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

[Operator Instructions] This call is being recorded. And I will now hand you over to the speakers. Please begin.

Good morning, and welcome to H+H conference call covering the first half of 2023. My name is Niclas Bo Kristensen, responsible for Investor Relations and Treasury. With me on this call are our CEO, Jorg Brinkmann; and our CFO, Peter Klovgaard-Jorgensen. Yesterday evening, the half year report and related documents, including the presentation for this call, was put on our Investor Relations website. During the call, management will present the interim financial report followed by Q&A session. Please be aware that this call is being recorded and will be made available on our Investor Relations website after this call. Before handing the call over to Jorg and Peter, I would like to direct your attention to the disclaimer on Page 2. During this call, the Executive Board might share forward-looking statements regarding various aspects of our business and company that go beyond historical facts. These statements are built on current expectations and assumptions. Hence, they are exposed to certain risks and uncertainties. Numerous factors could lead to substantial differences in actual results. For more details about the risk factors, please see the annual report for 2022. And with that, I will now turn the call over to Jorg.

Yes. Thank you, Niclas, and good morning to everyone participating in this call this morning. Before I talk you through our Q2 results, I would like to comment on our guidance change that we've published yesterday evening. You will see from our Q2 numbers that volumes and earnings actually have improved compared to quarter 1. Unfortunately, these positive trends that we were seeing doesn't hold. We are already seeing today that volumes in CWE and U.K. in the summer months of July and August are significantly weaker than we've expected. Additionally, we are observing increasing price pressure in the German market. This new development is impacting our top line, and we're looking into a more negative organic growth than expected, also hitting our EBIT for the second half of the year. We will certainly elaborate more on this throughout this call. But before we do this, let's take a look into the quarter's financials. Please turn to Page 4. During the second quarter, building activity in Europe remained at low levels. Organic growth amounted to minus 26%. This result is mainly driven by a negative volume trend of approximately 40%. However, in a market that was declining in that magnitude, we were able to successfully implement the planned price increases throughout quarter 2 and pass on inflation to the markets. The gross margin declined to 24% compared to 32% in quarter 2 2022. The lower gross profit margin versus last year is only partly driven by a loss of overhead recovery as we are mitigating this effect with our network efficiency measures. The major part is coming from a lack of margin on increased production costs, including the cost of energy. As we are having fairly high depreciation also from latest acquisitions we've done in Germany, the EBITDA margin is a good indicator and was still 12% in Q2 2023 compared to 23% in Q2 last year. However, the massive hit in volumes of 40% impacts our EBIT compared to quarter 2 last year. EBIT before special items amounted to DKK 38 million in quarter 2 2023 compared to DKK 177 million in quarter 2 last year, corresponding to EBIT margins before special items of 5% and 18%, respectively. Our free cash flow was negative by DKK 68 million, driven by restructuring costs and CapEx spend. And finally, financial gearing was 2x EBITDA, primarily driven by a negative working capital development in quarter 1. This remains within our long-term financial target of 1 to 2x EBITDA, and we're carefully watching the development given the changes in the business. Overall, there were low volumes in Q2, which had a significant impact on our financial performance. Nevertheless, we've made good progress to land price increases as planned and we were seeing early effects from our business improvement measures, which I will come to later. Now I will provide an update onto the situation in our markets on Page 5. The new build market in Europe is most likely one of the hardest hit segment in our economy. The war in Ukraine has changed the parameters for residential new build completely. Never have we experienced such steep increase of interest rates. This, in combination with high building costs, forces people to completely rethink their building projects. As a consequence of this, many are postponing their decision to build. Some -- same is valid for institutional investors adjusting to the demand and more and more postponing new build projects, a picture we are seeing in all our markets. In numbers, we are looking into a 30% to 40% less building permits issued across our markets, even lower is the number of mortgage contracts currently being issued which are even down to 50% in some areas. If we study the data in the last couple of weeks, we are seeing that the downward trend is kind of plateauing. And it looks like that the market has found a new base level. However, we do not expect a fast recovery. Without positive signs of the interest rate development or meaningful government support programs, it is very unlikely that the situation will change. Only positive is that the demand for housing is still high and the backlog is increasing every day. This situation will force governments to react sooner or later. Whereas we are seeing the same general picture across our group, the development is slightly different in each of our markets. On Page 6, starting off with Central Western Europe. In Germany, permissions for new buildings from January to May 2023 