H+H International A/S (HH) Earnings Call Transcript & Summary

Welcome to the H+H International Annual Report for 2022. [Operator Instructions] This call is being recorded. I'll now turn the call over to your hosts. Please begin.

Good morning, and welcome to H+H conference call and presentation for the annual report 2022. My name is Niclas Bo Kristensen, Head of Investor Relations and Treasury. Joining me on this morning's call is our CEO, Jörg Brinkmann and our CFO, Peter Klovgaard-Jørgensen. Yesterday evening, the annual report and supporting documents were published and uploaded to our Investor Relations website. The presentation for this call followed this morning. During today's call, management will present the annual financial report, after which there will be a Q&A session. Please note that this conference call is being recorded and will be made available on our Investor Relations website after the call. Before handing over the call to Jörg and Peter, I would like to direct your attention to the disclaimer on Page 2. During this call, Executive Board may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ significantly. For further information about the risk factors, please see the annual report for 2022. And with that, I will now turn over the call to Jörg.

Thank you, Niclas, and good morning to everyone participating in this call this morning. Today, I will go over a few financial highlights from the year before. And then moving on to an update on our sustainability efforts. Finally, I will provide an update for our core markets and our strategic priorities before Peter then will add additional color on the financial performance for the year and, certainly, our financial expectations for 2023. But first, please turn to Page 3. '22 was a record year for H+H, achieving the highest ever EBIT of DKK 455 million. We have delivered such results in a challenging market environment with high inflation and increased market uncertainty from second half and onwards. For me, the results demonstrate our strong and also sustainable business model. In that sense, I would like to thank all our employees around our European markets for their commitment and great work in 2022. Let me walk you through the financial highlights. Organic growth amounted to 14% in line with our recent guidance. The result is mainly influenced by the continued implementation of sales price increases to counter the high inflationary pressures throughout the year. It was partly offset by lower sales volumes in the second half of 2022 as a result of lower new build activity in Poland and also upgrade of the German Wittenborn factory. The gross margin of 28% and also EBIT margin of 13% is a clear proof point of our successful pass-through on inflationary costs. Our free cash flow of DKK 61 million, excluding acquisitions and divestments, illustrates the continued strong cash generation. And finally, financial gearing remained low at 0.7x EBITDA, comfortably below our long-term financial target of 1 to 2x EBITDA. But not only on the financials did we deliver great results. There's also a good progress with regards to our sustainability journey we will see on Page 4. Yesterday, we released H+H Sustainability Report for 2022 on our company website. Towards 2030, it is our ambition to reduce our Scope 1 and 2 emissions by 46%. In 2022, we made a big step into that direction. We reduced our emissions by 8% year-on-year, which is 5% ahead of our long-term Science Based Targets initiative goals for 2022. This is mainly coming from better energy consumption and a mix shift towards green electricity. Our long-term SBTi commitment serves as a North Star to become carbon-neutral by 2050. We are confident that this commitment will not only make an important contribution in the fight against climate change but also add significant and sustainable long-term value to our business and to our shareholders. In all we do, nothing is more important than the safety of our people, and I'm very pleased to report that we, in 2022, reduced our lost time incident frequency to 3.6, the lowest level ever achieved. However, every accident is one too many, and we invest to save lives towards the true zero-harm culture. Now let me provide an update on the situation in our key markets, starting with the Central Western Europe region on Page 5. In the CWE region, 2022 started with high demand for our products. In the second half of the year, however, high inflation, risk related to energy supply those days and increasing interest rates led to higher market uncertainty. And as a result, the building activity slowed down for the remainder of the year. The number of building permits issued in Germany is decreasing by 13% year-on-year. And macroeconomic indicators point to unfavorable conditions for the housing markets in 2023 as the country continues to face high inflation and interest rates, which drive an increasing trend of postponement and construction starts. Similar in the Nordic countries, demand was strong for most part of 2022, especially in the detached housing market. But in the last part of the year, building activity started to decline, and we are seeing a slowdown going into 2023 on the back of inflation and uncertainty. In 2022, a lot happened to strengthen our factory network. Part of this was the integration of the 2 acquisitions we made late 2021. The acquired AAC and CSU DOMAPOR