1% or whatever. And you need to do three or whatever the 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 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 will make that a lot easier to firm in on the margin target.

Yuri Serov

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 insulation in these two countries in percentage points? In the U.K., you said that you have a growth of double digits. I mean, I suppose [indiscernible] and you said that you are outperforming the market, but I’m just curious by how much and similar in the U.S.

Jens Birgersson

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 we — 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 Wall share is a couple of percentage of the total insulation market. And there, there are going to be a conversion so that we eat into it, but we’re talking in relation to the overall market that is huge when being from 2% to 2.5% to 3% to 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 proportionately 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 invest in. 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 segment, high rises, semi high rise, 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 refer projects, quite a few of them, where we are the only product. So this is not either a normal market, it is something that happens now because you’re fixing past mistakes. So 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, maybe 40%, 50% of the market will be stone wool and we will get there, but now it’s a transition into that state. So slight gains, I would call it, but not super dramatic.

Yuri Serov

Thank you.

Operator

The next question comes from the line of Yves Bromehead with Societe Generale. Please go ahead.

Yves Bromehead

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 what? Was it maintenance CapEx where you were down from five weeks? Is that what you said?

Jens Birgersson

Yes. Good morning, Yves. No, we had — when that auto worker strike started in — was in Detroit. We had a factory, one of our factories in Canada where 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 was a maintenance at all. It was a strike.

Yves Bromehead

Okay. And maybe just going 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 for 2023. Is that correct?

Kim Andersen

If we had these direct operator contracts from France and Norway and the other country 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 a 50% running also in H1, but we did a view of that in the middle of the year for H2.

Yves Bromehead

Okay. And 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 not Q2?

Kim Andersen

Until Q1 only.

Yves Bromehead

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 considering being spot for 2024?

Kim Andersen

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 decided that almost quarter-by-quarter, what to do.

Yves Bromehead

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?

Kim Andersen

They are not significant. All of our foundry coke suppliers in Europe are European-based. And many of them, we have five major sort of suppliers. So they are quite regionally spread out. So logistic cost is not normally a big issue.

Yves Bromehead

But your suppliers import from Australia?

Kim Andersen

No, no. They have queries in Europe.

Yves Bromehead

Okay. Interesting. Thank you.

Operator

The next question comes from the line of Claus Almer with Nordea. Please go ahead.

Claus Almer

Thank you. 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 will be the first.

Kim Andersen

Our energy spend for Q4 will more or less be unchanged at the price level as Q3.

Claus Almer

Okay. And then based on sourcing and your contracts next year, how does that look like?

Kim Andersen

And Q1 will similar be quite similar to Q3. So there hasn’t been a lot of dramatic move in the forward buying costs the last few quarters. But if you go much further than just a quarter ahead, then the premium starts to become a bit more expensive. And so we do not entertain that.

Claus Almer

But that’s — if you’re going to hedge — so if you just — if you don’t hedge and just do the spot then next year looks to be flattish year-over-year. Is that the way to think about it?

Kim Andersen

That I do not know. I cannot foresee how the energy cost develop. I’m just telling you that we have only covered Q1 and then we just had to maneuver that quarter-by-quarter.

Claus Almer

Yes, sorry, I mean, if things are unchanged as it is today, rest of 2024. So throughout 2024, we will see the same levels as we see today. Will there be any impact?

Kim Andersen

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.

Claus Almer

Okay. Thanks. And then my second question goes to the margins. Jens, you mentioned that you told, I guess, the unions in Canada, you could not afford a price hike in hourly rates, but at the same time, you’re running at the best EBIT margin since 2007. And so, it seems like you could afford a slightly higher hourly rate. And if I just may add. And then second, last year, when you were discussing with your customers, when you’re introducing price hikes, then an important argument was that it could see Rockwool also facing a lot of headwind, but I guess looking at your numbers, that’s not the case anymore. So 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?

Jens Birgersson

I think let’s say, to 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 to 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, it needs to be translated into pricing. So that happen. But the first ask was so big that we couldn’t take in the business in that factory, it would have been noncompetitive even with an increased price level.