decreased 33% compared to last year, and high interest rates have resulted in the reduction of new mortgage loans for private investors. Institutional investors hesitate to initiate new projects and demand for 1 and 2 family homes from private investors declined from last year. However, the underlying housing demand remains high due to a continued shortage of housing, especially in the larger cities, and the number of building permits issued continues to exceed the number of completions adding further to the construction backlog. Although there are some reluctance to undertake new projects in multifamily houses before selling current portfolios, the rental market remains also undersupplied. In a challenging market environment, where we are beginning to see downward price pressure, our CWE business has delivered minus 20% organic growth in Q2 and negative 14% for the first 6 months compared to last year, as we were able to expand our market position while so far maintaining prices and pass on inflation. Continuing with U.K. In the U.K., high interest rates are making mortgages less affordable. And combined with high inflation, they are reducing consumer spending significantly. Currently, mortgage rates are the highest they've been in 15 years at levels of 6% to 7%. Also in the U.K., we are observing a lack of housing. The U.K. government recently said that they want to build 1 million homes. But for this to work, we need interest rates to go down or government support programs like the recently stopped Help to Buy being reissued. In the U.K., the number of new home registrations fell by 42% in the second quarter of 2023 compared to the same period last year. For the quarter, in the U.K., we were able to maintain prices and increase volumes with foundation blocks and new customers, which resulted in negative 18% organic growth in Q2, a negative 26% for the first 6 months of the year. And finally, going to Poland. In our Polish market, we are starting to see demand recover slowly, although still impacted by the high level of economic uncertainty with building activity further constrained by growing inflation and continued high interest rates. The number of building permits in Poland decreased by 35% from January to June 2023 compared to last year with developers being the most affected. In this market environment, our Polish business delivered an organic growth of minus 45% in Q2 and negative 40% for the first 6 months. The Polish government has recently introduced a program called Safe Credit with a 2% interest rate. The purpose is to encourage especially younger homeowners to realize their investments now. Fundamentals of the program is, if you are buying a home for the first time, you can use the program to get meaningful financing at a reasonable interest level for 10 years. While its impact remains uncertain and the program is fairly new, the initiative demonstrates that housing remains on top of the government's agenda, and we will observe the effects the program has. Despite the huge volume decline, we have implemented price increases which are needed to pass on inflation. However, the competitive environment in Poland is challenging, and we are monitoring the market very closely to protect our leading position. Next, on Page 7, I will provide an update on our business improvement initiatives. The situation in all markets is extremely tough, and the July and August development shows how quickly the market can change. This is an area we cannot change and we don't have influence, but we are using the current market environment to proactively improve our business. It is important for me to make clear that our initiatives are all aiming for a stronger organization in the future. Instead of only managing costs short term and eventually give up on future opportunities, we are reorganizing our company to be much stronger in the future. As we are a manufacturing company, the first crucial element is making our plant network more efficient. By consolidating plants in certain areas and redirecting volumes to bigger and better performing plants, we are achieving cost savings through scale. In this context, we've already shut down 5 of our former 32 plants and laid off 20% of our workforce. The total network capacity, however, will not suffer from this move, but will remain on formal levels, below -- in the more efficient supply of the future and also comes along with better service for our customers. Our efforts are based on lean manufacturing principles. And despite our current situation, it is exciting for me to see the first results coming in. The positive side effect is that with high utilization, our energy usage and CO2 emissions are improving up to 20%, which will also help drive our ESG agenda in the future. The current lower sales volumes also open up to look into our organization and processes, allowing us to adjust our SG&A cost base. This is mainly achieved through better and standardized business processes using more and more digital tools. The biggest potential in this field for the group exists in our CWE region, where we have untapped potential from former acquisitions by further integrating the business into one very lean organization. On top of fixed costs, we are driving several procurement initiatives fueling the current economic situation in many areas. We are making good progress and have recently strengthened our group procurement function, and we have now also announced a central role for this. All our initiatives will certainly help to support the performance this year, but even more, we are building an even stronger company for when the markets will recover, driving both a great customer experience and better results in the future. Well, this concludes my opening remarks, and I will now turn the call to Peter for an update on our financials.