factories in Northeast Germany had a very successful year with efficient production and high output. Our new AAC plant in Feuchtwangen in Southern Germany was successfully ramped up and is now ready to serve the market. Additionally, we also upgraded the AAC factory in Wittenborn located in the northern part of Germany. The upgrade in Wittenborn resulted in temporary closing, which affected output in the second half of the year but is now back in operations on a new level. Our recent acquisitions and improvement projects have established a solid footprint across Germany, and we have taken considerably synergies from sales. However, further synergies are being worked on by more standardization and a higher utilization from independent plants towards the network of plants. That is also the reason why we have hired a new leader for our CWE region, who brings huge experience from bigger companies operations. During the year, our sales team was focusing on negotiating sales price increases to offset the higher input costs, and we believe this to continue into 2023. Beyond that, we are also preparing for the lower demand in 2023 and adjust our capacity through using short-time work where possible. Beyond that, we have initiated a cost savings program. Despite the uncertainty going into 2023, we remain positive for the long-term potential as there continues to be a structural undersupply of housing in Germany. Next, please turn to Page 6 for an update on the U.K. market. During 2022, the private housing market showed resilience to challenging market conditions and maintained a high level of building activity. Generally, our British factories were running at near full capacity to service our customers in the very high demand. As a result, we focus on the delivery of core wall products, leaving certain market share to alternative solutions. As the market now softens, we will seek to regain this market share by restoring a widened product portfolio, especially in foundations. With high inflation rising during '22 and to be continued into 2023, we focus on offsetting the input cost increases through sales price increases in close dialogue with our customers, and they are now being phased in over the coming months. Towards the end of the year, we did see market demand slowing down, and house builders have reported decreasing sales rates in Q4. We will continue to be watchful of the situation in U.K. and are prepared for capacity adjustments where needed. As we remain positive on the long-term fundamentals of the market, we continue to seek opportunities to further increase our capacity. That is why we continue with the capacity project in our Borough Green factory. The upgrade is expected to increase our capacity by approximately 10% and be completed in Q1 2024. Please turn to Page 7 for an update on the Polish market. In the first part of the year, demand remained at a very high level, supported by a strong order backlog and undersupply of rental housing. This has allowed for strong sales price dynamics being ahead of inflationary input costs in the first half of 2022. We have also invested into our network of plants in 2022 and have completed the work on our new CSU factory in Reda in the north of Poland. With a capacity of 60,000 cubic meter, it will serve the Polish tri-city area around Gdansk now with both high-quality CSU and AAC from our existing plant in Reda. However, the war in Ukraine caused high uncertainty, which, together with high inflation, has caused the market demand to soften. This has led to a sharp decline in dwelling starts and building permits, which are down 28% and 13%, respectively, year-on-year in 2022. As a consequence, we have started to adjust production capacity where we reduced weekend work and over time. Also, actions towards shift reductions and temporary factory shutdowns are in place. Beyond that, the sales team is constantly adjusting our prices to pass on continued high inflation. Turning now to an update on our strategic outlook on Page 8. 2023 will be challenging for our industry, no doubt. But all markets in which we operate hold attractive long-term growth opportunities for us, supported by trends of the demographic profile, urbanization and the political drive to secure affordable and sustainable housing. We remain strongly positioned to take advantage of these longer-term trends. Following the successful consolidation of the German and also the Polish white stone market, which has formed a solid platform for long-term growth and value creation, we will focus our efforts on optimizing and strengthening our production network. This will be done through standardization and move from independent plants to a network of plants. As a consequence, we built a stronger market position and prepare ourselves for future organic growth. The addition of capacity through debottlenecking and also expansion of existing production facilities will also be within our strategic [ scope ]. Our latest investment project in Borough Green is a really good example for this. And finally, growth through acquisitions will still remain on our agenda, and we maintain a pipeline of potential acquisition targets. This includes new geographies and potentially the expansion of our product offering around partners in wall-building. This concludes my remarks, and I will now turn the call over to Peter for an update on our financial performance.