So that was the case there on [indiscernible] settlement. Then you look at where does the EBIT come from. What the story doesn’t say is that, for example, last year, we were extremely challenged in North America. We started up a factory. It cost us a lot of money. We have had ongoing big challenge to get our Mississippi factory up and running in the south, it 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 a big, big improvement, but a lot of that is because we brand 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 — that we have better margin is now is, for example, that we’ve never been so successful in the U.S.

And so when we — and when we then look at salary increase. Yes, if we improved 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, the different segments, there are distributors that don’t mind that prices go up 1%, 2%, 3%. So the other, of course, at the end level that house construction companies that are under a lot of pressure because they sit between the contract and there is probably also [indiscernible] 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’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 North Volt 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 than competition, because we have just-in-time deliveries, we can execute that well. But they are also tough pricing discussions, but that’s just normal in the business and it 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’s very good performance in Asia and North America.

Claus Almer

Okay. That makes sense. If I may just a follow-up on the comments you made earlier on who knows what competitors will do if volumes will continue to decline? And just curious, does — do you think that you have a certain number of competitors where volumes are starting to get to a more, let’s call it, critical point or level in their factories. So if it continues to decline, then it will really hurt the profitability and efficiency of the factories?

Jens Birgersson

I mean with the type of declines we have seen in Germany, where 30%, 40% down on new building starts and they are running out of backlog in the housing sector. We are used to always having some competitors that miss a project because the smaller you are, the less stability you have because of the low or large numbers, you either over flow 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 can’t throw the product after a supplier, it’s not after a builder, it’s not credible because they also need to trust that you’re going to be there and deliver all of that. So we see the whole spectrum but this, of course, if the market from this level takes another 5%, 10% dip next year, 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 in 2007, 2008. The volume drop this year has been same magnitude, right? And we have managed it. But what happens if there is another drop of 10%, we’ll do our best in that situation, and let’s hope it doesn’t happen, but I never live it. So I need to kind of — we need 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 stay sustainable trying to fight for extreme volumes and solve the problems and the fundamental issue is that there is inflation still there.

Claus Almer

Okay. That makes a lot of sense. Thank you so much. Yes, well done so far in a very difficult year.

Jens Birgersson

Thank you, Claus.

Operator

The next question comes from the line of Yassine Touahri with On Field Research. Please go ahead.

Yassine Touahri

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 holding. What has changed? Is it because there is more consolidation? Is it because you’ve got [indiscernible] 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 solutions. Like not only selling mineral wool, but selling or insulation, 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. Where do you stand on that? Where do you see Rockwool moving in the next five to 10 years? Could you add some other accessories, some other complementary products?

And then my third question is on the nonresidential activity. So what we’ve seen there is we’ve seen a big drop in housing, but nonresidential is holding a little bit better. But do you feel a risk or do you see a risk that nonresidential could be a bit more difficult next year in context where some of the projects that were built this year are not renewed?

Jens Birgersson

Okay. See, you remind me of the questions. I have the area on the price. We have the solution and then you have nonresidential, right? Yassine. Yes. So on the pricing, 2009, 2010, 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 drumbeat. There weren’t clear rules. There weren’t clear gaps between the biggest customer and the smaller. So from day one, we started to work through and have a structured approach to pricing. They 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 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 [indiscernible] 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, EUR2.2 billion to now EUR3.6 billion, EUR3.7 billion, a bit more last year.

Without added headcount, we have lift productivity and improved competitiveness. So it’s not that all the improvement in margin comes from prices, big effort in cost reduction and productivity improvements. And we need to continue that. So not only price, people — some customers say it’s only price. But when you look at the productive, we do 40%, 50% more per employee today than we did eight, nine years back. So that is a factor. Then we go into solutions. And I have in previous businesses in this 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 nobody ever bothers to define it, they say solution and solution sounds complicated so we earn money. My observation is, if you want to 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 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 — the bigger the projects on 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, the [indiscernible] 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, first of 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 will have, then we’d rather stay very close to have all the small products really productive, but yes, it can fit into the same application. So that’s where I stand on that.