Thank you, Jorg, and welcome from me as well. I will take you through the financials for the quarter, starting with the revenue on Page 8. Total revenue decreased by 27% to DKK 231 million in the quarter compared to DKK 1 billion last year. Organic growth was negative 26% for the quarter compared to positive 13% last year. Organic growth across the group was driven by 39% lower volumes, offset by a 13% price increases compared to last year. Price increases have been implemented across all regions, but are increasingly coming under pressure. Revenue in the CWE decreased by 19% to DKK 355 million compared to DKK 444 million last year. Organic growth in the region was negative 20% as both -- as a result of lower sales volumes for both AAC and CSU, partly offset by higher sales prices equally for both product categories. Revenue in the U.K. decreased by 21% to DKK 222 million compared to DKK 281 million last year. Organic growth in the U.K. was negative 18%, which was demand driven, partly offset by higher sales prices. Revenue in Poland decreased by 45% to DKK 154 million compared to DKK 279 million last year. Organic growth was negative, also DKK 45 million, driven by a decrease in demand across both categories, slightly offset by sales price increases. Of the total revenue in the quarter of DKK 731 million, AAC and CSU constituted 71% and 29%, respectively. Now moving to a review of our core earnings on Page 9. Earnings for the quarter is influenced by various factors. Firstly, we have obviously experienced a significant decline in sales volumes across all markets. Secondly, we have implemented price increases, which cover the past inflation on direct production costs but not the full margin. Lastly, while we are adjusting our capacity to lower levels by utilizing more effective plants, the low volume still negatively impact our incremental production costs. Together, these factors are negatively impacting our margins. Gross profit amounted to DKK 178 million compared to DKK 320 million last year, corresponding to gross margins of 24% and 32%, respectively. EBITDA before special items amounted to DKK 87 million for the quarter compared to DKK 227 million last year, corresponding to EBITDA margins of 12% and 23%, respectively. The decrease compared to last year is driven by a lower gross profit and the SG&A cost base. However, this was partly offset by a continued focus on adjusting the organization to the reduced sales volumes. EBIT before special items amounted to DKK 38 million in the quarter compared to DKK 177 million last year, corresponding to EBIT margins of 5% and 18%, respectively. The significant drop in sales volume and EBITDA impacts our EBIT as depreciation remained the same compared to last year. On Page 10, we will see the development in [ near ] earnings for the first 6 months of the year. Gross profit in the first half 2023 decreased by 41% to DKK 332 million compared to DKK 564 million in 2022. Corresponding to gross margins of 24% and 30%, respectively. The decrease in gross profit margin is driven by the same reasons mentioned previously, including overhead costs spread over lower volumes and lack of margin recovery on past inflationary pressure on production costs, including energy expenses. EBITDA before special items in the first 6 months of 2023 decreased by 59% to DKK 159 million compared to DKK 386 million last year, corresponding to EBITDA margins of 12% and 21%, respectively. And finally, EBIT before special items for the first 6 months of 2023 decreased by DKK 228 million compared to the first half of 2022, corresponding to EBIT margins of 4% and 15%, respectively. Again, EBIT is negatively impacted by the lower EBITDA combined with a fixed depreciation level. Next, please turn to Page 11 for a review of our net debt in the second quarter. On 30th of June 2023, net interest-bearing debt totaled DKK 875 million, corresponding to an increase of DKK 61 million -- DKK 71 million since end of Q1. The increase in net interest-bearing debt for the quarter is driven by the lower earnings and CapEx. The company's financial gearing was 2x net interest-bearing debt to EBITDA, which remains within the company's long-term financial target of 1 to 2x EBITDA. As investments for the year have been scaled back since beginning of the year and we expect a stable inventory level, we expect net debt to decrease in the second half of the year. However, given the updated guidance, we anticipate that the net debt-to-EBITDA ratio will exceed our long-term target during the year. This, however, is not expected to put us in common risk. The company's net interest-bearing debt, excluding leasing, totaled DKK 800 million on 30th of June, corresponding to an unused committed bank facility of around DKK 200 million. Next, please turn to Page 12 for an update on special items and restructuring costs. The initiatives Jorg mentioned includes restructuring of production costs and SG&A expenses. Total restructuring costs are now increased to be -- expected to be around DKK 100 million, still with a payback of less than 1 year. In the current quarter, DKK 45 million of restructuring costs related to the initiatives have been recognized as special items, resulting in a total of DKK 55 million for the first 6 months. The majority of these have been paid in the quarter, while the rest will be paid during Q2 or Q3 mainly. As a result of the closedown of 5 plants, a comprehensive evaluation of the recoverable amounts of production and related equipment was conducted, leading to the acknowledgment of impairment losses amounting to DKK 97 million. In the second quarter of the year, we faced a situation where gas contracts entered into in 2022 led us to sell unused gas to the market. This caused a loss of DKK 16 million as the fixed gas prices for the sold gas were higher than the current marketplace. In addition, the loss of DKK 6 million was recognized by adjusting the fair value of the gas commodity forward contracts during the quarter. Next, please turn to Page 13 for an update on our financial guidance. The ongoing challenges in the market are clear. And despite a positive trend in Q2, we have seen lower volumes in July and August, which leads to an update of our financial outlook for 2023. Consequently, we anticipate sales volume decrease of 30% to 35% across all markets. In addition, we see an increase in competition in Germany. These directly impact our guidance with updated organic growth to be negative ranging from minus 20% to minus 25%, down from the previous estimate of around minus 15% to minus 20%. EBIT before special items are now projected within the range of DKK 30 million to DKK 100 million, down from the previous estimate of DKK 100 million to DKK 175 million. We are using the current environment to improve our business. And while we are seeing the first effects of these in the P&L, increased competition and increasing energy costs will negatively impact our earnings rest of the year. This concludes my prepared remarks, and I will now turn the call back to Jorg for closing statements.