Good morning. I will now take you through the financials, starting with the revenue for Q4 2022 on Page 9. Total revenue for the quarter increased by 11% to DKK 810 million, with an organic growth of 9%. In the Central Western Europe region, revenue amounted to DKK 369 million compared to DKK 350 million in Q4 last year. In the Central -- organic growth for the region was negative 2% as a result of lower sales volumes, partly offset by higher sales prices in both product segments. In the U.K., revenue was DKK 235 million compared to DKK 192 million last year. Organic growth was 25%, driven by higher sales prices. For Poland, revenue amounted to DKK 206 million for the quarter compared to DKK 189 million last year. Organic growth in Poland was 12%, driven by higher sales prices in both product segments, partly offset by lower volumes as market was softening. Now please turn to Page 10 for a few comments on our earnings margins for Q4. As previously mentioned, H+H faces an increase in inflationary pressure, which is adversely impacting earning margins. This effect in the quarter was primarily driven by 3 factors: firstly, we've seen continued increases in prices on certain raw materials, mainly cement and lime. Second, we had a drop in sales volumes in Poland, leading to capacity adjustments at higher incremental production costs. And finally, in the quarter, the Wittenborn factory in Germany was still in ramp-up, resulting in higher production costs, combined with lower stock of products negatively impacting sales for the quarter. Together, these effects are impacting our margins negatively. Gross profit for the fourth quarter amounted to DKK 202 million, representing a decrease of 6% relative to last year. This corresponds to a gross margin of 25% compared to 30% last year. The relatively lower gross margin year-on-year is mainly due to the higher production costs and as mentioned, the slowdown in Poland. EBITDA before special items was DKK 111 million compared to DKK 139 million last year, representing an EBITDA margin of 14%. And finally, EBIT before special items amounted to DKK 58 million compared to DKK 94 million last year. This corresponds to an EBIT margin of 7% versus 13% last year. Now please turn to Page 11 for a review of our full year earnings. Total revenue for the year increased by 19% to DKK 3.6 billion, with organic growth of 14%. The organic growth was mainly a result of the continued implementation of sales price increases to counter the strong inflationary pressure, offset by lower sales volume as a result of lower production outlook primarily due to the planned upgrade of the Wittenborn factory and lower volumes in Poland. Revenue in Central Western Europe amounted to DKK 1.6 billion compared to DKK 1.4 billion last year. Organic growth was 2%, driven by price increases in both product categories but offset by lower volumes, mainly driven by AAC in the second half of the year. Revenue in the U.K. amounted to DKK 1 billion compared to DKK 816 million last year. And organic growth was negative -- positive by 18% due to higher sales prices, offset by slightly lower volumes. Revenue in Poland was DKK 941 million compared to DKK 737 million last year, driven by higher sales prices in both product categories, offset by lower volumes in the second half of the year. The graphs to the left show the quarterly sales illustrated in the strong first half of the year and a softening in the second half compared to 2021. Now please turn to Page 12 for a review of our full year earnings. Gross profit for the full year 2022 increased by 13% to DKK 1 billion compared to DKK 900 million last year. This corresponds to a gross margin of 28% compared to 30% from last year. The gross margin was adversely impacted by increasing prices of raw materials and higher production costs and a softening in the second half of the year. EBITDA before special items increased by 11% to DKK 657 million compared to DKK 591 million last year, representing an EBIT margin -- EBITDA margin of 18%. The lower EBITDA margin before special items is a result of the increase in production costs, while SG&A was stable. And finally, EBIT before special items increased by 12% to DKK 455 million compared to DKK 408 million in 2021, representing the highest-ever EBIT for H+H. This corresponds to an EBIT margin of 13% versus 14% last year. Turning to Page 13, you will see a bridge from EBITDA to free cash flow in 2022. After special items of DKK 42 million, which mainly relates to additional transport costs related to the factory upgrades in Germany and costs related to management changes, we reported EBITDA before special items of DKK 657 million compared to DKK 591 million for 2021. Cash flow from operating activities amounted to DKK 316 million, mainly driven by higher EBITDA, which was offset by negative development in working capital due to an increase in stock of DKK 200 million, mainly -- driven mainly in the last quarter. The CapEx for the year was net DKK 255 million, driven mainly by investments in same conversion in the U.K., upgrade of our Wittenborn factory in Germany and the CSU factory in Reda, Poland. This leads to a free cash flow of DKK 61 million for the year. On Page 14, you will see the development in our net debt for the year. At the end of 2022, net debt totaled DKK 492 million, of which DKK 108 million relates to these liabilities. This compares to a total net debt of DKK 350 million at the end of 2021. The increase since beginning of the year is mainly a result of the purchase of treasury shares in connection with the recently concluded share buyback program, partly offset by free cash flow. The financial gearing ended at 0.7x EBITDA, below our target of 1x to 2x EBITDA before special average. I'm also pleased to announce the signing of a new sustainability-linked finance agreement, providing us with extended financing on improved terms. Next, please turn to Page 15 for a brief comment on the conclusion of our share buyback program. The decision of the Board of Directors to initiate the share buyback program was supported by the continued strong earnings and free cash flow generation, which was the strongest in the financial year, comfortably below our long-term target. As of 3rd of January 2023, a total of 1.1 million shares corresponding to 6.4% of total share capital in H+H have been bought back under the program for a total purchase price of DKK 150 million. It is expected that any shares bought back under the program, which are not used to meet obligations relating to the company's share-based incentive programs, will be proposed canceled at the Annual General Meeting in 2023. For the time being, H+H expects to use the free cash flow to develop the existing business and pursue value-adding investments within the debt gearing indicated. Next, please turn to Page 16 for a walk-through of our financial expectations for the full year 2023. We expect organic growth for the year to be around 0%. And EBIT before special items is expected to be in the range of DKK 330 million to DKK 400 million. The financial outlook for 2023 is based on the assumption that sales volumes will decrease by 10% to 15% in aggregate, mainly driven by Poland. The assumptions are based on a very slow start to the year, with expectation that volumes will pick up gradually over the year, combined with the slowdown seen in the second half of 2022. Also, further cost increases in 2023 are expected and is expected to be passed on through sales price increases. Finally, exchange rates primarily in the British pound, the euro and the Polish zloty will remain at the end-February levels. This concludes my prepared remarks, and I will now turn it back -- the call back to Jörg for closing statements.