Then on nonresidential 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 going to see more project delays if the recession deepened. So it’s back to that and maybe not fair to put all of that in Germany, but it’s more the underlying, the economic cycle. If Germany goes into deep recession and the others follow then, I think the nonresidential segment will be more threatened, because I see more near-shoring going on in the U.S. than I see here in Europe.

Yassine Touahri

And I think my question on nonresidential was more about the length of the project. Usually it takes like 18 months to build a factory offices. And my concern is that, maybe in 2023 you were working on nonresidential projects that were started before the jump in the west cost and the drop in construction costs is a risk that we see a number of 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 nonresidential next year? That’s my question.

Jens Birgersson

My pessimistic without doing an outlook is that I think maybe the market next year has some potential to get worse, but that’s not what I’ve seen now, but — and I stay on the pessimistic side. But in theory, we need to do a deeper analysis of the product. But remember, not all of our business is project business. That’s one portion of it. So the renovation were to start a little bit, that would quickly override that business. So yes, I cannot comment whether that will be up or down, but the potential is there for sure. We are running out of time, right? 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.

Operator

The next question comes from the line of Casper Blom with Danske Bank. Please go ahead.

Casper Blom

Thanks so much. Yes, of course, a lot of questions have been raised already. But again, 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 want to go into a discussion of whether or not that’s right or wrong. But merely if you could elaborate a little bit on 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.

Jens Birgersson

Yes. 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 in Denmark, where leaving or staying the alternative doesn’t really exist of leaving anymore. So — but we have been clear, protect the IP, keep control of our factories in a passive ownership and receive our normal dividends rather than leaving 4 times to 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 critics 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 on our IP and know-how and all the expertise we have built up 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 list 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 your questions, but obviously, all fresh. We need to see what happens, whether we will 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, I don’t want to sound overconfident, I also said that we do the best of the situation, 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.

Casper Blom

Okay. Thanks for that update. My second question is just maybe if you could elaborate a little bit on the Europe 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 trading towards the South?

Jens Birgersson

I think you heard that, I talked about France, [indiscernible] and Spain. And then if you move east, Romania, Croatia, doing quite well. And then the Nordics and Germany and then East were the big Eastern European countries do well. So I think it comes down to this general very negative sentiment with the PMI around 40 in Germany. Where our old rule, and I don’t know if it’s true, but if you read the economist, they will save 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 is doing better. The med is doing better. That’s what we see. The further north come, the worse it is the further east you come on average, it’s getting worse. Okay.

Casper Blom

Okay. Thanks a lot. And just to repeat, Claus, well done so far, quite impressive.

Jens Birgersson

Thanks a lot. Thanks. Last question.

Operator

Last question for today comes from the line of Zaim Beekawa with JPMorgan.

Zaim Beekawa

Good morning and thanks for taking my question. Just coming back to pricing. You mentioned [indiscernible] regarding 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.

Jens Birgersson

Sorry. Sorry, I went offline here. So Zaim, 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 has been relatively stable. But there are quite a few segments when the price is down a bit and there’s some segment 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 two years back, but we have a different situation. So there has been some of that. Prices on projects in Poland are down, okay? They’re down in flood-roof business it’s lower pricing, other segments not. So it’s a mix. Then we go to the sentiments for Europe. We cover 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 place is crash, and that’s it. But we haven’t seen any of that. We saw the dip that took out inventory. And then we have had a very good business. Our challenge now is actually to work back to backlog delivery time because due to the strike, we have too long delivery times. So we see 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 some macro story come in again and change it overnight. And that could happen, but it’s not in our plan.

Zaim Beekawa

Great. Thank you.

Jens Birgersson

Thank you, Zaim.

Operator

Ladies and gentlemen, this concludes the Q&A session. I’ll hand back to the host for any closing comments.

Kim Andersen

Thank you very much, and thank you very much, everybody for the very good and interesting questions. I know that there are a few of you who are still on the questionees, 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.