Thanks, Peter. Before opening for questions, let me conclude with a few final remarks on Page 14. The levels of new build activities across our markets are extremely low. The volume decline in the first half of 40% is severe, and we do not see significant improvements for the second half, especially now after the 2 summer months. Second, prices are under pressure. However, significant higher raw material costs and energy costs compared to last year drive us to maintain price quality in the market wherever we can. Third, as the market situation remains challenging, we are taking proactive steps to improve our operations. We are driving the efficiency of our plant network, improving our SG&A base and keeping a strong focus on procurement to support the balance between price and cost. All this we do to build an even stronger company for when the markets recover. With that, we are now ready to take your questions.

[Operator Instructions] The first question is from the line of Sebastian Grave from Nordea.

Guys, can you hear me now?

Yes.

Yes, perfect. Okay. I will take them one by one. So first here, on your guidance, what kind of end market volume assumptions are behind the updated guidance? As I recall, we have previously talked about around 30% decline in U.K. and CWE and 40% decline in Poland. So how are these -- how are the updated figures?

So in general, of course, our market data is always a little bit delayed. So as Jorg mentioned, it's basically the most recent data we have for market development. But what we have seen during these summer months is that we have seen a further decline during the summer period. And of course, thereby, we're also indicating that the market volumes will -- markets will further drop. But in general, our overall view is still that Poland is worth it and the volume may be up to 45%, and that the U.K. and CWE is around the 20% to 25%.

Okay. Okay. And I hear you talk about end-market volume development or your own internal volume development, just to be clear.

So these are the market developments.

Okay. And then if we look implicitly in H2, it seems like you expect volumes to increase from H1 despite softness in July and August. So could you maybe help understand what behind this assumption? And how do you really see volumes play out over the coming quarters?

So I think that the -- of course, if we first start with the first half of the year, then Q1 was very, very low. And we saw extremely slow start to the year, but still with the positive trend curve for Q2. And that has actually come through. So we have seen volumes picking up gradually for every month during Q2. And you will say, our base assumption before was essentially that positive projection would continue up to a certain level and then be stable for rest of the year. What we're seeing now is that, that positive trend curve has basically been broken during these 2 summer months here, and our base assumption essentially is that U.K. and -- will come back again, where CWE has just increased market pressure. What we have seen as a positive sign is that Poland actually has been very stable throughout this period. And therefore, you can say that builds more on our confidence for the Polish volumes.