Yes. Thank you, Peter. So before we open it up for questions, let me conclude with a few final remarks. Number one, '22 turned out to be the strongest ever financial year for H+H and, for me, clearly showing the performance of our business model. But after 14 years of growing markets, 2023 will be a challenging year with lower demand and, at the same time, high inflation and the need for further price adjustments. However, we see upsides in Germany and the United Kingdom to perform better than market. We are prepared to navigate through this new environment. Sales price increases are continuously being implemented capacity adjustments are being executed where needed and plans for cost saving programs have been established. The start into 2023 was weak with very low building activity in the new build sector. However, it is very early in the year, and we expect building activities to pick up. We will monitor this development very closely and adjust our execution plans wherever needed. This concludes my remarks, and we are now ready to take your questions.

[Operator Instructions] The first question will be from the line of Kristian Johansen from SEB.

Yes. Several questions from me. I'll just do them one by one. So to start with, you stated you're expecting activity to pick up gradually during 2023. Can you just elaborate a bit what do you base this on?

Yes. So when we talk about a weak start into the year, certainly the January, February and this has to do with volume hangover from last year and really a weak start, operating activities starting. So we expect the building season to really start literally now, and we see -- we're going to see a stronger performance actually really starting now. And then if you look into our business, usually, the second and third quarter, this is really the strongest quarter. And that is actually how this is based.

So is that more the seasonality? Or are you talking year-on-year development?

Yes. So that is the general seasonality. And I think a lot is also waiting for spring season to really see what will drive the market. I think overall, there's no question that we're looking into market declines across our footprint. So all markets are indicating negative volume growth. However, in our markets, in particular in U.K. and the CWE, we feel that we have some mitigating factors that will basically we will outperform that market decline. So in the U.K. specifically, we have been specifically in exiting certain product types, which we believe that we can regain in the marketplace and, thereby, allowing us to increase market share. And similarly, in CWE, because of the factory upgrades we've been doing, we suffered a negative organic growth in volume growth during the 2022, which also means that year-on-year, we do not expect the same drop. And therefore, we believe that we will be able to mitigate the market volume declines.

Understood. That was definitely more clear. Then the next question, in terms of Poland, so you say the 10% to 15% volume drop on the group level is probably driven by Poland. So I guess we're looking at, at least 20% volume decline in Poland yet. As I read your comments on the Polish market, you say you expect pricing to continue up. So I mean, to me, it sounds a bit optimistic that in Poland, which we know is quite sensitive on pricing when volume changes, that you expect to increase prices in such a substantial drop.

So I mean there's 2 elements of your question. Number one, is Poland the market that is suffering the most from this? Yes, it is. So -- and you are seeing this -- I mean we are talking about the construction starts of minus 28% and then the permit of minus 13%. So it is certainly a market that will go down the most. That is what we expect. And then if price increase is difficult in such environment, yes, it is. But the key thing here is that we see inflation of our input cost. And we are very clear on passing that on to the marketplace, and that has been the strategy last year when we executed that successfully, but this is also the guidance for this year. Could it be more challenging? Yes, it will.

Okay. So you go to the Polish market and continue to push your prices?

Yes. In line with inflation of input cost. That is very important.

Sure. But...

We are not saying we increased margins over volume losses. That's not what we are saying. But what we are saying is that we pass on the inflation we get from input costs to the marketplace.

Sure. Understood. Then just 2 other questions. So first of all, in terms of investments, what CapEx level are you planning for in 2023?

So obviously, in a time when you see -- we see declining markets, you're also a little bit more prudent on the investments. So in the light of what is happening, we foresee CapEx slightly below 2022 with a potential of even further lowering CapEx, if needed. So essentially saying that we have a resilience plan in place if needed. But the underlying assumption at this time is slightly below last year.

Understood. And then just my last question. If I look at your inventory levels during 2022 it has increased fairly significantly. Can you just elaborate a bit on the background for this development?

You're absolutely right. So overall, during the year, there is a negative cash flow and inventory of around DKK 200 million. And it is -- the biggest majority or the majority of that is in the last quarter, and it's driven by both volumes to more stock, more product on stock but also higher value. So obviously, as you go through an inflationary environment, we have, during the course of last year, seen higher production cost, and that feeds into the inventory.

The next question will be from the line of Sebastian Grave from Nordea.

Also, congratulations on the solid results. So I also have a few questions. And I guess I'll just take them one by one. So a follow-up on your guidance. I mean fairly upbeat '23 guidance, which basically, as I read it, boils down to you expecting to sort of retaining pricing power and being able to offset waning volumes. So to what extent is this outlook backed by existing backlogs among your customers? That will be my first.

I think if you look across the building sector has been both in the U.K. and in Germany, you actually still have a reasonable backlog. It's more construction start that has been delayed as people are waiting to really commit to that backlog. Similar in Poland, we've seen drops in construction starts, but the permit levels are still above the completion levels in Poland. So you can say that there is still an inherent order backlog waiting to be executed basically across all 3 core markets. So the reason that we're seeing a very slow start to the year is simply because the uncertainty on the inflation and general housing market, combined with interest rates, have slowed down the construction starts. But the backlog in general within the construction sector and the residential new build is essentially still there.

Okay. Understood. Maybe a bit of follow-up. So in previous slowdowns, I mean we have seen discipline fade quite a lot. And I mean now we're seeing a quite significant slowdown across all your markets. Why is it that this time is different in terms of pricing discipline in the markets? And I guess on your sort of 10% to 15% volume decline, what are your assumptions in terms of market share development across your end markets? You alluded to U.K. where you expect to sort of gain market share, but what about in Poland and Germany? The former, it sounds like that you are set to at least lose some market share if you keep pushing up prices.

So Sebastian, maybe a bit of a general comment here, right? But this volume price game, right? For sure, you can discuss that in a normal inflation environment, right? But where we are in the markets we are operating in, this is completely different, right, because that inflation we are seeing needs to be passed through to make sure the whole value chain is really working. And that is why the price increases we are seeing here this -- is more a need to pass on that inflation we're getting from our import cost, right? So that -- it is really different market dynamics if you really compare market conditions like from former downturns, right? So that is important. So it's not about -- and that -- I said that it's not about we are making better margins in the downturn scenario, but it's really to pass on the cost effects we are getting from our suppliers through to the market. That is actually the principle. Peter, do you want to elaborate on that?

I think just to add, compared to previous downturns, all our markets are much more consolidated than we were some 14 years ago. And that also means that, nonetheless, there should be a better pricing discipline across the players. And that is also why we believe that fundamentally speaking, we will have to pass on the cost increases. That doesn't mean that we, in this forecast, also not include certain procurement initiatives to drive down or to mitigate these cost increases. But fundamentally speaking, cost increases will need to be passed on.

And on your expectation of 10% to 15% volume decline, how much -- what were your assumptions in terms of market shares across markets? You mentioned U.K., but how about Germany and Poland?

So in general, in Poland, we would like to defend our market position. But we also know that, that is probably where pricing can be most difficult given the competition. We have before been willing to lose a little bit of market share but maintain our pricing discipline, and that has really paid back previously. So that is still the expectation. In terms of CWE, as mentioned, we expect to beat the market, which indicates that we expect to gain market share. And of course, it comes on the back of 2022 where we undersupplied to our customers.