So that's embedded. On top of this, what makes it really hard to predict is the -- that the builders, they take their own choices how to manage capacities. I mean think about it, the whole industry is faced with that downstream. So they're deciding when doing holidays, when taking capacities outright and how to actually streamline their own operations, and that is certainly impacting our business. But in general, there is -- I mean there's always seasonality. And obviously, there's also seasonality in that current market environment. So that is how that volume split is spread over the year.

Okay. Okay. Totally understand that, and that's totally fair. Maybe just a follow up. If you extrapolate on the current trading environment, i.e., no sequential volume improvement from July, August, what kind of development are we looking at in H2 compared to H1, let's say?

Well, we always know that activity is somewhat slower during Summer and there is a natural seasonality around that. What we've seen in these 2 months is just that it's much more severe than what we typically see. Then we also have seen an extended vacation period of summer break. For us, we're not really assuming that the volumes on the July, August levels would continue for rest of year. And therefore, for us, that's not really a scenario.

Okay, okay. That's fair. And...

So from today's perspective, we'll be leaping into a stronger autumn and then the -- if you look at the quarters, the Q2 is -- the Q3 is pretty much same like Q2 and then the Q4, if you look into that factor certainly in December, right? I mean, that is, well, what I'm going to talk about, seasonality. So that is how that is built.

Okay. You say that you see increasing pricing pressure, particularly in Germany. But if I look at the relationship between your sales volume guidance and the organic growth guidance, I see no change in the implied ASP development. So how does this really make sense?

I think, overall, of course, we're talking guidance ranges here. And you can say our guidance includes a certain impact of the price pressure. But I think, first and foremost, it's an expression of balancing price and volume, and that is our core. We do not believe that price decreases is the right way to go. We have still an impact from a high inflationary environment, and therefore, passing through is still the core focus for us, but it may come with reduced volumes.

Okay, okay. And on that note, Peter, maybe just to remind us again, what is your pricing strategy across divisions? And maybe a little more color on your thoughts on like this balance between protecting leverage in the organization and pricing. If you could share some thoughts.

Yes. So I mean the whole discussion starts with inflation, right? I mean we shouldn't forget that raw materials we buy that for higher prices than last year. The energy costs are higher than they were last year. So literally, the inflation is really driving the need for price increases. If you look into our first half earnings, you can see the price quality of this company, right? So even if the market was slowing down 40%, we were able to land price increases of around average 10%, right? So I think that is actually the -- it shows actually how we are operating and how we're executing this. And what we are seeing is -- and that is what we've announced in July, August, actually, we're seeing more price pressure, I mean the whole industry, the volume constraint. And so we see that our duty and also our commitment. And also, there's a need from that inflation to really keep the price quality in all our markets, right? But certainly, not giving up on our position, right? So -- and there's always a fine balance, very regional plan. But what a clear message is we cannot give up on the price quality of our business. That would be the wrong way to go.

I think also what we're saying -- to add on to that, as we also previously mentioned, part of our business is more fixed pricing frame -- fixed frame agreements, where we have a fairly good idea on the pricing. The other part is more project-based. And what we also mentioned earlier is that under this current environment, we may go into selective projects in certain regions, offering selected lower pricing in order to get some volume. So it is also something that is, to some extent, regionally based and project based.

Okay. That's very clear. And then last one for me, positive cash flow in H2?

Yes. Essentially, you can say that -- of course, our EBITDA is still at a positive basis. And as a result of that, the underlying business is making money. The rest is really within our control in terms of CapEx spend, which we have scaled down compared to previous years. So we do expect a lower CapEx than last year. And also bear in mind that we spent quite some working capital in the beginning of the year to build up a stock to utilize the full production set up before we scale back. So that also means that we still carry around 3 months or so of stock in our balance sheet. So depending on how the markets and the cash situation develops, we will have the ability to also reduce that stock if needed. So therefore, a big part of the cash flow is within our control.

[Operator Instructions] It does not seem like we have any more questions from the conference call. I will -- never mind. We just got 2 questions in here. We will take Peter Sehested from ABG.

I have 2. I'd like to delve a little bit into the price dynamics. I guess you are an active, does that mean, you said it yourself, you are probably an active player in sort of balancing prices for volumes? It also appears why I speculate at this occurs on a, let's say, region or at least very local basis and not sort of across the board in Germany. But I, nevertheless, would like to understand what are sort of your decision parameters for when you decide whether you should trade off price for volumes, in which regions, why, what kind of competition you're seeing there? So just a little bit more flavor on sort of the low level practicalities that you consider when you could touch a deal?