Okay. And just my last question, and sorry, it's a lot around pricing. But how much will you have to raise your prices from the current level, i.e., as of Q4 to offset sort of a 15% sales volume decline in '23? Or maybe asked definitely, so you keep your ASP fixed at the current level, what is the sort of implied spillover effect into '23 all else being equal?

So you're absolutely right that, of course, during 2022, we also increased pricing, which we also went through before. So there is quite a good spillover effect, but we are still implementing price increases both in the beginning of the year and also expect to gradually increase pricing further in certain markets. So it is a combination of spillover effects and new pricing being introduced.

Okay. Got it. And once again, congratulations.

The next question will be from the line of Peter Sehested from ABG.

Many of them have actually been asked. So I will just go into a bit of modeling details. I wondered, given that price is such an important component in your guidance, I wonder if you could give us a little bit more about what you have realized across the markets in Q4. And furthermore, what is the annual price impact for 2022? That is my first question.

So during the course of last year 2022, we did implement price increases gradually over the year. The biggest chunk of price increases were, as traditionally in the beginning of the year, with a phasing in over Q1, beginning Q2 and then another round in the beginning of Q1 with a -- sorry, Q3 with a phasing in the effect of that. So there were not significant new price increases implemented in Q4. So therefore, the assumption here is that the price increases announced to the market in the beginning of Q1 2023 is then also being phased in as normal during the course of Q2 -- Q1, sorry.

Okay. Just a follow-up on price. Are you giving rebates to certain...

Yes, we do. It is part of the business model.

Great stuff. In your quarterly reports, you have provided us with the volume developments, realized volume development. I wonder if you could provide us with the volume -- total volume development in 2022?

Please let us follow up on that and get back to the analyst teams.

Okay. So -- my final question for now would probably be around the markets and sort of the different dynamics because you're referring to completions and starts and permits. And it appears, given that they are all down across markets, but Poland is particularly tough. And we're also seeing some of the U.K. developers reporting of very significant drop in reservation rates and also lower completions during the fiscal 2023 first half of the year. Could you just give a bit of flavor how the differences are between the markets in terms of your realized volumes versus what we are observing in terms of permits and completions and starts, et cetera?

Yes, sure. So when you -- so starting in the U.K., for sure, this house builder reporting, we are following this. And this is really a good indicator. What we've seen is that reservation rates are down, but all the saying of all the house builders that is also for the early start in the year, and they are watching that spring season very closely, same do we. And then I'm going over to Germany. These building permits, this is a good indication for us, certainly not one of our volume assumption as we see these different upsides from the plant closures in last year. But certainly, the permit is giving a good indication. And then certainly, also in Germany, there are some house builders we are delivering. They're not as big as those in U.K., but also, they have a good insight for us. And then Poland coming to that, and we talked about that, it is the market that is most volatile. And it was also the market where we were seeing volumes decreasing already end of 2022. So the reaction in Poland is -- has been very fast actually, and it's a market that is expected to go down the most. And it's also where we have started to adjust capacity already end of 2022.

And I think also it's clear that with these market conditions, of course, as Jörg mentioned, we already have made certain adjustments. But currently, we're also executing further restructurings of the -- and adjustments of our production capacity, specifically in the Polish markets but also have a plan for CWE in particular and potentially U.K. So clearly, as part of these market developments, we are also restructuring our production capacity according to that.

Okay. Because in the previous comments, we've got sort of [indiscernible] in some markets. You sort of highlighted the strong backlog, and I also believe that you mentioned that the backlog, in principle, was also strong in Poland. So I'm just trying to sort of get a sense for what are the underlying dynamics and what [ does it ] make you referring to strong backlogs when talking about volume resilience, but then you have this fall off in Poland despite the fact that it also appears to be a strong backlog there?

I think the question came from whether we saw backlogs and what we saw across our markets. Now Poland is not the ones that have the most backlog generation as such. Much of the sales is done through merchants, so the visibility in the market is lower. But if you look at a more higher level than in general, the permits have been exceeding the completion levels for quite a number of years, which means that, nonetheless, there is an inherent construction backlog within the Polish building sector. But there's not the same visibility and transparency to see specifically backlogs for individual customers or merchants.

Okay. And then I just have a follow-up question on the cash flow. I would like -- in terms of the working capital, do we -- do you expect as weak as working capital in 2023? Or do you expect to wind down some of those?

I think, to be honest, that is still a little uncertain. And naturally, it's going to be -- there's multiple factors going into that. One is where we continue to see increasing input costs, then of course, there will be a value impact of that. And if that should settle down a bit, then there will be no -- then it will not be the same contributing factor. When you look at the volumes, there will really be a mix between sales volume developments and our capacity adjustments. And of course, as usual, we stay fairly agile in our operating model and business model, which also means that we have made capacity adjustments, and we are certainly ready to make more. But it really also depends on how the market specifically develops. So at this point, it's a little bit difficult to predict exactly how that stock development will be during the year.

The next question will be a follow-up from Kristian from SEB.

Just 2 follow-ups here. Special item costs. Do you expect any of that in 2023?

As mentioned, we are planning to do further capacity adjustments. And therefore, there will be some restructuring planned in that, and we do expect some special items. Exactly the size of that will again depend on how the markets develop, and how severe, we will be adjusting our capacity, but let's say for an initial estimation of that maybe on the prudent side, I would assume same level roughly as 2022 with these market developments that we are forecasting.

Understood. And then the second follow-up here is on your other operating income, which is fairly high in Q4. So I can see that you are reversing loss of a provision related to sale of the land in previous years of DKK 10 million. So first of all, can you confirm that, that reversal is in Q4 and then maybe, secondly, elaborate on the background of disposal?

So it's really very well spotted. So we do have an income of the DKK 10 million in 2022 numbers. It does relate to a sale of land that we did some years ago. I can't quite recall. It is before my time, so I would assume it's in 2018 or maybe even sooner than when we sold the land plot in Poland and had a receivable as a result of that. During the previous years, we have taken a provision against that, but we now have the [ court ] deciding on this receivable, and therefore, we have resolved the provision.

All right. And that's booked in the fourth quarter?

That's booked in the fourth quarter, yes.

The next question is a follow-up from Peter from ABG.

My follow-up again is on pricing. And how do you think about input prices? You basically -- your rhetoric is that they're going up. But with natural gas prices dropping significantly and electricity prices as well and we also hear from some of those manufacturers who are highly dependent on these 2 input costs that they expect their prices to come down as they are faced with tough questions from their customers as to why prices should maintain high given that the cost is off the cliff since 2022, so what is your perspective on that?

So overall, as you know, the key components of our input cost is related to minerals, so cement and lime. And as such, there is still a strong demand for such type of products, also driven by infrastructure projects, et cetera. So there are -- you're actually right that the energy costs are coming down, but we are yet to see that impacting the -- our raw material pricing. And on the contrary, we are still being met by continued price increases on these. And that is what we included in the forecast. Specifically around energy, we typically have a tradition for hedging forward on our energy really in order to also have a good gauge on our price increases in the markets. We follow the same principle in 2022, which means that we are fairly hedged, particularly on gas during 2023, which gives us a stable outlook on the cost side, but it also means that our average energy cost is likely to be higher than 2022 average. Having said that, these increases, clearly, as we are quite direct in our rhetoric around passing on input costs, it also means that we, of course, are taking initiatives to address these input costs on our key suppliers via procurement initiatives, which have been ongoing but, of course, get even more important in a scenario like these with lowering sales demands. So in general, we are launching procurement initiatives, and the success of those will, of course, also have an impact on our pass-through to the markets.

And as to what Peter is really describing here and that is the guiding principle of our company is that pass-through exercise, right? And this has the 2 angles. The one is the price increases as a consequence of the input cost. And then for sure, if market conditions change and, I mean, the energy is usually driving it, right, that is for sure then also working on the cost side with the same target to manage that pass-through from both angles. And actually, that is exactly the exercise we are doing in our company.

Okay. And given that hedging could be potentially crucial with, let's say, if the competition changes, et cetera, et cetera, could you just give us a bit of -- or remind us about your hedging policy? Are you fully hedged? Or is that in a 3 or 6 months rolling basis? Or how does that work at the moment?

On our gas, we are pretty much hedged throughout '23, whereas on coal, we are not hedged and is mainly using the spot market.

As there are no more questions, I will hand it back to the speakers for any closing remarks.

Guys, thanks for taking your time this morning to dial in to this call, and we are looking forward to see you in one or the other events within the next day and to further go into that discussion. Thank you. Have a great day. Bye-bye.