So I mean, the pricing, and as then Peter was saying, is really different by market-by-market actually. So when starting in U.K., we are a leader in U.K. So it's our responsibility actually to maintain a price level in the market, and that actually works quite well, actually. So when you then go to Poland, we are not leader by size, but certainly we feel a responsibility to really maintain a price level in the market. And so we've done that in the first half of the year. But it's a very fine balancing, actually. The competitive landscape in Poland is a bit different than any other markets. But so far, actually, we're balancing that. We'll find out actually the volume price mix, and we're going to continue with that throughout the second half. What has changed actually is the situation in Germany, but the German situation is a different one. We are not a leader in Germany. We are a smaller player in the marketplace, actually. And so that is certainly not us driving it. And so that is where we need to now react and finally balance volumes and prices. If you look in the first half, again, we were able to land the planned price increases, which were needed in the second half. It's still our commitment but the environment is changing, and we are managing through that.

Okay. So you are saying that you are -- the reasons why prices are dropping is not that you are initiating these price pressures or rebates or whatever you call yourself, but that you are met with the customers saying we just got a lower price from your competitor?

Yes, very clear that -- if you look into the competitive landscape, right, so there's also local players and also having different strategy and dynamics. And so that's certainly impacting the price quality in the markets. But to your question, a clear no. So it's not us using that momentum to increase our position here, but it is -- there's a need for the whole industry to make sure that we increase prices and fight for inflation.

Yes. Just a follow-up question on pricing. So are there differences between the competitors who sort of engage in, let's say, this price volume balance, i.e., do the smaller mom-and-pop shops act differently than versus the largest player in the market?

Yes. Naturally, I mean, that is what I was saying, but it is different if you're a public company or a privately owned company, right? I mean that is -- every company has a different strategy, different dynamics. And that was valid, actually. I mean, it's part of that industry, actually, right? And it's also still valid in that environment. So yes, there's different dynamics, and that is exactly the issue where we need to balance that. They will find out the volume price gain.

Cool. And my second question is a little bit of the same, but just on volumes. You gave some explanations to why there was a split in July, i.e., could be vacations, whatever, because the underlying drivers behind this, i.e., high interest rates, low mortgages down, et cetera, et cetera, they are basically unchanged or at a stable level. But can you provide a little bit more flavor what you see in the market on why there's -- is it, as you mentioned, just more vacation, some of the builders taking a breather, saving a bit of cost here during the summer? Or -- just a little bit more case story just to get a more bidding for what's the average mortgage?

This is -- so the -- you are right, the general market environment, and I was describing that, right? So actually, I think most people have never experienced such steep increase of interest rates, right? And it's not the level as such. I mean interest rates 10 years ago were higher than today. That is not the issue, actually, right? But it is the speed and rapidness actually that is very special in this environment. And that led -- and as you said, it led to low mortgage being issued to future homeowners, right? And that is actually reducing the demand. And you are right, that is not a new situation. So that is actually not changing even more, and that is what I was also saying. We see that this effect is kind of plateauing, actually. So it seems to be we have also, obviously, a new base level here. The question is, however, how builders react to that because they also faced with 40% to 50% less, some even worse actually. So there's customers reporting even worse building activity than that. And so the key question is how do they streamline their own operations? And everyone has different strategies here, right? And it looks like that there is a lot of builders taking an extensive holiday over the summer, adjusting their own capacity. And that is actually what we are experiencing, right? But that actually makes it really hard to predict when and how does the industry, i.e., the builders adjust their own capacity and manage throughout that new demand situation. That is actually it.

And we have a follow-up question from Sebastian Grave from Nordea.

So just the last one from me. Just to be clear here, the fact that your full year guidance suggests 0 EBIT in H2, this means that we're going to see gross margin pressure in Q2 compared to -- in H2 compared to H1, right?

Yes. So of course, we are making the -- all the initiatives that we're making. We also -- including also increasing the restructuring amounts to really scale back our organization so that it fits to these new sales volumes. So we're making a lot of efforts in order to protect that EBIT, obviously. But there are the increased competition, the lower sales volumes still impacting us. And also bear in mind that whatever savings we're making on the production side initially goes into an inventory and then being sold off, so you won't see the P&L effects of the production cost savings before you actually sell those goods. And then finally, another area are the energy costs as such. As we have also previously mentioned, we come from some fairly old energy hedges, which were extremely positive for us, and we renew part of those into new gas hedging contracts, which come into play starting this second half. So therefore, we do see a shift of the underlying energy cost, which will also impact us negatively. So you have a few different dynamics in there.

Okay. That's very clear.

Sebastian, just one clarification. You asked before about sales volumes in -- sorry, market volumes. I think I said that Poland was around negative 40%, whereas the other 2 were -- and I think I said 20% to 25%. That is more the internal view, whereas the actual underlying market is closer to 30% to 35% drop. Just to [ clarify ].

We have another follow-up question from Peter Sehested from ABG.

Just a follow-on on the hedging. Can you just give a brief guide, so high-level guidance, of how much of your expected gas consumption in the second half is hedged? How much is spot? And give us an average price for the hedging?

So overall, if you look across our markets, then Poland is still to a large majority a coal market, which we wanted to convert more and more into gas, but obviously that comes with a cost. So we are managing that balance between coal and gas. But as such, we do not have longer hedges in Poland. It's more of a spot market in general. So the tradition around gas hedging and energy hedging is more in the CWE region and the U.K. region. And we have the benefit of, as mentioned before, former hedges being made years ago, which we have -- puts us in a favorable position. But at the same time, during the last year, we entered into hedging arrangements which are more unfavorable compared to the current spot prices, and those are coming into play. And so this year, we have a more of a balance. And next year, we will be moving more into the spot market but still carry some of the unfavorable hedges.

So Peter, to add on that, so this is hedges coming back from summer last year. And so it was the policy, to Peter's point, in U.K and CWE to hedge for longer. And so there was a renewal situation last summer. And so that is when these hedges were made, and so they are now materializing actually. So we are changing from a very favorable position from old prices to this new price level actually, which puts us in an unfavorable position from -- actually July on. So that was the strategy. But certainly, I mean, that whole energy situation in this, to Peter's point, we are actually moving more towards a short-term hedging, more towards spot to be -- to have enough room to maneuver and react to that. But still, it is contracts lasting from summer 2022 that we are now faced with.

Okay. Just because previously you've said, you've sold some gas and that had made me assume that you were fully hedged for this year, but now you say you're more balanced. So is it fair to assume, let's say, you are 80% hedged and 20% spot for the second half?

I think it's more to say, I mean, we're quite elaborate in the interim report around the gas sold. So it's more depending on individual contracts respective to the individual areas of where we consume that gas. And that means that we have areas where the gas contracts that were entered assumed a higher production level than what we are currently seeing given the current situation. So it's not a general view that we, across the group, are fully hedged, but it's more that there are certain areas where we are hedged above our current production levels.

Okay. Understood. And then just final question on M&A. I mean we've touched upon this before in previous meetings. Clearly, not a focus right now. But at some point, this turns around. And do you see any, let's say -- so what is your view now with -- compared to 3 months ago? Do you see opportunity that competitors are getting a bit weaker? Or should we forget all -- should we just forget about M&A for the next couple of years?

I think the long-term strategy for this company hasn't changed. Actually, there is -- so we have a very clear view on potential M&A targets that could fit nicely into our group. And I think with our business improvement measures that we are executing at the moment and especially in how we're driving efficiency of our plants, that is even more exciting actually for future value creation. However, the question is when is the right timing, right? I mean we're coming from all-time high markets in 2022 to a significant downturn in the market. So -- and the answer will be in the middle. So the question is when will prices stabilize? So we are still open, but the question is really timing. And certainly, our priority at the moment as management of this company is to manage through these last quarters here with low volumes, making sure we're focusing on our price quality and making sure we drive through our business improvement measures and then navigate through these next rough quarters without -- not losing site for it, but our priority is very clear on making sure we get the company safely through that rough waters.

As there are no further questions in line at this moment, I will hand the call back to the speakers.

Okay. So thanks for participating in this call, and thanks for your questions. And we are looking forward to see one or the other during the next days on the road, and have a good day. Thank you.

This concludes this conference call, and you may now all disconnect your lines.